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, 1999
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.
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(Name of Small Business Issuer in its Charter)
Delaware 04-3120172
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(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
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(Address of Principal Executive Offices) (Zip Code)
(914) 677-5317
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(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
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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
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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, 2000 was 5,859,402.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual report on Form 10-KSB for the fiscal year ended December 31, 1996.
2. Information Statement on Schedule 14C dated August 9, 1997.
3. Annual report on Form 10-KSB for the fiscal year ended December 31, 1997.
4. Annual report on Form 10-KSB for the fiscal year ended December 31, 1998.
As used in this Form 10-KSB, the terms "we", "us", "our" and "Company" refer to
Epigen, Inc., a Delaware corporation incorporated on April 24, 1991, and its
predecessor, COD Associates, L.P., a Delaware limited partnership.
Forward-Looking Statements
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Except for historical information contained in this document, this Annual Report
on Form 10- KSB certain forward looking-statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Act"), and section 21E of
the Securities Exchange Act of 1934, as amended. In light of important factors
that can materially affect results, including those set forth elsewhere in this
Form 10-KSB, the inclusion of forward looking information should not be regarded
as a representation by the Company or any person that the objectives or plans of
the Company will be achieved. We may encounter competitive, technological,
financial and business challenges making it more difficult than expected to
continue to develop, market and manufacture
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our products; competitive conditions within the industry may change adversely;
upon development of our products, demand for our products may weaken; the market
may not accept our products; we may be unable to retain existing key management
or research personnel; our forecasts may not accurately anticipate market
demand; and there may be material adverse changes in our business and
operations. Certain important factors affecting the forward-looking statements
made herein include, but are not limited to, the risks and uncertainties
associated with completing pre-clinical and clinical trials for our
technologies; obtaining additional financing to support our operations,
obtaining regulatory approvals for our technologies; complying with other
governmental regulations applicable to our business; consummating arrangements
with corporate partners for product development; achieving milestones under
collaborative arrangements with potential corporate partners; developing the
capacity to manufacture, market and sell our products, whether directly or
indirectly with collaborative partners, developing market demand for and
acceptance of our products; competing effectively with other pharmaceutical and
biotechnological products; attracting and retaining key personnel; protecting
proprietary rights; accurately forecasting operating and capital expenditures,
other commitments, or clinical trial costs and other factors. Assumptions
relating to budgeting, marketing, product development and other managerial
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experiences and business
developments, the impact of which may cause us to alter our capital expenditure
or other budgets, which may in turn affect our business, financial position and
results of operations.
Risk Factors
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IF WE CANNOT OBTAIN ADDITIONAL FUNDING, OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS MAY BE REDUCED OR DISCONTINUED.
The Company has funded all operations to date primarily through equity
financings. The Company has raised in the aggregate approximately $16,329,459 in
equity and $4,318,888 in debt. At December 31, 1999, the Company had $521,766 in
cash and cash equivalents. We have expended and continue to expend substantial
funds on the development of our products. As a result we have had negative cash
flows from operations since inception and expect that this situation will
continue for the foreseeable future. The Company will require additional capital
to fund its research and working capital needs. The Company has no current
arrangements with respect to, or potential sources of, additional financing, and
there can be no assurance that any such financing will be available to the
Company when needed, on commercially reasonable terms, or at all. Any inability
to obtain additional financing will have a material adverse affect on the
Company, including possibly requiring the Company to significantly curtail or
cease its operations. If the Company is unable to locate a suitable strategic
partner, the Company estimates that an additional $3,000,000 will be required in
order for the Company to prosecute an FDA approval of the COD Test.
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WE HAVE HAD SIGNIFICANT LOSSES AND ANTICIPATE FUTURE LOSSES.
The Company was organized in 1991 as the successor to Cod Associates, L.P.
("COD") to continue research and development activities for the development
principally of an in-vitro blood test (the "COD Test"). During the period since
its inception the Company has not succeeded in developing the COD Test to the
point where it can be marketed commercially or submitted to the United States
Food and Drug Administration ("FDA") for approval. As a result, the Company has
not generated any operating revenues. For the period from April 24, 1991 to
December 31, 1999, the Company and its predecessor entity incurred a cumulative
net loss of approximately $20,105,368. The Company will be required to engage in
continuing research, testing and development activities which, together with
projected working capital needs, are expected to result in operating losses,
which may be substantial, for the foreseeable future. There can be no assurance
that the Company's research and development activities will be successful, that
the COD Test will prove effective in clinical trials of that it will be granted
regulatory approval or will become commercially viable or successfully marketed
or that the Company will ever achieve significant revenues from operations. The
Company's operations are subject to numerous risks associated with its industry,
including gaining access to markets in an industry characterized by numerous
large, well-established and well-capitalized competitors and by exhaustive
regulatory scrutiny. In addition, the Company may encounter unanticipated
problems, including development, regulatory, manufacturing and/or marketing
difficulties, some of which may be beyond the Company's ability to resolve. In
light of the Company's history of operating losses, the nature of the industry
in which it operates and the uncertainty surrounding the Company's ability to
successfully develop and market the COD Test, there can be no assurance that the
Company will be able to achieve profitability at all or on a sustained basis.
THE COMPANY IS INSOLVENT.
The Company presently is insolvent and unable to pay its debts as they become
due. As of December 31, 1999, the Company had outstanding indebtedness of
approximately $4,318,888, of which approximately $1,312,348 is accrued payroll
owed to present officers and directors of the Company. $1,955 is owed to
Biofund, Inc. ("Biofund") a Delaware corporation the shareholders of which are
all shareholders of the Company. $750,000 is owed to Bank of Millbrook.
$1,250,521 is owed to various individuals who are shareholders of the Company.
The remaining balance of approximately $1,004,064 is owed to trade creditors and
professionals which have provided legal services to the Company. The Company has
reached standstill agreements with various of its creditors pursuant to which
such creditors have agreed to defer payment of the amounts owed them under
certain circumstances. In the event the Company is unable to honor its
agreements with such creditors or if other creditors of the Company do not
forbear payment of the amounts owed them, the Company may be forced to seek
protection under the United States Bankruptcy Code, to cease operations or both.
In either event, such action would have a material adverse affect on the
Company's business and operations.
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OUR ACCOUNTANTS HAVE ISSUED A GOING CONCERN PARAGRAPH IN THEIR REPORT.
The Company and its predecessor have incurred continuing operating losses since
1987. The Company's management has included a footnote in the Company's
Financial Statements for the period ended December 31, 1997 and the Company's
independent auditor has included a paragraph in its Independent Auditor's Report
calling attention to such footnote and to the uncertainty surrounding the
Company's ability to continue as a going concern. There is no assurance that the
Company will be able to continue as a going concern. See, Note 1 to the
Company's Financial Statements included in this Annual Report on Form 10-KSB.
WE ARE DEPENDENT UPON THIRD PARTIES FOR FURTHER DEVELOPMENT, MANUFACTURING AND
MARKETING OF OUR PRODUCTS.
The Company's plan of operation and prospects will be largely dependent upon the
Company's ability to successfully develop the COD Test and enter into a suitable
arrangement with a strategic partner such as a major pharmaceutical firm, for
the necessary regulatory approvals of the COD Test. There can be no assurance
that the Company will successfully develop the COD Test, or that, if developed,
the Company will be able to enter into a suitable arrangement with a strategic
partner, that such strategic partner will be able to obtain the necessary
regulatory approvals or that the COD Test will be accepted by the medical
community and be commercially viable. The Company's business plan also
anticipates that the Company will rely on third parties to manufacture the COD
Test in accordance with Current Good Manufacturing Practices Regulations as
prescribed by the FDA and to market the COD Test. The Company does not
anticipate having the resources to manufacture and market the COD Test on its
own. The dependence upon third parties to manufacture and market the COD Test
may adversely affect the operating results by foregoing the revenues associated
with the manufacture and direct sale of the COD Test as well as the Company's
ability to deliver products on a timely and competitive basis. In general,
although the Company will seek to provide sufficient economic motivation to
parties with which it intends to establish strategic relationships to perform
their contractual obligations, because the COD Test is expected to be a small
portion of such third party's product line, the amount and timing of resources
devoted to the Company's products may be controlled to a significant extent by
such third parties. Further, there can be no assurance that the Company will be
able to enter into or maintain satisfactory third-party manufacturing and
marketing arrangements for the COD Test or, if entered into, that any such
arrangements will prove profitable to the Company.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATION.
The Company's products will be subject to regulation by the federal Food and
Drug Administration ("FDA") and comparable agencies in other countries. The
regulatory process, including required pre-clinical and clinical testing,
differs for each product but generally is lengthy and expensive. The Company
does not have the ability at present to make a submission to the FDA for
approval of its products and anticipates that a strategic partner will make the
actual submission of the COD Test to the FDA for approval. There can be no
assurance, however, that
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the Company will locate a suitable strategic partner, or that either a strategic
partner or the Company, on its own, will be successful in obtaining FDA approval
for the COD Test. Further, failure to comply with applicable regulations after
obtaining regulatory approval can, among other things, result in the suspension
of regulatory approval, as well as possible civil and criminal sanctions on the
part of the person prosecuting such application, whether such person be the
Company or a strategic partner. In addition, existing governmental regulation or
policies may be changed or additional government regulation may be applied that
could prevent or delay approval of the COD Test. Even if regulatory approval is
granted, the COD Test may be subject to continued review, and later discovery of
previously unknown problems may result in restrictions on the COD Test or its
manufacturer, including withdrawal of the product from the market. Moreover,
increased attention to the containment of health care costs in the United States
could result in new government regulations which could have a material adverse
affect on the Company's business. The likelihood of adverse governmental
regulation which may arise from future legislative or administrative action,
either in the United States of elsewhere, cannot be determined.
OUR TECHNOLOGY HAS NOT BEEN COMMERCIALLY PROVEN.
The Company's products are based on specific monoclonal antibody ("mAb")
technology which has been biostatistically proven using proprietary IgM
antibodies, but which now requires additional development and testing using
proprietary IgG antibodies before any such products can be deemed clinically
viable. While the Company has evaluated a number of mAb's and believes that such
evaluations show significant promise of viability, there can be no assurance
that the mAb technology will prove to be viable or that this technology will
ultimately be successfully developed or prove to have any commercially viable
applications.
WE ARE SUBJECT TO INTENSE COMPETITION FROM OTHER COMPANIES AND INSTITUTIONS.
The biopharmaceutical industry is characterized by intense competition and rapid
technological change. There are many competitors in the industry, both in the
United States and abroad including many large, well established and well
capitalized pharmaceutical companies, universities and institutes. In addition,
many companies and universities are engaged in development of, and companies may
offer products which are competitive with the COD Test. The Company is aware
that many companies have unsuccessfully attempted to develop and market an
in-vitro blood test for cancer monitoring. The Company is aware of research
activities aimed at developing an in- vitro blood test that will be an
improvement over existing products in the monitoring of carcinomas and of
research and development activities for in-vitro blood tests to detect cancer.
The COD Test is designed to be used as a confirmatory test in the diagnosis of
carcinomas, and would be competing with other tests. Most potential competitors
have substantially greater financial, technical, manufacturing, marketing,
distribution and/or other resources than the Company. Although the Company does
not intend itself to compete directly in this market, but rather to seek to
enter into a strategic relationship with an established manufacturer, the
proposed products are likely to face intense competition in the marketplace.
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The first uses for the COD Test are expected to be a confirmatory test for
prostate and breast cancers. The principal diagnostic aid for prostate cancer is
PSA. The present predictive value of PSA is approximately 25% of patients
tested. When coupled with a digital rectal examination, predictability increases
to approximately 49% and has a 77% false positive level. Mammograms have a 66%
false positive level. Further, PSA is unable to distinguish between benign
prostate hyperplasia (" BPH"), and non-cancerous swelling of the prostate, and
prostate cancer. PSA is widely used by the medical community. While preliminary
data suggest that the COD Test is more effective than both PSA and mammograms,
there can be no assurance that such data will be confirmed in clinical trials or
that the COD Test will prove more effective than either of such other tests in
practical application or that the COD Test will be accepted by the medical
community.
WE ARE DEPENDENT UPON A LIMITED PRODUCT LINE WHICH MAY EFFECT OUR FUTURE GROWTH.
The Company's current efforts are focused primarily on the development of the
COD Test. Because of its financial condition, the Company has not pursued
research and development of its in-vivo imaging agent or a therapeutic vaccine.
To the extent funds are available, the Company will continue research and
development of an in-vivo imaging agent and therapeutic vaccine. Accordingly,
the Company's near-term prospects will be largely dependent upon the success of
COD Test and on subsequent FDA approval and successful marketing of the COD
Test. The Company's business could be adversely affected by the development of a
competing product or the failure of COD Test to be accepted by the medical
community. While the Company intends to seek additional financial and clinical
assistance from strategic partners in the pharmaceutical industry, there can be
no assurance that any such arrangements will be made. If no such arrangements
are made, the Company may have to modify its proposed plan of operations or
reduce certain activities.
BECAUSE OF OUR FINANCIAL CONDITION, WE MAY NOT BE ABLE TO CONTINUE FUTURE
RESEARCH.
Because of the Company's financial condition, the Company has been unable to
pursue the development of the COD Test as rapidly as the Company believes
possible. Further, such financial condition has prevented the Company from
pursuing research and development of the in- vivo imaging agent. Recently, the
Company has been able to begin preliminary research on the development of a
therapeutic vaccine. The Company is aware of research and development efforts
for both in-vivo imaging agents and therapeutic vaccines by various competitors,
including pharmaceutical firms and universities. There can be no assurance that
the delays in research and development experienced by the Company have not
permitted competitors to advance development of competing products. Any such
advancements may render the Company's technology obsolete or noncompetitive.
Further, the Company's competitors may also succeed in developing technologies
or adapting existing technologies to products that are more effective or more
commercially acceptable than any which may be developed by the Company. Such
delays in research and development may permit the Company's competitors to
succeed in obtaining cost advantages, patent protection or other advantages
which could render the Company's technology noncompetitive.
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WE MAY NOT BE SUCCESSFUL IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PATENTS AND
LICENSES TO PATENTS.
The Company owns one United States patent for its Human Carcinogen Antigen
("HCA") and has a number of pending applications for foreign patents thereon. In
addition, the Company has patent applications pending in the United States on
HCA antibodies and anti-idiotypic antibodies to an epiglycanin epitope. The
patent application process can take several years and may entail considerable
expense without any assurance that a significant, or any, patent will issue. The
failure to obtain patent protection on the pending applications for the
technology underlying the Company's proposed products may materially adversely
affect its competitive position and business prospects. Further, even though a
patent has been obtained and other patents may be obtained, there can be no
assurance that any such patents will provide the Company with any competitive
advantage, that others will not design around any such patent or that any such
patent will not be challenged by a third party. It is also possible that the
technology developed by the Company may infringe patents or other rights owned
by others, licenses to which may not be available to the Company.
OUR PRODUCT DEVELOPMENT IS DEPENDENT UPON OTHERS, THE LOSS OF WHOSE SERVICES
WOULD IMPAIR OUR PRODUCT DEVELOPMENT.
The Company is materially dependent upon the continued efforts of such third
parties to perform research, development, clinical testing and evaluation of the
Company's proposed products, particularly Vacold, LLC, which conducts most of
the Company's present research on its IgG antibodies. Pursuant to its agreement
with Vacold, LLC, the Company has a month to month contract to develop its
in-vitro technology at a cost of $50,000 per month. Should the Company be unable
to pay the monthly fee, Vacold, LLC will curtail the use of its facilities and
personnel. The loss of Vacold, LLC's facilities and personnel could have a
material adverse affect on the Company's ability to develop the COD Test. The
Company continues to rely on the research and collaboration of third parties,
including Vacold, LLC and physicians associated with major hospitals such as
Duke University Hospital, Boston University Hospital and Columbia Presbyterian
Hospital and is materially dependent upon the continued efforts of such third
parties to perform research, development, clinical testing and evaluation of the
Company's proposed products. The loss of a significant research relationship
would have a material adverse affect on the Company's ability to continue the
research and development of the Company's products. The Company also relies on
its scientific advisors. The scientific advisors are generally employed on a
full-time basis by universities and hospitals and devote only a portion of their
time to the Company's affairs, and some have consulting or other advisory
arrangements with other entities which may conflict or compete with their
obligations to the Company. The loss of any of such persons or companies may
have a material adverse effect on the Company's operations if any of such
persons or companies were not replaced quickly. There is no assurance that the
Company would be able to arrange for a prompt replacement or that replacements
would be available on terms affordable by the Company. To the extent that third
parties or the Company's scientific advisors apply technological information
independently developed by them or by others to the Company's proposed products,
disputes may arise as to the proprietary rights to such information.
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Further, any inventions discovered by such persons as part of their regular
employment by others are not likely to become property of the Company.
The Company has disclosed some or all of the proprietary information relating to
the COD Test and its other potential products to its consultants and advisors
and has obtained written confidentiality agreements from each of such persons,
but if any of such agreements are breached, there can be no assurance that the
Company would be successful in preventing the improper us of such proprietary
information.
OUR TECHNOLOGY IS PLEDGED AS SECURITY FOR OUR DEBTS TO OFFICERS, DIRECTORS AND
SHAREHOLDERS.
The Company's intellectual property, including its current patent and patent
applications, are subject to security interests in favor of Donald C. Fresne,
the Company's Chairman, President and Chief Executive Officer and Biofund, Inc.,
of which Mr. Fresne and several other shareholders of the Company hold a
majority of the shares. Such security interests are intended to secure payment
to Mr. Fresne of all sums owed to him by the Company, including accrued but
unpaid salaries, and to secure the sum of $800,000, plus interest, owed to
Biofund, Inc. While neither Mr. Fresne nor Biofund, Inc. has expressed a present
intention of foreclosing on their respective security interests, there can be no
assurance that future circumstances may not cause them to so foreclose. If
either of such parties were to foreclose on their security interest, such action
would materially impair the Company's ability to continue operations.
OUR DEPENDENCY ON A LIMITED NUMBER OF SUPPLIERS MAY ADVERSELY EFFECT OUR ABILITY
TO COMPLETE CLINICAL TRIALS AND MARKET OUR PRODUCTS.
The Company currently relies on certain collaborating physicians to provide
substantially all of the human serum samples required to conduct clinical trials
on the COD Test at minimal cost. Numerous serum samples from the same patient
over a period of time are required in order to evaluate the efficacy of the COD
Test. Were the Company to attempt to obtain such samples from non-collaborating
sources, whether by choice or because a collaborating physician ceases to
collaborate with the Company, the costs of obtaining such samples could be
significant and could substantially reduce the Company's access to such samples.
Any interruption in the supply of serum samples or an increase in the costs of
such samples would have a material adverse affect on the development of the COD
Test.
WE ARE DEPENDENT UPON CERTAIN KEY PERSONNEL AND WILL NEED ADDITIONAL PERSONNEL
IN THE FUTURE.
The Company presently has two full-time and one part-time employees. The
Company's business plan contemplates that the Company will outsource all
significant operations. The success of the Company will be dependent on the
personal efforts of Donald C. Fresne, its President and Chief Executive Officer,
who is also a principal stockholder of the Company, to arrange for such
outsourcing on terms advantageous to the Company. Mr. Fresne devotes
substantially all of his
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time to the Company and intends to continue to so do. In the event the Company
is successful in arranging for a strategic partnership with a major
pharmaceutical firm, the Company intends to hire a President and Chief Operating
Officer with significant industry experience. Until the Company is able to hire
a President and Chief Operating Officer, the loss of the services of Mr. Fresne
could have a material adverse affect on the Company's prospects. The success of
the Company is also dependent upon its ability to retain qualified third-party
research and clinical personnel. While the Company has been able to arrange for
the retention of qualified third-party research and clinical personnel to date,
there can be no assurance that it will be able to continue to do so. Any
inability to attract and retain such qualified personnel would have a material
adverse affect on the Company.
OUR PRODUCTS, FF APPROVED, MAY NOT BE COMMERCIALLY VIABLE DUE TO HEALTH CARE
REFORM AND THIRD-PARTY REIMBURSEMENT LIMITATIONS.
The Company's ability to commercialize the COD Test may depend in part on the
extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health insurers and other organizations. Third-party payors increasingly
are challenging the price of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. In addition, current policies regarding cost reimbursement could
change, reducing or eliminating reimbursement for certain procedures and tests
and thereby adversely affect the Company's ability to market the COD Test. Also,
such third-party payors may determine that the COD Test is unnecessary,
inappropriate or not cost-effective or otherwise not subject to reimbursement,
regardless of any future FDA approval. There can be no assurance that
reimbursement from third-party payors will be available, or if available, that
reimbursement will not be limited, thereby adversely affecting the Company's
ability to sell its products profitably. In such event, sales of the COD Test
could be adversely affected.
MOST OF OUR STOCK IS HELD BY OUR OFFICERS AND DIRECTORS WHO THEREBY CONTROL THE
COMPANY.
As of December 31, 1999, the current officers and directors of the Company
beneficially owned, in the aggregate, approximately 46.67% of the outstanding
shares of Common Stock. In addition, by virtue of his ownership of 300,000
shares of the Company's Series A Preferred Stock, Mr. Fresne controls over 50%
of the voting power of the Company's capital stock. Accordingly, Mr. Fresne,
acting individually, and all such persons, acting together, will be in a
position to control the Company, elect all of the Company's directors, cause an
increase in the authorized capital or the dissolution, merger or sale of the
assets of the Company, and generally to direct the affairs of the Company. In
addition, the Board of Directors has authority to issue additional shares of
preferred stock having such rights, preferences and privileges as the Board may
determine. Any such issuance of preferred stock could, under certain
circumstances, have the effect of further delaying or preventing a change in
control of the Company and may adversely affect the rights of holders of Common
Stock. Statutory law also imposes limitations on certain business combinations.
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WE HAVE NOT, AND DO NOT EXPECT, TO PAY DIVIDENDS ON OUR STOCK.
To date, the Company has not paid any cash dividends on its Common Stock and
does not expect to declare or pay dividends on the Common Stock in the
foreseeable future.
THERE PRESENTLY IS NO TRADING MARKET FOR OUR SHARES OF COMMON STOCK.
Trading in the Company's shares of Common Stock was halted on the American Stock
Exchange in September 24, 1994 and the Company was delisted from such Exchange
in January 1995. Since September 24, 1999, there has been no market for the
shares of the Company's Common Stock. There can be no assurance that a trading
market for the Company's shares of Common Stock will develop in the future.
THERE ARE LIMITATIONS ON THE LIABILITY OF OUR OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation includes provisions to limit, to the
full extent permitted by Delaware Law, the personal liability of directors of
the Company for monetary damages arising from a breach of their fiduciary duties
as directors. As a result of such provisions in the Certificate of
Incorporation, stockholders may be unable to recover damages against the
directors of the Company for actions taken by them which constitute negligence,
gross negligence or a violation of certain of their fiduciary duties, which may
reduce the likelihood of stockholders instituting derivative litigation against
directors and may discourage or deter stockholders from suing directors for
breaches of their duty of care, even though such an action, if successful, might
otherwise benefit the Company and its stockholders.
THE ISSUANCE OF SUBSTANTIAL SHARES OF OUR COMMON STOCK MAY HAVE A NEGATIVE
EFFECT ON FUTURE STOCK PRICES.
In the event that a trading market is established for the Company's Common
Stock, sales of substantial amounts of Common Stock in such market could have an
adverse affect on the price of the Common Stock. Presently, the Company has
outstanding options to purchase 69,091 shares of Common Stock and warrants
outstanding to purchase an additional 1,405,436 shares of Common Stock. In
addition, the Company is obligated, under certain conditions, it issue 848,371
shares of Common Stock. Of such warrants and options, under certain conditions
stockholders of the Company owning an aggregate of approximately 917,252
warrants and 55,405 options are entitled to participate in future Company
registrations. Further, Richard E. Kent, the company's Vice Chairman and
Secretary and holder of such 55,405 options, is entitled to demand registration
of the shares underlying such options.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DIFFICULTIES OR DELAYS IN CLINICAL TRIALS.
We may encounter unanticipated problems, including development, manufacturing,
distribution, financing and marketing difficulties, during the product
development, approval and
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commercialization process. Our product candidates may take longer than
anticipated to progress through clinical trials or patient enrollment in the
clinical trials may be delayed or prolonged significantly, thus delaying the
clinical trials. Delays in patient enrollment will result in increased costs and
further delays. If we experience any such difficulties or delays, we may have to
reduce or discontinue our development, commercialization and clinical testing of
some or all of our products.
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PART I
ITEM 1. BUSINESS
Introduction
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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), a 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 surface of nearly all
carcinomas, and is generally absent in healthy cells. The Company is presently
planning to develop a confirmatory blood test for colorectal, ovarian, and lung
cancers.
A four-year clinical study at The Massachusetts General Hospital on 100 breast
cancer patients using an IgM antibody has been completed. During this study
period, the Company has raised new IgG antibodies that are to be used in a more
sensitive (sandwich) assay. The serum samples will be re-run using the new assay
to determine the predictive and the monitoring values of the technology.
Prostate Cancer
- ---------------
A clinical study on 433 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 prostatic hyperplasia) and cancer. The
results of such study indicate that the COD Test yields more accurate results
then the tests currently being used.
This study employed the use of IgM antibodies. The industry prefers IgG
antibodies because they are 20% of the size of IgM, have much shorter reactive
time, better sensitivity and specificity. The Company has successfully raised
new IgG antibodies, is currently involved in demonstrating
13
<PAGE>
the efficacy of these new antibodies to several biopharmaceutical companies, and
is seeking strategic alliances to manufacture and market this product on an
exclusive worldwide basis. Management believes the COD Test can save the health
care industry approximately one billion dollars per year, by eliminating
unnecessary follow-up procedures, i.e., biopsies, sonograms, and doctor
consultations.
The Company anticipates that its 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 assay as a confirmatory test for prostate cancer.
Other 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 current
bio-markers used to monitor breast cancer patients. Company data further
indicate that the COD Test can predict a recurrence in some cases up to eight
months before a physician can clinically make that determination. The Company
believes that the COD Test may be superior to other antigen-based blood tests
for breast, prostate, ovarian, and colon cancer. The Company expects that the
COD Test should 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 screen for ovarian cancer, a specific test for colorectal cancer, a
confirmatory test or screen for breast cancer, and a test for lung cancer. Each
new assay will allow the Company to negotiate an additional license agreement.
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 monoclonal antibodies linked
with a radioactive label. When this compound is injected into a patient, it
finds the carcinoma and marks it. Then, through the use of a scintillation
camera, the radioactive label should be detectable and displayable on a computer
screen or hard copy similar to an X-ray confirming the diagnosis and location of
the carcinoma, indicating whether the tumor has metastasized, shows the location
of the metastases, and to be used as 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 monoclonal
14
<PAGE>
antibodies 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, 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 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 elicitation of antibodies
that recognize HCA. The Company will initially rely on a contract manufacturer
for the production of the vaccine and will seek out a strategic partner to
conduct 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 have lived a normal life. Mice which had not been vaccinated
and so challenged died within two weeks.
Results of in-vitro tests have also shown that our antibodies kill cancer cells
and do not kill normal cells, indicating that our antibodies hold great promise
as a therapeutic.
In 1997, the Company entered into a contract with Dr. Carl Olsson, Professor and
Chairman of the Department of Urology of Columbia Presbyterian Hospital, to
develop the therapeutic vaccine.
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 will
kill the circulating cancer cells that cause the recurrence of a malignant tumor
without side effects to the patient. Enough biostatistical data are available
from patients who have had carcinomas removed at various stages and who have had
recurrences two to three years following their operation to establish the
effectiveness of the vaccine within three years from commencement of this study.
As soon as funding permits, the Company expects to begin development of this
vaccine. The Company also expects development to be completed at Columbia
Presbyterian Hospital.
15
<PAGE>
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 procedures 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 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 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 in the United States.
While it is impossible at this time to predict the effect of the various health
care containment initiatives 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 companies 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
- -------------------------
Epigen relies on contract laboratories and academia for research and development
effort. As of March 15, 1999, the Company had two full-time and two part-time
employees.
The Company has 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.
16
<PAGE>
Research and Development
- ------------------------
The total dollar amount spent during 1999 and 1998 on research by the Company
was $506,580 and $242,506, respectively.
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
chemicals, specifically created murine monoclonal antibodies 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 3% 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. 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, as amended on June 1, 1995, 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 January 30, 1997, Biotag, Inc. ("Biotag"), a company wholly owned by Donald
C. Fresne, entered into a Licensing Agreement with NKI ("Netherlands Cancer
Institute") to develop an IgG antibody specific to the HCA antigen and sequence
the antigen 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 was 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 three percent (3%) of the net selling price of any
17
<PAGE>
such products using the HCA antigen. In 1999 and 1998, $25,000 and $60,000 was
paid by the Company in connection with such research. Pursuant to an addendum to
such Agreement, dated November 16, 1998, Biotag and NKI agreed to extend the
term of such Agreement until February 1, 2000 and Biotag agreed to pay NKI an
additional $65,000 during such extension. To date, the amount of accrued but
unpaid fees owed by Biotag to NKI is $93,750.
On March 31, 1999, Epigen entered into a research and development agreement with
Vacold, LLC to raise and demonstrate IgG antibodies specific to the HCA antigen
for which they received 433,705 shares of Common Stock for work then completed
and are entitled to a monthly contract fee and a 3% royalty on net sales of
products incorporating the use of IgG antibodies raised by Vacold, LLC.
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. 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 effect of 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. Such space is leased from Donald C. Fresne. The
Company leased this space on a month-to-month basis prior to May 1, 1991, and,
effective on that date, entered into a three-year lease agreement paying rent
equal to the real estate taxes, insurance and utilities allocable thereto. The
Company paid $23,453 in rent under the lease in 1994 and $15,820 in rent in
1995. On April 14, 1994, Mr. Fresne agreed effective immediately to terminate
the lease. Further, Mr. 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 reinstate this lease under the same
terms and conditions as the previous lease, and the Company paid $33,000,
$36,000, and $41,500 in rent under the lease in each of 1997, 1998, and 1999
respectively. The Company believes that the terms of the lease are at least as
favorable as could have been obtained from a non-affiliated lessor.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings, nor is any of the
Company's property subject to any such pending legal proceedings.
18
<PAGE>
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
fiscal year covered by this report.
19
<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.
Sales of Unregistered Securities
- --------------------------------
The following is a summary of transactions by the Company during the year ended
December 31, 1999 involving issuances and sales of the Company's securities that
were not registered under the Act.
On or about January 19, 1999, the Company issued to two collaborating physicians
an aggregate of 20,000 shares of its Common Stock in consideration of services
performed in connection with the generation of new antibodies.
In March 1999 the Company issued an aggregate of 210,000 shares of its Common
Stock, including 50,000 shares to W. James Tozer, Jr., together with its Series
F and Series G Warrants, for an aggregate consideration of $185,000. Each
purchaser received one Series F Warrant and Series G Warrant, each entitling
such purchaser to acquire a number of shares of Common Stock equal to the number
of shares purchased with such purchaser's investment. Each of such Warrants is
exercisable through March 31, 2004. The Series F Warrant are exercisable at
$1.50 per share and the Series G Warrant are exercisable at $2.00 per share. A
such time the Company issued 75.000 shares of its Common Stock to an
unaffiliated entity in exchange for the cancellation of $75,000 in debt owed by
the Company to such entity and 10,000 shares to a collaborating researcher in
recognition of contributions to the Company's research program.
In July 1999, the Company issued to Donald C. Fresne and W. James Tozer, Jr.,
respectively, 300,000 and 50,000 shares of its Series A Preferred Stock. The
shares of such stock issued to Mr. Fresne were in consideration of the
cancellation of $300,000 of indebtedness owed to him by the Company. The shares
of such stock issued to Mr. Tozer were in consideration of the sum of $50,000 in
cash.
In September 1999, the Company issued 433,705 shares of its Common Stock to
Vacold, LLC pursuant to the terms of a research agreement between Vacold, LLC
and Biotag, Inc., of which
20
<PAGE>
Mr. Fresne is the sole shareholder, and 21,685 to the person who introduced
Vacold, LLC to the Company in consideration of such services. The Company also
issued 3,000 shares of its Common Stock to the Company's former accountant in
partial settlement of unpaid fees owed to such person. The Company also issued
25,000 shares of its Common Stock to each of Messrs Kent and Schroder as stock
bonuses. The Company also issued 100,000 shares of its Common Stock each to
Richard D. Field and Lionel Goldfrank, III at a price of $1.00 per share, plus
its Series H Warrants for 100,000 shares of Common Stock each. Such Warrants are
exercisable at $3.00 per shares through June 30, 2004 and contain piggy back
registration rights.
In November 1999, the Company issued to a collaborating hospital 560 shares of
its Common Stock in consideration of such hospital's cancellation of $1,680 of
debt owed by the Company thereto, at the rate of $3.00 per share.
The issuance of the securities of the Company in each of the above transactions
was deemed to be exempt from registration under the Act by virtue of Section
4(2) thereof, as a transaction not involving a public offering. The recipients
of such securities either received adequate information about the Company or had
access, through employment of other relationships with the Company, to such
information.
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 produced enough data indicating that the COD
Test can be used as a confirmatory test for prostate cancer 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's plan has
been to enlist a strategic partner to complete development , clinical trials,
marketing and manufacturing of the Company's 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, 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. We
anticipate that our partner will manufacture, 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.
21
<PAGE>
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 Company believes that the results demonstrate the
viability of the COD Test as a diagnostic aid. The study reveals the following
results in a comparison between its HCA and PSA:
Parameter HCA PSA
--------- --- ---
Sensitivity 96.4% (94%, 99%) 81.5%
Specificity 92.2% (89%, 96%) 51.6%
PPV(1) 90.9% (87%,95%) 57.5%
NPV(2) 97% (95%, 99%) 77.6%
(1) Positive Predictive Value
(2) Negative Predictive Value
Sensitivity is a measure of true positive or false negative. If there are 100
lesions and a test identifies 80 of these, the sensitivity is 80%. True (+) 80,
false negative (20).
Specificity is a measure of true negative or false positive. If there are 100
patients with no lesions and a test identifies 20 lesions, the specificity is
80%. True (-) 80, false (+) 20.
The study was done using IgM antibodies. Because of their smaller size and
faster reactivity, the industry prefers IgG antibodies. The Company has
successfully raised IgG antibodies that are 20% of the size of IgM antibodies.
The Company is now engaged in discussions with several major biopharmaceutical
companies that should lead to a license agreement.
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 an effective 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 obviate the need for unnecessary sonograms and
biopsies, and reduce stress experienced by patients who have 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 for this test.
22
<PAGE>
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.
23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To Epigen, Inc.:
We 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, 1999 and 1998, and the
related statements of operations, partners' deficit and stockholders' equity and
cash flows for the two years then ended and for the period from inception
(January 28, 1987) to December 31, 1999. 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, 1999. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our 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, 1999 and 1998, and the
results of its operation and its cash flows for the two years then ended and
from the period to inception (January 28, 1987) to December 31, 1999, 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
February 25, 2000
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
<PAGE>
EPIGEN, INC.
(formerly COD Associates, L.P.)
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
December 31, December 31,
1999 1998
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents .................... $ 521,766 $ 24,215
------------ ------------
Total current assets ...................... 521,766 24,215
Office equipment, net of accumulated
depreciation of $49,272 in 1999 and
$41,043 in 1998 ............................... 20,866 28,022
------------ ------------
$ 542,632 $ 52,237
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable demand ........................... $ 120,805 $ 145,805
Notes payable - 25% interest .................. 200,000 200,000
Notes payable - prime plus 5% ................. 250,000 250,000
Accrued interest-notes payable ................ 245,163 150,697
Accrued direct research and development
costs ........................................ 597,685 430,973
Accrued professional fees ..................... 316,534 357,535
Accrued payroll ............................... 1,312,348 1,173,520
Other accrued expenses ........................ 526,353 368,749
------------ ------------
Total current liabilities ................. 3,568,888 3,077,279
------------ ------------
Long Term Liabilities:
Note payable - Long term ...................... 750,000 --
------------ ------------
Total liabilities ......................... 4,318,888 3,077,279
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - Class A
$ .001 par value - Authorized 1,500,000
shares, Issued and outstanding -
350,000 and -0- shares
at December 31, 1999 and 1998 respectivly ..... 350 --
Common stock $.001 par value - Authorized
50,000,000 shares, Issued and outstanding -
5,810,875 and 4,786,925 shares
at December 31, 1999 and 1998 respectively .... 5,811 4,787
Additional paid-in capital .................... 16,323,298 15,484,456
Deficit accumulated during development
stage ........................................ (20,105,368) (18,513,938)
Less 5 shares of common stock held in
treasury, at cost ............................ (347) (347)
------------ ------------
Total stockholders' equity ................ (3,776,256) (3,025,042)
------------ ------------
$ 542,632 $ 52,237
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<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,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Contract research ............ $ -- $ -- $ 5,000 $ 5,000
Licensing fees ............... -- 1,600 -- 1,600
Management fee income ........ -- -- 3,072 3,072
Interest income .............. 3,713 -- -- 219,711
------------ ------------ ------------ ------------
3,713 1,600 8,072 229,383
------------ ------------ ------------ ------------
Operating Costs & Expenses:
Direct research and
development ................. 542,992 242,506 506,580 7,997,553
General and administrative ... 760,855 946,943 843,371 10,353,672
Fees due to General Partner
of the Predecessor and
affiliates, forgiven and
contributed to capital ...... -- -- -- 1,188,893
Interest expense, net ........ 104,889 247,496 249,551 794,633
------------ ------------ ------------ ------------
Total operating costs
and expenses ............ 1,408,736 1,436,945 1,599,502 20,334,751
------------ ------------ ------------ ------------
Net (loss) .................... $ (1,405,023) $ (1,435,345) $ (1,591,430) $(20,105,368)
============ ============ ============ ============
Net loss per common share ..... $ (0.92) $ (0.37) $ (0.30)
============ ============ ============
Weighted average
Number of shares of common
stock outstanding - see note 8 1,504,432 3,919,467 5,258,306
============ ============ ============
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,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ..................................... $ (1,405,023) $ (1,435,345) $ (1,591,430) $(20,105,368)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense ....... 4,195 5,316 8,229 110,218
Non-cash expenses paid in equity interest ... 55,641 1,033 535 2,811,413
Non-cash compensation expense associated
with the grant of stock options and warrants -- -- -- 427,964
Debt converted to equity ..................... 507,604 58,546 379,681 945,831
Changes in operating assets and liabilities:
Increase(decrease) in accrued direct
research and development costs .............. (22,323) 25,192 166,712 597,685
Increase(decrease) in accrued professional
fees ........................................ 46,938 97,953 (41,001) 316,534
Increase(decrease) in accrued payroll ........ 40,691 28,184 138,828 1,312,348
Increase(decrease) in accrued expenses to
affiliates, printing charges and other
expenses .................................... 115,656 212,213 252,070 771,516
------------ ------------ ------------ ------------
Net cash used in operating activities .... (656,621) (1,006,908) (686,376) (12,811,859)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of office equipment ................. (4,904) (29,135) (1,073) (74,133)
Purchase of treasury stock ................... -- -- -- (347)
Decrease(increase) in note receivable from
an officer/shareholder ...................... 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 .............................. 26,893 24,796 (1,073) (131,430)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock ....... 125,000 816,518 410,000 9,557,650
Decrease(increase) in subscription
receivable .................................. 100,000 -- -- --
Capital contributions ........................ -- -- -- 2,141,600
Proceeds from issuance of preferred stock .... 80,000 -- 50,000 445,000
Increase (decrease) in note payable-demand ... -- -- (25,000) 120,805
Net increase in note payable - other ......... 325,000 125,000 750,000 1,200,000
------------ ------------ ------------ ------------
Net cash provided by financing activities 630,000 941,518 1,185,000 13,465,055
------------ ------------ ------------ ------------
Net increase(decrease) in cash and cash
equivalents .................................. 272 (40,594) 497,551 521,766
Cash and cash equivalents, beginning period ... 64,537 64,809 24,215 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ...... $ 64,809 $ 24,215 $ 521,766 $ 521,766
============ ============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the period .............. $ -- $ -- $ 791 $ 60,128
Income taxes paid during the period .......... $ 1,090 $ 1,712 $ 1,012 $ 9,748
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, 1999
<CAPTION>
Preferred Preferred Common Common Additional
Number of Stock Number of Stock Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contributions in cash ............ -- $ -- -- $ -- $ --
Net Loss ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1987 ......... -- -- -- -- --
Contribution in cash ............. -- -- -- -- --
Net loss ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1988 ......... -- -- -- -- --
Contributions in cash, net of
distribution (Note 4) ........... -- -- -- -- --
Contributions of services ........ -- -- -- -- --
Net loss ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1989 ......... -- -- -- -- --
Contributions of services ........ -- -- -- -- --
Net loss ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1990 ......... -- -- -- -- --
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 ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1991 ......... -- -- 4,669,668 4,670 9,637,570
Purchase of treasury stock ....... -- -- -- -- --
Net loss ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1992 ......... -- -- 4,669,668 4,670 9,637,570
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 ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 ......... -- -- 5,138,469 5,138 10,235,580
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 ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 ......... -- -- 7,911,218 7,911 12,182,789
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 ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 ......... 200,000 $ 200 8,555,980 $ 8,556 $ 12,991,145
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 ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 ......... 650,000 650 10,255,980 10,256 13,833,995
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 ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 ......... -- -- 2,768,836 2,769 14,610,377
------------ ------------ ------------ ------------ ------------
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 ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 ......... -- -- 4,786,925 4,787 15,484,456
------------ ------------ ------------ ------------ ------------
Issuance of prefered stock ....... 350,000 350 -- -- 349,650
Issuance of common stock ......... -- -- 410,000 410 409,590
Stock bonuses * .................. -- -- 535,390 535 --
Debt converted to common shares .. -- -- 78,560 79 79,602
Net loss ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 ......... 350,000 $ 350 5,810,875 $ 5,811 $ 16,323,298
============ ============ ============ ============ ============
* These shares are not traded and have virtually no value, one tenth of one penny, and therefore are recorded at par value.
<PAGE>
Deficit
Accumulated
During Total
Development Treasury Partner (Deficit)
Stage Stock Contributions Equity
------------ ------------ ------------- ------------
Contributions in cash ............ $ -- $ -- $ 803,250 $ 803,250
Net Loss ......................... (825,763) -- -- (825,763)
------------ ------------ ------------ ------------
Balance, December 31, 1987 ......... (825,763) -- 803,250 (22,513)
Contribution in cash ............. -- -- 487,350 487,350
Net loss ......................... (1,043,528) -- -- (1,043,528)
------------ ------------ ------------ ------------
Balance, December 31, 1988 ......... (1,869,291) -- 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) -- -- (986,582)
------------ ------------ ------------ ------------
Balance, December 31, 1989 ......... (2,855,873) -- 2,214,794 (641,079)
Contributions of services ........ -- -- 86,900 86,900
Net loss ......................... (973,657) -- -- (973,657)
------------ ------------ ------------ ------------
Balance, December 31, 1990 ......... (3,829,530) -- 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) -- -- (1,365,962)
------------ ------------ ------------ ------------
Balance, December 31, 1991 ......... (5,195,492) -- -- 4,446,748
Purchase of treasury stock ....... -- (347) -- (347)
Net loss ......................... (1,486,513) -- -- (1,486,513)
------------ ------------ ------------ ------------
Balance, December 31, 1992 ......... (6,682,005) (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) -- -- (3,130,425)
------------ ------------ ------------ ------------
Balance, December 31, 1993 ......... (9,812,430) (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) -- -- (3,210,558)
------------ ------------ ------------ ------------
Balance, December 31, 1994 ......... (13,022,988) (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) -- -- (1,061,958)
------------ ------------ ------------ ------------
Balance, December 31, 1995 ......... $(14,084,946 $ (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) -- -- (1,588,624)
------------ ------------ ------------ ------------
Balance, December 31, 1996 ......... (15,673,570) (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) -- -- (1,405,023)
------------ ------------ ------------ ------------
Balance, December 31, 1997 ......... (17,078,593) (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) -- -- (1,435,345)
------------ ------------ ------------ ------------
Balance, December 31, 1998 ......... (18,513,938) (347) -- (3,025,042)
------------ ------------ ------------ ------------
Issuance of prefered stock ....... -- -- -- 350,000
Issuance of common stock ......... -- -- -- 410,000
Stock bonuses * .................. -- -- -- 535
Debt converted to common shares .. -- -- -- 79,681
Net loss ......................... (1,591,430) -- -- (1,591,430)
------------ ------------ ------------ ------------
Balance, December 31, 1999 ......... $(20,105,368 $ (347) $ -- $ (3,776,256)
============ ============ ============ ============
* These shares are not traded and have virtually no value, one tenth of one penny, and therefore are recorded at par value.
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, 1999
(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 1,500,000 preferred shares at $.001 par 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 diagnostic test,
complete the in vivo imaging procedure and complete the development and
commercialization of the therapeutic vaccine.
F-7
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The Company has incurred losses of $20,105,368 from inception through December
31, 1999 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.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
include cash on deposit with a financial institution amounting to $521,766 and
$24,215 at December 31, 1999 and 1998, respectively, which was insured for up to
$100,000 by the U.S. Federal Deposit Insurance Corporation. Generally these
deposits may be redeemed upon demand and therefore, bear minimal risk.
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.
F-8
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
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, 1999, the principal temporary difference is a net operating loss
carryforward for federal income tax purposes of approximately $14,500,000 which
expire through December 31, 2018. 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 $645,000 which expire through 2014.
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
F-9
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
of fair value, and accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
Net Loss Per Share
Net loss per share for 1997, 1998 and 1999 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, 1999 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, 1997, 1998 and 1999 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 $120,805, 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 1999, the Company defaulted on $150,000 of the
notes.
F-10
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(2) NOTE PAYABLE (continued)
During 1999, the Company entered into a long term loan agreement whereby it
promises to pay Bank of Millbrook up to $800,00 in a combined agreement with
Biofund, Inc. to provide secured collateral for this loan. The current loan
amount outstanding is $750,000 and will be paid at the rate of 7% per annum on
or before January 2, 2001.
(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, or (b) any products resulting from the Company-
sponsored research at BBRI, or (c) compositions containing such products. The
agreement provides for royalty payments not to exceed $10,000,000 per year to
BBRI equal to 5% of the net selling price and subject to certain reductions
described below. The agreement expires the later of ten years from the first
commercial sale of any such products or the expiration of any applicable patent.
During 1992, the Company entered into a contract with the University of Oslo
(the "University") in close collaboration with BBRI for the characterization of
the Human Carcinoma Antigen. The agreement calls for payment to the University
of 1% of net sales for any human therapeutic product utilizing these patent or
biological material rights sold to third parties. Pursuant to the Company's
agreement with BBRI, the royalty payable to BBRI is reduced to 4.5% for the net
selling price of any covered product for which a royalty is also payable to the
University.
During 1993, the Company entered into an agreement with Massachusetts General
Hospital ("MGH") to license certain antibodies for use in developing the in
vitro diagnostic test, the in vivo imaging agent and the therapeutic vaccine.
Under the 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.
Pursuant to the Company's agreement with BBRI, if royalties are to be paid to
both BBRI and MGH, the royalty otherwise payable to BBRI will be reduced so that
the total royalty paid to BBRI and MGH does 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, 1999
(Continued)
(3) LICENSING AGREEMENTS (continued)
On June 12, 1995, MGH agreed to reduce royalty payments due pursuant to the June
1, 1993 agreement by 50%.
The Company entered into an agreement dated as of March 31, 1999 with Vacold,
LLC for the creation of an IgG antibody. In lieu of cash, Vacold is to receive
6% of the Company's Common Stock (note 5), plus a 3% royalty on Epigen's sales
that include any IgG antibodies developed in Vacold's laboratory. A second
contract with Vacold for ongoing R&D has been negotiated at standard industry
rates. Vacold is to be responsible for the optimization and demonstration of the
new assay to prospective strategic partners.
(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 Chairman 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
F-12
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(4) RELATED PARTY TRANSACTIONS (continued)
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, 1999, 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.
Amounts receivable (including accrued interest) from the officer/stockholder
were as follows for the years ended December 31, 1997, 1998 and 1999:
Beginning Ending
Balance Additions Deductions Balance
------- --------- ---------- -------
1997 85,728 31,797 53,931
1998 53,931 32,536 86,467
1999 86,467 45,000 131,467*
*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.
F-13
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(4) RELATED PARTY TRANSACTIONS (continued)
Accrued Salary - Chairman:
As of December 31, 1999 the Company owed accrued salaries of $1,226,848, plus
accrued interest of $446,495, 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.
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 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
F-14
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(5) EQUITY TRANSACTIONS (continued)
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.
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,
F-15
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(5) EQUITY TRANSACTIONS (continued)
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.
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, together with warrants for an additional 363,636 shares of
common stock at an exercise price of $2.00 per
F-16
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(5) EQUITY TRANSACTIONS (continued)
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 for proceeds of $525,000.
During 1997, 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.
During the five years ended December 31, 1997 the Company has issued 483,330
shares of common stock for services totaling $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 as a compensation incentive.
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 in the amounts of $51,720 and $211,500, respectively, 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 to two of the Directors of the Company.
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
F-17
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(5) EQUITY TRANSACTIONS (continued)
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.
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 stock 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 as payment for the extension of the
loan.
F-18
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(5) EQUITY TRANSACTIONS (continued)
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.
During 1999, pursuant to a private placement pursuant to rule 506 of Regulation
D of the Securities Act of 1933, the Company sold 210,000 shares of common stock
to investors 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.
During 1999, a creditor converted $75,000 of debt into 75,000 shares of the
Company's common stock, and on March 5, 1999, a creditor converted $1,680 of
debt into 560 shares of the Company's common stock.
During 1999, the Company issued 10,000 shares of common stock to Dr. Gelber for
services to be provided. These shares were recorded at par value.
During 1999, pursuant to a private placement pursuant to rule 506 of Regulation
D of the Securities Act of 1933, the Company sold 200,000 shares of common stock
to investors at $1.00 per share with five year warrants attached to each share
with an exercise price of $3.00.
During 1999, a creditor converted $3,000 of debt into 3,000 shares of the
Company's common stock.
During 1999, the Company issued 433,705 shares of common stock to Vacold, LLC, a
Delaware Corporation, in satisfaction of the Company's obligation under its
March 31, 1999 Agreement (note 3). These shares were recorded at par value.
During 1999, the Company issued 21,685 shares of common stock as a commission to
Mr. Ransel Potter, representing 5% of the number of shares issued to Vacold,
LLC. These shares were recorded at par value.
During 1999, the Company issued an aggregate of 50,000 shares of common stock to
two of the Directors of the Company in recognition of substantial services.
These shares were recorded at par value.
F-19
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(5) EQUITY TRANSACTIONS (continued)
During 1999, the Company recorded the issuance of 20,000 shares of common stock
to two of the doctors at 10,000 shares each as a stock award to these doctors
engaged in the development of the IgG antibody for the Company's technology.
These shares were recorded at par value.
(6) PREFERRED STOCK
(a) Series A Preferred:
In 1995, the Company's Board of Directors authorized for issuance shares of
Series A Preferred Stock pursuant to the terms of the Company's certificate of
incorporation. The terms of the Series A Preferred Stock were amended in June
1999. Each such share is convertible into two shares of common stock of the
Company. Each Series 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 any distribution in liquidation or otherwise.
In connection with this authorization the Chairman of the Board of Directors
invested $100,000 for 200,000 shares of the Series 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 canceled in 1997.
During 1999, the Company sold 50,000 shares of Series A Preferred Stock at $1.00
per share.
During 1999, Donald Fresne converted $300,000 of debt into 300,000 shares of the
Company's Series A Preferred Stock.
(b) Series B Preferred:
In 1996, the Company's Board of Directors authorized for issuance shares of
Series B Preferred Stock pursuant to the terms of the Company's certificate of
incorporation. Each Series 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.
F-20
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(6) PREFERRED STOCK (continued)
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.
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
totaling 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 BBRI 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 one year
renewals thereafter, 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. Such agreement was amended and restated as of November
1, 1999 to provide, inter alia, for a five-year term extended annually unless
terminated by the Company or Mr. Kent. The Vice Chairman's Agreement allowed for
compensation of $18,000 per year, which was increased to $36,000 per year in
1998, plus stock options as follows:
F-21
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(8) COMPENSATION ARRANGEMENTS (continued)
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 remained in effect.
There were 10,541 options outstanding as of December 31, 1999.
2. The restated agreement provides for the immediate grant of options
to purchase 47,000 shares of the Company's Common Stock at a price of
$.50 per share effective November 1, 1999. In addition, the Vice
Chairman shall receive options to purchase an additional 37,000 shares
of the Company's Common Stock at a purchase price of $.50 per share on
June 1 of each year in which the agreement remains in effect, including
2000. All such options are for a period of seven years from the date of
grant and may not be exercised until six months following the date of
grant.
In 1997, the Vice Chairman's accrued salary of $46,500 was converted into 21,679
shares of commons stock of the Company.
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.
The Chairman's Agreement allows for compensation of $189,000 per annum with a
$50,000 per annum increase in April of each year during the term of the
Agreement. As of November 1, 1999, the Employment Agreement was further amended
and restated to include that upon the issuance of equity securities in the
Company, the Chairman would be awarded such number of additional shares of
Common Stock in the Company that would restore or otherwise increase his equity
position in the Company on a fully diluted basis to 33 1/3% of the total issued
and outstanding Common Stock of the Company on a fully diluted basis. The
original Agreement also allowed 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
F-22
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(8) COMPENSATION ARRANGEMENTS (continued)
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 canceled.
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.
F-23
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(8) COMPENSATION ARRANGEMENTS (continued)
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 canceled.
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
F-24
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(8) COMPENSATION ARRANGEMENTS (continued)
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 loss had Statement 123 been applied has not been presented since
there were no options granted during the years ended December 31, 1999, 1998 and
1997. Presentational pro forma net loss pursuant to Statement 123 has not been
presented for the period from inception to December 31, 1999 as the information
would not be meaningful.
Directors Fees
In 1999, the Directors, (other than Mr. Fresne) were issued 25,000 shares each
for past services, and the Company established an annual fee for such Directors
of $12,000, commencing with the first annual period ending June 30, 2000 to be
paid at such year end in Common Stock of the Company at $1 per share.
(9) SUBSEQUENT EVENTS
Financial Matters
In 2000, the Company corrected an inadvertent error in two of the drafting of
the $25,000 Promissory Notes. The Conversion price in the two Promissory Notes
was reduced, from $2.66 per share of Common Stock in the Company to $.83 per
share of Common Stock in the Company, and the Company authorized the issuance of
an additional 48,527 shares of Common Stock in the Company to reflect the
conversion of such Notes into Common Stock in the Company at a conversion price
of $.83 per share.
Year 2000 Computer Readiness
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
may be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1998, the Company developed and implemented a program for
F-25
<PAGE>
EPIGEN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(9) SUBSEQUENT EVENTS (continued)
Y2K information systems compliance. Accordingly, the Company believes that its
financial and information systems are now Y2K compliant. As to third-party
relationships, the Company believes that most of these parties intend to be Y2K
compliant by January 1, 2000. The costs incurred during period ended December
31, 1999 were not material. The Company has experienced virtually no Y2K
problems in January 2000 and does not expect to incur any further costs.
F-26
<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, 1999. The Company's prior
independent accountant, Paul C. Roberts, resigned as the Company's independent
accountant effective on March 19, 1999 in order to pursue other, non-accounting
related business. There were no disagreements with accountants on accounting and
financial disclosure.
24
<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 72 Chairman of the Board of Directors,
Director, resident and Chief Executive Officer
L. Courtney Schroder 62 Treasurer and Director
Richard E. Kent 71 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 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
25
<PAGE>
to furnish the Company with copies of all such reports. To the Company's
knowledge, Messrs. Schroder and Kent were delinquent in filing Form 4's with
respect to stock bonuses granted to each of them for 25,000 shares of the
Company's Common Stock and Mr. Kent failed to file a Form 4 for the grant of
options to purchase 47,000 shares of the Company's Common Stock pursuant to his
Amended and Restated Employment Agreement dated as of November 1, 1999. However,
such stock bonuses and options were included in Forms 5 late filed by Messrs.
Schroder and Kent.
ITEM 10. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth information concerning the compensation of the
Company's 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) 1999 152,483 -- 58,184(2) -- 300(5)
Chairman, President 1998 326,900 -- 52,348(2) -- 675(4)
and Chief Executive 1997 123,504 -- 17,721(2) -- 16,900
Officer
Richard E. Kent (1) 1999 -- -- --(3) 48,681 25(4)
Vice Chairman of the 1998 -- -- --(3) 1,681 75(4)
Board and Secretary 1997 -- -- --(3) 1,681 750(4)
L. Courtney Schroder 1999 -- -- --(3) -- 25(4)
Treasurer and Director 1998 -- -- --(3) -- 75(4)
1997 -- -- --(3) -- 750(4)
- ------------
<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 1999 of $152,483 and the amount of such accrual for 1999 is $270,913. In the case of Mr.
Kent, he received no salary payments in 1998 and the amount of such accrual for 1998 is $31,500, and the amount of
such accrual for 1999 is $36,000.
(2) Represents car expenses of $5,776, club membership fees of $6,960, and compensation for life insurance
of $45,448 for 1999; car expenses of $9,026, club membership fees of $6,724, and compensation for life insurance of
$36,598 for 1998; and car expenses of $5,410, and club membership fees of $12,935 for 1997.
26
<PAGE>
(3) Represents amounts which do not meet reporting thresholds.
(4) Represents common stock bonuses recorded by the Company at $.001 per share for 1999, 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.
(5) Represents preferred stock issued in consideration of cancellation of $300,000 of accrued salary owed to
Mr. Fresne.
</FN>
</TABLE>
OPTION GRANT TABLE
The following table sets forth information with respect to the Named Executive
Officers concerning the grant of stock options for Common Stock of the Company
during the fiscal year ended December 31, 1998. The Company did not have during
such fiscal year, and currently does not have, any plans providing for the grant
of stock appreciation rights ("SARs").
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to Or Base
Options/SAR Employees in Price Price Expiration
Granted (#) Fiscal Year ($/Sh) ($/Sh)(1) Date
------------ ------------ -------- --------- ----------
Richard E. Kent 1,687(1) 100% 2.00 N/A 09/13/05
47,000(1) 100% .50 N/A 11/01/06
- ------------
(1) Represents non-qualified stock options for shares of Common Stock
granted on September 13, 1994 pursuant to Mr. Kent's Employment Agreement dated
September 13, 1994 and amended and restated as of November 1, 1999.
No stock options for Common Stock were exercised during the fiscal year ended
December 31, 1998 by the Named Executive Officers. The following table provides
information related to the number and value of stock options for Common Stock
held at the end of such fiscal year by the Named Executive Officers. The Company
does not have any plans provided for SARs.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<CAPTION>
Value of Unexercised
Number of Unexercised In-The-Money Options at
Options at December 31, 1998 (#) December 31, 1998 ($)
Acquired on Value -------------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ------------ -------------------------------- -------------------------
<S> <C> <C> <C> <C>
Donald C. Fresne -- -- --/-- --/--
Richard E. Kent -- -- 59,873/-- --/--
L. Courtney Schroder -- -- 2,106/-- --/--
</TABLE>
27
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------
The following table sets forth information as of March 30, 2000 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) 2,903,053 41.35%
Box L
North Tower Hill Road
Millbrook, NY 12545
L. Courtney Schroder(3) 145,396 2.07%
25 Blackburn Lane
Manhasset, NY 11030
Richard E. Kent(4) 227,871 3.25%
49 Bournes Point Road
Wareham, MA 02571
W. James Tozer, Jr.(5) 1,000,551 14.25%
Vectra Management Group
65 East 55th Street, 9th Floor
New York, NY 10022
All directors and executive 3,276,770 46.67%
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 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.
28
<PAGE>
(2) Included in the shares reported by Mr. Fresne are 17,026 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, 25,702
shares issuable upon exercise of currently exercisable warrants to purchase
Common Stock, and 600,000 shares of Common Stock underlying 300,000 shares of
the company's Series A Preferred Stock. Pursuant to an Amended and Restated
Employment Agreement dated as of November 1, 1999, between Mr. Fresne and the
Company, the Company has agreed to issue to Mr. Fresne additional shares of the
Company's Common Stock for no further consideration in the event the Company
issues equity securities for cash or upon conversion of debt owed by the Company
or for services or for any other consideration such that the number of shares
owned by Mr. Fresne, beneficially or of record, shall, on a fully diluted basis,
equal 33-1/3 of the issued and outstanding shares of the Company's Common Stock.
In addition, in the event Mr. Fresne is instrumental in obtaining equity
financing of at least $1,000,000, Mr. Fresne shall be awarded that number of
shares of equity securities issued pursuant to such financing equal to 33-1/3%
of the number of securities so issued.
(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 59,873 shares of
Common Stock.
(5) Included in the shares held by Mr. Tozer are shares issuable upon
the exercise of currently exercisable warrants to purchase 404,546 shares of
Common Stock, and 100,000 shares of the Company's Common Stock issuable upon
conversion of 50,000 shares of the Company's Series A Preferred Stock. Pursuant
to an agreement dated as of May 4, 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,
1999. Donald Fresne and Richard Kent attended all of the meetings. L. Courtney
Schroder attended five (5) 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 nominating committee, audit committee or
compensation committee, such functions being reserved to the full Board of
Directors.
29
<PAGE>
Employment Agreements
- ---------------------
The Company initially 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. Such
agreement was amended on September 13, 1994 to provide for an annual extension
to the term of the employment agreement 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.
As of November 1, 1999, the Employment Agreement was further amended and
restated. Under the restated agreement, Mr. Fresne is to be paid a salary of
$189,000 per year with annual increases of $50,000 per year beginning in 1995.
At the discretion of the Board, Mr. Fresne may given merit increases and
bonuses. Upon the issuance of equity securities in the Company pursuant to the
sale thereof for a cash consideration or in lieu of a cash payment upon the
conversion of debt into such equity securities or for services or any other
consideration, after the date hereof and during the term hereof or any extension
thereof, Mr. Fresne is awarded such number of additional shares of Common Stock
in the Company that will restore or otherwise increase his equity position in
the Company on a fully diluted basis to 33 1/3% of the total issued and
outstanding Common Stock of the Company on a fully diluted basis, such grant to
be automatic upon the occurrence of such event.
In addition, in the event Mr. Fresne is instrumental in obtaining equity
financing for the Company during the term hereof for a cash infusion to the
capital of the Company of $1,000,000 or more, Mr. Fresne shall receive as
compensation therefore equity securities equal to 33.33% of the equity
securities issued pursuant to such financing.
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 and all
medical costs not covered by such insurance. 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
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. Such benefits shall continue for 10 years following
termination of employment for any reason other than cause.
Following the termination of employment with the Company, other than for cause,
Mr. Fresne shall be retained as a consultant and entitled to receive an annual
supplemental cash retirement and consulting benefit equal to his salary for the
year immediately preceding such termination of employment. Such annual
supplemental cash retirement and consulting benefit shall be payable for the
number of years equal to the number of full years that Mr. Fresne was employed
by the Company prior to the termination of his employment. The amount due in
each year shall be payable in twelve (12) equal monthly installments. In the
event of the death of Mr. Fresne during the term of this Employment Agreement,
any extension thereof or during the period such annual
30
<PAGE>
supplemental retirement and consulting benefits are payable, the Company shall
pay to Mr. Fresne's estate within 120 days after his death, the present value of
all amounts that would become due under such consulting arrangement which
present value shall be calculated by using as a discount rate the prime rate of
interest charged by Chemical Bank, N.A., or its successor, on the date of Mr.
Fresne's death.
Prior to November 1, 1999, Mr. Fresne received substantially the same salary and
benefits under his employment agreement, except that no provisions were made for
grants of stock in the event of equity financings or other sales of shares of
the Company's equity securities.
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 which was increased to $36,000 in 1998. In the
discretion of the Board of Directors, Mr. Kent may be given merit raises and
bonuses. Such agreement was amended and restated as of November 1, 1999 to
provide, inter alia, for a five-year term extended annually unless terminated by
the Company or Mr. Kent. The restated agreement provides for the immediate grant
of options to purchase 47,000 shares of the Company's Common Stock at a price of
$.50 per share effective November 1, 1999. In addition, Mr. Kent shall receive
options to purchase an additional 37,000 shares of the Company's Common Stock at
a purchase price of $.50 per share on June 1 of each year in which the agreement
remains in effect, including 2000. All such options are for a period of seven
years from the date of grant and may not be exercised until six months following
the date of grant. 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, 1999 was $85,500. In addition, the Company has
undertaken to reimburse Mr. Kent for premiums on a $100,000 in life insurance
policy presently owned by Mr. Kent.
Director Compensation
- ---------------------
In 1999, no cash compensation was paid to non-employee directors of the Company,
other than the stock awards 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.
31
<PAGE>
Presently, there are no outstanding options held by any officers or directors of
the Company pursuant to such plan.
Repricing of Outstanding Options and Warrants
- -------------------------------------------------
No options or warrants were repriced during 1999.
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 years ended December 31, 1997 and
December 31, 1998, each of which is incorporated herein by reference.
In March 1999, the Company's Board of Directors approved a plan to allow the
holders of the Company's 25% Bridge Notes to convert such debt, plus accrued
interest, into shares of the Company's Common Stock at the rate of $.83 per
share. As of December 31, 1999 no such conversions occurred.
In April 1999, the Company's Board of Directors, approved an arrangement
pursuant to which Mr. Fresne and Mr. Kent were granted the right, for a period
of five years, to convert all debts owed to them by the Company into shares of
the Company's Common Stock at the rate of $.83 per share or shares of the
Company's Series A Preferred Stock at the rate of $1.00 per share, in order to
facilitate any future financings the Company may require. A similar right was
granted to Mr. Kent, however, he could also convert such debt into shares of the
Company's Series A Preferred stock at the rate of $1.00 per share.
At such time the Board of Directors also established an annual fee payable to
the directors of the Company of equal to $12,000, commencing with the 12 month
period ending June 30, 2000, payable in shares of the Company's Common Stock at
the rate of $1.00 per share. In addition, the Board granted to Messrs Kent and
Schroder stock bonuses of 25,000 shares each of the Company's Common Stock.
In July 1999, the Company issued to Donald C. Fresne 300,000 shares of its
Series A preferred Stock and to W. James Tozer, Jr. 50,000 shares of its Series
A Preferred Stock at a price of $1.00 per share.
In November 1999, the Company's Board of Directors agreed to amend the
employment agreements of Messrs Fresne and Kent. For a description of such
amendments, See "Security Ownership of Certain Beneficial Owners and
Management-Employment Agreements" above.
Effective December 1, 1999, the Company entered into an arrangement with
Biofund, Inc., a Delaware corporation, pursuant to which Biofund, Inc. would
guarantee repayment to the Bank
32
<PAGE>
of Millbrook a loan to the Company by such Bank of up to $800,000 for up to one
year. Such loan is secured by certificates of deposit issued by the Bank of
Millbrook for the amount of the loan and held by such bank as collateral. In
exchange for its guarantee of such loan, the Company granted to Biofund, Inc. a
security agreement in its intellectual property and technology on the same terms
as that previously granted to Mr. Fresne. In addition, upon repayment of such
loan and return of the security for the guarantee to Biofund, Inc., Biofund,
Inc. has the right to purchase up to 2.5% for each $100,000 of guarantee
provided of the Company's issued and outstanding Common Stock, on a fully
diluted basis, as of November 1, 1999 at a price of $.01 per share. If such
right is exercised, Biofund, Inc. shall be entitled to purchase 2,831,900 shares
of the Company's Common Stock. Among the shareholders of Biofund, Inc. are
Messrs Fresne, David Clapp, Tozer, Goldfrank and Field, each of whom is a
director of Biofund, Inc. Mr. Fresne owns 6.3% of the outstanding shares of
Biofund, Inc., Mr. Clapp owns 25% of the outstanding shares of Biofund, Inc.,
Mr. Tozer owns 25.0% of the outstanding shares of Biofund, Inc., Mr. Goldfrank
owns 18.8% of the outstanding shares of Biofund, Inc. and Mr. Field owns 12.5%
of the outstanding shares of Biofund, Inc. In the event of an exercise of such
right, Mr. Fresne would own beneficially 178,410 of the shares of the Company's
Common Stock issuable upon such exercise, Mr. Clapp would own beneficially
707,975 shares of the Company's Common Stock issuable upon such exercise, Mr.
Tozer would own beneficially 707,975 of the shares of the Company's Common Stock
issuable upon such exercise, Mr. Goldfrank would own beneficially 532,397 of the
shares of the Company's Common Stock issuable upon such exercise and Mr. Field
would own beneficially 353,988 of the shares of the Company's Common Stock
issuable upon such exercise
To the extent the collateral securing the obligations of the Company to Biofund,
Inc. and Mr. Fresne is sold or otherwise disposed of to satisfy such lien, the
proceeds of such foreclosure, less costs thereof, shall be disbursed 60% to
Biofund, Inc. and 40% to Mr. Fresne until the smaller of the two obligations
secured by such liens shall have been satisfied in full. Thereafter, any
remaining proceeds shall be disbursed first to the holder of the unsatisfied
lien until the obligation secured by such lien is paid in full and any remaining
proceeds shall be returned to the Company.
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)
33
<PAGE>
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)
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)
3.13 Amended Certificate of Designation, Preferences and Rights or
Series A Preferred Stock of Epigen, Inc., filed with the Delaware
Secretary of State on June 11, 1999.
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)
34
<PAGE>
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. 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 Deleted
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
35
<PAGE>
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 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)
36
<PAGE>
10.31 Employment Agreement dated November 1, 1999 between the Company
and Donald C. Fresne.
10.32 Employment Agreement dated November 1, 1999 between the Company
and Richard E. Kent.
10.33 Agreement between Epigen, Inc. And Vacold, LLC dated March 31,
1999. (O)
10.34 Amendment, dated December 16, 1999, to the Restated Agreement
dated as of February 25, 1992 between Boston Biomedical Research
Institute and Epigen, Inc.
10.35 Release, dated May 26, 1999 from Bayer Diagnostic, of "right of
first refusal clause" in the Evaluation Agreement dated April 5,
1996 between Epigen, Inc. and Ciba Corning Diagnostics
Corporation.
20.1 Form of Warrant to Purchase Common Stock (G)
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.
37
<PAGE>
(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.
(O) Incorporated by reference to the Company's Form 8-K dated June 9, 1995.
38
<PAGE>
REPORTS ON FORM 8-K
The Company filed one report on Form 8-K for the fiscal year ended December 31,
1999 dated June 9, 1999.
39
<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 30, 2000 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 30, 2000 By: /s/ Donald C. Fresne
-------------------------------------
Donald C. Fresne, Chief Executive
Officer, Chairman of the Board of
Directors and President
Date: March 30, 2000 By: /s/ Richard E. Kent
-------------------------------------
Richard E. Kent, Vice Chairman of the
Board of Directors and Secretary
Date: March 30, 2000 By: /s/ L. Courtney Schroder
-------------------------------------
L. Courtney Schroder, Treasurer
(Principal Financial and Accounting
Officer) and Director
40
AMENDED CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS
OF
SERIES A PREFERRED STOCK
OF
EPIGEN, INC.
EPIGEN, INC., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation), in accordance with the provisions of
Section 151 of the General Corporation Law of the State of Delaware, does hereby
CERTIFY:
1. The Certificate of Incorporation, as amended, of the Corporation fixes
the total number of shares of all classes of capital stock which the Corporation
shall have authority to issue as Sixty-Five Million (65,000,000) shares, of
which Fifty Million (50,000,000) shares shall be Common Stock, par value $.001
per share (the "Common Stock"), and Fifteen Million (15,000,000) shares shall be
shares of Preferred Stock, par value $.001 per share (the "Preferred Stock").
2. The Certificate of Incorporation, as amended, of the Corporation,
expressly grants to the Board of Directors of the Corporation authority to
provide for the issuance of said Preferred Stock in one or more series, with
such voting powers, and with such designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors as
are not stated and expressed in its Certificate of Incorporation, as amended.
3. Pursuant to authority conferred upon the Board of Directors by the
Certificate of Incorporation, as amended, the Board of Directors, at a meeting
duly held on February 10, 1995, at which a quorum was duly present and acting
throughout, duly authorized and adopted the provisions establishing Series A
Preferred Stock of the Corporation pursuant to a Certificate of Designation,
Preferences and Rights of Series A Preferred Stock filed with the Secretary of
State of Delaware on June 12, 1995. The Board of Directors of the Corporation,
at a meeting duly held on October 20, 1995, at which a quorum was duly present
and acting throughout, duly authorized and adopted certain revisions to the
provisions of such Certificate of Designation, Preferences and Rights of Series
A Preferred Stock and an Amended Certificate of Designation, Preferences and
Rights of Series A Preferred Stock was filed with the Secretary of State of
-1-
<PAGE>
Delaware on November 20, 1995. The Board of Directors of the Corporation, at a
meeting duly held on December 15, 1995, at which a quorum was duly present and
acting throughout, duly authorized and adopted certain revisions to the
provisions of such Certificate of Designation, Preferences and Rights of Series
A Preferred Stock and an Amended Certificate of Designation, Preferences and
Rights of Series A Preferred Stock was filed with the Secretary of State of
Delaware on February 26, 1996. The Board of Directors of the Corporation, at a
meeting duly held on February 8, 1999, at which a quorum was duly present and
acting throughout, duly authorized and adopted the provisions set forth in the
following resolution providing for a further Amended Certificate of Designation,
Preferences and Rights of Series A Preferred Stock as follows:
RESOLVED, that an issue of a series of the Preferred Stock, par value $.001
per share, of the Corporation consisting of One Million Five Hundred Thousand
(1,500,000) shares is hereby provided for, and the voting power, designation,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, are fixed hereby as
follows:
1. DESIGNATION. The designation of such series shall be "Series A
Preferred Stock" (hereinafter referred to as the "Series A Preferred
Stock") and the number of shares constituting such series is One Million
Five Hundred Thousand (1,500,000). The number of authorized shares of
Series A Preferred stock may be increased or reduced by further resolutions
of the board of Directors of the Corporation or any duly authorized
committee thereof and by the filing of a certificate pursuant to the
provisions of the General Corporation Law of the State of Delaware stating
that such increase or reduction has been so authorized, but the number of
shares of Series A Preferred Stock shall not be reduced below 200,000
unless there shall be less than 200,000 shares of Series A Preferred Stock
outstanding, in which case the number of shares of Series A Preferred Stock
may be reduced to a number of shares equal to the number of such shares
outstanding from time to time. Shares of Series A Preferred Stock may
either be evidenced by certificates or may be uncertificated in the
discretion of the Corporation's Board of Directors; provided, however, that
if any such shares are not evidenced by certificates, the Board of
Directors of the Corporation shall cause to be made in the Corporation's
stockholder ledger an entry listing the name and address of each holder of
such shares, the date of issuance of such shares to each such holder and
the number of such shares so issued.
2. DIVIDENDS. The Series A Preferred Stock shall not be entitled to
any dividend.
-2-
<PAGE>
3. REDEMPTION. There shall be no mandatory redemption of the
outstanding shares of Series A Preferred Stock. Nothing herein, however,
shall prevent the Corporation from repurchasing or redeeming any or all of
its outstanding shares of Series A Preferred Stock in accordance with
applicable law.
4. SHARES TO BE RETIRED. All shares of Series A Preferred Stock
redeemed or purchased by the Corporation shall be retired and canceled and
shall be restored to the status of authorized but unissued shares of
Preferred Stock, without designation as to series, and may thereafter be
issued, but not as shares of Series A Preferred Stock.
5. CONVERSION OR EXCHANGE.
(a) CONVERSION RIGHT. The holders of Series A Preferred Stock shall
have the right at any time to convert all or any portion of such shares of
Series A Preferred Stock into shares of the Corporation's Common Stock, or
such other securities into which such Common Stock shall have been
converted or by which such Common Stock shall have been replaced, at the
rate of two (2) shares of Common Stock for each one (1) share of Series A
Preferred Stock. A holder of shares of Series A Preferred Stock may elect
to convert such shares into Common Stock in a single transaction or series
of transactions; provided, that in any election involving conversion of
less than all of such Holders shares of Series A Preferred Stock such
holder shall elect to convert not less than twenty percent (20%) of the
original amount of such holder's shares of Series A Preferred Stock.
(b) NOTICE OF CONVERSION. Any holder of outstanding shares of Series A
Preferred Stock may elect to convert such shares of Series A Preferred
Stock into shares of Common Stock by serving written notice on the
Corporation setting forth (1) the number of shares of such holder's Series
A Preferred Stock to be converted; (2) the date by which such conversion
must occur, such date being at least thirty (30) and not more than sixty
(60) days after the date of such notice; (3) whether such shares of Common
Stock are to be evidenced by a single certificate or multiple certificates
(in which latter case the denominations of such certificates shall also be
set forth); and (4) if such certificates are to be issued in the name or
names of a person or persons other than that of the holder of the Series A
Preferred Stock so converting, the name(s) and address(es) of such other
person(s).
-3-
<PAGE>
(c) ISSUANCE OF CERTIFICATES FOR COMMON STOCK. Promptly following the
effective date of any conversion in accordance with the written notice from
a holder of Series A Preferred Stock, the Corporation shall issue a
certificate or certificates evidencing shares of Common Stock into which
such shares of Series A Preferred Stock have been converted in accordance
with the instructions set forth in such converting holder's notice to the
Corporation.
(d) CERTAIN ADJUSTMENTS.
(i) STOCK DIVIDENDS, SPLITS AND COMBINATIONS. If at any time or from
time to time, the holders of Common Stock become entitled to receive
additional shares or less shares because of a stock dividend, stock split
or combination of shares, the number of shares of Common Stock into which
outstanding shares of Series A Preferred Stock may be converted shall be
proportionately and correspondingly adjusted.
(ii) RECLASSIFICATIONS. If at any time or from time to time, the
holders of Common Stock become entitled to receive a different class of
stock (the "Entitlement Event"), any holder of outstanding shares of Series
A Preferred Stock shall be entitled to receive upon such holder's
conversion of shares of Series A Preferred Stock after the Entitlement
Event for each share of Common Stock into which shares of Series A
Preferred Stock have been converted the same number and kind of shares of
stock as a holder of shares of the Common Stock immediately prior to the
Entitlement Event was eligible to receive with respect to such Common Stock
pursuant to the Entitlement Event. This provision shall include any
reclassification in connection with a merger of another corporation into
the Corporation.
(iii) CERTAIN DISTRIBUTIONS. If at any time or from time to time, the
holders of Common Stock become entitled to receive an extraordinary
distribution consisting of cash, debt securities or property including
stock of a subsidiary as a spin-off or split-off, the Corporation shall
send written notice at least thirty (30) days but no more than sixty (60)
days prior to the record date of shareholders eligible to receive such
distribution to the holders of shares of Series A Preferred Stock
describing the amount and nature of the distribution, the time fixed for
its payment and any conditions thereupon, and if such holder does not elect
to convert such holder's shares of Series A Preferred Stock on or before
such record date, the holder of such shares of Series A Preferred Stock
shall not be
-4-
<PAGE>
eligible to participate in such extraordinary distribution per share of the
Common Stock. An extraordinary distribution shall mean any distribution
other than periodic payments of cash dividends from profits intended to be
regular and recurring. The value of any extraordinary distribution shall be
conclusively determined in good faith by an affirmative vote of the Board
of Directors of the Corporation.
(iv) MERGER INTO OR SALE OF ASSETS TO ANOTHER CORPORATION. If at any
time or from time to time, the holders of the Common Stock become entitled
to receive stock, securities, property or cash (or any combination of them)
by reason of a capital reorganization or dissolution, liquidation or
winding-up of the Corporation, a merger with, a consolidation of the
Corporation into, a sale of all or substantially all of the assets of the
Corporation to, another corporation (the "Reorganization Event"), each
holder of shares of Series A Preferred Stock shall be entitled to receive
upon conversion of such shares of Series A Preferred Stock after the
Reorganization Event the same stock, securities, property or cash (or
combination of them) as a holder of the same number of shares of the Common
Stock into which such shares of Series A Preferred Stock was convertible
immediately prior to the Reorganization Event was eligible to receive with
respect to such Common Stock pursuant to the Reorganization Event.
(v) NOTICE OF ADJUSTMENTS. Upon any adjustment as herein described,
then, and in each such case, the Corporation, within 10 days thereafter,
shall give notice thereof to each record holder of shares of Series A
Preferred Stock stating the adjustment in the number of shares of Common
Stock into which such holder's shares of Series A Preferred Stock may be
converted and setting forth in reasonable detail the method of calculating
and the facts (including a statement of the consideration received or
deemed to have been received by the Corporation for any shares of Common
Stock) upon which such calculation is based.
(e) GENERAL. The Corporation will not, by amendment of its certificate
of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Section 5, but will at all times in
good faith assist in the carrying out of all such terms and in the taking
of all such action as may be necessary or appropriate in order to protect
the rights of the holders of Series A Preferred Stock. The Corporation will
take all such action as may be necessary or appropriate in order that the
-5-
<PAGE>
Corporation may validly and legally issue fully paid and non-assessable
shares of Common Stock or other securities into which outstanding shares of
Series A Preferred Stock may be converted upon the exercise of any
conversion granted herein. The Corporation will not (1) issue any capital
stock of any class which is preferred as to dividends or as to the
distribution of assets upon voluntary or involuntary dissolution,
liquidation or winding up, unless the rights of the holders thereof shall
be limited to a fixed sum or percentage of par value in respect of
participation in dividends and in any such distribution of assets; and
(2)(i) transfer all or substantially all of its properties and assets to
any other entity or (ii) consolidate with or merge into any other entity
where the Corporation is not the continuing or surviving entity, or (iii)
permit any other entity to consolidate with or merge into the Corporation
where the Corporation is the continuing or surviving entity unless, in
connection with such consolidation or merger, unless the conversion rights
granted hereby shall survive and apply to the Common Stock, or other
securities of the Corporation into which such shares of Series A Preferred
Stock can be converted, then issuable as a result of such transaction.
6. VOTING RIGHTS.
(a) GENERALLY. The holders of shares of Series A Preferred Stock
originally issued by the Corporation(the "Initial Holders") shall be
entitled, at all meetings of the stockholders of the Corporation and on all
occasions where stockholders are entitled to vote or give their consent, to
thirty (30) votes for each share of Series A Preferred Stock owned by them;
provided, however, that upon sale, gift or transfer of such shares by an
Initial Holder, whether voluntarily, involuntarily, by operation of law
including, without limitation, bankruptcy, appointment of a guardian,
committee of an incompetent, conservator or custodian or otherwise (but not
including by devise, bequest, the laws of inheritance or descent in which
case the persons taking such shares of Series A Preferred Stock under such
circumstances shall be entitled to such thirty (30) votes per share), such
shares of Series A Preferred Stock shall be entitled to, at all meetings of
the stockholders of the Corporation and on all occasions where stockholders
are entitled to vote or give their consent, to one vote for each share of
Series A Preferred Stock. The holders of shares of Series A Preferred Stock
shall vote with the holders of shares of Common Stock as a single class,
except to the extent that holders of Common Stock or holders of Series A
Preferred Stock shall be entitled to vote as a separate class pursuant to
the General Corporation Law of the State of Delaware.
-6-
<PAGE>
(b) RESTRICTIONS ON CREATION OF ADDIITONAL CLASSES OR SERIES OF
PREFERRED STOCK. Notwithstanding any other provision of the Certificate of
Incorporation, without the vote or consent of the holders of a least a
majority of the then outstanding shares of Series A Preferred Stock, the
Corporation shall not (i) create or issue or increase the authorized number
of shares of any class or classes or series of stock ranking prior to or in
parity with the Series A Preferred Stock upon liquidation, (ii) amend or
alter or repeal any of the provisions of the Certificate of Incorporation
so as to affect adversely the preferences or rights of the Series A
Preferred Stock or (iii) authorize any reclassification of the Series A
Preferred Stock.
7. LIQUIDATION PREFERENCE. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of the Series A Preferred Stock shall entitled to receive out of
the assets of the Corporation available for distribution to stockholders,
before any distribution of assets shall be made to the holders of Common
Stock or of any other shares of stock of the Corporation ranking as to such
distribution junior to the Series A Preferred Stock, an amount equal to
$1.00 per share. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the amounts payable with
respect to the Series A Preferred Stock and any other shares of stock of
the Corporation ranking as to any such distribution on a parity with the
Series A Preferred Stock are not paid in full, the holders of the Series A
Preferred Stock and of such other shares shall share ratable in any such
distribution of assets of the Corporation in proportion to the full
respective preferential amounts to which they are entitled. After payment
to the holders of the Series A Preferred Stock of the full preferential
amounts provided for in this Section 7, the holders of the Series A
Preferred Stock shall be entitled to no further participation in any
distribution of assets by the Corporation. The consolidation or merger of
the Corporation with or into any other corporation, or the sale of
substantially all of the assets of the Corporation in consideration for the
issuance of equity securities of another corporation, shall not be regarded
as a liquidation, dissolution or winding up of the Corporation within the
meaning of this Section 7, but only if such consolidation, merger or sale
of assets shall not in any way impair the voting power, preferences or
special rights of the Series A Preferred Stock.
8. LIMITATIONS ON DIVIDENDS ON JUNIOR RANKING STOCK. So long as any
Series A Preferred Stock shall be outstanding, the Corporation shall not
declare any dividends on other class or series of Preferred Stock of the
Corporation ranking as to dividends or distributions of assets junior to
the Series A Preferred Stock (any such junior ranking stock being herein
-7-
<PAGE>
referred to as "Junior Stock"), or make any payment on account of, or set
apart money for, a sinking or other analogous fund for the purchase,
redemption or other retirement of any shares of Junior Stock, or make any
distribution in respect thereof, whether in cash or property or in
obligations or stock of the Corporation, other than Junior Stock (such
dividends, payments, setting apart and distributions being herein called
"Junior Stock Payments"), unless all of the conditions set forth in the
following subsections (a) and (b) shall exist at the date of such
declaration in the case of any such dividend, or the date of such setting
apart in the case of any such fund, or the date of such payment or
distribution in the case of any other Junior Stock Payment:
(a) Full cumulative dividends shall have been paid or declared and set
apart for payment upon all outstanding shares of Preferred Stock other than
Junior Stock; and
(b) The Corporation shall not be in default or in arrears with respect
to any sinking or other analogous fund or any call for tenders obligation
or other agreement for the purchase, redemption or other retirement of any
shares of Preferred Stock other than Junior Stock.
9. RESTRICTIONS ON TRANSFER.
(a) RESTRICTIONS ON TRANSFER. Neither the Series A Preferred Stock,
nor any interest therein, shall be transferable except upon the conditions
specified in this Section 9, which conditions are intended to ensure
compliance with the Securities Act of 1933, as amended (the "Securities
Act") and all applicable state securities laws in respect of the transfer
of any such securities or any interest therein.
(b) RESTRICTIVE LEGEND. Each certificate, if shares of Series A
Preferred Stock shall issued in certificated form, shall (unless otherwise
permitted by the provisions of this Section 9) include a legend in a form
similar to the following:
NEITHER THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THEY ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER SUCH SECURITIES NO ANY
INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT,
APPLICABLE STATE SECURITIES LAWS AND THE RULES AND REGULATIONS THEREUNDER.
BY ACCEPTANCE OF THIS CERTIFICATE, THE HOLDER HEREOF REPRESENTS THAT IT IS
ACQUIRING THESE SECURITIES FOR INVESTMENT AND AGREES TO COMPLY IN ALL
RESPECTS WITH SECTION 9 OF THE CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF SERIES A PREFERRED STOCK OF THE CORPORATION, A COPY OF WHICH MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OR
THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL
EXECUTIVE OFFICE.
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<PAGE>
(c) STOP TRANSFER LEGEND. If shares of Series A Preferred Stock shall
issued in uncertificated form (unless otherwise permitted by the provisions
of this Section 9) , the Corporation shall cause its agent for transfer of
its securities to place a "stop transfer" legend on the Corporation's stock
transfer ledger or other similar records prohibiting the transfer of the
shares of Series A Preferred Stock or securities into which such shares
have been converted unless the holder thereof shall have complied with the
provisions of this Section 9.
(d) NOTICE OR PROPOSED TRANSFER. Each holder of shares of Series A
Preferred Stock, by his acceptance of such shares, agrees to comply in all
respects with the provisions of this Section 9. Prior to any proposed
transfer of any shares of Series A Preferred Stock or Common Stock
underlying the Series A Preferred Stock, except in the case of registration
thereof pursuant to the Securities Act of 1933, as amended, the holder
thereof shall give written notice to the Corporation of such holder's
intention of effect such transfer. Each such notice shall describe the
manner and circumstances of such transfer in reasonable detail, and shall
be accompanied by (i) a written opinion of counsel reasonable satisfactory
to the Corporation, addressed to the Corporation, to the effect that the
proposed transfer may be effected without registration of the Series A
Preferred Stock or the Common Stock underlying the Series A Preferred
Stock, or (ii) written assurance from the Securities Exchange Commission
("SEC") that the SEC will not recommend any action be taken by it in the
event such transfer is effected without registration under such Act. Such
proposed transfer may be effected only if the Corporation shall have
received such notice and such opinion of counsel or written assurance,
whereupon the holder of such shares of Series A Preferred Stock or Common
Stock underlying such shares of Series A Preferred Stock shall be entitled
to transfer such shares of Series A Preferred Stock or Common Stock
underlying such shares of Series A Preferred Stock in accordance with the
terms of such notice. Each certificate evidencing shares of Series A
Preferred Stock or shares of Common Stock underlying shares of Series A
Preferred Stock so transferred shall bear the legend set forth in Section
9(b) hereof, and each uncertificated share of Series A Preferred Stock so
transferred shall have entered against it in the Corporation's stock
transfer ledger or other similar records a "stop transfer" legend, except
that either such legend may be removed if the opinion of counsel or written
assurance is to the further effect that no such legend nor the restrictions
on transfer in this Section 9 are required in order to ensure compliance
with such Act.
-9-
<PAGE>
10. PREEMPTIVE RIGHTS. The holders of shares of Series A Preferred
Stock shall not be entitled to any preemptive or preferential rights for
the subscription to any shares of any capital stock of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Donald C. Fresne, its President, who affirms, under penalties of
perjury, that this Certificate is the act and deed of the Corporation and that
the facts stated herein are true, as of the 24th day of May, 1999.
EPIGEN, INC.
By: /s/: Donald C. Fresne
------------------------------------
Name: Donald C. Fresne
Title: President
-10-
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Employment
Agreement") made as of November 1, 1999, between EPIGEN, INC.,a Delaware
corporation, of Millbrook, New York (the "Company"), and DONALD C. FRESNE
("Employee"), residing at North Tower Hill Road, PO Box L, Millbrook, NY 12545.
W I T N E S E T H:
WHEREAS, Employee is presently employed as Chairman of the Board and
Chief Executive Officer of the Company;
WHEREAS, the Company and Employee desire to assure the continued
services of Employee to the Company on the terms and conditions set forth below;
WHEREAS, by employment Contract originally dated April 20, 1994 and
amended and restated from time to time, the Company and Employee agreed upon the
terms on which Employee would be employed by the Company; and
WHEREAS, the Company and Employee desire to amend and restate such
employment Contract as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Company and Employee agree as follows:
1. EMPLOYMENT
(a) The Company agrees to continue to employ Employee to render
executive and managerial services to the Company and Employee accepts such
appointment with the title of Chairman of the Board and Chief Executive Officer.
In such capacities Employee shall be Chairman of the Board of Directors of the
Company and Chief Executive Officer of the Company, possessing such powers and
authority and charged with such duties and responsibilities in relation to the
business and affairs of the Company as are customarily associated with such
offices, subject to the direction of the Board of Directors of the Company.
Page 1 of 9
<PAGE>
(b) Employee's principal place of employment shall be as required
by the Company and agreed by Employee from time to time in the United States of
America or abroad. Unless and until otherwise mutually agreed, the principal
location for the performance of Employee's services shall be in Millbrook, New
York. Notwithstanding the foregoing, Employee recognizes that the operations of
the Company may require travel by Employee on behalf of the Company, and agrees
that he will be available to engage in such travel (which will not, however,
require the relocation of his residence for the performance of his services)
when and as required and at the Company' s expense.
2. TERM
The term of Employee's employment under this Employment Agreement
commenced effective as of April 20, 1994 and, subject to the terms and
conditions of this Employment Agreement, shall continue from April 6, 1999 for a
period of sixty (60) consecutive months. On April 6 of each year, beginning
April 6, 2000, such term of this Employment Agreement shall be automatically
extended for an additional year unless prior to such date Employee or the
Company shall have notified the other in writing of its intention not to extend
the term of this Employment Agreement.
3. COMPENSATION
(a) Employee shall receive as full compensation for his services
hereunder, direct from the Company, a salary at the rate of $189,000 per annum,
paid by monthly installments, which salary shall be increased by $50,000 per
annum on April 6 of each year, increases to start in the year of 1995, during
the term of this Employment Agreement. At the discretion of the Board, Employee
may be given merit increases and bonuses during the term hereof.
(b) Upon the issuance of equity securities in the Company pursuant
to the sale thereof for a cash consideration or in lieu of a cash payment upon
the conversion of debt into such equity securities or for services or any other
consideration, after the date hereof and during the term hereof or any extension
thereof, Employee is hereby awarded such number of additional shares of Common
Stock in the Company that will restore or otherwise increase his equity position
in the Company on a fully diluted basis to 33 1/3% of the total issued and
outstanding Common Stock of the Company on a fully diluted basis, such grant to
be automatic upon the occurrence of such event.
(c) In addition, in the event Employee is instrumental in obtaining
equity financing for the Company during the term hereof for a cash infusion to
the capital of the Company of $1,000,000 or more, Employee shall receive as
compensation therefor equity securities equal to 33.33% of the equity securities
issued pursuant to such financing.
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<PAGE>
(d) At the request of the Employee, the Company will undertake to
file as promptly as practicable a Registration Statement on Form S-8 or other
applicable form with respect to the securities underlying the Options granted to
or equity securities issued to Employee pursuant to this Employment Agreement.
4. EXPENSES
Employee shall be reimbursed for all ordinary and reasonable
out-of-pocket expenses properly incurred while engaged in the business of the
Company pursuant to the Company policy then in effect, provided that such are
itemized and presented to the Company in accordance with the Company policy then
in effect. The Company shall provide a secretary for the Employee at his office.
5. BENEFITS
(a) The Company shall provide Employee or Employee shall be
entitled to reimbursement for the premium costs of the following insurance
policies for the term hereof:
(i) $750,000 of whole life insurance under which Employee is
the insured and has the sole right to designate the
beneficiary thereunder;
(ii) long term disability insurance; and
(iii) health insurance.
(iv) All prescriptions not reimbursable by such insurance
polcies.
(v) Medical expenses not covered by insurances.
Following the termination of Employee's employment hereunder for any reason
other than for cause (as hereinafter defined), including, without limitation, by
reason of the expiration of the term of this Employment Agreement, and for a
period of ten years thereafter, the Company shall (A) continue to reimburse
Employee upon demand for the premium costs of the policy described in clause
(i); (B) reimburse Employee upon demand for the premium costs of an individual
health insurance policy for Employee and his spouse, if any, that provides
Page 3 of 9
<PAGE>
substantially the same coverage as the health insurance policy covering the
Company's most senior executive; and (C) at the Company's expense, provide
Employee with an office comparable to his office immediately prior to his
termination of employment at a location selected by Employee, together with a
full-time secretary of his choice. Further, at least 15 days prior to the date
Employee is required to make any federal income tax payments, including, without
limitation, estimated tax payments, Employee shall notify the Company of the
amount, in cash, that is necessary to be paid to Employee to ensure that the sum
of (x) such cash payment, plus (y) the amount of such premiums, plus (z) the
value of the office and secretary, to the extent the same constitute taxable
income to Employee, less all federal or state taxes on such aggregate amount,
will equal the gross amount of the sum of such premiums and the value of the
office and the secretary. Within seven days after receipt of such notice, the
Company shall pay Employee such amount.
(b) The Company will reimburse Employee for dues and related
expenses of memberships that are used for the benefit of the Company.
(c) Employee shall be entitled to the full-time use a new Company
owned automobile, on which the Company shall purchase all appropriate insurance
policies and pay all maintenance and operating expenses. Employee shall,
however, reimburse the Company for his personal use of the automobile on a basis
to be determined by the Company from time to time.
(d) Following the termination of Employee's employment with the
Company, other than for cause (as hereafter defined), Employee shall be retained
as a consultant and entitled to receive an annual supplemental cash retirement
and consulting benefit equal to his salary for the year immediately preceding
such termination of employment. Such annual supplemental cash retirement and
consulting benefit shall be payable for the number of years equal to the number
of full years that Employee was employed by the Company prior to the termination
of his employment. The amount due in each year shall be payable in twelve (12)
equal monthly installments. In the event of the death of Employee during the
term of this Employment Agreement, any extension thereof or during the period
such annual supplemental retirement and consulting benefits are payable, the
Company shall pay to the estate of Employee, within 120 days after the death of
Employee, the present value of all amounts that would become due under Section
5(d), which present value shall be calculated by using as a discount rate the
prime rate of interest charged by Chemical Bank, N.A., or its successor, on the
date of Employee's death.
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<PAGE>
6. TERMINATION OF EMPLOYMENT
(a) The Board of Directors may terminate Employee's employment upon
one (1) month's notice to the Employee for "cause" as hereinafter defined.
The term "cause", as used in subsection 7(a) above with respect to
the termination of Employee's employment by the Company, shall mean (i)
embezzlement of property of the Company; or (ii) conviction of a crime which
constitutes a felony.
(b) The Company shall pay all legal fees, court costs, fees of
experts and other costs and expenses when incurred by Employee in connection
with Employee's interpretation of, or determinations under, or any actual,
threatened or contemplated litigation or legal, administrative or other
proceeding involving, the provisions of this Employment Agreement, whether or
not initiated by Employee.
7. OFFICE
Employee shall be entitled, at no cost to himself and at the
Company's expense, to maintain the existing office in Millbrook, New York for
the Company.
8. EMPLOYEE' S COVENANTS
Upon and subject to the terms am conditions of this Employment
Agreement, Employee covenants and agrees with the Company as follows:
(a) Employee shall remain in the employ of the Company and will
carry out the duties and responsibilities assigned to him from time to time by
the Company's Board of Directors.
(b) Employee shall devote a substantial portion of his business
time, efforts and abilities to the performance of his duties and the advancement
of the Company's interests and the achievement of its corporate goals and
objectives; will observe the policies and practices established by the Company's
Board of Directors; and will otherwise conduct himself in a manner reasonably
calculated to benefit the Company.
(c) During the term of this Employment Agreement, Employee shall
promptly advise the Company's Board of Directors of any business opportunities
of which he may become aware related to the business and corporate goals of the
Company.
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<PAGE>
9. REPORTS
Employee shall promptly communicate and disclose to the Company, on
request, all information obtained by him in the course of his employment
relating to the business of the Company. All written reports, recommendations,
advice, records, documents and other materials prepared or obtained by Employee
or coming into his possession during his employment hereunder which relate to
the progress and performance of the Company shall be the sole and exclusive
property of the Company and, at the end of Employee's employment hereunder or at
the request of the Company during the period of Employee's employment hereunder,
Employee shall promptly deliver all such written materials to the Company.
Employee shall prepare and submit to the Company such regular periodic reports
as the Company may request with respect to the activities undertaken by him or
conducted under his direction in connection with the business of the Company
during his employment hereunder. Such reports and the information contained
herein shall be and remain the sole property of the Company.
10. CONFIDENTIALITY
Employee shall not, during any period of his employment by the
Company, divulge, furnish, or make accessible to or use for the benefit of,
anyone other than the Company, its directors and officers, otherwise than in the
regular course of the business of the Company, or with the prior written consent
of the Company, any trade secret or confidential knowledge or information
relating in any way to the customers of the Company or to the business or
manufacturing processes from time to time carried out or conducted by the
Company.
11. PATENTS, TRADEMARKS, TRADE SECRETS
Except as the same may be pledged as security for debt, Employee
shall assign to the Company, immediately upon making or acquiring them, as the
case may be, any and all patent rights, letters patent, copyrights, trade-marks,
service marks, trade names and applications therefor in any country and all
rights and interests in, to and under the same which he may legally transfer,
now possessed by him or hereafter made, acquired, or possessed by him during the
term of this Employment Agreement, relating in any way to the business and
activities of the Company and its subsidiary and affiliated companies and agrees
that, upon request, he will promptly make all disclosures, execute all
instruments and papers, and perform all such other actions whatsoever necessary
or desired by the Company to vest and confirm in it, its successors, assigns and
nominees, fully and completely, all rights created or contemplated by this
section 11 and to which may be necessary or desirable to enable the Company and
its successors, assigns and nominees to secure and enjoy the full benefits and
advantages thereof.
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<PAGE>
12. INDEMNIFICATION AND DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Company shall indemnify Employee and advance expenses with
respect to any indemnifiable matter to Employee to the fullest extent permitted
by applicable law. To the extent that the Company maintains an insurance policy
or policies providing liability insurance for directors, officers, employees,
agents or fiduciaries of the Company, the Employee shall be covered by such
policy or policies in accordance with their terms to the maximum extent of the
coverage available for any such director, officer, employee, agent or fiduciary
under any such policy or policies.
13. PROHIBITED SOLICITATION
At no time during the full year following the termination of this
Employment Agreement shall Employee attempt to induce any person to leave the
employment of the Company.
14. REGISTRATION RIGHTS
The Employee shall have all of the rights and benefits, pari passu,
with the beneficiaries of any Registration Rights Agreement binding upon the
Company.
15. INJUNCTIVE RELIEF
The Company and Employee acknowledge and agree that the executive
and managerial services to be rendered by Employee hereunder are of such a
special, unique and extraordinary character that it gives them a peculiar value
impossible of replacement and for the loss of which the Company cannot be
reasonably or adequately compensated in damages. Employee acknowledges and
agrees that a breach by him of the provisions of Sections 10, 11 or 13 hereof
will cause the Company irreparable injury and damage, and the Company shall be
entitled to injunctive relief to prevent any such prospective or continuing
breach.
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<PAGE>
16. ARBITRATION
Any dispute arising with respect to this Employment Agreement shall
be submitted to arbitration by a single arbitrator in New York, New York in
accordance with the rules of the American Arbitration Association then in
effect, and judgment upon any award of such arbitrator may be entered in any
court having jurisdiction thereof. The costs of any arbitration proceeding
hereunder, excluding the out-of-pocket costs and accounting and legal fees and
related disbursements of each party which shall be borne by the party incurring
same, shall be shared equally by the parties.
17. WAIVER
Failure to insist upon compliance with any of the terms, covenants,
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition, nor shall any waiver or relinquishment of any right or power
hereunder at any one time or more times be deemed a waiver or relinquishment of
such right or power at any other time or times.
18. SEVERABILITY
The invalidity or unenforceability of any provision hereof shall in
no way affect the validity or enforceability of any other provision. The parties
to this Employment Agreement agree and intend that this Employment Agreement
shall be enforced as fully as it may be enforced consistent with applicable
statutes and rules of law.
19. NOTICES
Any notices required or permitted hereunder shall be given in
writing by registered or certified first class mail (air mail if international),
postage prepaid, addressed to the parties at their respective addresses first
above set forth, or to such other address as either party may from time to time
designate by notice to the other hereunder.
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<PAGE>
20. CHOICE OF LAW
This Employment Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York without regard to
conflicts of laws principles thereof.
21. ENTIRE AGREEMENT
This Employment Agreement represents the entire agreement of the
parties hereto, and supersedes any other agreements between the parties with
respect to the subject matter thereof, and may not be amended, modified or
supplemented in any respect, except by a subsequent writing executed by both
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the day and year first above written.
EPIGEN, INC.
By: /s/: Richard E. Kent
------------------------------------
Name: Richard E. Kent
Title: Vice Chairman
/s/: Donald C. Fresne
-----------------------------------------
Donald C. Fresne
Page 9 of 9
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT made as of the 1st day of November, 1999
("Employment Agreement") between EPIGEN, INC., a Delaware corporation, North
Tower Hill Road, PO Box L, Millbrook, NY 12545 (the "Company"), and RICHARD E.
KENT ("Employee"), residing at 49 Bournes Point Road, Wareham, MA 02571.
WITNESSETH:
WHEREAS, Employee is presently employed as Vice Chairman and Secretary
of the Company; and
WHEREAS, the Company and Employee desire to assure the continued
services of Employee to the Company on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Company and Employee agree as follows:
1. EMPLOYMENT. The Company agrees to continue to employ Employee to
render executive and managerial services to the Company and Employee accepts
such appointment with the title of Vice Chairman and Secretary of the Company.
In such capacity, Employee shall be Vice Chairman and Secretary of the Company,
possessing such powers and authority and charged with such duties and
responsibilities in relation to the business and affairs of the Company as are
customarily associated with such offices, subject to the direction of the Board
of Directors of the company and subject to the understanding that Employee may
give priority to and attend to his primary employment provided such primary
employment is not competitive with the business of the Company.
2. TERM. The term of Employee's employment under this Employment
Agreement commenced as of June 1, 1994 through the date hereof, and, subject to
the terms and conditions of this Employment Agreement, shall continue for a
period of five years from the date hereof and thereafter as such term is
extended. On June 1 of each year, beginning June 1, 2000, such term of this
Employment Agreement shall be automatically extended for an additional year
unless Employee or the company shall have notified the other in writing within
90 days of such date of its determination, by director
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resolution if by the Company, not to extend the term of this Employment
Agreement. The term of this Agreement shall continue without regard to whether
Employee continues to serve as a Director of the company or its successor.
3. COMPENSATION.
(a) Employee shall receive as full compensation for his services
hereunder, direct from the Company, a salary at the rate of $18,000 per annum
until March 31, 1998 and at the rate of $36,000 per annum beginning April 1,
1998, paid by monthly installments. At the discretion of the Board of Directors,
Employee may be given merit increases and bonuses during the term hereof.
(b) Employee shall be granted pursuant to the terms and conditions
of the form of option agreement set forth on Exhibit A hereto the following
nonqualifying options ("Stock Options") to purchase shares of the Company's
Common Stock, par value $0.001 per share (the "Common Stock"), at a purchase
price of $.50 per share upon the occurrence of the following events:
(i) upon the execution and delivery of this Agreement, 47,000
shares of Common Stock; and
(ii) on June 1 of each year in which this Employment Agreement
remains in effect, 37,000 shares of Common Stock.
(c) The Company will undertake to file as promptly as practicable a
Registration Statement on Form S-8 with respect to the shares of Common Stock
underlying the Stock Options.
4. EXPENSES. Employee shall be reimbursed for all ordinary and
reasonable out-of-pocket expenses properly incurred while engaged in the
business of the company pursuant to the Company policy then in effect, provided
that such are itemized and presented to the Company in accordance with the
Company policy then in effect.
5. BENEFITS.
(a) The Company shall provide Employee or Employee shall be
entitled to reimbursement for the premium costs of a $100,000 whole life
insurance policy under which Employee is the insured and has the sole right to
designate the beneficiary thereunder.
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(b) For so long as Employee is a Director of the Company, the
Company will pay Employee such directors' and meeting fees as may be paid to
directors who are not employees of the Company.
6. CHANGE IN CONTROL.
(a) DEFINITIONS. For purposes of this Section 6, the following
terms shall have the following meanings:
(i) "ANNUAL BASE SALARY" shall mean the average annual base
gross salary plus cash bonus, but excluding fringe benefits, deferred
compensation payments, contributions to retirement plans or any other payment,
paid accrued or payable by the Company to Employee for the fiscal year before
the Change in Control.
(ii) "CHANGE IN CONTROL" shall be deemed to occur (x) when a
person, corporation, partnership, association, entity or group (as defined in
Section 13(d) (3) of the Securities Exchange Act of 1934, as amended) (I)
acquires 25 percent or more of the Company's outstanding voting securities, or
(ii) acquires securities constituting 25 percent or more of the voting power
with respect to election of directors of the Company or (iii) acquires all or
substantially all of the assets of the Company, or (iv) enters into a contract
with respect to any of the foregoing or (v) when the directors of the Company as
a the date hereof cease to constitute a majority of all directors of the
Company; provided, however, that for purposes of this clause any person who
replaces a director with the support of Employee shall be deemed a director as
of the date hereof.
(iii) "FIRST ANNIVERSARY" shall mean the date twelve months
after a Change in Control.
(iv) "GOOD REASON" shall mean (v) a change in the status or
position of Employee which reflects a change from the status and position(s) as
were in effect immediately prior to such Change in Control, or (w) the
assignment to Employee of any duties or responsibilities which, in Employee's
reasonable judgment, are inconsistent with his status or position(s), or
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(x)removal of Employee from his current position or reduction in his pay or
requiring him to relocate, or (y) any refusal by the Company or its successor to
continue to allow Employee to attend to matters or engage in activities not
directly related to the business of the Company, which prior to such Change in
Control, he was permitted to attend or to engage in, or (z) the removal of
Employee, without his consent, to any location outside of the Boston,
Massachusetts area.
(b) If in the event that sixty (60) days prior to a Change in
Control or at any time after a Change in Control but prior to the First
Anniversary Employee shall be discharged for any reason (other than for cause),
Employee shall receive, within thirty (30) days after such discharge, a lump sum
severance payment equal to five (5) times his Annual Base Salary (hereinafter
referred to as "5X Base".
(c) If in the event that sixty (60) days prior to a Change in
Control or any time after a Change in Control but prior to the Fist Anniversary
thereof, Employee terminates employment for Good Reason, Employee shall receive,
within thirty (30) days after such discharge, a lump sum severance payment equal
to 5X Base.
(d) If in the event that after a Change in Control but prior to the
First Anniversary thereof, Employee voluntarily leaves the employ of the company
for reasons other than discharge or for Good Reason, Employee shall receive,
within thirty (30) days, a lump sum severance payment equal to three (3) times
his Annual Base Salary.
7. TERMINATION OF EMPLOYMENT.
(a) This Agreement shall terminate automatically upon the death of
Employee.
(b) The Board of Directors may terminate Employee's employment upon
one (1) week's notice to Employee for "cause" as hereinafter defined n
subparagraph (d) below.
(c) Upon the termination of Employee's employment pursuant to
subparagraph (a) or (b) above, Employee shall be entitled to no further
compensation other than accrued and unpaid compensation through the date of
termination.
(d) The term "cause", as used in subsection 5(b) above with respect
to the termination of Employee's employment by the Company, shall mean
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(i) embezzlement or other misappropriation of property of the Company; or (ii)
conviction of a crime which constitutes a felony.
8. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES.
Employee hereby represents and warrants to the Company as follows:
(a) Employee has full legal capacity to enter into this Employment
Agreement. This Employment Agreement has been duly executed and delivered by
Employee.
(b) The execution, delivery and performance by Employee of this
Employment Agreement will not conflict with or result in a breach of any of the
terms, conditions or provisions of, or constitute (with due notice or lapse of
time or both) a default under, any material indenture, mortgage, lease agreement
or other agreement or instrument to which Employee is a party or by which he is
bound, subject to the understanding set forth in Section 1 hereof.
9. EMPLOYEE'S COVENANTS. Upon and subject to the terms and conditions
of this Employment Agreement, Employee hereby covenants to the Company as
follows:
(a) Employee will remain in the employ of the Company and will
carry out the duties and responsibilities assigned to him from time to time by
the Company's Board of Directors;
(b) Employee will observe the policies and practices established by
the Company's Board of Directors and will otherwise conduct himself in a manner
reasonably calculated to benefit the Company; and
(c) During the term of this Employment Agreement, Employee will
promptly advise the Company's Board of Directors of any business opportunities
of which he may become aware related to the business and corporate goals of the
Company.
10. CONFIDENTIALITY. Employee shall not, during any period of his
employment by the Company or thereafter for any reason, divulge, furnish, or
make accessible to or use for the benefit of, anyone other than the Company, its
directors and officers, otherwise than in the regular course of the business of
the Company, or with the prior written consent of the company, any trade secret
or confidential knowledge or information relating in any way to the scientific
research of the Company, the customers of the Company or to the business or
manufacturing processes from time to time carried out or conducted by the
Company.
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11. INDENMIFICATION AND DIRECTORS AND OFFICERS LIABILITY INSURANCE. The
Company shall indemnify Employee and advance expenses with respect to any
indemnifiable matter to Employee to the fullest extent permitted by applicable
law. To the extent that the Company maintains an insurance policy or policies
providing liability insurance for directors, officers, employees, agents or
fiduciaries of the Company, the Employee shall be covered by such policy or
policies in accordance with their terms to the maximum extent of the coverage
available for any such director, officer, employee, agent or fiduciary under any
such policy or policies.
12. REGISTRATION RIGHTS. The Employee shall have all of the rights and
benefits, pari passu, with the beneficiaries of any Registration Rights
Agreement binding upon the Company.
13. WAIVER. Failure to insist upon compliance with any of the terms,
covenants or conditions hereof shall not be deemed a waiver of such term,
covenant or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
14. SEVERABILITY. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision. The parties to this Employment Agreement agree and intend that this
Employment Agreement shall be enforced as fully as it may be enforced consistent
with applicable statues and rules of law.
15. NOTICES. Any notices required or permitted hereunder shall be given
in writing by registered or certified first class mail, postage prepaid,
addressed to the parties at their respective addresses first above set forth, or
to such other address as either party may from time to time designate by notice
to the other hereunder.
16. GOVERNING LAW. This Employment Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York without
regard to conflicts of laws principles thereof. In the event that an action is
commended by Employee under this Agreement for failure of the Company to perform
its obligations hereunder, the Company shall pay the legal fees and expenses
incurred by Employee with respect to such action if Employee prevails on the
merits of such action as determined by a court of competent jurisdiction.
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17. ENTIRE AGREEMENT. This Employment Agreement represents the entire
agreement of the parties hereto, and supersedes any other agreements between the
parties with respect to the subject matter hereof, and may not be amended,
modified or supplemented in any respect, except by a subsequent writing executed
by both parties hereto.
18. MISCELLANEOUS. Neither this Employment Agreement, nor any term
hereof, may be amended, changed, waived, discharged or terminated except by an
instrument in writing signed by the party against which such amendment, change,
waiver, discharge or termination is sought to be enforced. This Employment
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original, and all of which together shall constitute one and the same
instrument. The headings contained in this Employment Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Employment Agreement. This Agreement shall be binding
upon the successors and assigns of the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the day and year first above written.
EPIGEN, INC.
By: /s/: Donald C. Fresne
------------------------------------
Name: Donald C. Fresne
Title: Chairman
/s/: Richard E. Kent
--------------------------------------
Richard E. Kent
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Exhibit A
EPIGEN, INC.
PO Box L
North Tower Hill Road
Millbrook, NY 12545
____________, 20__
Mr. Richard E. Kent
49 Bournes Point Road
Wareham, MA 02571
Re: Grant of Nonqualifying Stock Options to Purchase Shares of
Common Stock of Epigen, Inc. to Donald C. Fresne (the "Optionee")
-----------------------------------------------------------------
Dear Optionee:
You and Epigen, Inc., a Delaware corporation (the "Company"), hereby
agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee the
option (the "Stock Option") to purchase __________ shares of Common Stock, par
value $.001 per share (the "Common Stock") , of the Company for a purchase price
of $_____ per share (the "Option Price") . The Optionee may exercise the Stock
Option in accordance with this Agreement no earlier than [six months from the
date of grant] (the "Exercise Date') and no later than seven years from the date
of grant (the "Expiration Date") unless earlier terminated according to the
terms of this Agreement. The Stock Option is not intended to qualify as an
incentive stock option within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended.
2. EXERCISE OF STOCK OPTION. The Optionee may exercise the Stock
Option in whole or in part by written notice delivered to the Company in the
form of either Schedule A or Schedule B to this Agreement. Payment of the Option
Price for the shares of Common Stock purchased upon exercise of the Stock Option
shall be made by delivery to the Company of (i) a certified or bank cashier's
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check payable to the Company in the amount of the Option Price or (ii) stock
certificates, duly endorsed in blank and with signatures guaranteed,
representing a number of shares of Common Stock having a Fair Market Value (as
hereinafter defined) equal to the Option Price.
Upon the exercise of the Stock Option, the Optionee shall have the
right, in lieu of receiving shares of Common Stock and making any cash payment
to the Company, to receive a cash payment (the "Stock Appreciation Right
Payment") from the Company equal to the difference between the aggregate Fair
Market Value of the number of shares of Common Stock as to which the Stock
Option is being exercised and the aggregate Option Price of such shares,
provided, however, the Company shall not be obligated to make the Stock
Appreciation Right Payment to the Optionee if the Board of Directors shall
determine, in its sole discretion, that the Company does not have sufficient
cash available to make the Stock Appreciation Right Payment. If the Board of
Directors shall make such a determination, the Optionee shall receive shares of
Common Stock upon the exercise of the Stock Option.
"Fair Market Value" means (i) the closing sale price of the Common
Stock on any national securities exchange on which the Common Stock shall be
registered and listed on the business day immediately preceding the date of
exercise of the Stock Option, or (ii) if the Common Stock is traded in the
over-the-counter market and quoted on the National Association of Securities
Dealers Inc. National Market System ("NASDAQ- NMS"), the closing sale price of
the Common Stock on NASDAQ-NMS on the business day immediately preceding the
date of exercise of the Stock Option, or (iii) if the Common Stock is listed on
a national securities exchange or is quoted on NASDAQ- NMS, but there shall have
been no sale of such stock on the business day immediately preceding the date of
exercise of the Stock Option, the closing sale price on such exchange or on
NASDAQ-NMS on the most recent business day prior to the date of exercise of the
Stock Option on which there was a sale of such stock, or (iv) if the Common
Stock shall not at the time be listed on any such exchange or quoted on
NASDAQ-NMS, but is traded in the over-the-counter market and quoted by the
National Association of Securities Dealers Inc., the average of the closing bid
and asked prices for such stock on the business day immediately preceding the
date of exercise of the Stock Option as reported by the National Quotation
Bureau, or (v) if the Common Stock is not listed on any national securities
exchange and is not quoted by NASDAQ-NMS or the National Quotation Bureau, the
fair value per share of the Common Stock as determined in good faith and on a
reasonable basis by the Board of Directors of the Company.
3. DELIVERY OF SHARES OF COMMON STOCK AND STOCK APPRECIATION RIGHT
PAYMENT. The Company shall, upon payment of the Option Price for the shares of
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Common Stock, make prompt delivery of certificates representing the shares of
Common Stock to the Optionee. The Company shall, at all times during the term of
this Agreement, reserve and keep available, solely for issuance and delivery
upon exercise of the Stock Option, all shares of Common Stock issuable upon
exercise of the Stock Option. All shares of Common Stock issuable upon exercise
of the Stock Option shall , upon issuance, be duly authorized, validly issued,
fully paid and non-assessable, with no liability on the part of the holder
thereof. The Company shall pay allo original issue taxes on the exercise of the
Stock Option, and all other fees and expenses necessarily incurred by the
Company in connection therewith. The Stock Appreciation Right Payment shall be
made by delivery to the Optionee of a check payable to the Optionee in the
amount of the Stock Appreciation Right Payment.
4. NO RIGHTS IN OPTION STOCK. The Optionee shall have no rights as a
stockholder in respect of any shares subject to the Stock Option unless and
until the Optionee has exercised the Stock Option in complete accordance with
the terms hereof, and shall have no rights with respect to shares not expressly
conferred by this Agreement.
5. CERTAIN ADJUSTMENTS
(a) Subject to any required action by the stockholders of the
Company, in the event that the outstanding shares of Common Stock are hereafter
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company or of another corporation by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split, combination of shares or share dividends, the
Board of Directors of the Company shall adjust the number and kind of securities
subject to the Stock Option. In any such case, the Board of Directors of the
Company shall make such adjustment to the Stock Option without change in the
total price applicable to the unexercised portion of the Stock Option and with a
corresponding adjustment in the Option Price. In the event that the number of
shares of Common Stock is increased by sale of additional shares or conversion
of securities convertible into such shares or any other similar event not
referred to in the first sentence of this Section 5 (a) , the Board of Directors
of the Company may in its discretion, but shall not be obligated to, adjust the
number or kind of securities subject to the Stock Option.
(b) Should the Company sell all or substantially all of its assets
and discontinue its business, or merge or consolidate with another entity, or
liquidate or dissolve in connection with those events, then, in lieu of its
obligation under Section 5 (a), the Board of Directors of the Company may amend
or adjust the Stock Option so as to terminate it completely, or to continue the
Stock Option if exercisable at the date the Board of Directors of the Company
adopted the plan of sale, merger, consolidation or
Page 10
<PAGE>
liquidation, or may take other actions as it deems desirable and appropriate. In
any such case, however, the Optionee will be given either (i) a reasonable time
in which to exercise the Stock Option before the effectiveness of the sale and
discontinuation, merger, consolidation or liquidation, or (ii) the right to
obtain for his payment of the Option Price, an equivalent amount of any
securities the Optionee would have been entitled to obtain in consequence of
that- event, had he exercised the Stock Option immediately before the plan of
sale and discontinuation, merger, consolidation or liquidation was adopted.
(c) Should the Company be recapitalized in a transaction not
covered by Section 5(a) by the issuance of any other class or classes of
securities in exchange for the Common Stock, the Board of Directors of the
Company shall amend the Stock Option to reflect an adjusted option price per
unit of such securities as would equitably be obtained in accordance with the
terms otherwise applicable to the actual exchange.
(d) The Company shall not be required upon the exercise of the
Stock Option to issue or deliver fractional shares as a result of any adjustment
pursuant to this Section 5. The Optionee shall be entitled to receive a cash
payment in lieu of such fractional shares.
6. NONASSIGNABILITY. The Stock Option and this Agreement shall not be
encumbered, disposed of, assigned or transferred in whole or part, and may only
be exercised by the Optionee unless the prior written consent of the Company has
been obtained.
7. EFFECT UPON EMPLOYMENT. Nothing contained in this Agreement shall
be deemed to require the Company to continue the employment of, or any other
contractual arrangement with, the Optionee.
8. MISCELLANEOUS. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. This Agreement shall be binding
upon, inure to the benefit of and be enforceable by the successors and assigns
of the parties hereto. This Agreement may not be modified or supplemented except
upon the execution and delivery of a written agreement executed by each of the
parties hereto. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be deemed to have
been duly given if so given) if delivered in person, by cable, telegram or
telex, or by registered or certified mail, postage prepaid, return receipt
requested to the respective parties at their respective addresses or to such
other address as either party may
Page 11
<PAGE>
have furnished to the other in writing in accordance herewith, except that
notices for termination for cause need not be in writing and notices of change
of address shall only be effective upon receipt. This Agreement shall be
governed by and construed in accordance with the substantive law of the State of
New York without giving effect to the principles of conflict of laws thereof.
This Agreement may be executed in counterparts, each of which shall be an
original, but both of which together shall constitute one and the same
agreement.
In order to indicate your acceptance of the Stock Option on the above
terms and conditions, kindly sign the enclosed copy of this Agreement and return
it to the Company.
EPIGEN, INC.
By:
------------------------------------
[Officer]
Accepted and Agreed to:
- ------------------------------------
Richard E. Kent
Page 12
<PAGE>
Schedule A
NOTICE OF ELECTION TO EXERCISE
Epigen, Inc.
PO Box L
North Tower Hill Road
Millbrook, NY 12545
Attention:
Gentlemen:
I hereby irrevocably elect to exercise the Stock Option held by me
pursuant to the Option Agreement, dated ____________ (the "Option Agreement"),
between me and Epigen, Inc. (the "Company") to purchase shares of the Common
Stock, par value $0.001 per share (the "Common Stock"), of the Company at an
option price of $_________ per share.
Enclosed is either (a) a certified or bank cashier's check, payable to
the order of the Company, in the amount of $______ in full payment of the
purchase price or (b) stock certificates, duly endorsed in blank and with
signature guaranteed, representing _____ shares of Common Stock, in full payment
of the purchase price.
Please instruct American Stock Transfer & Trust Company (the "Transfer
Agent"), to issue _____ certificate(s) for ______ shares each and, if
applicable, a separate certificate for the remaining __________ shares in my
name as shown below. The following address is for the records of the Transfer
Agent for mailing stockholder communications:
-----------------------------------------
Name
-----------------------------------------
Taxpayer I.D. Number
(i.e. Social Security/Insurance Number
Page 13
<PAGE>
-----------------------------------------
Number and Street
-----------------------------------------
City State Zip Code
Please forward the certificate(s) to me at the following address:
-----------------------------------------
Number and Street
-----------------------------------------
City State Zip Code
This election incorporates, and is subject to, all terms and
conditions of the Option Agreement.
I am acquiring the foregoing shares for investment purposes only, and
not with a view to their sale or distribution.
Dated:
--------------------
-----------------------------------------
Signature
-----------------------------------------
Print Name
Page 14
<PAGE>
Schedule B
NOTICE OF ELECTION TO EXERCISE - STOCK APPRECIATION
RIGHT PAYMENT
Epigen, Inc.
PO Box L
North Tower Hill Road
Millbrook, NY 12545
Attention:
Gentlemen:
I hereby irrevocably elect to exercise the Stock Option held by me
pursuant to the Option Agreement, dated _____________ (the "Option Agreement"),
between me and Epigen, Inc. (the "Company") to purchase _____ shares of Common
Stock, par value $0.001 per share (the "Shares"), of the Company at an option
price of $________ per share.
I also hereby irrevocably elect pursuant to Section 2 of the Option
Agreement, in lieu of receiving the Shares and making any cash payment to the
Company, to receive a cash payment from the Company equal to the difference
between the aggregate Fair Market Value (as defined in the Option Agreement) of
the Shares and the aggregate Option Price of the Shares (the "Stock Appreciation
Right Payment")
Please forward the Stock Appreciation Right Payment to me at the
following address:
-----------------------------------------
Number and Street
-----------------------------------------
City State Zip Code
Dated:
--------------------
-----------------------------------------
Signature
-----------------------------------------
Print Name
Page 15
Federal Express
December 16, 1999
Thomas J. McQuaid, CPA
Assistant Director and CEO
Boston Biomedical Research Institute, Inc.
20 Staniford Street
Boston, MA 02114
Re: Restated Agreement dated as of February 25, 1992
------------------------------------------------
Dear Tom:
In accordance with our recent discussions and correspondence, the
purpose of this letter is to set forth our understanding regarding amendment of
the royalty provisions of the captioned Agreement, as previously amended.
We propose:
1. that the first sentence of Section 5(a) of such Agreement be
amended as follows:
(a) Epigen agrees to pay to BBRI a royalty of 3% of the NET SELLING
PRICE of any product, article, or composition sold by Epigen or
any affiliate of Epigen, which product, article, or composition
utilizes either the HC Antigen or epiglycanin, whether or not
developed via the CARCINOMA ASSAY RESEARCH PROGRAM, for a term
ending on the tenth (10th) anniversary of the first sale of any
such product.
2. that the first sentence of Section 5(b) of such Agreement be
amended as follows:
(a) Epigen agrees to pay to BBRI one-half of any royalties or
payments and considerations in lieu thereof received by Epigen
under any sub-license agreement granted by Epigen for any
product, article, or composition sold by such sublicensee which
is not an affiliate of Epigen which product, article, or
composition utilizes either the HC Antigen or epiglycanin,
whether or not developed via the CARCINOMA ASSAY RESEARCH
PROGRAM, not to exceed 3% of the NET SELLING PRICE thereof for a
term ending on the tenth (10th) anniversary of the first sale of
any such product.
3. that in all other respects such Agreement, as previously amended,
shall remain unchanged.
Should the foregoing accurately set forth our understanding, please
sign and return to us a copy of this letter.
Sincerely,
EPIGEN, INC.
By: /s/: Donald C. Fresne
------------------------------------
Donald C. Fresne, Chairman,
President and Chief
Executive Officer
AGREED TO AND ACCEPTED:
BOSTON BIOMEDICAL RESEARCH INSTITUTE, INC.
By: /s/: Kathleen G. Morgan
-------------------------------
Name: Kathleen G. Morgan, Ph.D.
Title: Director and CEO
Date: December 17, 1999
BAYER BUSINESS GROUP DIAGNOSTICS
BAYER CORPORATION
511 Benedict Avenue
Tarrytown, NY 10591-5097
May 26, 1999
Mr. Donald Fresne
Chairman of the Board
Chief Executive Officer
Epigen, Inc.
North Tower Hill Road
PO Box L
Millbrook, NY 12545
Dear Mr. Fresne:
I was confused by your fax dated 5/24/99. As we discussed on the telephone
earlier that day Dr. Maimonis has completed his evaluation of the COD Test and
the results were disappointing at best. The assays run had poor dynamic range
and linearity and could not be used for further study. Peter even had Dr.
Coddington in to observe the process of running the assays.
At this time Bayer has concluded its evaluation of the COD test and found
the results to be inconclusive. The fact that no demonstrated antibody to HCA of
IgG subtype exists, and that the assay is not robust in its current format, is a
cause for concern. Epigen can now consider itself free and clear of any
obligations relating to the "right of first refusal clause" of our Evaluation
Agreement of 1996. However, Bayer does reserve the right to review publications
in which the Bayer name is used, or in which data generated by Bayer is
presented or discussed. Bayer shall not unreasonably withhold consent to
publish.
If Epigen in the future can produce an assay for HCA, which utilizes IgG
antibodies, and can demonstrate statistically significant clinical and
analytical data validating the utility of the COD test, Bayer may again be
interested in licensing the assay.
Thank you for the opportunity to evaluate the assay and good luck in
licensing the COD test to other parties.
Best regards,
/s/: John J. Blackwood
- -----------------------------------------------
John J. Blackwood
Director, Business Development and Planning-LTS
Bayer Business Group Diagnostics
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