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
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JULY 1, 1996 TO DECEMBER 31, 1996.
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. [ ]
As of April 24, 1997, 30,114,206 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 April
24, 1997, based upon the closing price of such stock on the Nasdaq Stock
Market's SmallCap Market ("Nasdaq") on that date ($1.22) was $33,589,902.
================================================================================
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 healthcare market.
During 1996, DynaGen began expanding its business focus from being a development
and licensing company to building a diversified healthcare company focused on
the manufacture and distribution of generic drug products and specialty
pharmaceuticals, as well as the continued development of therapeutic and
diagnostic products. The Company intends to implement this strategy through the
acquisition of businesses, technologies and products that the Company believes
are undervalued, as well as through continued internal product development. In
August 1996, the Company acquired the tablet business of Able Laboratories, Inc.
("Able"), a generic pharmaceutical product subsidiary of Alpharma, Inc.
Prior to the Able acquisition, DynaGen's business consisted of developing
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. The Company is currently conducting a
multi-center pivotal Phase 3 clinical trial of NicErase-SL. Results from this
trial are anticipated to be available in the second quarter of 1997. 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. In addition, the Company is
also considering alternative delivery formats for its lobeline-based NicErase
technology and intends to seek strategic partners to further develop and market
these delivery formats. In December 1996, the Company licensed worldwide,
exclusive rights to develop a lobeline sulfate nasal delivery formulation,
NicErase-NS, to Nastech Pharmaceutical Company, Inc. ("Nastech").
DynaGen is also developing OrthoDyn(r), a bioresorbable bone cement system
for bone and joint repair which is currently in the preclinical development
stage. In April 1997, the Company entered into an agreement with Smith & Nephew,
plc ("Smith & Nephew") providing Smith & Nephew an exclusive period of 12 months
to evaluate the OrthoDyn product's human orthopaedic applications. Additionally,
the Company expanded its resorbable polymer technology patent base by obtaining
a patent for its Sleeper(tm) vaccine technology which enables vaccines to be
delivered in a single administration rather than in multiple vaccinations over a
period of time.
In December 1996, the Company obtained United States Food and Drug
Administration (the "FDA") clearance to market its proprietary NicCheck(r) I
product for detection of nicotine and/or its metabolites in urine as an aid in
indicating smoking status of individuals. The Company has recently commenced
marketing NicCheck to physicians, smoking cessation programs, HMOs, and
insurance companies.
In December 1996, the Company licensed technology from BioLoc, Inc.
("BioLoc") that is intended to improve the accuracy and efficiency, and reduce
the overall cost of, breast surgical biopsy procedures. The Company is also
conducting early stage research on a proprietary bacterial extract for the
treatment of infectious diseases.
The Company changed its year end from June 30 to December 31. Accordingly,
the Company began a new 12 month fiscal year on January 1, 1997. The six month
period resulting from this change, July 1, 1996 through December 31, 1996, is
referred to as the "Transition Period."
MULTISOURCE BUSINESS
The U.S. multisource or generic pharmaceutical market approximates $8
billion in annual sales. This sector has grown due to a number of factors
including the large number of drugs coming off patent, the growing importance
and impact of managed care organizations which prefer lower cost generics to
brand products, and the increasing physician, pharmacist and consumer acceptance
of generic drugs. 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.
1
To successfully participate in the multisource business, DynaGen intends to
compete with other generic companies through vertical integration of key
elements of the multisource business including manufacturing, packaging and
distribution. In August 1996, the Company acquired Able, a 46,000 square foot
tablet and suppository manufacturing facility. As part of this acquisition, the
Company obtained rights to eleven approved Abbreviated New Drug Applications
("ANDAs") as well as other generic formulations. Since the acquisition, DynaGen
has updated and expanded the manufacturing capability, validated several of the
acquired products, retrained employees in quality assurance procedures, and has
successfully met FDA requirements and guidelines to manufacture these products.
The Company is increasing sales of its current generic products through the
expansion of its distribution networks and by providing contract manufacturing
services to various pharmaceutical companies. The following is a list of generic
products that the Company obtained in the Able acquisition:
GENERIC PRODUCT THERAPEUTIC CATEGORY BRAND NAME(1)
--------------- -------------------- -------------
ANDA PRODUCTS:
Clorazepate tablets (three dosages) Anxiolytic Tranxene
Clorazepate capsules (three dosages)(2) Anxiolytic Tranxene
Loperamide tablets(2) Antidiarrheal Imodium
Acetaminophen suppositories (three dosages)(2) Analgesic Tylenol suppositories
Hydrocortisone acetate cream (1%)(2) 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.
(2) These products are not presently being marketed by the Company.
In April 1997, the Company signed an agreement with Kali Laboratories Inc.
("Kali"), a privately-held company specializing in the development of generic
drugs. The agreement provides for Kali to assist DynaGen in developing seven
specific generic drugs and obtaining FDA approval for these drugs. The patents
on these targeted drugs have expired or will expire over the next five years and
provide an opportunity for DynaGen to introduce generic equivalents. Kali's
management and its scientific staff have significant experience in developing
and obtaining approvals on generic drugs. DynaGen believes that by outsourcing
the development and approval activities it will benefit from the experience of a
highly seasoned team of scientists while reducing the requirement of major
investment in personnel and laboratory equipment.
To complement the acquisition of Able and pursue vertical integration, the
Company recently entered into an agreement to acquire all of the outstanding
shares of Superior Pharmaceutical Company ("Superior"), a privately-held
distributor of generic pharmaceutical products. Superior has its primary
operations in Cincinnati, Ohio, where it employs approximately 65 people, and
has 40,000 square feet of office, warehouse and distribution space. Superior
reported 1996 sales of approximately $32 million with pre-tax income of over $3
million. Under the terms of the agreement, DynaGen will pay Superior's
shareholders a total of $16.5 million, consisting of cash, three-year notes and
shares of DynaGen Common Stock. The shareholders may also receive certain cash
incentive payments based on Superior's performance during the three years
following the close of the transaction. The aquisition of Superior is subject to
customary closing conditions and the Company intends to close this acquisition
during the second quarter of 1997. There can be no assurance that the Superior
aquisition will close in the second quarter of 1997, or at all.
2
The Company plans to raise capital in order to finance the proposed
acquisition of Superior through the sale of its securities. There can be no
assurance that the Company will be able to secure this financing or that such
financing will be available on favorable terms. If the Company is unable to
obtain such financing, it will be unable to close the Superior acquisition.
Concurrently with the completion of the proposed Superior acquisition, Superior
and the Company intend to enter into a line of credit to provide financing for
Superior. The Company and Superior are currently engaged in discussions with a
commercial bank regarding such line of credit. There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company intends to fund Superior's operations with the line of credit and
Superior's cash generated from operations.
SPECIALTY PHARMACEUTICAL BUSINESS
DynaGen's specialty or emerging pharmaceutical business strategy is to
create a business based on branded generic products and multi-drug combinations
in convenient packaging for specific indications and treatments. Physicians
routinely prescribe two or more separate drugs for the treatment of several
common medical problems. These drugs are separately prescribed and dispensed but
are taken at various times during the course of the day as directed by the
physician. A major problem in such multi-drug therapies is lack of compliance by
the patient and therefore less than desirable therapeutic efficacy. For this
reason, the Company initially intends to focus its efforts in this area on
compliance enhancement packaging. DynaGen has identified near-term opportunities
in compliance enhancement packaging in the areas of women's healthcare and
respiratory infection. The Company is developing convenience packaging which it
believes will provide ease of prescription, dispensing, storage and
self-administration. Convenience packaging also provides cost advantages to the
consumer since there is only a single "co-pay" instead of multiple co-payments.
The Company's proposed specialty pharmaceutical products are in an early
stage of development and therefore are subject to the risks of unsuccessful
development, marketing and commercialization. These proposed products will
require substantial further development which may include clinical testing,
bio-equivalency studies and regulatory approval, all at a substantial cost to
the Company. The use of specialty pharmaceuticals will require the acceptance of
a new way of prescribing medication and there can be no assurance a market will
develop for such products. Additional investment by the Company in
manufacturing, marketing and sales infrastructures will also be required prior
to commercialization. No assurance can be given that these development efforts
will be successfully completed or that the products, if introduced, will be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
THERAPEUTIC PRODUCTS
OVERVIEW OF SMOKING CESSATION THERAPY
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. 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.
Until December 1993, there was 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 bloodstream. These formulations have not
been proven to be effective and they have not received FDA approval.
3
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, focusing primarily on the sublingual tablet, NicErase-SL.
NICERASE-SL. DynaGen is developing NicErase-SL, a sublingual tablet that is
held under the tongue where it dissolves in one to three minutes and releases
lobeline, the active ingredient of the tablet. 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, as is the case for other FDA
approved prescription smoking cessation products.
DynaGen has shown in clinical studies that NicErase-SL reduces symptoms of
tobacco withdrawal and is now evaluating its effectiveness as an aid in smoking
cessation in a 750 subject multi-center pivotal Phase 3 clinical trial. Results
from this first trial are anticipated to be available in the second quarter of
1997. 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-SL 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.
In light of the shift in the smoking cessation market from prescription to
OTC products and of the expanding availability of different dosage formats of
nicotine-based smoking cessation products such as the nicotine nasal spray, the
Company is refocusing its traditional development strategy by concentrating on
outlicensing its technology to one or more strategic partners. The Company
intends to minimize research and development expenditures on products which have
a long development and approval process. Since alternative drug delivery formats
have proven successful in the nicotine replacement therapy market, the Company
is considering the development of additional delivery formats for NicErase, such
as a transdermal patch and adhesive buccal wafer. The Company believes that a
product available in multiple delivery dosage formats may create more diverse
marketing opportunities.
In December 1996, DynaGen licensed its technology for the development of a
lobeline-containing nasal spray to Nastech. Under the terms of this agreement,
Nastech will be responsible for all remaining preclinical and clinical
development of the product. DynaGen and Nastech will divide equally all future
license and sales royalty revenues.
To date, the Company has not entered into any collaborative arrangements
with any third party with respect to the development and commercialization of
NicErase, except for the agreement with Nastech. The Company's future NicErase
development and commercialization activities will depend on a number of factors
including the results of the Company's current pivotal Phase 3 clinical trial
for NicErase-SL, 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 future clinical
trials, or that the Company will receive the necessary regulatory approvals to
commercialize NicErase-SL or any other NicErase format. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
ORTHODYN BIORESORBABLE BONE CEMENT
The global orthopaedics market continues to expand, and the Company believes
that resorbable materials are one of the most rapidly growing sectors. With
significant growth projected in the elderly population comes an increased demand
for orthopaedic materials. Advances continue to be made in the design of total
joint prostheses and other fixation devices. The area of bioresorbable bone
substitutes is of prime interest to the major orthopaedics manufacturers, with
most having the goal of adding such materials to their product line.
4
OrthoDyn is based on a family of bioresorbable, biocompatible polyesters
derived from compounds naturally occurring in the body. It is a composite
polymer/filler system and has strength and stiffness more similar to human bone
than fully ceramic systems. It is initially moldable, forming a very cohesive
dough, cures fast (10 to 30 minutes) with little or no heat evolution, and has
strength, stiffness and toughness similar to human bone. Preclinical studies
have demonstrated acceptable specifications with regard to degradation time,
biocompatibility and strength. These studies also have provided early
indications that new bone effectively grows into and replaces the cement. The
polymer component also has potential use for formation of preformed
bioresorbable pins, plates and screws.
In line with DynaGen's goal to minimize development expenditures on products
which have long-term development and clinical approval programs, the Company and
Smith & Nephew have recently entered into an agreement providing Smith & Nephew
with an exclusive period of 12 months to evaluate the OrthoDyn product's human
orthopaedic applications. There can be no assurance that the Company will enter
into a definitive agreement with Smith & Nephew or that such an agreement will
prove successful for DynaGen. Furthermore, no assurance can be given that
continued preclinical development of OrthoDyn will be successful, that the
necessary regulatory approvals will be obtained or that the OrthoDyn products
will be successfully marketed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results."
ADDITIONAL BIORESORBABLE POLYMER TECHNOLOGIES
Vaccine delivery represents a potential area for the application of the
Company's controlled release delivery systems. DynaGen's patent application
covering its Sleeper(tm) technology has recently been granted notice of
allowance from the U.S. Patent and Trademark Office. This technology involves a
unique combination of a bioresorbable polymer and a vaccine such that, upon
injection, the Sleeper delivery system immediately releases the initial amount
of vaccine corresponding to the first shot and then, after a predetermined
period of time, will release in a "burst" the second load of vaccine
representing the "booster" shot.
DynaGen also has developed a polymer system that can be applied to the
controlled, sustained release of a wide variety of drugs. The Company is
pursuing both corporate alliances and outlicensing approaches for further
development of these resorbable polymer technologies. There can be no assurance
that the Company will be able to find a suitable development partner for these
bioresorbable polymer technologies, that development efforts for these
technologies will be successfully completed or that the products, if introduced,
will be successfully marketed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results."
OTHER THERAPEUTIC PRODUCTS
The Company is also conducting early stage research on a proprietary
bacterial extract for the treatment of infectious diseases and 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."
DIAGNOSTIC PRODUCTS
The health care industry has shifted 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.
5
BREAST BIOPSY TECHNOLOGY
DynaGen recently licensed technology that is intended to improve the
accuracy and efficiency, and reduce the overall cost, of breast surgical biopsy
procedures from BioLoc, a privately held Boston-based company. The acquisition
of the BioLoc technology fits DynaGen's strategy of developing distinctive
healthcare products based on technologies acquired by the Company from outside
sources.
Core needle biopsy, the most commonly used non-surgical procedure for
diagnosis of suspicious lesions in breasts, is limited in its ability due to the
difficulty in capturing the targeted tissue and the need for multiple attempts
to obtain accurate and sufficient samples, resulting in unnecessary pain,
scarring and anxiety. The BioLoc technology is intended to overcome the
shortcomings of the core needle biopsy procedure by accurately guiding the
surgical biopsy instruments directly to the suspected tissue lesion identified
during mammography examination. Imaging and location tracking technologies are
combined to provide a three-dimensional view of the breast tissue which the
Company believes will allow the accurate depiction of the biopsy target and
guidance for its surgical removal. The Company is now completing its patent
application covering this technology and developing a prototype system.
The BioLoc technology is in an early stage of development and therefore is
subject to the risks of unsuccessful development, marketing and
commercialization. This proposed product will require substantial further
development and preclinical and clinical testing and regulatory approval, at a
substantial cost to the Company. Additional investment by the Company in
manufacturing, marketing and sales infrastructures will also be required prior
to commercialization. No assurance can be given that these development efforts
will be successfully completed or that the products, if introduced, will be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
SMOKING CESSATION AND RELATED DIAGNOSTIC PRODUCTS
NICCHECK I. NicCheck I is a simple colorometric test for the detection of
nicotine and/or 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 I can be used both as a companion
product for NicErase-SL or independently for clinical evaluation. The NicCheck I
result may be used to determine the appropriate level of nicotine replacement
therapy during smoking cessation efforts. Smokers who are trying to quit may
become more motivated by observing a decrease in color intensity of the NicCheck
I results as they reduce nicotine consumption. NicCheck I may also prove to be a
cost-effective means for insurance companies to employ risk assessment/risk
management strategies. The FDA recently granted the Company clearance to market
NicCheck I in the United States and the Company is now attempting to establish
multilevel sales and marketing approaches.
NICCHECK II. The Company is initiating preclinical studies for detecting
exposure to secondhand smoke. Secondhand smoke causes and exacerbates a number
of respiratory problems in nonsmokers. The Company believes that physicians
could use NicCheck II to promote early intervention.
TUBERCULOSIS DIAGNOSTIC PRODUCTS
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 from 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 continues to pursue
licensing arrangements for the promotion and distribution of these products, but
does not expect to generate material amounts of revenue from sales of these
products.
6
SALES AND MARKETING
The Company's generic therapeutic products are sold through private label
arrangements primarily through direct sales efforts to drug wholesalers,
distributors and retail drug chains and other pharmaceutical companies. In the
near future, the Company also intends to market its generic therapeutic products
under its own "Able Laboratories" name. The Company markets its diagnostic
products under its own name primarily through distributors.
The Company has relatively limited 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
During the Transition Period, approximately 85% of total revenues were
derived from three major customers: Schein Pharmaceutical ("Schein") (53%),
Genelabs Diagnostic Pte LTD ("Genelabs") (18%) and Alpharma, Inc. (14%). 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 (27%). There is no
assurance that the revenues from Schein and Genelabs will recur. The revenue
from BMP represents the recognition over two years of a one-time payment of
$500,000 and will not recur. In addition, the revenue from Alpharma, Inc. was
derived from a temporary supply agreement which ended in February 1997 and is
not expected to recur. 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.
INDUSTRY SEGMENTS AND SALES BY GEOGRAPHIC AREA
Financial information with respect to the Company's business segments and
product sales by geographic area is presented in Note 11 of "Notes to
Consolidated Financial Statements."
BACKLOG
The dollar amount of backlog orders for the Company's products as of
December 31, 1996 was approximately $300,000. Although orders are subject to
cancellation without penalty, management expects to fill substantially all of
them in the near future.
MANUFACTURING AND SUPPLIERS
DynaGen's generic products are manufactured at its Able Laboratories
facility in South Plainfield, New Jersey. The principal components used in the
Company's generic products are active and inactive pharmaceutical ingredients
and certain packaging materials. Sources for certain materials for the Company's
products must be approved by the FDA, and in many instances only one source has
been approved. Active raw material ingredients are purchased primarily from
United States distributors of bulk pharmaceutical materials manufactured by
foreign companies. To date, the Company has experienced no significant
difficulty in obtaining raw materials. However, 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 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Future Results."
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.
Nicheck I is produced by a contract manufacturer in the United States. 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.
7
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 ("cGMP") as prescribed by the FDA.
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 pharmaceutical 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. Revenues and gross profit derived from generic
pharmaceutical products tend to follow a pattern based on regulatory and
competitive factors unique to the generic pharmaceutical industry. As patents
for brand name products and related exclusivity periods mandated by regulatory
authorities expire, the first generic manufacturer to receive regulatory
approval for generic equivalents of such products is usually able to achieve
relatively high revenues and gross profit. As other generic manufacturers
receive regulatory approvals on competing products, prices and revenues
typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical market continues to intensify as the pharmaceutical industry
adjusts to increased pressures to contain health care costs. Brand name
companies are increasingly selling their products into the generic market
directly by acquiring or forming strategic alliances with generic pharmaceutical
companies. No regulatory approvals are required for a brand name manufacturer to
sell directly or through a third party to the generic market, nor do such
manufacturers face any other significant barriers to entry into such market.
These competitive factors may have a material adverse effect on the Company's
ability to sell its generic products.
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 nicotine chewing gum, nicotine nasal spray and the nicotine patch which
several pharmaceutical companies, such as SmithKline Beecham, Hoechst Marion
Roussel, McNeil Consumer Products Co. and Ciba Self-Medication have developed
and are marketing in the United States and elsewhere. Competition has been
increasing due to the 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 results of
pivotal Phase 3 clinical trials will prove successful for the Company's
NicErase-SL product candidate or that it 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 in the bone repair market,
including, but not limited to, Johnson & Johnson Co., Pfizer (Howmedica) and
Bristol-Myers Squibb Co. (Zimmer). 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
8
GOVERNMENT REGULATION
The Company's therapeutic and diagnostic products will be subject to
significant government regulation in the United States principally by the FDA,
and to a lesser extent, by the Drug Enforcement Administration, state
governments and other countries. Federal and state regulations and statutes
impose certain requirements on the testing, manufacture, labeling, storage,
recordkeeping, approval, advertising and promotion of the Company's products.
Noncompliance with applicable requirements can result in judicially and
administratively imposed sanctions including seizures of adulterated or
misbranded products, injunction actions, fines and criminal prosecutions.
Administrative enforcement measures can also involve product recalls and the
refusal of the government to approve new drug applications ("NDAs") or ANDAs. In
order to conduct clinical tests and 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.
To obtain FDA approval for a new drug or generic equivalent, a prospective
manufacturer must, among other things, comply with the FDA's cGMP regulations.
The FDA may inspect the manufacturer's facilities to assure such compliance
prior to approval or at any other reasonable time, and the Company must follow
cGMP regulations at all times during the manufacture and other processing of
drugs. To comply with the requirements set forth in these regulations, the
Company must continue to expend significant time to provide adequate resources
in the areas of development, production, quality control and quality assurance.
FDA approval is required before the Company can market any new drug,
including a generic equivalent of a previously approved drug or a new indication
or delivery method for a previously approved drug. There are three principal
ways to obtain FDA approval of a new drug:
1) New Drug Application (NDA) -- A prospective manufacturer must submit
to the FDA full reports of well-controlled clinical studies and other data
to prove that a drug is safe and effective and meets other requirements for
approval.
2) "Paper" NDAs -- Under certain circumstances, the FDA will permit
safety and efficacy to be demonstrated by submission of published literature
and journal articles.
3) Abbreviated New Drug Applications (ANDA) -- The Waxman-Hatch Act of
1984 established a statutory procedure for the submission and FDA review and
approval of ANDAs for generic versions of drugs previously approved by the
FDA. Under the ANDA procedure, the FDA waives the requirement of conducting
complete clinical studies of safety and efficacy, and instead typically
requires the applicant to submit data illustrating that the generic drug
formulation is bioequivalent to a previously approved drug. "Bioequivalence"
means that the rate of absorption and the levels of concentration of a
generic drug in the body needed to produce a therapeutic effect are
substantially equivalent to those of the previously approved drug. For some
drugs, the FDA may require other means of demonstrating that the generic
drug is bioequivalent to the original drug. The NDA and ANDA approval
process generally takes a number of years and involves the expenditure of
substantial resources.
FDA approval of an NDA dealing with 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
9
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, an 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.
The Waxman-Hatch Act establishes certain statutory protections for
FDA-approved drugs, which protections could preclude submission or delay the
approval of a competing ANDA. One such provision allows a five-year market
exclusivity period for NDAs involving new chemical compounds and a three-year
market exclusivity period for NDAs (including different dosage forms) containing
data from new clinical investigations essential to the approval of the
application. Both patented and non-patented drug products are subject to these
market exclusivity provisions. Another provision of the act extends patents for
up to five years as compensation for reduction of the effective market life of
the patent resulting from the time involved in the federal regulatory review
process.
The 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.
The Prescription Drug User Fee Act of 1992, enacted to expedite drug
approval by providing the FDA with resources to hire additional medical
reviewers, imposes three types of user fees on manufacturers of NDA-approved
prescription drugs. Applicants submitting only ANDAs and most other off-patent
drug manufacturers, including the Company, are not currently subject to any of
the three user fees. If the Company submits NDAs for non-ANDA products, the
Company will be subject to user fees.
Penalties for wrongdoing in connection with the development or submission of
an ANDA were established by the Generic Drug Enforcement Act of 1992,
authorizing the FDA to permanently or temporarily bar companies or individuals
from submitting or assisting in the submission of an ANDA. They may also
temporarily deny approval and suspend applications to market generic drugs. The
FDA may also suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct and also has authority to withdraw
approval of an ANDA under certain circumstances and to seek civil penalties. The
Company does not expect the law to have a material impact on the review or
approval of the Company's ANDAs.
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.
The Company's manufacturing subsidiary, Able, currently manufactures several
products which are regulated as "old drugs" and subject to the requirements of
the Over-the-Counter Drug Review regulations promulgated by the FDA. This class
of drugs requires no prior approval from FDA before marketing, but such products
must comply with applicable FDA monographs which specify,
10
among other things, required ingredients, dosage levels, label contents and
permitted uses. These monographs may be changed from time to time, in which case
the Company may be required to change the formulation, packaging or labeling of
any affected product. Changes to monographs normally have a delayed effective
date, so while the Company may have to incur costs to comply with any such
changes, disruption of distribution is not likely.
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.
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 cGMP 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.
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
Able is subject to a consent decree entered by the court on April 9, 1992 in
United States v. Able Laboratories, Inc., Civ. No. 91-4916 (D.N.J.) for failure
to comply with FDA cGMP and has been operating under this consent decree since
April 1992. The principals involved in the issuance of that order are no longer
employed by Able, DynaGen or any of its affiliates. Since the acquisition by
DynaGen, Able has made substantial commitments (both directed and financial) to
improve the plant, personnel, and equipment in order to effect an improvement in
its operations. Key management changes have been made with individuals who have
knowledge and commitment for cGMP in order to ensure continued cGMP compliance.
Ongoing cGMP training on a regularly scheduled basis will also be provided to
Able's employees.
11
Additionally, the latest Establishment Inspection, conducted on November 12,
13, 18, and 19, 1996 under the authority of an Order of Permanent Injunction did
not result in the issuance of an FDA Form 483, and the Establishment Inspection
Report (EIR) classified the inspection as "NN" -- no official action indicated.
The Company is in the process of initiating changes and plans to request the FDA
to join Able in a petition for relief from the consent decree.
PRODUCT LIABILITY AND INSURANCE COVERAGE
The Company presently maintains product liability insurance in the amount of
$3,000,000 for its products presently being marketed. The Company does not
presently maintain product liability insurance on any of its 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 Transition Period, the Company expended $1,092,253 on research and
development activities. 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 has filed several
U.S. and foreign patent applications for processes and products relating to its
controlled release delivery systems, smoking cessation technology, nicotine
detection product, bioresorbable bone cement product, immunological tests for
the diagnosis of mycobacterial disease, and other 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 two 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 and (ii)
sublingual tablet formulations. The Company has received a U.S. patent related
to a controlled release delivery system for drug dependency. In April 1997, the
Company received a notice of allowance from the U.S. patent office for the
Company's pulsed release vaccine delivery technology. 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 Company's generic and specialty pharmaceutical businesses rely upon
unpatented trade secrets and proprietary technologies and processes. No
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise
12
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its right to unpatented trade secrets. The
Company requires its employees, consultants and other advisors to execute
confidentiality agreements. However, there is no assurance that these agreements
will provide meaningful protection or adequate remedies for the Company's trade
secrets in the event of unauthorized use or disclosure of such information.
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 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), NicCheck(R) and OrthoDyn(R) are
registered trademarks of the Company. Sleeper(tm) is a trademark of the Company.
EMPLOYEES
As of April 24, 1997, the Company and its subsidiary had 67 full-time
employees, of whom 16 were employed in selling, general and administrative
activities and 51 were employed in research and development and manufacturing of
its products. Six 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
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 Transition Period.
13
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 -- --
TRANSITION PERIOD
- -----------------
July 1 to September 30, 1996 2.56 1.50 1.63 .88 -- --
October 1 to December 31, 1996 1.88 1.03 1.00 .16 -- --
- --------
(1) Redeemed on December 14, 1995.
On April 24, 1997, the last reported sale prices of the Company's Common
Stock and Public Warrants as reported on Nasdaq were $1.22 and $.50,
respectively.
As of April 24, 1997, based upon information from the Company's transfer
agent, 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.
14
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,
--------------------
TRANSITION
PERIOD ENDED
DECEMBER 31,
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues $ 359,908 $ 555,745 $ 497,553 $ 437,005 $ 883,910 $ 192,332
Costs and Expenses 4,687,745 5,899,650 3,836,295 4,264,141 4,388,575 2,837,862
Loss From Continuing
Operations (4,306,140) (5,097,419) (3,042,383) (3,645,804) (3,405,387) (2,660,040)
Loss From Discontinued
Operations -- -- -- (14,945) (48,095) (40,984)
Net Loss (4,306,140) (5,097,419) (3,042,383) (3,660,749) (3,453,482) (2,701,024)
Loss Per Share:
From Continuing
Operations (.15) (.21) (.14) (.22) (.26) (.23)
From discontinued
Operations -- -- -- -- -- (.01)
Net Loss (.15) (.21) (.14) (.22) (.26) (.24)
Weighted Average Number of
Shares Outstanding 28,794,118 24,433,949 21,179,703 16,517,117 13,070,565 11,471,849
AT JUNE 30,
-----------
AT
DECEMBER 31,
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total Assets $7,463,149 $11,576,666 $5,114,021 $7,834,706 $5,602,289 $ 1,942,367
Convertible Note Payable 1,600,000 2,000,000 -- -- -- --
Total Liabilities 2,409,133 2,733,032 587,207 420,964 441,171 604,238
Working Capital 5,502,295 10,203,693 4,102,747 6,967,894 4,584,747 739,465
Stockholders' Equity 5,054,016 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 develops and markets proprietary and generic therapeutic and
diagnostic products for the human healthcare market. The Company has begun
expanding its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products and specialty pharmaceuticals as well as
the continued development of therapeutic and diagnostic products. The Company
intends to implement this strategy through the acquisition of businesses,
technologies and products that the Company believes are undervalued as well as
through internal product development. In August 1996, the Company acquired the
tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical
product subsidiary of Alpharma, Inc. In addition, the Company has signed an
agreement to purchase all of the outstanding shares Superior Pharmaceutical
Company ("Superior"), a distributor of generic pharmaceuticals.
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. Management
anticipates that revenues from product sales will not be sufficient to fund its
current operations or produce an operating profit until such
15
time as the Company is able to establish acceptance of its products in their
respective markets and expand its distribution channels. 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.
RESULTS OF OPERATIONS
TRANSITION PERIOD ENDED DECEMBER 31, 1996 COMPARED WITH THE SIX MONTH
PERIOD ENDED DECEMBER 31, 1995
REVENUES
Revenues for the six month period ended December 31, 1996 (the "Transition
Period") were $360,000 versus $333,000 for the six months ended December 31,
1995. This increase of $27,000 is a result of an increase in Able product sales
partially offset by a decrease in fee revenue which was due to one-time fees
from Bristol-Meyers Products recognized during the six months ended December 31,
1995. The increase in product sales resulted from the Company realizing sales
from its Able subsidiary since its acquisition on August 19, 1996. The Company's
product sales also increased due to improved diagnostic products sales.
COST OF SALES
Cost of sales was 99% of product sales for the Transition Period compared
with 50% for the six months ended December 31, 1995. Tablet and suppository
production at Able during the Transition Period did not support the minimum
level of fixed manufacturing costs required at the facility. Management expects
that the cost of product sales, as a percentage of sales, will decrease as sales
orders and production volumes increase.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the Transition Period were $1,092,000
versus $1,037,000 for the six months ended December 31, 1995, an increase of
$55,000. This increase is primarily attributable to costs associated with the
ongoing NicErase-SL Phase 3 clinical trial and the Company's efforts in filing a
510(k) application with the U.S. Food and Drug Administration for its
NicCheck(R) product. The Company is also conducting early stage research on a
bacterial extract for the treatment of infectious diseases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the Transition Period were
$3,239,000 versus $1,189,000 for the six months ended December 31, 1995, an
increase of $2,050,000. The increase in selling, general and administrative
expenses is primarily due to additional payroll and plant operating costs of
approximately $793,000 resulting from the acquisition of Able. In addition, the
Company incurred additional costs of approximately $865,000 for the use of
business consultants to develop, seek and obtain alliances for certain Company
products, potential products and financial development. The Company incurred
additional costs of approximately $80,000 towards patent applications for
several of its products. Legal expenses increased by approximately $106,000
primarily related to assistance with technology licensing, pending acquisitions
and corporate regulatory filings. The remainder is due to a net increase in
other operating expenses.
OTHER INCOME (EXPENSE)
Investment income increased by $46,000 from $112,000 to $158,000 for the
Transition Period as compared to same period ended December 31, 1995. The
Company had greater funds available for investment during the Transition Period
compared to the six months ended December 31, 1995.
The Company incurred interest expense of $74,000 and amortized debt
financing costs of $62,000 during the Transition Period, both associated with
the $2,000,000 convertible note issued in 1996.
16
INCOME TAXES
There were no provisions for income taxes for the Transition Period and the
six months ended December 31, 1995 due to operating losses incurred by the
Company and valuation reserves applied against deferred tax assets. As of
December 31, 1996 and December 31, 1995, for Federal and state income tax
reporting purposes, the Company had net operating loss carryforwards of
approximately $23,460,000 and $19,270,000 respectively. In addition, the Company
had Federal and state research tax credit carryforwards of approximately
$583,000 and $120,000, respectively, available to reduce future tax liabilities.
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.
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 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.
17
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.
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.
18
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 December 31, 1996, the Company had working capital of $5,502,000
versus working capital of $10,204,000 at June 30, 1996. Cash and investment
securities were $5,117,000 at December 31, 1996 as compared to $10,464,000 at
June 30, 1996. Working capital was used primarily for research and development
and to fund the purchase of Able and its operations during the Transition
Period.
As discussed in Note 2 to the financial statements, in August 1996, the
Company acquired certain assets of Able, a generic pharmaceutical products
subsidiary of Alpharma Inc., for $550,000 in cash and acquisition costs of
$150,000. 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 has
increased revenues, costs and expenses, capital expenditures and net cash used
for operating activities. 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
June 1997, but that the available working capital will not be sufficient to fund
the acquisition of Superior. 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 plans to raise capital in order to finance the proposed
acquisition of Superior through the sale of its securities. There can be no
assurance that the Company will be able to secure this financing or that such
financing will be available on favorable terms. If the Company is unable to
obtain such financing, it will be unable to close the Superior acquisition.
Concurrently with the completion of the proposed Superior acquisition, Superior
and the Company intend to enter into a line of credit to provide financing for
Superior. The Company and Superior are currently in discussions with a
commercial bank regarding such line of credit. There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company intends to fund Superior's operations with the line of credit and
Superior's cash generated from operations.
The Company also continues to pursue additional sources of capital in order
to fund the growth of the Able generic drug business and its product development
efforts. The Able financing may take the form of a line of credit or equipment
notes or leases. There can be no assurance that the Company will be able to
secure additional financing for the Able business or its continued product
development efforts 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 would be materially and adversely
affected and the Company will be required to reduce or eliminate certain
expenditures, including its research and development activity with respect to
certain proposed products.
ENVIRONMENTAL LIABILITY
The Company has no known material environmental violations or assessments.
19
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted 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 Transition Period. As discussed in Note 1 to the financial
statements, the adoption of SFAS No. 121 and No. 123 did not have a material
effect on the Company's financial position, results of operations and cash
flows.
The Financial Accounting Standards Board issued SFAS No. 128, "Earnings per
Share," in February 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share, and is effective for financial statements issued
for periods ending after December 15, 1997. Earlier application is not
permitted. SFAS No. 128 requires the restatement of all prior-period earnings
per share data presented.
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 1. Business" relating to the Company's strategy with respect
to the development and marketing of the Company's products and 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.
History of Losses; Anticipation of Future Losses. The Company has incurred
operating losses since its inception and has an accumulated deficit of
$24,315,191 as of December 31, 1996. The Company incurred a net loss of
$4,306,140 for the Transition Period ended December 31, 1996, as compared with a
net loss of $1,809,816 for the same period ended December 31, 1995. 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.
20
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 generic pharmaceutical
business and the proposed acquisition of Superior. 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, marketing and distribution capabilities for its proposed
products and the continued operations of Able. 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 would be materially and adversely affected and the Company will be
required to reduce its overall expenditures including its research and
development activity with respect to certain proposed products.
In addition, the Company will require additional financing to fund the
proposed Superior acquisition and a line of credit to fund Superior's
operations. There can be no assurance that the Company will be able to secure
such financing or line of credit or that such financing or line of credit will
be available on favorable terms. If the Company is unable to obtain such
financing or line of credit, it will be unable to close the Superior
acquisition.
Uncertainties Related to NicErase-SL. Under applicable 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 and Superior Acquisitions. In August 1996, the Company
acquired certain assets of Able, and in March 1997, the Company signed an
agreement to purchase all of the outstanding shares of Superior. There can be no
assurance that the anticipated benefits from the Able acquisition or the
proposed Superior 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 and Superior requires 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.
Risks Associated with Managing a Changing Business. The Company has begun to
expand its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products as well as the continued development of
therapeutic and diagnostic products. In order to achieve this expansion, the
Company must undergo substantial changes in its operations, which may
significantly strain the Company's limited administrative, operational and
financial resources. The ability of the Company to achieve its business
objectives will depend in large part on its ability to build and expand its
manufacturing operations and sales and marketing capabilities, to generally
expand its operational capabilities and its
21
financial and management information systems, to develop the management skills
of its managers and supervisors and to train, motivate and manage both its
existing employees and the additional employees that will be required if the
Company is to expand its business. There can be no assurance that the Company
will succeed in developing all or any of these capabilities, and any failure to
do so would have a material adverse effect on the Company's business, financial
condition and results of operations.
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 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 and the proposed purchase of
Superior, involve a number of potential risks, 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, the proposed Superior 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.
Limited Manufacturing Capability and Experience. The Company's NicCheck,
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 will have to make significant
investments in its infrastructure and plant facility. The Company will need to
raise capital to finance these investments and there can be no assurance that
the Company will be able to obtain such financing or that such financing will be
available on favorable terms. 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.
Limited Commercialization of Proprietary Products. The Company has
commercially introduced and is currently marketing through distributors only two
of its proprietary 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.
22
Early Stage of Product Development. Several of the Company's proposed
products, including its specialty pharmeceuticals, OrthoDyn, the breast biopsy
technology being licensed from BioLoc and the bacterial extract for treatment of
infectious diseases, are at an early stage of development. The Company does not
expect that its early stage products will be available for a significant number
of years, if at all. The early stage products will require significant research
and development, and potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons.
Potential products may be found ineffective or cause harmful side effects during
preclinical testing or clinical trials, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be uneconomical to
produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's or its collaborative partners' product development
efforts will be successfully completed, that required regulatory approvals will
be obtained or that any products, if introduced, will be successfully marketed
or achieve customer acceptance.
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 a material 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.
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. Sources for certain materials for the Company's products must be
approved by the FDA, and in many instances only one source has been approved. If
raw materials from a specified supplier were to become unavailable, 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.
23
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 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. There is no assurance
that the Company will compete successfully in this market. Revenues and gross
profit derived from generic pharmaceutical products tend to follow a pattern
based on regulatory and competitive factors unique to the generic pharmaceutical
industry. As patents for brand name products and related exclusivity periods
mandated by regulatory authorities expire, the first generic manufacturer to
receive regulatory approval for generic equivalents of such products is usually
able to achieve relatively high revenues and gross profit. As other generic
manufacturers receive regulatory approvals on competing products, prices and
revenues typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical industry adjusts to increased pressures to contain health care
costs. Brand name companies are increasingly selling their products into the
generic market directly by acquiring or forming strategic alliances with generic
pharmaceutical companies. No regulatory approvals are required for a brand name
manufacturer to sell directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers to entry into such
market. These competitive factors may have a material adverse effect on the
Company's ability to sell its generic products.
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 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
24
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 Consolidated 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:
Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and
1995
Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and
1995 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity -- Six Months
Ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Six Months Ended December 31,
1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated 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.
25
DYNAGEN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report ............................................................. 27
Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and 1995 ........ 28
Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and 1995
and Years Ended June 30, 1996, 1995 and 1994 ........................................ 29
Consolidated Statements of Changes in Stockholders' Equity -- Six Months Ended
December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994 ...................... 30
Consolidated Statements of Cash Flows -- Six Months Ended December 31, 1996 and
1995 and Years Ended June 30, 1996, 1995 and 1994 ................................... 31
Notes to Consolidated Financial Statements ........................................... 32
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
DYNAGEN, INC.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of DynaGen,
Inc. and subsidiary as of December 31, 1996 and June 30, 1996 and 1995 and the
related consolidated statements of loss, changes in stockholders' equity and
cash flows for the six months ended December 31, 1996 and for each of the years
in the three-year period ended June 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DynaGen,
Inc. and subsidiary as of December 31, 1996 and June 30, 1996 and 1995, and the
results of their operations and their cash flows for the six months ended
December 31, 1996 and for each of the years in the three-year period ended June
30, 1996 in conformity with generally accepted accounting principles.
As indicated in Note 1 to the consolidated financial statements, the Company
needs additional capital to fund its operations, its acquisition of Superior
Pharmaceutical Company and the continued support of its proposed products.
WOLF & COMPANY, P.C.
Boston, Massachusetts
February 14, 1997, except for Note 14
as to which the date is March 7, 1997
27
DYNAGEN, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
DECEMBER 31, ------------------------
1996 1996 1995
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents (including interest-bearing deposits
of $1,835,000, $154,000 and $142,000, respectively) $ 2,112,300 $ 375,948 $ 263,956
Investment securities available for sale at fair value (Note 3) 3,004,700 10,087,918 4,201,876
Accounts receivable 261,932 89,703 28,971
Inventory (Note 4) 451,883 -- --
Notes receivable (Note 8) 185,000 75,000 --
Accrued interest receivable 40,179 86,873 86,653
Prepaid expenses and other current assets 255,434 221,283 108,498
------- ------- -------
Total current assets 6,311,428 10,936,725 4,689,954
--------- ---------- ---------
Property and equipment, net (Notes 5 and 6) 673,969 143,350 153,280
- - ------- ------- -------
Other assets:
Patents and trademarks, net of accumulated amortization of
$65,639, $54,341 and $46,024, respectively 265,840 277,138 268,809
Deferred debt financing costs, net of accumulated amortization
of $119,039 and $57,230, respectively (Note 6) 119,039 217,475 --
Deposits and other assets 92,873 1,978 1,978
------ ----- -----
Total other assets 477,752 496,591 270,787
------- ------- -------
$ 7,463,149 $ 11,576,666 $ 5,114,021
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 712,239 $ 519,624 $ 263,786
Accrued payroll and payroll taxes 96,894 147,441 73,421
Deferred revenue -- 65,967 250,000
--------- --------- -------
Total current liabilities 809,133 733,032 587,207
Convertible note payable (Notes 6, 10 and 14) 1,600,000 2,000,000 --
--------- --------- -------
Total liabilities 2,409,133 2,733,032 587,207
--------- --------- -------
Commitments and contingencies (Note 9)
Stockholders' equity (Notes 10 and 14):
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none outstanding -- -- --
Common stock, $.01 par value, 75,000,000 shares authorized,
29,106,231, 28,559,999 and 21,448,487 shares, respectively,
issued and outstanding 291,062 285,600 214,485
Additional paid-in capital 29,076,838 28,567,068 19,236,300
Accumulated deficit (24,315,191) (20,009,051) (14,911,632)
------------ ------------ ------------
5,052,709 8,843,617 4,539,153
Unrealized gain (loss) on investment securities available for
sale (Note 3) 1,307 17 (12,339)
--------- --------- -------
Total stockholders' equity 5,054,016 8,843,634 4,526,814
--------- --------- ---------
$ 7,463,149 $ 11,576,666 $ 5,114,021
============ ============= =============
See accompanying notes to consolidated financial statements.
28
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF LOSS
SIX MONTHS ENDED DECEMBER 31, YEARS ENDED JUNE 30,
----------------------------- --------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED)
Revenues (Note 11):
Net product sales $ 358,467 $ 57,855 $ 220,745 $ 247,553 -- $
Contract revenues -- -- -- -- 138,255
License fees and royalties 1,441 275,000 335,000 250,000 298,750
---------- ---------- ---------- ---------- ----------
Total revenues 359,908 332,855 555,745 497,553 437,005
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 356,312 28,837 96,680 134,392 --
Contract costs -- -- -- -- 82,903
Research and development 1,092,253 1,036,622 3,118,145 1,718,006 2,183,849
Selling, general and administrative 3,239,180 1,188,733 2,684,825 1,983,897 1,997,389
---------- ---------- ---------- ---------- ----------
Total costs and expenses 4,687,745 2,254,192 5,899,650 3,836,295 4,264,141
---------- ---------- ---------- ---------- ----------
Operating loss (4,327,837) (1,921,337) (5,343,905) (3,338,742) (3,827,136)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Investment income 157,788 111,521 367,715 296,555 183,082
Interest expense (Note 6) (74,282) -- (63,999) (196) (1,750)
Amortization of debt financing costs (Note 6) (61,809) -- (57,230) -- --
---------- ---------- ---------- ---------- ----------
Other income (expense), net 21,697 111,521 246,486 296,359 181,332
---------- ---------- ---------- ---------- ----------
Loss from continuing operations (4,306,140) (1,809,816) (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 $(4,306,140) $(1,809,816) $(5,097,419) $(3,042,383) $(3,660,749)
=========== =========== =========== =========== ===========
Net loss per share $ (.15) $ (.08) $ (.21) $ (.14) $ (.22)
=========== =========== =========== ============ ============
Weighted average shares outstanding 28,794,118 22,217,645 24,433,949 21,179,703 16,517,117
========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
29
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1996 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(NOTES 6, 9, 10 AND 14)
UNREALIZED
GAIN (LOSS)
SERIES A CONVERTIBLE ON INVESTMENT
PREFERRED STOCK COMMON STOCK ADDITIONAL SECURITIES
----------------------- --------------------- PAID-IN ACCUMULATED AVAILABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT FOR SALE TOTAL
------ ------ ------ ------ ------- ------- -------- -----
Balance at June 30, 1993 -- $ -- 14,544,297 $145,443 $13,224,175 $ (8,208,500) $ -- $5,161,118
Shares issued in 1994 public
offering -- -- 6,400,000 64,000 5,553,729 -- -- 5,617,729
Shares issued in private
placement -- -- 128,571 1,286 385,227 -- -- 386,513
Cancellation of stock options
issued for future services -- -- -- -- (72,540) -- -- (72,540)
Exercise of lenders' warrants -- -- 101,667 1,016 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 -- -- 21,174,535 211,745 19,109,908 (11,869,249) (38,662) 7,413,742
Exercise of stock options -- -- 500 5 370 -- -- 375
Exercise of underwriters'
warrants -- -- 273,452 2,735 126,022 -- -- 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 -- -- 21,448,487 214,485 19,236,300 (14,911,632) (12,339) 4,526,814
Exercise of underwriters'
warrants -- -- 503,982 5,040 32,085 -- -- 37,125
Exercise of public warrants -- -- 3,244,494 32,445 3,822,762 -- -- 3,855,207
Shares issued in private
placements 1,178,264 3,461,150 1,520,686 15,207 1,376,204 -- -- 4,852,561
Conversion of preferred stock (1,178,264) (3,461,150) 1,612,834 16,128 3,445,022 -- -- --
Exercise of stock options -- -- 95,855 959 4,616 -- -- 5,575
Employee stock and stock
option grants -- -- 117,250 1,172 557,685 -- -- 558,857
Stock options issued for
future services -- -- -- -- 55,225 -- -- 55,225
Stock issued for interest
obligation -- -- 16,411 164 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 -- -- 28,559,999 285,600 28,567,068 (20,009,051) 17 8,843,634
Exercise of stock options -- -- 81,767 818 15,682 -- -- 16,500
Stock issued for interest
obligation -- -- 50,052 500 79,117 -- -- 79,617
Stock options issued for
services -- -- -- -- 55,742 -- -- 55,742
Conversion of note payable -- -- 414,413 4,144 359,229 -- -- 363,373
Increase in unrealized gain on
investment securities -- -- -- -- -- -- 1,290 1,290
Net loss for the six months
ended December 31, 1996 -- -- -- -- -- (4,306,140) -- (4,306,140)
----- ------- --------- ------- ------- ---------- ------- ---------
Balance at December 31, 1996 -- $ -- 29,106,231 $291,062 $29,076,838 $(24,315,191) $ 1,307 $5,054,016
========== ========= =========== ======== =========== ============= ======== =========
See accompanying notes to consolidated financial statements.
30
DYNAGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
Cash flows from operating activities:
Net loss $(4,306,140) $(1,809,816) $ (5,097,419) $(3,042,383) $(3,660,749)
Adjustments to reconcile net loss to net cash used
for operating activities:
Stock and stock options issued for services 55,742 -- 558,857 -- --
Depreciation and amortization 129,558 32,440 125,610 64,195 91,163
Amortization and accretion of (discounts)
premiums on investment securities (31,497) (19,539) (134,474) 101,553 50,997
Stock issued for interest obligation 79,617 -- 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 (172,229) (23,621) (60,732) 30,518 (70,317)
Inventory (138,583) -- -- -- --
Prepaid expenses and other current assets 12,543 (47,227) (57,780) 24,121 (48,667)
Deposits and other assets (90,895) -- -- -- --
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 142,068 (3,770) 329,858 (77,933) (11,534)
Deferred revenue (65,967) (150,000) (184,033) 250,000 --
---------- ---------- ---------- ---------- ----------
Net cash used for operating activities (4,385,783) (2,021,533) (4,440,928) (2,609,036) (3,640,124)
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of investment securities (2,567,445) (5,937,166) (29,913,212) (3,187,379) (7,198,023)
Proceeds from sales and maturities of investment
securities 9,683,450 5,600,000 24,174,000 5,500,000 4,136,330
Purchase of wholly-owned subsidiary (700,000) -- -- -- --
Purchase of property and equipment (200,370) (2,874) (36,020) (23,339) (32,522)
Patent and trademark costs -- (32,867) (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 (110,000) -- (75,000) -- 16,072
---------- ---------- ---------- ---------- ----------
Net cash provided by (used for)
investing activities 6,105,635 (372,907) (5,922,843) 2,229,314 (2,985,331)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from stock warrants and options 16,500 3,896,088 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 16,500 3,896,088 10,475,763 123,308 6,065,902
---------- ---------- ---------- ---------- ----------
Net change in cash and cash equivalents 1,736,352 1,501,648 111,992 (256,414) (559,553)
Cash and cash equivalents at beginning of period 375,948 263,956 263,956 520,370 1,079,923
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 2,112,300 $ 1,765,604 $ 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 -- --
Additional cash flow information is included in Notes 2 and 6.
See accompanying notes to consolidated financial statements.
31
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The consolidated financial statements include the accounts of DynaGen, Inc.
(the "Company") which is developing and marketing therapeutic and diagnostic
products for the human health care market and its wholly-owned subsidiary, Able
Laboratories, Inc. ("Able"), which is engaged in the manufacture of generic
pharmaceuticals. (See Note 2.) All significant intercompany balances and
transactions have been eliminated in consolidation.
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, its
generic pharmaceutical business and the proposed acquisition of Superior. (See
Note 14.) 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, marketing and
distribution capabilities for its proposed products. The Company plans to secure
financing for the Superior acquisition through the sale of equity and/or debt
securities. In addition, the Company plans to obtain lines of credit, equipment
notes or leases from financial institutions to support the operations of both
Superior and Able. 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 would be
materially and adversely affected and the Company will be required to reduce its
overall expenditures including its research and development activity with
respect to certain proposed products.
Change in Year End
On January 30, 1997, the Company adopted December 31 as its fiscal year end. The
accompanying consolidated financial statements include audited financial
statements for the six month transition period ended December 31, 1996. Audited
financial statements are also presented for the three fiscal years ended June
30, 1996, 1995 and 1994. Unaudited financial statements and the related notes
thereto are presented for the six months ended December 31, 1995 for comparative
purposes only. All adjustments, consisting of only normal recurring adjustments,
which in the opinion of management are necessary for a fair presentation of the
unaudited financial information, have been made.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
balance sheet date and reported amounts of revenues and expenses during the
reporting period. 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
32
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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.
Inventory
Inventory is valued at the lower of cost or market on a first-in first-out
(FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense is provided
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful life of the asset or the life of the related
lease term.
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 six months ended December 31, 1996 and 1995
was $73,107 and $10,792, respectively, and for the years ended June 30, 1996,
1995 and 1994 was $79,660, $11,385 and $21,388, respectively.
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
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.
33
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement
encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Stock options
issued under the Company's stock option plans generally have no intrinsic value
at the grant date, and under Opinion No. 25 no compensation cost is recognized
for them. The Company has elected to remain with the accounting in Opinion No.
25 and, as a result, must make pro forma disclosures of net income and earnings
per share and other disclosures, as if the fair value based method of accounting
had been applied. The disclosure requirements of this Statement are effective
for the Company's consolidated financial statements for the six months ended
December 31, 1996. The pro forma disclosures include the effects of all awards
granted on or after July 1, 1995. (See Note 10.)
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 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 is effective for the six months ended December 31, 1996. The impact
of adoption of the new standard was not material to the Company's financial
position, results of operations and cash flows.
The FASB issued SFAS No. 128, "Earnings per Share," in February 1997. SFAS
No. 128 establishes standards for computing and presenting earnings per share,
and is effective for financial statements issued for periods ending after
December 15, 1997, earlier application is not permitted. SFAS No. 128 requires
the restatement of all prior period earnings per share data presented.
2. ACQUISITION OF ABLE LABORATORIES, INC.
On August 19, 1996, the Company acquired certain assets of Able consisting
primarily of machinery and equipment, raw materials and finished goods
inventory, and other assets of the tablet business. The assets were transferred
by the Company to a newly formed and wholly-owned subsidiary named Able
Laboratories, Inc. The purchase price consisted of $550,000 in cash and
acquisition costs of $150,000. The acquisition has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16. The
Company allocated $313,300 of the purchase price to inventory and $386,700 to
property and equipment. The results of operations related to Able have been
included with those of the Company since August 19, 1996.
34
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
2. ACQUISITION OF ABLE LABORATORIES, INC. -- (CONTINUED)
Unaudited pro forma consolidated operating results for the Company, assuming
the acquisition of Able had been made as of July 1, 1995 are as follows:
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
YEAR ENDED
1996 1995 JUNE 30, 1996
---- ---- -------------
Revenues ................................. $ 378,733 $ 2,406,200 $ 4,875,562
Net loss ................................. $(4,415,080) $(1,755,997) $(6,598,550)
Net loss per share ....................... $ (.15) $ (.08) $ (.27)
The unaudited pro forma information is not necessarily indicative either of
the results of operations that would have occurred had the purchase been made on
July 1, 1995 or of future results of operations of the combined companies.
3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale is as follows:
DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government agency obligations ............... $1,499,696 $1,000 $(71) $1,500,625
Corporate obligations ............................ 1,503,697 378 -- 1,504,075
---------- ------ ---- ----------
$3,003,393 $1,378 $(71) $3,004,700
========== ====== ==== ==========
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
=========== ====== ======= ===========
At December 31, 1996, all debt securities mature within one year. There were
no sales of securities available for sale during the six months ended December
31, 1996 and the years ended June 30, 1996 and 1995.
35
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
4. INVENTORY
Inventory consists of the following at December 31, 1996:
Raw materials ...................... $259,330
Work-in-progress ................... 163,847
Finished goods ..................... 28,706
--------
$451,883
========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
JUNE 30,
DECEMBER 31, ------------------ ESTIMATED
1996 1996 1995 USEFUL LIVES
---- ---- ---- ------------
Laboratory equipment .............. $ 702,141 $ 220,164 $220,164 7 years
Furniture and fixtures ............ 270,353 173,572 143,091 3-7 years
Leasehold improvements ............ 39,288 30,976 25,437 1-2 years
------ ------ ------
1,011,782 424,712 388,692
Less accumulated depreciation and
amortization .................... (337,813) (281,362) (235,412)
-------- -------- --------
$ 673,969 $ 143,350 $153,280
========= ========= ========
Depreciation and amortization expense for the six months ended December 31,
1996 and 1995 was $56,451 and $21,648, respectively. Depreciation and
amortization expense for the years ended June 30, 1996, 1995 and 1994 was
$45,950, $52,810 and $69,775, respectively.
6. 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 10.) 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. During
the six months ended December 31, 1996, $400,000 of the note payable was
converted for 414,413 shares of the Company's common stock and $36,627 of
related deferred debt financing costs were charged to additional paid-in
capital. (See Note 14.)
Interest expense on the convertible note payable for the six months ended
December 31, 1996 was $74,282 and for the year ended June 30, 1996 was $63,999.
Amortization expense on deferred debt financing costs for the six months ended
December 31, 1996 was $61,809 and 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.
36
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
7. INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes" effective July
1, 1993. There was no provision for income taxes for the six months ended
December 31, 1996 and 1995 and 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,
DECEMBER 31, -----------------------------
1996 1996 1995
---- ---- ----
Deferred tax asset:
Federal .............................. $ 8,008,000 $ 6,523,000 $ 4,929,000
State ................................ 1,986,000 1,793,000 1,433,000
--------- --------- ---------
9,994,000 8,316,000 6,362,000
Valuation reserve ....................... (9,994,000) (8,316,000) (6,362,000)
---------- ---------- ----------
Net deferred tax asset .................. $ -- $ -- $ --
=========== =========== ===========
The following differences give rise to deferred income taxes:
JUNE 30,
DECEMBER 31, -------------------------------
1996 1996 1995
Net operating loss carryforward ......... $ 9,185,000 $ 7,533,000 $ 5,496,000
Research tax credit carryforward ........ 662,000 657,000 672,000
Other ................................... 147,000 126,000 194,000
------- ------- -------
9,994,000 8,316,000 6,362,000
Valuation reserve ....................... (9,994,000) (8,316,000) (6,362,000)
---------- ---------- ----------
Net deferred tax asset .................. $ -- $ -- $ --
============ =========== ===========
The change in the valuation reserve is as follows:
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
Balance at beginning of period ......... $8,316,000 $6,362,000 $6,362,000 $5,084,000 $ --
Adoption of SFAS No. 109 ............... -- -- -- -- 3,525,000
Increase due to current period net
operating loss ....................... 1,678,000 688,000 1,954,000 1,278,000 1,559,000
--------- ------- --------- --------- ---------
Balance at end of period ............... $9,994,000 $7,050,000 $8,316,000 $6,362,000 $5,084,000
========== ========== ========== ========== ==========
As of December 31, 1996, the Company has Federal and state net operating
loss carryforwards of approximately $23,460,000 and $19,270,000, respectively.
The Federal and state net operating loss carryforwards expire in varying amounts
beginning in 2003 and 1997, respectively. In addition, the Company has Federal
and state research tax credit carryforwards of approximately $583,000 and
$120,000, respectively, available to reduce future tax liabilities. The Federal
and state research tax credit carryforwards expire in varying amounts beginning
in 2003 and 2006, respectively.
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.
37
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
8. RELATED PARTY TRANSACTIONS
Notes Receivable
During the year ended June 30, 1996, the Company loaned $75,000 in the
aggregate to an officer/director and an officer under notes which bear interest
at 5.05% per annum and have an extended due date of August 1, 1997. These notes
are secured by common stock of the Company issuable on exercise of stock options
held by the officers.
In October 1996, the Company granted a $250,000 line-of-credit to each of
two officer/directors which bear interest at 6.07% per annum and mature on
October 4, 1997. These lines-of-credit are secured by common stock of the
Company held by the officer/directors. At December 31, 1996, borrowings of
$110,000 were outstanding under the lines-of-credit.
The Company recognized interest income on notes receivable of $4,562 during
the six months ended December 31, 1996. At December 31, 1996, accrued interest
receivable of $4,562 is included in the consolidated balance sheet.
During the year ended June 30, 1994, an officer/director repaid $900 of a
note receivable and the Company forgave the balance of $15,172.
Consulting Fees
During 1996, the Company retained a consulting company for strategic
marketing and business development. The chief executive officer of the
consulting firm is also a director of the Company. During the six months ended
December 31, 1996 the Company paid the consulting firm $56,800 in fees.
The Company also entered into a marketing and business development agreement
for some of its technologies with another consulting firm. A principal of this
consulting firm is a director of the Company. During the six months ended
December 31, 1996, fees of $12,500 were paid to this consulting firm.
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.
9. COMMITMENTS AND CONTINGENCIES
Lease Agreements
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 lease agreement for Able provides for a
monthly rental of $21,965 plus real estate taxes and certain operating expenses
through March 31, 2000. At December 31, 1996, the aggregate future minimum
rental expense (excluding real estate taxes and operating expenses) payable
under the lease agreements amounts to approximately $400,000, $264,000, $264,000
and $66,000, respectively, for the years ending December 31, 1997, 1998, 1999
and 2000. Future minimum rentals to be received in 1997 under a noncancelable
sublease are $70,000.
Rent expense, net of subleases, for the six months ended December 31, 1996
and 1995 was $130,463 and $31,000, respectively, and 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 six months ended December 31, 1996 and 1995 was
$53,976 and $44,000, respectively, and for the years ended June 30, 1996, 1995
and 1994 was $90,637, $91,307 and $70,479, respectively.
38
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES -- (Continued)
Employment Agreements
As of December 31, 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 10) 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 10) 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 amortized the expense over the six month 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 10).
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.
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS
1992 Public Offering Warrants
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.
39
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. 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 1994 public offering. 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 6.) Placement costs for this transaction were $421,157 of
40
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
which $146,452 was charged to additional paid-in capital and $274,705 was
capitalized as deferred debt financing costs. During the six months ended
December 31, 1996, $400,000 of the note was converted for 414,413 shares of
common stock and $36,627 of related deferred debt financing costs were charged
to additional paid-in capital. (See Note 14.)
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 Board of Directors will
grant options and establish the terms of the options in accordance with plan
provisions. The 1989 Plan options are exercisable for a period of ten years from
the date of issuance. The following table summarizes the activity of options
granted under the 1989 plan:
SIX MONTHS YEARS ENDED JUNE 30,
ENDED --------------------------------------------------------
DECEMBER 31,
1996 1996 1995 1994
----------------- ------------------- ------------------ --------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ ----- ------ -------
Outstanding at beginning of
period ...................... 220,000 $.87 270,000 $.71 270,000 $.71 270,000 $1.98
Granted ....................... -- -- -- -- -- -- 83,000 .75
Cancelled ..................... -- -- -- -- -- -- (83,000) 4.87
Exercised ..................... (12,000) .75 (50,000) .05 -- -- -- --
Outstanding at end of period .. 208,000 .88 220,000 .87 270,000 .71 270,000 .71
======= ======= ======= =======
Exercisable at end of period .. 200,500 .89 197,500 .89 228,500 .72 187,000 .71
======= ======= ======= =======
Reserved for future grants at
end of period ............... -- -- -- --
======== ======== ======= ======
41
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
Information pertaining to options outstanding under the 1989 Plan at
December 31, 1996 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------ ----------- ---- ----- ----------- -----
$.75-$.88 ............... 206,000 4.6 Years $ .83 198,500 $ .84
$5.87 ................... 2,000 4.7 Years 5.87 2,000 5.87
------- -------
208,000 4.6 Years .88 200,500 .89
======= =======
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 14.) Under the 1991 Plan, the Board of Directors may
grant options, stock awards and purchase rights, and establish the terms of the
grant in accordance with the provisions of the plan. The 1991 Plan options are
exercisable for a period of seven years from the date of issuance and certain
options contain a net exercise provision. As of December 31, 1996, no stock
awards or purchase rights have been granted under the 1991 Plan. The following
table summarizes the activity of options granted under the 1991 Plan:
YEARS ENDED JUNE 30,
SIX MONTHS ------------------------------------------------------
ENDED
DECEMBER 31,
1996 1996 1995 1994
---- ---- ---- ----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ ----- ------ -----
Outstanding at beginning of
period ....................... 640,900 $1.04 609,100 $1.26 586,600 $1.18 597,200 $5.14
Granted ........................ 326,000 1.01 105,000 .29 50,000 1.94 589,000 1.09
Cancelled ...................... (56,000) 1.81 (21,500) 5.29 (27,000) .75 (599,600) 5.05
Exercised ...................... (113,000) .75 (51,700) .32 (500) .75 -- --
Outstanding at end of period ... 797,900 1.02 640,900 1.04 609,100 1.26 586,600 1.18
======= ======= ======= =======
Exercisable at end of period ... 343,992 1.18 418,300 1.09 201,826 1.87 58,600 4.18
======= ======= ======= =======
Reserved for future grants at end
of period .................... 236,900 506,900 590,400 613,400
======= ======= ======= =======
Weighted average fair value of
options granted during the
period ....................... $1.23 $2.94 N/A N/A
42
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
Information pertaining to options outstanding under the 1991 Plan at
December 31, 1996 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------ ----------- ---- ----- ----------- -----
$.01-$.75 ........ 587,900 5.1 Years $ .61 276,300 $ .59
$1.31-$1.94 ...... 180,000 6.8 Years 1.54 37,692 1.71
$5.25-$6.25 ...... 30,000 2.1 Years 5.92 30,000 5.92
------- -------
797,900 5.0 Years 1.02 343,992 1.18
======= =======
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. In September 1996, the Company and the underwriter amended the agreement,
and the Company paid the underwriter $500,000 in consulting fees for services
rendered.
On July 24, 1996, the Company's Board of Directors granted non-qualified
stock options to two directors of the Company to purchase an aggregate of
660,000 shares of common stock at an exercise price of $1.94 per share. These
options are exercisable by the directors until July 24, 2003. On October 28,
1996, the Company's Board of Directors granted a non-qualified stock option to a
director of the Company to purchase 330,000 shares of common stock at an
exercise price of $1.31 per share. This option is exercisable by the director
until October 28, 2003. The weighted average fair value of these options,
estimated using the Black-Scholes option-pricing model, on the date of grant was
$1.20 per share.
On December 10, 1996, the Company granted warrants to purchase an aggregate
of 100,000 shares of common stock at an exercise price of $1.44 per share. These
warrants are exercisable through December 31, 2003. The Company valued the
warrants at $99,000 and is expensing the warrants over their vesting period.
Expense for the six months ended December 31, 1996 was $19,800.
Stock-Based Compensation
At December 31, 1996, the Company has two stock-based compensation plans and
stock options issued outside of the plans, which are described above. The
Company applies APB Opinion No. 25 and related Interpretations in accounting for
stock options issued to employees and directors. Had
43
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS -- (Continued)
compensation cost for the Company's stock options issued to employees and
directors been determined based on the fair value at the grant dates consistent
with SFAS No. 123, the Company's net loss and net loss per share would have been
adjusted to the pro forma amounts indicated below:
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
Net loss:
As reported ..................... $(4,306,140) $(5,097,419)
Pro forma ....................... $(4,489,433) $(5,146,869)
Net loss per share:
As reported ..................... $ (.15) $ (.21)
Pro forma ....................... $ (.16) $ (.21)
Common stock equivalents have been excluded from all calculations of net
loss per share because the effect of including them would be anti-dilutive.
The fair value of each option grant under the 1991 Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants during the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively; dividend yield
of 0%; risk-free interest rates of 6.5% and 6.4%; expected volatility of 80% and
80% and expected lives of 3.8 and 3.9 years.
Weighted average assumptions used in valuing stock options issued outside of
the plans during the six months ended December 31, 1996 were dividend yield of
0%; risk free interest rate of 6.8%; expected volatility of 81% and an expected
life of 5 years.
Common Stock Reserved
The Company has reserved common stock at December 31, 1996 as follows:
NUMBER OF
SHARES
Convertible note payable .................................... 2,122,000
1992 public offering warrants ............................... 1,560,260
Private placement agents' warrants .......................... 68,328
Stock option plans .......................................... 1,242,800
Other stock options and warrants ............................ 1,960,000
---------
Total .................................................... 6,953,388
=========
The number of shares of common stock reserved in connection with the
convertible note payable is subject to adjustment (see Notes 6 and 14.)
11. REVENUES AND SEGMENT INFORMATION
Product Sales
During the six months ended December 31, 1996 and 1995, the Company's sales
to foreign customers amounted to 21% and 16% of total revenues, respectively.
During the years ended June 30, 1996 and 1995, the Company's sales to foreign
customers amounted to 36% and 42% of total revenues,
44
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED)
respectively. Sales to two domestic customers amounted to 53% and 14% of total
revenues, and sales to one foreign customer amounted to 18% of total revenues
during the six months ended December 31, 1996. 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:
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
Far East and Asia ........................... $ 68,815 $39,812 $183,706 $185,997
United States ............................... 281,934 4,693 18,877 39,860
Europe ...................................... 7,403 5,622 8,466 16,462
Other ....................................... 315 7,728 9,696 5,234
-------- ------- -------- --------
$358,467 $57,855 $220,745 $247,553
======== ======= ======== ========
A summary of sales by product is as follows:
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
Diagnostic tests ............................ $ 86,781 $57,855 $220,745 $247,553
Generic pharmaceuticals ..................... 271,686 -- -- --
-------- ------- -------- --------
$358,467 $57,855 $220,745 $247,553
======== ======= ======== ========
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.
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 for 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.
45
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
11. REVENUES AND SEGMENT INFORMATION -- (CONTINUED)
Segment Information
The Company has two principal operating segments: the development and
marketing of therapeutic and diagnostic products for the human health care
market and the manufacture and distribution of generic pharmaceuticals through
its recently acquired subsidiary, Able Laboratories, Inc. During the years ended
June 30, 1996, 1995 and 1994, the Company's continuing operations consisted of
the development and marketing of therapeutic and diagnostic products for the
human health care market. Segment information for the six months ended December
31, 1996 is as follows:
THERAPEUTICS AND GENERIC
DIAGNOSTIC PRODUCTS PHARMACEUTICALS
------------------- ---------------
Operating revenues ................................ $ 88,222 $ 271,686
Operating loss .................................... $(1,867,120) $ (842,877)
Identifiable assets ............................... $ 509,885 $1,410,679
Depreciation and amortization ..................... $ 94,626 $ 34,932
Capital expenditures .............................. $ 10,449 $ 576,621
Operating loss represents net sales less operating expenses for each
segment, and excludes general corporate expenses and other income and expenses
of a general corporate nature. Identifiable assets by segment are those assets
that are used in the Company's operations within that segment. General corporate
assets consist principally of cash, investment securities, notes receivables,
accrued interest receivable, certain office furniture and equipment and deferred
debt financing costs.
12. 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 has
made no contributions to the 401(k) Plan as of December 31, 1996.
13. 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)
========
46
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
13. DISCONTINUED OPERATIONS -- (Continued)
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)
========
14. SUBSEQUENT EVENTS
On January 13, 1997, $1,065,000 of the convertible note (see Note 6) was
exchanged for 989,594 shares of common stock of the Company.
On January 15, 1997 the Company granted warrants to a public relations
consultant to purchase 50,000 shares of common stock at an exercise price of
$1.97. These warrants are exercisable through January 15, 2002.
On January 30, 1997, the stockholders approved an increase in the number of
authorized shares of common stock from 40,000,000 to 75,000,000 shares. The
stockholders also voted to amend the 1991 Stock Plan to increase the number of
shares of common stock authorized for issuance thereunder from 1,200,000 to
2,600,000 shares.
On March 7, 1997, the Company entered into an agreement to acquire the stock
of Superior Pharmaceutical Company ("Superior") of Cincinnati, Ohio. Superior, a
privately-held company, markets and distributes generic pharmaceutical products
to independent, retail chain and institutional pharmacies. Superior reported
1996 sales of $32 million with pre-tax income of over $3.0 million.
Under the terms of the agreement, DynaGen will pay Superior's shareholders a
total of $16.5 million, consisting of $6.5 million in cash to be paid at the
closing, $5 million in three-year notes and 1,666,666 shares of DynaGen common
stock. The agreement provides that the aggregate value of the DynaGen common
stock to be issued is to be equal to $5,000,000. If at the first twelve-month
anniversary of the closing, the value of the common stock issued is less than
$5,000,000, then DynaGen shall deliver to the selling stockholders additional
shares (and cash, if average closing bid price is less than $1.50) to satisfy
the deficiency. The shareholders may also receive certain incentive payments
based on Superior's performance during the three years following the close of
the transaction. The successful completion of the transaction is subject to,
among other closing conditions, obtaining satisfactory equity and debt
financing.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996 and June 30, 1996, the Company's financial instruments
include investment securities which are carried at fair value (see Note 3),
notes receivable (see Note 8) and a convertible note payable (see Note 6). The
carrying value of the notes receivable approximate their fair value as these
instruments bear interest and mature in less than one year. The fair value of
the outstanding balance of the convertible note payable is approximately
$2,786,000 and $2,985,000 at December 31, 1996 and June 30, 1996, respectively,
based on the fair value of the common stock issuable on conversion of the note.
47
DYNAGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
16. QUARTERLY DATA (UNAUDITED)
Summaries of operating results on a quarterly basis are as follows:
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ --------------------
1996 1996 1995
---- ---- ----
SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net product sales ..... $ 299 $ 59 $ 70 $ 93 $ 39 $ 19 $ 25 $ 154 $ 41 $ 28
License fees and
royalties ........... 1 -- 25 35 25 250 -- 250 -- --
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Total revenues ..... 300 59 95 128 64 269 25 404 41 28
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Cost of sales ......... 331 25 22 46 21 8 14 76 24 20
Research and
development ......... 332 760 1,230 852 566 470 420 340 434 524
Selling, general and
administrative ...... 2,166 1,073 616 880 618 571 462 499 588 435
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Total costs and
expenses ......... 2,829 1,858 1,868 1,778 1,205 1,049 896 915 1,046 979
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Operating loss ........ (2,529) (1,799) (1,773) (1,650) (1,141) (780) (871) (511) (1,005) (951)
Other income, net ..... 1 21 74 62 57 54 70 69 75 82
------- ------- ------- ------- ------- ------ ------- ------- ------ -------
Net loss ........... $(2,528) $(1,778) $(1,699) $(1,588) $(1,084) $ (726) $ (801) $ (442) $ (930) $ (869)
======= ======= ======= ======= ======= ======== ======= ======= ====== =======
Net loss per share .... $ (.09) $ (.06) $ (.06) $ (.06) $ (.05) $ (.03) $ (.04) $ (.02) $ (.04) $ (.04)
======= ======= ======= ======= ======= ======= ======= ======= ======== =======
Weighted average
shares outstanding .. 28,972 28,616 27,288 26,062 22,628 21,808 21,195 21,175 21,175 21,175
======= ======= ======= ======= ======= ======= ======= ======= ======== =======
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 43 Chairman of the Board, Executive Vice
President and Director
Dr. Indu A. Muni 54 President, Chief Executive Officer, Treasurer
and Director
Dr. F. Howard Schneider 57 Senior Vice President -- Technology and
Director
Dr. Ian R. Ferrier(1)(2) 54 Director
Steven Georgiev(1)(2) 63 Director
Dr. Michael Sorell 49 Director
Peter J. Mione 50 Vice President -- Clinical and
Regulatory Affairs
Theodore A. Olsson 43 Vice President -- Corporate Development
- ---------
(1) Member of the Audit Committee.
(2) 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.
49
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.
DR. MICHAEL SORELL. Dr. Sorell has served as a director of the Corporation
since October 1996. Since February 1996, he has served as the Principal of MS
Capital, LLC, which provides strategic consulting in the areas of medical
technology and financial management to emerging biotech and healthcare
companies. From August 1994 to February 1996, Dr. Sorell was an emerging growth
strategist for Morgan Stanley & Co. Sciences Fund, a joint venture with Essex
Investment Management of Boston, MA. Dr. Sorell originally joined Morgan Stanley
in July 1986 as a Research Analyst covering pharmaceutical and biotechnology
companies, was promoted to Vice President in January 1990 and became a Principal
in January 1992. Prior to Morgan Stanley, Dr. Sorell was on the attending staff
of Memorial Sloan-Kettering Cancer Center as a pediatric oncologist and later
joined Schering-Plough Corporation in clinical research. Dr. Sorell earned an
M.D. degree from the Albert Einstein College of Medicine in 1972.
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. 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.
50
Based solely on its review of the copies of such forms received by it, the
Company believes that during the Transition Period all of its officers,
directors and greater-than-ten percent stockholders complied with all Section
16(a) filing requirements except for Theodore Olsson. Mr. Olsson, an officer of
the Company, was late in filing his Initial Statement of Beneficial Ownership of
Securities of the Corporation on Form 3, which was due on August 30, 1996, and
subsequently filed it on November 6, 1996.
SIGNIFICANT EMPLOYEES
The Company also relies on the services of the following significant
employees:
SUSAN BARRETT, age 41, has served as General Manager of the Company's
subsidiary Able Laboratories, since November 1996. Ms. Barrett has over 15 years
of operations, quality, and sales and marketing experience in the multisource
pharmaceutical industry. From November 1995 to November 1996, Ms. Barrett was a
consultant to pharmaceutical wholesalers and manufacturers in the areas of
quality, regulatory, sales and marketing and strategic planning. She was
Director of Sales at Qualitest Products, Inc., a privately held generic
pharmaceutical distributor and manufacturer, from May 1995 to November 1995 and
at Alpharma, Inc., a publicly traded generic pharmaceutical company, from
January 1993 to April 1995. From March 1991 to December 1992, Ms. Barrett worked
for Zenith Laboratories and was responsible for development of sales strategies.
Ms. Barrett has a Bachelor of Science Degree from New York Institute of
Technology in Industrial Management.
DR. NICOLAE ISTRATE, age 53, 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 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's prior experience included positions in financial
management and public accounting. Mr Bilodeau received a Bachelor Degree in
accounting from the University of Massachusetts, Amherst.
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.
51
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.
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, Professor of Medicine and 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 who are not employees of the Company receive 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, Mr. Georgiev and Dr. Sorell options
to purchase 330,000 shares each, which options were granted outside of the 1991
Stock Plan and 1989 Stock Option Plan. The Board of Directors, 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, stock options were awarded to Dr. Schneider and
certain other employees of the Company at an exercise price of $.01, which
options were fully vested on the date of grant.
52
EXECUTIVE COMPENSATION COMMITTEE
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 reviews and sets cash and non-cash compensation for Dr.
Muni and Mr. Wadekar and provides guidance to the Board of Directors 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
Transition Period and for the fiscal years ended June 30, 1996, 1995 and 1994,
of those persons who were at December 31, 1996 (i) the chief executive officer
and (ii) each other executive officer of the Company whose annual compensation
exceeded $100,000 (the "Named Officers"):
LONG-TERM
COMPENSATION(3)
----------------
AWARDS
ANNUAL COMPENSATION(2) ----------------
---------------------- NUMBER OF
FISCAL SALARY BONUS OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) COMPENSATION ($) SARS (#) COMPENSATION ($)(4)
--------------------------- ------- --- --- ---------------- -------- -------------------
DR. INDU A. MUNI ............... 1996A 72,500 -- -- -- 297
President, Chief Executive 1996 115,500 -- -- -- 304
Officer and Treasurer
1995 115,500 -- -- -- 304
1994 112,875 -- -- -- 304
DHANANJAY G. WADEKAR ........... 1996A 72,500 -- -- -- 297
Chairman of the Board and 1996 115,500 -- -- -- 304
Executive Vice President
1995 115,500 -- -- -- 304
1994 112,875 -- -- -- 304
DR. F. HOWARD SCHNEIDER ......... 1996A 62,833 -- -- -- 297
Senior Vice President -- 1996 115,500 -- -- 10,000 304
Technology
1995 115,500 -- -- -- 304
1994 112,875 -- -- 150,000(5) 15,476
- ---------
(1) Information regarding the Transition Period is set forth in the row headed
"1996A".
(2) 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.
(3) The Company did not grant any restricted stock awards or stock appreciation
rights ("SARs") or make any long-term incentive plan payouts during the
Transition Period or the fiscal years ended June 30, 1996, 1995 and 1994.
(4) Amount represents the dollar value of group-term life insurance premiums
paid by the Company for the benefit of the Named Officer except with respect
to Dr. Schneider in the fiscal year ended 1994 for which the 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.
(5) 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 $.75 per share, the fair
market value of the Company's Common Stock on the date of exchange, April
27, 1994.
OPTIONS/SAR GRANTS TABLE
There were no grants of stock options or SARs made to the Named Officers
during the Transition Period.
53
OPTION EXERCISES AND FISCAL YEAR END VALUES
Presented below is further information with respect to unexercised stock
options to purchase the Company's Common Stock held by each Named Officer as of
December 31, 1996. None of the Named Officers exercised any stock options during
the Transition Period.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($)
--------------------- ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Dr. Indu A. Muni ..................... -- -- -- --
Dhananjay G. Wadekar ................. -- -- -- --
Dr. F. Howard Schneider .............. 200,000 60,000 107,400 33,750
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
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 2,600,000 shares of Common Stock. The terms of options issued
under the 1991 Stock Plan, including number of shares, exercise price, duration
and vesting, are generally determined by the Board of Directors. As of April 24,
1997, options to purchase a total of 786,400 shares of Common Stock were
outstanding under the 1991 Stock Plan, of which options for 342,492 shares were
then exercisable, and 1,636,900 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 Board of Directors. As of April 24,
1997, options to purchase a total of 208,000 shares of Common Stock were
exercisable and outstanding under the 1989 Stock Option Plan and no shares of
Common Stock were reserved for future option grants.
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 Mr. Wadekar's annual base salaries to $145,000 and approved an
arrangement whereby Dr. Schneider is paid an annual base salary of $116,000 for
a four-day work week.
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.
54
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee and the Board of Directors are
responsible for determining compensation for executive officers of the Company.
Drs. Muni and Schneider and Mr. Wadekar serve 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 24, 1997, 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) 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 ................................................. 1,351,250 4.5%
99 Erie Street
Cambridge, Massachusetts 02139
Dr. Indu A. Muni ..................................................... 1,137,250 3.8%
99 Erie Street
Cambridge, Massachusetts 02139
Dr. F. Howard Schneider(2) ........................................... 330,000 1.1%
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
Dr. Michael Sorell ................................................... 0 0%
115 East 42nd Street
New York, NY 10128
All Directors and Executive Officers as a group (8 persons)(3) 2,946,500 9.7%
- ----------
(1) As of April 24, 1997, there were 30,114,206 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 June 23, 1997 (i.e., within 60
days after April 24, 1997) 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.
55
(2) Includes 260,000 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 365,000 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
during the calender year 1996 $80,000 in fees plus $12,388 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 December 31, 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.
The Company also entered into a consulting agreement with M.S. Capital, LLC.
to provide marketing and business development services with respect to certain
of the Company's technologies. Dr. Michael Sorell, a director of the
Corporation, is the principal of M.S. Capital, LLC. Pursuant to the consulting
agreement, the Company paid M.S. Capital, LLC $12,500 during the Transition
Period.
56
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
Consolidated Balance Sheets -- December 31, 1996 and June 30,
1996 and 1995
Consolidated Statements of Loss -- Six Months Ended December 31, 1996
and 1995 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity --
Six Months Ended December 31, 1996 and Years Ended June 30,
1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Six Months Ended December
31, 1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
No financial statement schedules have been included as part of this
report because they are either not required or the information is otherwise
included.
3. 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).
2c -- Agreement and Plan of Merger among the Registrant, DynaGen Acquisition Corporation,
Superior Pharmaceutical Company and the stockholders of Superior Pharmaceutical
Company dated March 7, 1997 (filed herewith).
3a -- Certificate of Incorporation, as amended (filed herewith).
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).
57
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 -- Amendment No. 1 to Investment Banking Agreement between Registrant and H.J. Meyers
& Co., Inc. dated September 23, 1996 (filed herewith).
4n -- 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).
4o -- 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).
4p -- Common Stock Purchase Warrant issued by Registrant to Zach Spigelman dated December
10, 1996 (filed herewith).
4q -- Common Stock Purchase Warrant issued by Registrant to Rich Theriault dated December
10, 1996 (filed herewith).
4r -- Common Stock Purchase Warrant issued by Registrant to Shawn Basu dated December
10, 1996 (filed herewith).
4s -- Common Stock Purchase Warrant issued to Leonardo G. Zangani dated January 15,
1997 (filed herewith).
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, as amended (filed herewith).
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).
58
EXHIBIT
NO. ITEM AND 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 as Exhibit 10g to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
10h* -- Non-Qualified Stock Option Agreement dated July 24, 1996 granting a stock option
to Steven Georgiev (filed as Exhibit 10h to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
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).
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 as Exhibit
10o to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996, and incorporated by reference).
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 as Exhibit 10r to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
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 as Exhibit 10s to Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated
by reference).
59
EXHIBIT
NO. ITEM AND REFERENCE
--- ------------------
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 as Exhibit 10t to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated
by reference).
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 as Exhibit 10u to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
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 as Exhibit 10v to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
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 as Exhibit 10w to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
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 as Exhibit
10 w to Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996, and incorporated by 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 as Exhibit 10y to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996, and incorporated by reference).
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 as Exhibit 10z to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996, and incorporated by reference).
10aa* -- Non Qualified Stock Option Agreement dated October 28, 1996 granting a stock option
to Dr. Michael Sorell (filed herewith).
21 -- Subsidiary of the Registrant (filed herewith).
23a -- Consent of Wolf & Company, P.C. dated April 29, 1997 (filed herewith).
24a -- Power of Attorney is contained on page 61 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 December 31,
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.
60
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 APRIL 30, 1997.
DYNAGEN, INC.
By: /s/ INDU A. MUNI
----------------------------------
INDU A. MUNI
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND TREASURER
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 April 30, 1997
- --------------------------------------- Vice President and Director
DHANANJAY G. WADEKAR
/s/ DR. INDU A. MUNI President, Chief Executive Officer, April 30, 1997
- --------------------------------------- Treasurer, (Principal Executive,
DR. INDU A. MUNI Financial and Accounting Officer)
and Director
/s/ DR. F. HOWARD SCHNEIDER Senior Vice President -- Technology April 30, 1997
- --------------------------------------- and Director
DR. F. HOWARD SCHNEIDER
Director April 30, 1997
- ---------------------------------------
STEVEN GEORGIEV
/s/ DR. IAN R. FERRIER Director April 30, 1997
- ----------------------------------------
DR. IAN R. FERRIER
Director April 30, 1997
- ----------------------------------------
DR. MICHAEL SORELL
61