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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT /X/
FILED BY A PARTY OTHER THAN THE REGISTRANT / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14a-12
DYNAGEN, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NOT APPLICABLE
(NAME OF PERSON(S) FILING PROXY STATEMENT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies: n/a
---
2) Aggregate number of securities to which transaction applies: n/a
---
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):_____
4) Proposed maximum aggregate value of transaction: $12,348,875
-----------
5) Total fee paid: $2,470
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:_____
2) Form, Schedule or Registration Statement No.:_____
3) Filing Party:_____
4) Date Filed: _____
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<PAGE>
DYNAGEN, INC.
1000 WINTER STREET, SUITE 2700
WALTHAM, MASSACHUSETTS 02451
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
to be held on November 27, 2000
and
PROXY STATEMENT
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
of DynaGen, Inc. The meeting will be held at the offices of Foley, Hoag & Eliot
LLP, One Post Office Square, 16th floor, Boston, Massachusetts 02109, on Monday,
November 27, 2000, beginning at 11:00 A.M. local time.
As a stockholder, your vote is important. We encourage you to execute
and return your proxy promptly whether you plan to attend the meeting or not so
that we may have as many shares as possible represented at the meeting.
Returning your completed proxy will not prevent you from voting in person at the
meeting prior to the proxy's exercise if you wish to do so. If you do wish to
attend the meeting in person, we ask that you notify DynaGen at (781) 890-0021
so that appropriate arrangements can be made to accommodate all stockholders
wishing to attend.
Thank you for your cooperation, continued support and interest in
DynaGen, Inc.
Sincerely,
C. Robert Cusick
PRESIDENT
IMPORTANT
PLEASE MARK, SIGN AND DATE YOUR PROXY
AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE>
SUMMARY TERM SHEET
This summary term sheet is intended to give you a summary description
of the material aspects of the proposed sale of our distribution subsidiary,
Superior Pharmaceutical Company, as described in this proxy statement. You
should review the proxy statement and the appendices to it so that you can gain
a more complete understanding of the proposed transaction.
PROPOSED TRANSACTION (SEE PAGE 12). The sale of Superior is valued at a
total of approximately $12,248,875. Under the agreement and plan of merger,
sometimes referred to as the merger agreement, a wholly-owned subsidiary of
RxBazaar.com, Inc. will merge with Superior Pharmaceutical Company in a cash
transaction. At the closing:
o We will receive a cash payment of $4,000,000.
o RxBazaar.com will assume our existing 13.5% senior subordinated debt in
the amount of $2,248,875.
o RxBazaar.com will become obligated to pay and will pay us and our Able
Laboratories subsidiary approximately $6,000,000 in respect of existing
intercompany advances and accounts payable that are currently
eliminated as intercompany accounts on our consolidated financial
statements.
CONTINUED GUARANTEE OF SUBORDINATED DEBT (SEE PAGE 9). Our subordinated
debt is currently guaranteed by both DynaGen and Superior. We have agreed to
continue our guarantee of payment of this debt although it is being assumed by
RxBazaar.com. If RxBazaar.com does not repay this debt, then we will have to
repay it under the terms of the guarantee, which will effectively reduce our
purchase price.
POTENTIAL DILUTION TO DYNAGEN (SEE PAGE 9). An unaffiliated investor
may provide RxBazaar.com with equity financing in the approximate amount of
$4,500,000 in connection with this transaction. We are negotiating the terms and
no definative agreement has been reached. We may be required, at the option of
the investor, as of a certain time after the date of the investment, to allow
the investor to cancel its shares of RxBazaar.com and receive shares of DynaGen
stock. While this would not reduce the cash purchase price we will receive for
Superior, it would have the consequence of diluting the interests of our
stockholders.
FAIRNESS OPINION (SEE PAGE 15). Context Capital Group has provided the
board of directors of DynaGen with its opinion that the proposed sale of
Superior is fair to DynaGen from a financial point of view.
CONFLICTS OF INTEREST OF CERTAIN OF OUR OFFICERS AND DIRECTORS (SEE
PAGE 9). Certain of our officers and directors have conflicts of interest with
respect to this transaction because they have interests in RxBazaar.com. The
proposed transaction was approved at a special committee consisting of our
outside directors who have no interest in RxBazaar.com.
OTHER MATTERS (SEE PAGE 24). We intend to take action on two other
matters that are not being submitted for stockholder approval. First, we intend
to sell our Generic Distributors, Inc. subsidiary. Second, we intend to change
our corporate name to "Able Laboratories, Inc." as approved by our stockholders
at our May 31, 2000 meeting.
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<PAGE>
TABLE OF CONTENTS
SUMMARY TERM SHEET............................................................ii
TABLE OF CONTENTS............................................................iii
PROXY STATEMENT FOR THE SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON NOVEMBER 27, 2000.................................1
Purpose of the Special Meeting........................................1
Solicitation; Expenses................................................1
Quorum................................................................2
Voting................................................................2
Record Date...........................................................2
Revoking a Proxy......................................................3
REASON FOR THE SPECIAL MEETING - PROPOSED SALE OF SUPERIOR.....................4
Information About the Parties.........................................4
Reasons for the Sale of Superior......................................7
Interests Of Certain Officers and Directors of DynaGen................9
Background of the Transaction........................................10
Terms of the Transaction.............................................12
Opinion of Context Capital Group.....................................15
No Changes to the Rights of Security Holders; No Dissenter's Rights..18
Federal Income Tax Consequences......................................18
Accounting Treatment.................................................18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................22
Introduction.........................................................22
Results of Operations................................................22
Liquidity and Capital Resources......................................24
Certain Factors That Could Affect Future Results.....................25
OTHER MATTERS.................................................................26
Disposition of Generic Distributors, Inc.............................26
Corporate Name Change................................................27
STOCKHOLDER PROPOSALS.........................................................27
MISCELLANEOUS.................................................................27
ADDITIONAL INFORMATION........................................................27
INDEX TO FINANCIAL STATEMENTS................................................F-1
APPENDIX A - Agreement And Plan Of Merger....................................A-1
APPENDIX B - Opinion Of Context Capital Group................................B-1
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<PAGE>
DYNAGEN, INC.
1000 WINTER STREET, SUITE 2700
WALTHAM, MASSACHUSETTS 02451
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 27, 2000
DynaGen hereby gives notice that it will hold a special meeting of
stockholders at the offices of Foley, Hoag & Eliot LLP, One Post Office Square,
16th Floor, Boston, Massachusetts 02109, on Monday, November 27, 2000, beginning
at 11:00 A.M. local time, for the following purposes:
1. To consider and act upon a proposal to sell DynaGen's Superior
Pharmaceutical Company subsidiary to RxBazaar.com, Inc.
2. To consider and vote upon a proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies if there are not
sufficient votes at the time of the special meeting to approve Proposal
1.
3. To transact such further business as may properly come before the
special meeting or any adjournment thereof.
The board of directors has fixed the close of business on October 24,
2000 as the record date for the stockholders entitled to notice of, and to vote
at, the special meeting and any adjournment thereof. Only stockholders of record
on such date are entitled to notice of, and to vote at, the special meeting or
any adjournment thereof.
By Order of the Board of Directors,
Dhananjay G. Wadekar
SECRETARY
Boston, Massachusetts
October 31, 2000
YOUR VOTE IS VERY IMPORTANT
PLEASE SIGN AND RETURN THE ENCLOSED PROXY, WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
<PAGE>
DYNAGEN, INC.
1000 WINTER STREET, SUITE 2700
WALTHAM, MASSACHUSETTS 02451
--------------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
---------------------
NOVEMBER 27, 2000
INTRODUCTION
This proxy statement and the enclosed form of proxy relates to the
special meeting of stockholders of DynaGen, Inc. The special meeting will take
place as follows:
Date: Monday, November 27, 2000
Time: 11 a.m.
Place: Foley, Hoag & Eliot LLP
One Post Office Square, 16th Floor
Boston, Massachusetts 02109
We are mailing this proxy statement and the enclosed form of proxy to
stockholders on or about October 31, 2000.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, we will submit to the stockholders a proposal
to approve the sale of our Superior Pharmaceutical Company subsidiary to
RxBazaar.com, Inc., and a proposal to adjourn the special meeting if necessary
to permit us to solicit additional proxies, if there do not appear to be
sufficient votes to approve the proposed sale. Information about the proposed
sale is contained in this proxy statement.
SOLICITATION; EXPENSES
The board of directors of DynaGen is soliciting proxies for the special
meeting and adjournments of the special meeting.
We will bear the cost of solicitation of proxies. We will reimburse
banks, brokers, custodians, nominees and fiduciaries for reasonable expenses
they incur in sending these proxy materials to you if you are a beneficial
holder of our shares. We may request banks and brokers, in addition to mailing
these proxy materials, to take additional actions to solicit their customers who
have stock of DynaGen registered in the name of a nominee. If so, we will
reimburse such banks and brokers for their reasonable out-of-pocket costs.
Georgeson Shareholder Communications, Inc., a professional proxy
solicitation firm, will help us solicit proxies at an estimated cost to DynaGen
of $17,500 plus expenses. Our officers and directors may also solicit proxies
after the original solicitation, by mail or telephone, for no additional
compensation.
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<PAGE>
QUORUM
Our by-laws provide that a quorum at the special meeting will be at
least a majority of the outstanding shares entitled to vote at the meeting. We
will treat shares of voting capital stock represented by a properly signed and
returned proxy as present at the meeting for purposes of determining the
existence of a quorum at the meeting. We will count abstentions and broker
non-votes as present or represented for purposes of determining the existence of
a quorum. A broker non-vote occurs when a broker or nominee holding shares for a
beneficial owner does not vote on a proposal because the broker or nominee does
not have discretionary voting power and has not received instructions from the
beneficial owner with respect to that proposal.
VOTING
We will follow your voting instructions as indicated on a properly
signed and returned proxy. We encourage you to vote on the proposal. If,
however, you sign and return the proxy but do not provide any voting
instructions, the person named in the proxy will vote signed proxies FOR the
proposal. The proxy holders will use their discretion on other matters that may
come before the meeting.
The proposal to sell Superior requires the affirmative vote of
holders of a majority of the outstanding shares of our stock entitled to vote at
the meeting. Therefore, if you fail to return a proxy or attend the meeting, or
if you abstain from voting on the proposal, it will have the same effect as if
you voted your shares against the proposal.
Our transfer agent will tabulate the votes through an automated system.
We do not intend to submit any other proposals to the stockholders at
the special meeting. The board of directors was not aware, a reasonable time
before mailing this proxy statement to stockholders, of any other business that
may properly be presented for action at the special meeting. If any other
business should properly come before the special meeting, shares represented by
all proxies received by us will be voted with respect thereto in accordance with
the best judgment of the persons named in the proxies.
RECORD DATE
We have set 5:00 p.m. EST on October 24, 2000 as the record date for
the special meeting. Only stockholders of record as of that time are entitled to
notice of and to vote at the special meeting and any adjournments thereof. As of
the record date, the following shares of common stock and preferred stock were
issued and outstanding and entitled to the following number of votes:
Class of Security Number of Shares Outstanding Number of Votes
----------------- ---------------------------- ---------------
Common Stock 87,702,306 87,702,306
Preferred Stock 55,850 17,669,200
The shares of common stock and preferred stock vote together as a
single class on the proposal. We have no other voting securities. A total of
105,371,506 votes are eligible to be cast at the meeting.
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<PAGE>
REVOKING A PROXY
You may vote in person or by proxy. Your signing and returning a proxy
will not in any way affect your right to attend the meeting and vote in person.
Your can revoke your proxy if you:
o Deliver, before the taking of the vote at the meeting, a signed
revocation letter dated later than the proxy, to DynaGen, Inc., 1000
Winter Street, Waltham, Massachusetts 02451, Attention: Special
Meeting.
o Deliver, before the taking of the vote at the meeting, a signed proxy
dated later than the first one, to American Stock Transfer & Trust, 40
Wall Street, 46th Floor, New York, New York, 10005.
o Attend the meeting and vote in person or by proxy. Attending the
meeting alone will not revoke your proxy.
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<PAGE>
REASON FOR THE SPECIAL MEETING -- PROPOSED SALE OF SUPERIOR
We propose to sell our Superior subsidiary to RxBazaar.com, Inc.
Because we are shifting our strategic focus to concentrate solely on the
manufacture of generic drugs, we believe that our distribution subsidiary,
Superior, no longer provides an advantage for us in the generic drug business.
Section 271 of the Delaware General Corporation Law requires
stockholder approval for a sale of all or substantially all of a company's
assets. We believe that the Superior transaction may not meet the technical
requirement for a sale of substantially all of our assets, because, among other
things, our Able Laboratories subsidiary, which we are not selling, represents a
substantial percentage of our total assets and business.
Nevertheless, our directors determined that the decision should
ultimately lie with our stockholders for the following reasons:
o Superior accounts for approximately 48% of our consolidated assets
based on our December 31, 1999 balance sheet.
o Superior 's contribution to our gross revenues for 1999 was
approximately 74%.
o Certain of our officers and directors may have direct conflicts of
interest with respect to the sale of Superior to RxBazaar.com, as
described in detail below.
o The sale of Superior, along with the proposed sale of our Generic
Distributors, Inc. subsidiary, will accomplish our goal of streamlining
our operations and allow us to strategically focus on our core business
of developing and manufacturing generic drugs.
Therefore, our directors determined that the most prudent course was to
seek your approval of the sale of Superior. Also, your approval is a condition
to the completion of the merger, as provided in the merger agreement between
Superior and RxBazaar.com.
THE DYNAGEN BOARD, INCLUDING ALL DISINTERESTED DIRECTORS, HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT, DETERMINED THAT THE SALE OF SUPERIOR IS IN THE
BEST INTERESTS OF DYNAGEN AND ITS STOCKHOLDERS, AND RECOMMENDS THAT YOU VOTE FOR
THE SALE OF SUPERIOR PURSUANT TO THE MERGER AGREEMENT.
We are also asking the stockholders to approve an adjournment of the
special meeting to permit us to solicit additional proxies in favor of the
proposal to sell Superior if there do not appear to be sufficient votes to
approve the proposal at the time of the meeting.
INFORMATION ABOUT THE PARTIES
DYNAGEN, INC.
Our Business
------------
We develop, manufacture and distribute generic drugs. Generic drugs
compete with brand-name drugs for which patent protection or other
government-mandated market exclusivity has expired. Generic drugs are the
chemical and therapeutic equivalents of brand-name drugs. They are required to
meet the
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<PAGE>
same governmental standards as the brand-name drugs they replace, and they must
meet all FDA guidelines. 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. market for generic drugs approximates $13
billion in annual sales. 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
permissible for generic manufacturers to produce and market competing
generic drugs;
o managed care organizations, which prefer lower-cost generics to
brand-name products, are capturing a greater share of the healthcare
market; and
o physicians, pharmacists and consumers increasingly accept generic drugs
as an alternative to brand-name drugs.
We intend to focus our efforts on the manufacturing of generic drugs.
Currently, we own three operating subsidiaries:
ABLE LABS: In August 1996, we acquired Able Laboratories, Inc.,
including its 46,000-square foot tablet and suppository
manufacturing facility in South Plainfield, New Jersey.
SUPERIOR: In June 1997, we acquired Superior Pharmaceutical Company, a
generic drug distributor in Cincinnati, Ohio.
GENERIC
DISTRIBUTORS: In March 1998, we acquired Generic Distributors Limited
Partnership, a distributor of generic drugs based in Monroe,
Louisiana.
Properties
----------
We maintain our principal executive offices at 1000 Winter Street,
Waltham, Massachusetts 02451. The premises, which consist of approximately 2,700
square feet of space, are sub-leased from BioTrack, Inc. for a term expiring on
January 31, 2001. Able Laboratories is located in 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, 2015. 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 a month-to-month basis.
Our corporate headquarters is at DynaGen, Inc., 1000 Winter Street,
Suite 2700, Waltham, Massachusetts 02451. The telephone number at our corporate
office is (781) 890-0021, and the facsimile number is (781) 890-0118.
Legal Proceedings
-----------------
On May 4, 2000, Generic Distributors Limited Partnership, Don Couvillon
and Sidney Johnson (collectively, "Claimants") filed for arbitration with the
American Arbitration Association in Atlanta, Georgia. Claimants alleged that
DynaGen, Generic Distributors, Inc., and Superior Pharmaceutical Co.
(collectively, "Respondents") breached the parties' March 2, 1998 Asset Purchase
Agreement by refusing
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<PAGE>
to pay certain compensation totaling $1,383,332. DynaGen and other respondents
denied liability and countersued Claimants for fraud in inducing the Asset
Purchase Agreement, breach of contract, negligent misrepresentation, and a
judgment of rescission. On June 6, 2000, Couvillon and Johnson filed a related
action in Federal District Court in Monroe, Louisiana against DynaGen, Generic
Distributors, Inc., and Superior Pharmaceutical Co., and later dismissed their
pending claims in the Atlanta arbitration. Couvillon and Johnson alleged
breaches of compensation provisions in their employment and consulting
contracts, respectively, and each demanded $116,666. We denied liability and
countersued for fraud in the inducement and negligent misrepresentations. We
intend to defend and prosecute both matters vigorously.
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.
RXBAZAAR.COM, INC.'S BUSINESS
RxBazaar.com, Inc. is a web portal that provides an online marketplace
for the purchase and sale of brand and generic pharmaceutical and related
products on the Internet. RxBazaar.com, Inc. was incorporated in October 1999 to
create an online marketplace for the purchase and sale of brand and generic
pharmaceutical and related products. RxBazaar.com is fully operational and is
currently selling products to its base of over 4,500 customers.
RxBazaar.com's strategy is to enable the following e-commerce
capabilities:
o Sale of pharmaceuticals to independent pharmacies, chain drug stores,
institutional pharmacies, and hospitals.
o Providing a marketplace where manufacturers, distributors, and
wholesalers can dispose of overstocks and short dated products in an
efficient and confidential manner.
o Providing sophisticated "search" engine capabilities allowing buyers
and sellers to quickly access specific items, specials or other types
of deals in a user-friendly environment.
o Utilizing a sophisticated data mining environment to generate customer
insights and create targeted sales campaigns.
o Serving as a "portal" for the pharmaceutical community.
As of this date, RxBazaar.com has approximately 30 employees of which
15 work in sales and administration and the rest work in software and systems
development.
RxBazaar.com is located at 11895 Kemper Springs Drive Cincinnati, Ohio
45240, in a 14,000-square foot office and warehouse facility. RxBazaar.com's
corporate headquarters are at 11895 Kemper Springs Drive, Cincinnati, Ohio
45240. The telephone number at RxBazaar.com's corporate office is (800) 255-8475
and the facsimile number is (888) 999-4368. RxBazaar.com's website address is
www.rxbazaar.com.
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<PAGE>
REASONS FOR THE SALE OF SUPERIOR
BACKGROUND
DynaGen, Inc. was founded in 1988 to develop proprietary new drugs.
Since 1996 we have become a developer and manufacturer of generic drugs and a
marketer and distributor of brand name and generic drugs. Our 1996 acquisition
of Able Laboratories created an opportunity for the development and manufacture
of generic drugs. The Superior and Generic Distributors acquisitions, in 1997
and 1998 respectively, created our distribution operations.
WHY WE HAVE DECIDED TO SELL SUPERIOR
Strategic Reasons
-----------------
Pharmaceutical manufacturing and pharmaceutical sales and distribution
each require significant capital and management resources. We believe that our
combination of generic drug manufacturing and distribution operations has not
created a strategic advantage. We have been divided, financially and
managerially, by maintaining both manufacturing and distribution capabilities.
As a result, both areas have lacked the management focus and capital funding
necessary to become a strong competitor in either sector of the generic drug
business.
Because the gross margins achieved by manufacturing operations are
typically higher than those in the distribution business, we have focused
resources on our Able Laboratories operations, including upgrading the
46,000-square foot facility, aggressively developing new products and filing FDA
applications for numerous generic drugs. Meanwhile, immediately after we
acquired it Superior began experiencing a sharp and steady decline in its sales
and margins. The decline was initially due, in part, to the loss of key
personnel immediately after the acquisition, which resulted in the loss of
business with certain federal and corporate accounts. Also, price pressure in
the generic drug industry caused further erosion in Superior's margins. Generic
Distributors also experienced a decline in sales and margins, primarily due to
price erosion in the industry. Although we provided ongoing capital to the
subsidiaries' operations, we do not believe that we have sufficient capital to
continue to do so.
We currently operate a combined generic drug manufacturing and
distribution business. However, management believes that this combination has
not created any strategic advantage in the generic drug business. The gross
margins we can achieve through our manufacturing operations are typically higher
than those in the distribution business. Also, as a distributor Superior
purchases and sells drugs manufactured by Able's direct competitors. We believe
that this has caused Superior to sometimes be viewed as a competitor by other
manufacturers, which has impaired Superior's ability to negotiate satisfactory
terms in its purchase agreements. Because of these factors, we have decided to
focus our future efforts on the manufacturing of generic drugs.
Financial Reasons -- Need to Replace Fleet Capital Loan
-------------------------------------------------------
A more critical reason for us to sell Superior is to improve our
financial position. To finance the Able Laboratories, Superior and Generic
Distributors acquisitions, we entered into three separate lending agreements.
The lenders acquired security interests in each of the operating subsidiaries,
and because we had three separate lenders, we were restricted from combining our
assets and cash flows among the subsidiaries. Furthermore, the downturn in
Superior and Generic Distributors' sales performance caused a severe shortage in
working capital and covenant defaults with all three lenders.
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<PAGE>
During 1998 and 1999, we sought an alternate credit facility that would
allow us to operate on a fully integrated basis. In November 1999, we secured a
$14 million line of credit for working capital from Fleet Capital which provided
us with better liquidity and capital resources. The Fleet Capital financing was
utilized to further integrate operations.
Despite having this financing, we have continued to face a working
capital shortage due to research and development investment, declining margins
on Superior sales and restrictive covenants of the Fleet Capital credit
facility. We have experienced covenant defaults in connection with the Fleet
credit facility, and Fleet has imposed further restrictions. As a result, we
have committed to seek alternate lenders by the end of 2000. If we fail to
obtain alternate financing, we will experience continued working capital
shortage and, most likely, a further decline in the value of the business. If
Fleet Capital imposes any further restrictions or reductions in their lending
then we will most certainly face serious disruption in our operations. It is
therefore imperative that we repay the Fleet Capital loan in full.
Conclusions of Management and The Board of Directors
----------------------------------------------------
We believe that our experience over the past three years shows that a
distribution operation adds little advantage in achieving our strategic plan for
success in a targeted sector of the generic drug business. Also, while both
Superior and Generic Distributors are marginally profitable, each consumes
significant management attention and resources.
It is management's opinion that the sale of Superior is in the best
interest of DynaGen and our stockholders because:
o The sale of Superior, along with our planned sale or other disposition
of Generic Distributors, will result in the elimination of
substantially all of DynaGen's debt.
o We will be able to focus management resources on higher-margin
manufacturing operations and achieve greater value for our
shareholders.
A special committee of our Board of Directors, made up of three
disinterested directors, has endorsed management's decision to undertake a
strategic shift in the focus of our core business and the sale of Superior and
Generic Distributors. The special committee considered the following factors
regarding the Superior sale:
o The net consideration received as a result of the sale will be
sufficient to repay our senior secured lender.
o Our obligations to our subordinated lenders will be relieved, subject
to our continued guarantee should RxBazaar.com fail to repay the
lenders.
o Superior has contributed marginally to our cash flow since its
acquisition.
o The improved cash flow resulting from our debt reduction in connection
with the sale of Superior will permit us to extend and expand our
research and development activities at Able.
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<PAGE>
o In the opinion of our financial advisor, Context Capital Group, the
consideration we will receive in connection with the sale of Superior
is fair to DynaGen from a financial point of view on the date of its
opinion. A copy of the Context Capital opinion is attached to this
proxy statement as Appendix B. Please review the opinion carefully. See
"Opinion of Context Capital Group" below. The board and the special
committee reasoned that, among other things, if the consideration is
fair to DynaGen, then it is also fair to DynaGen's stockholders.
o The Board of Directors can terminate the merger agreement and accept a
better proposal, if it determined that it had to do so in order to
discharge its fiduciary obligations.
The special committee also identified and considered the following
risks and potentially negative factors in its deliberations concerning the sale
of Superior:
o The sale of Superior disposes of the source of approximately 74% of our
1999 gross revenues, which may be difficult to replace in the short
term.
o Our guarantee of the subordinated debt to be assumed by RxBazaar.com
could have the effect of reducing the cash purchase price, if we were
required to repay the debt upon RxBazaar.com's default.
o Our separate agreement to issue DynaGen common stock if a potential
equity investor in RxBazaar.com elects to cancel its RzBazaar.com stock
could also dilute the equity interest of DynaGen's shareholders.
The special committee weighed these factors in view of the fact that
the proposal from RxBazaar.com achieves our most immediate and critical
objective of paying off the Fleet Capital loan. In sum, the special committee
concluded the risks of the transaction, including those relating to possible
dilution to DynaGen, were substantially outweighed by the potential benefits of
the merger.
INTERESTS OF CERTAIN DYNAGEN OFFICERS AND DIRECTORS IN THE MERGER
In considering our recommendation to approve the transaction, you
should recognize and consider the various relationships that exist between
DynaGen and RxBazaar.com. The personal interests of certain of our directors and
officers create a direct conflict of interest. These interests include:
o As of October 1, 2000, DynaGen beneficially owned 1,700,000 shares or
8.9% of the common stock of RxBazaar.com and has a warrant to purchase
an additional 1,200,000 shares at a price of $2.50 per share.
o As of October 1, 2000, Dhananjay G. Wadekar, our Executive Vice
President and a director of DynaGen owned 2,000,000 shares or 10.5% of
the outstanding stock of RxBazaar.com and two trusts for the benefit of
Mr. Wadekar's minor children owned 2,000,000 shares or 10.5% of the
outstanding stock of RxBazaar.com. Mr. Wadekar is also President and a
Director of RxBazaar.com.
o C. Robert Cusick, President and Chief Executive Officer and a director
of DynaGen, is also a Director of RxBazaar.com and owns 4,000,000
shares or 21% of the outstanding stock of Rxbazaar.com.
o As of October 1, 2000, Dennis Smith, President of Superior, owned
1,000,000 shares or 5.3% of the outstanding stock of RxBazaar.com.
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You should recognize that Messrs. Wadekar and Cusick have a direct
conflict of interest because of their ownership of stock in RxBazaar.com, their
service on the board of directors of RxBazaar.com, the protection of
indemnification and liability insurance and other reasons. The special committee
of the Board of Directors of DynaGen was aware of these interests and took these
interests into account in approving the proposed business combination. The
agreement between DynaGen and RxBazaar.com was negotiated on behalf of DynaGen
primarily by one of our outside directors, who has no connection with or
relationship to RxBazaar.com. The agreement was approved by a special committee
consisting of three of our directors who have no connection with or relationship
to RxBazaar.com.
BACKGROUND OF THE TRANSACTION
In May 1999, Mr. Cusick, Chairman and CEO, and Mr. Wadekar, Executive
Vice President of DynaGen, along with Dennis Smith, began evaluating
opportunities to increase DynaGen's sales using the internet. Their initial
review consisted of contacting other internet companies, discussing and
evaluating the regulatory framework under which an internet-based pharmaceutical
sales would operate. Management of DynaGen paid close attention to several
internet pharmaceutical distribution ventures that completed public offerings
over the next several months, reviewing the publicly available information.
Based on this review and management's experience, it became apparent that an
internet-based retail pharmaceutical operation would not likely be a viable
business opportunity for DynaGen.
In August 1999, Mr. Cusick met with Wayne Corona, an experienced
entrepreneur in the branded drug distribution market. In August and September
1999, Mr. Corona met with Messrs. Cusick, Smith and Wadekar to discuss the
possibility of bringing his expertise in branded drug distribution to complement
Superior's generic distribution business. In September 1999, Messrs. Wadekar and
Cusick met with Anand Adya, who was then a senior manager with Andersen
Consulting. Mr. Adya's expertise included internet-based solutions for
e-commerce, developing data mining software and customer relationship management
tools.
DynaGen management continued to review developments in the
business-to-consumer and business-to-business internet markets. It became
apparent that Superior's distribution operations might be well-suited to
supporting a business-to-business portal for buying and selling generic and
branded drugs. DynaGen asked an independent development firm to provide an
estimate of development costs. Based on this estimate of development costs, as
well the projected working capital needed to support a successful
business-to-business venture, we came to the conclusion that the necessary
financing would be difficult to obtain given our financial condition.
On September 11, 1999, at a regular board of directors meeting, Messrs.
Wadekar and Cusick presented this opportunity to the board of directors. The
board members discussed the various factors involved with the proposal. After
considering the opportunity, the board determined that e-commerce activities
were too far from our core strength of drug development and manufacturing.
Because the substantial financial and corporate resources that could be required
to develop and implement an e-commerce market plan, and the risks and
uncertainties associated with e-commerce business, such as the impact of losses
of a new subsidiary that might affect our balance sheet and the net worth, the
directors unanimously resolved to approve Messrs. Cusick and Wadekar's pursuit
of the above-described business opportunity outside of DynaGen.
In October 1999, Messrs. Wadekar and Cusick met with Mr. Corona and
others to continue their planning and to formalize their relationship.
RxBazaar.com was incorporated in Delaware on October 23, 1999.
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In November and December RxBazaar.com management continued their market
survey and met at Superior's facility for systems analysis and design of the web
portal. During this and several subsequent visits and further analysis it became
clear that the licensing and contracts that Superior has with its suppliers
could benefit RxBazaar.com and that RxBazaar.com's launch time and cost could be
reduced if RxBazaar.com entered into a strategic relationship with Superior.
In January and February 2000, Mr. Shikhar Ghosh, co-founder and a
director of Rzbazaar.com, held several meetings to evaluate financing options
and develop a strategic plan for RxBazaar.com. In February 2000, RxBazaar.com
management decided that, among other strategic alternatives, RxBazaar.com should
consider acquiring Superior to gain time, cost and infrastructure advantage.
Throughout the summer of 2000, the two companies held discussions from time to
time regarding a possible acquisition of Superior by RxBazaar.com. We initiated
discussions with Context Capital Group to assist us in evaluating a possible
transaction.
In March 2000, Anand Adya joined RxBazaar.com as chief technology
officer and took over all its information technology activities, and in April
2000 RxBazaar.com launched the first release of its Internet portal.
From March 2000 on, RxBazaar.com management met with several venture
capitalists, private equity investors, as well as analysts and investment
bankers from several investment banking firms.
On May 31, 2000, our board of directors met following our annual
meeting of stockholders. Among other things, the directors discussed the
possible sale of Superior to RxBazaar.com. The directors discussed the business
and accounting impact of the proposed transaction. At this meeting, the board
confirmed that because of conflicts of interest of Messrs. Wadekar and Cusick,
three disinterested directors, Harry Silverman, James Klint and F. Howard
Schneider, would act as a special committee of the board to review and approve
the proposed transaction with RxBazaar.com.
In September 2000, RxBazaar.com received a commitment for a senior
secured working capital line of credit. During this time RxBazaar.com also
continued negotiating with sources of equity financing for an equity investment
of $4.5 million.
On September 27, 2000, DynaGen and RxBazaar.com, along with respective
counsel, met to begin negotiating a purchase of Superior by RxBazaar.com. From
September 27, 2000, through October 20, 2000, RxBazaar.com management and
counsel conducted due diligence on Superior and its assets. During this time
representatives of the two companies also negotiated a purchase and sale
agreement.
From September 27, 2000, through October 20, 2000, our board of
directors, including the special committee of our outside directors, consulted
individually with Context Capital Group from time to time regarding the
transaction.
On October 20, 2000, our board of directors met to consider the
proposed transaction. A senior representative of Context Capital Group attended
the board meeting and made a presentation to the board of its analysis of the
proposed transaction. Messrs. Wadekar and Cusick attended part of the meeting
and answered questions from the special committee of three non-officer
directors. Messrs. Wadeker and Cusick then recused themselves from the meeting.
Context Capital provided the special committee with its oral opinion that the
proposed transaction was fair to DynaGen from a financial point of view. The
special committee voted unanimously to approve the transaction and the merger
agreement was executed by a representative of each party.
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TERMS OF THE TRANSACTION
The discussion of the cash merger and the description of the material
terms of the agreement and the plan of merger, which is sometimes referred to in
this document as the merger agreement, is subject to and qualified in its
entirety by reference to the merger agreement itself. A copy of the merger
agreement is included as Appendix A for your convenience. The merger agreement
is incorporated by reference in this proxy statement.
GENERAL
Under the merger agreement, RxBazaar.com, Inc. will acquire Superior
Pharmaceutical Company in a cash merger. Under the merger agreement, a
wholly-owned subsidiary of RxBazaar.com, Inc. will merge with Superior
Pharmaceutical Company in a cash transaction. The transaction is valued at a
total of approximately $12,248,875. At the closing:
o We will receive a cash payment of $4,000,000.
o RxBazaar.com will assume our existing 13.5% senior subordinated debt in
the amount of $2,248,875.
o RxBazaar.com will become obligated to pay and will pay us and our Able
Laboratories subsidiary approximately $6,000,000 in respect of existing
intercompany advances and accounts payable that are currently
eliminated as intercompany accounts on our consolidated financial
statements.
o We will continue to guarantee the payment of the 13.5% senior
subordinated debt.
STATEMENTS, REPRESENTATIONS AND WARRANTIES BY THE PARTIES
The merger agreement contains statements made by us about ourselves and
about Superior called representations and warranties that are typical of an
agreement of this type. They include, among other things, statements that:
o we have the authorization of our board of directors and stockholders to
enter into the agreement;
o we have disclosed all legal proceedings involving DynaGen or any of our
subsidiaries to RxBazaar.com;
o we have provided a list of all intellectual property owned by Superior;
and
o we have the authority to carry on our business as it is currently being
conducted.
The merger agreement also contains a number of similar representations
and warranties made by RxBazaar.com and its acquisition subsidiary. You can
review the representations and warranties in the copy of the merger agreement
attached to this proxy statement as Appendix A.
The merger agreement provides that the representations and warranties
of all parties to the merger agreement will survive and continue in effect until
the earlier of the second anniversary of the date of the merger or the date on
which RxBazaar.com's accountants deliver their report of the financial
statements of RxBazaar.com for the first complete fiscal year following the
merger.
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CONDUCT OF BUSINESS PENDING THE MERGER
The merger agreement contains various covenants, or promises, that
govern our actions and those of RxBazaar.com and Superior prior to the
completion of the transaction.
These covenants require all parties to the merger agreement to take
action or refrain from taking action with respect to various matters. Among
other things, each party agrees:
o to fully cooperate with the other parties by furnishing information or
performing actions reasonably requested by any other party, which
information or action is necessary to the speedy and successful
completion of the merger;
o to keep confidential all information furnished by one party to any
other party in connection with the merger agreement;
o to consult each other before issuing any press release or other public
statements with respect to the merger; and
o in general, to use its best efforts to complete the merger.
DynaGen and Superior also agree, among other things, to:
o conduct their respective businesses in the usual and normal course and
to refrain from any extraordinary transactions; and
o refrain from soliciting any person or group concerning any business
combination involving Superior until either the completion of the
merger or the termination of the merger agreement.
The merger agreement also contains a number of provisions requiring
RxBazaar.com to take or refrain from taking certain actions before the
completion of the merger.
CONDITIONS TO THE MERGER
The completion of the transaction depends upon the satisfaction of a
number of conditions. The obligations of all parties to the merger agreement
include, among other things:
o the merger agreement must be approved by our stockholders;
o no court order or other legal restraint or proceeding that would
prevent the completion of the merger can be in effect or pending; and
o the representations and warranties of all parties to the merger
agreement must be true as of the date of the completion of the merger.
In addition, RxBazaar.com's obligation to complete the merger depends
on the satisfaction of the following conditions, among other things:
o there will have been no material adverse change in the business,
assets, results of operations, prospects or financial condition of
Superior;
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o RxBazaar.com will have received at least $4,500,000 of new equity
capital;
o RxBazaar.com will have received the consent of the holders of our
senior subordinated debt to the assumption of such debt by
RxBazaar.com;
o RxBazaar.com will have received a line of credit in an amount equal to
or exceeding $12,500,000; and
o RxBazaar.com will have received the consent of the landlord of
Superior's offices stating that the merger will not be considered a
default under Superior's current lease.
TERMINATION OF THE AGREEMENT
The merger agreement may be terminated prior to its completion if:
o both DynaGen and RxBazaar.com consent to the termination of the
agreement;
o one party causes a material breach of the agreement and the
non-breaching party decides to terminate the merger agreement;
o the stockholders of DynaGen or Superior do not approve the transaction;
o a court or other governmental body issues a final order prohibiting the
merger;
o the closing of the merger has not occurred by November 30, 2000, due to
the inability of RxBazaar.com to secure $4,500,000 in equity investment
or a line of credit of at least $12,500,000; or
o After investigation of Superior's business and financial records,
RxBazaar.com determines the state of Superior's business is
unsatisfactory.
DYNAGEN BOARD'S RIGHT TO TERMINATE IN CASE IT RECEIVES A MORE
ATTRACTIVE PROPOSAL
In addition to the events that permit termination listed above, our
board of directors can terminate the merger agreement if, before the closing,
they receive a proposal for the sale of Superior that is more beneficial to our
stockholders, such that the exercise of their fiduciary duties requires them to
pursue the proposal. If we terminate the agreement for this reason, then we will
be obligated to pay RxBazaar.com's reasonable out-of-pocket expenses associated
with the proposed transaction.
INDEMNIFICATION
The merger agreement provides that the representations and warranties
of all parties to the agreement will survive the closing of the merger and
continue in effect until the earlier of (i) the second anniversary of the date
of the merger or (ii) the release by RxBazaar.com of audited financial
statements that include the combined operations of RxBazaar.com and Superior for
the year ended December 31, 2001. As part of the merger, DynaGen and
RxBazaar.com agree to indemnify each other for damages incurred by one party due
to the breach of a representation or warranty or non-fulfillment of a covenant
by the other party. In addition, we agree to indemnify RxBazaar.com for damages
incurred due to a claim by any current or former stockholder of Superior
asserting ownership rights, rights under the Company's
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charter or bylaws, wrongful repurchase of shares, preemptive rights, or
liabilities arising in connection with the pending Generic Distributors
litigation. Neither party shall be entitled to indemnification by the other
party for damages less than $100,000. If a party incurs damages above $100,000,
the party will be entitled to recover only amounts over $100,000 subject to
limitations on the aggregate amount. Our obligation to indemnify RxBazaar.com is
limited to an aggregate of $4,000,000 provided, however, that our obligation to
indemnify RxBazaar may be increased to an aggregate of $6,248,875 in the event
of a breach of a representation or warranty or non-fulfillment of a covenant
that we had knowledge of prior to the closing of the merger. RxBazaar.com's
obligation to indemnify us is limited to an aggregate of $4,000,000.
CLOSING AND EFFECTIVE TIME
If all of the conditions to the merger agreement are satisfied or
waived, then the parties intend to complete the merger as soon as practicable
after our stockholders approve the transaction. Upon the closing of the
transaction, the parties will file a certificate of merger with the Secretary of
State of Delaware and the Secretary of State of Ohio. The merger will be legally
effective at the time of the filing. If our shareholders approve the
transaction, we believe that the merger will become effective within two (2)
business days following approval of the transaction.
OPINION OF CONTEXT CAPITAL GROUP
Context Capital Group acted as our financial advisor in connection with
the proposed sale of Superior, and assisted our board and the special committee
in its examination of whether the transactions contemplated by the merger
agreement are fair, from a financial point of view, to DynaGen as Superior's
sole stockholder. Context Capital Group is an independent investment banking and
financial advisory firm, providing valuation and financial advisory services to
middle market corporate clients. We selected Context Capital Group as our
financial advisor based upon Context Capital Group's experience, ability and
reputation for providing fairness opinions and other advisory services on a
variety of corporate transactions of a size and type similar to the proposed
transaction.
On October 20, 2000, Context Capital Group gave its oral opinion to the
special committee of the board to the effect that, as of the date of such
opinion, the transactions contemplated by the merger agreement are fair, from a
financial point of view, to DynaGen as the sole shareholder of Superior. Context
Capital Group confirmed its opinion in writing on October 20, 2000.
In arriving at its fairness opinion, Context Capital Group reviewed,
among other items, the final draft agreement and plan of merger; our annual
reports filed on Form 10-KSB, including our audited financial information for
the last two fiscal years; our interim announcements and unaudited quarterly
reports on Form 10-QSB, and other public information of ours; unaudited
financial information for Superior for the last two fiscal years and unaudited
quarterly financial information for Superior; and operating and financial
information that we supplied to Context Capital Group for purposes of its
evaluation, including pro forma information and internal budgets. Context
Capital Group also reviewed our historical stock market prices and trading
volumes.
Context Capital Group reviewed industry and financial information,
which included, among other items, financial and stock market data relating to
publicly held companies that Context Capital Group considered relevant for
comparative purposes. All industry information and data on public companies
considered comparable to Superior and used in Context Capital Group's analysis
were obtained from regularly published industry and investment sources. In
addition, Context Capital Group held discussions with our senior management
regarding past, current, and projected operations of Superior. Context Capital
Group took into account its assessment of general economic, market and financial
conditions, as
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well as its experience in securities and business valuation. Context Capital
Group did not make any independent evaluations or appraisals of Superior's
assets or liabilities.
In performing its analysis and rendering its opinion, Context Capital
Group relied on the accuracy and completeness of all information provided to it,
whether obtained from public or private sources, including our management and
Superior's management, and did not attempt to independently verify any such
information. Context Capital Group prepared its written opinion effective as of
October 20, 2000. The opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of such
date. We did not place any limitation upon Context Capital Group with respect to
the procedures followed or factors considered by Context Capital Group in
rendering its opinion. We negotiated the consideration to be paid to us by
RxBazaar.com before we engaged Context Capital Group to provide an opinion on
the transaction.
THE FULL TEXT OF THE WRITTEN FAIRNESS OPINION OF CONTEXT CAPITAL GROUP,
WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED,
LIMITATIONS ON AND SCOPE OF REVIEW BY CONTEXT CAPITAL GROUP IN RENDERING ITS
OPINION, IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT. YOU ARE URGED TO
READ THE CONTEXT CAPITAL GROUP OPINION IN ITS ENTIRETY. THE OPINION WAS RENDERED
WITHOUT REGARD TO THE NECESSITY FOR, OR LEVEL OF, ANY RESTRICTIONS, OBLIGATIONS
OR UNDERTAKINGS WHICH MAY BE IMPOSED OR REQUIRED IN THE COURSE OF OBTAINING
REGULATORY APPROVALS FOR THE TRANSACTION CONTEMPLATED BY THE MERGER AGREEMENT.
THE CONTEXT CAPITAL GROUP OPINION IS NOT A RECOMMENDATION TO YOU ABOUT HOW TO
VOTE AT THE SPECIAL MEETING.
Context conducted its analysis under the assumption that the sale
proceeds to DynaGen will be cash of $4,000,000, plus settlement of intercompany
accounts of approximately $6,100,000, plus assumption of debt of $2,248,875.
Context Capital therefore valued the total transaction at approximately
$12,348,875 for the purpose of its opinion.
In preparing its opinion to our board, Context Capital Group performed
a variety of financial and comparative analyses regarding the valuation of
Superior including (i) a discounted cash flow analysis of the projected free
cash flow of Superior; (ii) a comparison of financial performance and market
valuation ratios of Superior with those of publicly traded companies Context
Capital Group considered relevant for purposes of its opinion; and (iii) a
review of recent control transactions involving companies in the generic drug
distribution industry. In addition, Context Capital Group conducted the analyses
it deemed appropriate for purposes of its opinion.
DISCOUNTED CASH FLOW ANALYSIS. Context Capital performed a discounted
cash flow analysis of the projected free cash flows of Superior. Context Capital
relied upon estimates provided by management of Superior. Based on the analysis,
the discounted cash flow of Superior was below the total value of the
acquisition that Context used as a measurement.
None of the projections reviewed by Context Capital or disclosed in
this proxy statement were reviewed by independent auditors, nor were they
prepared in accordance with generally accepted accounting principles. The
projections were based on numerous estimates and other assumptions and are
inherently subject to significant uncertainties and contingencies. There is no
assurance that the projections will be achieved. Neither we nor any other person
considers such projections to be an accurate prediction of future events.
COMPARABLE COMPANY ANALYSIS. In the comparable company analysis,
Context Capital selected a set of publicly traded companies based on
comparability to Superior. Although no single company chosen is exactly similar
to Superior, these companies share many of the same operating characteristics
and are affected by many of the same economic forces. The value of Superior was
derived from the rate
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at which these companies are capitalized in the market, after adjusting for
differences in operations and performance using measurements that included, but
were not limited to, historical and expected revenue and profit growth,
profitability margins, and returns on capital. The valuation multiples that
Context Capital analyzed included, but were not limited to, enterprise value
(total value of common equity and, preferred stock plus any extraordinary
balance sheet items and the book value of debt assumed less cash) as a multiple
of earnings before interest, taxes, depreciation and amortization, commonly
known as EBITDA, and enterprise value as a multiple of revenues. The following
table compares Superior to selected publicly traded companies.
<TABLE><CAPTION>
Selected Publicly Traded Companies
Superior ----------------------------------------
Pharmaceutical Low High Mean Median
-------------- --- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Enterprise Value/Revenue .5x .1x .9x .4x .2x
Enterprise Value/EBIT 12.3x 6.8x 20.3x 13.7x 14.3x
Enterprise Value/EBITDA 11.1x 5.9x 17.0x 11.6x 13.2x
Enterprise Value/Net Income 36.1x 18.4x 56.5x 37.8x 36.5x
</TABLE>
COMPARABLE TRANSACTION ANALYSIS. In the comparable transaction
analysis, Context Capital Group analyzed and reviewed publicly disclosed
transactions completed within the pharmaceutical distribution industry over the
past two years. Although no single transaction completed is exactly similar to
the transaction contemplated, these transactions share many of the same
characteristics and are affected by many of the same economic forces. The
transaction multiples that Context Capital analyzed included, but were not
limited to, purchase price (defined as cash, stock, and notes paid plus any
extraordinary balance sheet items and bank debt assumed less any cash on the
books in exchange for the stock or selected assets of the target company) as a
multiple to earnings before interest, taxes, depreciation and amortization,
commonly known as EBITDA, purchase price to EBIT, purchase price to revenue, and
purchase price to net income.
Comparable
Transactions
Superior Pharmaceutical Average
----------------------- -------
Purchase Price/Revenue .5x .2x
Purchase Price/EBIT 12.3x 11.5x
Purchase Price/EBITDA 11.1x 11.2x
Purchase Price/Net Income 36.1x 26.2x
FEE AND OTHER INFORMATION
We paid a fee of $40,000 to Context Capital in connection with its
opinion to our board. We also reimbursed Context Capital for its out of pocket
expenses and agreed to indemnify Context Capital for liabilities it might incur
in connection with the assignment. No portion of the fee we paid to Context
Capital was contingent upon the conclusion reached in its opinion. We have not
paid Context Capital any other compensation during the past two years and no
further compensation is contemplated. Furthermore, we have had no other
relationship at any time with Context Capital, and we have not agreed to engage
Context Capital to provide any services in the future.
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NO CHANGES TO THE RIGHTS OF SECURITY HOLDERS; NO DISSENTER'S RIGHTS
Our stockholders will not experience any change in their rights as
stockholders as a result of our sale of Superior. Dissenting stockholders will
not have appraisal rights in connection with the business combination under
Delaware law or under DynaGen's Certificate of Incorporation or By-laws.
FEDERAL INCOME TAX CONSEQUENCES
Our sale of Superior to RxBazaar.com is a transaction taxable to
DynaGen. However, we have significant net operating loss carryforwards and,
accordingly, we believe that no tax will be imposed on DynaGen in connection
with the merger.
ACCOUNTING TREATMENT
For accounting purposes, we will treat the sale of Superior as the sale
of our investment in Superior. Our gain on the sale will equal the gross
proceeds received less the carrying value of our investment in Superior. We
believe that our net gain will be about $1,500,000 at the closing.
A representative of Wolf & Company, P.C., our independent auditors, is
expected to be present at the special meeting, will have the opportunity to make
a statement if he or she desires to do so, and is expected to be available to
respond to appropriate questions from stockholders.
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the DynaGen's voting securities as of October 13, 2000,
by (i) each person or entity known to us to own beneficially five percent or
more of any series of preferred stock and common stock, (ii) each of our
directors, (iii) each of our named executive officers, and (iv) all of our
directors and executive officers as a group. Except as otherwise noted, each
beneficial owner has sole voting and investment power with respect to the shares
shown.
COMMON STOCK:
------------
<TABLE><CAPTION>
NUMBER OF SHARES PERCENT
BENEFICIALLY OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED (2) OUTSTANDING
--------------------------------------- --------- -----------
<S> <C> <C>
Generic Distributors Limited Partnership................. 5,106,383 (3) 5.7%
1611 Olive Street
Monroe, LA 71201
The Endeavor Capital Fund S.A............................ 5,167,173 (4) 5.7%
c/o Endeavor Management
14/14 Divrei Chaim Street
Jerusalem, 94479 Israel
Kenilworth LLC........................................... 14,072,948 (5) 14.2%
c/o Thomason Kernaghan
365 Bay Street, 10th Floor
Toronto, Ont. M5H 2V2
C. Robert Cusick......................................... 7,690,000 (6) 8.3%
Dhananjay G. Wadekar..................................... 7,140,000 (7) 7.8%
F. Howard Schneider...................................... 1,008,000 (8) 1.2%
Harry Silverman.......................................... 883,333 (9) 1.0%
James Klint ............................................. 233,333 (10) *
All directors and executive officers as a group
(5 persons)............................................ 16,954,666 (11) 18.2%
</TABLE>
----------------------
* Represents beneficial ownership of less than 1.0%.
(1) Unless otherwise noted, each stockholder's address is c/o DynaGen, Inc.,
1000 Winter Street, Suite 2700, Waltham, Massachusetts 02451.
(2) 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
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currently exercisable, or become exercisable by December 12, 2000 (60
days after October 13, 2000), 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 85,106,276 shares of common stock outstanding on October 13, 2000,
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 4,468,085 shares of common stock issuable upon conversion of the
Series E Preferred Stock and 638,298 shares of common stock issuable upon
conversion of the Series F Preferred Stock. The terms of the Series E
Preferred Stock and Series F Preferred Stock prohibit the holder from
converting shares of Series E Preferred Stock and Series F Preferred
Stock if such conversion would result in the beneficial ownership of more
than 4.9% of the outstanding common stock.
(4) Includes 5,167,173 shares of common stock issuable upon conversion of the
Series K Preferred Stock. The terms of the Series K Preferred Stock
prohibit the holder from converting shares of Series K Preferred Stock if
such conversion would result in the beneficial ownership of more than
4.9% of the outstanding common stock.
(5) Includes 10,425,532 shares of common stock issuable upon conversion of
the Series M Preferred Stock and 3,647,416 shares of common stock
issuable upon conversion of the Series K Preferred Stock. The terms of
the Series M Preferred Stock and Series K Preferred Stock prohibit the
holder from converting shares of Series M Preferred Stock and Series K
Preferred Stock if such conversion would result in the beneficial
ownership of more than 4.9% of the outstanding common stock.
(6) Includes 7,000,000 shares of common stock subject to options exercisable
by December 12, 2000.
(7) Includes 7,000,000 shares of common stock subject to options exercisable
by December 12, 2000.
(8) Includes 1,000,000 shares of common stock subject to options exercisable
by December 12, 2000.
(9) Includes 22,500 shares of common stock subject to a warrant exercisable
by December 12, 2000; and includes 83,333 shares of common stock subject
to options exercisable by December 12, 2000.
(10) Includes 83,333 shares of common stock subject to options exercisable by
December 12, 2000.
(11) Includes 15,189,166 shares of common stock subject to options, warrants,
or convertible notes exercisable by December 12, 2000.
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PREFERRED STOCK:
----------------
<TABLE><CAPTION>
NUMBER OF SHARES PERCENT
BENEFICIALLY OF PREFERRED STOCK
NAME OF BENEFICIAL OWNER OWNED (1) OUTSTANDING (2)
------------------------ --------- ---------------
<S> <C> <C>
Generic Distributors Limited Partnership............ 12,000(3) 31.9%
1611 Olive Street
Monroe, LA 71201
The Endeavor Capital Fund S.A. ..................... 8,500(4) 22.6%
c/o Endeavor Management
14/14 Divrei Chaim Street
Jerusalem, 94479 Israel
Kenilworth LLC...................................... 6,000(5) 15.9%
c/o Thomason Kernaghan
365 Bay Street, 10th Floor
Toronto, Ont. M5H 2V2
Finova Mezzanine Capital, Inc....................... 4,507(6) 12.0%
500 Church Street, Suite 200
Nashville, TN 37216
Argosy Investment................................... 2,253(7) 6.0%
950 West Valley Road
Wayne, PA 19087
Infusion Capital Investment Corporation............. 3,240(8) 8.6%
932 Burke Street
Winston Salem, NC 27101
</TABLE>
---------------------
(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 preferred stock owned by such person, subject to community
property laws where applicable.
(2) Based on 37,600 shares of voting preferred stock outstanding as of
October 13, 2000, including Series B Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series J Preferred Stock, Series K
Preferred Stock and Series L 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 8,500 shares of Series K Preferred Stock. See "Common Stock"
table.
(5) Consists of 6,000 shares of Series K Preferred Stock. See "Common Stock"
table.
(6) Consists of 4,507 shares of Series L Preferred Stock.
(7) Consists of 2,253 shares of Series L Preferred Stock.
(8) Consists of 3,240 shares of Series L Preferred Stock.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
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 proxy statement which could have a material adverse effect on our
financial condition and results of operations.
We acquired Generic Distributors on March 2, 1998. The acquisition
affects the comparability of our financial statements, in that the results of
Generic Distributors are included only after the acquisition date. The
acquisition was accounted for a purchase. See Note 3 to our Financial Statements
for the year ended December 31, 1999, entitled "Business Acquisitions."
RESULTS OF OPERATIONS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
REVENUE: Revenues for the year ended December 31, 1999 were
$29,139,553, compared to $24,980,294 for the year ended December 31, 1998. This
increase of $4,159,259 is primarily the result of improved new product sales at
our Able Laboratories.
COST OF SALES: Cost of sales was approximately 84% of product sales for
the year ended December 31, 1999 compared to 85% for the year ended December 31,
1998. The high percentage cost in 1999 and 1998 was due to low production and
sales levels at Able, which did not support the fixed manufacturing costs of the
Able facility. Cost of sales for Superior and GDI for 1999 and 1998 were 79% of
product sales.
RESEARCH AND DEVELOPMENT: Research and development expenses for the
year ended December 31, 1999 were $1,713,416 or 5.9% of revenue compared to
$814,108 or 3.3% of revenue for the year ended December 31, 1998. All of these
expenses relate to research and biostudies conducted by Able Laboratories. The
increase was primarily due to the larger number of biostudies undertaken during
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the year ended December 31, 1999 were $8,912,374,
compared to $10,912,589 for the year ended December 31, 1998. The decrease in
expenses was primarily attributable to the cutbacks and reduction of staff at
our headquarters and streamlining our administrative expenses.
OTHER INCOME: Investment income was $23,011 for the year ended December
31, 1999 as compared to $174,188 for the year ended December 31, 1998. Interest
and financing expenses of $2,425,730 for the year ended December 31, 1999,
compared to $2,517,881 for the year ended December 31, 1998, relate primarily to
private placements of debt financing and bank loans related to the Superior and
GDI acquisitions.
NET LOSS: We incurred a net loss of $10,065,098 in 1999, compared to a
net loss of $13,495,868 for 1998. The change in net loss was primarily due to
losses of $400,000 in 1999, and $2,500,000 in 1998, on impairment of Superior's
customer lists, based on our projections of Superior's future cash flows. We
plan to continue to monitor and evaluate the accuracy of these projections
during 2000. If cash flows do not occur as projected, we may be required to
recognize additional impairment losses.
-22-
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000
Revenues for the three-month period ended June 30, 2000, were
$7,979,260 compared to $6,581,040 for the period ended June 30, 1999. The
increase of $1,398,220 or 21% is primarily the result of improved sales due to
the introduction of two new products at Able.
Cost of sales was $6,048,339 or 76% of sales for the three-month period
ended June 30, 2000, compared to $5,565,327 or 85% of sales for the period
ending June 30, 1999. The Company improved its gross profit margin to 24%
primarily due to the higher margins of the new products introduced by Able
Laboratories. Management anticipates that the gross profit margin will continue
to improve as additional new products are introduced during the latter part of
fiscal 2000.
Selling, general and administrative expenses for the three-month period
ended June 30, 2000, were $2,436,784 compared to $2,365,505 for the three-month
period ended June 30, 1999. Expenses for the period ended June 30, 2000,
included additional professional fees and other expenses related to the
Company's annual meeting.
Research and development expenses for the three-month period ended June
30, 2000, were $759,840 compared to $322,282 for the three-month period ended
June 30, 1999. All of these expenses relate to research which is currently being
conducted at Able Laboratories to develop generic drugs. Management invested
significant funds during the second quarter of 2000 into new products.
Interest and other income was $757,382 for the three-month period ended
June 30, 2000, compared to $447,232 for the three-month period ended June 30,
1999. Other income in 1999 consisted primarily of forgiveness of debt and other
income in the corresponding three-month period of 2000 consisted of forgiveness
of debt and termination of certain trade agreements. Interest and financing
expenses increased by $147,713 to $524,685 for the three-month period ended June
30, 2000, from $376,972 for the three-month period ended June 30, 1999. This
increase in interest expense is primarily attributable to a higher average
balance on the Company's working capital line and the June 23, 1999 borrowing
from the New Jersey Economic Development Authority. We also issued several
warrants in connection with debt placements, the values of which are included in
our financing costs.
The Company incurred a net loss of $1,033,006 or $.02 per share for the
quarter ended June 30, 2000, compared to a net loss of $1,601,814 or $.05 per
share in the prior year. Overall the Company reduced its net loss by $569,000
while increasing its investment in research and development by $438,000.
SIX MONTHS ENDED JUNE 30, 2000
Revenues for the six-month period ended June 30, 2000, were $16,101,009
compared to $13,605,837 for the period ended June 30, 1999. The increase of
$2,495,172 or 18% is primarily the result of sales of Able products.
Cost of sales was $11,651,564 or 72% of sales for the six-month period
ended June 30, 2000, compared to $11,181,983, or 82% of sales for the period
ended June 30, 1999. The Company improved its gross profit margin to 28% due to
the higher margins of new products manufactured at Able Laboratories.
Research and development expenses were $1,067,589 for the six months
ended June 30, 2000, compared to $498,636 for the six months ended June 30,
1999. This increase of $568,953 reflects the Company's investment in research
and development for new products which are expected to be approved by the FDA in
the latter part of fiscal 2000 and we anticipate that would result in new sales.
-23-
<PAGE>
Selling, general and administrative expenses for the six-month period
ended June 30, 2000, were $4,760,822 compared to $4,356,322 for the six-month
period ended June 30, 1999. The increase in expenses of $404,500 is primarily
due to increases in sales, commissions and promotions, and bad debt expenses.
We recorded an additional $400,000 of loss on impairment of Superior's
customer lists in the first quarter of 1999 based on our revised projections of
Superior's cash flows after reviewing Superior's performance during the first
quarter of 1999.
Investment and other income was $772,677 for the six months ended June
30, 2000, compared to $477,984 for the six-month period ended June 30, 1999.
Other income in 1999 consisted primarily of forgiveness of debt and other income
in the corresponding six-month period of 2000 consisted of forgiveness of debt
and termination of certain trade agreements. Interest and financing expenses
were $972,133 for the six-month period ended June 30, 2000, compared to
$1,145,704 for the six-month period ended June 30, 1999. Interest expense was
higher in 1999 due to first quarter 1999 interest expense on obligations which
were settled in 1999. We also issued several warrants in connection with debt
placements, the values of which are included in our financing costs.
The Company incurred a net loss of $1,578,422 or $.03 per share for the
six months ended June 30, 2000, compared to a net loss of $3,498,824 or $.10 per
share in the prior year. Overall the Company reduced its net loss by $1,920,402
due to improved margins and a reduction of overall expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had working capital of $224,470, compared to a
working capital deficit of $1,126,801 at December 31, 1999. Cash was $339,373 at
June 30, 2000, compared to $310,549 at December 31, 1999. Working capital
increased primarily as a result of conversions of debt to equity. We expect our
cash needs for the next 12 months to be approximately $4,000,000. We expect to
generate the needed cash through additional financing activities. If we are not
able to raise the needed financing, we will be forced to curtail or suspend our
research and development and other business activities. See "Certain Factors
That May Affect Future Results."
In November 1999, we secured a line of credit for working capital from
BankBoston, N.A. (now Fleet Capital). Borrowings under the line are secured by
substantially all the assets of the Company and its subsidiaries. Under this
agreement, we can borrow up to 85% of our eligible accounts receivable and 60%
of our eligible inventory. The bank has also extended a term loan secured by the
equipment at Able. We use this line of credit primarily for our working capital
needs.
As of June 30, 2000, the Company was in default of certain loan
covenants, as a result the Company and the bank have agreed to limit the
borrowing on this line to $8.5 million. The Company has indicated to the bank
that it will seek an alternate lender to maximize its borrowing on its assets.
The Company expects to achieve this in the next several months.
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, 1998 and 1999 has limited our ability to
raise capital in a conventional sale of our securities. However, we continue to
pursue additional sources of capital in order to fund the growth of Able's
generic drug business and its product development efforts. If we are unable to
obtain such additional financing, our ability to maintain our current level of
operations would be materially and adversely affected and we would be required
to reduce or eliminate certain expenditures, including research and development
activities with respect to
-24-
<PAGE>
certain proposed products. We cannot give any assurance that we will raise the
needed financing. If we cannot raise such financing, we will not have adequate
working capital for our operations. Under such circumstances, we may have to
seek protection of the bankruptcy courts.
In October 2000, we entered into an agreement to sell our Superior
Pharmaceutical Company subsidiary. In conjunction with this proposed
transaction, we expect to receive a purchase price of $6,248,875 consisting of
$4,000,000 in cash and the assumption of our 13.5% senior subordinated debt by
the purchaser, RxBazaar.com, Inc. On closing of the transaction, RxBazaar.com is
also required to settle the outstanding intercompany balances due to us in the
amount of approximately $6,100,000. As of June 30, 2000 Superior owed
approximately $4,141,000 of trade payables to Able Laboratories and $2,402,000
of intercompany advances to DynaGen. The total cash received at closing
estimated at $10,543,000 as of June 30, 2000 will be used to payoff our Fleet
Capital working capital line of credit ($8,106,827 at June 30, 2000) and our
bank overdraft of $1,956,827. As a result our working capital as adjusted would
have been approximately $840,000 and our cash balance would have been
approximately $635,000. See "Pro Forma Financial Statements."
We are also currently negotiating the sale of our Generic Distributors
subsidiary for $1,400,000 in cash and the forgiveness of our intercompany
payable to Generic Distributors. The estimated effect of this sale at June 30,
2000, would be an increase in our cash balance to approximately $1,959,000 and
an increase in our working capital to approximately $1,041,000. See "Pro Forma
Financial Statements."
The payoff of our working capital line of credit and the assumption of
our senior subordinated debt by RxBazaar.com would enable our Able Laboratories
subsidiary to further maximize its borrowing ability on its accounts receivable,
inventory and fixed assets, subject only to the existing security interest
granted in connection with the New Jersey Economic Development Authority Bonds.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
We do not provide forecasts of our future financial performance.
However, from time to time, information we provide in statements made by our
employees or officers may contain "forward-looking" information that involves
risks and uncertainties. In particular, statements contained in this Proxy which
are not historical facts constitute forward-looking statements and are made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. You can identify these statements by forward-looking words such as
"may", "will", "expect", "anticipate", "believe", "estimate", "continue", and
similar words. You should read statements that contain these words carefully
because they: (1) discuss our future expectations; (2) contain projections of
our future operating results or financial condition; or (3) state other
"forward-looking" information. Various factors listed below, as well as any
cautionary language in this Proxy, provide examples of risks, uncertainties and
events that may cause our actual results to be materially worse than the
expectations we describe in our forward-looking statements.
Each forward-looking statement should be read in conjunction with the
consolidated financial statements and notes thereto in this proxy statement and
with the information contained therein, the factors set forth below, together
with the Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999, including, but not limited to, the section therein
entitled "Certain Factors That May Affect Future Results."
If the stockholders approve the sale of Superior, then we will face
risks associated with focusing on a single segment of the generic drug business
instead of the integrated manufacturing and distribution business we now
operate. In selling Superior, we are disposing of the source of 74% of our
revenue for 1999. Therefore, our business will depend completely on our ability
to compete successfully as a developer and manufacturer of generic drugs.
-25-
<PAGE>
In addition to the above and risks and uncertainties posed generally by
the generic drug industry, we face the following risks and uncertainties:
o If we do not replace the existing Fleet Capital line of credit with a
satisfactory replacement line then we will likely face significant
disruption in our business;
o our auditors have expressed doubt about our ability to continue as a
going concern;
o if we cannot raise significant additional funds, then we will have to
substantially curtail our operations and investors could lose their
investment;
o if we continue to incur losses, then the value of our common stock will
likely decline;
o we face intense competition from other manufacturers of generic drugs;
o if the Boston Stock Exchange were to delist our common stock; we will
have greater difficulty raising the capital we need to continue
operations;
o if our common stock becomes subject to penny stock rules, you may have
greater difficulty selling your shares;
o we are obligated to issue a large number of shares of common stock;
o the value of the common stock fluctuates widely and you could lose
money on your investment in our stock;
o we may face product liability for which we are not adequately insured;
and
o intense regulation by government agencies may delay our efforts to
commercialize our proposed drug products.
Because of the foregoing and other factors, we may experience material
fluctuations in our future operating results on a quarterly or annual basis
which could materially adversely affect our business, financial condition,
operating results and stock price.
OTHER MATTERS
DISPOSITION OF GENERIC DISTRIBUTORS, INC.
In connection with our strategy of focusing on our business of
manufacturing generic drugs, we are also in negotiations to sell our Generic
Distributors, Inc. subsidiary. This transaction is likely to occur before the
sale of Superior.
We consider Generic Distributors to be neither strategically important
nor a cash contributor to our operations. On the contrary, Generic Distributors
has experienced steady and continued losses during 1999 and 2000. Therefore,
management's options are to either discontinue operations of Generic
Distributors or seek a buyer. We are discussing with an independent third party
a transaction in which we would sell the assets of Generic Distributors for
cash. The buyer would also assume all current liabilities of Generic
Distributors and employ most of its workforce. We believe this sale is in the
company's best interest and we are actively pursuing completion of this
transaction. We can give no assurance that we will be able to complete this sale
and, if we do not, we will have no option but to discontinue the
-26-
<PAGE>
operations of Generic Distributors. Discontinuing operations at Generic
Distributors would cause expenses relating to inventory liquidation and employee
termination. We are not seeking stockholder approval for the disposition of
Generic Distributors.
After the sale of Superior, and assuming that the sale of Generic
Distributors, Inc. goes forward as presently anticipated, then our business will
consist of developing, making and selling generic drugs through our Able
Laboratories, Inc. subsidiary.
CORPORATE NAME CHANGE
At our annual meeting on May 31, 2000, stockholders approved a proposal
to change our company name to "Able Laboratories Inc." We anticipate that we
will effect this name change as soon as practicable after the sale of Superior.
We want to change our name to help promote our Able brand in the generic drug
market and to conform to our overall strategy of focusing on our core business
of developing and making generic drugs.
STOCKHOLDER PROPOSALS
It is contemplated that the next annual meeting of stockholders will be
held on or about May 20, 2001. Proposals of stockholders intended for inclusion
in the proxy statement to be mailed to all stockholders entitled to vote at the
next annual meeting of stockholders must be received at our principal executive
offices not later than December 30, 2000. In addition, Section 3 of our by-laws
requires that a stockholder who wishes to propose an item of business for
consideration at the annual meeting must give us written notice of such item of
business not less than 60 days nor more than 90 days before the date for such
meeting describing any proposal to be brought before such meeting. The
procedural requirements are fully set forth in Section 3 of our by-laws. In
order to avoid controversy as to the date on which we received a proposal, we
suggest that stockholders desiring to submit proposals do so by Certified Mail,
Return Receipt Requested.
MISCELLANEOUS
The board of directors does not intend to present to the special
meeting any business other than the proposals listed herein, and the board was
not aware, a reasonable time before mailing this proxy statement to the
stockholders, of any other business which may be properly presented for action
at the special meeting. If any other business should come before the special
meeting, the persons present will have discretionary authority to vote the
shares they own or represent by proxy in accordance with their judgment.
ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
can inspect and copy these reports, proxy statements and other information at
the public reference facilities of the SEC, in Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New
York 10048; and Suite 1400, Citicorp Center, 500 W. Madison Street, Chicago,
Illinois 60661. You can also obtain copies of these materials from the public
reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC also maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC
(http://www.sec.gov).
We will mail, without charge, a copy of our Annual Report on Form
10-KSB for the year ended December 31, 1999 (excluding exhibits) to any
stockholder solicited hereby who requests it in writing. Please submit any such
written request to: Shareholder Relations, DynaGen, Inc., 1000 Winter Street,
Suite 2700, Waltham, Massachusetts 02451.
-27-
<PAGE>
FINANCIAL STATEMENTS
<TABLE><CAPTION>
<S> <C>
DYNAGEN, INC.:
Independent Auditors' Report...................................................................................................F-2
Consolidated Balance Sheets - December 31, 1999 and 1998.......................................................................F-3
Consolidated Statements of Loss - Years Ended December 31, 1999 and 1998.......................................................F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) - Years Ended December 31, 1999 and 1998..................F-6
Consolidated Statements of Cash Flows - Years Ended December 31, 1999 and 1998.................................................F-7
Notes to Consolidated Financial Statements.....................................................................................F-9
Condensed Consolidated Balance Sheets (Unaudited) - June 30, 2000 and December 31, 1999........................................F-31
Condensed Consolidated Statements of Loss (Unaudited) - Three and Six Months Ended June 30, 2000 and 1999......................F-33
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three and Six Months Ended June 30, 2000 and 1999................F-36
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) - Six Months Ended June 30, 2000 and 1999.......F-35
Notes to Unaudited Condensed Consolidated Financial Statements.................................................................F-37
SUPERIOR PHARMACEUTICAL COMPANY
Balance Sheets (Unaudited) - June 30, 2000 and December 31, 1999...............................................................F-40
Statements of Operations (Unaudited) - Six Months Ended June 30, 2000 and Years Ended December 31, 1999 and 1998...............F-41
GENERIC DISTRIBUTORS, INC.
Balance Sheets (unaudited) - June 30, 2000 and December 31, 1999...............................................................F-42
Statements of Operations (unaudited) - Six Months Ended June 30, 2000, Year Ended December 31, 1999 and Ten Months
Ended December 31, 1998...................................................................................................F-43
DYNAGEN, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Pro Forma Balance Sheet - June 30, 2000........................................................................................F-45
Pro Forma Statement of Loss - Year Ended December 31, 1999.....................................................................F-47
Pro Forma Statement of Loss - Six Months Ended June 30, 2000...................................................................F-47
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
DynaGen, Inc.
Waltham, Massachusetts
We have audited the accompanying consolidated balance sheets of
DynaGen, Inc. and subsidiaries as of December 31, 1999 and 1998, 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 DynaGen'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, 1999 and 1998 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 working capital deficiency at December 31,
1999, and as discussed in Note 6 is in default on certain debt obligations.
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.
/s/ WOLF & COMPANY, P.C.
Boston, Massachusetts
February 11, 2000, except for Note 13 as to which the date is March 20, 2000
F-2
<PAGE>
DYNAGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 310,549 $ 97,045
Accounts receivable, net of allowance for doubtful
accounts of $270,025 and $68,133 5,582,646 3,673,472
Rebates receivable 262,380 398,724
Inventory 7,148,604 6,647,079
Notes receivable 85,000 150,000
Prepaid expenses and other current assets 395,726 201,470
----------- -----------
Total current assets 13,784,905 11,167,790
----------- -----------
Property and equipment, net 3,852,842 1,685,010
----------- -----------
Other assets:
Customer lists, net of accumulated amortization 2,385,098 7,636,072
Goodwill, net of accumulated amortization -- 337,652
Debt financing costs, net of accumulated amortization 885,988 277,325
Deposits and other assets 320,794 341,601
----------- -----------
Total other assets 3,591,880 8,592,650
----------- -----------
$21,229,627 $21,445,450
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DYNAGEN, INC.
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
<TABLE><CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ -- $ 621,313
Notes payable and current portion of long-term debt 9,826,615 13,162,041
Accounts payable and accrued expenses 5,070,285 3,805,209
Settlement obligation, current portion 14,806 --
Acquisition obligation -- 4,083,000
------------ ------------
Total current liabilities 14,911,706 21,671,563
Warrant put liability 984,769 858,435
Long term debt, less current portion 4,190,000 1,510,813
Settlement obligation, less current potion 467,589 --
------------ ------------
Total liabilities 20,554,064 24,040,811
------------ ------------
Commitments and contingencies Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized,
55,924 and 52,152 shares of Series A through L outstanding,
(liquidation value $6,468,214 and $5,212,977) 559 521
Common stock, $.01 par value, 75,000,000 shares authorized,
63,854,946 and 37,612,612 shares issued and outstanding 638,549 376,126
Additional paid-in capital 58,341,326 47,181,545
Accumulated deficit (58,304,871) (50,153,553)
------------ ------------
Total stockholders' equity (deficit) 675,563 (2,595,361)
------------ ------------
$ 21,229,627 $ 21,445,450
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE><CAPTION>
Years Ended December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales, net $ 29,139,553 $ 24,980,294
Cost of sales 24,377,890 21,283,289
------------ ------------
Gross profit 4,761,663 3,697,005
------------ ------------
Operating expenses:
Selling, general and administrative 8,912,374 10,912,589
Research and development 1,713,416 814,108
Loss on impairment of customer lists 400,000 2,500,000
------------ ------------
Total operating expenses 11,025,790 14,226,697
------------ ------------
Operating loss (6,264,127) (10,529,692)
------------ ------------
Other income (expense):
Investment income, net 23,011 174,188
Interest and financing expense (2,425,730) (2,517,881)
Miscellaneous income 515,528 261,376
------------ ------------
Other income (expense), net (1,887,191) (2,082,317)
------------ ------------
Net loss (8,151,318) (12,612,009)
Less returns to preferred stockholders:
Beneficial conversion feature 1,745,377 733,000
Dividends paid and accrued 168,403 150,859
------------ ------------
Net loss applicable to common stock $(10,065,098) $(13,495,868)
============ ============
Net loss per share-basic $ (0.20) $ (0.67)
============ ============
Weighted average shares outstanding 51,221,275 20,059,286
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1999 and 1998
<TABLE><CAPTION>
Preferred Stock Common Stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31,1997 63,522 $ 635 4,315,137 $ 43,151
Exercise of stock options -- -- 30,000 300
Stock issued for GDI acquisition 12,000 120 -- --
Shares issued in private placement 34,000 340 -- --
Delayed registration penalty -- -- -- --
Stock options and warrants issued for
services -- -- -- --
Conversion 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 -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 52,152 521 37,612,612 376,126
Stock options and warrants exercised -- -- 363,172 3,632
Shares issued in private placements 33,000 330 -- --
Conversion of preferred stock (39,228) (392) 17,856,521 178,565
Conversion of debt 10,000 100 3,407,641 34,076
Common stock issued for bonus -- -- 125,000 1,250
Common stock issued for services -- -- 2,990,000 29,900
Common stock and warrants issued for
Superior settlement -- -- 1,500,000 15,000
Stock options and warrants issued for
services -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 55,924 $ 559 63,854,946 $ 638,549
============ ============ ============ ============
Paid In Accumulated
Capital Deficit Total
------------ ------------ ------------
Balance at December 31,1997 $ 40,122,386 $(37,541,544) $ 2,624,628
Exercise of stock options 8,700 -- 9,000
Stock issued for GDI acquisition 1,199,880 -- 1,200,000
Shares issued in private placement 3,249,492 -- 3,249,832
Delayed registration penalty (175,000) -- (175,000)
Stock options and warrants issued for
services 303,996 -- 303,996
Conversion 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 note and debentures 175,000 -- 175,000
Adjustment due to change in ownership
of former subsidiary 271,088 -- 271,088
Net loss -- (12,612,009) (12,612,009)
------------ ------------ ------------
Balance at December 31, 1998 47,181,545 (50,153,553) (2,595,361)
Stock options and warrants exercised (3,532) -- 100
Shares issued in private placements 5,684,655 -- 5,684,985
Conversion of preferred stock (178,173) -- --
Conversion of debt 1,766,709 -- 1,800,885
Common stock issued for bonus 27,500 -- 28,750
Common stock issued for services 1,069,350 -- 1,099,250
Common stock and warrants issued for
Superior settlement 1,982,000 -- 1,997,000
Stock options and warrants issued for
services 811,272 -- 811,272
Net loss -- (8,151,318) (8,151,318)
------------ ------------ ------------
Balance at December 31, 1999 $ 58,341,326 $(58,304,871) $ 675,563
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
Years Ended December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,151,318) $(12,612,009)
Adjustments to reconcile net loss to net cash used
for operating activities:
Loss on impairment of customer lists 400,000 2,500,000
Beneficial conversion feature of convertible note -- 175,000
Stock, stock options and warrants issued for services 1,939,272 1,030,161
Depreciation and amortization 1,784,440 3,438,497
Adjustment due to change in ownership
of former subsidiary -- 271,088
Stock issued for interest obligation -- 176,739
Write-off of patent costs -- 224,984
(Increase) decrease in operating assets:
Accounts receivable (1,909,174) 198,561
Rebates receivable 136,344 315,252
Inventory (501,525) 3,516,029
Prepaid expenses and other current assets (194,256) (45,518)
Deposits and other assets (933) 50,636
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 1,629,786 (3,008,549)
------------ ------------
Net cash used for operating activities (4,867,364) (3,769,129)
------------ ------------
Cash flows from investing activities:
Purchase of wholly-owned subsidiary -- (1,296,205)
Purchase of property and equipment (2,586,232) (192,005)
(Increase) decrease in notes receivable 65,000 (40,000)
------------ ------------
Net cash used for investing activities (2,521,232) (1,528,210)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 100 9,000
Net proceeds from private stock placements 5,684,985 3,249,832
Net proceeds from debt placements 4,321,740 3,557,000
Debt financing costs paid (723,212) --
Payment of debt obligations (2,443,104) (335,748)
Repayments on settlement obligations (57,388) --
Net change in lines of credit 3,125,122 (2,029,606)
Net change in accounts receivable factoring (184,830) 184,830
Increase (decrease) in bank overdraft (621,313) 478,697
Payment of Superior notes payable (1,500,000) (416,666)
------------ ------------
Net cash provided by financing activities 7,602,100 4,697,339
------------ ------------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE><CAPTION>
<S> <C> <C>
Net change in cash and cash equivalents 213,504 (600,000)
Cash and cash equivalents at beginning of year 97,045 697,045
------------ ------------
Cash and cash equivalents at end of year $ 310,549 $ 97,045
============ ============
See accompanying notes to consolidated financial statements.
Supplemental cash flow information:
Interest paid $ 1,890,770 $ 1,279,820
Conversion of debt and accrued interest into common stock 1,050,885 1,160,000
Conversion of related party loans into common stock -- 295,000
Debt issued for delayed registration penalty -- 175,000
Common stock and warrants issued for Superior settlement 1,997,000 --
Conversion of debt into preferred stock 750,000 --
SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
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
============
</TABLE>
Additional cash flow information is included in Notes 3 and 6.
See accompanying notes to consolidated financial statements.
F-8
<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. as 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
receivable 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 in 1998 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% and this interest at December 31, 1999
was approximately 17%. Accordingly, BioTrack's financial statements are not
included in the accompanying consolidated financial statements. The Company's
remaining investment in BioTrack was written off in 1998. In February 1999, the
Company granted options to various individuals, including each of its 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.
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.
RECLASSIFICATIONS
Certain amounts have been reclassified in the 1998 consolidated
financial statements to conform to the 1999 presentation.
CASH EQUIVALENTS
Cash equivalents include interest-bearing deposits with original
maturities of three months or less.
REBATES RECEIVABLE
Rebates receivable 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.
F-9
<PAGE>
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
Customer lists are amortized over estimated lives of five years.
PATENTS, TRADEMARKS AND DEFERRED DEBT FINANCING COSTS
Patent and trademark costs, included in deposits and other assets, 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. Debt financing costs are being amortized on a straight-line basis over
the term of the debt. The related amortization expense for the years ended
December 31, 1999 and 1998 was $136,289 and $99,627, respectively.
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.
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 prescribed 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.
F-10
<PAGE>
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, put warrants, convertible
debt and convertible preferred stock 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 conversion features.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain 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. There were no other
items of comprehensive income during 1999 and 1998.
SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," 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 $58,304,871 and a working capital deficiency of
$1,126,801 at December 31, 1999. The Company is also in default on certain debt
obligations, as discussed in Note 6. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern.
MANAGEMENT PLANS
The following represents management's plans to improve the financial
condition of the Company including curing certain financial covenants defaults
and obtaining waivers wherever applicable. These plans are targeted to the
specific areas listed below.
BANKBOSTON WORKING CAPITAL LOAN
In November 1999 the Company received a working capital loan from
BankBoston. The loan agreement requires the Company to achieve certain financial
performance. As of December 31, 1999, the Company had not met some of the
conditions and is therefore in default of certain loan covenants. Specifically,
the Company has failed to meet the tangible net worth and operating cash to debt
service ratios.
F-11
<PAGE>
Management has plans to raise additional equity to increase its
stockholders' equity which is expected to cure the tangible net worth covenant.
With the improvement in sales and further reduction in expenses due to the
consolidation of certain general and administrative functions the Company also
expects to improve its financial condition so that it can meet the covenant
requirements.
BRIDGE LOANS AND UNSECURED SUBORDINATED DEBT
During 1998 and 1999 the Company received approximately $1.0 million
from certain officers, directors, consultants and unaffiliated third parties.
The Company is in default of certain terms related to these borrowings.
Management is negotiating with the unaffiliated third parties to
convert the debt to equity. The officers, directors and consultants have agreed
to continue to forbear from exercising their rights under the loan documents.
ADDITIONAL CAPITAL
To date, the Company has met substantially all of its capital
requirements through the sale of securities and loans convertible into common
stock. The Company had three separate lenders for each of its three subsidiaries
and could not consolidate its cash flows. With the completion of the BankBoston
working capital line, the Company has consolidated its borrowing. This allows
the Company to allocate its capital resources as needed. Management expects the
capital needs for the year 2000 to be approximately $4.0 million and is
currently negotiating with investors for a portion of this investment with the
balance to be obtained at a future date. The Company has received initial
interest from an investor and will continue to seek additional sources of
capital.
The Company has also been working with its 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"). The Company paid the shareholders
of Superior $6,250,000 in cash, $4,600,000 in three year secured promissory
notes, as adjusted and 166,667 shares of DynaGen's common stock with a
guaranteed value of $5,000,000. 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 and pay to the former Superior stockholders the difference between
$5,000,000 and the current aggregate market value of the shares issued. The
Company recorded a $4,083,000 acquisition obligation at December 31, 1997 based
on the difference between the current estimated fair value of the 1,833,334
shares of common stock issued and issuable and the guaranteed value of
$5,000,000.
On July 31, 1998 DynaGen entered into a contingent settlement agreement
to reduce the remaining purchase price to approximately $4,000,000. 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.
On December 17, 1998, the former Superior stockholders commenced a
civil action against the Company. In May, 1999, we settled all issues between us
and the former Superior stockholders by:
- paying $1,500,000 in cash;
- issuing 1,500,000 shares of common stock;
F-12
<PAGE>
- issuing warrants to purchase 1,000,000 shares of common stock at a
price of $0.86 per share expiring March 31, 2009;
- issuing warrants to purchase 300,000 shares of common stock at a
price of $.01 per share expiring March 31, 2009; and
- modifying the commercial lease agreement between Superior and a
company controlled by the former stockholders.
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 as adjusted, has been based on the estimated fair values at the
date of acquisition. The Company initially allocated $13,612,000 of the purchase
price to customer lists based on an independent appraisal, which was being
amortized on a straight-line basis over five years. In addition the Company
initially recorded goodwill of $386,219, which was being amortized over 15
years.
In the fourth quarter of 1998, the Company recorded a $2,500,000 loss
on impairment of the Superior customer lists based on the Company's projection
of future discounted cash flows of Superior. In the first quarter of 1999, the
Company recorded an additional $400,000 loss on impairment based on a revised
projection of the future discounted cash flows.
Under the settlement the Company valued the modification of its lease
agreement for additional rent, using discounted cash flows, at $539,783, to be
amortized over 15 years. The Company wrote off all of its remaining obligations
to the Superior shareholders. This transaction resulted in a reduction of
$3,756,162 in the customer list. In addition, the goodwill balance of $329,047
was adjusted due to the settlement of the purchase price.
Amortization of customer lists amounted to $948,972 and $2,722,400 for
the years ended December 31, 1999 and 1998 respectively. Amortization of
goodwill amounted to $8,605 and $25,816 for the years ended December 31, 1999
and 1998 respectively.
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 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 at the then
prevailing market prices. 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
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 $145,840 and $121,533 for
the years ended December 31, 1999 and 1998, respectively.
Unaudited pro forma consolidated operating results for the Company,
assuming the acquisition of GDI had been made as of the beginning of the fiscal
year ended December 31, 1998 are as follows:
Revenues $ 26,160,317
============
Net loss $(12,621,376)
============
Net loss per share - basic $ (0.67)
============
F-13
<PAGE>
The unaudited pro forma information is not necessarily indicative
either of the actual results of operations that would have occurred had the
purchase of GDI been made as of the beginning of the fiscal year ended December
31, 1998 or of future results of operations of the combined companies.
4. INVENTORY
Inventory consists of the following:
<TABLE><CAPTION>
December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 752,627 $ 401,531
Work-in-progress 35,345 66,372
Finished goods 6,360,632 6,179,176
------------ ------------
$ 7,148,604 $ 6,647,079
============ ============
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE><CAPTION>
December 31, Estimated
----------------------------- Useful
1999 1998 Lives
------------ ------------ -----------
<S> <C> <C> <C>
Machinery and equipment $ 2,811,296 $ 1,270,477 7 years
Furniture, fixtures and computers 1,146,223 1,171,638 2-7 years
Leasehold improvements 1,266,846 375,058 2 years
------------ ------------
5,224,365 2,817,173
Less accumulated depreciation
and amortization (1,371,523) (1,132,163)
------------ ------------
$ 3,852,842 $ 1,685,010
============ ============
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1999 and 1998 was $418,400 and $361,280, respectively.
6. DEBT
Notes payable consist of the following:
<TABLE><CAPTION>
December 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Convertible note payable $ -- $ 155,000
Bridge loans 1,006,389 725,000
Accounts receivable factoring -- 184,830
Machinery & equipment financing 150,000 586,333
7% convertible debenture -- 250,000
8% convertible debenture (see note 10) -- 328,500
9% convertible debenture 980,000 --
Secured debt - Fleet Bank -- 1,171,420
Loan payable-- Huntington -- 4,505,104
Notes payable - Superior acquisition -- 3,766,667
NJEDA bonds 2,000,000 --
Working capital loan - BankBoston 7,630,226 --
Senior subordinated debt 2,250,000 3,000,000
----------- -----------
Total 14,016,615 14,672,854
Less current portion 9,826,615 13,162,041
----------- -----------
Long-term debt $ 4,190,000 $ 1,510,813
=========== ===========
</TABLE>
F-14
<PAGE>
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. 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 common stock
leaving a balance of $155,000 on December 31, 1998. 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.
Interest expense on the convertible note payable for the years ended
December 31, 1999 and 1998 was $917 and $47,952, respectively. Amortization
expense on deferred debt financing costs for the year ended December 31, 1998
was $3,060.
BRIDGE LOANS
On December 19, 1997 the Company 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. 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 and during 1999, the balance of $175,000 was converted to 500,000
shares of common stock. In 1999, this employee advanced $75,000 under a 10% note
of which $40,000 was paid off leaving a balance of $35,000 payable to him on
December 31, 1999.
During 1999, the Chief Executive Officer periodically advanced personal
funds to the Company towards working capital requirements as needed. On December
31, 1999, the Company had a balance payable of $120,000 to this executive.
Additionally, the Chief Executive Officer and the Executive Vice President
pledged 164,025 shares and 135,125 shares, respectively, of their DynaGen common
stock to secure a note payable of the Company. These shares were subsequently
sold by the creditor and a payable of $53,043 and $43,697 was recorded to these
executives for the pledge of their personal shares of the Company.
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. The term of the
loan was renegotiated and $35,000 was paid off during 1999. On December 31,
1999, there was a balance of $15,000 included in notes payable.
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. During 1999, $400,000 was
repaid towards the loan, leaving a balance of $100,000 on December 31, 1999. The
Company issued a warrant to purchase 200,000 shares of common stock at an
F-15
<PAGE>
exercise price of $0.40 per share for an extension of this loan. The warrant was
valued at $17,438 and charged to expense. Interest accrued on this debt was
$4,767 on December 31, 1998 and $61,283 on December 31, 1999.
On January 26, 1999, the Company received $500,000 from an accredited
investor by executing a 10% Promissory Note to be repaid on April 15, 1999. The
terms of the note required an increased interest rate from 12% to 18% if the
note was not paid on the due date. This note was partially paid during 1999 and
the balance on December 31, 1999 was $139,649. Two executives of the Company
pledged their shares of DynaGen common stock common to repay this loan (see
above). Two warrants to purchase a total of 535,500 shares of common stock at an
exercise price of $0.05 per share were issued in connection with this note.
In January and February 1999, the Company sold to unaffiliated
accredited investors unsecured 12% promissory notes due in ninety days in the
aggregate principal amount of $400,000. The Company issued five year warrants to
purchase a total of 240,000 shares of Common Stock at an exercise price of $0.25
per share to the investors and a warrant to purchase 32,500 shares of Common
Stock at an exercise price of $0.02 per share to the placement agent in
connection with this investment. These notes are past due. The Company had
accrued interest payable on December 31, 1999 of $41,625 relating to these
notes. The Company charged $12,253 to expense in connection with the issuance of
these warrants.
In August 1999, the Company received $100,000 from an accredited
investor by executing a 10% promissory note to be repaid on demand. Interest
accrued as of December 31, 1999 for this note was $3,333.
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. 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 advanced funds equal
to 80% of invoice value upon receipt of invoices from Able. Upon payment in full
from Able's customers, K&L remitted the balance due Able less K&L's net charge
of 1% for each 10 days outstanding. The balance due K&L for accounts receivable
factoring at December 31, 1998 was $184,830. This agreement has expired.
Interest for the years ended December 31, 1999 and 1998 for accounts receivable
factoring was $49,761 and $81,178, respectively.
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 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. The
balance of $150,000 due to the executive's spouse is included in notes payable
on December 31, 1999. Interest expense under this agreement for the years ended
December 31, 1999 and 1998 was $22,500 and $12,250, respectively.
In October 1998, Able borrowed $462,000 under a machinery and equipment
financing agreement with Triple L, Ltd. for a period of 3 years at an effective
interest rate of 21%. This agreement was terminated in November, 1999 when a new
working capital line with BankBoston was completed. Interest expense for the
year ended December 31, 1999 was $81,893. The balance at December 31, 1998 was
$436,333 and interest for the year ended December 31, 1998 was $13,004.
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 average market price of the common stock based on 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.
F-16
<PAGE>
In September 1998, the Company received $250,000 from an investor in
the form of a convertible debenture bearing interest at 7% per annum. This
debenture is convertible into common stock at 80% of the average trading price
of the common stock for five trading days immediately preceding the conversion
date. During 1999, this debenture was converted into 491,426 shares of common
stock. The beneficial conversion discount of $62,500 was fully amortized in
1998. Interest accrued on the debenture at December 31, 1998 was $4,375.
In 1999, the Company received $980,000 by issuing 9% Convertible
Subordinated Debentures. The debentures mature in thirteen months from date of
issuance and carry a quarterly interest payment of 9% per annum. The principal
and interest accrued shall be automatically converted into shares of Common
Stock on the maturity date. The debentures are convertible into 4.9% of the
shares of Common Stock of DynaGen that are issued and outstanding on the date of
conversion. During 1999, the Company recorded interest expense of $41,629
related to these 9% convertible debentures.
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 carried an interest
rate of LIBOR plus 3%, payable in quarterly installments of $42,860 plus
interest and matured on April 26, 2003. The Fleet Bank also established a
revolving line of credit for working capital in the amount of $300,000 with
interest at LIBOR plus 2 1/2%. The loans were 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 1999, the company repaid the loan from proceeds of its new working
capital loan. Interest expense for the years ended December 31, 1999 and 1998
was $85,391 and $85,272 respectively.
LOAN PAYABLE - HUNTINGTON NATIONAL BANK
Superior had a secured revolving line of credit of $4,800,000 from a
bank with interest at prime plus 2% (9.75% at December 31, 1998) that matured on
January 31, 1999. Advances under the line of credit were subject to a borrowing
base consisting of the sum of (i) 80% of Superior's eligible accounts
receivable, plus (ii) 60% of Superior's eligible inventory.
The advances under the line were secured by a first-lien security
interest in all of the assets of Superior and were guaranteed by DynaGen.
Superior could 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 could not make any distributions to the Company. Superior was
not in compliance with various loan covenants at December 31, 1998 and had not
received a waiver from the bank. During 1999, the Company repaid the loan from
the proceeds of its new working capital loan.
NOTES PAYABLE - SUPERIOR ACQUISITION
In connection with the acquisition of Superior, the Company issued
$4,600,000 (as adjusted) in secured promissory notes payable to the former
Superior stockholders. The notes were payable in quarterly installments of
principal of $416,667 plus interest over three years at an interest rate of 9.5%
and were secured by a pledge of the Superior common stock. During the year ended
December 31, 1998, the Company made principal payments of $416,666. The Company
classified the notes payable as a current liability on December 31, 1998 due to
its default under certain loan covenants. This note and accrued interest were
settled in 1999 (see note 3).
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY BONDS
On June 23, 1999, Able Laboratories, Inc., completed the Industrial
Development Revenue Bond offering issued by the New Jersey Economic Development
Authority ("NJEDA"). The bonds consist of series 1999A $1,700,000, 8%
non-taxable and series 1999B $300,000, 8.25% taxable. Series 1999A bonds will
mature in 15 years and series 1999B bonds will mature in 4 years. The total cost
of the bond issued was $216,140 and the net proceeds are being used for the
acquisition, installation and commissioning of equipment and machinery. The bond
cost is being amortized over 15 years. Amortization expense for the year ended
December 31, 1999 was $7,142. At
F-17
<PAGE>
December 31, 1999, maturities of the bonds are as follows: $60,000 in 2000,
$70,000 in 2001, $80,000 in 2002, $90,000 in 2003, $95,000 in 2004 and
$1,605,000 in years 2005 through 2014.
In connection with these bonds, the Company has entered into various
agreements with the NJEDA and the bondholders, including an escrow agreement
pursuant to which the Company has deposited into escrow amounts intended to
cover the Company's obligations under the bond documents for periods of between
two and six months. The bonds are primarily secured by the equipment and
fixtures financed with the proceeds of the bonds.
The interest expense relating to these bonds for the year ended
December 31, 1999 was $37,318.
WORKING CAPITAL LOAN - BANK BOSTON
On November 30, 1999, we completed a loan transaction with BankBoston,
N.A. The loan agreement provides us with a revolving line of credit in the
maximum amount of $14,000,000, secured by a first lien on substantially all of
our assets. The total amount available for borrowing under the loan agreement is
based on 85% of eligible accounts receivable and 60% of eligible inventory. We
have borrowed $7,630,226 under this credit arrangement. With money borrowed
under the BankBoston loan transaction, we repaid Superior's secured loan from
Huntington Bank, GDI's secured loan from Fleet Bank and Able's obligations under
an accounts receivable factoring and equipment financing arrangement. In
connection with the BankBoston loan, we renegotiated certain provisions of our
existing subordinated loan arrangement. The interest rate for this revolving
loan ( plus margin) was 9.75% at December 31, 1999.
The Company issued a warrant to purchase 250,000 shares of Common Stock
at an exercise price of $0.38, in connection with this loan. The value of the
warrant was charged to deferred debt financing cost in January 2000. The
interest expense for the year ended December 31, 1999 was $56,582 and related
bank fees was $6,437. The Company was in default at December 31, 1999 with
respect to certain financial covenants.
SENIOR SUBORDINATED DEBT AND WARRANT PUT LIABILITY
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 was 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. In November 1999, the senior subordinated debt holders
agreed to subordinate their debt to BankBoston.
In June 1997, 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. These warrants are subject to put features under
certain circumstances. Proceeds of $702,000 from this financing were allocated
to the 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 warrants contain a provision which allows the warrant holder to
substitute their warrants for warrants issued by Superior, unless the market
value of the shares issuable pursuant to the original warrants 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 was in default under
the terms of the debt agreement and the debt had been classified as a current
liability.
F-18
<PAGE>
In 1999, as a result of securing a new working capital loan the Company
exchanged $750,000 of this senior debt for 10,000 shares of Series L Preferred
Stock. The Series L Preferred Stock is convertible into common stock at an
average of closing bid prices of Common Stock for three days immediately
preceding the conversion date. The Series L Preferred Stock has a stated
dividend of 13.5% per annum. When the proceeds of the conversion of Series L
Preferred Stock reach $750,000 plus accrued dividends, the balance of the Series
L Preferred Stock will be canceled. The Company issued 400,000 warrants to
purchase Common Stock at an exercise price of $0.38 per share and 168,750
warrants to purchase Common Stock at an exercise price of $0.01 per share in
connection with the negotiations of terms of the loan with senior lenders. The
value of these warrants totaling $122,344 was charged to expense for the year
ended December 31,1999. Interest expense for the years ended December 31, 1999
and 1998 was $396,562 and $405,000, respectively.
7. INCOME TAXES
There was no provision for income taxes for the years ended December
31, 1999 and 1998, due to the Company's net operating losses. The difference
between the statutory Federal income tax rate of 34% and the Company's effective
tax rate is primarily due to net operating losses incurred by the Company and
the valuation reserve against the Company's deferred tax asset.
The components of the net deferred tax asset are as follows:
<TABLE><CAPTION>
December 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax asset:
Federal $ 15,221,000 $ 13,819,000
State 2,745,000 2,986,000
------------ ------------
17,966,000 16,805,000
Valuation reserve (17,966,000) (16,805,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
The following differences give rise to deferred income taxes:
<TABLE><CAPTION>
December 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carry forward $ 16,084,000 $ 15,324,000
Research tax credit carry forward 640,000 620,000
Other 1,242,000 861,000
------------ ------------
17,966,000 16,805,000
Valuation reserve (17,966,000) (16,805,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
The increases in the valuation reserve are due to the Company's net
operating losses.
As of December 31, 1999, the Company has Federal and state net
operating loss carry forwards of approximately $42,700,000 and $25,000,000,
respectively. Federal and state net operating loss carry forwards expire in
varying amounts beginning in 2003 and 2000, respectively. In addition, the
Company has Federal and state research tax credit carry forwards of
approximately $590,000 and $74,000, respectively, available to reduce future tax
liabilities. The Federal and state research tax credit carry forwards expire in
varying amounts beginning in 2003 and 2006, respectively.
Use of net operating loss and tax credit carry forwards is subject to
annual limitations based on ownership changes in the Company's common stock as
defined by the Internal Revenue Code.
F-19
<PAGE>
8. RELATED PARTY TRANSACTIONS
RECEIVABLES
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, 1997, 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 written off leaving an
outstanding balance of $55,000.
The Company recognized interest income on notes receivable of $3,338
and $6,400 during the years ended December 31, 1999 and 1998, respectively. At
December 31, 1999 and 1998, accrued interest receivable of $10,850 and $7,512,
respectively, is included in other current assets.
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, 1999 and December 31, 1998, the
outstanding balance on this note was $30,000 and $95,000, respectively. No
interest income has been recognized on this note receivable as of December 31,
1999. The Company charged BioTrack $60,000 in management fees for both 1999 and
1998. At December 31, 1999, accounts receivable includes $120,000 due from
BioTrack.
CONSULTING FEES
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. During 1999, the Company
recorded $90,000 in forgiveness of debt related to the agreement.
ACCOUNTS PAYABLE
On November 3, 1998, an officer/director of the Company advanced
$50,000 to meet short-term working capital requirements. The entire amount was
outstanding as of December 31, 1998. This amount was repaid during 1999.
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 2015 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 $340,000 and $300,000
for 1999 and 1998, respectively.
The following is a schedule of future minimum lease payments for all
operating leases (with initial or remaining terms in excess of one year) as of
December 31, 1999:
F-20
<PAGE>
Years Ending December 31, Amount
------------------------- -----------
2000 $ 753,230
2001 690,218
2002 683,580
2003 683,580
2004 683,580
Thereafter 8,087,395
-----------
Total minimum future lease payments $11,581,583
===========
Rent expense, net of subleases for the years ended December 31, 1999
and 1998 was $703,681 and $960,827, respectively.
EMPLOYMENT AGREEMENTS
As of December 31, 1999, 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 Board of Directors.
CONTINGENCIES
Legal claims arise from time to time in the normal course of business
which, in the opinion of management, will have no material effect on the
Company's financial position or results of operations.
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS
PREFERRED STOCK
A summary of preferred stock outstanding is as follows:
<TABLE><CAPTION>
December 31, 1999 December 31, 1998
----------------------- -----------------------
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,
0 and 1,520 shares issued and outstanding $ -- $ -- $ 15 $ 152,000
Series B convertible, 12,515 shares authorized,
2,300 and 7,500 shares issued and outstanding 23 229,310 75 747,750
Series C convertible 7,500 shares authorized,
0 and 2,882 shares issued and outstanding -- -- 29 288,227
Series D convertible, 60,000 shares authorized,
0 and 5,000 shares issued and outstanding -- -- 50 500,000
Series E convertible, 10,500 shares authorized,
10,500 shares issued and outstanding 105 1,050,000 105 1,050,000
Series F convertible, 5,000 shares authorized,
1,500 shares issued and outstanding 15 150,000 15 150,000
Series G convertible, 10,000 shares authorized,
0 and 5,500 shares issued and outstanding -- -- 55 550,000
Series H convertible, 20,000 shares authorized,
650 and 17,750 shares issued and outstanding 6 65,000 177 1,775,000
Series I Convertible, 3,000 shares authorized,
974 and 0 shares issued and outstanding 10 973,904 -- --
</TABLE>
F-21
<PAGE>
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
Series J Convertible, 10,000 shares authorized,
10,000 and 0 shares issued and outstanding 100 1,000,000 -- --
Series K Convertible, 20,000 shares authorized,
20,000 and 0 shares issued and outstanding 200 2,000,000 -- --
Series L Convertible, 10,000 shares authorized,
10,000 and 0 shares issued and outstanding 100 1,000,000 -- --
---------- ---------- ---------- ----------
$ 559 $6,486,214 $ 521 $5,212,977
========== ========== ========== ==========
</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 at $3.87 per share. 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 warrants expired during 1999.
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 1998,
35,487 shares of Series A Preferred with accumulated dividends were converted
into 9,903,733 shares of common stock. During 1999, 1,520 shares of the Series A
Preferred Stock were converted into 350,000 shares of Common Stock.
The Series B Preferred Stock has a stated dividend of $7.00 per share
per annum. Upon liquidation, the Series B Preferred Stock ranks junior to the
Series A Preferred Stock. DynaGen registered 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. During 1999, 5,200 shares of Series B with accumulated
dividends were converted to 1,888,639 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. 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 and during 1999 the balance of
2,882 shares was converted into 2,145,219 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. In 1999, this
debenture was converted into 952,644 shares of Common Stock.
In March 1998, the Company sold 15,000 shares of Series D convertible
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 into common
stock at any time. The conversion price shall be equal to 85% of the average
closing bid price of the common stock for five trading days prior to the
conversion. In June 1998, 10,000 shares of Series D were converted into
2,678,570 shares of common stock. During 1999, the balance of 5,000 shares of
Series D was converted into 1,955,999 shares of Common Stock.
F-22
<PAGE>
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 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 and F Preferred
Shares are convertible into common stock at the prevailing market prices on the
date of conversion.
In 1997, 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 the market price. In 1998, 1,000 shares of Series G Preferred
Stock were converted into 50,000 shares of common stock. The balance of 5,500
shares were converted into 300,000 shares of Common Stock in 1999.
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. During 1999, 17,100
shares were further converted into 4,807,104 shares of Common Stock.
In May and June 1999, the Company received $3,000,000 from the issuance
of 3,000 shares of Series I to various unaffiliated investors. Shares of Series
I are convertible into Common Stock at 80% of the average of the closing bid
price of Common stock for the three (3) selected, closing bids of past five (5)
trading days immediately preceding any conversion date. The Company issued
165,652 Common Stock warrants at an exercise price of $0.91 per share and 34,722
Common Stock warrants at an exercise price of $0.396 per share as placement fees
in connection with this financing. During 1999, 2,026 shares of Preferred Series
I were converted and 6,409,560 shares of common stock were issued. The company
has registered the shares of Common Stock issuable upon conversion of Series I
Preferred Stock.
In July 1999, the Company received $1,000,000 from the issuance of
10,000 shares of Series J Preferred Stock to a single unaffiliated investor.
Shares of Series J Preferred Stock are convertible into Common Stock at 80% of
the average closing bid price of Common Stock for the five trading days
immediately preceding the conversion notice from the investor. The conversion
can take place on the earlier of (1) 90 days from original issue date of the
Series J Preferred Stock; or (2) the date on which a registration statement is
declared effective by the Securities and Exchange Commission.
In August, September and November, 1999, the Company received
$2,000,000 from the issuance of 20,000 shares of Series K Preferred Stock to
various unaffiliated investors. Holders of the Series K Preferred Stock have the
right to convert during any five trading day period up to 20% of their holdings,
into Common Stock of the Company at 80% of the three day average quoted price
for three days immediately proceeding the conversion notice from the holder. The
discount at 80% to the market price increases to 75%, and then to 70%, if the
investor retains his investment in the Series K Preferred Stock for longer
periods.
In November 1999, the Company issued 10,000 shares of Series L
Preferred Stock in exchange for the cancellation of $750,000 of senior
subordinated debt. The Series L Preferred Stock is convertible into common stock
having a value upon conversion of $750,000 plus dividends accruing at the rate
of 13.5% per annum. See Note 6.
Certain series of the 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
F-23
<PAGE>
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:
<TABLE><CAPTION>
Years Ended December 31
-----------------------
Convertible Preferred Stock 1999 1998
--------------------------- ---------- ----------
<S> <C> <C>
Series D $ -- $ 265,000
Series H 245,377 468,000
Series I 750,000 --
Series J 250,000 --
Series K 500,000 --
---------- ----------
$1,745,377 $ 733,000
========== ==========
</TABLE>
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 1999 and 1998 were
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
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,
-----------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
Outstanding at beginning of year 8,700 $ 9.18 20,800 $ 8.80
Canceled (2,500) 7.50 (12,100) 7.50
-------- --------
Outstanding at end of year 6,200 9.90 8,700 9.18
======== ========
Exercisable at end of year 6,200 9.90 8,700 9.18
======== ========
Reserved for future grants at end of year 14,600 12,100
======== ========
</TABLE>
Information pertaining to options outstanding under the 1989 Plan at
December 31, 1999 is as follows:
F-24
<PAGE>
<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 6,000 2.2 Years $ 8.30 6,000 $ 8.30
$58.70 200 1.6 Years 58.70 200 58.70
----------- -----------
6,200 2.0 Years $ 9.90 6,200 $ 9.90
=========== ===========
</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, 1999, no stock
awards or purchase rights have been granted under the 1991 Plan. The following
table summarizes the activity of options granted under the 1991 Plan:
<TABLE><CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 47,100 $4.70 78,246 $8.70
Granted -- -- 50,000 0.30
Canceled (22,300) 7.90 (31,146) 7.54
Exercised 3,500 0.10 (50,000) 0.30
----------- -----------
Outstanding at end of year 21,300 2.40 47,100 4.70
=========== ===========
Exercisable at end of year 21,300 2.40 36,710 4.20
=========== ===========
Reserved for future grants at end of year 168,530 146,230
=========== ===========
Weighted average fair value of options
granted during the year -- $0.49
</TABLE>
Information pertaining to options outstanding under the 1991 Plan at
December 31, 1999 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 12,000 4.0 Years $0.10 12,000 $0.10
$5.00 - $7.50 9,300 3.5 Years 5.30 9,300 5.30
----------- -----------
21,300 2.40 21,300 2.40
=========== ===========
</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:
F-25
<PAGE>
<TABLE><CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,150,000 $0.13 -- $ --
Granted 245,000 0.17 3,350,000 0.31
Canceled -- -- (2,200,000) 0.41
Exercised (25,000) 0.20 -- --
Outstanding at end of year 1,370,000 0.13 1,150,000 0.13
----------- -----------
Exercisable at end of year 1,370,000 0.13 --
=========== ===========
Reserved for future grants at end of year 1,105,000 1,350,000
=========== ===========
Weighted average fair value of options
granted during the year $0.10 $0.12
</TABLE>
Information pertaining to options outstanding under the 1998 plan at
December 31, 1999 is as follows:
<TABLE><CAPTION>
Options Outstanding and Exercisable
-------------------------------------------------------------------
Weighted Average Weighted Average
Exercise Prices Number Outstanding Remaining Life Exercise Prices
--------------- ------------------ -------------- ---------------
<S> <C> <C> <C>
$0.01 40,000 7 years $ 0.01
$0.10 - 0.20 1,330,000 6.6 years
---------
1,370,000 0.14
=========
</TABLE>
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 1999 and 1998, the Company issued 240,000 and 1,386,500 shares of
common stock under this Plan. The Company recorded expenses in 1999 and 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.
F-26
<PAGE>
On December 10, 1996, the Company granted warrants to purchase an
aggregate of 10,000 shares of common stock at an exercise price of $14.40 per
share. These warrants are exercisable through December 31, 2003.
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.
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 shares of common stock 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. These warrants were exercised during 1999 and 344,480 shares
were issued to the individual in a cashless exercise.
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. These
warrants were valued at $4,664 and charged to expense in 1999.
On January 7, 1999 the Company issued a warrant to purchase 45,000
shares of Common Stock at an exercise price of $0.25 per share, in connection
with the purchase by an accredited investor of units each consisting of a
$25,000 12% unsecured promissory note and a warrant to purchase 15,000 shares of
Common Stock. The value of these warrants, $2,153, and charged to expense in
1999.
On January 26, 1999, the Company issued a warrant to purchase 35,500
shares of Common Stock at an exercise price of $0.05 per share, a Warrant to
purchase 2,000 shares of Common Stock at an exercise price of $0.30 per share,
and a Warrant to purchase 500,000 shares of Common Stock at an exercise price of
$0.05 per share. These three warrants were issued in connection with a 10%
unsecured promissory note for $500,000 executed by the Company on January 27,
1999. The value of these warrants, $117,344 was charged to expense in 1999.
In February 1999, the Company granted a total of 1,500,000 non
qualified stock options at an exercise price of $.01 per share to three
directors which vested during 1999 in twelve equal installments. These stock
options expire in five years. These options were valued at $330,000 and charged
to expense in 1999.
On February 26, 1999, the Company issued several warrants totaling a
purchase of 195,000 shares of Common Stock at an exercise price of $0.25 per
share in connection with the sale to accredited investors of units
F-27
<PAGE>
each consisting of a $25,000 12% unsecured promissory note and a warrant to
purchase 15,000 shares of Common Stock. The Company valued these warrants at
$10,100 and charged this amount to expense.
During the first quarter of 1999 the Company issued approximately
5,330,000 non-qualified stock options to various employees at Able Laboratories.
The stock options were issued at an exercise price of $0.25 per share and are
exercisable for a period of ten years. The vesting period of these options is
between twelve and thirty-six months. The fair value of these options was $0.12
per share on the date of the grant.
In May and June 1999, the Company issued 165,652 warrants at an
exercise price of $.91 per share and 34,722 warrants at an exercise price of
$0.396 per share in connection with the issuance of its Series I Preferred Stock
to various unaffiliated investors. The value of these warrants, $56,978, was
charged to additional paid-in capital.
On May 27, 1999, the Company issued to the former shareholders of
Superior a warrant to purchase 1,000,000 shares at an exercise price of $0.86
per share valued at $650,000 and a warrant to purchase 300,000 shares at an
exercise price of $0.01 per share valued at $222,000 as part of the settlement
of all its acquisition obligations of Superior.
In August 1999, the Company issued two warrants to purchase 168,750
shares of Common Stock at an exercise price of $.01 per share to the senior
lenders in connection with negotiating terms of the senior subordinated debt.
The warrants were valued at $69,331 and charged to expense in 1999.
In September 1999, the Company granted 9,750,000 non-statutory stock
options to four directors at an exercise price of $0.25 per share which vest in
three installments in September 1999, January 2000 and April 2000. These stock
options expire in ten years. The Company also granted a non-statutory stock
option to purchase 500,000 shares of Common Stock at an exercise price of $0.25
per share to a director, which becomes exercisable upon fulfillment of certain
terms and conditions. The fair value of these warrants was $0.13 per share on
the date of the grant.
In November 1999, the Company issued 200,000 warrants at an exercisable
price of $0.40 per share that expire during the third quarter of 2001. These
warrants were issued in connection with extension of a $500,00 note which was
due in March 1999 and were valued at $17,438 and charged to expense during 1999.
In November 1999, the Company issued four warrants to purchase 500,000
shares of Common Stock at an exercise price of $0.38 per share in connection
with a new line of credit with BankBoston. The Company also issued three
warrants to purchase 400,000 shares of Common Stock at an exercise price of $.01
per share in connection with this refinancing. The value of all these warrants
totaling $188,562 was capitalized as debt financing cost.
STOCK-BASED COMPENSATION
At December 31, 1999, 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:
F-28
<PAGE>
Years Ended December 31,
-------------------------------
1999 1998
------------ ------------
Net loss:
As reported $ (8,151,318) $(12,612,009)
Pro forma (8,781,397) (13,119,784)
Net loss per share:
As reported $ (0.20) $ (0.67)
Pro forma $ (0.21) $ (0.70)
Common stock equivalents have been excluded from all calculations of
net loss per share because the effect of including them would be anti-dilutive.
The fair value of each option grant 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, 1999 and 1998,
respectively; dividend yield of 0%; risk-free interest rates of 5%; expected
volatility of 87% and 263%; and expected lives of 0.5 years.
COMMON STOCK RESERVED
The Company has reserved common stock at December 31, 1999 as follows:
Number of Shares
------------
Stock option plans 2,685,630
Preferred stock conversion 15,456,159
Other stock options and warrants 25,261,267
Consultants Stock Plan 873,500
------------
Convertible Debt 3,128,892
Total 47,405,448
============
At December 31, 1999 the Company has 75,000,000 shares of authorized
common stock of which 63,854,946 shares are outstanding. The Company only has
11,145,054 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, 1999 and 1998.
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, 1999, the Company has received $100,000 which was recorded as
deferred revenue included in accounts payable and accrued expenses, as this
money was refundable under certain conditions. During 1999, the Company
recognized the revenue associated with this agreement.
F-29
<PAGE>
12. EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) Profit Sharing Plan (the "401(k)
Plan") for all 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 matches up to 25% of employee
contributions not to exceed 6% 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 five years.
For the year ended December 31, 1999, the Company matched $29,606 and
contributed $0 in profit sharing. For the year ended December 31, 1998, Superior
matched $11,353 and contributed $25,000 in profit sharing.
13. SUBSEQUENT EVENTS
During February 2000, the Company issued 197,500 warrants to purchase
common stock at an exercise price of $0.25 to various individuals in connection
with consulting services.
During January 2000, 572 shares of Series I Preferred Stock were
converted into 2,695,752 shares of common stock. During February 2000, 800
shares of Series B Preferred Stock were converted into 267,447 shares of common
stock.
In February 2000, the Company issued 668,750 shares of common stock
upon exercise of stock options and warrants.
In February 2000, the Company issued 40,000 shares of common stock
under the consultants plan in connection with services rendered.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, 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 at December 31, 1998, 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 fair value of the 9%
convertible debentures at December 31, 1999 is $1,063,825 based on the fair
value of the common stock issuable upon conversion. The carrying value of other
debt obligations approximate fair values based on their maturities and interest
rates.
F-30
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE><CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 339,373 $ 310,549
Accounts receivable, net of
allowance for doubtful accounts of
$162,371 and $270,025 6,176,302 5,582,646
Rebates receivable 297,050 262,380
Inventory 8,953,070 7,148,604
Notes receivable 110,000 85,000
Prepaid expenses and other current assets 692,230 395,726
----------- -----------
Total current assets 16,568,025 13,784,905
----------- -----------
Property and equipment, net 3,808,286 3,852,842
----------- -----------
Other assets:
Customer lists, net of accumulated
amortization 1,927,525 2,385,098
Deferred debt financing costs, net
of accumulated amortization 747,041 885,988
Deposits and other assets 204,016 320,794
----------- -----------
Total other assets 2,878,582 3,591,880
----------- -----------
$23,254,893 $21,229,627
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-31
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE><CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Current liabilities:
Bank overdraft $ 1,956,827 $ --
Notes payable and current portion of long-term debt 9,467,567 9,826,615
Accounts payable and accrued expenses 4,235,971 5,070,285
Warrant put liability, current portion 667,667 --
Settlement obligation, current portion 15,523 14,806
------------ ------------
Total current liabilities 16,343,555 14,911,706
Warrant put liability, less current portion 382,265 984,769
Long term debt, less current portion 4,128,875 4,190,000
Settlement obligation, less current portion 459,645 467,589
------------ ------------
Total liabilities 21,314,340 20,554,064
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, 53,454 and 55,924 shares
of Series A through L outstanding,
(liquidation value $5,619,357 and $6,468,214) 534 559
Common stock, $.01 par value, 125,000,000 shares
authorized, 74,251,545 and 63,854,946 shares
issued and outstanding 742,515 638,549
Additional paid-in capital 61,080,797 58,341,326
Accumulated deficit (59,883,293) (58,304,871)
------------ ------------
Total stockholders' equity 1,940,553 675,563
------------ ------------
$ 23,254,893 $ 21,229,627
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-32
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE><CAPTION>
Three Months Ended,
----------------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales, net $ 7,979,260 $ 6,581,040
Cost of sales 6,048,339 5,565,327
------------ ------------
Gross profit 1,930,921 1,015,713
------------ ------------
Operating expenses:
Selling, general and administrative 2,436,784 2,365,505
Research and development 759,840 322,282
------------ ------------
Total operating expenses 3,196,624 2,687,787
------------ ------------
Operating loss (1,265,703) (1,672,074)
------------ ------------
Other income (expense):
Investment income, net 7,707 2,162
Interest and financing expense (524,685) (376,972)
Miscellaneous income 749,675 445,070
------------ ------------
Other income (expense), net 232,697 70,260
------------ ------------
Net loss (1,033,006) (1,601,814)
Less returns to preferred stockholders:
Beneficial conversion feature 291,667 803,727
Dividends paid and accrued 34,812 31,992
------------ ------------
Net loss applicable to common stock $ (1,359,485) $ (2,437,533)
============ ============
Net loss per share-basic $ (0.02) $ (0.05)
============ ============
Weighted average shares outstanding 71,301,787 48,664,848
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-33
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE><CAPTION>
Six Months Ended,
----------------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales, net $ 16,101,009 $ 13,605,837
Cost of sales 11,651,564 11,181,983
------------ ------------
Gross profit 4,449,445 2,423,854
------------ ------------
Operating expenses:
Selling, general and administrative 4,760,822 4,356,322
Research and development 1,067,589 498,636
Loss on impairment of customer lists -- 400,000
------------ ------------
Total operating expenses 5,828,411 5,254,958
------------ ------------
Operating loss (1,378,966) (2,831,104)
------------ ------------
Other income (expense):
Investment income, net 11,579 8,193
Interest and financing expense (972,133) (1,145,704)
Miscellaneous income 761,098 469,791
------------ ------------
Other income (expense), net (199,456) (667,720)
------------ ------------
Net loss (1,578,422) (3,498,824)
Less returns to preferred stockholders:
Beneficial conversion feature 291,667 995,377
Dividends paid and accrued 72,840 48,115
------------ ------------
Net loss applicable to common stock $ (1,942,929) $ (4,542,316)
============ ============
Net loss per share-basic $ (0.03) $ (0.10)
============ ============
Weighted average shares outstanding 68,806,766 44,303,126
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-34
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE><CAPTION>
Preferred Stock Common Stock
--------------------------- --------------------------- Additional Accumulated
Shares Amount Shares Amount Paid-In Capital Deficit Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 52,152 $ 521 37,612,612 $ 376,126 $ 47,181,545 $(50,153,553) $ (2,595,361)
Stock options and warrants
exercised -- -- 345,488 3,455 (3,355) -- 100
Shares issued in private
placement 3,000 30 -- -- 2,999,970 -- 3,000,000
Conversion of preferred
stock (33,027) (330) 10,258,055 102,581 (102,251) -- --
Conversion of debt -- -- 3,407,641 34,076 1,016,810 -- 1,050,886
Stock issued for bonus -- -- 125,000 1,250 27,500 -- 28,750
Stock issued for services -- -- 2,790,000 27,900 837,935 -- 865,835
Stock and warrants issued
for Superior Settlement -- -- 1,500,000 15,000 1,982,000 -- 1,997,000
Comprehensive Income:
Net loss -- -- -- -- -- (3,498,824) (3,498,824)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 22,125 $ 221 56,038,796 $ 560,388 $ 53,940,154 $(53,652,377) $ 848,386
============ ============ ============ ============ ============ ============ ============
Balance at December 31, 1999 55,924 $ 559 63,854,946 $ 638,549 $ 58,341,326 $(58,304,871) $ 675,563
Conversion of preferred
stock (7,470) (75) 4,650,490 46,505 (46,430) -- --
Shares issued in private
placement 5,000 50 -- -- 449,950 -- 450,000
Conversion of debt -- -- 3,854,909 38,549 1,533,539 -- 1,572,088
Stock and stock warrants
issued for services -- -- 1,151,000 11,510 765,264 -- 776,774
Stock options and warrants
exercised -- -- 740,200 7,402 37,148 -- 44,550
Comprehensive Income:
Net loss -- -- -- -- -- (1,578,422) (1,578,422)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 53,454 $ 534 74,251,545 $ 742,515 $ 61,080,797 $(59,883,293) $ 1,940,553
============ ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-35
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE><CAPTION>
Six Months Ended
------------------------------
June 30, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,578,422) $(3,498,824)
Adjustments to reconcile net loss to net cash used
for operating activities:
Stock, stock options and warrants issued for services 776,774 894,585
Loss on impairment of customer lists -- 400,000
Depreciation and amortization 874,600 938,366
(Increase) decrease in operating assets:
Accounts receivable (593,656) (123,848)
Rebates receivable (34,670) 39,504
Inventory (1,804,466) (1,475,156)
Prepaid expenses and other current assets (296,504) (701,416)
Deposits and other assets 105,908 (513,970)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (642,226) 750,322
Deferred revenue -- (100,000)
----------- -----------
Net cash used for operating activities (3,192,662) (3,390,437)
----------- -----------
Cash flows from investing activities:
Cash paid in Superior Settlement -- (1,500,000)
Purchase of property and equipment (157,491) (1,397,046)
(Increase) decrease in notes receivable (25,000) --
----------- -----------
Net cash provided by (used for) investing activities (182,491) (2,897,046)
----------- -----------
Cash flows from financing activities:
Net proceeds from stock warrants and options 44,550 100
Net proceeds from private stock placement 450,000 3,000,000
Net proceeds from debt placements 840,000 4,705,000
Payment of debt obligations (356,774) (430,720)
Repayments of settlement obligation (7,227) --
Net change in line of credit 476,601 (214,105)
Net change in accounts receivable factoring -- (117,515)
Increase in bank overdraft 1,956,827 645,962
----------- -----------
Net cash provided by financing activities 3,403,977 7,588,722
----------- -----------
Net change in cash and cash equivalents 28,824 1,301,239
Cash and cash equivalents at beginning of period 310,549 97,045
----------- -----------
Cash and cash equivalents at end of period $ 339,373 $ 1,398,284
=========== ===========
Supplemental cash flow information:
Interest paid 643,357 $ 651,504
Common stock issued for note payable and accrued interest 1,572,088 1,050,886
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-36
<PAGE>
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED 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. All significant intercompany balances and transactions have been
eliminated in consolidation.
The results of operations for the periods reported are not necessarily
indicative of those that may be expected for a full year. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
which are necessary for a fair statement of operating results for the interim
periods presented have been made.
The financial information included in this report has been prepared in
conformance with the accounting policies reflected in the financial statements
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999 filed with Securities and Exchange Commission.
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 materially from those
estimates.
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, put warrants, convertible
debt and convertible preferred stock 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 conversion features.
F-37
<PAGE>
2. INVENTORY
Inventory consists of the following:
June 30, December 31,
2000 1999
---------- ----------
Raw materials $1,092,502 $ 752,627
Work-in-progress 42,629 35,345
Finished goods 7,817,939 6,360,632
---------- ----------
$8,953,070 $7,148,604
========== ==========
3. PROPERTY AND EQUIPMENT
June 30, December 31,
2000 1999
---------- ----------
Machinery and equipment $2,848,856 $2,811,296
Furniture, fixtures, and computers 1,151,115 1,146,223
Leasehold improvements 1,381,885 1,266,846
---------- ----------
5,381,856 5,224,365
Less accumulated depreciation and amortization (1,573,570) (1,371,523)
---------- ----------
$3,808,286 $3,852,842
========== ==========
4 DEBT
Notes payable consist of the following:
June 30, December 31,
2000 1999
---------- ----------
Bridge loans $1,150,740 $1,006,389
Machinery & equipment financing 150,000 150,000
9% convertible debenture -- 980,000
NJEDA bonds 1,940,000 2,000,000
Working capital loan - BankBoston 8,106,827 7,630,226
Senior subordinated debt 2,248,875 2,250,000
---------- ----------
Total 13,596,442 14,016,615
Less current portion 9,467,567 9,826,615
---------- ----------
Long-term debt $4,128,875 $4,190,000
========== ==========
As of June 30, 2000, the Company was in default of certain loan
covenants, as a result the Company and the bank have agreed to limit the
borrowing on this line to $8.5 million. The Company has indicated to the bank
that it will seek an alternate lender to maximize its borrowing on its assets.
5. PREFERRED STOCK
During April and May 2000, the Company received $500,000 through the
sale of 500 shares of its Series J Preferred Stock. The shares of Series J
Preferred Stock are convertible into common stock at 80% of the average closing
bid price of the common stock for the five trading days immediately preceding
the conversion notice from the investor. The conversion can take place on the
earlier of (1) 90 days from the original issue date, or (2) the date on which a
registration statement is declared effective by the Securities and Exchange
Commission.
F-38
<PAGE>
6. SUBSEQUENT EVENTS
During July 2000, the Company received net proceeds of $1,220,000 from
the sale of preferred stock to a single investor. In addition, the Company
converted a $750,000 bridge loan received during the second quarter from the
same investor, into preferred stock. As a result of the two transactions, the
Company issued 26,500 shares of Series M Convertible Preferred Stock at $100 per
share. The Series M Preferred Stock carries a dividend of 4% and is convertible
into common stock at a conversion price equal to 80% of the average of the three
lowest prices per share during the five consecutive trading days prior to
conversion.
F-39
<PAGE>
SUPERIOR PHARMACEUTICAL COMPANY
BALANCE SHEETS
(Unaudited)
<TABLE><CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 184,274 $ 73,817
Accounts receivable 5,155,700 4,311,905
Estimated rebates 297,050 262,380
Inventory 7,277,096 7,467,842
Other current assets 9,815 30,894
------------ ------------
Total current assets 12,923,935 12,146,838
------------ ------------
Property and equipment 924,590 884,555
Less accumulated depreciation (673,803) (622,918)
------------ ------------
Net property and equipment 250,787 261,637
------------ ------------
Total assets $ 13,174,722 $ 12,408,475
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Intercompany payable to DynaGen $ 2,401,932 $ 3,865,885
Accounts payable and accrued expenses 6,101,710 4,351,659
------------ ------------
Total current liabilities 8,503,642 8,217,544
------------ ------------
Stockholder's equity:
Common stock 1 1
Additional paid-in capital 1,750,999 1,750,999
Retained earnings 2,920,080 2,439,931
------------ ------------
Total stockholder's equity 4,671,080 4,190,931
------------ ------------
Total liabilities and equity $ 13,174,722 $ 12,408,475
============ ============
</TABLE>
F-40
<PAGE>
SUPERIOR PHARMACEUTICAL COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE><CAPTION>
SIX MONTHS YEAR ENDED YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
JUNE 30, 2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Sales, net $ 13,110,082 $ 21,476,606 $ 19,624,192
Cost of sales 10,585,551 16,909,637 15,649,520
------------ ------------ ------------
Gross profit 2,524,531 4,566,969 3,974,672
Selling, general and administrative expenses 2,044,679 3,768,664 4,039,074
------------ ------------ ------------
Operating profit (loss) 479,852 798,305 (64,402)
------------ ------------ ------------
Other income (expense):
Miscellaneous income (expense) 580 (3,163) 18,313
Interest expense (283) (420,861) (405,067)
------------ ------------ ------------
Other income (expense), net 297 (424,024) (386,754)
------------ ------------ ------------
Net income $ 480,149 $ 374,281 $ (451,156)
============ ============ ============
</TABLE>
F-41
<PAGE>
GENERIC DISTRIBUTORS, INC.
BALANCE SHEETS
(Unaudited)
<TABLE><CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 75,960 $ 140,642
Accounts receivable 710,219 725,792
Intercompany receivable from DynaGen 371,995 451,102
Inventory 939,111 868,932
Other current assets 26,738 35,484
------------ ------------
Total current assets 2,124,023 2,221,952
------------ ------------
Property and equipment 152,025 152,025
Less accumulated depreciation (72,301) (63,090)
------------ ------------
Net property and equipment 79,724 88,935
------------ ------------
Deposits 4,038 4,038
------------ ------------
Total assets $ 2,207,785 $ 2,314,925
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 553,590 $ 539,929
------------ ------------
Total current liabilities $ 553,590 $ 539,929
------------ ------------
Stockholder's equity:
Common stock 1 1
Additional paid-in capital 1,716,999 1,716,999
Retained earnings (deficit) (62,805) 57,996
------------ ------------
Total stockholder's equity 1,654,195 1,774,996
------------ ------------
Total liabilities and equity $ 2,207,785 $ 2,314,925
============ ============
</TABLE>
F-42
<PAGE>
GENERIC DISTRIBUTORS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE><CAPTION>
SIX MONTHS ENDED YEAR ENDED TEN MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Product sales $ 2,471,763 $ 5,618,282 $ 5,361,457
Cost of sales 2,033,180 4,540,526 4,202,153
----------- ----------- -----------
Gross profit 438,583 1,077,756 1,159,304
Selling, general and administrative expenses 562,455 1,102,429 931,485
----------- ----------- -----------
Operating profit (loss) (123,872) (24,673) 227,819
----------- ----------- -----------
Other income (expense):
Miscellaneous income 3,071 16,629 8,946
Interest expense -- (85,391) (85,334)
----------- ----------- -----------
Other income (expense), net 3,071 (68,762) (76,388)
----------- ----------- -----------
Net income (loss) $ (120,801) $ (93,435) $ 151,431
=========== =========== ===========
</TABLE>
F-43
<PAGE>
DYNAGEN, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements of DynaGen, Inc.
for the year ended December 31, 1999 and as of and for the six months ended June
30, 2000 were prepared by DynaGen, Inc. to illustrate the estimated effects of
the merger proposal and the proposed sale of Generic Distributors, Inc.
principally:
o The effect of the sale of Superior for $6,248,875 in cash
consideration including the assumption of the senior subordinated
debt and the settlement of approximately $6,500,000 of
intercompany obligations outstanding as of June 30, 2000.
o The payoff of our working capital line of credit.
o The effect on our statements of loss for the elimination of
Superior's historical operations.
o The effect of the proposed sale of Generic Distributors for
estimated cash consideration of $1,400,000 and the forgiveness of
our intercompany payable to Generic Distributors.
o The effect on our statements of loss for the elimination of
Generic Distributors' historical operations.
Further information and description is provided in the notes to these
unaudited pro forma financial statements. To the extent these events are not
reflected in the historical statements of loss of DynaGen, Inc., the unaudited
pro forma statements of loss assume that these transactions occurred as of the
beginning of the periods presented. To the extent these events are not reflected
in the historical consolidated balance sheet, the unaudited pro forma balance
sheet assumes that these transactions occurred as of June 30, 2000.
DynaGen believes that the assumptions used provide a reasonable basis
for presenting the significant effects directly attributable to the contemplated
merger and the proposed sale of Generic Distributors. The pro forma financial
statements do not purport to represent what the results of operations or
financial position of DynaGen would actually have been if the merger and the
sale had in fact occurred on such dates or to project the results of operations
or financial position of DynaGen for any future period or date. These statements
should be read in connection with, and are qualified by reference to, the
consolidated financial statements of DynaGen, Inc. and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
F-44
<PAGE>
<TABLE><CAPTION>
DYNAGEN, INC.
PRO FORMA BALANCE SHEET
(Unaudited)
ASSETS
JUNE 30, 2000
--------------------------------------------------------------------------------------------
PAYOFF OF
DYNAGEN SALE OF LINE OF SALE OF GENERIC
CONSOLIDATED SUPERIOR(1) CREDIT(2) PRO FORMA DISTRIBUTORS(3) PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 339,373 $ 10,359,036 $(10,063,654) $ 634,755 $ 1,324,040 $ 1,958,795
Accounts receivable 6,176,302 (5,155,700) -- 1,020,602 (710,219) 310,383
Rebates receivable 297,050 (297,050) -- -- -- --
Inventory 8,953,070 (6,257,173) -- 2,695,897 (939,111) 1,756,786
Notes receivable 110,000 -- -- 110,000 -- 110,000
Prepaid expenses and other current
assets 692,230 (9,814) -- 682,416 (26,738) 655,678
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 16,568,025 (1,360,701) (10,063,654) 5,143,670 (352,028) 4,791,642
------------ ------------ ------------ ------------ ------------ ------------
Property and equipment, net 3,808,286 (250,787) -- 3,557,499 (79,724) 3,477,775
------------ ------------ ------------ ------------ ------------ ------------
OTHER ASSETS:
Customer lists, net of accumulated
amortization 1,927,525 (1,538,612) -- 388,913 (388,913) --
Deferred debt financing costs, net
of accumulated amortization 747,041 -- (339,878) 407,163 -- 407,163
Deposits and other assets 204,016 -- -- 204,016 (4,038) 199,978
------------ ------------ ------------ ------------ ------------ ------------
Total other assets 2,878,582 (1,538,612) (339,878) 1,000,092 (392,951) 607,141
------------ ------------ ------------ ------------ ------------ ------------
$ 23,254,893 $ (3,150,100) $(10,403,532) $ 9,701,261 $ (824,703) $ 8,876,558
============ ============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-45
</TABLE>
<PAGE>
<TABLE><CAPTION>
DYNAGEN, INC.
PRO FORMA BALANCE SHEET
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, 2000
---------------------------------------------------------------------------------------
PAYOFF OF SALE OF GENERIC
DYNAGEN SALE OF LINE OF DISTRIBUTORS
CONSOLIDATED SUPERIOR(1) CREDIT(2) PRO FORMA (3) PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Bank overdraft $ 1,956,827 $ -- $ (1,956,827) $ -- $ -- $ --
Notes payable and current portion
of long-term debt 9,467,567 -- (8,106,827) 1,360,740 -- 1,360,740
Accounts payable and accrued
expenses 4,235,971 (1,960,331) -- 2,275,640 (553,590) 1,722,050
Warrant put liability, current
portion 667,667 -- -- 667,667 -- 667,667
Settlement obligation, current
portion 15,523 (15,523) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 16,343,555 (1,975,854) (10,063,654) 4,304,047 (553,590) 3,750,457
Warrant put liability, less current
portion 382,265 -- -- 382,265 -- 382,265
Long-term debt, less current portion 4,128,875 (2,248,875) -- 1,880,000 -- 1,880,000
Settlement obligation, less current
portion 459,645 (459,645) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 21,314,340 (4,684,374) (10,063,654) 6,566,312 (553,590) 6,012,722
------------ ------------ ------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
10,000,000 shares authorized,
53,454 and 55,924 shares of
Series A through L outstanding
(liquidation value $5,619,357
and $6,468,214) 534 -- -- 534 -- 534
Common stock, $.01 par value,
125,000,000 shares authorized,
74,251,545 and 63,854,946 shares
issued and outstanding 742,515 -- -- 742,515 -- 742,515
Additional paid-in capital 61,080,797 -- -- 61,080,797 -- 61,080,797
Accumulated deficit (59,883,293) 1,534,274 (339,878) (58,688,897) (271,113) (58,960,010)
------------ ------------ ------------ ------------ ------------ ------------
Total stockholders' equity 1,940,553 1,534,274 (339,878) 3,134,949 (271,113) 2,863,836
------------ ------------ ------------ ------------ ------------ ------------
$ 23,254,893 $ (3,150,100) $(10,403,532) $ 9,701,261 $ (824,703) $ 8,876,558
============ ============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-46
</TABLE>
<PAGE>
<TABLE><CAPTION>
DYNAGEN, INC.
PRO FORMA STATEMENT OF LOSS
(unaudited)
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------------
ELIMINATION
ELIMINATION OF GENERIC
DYNAGEN OF PRO FORMA DISTRIBUTORS PRO FORMA
CONSOLIDATED SUPERIOR(1) ADJUSTMENTS PRO FORMA (5) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net $ 29,139,553 $21,476,606 $ 3,326,141(2) $ 10,989,088 $5,618,282 $ -- $ 5,370,806
Cost of sales 24,377,890 16,909,637 1,104,879(2) 8,573,132 4,540,526 -- 4,032,606
------------ ----------- ----------- ------------ ---------- ------------ -----------
Gross profit 4,761,663 4,566,969 2,221,262 2,415,956 1,077,756 -- 1,338,200
------------ ----------- ----------- ------------ ---------- ------------ -----------
Operating expenses:
Selling, general
and administrative 8,912,374 3,768,664 (957,577)(3) 4,186,133 1,102,429 (145,840)(6) 2,937,864
Research
and development 1,713,416 -- -- 1,713,416 -- -- 1,713,416
Loss on impairment
of customer lists 400,000 -- (400,000)(3) -- -- -- --
------------ ----------- ----------- ------------ ---------- ------------ -----------
Total operating
expenses 11,025,790 3,768,664 (1,357,577) 5,899,549 1,102,429 (145,840) 4,651,280
------------ ----------- ----------- ------------ ---------- ------------ -----------
Operating loss (6,264,127) 798,305 3,578,839 (3,483,593) (24,673) 145,840 (3,313,080)
------------ ----------- ----------- ------------ ---------- ------------ -----------
Other income (expense):
Investment income, net 23,011 -- -- 23,011 7,788 -- 15,223
Interest and financing
expense (2,425,730) (420,861) -- (2,004,869) (85,391) -- (1,919,478)
Miscellaneous income
(expense) 515,528 (3,163) -- 518,691 8,841 -- 509,850
------------ ----------- ----------- ------------ ---------- ------------ -----------
Other income
(expense), net (1,887,191) (424,024) -- (1,463,167) (68,762) -- (1,394,405)
------------ ----------- ----------- ------------ ---------- ------------ -----------
Net loss (8,151,318) 374,281 3,578,839 (4,946,760) (93,435) 145,840 (4,707,485)
Less returns to
preferred stockholders:
Beneficial conversion
feature 1,745,377 -- -- 1,745,377 -- -- 1,745,377
Dividends paid and
accrued 168,403 -- -- 168,403 -- -- 168,403
------------ ----------- ----------- ------------ ---------- ------------ -----------
Net loss applicable
to common stock $(10,065,098) $ 374,281 $ 3,578,839 $ (6,860,540) $ (93,435) $ 145,840 $(6,621,265)
============ =========== =========== ============ ========== ============ ===========
Net loss per
share-basic $ (0.20) $ (0.13) $ (0.13)
============ ============ ===========
Weighted average
shares outstanding 51,221,275 51,221,275 51,221,275
============ ============ ===========
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-47
</TABLE>
<PAGE>
<TABLE><CAPTION>
DYNAGEN, INC.
PRO FORMA STATEMENT OF LOSS
(unaudited)
SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------------------------------------------
ELIMINATION
ELIMINATION OF GENERIC
DYNAGEN OF PRO FORMA DISTRIBUTORS PRO FORMA
CONSOLIDATED SUPERIOR(1) ADJUSTMENTS PRO FORMA (5) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net $ 16,101,009 $13,110,082 $ 2,183,943(2) $ 5,174,870 $2,471,763 $ -- $ 2,703,107
Cost of sales 11,651,564 10,585,551 3,385,282(2) 4,451,295 2,033,180 -- 2,418,115
------------ ----------- ----------- ------------ ---------- ------------ -----------
Gross profit 4,449,445 2,524,531 (1,201,339) 723,575 438,583 -- 284,992
------------ ----------- ----------- ------------ ---------- ------------ -----------
Operating expenses:
Selling, general
and administrative 4,760,822 2,044,679 (384,654)(3) 2,331,489 562,455 (72,920)(6) 1,696,114
Research
and development 1,067,589 -- -- 1,067,589 -- -- 1,067,589
------------ ----------- ----------- ------------ ---------- ------------ -----------
Total operating
expenses 5,828,411 2,044,679 (384,654) 3,399,078 562,455 (72,920) 2,763,703
------------ ----------- ----------- ------------ ---------- ------------ -----------
Operating loss (1,378,966) 479,852 (816,685) (2,675,503) (123,872) 72,920 (2,478,711)
------------ ----------- ----------- ------------ ---------- ------------ -----------
Other income (expense):
Investment income, net 11,579 -- -- 11,579 -- -- 11,579
Interest and financing
expense (972,133) (283) (282,000)(4) (689,850) -- 51,000(7) (638,850)
Miscellaneous income 761,098 580 -- 760,518 3,071 -- 757,447
------------ ----------- ----------- ------------ ---------- ------------ -----------
Other income
(expense), net (199,456) 297 (282,000) 82,247 3,071 51,000 130,176
------------ ----------- ----------- ------------ ---------- ------------ -----------
Net loss (1,578,422) 480,149 (534,685) (2,593,256) (120,801) 123,920 (2,348,535)
Less returns to
preferred stockholders:
Beneficial conversion
feature 291,667 -- -- 291,667 -- -- 291,667
Dividends paid and
accrued 72,840 -- -- 72,840 -- -- 72,840
------------ ----------- ----------- ------------ ---------- ------------ -----------
Net loss applicable
to common stock $ (1,942,929) $ 480,149 $ (534,685) $ (2,957,763) $ (120,801) $ 123,920 $(2,713,042)
============ =========== =========== ============ ========== ============ ===========
Net loss per
share-basic $ (0.03) $ (0.04) $ (0.04)
============ ============ ===========
Weighted average
shares outstanding 68,806,766 68,806,766 68,806,766
============ ============ ===========
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-48
</TABLE>
<PAGE>
DYNAGEN, INC.
NOTES TO PRO FORMA BALANCE SHEET
JUNE 30, 2000
(Unaudited)
1. Sale of Superior
Reflects the elimination of all of Superior's assets and liabilities
included in the DynaGen consolidated balance sheet; the receipt of the
$4,000,000 cash portion of the merger consideration; the receipt of
$6,543,310 in settlement of intercompany obligations existing at June
30, 2000; the assumption of $2,248,875 of subordinated debt and the
settlement obligation of $475,168 by RxBazaar.com; and the write-off of
customer lists associated with Superior.
2. Payoff of Line of Credit
Reflects the payoff of DynaGen's existing line of credit and bank
overdraft with BankBoston and the write-off of the deferred financing
costs associated with the line of credit.
3. Sale of Generic Distributors
Reflects the elimination of all of Generic Distributors' assets and
liabilities included in the DynaGen consolidated balance sheet; the
receipt of an estimated $1,400,000 in cash consideration for the sale
and the forgiveness of our intercompany payable to Generic
Distributors.
NOTES TO PRO FORMA STATEMENTS OF LOSS
YEAR ENDED DECEMBER 31, 1999 AND
SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
(1) To eliminate the historical results of operations reflected in
the financial statements of Superior.
(2) To reflect sales of Able Laboratories to Superior and
associated costs which were previously eliminated in
consolidation.
(3) To eliminate amortization expense and impairment loss on
customer lists and goodwill of Superior reflected in DynaGen's
historical financial statements.
(4) To eliminate interest expense on the working capital line of
credit allocated to Superior.
(5) To eliminate the historical results of operations reflected in
the financial statements of Generic Distributors.
(6) To eliminate amortization expense on customer lists of Generic
Distributors reflected in DynaGen's historical financial
statements.
(7) To eliminate interest expense on the working capital line of
credit allocated to Generic Distributors.
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
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AGREEMENT AND PLAN OF MERGER
BY AND AMONG
RXBAZAAR.COM, INC.,
RXBAZAAR.COM ACQUISITION CORP.,
SUPERIOR PHARMACEUTICAL COMPANY
and
DYNAGEN, INC.
Dated as of October 20, 2000
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AGREEMENT AND PLAN OF MERGER
Table of Contents
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Page
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ARTICLE I - THE MERGER.........................................................1
SECTION 1.1. The Merger....................................................1
SECTION 1.2. Effective Time................................................1
SECTION 1.3. Effect of the Merger..........................................2
SECTION 1.4. Certificate of Incorporation; By-Laws.........................2
SECTION 1.5. Directors and Officers........................................2
SECTION 1.6. [Reserved]....................................................2
SECTION 1.7. Taking of Necessary Action; Further Action....................2
ARTICLE II - CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES................2
SECTION 2.1. Definitions...................................................2
SECTION 2.2. Merger Consideration; Conversion or Cancellation of Company
Common Stock..................................................3
SECTION 2.3. Exchange of Certificates......................................3
SECTION 2.4. Stock Transfer Books..........................................3
SECTION 2.5. Lost, Stolen or Destroyed Certificates........................3
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER................4
SECTION 3.1. Corporate Existence and Power.................................4
SECTION 3.2. Corporate Authorization.......................................4
SECTION 3.3. Governmental Authorization....................................4
SECTION 3.4. Non-Contravention.............................................5
SECTION 3.5. Capitalization................................................5
SECTION 3.6. Subsidiaries..................................................5
SECTION 3.7. Financial Statements..........................................5
SECTION 3.8. Absence of Undisclosed Liabilities............................6
SECTION 3.9. Title and Condition of Assets.................................6
SECTION 3.10. Real Property................................................7
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SECTION 3.11. Condition of Tangible Assets.................................7
SECTION 3.12. Subsequent Events............................................7
SECTION 3.13. Legal Proceedings............................................8
SECTION 3.14. Material Contracts...........................................9
SECTION 3.15. Employees...................................................10
SECTION 3.16. Transactions with Affiliates................................11
SECTION 3.17. Insurance Coverage..........................................11
SECTION 3.18. Compliance with Laws........................................11
SECTION 3.19. Accounts Receivable; Inventories............................11
SECTION 3.20. Finders' Fees...............................................12
SECTION 3.21. Employee Benefit Plans......................................12
SECTION 3.22. Taxes.......................................................13
SECTION 3.23. Environmental Matters.......................................14
SECTION 3.24. Intellectual Property.......................................14
SECTION 3.25. [Reserved]..................................................15
SECTION 3.26. Certain FDA Matters.........................................15
SECTION 3.27. Title.......................................................15
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.................15
SECTION 4.1. Corporate Existence and Power................................16
SECTION 4.2. Corporate Authorization......................................16
SECTION 4.3. Governmental Authorization...................................16
SECTION 4.4. Non-Contravention............................................16
SECTION 4.5. Capitalization...............................................16
SECTION 4.6. Legal Proceedings............................................17
SECTION 4.7. Compliance with Laws.........................................17
SECTION 4.8. Board Recommendation.........................................17
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SECTION 4.9. Finders' Fees................................................17
SECTION 4.10. [Reserved]..................................................17
SECTION 4.11. Interim Operations of Sub...................................17
ARTICLE V - COVENANTS OF ALL PARTIES..........................................17
SECTION 5.1. Cooperation..................................................17
SECTION 5.2. Other Required Information...................................18
SECTION 5.3. Confidentiality..............................................18
SECTION 5.4. Public Announcements.........................................18
SECTION 5.5. Miscellaneous Agreements and Consents........................19
SECTION 5.6. Best Efforts and Further Assurances..........................19
ARTICLE VI - COVENANTS OF THE STOCKHOLDER AND THE COMPANY.....................19
SECTION 6.1. Preservation of Business Organization........................19
SECTION 6.2. Carry on in Regular Course...................................19
SECTION 6.3. Consents.....................................................20
SECTION 6.4. Stockholders Meetings........................................20
SECTION 6.5. Access.......................................................20
SECTION 6.6. Documents and Information to be Furnished....................20
SECTION 6.7. Notices of Certain Events....................................20
SECTION 6.8. Accuracy of Representations and Warranties...................20
SECTION 6.9. No Solicitation..............................................21
SECTION 6.10. Non-Disturbance Agreement...................................21
SECTION 6.11. Section 338(h)(10) Election.................................21
SECTION 6.12. Acquisition Proposals.......................................21
ARTICLE VII - COVENANTS OF PARENT AND SUB.....................................23
SECTION 7.1. Preservation of Business Organization........................23
SECTION 7.2. Consents.....................................................23
SECTION 7.3. Notices of Certain Events....................................23
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SECTION 7.4. Accuracy of Representations and Warranties...................23
SECTION 7.5. Documents and Information to be Furnished....................24
SECTION 7.6. Indemnification..............................................24
SECTION 7.7. Non-Solicitation.............................................24
SECTION 7.8. Compliance with Lease Terms..................................24
ARTICLE VIII - CONDITIONS OF CLOSING..........................................24
SECTION 8.1. Conditions to Obligations of Parent, Sub, Stockholder and the
Company......................................................24
SECTION 8.2. Additional Conditions Applicable to Parent and Sub...........25
SECTION 8.3. Additional Conditions Applicable to the Stockholder and the
Company......................................................26
ARTICLE IX - TERMINATION......................................................27
SECTION 9.1. Termination..................................................27
SECTION 9.2. Survival Upon Termination....................................28
SECTION 9.3. Effect of Termination........................................28
SECTION 9.4. Certain Remedies Upon Termination............................28
ARTICLE X -- SURVIVAL; INDEMNIFICATION........................................28
SECTION 10.1. Survival....................................................28
SECTION 10.2. Mutual Indemnification......................................28
SECTION 10.3. Third Person Claims.........................................29
SECTION 10.4. Limitations on Indemnification..............................30
SECTION 10.5. [Reserved.].................................................30
SECTION 10.6. Resolutions of Conflicts; Arbitration.......................30
SECTION 10.7. Remedies....................................................31
ARTICLE XI - MISCELLANEOUS....................................................31
SECTION 11.1. Specific Performance........................................31
SECTION 11.2. Expenses....................................................31
SECTION 11.3. Further Assurances..........................................31
SECTION 11.4. Parties in Interest.........................................32
SECTION 11.5. Entire Agreement............................................32
SECTION 11.6 Amendment or Modification....................................32
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SECTION 11.7. Waiver......................................................32
SECTION 11.8. Assignability...............................................32
SECTION 11.9. Headings and Interpretation.................................32
SECTION 11.10. Notices....................................................33
SECTION 11.11. Law Governing..............................................33
SECTION 11.12. Invalidity of Provisions...................................34
SECTION 11.13. Counterparts...............................................34
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AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger dated as of October 20, 2000 (this
"AGREEMENT") by and among RxBazaar.com, Inc., a Delaware corporation ("PARENT");
RxBazaar.com Acquisition Corp., a Delaware corporation and a direct,
wholly-owned subsidiary of Parent ("SUB"); Dynagen, Inc., a Delaware corporation
("STOCKHOLDER"); and Superior Pharmaceutical Company, an Ohio corporation and a
direct wholly-owned subsidiary of the Stockholder (the "Company").
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent, Sub, Stockholder
and the Company have each determined that it is advisable and in the best
interests of each company and its respective stockholders for Parent to enter
into a business combination with the Company upon the terms and subject to the
conditions set forth herein;
WHEREAS, in furtherance of such combination, the respective Boards of
Directors of Parent, Sub, the Company and Stockholder have each approved the
merger (the "MERGER") of Sub with and into the Company in accordance with the
applicable provisions of the General Corporation Law of the State of Delaware
("DELAWARE Law") and the Ohio General Corporation Law ("OHIO LAW") upon the
terms and conditions set forth herein; and
WHEREAS, for federal income tax purposes, it is intended and the
parties elect that the Merger be treated as a transaction under the provisions
of Section 338(h)(10) of the Code;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with Delaware Law and Ohio Law,
at the Effective Time (as defined in Section 1.2), Sub shall be merged with and
into the Company. As a result of the Merger, the separate corporate existence of
Sub shall cease and the Company shall continue as the surviving corporation of
the Merger (the "SURVIVING CORPORATION"). The name of the Surviving Corporation
shall be Superior Pharmaceutical Company.
SECTION 1.2. EFFECTIVE TIME. Unless this Agreement shall have earlier
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 9.1 hereof, the closing of the Merger (the "CLOSING") will
take place as promptly as practicable (and in any event within two business
days) after the satisfaction or, if permissible, waiver of the conditions set
forth in Article VIII hereof, at the offices of Foley Hoag & Eliot LLP, One Post
Office Square, Boston, Massachusetts 02109, unless another date, time or place
is agreed to in writing by the parties hereto. The date upon which the Closing
occurs is herein referred to as the "CLOSING DATE." On the Closing Date, the
parties hereto shall cause the Merger to be consummated by filing a certificate
of merger (the "CERTIFICATE OF MERGER") with the Secretary of State of the State
of Delaware and the Secretary of State of the State of Ohio, in such form as
required by Delaware Law and Ohio Law (the date and time of such filings being
the "EFFECTIVE TIME").
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SECTION 1.3. EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in the Certificate of Merger and applicable
provisions of Ohio Law. At the Effective Time, all the property, rights,
privileges, powers and franchises of Sub and the Company shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Sub and the
Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.4. CERTIFICATE OF INCORPORATION; BY-LAWS. Unless otherwise
determined by Parent prior to the Effective Time, at the Effective Time, the
Articles of Incorporation and the Regulations of the Company, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
and the Regulations of the Surviving Corporation.
SECTION 1.5. DIRECTORS AND OFFICERS. Effective as of the Closing,
Parent shall appoint a total of three (3) directors to the board of directors of
the Surviving Corporation to hold office for one year and until their successors
shall have been duly elected and qualified. Parent shall select the directors in
its sole discretion.
SECTION 1.6. [RESERVED.]
SECTION 1.7. TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of
Parent, Sub, the Company and Stockholder will take all such reasonable and
lawful action as may be necessary or appropriate in order to effectuate the
Merger in accordance with this Agreement as promptly as possible. If, at any
time after the Effective Time, any such further action is necessary or desirable
to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of the Company and Sub, the officers
and directors of the Company and Sub immediately prior to the Effective Time are
fully authorized in the name of their respective corporations or otherwise to
take, and will take, all such lawful and necessary action.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.1. DEFINITIONS.
"COMPANY COMMON STOCK" shall mean the Common Stock, no par
value, of the Company.
"MERGER CONSIDERATION" shall mean (i) $4,000,000 in cash, (ii)
the assumption of the senior subordinated debt of the Stockholder payable to
Finova Mezzanine Capital, Inc. ("FINOVA") and Argosy Partners ("ARGOSY") in the
amount of $2,248,875, and (iii) the settlement of all outstanding intercompany
payables and receivables between the Company and the Stockholder.
"OUTSTANDING SHARES" shall mean the aggregate number of shares
of Company Common Stock outstanding immediately prior to the Effective Time.
SECTION 2.2. MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF
COMPANY COMMON STOCK. (a) At the Effective Time, by virtue of the Merger and
without any action on the part of Parent, Sub, the Company or the Stockholder,
the Outstanding Shares shall be converted into the right to receive the Merger
Consideration.
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(b) At the Effective Time, each share of Sub Common Stock, par
value $.01 per share, issued and outstanding immediately prior to the Effective
Time shall thereupon be converted into and become one (1) share of Common Stock
of the Surviving Corporation.
SECTION 2.3. EXCHANGE OF CERTIFICATES. (a) Upon surrender by
Stockholder of certificates that immediately prior to the Effective Time
represented all Outstanding Shares of Company Common Stock ("Certificates") to
the Parent, Stockholder shall be entitled to receive in exchange therefor the
Merger Consideration provided for in Section 2.2(a), and the Certificates so
surrendered shall forthwith be canceled.
(b) All Merger Consideration issued upon conversion of the
shares of Company Common Stock in accordance with the terms hereof shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock.
(c) Neither Parent, Sub nor the Company shall be liable to
Stockholder for any Merger Consideration delivered to a public official pursuant
to any abandoned property, escheat or similar law. From and after the Effective
Time, and until surrendered in accordance with the provisions of Section 2.3,
each Certificate representing Outstanding Shares shall represent, for all
purposes, only the right to receive the Merger Consideration.
(d) Parent shall be entitled to deduct and withhold from the
consideration otherwise payable to Stockholder such amounts as Parent is
required to deduct and withhold with respect to the making of any such payment
under the Internal Revenue Code of 1986, as amended (the "CODE"), or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by Parent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the Stockholder in respect of which such
deduction and withholding was made by Parent.
SECTION 2.4. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of the Company or the Surviving Company. On or after the Effective Time,
any Certificates presented to the Parent for any reason shall be converted into
the Merger Consideration.
SECTION 2.5. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificates shall have been lost, stolen or destroyed, the Parent shall make
payment in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, for the pro rata
amount of the Merger Consideration; provided, however, that Parent may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of any such lost, stolen or destroyed Certificate or Certificates having
an aggregate value of $100,000 or more to deliver a bond in such sum as Parent
may reasonably direct as indemnity against any claim that may be made against
Parent with respect to the Certificates alleged to have been lost, stolen or
destroyed.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER
The Stockholder hereby represents and warrants to each of Parent and
Sub that except as set forth in the written disclosure schedule delivered by the
Company to Parent and attached hereto (the "COMPANY DISCLOSURE SCHEDULE"):
SECTION 3.1. CORPORATE EXISTENCE AND POWER. Each of Stockholder and the
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, in the case of Stockholder,
and the laws of the state of Ohio, in the case of the Company, and has all
requisite corporate power and authority to own, lease or operate its properties
and assets and to carry on its business as now being conducted, and is duly
qualified to do business and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, other than in such jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect (as defined below) on the Company. Stockholder has
heretofore delivered to Parent and Sub true and complete copies of the Company's
Articles of Incorporation and Code of Regulations, as amended to date and as
currently in effect. For purposes of this Agreement, a "MATERIAL ADVERSE CHANGE"
or a "MATERIAL ADVERSE EFFECT" shall mean, with respect to Parent on the one
hand and the Company or Stockholder on the other hand, the result of one or more
events, changes or effects which, individually or in the aggregate, would have a
material adverse effect or impact on the business, assets, results of
operations, prospects or financial condition of such party and its subsidiaries,
taken as a whole, or is reasonably likely to delay substantially or prevent the
consummation of the transactions contemplated hereby.
SECTION 3.2. CORPORATE AUTHORIZATION. The execution, delivery and
performance by each of the Company and Stockholder of this Agreement and the
consummation by the Company and Stockholder of the Merger are within Stockholder
and the Company's corporate power and authority and, subject to the approval of
the Merger by each of the Company's stockholder and the Stockholder's
stockholders (collectively the "STOCKHOLDER APPROVALS"), have been duly
authorized by all necessary corporate action of the Company and the Stockholder.
This Agreement has been duly authorized, executed and delivered by each of
Stockholder and the Company and constitutes a valid and binding obligation of
each of the Company and Stockholder, enforceable against each of Stockholder and
the Company in accordance with its terms, subject to Stockholder Approvals.
SECTION 3.3. GOVERNMENTAL AUTHORIZATION. Except as set forth on
Schedule 3.3, the execution, delivery and performance by each of Stockholder and
the Company of this Agreement and the consummation of the Merger and the other
transactions contemplated by this Agreement by each of Stockholder and the
Company, do not and will not require any consent, approval or action by or in
respect of, or any declaration, filing or registration with, any governmental or
regulatory authority (each, a "GOVERNMENTAL AUTHORITY"), other than (i) routine
filings with the Secretary of State of Ohio and the Secretary of State of
Delaware necessary to consummate the Merger, (ii) compliance with the applicable
requirements of the Securities Act and the Securities Exchange Act of 1934 (the
"EXCHANGE ACT"), and (iii) such filings or notifications which would not prevent
or delay consummation of any of the transactions contemplated hereby in any
material respect, or otherwise prevent the Company or Stockholder from
performing its obligations under this Agreement in any material respect.
SECTION 3.4. NON-CONTRAVENTION. The execution, delivery and performance
by the Company and Stockholder of this Agreement and the consummation by the
Company and the Stockholder of the Merger and other transactions contemplated by
this Agreement, do not and will not, with or without the
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giving of notice, the lapse of time or both: (i) contravene or conflict with the
Articles of Incorporation or Code of Regulations of the Company or the
Certificate of Incorporation or By-Laws of Stockholder, (ii) assuming compliance
with the matters referred to in Section 3.3, contravene or conflict with or
constitute a violation of any provision of any law, rule, regulation, judgment,
injunction, order or decree currently in effect and binding upon or applicable
to the Company or Stockholder, (iii) except as set forth on Schedule 3.4,
require any consent, approval or other action by any individual, corporation,
partnership, joint venture, limited liability company, limited liability
partnership, association, trust or other entity or organization, including a
Governmental Authority (a "PERSON"), contravene or conflict with or constitute a
violation of or a default under, or give rise to any right of termination,
cancellation or acceleration of any right or obligation of the Company or
Stockholder or to a loss of any benefit to which the Company or Stockholder is
entitled under any material provision of (A) any agreement binding upon the
Company or Stockholder, or (B) assuming compliance with the matters referred to
in Section 3.3, any material license, franchise, permit or other similar
authorization held by the Company or Stockholder, or (iv) create or result in
any mortgage, lien, pledge, claim, charge, security interest, easement,
assessment, restrictive covenant, reservation, restriction or encumbrance of any
kind ("Lien") on any asset of the Company or Stockholder, except in the case of
clauses (ii), (iii) and (iv), for such matters as would not have a Material
Adverse Effect on the Company or Stockholder.
SECTION 3.5. CAPITALIZATION. The authorized capital stock of the
Company consists of (i) 750 shares of Company Common Stock, no par value, of
which 100 shares are issued and outstanding as of the date hereof. Stockholder
owns all of the Outstanding Shares. All issued and outstanding shares of Company
Common Stock are duly authorized, validly issued, fully paid and nonassessable,
and have not been issued in violation of any preemptive, first refusal or other
rights of any stockholder of the Company or any other Person. Except as set
forth in Schedule 3.5, there are no outstanding (i) securities of the Company
convertible into or exchangeable for shares of capital stock or voting
securities of the Company or (ii) options, warrants, exchange rights,
subscription rights or other agreements, commitments or rights to purchase or
otherwise acquire from the Company, or agreements, commitments or obligations of
the Company or Stockholder to issue or sell, any capital stock or securities
convertible into or exchangeable for capital stock of the Company (the items in
clauses (i) and (ii) being referred to collectively as the "COMPANY
SECURITIES"). Except as set forth in Schedule 3.5 or as contemplated by this
Agreement, there are no outstanding obligations of the Company or Stockholder to
sell, issue or deliver, or to repurchase, redeem or otherwise acquire, any of
the Company Securities. Schedule 3.5 sets forth a complete and correct list
(including number of shares and exercise price) of all Company Securities
described in clauses (i) and (ii) of the definition of Company Securities.
SECTION 3.6. SUBSIDIARIES. The Company does not hold or own, directly
or indirectly, any equity or ownership interest in any corporation, association,
partnership, joint venture or other Person.
SECTION 3.7. FINANCIAL STATEMENTS. Attached hereto as Schedule 3.7 are
the following financial statements of the Company (collectively, the "FINANCIAL
STATEMENTS"):
(i) the unaudited balance sheet as of December 31, 1998
and the related unaudited statements of earnings,
retained earnings and cash flows for the year ended
December 31, 1998;
(ii) the unaudited balance sheet as of December 31, 1999
and the related unaudited statements of earnings,
retained earnings and cash flows for the year ended
December 31, 1999; and
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(iii) the unaudited balance sheet as of August 31, 2000 (the
"BALANCE SHEET") and the related unaudited statements
of earnings, retained earnings and cash flows for the
eighth-month period ended August 31, 2000.
Each of the Financial Statements has been prepared in accordance with GAAP
(other than the omission of footnotes in the case of unaudited Financial
Statements) applied on a consistent basis and fairly presents the financial
position of the Company as of its date or the results of operations or changes
in financial position of the Company for the periods then ended. Except as may
be set forth in the Financial Statements, all of the revenues and expenses of
the Company reflected in the Financial Statements were derived or incurred in
the ordinary course of business of the Company. The account records underlying
the Financial Statements accurately and fairly reflect, in reasonable detail and
in all material respects, the transactions of the Company, and the Company's
books of account have been maintained in accordance with GAAP applied on a
consistent basis. All accounts, notes and other receivables of the Company are
valid and enforceable, are not subject to any valid defense, set off,
counterclaim or claim for returns or refunds, and are collectible in full in
accordance with their terms in the ordinary course of business of the Company,
except to the extent of any reserves therefor reflected on the Balance Sheet or
taken in the ordinary course of business consistent with past practice which, in
the aggregate, are not materially adverse to the Company.
SECTION 3.8. ABSENCE OF UNDISCLOSED LIABILITIES. To the best knowledge
of Stockholder, the Company has no liabilities or obligations which are, or
reasonably could be expected to be, in the aggregate, material to the business,
assets, results of operation, prospects or financial condition of the Company,
except those liabilities or obligations which are (a) fully reflected or
adequately reserved against in the Balance Sheet, (b) disclosed in this
Agreement or in Schedule 3.8 or (c) incurred in the ordinary course of business
consistent with past practice since August 31, 2000 (the "BALANCE SHEET DATE").
For the purposes of this Agreement, the phrase "LIABILITIES OR OBLIGATIONS"
shall include any direct or indirect indebtedness, claim, loss, damage,
deficiency (including deferred income tax and other net tax deficiencies), cost,
expense, obligation, guarantee, or responsibility, whether accrued, absolute or
contingent, fixed or unfixed, liquidated or unliquidated, secured or unsecured.
SECTION 3.9. TITLE AND CONDITION OF ASSETS. Except as set forth in
Schedule 3.9, the assets and properties owned, leased or subleased by the
Company constitute, and on the Closing Date will constitute, all of the assets
and properties used or held for use in the conduct of the business of the
Company, and are, and on the Closing Date will be, generally adequate to conduct
the business of the Company as currently conducted. The Company has, and on the
Closing Date will have record and marketable title to, or valid leasehold
interests in, all of its assets and properties, whether real, personal or mixed,
tangible or intangible, and whether now owned, leased or subleased or acquired
after the date of this Agreement, including all assets and properties identified
on the Balance Sheet, except for assets and properties sold since the Balance
Sheet Date in the ordinary course of business consistent with past practices and
as permitted by this Agreement. Except as disclosed in the Financial Statements
or in Schedule 3.9, none of such assets and properties is, or on the Closing
Date will be, subject to any Liens, except for (i) Liens incurred in the
ordinary course of business which are not yet due and payable, and (ii) Liens
which do not materially detract from the value of or interfere with the present
use of the property affected thereby and which do not, individually or in the
aggregate, have a Material Adverse Effect on the Company (the "PERMITTED
LIENS").
SECTION 3.10. REAL PROPERTY. Set forth on Schedule 3.10 is an accurate
and complete list and summary description of all real property currently owned
or leased by the Company and, except as set forth on Schedule 3.10, none of the
described leases require any consent to the transactions contemplated by this
Agreement. Stockholder has previously delivered to Parent and Sub accurate and
complete copies of all leases listed and described on Schedule 3.10. The Company
has possession of each of the
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aforementioned properties and, to the knowledge of Stockholder, no event has
occurred which, with the lapse of time or notice or both, could reasonably be
expected to result in a material default under any of the described leases. All
rents or other material payment obligations which have become due in respect of
each of such leased properties have been paid, the Company has complied in all
material respects with its obligations under the said leases and the Company has
not received any notice of any breach of its obligations under any covenants,
agreements, statutory requirements, planning consents, by-laws, orders and
regulations affecting any of such properties (whether owned or leased), their
use and any business of the Company there carried on.
SECTION 3.11. CONDITION OF TANGIBLE ASSETS. Except as set forth on
Schedule 3.11, all material tangible property, including the real property and
structures thereon, of the Company is in good operating condition, reasonable
wear and tear excepted, and the operation and use of such property in the
business of the Company conforms in all material respects to all applicable
laws, ordinances, regulations, permits, licenses and certificates.
SECTION 3.12. SUBSEQUENT EVENTS. Except as disclosed in Schedule 3.12,
since the Balance Sheet Date, the business of the Company has been conducted in
the ordinary course of business consistent with past practices and the Company
has not:
(a) incurred any Material Adverse Change;
(b) amended or otherwise changed its Articles of Incorporation
or Code of Regulations in any manner which would reasonably be expected to
result in a Material Adverse Change;
(c) declared, set aside or paid any dividend or other
distribution with respect to any of the Company Securities, or repurchased,
redeemed or otherwise acquired any outstanding shares of capital stock or other
securities of, or other equity or ownership interests in, the Company (including
the Company Securities) or issued or sold any Company Securities;
(d) amended the term of any outstanding security of the
Company;
(e) incurred any indebtedness for borrowed money or guaranteed
any such indebtedness of another Person, issued or sold any debt securities or
warrants or other rights to acquire any debt securities of the Company,
guaranteed any debt securities of another Person, entered into any "keep well"
or other agreement to maintain any financial statement condition of another
Person or entered into any arrangement having the economic effect of any of the
foregoing, except for the endorsement of checks in the normal course of
business, and the extension of credit to the Company by suppliers in the normal
course of business;
(f) created or assumed or permitted to exist any Lien on any
asset, other than Permitted Liens;
(g) made any loan or capital contribution to or investment in
any Person;
(h) entered into any lease or acquisition of any capital asset
or made any other investment for aggregate consideration in excess of $10,000;
(i) sold, leased, pledged, transferred or otherwise disposed
of any capital asset with an aggregate fair market value in excess of $10,000;
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(j) entered into any agreement or transaction, or made any
commitment, relating to its assets or business (including the acquisition or
disposition of any assets or business) or relinquished any contract or other
right, other than transactions, commitments and relinquishments in the ordinary
course of business consistent with past practices and those contemplated by this
Agreement;
(k) changed any method or practice of financial or tax
accounting or any method of maintaining books and records;
(l) (i) granted any severance or termination pay to any
director or officer of the Company or, except in the ordinary course of business
consistent with past practice, to any employee of the Company, (ii) entered into
any employment, severance, consulting, deferred compensation or other similar
agreement (or any amendment to any agreement) with any director or officer of
the Company or, except in the ordinary course of business consistent with past
practice, with any employee of the Company, (iii) changed any benefits payable
under existing severance or termination pay policies or employment, severance,
consulting or other similar agreements, or (iv) changed the compensation, bonus
or other benefits payable to directors, officers or employees of the Company
other than periodic increases in the ordinary course of business consistent with
past practice;
(m) paid, discharged, settled or satisfied any claim, Lien or
liability, other than those (i) which were reflected or reserved against in the
Balance Sheet and in the ordinary course of business consistent with past
practice, or (ii) which were incurred since the Balance Sheet Date in the
ordinary course of business consistent with past practice;
(n) written down the value of any inventory or written off as
uncollectible any notes, accounts or other receivables or any portion thereof
other than in the ordinary course of business consistent with past practice;
(o) entered into any transaction with any affiliates of the
Company, other than in the ordinary course of, and pursuant to the reasonable
requirements of, the business of the Company and upon terms that were no less
favorable to the Company than it could have obtained in a comparable transaction
with a Person who was not an affiliate;
(p) entered into any agreement, undertaking or commitment to
do any of the foregoing; or
(q) suffered any damage, destruction or other casualty loss
not covered by insurance affecting the business or assets of the Company which
has had or would reasonably be expected to result in or have a Material Adverse
Effect on the Company.
SECTION 3.13. LEGAL PROCEEDINGS. Except as set forth on Schedule 3.13,
there is no action, suit, litigation, governmental investigation or other
proceeding pending or, to the knowledge of Stockholder, threatened against or
relating to the Company, Stockholder or any of their respective properties or
businesses, or the transactions contemplated by the Agreement which could
reasonably be expected to have a Material Adverse Effect and, to the knowledge
of Stockholder, no basis for any such action exists.
SECTION 3.14. MATERIAL CONTRACTS. (a) Except for agreements, contracts,
plans, leases, arrangements or commitments disclosed in Schedule 3.14 or any
other Schedule to this Agreement, the Company is not a party to or subject to:
(i) any collective bargaining agreement;
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(ii) any agreements that contain any material unpaid
severance liabilities or obligations;
(iii) any bonus, deferred compensation, incentive
compensation, pension, profit-sharing or retirement
plans, or any other employee benefit plans or
arrangements;
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant
or salesperson or consulting or sales agreement,
contract or commitment with a firm or other
organization not terminable by the Company on 90
days' notice without liability except to the extent
applicable local law and/or general principles of
wrongful termination law may limit the Company's
ability to terminate such agreements, contracts or
commitments;
(v) agreement or plan, including, without limitation, any
stock option plan, stock appreciation right plan or
stock purchase plan, any of the benefits of which
will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be
calculated on the basis of any of the transactions
contemplated by this Agreement;
(vi) any fidelity or surety bond or completion bond;
(vii) any lease of personal property having a remaining
value individually in excess of $10,000;
(viii) any agreement of indemnification or guaranty;
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to
engage in any line of business or compete with any
Person;
(x) any agreement, contract or commitment relating to
capital expenditures and involving future obligations
in excess of $10,000;
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets not in the
ordinary course of business or any ownership interest
in any corporation, partnership, joint venture or
other business enterprise;
(xii) any mortgages, indentures, loans or credit
agreements, security agreements or other agreements
or instruments relating to the borrowing of money or
extension of credit, including guaranties referred to
in clause (viii) hereof;
(xiii) any purchase order or contract for the purchase of
raw materials or acquisition of assets involving
$50,000 or more;
(xiv) any distribution, joint marketing, supply or
development agreement; or
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(xv) any other agreement, contract or commitment which
involves payment by the Company of $25,000 or more
and is not cancelable without penalty within thirty
(30) days.
Neither the Company nor Stockholder has breached, or received in writing
any claim or threat that it has breached, any of the terms or conditions of any
other agreement, contract or commitment in such a manner as would permit any
other party to cancel or terminate the same or would permit any other party to
seek damages from the Company or Stockholder that could reasonably be expected
to have a Material Adverse Effect on the Company or on the transactions
contemplated hereby. Each agreement, contract or commitment set forth in any of
the schedules is in full force and effect and, except as otherwise disclosed in
such schedule, to the knowledge of Stockholder, each such agreement, contract or
commitment is not subject to any material default thereunder by any party
obligated to the Company pursuant thereto. The Company has obtained, or will
obtain prior to the Effective Time, all necessary consents, waivers and
approvals as are required in connection with the Merger under any of the
Company's material agreements.
(b) There is no contract, agreement, commitment or obligation to
which the Company is a party or is bound that, at the time it was entered into
or made was, or is currently, known or expected by Stockholder to result in any
material loss to the Company upon completion or performance thereof, or any bid,
offer or proposal which, if accepted would result in such a contract, agreement,
commitment or obligation.
(c) Except as disclosed in Schedule 3.14, the Company is not a
party to any agreement with any of its securityholders or optionholders, or any
affiliate thereof, nor is any securityholder or optionholder of the Company a
party to any agreement with any other such securityholder or optionholder
relating to the Company or any of its securities.
SECTION 3.15. EMPLOYEES. Schedule 3.15 sets forth a true and complete
list of (a) the names, titles, annual salaries and other compensation of all
employees of the Company (the "EMPLOYEES") and the location at which such
Employees regularly perform services for the Company and (b) the wage rates for
non-salaried Employees of the Company (by classification). Any agreements,
commitments or understandings between the Company and any Employee concerning
such Employee's future salary, compensation or terms of employment are described
in Schedule 3.15. Except as set forth on Schedule 3.15, none of such Employees
has indicated to the Company that he or she intends to resign or retire as a
result of the transactions contemplated by this Agreement or otherwise. The
Company is in compliance with all currently applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and is not engaged in any unfair labor practice, failure to
comply with which or engagement in which, as the case may be, has had, or could
reasonably be expected to have, a Material Adverse Effect on the Company. There
is no unfair labor practice complaint pending or, to the knowledge of
Stockholder, threatened against the Company before the National Labor Relations
Board.
SECTION 3.16. TRANSACTIONS WITH AFFILIATES. Except as set forth in
Schedule 3.16, there are no agreements or other continuing transactions between
the Company, on the one hand, and any affiliate of the Company, any of the
stockholders of the Company, any affiliate of any stockholder of the Company, or
any member of any such stockholder's family, on the other hand. Except as set
forth in Schedule 3.16, to the knowledge of Stockholder, none of the officers or
directors of the Company (a) has any material direct or indirect interest in any
entity which does business with the Company or any property, asset or right
which is used by the Company; or (b) has any contractual relationship with the
Company.
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SECTION 3.17. INSURANCE COVERAGE. Stockholder has furnished to Parent a
list of, and true and complete copies of, all insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company (including without limitation
any policies pertaining to product liability). There is no claim by the Company
or Stockholder pending under any of such policies or bonds as to which coverage
has been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums payable under all such policies and bonds have been paid and
the Company is otherwise in compliance in all material respects with the terms
and conditions of all such policies and bonds. Such policies of insurance and
bonds (or other policies and bonds providing substantially similar insurance
coverage) are in full force and effect.
SECTION 3.18. COMPLIANCE WITH LAWS. Neither Stockholder nor the Company
is in violation of any applicable provisions of any law, statute, ordinance,
regulation, judgment, order, injunction, permit, license, certificate or other
authorization, or its governing instruments, except for violations that have not
had and could not reasonably be expected to have a Material Adverse Effect on
the Company.
SECTION 3.19. ACCOUNTS RECEIVABLE; INVENTORIES. (a) Except as set forth
on Schedule 3.19(a), the accounts receivable of the Company, including the
accounts receivable reflected on the Balance Sheet and accounts receivable
acquired by the Company between the Balance Sheet Date and the Closing Date, are
valid and existing and represent bona fide claims against debtors for sales and
other charges, and were acquired in the ordinary course of business and have
been collected, or are expected to be collected in the ordinary course of
business within a period not exceeding ninety (90) days from invoice date, in
full and in accordance with their terms at their recorded amounts, subject only
to the reserve for receivables as reflected on the face of the Balance Sheet,
and (subject to the aforesaid reserves) are subject to no refunds, discounts
(except for normal cash and immaterial trade discounts) or other adjustments
and, to the best knowledge of Stockholder, to no defenses, rights of setoff,
counterclaims, encumbrances or conditions affecting any thereof. The accounts
receivable have been accrued on the books of the Company in the ordinary course
of business consistent with past practices in accordance with GAAP, and the
amount reserved for doubtful accounts and allowances disclosed in the Balance
Sheet or accrued on such books is consistent with past practices.
(b) Schedule 3.19(b) sets forth a detailed list of all inventory
of the Company. All of the inventories that are reflected in Schedule 3.19(b)
(i) were purchased or acquired in the ordinary course of the Company's business
and in a manner consistent with the regular inventory practices of the Company,
(ii) have been or will be used or sold in the ordinary course of business and in
a manner consistent with its regular inventory practices, (iii) are not in
excess of the Company's reasonable requirements, and (iv) are or will be
reflected in the Company's financial statements in accordance with GAAP
consistently applied. Since the Balance Sheet Date, due provision was made on
the books of the Company in the ordinary course of business consistent with past
practices to provide for all slow-moving, obsolete or unusable inventories to
their estimated useful or scrap values and such inventory reserves are adequate
to provide for such slow-moving, obsolete or unusable inventory and inventory
shrinkage.
(c) Except as disclosed on Schedule 3.19(b), the inventory does
not consist of any damaged or obsolete inventory or inventory not fit for use in
the ordinary course of business, including without limitation (i) raw materials
or work-in-process that are not used in current formulations of the Company's
products, (ii) any raw materials or work-in-process that, according to the
production schedule of the business, would not reasonably be expected to be used
within six months after the Closing Date or, if earlier, the end of such raw
material's or work-in-process' useful life, (iii) any finished goods that
represent products returned prior to April 1, 2000, (iv) any finished goods for
which no sales are forecast in the Company's sales plan, (v) any finished goods
not salable in the ordinary course of business at the Company's published prices
without additional manufacturing or packaging cost, (vi) any finished goods that
are "remnant", and (vii) any raw materials, work-in-process or finished goods
that, as a result of any
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judgment, order, decree or settlement relating to product labeling or otherwise,
may not be used in current product formulation. All inventory has been stored,
shipped and otherwise handled in compliance in all material respects with all
applicable federal and state law, rules and regulations (including, without
limitation those promulgated by the U.S. Food and Drug Administration ("FDA")).
SECTION 3.20. FINDERS' FEES. There is no investment banker, broker,
finder or other intermediary that has been retained by or is authorized to act
on behalf of the Company or Stockholder who might be entitled to any fee or
commission from Parent or any of its subsidiaries or the Company or Stockholder
upon consummation of the Merger.
SECTION 3.21. EMPLOYEE BENEFIT PLANS. Except as set forth in Schedule
3.21 neither the Company nor any Person that together with the Company would be
treated as a single employer under Section 414 of the Code (an "ERISA
AFFILIATE") has established or maintains or is obligated to make contributions
to or under or otherwise participate in (a) any bonus or other type of incentive
compensation plan, program, agreement, policy, commitment, contract or
arrangement (whether or not set forth in a written document), (b) any pension,
profit-sharing, retirement or other plan, program or arrangement, or (c) any
other employee benefit plan, fund or program, including, but not limited to,
those described in Section 3(3) of the Employment Retirement Income Security Act
of 1974, as amended ("ERISA"). All such plans (individually, a "PLAN" and
collectively, the "Plans") have been operated and administered in all material
respects in accordance with, as applicable, ERISA, and the Code, and the related
rules and regulations adopted by those federal agencies responsible for the
administration of such laws. No act or failure to act by the Company has
resulted in, nor does Stockholder have knowledge of a "prohibited transaction"
(as defined in ERISA) with respect to the Plans that is not subject to a
statutory or regulatory exception. No "reportable event" (as defined in ERISA)
has occurred with respect to any of the Plans which is subject to Title IV of
ERISA. At the Effective Time, the fair market value of the assets of any Plan
which is subject to Title IV of ERISA will exceed the present value of all
benefits accrued under such Title IV Plan, determined on a termination basis
using assumptions established by the Pension Benefit Guaranty Commission as in
effect on that date. Neither the Company nor any ERISA Affiliate has (i) engaged
in, or is a successor or parent corporation to an entity that has engaged in, a
transaction described in Section 4069 of ERISA, or (ii) incurred, or reasonably
expects to incur prior to the Effective Time, any liability under Title IV of
ERISA arising in connection with the termination of, or complete or partial
withdrawal from, any Plan covered or previously covered by Title IV or ERISA
that could become a liability of the Parent or Sub or any of their ERISA
Affiliates after the Effective Time. The Company has not previously made, is not
currently making, and is not obligated in any way to make, any contributions to
any multi-employer plan within the meaning of the Multi-Employer Pension Plan
Amendments Act of 1980.
SECTION 3.22. TAXES. (a) The term "TAXES" as used herein means all
federal, state, local, foreign and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs duties, or other
taxes, fees, assessments or other charges of any kind whatever, together with
any interest and any penalties, additions to tax or additional amounts with
respect thereto. The term "RETURNS" as used herein, means all returns,
declarations, reports, statements and other documents required to be filed in
respect of Taxes, and "RETURN" means any one of the foregoing returns. All
citations to the Code, or the Treasury regulations promulgated thereunder, shall
include any amendments or any substitute or successor provisions thereto.
(b) The Company has filed all Returns required to be filed and
has paid all Taxes owed (whether or not shown as due on such Returns),
including, without limitation, all Taxes that the Company is obligated to
withhold for amounts owing to employees, creditors and third parties. All such
Returns were complete and correct in all material respects. All Taxes with
respect to which the Company has
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become obligated have been paid and adequate reserves have been established for
all Taxes accrued but not yet payable (including any Taxes arising out of the
transactions contemplated by this Agreement). To the knowledge of Stockholder,
no issues have been raised (and are currently pending) by any taxing authority
in connection with any of the Returns. No waivers of statutes of limitation with
respect to any of the Returns have been given by or requested from the Company.
All deficiencies asserted or assessments made as a result of any examinations
have been fully paid, or are fully reflected as a liability in the financial
statements of the Company, or are being contested and an adequate reserve
therefor has been established and is fully reflected in the financial statements
of the Company. There are no liens for Taxes (other than for current Taxes not
yet due and payable) upon the assets of the Company. All material elections with
respect to Taxes affecting the Company, as of the date hereof, are set forth in
the financial statements of the Company, or are annexed hereto in Schedule 3.22.
The Company is not a party to any agreement, contract, arrangement or plan that
has resulted or would result, separately or in the aggregate, (i) in the payment
of any "excess parachute payments" within the meaning of Section 280G of the
Code (without regard to the exception in Sections 280G(b)(4) and 280G(b)(5) of
the Code) or (ii) in any payment which would not be deductible under Sections
162 and 404 of the Code. The Company has not agreed to make any adjustment under
Section 481(a) of the Code (or any similar provision of law or regulations) by
reason of a change in accounting method or otherwise, and the Company will not
be required to make any such adjustment as a result of the transactions set
forth in this Agreement. The Company does not have and has not had a permanent
establishment in any foreign country, as defined in any applicable Tax treaty or
convention between the United States of America and such foreign country. The
Company does not own any interest in any entity which is characterized as a
partnership for federal, state, local, foreign or other Tax purposes. The
Company is not and has not been a United States real property holding
corporation during the applicable period specified in Section 897(c)(1)(A)(ii).
The Company has not participated in or cooperated with any international
boycott, within the meaning of Section 999 of the Code.
(c) Set forth on Schedule 3.22 is a complete and accurate
description of the Company's (i) tax basis in its assets, (ii) tax elections,
(iii) methods of accounting, and (iv) agreements with respect to Taxes.
(d) The Company has never filed a consent pursuant to Section
341(f) of the Code, relating to collapsible corporations. The Company is a
corporation taxed under Subchapter C of Chapter 1 of the Code. Neither the
Company nor any predecessor has ever (i) been a party to any merger or
consolidation nor acquired substantially all of the assets of any Person (other
than the purchase of the Company by Stockholder on June 18, 1997), (ii) adopted
a plan of liquidation, or (iii) made any election under Section 936 or 992 of
the Code. There will be no tax imposed by Section 1374 of the Code and any
corresponding provisions of the laws of the State of Ohio or any other
applicable Governmental Authority in connection with the Merger.
(e) The Stockholder hereby individually represents that it has
timely filed all Returns with respect to Taxes required to be paid by a
Stockholder attributable to items of income, gain, deductions, losses and
credits of the Company, and has timely paid all such Taxes (whether or not shown
on such Returns); there has not been any audit of any Return filed by such
Stockholder, or to Stockholder's knowledge, any previous shareholder of the
Company, with respect to, or which may relate to, items of income, gain,
deduction, loss or credit of the Company; no such audit of any such Stockholder
is in progress and such Stockholder has not been notified by any Governmental
Authority that any such audit is contemplated or pending.
SECTION 3.23. ENVIRONMENTAL MATTERS. Except as set forth in Schedule
3.23, and except in all cases as, in the aggregate, have not had and could not
reasonably be expected to have a Material
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Adverse Effect, the Company: (i) has obtained all approvals which are required
to be obtained under all applicable federal, state, foreign or local laws or any
regulation, code, plan, order, decree, judgment, notice or demand letter issued,
entered, promulgated or approved thereunder relating to pollution or protection
of the environment, including laws relating to emissions, discharges, releases
or threatened releases of pollutants, contaminants, or hazardous or toxic
materials or wastes into ambient air, surface water, ground water, or land or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of pollutants, contaminants or
hazardous or toxic materials or wastes by the Company or its agents
("ENVIRONMENTAL LAWS"); (ii) are in compliance in all material respects with all
terms and conditions of such required approvals, and also are in compliance in
all material respects with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in applicable Environmental Laws; (iii) as of the date hereof,
Stockholder is not aware and neither Stockholder nor the Company has received
notice of any past or present violations of Environmental Laws or any event,
condition, circumstance, activity, practice, incident, action or plan which is
reasonably likely to interfere with or prevent continued compliance with or
which would give rise to any material common law or statutory liability, or
otherwise form the basis of any material claim, action, suit or proceeding,
against the Company based on or resulting from the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge or release into the environment, of any pollutant,
contaminant or hazardous or toxic material or waste; and (iv) has taken all
actions necessary under applicable Environmental Laws to register any products
or materials required to be registered by the Company (or any of their
respective agents) thereunder.
SECTION 3.24. INTELLECTUAL PROPERTY. Schedule 3.24 lists all Intellectual
Property Rights owned and/or used by the Company in the conduct of its business.
The Company owns or has a valid license to use from third parties such
Intellectual Property Rights. To the best knowledge of the Stockholder, the
Company's Intellectual Property Rights do not violate, infringe upon or
misappropriate the Intellectual Property Rights of any Person where such
violation or infringement would have a Material Adverse Effect. "INTELLECTUAL
PROPERTY RIGHT" means any trademark, service mark, registration thereof or
application for registration therefor, trade name, invention, patent, patent
application, trade secret, know-how, copyright, copyright registration,
application for copyright registration, or any other similar type of proprietary
intellectual property right, in each case which is owned or licensed by the
Company and used or held for use by the Company.
SECTION 3.25 [RESERVED.]
SECTION 3.26. CERTAIN FDA MATTERS. (a) Neither the Company nor Stockholder
has made any untrue statement of a material fact or fraudulent statement to the
FDA, failed to disclose a fact required to be disclosed to FDA, or committed any
act, made any statement, or failed to make any statement that could provide a
basis for FDA to invoke its policy respecting "Fraud, Untrue Statements of
Material Facts, Bribery, and Illegal Gratuities," set forth in 56 Fed. Reg.
46191 (September 10, 1991).
(b) Stockholder has provided to Parent for review, all
correspondence to or from FDA, the U.S. Drug Enforcement Agency ("DEA") and any
other state agency regulating the affairs of the Company (the "LOCAL AGENCIES"),
minutes of meetings with FDA, the DEA and any Local Agency, any existing written
reports of phone conversations, visits or other contracts with FDA, the DEA, and
any Local Agency, notices of inspectional observations, establishment inspection
reports, and all other documents in its possession concerning communications to
or from FDA, the DEA and any Local Agency, (including without limitation any
Form 482's issued by the FDA), or prepared by FDA, the DEA and any Local Agency
which bear in any way on the Company's compliance with FDA, DEA and state
regulatory requirements.
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(c) Stockholder has provided to Parent for review all documents
reflecting conclusions, opinions, or suggestions of Company or Stockholder
officers, employees, or agents, in-house or outside attorneys, or outside
consultants, which bear in any way on the Company's compliance with FDA, DEA and
state regulatory requirements.
(d) Stockholder is not aware of any information, whether or not in
written form, that it has not provided in the course of the review, which bears
in any way on the Company's compliance with FDA, DEA and state regulatory
requirements.
SECTION 3.27. TITLE. Except as set forth on Schedule 3.27, Stockholder
hereby represents and warrants that it is the sole record and beneficial owner
of, and has good, valid and marketable title to, all of the Outstanding Shares,
free and clear of any and all liens, security interests, pledges, encumbrances,
claims, equities, defects in title, rights and other restrictions of any nature
on transfer or voting held by any third party (collectively "ENCUMBRANCES").
Stockholder represents and warrants that the performance by it of its
obligations hereunder will be effective to transfer good, valid and marketable
title to the shares to be sold by it hereunder, free and clear of any and all
Encumbrances, other than those that may be imposed under federal or state
securities laws, and that the consummation of the transactions herein
contemplated will not result in a breach or default of the terms and provisions
of any stockholder agreement, stock pledge, guaranty, loan or other agreement to
which Stockholder is a party, or of any order, rule or regulation of any court,
regulation body or administrative agency applicable to Stockholder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub hereby jointly and severally represent and warrant to
the Company and the Stockholder as follows:
SECTION 4.1. CORPORATE EXISTENCE AND POWER. Each of Parent and Sub is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite power and authority to own,
lease or operate its properties and assets and to carry on its business as now
being conducted. Each of Parent and Sub is duly qualified to do business and is
in good standing in each jurisdiction where the character of the property owned
or leased by it or the nature of its activities makes such qualification
necessary, other than in such jurisdictions where the failure to be so qualified
would not, individually or in the aggregate, have a Material Adverse Effect on
Parent. Each of Parent and Sub has heretofore made available to Stockholder true
and complete copies its Certificate of Incorporation and By-Laws, as amended to
date and as currently in effect.
SECTION 4.2. CORPORATE AUTHORIZATION. The execution, delivery and
performance by Parent and Sub of this Agreement and the consummation by Parent
and Sub of the Merger and the other transactions contemplated by this Agreement
are within the corporate power and authority of Parent and Sub and have been
duly authorized by all necessary corporate action.
SECTION 4.3. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Parent and Sub of this Agreement and the consummation by Parent
and Sub of the Merger and the other transactions contemplated by this Agreement,
do not and will not require any consent, approval or action by or in respect of,
or any declaration, filing or registration with a Governmental Authority, other
than (i) routine filings with the Secretary of State of Delaware and the
Secretary of State of Ohio necessary to consummate the Merger, and (ii) such
filings or notifications that would not prevent or delay consummation of any of
the transactions contemplated hereby in any material respect, or otherwise
prevent Parent or Sub from performing its obligations under this Agreement in
any material respect.
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SECTION 4.4. NON-CONTRAVENTION. The execution, delivery and performance
by Parent and Sub of this Agreement and the consummation by Parent and Sub of
the Merger and other transactions contemplated by this Agreement do not and will
not, with or without the giving of notice, the lapse of time or both: (i)
contravene or conflict with the Certificate of Incorporation or By-Laws of
Parent or any of its subsidiaries, (ii) assuming compliance with the matters
referred to in Section 4.3, contravene or conflict with or constitute a
violation of any provision of any law, rule, regulation, judgment, injunction,
order or decree currently in effect and binding upon or applicable to Parent or
any of its subsidiaries or any of their respective properties, (iii) require any
consent, approval or other action by any Person, contravene or conflict with or
constitute a violation of or a default under, or give rise to any right of
termination, cancellation or acceleration of any right or obligation of Parent
or any of its subsidiaries or to a loss of any benefit to which Parent or any of
its subsidiaries is entitled, under any material provision of (A) any agreement
binding upon Parent or any of its subsidiaries, or (B) assuming compliance with
the matters referred to in Section 4.3, any license, franchise, permit or other
similar authorization held by Parent or any of its subsidiaries, or (iv) create
or result in any Lien on any asset of Parent or any of its subsidiaries, except
in the case of clauses (ii), (iii) and (iv), for such matters as would not have
a Material Adverse Effect on Parent.
SECTION 4.5. CAPITALIZATION. The authorized capital stock of Parent is
(i) 1,000,000 shares of preferred stock, par value $.001 per share, although no
shares of preferred stock were issued and outstanding or held in the treasury of
Parent as of the date hereof, and (ii) 50,000,000 shares of Common Stock, of
which 20,600,834 shares are issued and outstanding and no shares are held in the
treasury of Parent. There are reserved for issuance pursuant to Parent's various
stock plans and option agreements (the "PARENT PLANS") an aggregate of up to
3,500,000 shares of Common Stock, of which options to purchase 392,000 have been
granted or are currently outstanding. Except as provided in the immediately
preceding sentence of this Section 4.5, there are no outstanding options,
warrants, calls, rights, commitments or agreements to which Parent is a party or
by which Parent is bound obligating Parent to (x) issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
Parent or (y) grant, extend or enter into any such option, warrant, call, right,
commitment or agreement.
(b) The authorized capital stock of Sub consists of 100 shares
of Common Stock, par value $.01 per share, all of which shares are issued and
outstanding and owned of record by Parent. All issued and outstanding shares of
Common Stock, par value $.01 per share, of Sub are validly issued, fully paid
and nonassessable, and have not been issued in violation of any preemptive,
first refusal or other subscription rights of any stockholder of Sub or any
other Person.
SECTION 4.6. LEGAL PROCEEDINGS. There is no action, suit, investigation
or other proceeding pending or, to the knowledge of Parent, threatened against
or relating to Parent or any of its subsidiaries or any of their respective
properties or businesses, or the transactions contemplated by this Agreement
which may have a Material Adverse Effect, and, to the knowledge of the Parent,
no basis for any action exists.
SECTION 4.7. COMPLIANCE WITH LAWS. Neither Parent nor any of its
subsidiaries has violated, or is in violation of, any applicable laws,
regulations and ordinances relating to its business and operations, or any
judgment, order or injunction, and to Parent's knowledge, there is no pending
inspection or investigation relating to any violation thereof, except for
violations which have not had, and (if determined adversely to Parent and its
subsidiaries) could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent.
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SECTION 4.8. BOARD RECOMMENDATION. The Board of Directors of each of
Parent and Sub, at a meeting duly called and held, has by the vote of those
directors present determined that this Agreement and the transactions
contemplated hereby, including the Merger and the other agreements and
arrangements contemplated hereby and thereby, taken together, are fair to and in
the best interests of the stockholders of Parent and Sub and has approved the
same.
SECTION 4.9. FINDERS' FEES. There is no investment banker, broker,
finder or other intermediary that has been retained by or is authorized to act
on behalf of Parent or Sub who might be entitled to any fee or commission from
the Parent or any of its subsidiaries upon consummation of the Merger and the
other transactions contemplated hereby.
SECTION 4.10. [RESERVED.]
SECTION 4.11. INTERIM OPERATIONS OF SUB. Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby and has not engaged
in any business activities or conducted any operations other than in connection
with the transactions contemplated hereby.
ARTICLE V
COVENANTS OF ALL PARTIES
Each of the parties hereto hereby covenants and agrees with the other
parties as follows:
SECTION 5.1. COOPERATION. It shall cooperate fully with the other
parties hereto in furnishing any information or performing any action reasonably
requested by any such party, which information or action is necessary to the
speedy and successful consummation of the transactions contemplated by this
Agreement or is necessary, appropriate or desirable for the respective corporate
purposes of Parent, Sub, the Company or Stockholder.
SECTION 5.2. OTHER REQUIRED INFORMATION. It shall furnish to the other
parties hereto any application or statement, and all information concerning
itself and its Affiliates as is required to be set forth in any application or
statement to be filed with any Governmental Authority in connection with the
transactions contemplated by this Agreement. "AFFILIATE" means, with respect to
a specified Person, any Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, the
Person specified.
SECTION 5.3. CONFIDENTIALITY. (a) All information furnished by one
party (the "DISCLOSING PARTY") to any other party (the "RECEIVING PARTY") in
connection with this Agreement and the transactions contemplated hereby shall be
kept confidential by the receiving party (and shall be used by it only in
connection with this Agreement and the transactions contemplated hereby), except
to the extent that such information (i) is or becomes generally available to the
public other than as a direct or indirect result of disclosure by the receiving
party (or any of its directors, officers, employees, agents, advisors or
Affiliates (the "AGENTS")), (ii) was within the possession of the receiving
party prior to its being furnished to the receiving party by or on behalf of the
disclosing party (provided that the source of such information is not known by
the receiving party to be bound by a confidentiality agreement with or other
contractual, legal or fiduciary obligation of confidentiality to the disclosing
party or any other Person with respect to such information), (iii) becomes
available to the receiving party on a non-confidential basis from a source other
than the disclosing party or any of its Agents (provided that such source is not
known by the receiving party to be bound by a confidentiality agreement with or
other contractual, legal or fiduciary obligation of
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confidentiality to the disclosing party or any other Person with respect to such
information), or (iv) is required to be disclosed in any document filed with the
SEC or any other Governmental Authority.
(b) If the receiving party or any of its Agents is requested
or required (by oral questions, interrogatories, requests for information or
documents in legal proceedings, subpoena, civil investigative demand or other
similar process) to disclose any of the confidential information, the receiving
party shall use all reasonable efforts to provide the disclosing party with
prompt written notice of any such request or requirement so that the disclosing
party may seek a protective order or other appropriate remedy and/or waive
compliance with the provisions of this Agreement. If, in the absence of a
protective order or other remedy or the receipt of a waiver by the disclosing
party, the receiving party or any of its Agents are nonetheless, based on the
advice of counsel, required to disclose confidential information to any tribunal
or else stand liable for contempt or suffer other censure or penalty, the
receiving party or its Agents may, without liability hereunder, disclose to such
tribunal only that portion of the confidential information which such counsel
advises the receiving party is legally required to be disclosed. The receiving
party shall exercise its best efforts to preserve the confidentiality of the
confidential information, including by cooperating with the disclosing party to
obtain an appropriate protective order or other reliable assurance that
confidential treatment will be accorded the confidential information by such
tribunal.
(c) If the transactions contemplated by this Agreement shall
fail to be consummated, the receiving party shall promptly cause all copies of
documents or extracts thereof containing information and data as to the
disclosing party to be returned to the disclosing party.
SECTION 5.4. PUBLIC ANNOUNCEMENTS. Parent and Sub, on the one hand, and
Stockholder and the Company, on the other hand, will consult with each other
before issuing, and provide each other the opportunity to review and comment
upon, any press release or other public statements with respect to the
transactions contemplated by this Agreement, and shall not issue any such press
release or make any such public statement prior to such consultation, except
upon the advice of counsel that such a release is required by or is appropriate
under applicable law, policy or regulation of the SEC, court process or by
obligations pursuant to any listing agreement with any national securities
exchange or national securities quotation system.
SECTION 5.5. MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the
terms and conditions provided in this Agreement, each party shall use all
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, appropriate or desirable under
applicable laws and regulations to consummate the transactions contemplated by
this Agreement. Each party shall, and shall cause each of its Affiliates to, use
their respective reasonable efforts to obtain consents of all third parties and
Governmental Authorities necessary, appropriate or desirable for the
consummation of the transactions contemplated by this Agreement.
SECTION 5.6. BEST EFFORTS AND FURTHER ASSURANCES. Each of the parties
to this Agreement shall use its best efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby. Subject to its further rights under this Agreement, each
party shall use all reasonable efforts to cause the Closing to occur at the
earliest practicable time.
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ARTICLE VI
COVENANTS OF THE STOCKHOLDER AND THE COMPANY
The Stockholder and the Company hereby covenant and agrees with Parent
and Sub that, from and after the date hereof to the Closing Date (except as to
Section 6.11 which covenant shall survive after the Closing Date):
SECTION 6.1. PRESERVATION OF BUSINESS ORGANIZATION. The Company and
Stockholder shall use all reasonable efforts to preserve without material
impairment and the Company's business organization and goodwill as to suppliers,
distributors, clients and others having business relations with the Company.
SECTION 6.2. CARRY ON IN REGULAR COURSE. The Company and Stockholder
shall carry on the business of the Company in the ordinary and usual course in a
manner consistent with its past practices. Notwithstanding the foregoing,
neither the Company nor Stockholder shall, directly or indirectly, do, or
propose to do or make any commitment or obligation, with respect to (i) any act
or activity referenced in Section 3.12(a) - (q), or (ii) enter into any
agreement, undertaking or commitment to do any of the foregoing without the
prior written consent of Parent, which shall not be unreasonably withheld or
delayed, or except as specifically provided for in Section 6.2(b).
(b) Between the date hereof and the Closing, the Company may make
contributions to the 401(k) accounts of the Company's employees consistent with
its 401(k) plan and past practice. In no event shall the Company pay out any
extraordinary or additional bonuses nor shall the Company incur any
indebtedness, other than indebtedness incurred in the ordinary course of
business.
SECTION 6.3. CONSENTS. Stockholder and the Company shall use all
reasonable efforts to obtain consents in writing to the transactions
contemplated by this Agreement and/or such amendments, assignments or
modifications of such documents or instruments as may be required so that the
transactions contemplated by this Agreement shall not result in any default with
respect to any law, rule, regulation, order, decree, license, agreement or
commitment to which the Company is a party or its assets are bound.
SECTION 6.4. STOCKHOLDERS MEETINGS. Each of the Stockholder and the
Company shall, as soon as practicable, duly call, give notice of, convene and
hold a stockholders meeting for purposes of approving this Agreement, the Merger
and the transactions contemplated hereby and thereby, or, if permitted under
Ohio Law, as to Stockholder, Stockholder shall approve this Agreement and the
Merger by unanimous written consent.
SECTION 6.5. ACCESS. The Company and the Stockholder shall (i) permit
officers, employees, agents, attorneys and accountants and other Persons
designated by Parent full access (after reasonable notice to Stockholder) during
normal business hours to the properties, books, contracts, commitments, tax
returns, examination reports and surveys of Governmental Authorities (including
the IRS) and other records of the Company, and (ii) furnish to such designees of
Parent such financial and operating data and other information relating to the
assets and business of the Company as such designees may reasonably request.
Unless prohibited by law or contract, such designees of Parent shall be
furnished with accurate and complete copies of such contracts, commitments and
other books and records and all other information with respect to the assets and
business of the Company as such designees may reasonably request. The Company
and the Stockholder shall cause its respective employees, accountants,
attorneys, financial advisors and other agents or representatives to cooperate
with Parent in its due diligence investigation. From the date hereof until the
Effective Time, Parent and Stockholder shall confer on a
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regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations.
SECTION 6.6. DOCUMENTS AND INFORMATION TO BE FURNISHED. Prior to the
Closing, the Stockholder shall deliver to Parent promptly after such documents
are available the Company's unaudited monthly financial reports and all other
documents, financial statements, budgets, proxy or information statements,
reports, correspondence, notices and other items the Company delivers, or is
required to deliver, to any of its stockholders or directors.
SECTION 6.7. NOTICES OF CERTAIN EVENTS. Stockholder and the Company
shall promptly notify Parent of: (i) any notice or other communication from any
Person alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement, which consent
has not otherwise been disclosed to Parent pursuant to this Agreement; (ii) any
notice or other communication from any Governmental Authority in connection with
the transactions contemplated by this Agreement; (iii) any action, suit, claim,
investigation or proceeding commenced relating to or involving or otherwise
affecting the Company or Stockholder that, if it had existed on the date of this
Agreement, would have been required to have been disclosed pursuant to this
Agreement, or that relates to the consummation of the transactions contemplated
by this Agreement; or (iv) any matter arising or discovered after the date of
this Agreement that, if existing or known on the date of this Agreement, would
have been required to be disclosed pursuant to this Agreement, or that
constitutes a breach or prospective breach of this Agreement by the Company or
Stockholder.
SECTION 6.8. ACCURACY OF REPRESENTATIONS AND WARRANTIES. Neither the
Stockholder nor the Company shall take or agree or commit to take any action (or
omit to take any action) that would make any representation and warranty of the
Stockholder in this Agreement inaccurate in any material respect as of the
Closing Date.
SECTION 6.9. NO SOLICITATION. From and after the date of this Agreement
until the earlier of the Effective Time or termination of this Agreement
pursuant to its terms, the Company and the Stockholder shall not, and will
instruct its respective directors, officers, employees, representatives,
investment bankers, agents and Affiliates not to, directly or indirectly,
initiate, solicit, encourage or participate in discussions with, provide
information to, or approve transactions with, any Person or group concerning any
merger, purchase or sale of business combination assets, sale of shares of
capital stock (or securities convertible or exchangeable or otherwise
evidencing, or any agreement or instrument evidencing, the right to acquire
capital stock) or similar business combination involving the Company (all such
transactions being referred to herein as "ACQUISITION PROPOSALS"). The Company
and Stockholder will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. The Stockholder and the Company will (i) notify Parent
as promptly as practicable if any inquiry or proposal is made or any information
or access is requested in writing in connection with an Acquisition Proposal or
potential Acquisition Proposal and (ii) as promptly as practicable, notify
Parent of the significant terms and conditions of any such Acquisition Proposal.
In addition, subject to the other provisions of this Section 6.9, from and after
the date of this Agreement until the earlier of the Effective Time and
termination of this Agreement pursuant to its terms, the Company and Stockholder
will not, and will instruct their respective directors, officers, employees,
investment bankers, agents and Affiliates not to, directly or indirectly, make
or authorize any public statement, recommendation or solicitation in support of
any Acquisition Proposal made by any Person or group.
SECTION 6.10. NON-DISTURBANCE AGREEMENT. Each of the Company and
Stockholder shall use its best efforts to obtain and deliver to Parent an
agreement from each holder of any mortgage or deed of trust affecting the
properties in which the Company has a leasehold interest, which provides that if
such
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holder forecloses such mortgage or deed of trust (or takes a deed in lieu of
foreclosure or otherwise succeeds to the rights of the landlord thereunder) or
otherwise exercises its rights, such holder shall (i) not disturb the Surviving
Corporation's occupancy under its Lease, (ii) shall not join the Surviving
Corporation in any foreclosure actions, and (iii) shall be bound by the
obligations of the landlord under the Lease between the Surviving Corporation
and the landlord, in each case for so long as the Surviving Corporation
continues to honor and fulfill in all material respects its obligations under
the Lease.
SECTION 6.11. SECTION 338(H)(10) ELECTION. At the Parent's option, the
Stockholder will join with Parent and Sub in making an election under Code
338(h)(10) of the Code (and any corresponding election under state, local, and
foreign tax law) with respect to the purchase and sale of the Company Common
Stock hereunder (a "SECTION 338(H)(10) ELECTION"). The Stockholder will include
any income, gain, loss, deduction, or other tax item resulting from the Section
338(h)(10) Election on its tax returns to the extent required by applicable law.
The Stockholder shall also pay any tax imposed on the Company attributable to
the making of the Section 338(h)(10) Election, including, but not limited to,
(i) any tax imposed under Code Section 1374, (ii) any tax imposed under Reg.
1.338(h)(10)-1(e)(5), or (iii) any state, local or foreign tax imposed on the
Company's gain, and the Stockholder shall indemnify Parent, Sub and the Company
against any adverse consequences arising out of any failure to pay any such
taxes.
SECTION 6.12. ACQUISITION PROPOSALS. (a) Neither the Company nor the
Stockholder shall (whether directly or indirectly through advisors, agents or
other intermediaries), nor shall the Company or the Stockholder authorize or
permit any of its or their officers, directors, employees, agents,
representatives, advisors or subsidiaries to (i) solicit, initiate or take any
action knowingly to facilitate or encourage the submission of inquiries,
proposals or offers from any person (other than Sub or Parent) relating to (A)
any acquisition or purchase of any of the assets of the Company or of any class
of equity securities of the Company, (B) any tender offer (including a self
tender offer) or exchange offers, (C) any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving the Company other than the
transactions contemplated by this Agreement, or (D) any other transaction the
consummation of which would or could reasonably be expected to impede, interfere
with, prevent or materially delay the Merger (individually, "TRANSACTION
PROPOSAL"; collectively, "TRANSACTION PROPOSALS"), or agree to or endorse any
Transaction Proposal, or (ii) enter into or participate in any discussions,
negotiations or agreements regarding any Transaction Proposal, or furnish to any
other person any information with respect to its business, properties or assets
or any of the foregoing, or otherwise cooperate in any way with, or knowingly
assist or participate in, facilitate or encourage, any effort or attempt by any
other person (other than Sub or Parent) to do or seek any of the foregoing;
provided, however, that the foregoing shall not prohibit the Company or the
Stockholder (either directly or indirectly through advisors, agents or other
intermediaries) from, prior to the approval of the stockholders of the
Stockholder (A) furnishing information pursuant to an appropriate
confidentiality letter concerning the Company and its businesses, properties or
assets to a third party who has made a bona fide Transaction Proposal, (B)
engaging in discussions or negotiations with such a third party who has made a
bona fide Transaction Proposal, (C) following receipt of a bona fide Transaction
Proposal, taking and disclosing to its stockholders a position contemplated by
Rule 14d-9 or Rule 14e-2(a) under the Exchange Act or otherwise making
disclosure to its stockholders, or (D) taking any action required to be taken by
the Company or the Stockholder pursuant to a non-appealable, final order by any
court of competent jurisdiction, but in each case referred to in the foregoing
clauses (A) through (D) or Section 6.12(b) only to the extent that a majority of
the disinterested members of the Board of Directors of the Stockholder shall
have concluded in good faith on the basis of written advice (or advice confirmed
in writing) from outside counsel that the failure to take such action would be
contrary to the fiduciary duties of the Board of Directors of the Stockholder to
the stockholders of the Stockholder under applicable law; provided, further,
that, to the extent that it may do so without acting in a manner contrary to its
fiduciary duties under applicable law, the Board of Directors of the Stockholder
shall not take any of the foregoing actions referred to in clauses (i) through
(iii) and Section 6.12(b) until after reasonable
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notice to Parent with respect to such action and that such Board of Directors
shall continue to advise Parent after taking such proposal and the identity of
the person making it.
(b) Except as expressly permitted by this Section 6.12,
neither the Board of Directors of the Stockholder, nor any committee thereof
shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Parent, the approval or recommendation by such Board of
Directors or such committee of the Merger or this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any Transaction
Proposal, or (iii) cause the Company or the Stockholder to enter into any letter
of intent, agreement in principle, acquisition agreement or other similar
agreement (each, a "COMPANY ACQUISITION AGREEMENT") related to any Transaction
Proposal. Notwithstanding the foregoing, in the event that at any time prior to
the approval of the stockholders of the Stockholder the Board of Directors of
the Stockholder determines in good faith, after consultation with outside
counsel, that it is necessary to do so in order to comply with its fiduciary
duties to it's stockholders under applicable law, the Board of Directors of the
Stockholder may (subject to this and the following sentences) terminate this
Agreement pursuant to Section 9.1(i) and 9.4 (and concurrently with or after
such termination, if it so chooses, cause the Company and the Stockholder to
enter into any Company Acquisition Agreement with respect to any New Proposal),
but only at a time that is prior to the approval of the stockholders of the
Stockholder and is after the later of (x) the third business day following
Parent's receipt of written notice advising Parent that the Board of Directors
of the Stockholder is prepared to accept a New Proposal, specifying the material
terms and conditions of such New Proposal and identifying the person making such
New Proposal and (y) in the event of any amendment to the price or any material
term of a New Proposal, one business day following Parent's receipt of written
notice containing the material terms of such amendment, including any change in
price (it being understood that each further amendment to the price or any
material terms of the New Proposal shall require an additional one business day
period prior to which the Company or the Stockholder can take such action). For
purposes of this Agreement, a "New Proposal" means any proposal made by a third
party (i) to acquire, directly or indirectly, including pursuant to a tender
offer, exchange offer, merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction, for
consideration consisting of cash and/or securities, more than 50% of the
combined voting power of the shares of Company Common Stock then outstanding or
all or substantially all the assets of the Company, (ii) that is otherwise on
terms which the Board of Directors of the Stockholder determines in its good
faith judgment (based on the advice of a reputable financial advisor) to be more
favorable to the Stockholder's stockholders than the Merger, and (iii) for which
financing, to the extent required, is then committed or which, in the good faith
judgment of the Board of Directors of the Stockholder, is reasonably capable of
being obtained by such third party.
ARTICLE VII
COVENANTS OF PARENT AND SUB
Parent and Sub hereby covenant and agree with the Company and
Stockholder as follows:
SECTION 7.1. PRESERVATION OF BUSINESS ORGANIZATION. Prior to the
Closing, Parent and Sub shall use all reasonable efforts to cause to preserve
without material impairment the business organization of Parent and Sub and
their goodwill as to payors, providers, suppliers, distributors, clients and
others having business relations with Parent and Sub.
SECTION 7.2. CONSENTS. Parent and Sub shall use all reasonable efforts
to obtain consents in writing to the transactions contemplated by this Agreement
and/or such amendments, assignments or modifications of such agreements as may
be required so that the transactions contemplated by this Agreement shall not
result in any default with respect to any law, rule, regulation, order, decree,
license,
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agreement or commitment to which Parent or Sub is a party or by which any of
their respective assets is bound.
SECTION 7.3. NOTICES OF CERTAIN EVENTS. Prior to Closing, Parent shall
promptly notify the Stockholder and the Company of: (i) any notice or other
communication from any Person alleging that the consent of such Person is or may
be required in connection with the transactions contemplated by this Agreement,
which consent has not otherwise been obtained or disclosed to the Company
pursuant to this Agreement; (ii) any notice or other communication from any
Governmental Authority in connection with the transactions contemplated by this
Agreement; (iii) any action, suit, claim, investigation or proceeding commenced
relating to or involving or otherwise affecting Parent or any of its
subsidiaries that, if it had existed on the date of this Agreement, would have
been required to have been disclosed pursuant to this Agreement, or that relates
to the consummation of the transactions contemplated by this Agreement; or (iv)
any matter arising or discovered after the date hereof that, if existing or
known on the date of this Agreement, would have been required to be disclosed
pursuant to this Agreement, or that constitutes a breach or prospective breach
of this Agreement by Parent or Sub.
SECTION 7.4. ACCURACY OF REPRESENTATIONS AND WARRANTIES. Parent and Sub
shall not take or agree or commit to take any action (or omit to take any
action) that would make any representation and warranty of Parent or Sub in this
Agreement inaccurate in any material respect as of the Closing Date.
SECTION 7.5. DOCUMENTS AND INFORMATION TO BE FURNISHED. Prior to the
Closing, Parent shall deliver to Stockholder promptly after such documents are
available all documents, financial statements, proxy or information statements,
reports, correspondence, notices and other items it delivers, or is required to
deliver, to its stockholders as a group.
SECTION 7.6. INDEMNIFICATION. Subject to applicable law, Parent shall
and shall cause the Surviving Corporation to honor and fulfill in all respects
the obligations of the Company pursuant to indemnification agreements with the
Company's directors and officers existing at or before the Effective Time.
SECTION 7.7. NON-SOLICITATION. If the transactions contemplated by this
Agreement are not consummated, Parent and its Affiliates shall not, for a period
of one year from the date of this Agreement, directly or indirectly solicit any
employee of the Company to terminate such employee's employment with the
Company. Nothing herein shall prevent Parent from hiring any such employee
provided Parent has not violated the first sentence of this Section 7.7.
SECTION 7.8. COMPLIANCE WITH LEASE TERMS. Parent shall cause the
Surviving Corporation to honor and fulfill in all respects the obligations of
the Surviving Corporation pursuant to the Lease.
ARTICLE VIII
CONDITIONS OF CLOSING
SECTION 8.1. CONDITIONS TO OBLIGATIONS OF PARENT, SUB, STOCKHOLDER AND
THE COMPANY. The obligations of each of the parties hereto under this Agreement
to consummate the Merger and the other transactions to be consummated at the
Closing are subject to the satisfaction or waiver of the following conditions:
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(a) STOCKHOLDER APPROVALS. This Agreement and the Merger shall
have been adopted and approved by the stockholders of the Company and the
Stockholder as required by applicable state law.
(b) GOVERNMENTAL APPROVALS. Parent, Sub, Stockholder and the
Company shall have received all approvals or requirements of Governmental
Authorities to permit the consummation of the transactions contemplated by this
Agreement and to permit Parent and Sub to own the assets of, and to operate the
businesses of, the Company after the Closing. Each such approval shall be in
form and substance reasonably satisfactory to Parent and shall remain in full
force and effect at the Closing Date.
(c) LITIGATION; INJUNCTIONS. No action, suit, litigation,
injunction, restraining order, proceeding or investigation shall (i) have been
instituted and be pending, or (ii) be threatened by any Person or Governmental
Authority, which would materially and adversely affect the Merger and the other
transactions contemplated by this Agreement. On the Closing Date, there shall
not be in force any proceeding, order or decree restraining or enjoining
consummation of the Merger or the other transactions contemplated by this
Agreement, or placing any limitation upon such consummation or to invalidate,
suspend or require modification of any provision of this Agreement.
SECTION 8.2. ADDITIONAL CONDITIONS APPLICABLE TO PARENT AND SUB. The
obligations of Parent and Sub under this Agreement to consummate the Merger and
the other transactions contemplated by this Agreement are subject to the
satisfaction or waiver of the following conditions:
(a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants
and conditions of this Agreement to be complied with and performed by the
Company and/or Stockholder on or before the Closing Date shall have been
complied with and performed in all material respects.
(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Stockholder set forth in this Agreement
shall be true and correct in all material respects as of the Closing Date with
the same force and effect as if such representations and warranties were made
anew at and as of the Closing Date, except: (i) to the extent such
representations and warranties are by their express provisions made as of the
date of this Agreement or another specified date; and (ii) for the effect of any
activities or transactions which may have taken place after the date of this
Agreement which are expressly contemplated by this Agreement in order to effect
the transactions contemplated by this Agreement.
(c) NO MATERIAL ADVERSE CHANGE. Since the date of this
Agreement, there shall have been no material adverse change in the business,
assets, results of operations, prospects or financial condition of the Company,
other than as a result of events or conditions affecting the generic drug
industry generally or general economic conditions.
(d) CLOSING CERTIFICATES. Parent shall have received
certificates dated the Closing Date, signed by the chief executive officer and
the chief financial officer of the Company or such officer of the Company or the
Stockholder as the parties shall agree, to the effect that the conditions set
forth in Sections 8.2(a) through 8.2(c) have been satisfied.
(e) OPINION OF STOCKHOLDER AND COMPANY COUNSEL. Parent and Sub
shall have received from counsel to Stockholder and the Company an opinion dated
the Closing Date with respect to
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matters reasonably requested by Parent, which shall be in form and substance
reasonably satisfactory to Parent.
(f) REQUIRED CONSENTS. The holders of any note, guarantee or
other evidence of indebtedness (whether for money borrowed or otherwise) of any
of the Company, the lessors of any material real or personal property or assets
leased by the Company, the parties to any commitment or agreement to which the
Company is a party which is material to the conduct of the Company's business,
and any other Person (other than Governmental Authorities) which owns or has
authority to grant any material franchise, license, permit, easement, rights or
other authorization necessary for the business or operations of the Company, to
the extent that their consent or approval of the transactions contemplated by
this Agreement is required under the pertinent lease, contract, commitment or
agreement or other document or instrument or under applicable laws, rules or
regulations for the consummation of the transactions contemplated, including but
not limited to the consent of Finova and Argosy to the assumption of the senior
subordinated debt of the Stockholder, shall have granted such consent or
approval and no condition to such consent or approval shall exist which is
materially adverse to the conduct of the Company's business or results in
additional material obligations to Parent.
(g) EQUITY FINANCING OF PARENT. Parent shall have received not
less than $4,500,000 of equity capital.
(h) LINE OF CREDIT. Parent shall have received a line of
credit in an amount equal to or exceeding $12,500,000.
(i) TAX MATTERS. The Stockholder shall have provided to Parent
a clearance certificate or similar document that may be required by any state
taxing authority and a properly executed Form W-8 or W-9, as applicable.
(j) CONSENT OF LANDLORD. The Stockholder shall have delivered
to Parent a consent of SPC Properties Limited to the Merger and the other
transactions contemplated by this Agreement, which consent shall contain
representations that no Event of Default, as defined in the Commercial Lease
Agreement dated March 9, 1995 between SPC Properties Limited and the Company, as
amended, has occurred or is continuing and that no condition exists that, with
the passage of time, will become an Event of Default.
SECTION 8.3. ADDITIONAL CONDITIONS APPLICABLE TO THE STOCKHOLDER AND
THE COMPANY. The obligations of the Stockholder and/or the Company under this
Agreement to consummate the Merger and the other transactions contemplated to be
consummated at the Closing are subject to the satisfaction or waiver of the
following conditions:
(a) PERFORMANCE OF THIS AGREEMENT. All the terms, covenants
and conditions of this Agreement to be complied with and performed by Parent and
Sub on or before the Closing Date shall have been complied with and performed in
all material respects.
(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of Parent and Sub set forth in this Agreement
shall have been true and correct as of the Closing Date with the same force and
effect as if such representations and warranties were made anew at and as of the
Closing Date, except: (i) to the extent such representations and warranties are
by their express provisions made as of the date of this Agreement or another
specified date; and (ii) for the effect of any activities or transactions which
may have taken place after the date of this Agreement which are expressly
contemplated by this Agreement in order to effect the transactions contemplated
by this Agreement.
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(c) OFFICERS' CERTIFICATE. The Stockholder shall have received
a certificate dated the Closing Date, signed by the chief executive officer of
Parent, to the effect that the conditions set forth in Sections 8.3(a) and (b)
hereof have been satisfied.
(d) OPINION OF PARENT COUNSEL. The Company shall have received
from counsel to Parent and Sub an opinion dated the Closing Date with respect to
matters reasonably requested by the Company, which shall be in form and
substance reasonably satisfactory to the Company.
(e) REQUIRED CONSENTS. Parent and Sub shall have received all
material consents or approvals of the Merger or any other transactions
contemplated by this Agreement required under any material commitment or
evidence of indebtedness of Parent or any of its subsidiaries, or any lease of
any material real property of Parent and its subsidiaries, or under applicable
law for the consummation of the transactions contemplated hereby.
(f) CLOSING CERTIFICATES. Stockholder shall have received
certificates dated the Closing Date, signed by the chief executive officer and
the chief financial officer of the Company, to the effect that the conditions
set forth in Sections 8.2(a) through 8.2(c) have been satisfied.
ARTICLE IX
TERMINATION
SECTION 9.1. TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the Stockholder:
(a) by written mutual consent of Parent and Stockholder for
any reason, or by mutual action of their respective Boards of Directors;
(b) at the option of Parent, by written notice from Parent to
the Company if (i) a material breach by the Stockholder or the Company of any of
its representations, warranties or agreements contained in this Agreement
occurs, (ii) Parent has notified the Stockholder and the Company in writing of
the existence of such breach, and (iii) the Stockholder and the Company has
failed to cure such breach within ten (10) days after receiving such notice (or
if such breach is not capable of being cured within such ten (10) day period,
but is capable of being cured within thirty (30) days, the breaching party shall
have commenced good faith steps to promptly cure such breach);
(c) at the option of the Company or the Stockholder, by
written notice from the Stockholder to Parent if (i) a material breach by Parent
or Sub of any of their representations, warranties or agreements contained in
this Agreement occurs, (ii) the Company has notified Parent and Sub in writing
of the existence of such breach, and (iii) Parent and Sub have failed to cure
such breach within ten (10) days after receiving such notice (or if such breach
is not capable of being cured within such ten (10) day period, but is capable of
being cured within thirty (30) days, the breaching party shall have commenced
good faith steps to promptly cure such breach);
(d) at the option of Parent, by Parent if the Stockholder or
the Company (or either of their respective stockholders) fails to approve any
matter required to be approved by the Stockholder or the Company in order to
consummate the transactions contemplated by this Agreement by November 30, 2000;
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(e) by either Parent or Stockholder if a court of competent
jurisdiction or governmental, regulatory or administrative agency shall have
issued a non-appealable final order, decree or ruling or taken any other action,
in each case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(f) at the option of Parent, by Parent if there shall have
occurred a Material Adverse Change with respect to the Company;
(g) by Stockholder if the Closing has not occurred by November
30, 2000 if the sole reason for the failure to close is due to Parent having
failed to satisfy either of the conditions to Closing set forth in Sections
8.2(g) or 8.2(h);
(h) by Parent, if the results of Parent's due diligence
investigation of the Company and its business prove unsatisfactory in any
material respect; or
(i) at the option of the Company or the Stockholder, by the
Company or the Stockholder if this Agreement is terminated pursuant to Section
6.12 prior to the approval of this Agreement by the stockholders of the
Stockholder.
SECTION 9.2. SURVIVAL UPON TERMINATION. If this Agreement is
terminated, the agreements of the Company and Parent contained in Sections 5.3,
5.4, 9.1, 9.2 and 11.2 shall survive such termination.
SECTION 9.3. EFFECT OF TERMINATION. In the event of the termination of
this Agreement, nothing shall relieve any party from liability for any material
breach by any party hereof.
SECTION 9.4. CERTAIN REMEDIES UPON TERMINATION. If this Agreement is
terminated pursuant to Section 9.1(i), the Company shall pay to Parent within
five days of such termination, an amount in cash sufficient to reimburse Parent
and Sub for all reasonable expenses incurred in connection with attempting to
consummate the Merger and the other transactions contemplated hereby (including
without limitation reasonable legal, accounting and investment banking expenses)
(the "TRANSACTION EXPENSES") up to a maximum amount of $50,000; provided that
Parent shall provide reasonable evidence of the incurrence of such expenses.
ARTICLE X
SURVIVAL; INDEMNIFICATION
SECTION 10.1. SURVIVAL. The covenants, agreements, representations and
warranties of the Parent, and the Stockholder contained in this Agreement shall
survive the Closing until the earlier of (i) the second anniversary of the
Closing or (ii) the release by Parent of audited financial statements that
include the combined operations of the Surviving Corporation and the Parent for
the year ended December 31, 2001. Notwithstanding the preceding sentences, any
covenant, agreement, claim, representation or warranty in respect of which a
claim of indemnity may be sought under Section 10.2 shall survive the time at
which it would otherwise terminate pursuant to the preceding sentences, if
notice of the inaccuracy or breach thereof giving rise to such right to a claim
of indemnity shall have been given to the party against whom such indemnity may
be sought prior to such time, and any obligation of indemnity shall survive
until such claim of indemnity is resolved.
SECTION 10.2. MUTUAL INDEMNIFICATION. (a) By its approval of this
Agreement, the Stockholder agrees to indemnify, defend, protect, and hold
harmless each of Parent, Sub and the
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Surviving Corporation (each in its capacity as an indemnified party, and for
purposes of this paragraph, an "INDEMNITEE"), and shall reimburse the Indemnitee
for, at all times from and after the date of this Agreement from and against all
claims, damages, losses, liabilities, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses (including specifically, but
without limitation, reasonable attorneys' fees and expenses of investigation)
(collectively "DAMAGES") incurred by such Indemnitee as a result of or incident
to (i) any breach of any representation or warranty of the Stockholder set forth
herein, or in any other document delivered in connection herewith or with
respect to which a claim for indemnification is brought by an Indemnitee within
the survival period described in Section 10.1, (ii) any breach or nonfulfillment
by the Company or the Stockholder, or any noncompliance by the Company or the
Stockholder with, any covenant, agreement, or obligation contained herein or
other document delivered in connection herewith, except to the extent waived by
Parent, or (iii) any claim by a current or former stockholder of the Company or
any other person, firm, corporation or entity, seeking to assert, or based upon:
(A) ownership or rights of ownership to any shares of capital stock of the
Company; (B) any rights of the stockholder (other than the right to receive the
Merger Consideration pursuant to this Agreement), including any option,
preemptive rights, or rights to notice or to vote; (C) any rights under the
charter or bylaws of the Company; (D) any claim that his, her or its shares were
wrongfully repurchased by the Company, regardless of whether an action, suit or
proceeding can or has been made against the Company or (E) the claims set forth
in Schedule 3.13 and any similar claims that may be subsequently filed.
(b) Parent agrees to indemnify the Stockholder (for purposes
of this paragraph, in its capacity as an indemnified party, an "INDEMNITEE") and
shall reimburse the Indemnitee for all Damages incurred by such Indemnitee as a
result of or incident to (i) any breach of any representation or warranty of
Parent set forth herein, or in any other document delivered in connection
herewith or with respect to which a claim for indemnification is brought by the
Company or the Stockholder as an Indemnitee within the applicable survival
period described in Section 10.1, or (ii) any breach or nonfulfillment by Parent
or any noncompliance by Parent with any covenant, agreement or obligation
contained herein required to be performed or other document delivered in
connection herewith, except to the extent waived by the Stockholder.
SECTION 10.3. THIRD PERSON CLAIMS. Promptly after an Indemnitee has
received notice of or has knowledge of any claim by a person not a party to this
Agreement ("THIRD PERSON") or the commencement of any action or proceeding by a
Third Person, the Indemnitee shall, as a condition precedent to a claim with
respect thereto being made under this Agreement, give the Stockholder or Parent,
as the case may be, (for purposes of this paragraph, each an "INDEMNIFYING
PARTY") written notice of such claim or the commencement of such action or
proceeding; provided, however that the failure to give such notice will not
affect the Indemnitee's right to indemnification hereunder, except to the extent
that the Indemnifying Party been actually prejudiced as a result of such
failure. If the Indemnifying Party notifies the Indemnitee within thirty (30)
days from the receipt of the foregoing notice that the Indemnifying Party wishes
to defend against the claim by the Third Person, then the Indemnifying Party
shall have the right to assume and control the defense of the claim by
appropriate proceedings with counsel reasonably acceptable to the Indemnitee.
The Indemnitee may participate in the defense, at its sole expense, of any such
claim for which the Indemnifying Party shall have assumed the defense pursuant
to the preceding sentence, provided that counsel for the Indemnifying Party
shall act as lead counsel in all matters pertaining to the defense or settlement
of such claims, suit or proceedings; provided, however, that Indemnitee shall
control the defense of any claim or proceeding that in Indemnitee's reasonable
judgment could reasonably be expected to have a material and adverse effect on
Indemnitee's business apart from the payment of money damages. The Indemnitee
shall be entitled to indemnification for the reasonable fees and expenses of its
counsel for any period during which the Indemnifying Party has not assumed the
defense of any claim. Whether or not the Indemnifying Party shall have assumed
the defense of any claim, neither the Indemnitee nor the Indemnifying Party
shall make any settlement with
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respect to any such claim, suit or proceeding without the prior consent of the
other, which consent shall not be unreasonably withheld or delayed. It is
understood and agreed that in situations where failure to settle a claim
expeditiously would reasonably be expected to have an adverse effect on the
party wishing to settle, the failure of the other party to act upon a request
for consent to such settlement within ten (10) business days of receipt of
notice thereof shall be deemed to constitute consent to such settlement for
purposes of this Article X.
SECTION 10.4. LIMITATIONS ON INDEMNIFICATION. (a) No Indemnitee shall
be entitled to indemnification for Damages pursuant to Sections 10.2(a)(i) or
10.2(a)(ii) until the aggregate amount of Damages incurred exceeds $100,000 (the
"THRESHOLD"), and then shall be entitled only to the amount of Damages in excess
of the Threshold. All claims for Damages shall be net of, and offset by, any
insurance proceeds, reduction of tax liabilities or receipt of tax benefit
actually received by Parent or the Surviving Corporation that are attributable
to such Damages. Any liability for indemnification under this Article X shall be
reduced to the extent any Damages are reduced by such a recovery or reduction.
(b) The Stockholder's maximum aggregate liability for claims
made pursuant to Section 10.2(a)(i) and (ii) shall not exceed $4,000,000 in the
aggregate; provided, however, that such maximum aggregate liability shall be
increased, to not more than $6,248,875 in the aggregate, to the extent of each
claim representing a breach or non-fulfillment pursuant to Section 10.2(a)(i) or
10.2(a)(ii) that the Stockholder had knowledge of prior to the Closing (or after
reasonable inquiry and investigation, should have had knowledge of prior to the
Closing). The Parent's maximum aggregate liability for claims made pursuant to
Section 10.2(b) shall not exceed $4,000,000 in the aggregate.
(c) The limitations provided in Section 10.4(a) on the
Threshold and Section 10.4(b) regarding maximum aggregate liability and on an
Indemnitee's right to indemnification under this Article X shall not apply to
Damages for any matters set forth in Section 10.2(a)(iii) or any claim for
Damages under Sections 3.20, 3.22 and 3.27.
SECTION 10.5. [Reserved.]
SECTION 10.6. RESOLUTIONS OF CONFLICTS; ARBITRATION. The following
provisions shall apply with respect to the assertion of claims and the
indemnification provisions of this Article X.
(a) The Stockholder and Parent shall attempt promptly and in
good faith to agree upon the rights of the parties with respect to any disputed
claims. If the Stockholder and the Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and the
Stockholder shall satisfy the claim in accordance with the terms thereof.
(b) Any dispute or controversy concerning the indemnity
obligations of this Article X not agreed to by the parties pursuant to Section
10.6(a) shall be resolved in good faith by mediation among the Stockholder and
Parent. If such dispute can not be resolved by mediation within thirty (30)
days, then except for the right of either party to apply to a court of competent
jurisdiction for a temporary restraining order, preliminary injunction, or other
equitable relief to preserve the status quo or prevent irreparable harm pending
the selection and confirmation of an arbitrator, any continuing dispute,
controversy or claim arising out of, in connection with, or in relation to the
indemnity obligations under this Article X shall be settled by arbitration in
accordance with Section 10.6(c) below.
(c) If no agreement can be reached after good faith attempts
pursuant to Section 10.6(a) and 10.6(b) within ninety (90) days from the
commencement of any dispute or
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controversy, either Parent or the Stockholder may demand arbitration of the
matter unless the amount of the damage or loss is at issue in pending litigation
with a third party, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration; and in any such
event the matter shall be settled by arbitration conducted by a single
arbitrator mutually agreeable to the Stockholder and the Parent, or if a single
arbitrator cannot be agreed to by the parties within thirty (30) days, then by
three arbitrators. In the event of three arbitrators, Parent and the Stockholder
shall each select one arbitrator, and the two arbitrators so elected shall
select a third arbitrator. The decision of the arbitrators so selected as to the
validity and amount of any claim in dispute shall be binding and conclusive upon
the parties to this Agreement, and the parties shall act in accordance with such
decision and satisfy any such claim in accordance therewith. Judgment upon any
award rendered by the arbitrators may be entered in any court having
jurisdiction. Any mediation or arbitration shall be held in Boston,
Massachusetts. Any arbitration shall be conducted under the rules then in effect
of the American Arbitration Association, and shall be based on the provisions
and limitations of this Article X. The arbitrators shall have relevant
experience in the industry of the Company and, to the extent possible,
familiarity with acquisitions and business combinations. The parties agree to
compel the arbitrator(s) to resolve the arbitration within one hundred twenty
(120) days of the commencement of arbitration.
Notwithstanding anything contained herein to the contrary, no claim for
Damages, may be made until such claim is finally resolved pursuant to the
process and procedures set forth above in this Section.
SECTION 10.7 REMEDIES. The indemnification provisions of this Article X
are the sole and exclusive remedy of any party to this Agreement for a breach of
any representation, warranty or covenant contained herein, except with respect
to any claim based on intentional misrepresentation, fraud in the inducement, or
a similar theory. Notwithstanding the preceding sentence, from and after the
execution and delivery of this Agreement and until the Closing, each of the
parties acknowledges and agrees that the other parties hereto would be damaged
irreparably in the event any of the provisions of this Agreement are not
performed in accordance with their specific terms or otherwise are breached.
Accordingly, each of the parties hereto agrees the other parties hereto shall be
entitled to an injunction to prevent breaches of the provisions of this Article
X and to enforce specifically this Agreement and the terms and provisions of
Article X in any competent court having jurisdiction over the parties, in
addition to any other remedy to which they may be entitled at law or in equity.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. SPECIFIC PERFORMANCE. Each of the parties to this
Agreement hereby acknowledges that the other parties will have no adequate
remedy at law if it fails to perform any of its obligations under this
Agreement. In such event, each of the parties agrees that the other parties
shall have the right, in addition to any other rights it may have (whether at
law or in equity), to specific performance of this Agreement, except as set
forth to the contrary herein.
SECTION 11.2. EXPENSES. All costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expense.
SECTION 11.3. FURTHER ASSURANCES. If at any time after the Closing,
Parent or Sub shall consider it advisable that any further conveyance,
agreements, documents or instruments or any other things are necessary or
desirable to vest, perfect, confirm or record in the Surviving Corporation, the
title to any property, rights, privileges, powers and franchises of the Company,
the officers of the Company last in office and such other Persons, if any, as
the Board of Directors of the Company last in office may
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authorize, shall execute and deliver, upon Parent's reasonable request, any and
all proper conveyances, agreements, documents and instruments, and do all things
necessary or proper to vest, perfect, confirm or record title to such property,
rights, privileges, powers and franchises in the Surviving Corporation, and
otherwise to carry out the provisions of this Agreement.
SECTION 11.4. PARTIES IN INTEREST. All the terms and provisions of this
Agreement shall be binding upon, shall inure to the benefit of and shall be
enforceable by the respective successors and permitted assigns of the parties
hereto. Nothing expressed or implied in this Agreement is intended or shall be
construed to confer upon or give any Person other than the parties hereto, their
permitted successors or assigns, and their respective stockholders any rights or
remedies under or by reason of this Agreement or any transaction contemplated
hereby or thereby.
SECTION 11.5. ENTIRE AGREEMENT. This Agreement, together with the
Schedules hereto and thereto, supersede any other agreement, whether written or
oral, that may have been made or entered into by Parent, Sub, Stockholder and
the Company (or by any officers, directors, stockholders or partners of any of
such parties) relating to the matters contemplated hereby. This Agreement,
together with the Schedules hereto and thereto, constitute the entire agreement
by the parties, and there are no agreements or commitments except as set forth
herein or therein.
SECTION 11.6 AMENDMENT OR MODIFICATION. This Agreement may be amended
only with the written consent of Parent, Sub, the Company and Stockholder.
SECTION 11.7. WAIVER. Any party to this Agreement may, by written
notice to the other parties to this Agreement, (a) extend the time for the
performance of any of the obligations or other actions of the other parties for
its benefit under this Agreement; (b) waive any inaccuracies in the
representations or warranties of the other parties made to it contained in this
Agreement; (c) waive compliance with any of the conditions or covenants of the
other parties for its benefit contained in this Agreement; or (d) waive or
modify performance of any of the obligations of the other parties for its
benefit under this Agreement. Except as provided in the preceding sentence, no
action taken pursuant to this Agreement including any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants,
conditions or agreements contained in this Agreement. The failure of any party
hereto to enforce at any time any of the provisions of this Agreement shall in
no way be construed to be a waiver of any such provision, nor in any way to
affect the validity of this Agreement or any part hereof or thereof or the right
of such party thereafter to enforce each and every such provision. No waiver of
any breach of or non-compliance with this Agreement shall be held to be a waiver
of any other or subsequent breach or non-compliance.
SECTION 11.8. ASSIGNABILITY. Neither this Agreement nor any rights
hereunder shall be assignable, except (i) by the Company or Stockholder with the
prior written consent of Parent, or (ii) by Parent or by Sub with the prior
written consent of the Stockholder.
SECTION 11.9. HEADINGS AND INTERPRETATION. The headings contained in
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of this Agreement. Terms such as "HEREIN", "HEREOF",
"HEREINAFTER" refer to this Agreement in which they appear as a whole and not to
the particular sentence or paragraph where they appear, unless the context
otherwise requires. Unless the context otherwise requires, (i) terms used in the
plural include the singular, and vice versa, and (ii) words in the masculine
gender include the feminine, and vice versa. References in this Agreement to
Articles, Sections or the Schedules shall be to Articles, Sections or the
Schedules in this Agreement, unless otherwise indicated.
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SECTION 11.10. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be delivered by hand or overnight
courier service, mailed or sent by graphic scanning or other telegraphic
communications equipment of the sending party, as follows:
If to Parent or Sub:
RxBazaar.com, Inc.
11895 Kemper Springs Drive
Cincinnati, Ohio 45240-1635
Attention: President
Telecopy No.: 888-999-4368
with a copy to:
Chu, Ring & Hazel LLP
49 Melcher Street
Boston, MA 02210
Attention: Nina Ross, Esq.
Telecopy: (617) 443-9840
If to the Company or Stockholder:
Dynagen, Inc.
1000 Winter Street, Suite 2700
Waltham, Massachusetts 02451
Attention: President
Telecopy No.: 781-890-0118
with a copy to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attention: Gerard P. O'Connor, Esq.
Telecopy No.: (617) 832-7000
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt. All notices and other communications given to
any party hereto in accordance with the provisions of this Agreement shall be
deemed to have been given on the date of receipt if delivered by hand or
overnight courier service or sent by facsimile, or on the date five business
days after dispatch by certified or registered mail if mailed, in each case
delivered, sent or mailed (properly addressed) to such party as provided in this
Section 11.10 or in accordance with the latest unrevised direction from such
party given in accordance with this Section 11.10.
SECTION 11.11. LAW GOVERNING. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without giving effect to the principles of conflicts of law thereof.
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SECTION 11.12. INVALIDITY OF PROVISIONS. Each of the provisions
contained in this Agreement is distinct and severable and a declaration of
invalidity or unenforceability of any such provision or part thereof by a court
of competent jurisdiction shall not affect the validity or enforceability of any
other provision hereof or thereof.
SECTION 11.13. COUNTERPARTS. This Agreement may be executed
simultaneously in one or more counterparts, each of which shall be deemed to be
an original but all of which together shall constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Agreement and Plan of Merger has been duly
executed and delivered by the parties on the date first above written.
RXBAZAAR.COM, INC.
Attest:
_______________________________ By: Shikhar Ghosh
---------------------------------
Name: Shikhar Ghosh
Title: Director
RXBAZAAR.COM ACQUISITION CORP.
Attest:
_______________________________ By: Shikhar Ghosh
----------------------------------
Name: Shikhar Ghosh
Title: Director
SUPERIOR PHARMACEUTICAL COMPANY
Attest:
_______________________________ By: /s/ Dhananjay G. Wadekar
----------------------------------
Name: Dhananjay G. Wadekar
Title: Vice President
DYNAGEN, INC.
Attest:
_______________________________ By: /s/ Dhananjay G. Wadekar
----------------------------------
Name: Dhananjay G. Wadekar
Title: Executive Vice President
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OPINION OF CONTEXT CAPITAL GROUP
<PAGE>
=====================
CONTEXT CAPITAL GROUP
October 20, 2000
Board of Directors
DynaGen, Inc.
C/O Mr. Robert Cusick
1000 Winter Street, Suite 2700
Waltham, MA 02451
Dear Mr. Cusick:
We understand that DynaGen, Inc. (hereinafter "DynaGen" or the "Company") has
agreed to sell its wholly owned subsidiary Superior Pharmaceutical, Inc.
(hereinafter "Superior") to RxBazaar.com, Inc. (hereinafter "RxBazaar"). This
sale shall be referred to herein as the "Transaction." We understand that the
sale proceeds to DynaGen will be cash of $4,000,000 plus settlement of
inter-company payables/receivables of in excess of $6,100,000 plus assumption of
debt of $2,248,875. The total transaction is approximately $12,348,875 adjusted
for the inter-company payables/receivables.
You have requested our opinion (the "Opinion") as to the fairness of the
financial terms of the planned sale. The Opinion does not address the Company's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
selling Superior. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it. In rendering the
Opinion, we have assumed, with your consent, that the final executed form of the
Merger Agreement will not differ in any material respect from the draft that we
have examined, and that the Company and RxBazaar.com will comply with all the
material terms of the Agreement.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to stockholders and on Form 10-K
for the fiscal year ended December 31, 1999. Also, we have reviewed
Company-prepared interim financial statements for the 3-month periods
ended March 31, 2000 and June 30, 2000, which the Company's management
has identified as being the most current financial statements
available;
2. reviewed a copy of the Merger Agreement between DynaGen and RxBazaar.com;
3. held discussions with certain members of the senior management of the
DynaGen, Superior and RxBazaar, respectively, to discuss the
operations, financial condition, future prospects and projected
operations and performance of the DynaGen, Superior and RxBazaar, and
held discussions with representatives of the Company's independent
counsel to discuss certain matters;
4. visited certain facilities and business offices of Superior and RxBazaar;
5. reviewed forecasts and projections prepared by the Superior's
management for the years ended December 31, 2000 through 2003;
6. reviewed forecasts and projections prepared by RxBazaar's management
with for the years ended December 31, 2000 through 2003;
7. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
8. reviewed the Business Plan of RxBazaar
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to DynaGen, Superior and RxBazaar and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction;
B-1
One Penn Plaza, Suite 2134 New York, New York 10119
Tel: 212.760.1224 Fax: 212.760.1225 E-mail: [email protected]
<PAGE>
=====================
CONTEXT CAPITAL GROUP
10. reviewed drafts of certain documents to be delivered at the closing of
the Transaction; and
11. conducted such other studies, analyses and inquiries, as we have deemed
appropriate.
We have not assumed any responsibility for independent verification of any of
the foregoing information and have relied upon it being complete and accurate in
all material respects. We have relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to us have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of the Company, Superior and Rx
Bazaar after taking into effect the potential synergies and strategic benefits
anticipated to result from the Transaction, and that there has been no material
change in the assets, financial condition, business or prospects of the Company,
Superior and RxBazaar since the date of the most recent financial statements
made available to us. In addition, we have assumed with your approval that the
future financial results referred to above will be achieved at the times and in
the amounts projected by the management of the Company, Superior and Rx Bazaar.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company, Superior and Rx Bazaar
and do not assume any responsibility with respect to it. We have not made an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company, Superior and Rx Bazaar and were not furnished with
any evaluations or appraisals of the assets or liabilities (contingent or
otherwise) of the Company, Superior and Rx Bazaar. In particular, we have not
independently verified the future commercial viability of certain products and
technologies currently under development by the Company, Superior and Rx Bazaar
and therefore relied upon the best currently available estimates of management
of the Company, Superior and Rx Bazaar regarding the commercialization of such
products and technologies and the cash flows resulting there from. Our opinion
is necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
Furthermore, our advisory services and the Opinion expressed herein were
prepared for the use of the Company's Board of Directors.
Based upon and subject to the foregoing, and in reliance thereon, it is our
opinion that, as of the date hereof, the purchase price as set forth for
Superior by RxBazaar.com is fair to the Company from a financial point of view.
Best Regards,
/s/ Context Capital Group
Context Capital Group
B-2
One Penn Plaza, Suite 2134 New York, New York 10119
Tel: 212.760.1224 Fax: 212.760.1225 E-mail: [email protected]
<PAGE>
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 27, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF DYNAGEN, INC.
The undersigned stockholder of DynaGen, Inc., revoking all prior
proxies, hereby appoints F. Howard Schneider and Gerard P. O'Connor, or each of
them acting singly, proxies, with full power of substitution, to vote all shares
of capital stock of DynaGen which the undersigned is entitled to vote at the
special meeting of stockholders to be held at the offices of Foley, Hoag & Eliot
LLP, One Post Office Square, Boston, MA 02109 on November 27, 2000, beginning at
11:00 a.m. local time and at any adjournments thereof, upon matters set forth in
the notice of special meeting dated October 31, 2000 and the related proxy
statement, copies of which have been received by the undersigned, and in their
discretion upon any business that may properly come before the meeting or any
adjournments thereof. Attendance of the undersigned at the meeting or any
adjourned session thereof will not be deemed to revoke this proxy unless the
undersigned shall affirmatively indicate the intention of the undersigned to
vote the shares represented hereby in person prior to the exercise of this
proxy.
The undersigned hereby acknowledges receipt of a copy of the
accompanying notice of special meeting of stockholders and of the proxy
statement relating thereto, and hereby revokes any proxy or proxies heretofore
given. This proxy may be revoked at any time before it is exercised.
When properly executed, this proxy will be voted in the manner directed
herein by the undersigned. If no direction is given, this proxy will be voted
for proposals 1, 2 and 3 and in the discretion of the persons named as proxies
as to such other matters as may properly come before the meeting.
<PAGE>
1. To approve a proposal to sell DynaGen's Superior Pharmaceutical Company
subsidiary to RxBazaar.com, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To adjourn the special meeting if necessary to permit further solicitation
of proxies if there are not sufficient votes at the time of the special
meeting to approve Proposal No. 1.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To transact such other business as may properly come before the meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN WITH RESPECT TO THE PROPOSALS SET FORTH ABOVE, WILL BE VOTED
FOR SUCH PROPOSALS.
DATED:__________, 2000 Signature of Stockholder(s):_______________________
Print Name:________________________________________
Mark here if you plan to attend the meeting: [ ]
Mark here if your address has changed: [ ]
New address:_______________________________________
_______________________________________
Please promptly date and sign this proxy and mail it in the enclosed
envelope to assure representation of your shares. No postage need be affixed if
mailed in the United States. PLEASE SIGN EXACTLY AS NAME(S) APPEAR ON STOCK
CERTIFICATE. When shares are held by joint owners, both should sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such. If stockholder is a corporation, please sign full corporate
name by president or other authorized officer and, if a partnership, please sign
full partnership name by an authorized partner or other person.
