UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year Ended: December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-11055
Epigen, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 04-3120172
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
Tower Hill Lodge, North Tower Hill Road, PO Box L, Millbrook, NY 12545
(Address of Principal Executive Offices) (Zip Code)
(914) 677-5317
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------- ---------------------
Units, each consisting of two shares of Common Stock,
two Class A. Warrants and one Class B Warrant.............. None
Common Stock, par value $.0001 per share................... None
Class A Warrants........................................... None
Class B Warrants........................................... None
<PAGE>
Securities registered under Section 12(g) of the Exchange Act:
Not Applicable
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $0
On September 28, 1994, the last day the issuer's Common Stock was traded, the
aggregate market value (based upon the American Stock Exchange - Emerging
Company Marketplace last trade price before trading was halted) held by
non-affiliates was approximately $2,782,910.
The number of shares of Common Stock, $.0001 par value per share, outstanding as
of March 30, 1999 was 5,101,925, after giving effect to the 22 for 1 reverse
stock split to holders of record of the Company's Common Stock on September 3,
1997. All references herein to shares of Common Stock have been adjusted to give
effect to the reverse stock split.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual report on Form 10-KSB for the fiscal year ended December 31, 1995 -
Part II.
2. Annual report on Form 10-KSB for the fiscal year ended December 31, 1996 -
Parts II and III.
3. Information Statement on Schedule 14C dated August 9, 1997.
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
- ------------
Epigen, Inc. (the "Company") was incorporated in Delaware on April 24, 1991 to
become the successor to COD Associates, L.P. ("COD"), a Delaware limited
partnership. Effective May 1, 1991, in accordance with an assignment and
assumption agreement, all interests and rights of COD were assigned to, and
certain obligations and liabilities of COD were assumed by, the Company in
exchange for the issuance of shares of the Company's Common Stock to the
partners of COD.
The Company is developing products to monitor, diagnose and treat cancer in a
more effective, less expensive and less invasive manner than other products
currently available. If approved for sale by the appropriate regulatory
authorities, these products will utilize the Company's proprietary Human
Carcinoma Antigen ("HCA") and its proprietary monoclonal antibody ("mAb")
technology to detect, monitor and treat carcinomas. The Company's products are
all based on proprietary technology developed first at Massachusetts General
Hospital ("MGH") and then further developed at Boston Biomedical Research
Institute ("BBRI") by Dr. John Codington.
The COD Test
- ------------
The Company has completed the basic development of an in vitro blood test
(outside the body) diagnostic blood test for cancer (the COD Test) that uses the
Company's technology. The COD Test will be used to monitor breast cancer, as a
confirmatory test for prostate cancer, and as a confirmatory test for breast
cancer. HCA is found in large quantities on the cell membrane surface of nearly
all carcinomas, and is generally absent in healthy cells.
A four-year clinical study at The Massachusetts General Hospital on 100 breast
cancer patients has just been completed. This study will reflect the efficacy of
Epigen's assay as a monitoring aid in following the progress of breast cancer
patients. Because HCA is a tumor associated antigen, there is a direct
correlation between tumor burden and the amount of antigen found in the blood.
This test should reflect the patients response to therapy and detect residual or
recurring cancer.
Prostate Cancer
- ---------------
A clinical study on 400 patients in collaboration with a major biopharmaceutical
company has been completed. This study has demonstrated the ability of this
assay to distinguish between BPH (benign hyperplasia) and cancer.
The Company is currently negotiating strategic alliances with pharmaceutical
companies to manufacture and market this product on an exclusive worldwide
basis.
1
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The Company's strategic partner, once in place, will assume the responsibility
for regulatory approvals in the United States, Europe, and Japan, and will
conduct the necessary clinical trials required to seek approval for use of the
COD Test as a confirmatory test for prostate and breast cancer, a monitoring aid
for breast cancer, and other specific tests for lung, ovarian, and colorectal
cancers.
In order for the COD Test to be commercially acceptable to potential users such
as hospitals and clinical laboratories, at a minimum it must be functionally
comparable to antigen-based blood tests currently used to monitor at least one
major category of carcinoma. Company data indicate that with advanced breast
cancer patients, the COD Test picks up abnormals (cancers) better than the
bio-markers used to monitor breast cancer patients. Company data further
indicate that the COD Test has lead time, i.e., it can predict a recurrence in
some cases up to eight months before the physician can clinically make that
determination. The Company believes that he COD Test may be superior to other
antigen-based blood tests for breast, prostate and colon cancer. The Company
also expects the COD Test to be relatively inexpensive, and to reduce the need
for subsequent imaging and biopsy procedures. At this time, any conclusion as to
whether the COD Test is superior or comparable to other tests is dependent upon
the results of prospective clinical trials.
The Company continues to seek funding for immediate development of new assays,
i.e., a specific test for cancer, a screen for ovarian cancer, a specific test
for colorectal cancer.
In Vivo Imaging Agent
- ---------------------
The Company also has a program to develop an in vivo (inside the body) imaging
agent designed to assist in the diagnosis and staging (i.e., determining whether
cancer has spread to other organs) of carcinoma patients. The in vivo imaging
agent consists of one of the Company's proprietary mAb's linked with a
radioactive label on the site of any epithelial tumor. Through the use of a
scintillation camera, the radioactive label should then be detectable and
displayable on a computer screen or hard copy similar to an X-ray. The resulting
images are expected to confirm the diagnosis of a carcinoma, to indicate whether
a tumor has metastasized, to locate the metastases and to be a post-operative
check to determine whether all cancer has been removed.
The FDA regulates in vivo imaging agents as biologicals which require full
clinical testing. An Investigational New Drug ("IND") application is required
before clinical trials can begin. Several of the components of this lengthy
document have been completed. This includes a cGMP manufacturing run with full
documentation and quality control viral testing for the mAb which will be
injected into the patients. Animal toxicology testing has demonstrated that this
is a safe product.
To help expedite the clinical trials of the in vivo imaging agent, the Company
will combine the first two phases (safety and dosimetry). The Company expects
that the Phase I/II human clinical trials will be conducted at the Columbia
Presbyterian Medical Center under the direction of a team including Dr. Philip
Alderson, Chairman of the Department of Radiology, Dr. Martin Oster,
2
<PAGE>
Associate Professor of Clinical Medicine and a Specialist in Oncology, Dr.
Rashid Fawwaz, Professor of Radiology, and Dr. Ronald VanHeertum, Professor of
Clinical Radiology. All are members of the Company's Scientific Advisory Board.
The Company does not have resources to complete the IND, test, manufacture and
market the in vivo imaging agent, and will seek to raise equity capital and to
enter into arrangements with third parties to fund the extensive clinical trials
required by the regulatory process in return for marketing rights to the
product.
Therapeutic Vaccine
- -------------------
The Company has developed a series of anti-idiotypic monoclonal antibodies for
use as a therapeutic vaccine to treat a broad range of human carcinomas,
including breast, lung, colon and prostate cancers. The objective of this
vaccine is to stimulate the body's immune system to attack carcinomas. If
successful, the vaccine would create an immune response through the creation of
antibodies that recognize HCA. It would be necessary for the Company initially
to rely on a contract manufacturer for the production of the vaccine and to seek
out strategic partners to fund the clinical trials and other aspects of the
regulatory process in return for the marketing rights to the vaccine.
Preliminary tests on mice have shown that when vaccinated with the Company's
anti-idiotypic monoclonal antibody and subsequently challenged with malignant
tumors, the mice lived a normal life. Mice which had not been vaccinated and so
challenged, die within two weeks.
The Company recently entered into a contract with Dr. Carl Olsson, Professor and
Chairman of the Development of Urology of Columbia Presbyterian Hospital, to
develop the therapeutic vaccine using his department's financial resources.
The initial application for the vaccine would be to use it as a "cleanup tool"
subsequent to the removal of a carcinoma, the thesis being that the vaccine
would kill the circulating cancer cells that cause the recurrence of a malignant
tumor. Enough biostatistical data are available from patients who have had
carcinomas removed at various stages and have had recurrences in two to three
years to establish the effectiveness of the vaccine within three years from
commencement of this study. As soon as the funding permits, the development of
this vaccine will begin at Columbia Presbyterian Hospital.
Impact of Regulation
- --------------------
Marketing the Company's products will be subject to prior regulatory clearance
for approval by the FDA and comparable agencies or other informal processes of
foreign countries, none of which has been obtained. The regulatory process in
the United States and abroad, including the required pre-clinical testing for
the in vivo imaging agent and therapeutic vaccine, differs for each product but
is generally lengthy and expensive. The strategic partner will be required to
demonstrate that it can manufacture these products in a reproducible manner,
that the products are safe in animal models and that there is a basis for
believing that they may be effective in
3
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humans prior to the start of clinical trials. For products which require full
clinical testing, trials are arranged to evaluate the product's pharmacological
actions and possible side effects (Phase I). If acceptable product safety is
demonstrated, the product is then tested for effectiveness in a well-controlled
study using a relatively small number of patients (Phase II). If Phase II is
successfully completed, the product is then subject to expanded, controlled and
uncontrolled, trials intended to gather additional information regarding the
product's safety and effectiveness. Only after the clinical trials are
successfully completed may the Company apply to the FDA for approval to market a
product.
While it is impossible at this time to predict the effect of the various health
care containment initiates currently under consideration by the United States
government and various participants in the private sector, it is virtually
certain that the Company and its products will be affected in some fashion.
Competition
- -----------
The pharmaceutical industry (including biopharmaceutical and diagnostics
companies) is characterized by rapidly evolving technology and by intensive
competition and research efforts. Many companies, research biotechnology
institutes and universities are working in biotechnology disciplines similar to
the Company's fields of endeavor and many of these entities have greater
resources of funding available to them. In addition, many Company and
universities are engaged in the development of, and may offer, products which
may be or are competitive with the Company's proposed products. There are
numerous competitors in this field, with no one company, research institute or
university being dominant. The principal method of competition for the Company
is expected to be product performance.
Employees and Consultants
- -------------------------
As of March 15, 1999, the Company had two full-time and one part-time employees,
two of whom have agreed to have part of their respective salaries accrue while
the Company seeks to raise additional equity capital and one of whom has agreed
to accept stock in lieu of salary.
The Company relies on a Scientific Advisory Board, currently consisting of
fourteen individuals having extensive collective experience in the fields of
organic chemistry, radiology, pathology, molecular genetics, oncology, nuclear
medicine, microbiology, immunology and biostatistics to review and evaluate the
Company's research programs, advise the Company with respect to evolving
technology and recommend personnel to the Company. The Company also retains
consultants to supervise and implement its scientific programs.
Research and Development
- ------------------------
The total dollar amount spent during 1997 and 1998 on research by the Company
was $542,992 and $242,506 respectively.
4
<PAGE>
Customers
- ---------
The Company is still in the development stage, will not have customers until a
license agreement is obtained with a strategic partner, and no material part of
the business of the Company is dependent upon a single customer or a very few
customers.
Raw Materials
- -------------
The raw materials for the Company's proposed products consist of standard
chemical, specially created murine mAb's and specifically created epiglycanin (a
murine antigen).
Intellectual Property Rights
- ----------------------------
The Company owns the worldwide rights to all of the mAb and HCA technology
developed at BBRI, in return for the payment to BBRI of a 5 to 6% royalty on net
sales, pursuant to an agreement with BBRI (the "BBRI Agreement"). These
royalties extend for the life of any patent which issues or 10 years after the
first commercial introduction in a country of a product covered by the
agreement, whichever is later. If a patent issues as a result of the research
being done at the University of Oslo, the Company is obligated to pay 1% royalty
to the University of Oslo on net sales for therapeutic products covered by the
patent. If this occurs, the royalty obligation to BBRI for the same covered
product is reduced to 4.5%. The Company will own the rights to all patents
resulting from Company sponsored research conducted at the University of Oslo
and at BBRI.
Effective June 1, 1993, the Company entered into an agreement with MGH to
reacquire exclusive United States rights (subject to the achievement of certain
objectives) to certain hybridoma cell lines and mAb's that may be used in
connection with the COD Test, in vivo imaging agent or therapeutic vaccine. The
agreement provides for royalty payments to MGH or 5% for sales of products using
such monoclonal antibodies in the United States during the life of the patent
and 2% outside the United States (where there is no patent protection) for eight
years following the first commercial sale. Pursuant to the BBRI Agreement, in
the event royalties are payable to MGH, the royalty payable to BBRI will be
reduced so that the total royalties payable to BBRI and MGH do not exceed 6%. On
June 12, 1995, MGH agreed to reduce royalty payments due pursuant to the June 1,
1993 agreement by 50%.
On January 30, 1997, Biotag, Inc. ("Biotag"), a company wholly owned by Donald
C. Fresne, entered into a Licensing Agreement with NKI to develop an IgG
antibody pursuant to which Biotag will receive exclusive life of patent (or if
no patent is issued, 20 year) licenses to all products resulting from NKI's
research. The Company has entered into a Research Support Agreement with Biotag
dated as of October 31, 1997, pursuant to which the Company will receive a
perpetual, worldwide exclusive sublicense to market any products resulting from
the work of NKI. The Company is obligated to pay an aggregate of $113,750 to
support the research conducted by NKI on the IgG antibody and to pay to NKI a
royalty equal to five percent (5%) of the net selling price of any such
products. In 1998, $60,000 was paid by the Company in connection with such
research.
5
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In February 1994, a continuation-in-part was filed in the United States, and
corresponding patent applications were also filed in certain foreign countries,
covering HCA, HCA antigens, HCA immunoassay and methods of imaging and therapy.
The COD Test, in vivo imaging agent and therapeutic vaccine are all covered
under these patent filings. The patent application process can be expected to
take several years and may entail considerable expense, without any assurance
that a significant patent or any patent will issue. On October 20, 1995 a Notice
of Allowance was received for a patent covering the COD Test, specifically an
assay to determine the presence of human carcinoma antigen (HCA) in a biological
sample. On September 15, 1998, the patent was issued for the HCA antigen.
Environmental Compliance
- ------------------------
The effective environmental compliance on the Company's operations is not
significant.
ITEM 2. PROPERTIES
The Company occupies an aggregate of approximately 2,000 square feet of rental
space in Millbrook, New York.
The Company leased office space of approximately 2,000 square feet in Millbrook,
New York from Donald C. Fresne, the Company's Chairman of the Board of
Directors. The Company leased this space on a month-to-month basis prior to May
1, 1991, and, effective on that data, entered into a three-year lease agreement
paying rent equal to the real estate taxes, insurance and utilities allocable
thereto. The Company believes that the terms of the lease are at least as
favorable as could have been obtained from a non-affiliated lessor. The Company
paid $23,453 in rent under the lease in 1994 and $15,820 in rent in 1995. On
April 14, 1994, Donald C. Fresne agreed effective immediately to terminate the
lease. Further, Donald C. Fresne agreed to waive all sums accrued and unpaid by
the Company under this lease from and after October 1, 1994 through April 14,
1995. On June 1, 1995, the Company agreed to reinstitute this lease under the
same terms and conditions as the previous lease, and the Company paid $33,000
and $36,000 in rent under the lease in each of 1997 and 1998, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a part to any pending legal proceedings, nor is any of the
Company's property subject to any such pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of the fiscal year covered by this report.
6
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, Units, Class A. Warrants and Class B Warrants were
traded on the American Stock Exchange Emerging Company Marketplace (AMEX/ECM)
under the symbols EPN.EC, EPN. EEC, EPN.WS.A.EC and EPN.WS.B.EC, respectively
through September 28, 1994 when trading was halted. In January 1995, the Company
consented to being delisted for failing to meet the minimum capital requirements
for continued listing. As of February 28, 1999, there were 271 holders of record
of the Company's Common Stock. The Company's Class A Warrants and Class B
Warrants expired unexercised on December 10, 1996. Since the Company's Stock has
not traded on any organized market system during the last two fiscal years,
reported prices for any trades are not available.
For information regarding the sale of unregistered securities by the Company
during the past three fiscal years, see "certain Relationships and Transactions"
herein and the Company's reports on Form 10-KSB for the fiscal years ended
December 31, 1996 and 1997, and Note 5 to the financial statements included
herein. The Company relied upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder in connection with such sales.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company presently is insolvent and unable to pay its debts as they become
due. The officers have agreed temporarily to allow part of their salaries to
accrue. Currently, liabilities exceed assets. Should a sufficient number of the
company's creditors pursue the obligations owed them, the Company might be
forced into a voluntary or involuntary bankruptcy.
The Company believes that it has optimized the COD Test sufficiently and has
produced enough compelling data indicating that this Test can be used as a
confirmatory test for prostate cancer, and to allow the Company to negotiate a
license agreement.
The Company does not presently have the resources to complete the development,
and conduct prospective clinical trials on new products. It has never been part
of the Company's strategy to market any of its products. The Company continues
to seek funding for future development of its products through certain potential
strategic partners and other sources of funding. The Company is pursuing a
license agreement with a major biopharmaceutical company provided, by inter
alia, that the biopharmaceutical company will be responsible for obtaining all
regulatory approvals in all the countries in which our product is to be sold.
Our partner will manufacture,
7
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market, and have the right to sublicense the technology. No assurances can be
made that the Company will be successful in negotiating such a license
agreement.
The Company continues to pursue its business plan to the extent resources
permit.
The Company, through collaborations with hospitals in the Northeast and a major
biopharmaceutical company, has completed a large clinical study on over 400
prostate cancer patients. The results were impressive. The Company is presently
engaged in discussions with several major biopharmaceutical companies that
should lead to license negotiations.
The Company has also entered into other collaborations with hospitals to develop
a confirmatory test for breast cancer. The hospitals are to collect serum
samples from patients who have positive mammograms and subsequent biopsies. This
will allow the Company to demonstrate the ability of the COD Test to
differentiate between cancer and normals, and confirm the presence of a
carcinoma. Mammograms have a 66% false positive rate. The COD Test should drop
this false positive rate to 5 - 10%. The Company believes from in-house
preliminary data that the COD Test should be a confirmatory test for breast
cancer. As soon as these data are available, a presentation will be made to
prospective strategic partners with the intent to license the technology. If
successful, this Test will reduce the need for sonograms and biopsies, and
reduce stress experienced by patients from false positives.
The Company has formed a collaboration with two thoracic surgeons at a New York
hospital to help develop a test for lung cancer.
There can be no assurance that such test results will yield sufficiently
positive results. The results of such tests and collaboration will determine to
a significant extent the Company's ability to promote potential strategic
alliances.
The Company does not anticipate using any significant funds for work on its
other products over the next 12 months. Research on its therapeutic vaccine at
Columbia Presbyterian Hospital under the auspices of Dr. Carl Olsson is on hold
until funding is available.. Work on the Company's in vivo imaging agent is
being delayed until sufficient funds are available to continue such work.
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 is shown in the Financial Statements and
Notes thereto.
8
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To Epigen, Inc.:
We have audited the accompanying balance sheet of Epigen, Inc. (a Delaware
corporation in the development stage, formed on April 24, 1991, which became the
successor entity to COD Associates, L.P., a Delaware limited partnership in the
development stage, on May 1, 1991) as of December 31, 1998, and the related
statements of operations, partners' deficit and stockholders' equity and cash
flows for the year then ended and for the period from inception (January 28,
1987) to December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of COD Associates, L.P. for the period from inception to December 31,
1987, and the Company's financial statements for the years ended December 31,
1990 through 1997. Such statements are included in the cumulative from inception
to December 31, 1998. Those statements were audited by other auditors whose
reports expressed unqualified opinions on those statements, and our opinion,
insofar as it relates to amounts for the period from inception to December 31,
1997, included in the cumulative totals, is based solely on the reports of the
other auditors.
We conducted our audit 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 audit and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Epigen, Inc. as of December 31, 1998, and the results
of its operation and its cash flows for the year then ended and from the period
to inception (January 28, 1987) to December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
which the Company expects to continue for the foreseeable future, that raise
substantial doubt about its ability to continue as a going concern. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KIRSHON, SHRON & CHERNICK, P.C.
Poughkeepsie, NY
March 25, 1999
F-1
<PAGE>
PAUL C. ROBERTS
Certified Public Accountant
87 Old Purchase Way
Edgartown, MA 02539
(508) 627-1042
INDEPENDENT AUDITOR'S REPORT
To Epigen, Inc.:
I have audited the accompanying balance sheets of Epigen, Inc. (a Delaware
corporation in the development stage, formed on April 24, 1991, which became the
successor entity to COD Associates, L.P., a Delaware limited partnership in the
development stage, on May 1, 1991) as of December 31, 1997 and 1996, and the
related statements of operations, partners' deficit and stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1997 and
for the period from inception (January 28, 1987) to December 31, 1997. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits. I did not audit the financial statements of COD Associates, L.P. for
the period from inception to December 31, 1989, and the Company's financial
statements for the years ended December 31, 1990, 1991 and 1992. Such statements
are included in the cumulative from inception to December 31, 1997. The total
net loss from inception to December 31, 1992 reflects 39% of the cumulative
total. Those statements were audited by other auditors whose reports expressed
unqualified opinions on those statements, and my opinion, insofar as it relates
to amounts for the period from inception to December 31, 1992, included in the
cumulative totals, is based solely on the reports of the other auditors.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audits and the reports of the other auditors provide a
reasonable basis for my opinion.
In my opinion, based on my audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Epigen, Inc. as of December 31, 1997 and 1996, and the
results of its operation and its cash flows for each of the two years in the
period ended December 31, 1997 and from the period to inception (January 28,
1987) to December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
which the Company expects to continue for the foreseeable future, that raise
substantial doubt about its ability to continue as a going concern. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Paul C. Roberts
Certified Public Accountant
May 17, 1998
F-2
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EPIGEN, INC.
(formerly COD Associates, L.P.)
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
December 31, December 31,
1998 1997
------------ ------------
Assets
Current Assets:
Cash and cash equivalents .................... $ 24,215 $ 64,809
------------ ------------
Total current assets ...................... 24,215 64,809
Office equipment, net of accumulated
depreciation of $41,043 in 1998 and
$35,727 in 1997 ............................... 28,022 4,203
Note receivable from an officer/stockholder .... -- 53,931
------------ ------------
$ 52,237 $ 122,943
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Note payable demand ........................... $ 145,805 $ 145,805
Notes payable - 25% interest .................. 200,000 225,000
Notes payable - prime plus 5% ................. 250,000 100,000
Accrued interest-notes payable ................ 150,697 39,367
Accrued direct research and development
costs ........................................ 430,973 405,781
Accrued professional fees ..................... 357,535 259,582
Accrued payroll ............................... 1,173,520 1,145,336
Other accrued expenses ........................ 368,749 267,866
------------ ------------
Total current liabilities ................. $ 3,077,279 2,588,737
------------ ------------
Stockholders' Equity:
Common stock $.001 par value - Authorized
50,000,000 shares, Issued and
outstanding - 4,786,925 and 2,768,836 shares
at December 31, 1998 and 1997 respectively .... 4,787 2,769
Additional paid-in capital .................... 15,484,456 14,610,377
Deficit accumulated during development
stage ........................................ (18,513,938) (17,078,593)
Less 5 shares of common stock held in
treasury, at cost ............................ (347) (347)
------------ ------------
Total stockholders' equity ................ (3,025,042) (2,465,794)
------------ ------------
$ 52,237 $ 122,943
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
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<TABLE>
EPIGEN, INC.
(formerly COD Associates, L.P.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<CAPTION>
Cumulative
from
Inception to
Years Ended December 31, December 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Licensing fees ............... $ -- $ -- $ 1,600 $ 1,600
Interest income .............. 7,384 3,713 -- 219,711
------------ ------------ ------------ ------------
7,384 3,713 1,600 221,311
------------ ------------ ------------ ------------
Operating Costs & Expenses:
Direct research and
development ................. 261,665 542,992 242,506 7,490,973
General and administrative ... 1,242,116 760,855 946,943 9,510,301
Fees due to General Partner
of the Predecessor and
affiliates, forgiven and
contributed to capital ...... -- -- -- 1,188,893
Interest expense, net ........ 92,227 104,889 247,496 545,082
------------ ------------ ------------ ------------
Total operating costs
and expenses ............ 1,596,008 1,408,736 1,436,945 18,735,249
------------ ------------ ------------ ------------
Net (loss) .................... (1,588,624) (1,405,023) $ (1,435,345) $(18,513,938)
============ ============ ============ ============
Net loss per common share ..... $ (3.59) $ (0.92) $ (0.37)
============ ============ ============
Weighted average
Number of shares of common
stock outstanding - see note 8 442,431 1,504,432 3,919,467
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
EPIGEN, INC.
(formerly COD Associates, L.P.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<CAPTION>
Cumulative
from
Inception to
December 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................. $ (1,588,624) $ (1,405,023) $ (1,435,345) $(18,513,938)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense .................... 7,114 4,195 5,316 101,989
Non-cash expenses paid in equity interest ................ 410,000 55,641 1,033 2,810,878
Non-cash compensation expense associated
with the grant of stock options and warrants ............ -- -- -- 427,964
Debt converted to equity .................................. -- 507,604 58,546 566,150
Changes in operating assets and liabilities:
Decrease(increase) in prepaid expenses .................... 863 -- -- --
Increase(decrease) in accrued direct
research and development costs ........................... (64,702) (22,323) 25,192 430,973
Increase(decrease) in accrued professional
fees ..................................................... 78,734 46,938 97,953 357,535
Increase(decrease) in accrued payroll ..................... 690,837 40,691 28,184 1,173,520
Increase(decrease) in accrued expenses to
affiliates, printing charges and other
expenses ................................................. 89,660 115,656 212,213 519,446
------------ ------------ ------------ ------------
Net cash used in operating activities ................. (376,118) (656,621) (1,006,908) (12,125,483)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of office equipment .............................. -- (4,904) (29,135) (73,060)
Purchase of treasury stock ................................ -- -- -- (347)
Decrease(increase) in note receivable from
an officer/shareholder ................................... (7,384) 31,797 53,931 --
Decrease(increase) in other assets ........................ -- -- -- (3,025)
Increase in organizational costs .......................... -- -- -- (53,925)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities ........................................... (7,384) 26,893 24,796 (130,357)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock .................... 220,000 125,000 816,518 9,147,650
Decrease(increase) in subscription
receivable ............................................... -- 100,000 -- --
Capital contributions ..................................... 2,141,600
Proceeds from issuance of preferred stock ................. 215,000 80,000 -- 395,000
Increase in note payable-demand ........................... -- -- -- 145,805
Net increase in note payable - other ...................... -- 325,000 125,000 450,000
------------ ------------ ------------ ------------
Net cash provided by financing activities ............. 435,000 630,000 941,518 12,280,055
------------ ------------ ------------ ------------
Net increase(decrease) in cash and cash
equivalents ............................................... 51,498 272 (40,594) 24,215
Cash and cash equivalents, beginning period ................ 13,039 64,537 64,809 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ................... $ 64,537 $ 64,809 $ 24,215 $ 24,215
============ ============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period ........................... $ -- $ -- $ -- $ 59,337
Income taxes paid during the period ....................... $ 456 $ 1,090 $ 1,712 $ 8,736
The accompanying notes are an integral part of these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
EPIGEN, INC.
(formerly COD Associates, L.P.)
(A Development Stage Company)
STATEMENTS OF PARTNERS' DEFICIT AND STOCKHOLDERS EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 28, 1987)
TO DECEMBER 31, 1998
<CAPTION>
Deficit
Accumulated
Preferred Preferred Common Common Additional During
Number of Stock Number of Stock Paid-in Development
Shares Amount Shares Amount Capital Stage
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contributions in cash ............ -- $ -- -- $ -- $ -- $
Net Loss ......................... -- -- -- -- -- (825,763)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1987 ......... -- -- -- -- -- (825,763)
Contribution in cash ............. -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- (1,043,528)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1988 ......... -- -- -- -- -- (1,869,291)
Contributions in cash, net of
distribution (Note 4) ........... -- -- -- -- -- --
Contributions of services ........ -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- (986,582)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1989 ......... -- -- -- -- -- (2,855,873)
Contributions of services ........ -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- (973,657)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1990 ......... -- -- -- -- -- (3,829,530)
Conversion from partnership
to corporation .................. -- -- 2,500,000 2,500 2,299,194 --
Conversion of accrued liabilities
to equity (Note 5) .............. -- -- -- -- 1,790,024 --
Contributions of Services
(Note 5) ........................ -- -- -- -- 317,917 --
Issuance of common stock ......... -- -- 2,169,668 2,170 5,230,435 --
Net loss ......................... -- -- -- -- -- (1,365,962)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1991 ......... -- -- 4,669,668 4,670 9,637,570 (5,195,492)
Purchase of treasury stock ....... -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- (1,486,513)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1992 ......... -- -- 4,669,668 4,670 9,637,570 (6,682,005)
Issuance of common stock, net
of issuance costs of $66,730 .... -- -- 458,667 458 362,812 --
Issuance of common stock in
exchange for services ........... -- -- 10,134 10 76,159 --
Compensation associated with
the grant of stock options ...... -- -- -- -- 159,039 --
Net loss ......................... -- -- -- -- -- (3,130,425)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1993 ......... -- -- 5,138,469 5,138 10,235,580 (9,812,430)
Issuance of common stock, net
of issuance costs of $180,670 ... -- -- 2,031,666 2,032 1,248,798 --
Issuance of common stock in
exchange for services ........... -- -- 741,083 741 429,486 --
Compensation associated with
grant of stock options .......... -- -- -- -- 268,925 --
Net loss ......................... -- -- -- -- -- (3,210,558)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 ......... -- -- 7,911,218 7,911 12,182,789 (13,022,988)
Issuance of preferred stock ...... 200,000 200 -- -- 99,800 --
Issuance common stock ............ -- -- 1,222,000 1,222 303,778 --
Issuance common stock for services -- -- 812,021 812 403,389 --
Escrow shares retired ............ -- -- (1,389,259) (1,389) 1,389 --
Net loss ......................... -- -- -- -- -- (1,061,958)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 ...... 200,000 $ 200 8,555,980 $ 8,556 $ 12,991,145 $(14,084,946)
Issuance of preferred stock ... 450,000 450 -- -- 214,550 --
Issuance of common stock ...... -- -- 880,000 880 219,120 --
Issuance common stock for ..... -- -- -- --
services ..................... -- -- 820,000 820 409,180 --
Net loss ...................... -- -- -- -- -- (1,588,624)
------------ ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1996 ...... 650,000 650 10,255,980 10,256 13,833,995 (15,673,570)
Issuance of preferred stock ... 400,000 400 -- -- 179,600 --
Issuance of common stock ...... -- -- 1,000,000 1,000 124,000 --
Conversion of preferred stock
to common stock .............. (850,000) (850) 3,400,000 3,400 (2,550) --
Cancellation of subscription
receivable ................... (200,000) (200) -- -- (99,800) --
Common shares issued in private
placement protection ......... -- -- 400,000 400 (400) --
Issuance common stock for
services ..................... -- -- 375,000 375 36,188 --
Debt converted to common shares -- -- 1,067,105 1,067 340,524 --
Stock bonuses ................. -- -- 19,078,000 19,078 -- --
One-for-twenty two reverse
stock split .................. -- -- (33,958,990) (33,959) 33,959 --
Common shares issued in private
placement protection ......... -- -- 13,181 13 (13) --
Stock bonuses ................. -- -- 900,000 900 -- --
Debt converted to common shares -- -- 126,060 126 164,874 --
Common shares issued with
notes payable ................ -- -- 112,500 113 -- --
Net loss ...................... -- -- -- -- -- (1,405,023)
------------ ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1997 ...... -- -- 2,768,836 2,769 14,610,377 (17,078,593)
------------ ------------ ----------- ------------ ------------ ------------
Issuance of common stock ...... 963,277 963 815,555 --
Stock bonuses ................. -- -- 1,032,802 1,033 -- --
Debt converted to common shares -- -- 22,010 22 58,524 --
Net loss ...................... -- -- -- -- -- (1,435,345)
------------ ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1998 ...... -- -- 4,786,925 $ 4,787 $ 15,484,456 $(18,513,938)
============ ============ =========== ============ ============ ============
<PAGE>
Total
Treasury Partner (Deficit)
Stock Contributions Equity
------------ ------------- -----------
Contributions in cash ............ $ -- $ 803,250 $ 803,250
Net Loss ......................... -- -- (825,763)
----------- ----------- -----------
Balance, December 31, 1987 ......... -- 803,250 (22,513)
Contribution in cash ............. -- 487,350 487,350
Net loss ......................... -- -- (1,043,528)
----------- ----------- -----------
Balance, December 31, 1988 ......... -- 1,290,600 (578,691)
Contributions in cash, net of
distribution (Note 4) ........... -- 851,000 851,000
Contributions of services ........ -- 73,194 73,194
Net loss ......................... -- -- (986,582)
----------- ----------- -----------
Balance, December 31, 1989 ......... -- 2,214,794 (641,079)
Contributions of services ........ -- 86,900 86,900
Net loss ......................... -- -- (973,657)
----------- ----------- -----------
Balance, December 31, 1990 ......... -- 2,301,694 (1,527,836)
Conversion from partnership
to corporation .................. -- (2,301,694) --
Conversion of accrued liabilities
to equity (Note 5) .............. -- -- 1,790,024
Contributions of Services
(Note 5) ........................ -- -- 317,917
Issuance of common stock ......... -- -- 5,232,605
Net loss ......................... -- -- (1,365,962)
----------- ----------- -----------
Balance, December 31, 1991 ......... -- -- 4,446,748
Purchase of treasury stock ....... (347) -- (347)
Net loss ......................... -- -- (1,486,513)
----------- ----------- -----------
Balance, December 31, 1992 ......... (347) -- 2,959,888
Issuance of common stock, net
of issuance costs of $66,730 .... -- -- 363,270
Issuance of common stock in
exchange for services ........... -- -- 76,169
Compensation associated with
the grant of stock options ...... -- -- 159,039
Net loss ......................... -- -- (3,130,425)
----------- ----------- -----------
Balance, December 31, 1993 ......... (347) -- 427,941
Issuance of common stock, net
of issuance costs of $180,670 ... -- -- 1,250,830
Issuance of common stock in
exchange for services ........... -- -- 430,227
Compensation associated with
grant of stock options .......... -- -- 268,925
Net loss ......................... -- -- (3,210,558)
----------- ----------- -----------
Balance, December 31, 1994 ......... (347) -- (832,635)
Issuance of preferred stock ...... -- -- 100,000
Issuance common stock ............ -- -- 305,000
Issuance common stock for services -- -- 404,201
Escrow shares retired ............ -- -- --
Net loss ......................... -- -- (1,061,958)
----------- ----------- -----------
Balance, December 31, 1995 ...... $ (347) -- $ (1,085,392)
Issuance of preferred stock ... -- -- 215,000
Issuance of common stock ...... -- -- 220,000
Issuance common stock for .....
services ..................... -- -- 410,000
Net loss ...................... -- -- (1,588,624)
------------ ------------ ------------
Balance, December 31, 1996 ...... (347) -- (1,829,016)
Issuance of preferred stock ... -- -- 180,000
Issuance of common stock ...... -- -- 125,000
Conversion of preferred stock
to common stock .............. -- -- --
Cancellation of subscription
receivable ................... -- -- (100,000)
Common shares issued in private
placement protection ......... -- -- --
Issuance common stock for
services ..................... -- -- 36,563
Debt converted to common shares -- -- 341,591
Stock bonuses ................. -- -- 19,078
One-for-twenty two reverse
stock split .................. -- -- --
Common shares issued in private
placement protection ......... -- -- --
Stock bonuses ................. -- -- 900
Debt converted to common shares -- -- 165,000
Common shares issued with
notes payable ................ -- -- 113
Net loss ...................... -- -- (1,405,023)
------------ ------------ ------------
Balance, December 31, 1997 ...... (347) -- 2,465,794
------------ ------------ ------------
Issuance of common stock ...... 816,518
Stock bonuses ................. -- -- 1,033
Debt converted to common shares -- -- 58,546
Net loss ...................... -- -- (1,435,345)
------------ ------------ ------------
Balance, December 31, 1998 ...... $ (347) $ -- $(3,025,042)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
</TABLE>
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Epigen, Inc. (the Successor) was formed on April 24, 1991 as the successor
entity to COD Associates, L.P. (the Predecessor) (collectively the Company).
Effective May 1, 1991, in accordance with the terms of an Assignment and
Assumption Agreement, all interest and rights were assigned to, and certain
obligations and liabilities of the Predecessor were assumed by, the Successor in
exchange for 340,909 shares of common stock which subsequently was reduced to
113,636 shares pursuant to a reverse stock split (Note 5). The Successor was
organized to serve as the vehicle for an initial public offering of common stock
and warrants to raise additional capital to complete and commercialize the
research and development work of the Predecessor and related activities.
The Company is authorized to issue up to 50,000,000 common shares at $.001 par
value and 15,000,000 preferred shares at $.001 per value.
The Company is engaged in developing products that are designed to be useful as
a monitoring device for tumors, and a diagnostic aid and screen in the diagnosis
of cancer. The Company's products will incorporate measurements of a substance
found in significant quantities in the cell membranes of cancerous tumors. The
first product under development is an in vitro diagnostic test, intended for use
in monitoring carcinoma patients and as a confirmatory test for breast cancer
and prostate cancer. The Company is in the early stages of developing a vaccine
to be used as a therapeutic in patients who have had malignant tumors removed.
The Company is a development stage enterprise that has not generated significant
operating revenues to date. Expenses incurred have primarily been research,
development and administrative costs. The developmental nature of the activities
is such that inherent risks exist in the Company's operations. Successful future
operations are subject to several risks, including the ability of the Company to
successfully market its products and to generate significant revenues from
sales, regulation by the United States Food and Drug Administration, the
development of enhancements to allow entry into new markets and the Company's
ability to raise funds to further finance development of its products. After the
product has been successfully introduced into the market, additional time may be
necessary before significant revenues are realized. The Company will require
additional financing in order to commercialize the in vitro
F-7
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
diagnostic test, complete the in vivo imaging procedure and complete the
development and commercialization of the therapeutic vaccine.
The Company has incurred losses of $18,513,938 from inception through December
31, 1998 and has funded those losses through the sale of common and preferred
stock shares, capital contributions, and loans from investors. The Company is
currently experiencing severe cash flow problems and in the event the Company is
unable to raise additional funding through the sale of equity securities,
various debt instruments or from other sources, there is substantial doubt
concerning its ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
Cash and Cash Equivalents
Cash and cash equivalents include all funds held in checking and money market
bank accounts.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Research and Development
Direct research and development is performed under arrangements with various
individuals and institutions. The terms of these arrangements generally call for
payment of salaries, overhead and expenses.
Research and development costs are expensed in the period in which they are
incurred.
Organizational Costs
Organizational costs were being amortized on a straight line basis over five
years.
F-8
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
During 1992, the Company adopted SFAS No. 109, Accounting for Income Taxes.
Adoption of this method of accounting did not have an effect on the Company's
financial position or results from operations.
At December 31, 1998, the principal temporary difference is a net operating loss
carryforward for federal income tax purposes of approximately $13,000,000. The
Company has provided a full valuation reserve against the benefit of this net
operating loss carryforward due to uncertainty regarding its realization. In
addition, the Company has credits for increasing research costs of approximately
$594,000 which expire through 2013. Any credit not used during the carry forward
period may be deducted in the first period subsequent.
Office Equipment
Office equipment is recorded at cost. Additions and improvements are
capitalized, and ordinary repairs and maintenance are expensed as incurred.
Depreciation and amortization are computed primarily using the straight-line
method over three to five years.
Fair Value
The Company has a number of financial instruments, none of which are held for
trading purposes. The carrying value of cash, receivables and accounts payable
approximates fair value due to the short maturity of these instruments. The
carrying value of short-term debt approximate fair value based on discounting
the projected cash flows using market rates available for similar maturities.
Considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value, and accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
F-9
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Share
Net loss per share for 1996, 1997 and 1998 include the weighted common average
shares outstanding net of shares of treasury stock. The cumulative net loss per
common share for the period from inception to December 31, 1998 has not been
presented, as such information is not considered to be relevant or meaningful.
All warrants, options and convertible preferred stock outstanding as of December
31, 1996, 1997 and 1998 have been excluded as they are antidillutive.
(2) NOTE PAYABLE
Demand:
The Company has entered into an agreement whereby it promises to pay the order
of the payee $145,805, payable together with interest at the rate of 9% per
annum on demand. This note was executed in connection with fees owed the payee
for professional services.
Other:
During 1997, the Company borrowed $225,000 ($25,000 from related parties) by
issuing notes, which bear interest at 25% per annum and are due September 8,
1998 through October 17, 1998. In connection with these notes the Company issued
112,500 shares of its common stock. In 1998, notes totaling $25,000 were
converted into 11,005 shares of the Company's common stock. The remaining notes
outstanding are currently in default.
In December 1997, the Company borrowed $100,000 by issuing a note, which bears
interest at prime plus 5% and is due on December 23, 1998. This loan may be
converted at any time before the loan is paid in full at the rate of $2.66 per
common share. The note is currently in default.
During 1998, the Company borrowed $175,000 by issuing notes which bear interest
at prime plus 5% and are due January 21, 1999 through April 9, 1999. These loans
may be converted at any time before the notes are paid in full at the rate of
$2.66 per common share. Notes totaling $25,000 were converted into 11,005 shares
of the Company's common stock. In January 1999, the Company defaulted on
$100,000 of the notes.
F-10
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(3) LICENSING AGREEMENTS
The Company's technology is used under an exclusive license from Boston
Biomedical Research Institute (BBRI). Pursuant to the terms of this license
agreement, the Company has been granted an exclusive, worldwide license to
manufacture, use, lease, sell or otherwise transfer (a) any products utilizing
any patent obtained by BBRI, (b) any products resulting from the Company-
sponsored research at BBRI or (c) compositions containing such products. The
agreement calls for royalty payments to BBRI equal to 5% of the net selling
price not to exceed $10,000,000 per year. The agreement expires on the later of
10 years from the first commercial sale of the in vitro blood test or expiration
of any patents thereon.
During 1992, the Company entered into a contract with the University of Oslo
(the University) in close collaboration with BBRI for the development of
antigen- specific characterizations. The agreement calls for payments to the
University of 1% of net sales for any human therapeutic product utilizing these
patent or biological material rights sold to third parties.
If royalties are to be paid both to BBRI and the University, the agreement with
BBRI provides that the total royalty paid to BBRI and the University shall not
exceed 5.5% of the net selling price of any licensed product or process.
During 1993, the Company entered into an agreement with Massachusetts General
Hospital to license certain antibodies for use in developing the in vitro
diagnostic test, the in vivo imaging agent and the therapeutic vaccine. Under
this agreement, the Company is required to pay royalties ranging from 2% to 5%
of the net sales price, as defined, depending on the country in which the
product is sold. The term of the agreement expires, on a country-by-country
basis, eight years after the first commercial sale or for the life of a valid
patent in a country, whichever occurs first. Subsequent to the signing of the
agreement Massachusetts General Hospital agreed to reduce the royalty
percentages to one-half the original amounts.
If royalties are to be paid to both BBRI and Massachusetts General Hospital, the
agreement with BBRI provides that the total royalty paid to BBRI and
Massachusetts General Hospital shall not exceed 6% of the net selling price of
any licensed product or process.
F-11
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(4) RELATED PARTY TRANSACTIONS
The Company incurred expenses payable to affiliates of the General Partner of
the Predecessor for rental of office space and reimbursement of administrative
salaries. The total of such expenses was $32,600 in 1991.
Beginning in 1989, the General Partner of the Predecessor was entitled to
receive a management fee of $250,000 per year, of which $37,500 was paid.
In 1991, the General Partner of the Predecessor and its Chairmen agreed to
forgive all amounts owed for management fees and salary at the date of the
Prospectus for the Company's initial public offering. These amounts ($1,038,036)
have been reflected as a capital contribution in the accompanying financial
statements.
In 1989, David H. Smith, a stockholder of the Company, contributed $840,000 to
the Predecessor to purchase a limited partnership interest. The Predecessor, in
turn, purchased an annuity, owned by Mr. Smith, for $450,000, which has been
accounted for as a distribution of partners' capital. Mr. Smith borrowed
$280,000 against the annuity and contributed that amount to the Predecessor for
a total net contribution of $670,000. Prior to the initial public offering, the
Predecessor reimbursed Mr. Smith for his interest expense on the $280,000 loan.
This arrangement was terminated prior to the effective date of the initial
public offering. Effective May 1, 1991, Mr. Smith and the Company entered into a
consulting agreement that provided for payment of a consulting fee to Mr. Smith
of $2,200 per month for one year. As partial consideration for entering into
such agreements, Mr. Smith converted amounts due him at July 31, 1991, to common
shares of the Company. The conversion to equity did not involve the issuance of
additional shares by the Company, but solely the transfer of previously
outstanding shares by existing stockholders.
Note Receivable from an Officer/Stockholder
During August 1992, the Company entered into a loan agreement with a stockholder
for $200,000 plus $15,310 of associated legal costs. This note is collateralized
by 49,534 shares of the Company's common stock held by the stockholder. The
outstanding balance, $86,467 at December 31, 1998, accrues interest at a rate of
prime plus 1%. The principal and all accrued interest were payable in full on
May 8, 1996. The Company had extended the maturity date to May 9, 1999.
F-12
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(4) RELATED PARTY TRANSACTIONS (continued)
Amounts receivable (including accrued interest) from the officer/stockholder
were as follows for the years ended December 31, 1996, 1997 and 1998:
Beginning Ending
Balance Additions Deductions Balance
1996 78,344 7,384 85,728
1997 85,728 31,797 53,931
1998 53,931 32,536 86,467*
*Netted against monies due to the officer/stockholder
Leased Office Space
The Company leases office space from a company wholly owned by the Chairman of
the Board of Directors. This lease was terminated in 1995, by mutual consent,
retroactive to October 1994. The Company paid $23,453 in rent under the lease in
1994. This lease was reinstated effective June 1, 1995. The lease ended on May
31, 1998 and required annual rental payments of approximately $30,000. Rental
payments under this lease were $52,000 in 1998, of which $16,000 was for back
rent, $36,000 in 1997 and $27,120 in 1996. In 1998, this lease was renewed at a
rate of $3,000 per month for a term of three years, expiring May 2001.
Accrued Salary - Chairman:
As of December 31, 1998 the Company owed accrued salaries of $1,173,889, plus
accrued interest of $297,961, to the Chairman of the Board of Directors.
(5) EQUITY TRANSACTIONS
In August 1997, the Company's shareholders approved a one-for-twenty two reverse
stock split. Accordingly, all share data has been restated for periods prior to
the reverse stock split.
The Predecessor had two offerings of limited partnership interests. The initial
offering, pursuant to a Private Placement Memorandum dated January 28, 1987,
provided for the sale of five units, each representing a 14% interest at a cost
of $420,000 per unit. Proceeds of $831,600, net of placement fees paid to the
General Partner of $92,400, were received under this offering during 1987 and
1988, representing 2.2 units.
F-13
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(5) EQUITY TRANSACTIONS (continued)
A second Private Placement Memorandum dated February 29, 1988, provided for 10
Class A units, each representing a 2% interest at a cost of $150,000 per unit.
Class A Limited Partners were entitled to a preferred return equal to .5% of
gross income until such returns equaled 500% of the initial contribution.
Proceeds of $1,310,000, net of placement fees paid to the General Partner of
$145,000, were received under this offering during 1988 and 1989, representing
9.7 units.
Some of the direct research and development expenses incurred by the Company
were payable in cash and some were payable in equity interests. During the year
ended December 1990, $86,900 was credited to equity in accordance with this
arrangement.
During 1991, the Chairman of the General Partner (who continues as Chairman of
the Successor) and the General Partner of the Predecessor transferred to certain
directors and advisers of the General Partner, limited partnership interests in
the Predecessor as consideration for services rendered to the General Partner.
The Company has recognized expense of $317,917 related to these transactions in
1991.
On December 10, 1991, the Company completed its initial public offering.
Proceeds from this offering were $5,232,605 after deducting $1,276,399 of costs.
The initial public offering was for 1,084,834 units, including 141,500 units
issued pursuant to an overallotment agreement with the underwriters. Each unit
consisted of two common shares, two redeemable Class A warrants and one
redeemable Class B warrant which were immediately and separately transferable.
Each redeemable Class A warrant entitles the holder to purchase one common share
and one redeemable Class B warrant at a price of $4.50, subject to adjustment.
Each redeemable Class B warrant entitles the holder to purchase one common share
at a price of $6.75, subject to adjustment.
Commencing one year after the effective date of the initial public offering
(December 10, 1991), if the average of the closing prices of the common shares
of the Company exceeds $6.30 for any period of 30 consecutive business days,
management may redeem all (but not less than all) of the redeemable Class A
warrants at a price of $.05 per warrant by providing 30 days written notice. The
redeemable Class B warrants are subject to similar provisions if the average of
the closing price of the common stock of the company exceeds $9.75. All of these
Class A and Class B warrants expired in 1996.
F-14
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(5) EQUITY TRANSACTIONS (continued)
In conjunction with the initial public offering, various creditors, including
the General Partner and affiliates, agreed to accept 13,103 shares of common
stock in satisfaction of $792,819 of indebtedness. The conversion to equity did
not involve the issuance of additional shares by the Company, but solely the
transfer of previously outstanding shares by existing stockholders.
The stockholders of the Company, except those who received common shares in
satisfaction of indebtedness, have placed in escrow on a pro rata basis, an
aggregate of 63,148 of the 113,636 common shares outstanding prior to the
initial public offering (the Escrow shares). These stockholders will continue to
vote the Escrow shares, which shall not be assignable or transferable.
The Escrow Shares will be released only if either of the following conditions
are met: (i) beginning on December 10, 1991 and ending 18 months thereafter, the
price for the Company's common stock as reported by NASDAQ or the sales price on
any national market system or stock exchange (the Sale Price) averages in excess
of $8.25 per share (subject to adjustments) for 30 consecutive business days; or
(ii) beginning 19 months from December 10, 1991 and ending 36 months from such
date, the Sales Price for the Company's common stock averages in excess of
$11.25 per share (subject to adjustments), for 30 business days. If neither of
the foregoing conditions has been met on the first day of the 37th month after
December 10, 1991, all Escrow Shares will be forfeited and contributed to the
capital of the Company. As of December 10, 1994, neither of the conditions had
been met and therefore all Escrow Shares were contributed to capital on January
1, 1995.
During 1992, the Company purchased 5 shares of treasury stock at a cost of $347.
The Company has recognized a reduction to stockholders' equity for this amount.
During March 1992, the Company exchanged the nonexclusive right to manufacture
and market its in vitro diagnostic test in exchange for 3,273 shares of the
Company's common stock that had been previously issued in exchange for services
rendered. As the value of these potential future rights is indeterminable, these
shares have been accounted for herein as a no-cost purchase of treasury stock.
During February 1993, the Company issued 1,515 of those shares as compensation
for consulting services through July 1994.
F-15
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(5) EQUITY TRANSACTIONS (continued)
During December 1993, the Company issued 20,849 shares of restricted common
stock to qualified foreign investors under Regulation S of the Securities Act of
1993 at a price of $.9375 per share. Proceeds from the issuance were $363,270
after deducting $66,730 of costs. In addition, the company issued 461 shares of
common stock.
During February 1994, the Company issued 30,455 shares of restricted common
stock to qualified foreign investors under Regulation S of the Securities Act of
1933 at a price of $.95 share. Proceeds from the issuance were $570,350 after
deducting $66,150 of costs. In addition, the Company issued 1,523 warrants to
the placement agent. The warrants expired in February 1998.
During March 1994, the Company issued 51,894 shares of restricted common stock
to qualified foreign investors under Regulation S of the Securities Act of 1933
at a price of $.60 per share. Proceeds from the issuance were $658,302 after
deducting $26,698 of costs. In addition, the Company issued 5,189 warrants to
the placement agent. The warrants expired in March 1998.
During April 1994, the Company issued 10,000 shares of restricted common stock
to qualified foreign investors under Regulation S of the Securities Act of 1933
at a price of $.50 per share. Proceeds from the issuance were $98,000 after
deducting $12,000 of costs. In addition, the Company issued 1,000 warrants to
the placement agent. The warrants expired in April 1998.
During 1995, the Company offered pursuant to a private placement pursuant to
Rule 504 of Regulation D of the Securities Act of 1933, up to 363,636 shares of
its common stock at a price of $.25 share, together with warrants for an
additional 363,636 shares of common stock at a price of $2.00 per share for five
years following issuance. As of December 31, 1997, the Company has issued 95,545
common shares and 95,545 warrants to purchase common shares of the Company or
proceeds of $525,000.
During 1997, the Company offered pursuant to a private placement pursuant to
Rule 504 of Regulation D of the Securities Act of 1933, the Company issued
45,455 shares of its common stock for net proceeds of $125,000, together with
warrants for an additional 27,727 shares of common stock at a price of $2.00 per
share. These warrants expire December 31, 2001.
F-16
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(5) EQUITY TRANSACTIONS (continued)
During the five years ended December 31, 1997 the Company has issued 483,330
shares of common stock for services totalling $1,357,160.
During the year ended December 31, 1997, the Company issued 31,363 share of
common stock pursuant to price protection provisions in connection with earlier
purchases of common stock.
During the year ended December 31, 1997, the Chairman of the Company was issued
1,627,727 shares of common stock of the Company.
During the year ended December 31, 1997, the Company issued to the Directors of
the Company and others 139,455 shares of common stock for services.
During the year ended December 31, 1997, accounts payable and accrued expenses
of the Company were converted into 174,565 shares of common stock of the
Company.
During the year ended December 31, 1997 the Company issued 112,500 shares of
common stock in connection with debt securities whereby the Company raised
$225,000 (see Note 2).
During the year ended December 31, 1998, the Company issued 50,000 shares of
common stock as a bonus.
During the year ended December 31, 1998, the Company issued 350,000 shares of
common stock as a bonus to the Chairman of the Board of Directors and 25,000
shares of common stock each to two members of the Board of Directors.
During the year ended December 31, 1998, the Company issued an aggregate of
$140,500 principal amount of its prime plus 5% one year promissory notes. Each
note is prepayable within ten days of the completion of a sale of the Company's
common stock aggregating at least $1,000,000. The holders of these notes
received an aggregate of 64,672 shares of the Company's common stock.
During the year ended December 31, 1998, the Company issued 271,107 shares of
the Company's common stock to investors at a cost of $0.83 per share. These
shares were booked at par value with the additional investment credited to paid
in capital.
F-17
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 (Continued)
(5) EQUITY TRANSACTIONS (continued)
During the year ended December 31, 1998 the Company issued an aggregate of
$55,000 principal amount of its prime plus 5% one year promissory notes. Each
note is prepayable within ten days of the completion of a sale of the Company's
common stock aggregating at least $1,000,000. Principal amounts of such notes
are convertible by the holders into shares of the Company's common stock at a
rate of $0.83 per share. The holders of these notes received an aggregate of
66,265 shares of the Company's common stock, and an aggregate of 66,265 warrants
to purchase shares of the Company's common stock at a rate of $0.83 per share.
These 66,265 shares of common stock were booked at par value.
During the year ended December 31, 1998, investors purchased an aggregate of
592,170 shares of the Company's common at a cost of $0.83 per share, and an
aggregate of 100,000 shares of the Company's common at a cost of $1.00 per
share. The 100,000 shares purchased included warrants to purchase another
100,000 shares of the Company's common stock at $1.50 per share over a three
year period, plus piggyback registration rights.
During the year ended December 31, 1998, the Company issued 300,000 shares of
its common stock in recognition of substantial services by Donald Fresne,
Chairman of the Board, and 50,000 shares each of the Company's common stock in
recognition of substantial services by the Directors of the Company and the law
firm Harley & Deickler.
During the year ended December 31, 1998, the Company issued 22,010 shares of
common stock in exchange for a 25% note payable in the amount of $50,000 plus
accrued interest at $2.66 per share. (See Note 2)
During 1998, the Company issued 100,000 three year warrants and 974,426 five
year warrants to promissory note holders.
During 1998, the Company issued 24,702 five year warrants to the Chairman of the
Board. These warrants are exercisable through April 15, 2003 at $.83 per share.
During 1998, the Company issued 75,188 warrants to a convertible promissory note
holder. These warrants are exercisable through January 21, 2003 at $2.66 per
share.
F-18
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(6) PREFERRED STOCK
(a) Series A Preferred:
In 1995, the Company's Board of Directors authorized for issuance shares of
Class A Preferred stock pursuant to the terms of the Company's certificate of
incorporation. Each such share is con- vertible into two shares of common stock
of the Company. Each Class A share shall be entitled to 30 votes per share on
all matters that may come before the stockholders for a vote. Such shares shall
be entitled to a preference in dividends and a preference in any distribution in
liquidation or otherwise and dividends are cumulative. Preferred stock must be
redeemed no later than December 31, 1999 at a redemption price of $.50 per share
plus accrued but unpaid dividends.
In connection with this authorization the Chairman of the Board of Directors has
invested $100,000 for 200,000 shares of the Class A Convertible Preferred Stock
at a price per share of $.50. The holder has the right to return the stock at
any time two years after issuance at $.50 per share, plus unpaid accrued
dividends. This subscription was cancelled in 1997.
(b) Series B Preferred:
In 1996, the Company's Board of Directors authorized for issuance shares of
Class B preferred stock pursuant to the terms of the Company's certificate of
incorporation. Each Class B share shall be entitled to one vote per share on all
matters that may come before the stockholders for a vote. An annual dividend
equal to the Company's net profit before income taxes for each of the Company's
fiscal years beginning July 1, 1996 as to such time as the holders receive an
aggregate amount equal to $.70 per share shall be paid, thereafter pari passu as
the common stockholders. There is no mandatory redemption and the stock has
standard antidilution rights and ranks pari passu with the Series A Preferred
stock on liquidation rights.
In 1996 and 1997 there were 450,000 and 400,000 shares issued for net proceeds
of $215,000 and $180,000, respectively. During 1997, all 850,000 preferred
shares were converted into 154,545 shares of common stock.
In connection with the issuance of the 1996 Series B Preferred Stock, the
holders also received one Class C and one Class D warrant to purchase one common
share for each share of Series B preferred stock purchased, at $2.00 per share,
respectively, for a period of five years from the date of purchase.
F-19
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(6) PREFERRED STOCK (continued)
In connection with the issuance of the 1997 Series B Preferred Stock, the
holders also received Class C and Class D warrants to purchase common stock
totalling 800,000 shares at $2.00 per share.
(7) COMMITMENTS AND CONTINGENCIES
Pursuant to the licensing agreement discussed in Note 2, the Company had agreed
to reimburse BBRI for certain costs for research and development pursuant to
budgets prepared by BBRI. This obligation expired in 1994.
The licensing agreements also provides for the indemnification of BGRI by the
Company against product liability claims incurred.
(8) COMPENSATION ARRANGEMENTS
The Company has entered into employment agreements (individually the Agreement
and collectively the Agreements) with individuals to serve as the Chairman and
the Vice Chairman of the Board of Directors. The Vice Chairman's Agreement is in
effect for a period of three years commencing June 1, 1994. Subsequent to the
initial, three-year term, the Vice Chairman's Agreement allows for automatic
extension for an additional year unless the Vice Chairman or the Company party
notifies the other party of their intent not to extend within 90 days of June 1
of each renewal year, in writing. The Vice Chairman's Agreement allowed for
compensation of $18,000 per year plus stock options as follows:
1. 2,136 Shares available for $2.00 per share upon execution and
delivery of the Agreement and 1,681 Shares available for $2.00 per
share on June 1 of each year in which the Agreement remains in effect.
There were 8,863 options outstanding as of December 31, 1998.
In 1997, the Vice Chairman's accrued salary of $46,500 was converted into 21,679
shares of commons stock of the Company.
In 1998, the agreement was amended to increase the rate of salary to $36,000 per
year.
The Chairman's Agreement is in effect for a period of 60 consecutive months
commencing April 20, 1994. On April 20 of each year, beginning April 20, 1995,
such term of the Agreement shall be automatically extended for an additional
year unless prior to such date the employee or the Company have notified the
other in writing of its intention not to extend.
F-20
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(8) COMPENSATION ARRANGEMENTS (continued)
The Chairman's Agreement allows for compensation of $189,000 per annum with a
$50,000 per annum increase on April 20 of each year during the term of the
Agreement. The Agreement also allows for the payment of certain benefits and the
following:
1. Stock options to purchase 400,000 shares of common stock at
$.66 per share as long as the Agreement remains in effect.
2. Stock options to purchase shares of common stock of the
Company at $.66 per share upon the formation and closing of a
strategic alliance or joint venture with a well established
company which first assumes responsibility for marketing the
Company's COD test in (A) the United States, 200,000 shares of
common stock (B) Europe, 200,000 shares of common stock and
(C) Japan, 200,000 shares of common stock.
3. Stock options to purchase 500,000 shares of common stock of
the Company at $.66 per share upon the approval of the Food
and Drug Administration of the Company's COD test.
4. Stock options to purchase 600,000 shares of common stock of
the Company at $.50 per share upon the closing by the Company
of a Financing (the receipt by the Company of cash, cash
equivalent or any other benefit or consideration having a
value of at least $1,000,000). In August 1995, the exercise
price of these options were reduced to $.25 for the first
300,000 shares and $.50 for the remaining 300,000 shares.
All of the above options outstanding and rights to options were relinquished by
the Chairman in 1997.
Stock Option Plan:
The company has established a 1991 Stock Option Plan (the Plan) which provides
for the grantings of options to key employees and consultants to purchase up to
an aggregate of 6,818 shares of the Company's common stock, from either
authorized but unissued or reacquired shares. Options to purchase 2,545 shares
have been granted under the plan. In 1997, all options under the plan were
cancelled.
F-21
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(8) COMPENSATION ARRANGEMENTS (continued)
Stock Option Plan (continued):
Options granted under the Plan may be either incentive or nonqualified options.
The exercise price of both the incentive and nonqualified options granted must
be at least equal to the fair market value of the common stock at the date of
grant. Options may be granted for terms of up to 10 years. Certain other
limitations have been placed on incentive options granted to persons possessing
10% or more of the total combined voting power of the Company on the date of
grant related to exercise price and aggregate options available to be exercised
in any calendar year.
Other Stock Options:
During 1992 and 1993, the Company granted options to selected employees and
members of the Company's Board of Directors to purchase an aggregate of 12,614
shares of the Company's common stock at an option price of $3.60 per share,
which was not less than the fair market value of the stock at the date of grant.
During May 1992, 1,705 of these options were canceled. During 1997, these
options were repriced and reissued at $2.00 per share. The options vest ratably
over a five-to ten-year period and expire in five to ten years. Of the total
options granted during 1992 and 1993, 6,919 were outstanding and exercisable at
December 31, 1998.
On February 2, 1993, April 15, 1993, and April 20, 1994, the exercise price of
certain options was reduced to the fair market value of the Company's stock at
that date. These options were treated as canceled and reissued.
During April 1993, the Company granted 19,545 seven-year options at $1.25 per
share to selected members of the Company's Board of Directors, with exercise
contingent upon exercise of the Class A warrants of the Company, and 29,091
seven-year options at $1,25 per share, with exercises contingent upon exercise
of the Class B warrants of the Company. (See Note 5 for descriptions of
warrants). The Company will incur compensation expense, if any, at the time such
options become exercisable. On April 20, 1994, the exercise price of certain of
these options was reduced to the fair market value of the Company's stock on
that date. During 1996, all of these options were cancelled.
F-22
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(8) COMPENSATION ARRANGEMENTS (continued)
During December 1993, the Company granted 35,284 seven-year options at $.9375
and 134,358 at $.75 in connection with the Regulation S offerings (See Note 5).
As these options were issued below fair market value, the Company recognized a
compensation charge of $159,039 during 1993.
During February 1994, as part of a development agreement, the Company granted
100,000 options at $1.88 per share, which was not less than the fair market
value of the stock at the date of grant.
In connection with the Regulation S offerings in 1994 (See Note 5), the Chairman
of the Board of Directors was granted options to purchase 436,529 of the
Company's common stock at exercise prices ranging from $.50 per share to $.75
per share.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 "Accounting and Disclosure of Stock Based Compensation" (Statement 123).
Statement 123 is effective for fiscal years beginning after December 15, 1995,
and allows for the option of continuing to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and the
related interpretations or selecting the fair value method of expense
recognition as described in Statement 123. The Company has elected to follow APB
25 in accounting for its employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options are equal to or less than
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma net income had Statement 123 been applied would not change. There is
no market for the Company's stock at this time and therefore the Company
believes the fair value of all outstanding options to be zero.
(9) SUBSEQUENT EVENTS
(a) In 1999, the Company issued 20,00 shares of common stock for services.
(b) In 1999, the Company issued 75,000 shares of common stock in exchange for
an obligation for services rendered to the Company.
(c) In 1999, the Company issued 10,000 shares of common stock for services to
be provided by Dr. Gelber.
F-23
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(9) SUBSEQUENT EVENTS (continued)
(d) In 1999, the Company sold 210,000 shares of common stock to investors
at $1.00 per share.
(e) In February 1999, the Company agreed to issue 150,000 shares of Series
A Preferred Stock in exchange for $150,000 debt of Mr. Fresne, Chairman
of the Board. These shares will have the same rights as those
previously issued with the exception of dividend rights.
(f) In February 1999, the Company agreed to sell 350,000 shares of common
stock to an investor at $1.00 per share with two five year warrants
attached to each share. One warrant with an exercise price of $1.50 and
one warrant with an exercise price of $2.00.
F-24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has retained Kirshon, Shron and Chernick, PC as its independent
accountant for the fiscal year ended December 31, 1998. Such appointment was
effective March 19, 1999. The Company's prior independent accountant, Paul C.
Roberts, resigned as the Company's independent accountant effective on such date
in order to pursue other, non-accounting related business. There were no
disagreements with accountants on accounting and financial disclosure.
9
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth as to the directors and each executive officer:
(1) his name; (2) his age; and (3) his present position with the Company.
Name Age Title
- ---- --- -----
Donald C. Fresne 71 Chairman of the Board of Directors,
Director, resident and Chief Executive Officer
L. Courtney Schroder 61 Treasurer and Director
Richard E. Kent 70 Vice Chairman of the Board of Directors and
Secretary
DONALD C. FRESNE has been the Chairman of the Board of Directors and a Director
of the Company since 1991, the Chief Executive Officer of the Company since
March 24, 1994 and President since August 29, 1997. Mr. Fresne, the founder of
COD Associates, has served as Chairman of the Board of Directors of Biotag,
Inc., the general partner of COD Associates, since 1986. Mr. Fresne was Chairman
and a principal stockholder of RMC Environmental Services, Inc., an
environmental consulting company, from 1989 to 1994.
L. COURTNEY SCHRODER has been Treasurer and a Director of the Company since
1991. Mr. Schroder served as a director of Biotag, Inc. from 1987 to 1991. He
served as Vice President of Chase Manhattan Bank from 1981 until July 1991, and
is currently Vice President of UBS Asset Management (New York) Inc.
RICHARD E. KENT has been a Director of the Company since 1991 and Vice Chairman
of the Board of Directors of the Company since January 28, 1994 and the
Company's Secretary since June, 1994. Mr. Kent served as a director of Biotag,
Inc. from 1987 to 1991. Mr. Kent was Vice President, Secretary and General
Counsel of Grossman's Inc., a retailer of building materials, from 1986 until
his retirement in December 1997. In April 1997, Grossman's Inc. filed for
protection under Chapter 11 of the United States Bankruptcy Code. Mr. Kent
presently is a consultant to Grossman's, Inc.
COMPLIANCE WITH SECTION 16(a) OF SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and officers and persons who own beneficially more than ten
percent of the Common
10
<PAGE>
Stock of the Company to file with the Securities and Exchange Commission initial
reports of beneficial ownership and reports of changes in beneficial ownership
of the Common Stock. Directors, officers and persons owning more than ten
percent of the Common Stock are required to furnish the Company with copies of
all such reports. To the Company's knowledge, no officer or director failed to
timely file a report pursuant to section 16(a).
ITEM 10. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth information concerning the compensation of the
Company's Chief Executive Officer and other most highly compensated executive
officer (collectively, the "Named Executive Officers") for services as executive
officers of the Company for the last three fiscal years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Name and Other Annual Underlying All Other
Principal Positions Year Salary ($) Bonus ($) Compensation ($) Options Compensation ($)
------------------- ---- ---------- --------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Donald C. Fresne (1) ... 1998 326,900 -- 52,348(2) -- 675(4)
Chairman, President .. 1997 123,504 -- 17,721(2) -- 16,900
and Chief Executive .. 1996 34,149 -- 19,500(2) -- 4,650
Officer
Richard E. Kent (1) .... 1998 -- -- --(3) 1,681 75(4)
Vice Chairman of the . 1997 -- -- --(3) 1,681 750(4)
Board and Secretary .. 1996 -- -- -- 1,681 --
L. Courtney Schroder ... 1998 -- -- --(3) -- 75(4)
Treasurer and Director 1997 -- -- --(3) -- 750(4)
1996 -- -- -- -- --
- --------------------
<FN>
(1) Mr. Fresne became Chief Executive Officer of the Company on March 24, 1994 and President on August 29, 1997. Mr. Kent
became Vice Chairman of the Board of Directors and Secretary of the Company in June 1994. The payment of salaries and benefits to
Mr. Fresne and Mr. Kent were curtailed beginning in October 1994 because of the Company's lack of cash flow. Portions of the unpaid
amounts of such salaries have been accrued. In the case of Mr. Fresne, he received salary payments in 1998 of $326,900 and the
amount of such accrual for 1998 is $373,453. In the case of Mr. Kent, he received no salary payments in 1998 and the amount of such
accrual for 1998 is $31,500. Mr. Kent's annual salary was $18,000 until April 15, 1998 when it was increased to $36,000.
11
<PAGE>
(2) Represents car allowances of $9,026 and club membership fees of $6,724 for 1998 and compensation for life insurance of
$36,598, car allowances of $5,410 and club membership fees of $12,935 for 1997, and car allowances of $12,779 and club membership
fees of $9,092 for 1996.
(3) Represents amounts which do not meet reporting thresholds.
(4) Represents common stock bonuses recorded by the Company at $.001 per share for 1998, and common stock bonuses at recorded
by the Company at $.001 per share for 1997.
</FN>
</TABLE>
OPTION GRANT TABLE
The following table sets forth information with respect to the Named Executive
Officers concerning the grant of stock options for Common Stock of the Company
during the fiscal year ended December 31, 1998. The Company did not have during
such fiscal year, and currently does not have, any plans providing for the grant
of stock appreciation rights ("SARs").
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to Or Base
Options/SARs Employees in Price Price Expiration
Granted (#) Fiscal Year ($/Sh) $/Sh)(1) Date
------------ ------------ -------- -------- ----------
Richard E. Kent 1,687(1) 100% 2.00 N/A 9/13/05
- --------------------
(1) Represents non-qualified stock options for shares of Common Stock
granted on September 13, 1994 pursuant to Mr. Kent's Employment Agreement dated
September 13, 1994 pursuant to Mr. Kent's Employment Agreement dated September
13, 1994.
No stock options for Common Stock were exercised during the fiscal year ended
December 31, 1998 by the Named Executive Officers. The following table provides
information related to the number and value of stock options for Common Stock
held at the end of such fiscal year by the Named Executive Officers. The Company
does not have any plans provided for SARs.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Value of Unexercised
Number of Unexercised In-The-Money Options at
Options at December 31, 1998 (#) December 31, 1998 ($)
Acquired on Value -------------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------- ------------ ------------ -------------------------------- -------------------------
<S> <C> <C> <C> <C>
Donald C. Fresne -- -- --/-- --/--
Richard E. Kent -- -- 11,196/-- --/--
L. Courtney Schroder -- -- 2,106/-- --/--
</TABLE>
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 30, 1999 with respect to
the beneficial ownership of the Common Stock of the Company by (i) each person
known to the Company who beneficially owns more than 5% of any class of voting
securities of the Company, (ii) each director and nominee of the Company, (iii)
the executive officers of the Company and (iv) all directors and executive
officers of the Company as a group.
Amount and
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Ownership(1) of Class
- ------------------- ------------ --------
Donald C. Fresne(2) 2,325,171 45.1%
Box L
North Tower Hill Road
Millbrook, NY 12545
L. Courtney Schroder(3) 120,396 2.3%
25 Blackburn Lane
Manhasset, NY 11030
Richard E. Kent(4) 164,049 3.2%
49 Bournes Point Road
Wareham, MA 02571
Leo W. Long(5) 518,560 10.1%
c/o Long Motor Corporation
14600 West 107 Street
Lenexa, KS 66215
W. James Tozer, Jr.(6) 600,552 11.7%
Vectra Management Group
65 East 55th Street, 9th Floor
New York, NY 10022
All directors and executive 2,609,616 50.6%
officers of the Company as
a group (3 persons)
- --------------------
(1) A person is deemed to be the beneficial owner of securities that such
person can acquire as of and within the 60 days following the date of this table
upon the exercise of options and warrants. Each beneficial owner's percentage of
ownership is determined by assuming that
13
<PAGE>
options and warrants that are held by such person (but not those held by any
other person) and which are exercisable as of and within 60 days following the
date of this table have been exercised. For purposes of the footnotes that
follow, "currently exercisable" means options and/or warrants that are
exercisable as of and within 60 days following the date of this table. Except as
indicated in the footnotes that follow, shares listed in the table are held with
sole voting and investment power. All shares holdings set forth herein reflect
the effect of a 22 for 1 reverse split of the Company's Common Stock effective
September 3, 1997.
(2) Included in the shares reported by Mr. Fresne are 20,822 shares owned
by Biotag, Inc., the former general partner of the COD Associates, L.P., the
predecessor to the Company, which is wholly-owned by Mr. Fresne, and 24,702
shares issuable upon exercise of currently exercisable warrants to purchase
Common Stock.
(3) Included in the shares reported by Mr. Schroder are shares issuable
upon exercise of currently exercisable options to purchase 2,106 shares of
Common Stock.
(4) Included in the shares reported by Mr. Kent are shares issuable upon
the exercise of currently exercisable options to purchase 11,196 shares of
Common Stock.
(5) Included in the shares held by Mr. Long are shares issuable upon the
exercise of currently exercisable warrants to purchase 266,097 shares of Common
Stock.
(6) Included in the shares held by Mr. Tozer are shares issuable upon the
exercise of currently exercisable warrants to purchase 104,546 shares of Common
Stock. Pursuant to a verbal agreement dated as of February 9, 1999, to be
confirmed in writing, the Company and Mr. Tozer agreed that in exchange for his
capital contributions to date, to the extent that subsequent capital
contributions by third parties prior to the date the Company enters into a
strategic partnership with a major pharmaceutical firm reduce Mr. Tozer's
holdings in the Company's Common Stock to less than 10% on a fully diluted
basis, the Company shall issue to Mr. Tozer, for no additional consideration,
that number of shares of Common Stock necessary to bring his aggregate
percentage interest in the Company's Common Stock on a fully diluted basis to
10%. In addition, to the extent a strategic partner purchases shares of the
Company's Common Stock at a price of less than $200,000 per 1% of the Company's
issued and outstanding Common Stock, Mr. Tozer shall be entitled to receive, for
no additional consideration, the number of shares of Common Stock necessary to
bring his aggregate percentage interest in the Company's Common Stock on a fully
diluted basis to 10%.
MEETINGS OF THE BOARD AND COMMITTEES OF THE BOARD
The Board of Directors held six (6) meetings during the year ended December 31,
1998. All directors attended all of the meetings. The Board of Directors has one
standing committee -- the Executive Committee did not meet in 1998. The Board of
Directors does not have a standing
14
<PAGE>
nominating committee, audit committee or compensation committee, such functions
being reserved to the full Board of Directors.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Donald C. Fresne,
Chairman of the Board of Directors and Chief Executive Officer of the Company,
for an initial five-year term commencing on April 20, 1994 and ending on April
20, 1999. Such agreement was amended on September 13, 1994. On April 20 of each
year, beginning on April 20, 1995, the term of the employment agreement will be
automatically extended for an additional year unless prior to such date Mr.
Fresne or the Company notifies the other of its intention not to extend the
term.
Under the agreement, as amended, Mr. Fresne is to be paid a salary of $189,000
per year with annual increases of $50,000 per year, and, in the discretion of
the Board, may given merit increases and bonuses. Further, upon the exercise of
65% of the Company's presently outstanding Class A Warrants, Mr. Fresne will be
paid a cash bonus of $250,000, and upon the exercise of 65% of the Company's
presently outstanding Class B Warrants, Mr. Fresne will be paid a cash bonus of
$200,000. Such warrants expired unexercised on December 10, 1996. As such, Mr.
Fresne will not be entitled to any such bonus. In addition, Mr. Fresne was
granted seven-year options under the agreement to purchase 400,000 shares of
Common Stock at $0.66 per share and to purchase the following additional number
of shares of Common Stock at $0.66 per share upon the occurrence of the
following events: (1) upon the formation and closing of a strategic alliance or
joint venture with a well-established company which first assumes responsibility
for marketing the Company's in vitro diagnostic blood test in (a) the United
States, 200,000 shares of Common Stock, (b) Europe, 200,000 shares of Common
Stock and (c) Japan, 200,000 shares of Common Stock and (ii) 500,000 shares of
Common Stock upon the approval by the Food and Drug Administration of the
diagnostic blood test. Further, Mr. Fresne has been granted seven-year options
under the agreement to purchase the following shares of Common Stock at $0.50
per share upon the occurrence of the following events: (i) 600,000 shares upon
the closing of a financing pursuant to which the Company receives consideration
of at least $1,000,000; (ii) up to 216,967 shares when and as the Company's
Class A Warrants are exercised, on the basis of one option share for each ten
Class A Warrants exercised; and (iii) up to 325,450 shares when and as the
Company's Class B Warrants are exercised. Such warrants expired unexercised on
December 10, 1996. As such, the options associated with the Class A and Class B
warrants expired. In September 1997, Mr. Fresne voluntarily surrendered all
other options granted to him under such Agreement.
The Company also will provide Mr. Fresne with a company car, reimburse him for
membership dues and expenses used for the Company's benefit and reimburse him
for the premiums paid for (i) a $750,000 whole life insurance policy; (ii)
long-term disability insurance and (iii) health insurance benefits. Following
Mr. Fresne's termination of employment with the Company (other than for cause)
he will continue to be reimbursed for the premiums paid on the life insurance
policy and on all individual health insurance policy for him and his spouse and
will be provided
15
<PAGE>
with an office and secretary. The Company also will be responsible for
reimbursing Mr. Fresne for all federal and state income taxes attributable to
the aforementioned benefits.
On August 29, 1997 the Company and Mr. Fresne executed an amendment to Mr.
Fresne's employment agreement, effective as of July 14, 1997, to provide that he
would receive a yearly salary from the Company equal to $339,000, payable
monthly, plus an annual increase of $50,000 on April 20 of each year in which
this Employment Contract is in effect; provided however, that effective on the
closing of a private placement of the Company's securities his salary would be
$250,000 per year and remain at that level until such time as the Company
successfully completes a sale of its securities in either a private or public
sale or receives license or royalty payments for its products in the aggregate
amount of $1,000,000 in a single fiscal year. From and after the closing of such
sale of securities, or receipt of license or royalty payments for its products
aggregating $1,000,000 in a single fiscal year, his salary shall be increased to
the level he would have been entitled to receive in the event his salary had not
been reduced as herein provided. Furthermore, subject to completion of a public
or private sale of securities of the Company aggregating at least $1,000,000
prior to December 31, 1997, all but $300,000 of salary owed by the Company to
Mr. Fresne which is accrued but unpaid as of June 30, 1997 shall be capitalized
and Mr. Fresne shall forego receipt of same. Such amendment also provided that
upon closing of a private sale of the Company's securities yielding gross
proceeds of at least $1,000,000, Mr. Fresne would surrender all unexercised
stock options in his name, including the an option which permitted him to
receive a number of securities equal to 15% of the securities sold in any such
offering. The Company also was to reimburse Mr. Fresne for the amount of
expenses incurred by him for health care and not reimbursed by the health
insurance and Medicare. The obligation of the Company to pay the premium on Mr.
Fresne's whole life insurance policy shall be suspended for a period beginning
August 1, 1997 and ending July 31, 1998, during which period Mr. Fresne may pay
such premium. Thereafter, the Company shall pay such premium to the extent
provided in such agreement. Such amendment was intended to go into effect upon
the closing of a proposed sale of the Company's securities pursuant to a private
placement agented by Whale Securities Co., L.P. Such private placement was
abandoned by Whale Securities Co., L.P. in October 1997 because of then adverse
market conditions. On January 22, 1998, the Company's board of directors
rescinded such amendment and confirmed that the Amended and Restated Employment
Contract remained in effect.
Mr. Fresne's employment agreement also provides that following the termination
of his employment with the Company (other than for cause) he will be entitled to
a continuation of his salary for a number of years equal to the number of years
that he was employed by the Company prior to his termination of employment.
Moreover, upon a change in control of the Company (as defined in the employment
agreement) and the termination of Mr. Fresne's employment within a period
commencing six months prior to, and ending one year after, such change in
control, Mr. Fresne will receive a lump sum payment equal to the lesser of
$2,000,000 or 2.999 times his average annual compensation for the five years
before the change in control.
16
<PAGE>
On September 13, 1994, the Company entered into an employment agreement for an
initial three year term, effective June 1, 1994 with one year renewals
thereafter, with Richard E. Kent pursuant to which Mr. Kent will serve as Vice
Chairman of the Company. Pursuant to such agreement, Mr. Kent was to receive an
annual salary of $18,000 and, in the discretion of the Board of Directors, may
be given merit raises and bonuses. Such agreement was automatically extended
through May 31, 1998. The agreement granted Mr. Kent options to purchase 2,137
shares of the Company's Common Stock at a price of $2.00 per share effective
September 13, 1994. In addition, Mr. Kent receives options to purchase an
additional 1,681 shares of the Company's Common Stock at a purchase price of
$2.00 per share on June 1 of each year in which the agreement remains in effect,
including 1998. The Company has granted to Mr. Kent certain demand registration
rights (exercisable on two occasions) and piggyback registration rights with
respect to the Common Stock underlying options now or hereafter held by Mr. Kent
during the term of the agreement. Mr. Kent has not received any salary payments
pursuant to such agreement and the amount of accrued salary owed him as of the
December 31, 1996 was $46,500. On July 14, 1997, Mr. Kent agreed to convert all
of such then accrued salary into 21,679 shares of Common Stock, at the rate of
$2.146 per share. On April 15, 1998, the Company's Board of Directors increased
Mr. Kent's annual salary to $36,000.
DIRECTOR COMPENSATION
In 1998, no compensation was paid to non-employee directors of the Company,
other than reimbursement for travel expenses incurred for attending meetings of
the Board of Directors and its Committees and the stock bonuses described in the
section of this Form 10-KSB entitled "Certain Relationships and Related
Transactions".
STOCK OPTION PLAN
As of June 1, 1991, the Board of Directors of the Company adopted the 1991 Stock
Option Plan (the "Plan") which was ratified and approved by the Company's
stockholders on October 1, 1991. The Plan provides for the grant by the Company
of options to purchase up to an aggregate of 150,000 of the Company's authorized
but unissued shares of Common Stock (subject to adjustment in certain cases
including stock splits, recapitalizations and reorganizations) to key employees
of the Company and consultants. It is presently administered by the Board of
Directors as a whole.
Presently, there are no outstanding options held by any officers or directors of
the Company.
REPRICING OF OUTSTANDING OPTIONS AND WARRANTS
No option or warrants were repriced during 1998.
17
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
For information regarding certain transactions involving the Company and its
directors and executive officers prior to August 1, 1997, see "Certain
Relationships and Transactions", of the Company's Information Statement on
Schedule 14C, dated August 9, 1997. For information regarding certain
transactions involving the Company and its directors and executive officers
after August 1, 1997, see "Certain Relationships and Transactions", of the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 each
of which is incorporated herein by reference.
In January 1998, the Company issued two promissory notes in the aggregate
principal amount of $125,000 to two existing stockholders to fund interim
operating expenses. Such notes require that the principal be repaid on the
earlier of ten (10) days following the closing of a sale or sales of the
company's Common Stock aggregating $1,000,000 or one year from the date of such
note, together with interest at the rate of the then prime rate plus 5%. The
lenders may also convert the principal amount of such loan into shares of the
Company's Common Stock at the rate of $2.66 of principal amount per share. For
each $100,000 of principal amount of loans, such lenders also received (i)
37,596 shares of the Company's Common Stock and (ii) five year warrants to
purchase an additional 75,188 shares of the Company's Common Stock at an
exercise price of $2.66 per share. In October 1998, one such stockholder
converted $25,000 of such debt, plus accrued interest, to equity for an
aggregate of 10,301 shares of common Stock. Such stockholder also converted a
loan of $25,000 extended to the Company in October 1997, plus accrued interest,
into 11,709 shares of the Company's Common Stock at $2.66 per share.
In January 1998, the Company's Board of Directors issued to Mr. Fresne, Mr. Kent
and Mr. Schroder bonuses of 350,000, 25,000 and 25,000 shares, respectively, of
the Company's Common Stock. Such shares are restricted and cannot be sold by the
holders thereof until the earlier of three years from the date of issuance or
the sale of all or substantially all of the Company's Common Stock to a third
party.
In August 1998, the Company's Board of Directors issued to Mr. Fresne, Mr. Kent
and Mr. Schroder bonuses of 300,000, 50,000 and 50,000 shares respectively of
the Company's Common Stock. Such shares are restricted and cannot be sold by the
holders thereof until the earlier of three years from the date of issuance or
the sale of all or substantially all of the Company's Common Stock to a third
party.
In January 1998, the Company's board of Directors authorized the conversion by
Mr. Fresne of up to $1,000,000 in debt owed by the Company to him at a price of
$1.00 per share, subject to the consummation of a transaction with either the
Proquest Fund or Molecular Geriatrics Corporation ("MGC"). In light of the
valuation placed on the Company's Common Stock by Sunrise Capital Corporation in
February 1998, the Company's Board of Directors amended such conversion right to
reduce the price per share to $.83, of which up to half of such conversion could
be in the form of shares of the Company's Preferred Stock, the terms of which
would be
18
<PAGE>
dependent upon a completed transaction with MGC. In addition, Mr. Fresne would
have an option to purchase an that number of shares of the Company's Common
Stock equal to 15% of the shares of Common Stock outstanding prior to the
completion of a transaction with MGC. The exercise price is $.83 per share. Such
option will vest upon entry by the Company into a strategic partnership with a
major pharmaceutical firm.
However, in February 1999, the Company's Board of Directors authorized Mr.
Fresne to convert up to $150,000 in debt owed to him by the Company into shares
of the Company's Series A Preferred Stock at a price of $.83 per share,
provided, however, that the terms of such Series A Preferred are to be amended
to delete any dividend rights. No such conversion has occurred as of the date of
this report and no such shares have been issued.
For a discussion of the relationship among Donald C. Fresne, BioTag and NKI, see
Part I, Item 1-Business-Intellectual Property Rights, incorporated herein by
reference.
During March and April 1998, Mr. Fresne loaned the Company an aggregate of
$20,500, represented by 4 promissory notes bearing interest at a rate of prime
plus 5%. Such notes were repaid in May and June 1998. In addition, Mr. Fresne
received five year warrants to purchase an aggregate of 24,702 shares of the
Company's Common Stock at a price of $.83 per share. Such shares of Common Stock
carried with them piggyback registration rights.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
EXHIBITS EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of the Company filed with the
Delaware Secretary of State on April 24 1991 (A)
3.2 Certificate of Amendment of the Company's Certificate of
Incorporation of the Company filed with the Delaware Secretary of
State on November 8, 1991 (B)
3.3 Certificate of Amendment of the Company's Certificate of
Incorporation of the Company filed with the Delaware Secretary of
State on September 3, 1997 (M)
3.4 Certificate of Amendment of the Company's Certificate of
Incorporation filed with the Delaware Secretary of State on
September 3, 1997 (M)
3.5 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock of the Company (K)
19
<PAGE>
3.6 Amended Certificate of Designation, Preferences and Rights of
Series A Preferred Stock of the Company (L)
3.7 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of the Company
3.8 By-laws of the Company (A)
3.9 By-laws of the Company (H)
3.10 Amendment to Article III, Section 1 to the Company's by-laws (M)
3.11 Certificate of Amendment of Certificate of Incorporation Before
Payment of Capital of Company filed with the Delaware Secretary
of State on May 28, 1991 (F)
3.12 Certificate of Correction Filed to Correct a Certain Error in the
Certificate of Incorporation Filed in the Office of the Secretary
of State of Delaware on May 28, 1991, filed with the Delaware
Secretary of State on November 8, 1991 (F)
4.1 Form of Warrant Agreement by and among, the Company, American
Stock Transfer & Trust Company, as Warrant Agent, and D.H. Blair
& Co., Inc., relating to the Company's Class A and Class B
Warrants (B)
4.2 Escrow Agreement, dated December 1991, among American Stock
Transfer & Trust Company, as Escrow Agent, the Company and
certain stockholders of the Company relating to the deposit in
escrow of certain shares of the Company's Common Stock (C)
10.1 Agreement dated December 12, 1986 (the "BBRI Agreement") between
Donald C. Fresne and BBRI relating to mAb and HCA technology (A)
10.2 Assignment and Amendment to BBRI Agreement dated as of April 30,
1991, among Donald C. Fresne, BBRI and the Company
10.3 Amendment to BBRI Agreement dated as of April 6, 1993, between
BBRI and the Company
10.4 Lease Agreement, dated May 1, 1991, between the Company and
Dutchess Management Company relating to the Company's offices
located in Millbrook, NY (A)
10.5 Extension of Lease, dated October 22, 1993, between the Company
and L.
20
<PAGE>
Grignaffini & Sons, Inc., relating to the Company's offices
located in Wellesley, MA
10.6 Agreement, dated November 27, 1989 (the "Whittaker Agreement"),
between COD and Whittaker Bioproducts, Inc., relating to the mAb
research (A)
10.7 Consent to Assignment of Whittaker Agreement, dated September 11,
1991, between Whittaker, M.A. Bioproducts, Inc. and the Company
10.8 Agreement between the Company and The University of Oslo (the "UO
Agreement") relating to HCA research (D)
10.9 Amendment to the UO Agreement, dated November 11, 1993, between
the Company and The University of Oslo
10.10 1991 Stock Option Plan of the Company (A)
10.11 Technical Collaboration and cGMP Manufacturing Agreement, dated
as of November 25, 1992, between the Company and Verax
Corporation (E)
10.12 Agreement, dated as of April 1, 1992, between the Company and
Immunotech Corporation, relating to development of an in vitro
blood serum test kit (E)
10.13 Agreement, dated as of August 27, 1992, between the Company and
Donald C. Fresne, relating to a loan of up to $350,000 (E)
10.14 Employment Contract, dated May 1, 1991, between the Company and
James F. Mongiardo (A)
10.15 Employment Contract, dated May 1, 1991, between the Company and
Donald C. Fresne (A)
10.16 Agreement, dated December 7, 1993, between the Company and
Baytree Associates, Inc., relating to a Regulation S offering
10.17 Agreement, dated as of November 1, 1993, between BioMolecular
Assays, Inc. and the Company relating to the development of the
COD Test
10.18 Agreement, effective as of June 1, 1993, between MGH and the
Company, relating to a license for an invention pertaining to
certain hybridoma cell lines
10.19 Lease dated January 15, 1992 (the "Wellesley Lease"), between the
Company and L. Grignaffini & Sons, Inc., relating to the
Company's offices located in
21
<PAGE>
Wellesley, MA
10.20 Extension of Lease dated November 9, 1992 between the Company and
L. Grignaffini & Sons, Inc., relating to the Wellesley Lease
10.21 Employment Contract, dated April 20, 1994, between the Company
and Donald C. Fresne (H)
10.22 Agreement, dated February 10, 1994, between the Company and
Baytree Associates to raise equity capital (H)
10.23 Agreement, dated March 9, 1994, between the Company and Baytree
Associates to raise equity capital (H)
10.24 Agreement, dated March 9, 1994, between the Company and Baytree
Associates to raise equity capital (H)
10.25 Agreement, dated April 14, 1994, between the Company and Baytree
Associates to raise equity capital (H)
10.26 Amended and Restated Employment Contract dated September 13,
1994, between the Company and Donald C. Fresne (I)
10.27 Employment Contract dated September 13, 1994, between the Company
and Richard E. Kent (I)
10.28 Amendment, dated April 19, 1994, to the Restated Agreement dated
February 25, 1992, as amended, between the Company and BBRI
regarding a change in the payment terms (I)
10.29 Preferred Stock and Warrant Purchase and Security Agreement
between the Company and Donald C. Fresne dated May 1, 1995 (K)
10.30 Research Support Agreement dated as of October 31, 1997 between
the Company and BioTag with attached copy of NKI/BioTag Research
Agreement dated January 30, 1997 (N)
20.1 Form of Warrant to Purchase Common Stock (G)
22
<PAGE>
27.0 Financial Data Schedule
- ---------------------
Notes to Exhibits:
(A) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33-42868), filed on September 20, 1991.
(B) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended by Amendment No. 2 (Registration No. 33-42868), filed on
November 27, 1991.
(C) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended by Amendment No. 3 (Registration No. 33-42868), filed on
December 4, 1991.
(D) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1991.
(E) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1992.
(F) Filed together with Exhibit 3.3.
(G) Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended March 31, 1994.
(H) Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended September 30, 1994.
(I) Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended September 30, 1994.
(J) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1994.
(K) Incorporated by reference to the Company's Form 8-K filed on June 15,
1995.
(L) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1996.
(M) Incorporated by reference to the Company's Information Statement on
Schedule 14(c) dated August 9, 1997.
(N) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1997.
23
<PAGE>
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K for the fiscal year ended
December 31, 1998.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EPIGEN, INC.
Date: March 31, 1999 By: /s/ Donald C. Fresne
-------------------------------------
Donald C. Fresne, Chief Executive
Officer, Chairman of the Board of
Directors and President
In accordance with the Exchange Act, this report has been signed below by the
following persons of behalf of the registrant and in the capacities and on the
dates indicated.
Date: March 31, 1999 By: /s/ Donald C. Fresne
-------------------------------------
Donald C. Fresne, Chief Executive
Officer, Chairman of the Board of
Directors and President
Date: March 31, 1999 By: /s/ Richard E. Kent
-------------------------------------
Richard E. Kent, Vice Chairman of the
Board of Directors and Secretary
Date: March 31, 1999 By: /s/ L. Courtney Schroder
-------------------------------------
L. Courtney Schroder, Treasurer
(Principal Financial and Accounting
Officer) and Director
25
<PAGE>
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<PERIOD-END> Dec-31-1998
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