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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1998 1-11352
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DYNAGEN, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 04-2911026
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
840 MEMORIAL DRIVE 01821
CAMBRIDGE, MASSACHUSETTS 02139 (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number: (617) 491-2527
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
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Common Stock, $.01 par value Boston Stock Exchange
Securities Registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, $.01 par value
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 / /.
Check if no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year : $24,980,294
The aggregate market value of the DynaGen, Inc.'s common stock, $0.01
par value per share ("Common Stock") held by non-affiliates, based on the
closing price of the Common Stock on March 15, 1999 as reported on the OTC
Bulletin Board, was approximately $9,717,430.
As of March 15, 1999, there were outstanding 41,350,765 shares of
Common Stock.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
DynaGen, Inc., referred to in this Report as the "Company," "we" or "us,"
develops, makes and sells generic drugs. From our inception in 1988 until 1996,
we focused primarily on developing new drugs and licensing the resulting
products and technologies to others. Beginning in 1996, we began shifting our
business focus to building a generic drug manufacturing and distribution
business. We have licensed most of our existing proprietary therapeutic and
diagnostic products to other companies for further development and
commercialization, and have divested a non-core business, BioTrack, Inc. We no
longer intend to devote significant time and resources to the development of
proprietary drugs or technology.
RISK FACTORS -- SPECIAL CONSIDERATIONS
We experienced a sharp decline in our stock price and market value in 1997
and 1998. In the section of this Report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results," we have described several risk factors which we
believe are significant and should be given very careful consideration by you
when you evaluate DynaGen. We consider each of these risks specific to us,
although some are industry or sector related issues which could also impact to
some degree other businesses in our market sector. In our case, there are three
specific risk factors to which we want to draw your attention:
o our independent auditors, in their opinion on our financial statements
as of December 31, 1998 and for the year then ended, have expressed
substantial doubt as to our ability to continue as a going concern;
o we need significant additional financing; and
o we are involved in litigation with the former stockholders of Superior
Pharmaceutical Company, our distribution subsidiary which accounts for
a substantial part of our assets and revenues.
If we are unable to solve these problems in the near future, we will likely have
to file for bankruptcy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results,"
MULTISOURCE GENERIC DRUG BUSINESS
Generic drugs are the chemical and therapeutic equivalents of brand-name
drugs. They must meet the same governmental standards as the brand-name drugs
they replace, and they must meet all FDA guidelines before they can be made or
sold. We can manufacture and market a generic drug only if the patent or other
government-mandated market exclusivity period for the brand-name equivalent has
expired. Generic drugs are typically sold under their generic chemical names at
prices significantly below those of their brand-name equivalents. We estimate
that the U.S. generic or multisource pharmaceutical market approximates $12
billion in annual sales. We believe that this market has grown due to a number
of factors, including:
o a significant number of widely-prescribed brand-name drugs are at or
near the end of their period of patent protection, making it possible
for generic manufacturers to produce and market competing generic
drugs;
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o managed care organizations, which typically prefer lower-cost generic
drugs to brand-name products, continue to grow in importance and impact
in the U.S. health care market; and
o physicians, pharmacists and consumers increasingly accept generic
drugs.
OUR STRATEGY AND SUBSIDIARIES
We intend to compete with other generic companies through vertical
integration of two key elements of the business: manufacturing and distribution.
We have acquired three operating subsidiaries to effect this integration:
o In August 1996, we acquired Able Laboratories, Inc., including its
46,000-square foot tablet and suppository manufacturing facility in
South Plainfield, New Jersey;
o in June 1997, we acquired Superior Pharmaceutical Company, a generic
drug distributor in Cincinnati, Ohio; and
o in March 1998, we acquired Generic Distributors Limited Partnership, or
GDI, a distributor of generic drugs based in Monroe, Louisiana.
As part of the acquisition of Able, we obtained rights to market several
generic drug products the sale of which had already been approved by the FDA. We
are currently marketing three of these products.
Since we acquired it, Superior has experienced a sharp and steady decline
in its sales and margins. This decline was due in part to the loss of key
personnel immediately after the acquisition, which resulted in a loss of
business with certain federal and corporate accounts, as well as further erosion
in margins as a result of price pressure in the generic drug industry. We have
since taken actions intended to improve Superior's performance. We can give no
assurance, however, that these actions will improve Superior's performance in
the near future. In the past six months, Superior has hired and trained
additional sales staff, upgraded its systems and instituted controls to improve
margins. Superior is also aggressively bidding on federal and state contracts
and has won supply agreements with the governments of the states of Florida,
Ohio, Louisiana, and Texas. We are presently involved in a dispute with the
former owners of Superior. See "-- Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
GDI's customer base consists primarily of independent pharmacies in the
states of Louisiana, Texas, Arkansas, Alabama and Mississippi. We believe that
GDI complements Superior by providing next-day delivery service to the southern
and southeastern United States. We believe that GDI has the potential to grow
its business through supply opportunities with institutional, hospital and
nursing home pharmacies. We can give no assurance, though, that such
opportunities will arise, or that we will be able to exploit any such
opportunities profitably.
PRODUCT LINE INFORMATION
Our operations consist of manufacturing and distribution of generic drugs.
Our manufacturing subsidiary, Able Laboratories, produces tablets and
suppositories. Our distribution subsidiaries, GDI and Superior, primarily sell
products manufactured by almost all of the major generic drug manufacturers. In
addition, they provide sales and marketing support for all of Able's products.
We currently manufacture or have approval to manufacture the following products:
<TABLE>
<CAPTION>
Equivalent
Product Indication Brand-Name Product(1)
------- ---------- ---------------------
<S> <C> <C>
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
ANDA Products:
Clorazepate tablets (three dosages) Anxiolytic Tranxene
Loperamide tablets Antidiarrheal Imodium(R)
Acetaminophen suppositories
(three dosages) Analgesic Tylenol(R) suppositories
Hydrocortisone acetate cream(1%) Anti-inflammatory Anusol4(R)-HC cream
Other Generic Formulations:
Biacodyl tablets Laxative Dulcolax(R)
Choline magnesium trisalicylate tablets
(three dosages) Anti-inflammatory Trilisate(R)
Methenamine Mandelate tablets
(two dosages) Urinary Antibacterial Mandelamine(R)
Phenazopyridine HCL tablets
(two dosages) Urinary Tract Analgesic Pyridium(R)
Salsalate tablets (two dosages) Anti-inflammatory Disalcid(R)
</TABLE>
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(1) All brand names are registered trademarks of their respective
manufacturers.
While we are primarily a generic drug company, we have also developed a
brand product, ZotrimTM, for the complete treatment of urinary tract infection.
We have entered into an agreement with MOVA Laboratories, Inc., under which we
will manufacture and supply the product to MOVA.
Zotrim is a specialty product aimed at providing complete treatment of
urinary tract infection, a condition primarily afflicting women. Current
treatments require two separate drugs to be taken in a specific sequence over
several days. This requires two separate prescriptions which result in higher
costs, including higher co-payments for the patient, and increased time for
pharmacists to dispense. In addition, patients are prone to make errors in
taking both medications in proper sequence. Zotrim(TM) combines the two most
commonly used drugs in an easy-to-use package which is designed to enhance
compliance by providing standardized medication instructions on the package.
We have filed several patent applications covering the Zotrim(TM) product
as well as our proprietary method of compliance enhancement packaging. In
February 1999, we filed a New Drug Application, or NDA, with the U.S. Food and
Drug Administration, or FDA, for Zotrim(TM).
At our manufacturing subsidiary, Able Laboratories, we are developing
generic products in the form of tablets, capsules and suppositories. The
research, development, clinical testing and FDA review process leading to
approvals takes approximately two years for each product. As discussed in the
section titled "Government Regulation," some of the products require no review
or limited laboratory testing, in which case the timing is less than two years.
Typically, our research and development activities consist of (i) identifying
brand name drugs for which patent protection has expired or is to expire in the
near future, (ii) conducting research (including patent and market research) and
developing new product formulations based upon such drugs, and (iii) obtaining
approval from the FDA for such new product formulations. We contract with
outside laboratories to conduct biostudies which are required for FDA approval.
We use biostudies to demonstrate that the rate and extent of absorption of a
generic drug are not significantly different from that achieved by the
corresponding brand name drug. These biostudies are subject to rigorous
standards set by the FDA. They can cost up to $500,000 and are a major part of
the overall cost of drug development.
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BIOTRACK, INC.
We formed BioTrack, Inc. in 1997 to develop and commercialize a technology
involving tumor localization and tracking intended to allow breast biopsies to
be performed in a cost-effective and less invasive manner. BioTrack requires
significant additional research and development expenditures to complete
development of this technology.
In 1998, in connection with our plan to shift our business to generic drug
manufacturing and distribution, the Board of Directors determined that BioTrack
did not fit into our plan to be a generic drug manufacturing and distribution
company. On April 30, 1998, the Board of Directors unanimously voted to divest
our majority share in BioTrack. We caused BioTrack to redeem 3,930,000 shares of
its common stock held by DynaGen, in exchange for a $1,000,000 promissory note.
Our equity in BioTrack was reduced to approximately 1,300,000 shares, or 26%,
and the balance was distributed to the inventors of the technology, investors,
and BioTrack management. In February 1999, the Board of Directors voted to issue
options to purchase 1,045,000 of our remaining shares of BioTrack to various
individuals, including each of our directors, in consideration of services
rendered to DynaGen by each of the individuals. If these options are exercised
in full, then we would own 255,000 shares of BioTrack.
SALES AND MARKETING
Our products are sold through private label arrangements primarily through
direct sales efforts to drug wholesalers, distributors and retail drug chains
and other pharmaceutical companies. We also market our generic drug products
under our "Able Laboratories" name, as well as under our "Superior
Pharmaceutical Company" name. The majority of Able's sales are to customers who
purchase under firm purchase order commitments. These purchase orders range from
$25,000 to $400,000 and are filled within three to four months from the time we
receive them. Able generally does not manufacture products unless it has a firm
purchase order.
Our distribution subsidiaries, Superior and GDI, have over 5,000 customers,
the majority of whom are independent pharmacies. These customers purchase
products via telephone orders depending on their needs from time to time, but
are not obligated to purchase any products from us. We compete with other
generic distributors on the basis of price and service to attract and retain
such customers. We have minimal levels of sales under long-term contracts, which
are typically for a term of twelve months. These arrangements include contracts
with federal, state or local agencies. Superior and GDI bid on a fixed price
basis for these contracts.
Superior employs approximately 25 telemarketers who have been trained in
products and sales techniques. Superior has developed a database of independent
pharmacies as potential customers. The pharmacies routinely purchase from
several wholesalers and distributors. Superior's sales personnel use competitive
price, service, delivery, accuracy of shipment and selling technique as
competitive factors in getting business. Superior allocates territories and
accounts to its telemarketers who develop a relationship with the pharmacists.
Superior supports its sales staff through marketing and promotional events
including mass mailings, price specials, and general advertising. Superior
compensates sales personnel based on their performance.
GDI's marketing organization is similar to that of Superior. Almost 80% of
GDI's sales are to independent pharmacies in the southern United States with
minimal sales to the chains and institutional pharmacies. Both Superior and GDI
generate approximately 75% of their business with existing customers.
BACKLOG
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Approximately 90% of our sales are from operations of Superior and GDI.
Both Superior and GDI generally ship orders within 24 to 48 hours of receipt.
Therefore, the order backlog does not bear a significant relationship to their
overall sales. The dollar amount of backlog orders for Able as of December 31,
1998 was approximately $472,000. Although orders at Superior and GDI are subject
to cancellation without penalty, management expects to fill substantially all of
them in the near future.
MANUFACTURING AND SUPPLIERS
We manufacture our generic products at our Able Laboratories facility in
South Plainfield, New Jersey. The principal components used in the manufacture
of generic products are active and inactive pharmaceutical ingredients and
certain packaging materials. The FDA must approve sources for certain materials,
and in many instances only one source may have been approved. We purchase active
raw material ingredients primarily from United States distributors of bulk
pharmaceutical materials manufactured by the U.S. or foreign companies. If raw
materials from a specified supplier were to become unavailable, we would have to
file a supplement to the applicable regulatory approval, and revalidate the
manufacturing process using any new supplier's materials. Delays in revalidating
the manufacturing process or in obtaining new materials could result in the loss
of revenues and could have a material adverse effect on our business, financial
condition and results of operations.
Superior Pharmaceutical Company stocks and sells over 2,000 different items
such as tablets, capsules, injectables, vaccines, over-the-counter products,
vitamins and hospital supplies. Superior must carry a broad product line of this
nature in order to service its customer base, which consists of independent
pharmacies, pharmacy chains and institutional pharmacies. Superior negotiates
and issues purchase orders, normally in the beginning of each year, to vendors
and manufacturers for these items. The supply agreements are complex, as they
normally provide for volume discounts (rebates), shelf stock adjustments for
lower prices, and returns of unsold goods. Competition among generic drug
manufacturers is intense and the pressure has resulted in steadily declining
prices. If multiple vendors are not available (i.e., if a sole generic approval
is granted by the FDA), the prices generally remain high and the suppliers do
not offer the traditional discounts. In general, however there are almost always
multiple suppliers available for most products. Superior has traditionally
enjoyed good relationships with its suppliers.
GDI's agreements with its suppliers, most of whom are common to Superior,
are similar in nature. The two companies are now combining their purchasing
functions, wherever possible, and are issuing purchase orders to vendors to take
advantage of higher volume. Both Superior and GDI consider their relationship
with the vendors satisfactory.
Able's facilities in South Plainfield, New Jersey are registered with the
FDA and are subject to current Good Manufacturing Practices ("cGMP") as
prescribed by the FDA.
COMPETITION
We compete primarily with other generic manufacturers and distributors.
Many of these companies 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 drug market, we compete with:
o off-patent drug manufacturers;
o brand-name pharmaceutical companies that manufacture off-patent drugs;
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o the original manufacturers of brand-name drugs; and
o manufacturers of new drugs that may be used for the same indications as
our products.
Revenues and gross profit derived from generic drugs 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
we can achieve from developing and manufacturing generic products depends, in
part, on our 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 our ability to
sell our generic products.
Both Superior and GDI compete with other distributors and wholesalers of
generic drugs. The wholesalers are much larger, have a national network of
warehouse and distribution centers, and carry a full line of products, including
brand-name pharmaceuticals. The wholesalers are also better capitalized and
obtain the best (or lowest) price from the vendors. Other distributors are
small, privately-held companies that distribute generic drugs to regional
pharmacies. Major wholesalers include Cardinal Health, Inc., McKesson Corp., and
Andox Corporation.
Superior and GDI believe that size of a company and price are not the only
factors in achieving sales. Superior and GDI employ a direct telemarketing force
(comprising approximately 36 persons currently). The telemarketers call upon
customers, assist them in providing critical product information, and supply
almost on a "just in time" basis. Several customers, mostly the independent
pharmacies, order product at least two or three times a week to minimize
inventory cost. The telemarketing force and an efficient shipping operation
provide a competitive advantage for Superior and GDI. We believe that several
other distributors with whom we compete, who are smaller, less automated, and
have a smaller telemarketing force are not as efficient as Superior.
There can be no assurance that we will be able to successfully market any
of our current or proposed products. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Certain Factors That May
Affect Future Results."
GOVERNMENT REGULATION
Our products are highly regulated, principally by the FDA, the Drug
Enforcement Administration, state governments and governmental agencies of other
countries. Federal and state regulations and statutes impose certain
requirements on the testing, manufacture, labeling, storage, recordkeeping,
approval, advertising and promotion of our 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, known as NDAs, or abbreviated new drug applications,
known as ANDAs. In order to conduct clinical tests and produce and market
products for human diagnostic and therapeutic use, we must comply with mandatory
procedures and
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safety standards established by the FDA and comparable state and foreign
regulatory agencies. Typically, standards require that products be approved by
the FDA as safe and effective for their intended use prior to being marketed for
human applications.
To obtain FDA approval for a new drug or generic equivalent, a prospective
manufacturer must, among other things, comply with the FDA's current Good
Manufacturing, or cGMP, regulations. The FDA may inspect the manufacturer's
facilities to assure such compliance prior to approval or at any other
reasonable time. Our Able manufacturing subsidiary 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, we must continue to expend
significant time and resources in the areas of development, production, quality
control and quality assurance.
We must obtain FDA approval before we can market a generic equivalent of a
previously approved drug. The process for obtaining an ANDA approval is as
follows:
Abbreviated New Drug Application (ANDA) - The Waxman-Hatch Act of 1984
established a statutory procedure for the submission and FDA review and approval
of ANDAs for generic versions of drugs previously approved by the FDA. Under the
ANDA procedure, the FDA waives the requirement of conducting complete clinical
studies of safety and efficacy, and instead typically requires the applicant to
submit data illustrating that the generic drug formulation is "bioequivalent" to
a previously approved drug. "Bioequivalence" means that the rate of absorption
and the levels of concentration of a generic drug in the body needed to produce
a therapeutic effect are substantially equivalent to those of the previously
approved drug. For some drugs, the FDA may require other means of demonstrating
that the generic drug is bioequivalent to the original drug. The NDA and ANDA
approval processes both generally take a number of years and involve the
expenditure of substantial resources.
The Waxman-Hatch Act establishes certain statutory protections for
FDA-approved drugs, which could preclude submission or delay the approval of a
competing ANDA. One such provision allows a five-year market exclusivity period
for NDAs involving new chemical compounds and a three-year market exclusivity
period for NDAs (including different dosage forms) containing data from new
clinical investigations essential to the approval of the application. Both
patented and non-patented drug products are subject to these market exclusivity
provisions. Another provision of the act extends patents for up to five years as
compensation for reduction of the effective market life of the patent resulting
from the time involved in the federal regulatory review process.
The 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 DynaGen, are not currently subject to any of the
three user fees. If we submit NDAs for non-ANDA products, we may be subject to
user fees.
Penalties for wrongdoing in connection with the development or submission
of an ANDA were established by the Generic Drug Enforcement Act of 1992,
authorizing the FDA to permanently or temporarily bar companies or individuals
from submitting or assisting in the submission of an ANDA. They may also
temporarily deny approval and suspend applications to market generic drugs. The
FDA may also suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct, and under certain circumstances also
has authority to withdraw approval of an ANDA and to seek civil penalties. We do
not expect the law to have a material impact on the review or approval of our
ANDAs.
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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. We believe that the federal and state
governments may continue to enact measures in the future aimed at reducing the
cost of drugs and devices to the public. We cannot predict the nature of such
measures or their impact on our profitability.
Our manufacturing subsidiary, Able, currently manufactures several products
which are regulated as "old drugs" and subject to the requirements of the
Over-the-Counter Drug Review regulations promulgated by the FDA. This class of
drugs requires no prior approval from FDA before marketing, but such products
must comply with applicable FDA monographs which specify, among other things,
required ingredients, dosage levels, label contents and permitted uses. These
monographs may be changed from time to time, in which case we might be required
to change the formulation, packaging or labeling of any affected product.
Changes to monographs normally have a delayed effective date, so while we may
have to incur costs to comply with any such changes, disruption of distribution
is not likely.
The FDA can also significantly delay the approval of a pending NDA or ANDA
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
approval, the seizure of drug products or the FDA's refusal to approve
additional applications.
There can be no assurance that the requisite approvals from the FDA will be
granted for any of our proposed products or processes, that the process to
obtain such approvals will not be excessively expensive or lengthy, or that we
will have sufficient funds to pursue such approvals. The failure to receive the
requisite approvals for our products or processes, when and if developed, or
significant delays in obtaining such approvals, would prevent us from
commercializing our products as anticipated and would have a materially adverse
effect on our 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."
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. Able 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 their affiliates. Since we
acquired it, Able has made substantial commitments (both operational and
financial) to improve the plant, personnel, and equipment in order to effect an
improvement in its operations. We have made key management changes to retain
individuals who have knowledge and commitment for cGMP in order to ensure
continued cGMP compliance. We have also provided cGMP training on a regularly
scheduled basis to Able's employees.
As generic drug distributors, Superior Pharmaceutical Company and GDI sell
products in almost every state in the U.S. They are each required to have a
wholesale distributor's license as well as a license for controlled substances
for the states of Ohio and Louisiana, respectively. The licenses that a
distributor is required to carry for other states varies from state to state.
For example, Kentucky, Massachusetts, Nebraska, New York and New Jersey, among
others, do not require that an out-of-state distributor obtain any licenses as a
condition to conducting trade in their states. Other states, such as Idaho,
Illinois, Maryland, Oregon and Montana, among others, require that an
out-of-state distributor obtain a wholesale distribution license as well as a
controlled substance license from that particular state in order to conduct
business. Thus, the distributor is required to ascertain which licenses are
required from each state and then
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obtain them accordingly. The licenses, once obtained, need to be renewed
periodically including the payment of fees which vary from state to state.
Furthermore, since several products carried by DynaGen's distribution
subsidiaries are controlled substances, the distribution subsidiaries are each
required to detail and hold a federal license for controlled substances from the
Drug Enforcement Agency.
PRODUCT LIABILITY AND INSURANCE COVERAGE
We presently maintain product liability insurance in the amount of
$3,000,000 for the products we market. We also maintain product liability
insurance for those products in clinical investigations. Although we intend to
obtain product liability insurance prior to the commercialization of certain
products which are not presently insured, there can be no assurance that we 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 us, insufficiency of insurance
coverage could have a materially adverse impact on our operations and financial
condition. Furthermore, the costs of defending or settling a product liability
claim and any attendant negative publicity may have a materially adversely
affect us, even if we ultimately prevailed. 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 our ability to achieve broad
commercial distribution of our proposed products, which could have a materially
adverse effect upon our business and financial condition.
RESEARCH AND DEVELOPMENT
For the fiscal year ended December 31, 1998, we expended $814,108 on
research and development activities compared to $3,220,283 in the fiscal year
ended December 31, 1997. This decline is due primarily to our decision to focus
on generic drug manufacturing and distribution.
PATENTS AND PROPRIETARY TECHNOLOGY
Our generic business relies upon unpatented trade secrets and proprietary
technologies and processes. There is no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques, or gain access to our trade secrets or proprietary technology, or
that the we can meaningfully protect unpatented trade secrets. We require
employees, consultants and other advisors to execute confidentiality agreements.
However, these agreements may not provide meaningful protection for our trade
secrets, or adequate remedies in the event of unauthorized use or disclosure of
such information. The manufacture and sale of certain products will involve the
use of processes, products or information, including some owned by others.
EMPLOYEES
As of February 28, 1999, DynaGen and its subsidiaries had 107 full-time
employees, of whom 82 were employed in selling, general and administrative
activities and 25 were employed in research and development and manufacturing of
its products. None of our employees are represented by a union. We believes our
relationship with employees is good.
ITEM 2. PROPERTIES
We maintain our principal executive offices at 840 Memorial Drive,
Cambridge, Massachusetts 02139. The premises, which consist of approximately
4,000 square feet of space, are leased from an unaffiliated party, for a term
expiring on September 19, 2002.
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Able Laboratories 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, 2005.
Superior is located in a 37,300 square foot facility in Cincinnati, Ohio.
The property is leased from a partnership of three of Superior's former
stockholders for a term expiring on March 31, 2015.
GDI is located in a 11,000 square foot leased facility in Monroe,
Louisiana. The property is leased from an unaffiliated party for a term expiring
on August 31, 1999.
We believe that our present facilities are adequate to meet our current
needs. If new or additional space is required, we believe that adequate
facilities are available at competitive prices in the respective areas.
ITEM 3. LEGAL PROCEEDINGS
We acquired Superior in June 1997. At the time Superior had $30,000,000 in
sales and was profitable. Superior's performance has declined sharply since the
acquisition. Superior experienced loss of key personnel, declining revenues,
erosion of margins and an overall decline in its business. Also, a number of key
personnel at Superior were recruited by competitors immediately after the
acquisition. This downturn has caused a severe shortage of working capital and
consequently, we have not paid the former Superior stockholders all of the
amounts set forth in the agreement as part of the purchase price.
We used a combination of cash, a note and 166,667 shares of Common Stock to
acquire Superior in June 1997. The merger agreement for the Superior acquisition
provided that we would also be obligated to issue to the former stockholders of
Superior up to an additional 1,666,667 shares of Common Stock if on June 18,
1998 the Common Stock had not had an average closing bid price of at least
$30.00 per share for the 10 previous trading days. The merger agreement also
stated that any difference between the value of the stock issued and the
$5,000,000 guaranteed value was to be paid in cash. The Common Stock traded at
approximately $0.50 per share as of June 18, 1998, and we therefore became
obligated to pay approximately $4,000,000 in cash to the former stockholders of
Superior. Under the agreement, we owe the former stockholders a total of
approximately $9,000,000 in common stock, cash and notes. Because of the
business downturn at Superior, we have not been able to obtain financing
sufficient to settle all of the amounts owed to the former Superior
stockholders.
On July 31, 1998 we entered into a contingent settlement agreement to
reduce the remaining purchase price to approximately $4,000,000. We continued to
seek the exact amount and the form of payment (i.e., cash and/or stock) for the
final settlement, but were unable to obtain sufficient financing.
On December 17, 1998, the former Superior stockholders commenced a civil
action in the Court of Common Pleas, Hamilton County, Ohio. The complaint filed
by the former Superior stockholders alleged that we owed them approximately
$9,000,000, including $4,166,667 in connection with promissory notes issued in
connection with the merger as well as $4,817,660 as an adjustment to the
purchase price. We have filed our response to this complaint. The former
Superior stockholders have voluntarily continued to forbear in taking further
action in connection with the lawsuit, and we are working to settle all
outstanding issues between us. The two former Superior stockholders who are
employees of Superior continue to be employed by Superior and to perform key
functions for Superior and for DynaGen, both in connection with our continuing
effort to seek additional financing and our ongoing operations.
If we do not settle or successfully defend against the lawsuit, we will
likely have to pay a substantial sum of money to the former owners of Superior.
We would lose a substantial amount of assets and face liabilities of up to
approximately $9,000,000, and we could be forced to liquidate all of our assets
or to declare bankruptcy.
11
<PAGE>
We can give no assurance that we will be able to obtain financing to meet
the obligations to pay the former Superior shareholders. See "Factors That May
Affect Future Results -- We Face Substantial Obligations Relating to the
Acquisition of Superior."
We are also involved in certain other legal proceedings from time to time
incidental to our normal business activities. While the outcome of any such
proceedings cannot be accurately predicted, we do not believe the ultimate
resolution of any existing matters should have a material adverse effect on our
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 fourth quarter of 1998.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price of Common Stock
Our Common Stock is traded on the Boston Stock Exchange under the symbol
"DYG" and is quoted on the OTC Bulletin Board under the symbol "DYGN." On March
15, 1999, based upon information from American Stock Transfer & Trust Company,
our transfer agent, there were approximately 1,180 holders of record of Common
Stock. We believe that there are a substantial number of additional beneficial
owners that hold Common Stock in "street name" through brokerage firms. The
following table sets forth, for the periods indicated, the range of quarterly
high and low sale prices as reported on the OTC Bulletin Board for the Common
Stock.
Common Stock(1)
---------------
High Low
---- ---
Fiscal 1997:
------------
January 1 to March 31, 1997 $24.69 $12.81
April 1 to June 30, 1997 16.88 9.69
July 1 to September 30, 1997 10.63 3.75
October 1 to December 31, 1997 5.94 1.25
Fiscal 1998:
------------
January 1 to March 31, 1998 $0.94 $0.13
April 1 to June 30, 1998 0.78 0.31
July 1 to September 30, 1998 0.69 0.19
October 1 to December 31, 1998 0.22 0.10
-------------------
(1) Prices have been adjusted to reflect a one-for-ten reverse split
of the outstanding shares of common stock effective March 10,
1998.
We have never paid dividends to common stockholders since inception and
do not plan to pay dividends to common stockholders in the foreseeable future.
We intend to retain any earnings to finance our operations.
(b) Sales of Unregistered Securities During the Year Ended December 31, 1998
During the fiscal year ended December 31, 1998, DynaGen sold the
following securities pursuant to one or more exemptions from registration under
the Securities Act of 1933, as amended, including the exemption provided by
Section 4(2) thereof:
On February 3, 1998, the Company issued 10,000 shares of Common Stock to
Martin Janis Co., an unaffiliated company, in consideration for consulting
services rendered.
On February 26, 1998, the Company sold to Sovereign Partners, for
$500,000, a 7% convertible debenture due February 26, 1999, convertible into
shares of Common Stock at a conversion price of 85% of the market price of the
Common Stock for the five trading days immediately preceding the date of
conversion.
On March 2, 1998 the Company sold 10,500 shares of Series E Convertible
Preferred Stock, $0.01 par value per share, and 1,500 shares of Series F
Convertible Preferred Stock, $0.01 par value per share, to the owners of Generic
Distributors Limited Partnership. in connection with DynaGen's acquisition of
13
<PAGE>
Generic Distributors, Inc. Shares of Series E and Series F Preferred Stock are
convertible into shares of Common Stock at a conversion price equal to the
average of the closing bid price of the Common Stock for the three (3) trading
days immediately prior to the date of the conversion.
On March 19, 1998, the Company sold 5,000 shares of Series D Convertible
Preferred Stock, $0.01 par value per share ("Series D Stock"), to The Endeavour
Capital Fund, S.A. for $500,000. The Series D Preferred Stock is convertible
into Common Stock at a conversion price per share of 85% of the average of the
closing bid price of the Common Stock for the five (5) trading days immediately
preceding conversion. The Company also issued to Endeavour, in settlement of
contractual penalties, a $328,500 8% convertible debenture, convertible into
shares of Common Stock at the market price of the Common Stock for the five
trading days immediately preceding the date of conversion, and a warrant, which
expires March 19, 2001, to purchase 1% of the outstanding Common Stock on the
date of exercise of the warrant for $150,000.
On March 31, 1998, the Company sold 5,000 shares of Series D Convertible
Preferred Stock, $0.01 par value per share ("Series D Stock"), to Sovereign
Partners, an unaffiliated investor, in consideration of cancellation of a
$500,000 7% convertible debenture previously issued to the investor. The Company
also sold 5,000 shares of Series D Stock to Dominion Capital Fund, an
unaffiliated investor, for $500,000 on the same date. The Series D Preferred
Stock is convertible into Common Stock at a conversion price per share of 85% of
the average of the closing bid price of the Common Stock for the five (5)
trading days immediately preceding conversion. The Company also issued to each
of Sovereign and Dominion an $87,500 8% convertible debenture, convertible into
common stock at the average trading price for the five trading days immediately
preceding the conversion date, for delayed registration penalties incurred in
connection with the Series D Stock purchase.
On March 31, 1998, the Company issued a warrant expiring January 22, 1999
to purchase up to 250,000 shares of Common Stock at a purchase price of $.125
per share to USIS International, Inc., a public relations consultant to the
Company, in consideration for services rendered.
During the quarter ended March 31, 1998, the Company issued an aggregate
of 10,352,814 shares of Common Stock upon exercise of options and warrants and
conversion of convertible debt and equity securities.
On April 29, 1998, the Board of Directors approved the issuance of
1,893,333 shares of Common Stock to various individual officers of the Company
and their family members, in consideration of forgiveness of indebtedness for
cash advances totaling $295,000 made to the Company by the individuals. The
Company issued 400,000 shares to Dhananjay G. Wadekar, Executive Vice President
and a director, in consideration of forgiveness of $50,000 advanced to the
Company, and issued 400,000 shares to two members of Mr Wadekar's family in
consideration for forgiveness of a total of $50,000 advanced to the Company. See
"Certain Relationships and Related Transactions."
On April 30, 1998, the Company granted to various employees, officers and
directors of the Company, stock options to purchase up to 2,200,000 shares of
Common Stock at purchase prices of $0.37 and $0.41 under the Company's 1998
Stock Option Plan. Options to purchase up to an additional 2,600,000 shares were
approved by the Board, subject to stockholders' approval. At the date of this
Report, the approval of DyanGen's stockholders for these grants has not been
sought or obtained, and so the options have not been granted. All of the
2,200,000 options granted under the 1998 Stock Option Plan were later canceled
without being exercised, and 1,150,000 new options were issued in their place,
in connection with the November 1998 repricing of options. See "Option/SAR
Repricing."
On April 30, 1998, the Company sold a 5% convertible debenture due July
26, 1998 to Sovereign Partners for $250,000. Pursuant to a letter agreement
dated June 25, 1998, the debenture was made
14
<PAGE>
convertible into Common Stock at a discount of 20% of the market price of the
Common Stock on the date of conversion.
On May 8, 1998, the Board of Directors voted to approve the grant to
Steven Georgiev and Howard Schneider, directors of the Company, of non-qualified
stock options to purchase up to 150,000 and 300,000 shares of Common Stock,
respectively, at a purchase price of $0.33 per share. These stock options are
subject to approval by the Company's stockholders, which as of the date of this
Report has not been sought or obtained. These options, therefore, have not been
granted.
On May 13, 1998, the Company sold a 5% convertible debenture due August
12, 1998 to Sovereign Partners for $200,000. Pursuant to a letter agreement
dated June 25, 1998, the debenture was made convertible into Common Stock at a
discount of 20% of the market price of the Common Stock on the date of
conversion.
On June 1, 1998, the Company granted to C. Robert Cusick, a director of
the Company, a non-qualified stock option expiring June 1, 2005 to purchase up
to 2,000,000 shares of Common Stock at a purchase price of $0.33 per share, in
connection with Mr. Cusick's election as a director of the Company. This option
was canceled in connection with the November 1998 repricing of options. See
"Option/SAR Repricing."
In June 1998, the Company issued 14,250 shares of Series H Convertible
Preferred Stock, $0.01 par value per share ("Series H Stock"), to various
unaffiliated investors for aggregate consideration of $1,425,000. Shares of
Series H Preferred Stock are convertible into Common Stock at 67% of the average
of the closing bid price of the Common Stock for the five (5) trading days
immediately preceding any conversion date.
On June 24, 1998, the Company issued 60,000 shares of Common Stock to
Ascentech, an unaffiliated company, in settlement of amounts owed.
On June 30, 1998, the Company issued a warrant expiring June 30, 2001 to
purchase up to 350,000 shares of Common Stock at a purchase price of $.01 per
share to Michael Vasinkevich, an investment banker providing services to the
Company.
During the quarter ended June 30, 1998, the Company issued an aggregate
of 5,056,297 shares of Common Stock upon exercise of options and warrants and
conversion of convertible debt and equity securities.
On July 2, 1998, the Company issued 100,000 shares of Common Stock to an
unaffiliated company in consideration for services rendered. On the same date,
the Company issued 150,000 shares of Common Stock to Dennis Smith, an officer of
Superior Pharmaceutical Company, as compensation for services rendered, and
issued 60,000 shares of Common Stock to Michael Sorrell, a former director of
the Company, in settlement of amounts owed to Mr. Sorrell.
On July 14, 1998, the Company issued 150,000 shares of Common Stock to
Steven Georgiev, a director of the Company, in consideration for services
rendered.
On July 15, 1998, the Company issued 36,000 shares of Common Stock to
Martin Janis, an unaffiliated company, in settlement of amounts owed.
On July 22, 1998, the Company issued 4,750 shares of Series H Stock to
various unaffiliated investors for aggregate consideration of $475,000. Shares
of Series H Preferred Stock are convertible into
15
<PAGE>
Common Stock at 67% of the average of the closing bid price of the Common Stock
for the five (5) trading days immediately preceding any conversion date.
On August 1, 1998, the Company issued a warrant to purchase up to 200,000
shares of Common Stock at a purchase price of $.15 per share to Fortress
Financial, in consideration for services rendered. This warrant expired on
December 31, 1998 without being exercised. On the same date, the Company issued
a warrant expiring June 30, 1999 to purchase up to 750,000 shares of Common
Stock at a purchase price of $.15 per share to USIS International Corp., in
consideration for services rendered.
On August 6, 1998, the Company issued 416,167 shares of Common Stock to
the former stockholders of Superior in connection with obligations relating to
the Company's June 1997 acquisition of Superior.
On August 18, 1998, the Company issued a warrant expiring August 18, 2001
to purchase up to 37,500 shares of Common Stock at a purchase price of $.40 per
share to Carolyn Cusick, in consideration for Ms. Cusick's making a $150,000
loan to the Company at 15% interest. Carolyn Cusick is the wife of C. Robert
Cusick, President and Chairman of the Board of Directors of the Company. See
"Certain Relationships and Related Transactions." On the same date, the Company
issued a warrant expiring August 18, 2001 to purchase up to 37,500 shares of
Common Stock at a purchase price of $.40 per share to Porter Capital, an
unaffiliated company, in consideration for a $150,000 loan at 15% interest.
On August 19, 1998, the Company issued 25,000 shares of Common Stock to
Larry Roark and Linda Roark, in consideration for services rendered in
connection with the sale of shares of BioTrack, Inc.
On August 26, 1998, the Company issued a warrant expiring December 31,
1999 to purchase 150,000 shares of Common Stock at a purchase price of $0.50 per
share to Michael Sorrell, a former director of the Company, in settlement of
amounts owed to Mr. Sorrell.
On September 29, 1998, the Company issued a $250,000 7% convertible
debenture due December 31, 1998 to Sovereign Partners, an unaffiliated investor,
for $250,000.
During the quarter ended September 30, 1998, the Company issued an
aggregate of 2,747,014 shares of Common Stock upon exercise of options and
warrants and conversion of convertible debt and equity securities.
On November 19, 1998, the Company's Board of Directors voted to reprice
certain options held by its directors and officers. In connection with the
repricing, the Company canceled a total of 3,150,000 options held by its
directors, C. Robert Cusick, Dhananjay G. Wadekar, Steven Georgiev and F. Howard
Schneider, and issued to each individual an option to purchase a number of
shares equal to the number of shares under the individual's canceled option at
an exercise price of $0.125, the closing price of the Company's Common Stock on
the date of the grant.
On November 20, 1998, the Company issued to Project Capital Partners LLC,
an unaffiliated investor, a $500,000 12% subordinated promissory note due March
20, 1999 and a warrant expiring November 20, 2000 to purchase 1,000,000 shares
of Common Stock at $0.05 per share. The Company received proceeds of $500,000.
On December 10, 1998, the Company issued 150,000 shares of Common Stock
to Brad Donner and 150,000 shares of Common Stock to David Mura, in
consideration for services rendered in connection with the Company's hiring of
Mr. Cusick as President and Chief Executive Officer.
16
<PAGE>
On December 29, 1998, the Company issued a warrant to purchase 1,200,000
shares of common stock at $.375 per share through December 29, 2003 in
consideration of future services to be rendered by an investment banker.
During the quarter ended December 31, 1998, the Company issued an
aggregate of 10,924,354 shares of Common Stock upon exercise of options and
warrants and conversion of convertible debt and equity securities.
The Company relied on one or more exemptions from registration under the
Securities Act of 1933, as amended (the "Securities Act"), for each of the
foregoing transactions, including without limitation the exemption provided by
Section 4(2) of the Securities Act. The Company used all of the net cash
proceeds raised by the sale of unregistered securities to repay indebtedness and
for working capital.
See Note 13 to the financial statements included in this Report, entitled
"Subsequent Events," for information relating to sales of unregistered
securities during the first quarter of fiscal 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The selected financial data set forth below has been derived from our
audited financial statements. The information set forth below should be read in
connection with the financial statements and notes thereto, as well as other
information contained in this Report which could have a material adverse effect
on our financial condition and results of operations. In particular, refer to
the matters described under the headings "Factors That May Affect Future
Results" contained elsewhere in this Report.
We acquired Superior Pharmaceutical Company on June 18, 1997, and we
acquired Generic Distributors on March 2, 1998. The acquisitions affect the
comparability of the data presented below, in that the results of Generic
Distributors and Superior are included only after the respective acquisition
dates. The acquisitions were accounted for as purchases. See Note 3 to the
Financial Statements, entitled "Business Acquisitions."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $24,980,294 $ 14,009,730
Costs and Expenses 35,509,986 24,087,512
Operating Loss 10,529,692 10,077,782
Other Income (Expense), Net (2,082,317) (2,163,496)
Net Loss (12,612,009) (12,241,278)
Less returns to preferred stock including beneficial conversion features 883,859 2,108,000
Net loss applicable to common stock (13,495,868) (14,349,278)
Net Loss per share - basic $(0.67) $(4.48)
Weighted average number of shares outstanding 20,059,286 3,204,163
BALANCE SHEET DATA: December 31, December 31,
------------ ------------
1998 1997
---- ----
Current Assets $11,167,790 $13,933,096
Total Assets 21,445,450 29,348,114
Current Liabilities 21,671,563 25,644,392
Long term debt 1,510,813 328,500
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Warrant put liability 858,435 750,594
Total Liabilities 24,040,811 26,723,486
Working Capital (Deficit) (10,503,773) (11,711,296)
Stockholders' Equity (Deficit) $(2,595,361) $2,624,628
</TABLE>
OVERVIEW
DynaGen makes and sells generic drugs for the human health care market.
In 1998, we shifted our business focus from being a development and licensing
company to building a company focused on the manufacture and distribution of
generic drug products and specialty pharmaceuticals. We intend to implement this
strategy through the acquisition of businesses, technologies and products that
we believe are undervalued, as well as through internal product development. In
August 1996, we acquired the tablet business of Able Laboratories, Inc.
("Able"), a generic pharmaceutical product subsidiary of Alpharma, Inc. In
addition, we acquired Superior Pharmaceutical Company ("Superior"), a
distributor of generic pharmaceuticals, in June 1997. In March 1998, we acquired
Generic Distributors Limited Partnership through our wholly-owned subsidiary,
Generic Distributors, Incorporated ("GDI"),
We have financed our operating losses primarily through the proceeds from
public and private stock offerings and debt offerings. We anticipate that
revenues from product sales will not be sufficient to fund our current
operations or produce an operating profit until such time as we can establish
acceptance of our products in their respective markets and expand our
distribution channels. We have incurred losses since inception and expect to
incur additional losses until such time as we can successfully develop,
manufacture, and sell or license our existing and proposed products and
technologies.
Our history of operating losses raises substantial doubt about our
ability to continue operations. If we are unable to secure significant
additional financing or to renegotiate our agreements with our existing
creditors, we may have to file for bankruptcy. Our independent auditors issued
an opinion on our financial statements as of December 31, 1998 and for the year
then ended which included an explanatory paragraph expressing substantial doubt
about our ability to continue as a going concern. See "-- Certain Factors That
May Affect Future Results" and "Business -- Risk Factors; Special
Considerations."
RESULTS OF OPERATIONS
Revenue: Revenues for the year ended December 31, 1998 were $24,980,294,
compared to $14,009,730 for the year ended December 31, 1997. This increase of
$10,970,564 is primarily the result of product sales by DynaGen's wholly-owned
generic drug distribution subsidiaries, Superior acquired in June 1997 and
Generic Distributors, Incorporated ("GDI") acquired in March 1998.
Cost of Product Sales: Cost of product sales was approximately 85% of
product sales for the year ended December 31, 1998 compared to 95% for the year
ended December 31, 1997. The high percentage cost in 1998 and 1997 was due to
low production and sales levels at Able, which did not support the fixed
manufacturing costs of the Able facility. Cost of product sales for Superior and
GDI for 1998 and 1997 was 79% and 81% of product sales, respectively.
Research and Development: Research and development expenses for the year
ended December 31, 1998 were $814,108, compared to $3,220,283 for the year ended
December 31, 1997. 1997 R&D expenses were primarily the result of the
NicErase-SL Phase 3 clinical trials, now concluded, and the NicErase-SL
development program which has been discontinued. 1998 expenses relate to
developing several generic versions of branded pharmaceuticals to support the
generic drug business.
18
<PAGE>
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended December 31, 1998 were $10,912,589,
compared to $7,611,578 for the year ended December 31, 1997. The increase in
expenses was primarily attributable to the acquisition of Superior in June 1997
and GDI in March 1998. Superior and GDI accounted for approximately $2,900,000
of the increase in expenses.
Loss on Impairment: We recorded a $2,500,000 loss on impairment of
Superior's customer lists in the fourth quarter of 1998 based on our current
projections of Superior's future cash flows. We plan to continue to monitor and
evaluate the accuracy of these projections during 1999. If cash flows do not
occur as projected, we may be required to recognize additional impairment
losses.
Other Income: Investment income was $174,188 for the year ended December
31, 1998 as compared to $120,359 for the year ended December 31, 1997. Interest
and financing expenses of $2,256,505 for the year ended December 31, 1998,
compared to $2,283,855 for the year ended December 31, 1997, relate primarily to
private placements of debt financing and bank loans related to the Superior and
GDI acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had a working capital deficit of $10,503,773,
compared to working capital deficit of $11,711,296 at December 31, 1997. Cash
was $97,045 at December 31, 1998 compared to $697,045 at December 31, 1997.
Working capital increased primarily as a result of our acquisition of GDI and
equity placements in 1998. We expect our cash needs for the next 12 months to be
approximately $5,000,000. We expect to generate the needed cash through
additional financing activities. If we are not able to raise the needed
financing, we will likely need to seek the protection of the bankruptcy courts.
See "Business -- Risk Factors; Special Considerations" and "Certain Factors That
May Affect Future Results."
In June 1997, we acquired Superior Pharmaceutical Company, of Cincinnati,
Ohio, for an adjusted purchase price of $15.9 million in cash, notes and stock.
The merger agreement guaranteed that the selling shareholders would receive at
least $5,000,000 in the stock value as of June 1998. The agreement provided that
we would make up any shortfall in this guaranteed stock value through the
issuance of additional stock and cash.
At the time of the acquisition Superior had $30,000,000 in sales and was
profitable. Superior's performance has declined sharply since the acquisition.
Superior experienced loss of key personnel, declining revenues, erosion of
margins and an overall decline in its business. Also, a number of key personnel
at Superior were recruited by competitors immediately after the acquisition.
This downturn has caused a severe shortage of working capital and consequently,
we have not paid the former Superior stockholders all of the amounts set forth
in the agreement as part of the purchase price.
We used a combination of cash, a note and 166,667 shares of Common Stock
to acquire Superior. The merger agreement provided that we would also be
obligated to issue to the former stockholders of Superior up to an additional
1,666,667 shares of Common Stock if on June 18, 1998 the Common Stock had not
had an average closing bid price of at least $30.00 per share for the 10
previous trading days. The merger agreement also stated that any difference
between the value of the stock issued and the $5,000,000 guaranteed value was to
be paid in cash. The Common Stock traded at approximately $0.50 per share as of
June 18, 1998, and we therefore became obligated to pay approximately $4,000,000
in cash to the former stockholders of Superior. Under the agreement, we owe the
former stockholders a total of approximately $9,000,000 in common stock, cash
and notes. Because of the business downturn at Superior, we have not been able
to obtain financing sufficient to settle all of the amounts owed to the former
Superior stockholders.
19
<PAGE>
On July 31, 1998 we entered into a contingent settlement agreement to
reduce the remaining purchase price to approximately $4,000,000. We continued to
seek the exact amount and the form of payment (i.e., cash and/or stock) for the
final settlement, but were unable to obtain sufficient financing. On December
17, 1998, the former Superior stockholders commenced a civil action in the Court
of Common Pleas, Hamilton County, Ohio. The complaint filed by the former
Superior stockholders alleged that we owed them approximately $9,000,000,
including $4,166,667 in connection with promissory notes issued in connection
with the merger as well as $4,817,660 as an adjustment to the purchase price. We
have filed our response to this complaint. The former Superior stockholders have
voluntarily continued to forbear in taking further action in connection with the
lawsuit, and we are working to settle all outstanding issues between us. The two
former Superior stockholders who are employees of Superior continue to be
employed by Superior and to perform key functions for Superior and for DynaGen,
both in connection with our continuing effort to seek additional financing and
our ongoing operations.
If we do not settle or successfully defend against the lawsuit, we will
likely have to pay a substantial sum of money to the former owners of Superior.
We would lose a substantial amount of assets and face liabilities of up to
approximately $9,000,000, and we could be forced to liquidate all of our assets
or to declare bankruptcy. We can give no assurance that we will be able to
obtain financing to meet the obligations to pay the former Superior
shareholders. See "-- Certain Factors That May Affect Future Results" and
"Business -- Legal Proceedings."
We have satisfied various liabilities by divesting substantially all of
our equity ownership in BioTrack, Inc., a subsidiary formed to develop and
commercialize a technology involving tumor localization and tracking. In 1998,
in connection with our plan to shift our business to generic drug manufacturing
and distribution, the Board of Directors determined that BioTrack did not fit
into our plan to be a generic drug manufacturing and distribution company. On
April 30, 1998, the Board of Directors unanimously voted to divest our majority
share in BioTrack. Our equity in BioTrack was reduced to approximately 1,300,000
shares, or 26%, and we distributed the balance to the inventors of the
technology, investors and BioTrack management. In February 1999, the Board of
Directors voted to issue options to purchase 1,045,000 shares of BioTrack to
various individuals, including each of the directors, in consideration of
services render to DynaGen by each of the individuals. If these options are all
exercised in full, then we will own 255,000 shares of BioTrack.
We have senior secured working capital and lending facilities from three
separate entities. Huntington National Bank has provided working capital for
Superior Pharmaceutical. The initial note matured in June 1998 and since then,
Huntington has extended the facility on a monthly basis. Fleet Capital has
provided a term loan for the acquisition of GDI and K&L Financial has provided
working capital for Able Laboratories. We are in default of certain financial
covenants, but we have not defaulted on payment obligations.
To date we have met substantially all of our capital requirements through
the sale of securities and loans convertible into common stock. The negative
impact of events in 1997 and 1998 has therefore severely limited our ability to
raise capital in a conventional sale of our securities. We have engaged an
investment banking firm, which specializes in turnaround of companies, to seek
both debt and equity financing. We have received a commitment from a national
bank for a working capital loan and term loan. If we obtain this financing, we
intend to use the working capital line to consolidate our current debt from the
three existing lenders. The commitment is contingent upon our settling
outstanding Superior payment obligations and obtaining at least $4 million in
equity capital. We have received commitments from two separate groups of
investors for this equity investment.
We cannot give any assurance that these commitments will result in
investments and lending by these investors. If we cannot raise such financing,
we will not be able to satisfy the Superior obligation and have
20
<PAGE>
working capital for our other operations. Under such circumstances we will have
to seek protection of the bankruptcy courts. See "Business -- Risk Factors;
Special Considerations" and "Certain Factors That May Affect Future Results."
We have also been working with our trade creditors to reduce our
obligations. A substantial majority of the creditors have accepted our payment
plans, which include periodic payments, discounts of amounts outstanding, and
acceptance of shares of Common Stock.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
We do not provide forecasts of our future financial performance. However,
from time to time, information provided by us or statements made by our
employees may contain "forward looking" information that involves risks and
uncertainties. In particular, statements contained in this Report that are not
historical facts (including but not limited to, statements contained in Item 1
of this Report ("Business") relating to our strategy with respect to the
development and marketing of our products and to statements contained in Item 6
of this Report ("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. Our 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-KSB, as well as the accuracy
of our internal estimates of revenue and operating expense levels.
The following risk factors should be read in conjunction with the
financial statements and related notes thereto. The following factors, among
others, could cause our 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 our business, results of
operations and financial condition.
OUR FINANCIAL CONDITION IS HIGHLY UNCERTAIN; WE HAVE A HISTORY OF LOSSES
AND WE ANTICIPATE FUTURE LOSSES
We have incurred operating losses in every operating period since our
inception and had an accumulated deficit of $50,153,553 as of December 31, 1998.
We incurred a net loss of $12,612,009 in the year ended December 31, 1998.
Our losses have resulted principally from expenses we incurred in
research and development activities, and from general and administrative costs
associated with our development efforts. In addition, our Able subsidiary has
incurred operating losses, primarily because revenues have not equaled expenses.
To continue development of our current and proposed products, we will need to
expend substantial additional resources to conduct further product development
and to establish manufacturing, sales, marketing, regulatory and administrative
capabilities. Therefore, we expect to incur substantial operating losses over
the next several years as we expand our product programs and commence marketing
efforts. We can give no assurance that we will ever generate substantial
revenues from our business, or achieve profitability.
OUR ABILITY TO CONTINUE OPERATIONS IS IN QUESTION; WE NEED TO RAISE
SIGNIFICANT ADDITIONAL FUNDS TO CONTINUE OPERATIONS
Our history of operating losses raises substantial doubt about our
ability to continue operations. If we are unable to secure significant
additional financing or to renegotiate our agreements with our existing
21
<PAGE>
creditors, we may be obliged to seek protection from our creditors by declaring
bankruptcy. Our independent auditors issued an opinion on our financial
statements as of December 31, 1998 and for the year then ended which included an
explanatory paragraph expressing substantial doubt about our ability to continue
as a going concern. The reasons cited by the independent auditors include the
following:
o we have incurred recurring losses from operations resulting in a
stockholders' deficit and a working capital deficiency at
December 31, 1998;
o we have defaulted on conditions placed upon us by our banks and
other lenders;
o we have substantial liabilities to the former stockholders of
Superior Pharmaceutical Company, which are past due, and we are
involved in litigation with the former Superior stockholders
over this liability;
o our ability to use cash generated by our subsidiaries is
restricted under the terms of the subsidiaries' loan agreements.
OUR FINANCIAL CONDITION IS HIGHLY UNCERTAIN, AND WE MAY NEED TO SEEK
PROTECTION FROM OUR CREDITORS BY FILING FOR BANKRUPTCY
We will likely be forced to declare bankruptcy if we cannot continue to
pay our creditors. As of December 31, 1998, our total assets were less than our
total liabilities. We need to raise at least $5,000,000 to continue operations
for the next year. We also need to renegotiate the terms of our existing
agreements with our creditors. If we do not raise the necessary money or are not
successful in renegotiating the terms of our existing arrangements, we will
probably have to seek the protection of the bankruptcy courts and holders of
Common Stock would stand to lose their entire investment. Among other things, we
need substantial funds to settle all liabilities to the former stockholders of
Superior. See "-- Our Ability to Continue Operations is in Question; We Need to
Raise Significant Additional Funds to Continue Operations" and "-- We Face
Substantial Obligations Relating to the Acquisition of Superior."
OUR INTANGIBLE ASSETS ARE SUBJECT TO IMPAIRMENT LOSS
Depending on our future performance, we may have to recognize a material
loss because of the nature of certain of our assets. When we acquired Superior
and GDI, we paid more for the companies than the fair value of the tangible
assets we acquired. Accounting rules require us to record the difference on our
books as an intangible asset. Intangible assets are "long-lived" assets which
remain on our balance sheet as we amortize them. The accounting rules also
require us to record an impairment loss if, and to the extent that, the expected
cash flow to be produced by an acquired asset over its useful life is less than
the carrying amount of the asset. We also must review our long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may be not be recoverable.
Intangible assets such as customer lists and goodwill account for a high
percentage of the total assets on our balance sheet. In light of our continuing
operating losses and negative cash flow, in August 1998 we undertook an
impairment analysis of these intangible assets. Based on projections of future
cash flows expected at that time to be produced by the acquired assets, we
determined, at that time, that the assets were not impaired.
In February 1999, we reviewed and evaluated the assets and the cash flow
projections underlying the impairment analysis. We decided at that time to
record a $2,500,000 loss on impairment of the Superior customer lists in our
1998 financial statements, based on revised projections of Superior's future
cash flows.
22
<PAGE>
We intend to continue to evaluate these long-lived assets as required by
the accounting rules, and to monitor and evaluate the accuracy of the
assumptions and beliefs underlying our revenue projections. If our anticipated
cash flows do not occur as projected, and as a result we determined that the
assets are further impaired, we would be required to recognize an additional
loss in accordance with the accounting rules.
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ STOCK MARKET
Our Common Stock was delisted from the Nasdaq Stock Market as of the
close of trading on October 6, 1998. We anticipate that our Common Stock will
continue to trade on the Boston Stock Exchange and will also be quoted on the
OTC Bulletin Board. Delisting of the Common Stock from the Boston Stock Exchange
could have a material adverse effect on the public perception of the value of
the common stock and, consequently, on our ability to raise capital necessary
for our continued operations.
OUR COMMON STOCK MAY BE SUBJECT TO PENNY STOCK RULES
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has (i) net tangible assets of at least $2,000,000, if
the issuer has been in continuous operation for at least three years, (ii) net
tangible assets of at least $5,000,000, if the issuer has been in continuous
operation for less than three years, or (iii) average annual revenue of at least
$6,000,000 for the last three years. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith.
If our Common Stock were delisted from the Boston Stock Exchange, and if
at that time we did not have at least $2,000,000 in net tangible assets or at
least $6,000,000 in average annual revenue for the last three years, trading in
the Common Stock would be covered by Rules 15g-1 through 15g-6 and 15g-9
promulgated under the Securities Exchange Act. Under those rules, broker/dealers
who recommend such securities to persons other than established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker/dealers to trade in our Common Stock and thus would make
it more difficult for purchasers of Common Stock to sell their securities in the
secondary market. The market liquidity for the Common Stock could be severely
affected.
WE ARE OBLIGATED TO ISSUE A LARGE NUMBER OF SHARES OF COMMON STOCK AT
PRICES BELOW THE MARKET PRICE, WHICH COULD ADVERSELY AFFECT THE VALUE OF
THE COMMON STOCK
We are obligated to issue a large number of shares at prices lower than
market value. Therefore, the Common Stock could lose value if a large number of
shares are issued into the market. At December 31, 1998 we had 37,612,612 shares
of Common Stock issued and outstanding. We have issued a large number of
securities, such as options, warrants, convertible preferred stock and
convertible notes, that are convertible by their holders into shares of Common
Stock. As of December 31, 1998, we were obligated to issue up to approximately
31,282,349 shares of Common Stock upon the conversion or exercise of convertible
securities. We have also reserved 9,865,390 shares of Common Stock for issuance
pursuant to options granted to our employees, officers, directors and
consultants. The holders of these convertible securities likely would only
exercise their rights to acquire Common Stock at times when the exercise price
is lower than the price at which they could buy the Common Stock on the open
market. Therefore, because
23
<PAGE>
we would likely receive less than current market price for any shares of Common
Stock issued upon exercise of options and warrants, the exercise of a large
number of these convertible securities could reduce the per-share market price
of Common Stock held by existing investors. Also, the exercise of a large number
of convertible securities could limit our ability to obtain additional equity
capital by selling Common Stock. In all likelihood, we would be able to sell
shares of Common Stock elsewhere on more favorable terms at the time the holders
of convertible securities choose to exercise their rights.
WE FACE SUBSTANTIAL OBLIGATIONS RELATING TO THE ACQUISITION OF SUPERIOR
We acquired Superior in June 1997. At the time, Superior had $30,000,000
in sales and was profitable. Superior's performance has declined sharply since
the acquisition. This downturn caused a cash shortage and consequently, we have
not paid the former Superior stockholders all of the amounts set forth in the
agreement as part of the purchase price.
We used a combination of cash, a note and 166,667 shares of Common Stock
to acquire Superior in June 1997. The merger agreement for the Superior
acquisition provided that we would also be obligated to issue to the former
stockholders of Superior up to an additional 1,666,667 shares of Common Stock if
on June 18, 1998 the Common Stock had not had an average closing bid price of at
least $30.00 per share for the 10 previous trading days. The merger agreement
also stated that any difference between the value of the stock issued and the
$5,000,000 guaranteed value was to be paid in cash. The Common Stock traded at
approximately $0.50 per share as of June 18, 1998, and we therefore became
obligated to pay approximately $4,000,000 in cash to the former stockholders of
Superior. Under the agreement, we owe the former stockholders a total of
approximately $9,000,000 in common stock, cash and notes. Because of the
business downturn at Superior, we have not been able to obtain financing
sufficient to settle all of the amounts owed to the former Superior
stockholders.
On July 31, 1998 we entered into a contingent settlement agreement to
reduce the remaining purchase price to approximately $4,000,000. We continued to
seek the exact amount and the form of payment (i.e., cash and/or stock) for the
final settlement, but were unable to obtain sufficient financing.
On December 17, 1998, the former Superior stockholders commenced a civil
action in the Court of Common Pleas, Hamilton County, Ohio. The complaint filed
by the former Superior stockholders alleged that we owed them approximately
$9,000,000, including $4,166,667 in connection with promissory notes issued in
connection with the merger as well as $4,817,660 as an adjustment to the
purchase price. We have filed our response to this complaint. The former
Superior stockholders have voluntarily continued to forbear in taking further
action in connection with the lawsuit, and we are working to settle all
outstanding issues between us. The two former Superior stockholders who are
employees of Superior continue to be employed by Superior and to perform key
functions for Superior and for DynaGen, both in connection with our continuing
effort to seek additional financing and our ongoing operations.
If we do not settle or successfully defend against the lawsuit, we will
likely have to pay a substantial sum of money to the former owners of Superior.
We would lose a substantial amount of assets and face liabilities of up to
approximately $9,000,000, and we could be forced to liquidate all of our assets
or to declare bankruptcy.
We can give no assurance that we will be able to obtain financing to meet
the obligations to pay the former Superior shareholders.
24
<PAGE>
WE FACE INTENSE COMPETITION FROM A WIDE RANGE OF MANUFACTURERS
The generic drug manufacturing and distribution business is highly
competitive. We compete with several companies that are better capitalized and
that have financial and human resources significantly greater than ours. Because
we manufacture generic drugs, our products by their very nature are chemically
and biologically equivalent to the products of our larger and profitable
competitors. These larger companies could capture a significant share of the
market.
OUR STOCK PRICE IS HIGHLY VOLATILE; THE VALUE OF THE COMMON STOCK MAY
FLUCTUATE WIDELY FROM DAY TO DAY
Volatility in our stock price may negatively impact the market price of
our Common Stock and increases the risk that we could be the subject of costly
securities litigation. The market price of our Common Stock has fluctuated
between $70.00 and $.10 from January 1, 1993 to December 31, 1998 and was
approximately $.25 on January 27, 1999. It is likely that the price of the
Common Stock will continue to fluctuate widely in the future. The market price
of our Common Stock could fluctuate substantially based on a variety of factors,
including:
o quarterly fluctuations in our operating results;
o announcements of new products by us or our competitors;
o key personnel losses;
o sales of common stock; and
o developments or announcements with respect to industry
standards, patents or proprietary rights.
WE MAY BE SURPRISED BY YEAR 2000 ISSUES
Many currently installed software products and computer systems are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This ability is commonly referred to as being Year 2000
compliant. The use of software and computer systems that are not Year 2000
compliant could result in system failures or miscalculations causing disruptions
of operations, including a temporary inability to process transactions, send
invoices or engage in similar normal business activities. We have not conducted
a Year 2000 review of our vendors and suppliers or licensees. Failure of systems
maintained by our vendors and suppliers to operate properly with regard to the
Year 2000 and thereafter could require us to incur significant unanticipated
expenses to remedy any problems or replace affected vendors and suppliers. See
"Year 2000 Compliance."
WE MAY FACE PRODUCT LIABILITY FOR WHICH WE ARE NOT ADEQUATELY INSURED
The testing, marketing and sale of pharmaceutical products for human use
entail inherent risks. Liability might result from claims made directly by
consumers or by pharmaceutical companies or others selling our products.
Superior, GDI and Able presently carry product liability insurance in amounts
that we believe to be adequate, but there can be no assurance that such
insurance will remain available at a reasonable cost or that any insurance
policy would offer coverage sufficient to meet any liability arising as a result
of a claim. We intend to seek to obtain insurance coverage if and when our
proposed products are commercialized but can give no assurance that we will be
able to obtain such insurance on reasonable terms
25
<PAGE>
or that, if obtained, such insurance will be sufficient to protect us against
such potential liability or at a reasonable cost. The obligation to pay any
product liability claim or a recall of a product could have a material adverse
affect on our business, financial condition and future prospects.
INTENSE REGULATION BY GOVERNMENT AGENCIES MAY DELAY OUR EFFORTS TO
COMMERCIALIZE OUR PROPOSED DRUG PRODUCTS
Our research, preclinical development, clinical trials, manufacturing and
marketing of our 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. We can give no
assurance that we will be able to obtain the necessary approvals for clinical
testing or for the manufacturing or marketing of our proposed products. Present
and future governmental regulatory processes could prevent or delay approval of
our products make them too costly for us to pursue. Also, if we failed to comply
with applicable regulatory requirements we could face fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. Our success in the generic drug market depends in part on our
ability to obtain FDA approval of ANDAs for our new products, as well as our
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 our 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, we would be required to
file a supplement to our 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 cGMP standards. We could be subject to fines and
sanctions such as the suspension of manufacturing or the seizure of drug
products if we were found to be in non-compliance with cGMP standards.
YEAR 2000 COMPLIANCE
Many computer systems and software products could experience problems
handling dates beyond the year 1999 because the systems are coded to accept only
two-digit entries in the date code fields. Inability of products and systems on
which we rely to process these dates could have a material adverse effect on our
business.
We have assessed our internal processes and systems. We believe that our
sales, administration, and general operations are substantially year 2000
compliant. Prior to purchasing any new equipment or software, it is company
policy to ensure that the specifications include year 2000 compliance.
We intend to query major suppliers and other third parties upon which we
may be dependent to determine the extent of their Year 2000 compliance. We
intend to complete this inquiry and assessment of the Year 2000 readiness of the
systems and products of these suppliers and other third parties by mid-1999.
However, due to the need to devote management and financial resources to other
matters, we have not as yet completed this inquiry and assessment.
Contingency Plan
To minimize potential disruptions, we intend to adopt a contingency plan,
if deemed necessary, to address any issues raised during our planned assessment
in 1999. Because no specific instance of material
26
<PAGE>
Year 2000 non-compliance has been discovered to date, we have not adopted a
contingency plan to deal with Year 2000 issues.
Costs
Based on our internal investigation to date, we do not expect the total
costs of our Year 2000 review and compliance to have a material adverse effect
on our business or financial results. We may have to spend a material amount to
develop and implement a contingency plan during 1999, if we find that a material
supplier or other third party on whom we rely will face business interruptions
as a result of Year 2000 issues.
Risk
Based on our review of our Year 2000 issues to date, we do not anticipate
significant interruption of normal internal operations. The risk posed by Year
2000 issues depends substantially on the number and type of any instances of
non-compliance that have not yet been discovered by us. To the extent that our
internal systems, or products and services obtained from third parties, are
found not to be Year 2000 compliant, we could face business disruptions which
could, in turn, cause delays in meeting operating goals and could divert
significant management resources.
ITEM 7. FINANCIAL STATEMENTS
DynaGen's Consolidated Financial Statements and Related Independent
Auditors' Report are presented in the following pages. The financial statements
filed in this Item 7 are as follows:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Loss - Years Ended December 31, 1998
and 1997
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
DynaGen, Inc.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of DynaGen,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of loss, changes in stockholders' equity (deficit) and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
DynaGen, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred recurring
losses from operations resulting in a stockholders' deficit and a working
capital deficiency at December 31, 1998. In addition, the Company has debt
obligations which are in default, a significant acquisition obligation in
connection with its acquisition of Superior Pharmaceutical Company ("Superior"),
is involved in litigation with the former stockholders of Superior and access to
the cash and equity of Superior and Generic Distributors, Inc. is restricted
under the terms of their loan agreements. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As described in Note 1, the Company restated its financial statements to
present the effect of a beneficial conversion discount on the convertible notes
issued in 1996.
/s/ WOLF & COMPANY, P.C.
Boston, Massachusetts
February 12, 1999, except for Note 13 as to which the date is March 29, 1999
28
<PAGE>
DYNAGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 97,045 $ 697,045
Accounts receivable, net of allowance for doubtful
accounts of $68,133 and $43,118 3,673,472 3,152,779
Rebates 398,724 713,976
Inventory 6,647,079 9,111,324
Notes receivable 150,000 110,000
Prepaid expenses and other current assets 201,470 147,972
----------- -----------
Total current assets 11,167,790 13,933,096
----------- -----------
Property and equipment, net 1,685,010 1,772,878
----------- -----------
Other assets:
Customer lists, net of accumulated amortization of
$4,205,133 and $1,361,200 7,636,072 12,250,800
Goodwill, net of accumulated amortization of
$48,567 and $22,751 337,652 363,468
Patents and trademarks, net of accumulated amortization of
$0 and $89,164 65,229 345,381
Deferred debt financing costs, net of accumulated
amortization 277,325 359,621
Deposits and other assets 276,372 322,870
----------- -----------
Total other assets 8,592,650 13,642,140
----------- -----------
$21,445,450 $29,348,114
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
DYNAGEN, INC.
CONSOLIDATED BALANCE SHEETS - (Continued)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $621,313 $142,616
Notes payable and current portion of long-term debt 13,162,041 14,933,043
Accounts payable and accrued expenses 3,705,209 6,485,733
Deferred revenue 100,000 --
Acquisition obligation 4,083,000 4,083,000
----------- -----------
Total current liabilities 21,671,563 25,644,392
Warrant put liability 858,435 750,594
Long term debt, less current portion 1,510,813 328,500
----------- -----------
Total liabilities 24,040,811 26,723,486
----------- -----------
Commitments and contingencies Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized
52,152 and 63,522 shares of Series A through H outstanding,
(liquidation value $5,212,977 and $6,348,417) 521 635
Common stock, $.01 par value, 75,000,000 shares authorized,
37,612,612 and 4,315,137 shares issued and outstanding 376,126 43,151
Additional paid-in capital 47,181,545 40,122,386
Accumulated deficit (50,153,553) (37,541,544)
----------- -----------
Total stockholders' equity (deficit) (2,595,361) 2,624,628
----------- -----------
$21,445,450 $29,348,114
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Product sales $24,979,594 $13,920,904
Fees and royalties 700 88,826
----------- -----------
Total revenues 24,980,294 14,009,730
----------- -----------
Costs and expenses:
Cost of sales 21,283,289 13,255,651
Research and development 814,108 3,220,283
Selling, general and administrative 10,912,589 7,611,578
Loss on impairment of customer lists 2,500,000 --
----------- -----------
Total costs and expenses 35,509,986 24,087,512
----------- -----------
Operating loss (10,529,692) (10,077,782)
----------- -----------
Other income (expense):
Investment income, net 174,188 120,359
Interest and financing expense (2,256,505) (2,283,855)
----------- -----------
Other income (expense), net (2,082,317) (2,163,496)
----------- -----------
Net loss (12,612,009) (12,241,278)
Less returns to preferred stockholders:
Beneficial conversion feature 733,000 1,918,000
Dividends paid and accrued 150,859 190,000
----------- -----------
Net loss applicable to common stock $(13,495,868) $(14,349,278)
=========== ===========
Net loss per share-basic $ (0.67) $ (4.48)
=========== ===========
Weighted average shares outstanding 20,059,286 3,204,163
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Comprehensive
Income Shares Amount Shares Amount
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 2,910,623 $ 29,106
Stock issued in private placements 69,950 699 147,500 1,475
Common Stock issued for Superior acquisition -- -- 166,667 1,667
Exercise of stock options -- -- 150 2
Issuance of common stock purchase warrants -- -- -- --
Delayed registration penalty -- -- -- --
Stock options and warrants issued for services -- -- -- --
Stock issued for interest obligation -- -- 6,418 64
Conversions of note payable 5,015 50 113,959 1,140
Conversion of preferred stock (11,443) (114) 757,320 7,573
Stock issued for services 212,500 2,124
Decrease in unrealized gain on investment $ (1,307) -- -- -- --
securities
Net loss for the year ended December 31, 1997 $(12,241,278) -- -- -- --
------------ ------- ------- ------- -------
(12,242,585)
Balance at December 31, 1997 63,522 635 4,315,137 43,151
Exercise of stock options -- -- 30,000 300
Shares issued for GDI acquisition 12,000 120 -- --
Shares issued in private placements 34,000 340 -- --
Commission paid on private placement -- -- -- --
Delayed registration penalty -- -- -- --
Stock options and warrants issued for service -- -- -- --
Conversions of debt -- -- 8,281,362 82,814
Conversion of preferred stock (57,370) (574) 20,230,295 202,303
Conversion of related party loans -- -- 1,893,333 18,933
Common stock issued for interest -- -- 733,214 7,332
Common stock issued for services -- -- 1,829,271 18,293
Common stock issued for bonus -- -- 300,000 3,000
Beneficial conversion feature of convertible -- -- -- --
note and debentures
Adjustment due to change in ownership of -- -- -- --
former subsidiary
Net loss for the year ended December 31, 1998 $(12,612,009) -- -- -- --
------------ ------- ------- ------- -------
$(12,612,009)
Balance at December 31, 1998 ========== 52,152 $521 37,612,612 $376,126
====== ==== ========== ========
</TABLE>
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)(continued)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-In Accumulated Comprehensive
Capital Deficit Income Total
------- ------- ------ -----
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $30,323,869 $(25,300,266) $1,307 $5,054,016
Stock issued in private placements 6,672,473 -- -- 6,674,647
Common Stock issued for Superior acquisition 915,333 -- -- 917,000
Exercise of stock options 1,123 -- -- 1,125
Issuance of common stock purchase warrants 450 -- -- 450
Delayed registration penalty (328,500) -- -- (328,500)
Stock options and warrants issued for services 801,034 -- -- 801,034
Stock issued for interest obligation 59,774 -- -- 59,838
Conversions of note payable 1,495,163 -- -- 1,496,353
Conversion of preferred stock (7,459) -- -- --
Stock issued for services 189,126 -- -- 191,250
Decrease in unrealized gain on investment -- -- (1,307) (1,307)
securities
Net loss for the year ended December 31, 1997 -- (12,241,278) -- (12,241,278)
---------- ----------- ------- ------------
Balance at December 31, 1997 40,122,386 (37,541,544) -- 2,624,628
Exercise of stock options 8,700 -- -- 9,000
Shares issued for GDI acquisition 1,199,880 -- -- 1,200,000
Shares issued in private placements 3,399,660 -- -- 3,400,000
Commission paid on private placement (150,168) -- -- (150,168)
Delayed registration penalty (175,000) -- -- (175,000)
Stock options and warrants issued for service 303,996 -- -- 303,996
Conversions of debt 1,077,186 -- -- 1,160,000
Conversion of preferred stock (201,729) -- -- --
Conversion of related party loans 276,067 -- -- 295,000
Common stock issued for interest 169,407 -- -- 176,739
Common stock issued for services 576,672 -- -- 594,965
Common stock issued for bonus 128,400 -- -- 131,400
Beneficial conversion feature of convertible 175,000 -- -- 175,000
note and debentures
Adjustment due to change in ownership of 271,088 -- -- 271,088
former subsidiary
Net loss for the year ended December 31, 1998 -- (12,612,009) -- (12,612,009)
---------- ----------- ------- ------------
Balance at December 31, 1998 $47,181,545 $(50,153,553) $ -- $(2,595,361)
=========== ============ ======= ============
</TABLE>
32
<PAGE>
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,612,009) (12,241,278)
Adjustments to reconcile net loss to net cash used
for operating activities:
Loss on impairment of customer lists 2,500,000 --
Beneficial conversion feature of convertible note 175,000 --
Stock and stock options issued for services 1,030,161 992,284
Depreciation and amortization 3,438,497 1,714,250
Adjustment due to change in ownership
of former subsidiary 271,088 --
Amortization and accretion of (discounts)
premiums on investment securities -- (10,152)
Stock issued for interest obligation 176,739 59,838
Write-off of patent costs 224,984 --
(Increase) decrease in operating assets:
Accounts receivable 198,561 (428,612)
Rebates 315,252 (215,672)
Inventory 3,516,029 (1,268,351)
Prepaid expenses and other current assets (45,518) 170,149
Deposits and other assets 50,636 (211,250)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (3,108,549) 4,521,843
Deferred revenue 100,000 --
------------ -------------
Net cash used for operating activities (3,769,129) (6,916,951)
------------ -------------
Cash flows from investing activities:
Purchase of investment securities -- (1,186,455)
Sales and maturities of investment
securities -- 4,200,000
Purchase of wholly-owned subsidiary (1,296,205) (6,878,463)
Purchase of property and equipment (192,005) (959,224)
Patent and trademark costs -- (103,067)
(Increase) decrease in notes receivable (40,000) 75,000
------------ -------------
Net cash provided by (used for) investing
activities (1,528,210) (4,852,209)
------------ -------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 9,000 1,125
Net proceeds from private stock placements 3,249,832 6,775,920
Net proceeds from debt placements 3,557,000 3,326,898
Payment of debt obligations (335,748) --
Net change in line of credit (2,029,606) 524,013
Net change in accounts receivable factoring 184,830 --
Increase in bank overdraft 478,697 142,616
Payment of Superior notes payable (416,666) (416,667)
------------ -------------
Net cash provided by financing activities 4,697,339 10,353,905
------------ -------------
Net change in cash and cash equivalents (600,000) (1,415,255)
Cash and cash equivalents at beginning of year 697,045 2,112,300
------------ -------------
Cash and cash equivalents at end of year $ 97,045 $ 697,045
============ =============
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 1,279,820 $ 574,300
Conversion of debt into common stock 1,160,000 --
Conversion of related party loans into common stock 295,000 --
Debt issued for delayed registration penalty 175,000 --
</TABLE>
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On June 18, 1997, the Company purchased all of the common stock of Superior
Pharmaceutical Company for $15,850,000. In connection with the acquisition, non
cash financing activities, liabilities assumed and goodwill and customer lists
were as follows:
Fair value of assets acquired $ 10,810,660
Cash paid for common stock (6,250,000)
Common stock issued and acquisition obligation (5,000,000)
Note payable issued, net of adjustment (4,600,000)
Liabilities assumed (8,263,478)
------------
Goodwill and customer lists (exclusive of other
acquisition costs of $694,890) $ 13,302,818
============
On March 2, 1998, the Company purchased the net assets of Generic Distributors
Limited Partnership for $2,350,000. In connection with the acquisition, non-cash
financing activities, liabilities assumed and customer lists were as follows:
Fair value of assets acquired $2,375,274
Cash paid (1,200,000)
Preferred stock issued (1,150,000)
Liabilities assumed (658,274)
--------
Customer lists (exclusive of other acquisition
costs of $96,205) $ 633,000
============
Additional cash flow information is included in Note 6.
See accompanying notes to consolidated financial statements.
34
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of DynaGen,
Inc. (the "Company") and its wholly-owned subsidiaries, Able Laboratories, Inc.
("Able"), which is engaged in the manufacture of generic pharmaceuticals,
Superior Pharmaceutical Company ("Superior") and Generic Distributors Inc.
("GDI") both of which are engaged in the distribution of generic pharmaceuticals
and Apex Pharmaceuticals, Inc. which is developing therapeutic products. The
consolidated financial statements no longer include the accounts of BioTrack,
Inc. for the reason described below. All significant intercompany balances and
transactions have been eliminated in consolidation.
During 1998, the Company sold 300,000 shares of its BioTrack subsidiary's
common stock, recognizing a gain of $150,000, which is included in investment
income. In April 1998, BioTrack redeemed 3,930,000 shares of its common stock
held by the Company for a $1,000,000 promissory note. This note has not been
recognized in the accompanying financial statements because of the uncertainty
and risks inherent in technology start-up companies. As a result of the
ownership changes in BioTrack described above, the Company adjusted its
investment in BioTrack by $271,088 which was added to additional paid-in
capital. The Company's ownership interest in BioTrack at December 31, 1998 was
approximately 26%. Accordingly, BioTrack's financial statements are not included
in the accompanying consolidated financial statements. The Company's remaining
investment is carried on the equity basis of accounting. In February 1999, the
Company granted options to various individuals, including each of the directors,
to purchase an aggregate 1,045,000 shares at $.50 per share of the BioTrack
stock owned by the Company. The options expire in February 2004.
FINANCIAL STATEMENT RESTATEMENT
The accompanying financial statements have been restated from those
originally issued to reflect a change in accounting for the February 1996
issuance of a convertible note, as described in Note 6 to the financial
statements. The convertible note was convertible into common stock at a discount
to the traded market price. At the date of issuance, the Company did not
allocate any portion of the proceeds received to the beneficial discount.
Subsequently, the Securities and Exchange Commission announced its
position that a beneficial conversion discount on convertible notes should be
computed based on the quoted market value of the Company's common stock and this
amount should be recognized as additional interest expense and an addition to
paid-in capital.
The Company estimated the amount of the beneficial conversion discount at
the date of issuance to be $985,000 and the financial statements have been
restated to comply with the accounting treatment described above. A summary of
the impact of the restatement on the Company's financial statements follows:
35
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As Reported As Restated
----------- -----------
At December 31, 1997:
Additional paid-in capital $ 39,137,311 $ 40,122,386
============= ============
Accumulated deficit $(36,556,469) $(37,541,544)
============ ============
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the balance sheet date and reported amounts of revenues and
expenses during the reporting period. Material estimates that are particularly
susceptible to significant change in the near term relate to the carrying values
of rebates receivable and intangible assets, the valuation of equity instruments
issued by the Company and the amount of obligations due as a result of defaults
on certain debt obligations.
Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents include interest-bearing deposits with original
maturities of three months or less.
REBATES
Rebates represent incentives provided by pharmaceutical suppliers based
on purchases. Management has estimated its rebates based upon agreements and
purchases during the year. Actual rebates could be different due to market
volatility and whether the Company continues to use these suppliers.
INVENTORY
Inventory is valued at the lower of average cost or market on a first-in
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is
provided over the estimated useful lives of the assets using the straight-line
method. Leasehold improvements are amortized on the straight-line method over
the shorter of the estimated useful life of the asset or the life of the related
lease term.
CUSTOMER LISTS AND GOODWILL
Customer lists and goodwill are being amortized over estimated lives of
five and fifteen years, respectively.
PATENTS, TRADEMARKS AND DEFERRED DEBT FINANCING COSTS
Patent and trademark costs are amortized over a five-year period on a
straight-line basis commencing on the earlier of the date placed in service or
the date the patent or trademark is granted. Deferred debt financing costs are
being amortized on a straight-line basis over the term of the debt. The related
amortization expense for the year ended December 31, 1998 and 1997 was $99,627
and $99,888.
36
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In December 1998, patents and trademarks with a net carrying value of
$224,984 were written off as management is no longer actively marketing the
underlying products.
REVENUE RECOGNITION
Revenues from product sales are recognized when products are shipped.
Revenues from license fees and royalties are recognized as the terms of the
agreements are met.
ADVERTISING COSTS
Advertising costs are charged to expense when incurred.
INCOME TAXES
Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the currently enacted income tax rates expected to be in
effect when the taxes are actually paid or recovered. A deferred tax asset is
also recorded for net operating loss, capital loss and tax credit carry forwards
to the extent their realization is more likely than not. The deferred tax
expense for the period represents the change in the deferred tax asset or
liability from the beginning to the end of the period.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" 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, has provided 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 pro forma
disclosures include the effects of all awards granted on or after July 1, 1995.
(See Note 10.)
EARNINGS PER SHARE
Basic earnings per share represents income available to common stock
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
For all periods presented, options, warrants and put warrants, were
anti-dilutive and excluded from the diluted earnings per share computations.
The loss applicable to common stockholders has been increased by the
stated dividends on the convertible preferred stock and the amortization of
discounts on convertible preferred stock due to beneficial
37
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
conversion features. Shares of common stock contingently issuable to the former
stockholders of Superior have not been included in earnings per share because to
do so would have been anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. Accounting principles generally require
that recognized revenue, expenses, gains and losses be included in net income.
Certain FASB statements, however, require entities to report specific changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, as a separate component of the equity section of
the balance sheet. Such items, along with net income, are components of
comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Additionally, SFAS No. 130 requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company adopted these disclosure requirements
beginning in the first quarter of 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. The Statement also requires descriptive information about the way that
the operating segments were determined, the products and services provided by
the operating segments, differences between the measurements used in reporting
segment information and those used by the enterprise in its general-purpose
financial statements, and changes in the measurement of segment amounts from
period to period.
2. GOING CONCERN
The Company has incurred recurring losses from operations resulting in an
accumulated deficit of $50,153,553 and a working capital deficiency of
$10,503,773 at December 31, 1998. In addition, the Company is in default with
respect to certain covenants in its debt agreements and obligated to make
payments as follows:
Sirrom Capital Corporation ("Sirrom") and Odyssey Investment Partners,
L.P. ("Odyssey") - The Company issued secured promissory notes in the aggregate
principal amount of $3,000,000 on June 18, 1997 which were due June 17, 2002. In
addition, the Company issued stock warrants to purchase in the aggregate 40,000
shares of the Company's common stock and granted Sirrom and Odyssey the right to
sell to the Company the warrants (put warrants) under a put and substitution
agreement. At the time of issuance, $702,000 of the proceeds was allocated to
the put warrants, resulting in a discount on the promissory notes.
The discount on the notes was being amortized to expense over the term of
the promissory notes. The Company is in default of certain covenants in the loan
agreement and has not obtained a waiver of the defaults from the lender.
Accordingly, the total principal amount of the loan, $3,000,000, has been
classified as a current liability and the unamortized discount on the loan was
charged to expense at December 31, 1997. (See Note 6.)
38
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Superior Pharmaceutical Company - The Company acquired Superior on June
18, 1997 for an adjusted purchase price of $15,850,000. The purchase price was
paid as follows: $6,250,000 in cash, $5,000,000 ($4,600,000 as adjusted) of 9.5%
secured promissory notes to the former Superior stockholders due in quarterly
installments through June 30, 2000 and common stock of the Company with a
guaranteed value of $5,000,000.
At December 31, 1998, the Company is in default under the terms of the
notes and the balance of $3,766,667 has been classified as a current liability.
The Company issued 166,667 shares of common stock to the former Superior
stockholders on June 18, 1997. The agreement with the Superior stockholders
provided that on June 18, 1998, the Superior stockholders would receive up to an
additional 1,666,667 shares of common stock, if the Company's stock price was
less than $30.00 per share. Any difference between the value of the stock
received and the $5,000,000 guaranteed value is to be paid in cash. The common
stock issued and issuable did not reach the specified level of $5,000,000 as of
June 18, 1998. Accordingly, the Company accrued a current liability to the
former Superior stockholders in the amount of $4,083,000 at December 31, 1997
and reduced the amount originally added to additional paid-in capital at the
time of acquisition. On June 18, 1998, the value of the common stock issued was
approximately $83,000 and the value of the additional common stock issuable
under the agreement was approximately $834,000 resulting in a $4,083,000 cash
obligation.
On July 31, 1998 the Company entered into a contingent settlement
agreement to reduce the remaining purchase price to approximately $4,000,000.
The former stockholders of Superior have filed a lawsuit against the Company.
See Note 3, "Business Acquisitions."
The Huntington National Bank - Superior has a line of credit with the
Huntington National Bank. At December 31, 1998 and 1997, Superior was in default
of certain loan covenants in the loan and security agreement with the bank.
Superior is in negotiations with the bank with respect to the defaults, but has
not received a waiver of the defaults at the present time.
The Company has guaranteed the loan to the bank. The loan and security
agreement with the bank requires the Company to achieve a tangible net worth,
exclusive of the tangible net worth of Superior, of $4,000,000, which the
Company has not achieved at December 31, 1998 and 1997.
The loan and security agreement with the bank allowed Superior to make
distributions to the Company in amounts sufficient to enable the Company to pay
the debt service due to the former stockholders of Superior, provided, however,
that such permitted payments cannot be made by Superior in the event of a
default.
MANAGEMENT PLANS
The following represents management's plans to improve the financial
condition of the Company including curing defaults and obtaining waivers
wherever applicable. These plans are targeted to the specific areas listed
below.
Sirrom and Odyssey - The Company has negotiated a forbearance agreement
whereby Sirrom and Odyssey will forbear from exercising their rights under the
Loan Documents. During this forbearance period, the Company will not be required
to make interest payments in return for a warrant to purchase the Common Stock
of the Company. The terms of the warrant are currently being negotiated.
Management plans to restore the payments upon the completion of the debt and
equity financing described below.
39
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Superior Pharmaceutical Company - The Company continues to negotiate with
the former shareholders of Superior to settle all the outstanding issues.
The former Superior stockholders have proposed to continue forbearing to
take further action in connection with the lawsuit as described in the
contingent settlement agreement. Their current proposal would require DynaGen to
pay $4,300,000 in full and final settlement of all claims arising out of the
merger. The former Superior stockholders have further informed DynaGen that they
are willing to consider a counterproposal that would include a reduced cash
payment as well as payment of Common Stock and stock purchase warrants. They
have further advised us that they will continue to negotiate to resolve the
outstanding issues, if we are able to demonstrate our ability to make the cash
payment that would be payable under such a counterproposal. The two former
Superior stockholders who are employees of Superior continue to be employed by
Superior and to perform key functions for Superior and for DynaGen, both in
connection with our continuing effort to seek additional financing and our
ongoing operations.
The Huntington National Bank - The Company has obtained eight monthly
extensions from Huntington since the expiration of the initial revolving line of
credit in July 1998. Huntington continues to receive all payments due under the
Loan Agreement including, interest payments, renewal fees and service fees.
Assuming that the Company is able to obtain the necessary equity capital
described below, the new senior lender will replace Huntington and eliminate the
default condition.
To date the Company has met substantially all of its capital requirements
through the sale of securities and bridge loans convertible into common stock.
The Company has engaged an investment banking firm, which specializes in
turnaround of companies, to seek both debt and equity financing. The Company has
received a commitment from a national bank for a working capital loan and term
loan. If The Company obtains this financing, the Company intends to use the
working capital line to consolidate the current debt from the three existing
lenders. The commitment is contingent upon settling outstanding Superior payment
obligations and obtaining at least $4 million in equity capital. The Company has
received preliminary commitments from two separate groups of investors for this
equity investment.
The Company has also been working with the trade creditors to reduce its
obligations. Several creditors have accepted payment plans, which include
periodic payments, discounts of amounts outstanding, and acceptance of shares of
Common Stock.
3. BUSINESS ACQUISITIONS
SUPERIOR PHARMACEUTICAL COMPANY
On June 18, 1997, the Company acquired all of the outstanding stock of
Superior Pharmaceutical Company ("Superior"), a distributor of generic
pharmaceutical products. The Company paid the shareholders of Superior
$6,250,000 in cash, $5,000,000 in three year secured promissory notes and
166,667 shares of DynaGen's common stock with a guaranteed value of $5,000,000.
The secured promissory notes were subsequently reduced by $400,000 due to a
deficiency in the required net worth of Superior as of the acquisition date.
DynaGen was obligated to issue to the shareholders up to an additional 1,666,667
shares of its common stock on June 18, 1998 if its common stock was not trading
at an average of at least $30.00 per share for 10 consecutive trading days. The
merger agreement provides further that DynaGen shall pay to the former Superior
stockholders the difference between $5,000,000 and the current aggregate market
value of the shares issued to the former Superior stockholders. The Company
recorded a $4,083,000 acquisition obligation at December 31, 1997 based on the
difference between the current
40
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
estimated fair value of the 1,833,334 shares of common stock issued and issuable
and the guaranteed value of $5,000,000. The former shareholders of Superior who
remain as senior management at Superior, may also receive certain incentive
payments based on Superior's performance during the three years following the
closing of the acquisition. Any such payments will be expensed as incurred.
DynaGen contributed $1,750,000 in additional capital to Superior immediately
following the closing.
On July 31, 1998 DynaGen entered into a contingent settlement agreement
to reduce the remaining purchase price to approximately $4,000,000. On December
17, 1998, the former Superior stockholders commenced a civil action in the Court
of Common Pleas, Hamilton County, Ohio. The complaint filed by the former
Superior stockholders alleged that they were owed approximately $9,000,000,
including $4,166,667 in connection with promissory notes issued in connection
with the merger as well as $4,817,660 as an adjustment to the purchase price.
At December 31, 1998, the Company has not issued the additional 1,666,667
shares of common stock and is currently in default under the terms of the note.
During 1998, the Company issued the former shareholders of Superior 416,167
shares of common stock in connection with a forbearance agreement which has
expired. The shares were valued at $143,700 and charged to expense.
The Superior acquisition has been accounted for as a purchase. The
results of operations of Superior have been included in the Company's
consolidated financial statements since the date of acquisition. The purchase
price allocation was based on the estimated fair values at the date of
acquisition. The Company allocated $13,612,000 of the purchase price to customer
lists, which is being amortized on a straight-line basis over five years.
Amortization of customer lists amounted to $2,722,400 and $1,361,200 for the
years ended December 31, 1998 and 1997, respectively. In addition, the Company
recorded goodwill of $386,219, which is being amortized on a straight-line basis
over 15 years. Amortization expense for the years ended December 31, 1998 and
1997 was $25,816 and $22,751, respectively. In the fourth quarter of 1998, the
Company recorded a loss on impairment of the Superior customer lists based on
the Company's current projection of future discounted cash flows of Superior.
GENERIC DISTRIBUTORS, INC.
On March 2, 1998, the Company through its subsidiary, Generic
Distributors, Incorporated ("GDI"), completed the acquisition of substantially
all of the assets and liabilities of Generic Distributors Limited Partnership
("GDLP"), of Monroe, LA. In connection with the acquisition, the Company paid
the limited partnership $1,200,000 in cash, 10,500 shares of Series E
Convertible Preferred Stock valued at $1,050,000 and 1,500 shares of Series F
Convertible Preferred Stock valued at $100,000, for a total purchase price of
$2,350,000. The Series E Preferred Stock is convertible beginning 12 months from
the closing into the Company's common shares at the then prevailing market
prices. The Series F Preferred Stock is convertible into $100,000 in value of
the Company's common stock commencing 120 days after the closing at the then
prevailing market prices. In connection with the transaction, GDI received
$1,200,000 in a five-year term loan from Fleet Bank. The loan matures on April
26, 2003. Fleet Bank also established a revolving line of credit for general
working capital in the amount of $300,000. The line bears interest at LIBOR plus
2-1/2%. The loans are secured by all of the assets of GDI and Able and a pledge
of all of the common stock of GDI, and are guaranteed by the Company. In
addition, the Company entered into employment and consulting agreements with the
sellers.
The GDI acquisition has been accounted for as a purchase. The results of
operations of GDI have been included in the Company's consolidated financial
statements since the date of acquisition. The purchase price allocation was
based on the estimated fair values at the date of acquisition. The company
41
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
allocated $729,205 of the purchase price to customer lists, based on an
independent appraisal, which is being amortized on a straight line basis over
five years. Amortization of customer lists amounted to $121,533 for the year
ended December 31, 1998.
Unaudited pro forma consolidated operating results for the Company,
assuming the acquisitions of Superior and GDI had been made as of the beginning
of the most recent fiscal year for each of the periods presented, are as
follows:
Year Ended December 31,
-----------------------
1998 1997
---- ----
Revenues $ 26,160,317 $ 33,115,330
=========== ============
Net Loss $(12,621,376) $(11,945,780)
============ ============
Net loss per share $ (0.67) $ (4.39)
============ ============
The unaudited pro forma information is not necessarily indicative either
of the actual results of operations that would have occurred had the purchases
been made as of the beginning of each of the fiscal periods presented or of
future results of operations of the combined companies.
4. INVENTORY
Inventory consists of the following:
December 31,
------------
1998 1997
---- ----
Raw materials $ 401,531 $ 311,166
Work-in-progress 66,372 136,240
Finished goods $ 6,179,176 8,663,918
----------- -------------
$ 6,647,079 $ 9,111,324
=========== ============
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, Estimated
------------------------------------------ Useful
1998 1997 Lives
---------------- --------------- ----------
<S> <C> <C> <C>
Machinery and equipment $1,270,477 $1,347,683 7 years
Furniture, fixtures and computer 1,171,638 1,027,228 2-7 years
Leasehold improvements 375,058 235,904 2 years
----------- ----------
2,817,173 2,610,815
Less accumulated depreciation
and amortization (1,132,163) (837,937)
----------- ----------
$ 1,685,010 $1,772,878
=========== ==========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998 and 1997 was $361,280 and $230,411, respectively.
6. DEBT
42
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
-------------- --------------
<S> <C> <C>
Convertible note payable $ 155,000 $ 535,000
Bridge loans 725,000 630,000
Accounts receivable factoring 184,830 --
Machinery & Equipment Financing 586,333 --
7% Convertible Debenture 250,000 --
8% Convertible Debenture 328,500 328,500
Secured debt - Fleet Bank 1,171,420 --
Loan Payable-- Huntington 4,505,104 6,584,710
Notes payable - Superior Acquisition 3,766,667 4,183,333
Senior subordinated debt 3,000,000 3,000,000
----------- -----------
Total 14,672,854 15,261,543
Less current portion 13,162,041 14,933,043
----------- -----------
Long-term debt $ 1,510,813 $ 328,500
=========== =========
</TABLE>
Convertible Note Payable
On February 7, 1996, the Company issued a $2,000,000 convertible note
payable in connection with a private placement. The note matured on February 7,
1998 and bears interest at 8% per annum, with interest payable quarterly in cash
or the Company's common stock. The note is convertible into shares of common
stock at any time at the option of the investor at a rate of 67% of the five-day
average of the closing bid price per share of the Company's common stock one
trading day prior to the date the notice of conversion is received by the
Company. The value of the beneficial conversion feature at the date of issuance,
based on the market value of the Company's common stock was approximately,
$985,000. This discount has been charged as additional interest expense and
added to paid-in capital in the year ended June 30, 1996. In the year ended
December 31, 1998, $380,000 of the note payable was converted for 5,452,535
shares of the Company common stock leaving a balance of $155,000 on December 31,
1998. During the year ended December 31, 1997, $1,065,000 of the note payable
was converted for 98,959 shares of the Company's common stock and $79,235 of
related deferred debt financing costs were charged to additional paid-in
capital. During the six months ended December 31, 1996, $400,000 of the note
payable was converted for 41,441 shares of the Company's common stock and
$36,627 of related deferred debt financing costs were charged to additional
paid-in capital.
Interest expense on the convertible note payable for the years ended
December 31, 1998 and 1997 was $47,952 and $45,640, respectively. Amortization
expense on deferred debt financing costs for the years ended December 31, 1998
and 1997 was $3,060 and $36,744, respectively.
On January 13, 1999, the $155,000 balance of the convertible note and
accrued interest of $14,914 were converted into 1,163,571 shares of common
stock.
Bridge Loans
43
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On December 19, 1997 DynaGen sold a subordinated note in the principal
amount of $155,000 to a lender with an interest rate of 7% per annum. This
unsecured note was payable in full with interest on January 18, 1998. In
connection with this bridge loan, DynaGen agreed to issue 15,000 shares of
common stock to the investor as additional consideration for the loan. This note
and accrued interest of $5,924 was converted into 1,040,949 shares of common
stock on March 25, 1998.
On October 3, 1997, the Company received $250,000 in a subordinated note
from an employee at an interest rate of 18% per annum due on November 30, 1997.
The due date on this note was extended to June 30, 1999 and the investor has the
option of extending the note or to be paid in full from subsequent financings.
This investor also received 20,000 shares of BioTrack common stock valued at
$1,000 as additional consideration for the loan. During 1998, $75,000 was paid
back to the employee leaving a balance of $175,000 in notes payable on December
31, 1998.
In addition, four investors loaned $175,000 to BioTrack in December 1997
at 10% interest per annum due on February 12, 1998. In February 1998, $75,000 of
these short-term loans were repaid in full with interest. These investors also
purchased 35,000 shares of BioTrack common stock for $1,750. During 1998, the
Company sold its majority interest in BioTrack and these loans are no longer
included in the Company's consolidated financial statements.
In October 1997, Apex Pharmaceuticals Inc. received a $50,000 bridge loan
at an interest rate of 12% per annum from a consultant. This loan matured on
December 31, 1998 and is currently due on demand.
DynaGen obtained debt financing in the form of a bridge loan of $500,000,
from a private investor at an interest rate of 7% per annum and due September
30, 1997 related to its Superior acquisition. In connection with this bridge
loan, the Company has issued 15,000 shares of its unregistered common stock to
the investor as additional consideration for the loan. Proceeds of $150,000 from
the debt financing were allocated to the common stock based on the fair value of
the common stock at June 18, 1997. The balance of the proceeds was allocated to
the bridge loan. The debt discount of $150,000 on the bridge loan was fully
amortized at December 31, 1997. On October 10, 1997, the bridge loan and all
accrued interest was converted into 5,015 shares of Series B Preferred Stock and
15,000 shares of common stock in full satisfaction of the debt.
In November 1998, the Company received $500,000 from an unaffiliated
investor at an interest rate of 12% due on March 20, 1999, to be repaid from the
proceeds of any senior debt financing. A warrant to purchase one million shares
of common stock at $.05 per share expiring on November 20, 2000, valued at
$97,490, was also issued in connection with this loan. Interest accrued on this
debt was $4,767 on December 31, 1998.
Accounts Receivable Factoring
In July 1998, Able entered into a short-term financing agreement with
Porter Capital ("Porter") whereby Able financed its outstanding accounts
receivable through Porter. Porter advanced funds equal to 70% of invoice value
upon receipt of invoices from Able. Upon payment in full from Able's customers,
Porter remitted the balance due Able, less Porter's net charge of 2% per 30 days
outstanding. This agreement has expired.
In October 1998, Able replaced its existing short-term financing
agreement with Porter by entering into a short-term financing agreement with K&L
Financial, Inc. ("K & L"). K&L will advance funds
44
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
equal to 80% of invoice value upon receipt of invoices from Able. Upon payment
in full from Able's customers, K&L remits the balance due Able less K&L's net
charge of 1% for each 10 days outstanding. The term of this agreement is twelve
months. The balance due K&L for accounts receivable factoring at December 31,
1998 is $184,830. Interest for the year ended December 31, 1998 for accounts
receivable factoring was $81,178.
Machinery & Equipment Financing
In July 1998, Able entered into a machinery and equipment financing
agreement with Porter and the spouse of the Chief Executive Officer and Chairman
of the Company whereby Able borrowed $300,000 at an annual interest rate of 15%.
In October 1998, the Company paid off Porter's $150,000 share of this loan.
Interest expense under this agreement for the year ended December 31, 1998 was
$12,250.
In October 1998, Able borrowed $462,000 under a machinery and equipment
financing agreement with Triple L, Ltd. ("Triple L") for a period of 3 years at
an effective interest rate of 21%. The balance at December 31, 1998 is $436,333
and interest for the year ended December 31, 1998 was $13,004. At December 31,
1998 maturities of the debt are as follows; $154,000 in 1999, $154,000 in 2000,
and $128,333 in 2001.
Convertible Debentures
In April and May 1998, the Company sold two 5% convertible debentures in
the aggregate amount of $450,000 to an unaffiliated investor. In June 1998,
these notes were amended and made convertible into common stock at a 20%
discount to the market price of the average common stock based on the average of
the closing bid for five days preceding the date of the conversion. The Company
issued 1,363,636 shares in connection with this conversion in August 1998 and
recorded $112,500 of interest expense for the beneficial conversion feature.
In September 1998, the Company received $250,000 from an investor in the
form of a convertible debenture at a rate of interest of 7% per annum. This
debenture is convertible to common stock at 80% of the average trading price of
the common stock for five trading days immediately proceeding the conversion
date. The entire amount is outstanding on December 31, 1998. The beneficial
conversion discount of $62,500 was fully amortized in 1998. Interest accrued on
December 31, 1998 was $4,375.
Secured Debt - Fleet Bank
In March 1998, the Company received $1,200,000 in a five-year term loan
from Fleet bank to finance the acquisition of GDI. The loan carries an interest
rate of LIBOR plus 3%, is payable in quarterly installments of principal of
$42,860 plus interest and matures on April 26, 2003. The Fleet Bank also
established a revolving line of credit for general working capital in the amount
of $300,000. The line bears interest at LIBOR plus 2 1/2%. The loans are secured
by all of the assets of GDI and Able and a pledge by the Company of all of the
common stock of Able and GDI. During 1998, the Company drew down $100,000
against the line of credit. In 1998, $128,580 was paid down on the term loan. At
December 31, 1998, the Company was current in its payments to the bank but was
not in compliance with certain loan covenants. Interest expense for the year
ended December 31, 1998 was $85,272. At December 31, 1998 maturities of these
debt obligations are as follows; $271,440 in 1999, $171,440 in 2000, $171,440 in
2001, $171,440 in 2002 and $385,660 in 2003.
45
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Notes Payable - Superior Acquisition
In connection with the acquisition of Superior, the Company issued
$5,000,000 in secured promissory notes payable to the former Superior
stockholders. The notes are payable in quarterly installments of principal of
$416,667 plus interest over three years at an interest rate of 9.5% and are
secured by a pledge of the Superior common stock. During the years ended
December 31, 1998 and 1997, the Company made principal payments of $416,666 and
$416,667, respectively. In addition, the notes were reduced by $400,000 in 1997,
due to a shortfall in the required net worth of Superior as of the acquisition
date. The Company has classified the notes payable as a current liability on
December 31, 1998 and 1997 as it is currently in default under certain loan
covenants. As of December 31, 1998, maturities of the notes payable are
$2,933,334 in 1999 and $833,333 in 2000.
Senior Subordinated Debt
In June 1997, DynaGen obtained senior subordinated debt financing of
$3,000,000 from two private investors bearing interest at 13.5% payable in
monthly installments. The principal is payable upon maturity at the end of five
years. The loan is secured by a first-lien security interest on the assets of
DynaGen, a second-lien security interest on the assets of Superior and a
second-lien interest in the pledge of the Superior common stock and a guarantee
of payment by Superior.
DynaGen also issued to the investors warrants to purchase 40,000 shares
of common stock of DynaGen at an exercise price of $.10 per share exercisable
for five years. In addition, these warrants are subject to put features under
certain circumstances. Proceeds of $702,000 from this financing were allocated
to the DynaGen stock warrants, based on their estimated fair value. This amount
is reflected in the accompanying financial statements as a warrant put liability
because the warrants give the holders the choice of a cash settlement under
certain conditions. The put allows the holders to sell two-thirds of the
warrants to the Company after three years for $667,000, and all of the warrants
after five years for $1,500,000 unless the market value of the shares issuable
pursuant to the warrant is equal to or greater than the put value. The Company
is accruing the put value of the warrants to their redemption amounts over their
respective terms. The stock purchase warrants contain a provision which allows
the warrant holder to substitute their warrants for stock purchase warrants,
issued by Superior, unless the market value of the shares issuable pursuant to
the warrant is equal to or greater than the put value. The substitute warrants
allow the warrant holders to purchase 15% of Superior's common stock at an
exercise price of $.01 per share.
The remaining proceeds from this offering of $2,298,000 were allocated to
the subordinated debt. The debt discount of $702,000 was being amortized, using
the interest method, over the term of the debt. At December 31, 1997, the
Company amortized the entire debt discount as the Company is in default under
the terms of the debt agreement and the debt has been classified as a current
liability.
Loan Payable - Huntington National Bank
Superior has a secured revolving line of credit of $4,800,000 from a bank
which bears interest at prime plus 2% (9.75% at December 31, 1998) and matured
on January 31, 1999. The line of credit has been reduced to $4,550,000 at prime
plus 2.5% and the maturity was extended to March 31, 1999. Advances under the
line of credit are subject to a borrowing base consisting of the sum of (i) 80%
of Superior's eligible accounts receivable, plus (ii) 60% of Superior's eligible
inventory.
46
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The advances under the line are secured by a first-lien security interest
in all of the assets of Superior and are guaranteed by DynaGen. Superior may not
make distributions to the Company, other than distributions to pay principal and
interest on the notes payable to the former Superior stockholders, without the
prior written consent of the bank. In the event of a default Superior may not
make any distributions to the Company. Superior was not in compliance with
various loan covenants at December 31, 1998 and has not received a waiver from
the bank.
7. INCOME TAXES
There was no provision for income taxes for the years ended December 31,
1998 and 1997, due to the Company's net operating losses. The difference between
the statutory Federal income tax rate of 34% and the Company's effective tax
rate is primarily due to net operating losses incurred by the Company and the
valuation reserve against the Company's deferred tax asset.
The components of the net deferred tax asset are as follows:
December 31,
------------
1998 1997
---- ----
Deferred tax asset:
Federal $13,819,000 $11,477,000
State 2,986,000 2,634,000
----------- -----------
16,805,000 14,111,000
Valuation reserve (16,805,000) (14,111,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The following differences give rise to deferred income taxes:
December 31,
------------
1998 1997
---- ----
Net operating loss carry forward $15,324,000 $12,714,000
Research tax credit carryforward 620,000 620,000
Other 861,000 777,000
----------- -----------
16,805,000 14,111,000
Valuation reserve (16,805,000) (14,111,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The increases in the valuation reserve are due to the Company's net
operating losses.
As of December 31, 1998, the Company has Federal and state net operating
loss carryforwards of approximately $39,800,000 and $28,700,000, respectively.
Federal and state net operating loss carryforwards expire in varying amounts
beginning in 2003 and 1999, respectively, In addition, the Company has Federal
and state research tax credit carryforwards of approximately $583,000 and
$56,000, respectively, available to reduce future tax liabilities. The Federal
and state research tax credit carryforwards expire in varying amounts beginning
in 2003 and 2006, respectively.
47
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Use of net operating loss and tax credit carryforwards is subject to
annual limitations based on ownership changes in the Company's common stock as
defined by the Internal Revenue Code.
8. RELATED PARTY TRANSACTIONS
Notes Receivable
During the year ended June 30, 1996, the Company loaned $75,000 in the
aggregate to an officer/director and an officer under notes which bear interest
at 5.05% per annum. These notes were secured by common stock of the Company
issuable on exercise of stock options held by the officers. In December 1997,
the entire amount, including accrued interest of $6,676, was forgiven and the
stock options were returned to the Company.
In October 1996, the Company granted a $250,000 line-of-credit to each of
two officer/directors which bear interest at 6.07% per annum and which matured
on October 4, 1998. These lines-of-credit are secured by common stock of the
Company held by the officer/directors. At December 31, 1998, borrowings of
$110,000 were outstanding under the lines-of-credit. In December 1998, a $55,000
note together with accumulated interest of $6,955 was forgiven leaving an
outstanding balance of $55,000.
The Company recognized interest income on notes receivable of $6,400 and
$10,464 during the years ended December 31, 1998 and 1997, respectively. At
December 31, 1998 and 1997, accrued interest receivable of $7,512 and $8,346,
respectively, is included in the consolidated balance sheet.
In September 1998, the Company loaned $250,000 to its affiliate,
BioTrack, Inc. under notes receivable which bear an interest rate of 7% per
annum due on March 31, 1999. On December 31, 1998, the outstanding balance on
this note was $95,000.
Consulting Fees
During 1996, the Company retained a consulting company for strategic
marketing and business development. The chief executive officer of the
consulting firm was also a director of the Company at that time. The consulting
fees for the year ended December 31, 1997 were $15,678.
The Company paid $495,000 in finder's fees to a consulting firm relating
to the acquisition of Superior. A former director of the Company was also a
minority shareholder of this consulting firm at the time of the acquisition.
The Company also entered into a marketing and business development
agreement for some of its technologies with another consulting firm. A principal
of this consulting firm was a director of the Company at that time. During the
year ended December 31, 1997, fees of $20,833 were paid to this firm.
In the year ended December 31, 1997, the Company paid fees of $20,050 to
the spouse of an officer/director for research and development services.
In January 1998, the Company entered into a consulting agreement with one
of its directors for corporate development and financial planning. In 1998, the
Company accrued $90,000 towards these consulting fees all of which was included
in accounts payable on December 31, 1998.
48
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accounts Payable
On November 3, 1998, an officer and director of the Company advanced
$50,000 to meet short-term working capital requirements. The entire amount is
outstanding as of December 31, 1998.
Other
In February 1998, the Company sold 100,000 shares of BioTrack, Inc., its
subsidiary at the time, to the spouse of one of its directors for $50,000.
9. COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company leases offices and warehouse facilities under operating
leases expiring in various years through 2014 that require the Company to pay
certain costs such as maintenance and insurance. The main facility at Superior
is rented from a related party. The related party rent was $300,000 and $162,000
for 1998 and 1997, respectively.
The following is a schedule of future minimum lease payments and
sub-lease revenues for all operating leases (with initial or remaining terms in
excess of one year) as of December 31, 1998:
<TABLE>
<CAPTION>
LEASE PAYMENT SUB-LEASE
YEAR AMOUNT REVENUE NET PAYMENT
- ---- ------ ------- -----------
<S> <C> <C> <C>
1999 $1,003,000 $315,000 $688,000
2000 1,052,000 318,000 734,000
2001 1,054,000 321,000 733,000
2002 986,000 222,000 764,000
2003 624,000 -- 624,000
Thereafter 4,984,000 -- 4,984,000
---------- ---------- ----------
Total minimum future lease payment $9,703,000 $1,176,000 $8,527,000
========== ========== ==========
</TABLE>
Rent expense, net of subleases for the years ended December 31, 1998 and
1997 was $960,827 and $643,564, respectively.
Employment Agreements
As of December 31, 1998, the Company has employment agreements with
certain of its officers that provide for minimum annual salaries, reimbursement
of business related expenses and participation in other employee benefit
programs. The agreements also include confidentiality, non-disclosure,
severance, automatic renewal and non-competition provisions. Salary levels are
subject to periodic review by the Compensation Committee.
Contingencies
49
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 or results of operations. See Notes 2 and 3 for a
description of litigation with the former stockholders of Superior.
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS
Preferred Stock
A summary of preferred stock outstanding is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Liquidation Liquidation
Par Value Value Par Value Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Preferred stock, $.01 par value, 10,000,000 shares
authorized:
Series A convertible, 50,000 shares authorized,
1,520 and 37,007 shares issued and outstanding $ 15 $152,000 $ 370 $3,700,672
Series B convertible, 12,515 shares authorized,
7,500 and 12,515 shares issued and outstanding 75 747,750 125 1,247,745
Series C convertible, 7,500 shares authorized,
2,882 and 7,500 shares issued and outstanding 29 288,227 75 750,000
Series D convertible, 60,000 shares authorized,;
5,000 shares issued and outstanding in 1998 50 500,000 -- --
Series E convertible, 10,500 shares authorized,
10,500 shares issued and outstanding in 1998 105 1,050,000 -- --
Series F convertible, 5,000 shares authorized,
1,500 shares issued and outstanding in 1998 15 150,000 -- --
Series G convertible, 10,000 shares authorized,
5,500 and 6,500 shares issued and outstanding 55 550,000 65 650,000
Series H convertible, 20,000 shares authorized,
17,750 shares issued and outstanding in 1998 177 1,775,000 -- --
----- ----------- ------ -----------
$ 521 $ 5,212,977 $ 635 $ 6,348,417
===== =========== ====== ===========
</TABLE>
During 1997, the Company sold 48,450 shares of Series A Preferred Stock
for $4,845,000 and issued two year warrants to purchase 38,760 shares of Common
Stock. No value was assigned to the warrants. The Series A Preferred Stock has a
stated dividend of $5.00 per share per annum. DynaGen registered the shares of
common stock issuable upon conversion of the Series A Preferred Stock and
exercise of the warrants. The exercise price of the warrants is $3.87 per share.
The holders of Series A Preferred Stock have certain rights of first refusal on
future equity financings.
The Series A Preferred Stock may be converted into common stock at a
conversion price equal to the lesser of 120% of the average closing bid price,
as defined (the Series A Effective Price) or discounted percentages of the
Series A Effective Price decreasing from 80% to 74% over time. During 1997,
11,443 shares of Series A Preferred Stock with accumulated dividends were
converted into 757,320 shares of common stock. During 1998, 35,487 shares of
Series A Preferred with accumulated dividends were converted into 9,903,733
shares of common stock. Any outstanding shares of the Series A Preferred Stock
50
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
will be automatically converted to common stock two years from the issue date.
The Company issued 100,000 shares to a placement agent in connection with
placement fees for Series A Preferred Stock.
In June 1997, the Company sold 7,500 shares of Series B Preferred Stock
for $747,750 and 22,500 shares of common stock for $2,250 for aggregate proceeds
of $750,000 to a private investor. The common stock was sold at a discount of
approximately $230,000 from the market price. The discount has not been recorded
because it would result in an increase and offsetting decrease in additional
paid-in capital. The Series B Preferred Stock has a stated dividend of $7.00 per
share per annum. Additionally, a $500,000 bridge loan provided in June 1997 and
accrued interest was converted to 5,015 shares of Series B Preferred Stock and
15,000 shares of common stock in October 1997 per the terms of the bridge loan.
Upon liquidation, the Series B Preferred Stock ranks junior to the Series A
Preferred Stock. DynaGen registered the 22,500 shares of common stock issued and
the shares of common stock issuable upon conversion of the Series B Preferred
Stock.
The Series B preferred stock may be converted into Common Stock at a
conversion price equal to the lesser of 125% of the average closing bid price,
as defined (the "Series B Effective Price") or discounted percentages of the
Series B Effective Price decreasing from 80% to 75% over time. Any outstanding
shares of the Series B Preferred Stock will be automatically converted to common
stock two years from the issue date. During 1998, 5,015 shares of Series B
Preferred Stock with accumulated dividends were converted into 1,649,864 shares
of common stock.
On August 21, 1997, the Company sold 7,500 shares of Series C Preferred
Stock for $750,000 and issued a common stock purchase warrant to purchase 25,000
shares of common stock to a private investor. No value was assigned to the
warrants. The exercise price of the warrants is $7.4609 per share based on 125%
of the ten day average of the closing bid price of the common stock. The Series
C Preferred Stock may be converted into common stock at a conversion price equal
to the lesser of 125% of the five day average of the closing bid price of the
common stock or discounted percentages, ranging from 80% to 74% over time, of
the current five day average closing bid price of the common stock. The Series C
Preferred Stock has a stated dividend of $7.00 per share per annum. During 1998,
4,618 shares of Series C Preferred Stock with accumulated dividends were
converted into 5,569,341 shares of common stock.
Effective December 31, 1997, the Company issued an 8% Debenture due April
19, 2009 for $328,500 to settle certain penalties related to delayed
registration of the Series C Preferred Stock. The Debenture is repayable solely
in common stock and may be converted at the average trading value of common
stock, for the five trading days preceding the conversion date.
The Company issued 6,500 shares of Series G Preferred stock in settlement
of $650,000 of accrued expenses. These shares may be converted into common stock
at market prices beginning in 90 days from issue date. In 1998, 1,000 shares of
Series G Preferred Stock were converted into 50,000 shares of common stock.
In March 1998, the Company issued 10,500 shares of Series E Convertible
Preferred Stock and 5,000 shares of Series F Convertible Preferred Stock in
connection with its acquisition of GDI. (Note 2.) The Series E Preferred Shares
are convertible beginning twelve months from issuance into common stock at the
prevailing market prices on the date of conversion. The Series F Preferred Stock
may be converted into common stock at the market price, commencing 120 days
after the closing. At December 31, 1998, no conversions had been made of the
Company's Series F Preferred Stock.
51
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In March 1998, the Company sold 15,000 shares of Series D Preferred Stock
for $1,500,000 and also issued a warrant to purchase a number of shares of
common stock equal to 1% of the issued and outstanding common stock on the date
of exercise of the warrant for $150,000 expiring March 2001. The Series D
Preferred Stock does not carry any dividend and may be converted at any time at
the request of the holder. The conversion price shall be equal to the lesser of
(1) 85% of the average closing bid price of the common stock for five trading
days prior to the conversion or (2) 125% of the market price of the common stock
on the closing date of the Series C Preferred Stock. In June 1998, 10,000 shares
of Series D were converted into 2,678,570 shares of common stock.
In connection with the Series D, two investors received 8% convertible
debentures in the aggregate original principal amount of $175,000 as delayed
registration penalties. These debentures were convertible into common stock at
the market price of the common stock on the date of the conversion. In June
1998, the investors converted these debentures into 424,242 shares of common
stock.
In June and July 1998, the Company sold 19,000 shares of Series H
Preferred Stock and received aggregate proceeds of $1,900,000 from the sale. The
Series H Preferred Stock may be converted after a twelve month holding period
into shares of common stock based on 67% the average closing bid price for the
preceding five days. In August 1998, the Company allowed one investor to convert
1,250 shares of Series H, at 80% of the average closing bid price for the
preceding five days, into 378,787 shares of common stock.
The Series A, B, C, D and H Convertible Preferred Stock have conversion
features that were "in the money" at the date of issue ("beneficial conversion
feature"). These securities may be convertible into common stock at the discount
percentages specified above. The beneficial conversion features were recognized
and measured in the financial statements by allocating a portion of the proceeds
equal to the intrinsic value of the conversion feature to additional paid-in
capital. The intrinsic value was calculated at the date of issue of the
convertible preferred stock as the difference between the conversion price and
the face value of the common stock into which the securities are convertible,
multiplied by the number of shares into which the security is convertible. A
summary of the amounts allocated to the beneficial conversion feature is as
follows:
Year Ended December 31,
-----------------------
Convertible Preferred Stock 1998 1997
--------------------------- ---- ----
Series A $ -- $1,366,000
Series B -- 374,000
Series C -- 178,000
Series D 265,000 --
Series H 468,000 --
-------- ----------
$733,000 $1,918,000
========= ==========
The discount resulting from the allocation of proceeds to the beneficial
conversion feature is analogous to a dividend and has been recognized as a
return to the preferred shareholders from the date of issuance through the date
the security is first convertible. The discounts for 1997 and 1998 were fully
amortized by a charge against additional paid-in capital because the Company had
no accumulated earnings at those dates. The amortization of the discount has
been reflected as a return to the preferred shareholders in the calculation of
basic earnings per share.
Common Stock
52
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In April 1998, the Company issued 1,893,333 shares of common stock with a
market value of $295,000 to various family members of several officer/directors,
including 400,000 shares to an officer/director, in payment of $295,000 of
loans.
Stock Option Plans
The Company adopted the 1989 Stock Option Plan (the "1989 Plan") and
reserved 60,000 shares of common stock for issuance to employees, officers,
directors and consultants. Under the 1989 Plan, the Board of Directors will
grant options and establish the terms of the options in accordance with plan
provisions. The 1989 Plan options are exercisable for a period of ten years from
the date of issuance. The following table summarizes the activity of options
granted under the 1989 plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 20,800 $8.80 20,800 $8.80
Granted -- -- -- --
Canceled (12,100) 7.50 -- --
Exercised -- -- -- --
------- -------
Outstanding at end of year 8,700 9.18 20,800 8.80
===== ======
Exercisable at end of year 8,700 9.18 20,800 8.80
===== ======
Reserved for future grants at end of year 12,100 --
====== ======
</TABLE>
Information pertaining to options outstanding under the 1989 Plan at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$7.50-$8.50 8,500 2.0 Years $ 8.01 8,500 $ 8.01
$58.70 200 2.6 Years 58.70 200 58.70
----- -----
8,700 2.0 Years $ 9.18 8,700 $ 9.18
===== =====
</TABLE>
The Company adopted the 1991 Stock Plan (the "1991 Plan") and reserved
260,000 shares of common stock for issuance to employees, officers, directors
and consultants. Under the 1991 Plan, the Board of Directors may grant options,
stock awards and purchase rights, and establish the terms of the grant in
accordance with the provisions of the plan. The 1991 Plan options are
exercisable for a period of seven years from the date of issuance and certain
options contain a net exercise provision. As of December 31, 1998, 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:
53
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 78,246 $ 8.70 79,790 $10.20
Granted 50,000 0.30 21,000 2.31
Canceled (31,146) 7.54 (22,394) 10.00
Exercised (50,000) 0.30 (150) 7.50
-------- -----
Outstanding at end of year 47,100 4.70 78,246 5.80
====== ======
Exercisable at end of period 36,710 4.20 52,800 8.70
====== ======
Reserved for future grants at end of year 286,230 165,084
======= =======
Weighted average fair value of options
granted during the year $ 0.49 $2.30
</TABLE>
Information pertaining to options outstanding under the 1991 Plan at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.10 19,500 2.63 Years $0.10 19,500 $0.10
$5.00 - $7.00 21,600 1.90 Years 5.58 14,960 5.83
$9.40 - $52.50 6,000 0.6 Year 16.58 2,250 28.55
-------- -------
47,100 2.1 Years 4.70 36,710 $4.20
====== ======
</TABLE>
The Company adopted the 1998 Stock Option Plan (the "1998 Plan") and
reserved 2,500,000 shares of common stock for issuance to employees, officers,
directors and consultants. Under the 1998 Plan, the Board of Directors may grant
options, and establish the terms of the grant in accordance with the provisions
of the plan. The 1998 Plan options are exercisable for a period of up to ten
years from the date of issuance and certain options contain a net exercise
provision. The following table summarizes the activity of options granted under
the 1998 Plan:
54
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at the beginning of year -- $ --
Granted 3,350,000 0.31
Canceled (2,200,000) 0.41
Exercised -- --
---------
Outstanding at end of year 1,150,000 0.13
=========
Exercisable at end of year --
Reserved for future grants at end of year 1,350,000
Weighted average fair value of options granted =========
during the year $0.12
</TABLE>
At December 31, 1998, all 1,150,000 outstanding options have an exercise
price of $.13 per share and a weighted average remaining life of 6.9 years.
Consultant Stock Plan
The Company adopted the Consultant Stock Plan in June 1998 which provides
for stock grants for services rendered to the Company. The Company reserved
2,500,000 shares of common stock for issuance and registered the shares. During
1998, the Company issued 1,386,500 shares of common stock under this Plan. The
Company recorded expenses in 1998 based on the fair value of the common stock
issued.
Other Stock Options and Warrants
On September 6, 1990, the Company's Board of Directors granted
non-qualified stock options to purchase 45,000 shares of common stock at a price
of $8.75 per share through September 2000, all of which are currently
exercisable by a former director of the Company.
On November 20, 1995, the Company entered into a one-year investment
banking agreement with the underwriter of the Company's prior public offerings.
As compensation for services, the Company granted a warrant to purchase 40,000
shares of common stock at an exercise price of $25 per share. The warrant is
exercisable through November 20, 2000. The shares underlying the warrant were
registered on a Form S-3 registration statement declared effective on March 29,
1996.
On July 24, 1996, the Company's Board of Directors granted non-qualified
stock options to two directors of the Company to purchase an aggregate of 66,000
shares of common stock at an exercise price of $19.40 per share. These options
are exercisable by the directors until July 24, 2003. On October 28, 1996, the
Company's Board of Directors granted a non-qualified stock option to a director
of the Company to purchase 33,000 shares of common stock at an exercise price of
$13.10 per share. This option is exercisable by the director until October 28,
2003.
On December 10, 1996, the Company granted warrants to purchase an
aggregate of 10,000 shares of common stock at an exercise price of $14.40 per
share. These warrants are exercisable through December
55
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
31, 2003. The Company valued the warrants at $99,000 and is expensing the
warrants over their vesting period. Expense for the years ended December 31,
1998 was $39,602 and $39,598, respectively.
On August 28, 1997, the Company issued a warrant expiring on July 31,
2004, to purchase 100,000 shares of Common Stock at an exercise price of $1.50
per share as consideration of investment banking services rendered to the
Company by an investment banker. The Company recognized compensation expense of
$452,000 in the third quarter of fiscal 1997 based on the fair value of the
warrant.
On June 1, 1998, the Company granted the Chairman and Chief Executive
Officer of the Company, a non-qualified stock option expiring June 1, 2005, to
purchase up to 2,000,000 options at a price of $0.33 per share. This option was
canceled on November 19, 1998 and repriced at $0.125.
On June 30, 1998, the Company issued a warrant expiring June 30, 2001, to
purchase up to 350,000 shares of Common Stock at an exercise price of $.01 per
share to an unaffiliated individual in consideration of investment banking
services rendered. The Company valued this warrant at $140,000 and charged it to
expense in 1998.
On August 1, 1998, the Company issued a warrant to purchase up to 200,000
shares of Common Stock at a purchase price of $.15 per share to an unaffiliated
company in connection with investment banking services rendered. This warrant
expired on December 31, 1998 without being exercised. The $4,000 value of this
warrant was charged to expense in 1998. On the same date, the Company issued a
warrant expiring June 30, 1999 to purchase up to 750,000 shares of Common Stock
at a purchase price of $.15 per share to an unaffiliated company in
consideration of services rendered. This warrant was valued at $25,000 and
charged to expense in 1998.
On August 18, 1998, the Company issued a warrant to purchase up to 37,500
shares of Common Stock at a purchase price of $.40 per share, to the spouse of
the Chairman and Chief Executive Officer for making a loan of $150,000 to the
Company at 15% interest. On the same date, the Company issued a warrant to
purchase up to 37,500 shares of Common Stock at a purchase price of $0.40 per
share to an unaffiliated company, in consideration of making a loan of $150,000
at 15% interest. These warrants expire on August 18, 2001. The warrants were
valued at $12,400 which was charged to expense in 1998.
On August 26, 1998, the Company issued a warrant expiring December 31,
1999 to purchase 150,000 shares of common stock at a purchase price of $.50 per
share to a former director of the Company, in settlement of amounts owed. This
warrant was valued at $13,500 which was charged to expense in 1998.
On December 29, 1998, the Company issued a warrant to purchase 1,200,000
shares of common stock at $.375 per share through December 29, 2003 in
consideration of future services to be rendered by an investment banker.
Stock-Based Compensation
At December 31, 1998, the Company has three stock-based compensation
plans and stock options issued outside of the plans, which are described above.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for stock options issued to employees and directors. Had compensation cost for
the Company's stock options issued to employees and directors been determined
based on the fair value at the grant dates consistent with SFAS No. 123, the
Company's net loss and net loss per share would have been adjusted to the pro
forma amounts indicated below:
56
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Year Ended December 31,
-----------------------
1998 1997
---- ----
Net loss:
As reported $(12,612,009) $(12,241,278)
Pro forma (13,119,784) (12,555,111)
Net loss per share:
As reported $ (0.67) $ (4.48)
Pro forma $ (0.70) $ (4.58)
Common stock equivalents and contingently issuable shares 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 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 years ended December 31, 1998 and
1997, respectively; dividend yield of 0%; risk-free interest rates of 5% and
6.5%; expected volatility of 263% and 80%; and expected lives of 0.5 and 1.0
years.
Common Stock Reserved
The Company has reserved common stock at December 31, 1998 as follows:
Number of Shares
Convertible note payable 1,163,571
Convertible Debenture 2,936,111
Stock option plans 2,854,130
Superior acquisition 2,000,000
Preferred stock conversion 27,182,667
Other stock options and warrants 5,897,760
Consultants Stock Plan 1,113,500
----------
Total 43,147,739
==========
At December 31, 1998 the Company has 75,000,000 shares of authorized
common stock of which 37,612,612 shares are outstanding. The Company only has
37,387,388 shares available which is less than the total common stock reserved.
The number of shares of common stock reserved in connection with the convertible
debt and convertible preferred stock is subject to adjustment (see Notes 6 and
10.) The Company also has an outstanding warrant which allows the holder to
purchase shares equal to 1% of the outstanding stock on the date of exercise of
the warrant (see Note 10.)
11. REVENUES AND SEGMENT INFORMATION
The Company operates in one principal business segment, the manufacturing
and distribution of generic pharmaceuticals which accounts for over 90% of the
Company's consolidated assets, revenues and operating losses. There were no
major customers for the years ended December 31, 1998 and 1997.
57
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
License Fees
In July 1998, the Company and MOVA Laboratories, Inc. entered into a
licensing, manufacturing, supply, and distribution agreement. Under the terms of
the agreement, the Company will continue development and seek FDA new drug
application approval to commercialize a branded pharmaceutical product. At
December 31, 1998, the Company has received $100,000 which is recorded as
deferred revenue as this money is refundable under certain conditions.
12. EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan")
for the DynaGen and Able employees. Employees who have attained the age of 21
may elect to reduce their current compensation, subject to certain limitations,
and have that amount contributed to the 401(k) Plan. The Company may make
discretionary contributions to the 401(k) Plan up to 25% of employee
compensation, subject to certain limitations. Employee contributions to the
401(k) Plan are fully vested at all times and all Company contributions become
vested over a period of six years. The Company has made no contributions to the
401(k) Plan as of December 31, 1998.
Superior provides its employees with a Section 401(k) profit sharing
plan. Eligible participants must be twenty-one years old and have worked for one
year. Employer matching and profit sharing contributions are discretionary. For
the year ended December 31, 1998, Superior matched $11,353 and contributed
$25,000 in profit sharing. For the year ended December 31, 1997, Superior
matched $5,919 and contributed $18,208 in profit sharing.
13. SUBSEQUENT EVENTS
On January 7, 1999 the Company received $75,000 in exchange for a 12%
unsecured promissory note from an accredited investor due in ninety days. The
Company also issued a warrant to purchase 45,000 shares of Common Stock at an
exercise price of $0.25.
On January 27, 1999 the Company received $500,000 for issuing an
unsecured 10% promissory note due May 15, 1999. The rate of interest increases
to 12% between April 16, 1999 and May 15, 1999 and then increases to 18% until
it is fully paid. A warrant to purchase 500,000 shares of Common Stock at an
exercise price of $0.05 per share was issued in connection with this note.
On February 26, 1999 the Company sold to unaffiliated accredited
investors unsecured 12% promissory notes due May 28, 1999 in the aggregate
principal amount of $325,000. The Company issued warrants to purchase a total of
195,000 shares of Common Stock at an exercise price of $0.25 per share, and a
warrant to purchase 32,500 shares of common stock at an exercise price of $0.02
per share, in connection with this investment.
The Company issued 125,000 shares of common stock to four employees
during January 1999 in connection with services rendered as additional
compensation.
In February and March of 1999, 500 shares of Series B Preferred Stock
were converted into 204,707 shares of common stock.
58
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In February and March 1999, the Company granted a total of 2,200,000
stock options to three directors of which 500,000 options vested immediately and
the balance vest in twelve equal monthly installments during 1999. The options
are exercisable at $.01 per share and expire in five years.
As of March 10, 1999, the outstanding balance of the Series C preferred
stock was converted into 2,145,219 shares of common stock.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998 and 1997, the Company's financial instruments
include notes receivable (see Note 8) and debt obligations (see Note 6). The
carrying value of the notes receivable approximate their fair value as these
instruments bear interest and mature in less than one year. The fair value of
the outstanding balance of the convertible note payable is approximately
$231,000 and $799,000 at December 31, 1998 and 1997, respectively, based on the
fair value of the common stock issuable on conversion of the note. The fair
value of the 7% convertible debenture at December 31, 1998 is $312,500 based on
the fair value of the common stock issuable on conversion of the debt. The
carrying value of other debt obligations approximate fair values based on their
maturities and interest rates.
15. PARENT COMPANY ONLY
Financial information pertaining only to DynaGen, Inc. has been included
due to the restrictions placed on distribution of the net assets of Superior and
GDI under their debt agreements. (See Note 6.) The restricted net assets of
Superior and GDI were approximately $2,600,000 and $370,000, respectively, at
December 31, 1998.
59
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash...................................................................... $ 15,399 $ --
Accounts receivable....................................................... 63,009 14,981
Notes receivable.......................................................... 150,000 110,000
Prepaid expenses and other current assets................................. 120,052 127,270
----------- -----------
Total current assets.................................................. 348,460 252,251
----------- -----------
Property and equipment, net.................................................. 67,185 124,001
----------- -----------
Other assets:
Investment in and advances to subsidiaries................................ 11,816,525 16,869,157
Patents and trademarks, net of accumulated amortization................... -- 242,315
Deferred debt financing costs, net of accumulated amortization............ 277,325 359,621
Deposits and other assets................................................. 44,486 245,725
----------- -----------
Total other assets.................................................... 12,138,336 17,716,818
----------- -----------
$12,553,981 $18,093,070
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
Current liabilities:
Bank overdraft........................................................... $ -- $ 142,616
Notes payable............................................................ 7,996,667 7,873,333
Accounts payable and accrued expenses.................................... 1,882,740 2,290,399
Acquisition obligation................................................... 4,083,000 4,083,000
----------- -----------
Total current liabilities............................................ 13,962,407 14,389,348
Warrant put liability.................................................... 858,435 750,594
Long term debt........................................................... 328,500 328,500
----------- -----------
Total liabilities.................................................... 15,149,342 15,468,442
----------- -----------
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized, 52,152 and
63,522 shares of Series A through H outstanding
(liquidation value $5,212,977 and $6,348,417).......................... 521 635
Common stock, $.01 par value, 75,000,000 shares authorized,
37,612,612 and 4,315,137 shares issued and outstanding................. 376,126 43,151
Additional paid-in capital............................................... 47,181,545 40,122,386
Accumulated deficit...................................................... (50,153,553) (37,541,544)
----------- -----------
Total stockholders' equity........................................... (2,595,361) 2,624,628
----------- -----------
$12,553,981 $ 18,093,070
=========== ============
</TABLE>
60
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Product sales............................................................ $ 54,433 $ 110,395
Fees and royalties....................................................... 700 88,826
------------- -------------
Total revenues....................................................... 55,133 199,221
------------- -------------
Costs and expenses:
Cost of sales............................................................ 7,964 41,338
Research and development................................................. 352,494 1,813,390
Selling, general and administrative...................................... 2,540,759 4,541,054
------------- -------------
Total costs and expenses............................................. 2,901,217 6,395,782
------------- -------------
Operating loss....................................................... (2,846,084) (6,196,561)
------------- -------------
Other income (expense):
Investment income, net................................................... 146,929 120,359
Interest and financing expense........................................... (1,669,687) (1,910,006)
------------- -------------
Other income (expense), net.......................................... (1,522,758) (1,789,647)
------------- -------------
Loss before losses of unconsolidated subsidiaries........................... (4,368,842) (7,986,208)
Losses of unconsolidated subsidiaries....................................... (8,243,167) (4,255,070)
------------- -------------
Net loss............................................................. $(12,612,009) $(12,241,278)
============= =============
</TABLE>
61
<PAGE>
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $(12,612,009) $(12,241,278)
Adjustments to reconcile net loss to net cash used for operating
activities:
Stock and stock options issued for services.......................... 1,205,361 992,284
Depreciation and amortization........................................ 466,970 1,582,475
Loss on disposal of equipment........................................ 25,570 --
Adjustment due to change in ownership of subsidiary.................. 271,088 --
Accretion of discounts on investment securities...................... -- (10,152)
Stock issued for interest obligation................................. 176,739 59,838
Losses of unconsolidated subsidiaries................................ 8,243,167 4,255,070
(Increase) decrease in operating assets:
Accounts receivable.................................................. (48,028) (88)
Prepaid expenses and other current assets............................ 7,218 146,783
Deposits and other assets............................................ 201,239 (218,747)
Increase (decrease) in accounts payable and accrued expenses............. (407,659) 2,612,725
---------- -----------
Net cash used for operating activities........................ (2,470,344) (2,821,090)
---------- -----------
Cash flows from investing activities:
Purchase of investment securities........................................ -- (1,186,455)
Proceeds from maturities of investment securities........................ -- 4,200,000
Investment in and advances to subsidiaries............................... (1,990,535) (11,610,269)
Purchase of property and equipment....................................... (3,272) (41,765)
(Increase) decrease in notes receivable.................................. (40,000) 75,000
---------- -----------
Net cash used for investing activities........................ (2,033,807) (8,563,489)
---------- -----------
Cash flows from financing activities:
Net proceeds from stock warrants and options............................. 9,000 1,125
Net proceeds from private stock placements............................... 3,249,832 6,775,920
Net proceeds from debt .................................................. 1,895,000 2,851,898
Increase (decrease) in bank overdraft.................................... (142,616) 142,616
Repayment of notes payable............................................... (491,666) (416,667)
---------- -----------
Net cash provided by financing activities..................... 4,519,550 9,354,892
---------- -----------
Net decrease in cash and cash equivalents................................... 15,399 (2,029,687)
Cash and cash equivalents at beginning of year.............................. -- 2,029,687
---------- -----------
Cash and cash equivalents at end of year.................................... $ 15,399 $ --
========== ===========
</TABLE>
62
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
The current directors and executive officers of DynaGen, their age and their
positions held are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
C. Robert Cusick 51 Chairman of the Board of Directors, President,
Chief Executive Officer and Treasurer
Dhananjay G. Wadekar 45 Executive Vice President, Director
Dr. F. Howard Schneider (1)(2) 59 Director
Steven Georgiev (1)(2) 65 Director
Peter J. Mione 52 Vice President - Clinical and Regulatory Affairs
--------------
(1) Member of the Audit Committee
(2) Member of the Executive Compensation Committee
</TABLE>
Our By-laws provide for the annual election of the Board of Directors.
All directors 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.
C. Robert Cusick. Mr. Cusick has served as the chairman of the Board of
Directors of DynaGen since May 1998. Mr. Cusick was the Chief Executive Officer,
President and Director of International Murex Technologies Corporation from
December 1, 1996 until April 1998, when International Murex was acquired by
Abbott Laboratories. Mr. Cusick is a certified public accountant and has served
in various executive positions in manufacturing, banking and real estate.
Dhananjay G. Wadekar. Mr. Wadekar has served as a director of DynaGen
since inception and as Executive Vice President since November 1991. In
addition, he served as the Chairman, Chief Executive Officer and Treasurer of
DynaGen from its inception until July 1990 and as a consultant to DynaGen from
July 1990 to October 1991. Mr. Wadekar earned an M.S. degree from the
Massachusetts Institute of Technology and an M.B.A. from Colorado State
University.
Dr. F. Howard Schneider. Dr. Schneider has served as a director of
DynaGen since September 1989. Dr. Schneider was Chairman of the Board from July
1990 until February 1991, and served as Senior Vice President - Technology
effective June 1991 until his resignation in November 1997. Dr. Schneider was
previously a partner and Senior Vice President of Bogart Delafield Ferrier,
Inc., a healthcare consulting firm that provides strategic consulting services
to pharmaceutical and biotechnology companies.
Steven Georgiev. Mr. Georgiev has served as a director of DynaGen since
July 1996. Mr. Georgiev has had over thirty years of experience in the
development and management of technology product and service companies. He has
served as Chief Executive officer for several companies with annual revenues
ranging from $10 million to $100 million. He currently serves on the boards of
two other publicly held companies, Excel Technologies, Inc. and Senetek, PLC.
Mr. Georgiev earned a B.S. degree in Engineering Physics from Cornell University
and an M.S. in Management from the Massachusetts Institute of Technology.
Peter J. Mione. Mr. Mione has served as Vice President - Clinical and
Regulatory Affairs since November 1991. Mr. Mione joined DynaGen as Manager of
Regulatory Affairs in May 1989 and served in that capacity until October 1991.
Mr. Mione is responsible for monitoring clinical studies, preparation of
63
<PAGE>
protocols, and submission of data on our proposed products to the FDA for
approval. Prior to joining DynaGen, Mr. Mione was a independent consultant from
October 1988 to April 1989 and served as Administrative Coordinator at Toxikon
Corp. (from 1987 to 1988), a company providing toxicology study services. Prior
thereto, Mr. Mione was Director of Regulatory Compliance at Genus Diagnostics, a
manufacturer of diagnostic kits.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires DynaGen's officers and directors, and persons who own more than ten
percent of a registered class of our equity securities, to file reports of
ownership and change 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 us with all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, we
believe that during fiscal 1998 all officers, directors and greater-than-ten
percent stockholders complied with all Section 16(a) filing requirements, except
that each of Steve Georgiev, Howard Schneider and Dhananjay Wadekar omitted to
file timely Forms 4 to report options granted to them in April 1998 and May
1998, each of Messrs. Georgiev, Schneider and Wadekar and C. Robert Cusick
omitted to file a timely report on Form 4 to report the repricing of stock
options in November 1998 and Mr. Wadekar omitted to file a timely report on Form
4 to report the issuance of Common Stock in connection with the forgiveness of
loans to DynaGen in April 1998. Each of the transactions were reported on Form 4
after we discovered the oversight.
SIGNIFICANT EMPLOYEES
We also rely on the services of the following significant employees:
Dennis B. Smith, age 43, has served as President and Chief Executive
Officer of Superior Pharmaceutical Company since 1989. Prior to 1989, Mr. Smith
was Business Development Vice President for Bioline Laboratories in 1988-1989.
He was Director of Sales at Bioline Laboratories in 1987-1988. Prior to joining
Bioline, Mr. Smith served as Midwest Region Sales Manager for Goldline
Laboratories in 1985-1987. He was Field Sales Representative for Generix Drug
Corporation in 1982-1985; Generix Drug was the precursor company to Goldline
Laboratories. He served as a field sales representative for Cooper Drug Company
in 1980-1982. Mr. Smith studied business management at Southern State College
and at the University of Cincinnati.
Eric C. Hagerstrand, age 51, founded Superior Pharmaceutical Company in
1986 and has served as Chairman, Director, and Chief Financial Officer since
that time. He assumed the position of Chief of Operations in 1984. Mr.
Hagerstrand was engaged in the private practice of law for twenty years prior to
devoting his full time to Superior in 1994. He maintains full licensing and
membership in the Ohio State Bar Association and the Cincinnati Bar Association.
Mr. Hagerstrand graduated from Wittenberg University in 1969 with a major in
economics and earned his law degree from the University of Cincinnati College of
Law in 1974.
Donald Couvillon, age 51, founded Generic Distributors Incorporated, of
Monroe, LA, in August 1985. From 1978 until 1989 he was the sole owner of a
retail pharmacy. Don's Pharmasave. Prior to that, he worked in Eli Lilly and
Company from 1976 to 1977. Mr. Couvillon obtained his degree in pharmacy from
the NLU Pharmacy School in 1991.
64
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors who are also employees of DynaGen are not compensated for
attending meetings of the Board of Directors. We have instituted a policy of
paying directors who are not employees a participation fee of $1,000 for each
meeting of the Board of Directors attended and for each committee meeting
attended, up to a maximum of $1,000 per calendar day, regardless of how many
meetings occur on one day. Our non-employee directors waived their fees for all
board meetings during 1998. Mr. Cusick's consulting agreement provides for
annual consulting fees of $75,000, which are in lieu of any attendance fees, but
Mr. Cusick was not paid any money in respect of this agreement in 1998. Mr.
Cusick has waived his consulting fees for the year 1998 and the Company therefor
did not accrue this expense. See "Employment and Consulting Agreements." All
directors are also reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings and other services as directors. Directors are
entitled to receive stock options under the 1998 Stock Option Plan, the 1991
Stock Plan and the 1989 Stock Option Plan.
On June 1, 1998, the Board of Directors granted to Mr. Cusick a
non-qualified stock option to purchase up 2,000,000 shares of Common Stock, in
connection with Mr. Cusick's joining DynaGen as a director. This option was
later canceled, and a new option issued for a like number of shares, in
connection with the November 1998 repricing of options. See "Option /SAR
Repricing."
On April 30, 1998, the Board of Directors also granted to each of Mr.
Wadekar and Dr. Muni options to purchase up to 700,000 shares of Common Stock
under the 1998 Stock Option Plan. The Board also voted on that date to approve
the grant of an option to each of Mr. Wadekar and Dr. Muni to purchase up to
1,300,000 options to be granted outside the provisions of a plan, subject to the
approval of the stockholders. These options have not been submitted to the
stockholders for approval, and so have not been granted. Dr. Muni's options
expired without being exercised following his resignation and the termination of
his employment with DynaGen. Mr. Wadekar's option was later canceled, and a new
option issued for a like number of shares, in connection with the November 1998
repricing of options. See "Executive Compensation -- Option Grants in Last
Fiscal Year" and "--Option /SAR Repricing."
On April 30, 1998, the Board of Directors granted to Mr. Georgiev an
option to purchase up to 350,000 shares of Common Stock under the 1998 Stock
Option Plan. On May 8, 1998, the Board also voted to approve the grant of an
option to Mr. Georgiev to purchase up to 150,000 shares to be granted outside
the provisions of any plan, subject to the approval of the stockholders. This
option has not been submitted to the stockholders for approval, and so has not
been granted. The option for 350,000 shares was later canceled, and a new option
was issued for a like number of shares, in connection with the November 1998
repricing of options. See "Option /SAR Repricing."
On April 30, 1998, the Board granted to Dr. Schneider an option to
purchase up to 100,000 shares of Common Stock under the 1998 Stock Option Plan.
On May 8, 1998, the Board voted to approve the grant to Dr. Schneider of an
option to purchase up to 300,000 shares outside the provisions of any plan,
subject to shareholder approval. This option has not been submitted to the
stockholders for approval, and so has not been granted. The 100,000 share option
was later canceled, and a new option was issued for a like number of shares, in
connection with the November 1998 repricing of options. See "Option/SAR
Repricing."
The Board of Directors, which administers our 1989, 1991 and 1998 Stock
Option Plans, has a general policy of awarding stock options at no less than
fair market value at the date of the grant and the options granted in 1998 vest
over one year in quarterly installments.
65
<PAGE>
EXECUTIVE COMPENSATION COMMITTEE
The Board of Directors has established an Executive Compensation
Committee, of which Dr. Schneider and Mr. Georgiev are the current members. The
Executive Compensation Committee, along with the full Board of Directors, is
responsible for reviewing and setting cash and non-cash compensation for the
Chief Executive Officer and our other officers and employees. The Executive
Compensation Committee did not meet formally during fiscal 1998. We intend to
resume regular meetings of the Executive Compensation Committee during 1999.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee, consisting of
Dr. Schneider and Mr. Georgiev. The Audit Committee did not meet formally during
fiscal 1998. We intend to resume regular meetings of the Audit Committee during
1999.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation for services rendered in all capacities to DynaGen for the fiscal
years ended December 31, 1998 and 1997 of (i) each person who served as Chief
Executive Officer during 1998 and (ii) the other executive officers of DynaGen
serving on December 31, 1998 whose salary and bonus for 1998 exceeded $100,000
(the "Named Executive Officers"):
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
--------------- -------------------
SECURITIES ALL OTHER
NAME AND FISCAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) OPTIONS(2) $(3)
- ------------------ ---- --------- ---------- ----
<S> <C> <C> <C> <C>
C. Robert Cusick(4) 1998 (5) 2,000,000 --
Chairman, President, Chief
Executive Officer and
Treasurer
Dhananjay G. Wadekar 1998 145,000 700,000(6) 304
Executive Vice President 1997 124,300 304
1996 115,500 304
Indu A. Muni(4) 1998 123,064 700,000(6)(7) 61,695
Former President, Chief 1997 124,300 304
Executive Officer and 1996 115,500 304
Treasurer
- ----------------------
</TABLE>
(1) Other than as described in this table or the footnotes to this table, we
did not pay any Named Executive Officer any compensation, including
incidental personal benefits, in excess of 10% of such Named Executive
Officer's salary.
(2) Excludes options granted in fiscal 1998 that were later canceled in
connection with the November 1998 option repricing. See "Option Grants in
Last Fiscal Year."
(3) Amount represents the dollar value of group-term life insurance premiums
we paid for the benefit of the Named Executive Officer, except with
respect to Dr. Muni in fiscal year ended 1998, for which the amount shown
amount also includes $61,695 representing principal and interest
outstanding on a loan made by the Company to Dr. Muni and forgiven by us.
66
<PAGE>
(4) Dr. Muni served as President, Chief Executive Officer and Treasurer until
November 5, 1998. On November 6, 1998, Mr. Cusick became President, Chief
Executive Officer and Treasurer.
(5) Mr. Cusick presently serves as President and Chief Executive Officer
without receiving a cash salary. We entered into a consulting agreement
with Mr. Cusick on May 8, 1998, pursuant to which we agreed to pay Mr.
Cusick $75,000 per year in consulting fees. We did not pay any cash or
non-cash compensation to Mr. Cusick under this agreement in 1998. In
February 1999, the Board of Directors voted (a) to grant Mr. Cusick, an
option to purchase up to 300,000 shares of Common Stock at a purchase
price of $0.01 per share, and (b) to increase the amount of Mr. Cusick's
consulting compensation to $148,000 annually, payable solely in options
to purchase Common Stock. See "Employment and Consulting Agreements."
(6) The Board of Directors also voted in April 1998 to grant to each of Dr.
Muni and Mr. Wadekar an option to purchase up to 1,300,000 shares of
Common Stock, subject to stockholder approval. The options have not been
submitted to the stockholders for approval and so have not been granted.
See "Option Grants in Last Fiscal Year."
(7) This option expired without being exercised following Dr. Muni's
resignation and termination of his employment.
OPTIONS/SAR GRANTS TABLE
The following table sets forth each grant of stock options made during
the year ended December 31, 1998 to each of the Named Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL MARKET
SECURITIES OPTIONS GRANTED PRICE ON
UNDERLYING TO EMPLOYEES EXERCISE DATE OF
OPTIONS IN FISCAL PRICE GRANT EXPIRATION
NAME GRANTED(#) YEAR $/SHARE ($/SHARE) DATE
---- ---------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C>
C. Robert Cusick 2,000,000(2) 31.0% 0.33 0.33 (2)
2,000,000(3) 31.0% 0.125 0.125 11/18/05
Indu A. Muni 700,000(4) 10.8% 0.41 0.38 (4)
Dhananjay G. Wadekar 700,000(2) 10.8% 0.41 0.38 (2)
700,000(3) 10.8% 0.125 0.125 11/18/05
- ------------------------
</TABLE>
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (0%, 5% and
10%) on the market value of the Company's Common Stock over the term of
the options. These numbers are calculated based on rules promulgated by
the Commission and do not reflect the Company's estimate of future stock
price growth. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent on the timing of such exercises and the
future performance of the Company's Common Stock. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts will be received by the individuals.
(2) Represents an option later canceled in connection with the November 1998
repricing of options. See "Option/SAR Repricing."
(3) Vests in four quarterly installments, starting November 19, 1998. As of
December 31, 1998, none of these options were exercisable.
(4) All stock options granted to Dr. Muni expired without being exercised
following his resignation and termination of his employment as of
November 5, 1998.
67
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information concerning the number
and value of unexercised stock options held by the Named Executive Officers as
of December 31, 1998. None of the Named Executive Officers exercised any stock
options during fiscal 1998.
<TABLE>
<CAPTION>
COMMON STOCK
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS HELD
DECEMBER 31, 1998 (*) AT DECEMBER 31, 1998($) (1)
---------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
C. Robert Cusick 0 2,000,000 -- 90,000
Indu A. Muni 0 0 -- --
Dhananjay G. Wadekar 0 700,000 -- 31,500
- --------------
</TABLE>
(1) Calculated on the basis of the last sale price of the Common Stock on
December 31, 1998, as reported on the OTC Bulletin Board ($.17 per
share), less the applicable option exercise price.
OPTION/SAR REPRICING
The November 1998 repricing of options held by certain Named Executive
Officers described in the table below reflects the consistent application of the
policy of the Board and the Executive Compensation Committee regarding stock
options. The Board of Directors believes that to provide maximum incentive to
senior executives, options should be granted at exercise prices equal to or not
materially in excess of the market price of the Common Stock. Accordingly,
options granted by the Board earlier in 1998 were repriced on November 19, 1998.
The options set forth below were repriced in order to more accurately reflect
the market value of the Company's Common Stock, determined by reference to the
closing price of the Common Stock on the OTC Bulletin Board on that date.
The following table sets forth information concerning the repricing
during fiscal 1998 of options previously awarded to the Named Executive Officers
as well as information concerning all such repricing of options held by
executive officers of the Company during the last ten fiscal years ended
December 31, 1998.
<TABLE>
<CAPTION>
TEN-YEAR OPTION/SAR REPRICING
NUMBER OF LENGTH OF
SECURITIES EXERCISE ORIGINAL OPTION
UNDERLYING MARKET VALUE PRICE AT TIME TERM REMAINING
OPTIONS/SARS AT TIME OF OF REPRICING NEW AT DATE OF
REPRICED OR REPRICING OR OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- ---- ---- --------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
C. ROBERT CUSICK 11/11/98 2,000,000 $0.125 $0.33 $0.125 6 YEARS, 202 DAYS
DHANANJAY G. WADEKAR 11/11/98 700,000 $0.125 $0.33 $0.125 6 YEARS, 163 DAYS
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
We have entered into an employment agreement with Mr. Wadekar, our
Executive Vice President. We also had an employment agreement with Dr. Indu
Muni, our former President and Chief Executive
68
<PAGE>
Officer. For 1998, the Board of Directors set Dr. Muni's and Mr. Wadekar's
annual base salaries at $145,000.
Mr. Wadekar's employment agreement provides that (i) during his
respective period of employment with DynaGen and for a period of one year
thereafter, he will not engage in any business activity engaged in or under
development by DynaGen 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 DynaGen. In the event DynaGen terminates
Mr. Wadekar's employment without cause, we will be obligated to pay to him an
amount equal to three months' base salary. In February 1999, the Board of
Directors voted to increase Mr Wadekar's salary in the form of stock options.
The Board of Directors voted to grant Mr. Wadekar a five-year option to purchase
up to 200,000 shares of Common Stock at an exercise price of $0.01 per share.
This option was granted in March 1999 and was exercisable in full as of the date
of the grant. The Board of Directors also voted to grant Mr. Wadekar a five-year
option to purchase up to 200,000 shares of Common Stock at an exercise price of
$0.01 per share. This option was granted in March 1999 and was exercisable as to
one-sixth of the total number of shares as of the date of grant, with the
remaining shares vesting in equal monthly installments on the last day of each
month during calendar year 1999.
We entered into a consulting agreement with C. Robert Cusick in 1998, in
connection with Mr. Cusick's joining DynaGen as Chairman of the Board and a
non-executive director. The agreement calls for the creation of an Operating
Committee, consisting of the Chairman of the Board, the Executive Vice President
and the Chief Executive Officer. The agreement further provides that any
proposed action of the Operating Committee in which Mr. Cusick does not concur
will be submitted to the entire board for consideration prior to its
implementation. The Board of Directors has not formally created the Operating
Committee described in the consulting agreement and the committee has not
purported to take any action as such. Mr. Cusick became President and Chief
Executive Officer on November 6, 1998. Mr. Cusick's consulting agreement
provides for consulting fees of $75,000 per year. Mr. Cusick did not draw any
consulting fees owed to him under the agreement during 1998. In February 1999,
the Board of Directors voted to pay Mr. Cusick in the form of stock options. The
Board of Directors voted to grant Mr. Cusick a five-year option to purchase up
to 300,000 shares of Common Stock at an exercise price of $0.01 per share. This
option was granted in March 1999 and was exercisable in full as of the date of
the grant. The Board of Directors also voted to grant Mr. Cusick a five-year
option to purchase up to 600,000 shares of Common Stock at an exercise price of
$0.01 per share, in satisfaction of amounts payable to him under his consulting
agreement for 1999. This option was granted in March 1999 and was exercisable as
to one-sixth of the total number of shares as of the date of grant, with the
remaining shares vesting in equal monthly installments on the last day of each
month during calendar year 1999.
DynaGen also granted Mr. Cusick an option to purchase up to 2,000,000
shares of Common Stock at a purchase price of $.33 per share. The option was
canceled and a new option was issued for the same number of shares at a purchase
price of $.125, in connection with the November 19, 1998 repricing of options.
The agreement provides that Mr. Cusick is not precluded from performing
providing consulting services or advice to similarly situated companies,
consistent with his fiduciary duty as a director of DynaGen.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors and the Executive Compensation Committee were
responsible for determining compensation of executive officers of the Company
during fiscal 1998. None of the officers or directors was present during
discussion of, and abstained from voting with respect to, his own compensation
as an executive officer of the Company.
69
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding the
beneficial ownership of the company's voting securities as of March 15, 1999, by
(i) each person or entity known to the Company to own beneficially five percent
or more of the Company's Common Stock and preferred stock, $0.01 par value per
share ("Preferred Stock") certain sales of which have been designated as voting
securities, (ii) each of the Company's directors, (iii) the Named Executive
Officers, and (iv) all directors and executive officers of the Company as a
group. Except as otherwise noted, each beneficial owner has sole voting and
investment power with respect to the shares shown.
70
<PAGE>
COMMON STOCK:
<TABLE>
<CAPTION>
Shares
Beneficially Owned(1)(2)
-------------------------------------------
Name AND ADDRESS Number Percent
-------------------- -------------------
<S> <C> <C>
The Endeavour Capital Fund S.A
c/o Endeavor Management
14/14 Divrei Chaim St.
Jerusalem 94479, Israel . ...................................... 3,206,383(3) 7.2
Generic Distributors Limited Partnership
1611 Olive Street
Monroe, LA 71201................................................ 5,106,383(4) 11.0
Julius Bear Securities, Inc.
As agent for certain
non-U.S. persons
330 Madison Ave.
New York, NY 10017 ............................................. 2,382,979(5) 6.2
Mazier Partners
49 Headquarters Plaza
Morristown, NJ 07960............................................ 2,340,426(6) 5.4
C. Robert Cusick.................................................. 1,164,035(7) 2.7
Dhananjay G. Wadekar.............................................. 910,125(8) 2.2
Steven Georgiev................................................... 87,500(9) *
Indu A. Muni...................................................... 113,725(10)
F. Howard Schneider............................................... 52,285(11) *
All directors and executive officers as a group 2,239,995(12) 5.2%
(5 persons) (11)...............................................
- ------------------
</TABLE>
* Less than 1.0%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated, each
person possesses sole voting and investment power with respect to all of
the shares of common stock owned by such person, subject to community
property laws where applicable. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person
that are currently exercisable, or become exercisable by May 14, 1999 (60
days after March 15, 1999), are deemed outstanding. Such shares, however,
are not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Percentage ownership is based on
41,350,765 shares of Common Stock outstanding on March 15, 1999, plus
securities deemed to be outstanding with respect to individual
stockholders pursuant to Rule 13d-3(d)(1) under the Exchange Act. The
information as to each person has been furnished by such person.
(3) Includes 1,808,511 shares of common stock issuable upon conversion of
Series D Preferred Stock and 1,397,872 shares issuable upon conversion of
328,500 7% Convertible Debenture. The terms of the Series D Stock prohibit
the holder from converting shares of Series D if such conversion would
result in beneficial ownership of more than 4.9% of outstanding Common
Stock.
(4) Includes 2,382,979 shares of common stock issuable upon conversion of
Series B Preferred Stock. The terms of the Series B Stock prohibit the
holder from converting shares of Series B if such conversion would result
in beneficial ownership of more than 4.9% of outstanding Common Stock.
71
<PAGE>
(5) Includes 4,468,085 shares of common stock issuable upon conversion of
Series E Preferred Stock and 638,298 shares issuable upon conversion of
Series F Preferred Stock. The terms of the Series E and Series F Stock
prohibit the holder from converting shares of Series E or F, if such
conversion would result in beneficial ownership of more than 4.9% of
outstanding Common Stock.
(6) Includes 2,340,426 shares of common stock issuable upon conversion of
Series G Preferred Stock. The terms of the Series G Stock prohibit the
holder from converting shares of Series G if such conversion would result
in beneficial ownership of more than 4.9% of outstanding Common Stock.
(7) Includes 1,000,000 shares subject to options exercisable by May 14, 1999.
Excludes 1,900,000 shares subject to options not exercisable by May 14,
1999.
(8) Includes 375,000 shares subject to options exercisable by May 14, 1999.
Excludes 725,000 shares subject to options not exercisable by May 14,
1999.
(9) Consists of 87,500 shares subject to options exercisable by May 14, 1999.
Excludes 252,500 shares subject to options not exercisable by May 14,
1999.
(10) Based on information available to the Company as of November 5, 1998, the
date of Dr. Muni's resignation as President and Chief Executive Officer.
(11) Includes 25,000 shares subject to options exercisable by May 14, 1999.
Excludes 75,000 shares subject to options not exercisable by May 14,
1999.
(12) Includes 1,487,500 shares subject to option exercisable by May 14, 1999.
See Notes 7-11.
PREFERRED STOCK:
<TABLE>
<CAPTION>
Shares
Beneficially Owned(1)
-------------------------------------------
Name AND ADDRESS Number Percent(2)
-------------------- -------------------
<S> <C> <C>
Generic Distributors Limited Partnership
1611 Olive Street
Monroe, LA 71201................................................ 11,500(3) 39.8%
The Endeavour Capital Fund S.A
c/o Endeavor Management
14/14 Divrei Chaim St.
Jerusalem 94479, Israel . ...................................... 5,004(4) 17.3%
Julius Baer Securities, Inc.
As agent for certain
non-U.S. persons
330 Madison Ave.
New York, NY 10017 ............................................. 7,000(5) 24.2%
</TABLE>
- -----------------------
* Less than 1.0%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated, each
person possesses sole voting and investment power with respect to all of
the shares of common stock owned by such person, subject to community
property laws where applicable.
(2) Based on 28,902 shares of voting preferred stock outstanding as of March
15, 1999, including Series A Preferred Stock, Series B Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock.
(3) Consists of 10,500 shares of Series E Preferred Stock and 1,500 shares of
Series F Preferred Stock. See "Common Stock" table.
(4) Consists of shares of Series D Preferred Stock. See "Common Stock" table.
(5) Consists of shares of Series B Preferred Stock. See "Common Stock" table.
72
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 1998, certain officers and their family members, including
Dhananjay G. Wadekar, our Executive Vice President, loaned DynaGen the aggregate
sum of $295,000. In fiscal 1998, these individuals forgave the loans to DynaGen
and DynGen, in consideration for the forgiveness of the loans, issued 1,893,333
shares of Common Stock to the individuals.
In fiscal 1998, Carolyn Cusick, the spouse of C. Robert Cusick, DyanGen's
President and Chief Executive Officer, loaned us $150,000 at 15% interest. In
connection with this transaction, we issued Ms. Cusick a warrant to purchase up
to 37,500 shares of Common Stock at an exercise price of $.40 per share.
In November 1998, Mr. Wadekar advanced $50,000 to DynaGen. We used the
advance to meet payroll obligations and other short-term working capital
requirements. The entire amount remained outstanding as of December 31, 1998.
In January 1998, we entered into a consulting agreement for corporate
development and financial planning with Steven Georgiev, a director. In 1998, we
accrued $90,000 towards these consulting fees during fiscal 1998, but did not
pay Mr. Georgiev any of this accrued amount. All of this amount remained
outstanding on December 31, 1998. In February 1999, the Board of Directors voted
to approve the issuance of shares of Common Stock to Mr. Georgiev having an
aggregate market value of the amounts accrued to date pursuant to his consulting
agreement. For 1999, the Board voted to grant Mr. Georgiev a five-year option to
purchase up to 900,000 shares of Common Stock at a purchase price of $0.01 per
share. This option was granted in March 1999, was exercisable for one-sixth the
number of shares as of the date of grant and vests in equal monthly installments
through calendar year 1999 with respect to the remaining shares, provided that
Mr. Georgiev continues to serve as a director and to perform services under the
consulting agreement.
In February 1999, we granted to each of our directors options to purchase
an aggregate of 1,045,000 shares of the BioTrack common stock owned by us, in
consideration of cash advances, deferment of expense reimbursement, and the
extraordinary management and consulting services that the board was called upon
to perform on behalf of DynaGen. The options are exercisable at a purchase price
per share of $.50 and expire in February 2004.
PART IV
ITEM 13. 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
Financial Statements:
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Loss - Years Ended December 31, 1998
and 1997
73
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) -Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31,
1998 and 1997
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) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Asset Purchase Agreement dated February 26, 1998 by and among
DynaGen, Inc., Superior Pharmaceutical Company, Generic
Distributors Incorporated, Generic Distributors Limited
Partnership, United Pharmacists, Inc., and Mr. Donald Couvillon
(filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on March 17, 1998 and incorporated herein by reference)
2.2 Amendment No. 1 to the Asset Purchase Agreement dated February 26,
1998 by and among DynaGen, Inc., Superior Pharmaceutical Company,
Generic Distributors Incorporated, Generic Distributors Limited
Partnership, United Pharmacists, Inc., and Mr. Donald Couvillon
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K
filed on March 17, 1998 and incorporated herein by reference)
2.3 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 as Exhibit 2c to the Registrant's Report on Form 10-K
for the Year Ended December 31, 1997, and incorporated by
reference)
3.1 Restated Certificate of Incorporation (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998,
as amended on September 14, 1998, and incorporated herein by
reference).
3.2 By-laws, as amended (filed as Exhibit 3b to Registrant's
Registration Statement on Form S-1, No. 33-46445, and incorporated
by reference).
4.1 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).
10.1* 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).
10.2* 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).
74
<PAGE>
10.3* 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).
10.4* 1991 Stock Plan, as amended (filed as Exhibit 10d* to Registrant's
Transition Report on Form 10-K for the period ended December 31,
1996, and incorporated by reference).
10.5* 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).
10.6* 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).
10.7* 1998 Stock Option Plan ((filed as Appendix A to the Registrant's
definitive proxy materials for the Special Meeting of Stockholders
on March 4, 1998, and incorporated by reference)
10.8* Non-Qualified Stock Option Agreement dated July 24, 1996 granting
a stock option to Steven Georgiev (filed as Exhibit 10d to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996, and incorporated by reference).
10.9* Employment Agreement dated November 1, 1991 by and between the
Company and Dhananjay G. Wadekar (filed as Exhibit 10d to
Registrant's Registration Statement on Form S-18, No. 33-31836-B,
and incorporated by reference).
10.10* Amendment 1 to Key Employment Agreement by and between DynaGen,
Inc. and Dhananjay G. Wadekar (filed as Exhibit 10c to
Registrant's Registration Statement on Form S-1, No. 33-71416, and
incorporated by reference).
10.11 Registration Rights Agreement dated June 18, 1997 among DynaGen
and Eric Hagerstrand, Dennis Smith and Thomas Canning (filed as
Exhibit 4.1 to Registrant's Current Report on Form 8-K dated June
18, 1997, and incorporated by reference).
10.12 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Eric C. Hagerstrand (filed as Exhibit 4.2 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference)
10.13 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Dennis B. Smith (filed as Exhibit 4.3 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference)
10.14 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Thomas L. Canning (filed as Exhibit 4.4 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference).
10.15 Pledge Agreement dated June 18, 1997 among DynaGen and Eric
Hagerstrand, Dennis Smith and Thomas Canning (filed as Exhibit 4.5
to Registrant's Current Report on Form 8-K dated June 18, 1997,
and incorporated by reference).
75
<PAGE>
10.16 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Sirrom (filed as Exhibit 4.6 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.17 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Odyssey (filed as Exhibit 4.7 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.18 Stock Purchase Warrant dated June 18, 1997 issued by DynaGen to
Sirrom (filed as Exhibit 4.8 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.19 Stock Purchase Warrant dated June 18, 1997 issued by DynaGen to
Odyssey (filed as Exhibit 4.9 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.20 Pledge and Security Agreement dated June 18, 1997 issued by
DynaGen to Sirrom (filed as Exhibit 4.10 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference).
10.21 Securities Purchase Agreement dated June 17, 1997 between DynaGen
and Julius Baer Securities Inc. as agent for certain non-U.S.
persons (filed as Exhibit 4.18 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.22 Registration Rights Agreement dated June 17, 1997 between DynaGen
and Julius Baer Securities Inc. as agent for certain non-U.S.
persons (filed as Exhibit 4.19 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.23 Stock Purchase Warrant dated June 18, 1997 issued by Superior to
Sirrom (filed as Exhibit 4.20 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.24 Stock Purchase Warrant dated June 18, 1997 issued by Superior to
Odyssey (filed as Exhibit 4.21 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.25 Revolving Note dated June 18, 1997 issued by Superior to
Huntington National Bank (filed as Exhibit 4.22 to DynaGen's
Current Report on Form 8-K dated June 18, 1997, and incorporated
by reference).
10.26 Form of Securities Purchase Agreement among the Company and the
purchasers of Series A Preferred Stock filed as Exhibit 4a to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
10.27 Form of Common Stock Purchase Warrant issued by the Company to the
purchasers of Series A Preferred Stock (filed as Exhibit 4.16 to
the Registrant's Current Report on Form 8-K dated June 18, 1997,
and incorporated by reference).
10.28 Stock Purchase Agreement dated August 21, 1997 between the Company
and Endeavour Capital Fund S.A. filed as Exhibit 4d to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
76
<PAGE>
10.29 Registration Rights Agreement dated August 21, 1997 between the
Company and Endeavour Capital Fund S.A. filed as Exhibit 4e to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
10.30 Common Stock Purchase Warrant dated August 21, 1997 issued by the
Company to Endeavour Capital Fund S.A. (filed as Exhibit 4f to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
10.31 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 10d to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996, and incorporated by
reference).
10.32 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 10d to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated by reference).
10.33 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 10d to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, and incorporated by reference).
10.34 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).
10.35 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 10d to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, and incorporated by reference).
10.36 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
10d to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996, and incorporated by reference).
10.37 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 10d to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated by reference).
10.38 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
10d to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996, and incorporated by reference).
77
<PAGE>
10.39 Loan Agreement dated June 18, 1997 among DynaGen, Sirrom and
Odyssey (filed as Exhibit 99.1 to Registrant's Current Report on
Form 8-K dated June 17, 1997, and incorporated by reference).
10.40 Security Agreement dated June 18, 1997 among DynaGen, Sirrom and
Odyssey (filed as Exhibit 99.2 to Registrant's Current Report on
Form 8-K dated June 17, 1997, and incorporated by reference).
10.41 Amended and Restated Loan and Security Agreement dated June 18,
1997 among Huntington National Bank, Superior and DynaGen (filed
as Exhibit 99.3 to Registrant's Current Report on Form 8-K dated
June 17, 1997, and incorporated by reference).
10.42 Continuing Guaranty Unlimited dated June 18, 1997 from DynaGen to
Huntington National Bank (filed as Exhibit 99.4 to Registrant's
Current Report on Form 8-K dated June 17, 1997, and incorporated
by reference).
10.43 Commercial Lease Agreement dated March 9, 1995 between S.C.
Properties Limited and Superior (filed as Exhibit 10e to
Registrant's Report on Form 10-Q for the period ended June 30,
1997, and incorporated by reference).
10.44 Amendment, Estoppel and Consent Agreement dated June 18, 1997
between S.C. Properties Limited and Superior (filed as Exhibit 10f
to Registrant's Report on Form 10-Q for the period ended June 30,
1997, and incorporated by reference).
10.45 Indenture of Lease dated July 1, 1997 between Rivertech Associates
LC and the Company (filed as Exhibit 10a to Registrant's Report on
Form 10-Q for the period ended September 30, 1997, and
incorporated by reference).
10.46 Term Extension Agreement dated August 28, 1997 between CVN
Associates, Inc. and Able Laboratories, Inc. with respect to the
Company's facility at 6 Hollywood Court, South Plainfield, New
Jersey (filed as Exhibit 10ii to the Registrant's Report on Form
10- K for the Year Ended December 31, 1997, and incorporated by
reference)
10.47 Subscription Agreement Dated February 26, 1998 with Sovereign
Partners (filed as Exhibit 4a to the Company's Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference)
10.48 7% Debenture Dated February 26, 1998 in the name of Sovereign
Partners (filed as Exhibit 4b to the Company's Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference)
10.49 Registration Rights Agreement Dated February 26, 1998 with
Sovereign Partners (filed as Exhibit 4d to the Company's Report on
Form 10-Q for the quarter ended March 31, 1998 and incorporated
herein by reference)
10.50 Agreement dated March 19, 1998 with Endeavour Capital Fund S.A.
(filed as Exhibit 4d to the Company's Report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by reference)
10.51 8% Debenture Dated March 19, 1998 in favor of Endeavour Capital
Fund S.A. (filed as Exhibit 4e to the Company's Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein
by reference)
78
<PAGE>
10.52 Warrant Dated March 19, 1998 in the name of Endeavour Capital Fund
S.A. (filed as Exhibit 4f to the Company's Report on Form 10-Q for
the quarter ended March 31, 1998 and incorporated herein by
reference)
10.53 Agreement dated March 31, 1998 with Sovereign Partners and
Dominion Capital Fund, Ltd. (filed as Exhibit 4g to the Company's
Report on Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference)
10.54 8% Debenture Dated March 31, 1998 in the name of Sovereign
Partners (filed as Exhibit 4h to the Company's Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference)
10.55 8% Debenture Dated March 31, 1998 in the name of Dominion Capital
Fund, Ltd. (filed as Exhibit 4i to the Company's Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein
by reference)
10.56 Credit Agreement by and between DynaGen, Inc., Generic
Distributors Incorporated, Able Laboratories, Inc., and Fleet
National Bank dated February 26, 1998 (filed as Exhibit 10a to the
Company's Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference)
10.57 Term Note issued by Generic Distributors Incorporated to Fleet
National Bank dated February 26, 1998 (filed as Exhibit 10b to the
Company's Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference)
10.58 Pledge and Security Agreement by and between DynaGen, Inc. and
Fleet National Bank dated February 26, 1998 (filed as Exhibit 10c
to the Company's Report on Form 10-Q for the quarter ended March
31, 1998 and incorporated herein by reference)
10.59 Security Agreement by and between Generic Distributors
Incorporated and Fleet National Bank dated February 26, 1998
(filed as Exhibit 10d to the Company's Report on Form 10- Q for
the quarter ended March 31, 1998 and incorporated herein by
reference)
10.60 Warrant to Purchase 350,000 shares of Common Stock, dated June 30,
1998 (filed as Exhibit 4d to the Company's Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference)
10.61 Warrant to Purchase up to 400,000 shares of Common Stock, dated
April 1, 1998 (filed as Exhibit 4d to the Company's Report on Form
10-Q for the quarter ended June 30, 1998 and incorporated herein
by reference)
10.62 Warrant to Purchase 250,000 shares of Common Stock, dated April 1,
1998 (filed as Exhibit 4e to the Company's Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference)
10.63 $250,000 Note dated April 30, 1998 (filed as Exhibit 4f to the
Company's Report on Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference)
10.64 $200,000 Note dated May 13, 1998 (filed as Exhibit 4g to the
Company's Report on Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference)
79
<PAGE>
10.65 Letter Agreement dated June 25, 1998 amending terms of Notes
(filed as Exhibit 4h to the Company's Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference)
10.66 Form of Subscription Agreement for Series H Convertible Preferred
Stock (filed as Exhibit 4i to the Company's Report on Form 10-Q
for the quarter ended June 30, 1998 and incorporated herein by
reference)
10.67 Commercial Financing Agreement between the Company and Porter
Capital Corporation (filed as Exhibit 10a to the Company's Report
on Form 10-Q for the quarter ended June 30, 1998 and incorporated
herein by reference)
10.68 Warrant dated August 26, 1998 in the name of Michael Sorrell to
purchase 150,000 shares of Common Stock. (filed as Exhibit 4a to
the Company's Report on Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference)
10.69 Warrant dated August 1, 1998 in the name of Fortress Financial to
purchase 200,000 shares of Common Stock (filed as Exhibit 4b to
the Company's Report on Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference)
10.70 Warrant dated August 18, 1998 in the name of Carolyn Cusick to
purchase 37,500 shares of Common Stock (filed as Exhibit 4d to the
Company's Report on Form 10-Q for the quarter ended September 30,
1998 and incorporated herein by reference)
10.71 Warrant dated August 18, 1998 in the name of Porter Capital
Corporation to purchase 37,500 shares of Common Stock (filed as
Exhibit 4d to the Company's Report on Form 10- Q for the quarter
ended September 30, 1998 and incorporated herein by reference)
10.72 $250,000 7% Convertible Debenture in the name of Sovereign
Partners dated September 29, 1998 (filed as Exhibit 4e to the
Company's Report on Form 10-Q for the quarter ended September 30,
1998 and incorporated herein by reference)
10.73 Factoring Agreement dated October 2, 1998 with K & L Financial,
Inc. (filed as Exhibit 10a to the Company's Report on Form 10-Q
for the quarter ended September 30, 1998 and incorporated herein
by reference)
10.74 Asset Purchase Agreement and exhibits thereto dated October 2,
1998 with Triple L, Ltd. (filed as Exhibit 10b to the Company's
Report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference)
10.75 Financial Consulting and Investment Banking Agreement with
Schneider Securities, Inc. dated December 29, 1998
10.76 Warrant to purchase 1,200,000 shares of Common Stock, dated
December 29, 1998 in the name of Schneider Securities, Inc.
10.77 12% $500,000 Subordinated Promissory Note, dated November 20, 1998
in the name of Project Capital Finance LLP
10.78 Warrant to Purchase 1,000,000 shares of Common Stock, dated
November 20, 1998 in the name of Project Capital Finance LLP
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10.79* Consulting Agreement with C. Robert Cusick dated May 11, 1998
10.80* Stock Option in the name of Dhananjay G. Wadekar, dated November
19, 1998
10.81* Stock Option in the name of C. Robert Cusick, dated November 19,
1998
10.84 Consultant Stock Plan (filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-8, File No. 333-57249, filed on
June 19, 1998 and incorporated hereby by reference)
21.1 Subsidiaries of the Registrant
23.1 Consent of Wolf & Co., P.C.
24.1 Power of Attorney is contained on the signature page of this
Annual Report on Form 10-K.
27.1 Financial Data Schedules
- ---------------------------
* 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,
1998.
(c) Exhibits
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DYNAGEN, INC.
By: /s/ C. Robert Cusick
-------------------------
C. Robert Cusick
President, Chief Executive
Officer and Treasurer
In accordance with the Exchange Act, this report 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 C. Robert Cusick and
Dhananjay G. Wadekar, 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-KSB, hereby ratifying and confirming his signature as it
may be signed by his attorneys to such report and any and all amendments
thereto.
81
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
--------- ---- -----
<S> <C> <C>
President, Chief Executive Officer, Treasurer
/S/ C. ROBERT CUSICK March 25, 1999 and Director
.......................... (Principal Executive Officer, Principal
C. ROBERT CUSICK Financial and Accounting Officer)
/S/ DHANANJAY G. WADEKAR March 25, 1999 Executive Vice President and Director
..........................
DHANANJAY G. WADEKAR
/S/ F. HOWARD SCHNEIDER March 25, 1999 Director
..........................
F. HOWARD SCHNEIDER
/S/ STEVEN GEORGIEV March 25, 1999 Director
..........................
STEVEN GEORGIEV
</TABLE>
82
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Asset Purchase Agreement dated February 26, 1998 by and among
DynaGen, Inc., Superior Pharmaceutical Company, Generic
Distributors Incorporated, Generic Distributors Limited
Partnership, United Pharmacists, Inc., and Mr. Donald Couvillon
(filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on March 17, 1998 and incorporated herein by reference)
2.2 Amendment No. 1 to the Asset Purchase Agreement dated February 26,
1998 by and among DynaGen, Inc., Superior Pharmaceutical Company,
Generic Distributors Incorporated, Generic Distributors Limited
Partnership, United Pharmacists, Inc., and Mr. Donald Couvillon
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K
filed on March 17, 1998 and incorporated herein by reference)
2.3 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 as Exhibit 2c to the Registrant's Report on Form 10-K
for the Year Ended December 31, 1997, and incorporated by
reference)
3.1 Restated Certificate of Incorporation (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998,
as amended on September 14, 1998, and incorporated herein by
reference).
3.2 By-laws, as amended (filed as Exhibit 3b to Registrant's
Registration Statement on Form S-1, No. 33-46445, and incorporated
by reference).
4.1 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).
10.1* 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).
10.2* 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).
10.3* 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).
10.4* 1991 Stock Plan, as amended (filed as Exhibit 10d* to Registrant's
Transition Report on Form 10-K for the period ended December 31,
1996, and incorporated by reference).
10.5* 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).
83
<PAGE>
10.6* 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).
10.7* 1998 Stock Option Plan ((filed as Appendix A to the Registrant's
definitive proxy materials for the Special Meeting of Stockholders
on March 4, 1998, and incorporated by reference)
10.8* Non-Qualified Stock Option Agreement dated July 24, 1996 granting
a stock option to Steven Georgiev (filed as Exhibit 10d to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996, and incorporated by reference).
10.9* Employment Agreement dated November 1, 1991 by and between the
Company and Dhananjay G. Wadekar (filed as Exhibit 10d to
Registrant's Registration Statement on Form S-18, No. 33-31836-B,
and incorporated by reference).
10.10* Amendment 1 to Key Employment Agreement by and between DynaGen,
Inc. and Dhananjay G. Wadekar (filed as Exhibit 10c to
Registrant's Registration Statement on Form S-1, No.
33-71416, and incorporated by reference).
10.11 Registration Rights Agreement dated June 18, 1997 among DynaGen
and Eric Hagerstrand, Dennis Smith and Thomas Canning (filed as
Exhibit 4.1 to Registrant's Current Report on Form 8-K dated June
18, 1997, and incorporated by reference).
10.12 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Eric C. Hagerstrand (filed as Exhibit 4.2 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference)
10.13 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Dennis B. Smith (filed as Exhibit 4.3 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference)
10.14 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Thomas L. Canning (filed as Exhibit 4.4 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference).
10.15 Pledge Agreement dated June 18, 1997 among DynaGen and Eric
Hagerstrand, Dennis Smith and Thomas Canning (filed as Exhibit 4.5
to Registrant's Current Report on Form 8-K dated June 18, 1997,
and incorporated by reference).
10.16 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Sirrom (filed as Exhibit 4.6 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.17 Secured Promissory Note dated June 18, 1997 issued by DynaGen to
Odyssey (filed as Exhibit 4.7 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.18 Stock Purchase Warrant dated June 18, 1997 issued by DynaGen to
Sirrom (filed as Exhibit 4.8 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
84
<PAGE>
10.19 Stock Purchase Warrant dated June 18, 1997 issued by DynaGen to
Odyssey (filed as Exhibit 4.9 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.20 Pledge and Security Agreement dated June 18, 1997 issued by
DynaGen to Sirrom (filed as Exhibit 4.10 to Registrant's Current
Report on Form 8-K dated June 18, 1997, and incorporated by
reference).
10.21 Securities Purchase Agreement dated June 17, 1997 between DynaGen
and Julius Baer Securities Inc. as agent for certain non-U.S.
persons (filed as Exhibit 4.18 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.22 Registration Rights Agreement dated June 17, 1997 between DynaGen
and Julius Baer Securities Inc. as agent for certain non-U.S.
persons (filed as Exhibit 4.19 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.23 Stock Purchase Warrant dated June 18, 1997 issued by Superior to
Sirrom (filed as Exhibit 4.20 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.24 Stock Purchase Warrant dated June 18, 1997 issued by Superior to
Odyssey (filed as Exhibit 4.21 to Registrant's Current Report on
Form 8-K dated June 18, 1997, and incorporated by reference).
10.25 Revolving Note dated June 18, 1997 issued by Superior to
Huntington National Bank (filed as Exhibit 4.22 to DynaGen's
Current Report on Form 8-K dated June 18, 1997, and incorporated
by reference).
10.26 Form of Securities Purchase Agreement among the Company and the
purchasers of Series A Preferred Stock filed as Exhibit 4a to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
10.27 Form of Common Stock Purchase Warrant issued by the Company to the
purchasers of Series A Preferred Stock (filed as Exhibit 4.16 to
the Registrant's Current Report on Form 8-K dated June 18, 1997,
and incorporated by reference).
10.28 Stock Purchase Agreement dated August 21, 1997 between the Company
and Endeavour Capital Fund S.A. filed as Exhibit 4d to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
10.29 Registration Rights Agreement dated August 21, 1997 between the
Company and Endeavour Capital Fund S.A. filed as Exhibit 4e to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
10.30 Common Stock Purchase Warrant dated August 21, 1997 issued by the
Company to Endeavour Capital Fund S.A. (filed as Exhibit 4f to the
Company's Report on Form 10-Q for the period ended September 30,
1997 and incorporated herein by reference).
10.31 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 10d to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996, and incorporated by
reference).
85
<PAGE>
10.32 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 10d to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated by reference).
10.33 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 10d to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, and incorporated by reference).
10.34 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).
10.35 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 10d to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, and incorporated by reference).
10.36 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
10d to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996, and incorporated by reference).
10.37 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 10d to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated by reference).
10.38 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
10d to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996, and incorporated by reference).
10.39 Loan Agreement dated June 18, 1997 among DynaGen, Sirrom and
Odyssey (filed as Exhibit 99.1 to Registrant's Current Report on
Form 8-K dated June 17, 1997, and incorporated by reference).
10.40 Security Agreement dated June 18, 1997 among DynaGen, Sirrom and
Odyssey (filed as Exhibit 99.2 to Registrant's Current Report on
Form 8-K dated June 17, 1997, and incorporated by reference).
10.41 Amended and Restated Loan and Security Agreement dated June 18,
1997 among Huntington National Bank, Superior and DynaGen (filed
as Exhibit 99.3 to Registrant's Current Report on Form 8-K dated
June 17, 1997, and incorporated by reference).
86
<PAGE>
10.42 Continuing Guaranty Unlimited dated June 18, 1997 from DynaGen to
Huntington National Bank (filed as Exhibit 99.4 to Registrant's
Current Report on Form 8-K dated June 17, 1997, and incorporated
by reference).
10.43 Commercial Lease Agreement dated March 9, 1995 between S.C.
Properties Limited and Superior (filed as Exhibit 10e to
Registrant's Report on Form 10-Q for the period ended June 30,
1997, and incorporated by reference).
10.44 Amendment, Estoppel and Consent Agreement dated June 18, 1997
between S.C. Properties Limited and Superior (filed as Exhibit 10f
to Registrant's Report on Form 10-Q for the period ended June 30,
1997, and incorporated by reference).
10.45 Indenture of Lease dated July 1, 1997 between Rivertech Associates
LC and the Company (filed as Exhibit 10a to Registrant's Report on
Form 10-Q for the period ended September 30, 1997, and
incorporated by reference).
10.46 Term Extension Agreement dated August 28, 1997 between CVN
Associates, Inc. and Able Laboratories, Inc. with respect to the
Company's facility at 6 Hollywood Court, South Plainfield, New
Jersey (filed as Exhibit 10ii to the Registrant's Report on Form
10- K for the Year Ended December 31, 1997, and incorporated by
reference)
10.47 Subscription Agreement Dated February 26, 1998 with Sovereign
Partners (filed as Exhibit 4a to the Company's Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference)
10.48 7% Debenture Dated February 26, 1998 in the name of Sovereign
Partners (filed as Exhibit 4b to the Company's Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference)
10.49 Registration Rights Agreement Dated February 26, 1998 with
Sovereign Partners (filed as Exhibit 4d to the Company's Report on
Form 10-Q for the quarter ended March 31, 1998 and incorporated
herein by reference)
10.50 Agreement dated March 19, 1998 with Endeavour Capital Fund S.A.
(filed as Exhibit 4d to the Company's Report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by reference)
10.51 8% Debenture Dated March 19, 1998 in favor of Endeavour Capital
Fund S.A. (filed as Exhibit 4e to the Company's Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein
by reference)
10.52 Warrant Dated March 19, 1998 in the name of Endeavour Capital Fund
S.A. (filed as Exhibit 4f to the Company's Report on Form 10-Q for
the quarter ended March 31, 1998 and incorporated herein by
reference)
10.53 Agreement dated March 31, 1998 with Sovereign Partners and
Dominion Capital Fund, Ltd. (filed as Exhibit 4g to the Company's
Report on Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference)
10.54 8% Debenture Dated March 31, 1998 in the name of Sovereign
Partners (filed as Exhibit 4h to the Company's Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference)
87
<PAGE>
10.55 8% Debenture Dated March 31, 1998 in the name of Dominion Capital
Fund, Ltd. (filed as Exhibit 4i to the Company's Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein
by reference)
10.56 Credit Agreement by and between DynaGen, Inc., Generic
Distributors Incorporated, Able Laboratories, Inc., and Fleet
National Bank dated February 26, 1998 (filed as Exhibit 10a to the
Company's Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference)
10.57 Term Note issued by Generic Distributors Incorporated to Fleet
National Bank dated February 26, 1998 (filed as Exhibit 10b to the
Company's Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference)
10.58 Pledge and Security Agreement by and between DynaGen, Inc. and
Fleet National Bank dated February 26, 1998 (filed as Exhibit 10c
to the Company's Report on Form 10-Q for the quarter ended March
31, 1998 and incorporated herein by reference)
10.59 Security Agreement by and between Generic Distributors
Incorporated and Fleet National Bank dated February 26, 1998
(filed as Exhibit 10d to the Company's Report on Form 10- Q for
the quarter ended March 31, 1998 and incorporated herein by
reference)
10.60 Warrant to Purchase 350,000 shares of Common Stock, dated June 30,
1998 (filed as Exhibit 4d to the Company's Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference)
10.61 Warrant to Purchase up to 400,000 shares of Common Stock, dated
April 1, 1998 (filed as Exhibit 4d to the Company's Report on Form
10-Q for the quarter ended June 30, 1998 and incorporated herein
by reference)
10.62 Warrant to Purchase 250,000 shares of Common Stock, dated April 1,
1998 (filed as Exhibit 4e to the Company's Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference)
10.63 $250,000 Note dated April 30, 1998 (filed as Exhibit 4f to the
Company's Report on Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference)
10.64 $200,000 Note dated May 13, 1998 (filed as Exhibit 4g to the
Company's Report on Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference)
10.65 Letter Agreement dated June 25, 1998 amending terms of Notes
(filed as Exhibit 4h to the Company's Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference)
10.66 Form of Subscription Agreement for Series H Convertible Preferred
Stock (filed as Exhibit 4i to the Company's Report on Form 10-Q
for the quarter ended June 30, 1998 and incorporated herein by
reference)
10.67 Commercial Financing Agreement between the Company and Porter
Capital Corporation (filed as Exhibit 10a to the Company's Report
on Form 10-Q for the quarter ended June 30, 1998 and incorporated
herein by reference)
88
<PAGE>
10.68 Warrant dated August 26, 1998 in the name of Michael Sorrell to
purchase 150,000 shares of Common Stock. (filed as Exhibit 4a to
the Company's Report on Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference)
10.69 Warrant dated August 1, 1998 in the name of Fortress Financial to
purchase 200,000 shares of Common Stock (filed as Exhibit 4b to
the Company's Report on Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference)
10.70 Warrant dated August 18, 1998 in the name of Carolyn Cusick to
purchase 37,500 shares of Common Stock (filed as Exhibit 4d to the
Company's Report on Form 10-Q for the quarter ended September 30,
1998 and incorporated herein by reference)
10.71 Warrant dated August 18, 1998 in the name of Porter Capital
Corporation to purchase 37,500 shares of Common Stock (filed as
Exhibit 4d to the Company's Report on Form 10- Q for the quarter
ended September 30, 1998 and incorporated herein by reference)
10.72 $250,000 7% Convertible Debenture in the name of Sovereign
Partners dated September 29, 1998 (filed as Exhibit 4e to the
Company's Report on Form 10-Q for the quarter ended September 30,
1998 and incorporated herein by reference)
10.73 Factoring Agreement dated October 2, 1998 with K & L Financial,
Inc. (filed as Exhibit 10a to the Company's Report on Form 10-Q
for the quarter ended September 30, 1998 and incorporated herein
by reference)
10.74 Asset Purchase Agreement and exhibits thereto dated October 2,
1998 with Triple L, Ltd. (filed as Exhibit 10b to the Company's
Report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference)
10.75 Financial Consulting and Investment Banking Agreement with
Schneider Securities, Inc. dated December 29, 1998
10.76 Warrant to purchase 1,200,000 shares of Common Stock, dated
December 29, 1998 in the name of Schneider Securities, Inc.
10.77 12% $500,000 Subordinated Promissory Note, dated November 20, 1998
in the name of Project Capital Finance LLP
10.78 Warrant to Purchase 1,000,000 shares of Common Stock, dated
November 20, 1998 in the name of Project Capital Finance LLP
10.79* Consulting Agreement with C. Robert Cusick dated May 11, 1998
10.80* Stock Option in the name of Dhananjay G. Wadekar, dated November
19, 1998
10.81* Stock Option in the name of C. Robert Cusick, dated November 19,
1998
89
<PAGE>
10.84 Consultant Stock Plan (filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-8, File No. 333-57249, filed on
June 19, 1998 and incorporated hereby by reference)
21.1 Subsidiaries of the Registrant
23.1 Consent of Wolf & Co., P.C.
24.1 Power of Attorney is contained on the signature page of this
Annual Report on Form 10-K.
27.1 Financial Data Schedules (filed in electronic format only).
90
EXHIBIT 10.75
FINANCIAL CONSULTING AND INVESTMENT BANKING AGREEMENT
THIS AGREEMENT is made this 29 day of December, 1998 by and between
DYNAGEN, INC., a corporation having its principal office in Cambridge, MA (the
"Company"), and SCHNEIDER SECURITIES, INC., a Colorado corporation having an
office at 1120 Lincoln Street, Suite 900, Denver, Colorado 80203 ("SSI").
In consideration of the mutual premises contained herein and on the
terms and conditions hereinafter set forth, the Company and SSI agree as
follows:
1. PROVISION OF SERVICES. The Company hereby retains SSI to perform non
exclusive consulting services related to corporate finance and investment
banking matters, and SSI hereby accepts such retention and shall undertake
reasonable efforts to perform for the Company the duties described herein. In
this regard, SSI shall devote such time and attention to the business of the
Company as shall be determined by SSI, in its sole discretion.
(a) SSI agrees, to the extent reasonably required in the conduct of the
business of the Company, and at the Company's written request to SSI's Senior
Vice President of Corporate Finance (or such other person designated by SSI), 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) advice with regard to stockholder relations and public
relations matters, and
(ii) evaluation of financial matters and assistance in
financial arrangements and/or transactions.
(b) SSI agrees to prepare and disseminate, or cause the preparation and
dissemination of, a "Corporate Profile" and/or "Research" report in compliance
with applicable state and federal securities laws, within ninety (90) days of
the date hereof. SSI shall use reasonable efforts to keep tile Corporate Profile
current for one year.
(c) At SSI's request, the Company will provide "due diligence"
presentations to Registered Representatives of SSI and other brokerage firms.
SSI agrees to use reasonable efforts to arrange such meetings.
(d) Notwithstanding the foregoing, SSI shall provide services to the
Company in connection with mergers, acquisitions, consolidations, joint ventures
and similar corporate finance transactions; however, for each such transaction
or transactions, SSI and the Company will formalize their arrangement in a
separate agreement at the time service is provided.
(e) SSI shall use reasonable efforts in furnishing advice
recommendations, and for this purpose SSI shall at all times maintain or keep
and make available qualified personnel or a network of qualified outside
professionals for the performance of its obligations under this Agreement. To
the extent reasonably practicable, SSI shall so use its own personnel rather
than outside professionals.
<PAGE>
(f) SSI will designate at least one person to act as an advisor to the
Company's Board of Directors. The Company shall invite SSI to attend and
participate in at least one meetings of its Board of Directors for every year
that this Agreement is in effect. The Company shall provide notice of such
meetings to SSI at least two (2) weeks prior to the date that the meeting is
scheduled to occur. SSI will use its reasonable efforts to attend any other
meetings of the Company"s Board of Directors to which the Company requests SSI's
attendance. Any expenses incurred by SSI in attending such meetings shall be
paid for by the Company.
2. TERM. SSI's retention hereunder shall be for a term of one (1) year
commencing on the date of this Agreement. Except as provided for in paragraph 8
below, this Agreement may be terminated by either party upon sixty (60) days
prior written notice.
3. COMPENSATION. In consideration for the services provided by SSI hereunder,
the Company shall issue to SSI a warrant (the "Warrant") to purchase 1,200,000
shares of the common stock of the Company (the "Underlying Common Stock") at a
per share price of $0.375(the "Strike Price"). The Warrant shall be issued to
SSI in the form of a warrant agreement (the "Warrant Agreement") which shall be
in form and content satisfactory to SSI. The Warrant Agreement shall provide
for, among other provisions, the following:
(a) The Warrant shall not be exercisable by SSI until ninety (90) days
following the date of this Agreement (the "Strike Date"). The Warrant shall
expire five (5) years from the date that the Warrant Agreement is issued,
(b) Anti
dilution provisions for stock dividends, splits, mergers, sale of substantially
all of the Company's assets, sale of stock at below the then current exercise
price of the Warrant~ except for sale of stock pursuant to the Company's Stock
Option Plan(s).
(c) In lieu of any cash payment required by SSI in connection with the
exercise of the Warrant, the holder(s) of the Warrant shall have the right at
any time and from time to time, to exercise the Warrant in full or in part by
surrendering the Warrant Agreement and/or Certificates as payment of the
aggregated Strike Price. The number of shares of Underlying Common Stock to be
issued upon exercise shall be determined by multiplying the number of the shares
of common stock within the Warrant to be exercised by an amount equal to the
market price per share less the Strike Price, and then dividing the product
thereof by the market price per share. Solely for the purposes of this
paragraph, market price shall be calculated as the average of the market prices
for each of the five (5) trading days preceding the date notice is given that
the holder(s) intend(s) to exercise the Warrant.
(d) The Company will reserve and at all times have available a
sufficient number of shares of its common stock to be issued upon the exercise
of the Warrant. Furthermore, the Company shall instruct its transfer agent to
accept a Rule 144 opinion letter from any attorney (not just an opinion from the
Company's counsel) representing SSI or any of its employees or agents that are
holders of the Warrant.
(e) The Company shall, subject to the conditions listed below, grant
"piggy back" registration rights to include the shares of the Underlying Common
Stock in any registration statement filed by the Company under the Securities
Act of 1933 relating to an underwriting of the sale of shares of common stock or
other security of the Company. In the event that the Company grants registration
rights to any other stockholder on terms and conditions that SSI deems to be
more favorable than those granted hereunder, the Company shall grant the same
rights to SSI. Furthermore, in the event that the Company grants registration
rights to any other stockholder, the Company shall issue written notice thereof
to SSI at least 10 business days prior to the date that the Company files any
such registration statement.
<PAGE>
4. EXPENSES. The Company agrees to reimburse SSI for reasonable expenses
incurred by SSI in connection with the services rendered by SSI hereunder,
including but not limited to SSI's due diligence activities with respect to the
Company. Any such expenses exceeding $1,000 shall require the prior approval of
the Company.
5. INDEMNIFICATION. The Company agree to indemnify and hold harmless SSI and its
affiliates, the respective directors, officers, partners, agents and employees
and each other person, if any, controlling SSI or any of its affiliates
(collectively the "SSI Parties") from all losses, claims, damages, liabilities
and expenses incurred by them (including attorney's fees and disbursements) that
result from any violations of securities laws or rules or any untrue Statements
made or any statements omitted to be made in connection with securities related
matters by the Company, its agents or employees. SSI will indemnify and hold
harmless the Company and the r 0 directors, officers, agents and employees of
the Company (the "Company Parties") from and against all losses, claims,
damages, liabilities and expenses that result from malfeasance, or gross
negligence in the performance of SSI's duties hereunder. Each person or entity
seeking indemnification hereunder shall promptly notify the Company, or SSI as
applicable, of any loss, claim, damage or expense for which the Company or SSI
as applicable, may become liable pursuant to this Section 5. Neither party shall
pay, settle or acknowledge liability under any such claim without the written
consent of the party liable for indemnification, and shall permit the Company or
SSI as applicable a reasonable opportunity to cure any underlying problem or to
mitigate damages. The scope of this indemnification between SSI and the Company
shall be limited to, and pertain only to certain transactions contemplated or
entered into pursuant only to this Agreement.
The Company or SSI, as applicable, shall have the opportunity to defend any
claim for which it may be liable hereunder, provided it notifies the party
claiming the right to indemnification within fifteen (15) days of notice of the
claim.
6. STATUS OF SSI. SSI shall at all times bean independent contractor of the
Company and, except as expressly provided or authorized in this Agreement, shall
have no authority to act for or represent the Company.
7. OTHER ACTIVITIES OF SSI. The Company recognizes that SSI now renders and may
continue to render financial consulting, management, investment banking and
other services to other companies that may or may not conduct business and
activities similar to those of the Company. SSI shall be free to render such
advice and other services and the Company hereby consents thereto. SSI shall not
be required to devote its full time and attention to the performance of its
duties under this Agreement, but shall devote only so much of its time and
attention as it deems reasonable or necessary for such purposes, in its sole
discretion,
8. OTHER COVENANTS OF THE COMPANY. The Company covenants, promises and agrees
that:
(a) for a period of at least five years from the date of this Agreement
the Company shall provide SSI at least thirty (30) days prior written notice of
the proposed sale of any securities of the Company in a "Regulation S" or
"Regulation D" offering. Such notice shall specify the type of securities to be
offered, the purchase price thereof, the terms and conditions of the offering
and the proposed offering date. SSI shall be entitled to immediately terminate
this Agreement and retain all of the compensation set forth herein without
offset and with no further liability to the Company, in the event that during
the term of this Agreement, the Company completes a sale of its securities
pursuant to a Regulation D or S offering without SSI's prior written consent
thereto.
(b) the Company hereby covenants and agrees that it shall immediately
notify SSI in the event that its net tangible assets falls below $2,500,000.
(c) following the execution of this Agreement, the Company shall
immediately commence all possible efforts to obtain listing on a national
securities exchange or become re listed on the NASDAQ small cap market.
(d) during the term of this Agreement, the Company shall furnish SSI
with copies of its annual, quarterly and proxy filings with the SEC, immediately
upon the Company's completion thereof.
<PAGE>
9. CONTROL. Nothing contained herein shall be deemed to require the Company to
take any action contrary to its Certificate of Incorporation or By Laws, or any
applicable statute or regulation, or to deprive its Board of Directors of their
responsibility for any control of the
affairs of the Company.
10. PUBLIC DISCLOSURE REQUIREMENT. Within ten (10) business days of the final
execution of this Agreement the Company shall cause the release of a public,
announcement which sets forth, in pertinent part, a description of this
Agreement, including without limitation, the name of SSI, the nature of the
services to be provided hereunder by SSI and the compensation paid to it in
connection herewith. Additionally, for so long as this Agreement is in effect,
the Company shall include a description of this Agreement in its quarterly
and/or annual filings with the Securities and Exchange Commission. At least
three (3) business days prior to the dissemination of any such public
announcement or filing containing the above required description, the Company
shall submit to SSI, for its review and comment, the proposed public
announcement or description. SSI shall thereafter have three (3) business days
within which to submit its editions or amendments to the public announcement
and/or description for inclusion therein, which editions and amendments shall be
incorporated in the final version disseminated by the Company, unless, in the
reasonable judgment of counsel to the Company, such editions or amendments
cannot be incorporated.
11. NOTICES. Any notices hereunder shall be sent to the Company and SSI at their
respective addresses above set forth. Any notice shall be given by registered or
certified mail, postage prepaid, and shall be deemed to have been given when
deposited in the United States mail. Either party may designate any other
address to which notice shall be given, by giving written notice to the other of
such change of address in the manner herein provided.
12. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties with respect to its subject matter and
supersedes all prior discussion, agreements and understandings between them with
respect thereto. This Agreement may not be modified except in a writing signed
by the parties.
13. JURISDICTION AND VENUE. This Agreement has been made in the State of
Colorado and shall be governed by and construed in accordance with the laws
thereof without regard to principles of conflict of laws. Any proceeding
commenced by either party to enforce or interpret any provision of this
Agreement shall be brought in the City and County of Denver, Colorado. The
Company hereby submits to the jurisdiction of the courts of the State of
Colorado, including the federal courts, for such purposes.
14. NO ASSIGNMENT. Neither this Agreement nor the rights of either party
hereunder shall be assigned by either party without the prior written consent of
the other party.
15. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
16. NON COMPLIANCE. If any provision of this Agreement conflicts with any law,
rule or regulation of any federal, state or self regulatory organization,
including the Securities and Exchange Commission, the blue sky laws of any
state, the National Association of Securities Dealers, Inc., or any other
governmental authority having jurisdiction over the activities or services
described herein, then in that event, the Company and SSI shall amend this
Agreement to bring any affected provision into compliance with such regulations.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the day and year first above written,
Schneider Securities, Inc. DynaGen, Inc.
/s/ Dhanajay G. Wadekar
- -------------------------- --------------------------
By: By: Dhanajay G. Wadekar
Its: Its: Executive Vice President
EXHIBIT 10.76
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND NEITHER
THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE
APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
VOID UNLESS EXERCISED BEFORE 5:00 P.M., EASTERN STANDARD TIME ON DECEMBER 29,
2003.
DYNAGEN, INC.
COMMON STOCK PURCHASE WARRANT
DYNAGEN, INC., a Delaware corporation (the "COMPANY"), hereby certifies
that, SCHNEIDER SECURITIES, INC. is entitled, subject to the terms set forth
below, to purchase from the Company, at any time or from time to time before
5:00 p.m., Eastern Standard Time, on or before December 29, 2003, 1,200,000
fully paid and non-assessable shares of Common Stock, $.01 par value, of the
Company, at an exercise price per share equal to $0.375. 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 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.
<PAGE>
(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
unless 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 EXACT NUMBER OF SHARES OF COMMON STOCK FOR WHICH THIS WARRANT MAY BE
EXERCISED AT ANY TIME SHALL BE DETERMINED BY THE BOARD OF DIRECTORS OF THE
COMPANY AND SET FORTH IN A NOTICE FROM THE COMPANY TO SCHNEIDER SECURITIES, INC.
THE NUMBER OF SHARES FOR WHICH THIS WARRANT EXERCISABLE AT ANY TIME IS SUBJECT
TO THE SATISFACTORY PERFORMANCE OF SERVICES PURSUANT TO A CERTAIN INVESTMENT
BANKING AGREEMENT BETWEEN THE COMPANY AND SCHNEIDER SECURITIES, INC., NO PORTION
OF THIS WARRANT MAY BE EXERCISED ABSENT THE AFORESAID NOTICE FROM THE COMPANY,
SIGNED BY AN AUTHORIZED OFFICER OF THE COMPANY.
1.4 Net Issuance. Notwithstanding anything to the contrary
contained in Section 1(a) hereof, in the case of any exercise on or prior to
December , 2000 the Holder may elect to exercise this Warrant in whole or in
part by receiving shares of Common Stock equal to the net issuance value (as
determined below) of this Warrant, or any part hereof as may then be exercised
pursuant to the terms hereof, upon surrender of this Warrant at the principal
office of the Company together with notice of such election (with the form at
the end hereof duly executed), in which event the Company shall issue to the
Holder a number of shares of Common Stock computed using the following formula:
<PAGE>
X = Y (A-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 as to which
this Warrant is to be exercised
A = the daily mean average of the closing price of a
share of Common Stock on the ten consecutive
trading days before the conversion date
B = the Exercise Price
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.
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. The holder of this Warrant must exercise this
Warrant prior to the consummation of any of the foregoing events in order to
obtain the benefits of this Section.
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
<PAGE>
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.
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
<PAGE>
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. 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.
7. 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.
8. 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.
9. 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 counsel
acceptable to the Company to the effect that such transfer or exchange may be
made without
<PAGE>
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.
10. 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.
11. 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.
12. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Eastern Standard Time, on December , 2000.
IN WITNESS WHEREOF, DYNAGEN, INC. has caused this Warrant to be signed
by its Executive Vice President and its corporate seal to be hereunto affixed
and attested by its Secretary this ____ day of _________, 1998.
ATTEST: DYNAGEN, INC.
: By:
----------------------- -------------------------
Dhananjay Wadekar
Executive Vice President
<PAGE>
SUBSCRIPTION
The undersigned, _______________________________________, pursuant to
the provisions of the foregoing Warrant, hereby agrees to subscribe for the
purchase of ________ shares of the Common Stock of DYNAGEN, INC. covered by said
Warrant, and makes payment therefor in full at the price per share provided by
said Warrant.
Dated:____________________________ Signature:_________________________________
Address:___________________________
ASSIGNMENT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns
and transfers unto ______________________________ the foregoing Warrant and all
rights evidenced thereby, and does irrevocably constitute and appoint
_____________________, attorney, to transfer said Warrant on the books of
DYNAGEN, INC..
Dated:____________________________ Signature:_________________________________
Address:___________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfers
unto ___________________________ the right to purchase _________ shares of the
Common Stock of DYNAGEN, INC. by the foregoing Warrant, and a proportionate part
of said Warrant and the rights evidenced hereby, and does irrevocably constitute
and appoint _________________________, attorney, to transfer that part of said
Warrant on the books of DYNAGEN, INC.
Dated:____________________________ Signature:_________________________________
Address:___________________________
___________________________
<PAGE>
NET ISSUANCE ELECTION
The undersigned, _______________________________, pursuant to the
provisions of the foregoing Warrant, hereby tenders the right to purchase _____
shares of the Common Stock of DYNAGEN, INC., and a proportionate part of said
Warrant and the rights evidenced thereby, in exchange for a number of shares of
said Common Stock to be computed in accordance with the provisions of Section
1.4 of said Warrant.
Dated:____________________________ Signature:_________________________________
Address:___________________________
___________________________
12% SUBORDINATED PROMISSORY NOTE
$500,000 Boston, Massachusetts
November 20, 1998
On March 20, 1999 ( the "Maturity Date"), for value received, the
undersigned DynaGen, Inc., a Delaware corporation (the "Maker"), promises to pay
to Project Capital Partners LLC, 50 Federal Street, Boston, MA 02109 (the
"Payee"), the principal sum Five Hundred Thousand United States Dollars
($500,00) or the then outstanding principal amounts remaining unpaid hereunder
from time to time outstanding from the date hereof until payment in full, such
interest to be payable at such rates and such times as are hereinafter
specified. This Note is non-negotiable.
1. Interest and Principal
1.01 Interest. The maker shall pay interest on the outstanding
principal amount of this Note from the date hereof until such principal amount
is paid in full at the rate of twelve percent (12%) per annum. Interest shall
accrue and shall be paid on the Maturity Date. Any overdue installment of
interest or principal, and any amount of principal and interest outstanding
while an Event of Default has occurred and is ongoing, shall bear interest at
the rate of eighteen percent (18%) per annum. Interest shall be calculated on
the basis of a 365 day year for the actual number of days elapsed.
1.02 Optional Prepayment. This Note may be prepaid in whole or in part,
at any time or from time to time before the Maturity Date, at the option of the
Maker, by paying to the Payee an amount equal to the principal amount to be
prepaid together with all interest accrued and unpaid thereon.
1.03 Mandatory Prepayment. This Note shall be prepaid from the proceeds
of any senior debt financing that yields aggregate net proceeds or total
availability to the maker exceeding $5,000,000.
1.04 Delivery of Payment. All payments made hereunder shall be made by
bank check sent by overnight courier or at the Payee's election, by wire
transfer to the Payee at the address set forth above or to such other address as
the Payee may from time to time designate in writing to the Maker. Such payments
shall be accompanied by a notice setting forth in reasonable detail (a) the
amount of interest and principal being paid and (b) the remaining principal
amount. If any payments are required to be made on a day which is not a Business
Day (as hereinafter defined) the date on which such payment is required to be
made shall be extended to, and such payment shall be required to be made on, the
next Business Day. "Business Day" shall mean a day other than Saturday, Sunday
and any day which shall be in the City of Boston, Massachusetts, a legal holiday
or a day on which banking institutions are authorized by law to close.
<PAGE>
2. Subordination
2.1 Subordinated Debt. The indebtedness evidenced by this Note, and the
payment of the principal hereof, and any interest hereon, is wholly
subordinated, junior and subject in right of payment, to the extent and in the
manner hereinafter provided, to the prior payment of all Senior Indebtedness of
the Maker now outstanding or hereinafter incurred. "Senior Indebtedness" means
the principal, interest and reasonable and customary charges and expenses
arising out of or relating to all indebtedness of the Maker for monies borrowed
from banks, trust companies, insurance companies and other financial
institutions, and indebtedness thereto for any related costs, expenses and
indemnities. This section 2 is and is intended solely for the purposes of
defining the relative rights of the Payee and the holders of Senior Indebtedness
and nothing herein shall impair, as between the Maker and the Payee, the
obligation of the Maker, which is unconditional and absolute, to pay to the
Payee the principal thereof and interest thereon, in accordance with the terms
hereof, nor shall anything herein prevent the Payee from exercising all remedies
otherwise permitted by applicable law or hereunder upon default, subject to the
rights set forth above of holders of Senior Indebtedness.
3. Event of Default
4.1 Events of Default. An "Event of Default" shall occur if:
(a) the Maker defaults in the payment of interest on this Note when the
same becomes due and payable and such Default continues for a period of 30 days;
(b) the Maker defaults in the payment of principal on this Note when
the same becomes due and payable, at maturity or otherwise;
(c ) the Maker fails to comply with any of the other agreements
contained in this Note, and the Default continues for the period and after the
notice specified below; and
(d) the Maker pursuant to or within the meaning of any Bankruptcy Law
(as defined below):
(i) commences a voluntary case;
(ii) consents to the entry of an order against it for relief in an
involuntary case; or
(iii) makes a general assignment for the benefit of its creditors;
or
(e) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(i) is for relief against the maker in an involuntary case;
<PAGE>
(ii) appoints a Custodian (as hereinafter defined) for all or
substantially all of the assets of the Maker; or
(iii) orders a liquidation of the Maker.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
federal or state law. The term "Custodian" means any receiver, trustee,
assignee, liquidator, or similar official under any Bankruptcy Law.
A default under clause (C) above shall not constitute an Event of
Default until Payee notifies the maker of the Default and the Maker does not
cure the Default within 60 days of such notice. The notice must specify the
Event of Default, demand that it be remedied, and state that it is a notice of
Event of Default.
4. Miscellaneous
The undersigned hereby waives presentment, demand for payment, notice
of dishonor and any and all other notices or demands in connection with the
delivery, acceptance, performance, default or enforcement of this Note, and
hereby consents to any extensions of time, renewals, releases of any party to
this Note, waivers or modifications that may be granted or consented to by the
Payee in respect to the time of payment or any other provision of this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
(EXCLUSIVE OF THE LAWS GOVERNING CONFLICTS OF LAWS) OF THE COMMONWEALTH OF
MASSACHUSETTS.
DYNAGEN, INC.
By: /s/ Dhananjay Wadekar
-----------------------------
Name: Dhananjay Wadekar
Title: Executive Vice President
EXHIBIT 10.78
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND NEITHER
THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE
APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Void after 5:00 p.m. Eastern Standard Time, on November 20, 2000.
WARRANT TO PURCHASE COMMON STOCK
OF
DYNAGEN, INC.
FOR VALUE RECEIVED, DYNAGEN, INC., a Massachusetts corporation (the "Company"),
hereby certifies that Project Capital Finance LLC, or its permitted assigns, is
entitled to purchase from the Company, at any time or from time to time
commencing on November 20, 1998 and prior to 5:00 P.M., Eastern Standard Time,
on November 20, 2000, a total of One Million fully paid and nonassessable shares
of the common stock, par value $.01 per share, of the Company for an aggregate
purchase price of $0.05 per share. (Hereinafter, (i) said common stock, together
with any other equity securities which may be issued by the Company with respect
thereto or in substitution therefor, is referred to as the "Common Stock", (ii)
the shares of the Common Stock purchasable hereunder are referred to as the
"Warrant Shares", (iii) the aggregate purchase price payable hereunder for the
Warrant Shares is referred to as the "Aggregate Warrant Price", (iv) the price
payable hereunder for each of the Warrant Shares is referred to as the "Exercise
Price", (v) this Warrant, and all warrants hereafter issued in exchange or
substitution for this Warrant are referred to as the "Warrant" and (vi) the
holder of this Warrant is referred to as the "Holder".) The Exercise Price is
subject to adjustment as hereinafter provided.
1. Exercise of Warrant.
(a) Exercise. This Warrant may be exercised, in whole at any time or in
part from time to time, commencing on November 20, 1998 and prior to 5:00 P.M.,
Eastern Standard Time on November 20, 2000, by the Holder of this Warrant by the
surrender of this Warrant (with the subscription form at the end hereof duly
executed) at the address set forth in Subsection 9(a) hereof, together with
proper payment of the Aggregate Warrant Price, or the proportionate part thereof
if this Warrant is exercised in part. Payment for Warrant Shares shall be made
by certified or official bank check payable to the order of the Company. If this
Warrant is exercised in part, the Holder is entitled to receive a new Warrant
covering the number of Warrant Shares in respect of which this Warrant has not
been exercised and setting forth the proportionate part of the Aggregate Warrant
Price applicable to such Warrant Shares. Upon such surrender of this
<PAGE>
Warrant, the Company will (a) issue a certificate or certificates in the name of
the Holder for the largest number of whole shares of the Common Stock to which
the Holder shall be entitled if this Warrant is exercised in whole and (b)
deliver the proportionate part thereof if this Warrant is exercised in part,
pursuant to the provisions of the Warrant. In lieu of any fractional share of
the Common Stock which would otherwise be issuable in respect to the exercise of
the Warrant, the Company at its option may (a) pay in cash an amount equal to
the product of (i) the daily mean average of the Closing Price of a share of
Common Stock on the ten consecutive trading days before the Conversion Date and
(ii) such fraction of a share or (b) issue an additional share of Common Stock.
Upon exercise of the Warrant, the Company shall issue and deliver to
the Holder certificates for the Common Stock issuable upon such exercise within
ten business days after such exercise and the person exercising shall be deemed
to be the holder of record of the Common Stock issuable upon such exercise.
No warrant granted herein shall be exercisable after 5:00 p.m. Eastern
Standard Time on the second anniversary of the date of issuance.
(b) Net Issuance. Notwithstanding anything to the contrary contained in
Subsection 1(a) hereof, in the case of any exercise on or prior to November 20,
2000 the Holder may elect to exercise this Warrant in whole or in part by
receiving shares of Common Stock equal to the net issuance value (as determined
below) of this Warrant, or any part hereof, upon surrender of this Warrant at
the principal office of the Company together with notice of such election (with
the form at the end hereof duly executed), in which event the Company shall
issue to the Holder a number of shares of Common Stock computed using the
following formula:
X= Y (A-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 as to which
this Warrant is to be exercised
A = the current fair market value of one share of
Common Stock calculated as of the last trading
day immediately preceding the exercise of this
warrant
B = the Exercise Price
(c) Certain Adjustments
The Exercise Price and the number of Warrant Shares shall be equitably
adjusted from time to time to account for stock splits, stock dividends,
combinations, recapitalizations, reclassifications and similar events.
<PAGE>
2. Reservation of Warrant Shares. The Company agrees that, prior to the
expiration of this Warrant, the Company will at all times have authorized and
reserved, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, the number of shares of the Common Stock as from time
to time shall be issuable upon the exercise of this Warrant.
3. Fully Paid Stock: Taxes. The Company agrees that the shares of the
Common Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant shall, at the time of such delivery,
be validly issued and outstanding, fully paid and nonassessable, and not subject
to preemptive rights, and the Company will take all such actions as may be
necessary to assure that the par value or stated value, if any, per share of the
Common Stock is at all times equal to or less than the then Exercise Price. The
Company further covenants and agrees that it will pay, when due and payable, any
and all Federal and state stamp, original issue or similar taxes that may be
payable in respect of the issue of any Warrant Share or certificate therefor.
4. Transfer.
(a) Securities Laws. Neither this Warrant nor the Warrant
Shares issuable upon the exercise hereof have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or under any state
securities laws and unless so registered may not be transferred, sold, pledged,
hypothecated or otherwise disposed of unless an exemption from such registration
is available. In the event Holder desires to transfer this Warrant or any of the
Warrant Shares issued, the Holder must give the Company prior written notice of
such proposed transfer including the name and address of the proposed
transferee. Such transfer may be made only either (i) upon publication by the
Securities and Exchange Commission (the "Commission") of a ruling,
interpretation, opinion or "no action letter" based upon facts presented to said
Commission, or (ii) upon receipt by the Company of an opinion of counsel to the
Company in either case to the effect that the proposed transfer will not violate
the provisions of the Securities Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or the rules and regulations promulgated under
either such act, or to the effect that the Warrant or Warrant Shares to be sold
or transferred has been registered under the Securities Act and that there is in
effect a registration statement in which is included a prospectus meeting the
requirements of Subsection 10 (a) of the Securities Act, which is being or will
be delivered to the purchaser or transferee at or prior to the time of delivery
of the certificates evidencing the Warrant or Warrant Shares to be sold or
transferred.
(b) Conditions to Transfer. Prior to any such proposed
transfer, and as a condition thereto, if such transfer is not made pursuant to
an effective registration statement under the Securities Act, the Holder will,
if requested by the Company, deliver to the Company (i) an investment covenant
signed by the proposed transferee, (ii) an agreement by such transferee to the
impression of the restrictive investment legend set forth herein on the
certificate or certificates representing the securities acquired by such
transferee, (iii) an agreement by such transferee that the Company may place a
"stop transfer order" with its transfer agent or registrar,
<PAGE>
and (iv) an agreement by the transferee to indemnify the Company to the same
extent as set forth in the next succeeding paragraph.
(c) Indemnity. The Holder acknowledges that the Holder
understands the meaning and legal consequences of this Section 4, and the Holder
hereby agrees to indemnify and hold harmless the Company, its representatives
and each officer and director thereof from and against any and all loss, damage
or liability (including all attorneys' fees and costs incurred in enforcing this
indemnity provision) due to or arising out of (a) the inaccuracy of any
representation or the breach of any warranty of the Holder contained in, or any
other breach of, this warrant, (b) any transfer of the Warrant or any of the
Warrant Shares in violation of the Securities Act, the Exchange Act or the rules
and regulations promulgated under either of such acts, (c) any transfer of the
Warrant or any of the Warrant Shares not in accordance with this Warrant or (d)
any untrue statement or omission to state any material fact in connection with
the investment representations or with respect to the facts and representations
supplied by the Holder to counsel to the Company upon which its opinion as to a
proposed transfer shall have been based.
(d) Transfer. Except as restricted hereby, this Warrant and
the Warrant Shares issued may be transferred by the Holder in whole or in part
at any time or from time to time. Upon surrender of this Warrant to the Company
or, if the Company so instructs the Holder in writing, at the office of its
stock transfer agent, if any, with assignment documentation duly executed and
funds sufficient to pay any transfer tax, and upon compliance with the foregoing
provisions, the Company shall, without charge, execute and deliver a new Warrant
in the name of the assignee named in such instrument of assignment, and this
Warrant shall promptly be canceled. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of this Warrant in any way contrary to the
provisions of this Warrant, or any levy of execution, attachment or other
process attempted upon the Warrant, shall be null and void and without effect.
(e) Legend and Stop Transfer Orders. Unless the Warrant Shares
have been registered under the Securities Act, upon exercise of any part of the
Warrant and the issuance of any of the Warrant Shares, the Company shall
instruct its transfer agent to enter stop transfer orders with respect to such
shares, and all certificates representing Warrant Shares shall bear on the face
thereof substantially the following legend, insofar as is consistent with
Massachusetts law:
"The shares of common stock represented by this certificate have not
been registered under the Securities Act of 1933, as amended, and may
not be sold, offered for sale, assigned, transferred or otherwise
disposed of unless registered pursuant to the provisions of that Act or
an opinion of counsel to the Company is obtained stating that such
disposition is in compliance with an available exemption from such
registration."
5. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of an
unsecured indemnity from the
<PAGE>
Holder reasonably satisfactory to the Company, if lost, stolen or destroyed, and
upon surrender and cancellation of the Warrant, if mutilated, the Company shall
execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
6. Piggyback Registration Rights. The Holder shall have the right to
have the Warrant Shares included for sale on each registration statement filed
by the Company that covers shares of common stock held by stockholders of the
Company, except registration statements filed on Form S-4 and Form S-8 or their
successor forms or any other form which does not permit registration of Warrant
Shares, all at the Company's cost and expense (except commissions or discounts
and fees of the Holder's own professionals, if any); provided, however, that
this provision shall not apply to any shares of Company Common Stock that may
then be sold within a six-month period under Rule 144 of the Act. If the
offering with respect to which a registration statement is filed is managed by
an independent underwriter, and if in the reasonable judgment of the managing
underwriter, which shall be evidenced by a writing delivered to the Holder, the
sale of Warrant Shares in connection with the proposed offering would have a
material adverse effect on the offering, then the number of Warrant Shares to be
sold may be cut back, pro rata with other holders of the common stock who
propose to sell shares in the offering. The Company shall give the Holder three
weeks' notice of the intended filing date of any registration statement, other
than a registration statement held on Form S-4 or Form S-8 or any successor
form, and the Holder shall have two weeks after receipt of such notice to notify
the Company of its intent to include any Warrant Shares in such registration
statement.
7. Warrant Holder Not Shareholder. Except as otherwise provided herein,
this Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder, prior
to the exercise hereof.
8. Communication. No notice or other communication under this Warrant
shall be effective unless the same is in writing and is mailed by certified
mail, return receipt requested, or sent by facsimile, addressed to:
(a) the Company at 840 Memorial Drive, Cambridge,
Massachusetts 02139, or such other address as the Company has designated in
writing to the Holder, with a copy to David A. Broadwin, Esq., Foley, Hoag &
Eliot LLP, One Post Office Square, Boston, Massachusetts 02109, or
(b) the Holder at 50 Federal Street, Boston, MA 02109, or such
other address as the Holder has designated in writing to the Company.
Any notice given hereunder shall be effective upon the earlier of (i)
receipt, or (ii) a date three days from the date of mailing.
9. Headings. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof
<PAGE>
10. Applicable Law. This Warrant shall be governed by and construed in
accordance with the law of The Commonwealth of Massachusetts without giving
effect to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, DYNAGEN, INC. has caused this Warrant to be signed
by its Executive Vice President and its corporate seal to be hereunto affixed
and attested by its Secretary this 20th day of November, 1998.
ATTEST: DYNAGEN, INC.
: By: /s/ Dhananjay Wadekar
------------------------ ----------------------------
Dhananjay Wadekar
Executive Vice President
[Corporate Seal]
<PAGE>
SUBSCRIPTION
The undersigned, _______________________________________, pursuant to
the provisions of the foregoing Warrant, hereby agrees to subscribe for the
purchase of ________ shares of the Common Stock of DYNAGEN, INC. covered by said
Warrant, and makes payment therefor in full at the price per share provided by
said Warrant.
Dated:____________________________ Signature:_________________________________
Address:___________________________
___________________________
ASSIGNMENT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns
and transfers unto ______________________________ the foregoing Warrant and all
rights evidenced thereby, and does irrevocably constitute and appoint
_____________________, attorney, to transfer said Warrant on the books of
DYNAGEN, INC..
Dated:____________________________ Signature:_________________________________
Address:___________________________
___________________________
___________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfers
unto ___________________________ the right to purchase _________ shares of the
Common Stock of DYNAGEN, INC. by the foregoing Warrant, and a proportionate part
of said Warrant and the rights evidenced hereby, and does irrevocably constitute
and appoint ___________________________________, attorney, to transfer that part
of said Warrant on the books of DYNAGEN, INC.
Dated:____________________________ Signature:_________________________________
Address:___________________________
___________________________
___________________________
<PAGE>
NET ISSUANCE ELECTION
The undersigned, _______________________________, pursuant to the
provisions of the foregoing Warrant, hereby tenders the right to purchase _____
shares of the Common Stock of DYNAGEN, INC., and a proportionate part of said
Warrant and the rights evidenced thereby, in exchange for a number of shares of
said Common Stock to be computed in accordance with the provisions of Section 1
(b) of said Warrant.
Dated:____________________________ Signature:_________________________________
Address:___________________________
___________________________
___________________________
C. ROBERT CUSICK
1100 Lancaster Street
Pittsburgh, Pennsylvania 15218
May 11, 1998
The Board of Directors
DynaGen. Inc.
99 Eric Street
Cambridge, Massachusetts 02139
Ladies and Gentlemen:
The purpose of this letter is to set forth our understanding pursuant
to which I will become the non-executive Chairman of the Board of DynaGen, Inc.,
a Delaware corporation (the "Company") and act as a consultant to the Company in
respect to organizational and operational matters. Based upon the foregoing, we
agreed as follows:
1. Effective May 15, 1998, I will be elected a director and
non-executive Chairman of the Board of Directors of the Company. In that
capacity, I will preside at meetings of the Board of Directors of the Company
and fulfill the obligations of such position as set forth in the Company's
By-Laws. I will also serve as Chairman of the Company's Operating Committee,
such committee to be composed of the Chief Executive Officer, the Executive Vice
President and the Chairman of the Board of the Company. The term of this letter
agreement shall be for a period of two years, and may be extended for an
additional one year period at my sole option. The Company agrees that (a) during
my tenure on the Operating Committee, any proposed action of such committee with
which I do not concur will be submitted to the entire Board of Directors for
consideration prior to its implementation by the officers, employees or agents
of the Company and (b) during the term of this Agreement, I shall have the right
to approve all press releases concerning the Company prior to their release to
the news media.
2. As part of the services to be rendered pursuant to paragraph 1, I
agree to make myself available to the Company for up to one (1) day per week to
consult with the executive officers and directors of the Company on various
organizational and operational matters concerning the Company. Additionally, at
my option, I may make myself available at other times as may be requested by the
Company.
3. As compensation for services to be provided hereunder, the Company
agrees to pay to me a consulting fee of $75,000.00 per annum, payable in monthly
installments of $6,250.00 per month, such payments to be made on the first of
each month. The consulting fees payable hereunder shall be in lieu of any
standard fees for attendance at meetings of the Board of Directors or any
committee thereof.
<PAGE>
DynaGen, Inc.
May 11, 1998
Page 2
4. As an inducement to me to become Chairman of the Board of the
Company and perform the consulting services hereunder, the Company has agreed to
grant to me options to purchase 200,000 shares of the Company's Common Stock at
a price equal to $.33 per share (the "Option"). The shares granted pursuant to
the Option shall vest as follows: 250,000 shares shall vest and be fully
exercisable effective May 15, 1998; an additional 250,000 shares shall vest and
be fully exercisable on each August 15, November 15, February 15 and May 15
thereafter until fully vested. Options granted hereunder shall vest immediately
upon (a) any failure of the Board of Directors of the Company to elect me as
Chairman of the Board during the term hereof; (b) any action to remove me from
such capacity during the term of this letter agreement; or (c) my voluntary
termination of this letter agreement after February 15, 1999. Vested options
shall remain exercisable for a period of two years following the termination or
expiration of this letter agreement for any reason. Certificates or other
evidence of ownership of the Option will be delivered to me within ten days of
the execution of this letter agreement.
5. The Company agrees to reimburse me for all travel, living and other
business expenses in accordance with the Company's policies and procedures upon
my submission of appropriate documentation with respect to such expenses.
6. Nothing herein shall be construed to preclude or otherwise prohibit
me from entering into other consulting agreements or otherwise providing advice
and expertise to other similarly situated businesses, provided that any such
services are performed consistent with my fiduciary obligations to the Company
as a member of the Board of Directors of the Company, and are not, in any event,
provided to any business entity whose primary line is business is the
development, marketing and sale of generic drugs or branded generic drug
products.
7. The Company has advised me that it has in place a directors and
officers liability insurance policy with a $5,000,000 limit. The Company agrees
to maintain such insurance at or above such limits during my tenure on the Board
of Directors and for a period of not less than five (5) years following my
resignation or other removal from the Board of Directors.
8. The Company agrees to indemnify and hold me harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
(including, without limitation, all fees, expenses and disbursements of counsel)
(hereinafter collectively referred to as a "Loss"), which may be incurred by or
asserted or awarded against me in connection with or in any manner arising out
or relating to this letter agreement or the services to be performed by me
hereunder, whether or not any investigation, litigation or proceeding is brought
by the Company or any of its affiliates, shareholders or creditors, except to
the extent such Loss is found in a final judgment by a court of competent
jurisdiction to have resulted from my gross negligence or willful misconduct.
The indemnity contained in this paragraph 8 shall be in addition to, and not in
lieu of, any other obligation to indemnify me that the Company may have,
including, without limitation, any provisions in the Company's By-Laws or other
instruments or agreements to which the Company is a party, such other agreements
or instruments to be relied upon by me first before I seek indemnification from
the Company hereunder.
If the above is acceptable to you, please so indicate by signing and
returning one copy of this letter to me.
Very truly yours
/s/ C. Robert Cusick
Accepted and agreed:
DYNAGEN, INC.
By:/s/ Dhananjay G. Wadekar
Title: Executive Vice President
EXHIBIT 10.80
INCENTIVE STOCK OPTION
GRANTED BY
DYNAGEN, INC.
(hereinafter called the "Company")
TO
----------------------
(hereinafter called the "Holder")
UNDER THE
1998 STOCK OPTION PLAN
For valuable consideration, the receipt of which is hereby
acknowledged, the Company hereby grants to the Holder the following option:
FIRST: Subject to the terms and conditions hereinafter set forth, the
Holder is hereby given the right and option to purchase from the Company shares
of the common stock, $.01 par value per share, ("Common Stock"), of the Company.
Schedule A hereto, the provisions of which are incorporated by reference herein,
sets forth (a) the maximum number of shares that the Holder may purchase upon
exercise of this Option, (b) the exercise price per share of Common Stock
purchasable hereunder, (c) the expiration date of this Option, (d) the vesting
rate and (e) certain other terms and conditions applicable to this Option.
This Option is and shall be subject in every respect to the provisions
of the Company's 1998 Stock Option Plan, as the same may be amended from time to
time (the "Plan"). A copy of the Plan is being delivered herewith, and the Plan
is hereby incorporated herein by reference and made a part hereof. In the event
of any conflict or inconsistency between the terms of this Option and those of
the Plan, the terms of the Plan shall govern.
This Option shall be exercised in whole or in part by the Holder's
delivery to the Company of written notice (the "Notice of Exercise") setting
forth the number of shares with respect to which this Option is to be exercised,
together with (a) cash in an amount, or a check, bank draft or postal or express
money order payable in an amount, equal to the aggregate exercise price for the
shares being purchased, (b) with the consent of the Board (which term shall
herein include the "Committee," as that term is defined in the Plan), shares of
Common Stock having a fair market value equal to such aggregate exercise price;
(c) with the consent of the Board, a personal recourse note issued by the Holder
to the Company in a principal amount equal to such aggregate exercise price and
with such other terms, including interest rate and maturity,
<PAGE>
as the Board may determine in its discretion, provided that the interest rate
borne by such note shall not be less than the lowest applicable federal rate, as
defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended; (d)
with the consent of the Board, such other consideration that is acceptable to
the Board and that has a fair market value, as determined by the Board, equal to
such aggregate exercise price; or (e) with the consent of the Board, any
combination of the foregoing. The "fair market value" of the Common Stock shall
equal (i) the closing price per share on the date of grant of the Option as
reported by the National Market System or another automated quotation system of
the National Association of Securities Dealers, Inc., including the OTC Bulletin
Board, (ii) if the Common Stock is not quoted on any such system, as reported by
a national stock exchange or (iii) if the Common Stock is not listed on such an
exchange, the fair market value as determined by the Board.
SECOND: The Company, in its discretion, may file a registration
statement on Form S-8 under the Securities Act of 1933, as amended, to register
shares of Common Stock reserved for issuance under the Plan. At any time at
which such a registration statement is not in effect, it shall be a condition
precedent to any exercise of this Option that the Holder shall deliver to the
Company a customary "investment letter" satisfactory to the Company and its
counsel in which, among other things, the Holder shall (a) state that he or she
is acquiring shares of Common Stock subject to the Option for his or her own
account for investment and not with a view to the resale or distribution thereof
and (b) acknowledge that those shares are not freely transferable except in
compliance with federal and state securities laws.
THIRD: In order to exercise this option in whole or in part, the Holder
shall deliver to the Company the Notice of Exercise and related investment
letter, payment of exercise price pursuant to Paragraphs First and Second hereof
and any agreement not inconsistent with the provisions of Section 7 of the Plan
that may then be required by the Company in its sole discretion, including
without limitation an executed counterpart of the Stockholder Agreement entered
into by and among certain stockholders of the Company, or any amendment thereto,
or successor agreement. As promptly as practicable after receipt by the Company,
such materials, the Company shall deliver to the Holder (or if any other
individual or individuals are exercising this Option, to such individual or
individuals) a certificate registered in the name of the Holder (or the names of
the other individual or individuals exercising this Option) and representing the
number of shares with respect to which this Option is then being exercised;
provided, however, that if any law or regulation or order of the Securities and
Exchange Commission or any other body having jurisdiction in the premises shall
require the Company or the Holder (or the individual or individuals exercising
this Option) to take any action in connection with the shares then being
purchased, the date for the delivery of the certificate for such shares shall be
extended for the period necessary to take and complete such action. The Company
may imprint upon said certificate the legend contemplated by Section 9.2 of the
Plan and such other legends as counsel for the Company may consider appropriate.
Delivery by the Company of the certificates for such shares shall be deemed
effected for all purposes when the Company or a stock transfer agent of the
Company shall have deposited such certificates in the United States mail,
addressed to the Holder, at the address specified in the Notice. The Company
will pay all fees or expenses necessarily incurred by the Company in connection
with the issuance and delivery of shares pursuant to the exercise of this
Option.
The Company will, at all times while any portion of this Option is
outstanding, reserve and keep available, out of shares of its authorized and
unissued Common Stock or shares of
<PAGE>
Common Stock held in treasury, a sufficient number of shares of its Common Stock
to satisfy the requirements of this Option.
FOURTH: If the Company shall effect any subdivision or consolidation of
shares of its stock or other capital readjustment, the payment of a stock
dividend, or other increase or reduction of the number of shares outstanding, in
any such case without receiving compensation therefor in money, services or
property, then the number, class and per share price of shares of stock subject
to this Option shall be appropriately adjusted in such a manner as to entitle
the Holder to receive upon exercise of this Option, for the same aggregate cash
consideration, the same total number and class of shares as he or she would have
received as a result of the event requiring the adjustment had he or she
exercised this Option in full immediately prior to such event.
If the Company shall be a party to a reorganization or merger with one
or more other corporations (whether or not the Company is the surviving or
resulting corporation), shall consolidate with or into one or more other
corporations, shall be liquidated, or shall sell or otherwise dispose of
substantially all of its assets to another corporation (each a "Transaction"),
then:
(a) subject to the provisions of clauses (b) and (c) below,
after the effective date of the Transaction, the Holder of this Option
shall be entitled, upon exercise hereof and at no additional cost, to
receive shares of Common Stock or, if applicable, shares of such other
stock or other securities, cash or property as the holders of shares of
Common Stock received pursuant to the terms of the Transaction;
(b) the Board may accelerate the time for exercise of this
Option to a date prior to the effective date of the Transaction, as
specified by the Board; or
(c) this Option may be canceled by the Board as of the
effective date of the Transaction, provided that (i) notice of such
cancellation shall have been given to the Holder and (ii) the Holder
shall have the right to exercise this Option to the extent the same is
then exercisable or, if the Board shall have accelerated the time for
exercise of this Option, in full during the thirty-day period preceding
the effective date of the Transaction.
Except as hereinbefore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services, either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to this Option.
FIFTH: Neither the Holder nor any other person shall, by virtue of the
granting of this Option, be deemed for any purpose to be the owner of any shares
of Common Stock subject to this Option or to be entitled to the rights or
privileges of a holder of such shares unless and until this Option has been
exercised pursuant to the terms hereof with respect to such shares and the
Company has issued and delivered the shares to the Holder.
<PAGE>
SIXTH: This Option is not transferable by the Holder or by operation of
law, otherwise than by will or under the laws of descent and distribution. This
Option is exercisable, during the Holder's lifetime, only by the Holder.
In the event that the Holder's employment with the Company or any
subsidiary is terminated by the Company without "Cause" (as defined
hereinafter), the Holder shall have the right to exercise this Option within
thirty days after the latest date on which the Holder so ceases to be an
employee of the Company or any subsidiary or parent (but not later than the
expiration date of this Option) with respect to the shares which were
purchasable by the Holder by exercise of this Option on such date.
In the event that the Holder's employment is terminated by the Holder
for any reason or by the Company for Cause, this Option shall terminate
immediately. As used in this Option, "Cause" shall mean a determination by the
Company (including the Board) or a subsidiary or parent that the Holder's
employment with the Company or such subsidiary or parent should be terminated as
a result of (i) a material breach by the Holder of any agreement to which the
Holder and the Company (or such subsidiary or parent) are both parties, (ii) any
act (other than retirement) by the Holder that may have a material and adverse
effect on the business of the Company or any subsidiary or on the ability to
perform services for the Company or such subsidiary, including the proven or
admitted commission of any crime (other than an ordinary traffic violation), or
(iii) any material misconduct or material neglect of duties by the Holder in
connection with the business or affairs of the Company or such subsidiary or
parent.
In the event of the death or permanent and total disability of the
Holder prior to termination of the Holder's employment with the Company and all
subsidiaries or parents and prior to the date of expiration of this Option, this
Option shall terminate on the earlier of the expiration date of this Option or
one year following the date of such death or disability.
In the event of the death of the Holder prior to termination of the
Holder's employment with the Company and all subsidiaries or parents and prior
to the date of expiration of this Option, the Holder's executors, administrators
or any individual or individuals to whom this Option is transferred by will or
under the laws of descent and distribution, as the case may be, shall have the
right to exercise this Option with respect to the number of shares purchasable
by the Holder at the date of death.
SEVENTH: The Holder agrees that, during the 180-day period commencing
with the closing date of any public offering by the Company of shares of Common
Stock pursuant to a registration statement filed under the Securities Act of
1933, as amended, or any successor act, the Holder will not, without the prior
written consent of the representative or representatives of the underwriters of
such offering, directly or indirectly, sell, offer to sell, contract to sell,
grant any option for the sale of, assign, transfer, pledge, hypothecate or
otherwise dispose of or encumber any shares of Common Stock acquired upon
exercise of this Option, other than such shares, if any, as shall be covered by
such registration statement or as shall be consented to by the Company and such
representative or representatives. The Holder further agrees that, in order
<PAGE>
to facilitate any such public offering, (a) the agreements in this Paragraph
Seventh shall be for the benefit of such underwriters as well as the Company and
(b) upon request of such representative or representatives, the Holder will
execute a separate written instrument to the effect set forth in the preceding
sentence, with such changes therein as such representative or representatives
may request, provided that such changes are not materially adverse to the
interest of the Holder.
EIGHTH: If the Company in its discretion determines that it is
obligated to withhold tax with respect to shares of Common Stock received on
exercise of this Option, the Holder agrees that the Company may withhold from
the Holder's wages the appropriate amount of federal, state or local withholding
taxes attributable to the Holder's exercise of such Option. At the Company's
discretion, the amount required to be withheld may be withheld in cash from such
wages or (with respect to compensation income attributable to the exercise of
this Option) in kind from the Common Stock otherwise deliverable to the Holder
on exercise of this Option. The Holder further agrees that, if the Company does
not withhold an amount from the Holder's wages sufficient to satisfy the
Company's withholding obligation, the Holder will remit to the Company on
demand, in cash, the amount estimated by the Company to be underwithheld.
NINTH: Any notice to be given to the Company hereunder shall be deemed
sufficient if addressed to the Company and delivered at the office of the Chief
Financial Officer of the Company, or to such other officer or at such other
address as the Company may hereafter designate, or when deposited in the mail,
postage prepaid, addressed to the attention of the Chief Financial Officer of
the Company at such office or other address.
Any notice to be given to the Holder hereunder shall be deemed
sufficient if addressed to and delivered in person to the Holder at his address
furnished to the Company or when deposited in the mail, postage prepaid,
addressed to the Holder at such address.
TENTH: This Option is subject to all laws, regulations and orders of
any governmental authority which may be applicable thereto and, notwithstanding
any of the provisions hereof, the Holder agrees that he will not exercise the
Option granted hereby nor will the Company be obligated to issue any shares of
stock hereunder if the exercise thereof or the issuance of such shares, as the
case may be, would constitute a violation by the Holder or the Company of any
such law, regulation or order or any provision thereof.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed in its name and on its behalf as of the effective date.
DYNAGEN, INC.
By:/s/ Dhananjay G. Wadekar
------------------------------
Name: Dhanajay G. Wadekar
Title: Executive Vice President
Acknowledgment
The undersigned Holder acknowledges receipt of this Stock Option
Agreement, including Schedule A hereto, and a copy of the 1998 Stock Option
Plan, and agrees to be bound by all obligations of the Holder as set forth in
such Stock Option Agreement.
HOLDER
------------------------------------------------
Name
<PAGE>
SCHEDULE A
DYNAGEN, INC.
INCENTIVE STOCK OPTION
----------------------
Date of Grant: November 19, 1998
Name of Holder: Dhananjay G. Wadekar
Address: 840 Memorial Drive
Cambridge, MA 02139
Social Security Number: _________________
Maximum number of shares for which
this Option is exercisable: 700,000
Exercise (purchase) price per share: $0.125
Expiration date of this Option: November 19, 2005
Vesting rate: Option becomes exercisable in equal
installments at the end of each
fiscal quarter of the Company over
two years, beginning with the fiscal
quarter ending June 30, 1998;
provided, that if the Holder resigns
or is removed as Chairman of the
Board of Directors of the Company at
any time prior to March 1, 1999,
then only the portion of this Option
then vested shall be exercisable
thereafter, and if the Holder
resigns or is removed from such
position at any time on or after
March 1, 1999, then the entire
Option shall become fully
exercisable.
Other terms and conditions: None
EXHIBIT 10.81
STOCK OPTION
GRANTED BY
DYNAGEN, INC.
(hereinafter called the "Company")
TO
C. ROBERT CUSICK
(hereinafter called the "Holder")
For valuable consideration, the receipt of which is hereby
acknowledged, the Company hereby grants to the Holder the following option:
FIRST: Subject to the terms and conditions hereinafter set forth, the
Holder is hereby given the right and option to purchase from the Company shares
of the common stock, $.01 par value per share, ("Common Stock"), of the Company.
Schedule A hereto, the provisions of which are incorporated by reference herein,
sets forth (a) the maximum number of shares that the Holder may purchase upon
exercise of this Option, (b) the exercise price per share of Common Stock
purchasable hereunder, (c) the expiration date of this Option, (d) the vesting
rate and (e) certain other terms and conditions applicable to this Option.
This Option shall be exercised in whole or in part by the Holder's
delivery to the Company of written notice (the "Notice of Exercise") setting
forth the number of shares with respect to which this Option is to be exercised,
together with (a) cash in an amount, or a check, bank draft or postal or express
money order payable in an amount, equal to the aggregate exercise price for the
shares being purchased, (b) with the consent of the Board, shares of Common
Stock having a fair market value equal to such aggregate exercise price; (c)
with the consent of the Board, a personal recourse note issued by the Holder to
the Company in a principal amount equal to such aggregate exercise price and
with such other terms, including interest rate and maturity, as the Board may
determine in its discretion, provided that the interest rate borne by such note
shall not be less than the lowest applicable federal rate, as defined in Section
1274(d) of the Internal Revenue Code of 1986, as amended; (d) with the consent
of the Board, such other consideration that is acceptable to the Board and that
has a fair market value, as determined by the Board, equal to such aggregate
exercise price; or (e) with the consent of the Board, any combination of the
foregoing. The "fair market value" of the Common Stock shall equal (i) the
closing price per share on the date of grant of the Option as reported by a
national stock exchange, (ii) if the Common Stock is not listed on such an
exchange, as reported by the National Market System or another automated
quotation system of the National
<PAGE>
Association of Securities Dealers, Inc., or (iii) if the Common Stock is not
quoted on any such system, the fair market value as determined by the Board.
SECOND: The Company, in its discretion, may file a registration
statement on Form S-8 under the Securities Act of 1933, as amended, to register
shares of Common Stock reserved for issuance hereunder. At any time at which
such a registration statement is not in effect, it shall be a condition
precedent to any exercise of this Option that the Holder shall deliver to the
Company a customary "investment letter" satisfactory to the Company and its
counsel in which, among other things, the Holder shall (a) state that he is
acquiring shares of Common Stock subject to the Option for his or her own
account for investment and not with a view to the resale or distribution thereof
and (b) acknowledge that those shares are not freely transferable except in
compliance with federal and state securities laws.
THIRD: In order to exercise this option in whole or in part, the Holder
shall deliver to the Company the Notice of Exercise and related investment
letter, if required, and payment of the exercise price pursuant to Paragraphs
First and Second hereof. As promptly as practicable after receipt by the
Company, such materials, the Company shall deliver to the Holder (or if any
other individual or individuals are exercising this Option, to such individual
or individuals) a certificate registered in the name of the Holder (or the names
of the other individual or individuals exercising this Option) and representing
the number of shares with respect to which this Option is then being exercised;
provided, however, that if any law or regulation or order of the Securities and
Exchange Commission or any other body having jurisdiction in the premises shall
require the Company or the Holder (or the individual or individuals exercising
this Option) to take any action in connection with the shares then being
purchased, the date for the delivery of the certificate for such shares shall be
extended for the period necessary to take and complete such action. The Company
may imprint upon said certificate a legend to the following effect:
The shares of stock represented by this certificate have been
acquired for investment and have not been registered under the
Securities Act of 1933. Such securities may not be sold,
transferred, pledged or hypothecated unless the registration
provisions of said Act have been complied with or unless the
Corporation has received an opinion of its counsel that such
registration is not required, except upon such registration or
upon receipt by the Corporation of an opinion of counsel
satisfactory to the Corporation, in form and substance
satisfactory to the Corporation, that registration is not
required for such sale or transfer.
and such other legends as counsel for the Company may consider appropriate.
Delivery by the Company of the certificates for such shares shall be deemed
effected for all purposes when the Company or a stock transfer agent of the
Company shall have deposited such certificates in the United States mail,
addressed to the Holder, at the address specified in the Notice. The Company
will pay all fees or expenses necessarily incurred by the Company in connection
with the issuance and delivery of shares pursuant to the exercise of this
Option.
<PAGE>
The Company will, at all times while any portion of this Option is
outstanding, reserve and keep available, out of shares of its authorized and
unissued Common Stock or shares of Common Stock held in treasury, a sufficient
number of shares of its Common Stock to satisfy the requirements of this Option.
FOURTH: If the Company shall effect any subdivision or consolidation of
shares of its stock or other capital readjustment, the payment of a stock
dividend, or other increase or reduction of the number of shares outstanding, in
any such case without receiving compensation therefor in money, services or
property, then the number, class and per share price of shares of stock subject
to this Option shall be appropriately adjusted in such a manner as to entitle
the Holder to receive upon exercise of this Option, for the same aggregate cash
consideration, the same total number and class of shares as he or she would have
received as a result of the event requiring the adjustment had he or she
exercised this Option in full immediately prior to such event.
If the Company shall be a party to a reorganization or merger with one
or more other corporations (whether or not the Company is the surviving or
resulting corporation), shall consolidate with or into one or more other
corporations, shall be liquidated, or shall sell or otherwise dispose of
substantially all of its assets to another corporation (each a "Transaction"),
then:
(a) subject to the provisions of clauses (b) and (c) below,
after the effective date of the Transaction, the Holder of this Option
shall be entitled, upon exercise hereof and at no additional cost, to
receive shares of Common Stock or, if applicable, shares of such other
stock or other securities, cash or property as the holders of shares of
Common Stock received pursuant to the terms of the Transaction;
(b) the Board may accelerate the time for exercise of this
Option to a date prior to the effective date of the Transaction, as
specified by the Board; or
(c) this Option may be canceled by the Board as of the
effective date of the Transaction, provided that (i) notice of such
cancellation shall have been given to the Holder and (ii) the Holder
shall have the right to exercise this Option to the extent the same is
then exercisable or, if the Board shall have accelerated the time for
exercise of this Option, in full during the thirty-day period preceding
the effective date of the Transaction.
Except as hereinbefore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services, either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to this Option.
FIFTH: Neither the Holder nor any other person shall, by virtue of the
granting of this Option, be deemed for any purpose to be the owner of any shares
of Common Stock subject to
<PAGE>
this Option or to be entitled to the rights or privileges of a holder of such
shares unless and until this Option has been exercised pursuant to the terms
hereof with respect to such shares and the Company has issued and delivered the
shares to the Holder.
SIXTH: This Option is not transferable by the Holder or by operation of
law, otherwise than by will or under the laws of descent and distribution. This
Option is exercisable, during the Holder's lifetime, only by the Holder.
SEVENTH: If the Company in its discretion determines that it is
obligated to withhold tax with respect to shares of Common Stock received on
exercise of this Option, the Holder agrees that the Company may withhold from
the Holder's wages, if and to the extent that the Holder is then employed by the
Company and subject to such withholding, the appropriate amount of federal,
state or local withholding taxes attributable to the Holder's exercise of such
Option. At the Company's discretion, the amount required to be withheld may be
withheld in cash from such wages or (with respect to compensation income
attributable to the exercise of this Option) in kind from the Common Stock
otherwise deliverable to the Holder on exercise of this Option. The Holder
further agrees that, if the Company does not withhold an amount from the
Holder's wages sufficient to satisfy the Company's withholding obligation, the
Holder will remit to the Company on demand, in cash, the amount estimated by the
Company to be underwithheld.
EIGHTH: Any notice to be given to the Company hereunder shall be deemed
sufficient if addressed to the Company and delivered at the office of the Chief
Financial Officer of the Company, or such other address as the Company may
hereafter designate, or when deposited in the mail, postage prepaid, addressed
to the attention of the Chief Financial Officer of the Company at such office or
other address.
Any notice to be given to the Holder hereunder shall be deemed
sufficient if addressed to and delivered in person to the Holder at his address
furnished to the Company or when deposited in the mail, postage prepaid,
addressed to the Holder at such address.
NINTH: This Option is subject to all laws, regulations and orders of
any governmental authority which may be applicable thereto and, notwithstanding
any of the provisions hereof, the Holder agrees that he will not exercise the
Option granted hereby nor will the Company be obligated to issue any shares of
stock hereunder if the exercise thereof or the issuance of such shares, as the
case may be, would constitute a violation by the Holder or the Company of any
such law, regulation or order or any provision thereof.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed in its name and on its behalf as of the effective date.
DYNAGEN, INC.
[SEAL]
By: /s/ Dhananjay Wadekar
---------------------------
Dhananjay G. Wadekar
Executive Vice President
Acknowledgment
The undersigned Holder acknowledges receipt of this Stock Option
Agreement, including Schedule A hereto, and agrees to be bound by all
obligations of the Holder as set forth in such Stock Option Agreement.
HOLDER
--------------------------------------------------
Name
<PAGE>
SCHEDULE A
DYNAGEN, INC.
STOCK OPTION
Date of Grant: November 19, 1998
Name of Holder: C. Robert Cusick
Address:
------------------------
------------------------
Maximum number of shares for which
this Option is exercisable: 2,000,000
Exercise (purchase) price per share: $.125
Expiration date of this Option: November 19, 2005
Vesting rate: Option becomes exercisable in equal
installments at the end of each
fiscal quarter of the Company over
two years, beginning with the fiscal
quarter ending June 30, 1998;
provided, that if the Holder resigns
or is removed as Chairman of the
Board of Directors of the Company at
any time prior to March 1, 1999,
then only the portion of this Option
then vested shall be exercisable
thereafter, and if the Holder
resigns or is removed from such
position at any time on or after
March 1, 1999, then the entire
Option shall become fully
exercisable.
Other terms and conditions: None
EXHIBIT 21.1
Subsidiaries of the Registrant
Each of the following is a wholly-owned subsidiary of DynaGen, Inc.:
Able Laboratories, Inc.
Superior Pharmaceutical Company
Generic Distributors, Inc.
Apex Pharmaceuticals, Inc.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement Number 33-66826 (dated August 2, 1993 on Form S-8), Number 33-78546
(dated May 2, 1994 on Form S-8), Number 33-71416 (Post-Effective Amendment No. 3
to Form S-1 on Form S-3 dated May 16, 1995), Number 33-95432 (dated August 4,
1995 on Form S-8), Number 333-1748 (dated March 28, 1996 on Form S-3), Number
333-19471 (dated January 9, 1997 on Form S-3), File No. 333-33321 (dated August
8, 1997 on Form S-3), File No. 333-47077 (dated February 27, 1998 on Form S-3)
and File No. 333-57249 (Dated June 19, 1998 on Form S-8), of DynaGen, Inc., of
our report dated February 12, 1999, except for Note 13 as to which the date is
March 29, 1999, which included an explanatory paragraph about the Company's
ability to continue as a going concern, appearing in this Annual Report on Form
10-KSB of DynaGen, Inc. for the year ended December 31, 1998.
Boston, Massachusetts /s/ Wolf & Company, P.C.
March 29, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 97,045
<SECURITIES> 0
<RECEIVABLES> 3,741,605
<ALLOWANCES> 68,133
<INVENTORY> 6,647,079
<CURRENT-ASSETS> 11,167,790
<PP&E> 2,817,173
<DEPRECIATION> 1,132,163
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0
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<COMMON> 376,126
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<TOTAL-LIABILITY-AND-EQUITY> 21,445,450
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<INCOME-PRETAX> (12,612,009)
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<INCOME-CONTINUING> (12,612,009)
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