Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________ TO ___________ .
COMMISSION FILE NUMBER 1-11352
----------
DYNAGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------
DELAWARE 04-3029787
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
99 ERIE STREET, CAMBRIDGE, MASSACHUSETTS 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
----------
(617) 491-2527
----------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- -------------------
COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS BOSTON STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
--------------
COMMON STOCK, $.01 PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
----------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES[X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, IN
DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III
OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
As of September 23, 1996, 28,661,412 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding. The aggregate market value
of the registrant's voting stock held by non-affiliates of the registrant as of
September 23, 1996, based upon the closing price of such stock on the Nasdaq
Stock Market's SmallCap Market ("Nasdaq") on that date ($2.00) was $50,959,824.
================================================================================
PART I
ITEM 1. BUSINESS
INTRODUCTION
DynaGen, Inc. ("DynaGen" or the "Company") develops and markets proprietary
and generic therapeutic and diagnostic products for the human health care
market. In August 1996, the Company acquired the tablet business of Able
Laboratories, Inc. ("Able"), a generic pharmaceutical products subsidiary of
ALPHARMA USPD INC.
Generic drugs are lower priced equivalents of brand-name drugs that have
gone off-patent. According to industry sources, the U.S. generic pharmaceutical
market approximates $8 billion in annual sales. In connection with the
acquisition of Able, the Company acquired the rights to several U.S. Food and
Drug Administration ("FDA") approved Abbreviated New Drug Application ("ANDA")
products as well as other generic formulations. The Company intends to increase
sales of its current generic product portfolio through expansion of its
distribution network, by reintroducing certain products that were previously
discontinued by Able's prior owner, and by developing a program to add new ANDA
products. There can be no assurance that the Company will be successful in
implementing this strategy or receiving the necessary regulatory approvals.
Prior to the Able acquisition, DynaGen's business consisted of proprietary
diagnostic products and proprietary therapeutic and diagnostic product
candidates. The Company's lead therapeutic product candidate, NicErase(R)-SL, is
intended as an aid in smoking cessation and to provide relief from nicotine
withdrawal symptoms. Unlike currently available smoking cessation products,
NicErase's active ingredient is lobeline, a non-nicotine therapeutic compound.
Results of human clinical trials conducted by the Company suggest that NicErase
is safe, reduces nicotine withdrawal symptoms and does not exhibit potential for
addiction. The Company is currently conducting a multi-center pivotal Phase 3
clinical trial of NicErase-SL. Results from this first trial are anticipated to
be available in the fourth quarter of 1996. There can be no assurance that the
results of the Company's ongoing Phase 3 clinical trial of NicErase-SL will be
favorable for the Company.
DynaGen is also developing OrthoDyn(R), a bioresorbable bone cement system
for bone and joint repair which is currently in the preclinical development
stage. The Company is also conducting early stage research on bacterial extract
for the treatment of infectious diseases.
DynaGen has also developed proprietary diagnostic tests for certain
infectious diseases including tuberculosis ("TB"). The Company is currently
selling MycoDot(R), a product to detect antibodies against mycobacteria in blood
or serum, through distributors primarily in Southeast Asia, Pacific Rim
countries, China, India and Japan. DynaGen has received clearance under three
Premarket Notification 510(k)s to the FDA to market its MycoAKT(R) diagnostic
tests that identify three mycobacterial species in culture. The Company has
granted exclusive U.S. manufacturing and distribution rights and semi-exclusive
worldwide rights for MycoAKT to a third party. The Company has also filed a
510(k) application with the FDA seeking clearance to market its proprietary
NicCheck(R) I product for detection of nicotine consumption.
THERAPEUTIC PRODUCTS
OVERVIEW OF SMOKING CESSATION THERAPY
Until recently, all of the FDA-approved smoking cessation products required
a prescription from a physician. Nicorette(R), a nicotine-containing gum
currently marketed by SmithKline Beecham Consumer Health Care, was the first
prescription product approved by the FDA as an aid to smoking cessation.
Nicotine-containing transdermal patches and nasal sprays have also been
developed and initially approved by the FDA for prescription use and marketed as
such by pharmaceutical companies. Beginning in 1996 the FDA granted approval for
several nicotine patch and gum products, including some of the products
mentioned above, to be sold over-the-counter ("OTC"), without prescription. The
FDA approval of OTC products has caused a shift in the smoking cessation
marketplace from prescription to OTC use.
The rationale behind currently marketed nicotine based smoking cessation
products is that by gradually decreasing the concentration and daily dosage of
nicotine one can overcome nicotine dependency without experiencing withdrawal
problems.
1
Until December 1993, there were a variety of non-FDA approved
over-the-counter smoking cessation products. Several of these products contained
lobeline as their active ingredient because it was believed that lobeline could
temporarily replace nicotine and help to overcome nicotine dependency and
withdrawal problems. The majority of the lobeline products were taken orally
assuming that a sufficient quantity of lobeline would be absorbed from the
gastrointestinal ("GI") tract into the blood stream. These formulations have not
been proven to be effective and they have not received FDA approval.
DynaGen's research is consistent with the hypothesis that lobeline relieves
nicotine withdrawal symptoms by binding to nicotine receptors in the brain
without activating the addiction mechanisms. Based on the belief that a lobeline
formulation which does not depend on absorption from the GI tract might be an
effective tobacco substitute, DynaGen has developed alternative delivery
formulations, the most promising of which is the sublingual tablet, NicErase-SL.
NICERASE-SL. NicErase-SL is a sublingual tablet that is held under the
tongue where it dissolves in one to three minutes. As the tablet dissolves, the
lobeline enters the bloodstream directly through blood vessels under the tongue
and in the mouth. NicErase-SL is designed for use by individuals who want to
stop smoking. It is expected that NicErase-SL will be used in a six-week program
that includes smoking cessation counseling similar to other FDA approved
prescription smoking cessation products.
In November, 1994, DynaGen initiated a multi-center pilot Phase 3 smoking
cessation clinical trial with NicErase-SL. The primary purpose of this trial was
to project the number of subjects required to demonstrate statistically
significant differences between NicErase-SL and placebo treated subjects in the
planned pivotal Phase 3 trials. A total of 180 subjects were enrolled, 60 at
each of three locations: the Tobacco Research Center at West Virginia
University, the University of Nebraska Medical Center and the Arizona Clinical
Research Center. During the study, NicErase-SL sublingual tablets were
self-administered daily for six weeks. One half of the subjects received
NicErase-SL and the other half received placebo tablets. All subjects received
brief individualized smoking cessation counseling on a weekly basis.
The pilot Phase 3 trial showed encouraging results, particularly for those
smokers who were considered to be more highly nicotine dependent. The quit rates
for highly dependent smokers treated with NicErase-SL for six weeks were
approximately double the quit rates of those who received the placebo. Other
indicators of effectiveness also improved. For example, the craving for tobacco
and the number of cigarettes smoked by those who did not abstain completely were
reduced by NicErase-SL compared to the placebo treatment. These results
warranted the conduct of more extensive testing in order to determine whether
NicErase-SL would be an effective smoking cessation product.
The Company thus began a multi-center pivotal Phase 3 clinical trial with
NicErase-SL in March 1996. This trial consists of a total of approximately 750
subjects at two sites in the United States and one in Europe. Results from this
first trial are anticipated to be available in the fourth quarter of 1996. At a
minimum, a second similar trial would also be necessary before the Company could
file, with the FDA, a New Drug Application to market NicErase as a prescription
product. The FDA currently requires that smoking cessation products be initially
marketed for prescription use with a possible switch to OTC only after a
positive history of prescription use has been established and demonstrated to
the FDA's satisfaction.
The Company is currently evaluating its developmental and commercialization
strategy for NicErase-SL in light of the shift in the smoking cessation market
from prescription to OTC products. To date, the Company has not entered into any
collaborative arrangements with any third party with respect to the development
and commercialization of NicErase-SL. The Company's future development and
commercialization activities will depend on a number of factors including the
results of the Company's current pivotal Phase 3 clinical trial, the changing
demands of the smoking cessation market and the Company's ability to secure a
suitable marketing and development partner. There can be no assurance that the
results of the current pivotal Phase 3 clinical trial will be sufficient to
support further clinical development of NicErase-SL or a second pivotal phase 3
clinical trial. Even if such results are promising, there can be no assurance
that such results will be repeated in the future clinical trials, or that the
Company will receive the necessary regulatory approvals to commercialize
NicErase-SL. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors That May Affect Future Results."
2
OTHER THERAPEUTIC PRODUCTS
The Company is developing OrthoDyn, a family of bioresorbable, biocompatible
polymers derived from compounds naturally occurring in the body. Formulation of
these polymers with appropriate fillers and additives yields a moldable mixture
that sets within 10 to 30 minutes into a solid mass with strength
characteristics similar to those of natural bone. Based upon this technology,
the Company is developing an orthopedic bone cement which is intended to be used
in filling cavities in bone and for securing various orthopedic fixation devices
in place, such as artificial joint components and fracture repair rods, plates,
pins, screws and nails. Preclinical studies have demonstrated acceptable
specifications with regard to degradation time, maintenance of strength over
time, and torsion and compression strength of OrthoDyn polymers. Based upon
these qualities, management believes that OrthoDyn bone cement may have
applications in the human orthopedic market. DynaGen intends to seek a partner
to aid in further development of OrthoDyn. There can be no assurance that the
Company will be able to find a suitable development partner for OrthoDyn or that
continued preclinical development of OrthoDyn will be acceptable to justify
continued development.
The Company is conducting early stage research on bacterial extract for the
treatment of infectious diseases. It is currently engaged in the
characterization and partial purification of the extract prior to filing an
investigational new drug application. Management is also evaluating potential
clinical applications for this technology. These types of therapeutics have been
studied in the past and have had mixed results. There can be no assurance that
the Company can successfully develop, test and market products based on this
technology. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors That May Affect Future Results."
GENERIC PRODUCTS
Generic drugs are the chemical and therapeutic equivalents of brand-name
drugs. They are required to meet the same governmental standards as the
brand-name drugs and must receive FDA approval prior to manufacture and sale.
Generic drugs may be manufactured and marketed only if relevant patents (and any
additional government-mandated market exclusivity periods) have expired. These
drugs are typically sold under their generic chemical names at prices
significantly below those of their brand-name equivalents. According to industry
sources, the U.S. generic pharmaceutical market approximates $8 billion in
annual sales and has been growing due to a number of factors, including the
large number of major drugs coming off-patent, the growing importance and impact
of managed care organizations and the increasing physician, pharmacist, and
consumer acceptance of generic drugs.
In connection with the acquisition of Able in August 1996, DynaGen acquired
the rights to several approved ANDA products as well as other generic
formulations. The Company intends to increase sales of its current generic
product portfolio through expansion of its distribution network, by
reintroducing certain products that were previously discontinued by Able's prior
owner, and by developing a program to add new ANDA products.
The following is a list of the generic products that the Company acquired in
the Able acquisition:
GENERIC PRODUCT THERAPEUTIC CATEGORY BRAND NAME(1)
--------------- -------------------- --------------
ANDA PRODUCTS:
Clorazepate tablets (three dosages) Anxiolytic Tranxene
Clorazepate capsules (three dosages) Anxiolytic Tranxene
Loperamide tablets Antidiarrheal Imodium
Acetaminophen suppositories (three dosages) Analgesic Tylenol suppositories
Hydrocortisone acetate cream (1%) Anti-inflammatory Anusol-HC cream
OTHER GENERIC FORMULATIONS:
Bisacodyl tablets Laxative Dulcolax
Choline magnesium trisalicylate tablets (three dosages) Anti-inflammatory Trilisate
Methenamine Mandelate tablets (two dosages) Urinary Antibacterial Mandelamine
Phenazopyridine HCL tablets (two dosages) Urinary Tract Analgesic Pyridium
Salsalate tablets (two dosages) Anti-inflammatory Disalcid
- ----------
(1) All brand names are registered trademarks of their respective
manufacturers.
3
DIAGNOSTIC PRODUCTS
The health care industry is shifting to a managed care approach which
integrates prevention, diagnostic, therapeutic and compliance technologies into
a panel of products for specific disease management. In light of this structural
shift, the Company is developing diagnostic products which may help in the
prevention and diagnosis of disease and in the determination of compliance with
smoking cessation programs.
SMOKING CESSATION AND RELATED DIAGNOSTIC PRODUCTS
NICCHECK. NicCheck is a simple colorometric test for the detection of
nicotine and its metabolites in urine. The test distinguishes between smokers
and nonsmokers with 97% accuracy and is also able to distinguish between high
and low consumers of nicotine. NicCheck can be used both as a companion product
for NicErase-SL or independently for clinical evaluation. Smokers who are trying
to quit may become more motivated by visual verification of their smoking
behavior observed in the changing color intensity of NicCheck I. NicCheck may
also prove to be a cost-effective means for insurance companies to employ risk
assessment/risk management strategies. The Company has conducted human clinical
trials on this product and has filed a 510(k) application with the FDA seeking
clearance to market its NicCheck I test.
EMPHYDYN(TM). The Company is developing EmphyDyn, a diagnostic test for
emphysema that uses immunoassay technology to detect a breakdown of the elastin
lung protein which signals impending lung function impairment. The Company's
proposed EmphyDyn test, which is in the preclinical stage of development, is
intended to be used by physicians to quantitatively assess emphysematous changes
in the lungs at an early stage, thus enabling preventative measures.
TUBERCULOSIS DIAGNOSTIC PRODUCTS
Tuberculosis ("TB") is a chronic, infectious disease which afflicts both
humans and animals. Although the disease is generally considered curable,
particularly when diagnosed in its early stages, large numbers of TB cases occur
in the world population. Diagnostic methods used for the detection of active TB
include microscopic examinations and culturing of biological fluid samples such
as sputum or bronchoalveolar lavage. Microscopic examination has poor
sensitivity and it can be three to eight weeks before growth occurs in culture.
Faster growth of the mycobacterium by culture methods that take seven to
fourteen days can be achieved, but these procedures are laborious, costly and
also require sophisticated instrumentation to read results. The Company's TB
diagnostic test kits are designed to facilitate a more accurate diagnosis of TB
and complement other TB diagnostics currently in use.
MYCODOT. The Company's MycoDot test uses antigen-coated plastic combs to
detect antibodies against mycobacteria in blood or serum. The 20-minute test is
easy to use and yields a color change if the specific antibodies are present in
the sample, indicating that the individual may have a case of active
tuberculosis. Through its arrangements with distributors, the Company has
established distribution channels throughout Southeast Asia and the Pacific Rim
countries. The Company has also recently entered into license or distribution
agreements which include China, India and Japan. These areas were targeted by
the Company because of their high incidence of TB. The Company realized MycoDot
product sales of approximately $201,000 during each of its first two years of
commercialization. The Company is seeking to expand MycoDot distribution to
several other countries around the world.
MYCOAKT. The Company has developed tests for the identification of M. avium
complex, M. tuberculosis complex and M. kansasii isolates in culture. MycoAKT is
used for the identification of these mycobacterial species grown in culture from
a biological sample. Determining the type of mycobacteria is important due to
the increasing frequency of non-tuberculosis mycobacterial diseases associated
with AIDS. The Company received FDA clearance under a 510(k) application to
market each of these tests and has licensed exclusive U.S. manufacturing and
distribution rights to a distributor. Semi-exclusive rights have also been
licensed for the rest of the world.
4
SALES AND MARKETING
The Company markets its diagnostic products under its own name primarily
through distributors. Its generic therapeutic products are sold under its own
"Able Laboratories" name and through private label arrangements. The Company's
generic products are sold to drug wholesalers, manufacturer's representatives,
distributors and by direct sales efforts to retail chains and other
pharmaceutical companies.
The Company has relatively little experience in sales, marketing and
distribution. There can be no assurance that the Company can successfully
implement its sales and marketing strategy or that it can successfully market or
sell any of its products or proposed products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results."
MAJOR CUSTOMERS AND SALES BY GEOGRAPHIC AREA
For the fiscal year ended June 30, 1996, approximately 79% of total revenues
were derived from three major customers: Bristol-Myers Products ("BMP") (45%),
Hainan OSROC Bio-Tech Co. Ltd. ("OSROC") (23%) and Remel LP ("Remel") (11%). For
the fiscal year ended June 30, 1995, approximately 77% of total revenues were
derived from two major customers: BMP (50%) and Genelabs Diagnostics Pte LTD
("Genelabs") (27%). There is no assurance that the revenues from OSROC, Remel
and Genelabs will recur. The revenue from BMP represents the recognition over
two years of a one-time payment of $500,000 for an option regarding the
Company's smoking cessation technology. BMP informed the Company in July 1995
that it decided not to exercise its option to license the technology. The loss
of any key customer and the inability of the Company to replace revenues
provided by a key customer could have a material adverse effect on the Company's
business, financial condition and results of operations.
Information with respect to product sales by geographic area is presented in
Note 9 of "Notes to Financial Statements."
MANUFACTURING AND SUPPLIERS
DynaGen's generic therapeutic products are manufactured at its Able
Laboratories facility in South Plainfield, New Jersey. Management believes that
sufficient quantities of the principal raw materials and components of its
generic products are available at competitive prices from a limited number of
suppliers in the United States and abroad. If new materials from a specified
supplier were to become unavailable, the Company would be required to file a
supplement to its ANDA and revalidate the manufacturing process using the new
supplier's materials. If unexpected delays in obtaining new materials do occur,
it could result in the loss of revenues and have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's strategy is to license its diagnostic products for manufacture
and distribution by third parties. The Company has entered into license
agreements for the manufacture and distribution of its MycoAKT and MycoDot
products. MycoDot is produced by a single licensed manufacturer in India. The
Company's dependence upon third parties for the manufacture and distribution of
its diagnostic products could have a material adverse effect on its ability to
deliver its products on a timely basis.
Clinical supplies of the Company's proprietary NicErase-SL product candidate
are manufactured by a third-party contract manufacturer.
The Company's Cambridge, Massachusetts and South Plainfield, New Jersey
facilities are registered with the FDA and subject to current Good Manufacturing
Practices ("GMP") as prescribed by the FDA.
5
COMPETITION
The Company competes with other generic manufacturers, specialized
biotechnology companies and major pharmaceutical companies. Many of these
competitors possess substantially greater financial and other resources, such as
expertise in clinical trials, FDA submissions and marketing, that are needed to
commercialize a pharmaceutical product.
In the generic market, the Company competes with off-patent drug
manufacturers, brand-name pharmaceutical companies that manufacture off-patent
drugs, the original manufacturers of brand-name drugs and manufacturers of new
drugs that may be used for the same indications as the Company's products. The
principal competitive factors in the generic pharmaceutical market are the
ability to be among the first to introduce products after a patent expires,
price, quality, methods of distribution, reputation, breadth of product line and
customer service, including the maintenance of inventories for timely delivery.
Approvals for new products may have an effect on a company's entire product line
since orders for new products are frequently accompanied by, or bring about,
orders for other products. Management believes that price is a significant
competitive factor, particularly as the number of off-patent entrants offering a
particular product increases. As competition from other manufacturers
intensifies, selling prices typically decline.
In the field of nicotine addiction, the NicErase-SL product candidate will
compete with both prescription and OTC products. In particular, Management
believes that the principal drug competition for its proposed NicErase product
is a nicotine chewing gum and the nicotine patch which several pharmaceutical
companies, such as SmithKline Beecham, Hoechst Marion Roussel, McNeil Consumer
Products Co. and Basel Pharmaceuticals (Ciba-Geigy) have developed and are
marketing in the United States and elsewhere. Competition has been increasing
due to the recent FDA approval of several nicotine patch and gum products to be
sold OTC, without prescription (see "Overview of Smoking Cessation Therapy").
These FDA approvals have caused a shift in the smoking cessation marketplace
from prescription to OTC use. Other programs that emphasize behavioral
modification approaches, such as hypnosis, will create additional competition in
the smoking cessation market. There can be no assurance that the Company's
NicErase-SL product candidate will receive the necessary regulatory approvals
and even if such approvals are obtained that such product will be commercially
successful.
OrthoDyn, the Company's orthopedic product candidate, will compete with
products from a number of much larger companies, including Johnson & Johnson
Co., U.S. Surgical Corp. and Bristol-Myers Squibb Co. There can be no assurance
that the Company's OrthoDyn product candidate will receive the necessary
regulatory approvals and even if such approvals are obtained that such product
will be commercially successful.
Management believes that the Company's current and proposed diagnostic
products will compete on the basis of price, performance and technological
features such as speed of detection, absence of radioactive substance, accuracy
and reliability. Management believes that Gen-Probe, Inc. and Becton-Dickinson,
among others, are its immediate competitors and that other companies may
introduce competing products. There can be no assurance that the Company will be
able to successfully market any of its diagnostic products.
GOVERNMENT REGULATION
The Company's proposed therapeutic and diagnostic products will be subject to
significant government regulation in the United States and other countries. In
order to conduct clinical tests, produce and market products for human
diagnostic and therapeutic use, the Company must comply with mandatory
procedures and safety standards established by the FDA and comparable state and
foreign regulatory agencies. Typically, such standards require that products be
approved by the FDA as safe and effective for their intended use prior to being
marketed for human applications. The FDA regulates the conduct of clinical
studies as well as the introduction, manufacturing, labeling, recordkeeping and
advertising of drugs and medical devices in the United States. The FDA has the
power to seize adulterated or misbranded products, require removal of products
from the market, enjoin further manufacture or sale, impose civil penalties and
criminal sanctions and publicize relevant facts.
6
There are two principal methods by which FDA authorization may be obtained
to market medical device products, such as the Company's diagnostic test kits.
One method is to seek FDA clearance through a premarket notification filing
under Section 510(k) of the Federal Food, Drug, and Cosmetic Act. Applicants
under the 510(k) procedure must prove that the device for which marketing
clearance is sought is substantially equivalent to a device on the market prior
to the Medical Device Amendments of 1976 or a device marketed thereafter
pursuant to the 510(k) procedure. The review period for a 510(k) submission is
generally shorter than that of a premarket approval ("PMA") procedure, however,
it cannot be estimated with any degree of certainty.
If the 510(k) procedure is not applicable, a PMA must be obtained from the
FDA. Under the PMA procedure, the applicant must conduct substantial clinical
testing that is required to determine the safety, effectiveness and potential
hazards of the product. Clinical testing requires prior review of the study
protocol by an institutional review board ("IRB") and patients informed consent,
and may require submission of an investigational device exemption application to
the FDA (for significant risk devices). Prior to human testing, animal testing
may be required to determine the safety of the product. The review period under
a PMA application is generally longer than review of a 510(k) and it may include
review of the application by an outside advisory committee of experts in the
field. In addition, the preparation of a PMA application is significantly more
complex, expensive and time consuming than the 510(k) procedure and no assurance
can be given that the FDA will grant approval for the sale of the Company's
products for routine clinical applications or that the length of time the
approval process will require will not be extensive.
FDA approval of a new pharmaceutical or biological product for human use is
a multistep process. Generally, preclinical animal testing first must be
conducted to establish the safety and potential efficacy of the experimental
product for treatment of a given disease or condition. Once the product has been
found to be reasonably safe in animals, suggesting that human testing would be
appropriate, an investigational new drug ("IND") application is submitted to the
FDA. FDA acceptance of the IND allows a company to initiate clinical testing on
human subjects. The initial phase of clinical testing (Phase 1) is conducted to
evaluate the safety and, if possible, to gain early evidence of effectiveness of
the experimental product in humans. If acceptable product safety is
demonstrated, then Phase 2 trials are initiated. The Phase 2 trials involve
studies in a small sample of the actual intended patient population to assess
the efficacy of the drug for a specific application, to determine dose tolerance
and the optimal dose range and to gather additional information relating to
safety and potential adverse side effects. Phase 2 studies are also utilized to
evaluate combinations of products for therapeutic activity. Once an
investigational drug is found to have some efficacy and an acceptable safety
profile in the targeted patient population, Phase 3 trials may be initiated.
Phase 3 trials are expanded controlled trials that are intended to gather
additional information about safety and effectiveness in order to evaluate the
overall risk-benefit relationship of the experimental product and to provide an
adequate basis for product labeling. These trials also may compare the safety
and activity of the experimental product with currently available products. It
is not possible to estimate the time in which Phase 1, 2 and 3 studies will be
completed with respect to a given product, although the time period can be as
long as several years.
Upon completion of clinical testing, which demonstrates that the product is
safe and effective for a specific indication, a New Drug Application ("NDA") or
a Product License Application ("PLA") for a biological product may be submitted
to the FDA. This application includes details of the manufacturing procedures,
testing processes, preclinical studies and clinical trials. FDA first determines
whether to accept the application for filing. If it does, FDA's review
commences; if it does not, the Company may need to obtain additional data before
resubmitting the application. FDA approval of the application is required before
the applicant may market the new product. In addition, the FDA may impose
conditions on the approval, such as post-marketing testing and surveillance
programs to monitor a product's safety and effectiveness.
An NDA must be submitted to the FDA for new drugs that have not been
previously approved by the FDA and for new combinations of, and new indications
and new delivery methods for, previously approved drugs. In the case of a new
formulation of a drug that has been previously approved by the
7
FDA which is identical in active ingredient(s), dosage form, strength, route of
administration, and conditions of use, an abbreviated approval process known as
an ANDA (Abbreviated New Drug Application) is available. In general, for an ANDA
to be approved, the drug must be shown to be bioequivalent to the previously
approved drug and the manufacturing processes will be reviewed by FDA. The NDA
and ANDA approval process generally takes a number of years and involves the
expenditure of substantial resources.
The requirements applicable to the ANDA procedure for obtaining FDA approval
for generic forms of brand-name drugs which are off-patent or whose market
exclusivity has expired were enacted by the Waxman-Hatch Act of 1984. This act
also provides market exclusivity provisions for brand-name drugs which could
preclude the submission or delay the approval of a competing ANDA. One such
provision allows a five-year market exclusivity period for NDAs involving new
chemical compounds and a three-year market exclusivity period for new drug
applications (including different dosage forms) containing data from new
clinical investigations essential to the approval of the application. Both
patented and non-patented drug products are subject to these market exclusivity
provisions. Another provision of law may extend patents for up to five years as
compensation for reduction of the effective life of the patent as a result of
time spent for clinical studies and by FDA reviewing a drug application.
The Orphan Drug Act also has market exclusivity provisions of seven years
for the first approved drug for a rare disease or condition. A grant of
exclusivity under this act can preclude the approval of both NDAs and ANDAs for
the orphan indication.
Penalties for wrongdoing in connection with the development or submission of
an ANDA were established by the Generic Drug Enforcement Act of 1992,
authorizing FDA to permanently or temporarily bar companies or individuals from
submitting or assisting in the submission of an ANDA. They may also temporarily
deny approval and suspend applications to market generic drugs. FDA may also
suspend the distribution of all drugs approved or developed in connection with
certain wrongful conduct and also has authority to withdraw approval of an ANDA
under certain circumstances and to seek civil penalties.
The FDA can also significantly delay the approval of a pending NDA, ANDA,
510(k) or PMA under its "Fraud, Untrue Statements of Material Facts, Bribery,
and Illegal Gratuities Policy." Manufacturers of drugs and devices must also
comply with the FDA's GMP standards or risk sanctions such as the suspension of
manufacturing or the seizure of drug products and the FDA's refusal to approve
additional applications.
Reimbursement legislation such as Medicaid, Medicare, Veterans
Administration and other programs govern reimbursement levels. All
pharmaceutical manufacturers rebate to individual states a percentage of their
revenues arising from Medicaid-reimbursed drug sales. Generic drug manufacturers
currently rebate 11% of average net sales price for products marketed under
ANDAs. NDA manufacturers are required to rebate the greater of 15.2% of average
net sales price or, the difference between average net sales price and the
lowest net sales price during a specified period. The Company believes that the
federal and/or state governments may continue to enact measures in the future
aimed at reducing the cost of drugs and devices to the public. The Company
cannot predict the nature of such measures or their impact on the Company's
profitability.
In addition, if the Company elects to manufacture its drugs, devices or
biological products itself, it will be necessary to meet mandated FDA
manufacturing requirements by applying for appropriate FDA establishment
registration such as an Establishment License Application for biological
products, Drug Establishment Registration for its drug products and a Device
Establishment Registration for devices.
There can be no assurance that the appropriate approvals from the FDA will
be granted as to any of the Company's proposed products or processes, that the
process to obtain such approvals will not be excessively expensive or lengthy,
or that the Company will have sufficient funds to pursue such approvals. The
failure to receive the requisite approvals for the Company's products or
processes, when and if developed, or significant delays in obtaining such
approvals, would prevent the Company from commercializing its products as
anticipated and would have a materially adverse effect on the business,
financial condition and results of operations of the Company.
8
PRODUCT LIABILITY AND INSURANCE COVERAGE
The Company presently maintains product liability insurance in the amount of
$2,000,000 covering products manufactured at its Able Laboratories subsidiary.
The Company does not presently maintain product liability insurance on any of
its other products or proposed products. Although, the Company intends to obtain
product liability insurance prior to the commercialization of certain products
which are not presently insured, there can be no assurance that the Company will
obtain such insurance at favorable rates or, even if obtained, that any
insurance will be adequate to cover potential liabilities.
In the event of a successful suit against the Company, insufficiency of
insurance coverage could have a materially adverse impact on the Company's
operations and financial condition. Furthermore, the costs of defending or
settling a product liability claim and any attendant negative publicity may have
a materially adverse impact on the Company, even if the Company ultimately
prevails. Furthermore, certain food and drug retailers require minimum product
liability insurance coverage as a precondition to purchasing or accepting
products for commercial distribution. Failure to satisfy these insurance
requirements could impede the Company's ability to achieve broad commercial
distribution of its proposed products, which could have a materially adverse
effect upon the business and financial condition of the Company.
RESEARCH AND DEVELOPMENT
For the fiscal years ended June 30, 1996, 1995 and 1994, the Company
expended $3,118,145, $1,718,006 and $2,183,849, respectively, on research and
development activities.
PATENTS AND PROPRIETARY TECHNOLOGY
As part of its initial organization, the Company acquired several patents
related to the polymer technologies. In addition, the Company prepared and filed
several U.S. patent applications for processes and products relating to its
controlled release delivery systems, smoking cessation technology, nicotine
detection product, immunological tests for the diagnosis of mycobacterial
disease, and other related technologies. No assurance can be given that existing
patent applications will be granted or that any patents, if issued, will provide
the Company with adequate protection relating to the covered products,
technology or processes.
To date, the Company has received three U.S. patents related to its NicErase
smoking cessation technology covering: (i) the transdermal delivery system for
the administration of lobeline as an aid to smoking cessation, (ii) the
controlled release delivery system, and (iii) sublingual tablet formulations.
Competitors may have filed applications for, or may have been issued patents or
may obtain additional patents and proprietary rights relating to, products or
processes competitive with those of the Company. Accordingly, there can be no
assurance that the Company's patent applications will result in patents being
issued or that, if issued, the patents will afford protection against
competitors with similar technology; nor can there be any assurance that any
patents issued to the Company will not be infringed or circumvented by others or
that others will not obtain patents that the Company would need to license or
circumvent. There can be no assurance that licenses that might be required for
the Company's processes or products would be available on reasonable terms, if
at all. In addition, there can be no assurance that the Company's patents, if
issued, would be held valid by a court.
The manufacture and sale of certain products developed by the Company will
involve the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain of such processes, products and information, there
can be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop alternatives to avoid infringing
patents of others, potentially causing increased costs and delays in product
development and introduction, or precluding the Company from developing,
manufacturing or selling its proposed products. Additionally, there can be no
assurance that the patents underlying any licenses will be valid
9
and enforceable. To the extent any products developed by the Company are based
on licensed technology, royalty payments on the licenses will reduce the
Company's gross profit from such product sales and may render the sales of such
products uneconomical.
MycoDot(R), NicErase(R), MycoAKT(R), MycoDyn Uritec(R), NicCheck(R) and
OrthoDyn(R) are registered trademarks of DynaGen, Inc. EmphyDyn(tm) is a
trademark of DynaGen, Inc.
EMPLOYEES
As of September 27, 1996, the Company and its subsidiary had 63 full-time
employees, of whom 15 were employed in general and administrative activities and
48 were employed in research and development and manufacturing of diagnostic and
therapeutic products. Eight of the Company's employees hold doctoral degrees
including one who holds a Doctorate in Medicine (M.D.). None of the Company's
employees are represented by a union. The Company believes its relationship with
its employees is good.
ITEM 2. PROPERTIES
The Company maintains its principal executive offices and laboratory
facilities at 99 Erie Street in Cambridge, Massachusetts. The premises, which
consist of approximately 27,000 square feet of space, are leased from an
unaffiliated party, for a term expiring on September 30, 1997.
The Able Laboratories subsidiary is located at a 46,000 square foot leased
tablet and suppository manufacturing facility in South Plainfield, New Jersey.
The premises are leased from an unaffiliated party for a term expiring on March
31, 2000.
The Company believes that its present facilities are adequate to meet its
current needs. If new or additional space is required, the Company believes that
adequate facilities are available at competitive prices in the Boston,
Massachusetts and South Plainfield, New Jersey metropolitan
areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings incidental to its
normal business activities. While the outcome of any such proceedings cannot be
accurately predicted, the Company does not believe the ultimate resolution of
any existing matters should have a material adverse effect on its financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, whether through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended June 30, 1996.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock and Redeemable Common Stock Purchase Warrants
("Public Warrants") are traded principally on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "DYGN" and "DYGNW," respectively, and on the Boston
Stock Exchange under the symbols "DYG" and "DYGW," respectively. The Company's
Class A Redeemable Common Stock Purchase Warrants ("Class A Public Warrants")
traded principally on Nasdaq under the symbol "DYGNZ" and on the Boston Stock
Exchange under the symbol "DYGZ" until they were redeemed on December 14, 1995.
The following table sets forth, for the periods indicated, the range of
quarterly high and low sale prices as reported on Nasdaq for the Company's
Common Stock, Public Warrants and Class A Public Warrants.
CLASS A
COMMON STOCK PUBLIC WARRANTS PUBLIC WARRANTS(1)
------------ --------------- ------------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
FISCAL 1995
- -----------
July 1 to September 30, 1994 $1.44 $ .53 $ .44 $ .13 $ .56 $ .13
October 1 to December 31, 1994 2.75 1.19 .75 .34 1.69 .47
January 1 to March 31, 1995 3.13 1.63 1.38 .38 2.25 .88
April 1 to June 30, 1995 4.63 2.13 2.63 .75 3.81 1.25
FISCAL 1996
- -----------
July 1 to September 30, 1995 6.55 1.63 5.00 .50 5.19 1.00
October 1 to December 31, 1995 3.88 1.88 2.81 1.00 2.81 .56
January 1 to March 31, 1996 3.66 2.19 2.44 1.13 -- --
April 1 to June 30, 1996 3.19 2.13 2.50 1.13 -- --
- ----------
(1) Redeemed on December 14, 1995.
On September 23, 1996, the last reported sale prices of the Company's Common
Stock and Public Warrants as reported on Nasdaq were $2.00 and $1.00,
respectively.
As of September 23, 1996, there were approximately 753 holders of record of
the Company's Common Stock. As of such date, the Company estimates that there
are approximately 12,000 beneficial holders of the Company's Common Stock.
The Company has not declared or paid any cash dividends since its inception
and does not anticipate paying any cash dividends to its stockholders in the
foreseeable future. The Company currently intends to retain earnings, if any, to
fund the development and future growth of its business.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
audited financial statements of the Company. This information should be read in
conjunction with the financial statements and notes thereto set forth elsewhere
herein.
YEARS ENDED JUNE 30,
--------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues $ 555,745 $ 497,553 $ 437,005 $ 883,910 $ 192,332
Costs and Expenses 5,899,650 3,836,295 4,264,141 4,388,575 2,837,862
Loss From Continuing Operations (5,097,419) (3,042,383) (3,645,804) (3,405,387) (2,660,040)
Loss From Discontinued Opera-
tions - - (14,945) (48,095) (40,984)
Net Loss (5,097,419) (3,042,383) (3,660,749) (3,453,482) (2,701,024)
Loss Per Share:
From Continuing Operations (.21) (.14) (.22) (.26) (.23)
From Discontinued Operations - - - - (.01)
Net Loss (.21) (.14) (.22) (.26) (.24)
Weighted Average Number of Shares
Outstanding 24,433,949 21,179,703 16,517,117 13,070,565 11,471,849
AT JUNE 30,
-----------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total Assets $11,576,666 $5,114,021 $7,834,706 $5,602,289 $ 1,942,367
Convertible Note Payable 2,000,000 -- -- -- --
Total Liabilities 2,733,032 587,207 420,964 441,171 604,238
Working Capital 10,203,693 4,102,747 6,967,894 4,584,747 739,465
Stockholders' Equity 8,843,634 4,526,814 7,413,742 5,161,118 1,338,129
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is primarily engaged in the development and marketing of
therapeutic and diagnostic products for the human health care market and
recently entered the generic drug business in August 1996, through its
acquisition of Able.
The Company began to realize revenues from the sale of recently developed
products, primarily MycoDot, during fiscal 1995. Management anticipates that
revenues from product sales will not be sufficient to fund its current
operations or produce an operating profit until such time as the Company is able
to establish acceptance of its products in their respective markets and expand
its distribution channels. The Company has received technology license fees and
royalties related to certain of its therapeutic and diagnostic products.
However, based on the terms of the agreements presently in place, these fees and
royalties are not expected to recur.
The Company has financed its operations primarily through the proceeds from
its public and private stock offerings, a convertible note and limited revenues
from product sales and technology license fees and royalties. The Company has
incurred losses since inception and expects to incur additional losses until
such time as it is able to successfully develop, manufacture, and sell or
license its existing and proposed products and technologies.
12
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Revenues
Revenues for the year ended June 30, 1996 ("Fiscal 1996") were $556,000
versus $498,000 for the year ended June 30, 1995 ("Fiscal 1995"). This increase
of $58,000 is a result of an increase in license fees of $85,000 offset by a
$27,000 decrease in product sales. The increase in license fee revenue is
attributable to one-time license fees received under distribution arrangements
for the Company's MycoAKT and MycoDot products. MycoDot and MycoDyn Uritec
product sales remained consistent between Fiscal 1996 and Fiscal 1995. The
decrease in total product sales resulted from lower shipments of other products
in Fiscal 1996. The Company's product sales are summarized by geographic area
and by product in Note 9 to the financial statements.
Cost of Sales
Cost of product sales was 44% of net product sales in Fiscal 1996 compared
to 54% in Fiscal 1995. This decrease in the cost of sales percentage is
primarily attributable to a reallocation of certain manufacturing staff to
product marketing and support roles.
Research and Development Expenses
Research and development expenses were $3,118,000 for Fiscal 1996 versus
$1,718,000 for Fiscal 1995, an increase of $1,400,000. This increase is
primarily due to approximately $1,200,000 in additional therapeutic product
development costs and $285,000 in compensation expense resulting from stock
grants. The increase in therapeutic development is mainly attributable to the
initiation of the first of two planned pivotal Phase 3 clinical trials for the
Company's NicErase-SL smoking cessation product.
The increase in research and development expenses was partially offset by a
decrease in diagnostic product development costs of $74,000. The Company has
limited diagnostic product development primarily to NicCheck, a test to detect
the presence of nicotine.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal 1996 were $2,685,000
versus $1,984,000 for Fiscal 1995, an increase of $701,000. Selling, general and
administrative expenses increased in the following areas: staffing - $355,000,
investor relations - $165,000, consulting - $111,000 and legal - $62,000. The
increase in investor relations expenses is attributable to a new program
designed to inform investors on corporate developments and strategy. Legal
expenses increased primarily for assistance with certain licensing arrangements,
regulatory issues, stock grants and options. The increase in staffing expenses
is primarily due to the award of stock grants and options. Consulting expenses
relate to assistance provided towards developing a strategy for business
alliances for certain Company products.
Other Income (Expense)
The increase in investment income is primarily due to greater funds
available for investment during Fiscal 1996. The increases in interest expense
and debt financing cost amortization are attributable to the $2,000,000
convertible note payable issued in 1996.
Income Taxes
There were no provisions for income taxes for Fiscal 1996 and Fiscal 1995
due to operating losses incurred by the Company and valuation reserves applied
against deferred tax assets. As of June 30, 1996, for Federal and state income
tax reporting purposes, the Company had net operating loss
13
carryforwards of approximately $18,950,000 and $17,370,000 respectively. In
addition, the Company had Federal and state research tax credit carryforwards of
approximately $583,000 and $113,000, respectively, available to reduce future
tax liabilities.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Revenues
Revenues for Fiscal 1995 were $498,000 versus $437,000 for the year ended
June 30, 1994 ("Fiscal 1994"). This increase of $61,000, or 14%, is a result of
an increase in diagnostic product sales of $248,000 offset by a decrease in
contract service revenue of $138,000 and a decrease in license fees and
royalties of $49,000. Product sales were realized primarily from sales of
MycoDot, a tuberculosis antibody detection product, to a distributor in Asia.
The Company also recognized fee revenue of $250,000 from Bristol-Myers Products
("BMP"). The Company granted BMP the right to evaluate its smoking cessation
technology for which the Company received a $500,000 payment, of which $250,000
was deferred as revenue until Fiscal 1996. In July 1995, BMP informed the
Company that it decided not to exercise its option to license the technology as
BMP's strategic interest was in developing an over-the-counter smoking cessation
product. The Company's NicErase-SL smoking cessation product is being developed
for prescription use. In Fiscal 1994, royalties were attributable to a one-time
payment under an agreement to license certain tuberculosis diagnostic
technology. Contract service revenues for Fiscal 1994 related to the Company's
development of a vaccine delivery system under a U.S. Army contract completed in
Fiscal 1994. The Company is no longer performing any contract development work.
Cost of Sales
Cost of product sales for Fiscal 1995 was 54% of net product sales.
Research and Development Expenses
Research and development expenses were $1,718,000 for Fiscal 1995 versus
$2,184,000 for Fiscal 1994, a decrease of $466,000 or 21%. In Fiscal 1995, the
Company expended $1,476,000 on therapeutic product development and $242,000
towards diagnostic product development, compared to $1,500,000 and $684,000,
respectively, in Fiscal 1994. This is reflective of the Company's strategy
whereby resources were directed towards NicErase-SL development with limited
expenditures towards other therapeutic and diagnostic product development.
During Fiscal 1995, therapeutic product development focused primarily on
NicErase-SL, as the Company completed a multi-center pilot Phase 3 clinical
trial.
Diagnostic product development included limited development efforts for the
Company's NicCheck and MycoAKT products. In March 1995, the Company received
clearance from the FDA to market the MycoAKT products and is currently seeking
and evaluating strategic alliances with third parties. MycoAKT diagnostic test
kits are used to identify three mycobacterial species. The Company continued its
manufacturing development scale-up and regulatory approval efforts with respect
to NicCheck, a nicotine detection product.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses for Fiscal 1995 were $1,984,000
versus $1,997,000 for Fiscal 1994, a decrease of $13,000. Comparing Fiscal 1995
to Fiscal 1994, savings realized from decreases in salaries and related
benefits, public relations expenditures, use of outside business consultants and
travel expenses were offset by increases in product marketing and support costs
and business insurance. Product marketing and support efforts focused primarily
on the implementation of distribution arrangements (including sales and
marketing support in connection with such distribution arrangements) for the
Company's tuberculosis related diagnostic products and business development
efforts for NicCheck.
14
Other Income (Expense)
Investment income increased by $113,000 from $183,000 to $296,000 when
comparing Fiscal 1994 to Fiscal 1995. The Company had greater funds available
for investment during Fiscal 1995 as a result of the Company's March 1994 public
offering.
Income Taxes
There were no provisions for income taxes for Fiscal 1995 and 1994 due to
operating losses incurred by the Company.
Discontinued Operations
In May 1994, the Company sold certain assets of its contract research and
development business that related to the Company's fluid systems consulting
services ("FSD"). The Company sold accounts receivable, work in process and
certain furniture and equipment for $165,000, and assigned to the buyer all of
the outstanding consulting projects. In addition, the Company entered into a
sub-lease agreement whereby the buyer occupies the space used by the FSD
business. This transaction resulted in a loss on disposal of $13,000. In
management's opinion, these services did not fit the strategic direction of the
Company's core therapeutic and diagnostic business. Moreover, these services
were not expected to be a significant source of revenues, profit or cash flow to
the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had working capital of $10,204,000 versus
working capital of $4,103,000 at June 30, 1995. Cash and investment securities
were $10,464,000 at June 30, 1996 as compared to $4,466,000 at June 30, 1995.
The increases in working capital, cash and investment securities are primarily
the result of $3,892,000 raised from the exercise of the Company's public and
underwriters' warrants and $6,578,000 in net proceeds from private placements of
common stock, a convertible note and convertible preferred stock. During Fiscal
1996, $4,441,000 was utilized in the Company's research and development efforts
and for other operating activities.
As discussed in Note 12 to the financial statements, in August 1996 the
Company acquired certain assets of Able, a generic pharmaceutical products
subsidiary of ALPHARMA USPD INC., for $550,000. Able manufactures and markets
prescription and over-the-counter pharmaceuticals from a 46,000 square foot
leased manufacturing facility in South Plainfield, New Jersey. DynaGen obtained
the rights to several approved ANDA products through this purchase. DynaGen
plans to increase sales of its generic product portfolio by expanding Able's
distribution network, by reintroducing discontinued products and by developing
new ANDA products. The acquisition is expected to increase revenues, costs and
expenses, capital expenditures and the net cash used for operating activities
during the foreseeable future. DynaGen intends to fund Able's operations until
it becomes self-supporting. There can be no assurance that the Company will be
successful in assimilating this or any future acquisition or that Able will
generate sufficient revenues to become self-supporting.
Management anticipates that the available working capital will be sufficient
to fund the current level of operations, including the Able business, through
September 1997. The Company has realized limited revenues from license fees and
the sale of its diagnostic products. Its future prospects and revenue potential
from product sales cannot be determined with any certainty at this time. The
Company continues to explore additional sources of capital in order to fund the
growth of its generic drug business and its product development efforts. There
can be no assurance that the Company will be able to secure additional financing
or that financing will be available on favorable terms. If the Company is unable
to obtain such additional financing, the Company's ability to maintain its
current level of operations could be materially and adversely affected and the
Company may be required to reduce or eliminate certain expenditures, including
its research and development activity with respect to certain proposed products.
15
ENVIRONMENTAL LIABILITY
The Company has no known material environmental violations or assessments.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company intends to adopt Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and SFAS No. 123, "Accounting for
Stock-Based Compensation" in the year ended June 30, 1997. As discussed in Note
1 to the financial statements, the adoption of SFAS No. 121 is not expected to
have a material effect on the Company's financial position, results of
operations and cash flows. The Company is currently evaluating the impact of the
adoption of SFAS No. 123 as it relates to stock-based compensation granted to
non-employees.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Form 10-K
that are not historical facts (including, but not limited to statements
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to liquidity and capital
resources) constitute forward looking statements and are made under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed within this Form 10-K,
as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto. The
following factors, among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
Limited Operating History; History of Losses; Anticipation of Future Losses.
The Company has incurred operating losses since its inception and has an
accumulated deficit of $20,009,051 as of June 30, 1996. The Company incurred a
net loss of $5,097,419 for the fiscal year ended June 30, 1996, compared with a
net loss of $3,042,383 for the fiscal year ended June 30, 1995. Such losses have
resulted principally from expenses incurred in research and development and from
general and administrative costs associated with the Company's development
efforts. The continued development of the Company's products will require the
commitment of substantial resources to conduct further development and
preclinical and clinical trials, and to establish manufacturing, sales,
marketing, regulatory and administrative capabilities. In addition, the
Company's recently acquired subsidiary, Able, has incurred net operating losses
in the past. The Company expects to provide its Able subsidiary with working
capital during the foreseeable future until Able can become self-supporting. The
Company expects to incur substantial operating losses over the next several
years as its product programs expand, various clinical trials commence and
marketing efforts are launched. The amount of net losses and the time required
by the Company to reach sustained profitability are highly uncertain and to
achieve profitability, the Company must, among other things, successfully
complete development of its products, obtain regulatory approvals, and establish
manufacturing and marketing capabilities by itself or with third parties. There
is no assurance that the Company will ever generate substantial revenues or
achieve profitability.
Future Capital Needs; Uncertainty of Additional Funding. It is anticipated
that the Company will continue to expend significant amounts of capital to fund
its research and development, clinical trials and the operation of Able. The
Company's available working capital is inadequate for completion of the
Company's development programs, and additional financing will be necessary for
the continued support of the Company's proposed products and operations,
including the establishment of manufacturing,
16
marketing and distribution capabilities for its proposed products. There can be
no assurance that the Company will be able to secure additional financing or
that such financing will be available on favorable terms. If the Company is
unable to obtain such additional financing, the Company's ability to maintain
its current level of operations could be materially and adversely affected and
the Company may be required to reduce its overall expenditures including its
research and development activity with respect to certain proposed products.
Uncertainties Related to NicErase-SL. Under applicable federal law, the
Company will not be permitted to sell NicErase-SL, and thus generate any revenue
from its development of NicErase-SL, unless it obtains the necessary regulatory
approvals from the FDA for the commercial sale of that product. To obtain such
regulatory approvals, the Company must demonstrate to the satisfaction of the
FDA, through preclinical studies and clinical trials, that NicErase-SL is safe
and effective. Although the results of the Company's pilot Phase 3 clinical
trials were encouraging, they do not necessarily indicate, and they do not
guarantee, that the results of the ongoing multi-center Phase 3 clinical trial
will be favorable to the Company. Nor do the results obtained in the small-scale
pilot tests completed by the Company to date necessarily indicate that the
Company will ultimately succeed in obtaining FDA approval for the commercial
sale of NicErase-SL. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals or will result in marketable products. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. If NicErase-SL is not
shown to be safe and effective in either current ongoing, or any future clinical
trials, and if the Company is thus unable to commercialize NicErase-SL it would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Integration of Able Acquisition. In August 1996, the Company acquired
certain of the assets of Able Laboratories, Inc. There can be no assurance that
the anticipated benefits from this acquisition will be realized. Additionally,
there can be no assurance that the Company will be able to effectively market
the existing Able products, that it will obtain FDA approval to market
additional generic drugs or that it will be successful in managing the combined
operations. The integration of Able will require substantial attention from
management, many of whom have limited experience in integrating acquisitions.
The diversion of management's attention, the process of integrating the
businesses and any difficulties encountered in the transition process could
cause an interruption of business, and could have a material adverse effect on
the Company's operations and financial performance.
Limited Commercialization of Products. The Company has commercially
introduced and is currently marketing through distributors only two products,
yielding limited revenues from the sale of these products. Historically,
substantially all of the Company's revenues had been generated from research and
development contracts and license fees. The Company's ability to achieve
profitability will depend on its ability to develop and introduce commercially
viable products, obtain regulatory approvals for these products and either
successfully manufacture, market and distribute such products on its own or
enter into collaborative agreements for product manufacturing, marketing and
distribution. Many of the Company's proposed therapeutic and diagnostic products
will require substantial further development, preclinical and clinical testing,
and investment by the Company or third party licensees in manufacturing,
marketing and sales infrastructures prior to their commercialization. No
assurance can be given that the Company's development efforts will be
successfully completed, that regulatory approvals will be obtained, or that
these products, once introduced, will be successfully marketed.
Future Acquisitions. Management may from time to time consider other
acquisitions of assets, businesses or technologies that will enable the Company
to acquire complementary skills and capabilities, offer new products, expand its
customer base or obtain other competitive advantages. There can be no assurance
that the Company will be able to successfully identify suitable acquisition
candidates, obtain financing on satisfactory terms, complete acquisitions,
integrate acquired operations into its existing operations or expand into new
markets. Acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, and amortization
expense related to intangible
17
assets acquired, any of which could materially adversely affect the Company's
business and results of operations. Acquisitions, including the Company's recent
acquisition of Able, involve a number of potentialrisks, including difficulties
in the assimilation of the acquired Company's operations and products, diversion
of management's resources, uncertainties associated with operating in new
markets and working with new employees and customers, and the potential loss of
the acquired company's key employees. There can also be no assurance that the
Able acquisition and future acquisitions, if any, will not have a material
adverse effect upon the Company's business and results of operations. Once
integrated, acquired operations may not achieve levels of revenues,
profitability or productivity comparable to those achieved by the Company's
existing operations, or otherwise perform as expected. The Company is not
currently engaged in negotiations with respect to any acquisition and does not
currently have any agreements, arrangements or understandings with respect to
any particular acquisition.
Limited Manufacturing Capability and Experience. The Company's MycoDot and
MycoAKT products are currently made by licensed manufacturers. The Company
intends to enter into licenses, joint venture and similar collaborative
arrangements with third parties for the manufacture of other proprietary
products and proposed products. There are no other such agreements and there can
be no assurance that the Company will be successful in securing manufacturing
agreements for its products or that such agreements will prove to be on terms
favorable to the Company. In addition, the Company's dependence upon third
parties for the manufacture of its products and proposed products could have an
adverse effect on the Company's profitability and its ability to deliver its
proposed products on a timely and competitive basis. To the extent that the
Company attempts to manufacture any of its products, there can be no assurance
that the Company will be able to attract and retain qualified manufacturing
personnel, or build or rent manufacturing facilities.
The Company's generic therapeutic products are manufactured at its Able
Laboratories facility in South Plainfield, New Jersey. In order to maintain
compliance with FDA GMP standards, the Company may have to make significant
investments in its infrastructure and plant facility. There can be no assurance
that such capital expenditures and overhead costs will not have a material
effect upon the Company's ability to achieve profitability. There can be no
assurance that the Company will retain the key employees it acquired in the Able
acquisition.
Lack of Marketing Experience. The Company currently does not plan to market
its proprietary products directly and does not have adequate resources or
expertise to develop a substantial marketing organization and internal sales
force for these products. Since the Company does not have the financial or other
resources to undertake extensive direct marketing activities, the Company
intends to enter into marketing arrangements with third parties, including
possible joint venture, license or distribution arrangements. While the Company
intends to license its products for manufacture and sale to established health
care or pharmaceutical companies, it has had very limited success in its efforts
to enter into such agreements to date. There can be no assurance that the
Company will be able to locate collaborative partners or that these strategic
alliances, if consummated, will prove successful.
With respect to the Company's generic therapeutic products, there can be no
assurance that present and potential customers of Able will continue their
recent buying patterns without regard to the Able acquisition, and any
significant delay or reduction in orders could have an adverse effect on the
Company's near-term business and results of operations.
Regulation by Government Agencies. The Company's research, preclinical
development, clinical trials, manufacturing and marketing of its proposed
products are subject to extensive regulation by numerous governmental
authorities in the United States (including the FDA), and other equivalent
foreign regulatory authorities. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. There can be no assurance that
the Company will be able to obtain the necessary approvals for clinical testing
or for the manufacturing or marketing of its proposed products. Further,
additional governmental regulation may be established which could prevent or
delay regulatory approval of the Company's products. The regulatory process may
delay for long periods, and ultimately prevent, marketing of new products or
impose costly procedures that would have a material adverse effect on the
Company's business. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
18
The Company's success in the generic drug market depends, in part, on its
ability to obtain FDA approval of ANDAs for its new products, as well as its
ability to procure a continuous supply of raw materials and to validate the
manufacturing processes used to produce consistent test batches for FDA
approval. Such raw materials are generally available from several sources;
however, this may not always be the case. Since the federal drug application
process requires specification of raw material suppliers, if raw materials from
a specified supplier were to become unavailable, the Company would be required
to file a supplement to its ANDA and revalidate the manufacturing process using
a new supplier's materials. This could cause a delay of several months in the
manufacture of the drug involved and the consequent loss of potential revenue
and market share. Additionally, there is often a time lag, sometimes
significant, between the receipt of ANDA approval and the actual marketing of
the approved product due to this validation process.
The Able Laboratories facility is subject to plant inspections by the FDA to
determine compliance with GMP standards. The Company could be subject to fines
and sanctions such as the suspension of manufacturing or the seizure of drug
products if it were found to be in non-compliance with GMP standards.
Rapid Technological Advances and Competition. The therapeutic and diagnostic
markets in which the Company competes have undergone and can be expected to
continue to undergo rapid and significant technological advances. There can be
no assurance that the technological developments of others will not render the
Company's technology or products incorporating such technology either
uneconomical or obsolete. The Company competes with a number of specialized
biotechnology companies and major pharmaceutical companies. Most of these
companies have substantially greater financial, technical and human resources
and research and development staffs and facilities, as well as substantially
greater experience in conducting clinical trials, obtaining regulatory
approvals, and manufacturing and marketing products than does the Company. There
can be no assurance that the Company's products or proposed products will be
able to compete successfully.
In addition, with its newly acquired generic product line, the Company is
now competing in a new market. Generic products with limited competition are
generally sold at higher prices, resulting in relatively high gross margins. As
more competing products become available, selling prices and gross margins can
decline dramatically and impair overall profitability. The Company may
experience price erosion in its generic product line. There is also no assurance
that the Company will compete successfully in this new market.
Dependence on Patents and Proprietary Technology. The Company owns certain
patents and has applied for other patents relating to its technology and
proposed products. No assurance can be given, however, whether pending patent
applications will be granted or whether any patents granted will be enforceable
or provide the Company with meaningful protection from competitors. Even if a
competitor were to infringe the Company's patents, the costs of enforcing its
patent rights may be substantial or even prohibitive. In addition, there can be
no assurance that the Company's proposed products will not infringe the patent
rights of others. The Company may be forced to expend substantial resources if
the Company is required to defend against any such infringement claims. The
Company also may desire or be required to obtain licenses from others in order
to further develop, produce and market commercially viable products effectively.
There can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, that the patents underlying such licenses will be
valid and enforceable or that the proprietary nature of the unpatented
technology underlying such licenses will remain proprietary. The Company also
relies on unpatented proprietary know-how and trade secrets, and employs various
methods including confidentiality agreements with employees, consultants,
manufacturing and marketing partners to protect its trade secrets and know-how.
However, such methods may not afford complete protection and there can be no
assurance that others will not independently develop such trade secrets and
know-how or obtain access thereto.
The manufacture and sale of certain products developed by the Company will
involve the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain such processes, products and information, there can
be no assurance that such licenses will not be terminated or expire during
critical
19
periods, that the Company will be able to obtain licenses for other rights which
may be important to it, or, if obtained, that such licenses will be obtained on
commercially reasonable terms. If the Company is unable to obtain such licenses,
the Company may have to develop alternatives to avoid infringing patents of
others, potentially causing increased costs and delays in product development
and introduction, or precluding the Company from developing, manufacturing or
selling its proposed products. Additionally, there can be no assurance that the
patents underlying any licenses will be valid and enforceable. To the extent any
products developed by the Company are based on licensed technology, royalty
payments on the licenses will reduce the Company's gross profit from such
product sales and may render the sales of such products uneconomical.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and related Independent Auditors' Report
are presented in the following pages. The financial statements filed in this
Item 8 are as follows:
Independent Auditors' Report
Financial Statements:
Balance Sheets -- June 30, 1996 and 1995
Statements of Loss -- Years ended June 30, 1996, 1995 and 1994
Statements of Changes in Stockholders' Equity -- Years ended June 30,
1996, 1995 and 1994
Statements of Cash Flows -- Years ended June 30, 1996, 1995 and 1994
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
20
DYNAGEN, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report 22
Financial Statements:
Balance Sheets -- June 30, 1996 and 1995 23
Statements of Loss -- Years Ended June 30, 1996, 1995 and 1994 24
Statements of Changes in Stockholders' Equity -- Years Ended June 30, 1996, 1995
and 1994 25
Statements of Cash Flows -- Years Ended June 30, 1996, 1995 and 1994 26
Notes to Financial Statements 27
21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
DYNAGEN, INC.
Cambridge, Massachusetts
We have audited the accompanying balance sheets of DynaGen, Inc. as of June
30, 1996 and 1995 and the related statements of loss, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended June
30, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DynaGen, Inc. at June 30,
1996 and 1995, and the results of its operations and cash flows for each of the
years in the three-year period ended June 30, 1996 in conformity with generally
accepted accounting principles.
WOLF & COMPANY, P.C.
Boston, Massachusetts
July 24, 1996, except for Note 12
as to which the date is August 19, 1996
22
DYNAGEN, INC.
BALANCE SHEETS
JUNE 30, 1996 AND 1995
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents (including interest-bearing deposits of $154,000 and
$142,000) $ 375,948 $ 263,956
Investment securities available for sale at fair value (Note 2) 10,087,918 4,201,876
Accounts receivable 89,703 28,971
Notes receivable (Note 6) 75,000 --
Accrued interest receivable 86,873 86,653
Prepaid expenses and other current assets 221,283 108,498
------- -------
Total current assets 10,936,725 4,689,954
---------- ---------
Property and equipment, net (Notes 3 and 4) 143,350 153,280
------- -------
Other assets:
Patents and trademarks, net of accumulated amortization of $54,341 and $46,024 277,138 268,809
Deferred debt financing costs, net of accumulated amortization of $57,230
(Note 4) 217,475 --
Deposits 1,978 1,978
----- -----
Total other assets 496,591 270,787
------- -------
$ 11,576,666 $ 5,114,021
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 519,624 $ 263,786
Accrued payroll and payroll taxes 147,441 73,421
Deferred revenue 65,967 250,000
------ -------
Total current liabilities 733,032 587,207
Convertible note payable (Notes 4 and 8) 2,000,000 --
--------- --------
Total liabilities 2,733,032 587,207
--------- -------
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 8 and 12):
Preferred stock, $.01 par value, 10,000,000 shares authorized, none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized, 28,559,999
and 21,448,487 shares issued and outstanding 285,600 214,485
Additional paid-in capital 28,567,068 19,236,300
Accumulated deficit (20,009,051) (14,911,632)
----------- -----------
8,843,617 4,539,153
Unrealized gain (loss) on investment securities available for sale (Note 2) 17 (12,339)
---------- ---------
Total stockholders' equity 8,843,634 4,526,814
---------- ---------
$ 11,576,666 $ 5,114,021
============= ============
See accompanying notes to financial statements.
23
DYNAGEN, INC.
STATEMENTS OF LOSS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Revenues (Note 9):
Net product sales $ 220,745 $ 247,553 $ --
Contract revenues -- -- 138,255
License fees and royalties 335,000 250,000 298,750
------- ------- -------
Total revenues 555,745 497,553 437,005
------- ------- -------
Costs and expenses:
Cost of sales 96,680 134,392 --
Contract costs -- -- 82,903
Research and development 3,118,145 1,718,006 2,183,849
Selling, general and administrative 2,684,825 1,983,897 1,997,389
--------- --------- ---------
Total costs and expenses 5,899,650 3,836,295 4,264,141
--------- --------- ---------
Operating loss (5,343,905) (3,338,742) (3,827,136)
---------- ---------- ----------
Other income (expense):
Investment income 367,715 296,555 183,082
Interest expense (Note 4) (63,999) (196) (1,750)
Amortization of debt financing costs (Note 4) (57,230) -- --
------- --------- --------
Other income (expense), net 246,486 296,359 181,332
------- ------- -------
Loss from continuing operations (5,097,419) (3,042,383) (3,645,804)
---------- ---------- ----------
Loss from operations of fluid systems consulting services -- -- (1,538)
Loss on disposal of fluid systems consulting services -- -- (13,407)
-------- --------- -------
-- -- (14,945)
--------- ---------- ----------
Net loss $(5,097,419) $(3,042,383) $ (3,660,749)
=========== =========== ============
Net loss per share $ (.21) $ (.14) $ (.22)
=========== ============ =============
Weighted average shares outstanding 24,433,949 21,179,703 16,517,117
========== ========== ==========
See accompanying notes to financial statements.
24
DYNAGEN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(NOTES 4, 7, 8 AND 12)
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balance at June 30, 1993 -- $ -- 14,544,297 $145,443
Shares issued in 1994 public
offering -- -- 6,400,000 64,000
Shares issued in private
placement -- -- 128,571 1,286
Cancellation of stock options
issued for future services -- -- -- --
Exercise of lenders' warrants -- -- 101,667 1,016
Change in method of accounting
for investment securities -- -- -- --
Net loss for the year ended June
30, 1994 -- -- -- --
------- ------- ---------- --------
Balance at June 30, 1994 -- -- 21,174,535 211,745
Exercise of stock options -- -- 500 5
Exercise of underwriters'
warrants -- -- 273,452 2,735
Decrease in unrealized loss on
investment securities -- -- -- --
Net loss for the year ended June
30, 1995 -- -- -- --
------- ------- ---------- --------
Balance at June 30, 1995 -- -- 21,448,487 214,485
Exercise of underwriters'
warrants -- -- 503,982 5,040
Exercise of public warrants -- -- 3,244,494 32,445
Shares issued in private
placements 1,178,264 3,461,150 1,520,686 15,207
Conversion of preferred stock (1,178,264) (3,461,150) 1,612,834 16,128
Exercise of stock options -- -- 95,855 959
Employee stock and stock
option grants -- -- 117,250 1,172
Stock options issued for
future services -- -- -- --
Stock issued for interest
obligation -- -- 16,411 164
Change in unrealized gain
(loss) on investment
securities -- -- -- --
Net loss for the year ended June
30, 1996 -- -- -- --
------- ---------- ---------- --------
Balance at June 30, 1996 -- $ -- 28,559,999 $285,600
======= ========== ========= ========
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(NOTES 4, 7, 8 AND 12)
UNREALIZED
GAIN
(LOSS)ON
INVESTMENT
ADDITIONAL SECURITIES
PAID-IN ACCUMULATED AVAILABLE
CAPITAL DEFICIT FOR SALE TOTAL
------- ------- -------- -----
Balance at June 30, 1993 $13,224,175 $ (8,208,500) $ -- $5,161,118
Shares issued in 1994 public
offering 5,553,729 -- -- 5,617,729
Shares issued in private
placement 385,227 -- -- 386,513
Cancellation of stock options
issued for future services (72,540) -- -- (72,540)
Exercise of lenders' warrants 19,317 -- -- 20,333
Change in method of accounting
for investment securities -- -- (38,662) (38,662)
Net loss for the year ended June
30, 1994 -- (3,660,749) -- (3,660,749)
---------- ----------- ------- ----------
Balance at June 30, 1994 19,109,908 (11,869,249) (38,662) 7,413,742
Exercise of stock options 370 -- -- 375
Exercise of underwriters'
warrants 126,022 -- -- 128,757
Decrease in unrealized loss on
investment securities -- -- 26,323 26,323
Net loss for the year ended June
30, 1995 -- (3,042,383) -- (3,042,383)
-------- ------------ ------ ----------
Balance at June 30, 1995 19,236,300 (14,911,632) (12,339) 4,526,814
Exercise of underwriters'
warrants 32,085 -- -- 37,125
Exercise of public warrants 3,822,762 -- -- 3,855,207
Shares issued in private
placements 1,376,204 -- -- 4,852,561
Conversion of preferred stock 3,445,022 -- -- --
Exercise of stock options 4,616 -- -- 5,575
Employee stock and stock
option grants 557,685 -- -- 558,857
Stock options issued for
future services 55,225 -- -- 55,225
Stock issued for interest
obligation 37,169 -- -- 37,333
Change in unrealized gain
(loss) on investment
securities -- -- 12,356 12,356
Net loss for the year ended June
30, 1996 -- (5,097,419) -- (5,097,419)
---------- ---------- ------ ----------
Balance at June 30, 1996 $28,567,068 $(20,009,051) $ 17 $8,843,634
=========== ============ ======== ==========
See accompanying notes to financial statements.
25
DYNAGEN, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $ (5,097,419) $(3,042,383) $(3,660,749)
Adjustments to reconcile net loss to net cash used for operating
activities:
Employee stock and stock option grants 558,857 -- --
Depreciation and amortization 125,610 64,195 91,163
Amortization and accretion of (discounts) premiums on
investment securities (134,474) 101,553 50,997
Stock issued for interest obligation 37,333 -- --
Write-off of patent costs 41,852 40,893 --
Gain on sales of investment securities -- -- (4,424)
Loss on disposal of fluid systems consulting services -- -- 13,407
(Increase) decrease in operating assets:
Accounts receivable (60,732) 30,518 (70,317)
Prepaid expenses and other current assets (57,780) 24,121 (56,659)
Recoverable amounts on long-term contracts -- -- 7,992
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 329,858 (77,933) (11,534)
Deferred revenue (184,033) 250,000 --
-------- ------- -------
Net cash used for operating activities (4,440,928) (2,609,036) (3,640,124)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of investment securities (29,913,212) (3,187,379) (7,198,023)
Proceeds from sales and maturities of investment securities 24,174,000 5,500,000 4,136,330
Purchase of property and equipment (36,020) (23,339) (32,522)
Patent and trademark costs (72,611) (69,293) (63,911)
Decrease in deposits -- 9,325 2,971
Net proceeds from disposal of fluid systems consulting services -- -- 153,752
(Increase) decrease in notes receivable (75,000) -- 16,072
------- -------- ------
Net cash provided by (used for) investing
activities (5,922,843) 2,229,314 (2,985,331)
---------- --------- ----------
Cash flows from financing activities:
Net proceeds from exercise of stock warrants and options 3,897,907 129,132 20,333
Net proceeds from private stock placements 4,852,561 -- 386,513
Net proceeds from convertible note payable 1,725,295 -- --
Net proceeds from public stock offerings -- -- 5,617,729
Decrease in deferred offering costs -- -- 50,000
Principal payments on capital lease -- (5,824) (8,673)
------- ------ ------
Net cash provided by financing activities 10,475,763 123,308 6,065,902
---------- ------- ---------
Net change in cash and cash equivalents 111,992 (256,414) (559,553)
Cash and cash equivalents at beginning of year 263,956 520,370 1,079,923
------- ------- ---------
Cash and cash equivalents at end of year $ 375,948 $ 263,956 $ 520,370
============ ============ ============
Supplemental cash flow information:
Interest paid on capital lease $ -- $ 196 $ 1,750
Stock options issued (cancelled) in exchange for future services 55,225 -- (72,540)
Conversion of preferred stock to common stock 3,461,150 -- --
See accompanying notes to financial statements.
26
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company was incorporated in the state of Delaware in November 1988 for
the purpose of developing and marketing therapeutic and diagnostic products for
the human health care market.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the balance
sheet date and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include interest-bearing deposits with original maturities
of three months or less.
Investment Securities
Effective June 30, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, investments in debt
securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and carried at amortized cost.
Investments that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading securities" and carried at fair
value, with unrealized gains and losses included in earnings. Investments not
classified as either of the above are classified as "available for sale" and
carried at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity. The cumulative effect of the change in
accounting principle at June 30, 1994 was to decrease stockholders' equity by
$38,662. There was no effect on the net loss for the year ended June 30, 1994.
Prior to June 30, 1994, investment securities were carried at amortized cost
which approximated fair value. Gains and losses on disposition of investment
securities are computed by the specific identification method.
Property And Equipment
Property and equipment are stated at cost. Depreciation expense is provided
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful life of the asset or the life of the related
lease term.
Goodwill, Organization Expenses, Patents, Trademarks and Deferred Debt
Financing Costs
Goodwill and organization expenses were amortized over a five-year period on
a straight-line basis and were fully amortized as of June 30, 1994. Patent and
trademark costs are amortized over a five-year period on a straight-line basis
commencing on the earlier of the date placed in service or the date the patent
or trademark is granted. Deferred debt financing costs are being amortized on a
straight-line basis over the two-year term of the convertible note payable. The
related amortization expense for the years ended June 30, 1996, 1995 and 1994
was $79,660, $11,385 and $21,388, respectively.
27
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Deferred Offering Costs
Deferred offering costs represent costs incurred in connection with raising
capital. Upon completion of an offering, the amount credited to additional
paid-in capital is reduced by the deferred offering costs.
Revenue Recognition
Revenues from product sales are recognized when products are shipped.
Revenues from license fees and royalties are recognized as the terms of the
agreements are met. Revenues earned under long-term contracts are recognized
using the percentage-of-completion method. Anticipated losses on uncompleted
contracts are charged to operations when incurred.
Income Taxes
Effective July 1, 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes." As permitted under SFAS No. 109, prior year
financial statements were not restated. Under SFAS No. 109, deferred tax assets
and liabilities are recorded for temporary differences between the financial
statement and tax bases of assets and liabilities using the currently enacted
income tax rates expected to be in effect when the taxes are actually paid or
recovered. A deferred tax asset is also recorded for net operating loss, capital
loss and tax credit carryforwards to the extent their realization is more likely
than not. The deferred tax expense for the period represents the change in the
deferred tax asset or liability from the beginning to the end of the period. The
change in accounting principle had no cumulative effect on fiscal years ending
prior to July 1, 1993 and no effect on the net loss for the year ended June 30,
1994.
Net Loss Per Share
Net loss per share is calculated based on the weighted average number of
common shares outstanding during the year. The effect of all common stock
equivalents has been excluded from the calculation since its inclusion would be
anti-dilutive.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" in March 1995. SFAS No. 121 requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS No. 121 will become
effective for the Company's fiscal year ending June 30, 1997. The Company
expects the impact of the new standard to be immaterial to its financial
position, results of operations and cash flows.
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" in
October 1995. The Company intends to continue to account for its stock-based
transactions with employees in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and will include the
pro forma disclosures required by SFAS No. 123 beginning with its June 30, 1997
financial statements.
28
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
2. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale is as follows:
JUNE 30, 1996
-------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government obligations $ 187,301 $ -- $ (100) $ 187,201
U.S. Government agency obligations 4,295,274 3,445 (1,252) 4,297,467
Corporate obligations 5,605,326 2 (2,078) 5,603,250
--------- - ------ ---------
$10,087,901 $3,447 $(3,430) $10,087,918
=========== ====== ======= ===========
JUNE 30, 1995
-------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government agency obligations $1,702,408 $ 97 $ (8,209) $ 1,694,296
Corporate obligations 2,511,807 -- (4,227) 2,507,580
--------- ---- ------ ---------
$4,214,215 $ 97 $(12,436) $4,201,876
========== ==== ======== ==========
The amortized cost and fair value of debt securities by contractual maturity
at June 30, 1996 is as follows:
AMORTIZED FAIR
COST VALUE
---- -----
Within 1 year $ 9,086,276 $ 9,082,848
Over 1 to 5 years 1,001,625 1,005,070
--------- ---------
$10,087,901 $10,087,918
=========== ===========
There were no sales of securities available for sale during the years ended
June 30, 1996 and 1995.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
JUNE 30,
--------
ESTIMATED
1996 1995 USEFUL LIVES
---- ---- ------------
Laboratory equipment $ 220,164 $ 220,164 7 years
Furniture and fixtures 173,572 143,091 3-7 years
Leasehold improvements 30,976 25,437 1-2 years
------ ------
424,712 388,692
Less accumulated depreciation and
amortization (281,362) (235,412)
-------- --------
$ 143,350 $153,280
========= ========
The related depreciation and amortization expense for the years ended June
30, 1996, 1995 and 1994 was $45,950, $52,810 and $69,775, respectively.
29
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
4. DEBT
Convertible Note Payable
On February 7, 1996, the Company issued a $2,000,000 convertible note
payable in connection with a private placement. Deferred debt financing costs
were $274,705. (See Note 8.) The note matures on February 7, 1998 and bears
interest at 8% per annum, with interest payable quarterly in cash or the
Company's common stock. The note is convertible into shares of common stock at
any time at the option of the investor at a rate of 67% of the five-day average
of the closing bid price per share of the Company's common stock one trading day
prior to the date the notice of conversion is received by the Company. The
Company may require conversion of the note under certain circumstances.
Interest expense on the convertible note payable for the year ended June 30,
1996 was $63,999. Amortization expense on deferred debt financing costs for the
year ended June 30, 1996 was $57,230.
Capital Lease
In December 1991, the Company entered into a lease agreement for telephone
equipment with a cost of $25,329. During the year ended June 30, 1995, the
Company made the final payment due under the lease and acquired title to the
equipment. Interest expense on the lease for the years ended June 30, 1995 and
1994 was $196 and $1,750, respectively.
5. INCOME TAXES
As discussed in Note 1, the Company adopted SFAS No. 109, "Accounting for
Income Taxes" effective July 1, 1993. There was no provision for income taxes
for the years ended June 30, 1996, 1995 and 1994 due to the Company's net
operating losses. The difference between the statutory Federal income tax rate
of 34% and the Company's effective tax rate is primarily due to net operating
losses incurred by the Company and the valuation reserve against the Company's
deferred tax asset.
The components of the net deferred tax asset are as follows:
JUNE 30,
--------
1996 1995
---- ----
Deferred tax asset:
Federal $ 6,523,000 $ 4,929,000
State 1,793,000 1,433,000
--------- ---------
8,316,000 6,362,000
Valuation reserve (8,316,000) (6,362,000)
---------- ----------
Net deferred tax asset $ -- $ --
=========== ==========
The following differences give rise to deferred income taxes:
JUNE 30,
--------
1996 1995
---- ----
Net operating loss carryforward $ 7,533,000 $ 5,496,000
Research tax credit carryforward 657,000 672,000
Other 126,000 194,000
------- -------
8,316,000 6,362,000
Valuation reserve (8,316,000) (6,362,000)
---------- ----------
Net deferred tax asset $ -- $ --
========== ===========
30
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
5. INCOME TAXES -- (Continued)
The change in the valuation reserve is as follows:
YEARS ENDED JUNE 30,
--------------------
1996 1995 1994
---- ---- ----
Balance at beginning of year $6,362,000 $5,084,000 $ --
Adoption of SFAS No. 109 -- -- 3,525,000
Increase due to current year's net operating
loss 1,954,000 1,278,000 1,559,000
--------- --------- ---------
Balance at end of year $8,316,000 $6,362,000 $5,084,000
========== ========== ==========
As of June 30, 1996, the Company has Federal and state net operating loss
carryforwards of approximately $18,950,000 and $17,370,000, respectively. The
Federal and state net operating loss carryforwards expire in varying amounts
beginning in 2004 and 1997, respectively. In addition, the Company has Federal
and state research tax credit carryforwards of approximately $583,000 and
$113,000, respectively, available to reduce future tax liabilities. The Federal
and state research tax credit carryforwards expire in varying amounts beginning
in 2004 and 2007, respectively.
Use of net operating loss and tax credit carryforwards is subject to annual
limitations based on ownership changes in the Company's common stock as defined
by the Internal Revenue Code.
6. RELATED PARTY TRANSACTIONS
Notes receivable at June 30, 1996 consist of notes to an officer/director
and an officer which bear interest at 5.05% per annum and mature on February 2,
1997. The notes are secured by common stock of the Company issuable upon
exercise of stock options held by the officers.
Note receivable at June 30, 1993 consisted of advances made under a
promissory note to an officer/director. The note was secured by 5,000 shares of
the Company's common stock and had an annual interest rate of 6%. During the
year ended June 30, 1994, the officer/director repaid $900 of the note and the
Company forgave the balance.
The Company retained a director as a consultant to assist with certain
public and investor relations matters. During the years ended June 30, 1996 and
1995, the director was paid fees of $31,000 and $49,000, respectively.
During the years ended June 30, 1996 and 1995, the Company paid consulting
fees of $11,550 and $18,188, respectively, to the spouse of an officer/director
for research and development services.
7. COMMITMENTS AND CONTINGENCIES
Lease Agreement
The Company's current lease agreement for its corporate headquarters
provides for a monthly rental of $15,188 plus real estate taxes and operating
expenses through September 30, 1997. The aggregate future minimum rental expense
(excluding real estate taxes and operating expenses) payable under the lease
agreement at June 30, 1996 is $228,000. Future minimum rentals to be received
under a noncancelable sublease at June 30, 1996 are $26,000.
Rent expense, net of subleases, for the years ended June 30, 1996, 1995 and
1994 was $61,366, $71,031 and $142,917, respectively. Real estate tax expense
for the years ended June 30, 1996, 1995 and 1994 was $90,637, $91,307 and
$70,479, respectively.
31
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
7. COMMITMENTS AND CONTINGENCIES -- (Continued)
Employment Agreements
As of June 30, 1996, the Company has employment agreements with three
officer/directors that provide for minimum annual salaries, reimbursement of
business related expenses and participation in other employee benefit programs.
The agreements also include confidentiality, non-disclosure, severance,
automatic renewal and non-competition provisions. Salary levels are subject to
periodic review by the Board of Directors.
Consulting Agreements
In May 1993, the Company entered into a two-year consulting agreement for
public relations services. As part of the compensation for the services to be
rendered, the consultant was granted an option under the 1991 Stock Plan (see
Note 8) to purchase 37,200 shares of common stock at $.60 per share exercisable
through May 1, 2000. The Company valued the option at $145,080 and was
amortizing this expense over the term of the consulting agreement. In May 1994,
the consulting agreement was terminated and options to purchase 18,600 shares of
common stock valued at $72,540 were cancelled.
In February 1996, the Company entered into a six-month public and investor
relations services agreement with a public relations firm. As compensation for
these services, the firm was granted an option under the 1991 Stock Plan (see
Note 8) to purchase 20,000 shares of the Company's common stock at $.01 per
share exercisable through February 1, 2003 as long as the firm maintains a
business relationship with the Company. The Company valued the option at $55,225
and is amortizing the expense over the term of the agreement.
Demand Registration Rights
The Company has agreed that, under certain circumstances, it will register
under federal and state securities laws certain shares of common stock issued in
connection with private placements and certain shares of common stock issuable
in connection with warrants issued to the Company's investment banker and agents
for the private placements. The Company will bear the cost of registering these
securities. (See Note 8).
Contingencies
Legal claims arise from time to time in the normal course of business which,
in the opinion of management, will have no material effect on the Company's
financial position.
8. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS
1992 Public Offering
In October 1992, the Company completed a public offering of 920,000 units at
$5.00 per unit, each unit consisted of one share of common stock and one
redeemable common stock purchase warrant. The warrant originally allowed the
holder to purchase one share of common stock at a price of $6.50, subject to
adjustment in certain instances, through September 24, 1995. As a result of
subsequent debt and equity financings, the 917,800 warrants that remain
outstanding have been adjusted to allow the holder to purchase 1.7 shares with
each warrant at an exercise price of $3.90 per warrant. Furthermore, on August
7, 1995, the Company extended the expiration date of the warrants to September
24, 1997. During the year ended June 30, 1996, 2,200 warrants were exercised to
purchase 3,300 shares of common stock. Net proceeds were $9,438.
The 1992 public offering underwriter's warrants expired on September 24,
1995.
32
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
8. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
1994 Public Offering
On March 23, 1994, the Company completed a public offering of 1,600,000
units at $4.50 per unit. Each unit consisted of four shares of common stock and
two Class A redeemable common stock purchase warrants. Each warrant allowed the
holder to purchase one share of common stock at a price of $1.20, subject to
adjustment in certain instances, through March 16, 1999. Net proceeds of the
offering after deduction of all expenses were $5,617,729.
The underwriting agreement granted the underwriters warrants to purchase
160,000 units at $7.425 per unit, subject to adjustment in certain instances,
during the period March 16, 1995 to March 16, 1999. The warrants contain, among
other things, a net exercise feature.
Public Offering Warrants
In May 1995, the Company filed a registration statement to register the
shares issuable upon the exercise of the warrants issued in the 1992 and 1994
public offerings and the shares issuable upon the exercise of the warrants
issued to the underwriters of the 1992 and 1994 public offerings. Registration
costs of $34,593 were deducted from net proceeds of warrant exercises during the
year ended June 30, 1995.
1994 Public Offering Warrants
In June 1995, 22,000 warrants issued to the underwriters of the 1994 public
offering were exercised at $7.425 per warrant. The Company received proceeds of
$163,350 and issued the warrant holder 88,000 shares of common stock and 44,000
Class A redeemable common stock purchase warrants. In addition, in June 1995,
35,000 warrants issued to the underwriters of the 1994 public offering were
exercised, using their net exercise feature, in exchange for 185,452 shares of
common stock.
During the period from July 1995 to November 1995, 103,000 warrants issued
to the underwriters of the 1994 public offering were exercised to acquire
503,982 shares of common stock and 10,000 Class A redeemable common stock
purchase warrants using their net exercise feature and payment to the Company of
$37,125.
In December 1995, the Company completed the redemption of the Class A
redeemable common stock purchase warrants resulting in the purchase of 3,241,194
shares of common stock yielding net proceeds of $3,845,769 after deducting
expenses. The remaining 12,806 unexercised warrants were redeemed by the Company
for $.01 per warrant.
Private Placements
During the year ended June 30, 1993, the Company entered into two common
stock private placement agreements. In July 1993, the Company sold 128,571
shares of common stock at $3.50 per share. Net proceeds were $386,513 after
deducting commissions and expenses of $63,486.
The Company issued warrants to the placement agents to purchase 68,328
shares of common stock at $4.75 per share and 47,400 shares of common stock at
$5.53 per share. During the year ended June 30, 1995, the warrant to purchase
47,400 shares was cancelled. The agents' warrants are exercisable over a
four-year period commencing one year from the closing date and carry certain
demand registration rights. The exercise price is subject to adjustment in
certain instances. As a result of subsequent debt and equity financings, the
warrant exercise price has been adjusted to $4.37 per share.
On February 7, 1996, the Company raised $3 million in a private placement,
from the sale to a single investor of 579,626 shares of common stock at a price
of approximately $1.73 per share and the issuance of a $2 million convertible
note. (See Note 4.) Placement costs for this transaction were $421,157 of which
$146,452 was charged to additional paid-in capital and $274,705 was capitalized
as deferred debt financing costs.
33
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
8. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
On February 21, 1996 and March 4, 1996, the Company issued, in private
placements, an aggregate of 388,500 shares of common stock and 1,178,264 shares
of Series A preferred stock for aggregate consideration of $3,500,000. Placement
costs of $487,461 were charged to additional paid-in capital. The Series A
preferred stock was convertible into common stock 100 days after initial
issuance into that number of shares obtained by dividing the consideration paid
for the preferred stock by 80% of the five-day average of the closing bid price
per share of the common stock at the date of the conversion. Each share of
preferred stock had a liquidation value equal to $2.9375, the consideration paid
per share. In June 1996, the 1,178,264 shares of Series A preferred stock were
converted into 1,612,834 shares of common stock based on the above formula.
In February 1996, the Company issued, in a private placement, 552,560 shares
of common stock for aggregate consideration of $1,000,000. Placement costs of
$13,526 were charged to additional paid-in capital.
BONUS COMPENSATION
In February 1996, the Company granted to certain employees and a consultant,
bonus compensation paid in the form of (1) 117,250 shares of common stock
outside of the 1991 Stock Plan and the 1989 Stock Option Plan and (2) stock
options under the 1991 Stock Plan for 65,000 shares of common stock at an
exercise price of $.01 per share. The Company recognized $558,857 in
compensation expense associated with the grants.
STOCK OPTION PLANS
The Company adopted the 1989 Stock Option Plan (the "1989 Plan") and
reserved 600,000 shares of common stock for issuance to employees, officers,
directors and consultants. Under the 1989 Plan, the Stock Option Committee of
the Board of Directors will grant options and establish the terms of the options
in accordance with plan provisions. The following table summarizes the activity
of options granted under the 1989 plan:
YEARS ENDED JUNE 30,
--------------------
1996 1995 1994
---- ---- ----
Outstanding at beginning of year 270,000 270,000 270,000
Granted -- -- 83,000
Cancelled -- -- (83,000)
Exercised at $.05 per share (50,000) -- --
------- ------- -------
Outstanding at end of year 220,000 270,000 270,000
======= ======= =======
Exercisable at end of year 197,500 228,500 187,000
======= ======= =======
Exercise prices per share at end of year $.75 to $.05 to $.05 to
$5.87 $5.87 $5.87
===== ===== =====
Reserved for future grants at end of year -- -- --
===== ===== =====
On April 27, 1994, the Company repriced 83,000 stock options issued to
employees under the 1989 Plan, by issuing new options in exchange for their old
options. The new option exercise price was set at the then current market price
of $.75 per share and the new options will vest over two to three years.
34
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
8. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
The 1989 Plan options are exercisable for a period of ten years from the
date of issuance.
The Company adopted the 1991 Stock Plan (the "1991 Plan") and reserved
1,200,000 shares of common stock for issuance to employees, officers, directors
and consultants. (See Note 12.) Under the 1991 Plan, the Stock Option Committee
of the Board of Directors may grant options, stock awards and purchase rights,
and establish the terms of the grant in accordance with the provisions of the
plan. The following table summarizes the activity of options granted under the
1991 Plan:
YEARS ENDED JUNE 30,
--------------------
1996 1995 1994
---- ---- ----
Outstanding at beginning of year 609,100 586,600 597,200
Granted 105,000 50,000 589,000
Cancelled (21,500) (27,000) (599,600)
Exercised at $.01 to $.75 per share (51,700) (500) --
------- ------- -------
Outstanding at end of year 640,900 609,100 586,600
======= ======= =======
Exercisable at end of year 418,300 201,826 58,600
======= ======= ======
Exercise prices per share at end of year $.01 to $.60 to $.60 to
$6.25 $6.25 $6.25
===== ===== =====
Reserved for future grants at end of year 506,900 590,400 613,400
======= ======= =======
On April 27, 1994, the Company repriced 512,000 options issued to employees
and directors by issuing new options in exchange for their old options. The new
option price was set at the then current market price of $.75 per share and the
new options will vest over two to three years.
The 1991 Plan options are exercisable for a period of seven years from the
date of issuance and certain options contain a net exercise provision. As of
June 30, 1996, no stock awards or purchase rights have been granted under the
1991 Plan.
Other Stock Options and Warrants
On September 6, 1990, the Company's Board of Directors granted non-qualified
stock options to purchase 450,000 shares of common stock at a price of $.875 per
share through September 2000, all of which are currently exercisable by a former
director of the Company. In January 1993, the Company granted an option to
purchase 20,000 shares of common stock at a price of $5.25 per share exercisable
through January 15, 1999.
On November 20, 1995, the Company entered into a one-year investment banking
agreement with the underwriter of the Company's prior public offerings. As
compensation for services, the Company granted a warrant to purchase 400,000
shares of common stock at an exercise price of $2.50 per share. The warrant is
exercisable through November 20, 2000. The shares underlying the warrant were
registered on a Form S-3 registration statement declared effective on March 29,
1996.
35
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
8. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
Common Stock Reserved
The Company has reserved common stock at June 30, 1996 as follows:
NUMBER OF
SHARES
------
Convertible note payable 1,234,000
1992 public offering warrants 1,560,260
Private placement agents' warrants 68,328
Stock option plans 1,367,800
Other stock options 470,000
Investment banker's warrant 400,000
-------
Total 5,100,388
=========
The number of shares of common stock reserved in connection with the
convertible note payable is subject to adjustment (see Note 4.)
9. REVENUES
Product Sales
During the years ended June 30, 1996 and 1995, the Company's sales to
foreign customers amounted to 36% and 42% of total revenues, respectively. Sales
to one foreign customer amounted to 23% of total revenues during the year ended
June 30, 1996 and sales to a different foreign customer amounted to 27% of total
revenues during the year ended June 30, 1995. A summary of sales by geographic
area is as follows:
YEARS ENDED JUNE 30,
--------------------
1996 1995
---- ----
Far East and Asia $183,706 $ 185,997
United States 18,877 39,860
Europe 8,466 16,462
Other 9,696 5,234
----- -----
$220,745 $247,553
======== ========
A summary of sales by product is as follows:
YEARS ENDED JUNE 30,
--------------------
1996 1995
---- ----
MycoDot (tuberculosis antibody detection) $201,428 $ 201,145
MycoDyn Uritec (tuberculosis therapy compliance test) 19,204 20,256
Other 113 26,152
------ ------
$220,745 $247,553
======== ========
The Company's MycoDot product is manufactured on a contract basis by one
company located in India. A change in the contract manufacturer could cause a
delay in production and result in a possible loss of sales.
Contract Revenues
The Company had a contract with the U.S. Government which amounted to
approximately 32% of total revenues during the year ended June 30, 1994.
36
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
9. REVENUES -- (CONTINUED)
License Fees And Royalties
During the year ended June 30, 1994, the Company received $273,750 in full
satisfaction of all minimum royalties due under an agreement in which it granted
world-wide licenses to manufacture and sell certain diagnostic tests. Revenue
under this agreement was 63% of total revenues for the year ended June 30, 1994.
In May 1994, the Company received a non-refundable payment of $25,000 for
entering into a letter of intent relating to a distribution agreement for its
MycoDot diagnostic test.
During the year ended June 30, 1995, the Company entered into an agreement
where it granted a third party the right to evaluate licensing the Company's
smoking cessation technology on an exclusive worldwide basis, except for Europe.
In return, the Company received a $500,000 fee, $250,000 of which was refundable
should the Company license its smoking cessation technology to a different party
prior to October 15, 1995. On July 13, 1995, the third party informed the
Company that it would not exercise its right to license the technology at this
time. Revenues earned under this agreement were approximately 45% and 50% of
total revenues for the years ended June 30, 1996 and 1995, respectively.
License fee revenue for the year ended June 30, 1996 includes $250,000
related to the smoking cessation technology mentioned above, $60,000 for certain
rights to manufacture and sell the Company's MycoAKT latex agglutination
products, and $25,000 for exclusive MycoDot distribution rights in Japan.
10. EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan").
Employees who have attained the age of 21 may elect to reduce their current
compensation, subject to certain limitations, and have that amount contributed
to the 401(k) Plan. The Company may make discretionary contributions to the
401(k) Plan up to 25% of employee compensation, subject to certain limitations.
Employee contributions to the 401(k) Plan are fully vested at all times and all
Company contributions become vested over a period of six years. The Company made
no contributions to the 401(k) Plan during the years ended June 30, 1996, 1995
and 1994.
11. DISCONTINUED OPERATIONS
The Company sold the assets of its fluid systems consulting business on May
6, 1994. A summary of the loss on disposal is as follows:
Net proceeds on sale $153,752
Book values of assets sold:
Accounts receivable (92,373)
Recoverable amounts on long-term contracts (45,871)
Property and equipment (28,915)
-------
Loss on disposal $(13,407)
========
A summary of the loss from operations of the fluid systems consulting
business for the year ended June 30, 1994 is as follows:
Contract revenues $502,057
Contract costs 288,480
Selling, general and administrative expenses 215,115
-------
Loss from operations $ (1,538)
=========
37
DYNAGEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
12. SUBSEQUENT EVENTS
On July 24, 1996, the Board of Directors granted stock options outside of
the 1989 and 1991 stock option plans to purchase 660,000 shares of common stock
at an exercise price of $1.94 per share through July 24, 2003 to two new
directors. The options vest over a three-year period.
On August 5, 1996, the Board of Directors voted to recommend to the
stockholders that the Company increase the number of authorized shares of common
stock from 40,000,000 to 60,000,000 shares and approved an amendment to the 1991
Stock Plan increasing the number of shares reserved for issuance thereunder from
1,200,000 to 2,200,000 shares, subject to stockholder approval.
On August 19, 1996, the Company purchased for $550,000 the tablet business
assets of Able Laboratories, Inc. In addition, the Company assumed the sellers'
obligations under a lease for a manufacturing facility. Under the lease, the
Company will pay rent of $21,965 per month plus certain expenses through March
31, 2000.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996, the Company's financial instruments include investment
securities which are carried at fair value (see Note 2), notes receivable (see
Note 6) and a convertible note payable (see Note 4). The carrying value of the
notes receivable approximate their fair value as these instruments bear interest
at market rates and mature in less than one year. The fair value of the
convertible note payable is approximately $2,985,000 based on the fair value of
the common stock issuable on conversion of the note.
14. QUARTERLY DATA (Unaudited)
Summaries of operating results on a quarterly basis are as follows:
YEARS ENDED JUNE 30,
--------------------
1996 1995
---- ----
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net product sales $ 70 $ 93 $ 39 $ 19 $ 25 $ 154 $ 41 $ 28
License fees and royalties 25 35 25 250 -- 250 -- --
------- ------- ------- ------- ------- -------- ------- --------
Total revenues 95 128 64 269 25 404 41 28
------- ------- ------- ------- ------- -------- ------- --------
Cost of sales 22 46 21 8 14 76 24 20
Research and development 1,230 852 566 470 420 340 434 524
Selling, general and
administrative 616 880 618 571 462 499 588 435
------- ------- ------- ------- ------- -------- ------- --------
Total costs and expenses 1,868 1,778 1,205 1,049 896 915 1,046 979
------- ------- ------- ------- ------- -------- ------- --------
Operating loss (1,773) (1,650) (1,141) (780) (871) (511) (1,005) (951)
Other income, net 74 62 57 54 70 69 75 82
------- ------- ------- ------- ------- -------- ------- --------
Net loss $(1,699) $(1,588) $(1,084) $ (726) $ (801) $ (442) $ (930) $ (869)
======= ======= ======= ======= ======= ======= ======== ========
Net loss per share $ (.06) $ (.06) $ (.05) $ (.03) $ (.04) $ (.02) $ (.04) $ (.04)
======= ======= ======= ======= ======= ======= ======== ========
Weighted average shares
outstanding 27,288 26,062 22,628 21,808 21,195 21,175 21,175 21,175
====== ====== ====== ====== ====== ====== ====== ======
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company, their ages and
their positions held in the Company are as follows:
NAME AGE POSITION
---- --- --------
Dhananjay G. Wadekar(1) 42 Chairman of the Board, Executive Vice
President and Director
Dr. Indu A. Muni(1) 53 President, Chief Executive Officer, Treasurer
and Director
Dr. F. Howard Schneider 57 Senior Vice President -- Technology and
Director
Dr. Ian R. Ferrier(2)(3) 53 Director
Steven Georgiev(2)(3) 61 Director
Peter J. Mione 49 Vice President -- Clinical and
Regulatory Affairs
Theodore A. Olsson 42 Vice President -- Corporate Development
- ----------
(1) Member of the Stock Option Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Compensation Committee, which was established on
July 24, 1996.
The By-laws of the Company provide for the annual election of the Board of
Directors. All Directors of the Company are elected to hold office until the
next annual meeting of Stockholders, and until their successors have been duly
elected and qualified. Officers are elected by, and serve at the discretion of,
the Board of Directors.
DHANANJAY G. WADEKAR. Mr. Wadekar is a co-founder of the Company and has
served as a director of the Company since inception and as Chairman of the Board
and Executive Vice President of the Company since November 1991. In addition, he
served as the Chairman, Chief Executive Officer and Treasurer of the Company
from its inception until July 1990 and as a consultant to the Company during the
period July 1990 to October 1991. Since April 1996, Mr. Wadekar has served as a
director of CSL Lighting Manufacturing, Inc., a publicly traded manufacturer of
high-end lighting fixtures. Mr. Wadekar was a director of Holometrix, Inc., a
publicly traded thermal instrumentation company which he founded, from 1985
until November 1994.
DR. INDU A. MUNI. Dr. Muni is a co-founder of the Company and has served as
President and a director of the Company since inception and as Chief Executive
Officer and Treasurer since July 1990. From May 1988 to November 1988, Dr. Muni
served as Vice President of Biomaterial and Environmental Science and
Engineering for Holometrix, Inc., a publicly traded thermal instrumentation
company. Between July 1987 and May 1988, Dr. Muni provided biological consulting
services to pharmaceutical and biotechnology companies as an independent
consultant. From February 1981 to July 1987, Dr. Muni served as Executive Vice
President of Bioassay Systems Corporation, a publicly traded provider of
contract research and development services in the areas of pharmaceutical and
diagnostic systems.
DR. F. HOWARD SCHNEIDER. Dr. Schneider has served as a director of the
Company since September 1989, was Chairman of the Board of the Company from July
1990 until February 1991 and became Senior Vice President -- Technology
effective June 1991. Dr. Schneider was previously a partner and Senior Vice
President of Bogart Delafield Ferrier, Inc. ("Bogart Delafield Ferrier"), a
healthcare consulting firm that provides strategic consulting services to
pharmaceutical and biotechnology companies. Dr. Schneider participated in the
management buyout of Bogart Delafield Ferrier from its parent corporation,
McCann Healthcare Group, a subsidiary of Inter Public Group.
39
DR. IAN R. FERRIER. Dr. Ferrier has served as a director of the Company
since July 1996. In 1982, he founded Bogart Delafield Ferrier. Dr. Ferrier has
served as Chief Executive Officer of Bogart Delafield Ferrier since 1982 and as
Chairman since 1989. He earned a medical degree from Edinburgh University and
specialized in clinical pharmacology during postgraduate training. Prior to
founding Bogart Delafield Ferrier, he held various clinical research and
management positions with ICI Pharmaceuticals, Kalipharma Inc., and the Tech
America Group. He serves as a director on the board of NASTECH Pharmaceuticals
Co., Inc., a publicly traded company, and on the boards of several privately
held biotechnology and pharmaceutical companies.
STEVEN GEORGIEV. Mr. Georgiev has served as a director of the Company since
July 1996. Since November 1993, he has been Chief Executive Officer of Palomar
Medical Technologies, Inc. ("Palomar"), a publicly traded Massachusetts firm
specializing in medical applications of lasers, and from November 1993 until
August 1994 he was also President of Palomar. Mr. Georgiev was a consultant to
Palomar's predecessor, Dymed Corporation, from June 1991 until Palomar's
September 1991 merger with Dymed Corporation, at which time he became Palomar's
Chairman of the Board of Directors. Mr. Georgiev has been a director of Excel
Technology, Inc., a publicly traded laser system and electro-optical component
company, since October 1992, and of XXSYS Technology, Inc. since June 1994. Mr.
Georgiev earned a B.S. degree in Engineering Physics from Cornell University and
a M.S. in Management from the Massachusetts Institute of Technology.
PETER J. MIONE. Mr. Mione has served the Company as Vice President --
Clinical and Regulatory Affairs since November 1991 and initially as Manager of
Regulatory Affairs from May 1989 to October 1991. Mr. Mione is responsible for
monitoring clinical studies, preparation of protocols, and submission of data on
the Company's proposed products to the FDA for approval. Prior to joining the
Company, Mr. Mione was an independent consultant from October 1988 to April 1989
and served as Administrative Coordinator at Toxikon Corp. (from 1987 to 1988), a
company providing toxicology study services. Prior thereto, Mr. Mione was
Director of Regulatory Compliance at Genus Diagnostics, a manufacturer of
diagnostic kits.
THEODORE A. OLSSON. Mr. Olsson has served as Vice President -- Corporate
Development since August 1996, and initially served as Director, Polymer
Products from November 1993 to August 1996. Mr. Olsson is currently responsible
for the day-to-day operations at Able Prior to joining the Company, Mr. Olsson
served as Senior Consultant and Unit Manager for Arthur D. Little, Inc. from
July 1990 to November 1993. Mr. Olsson has a Bachelor of Science degree in
Biochemistry from the University of Massachusetts, Amherst.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and The Nasdaq Stock Market. Officers, directors and greater-than-ten percent
stockholders are required by Securities and Exchange Commission regulations to
furnish the Company with all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that during fiscal 1996 all of its officers, directors and
greater-than-ten percent stockholders complied with all Section 16(a) filing
requirements.
SIGNIFICANT EMPLOYEES
The Company also relies on the services of the following significant
employees:
DR. NICOLAE ISTRATE, age 52, has served as Section Leader, Immunology since
September 1991 and as Senior Research Immunologist for the Company since April
1990, and as a Consultant to the Company for six months prior to that time. From
December 1988 to October 1989, Dr. Istrate was
40
the Director of the Hybridoma Laboratory for Cambridge Medical Technology
Corporation of Billerica, Massachusetts where his responsibilities included the
establishment of a monoclonal antibody laboratory and research in diagnostic
methods and testing. From March 1987 to September 1988, Dr. Istrate was Manager
of the Departmental Laboratory for Swine and Bovine Viral Vaccines in Timisoara,
Romania, where he developed methods for viral diagnosis and viral vaccines. Dr.
Istrate holds a Doctorate Degree in Veterinary Medicine and a Ph.D. in
Microbiology from the Faculty of Veterinary Medicine in Bucharest, Romania.
DR. SARASWATHY V. NOCHUR, age 37, became Director -- Diagnostic Products in
February 1994 and previously served the Company as Product Manager -- Diagnostic
Reagents from July 1991 to February 1994 and as Research Scientist from July
1989 to June 1991. Dr. Nochur initially served the Company as a consultant from
March 1989 to July 1989. From October 1983 to December 1988, Dr. Nochur
conducted research in connection with her doctoral dissertation at the
Massachusetts Institute of Technology on the deregulation of cellulase and the
optimization of ethanol production from cellulose. From 1982 to 1983, she was
employed by Hoechst Pharmaceuticals where her work involved the development of
immunodiagnostic products based on polyclonal antibody detection systems.
DENNIS R. BILODEAU, CPA, age 39, has served as Controller for the Company
since July 1992. Prior to joining the Company, Mr. Bilodeau was a self employed
CPA from January 1992 to July 1992. From May 1990 to December 1991, Mr. Bilodeau
was a senior supervisor at Siegfried and Associates, Certified Public
Accountants. Mr. Bilodeau was a financial recruiter for Romac & Associates from
May 1989 to April 1990. From July 1985 to May 1989, Mr. Bilodeau was Controller
at SD-Scicon, Inc., a computer software design company.
CYNTHIA A. KILEY, age 36, has served the Company since inception, most
recently as Director, Human Resources. She was Manager of Administrations from
May 1992 to September 1993 and prior to that served as Office Manager. Ms. Kiley
was Manager of Publications for Holometrix, Inc. from May 1988 to February 1989.
From 1984 to May 1988, Ms. Kiley was responsible for publications management for
Dynatech Scientific, Inc. Ms. Kiley received her Bachelor of Arts Degree in
Biology from Emmanuel College.
SCIENTIFIC ADVISORY BOARD
To provide scientific guidance to the Company's product development
programs, as well as assistance in recruiting employees and collaborators, the
Company works with a network of experts who serve as consultants to the Company.
Each consultant has entered into a consulting agreement with the Company. These
consulting agreements typically specify the compensation to be paid to the
consultant and require that all information about the Company's products and
technology be kept confidential. Most of the consultants are employed by
employers other than the Company and may have commitments to or consulting or
advisory agreements with other entities that may limit their availability to the
Company. The consultants have agreed, however, not to provide any services to
any other entities that might conflict with the services that they provide the
Company. Members of the Company's Scientific Advisory Board offer consultation
on specific issues encountered by the Company.
The current members of the Scientific Advisory Board are:
DR. F. HOWARD SCHNEIDER, Chairman of the Scientific Advisory Board, Senior
Vice President -- Technology and Director.
41
DR. JUDITH K. OCKENE, Professor of Medicine and Director of the Division of
Preventive and Behavioral Medicine at the University of Massachusetts Medical
School in Worcester, MA. Dr. Ockene has served as a member of the Advisory
Committee and Scientific Editor of Surgeon General's Reports on Smoking and
Health.
DR. LEE B. REICHMAN, Director of the New Jersey Medical School National
Tuberculosis Center and Professor of Medicine, Preventive Medicine and Community
Health at the University of Medicine and Dentistry of New Jersey. Dr. Reichman
is a leading expert on tuberculosis.
DR. THOMAS J. RYAN, Former Chief of Cardiology at The University Hospital in
Boston. Dr. Ryan is a past President of the American Heart Association.
DR. SAUL TZIPORI, Professor and Division Head in Infectious Diseases at
Tufts University School of Veterinary Medicine and Professor of Medicine at New
England Medical Center in Boston. Dr. Tzipori is a past Associate Director of
the International Center for Diarrheal Disease Research in Bangladesh.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors were not compensated during the fiscal year ended June 30, 1996
for attending meetings of the Board of Directors. The Company has since
instituted a policy of paying directors who are not employees of the Company a
participation fee of $1,000 for each meeting of the Board of Directors attended
and for each committee meeting attended, up to a maximum of $1,000 per calendar
day, regardless of how may meetings occur on one day. All directors are also
reimbursed for out-of-pocket expenses incurred in connection with attendance at
meetings and other services as directors. Directors are entitled to receive
stock options under the 1991 Stock Plan and the 1989 Stock Option Plan. To date,
Mr. Wadekar and Dr. Muni have received no options, and Dr. Schneider has
received options to purchase a total of 310,000 shares of the Company's Common
Stock under the 1991 Stock Plan and 1989 Stock Option Plan. In addition, the
Board of Directors granted to Dr. Ferrier and Mr. Georgiev options to purchase
330,000 shares each, which options were granted outside of the 1991 Stock Plan
and 1989 Stock Option Plan. The Company's Stock Option Committee, which
administers the Company's 1989 Stock Option Plan and 1991 Stock Plan, has a
general policy of awarding stock options at not less than fair market value at
the date of grant, and options generally vest over 2, 3 or 4 years. During the
fiscal year ended June 30, 1996, however, the Stock Option Committee awarded
stock options to Dr. Schneider and certain other officers of the Company at an
exercise price of $.01, which options were fully vested on the date of grant.
EXECUTIVE COMPENSATION COMMITTEE
Although the Board of Directors did not have a compensation committee during
the fiscal year ended June 30, 1996, on July 24, 1996, the Board established an
Executive Compensation Committee, of which Dr. Ferrier and Mr. Georgiev are the
members. The Executive Compensation Committee will review and set cash and
non-cash compensation for Dr. Muni and Mr. Wadekar and will provide guidance to
the Board of Directors and the Stock Option Committee on the cash and non-cash
compensation payable to other officers and employees of the Company.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended June 30, 1996, 1995 and 1994, of those persons who were at
June 30, 1996 (i) the chief executive officer and (ii) each other executive
officer of the Company whose annual compensation exceeded $100,000 (the "Named
Officers"):
42
LONG-TERM
COMPENSATION(2)
---------------
ANNUAL COMPENSATION(1) AWARDS
---------------------- ------
NUMBER OF
FISCAL SALARY BONUS OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($) SARS (#) COMPENSATION ($)
--------------------------- ---- --- --- ---------------- -------- ----------------
DR. INDU A. MUNI ............... 1996 115,500 -- -- -- 304(3)
President, Chief Executive 1995 115,500 -- -- -- 304(3)
Officer and Treasurer 1994 112,875 -- -- -- 304(3)
DHANANJAY G. WADEKAR ........... 1996 115,500 -- -- -- 304(3)
Chairman of the Board and 1995 115,500 -- -- -- 304(3)
Executive Vice President 1994 112,875 -- -- -- 304(3)
DR. F. HOWARD SCHNEIDER ......... 1996 115,500 -- -- 10,000 304(3)
Senior Vice President -- 1995 115,500 -- -- -- 304(3)
Technology 1994 112,875 -- -- 150,000(4) 15,476(5)
- ----------
(1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer was less than the lesser of $50,000 or 10%
of the total salary and bonus reported.
(2) The Company did not grant any restricted stock awards or stock appreciation
rights ("SARs") or make any long-term incentive plan payouts during the
fiscal years ended June 30, 1996, 1995 and 1994.
(3) Amount represents the dollar value of group-term life insurance premiums
paid by the Company for the benefit of the Named Officer.
(4) The Company repriced certain of Dr. Schneider's outstanding options in
Fiscal 1994 as follows: Options to purchase 150,000 shares granted in July
1992 at an exercise price of $5.25 were canceled in exchange for options to
purchase 150,000 shares at an exercise price of $.75 per share, the fair
market value of the Company's Common Stock on the date of exchange, April
27, 1994.
(5) Amount is comprised of: (i) $15,172 representing forgiveness from repayment
of a loan owed to the Company by Dr. Schneider and (ii) $304 representing
the dollar value of group-term life insurance premiums paid by the Company
for the benefit of Dr. Schneider.
OPTIONS/SAR GRANTS TABLE
The following table sets forth each grant of stock options made during the
year ended June 30, 1996 to each of the Named Officers:
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS MARKET ANNUAL RATES OF
SECURITIES GRANTED TO PRICE ON STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE DATE OF FOR OPTION TERM(2)
OPTIONS IN FISCAL PRICE GRANT EXPIRATION -------------------------
NAME GRANTED(1) YEAR ($/SHARE) ($/SHARE) DATE 0% ($) 5% ($) 10%($)
---- ---------- ---- --------- --------- ---- ------ ------ ---
Dr. Indu A. Muni -- -- -- -- -- -- -- --
Dhananjay G. Wadekar -- -- -- -- -- -- -- --
Dr. F. Howard Schneider 10,000 18.2 0.01 3.19 2/02/03 31,800 44,787 62,064
- ----------
(1) All options granted are reflected in the Summary Compensation Table, were
granted on February 2, 1996 and were fully exercisable immediately upon
grant.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (0%, 5% and
10%) on the market value of the Company's Common Stock over the term of the
options. These numbers are calculated based on rules promulgated by the
Commission and do not reflect the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the timing of such exercises and the future
performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.
43
OPTION EXERCISES AND FISCAL YEAR END VALUES
Presented below is further information with respect to unexercised stock
options to purchase the Company's Common Stock held by each Named Officer as of
June 30, 1996. None of the Named Officers exercised any stock options during
fiscal 1996.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1996 (#) JUNE 30, 1996 ($)
----------------- -----------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Dr. Indu A. Muni -- -- -- --
Dhananjay G. Wadekar -- -- -- --
Dr. F. Howard Schneider 200,000 60,000 332,400 101,250
Stock Plans. The Company currently maintains two employee stock plans: the
1989 Stock Option Plan and the 1991 Stock Plan. Each plan is administered by the
Stock Option Committee of the Board of Directors. The 1991 Stock Plan currently
provides for the grant of incentive stock options, non-qualified options, awards
and authorizations to purchase up to 1,200,000 shares of Common Stock. At the
Annual Meeting of Stockholders of the Company, the stockholders will consider
and vote upon a proposal to approve an amendment to the 1991 Stock Plan to
increase the number of shares of Common Stock authorized to be issued thereunder
from 1,200,000 to 2,200,000 shares and to permit grants thereunder to comply
with Section 162(m) of the Internal Revenue Code. The terms of options issued
under the 1991 Stock Plan, including number of shares, exercise price, duration
and vesting, are generally determined by the Stock Option Committee. As of June
30, 1996, options to purchase a total of 640,900 shares of Common Stock were
outstanding under the 1991 Stock Plan, of which options for 418,300 shares were
then exercisable, and 506,900 shares of Common Stock were reserved for future
option grants.
The 1989 Stock Option Plan provides for the grant of incentive stock options
and non-qualified options to purchase up to an aggregate of 600,000 shares of
Common Stock to the Company's employees, officers, directors and consultants.
The terms of such options, including number of shares, exercise price, duration
and vesting, are generally determined by the Stock Option Committee. As of June
30, 1996, options to purchase a total of 220,000 shares of Common Stock were
outstanding under the 1989 Stock Option Plan, of which options for 197,500
shares were then exercisable, and no shares of Common Stock were reserved for
future option grants.
BOARD OF DIRECTORS AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
The Company's executive compensation program was administered by the Board
of Directors during fiscal 1996. The Board of Directors' informal executive
compensation philosophy (which applies generally to all of the Company's
management) considers a number of factors, which may include providing levels of
compensation competitive with companies at a comparable stage of development and
in the Company's geographic area, recognizing the overall cost of living in the
Company's geographical region, integrating management's pay with the achievement
of performance goals, rewarding above average corporate performance, recognizing
and providing incentive for individual initiative and achievement, and promoting
a cooperative spirit among the executive officers of the Company. Senior
management's compensation is weighted more heavily toward compensation
contingent upon the Company's achieving certain business objectives. The Board
of Directors also endorses the position that equity ownership by management is
beneficial in aligning management's and stockholders' interest in the
enhancement of stockholder value by providing management with longer-term
incentives. Accordingly, compensation structures for management generally
include a combination of salary and stock options.
In setting cash compensation for Dr. Muni and Mr. Wadekar and reviewing and
approving the cash compensation for all other executive officers, the Board of
Directors reviews salaries for all executive officers annually. The Board of
Directors' policy is to fix base salaries at levels comparable to the amounts
paid to senior executives with comparable qualifications, experience and
responsibilities at
44
other companies of similar size and engaged in a similar business to that of the
Company in the metropolitan Boston area (which together comprise a subset of the
Company's Peer Group Index referred to in the Performance Graph below). In
addition, the base salaries take into account the Company's relative performance
as compared to these companies and the attainment of certain planned objectives.
The Company believes the present compensation for its executive officers is
comparable to these similarly situated companies.
The cash compensation program for Dr. Muni and Mr. Wadekar is designed to
reward performance that enhances stockholder value. The cash compensation
package is comprised only of base pay as a function of the several factors
mentioned above. Dr. Muni and Mr. Wadekar have not been issued any stock
options. As co-founders of the Company, each of Dr. Muni and Mr. Wadekar have an
appreciable share of the Company's outstanding Common Stock. As a result, the
Board of Directors currently believes that in the near term, Dr. Muni's and Mr.
Wadekar's equity interests are sufficiently aligned with the Company's
stockholders with respect to the goal of enhancing stockholder value.
Incentive-based compensation is an integral part of the overall compensation
package of the remaining members of the executive group. Incentive compensation
in the form of stock options is designed to provide long-term incentives to
executive officers and other employees, to encourage the executive officers and
other employees to remain with the Company and to enable them to develop and
maintain a stock ownership position in the Company's Common Stock. The Company's
1989 Stock Option Plan and 1991 Stock Plan, administered by the Stock Option
Committee (of which Dr. Muni and Mr. Wadekar are the only members), have been
used for the granting of stock options to eligible employees, including
executive officers. Because some of the Company's products are still in a
developmental stage and the Company is only beginning to sell certain of its
products, the Stock Option Committee has granted stock options to all employees,
officers and directors of the Company in order to foster a spirit of cooperation
and common purpose in making the Company a successful enterprise.
During fiscal 1996, the Stock Option Committee granted options to purchase
55,000 shares of Common Stock to the directors, officers and employees of the
Company. Options generally become exercisable based upon a vesting schedule tied
to years of future service to the Company. The value realizable from exercisable
options is dependent upon the extent to which the Company's performance is
reflected in the market price of the Company's Common Stock at any particular
point in time. Equity compensation in the form of stock options is designed to
provide long-term incentives to executive officers and other employees. The
Stock Option Committee has granted options in order to motivate these employees
to maximize stockholder value. Generally, options granted to officers and
employees vest over 2, 3 or 4 years and expire after a 7 or 10-year period. In
addition, the Stock Option Committee has a general policy of awarding stock
options at not less than the fair market value at the date of grant in order to
reward executives and other employees only to the extent that the stockholders
also benefit through appreciation in the value of the Company. On February 2,
1996, however, the Stock Option Committee granted immediately exercisable
options to purchase 55,000 shares of Common Stock to certain officers of the
Company at an exercise price of $0.01 per share. In addition, the Board of
Directors awarded 117,250 shares of Common Stock, outside of the 1991 Stock Plan
and the 1989 Stock Option Plan, as a bonus to a number of employees of the
Company. The Common Stock and stock option awards were made to recognize the
past performance of all employees and to provide an incentive to all employees
to remain with the Company. The Board of Directors believes that these awards
foster a spirit of common purpose towards making the corporation a successful
enterprise.
Options granted to employees are based on such factors as individual
initiative, achievement and performance. In making specific grants to
executives, the Stock Option Committee evaluates each officer's total equity
compensation package. The Stock Option Committee generally reviews the option
holdings of each of the executive officers including vesting and exercise price
and the then current value of such unvested options. The Stock Option Committee
considers equity compensation to be an integral part of a competitive executive
compensation package and an important mechanism to align the interests of
management with those of the Company's stockholders.
45
The Board of Directors is satisfied that the executive officers of the
Company are dedicated to achieving significant improvements in the long-term
financial performance of the Company and that the compensation policies and
programs implemented and administered have contributed and will continue to
contribute towards achieving this goal.
This report has been submitted by the members of the Board of Directors and
the Stock Option Committee:
DR. INDU A. MUNI
DR. F. HOWARD SCHNEIDER
DHANANJAY G. WADEKAR
46
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return
(assuming reinvestment of dividends, if any) from investing $100 on June 30,
1991 in each of (i) the Company's Common Stock, (ii) The Nasdaq Stock Market
Index of U.S. Companies ("Nasdaq Index"), and (iii) the Nasdaq Pharmaceutical
Stock Index ("Peer Group Index"). The Peer Group Index reflects the performance
of all corporations that are members of the pharmaceutical industry with 2830 as
their Primary Standard Industrial Classification Code Number. The values of all
three indexes are set at $100 as of June 30, 1991 and are plotted as of the end
of each fiscal quarter through the most recent fiscal year end.
DYNAGEN, INC. STOCK PERFORMANCE GRAPH
FY 1996
DATE NASDAQ-US PEER GROUP INDEX DYNAGEN, INC.
- ---- --------- ---------------- -------------
6/30/91 100 100 100
9/30/91 112 138 93
12/31/91 125 171 82
3/31/92 129 148 106
6/30/92 120 125 82
9/30/92 125 117 74
12/31/92 146 143 64
3/31/93 148 103 75
6/30/93 151 108 67
9/30/93 164 117 52
12/31/93 168 127 41
3/31/94 160 104 12
6/30/94 153 91 9
9/30/94 165 102 19
12/30/94 163 96 26
3/31/95 178 103 36
6/30/95 204 120 59
9/30/95 228 150 51
12/31/95 231 175 29
3/31/96 242 182 36
6/30/96 261 177 32
JUNE 30, 1991 JUNE 30, 1992 JUNE 30, 1993 JUNE 30, 1994 JUNE 30, 1995 JUNE 30, 1996
------------- ------------- ------------- ------------- ------------- -------------
DYNAGEN, INC. $100 $ 82 $ 67 $ 9 $ 59 $ 32
NASDAQ INDEX 100 120 151 153 204 261
PEER GROUP 100 125 108 91 120 177
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment agreements with Dr. Muni, the
Company's President, Chief Executive Officer and Treasurer, Mr. Wadekar, the
Company's Chairman of the Board and Executive Vice President, and Dr. Schneider,
the Company's Senior Vice President -- Technology. Dr. Muni's agreement expires
in August 1997, and Mr. Wadekar's and Dr. Schneider's agreements expire in
October 1997. Under the agreements, Dr. Muni, Mr. Wadekar and Dr. Schneider were
paid annual base salaries of $115,500, effective October 1, 1993.
Effective July 1, 1996, the Executive Compensation Committee increased Dr.
Muni and Dr. Wadekar's annual base salaries to $145,000.
47
In addition, Dr. Muni, Mr. Wadekar and Dr. Schneider have each agreed that
(i) during his respective period of employment with the Company and for a period
of one year thereafter, he will not engage in any business activity engaged in
or under development by the Company and (ii) for a period of three years
following his respective period of employment, he will not engage in any
activities for any direct competitor similar or related to those activities
engaged in during the preceding two years of employment with the Company. In the
event the Company terminates Dr. Muni's, Mr. Wadekar's or Dr. Schneider's
employment without cause, the Company is obligated to pay to him an amount equal
to three months base salary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during fiscal 1996. The
Board of Directors and the Stock Option Committee were responsible for
determining compensation of executive officers of the Company. During fiscal
1996, Drs. Muni and Schneider and Mr. Wadekar served on the Board of Directors.
None of these three officers was present during discussion of and abstained from
voting with respect to his own compensation as an executive officer of the
Company. The Stock Option Committee, of which Dr. Muni and Mr. Wadekar are
members, did not grant any options to Dr. Muni or Mr. Wadekar during fiscal
1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 23, 1996, certain
information concerning the ownership of the Company's Common Stock by: (i) each
person who is known by the Company to own beneficially five percent or more of
the outstanding shares of the Company's Common Stock; (ii) each of the Company's
directors; (iii) the chief executive officer and each Named Officer; and (iv)
all directors and executive officers as a group. Except as otherwise indicated,
to the knowledge of the Company, the persons listed in the table have sole
voting and investment powers with respect to the shares indicated.
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME OF BENEFICIAL OWNER OWNED COMMON STOCK(1)
------------------------ ----- ---------------
Dhananjay G. Wadekar 1,651,250 5.8%
99 Erie Street
Cambridge, Massachusetts 02139
Dr. Indu A. Muni 1,437,250 5.0%
99 Erie Street
Cambridge, Massachusetts 02139
Dr. F. Howard Schneider(2) 270,000 *
99 Erie Street
Cambridge, Massachusetts 02139
Dr. Ian R. Ferrier 0 0%
c/o Bogart Delafield Ferrier, Inc.
North Tower, 5th Floor
49 Headquarters Plaza
Morristown, New Jersey 07960
Steven Georgiev 0 0%
c/o Palomar Medical Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
All Directors and Executive Officers as a group (7 persons)(3) 3,461,375 12.0%
- ----------
* Indicates less than 1%.
(1) As of September 23, 1996, there were 28,661,412 shares of the Company's
Common Stock outstanding. Pursuant to the rules of the Securities and
Exchange Commission (the "Commission"), shares of Common Stock that an
individual or group has a right to acquire on or before November 22, 1996
(i.e.,
48
within 60 days after September 23, 1996) pursuant to the exercise of
presently exercisable or outstanding options, warrants or conversion
privileges are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table. Information with respect to beneficial
ownership is based upon information furnished by such stockholder.
(2) Includes 200,000 shares issuable to Dr. Schneider pursuant to immediately
exercisable stock options. Does not include 100 shares owned by Dr.
Schneider's wife, of which he disclaims any beneficial interest or control.
(3) Includes 279,875 shares issuable pursuant to immediately exercisable stock
options. Does not include 100 shares owned by Dr. Schneider's wife of which
he disclaims any beneficial interest or control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 1996, the Company entered into a strategic marketing relationship
for certain of the Company's technologies with Bogart Delafield Ferrier. In
connection with this relationship, the Company paid to Bogart Delafield Ferrier
$30,000 in fees plus $2,377 for expenses. Bogart Delafield Ferrier is also
entitled to royalties of 1 1/2% of the dollar value of any transaction with
respect to certain of the Company's technologies initiated with a pharmaceutical
or managed care company between March 12, 1996 and September 30, 1996. No such
transaction was initiated during this time period. Dr. Ferrier, who became a
director of the Company in July 1996, is Chief Executive Officer and Chairman of
Bogart Delafield Ferrier.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
The following financial statements are filed as part of this
report:
Independent Auditors' Report
Balance Sheets -- June 30, 1996 and 1995
Statements of Loss -- Years Ended June 30, 1996, 1995 and 1994
Statements of Changes in Stockholders' Equity -- Years Ended
June 30, 1996, 1995 and 1994
Statements of Cash Flows -- Years Ended June 30, 1996, 1995 and 1994
Notes to Financial Statements
2. Financial Statement Schedules:
No financial statement schedules have been included as part of this
report because they are either not required or the information is otherwise
included.
3. List of Exhibits:
The following exhibits, required by Item 601 of Regulation S-K, are filed
as a part of this Annual Report on Form 10-K. Exhibit numbers, where
applicable, in the left column correspond to those of Item 601 of Regulation
S-K.
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
2a -- Asset Purchase Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition
Corp., Able Laboratories, Inc. and Alpharma USPD Inc. (filed as Exhibit 2.1 to
Registrant's Form 8-K dated August 19, 1996 and incorporated by reference).
2b -- Product Supply Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition
Corp. and Able Laboratories, Inc. (filed as Exhibit 2.2 to Registrant's Form 8-K
dated August 19, 1996 and incorporated by reference).
3a -- Certificate of Incorporation, as amended (filed as Exhibit 3a to Registrant's
Registration Statement on Form S-1, No. 33-46445, and incorporated by reference).
3b -- By-laws, as amended (filed as Exhibit 3b to Registrant's Registration Statement
on Form S-1, No. 33-46445, and incorporated by reference).
4a -- Specimen Common Stock Certificate (filed as Exhibit 4a to Registrant's Registration
Statement on Form S-18, No. 33-31836-B, and incorporated by reference).
4b -- Specimen Warrant Certificate (filed as Exhibit 4b to Registrant's Registration
Statement on Form S-1, No. 33-46445, and incorporated by reference).
4c -- Form of Warrant Agreement (filed as Exhibit 1d to Registrant's Registration Statement
on Form S-1, No. 33-46445, and incorporated by reference).
4d -- Subscription Agreement between the Registrant and GFL Performance Fund Limited,
dated January 31, 1996 (filed as Exhibit 4b to Registrant's Registration Statement
on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4e -- Note Purchase Agreement between the Registrant and GFL Performance Fund Limited,
dated January 31, 1996 (filed as Exhibit 4c to Registrant's Registration Statement
on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4f -- Convertible Note issued by the Registrant to GFL Performance Fund Limited, dated
February 7, 1996 (filed as Exhibit 4d to Registrant's Registration Statement on
Form S-3 (File No. 333-1748) and incorporated herein by reference).
50
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
4g -- Registration Rights Agreement between the Registrant and GFL Performance Fund
Limited, dated February 7, 1996 (filed as Exhibit 4e to Registrant's Registration
Statement on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4h -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer
Securities Inc., dated February 16, 1996 (filed as Exhibit 4e to Registrant's
Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4i -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer
Securities Inc., dated February 29, 1996 (filed as Exhibit 4f to Registrant's
Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4j -- Registration Rights Agreement between the Registrant and Julius Baer Securities
Inc., dated February 16, 1996 (filed as Exhibit 4g to Registrant's Current Report
on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4k -- Registration Rights Agreement between the Registrant and Julius Baer Securities
Inc., dated February 29, 1996 (filed as Exhibit 4h to Registrant's Current Report
on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4l -- Investment Banking Agreement between the Registrant and H. J. Meyers & Co., Inc.,
dated November 20, 1995 (filed as Exhibit 4f to Amendment No. 1 to Registrant's
Registration Statement on Form S-3, No. 333-1748, and incorporated herein by
reference).
4m -- Common Stock Purchase Warrant issued by the Registrant to H. J. Meyers & Co.,
Inc., dated November 20, 1995 (filed as Exhibit 4g to Amendment No. 1 to Registrant's
Registration Statement on Form S-3, No. 333-1748, and incorporated herein by
reference).
4n -- Form of Warrant Agent Agreement (filed as Exhibit 4g to Registrant's Registration
Statement on Form S-1, No. 33-71416, and incorporated by reference).
10a* -- 1989 Stock Option Plan, as amended (filed as Exhibit 10c to Registrant's Registration
Statement on Form S-18, No. 33-31836-B, and incorporated by reference).
10b* -- Form of Incentive Stock Option Agreement under 1989 Stock Option Plan of the
Registrant (filed as Exhibit 4.6 to Registrant's Registration Statement on
Form S-8, No.33-66826, and incorporated by reference).
10c* -- Form of Non-Qualified Stock Option Agreement under 1989 Stock Option Plan of the
Registrant (filed as Exhibit 4.7 to Registrant's Registration Statement on Form
S-8, No. 33-66826, and incorporated by reference).
10d* -- 1991 Stock Plan (filed as Exhibit 10z to Registrant's Registration Statement on
Form S-18, No. 33-31836-B, and incorporated by reference).
10e* -- Form of Incentive Stock Option Agreement under 1991 Plan (filed as Exhibit 10aa
to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated
by reference).
10f* -- Form of Non-Qualified Stock Option Agreement under 1991 Plan (filed as Exhibit
10bb to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and
incorporated by reference).
10g* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
to Dr. Ian Ferrier (filed herewith).
10h* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
to Steven Georgiev (filed herewith).
10i* -- Employment Agreement dated September 1, 1989 by and between the Company and Dr.
Indu A. Muni (filed as Exhibit 10a to Registrant's Registration Statement on Form
S-18, No. 33-31836-B, and incorporated by reference).
51
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
10j* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Indu
A. Muni (filed as Exhibit 10bb to Registrant's Registration Statement on Form
S-1, No. 33-71416, and incorporated by reference).
10k* -- Employment Agreement dated October 1, 1991 by and between the Company and Dr.
F. Howard Schneider (filed as Exhibit 10w to Registrant's Registration Statement
on Form S-18, No. 33-31836-B, and incorporated by reference).
10l* -- Employment Agreement dated November 1, 1991 by and between the Company and Dhananjay
G. Wadekar (filed as Exhibit 10x to Registrant's Registration Statement on Form
S-18, No. 33-31836-B, and incorporated by reference).
10m* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Dhananjay
G. Wadekar (filed as Exhibit 10cc to Registrant's Registration Statement on Form
S-1, No. 33-71416, and incorporated by reference).
10n -- Lease Agreement dated September 26, 1991 by and between the Company and The 99
Erie Street Realty Trust and the Edward S. Stimpson Trust with respect to its
facility at 99 Erie Street, Cambridge, Massachusetts (previously filed as the
only Exhibit to Registrant's Form 10-Q for the quarter ended September 30, 1991).
10o -- Amendment to Lease Agreement dated May 15, 1992 by and between the Company and
The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed herewith).
10p -- Second Amendment to Lease Agreement dated May 31, 1993 by and between the Company
and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
10w to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1993, and incorporated by reference).
10q -- Third Amendment to Lease Agreement dated April 1, 1995 by and between the Company
and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
10r to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1995, and incorporated by reference).
10r -- Exercise of Option to Extend Lease Term dated May 3, 1996, from the Company to
Meredith & Grew, Incorporated with respect to its facility at 99 Erie Street,
Cambridge, Massachusetts (filed herewith).
10s -- Lease Agreement dated November 29, 1984 between Hollywood Court Associates and
Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood
Court, South Plainfield, New Jersey (filed herewith).
10t -- Space Expansion and Term Extension Agreement dated April 1988 between Hollywood
Court Associates and Able Laboratories, Inc. with respect to the Company's facility
at 6 Hollywood Court, South Plainfield, New Jersey (filed herewith).
10u -- Assignment of Lease dated April 1989 between Hollywood Court Associates and CVN
Associates L.P. with respect to the Company's facility at 6 Hollywood Court, South
Plainfield, New Jersey (filed herewith).
10v -- Space Expansion Agreement dated June 1993 between CVN Associates, L.P. and Able
Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed herewith).
10w -- Term Extension Agreement dated June 1993 between CVN Associates, L.P. and Able
Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed herewith).
10x -- Assignment of Lease dated August 19, 1996 between Able Laboratories, Inc. and
Able Acquisition Corp. (predecessor corporation to Able) with respect to the Company's
facility at 6 Hollywood Court, South Plainfield, New Jersey (filed herewith).
52
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
10y -- Landlord's Consent to Assignment of Lease dated August 19, 1996 among CVN Associates,
L.P., Able Acquisition Corp. (predecessor corporation to Able), Able Laboratories,
Inc. and the Company with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed herewith).
10z -- Guaranty of Lease dated August 19, 1996 between the Company and Able Laboratories,
Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield,
New Jersey (filed herewith).
21 -- Subsidiary of the Registrant (filed herewith).
23a -- Consent of Wolf & Company, P.C. dated September 25, 1996 (filed herewith).
24a -- Power of Attorney is contained on page 54 of this Annual Report on Form 10-K.
27 -- Financial Data Schedule (filed herewith in electronic format only).
----------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
(c) Exhibits:
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) above.
(d) Financial Statement Schedules:
No financial statement schedules are filed as part of this Form 10-K.
53
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE
CITY OF CAMBRIDGE, COMMONWEALTH OF MASSACHUSETTS ON SEPTEMBER 30, 1996.
DYNAGEN, INC.
By: /s/ DHANANJAY G. WADEKAR
----------------------------
DHANANJAY G. WADEKAR
CHAIRMAN OF THE BOARD OF
DIRECTORS AND
EXECUTIVE VICE PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED; AND EACH OF THE
UNDERSIGNED OFFICERS AND DIRECTORS OF DYNAGEN, INC. HEREBY SEVERALLY CONSTITUTES
AND APPOINTS DHANANJAY G. WADEKAR, DR. INDU A. MUNI AND JOHN M. HESSION, AND
EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER TO THEM, AND EACH OF THEM SINGLY, TO SIGN FOR HIM, IN HIS NAME IN THE
CAPACITY INDICATED BELOW, ALL AMENDMENTS TO SUCH REPORT ON FORM 10-K, HEREBY
RATIFYING AND CONFIRMING HIS SIGNATURE AS IT MAY BE SIGNED BY HIS ATTORNEYS TO
SUCH REPORT AND ANY AND ALL AMENDMENTS THERETO.
NAME CAPACITY DATE
---- -------- ----
/s/ DHANANJAY G. WADEKAR Chairman of the Board, Executive September 30, 1996
- ----------------------------- Vice President and Director
DHANANJAY G. WADEKAR
/s/ DR. INDU A. MUNI President, Chief Executive Officer, September 30, 1996
- ----------------------------- Treasurer, (Principal Executive,
DR. INDU A. MUNI Financial and Accounting Officer)
and Director
/s/ DR. F. HOWARD SCHNEIDER Senior Vice President -- Technology September 30, 1996
- ----------------------------- and Director
DR. F. HOWARD SCHNEIDER
/s/ STEVEN GEORGIEV Director September 30, 1996
- -----------------------------
STEVEN GEORGIEV
/s/ DR. IAN R. FERRIER Director September 30, 1996
- -----------------------------
DR. IAN R. FERRIER
54
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--- ----------------------
2a -- Asset Purchase Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition
Corp., Able Laboratories, Inc. and Alpharma USPD Inc. (filed as Exhibit 2.1 to
Registrant's Form 8-K dated August 19, 1996 and incorporated by reference).
2b -- Product Supply Agreement, dated August 9, 1996, among DynaGen, Inc., Able Acquisition
Corp. and Able Laboratories, Inc. (filed as Exhibit 2.2 to Registrant's Form 8-K
dated August 19, 1996 and incorporated by reference).
3a -- Certificate of Incorporation, as amended (filed as Exhibit 3a to Registrant's
Registration Statement on Form S-1, No. 33-46445, and incorporated by reference).
3b -- By-laws, as amended (filed as Exhibit 3b to Registrant's Registration Statement
on Form S-1, No. 33-46445, and incorporated by reference).
4a -- Specimen Common Stock Certificate (filed as Exhibit 4a to Registrant's Registration
Statement on Form S-18, No. 33-31836-B, and incorporated by reference).
4b -- Specimen Warrant Certificate (filed as Exhibit 4b to Registrant's Registration
Statement on Form S-1, No. 33-46445, and incorporated by reference).
4c -- Form of Warrant Agreement (filed as Exhibit 1d to Registrant's Registration Statement
on Form S-1, No. 33-46445, and incorporated by reference).
4d -- Subscription Agreement between the Registrant and GFL Performance Fund Limited,
dated January 31, 1996 (filed as Exhibit 4b to Registrant's Registration Statement
on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4e -- Note Purchase Agreement between the Registrant and GFL Performance Fund Limited,
dated January 31, 1996 (filed as Exhibit 4c to Registrant's Registration Statement
on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4f -- Convertible Note issued by the Registrant to GFL Performance Fund Limited, dated
February 7, 1996 (filed as Exhibit 4d to Registrant's Registration Statement on
Form S-3 (File No. 333-1748) and incorporated herein by reference).
4g -- Registration Rights Agreement between the Registrant and GFL Performance Fund
Limited, dated February 7, 1996 (filed as Exhibit 4e to Registrant's Registration
Statement on Form S-3 (File No. 333-1748) and incorporated herein by reference).
4h -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer
Securities Inc., dated February 16, 1996 (filed as Exhibit 4e to Registrant's
Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4i -- Offshore Securities Subscription Agreement between the Registrant and Julius Baer
Securities Inc., dated February 29, 1996 (filed as Exhibit 4f to Registrant's
Current Report on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4j -- Registration Rights Agreement between the Registrant and Julius Baer Securities
Inc., dated February 16, 1996 (filed as Exhibit 4g to Registrant's Current Report
on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4k -- Registration Rights Agreement between the Registrant and Julius Baer Securities
Inc., dated February 29, 1996 (filed as Exhibit 4h to Registrant's Current Report
on Form 8-K dated February 2, 1996 and incorporated herein by reference).
4l -- Investment Banking Agreement between the Registrant and H. J. Meyers & Co., Inc.,
dated November 20, 1995 (filed as Exhibit 4f to Amendment No. 1 to Registrant's
Registration Statement on Form S-3, No. 333-1748, and incorporated herein by
reference).
INDEX TO EXHIBITS -- (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--- ------------------
4m -- Common Stock Purchase Warrant issued by the Registrant to H. J. Meyers & Co.,
Inc., dated November 20, 1995 (filed as Exhibit 4g to Amendment No. 1 to Registrant's
Registration Statement on Form S-3, No. 333-1748, and incorporated herein by
reference).
4n -- Form of Warrant Agent Agreement (filed as Exhibit 4g to Registrant's Registration
Statement on Form S-1, No. 33-71416, and incorporated by reference).
10a* -- 1989 Stock Option Plan, as amended (filed as Exhibit 10c to Registrant's Registration
Statement on Form S-18, No. 33-31836-B, and incorporated by reference).
10b* -- Form of Incentive Stock Option Agreement under 1989 Stock Option Plan of the
Registrant (filed as Exhibit 4.6 to Registrant's Registration Statement on
Form S-8, No.33-66826, and incorporated by reference).
10c* -- Form of Non-Qualified Stock Option Agreement under 1989 Stock Option Plan of the
Registrant (filed as Exhibit 4.7 to Registrant's Registration Statement on Form
S-8, No. 33-66826, and incorporated by reference).
10d* -- 1991 Stock Plan (filed as Exhibit 10z to Registrant's Registration Statement on
Form S-18, No. 33-31836-B, and incorporated by reference).
10e* -- Form of Incentive Stock Option Agreement under 1991 Plan (filed as Exhibit 10aa
to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and incorporated
by reference).
10f* -- Form of Non-Qualified Stock Option Agreement under 1991 Plan (filed as Exhibit
10bb to Registrant's Registration Statement on Form S-18, No. 33-31836-B, and
incorporated by reference).
10g* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
to Dr. Ian Ferrier (filed herewith).
10h* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
to Steven Georgiev (filed herewith).
10i* -- Employment Agreement dated September 1, 1989 by and between the Company and Dr.
Indu A. Muni (filed as Exhibit 10a to Registrant's Registration Statement on Form
S-18, No. 33-31836-B, and incorporated by reference).
10j* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Indu
A. Muni (filed as Exhibit 10bb to Registrant's Registration Statement on Form
S-1, No. 33-71416, and incorporated by reference).
10k* -- Employment Agreement dated October 1, 1991 by and between the Company and Dr.
F. Howard Schneider (filed as Exhibit 10w to Registrant's Registration Statement
on Form S-18, No. 33-31836-B, and incorporated by reference).
10l* -- Employment Agreement dated November 1, 1991 by and between the Company and Dhananjay
G. Wadekar (filed as Exhibit 10x to Registrant's Registration Statement on Form
S-18, No. 33-31836-B, and incorporated by reference).
10m* -- Amendment 1 to Key Employment Agreement by and between DynaGen, Inc. and Dhananjay
G. Wadekar (filed as Exhibit 10cc to Registrant's Registration Statement on Form
S-1, No. 33-71416, and incorporated by reference).
10n -- Lease Agreement dated September 26, 1991 by and between the Company and The 99
Erie Street Realty Trust and the Edward S. Stimpson Trust with respect to its
facility at 99 Erie Street, Cambridge, Massachusetts (previously filed as the
only Exhibit to Registrant's Form 10-Q for the quarter ended September 30, 1991).
INDEX TO EXHIBITS -- (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--- ------------------
10o -- Amendment to Lease Agreement dated May 15, 1992 by and between the Company and
The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed herewith).
10p -- Second Amendment to Lease Agreement dated May 31, 1993 by and between the Company
and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
10w to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1993, and incorporated by reference).
10q -- Third Amendment to Lease Agreement dated April 1, 1995 by and between the Company
and The 99 Erie Street Realty Trust and the Edward S. Stimpson Trust with respect
to its facility at 99 Erie Street, Cambridge, Massachusetts (filed as Exhibit
10r to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1995, and incorporated by reference).
10r -- Exercise of Option to Extend Lease Term dated May 3, 1996, from the Company
to Meredith & Grew, Incorporated with respect to its facility at 99 Erie Street,
Cambridge, Massachusetts (filed herewith).
10s -- Lease Agreement dated November 29, 1984 between Hollywood Court Associates and
Able Laboratories, Inc. with respect to the Company's facility at 6 Hollywood
Court, South Plainfield, New Jersey (filed herewith).
10t -- Space Expansion and Term Extension Agreement dated April 1988 between Hollywood
Court Associates and Able Laboratories, Inc. with respect to the Company's facility
at 6 Hollywood Court, South Plainfield, New Jersey (filed herewith).
10u -- Assignment of Lease dated April 1989 between Hollywood Court Associates and CVN
Associates L.P. with respect to the Company's facility at 6 Hollywood Court, South
Plainfield, New Jersey (filed herewith).
10v -- Space Expansion Agreement dated June 1993 between CVN Associates, L.P. and Able
Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed herewith).
10w -- Term Extension Agreement dated June 1993 between CVN Associates, L.P. and Able
Laboratories, Inc. with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed herewith).
10x -- Assignment of Lease dated August 19, 1996 between Able Laboratories, Inc. and
Able Acquisition Corp. (predecessor corporation to Able) with respect to the Company's
facility at 6 Hollywood Court, South Plainfield, New Jersey (filed herewith).
10y -- Landlord's Consent to Assignment of Lease dated August 19, 1996 among CVN Associates,
L.P., Able Acquisition Corp. (predecessor corporation to Able), Able Laboratories,
Inc. and the Company with respect to the Company's facility at 6 Hollywood Court,
South Plainfield, New Jersey (filed herewith).
10z -- Guaranty of Lease dated August 19, 1996 between the Company and Able Laboratories,
Inc. with respect to the Company's facility at 6 Hollywood Court, South Plainfield,
New Jersey (filed herewith).
21 -- Subsidiary of the Registrant (filed herewith).
23a -- Consent of Wolf & Company, P.C. dated September 25, 1996 (filed herewith).
24a -- Power of Attorney is contained on page 54 of this Annual Report on Form 10-K.
27 -- Financial Data Schedule (filed herewith in electronic format only).
- ----------
* Indicates a management contract or any compensatory plan, contract
or arrangement.