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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number __________________
EMPYREAN BIOSCIENCE, INC.
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(Name of Small Business Issuer in its Charter)
WYOMING 86-0973095
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23800 Commerce Park Road, Suite A, Cleveland, Ohio 44122
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (216) 360-7900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act, during the past 12 months (of for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10KSB. [ ]
The registrant's total revenues for the year ended December 31, 1999 were
$662,000.
As of March 24, 2000, the aggregate market value of the common stock held
by non-affiliates computed by reference to the average bid and asked prices of
such stock was $38,724,361.
As of March 24, 2000, the Registrant had 36,064,551 shares of common stock
outstanding.
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EMPYREAN BIOSCIENCE, INC.
PART I
ITEM 1. BUSINESS
HISTORY
We were originally incorporated in the Province of British Columbia, Canada
in 1986 under the name "Mr. Build Industries Inc." Since that time, we changed
our name at various times, and on December 31, 1996, under the name Empyrean
Diagnostics, Ltd., we changed our governing jurisdiction from the Province of
British Columbia to the State of Wyoming through the filing of a certificate of
continuance with the Wyoming Secretary of State. We intend to seek a stockholder
vote on our planned reincorporation into Delaware and to elect new directors. A
registration statement on Form S-4 relating to our reincorporation, which would
be accomplished by a merger of our existing Wyoming corporation into a newly
formed Delaware corporation, has been filed with the Securities and Exchange
Commission but has not yet become effective.
Prior to April 1997, we distributed and marketed an HIV diagnostic product.
In April 1997, in connection with a change in our management team, we shifted
our focus from marketing and distributing the HIV diagnostic test kit to
marketing and distributing preventative products. In 1998, we discontinued
marketing and distributing our diagnostic kits. We wrote off our HIV diagnostic
kit inventory in 1997 and our Trichomonas diagnostic kit inventory in 1998, and
stopped marketing our diagnostic products. This shift in focus coincided with
our acquisition of rights from International Bioscience Corporation ("IBC") to
use their microbicide formulation in our current and proposed preventative
products.
We market, sell and distribute innovative personal care products that are
intended to prevent the spread of infectious disease. To date, we have
introduced one product, which is marketed as both the Preventx(R) hand sanitizer
and the Coleman(R) hand sanitizer and first aid antiseptic with the Advanced
Preventx(R) Formula. IBC is presently developing at least three additional
preventative products for us: baby wipes, a disinfectant surface spray and a
microbicidal contraceptive gel. We are hopeful the baby wipes and disinfectant
surface spray will be introduced during the last half of the year 2000. The
microbicidal contraceptive gel must undergo clinical trials and obtain
regulatory approval prior to marketing. We anticipate regulatory approval of the
microbicidal contraceptive gel will take at least 18 months.
We have changed our Board of Directors and management from time to time in
connection with restructuring of our business.
We have not undergone any bankruptcy, receivership, or similar proceedings
nor have we had any material consolidation, merger, or purchase or sale of a
significant amount of assets not in the ordinary course of business (except the
disposal of our diagnostic equipment assets upon discontinuance of that business
line, as described above). We have a negative net worth and have incurred net
losses in 1998 and 1999 and expect to incur net losses at least through the
second quarter of 2000. We expect operations to generate negative cash flow
through at least the first two quarters of 2000 and we currently have no credit
line available to us. These factors raise doubts about our ability to continue
as a going concern and our audit report contains an explanatory paragraph with
respect to this matter.
OVERVIEW
We market, sell and distribute innovative personal care products that are
intended to prevent the spread of infectious disease. Our current product, the
hand sanitizer, developed and licensed to us by IBC, is sold over-the-counter in
the retail markets and also to various commercial, industrial and institutional
customers. Our current product is marketed as a hand sanitizer product sold
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under our Preventx(R) brand name and as a hand sanitizer and first aid
antiseptic sold under the Coleman(R) brand name. IBC is also utilizing the
formula used in our innovative hand sanitizer product to develop a variety of
other products with similar chemical formulations including a baby wipe product,
a disinfectant surface spray to be marketed to the retail markets and also to
the food service, hotel and other industries and a microbicidal contraceptive
gel designed to prevent pregnancy and sexually transmitted diseases ("STDs").
We believe that the preventative formula licensed from IBC will be shown to
be both safer and more effective as an anti-microbicide than existing
competitive products in the market and offers us a platform to leverage our
expertise into other areas of the infectious disease market.
We believe that the spread of infectious disease has become a major concern
in many industries, including the health care, food service and public
accommodation industries. We also believe that bacterial contamination has
become, and will continue to be, an issue of heightened public concern fueled by
the prevalence or reemergence of several deadly diseases in recent years,
including HIV (the causative agent of AIDS), Hepatitis, and other diseases.
A major source for transmission of infection is the bacterial flora on the
skin, primarily the hands. Skin has two types of microbial flora, resident or
colonizing flora and transient or contaminating flora. Resident flora is
relatively stable and is not readily removed, although it can be inactivated by
antiseptics. Transient flora, on the other hand, can be acquired by contact,
does not colonize, and is easier to remove by physical or chemical means.
Infections can arise from either group.
The primary means to avoid the spread of contamination by microorganisms is
through regular hand washing and the use of barriers such as latex gloves. Poor
compliance with normal hand washing protocols and the porous nature of
protective gloves limit their effectiveness. In addition, many effective
antiseptics cannot be used on skin or other surfaces because they are too toxic
for routine use or lead to undesirable side effects.
We believe that the IBC formulation used in our existing hand sanitizer
product and in our other infectious disease preventative products that IBC has
under development has the potential to offer several unique advantages over
other products currently available in the market, in that the IBC formulation:
* may protect skin and surfaces from a broader range of harmful
microorganisms and infectious diseases;
* may be longer lasting and more effective,
* is alcohol and triclosan free, and as a result may be relatively
non-irritating and may avoid safety concerns such as flammability,
* is virtually odor free, and
* may be virtually non-toxic and safer for use around children and in
food preparation and medical applications.
The basic IBC product formulation utilizes benzalkonium chloride as its
active ingredient, which has been recognized to be effective at killing harmful
microorganisms and, we believe, is safe and offers greater versatility by
assisting the healing of minor cuts and abrasions.
We will attempt to capture a significant percentage of the infectious
disease preventative markets in which we compete by marketing, selling and
distributing superior products based on the IBC formulation in large or rapidly
growing market segments, by developing brand awareness for our products, and by
leveraging our name and product recognition into compatible consumer product
applications and into other products intended to prevent infectious disease. We
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believe that by offering unique products that may offer increased protection
against infectious disease while at the same time eliminating many of the
discomforts and side effects caused by existing products on the market, we can
increase the demand for over-the-counter disease preventative products and
position ourselves to benefit from this expansion.
Our hand sanitizer is, and our disinfectant surface spray products will be,
marketed to consumers through retail channels of distribution and to various
commercial, industrial and institutional customers such as health care
personnel, hotels, airlines, food service companies and restaurants, cruise
lines, banks, casinos and other money handling entities, police departments,
emergency response, correctional facilities and other city services industries.
We expect our microbicidal contraceptive gel will be marketed primarily to
consumers through retail channels of distribution, and to contraceptive product
manufacturers. Our baby wipe product will be marketed primarily to consumers
through retail channels of distribution. Our primary focus in marketing our
products is to generate sales and create brand awareness and effectively
communicate our unique features and benefits to consumers, and to establish
relationships with retailers, distributors, wholesalers and volume buying
organizations, such as health maintenance organizations, hospital buying groups,
hotel and restaurant chains, and municipal service agencies.
We market and distribute the IBC licensed current product, and intend to
market and distribute the products currently under development by IBC, primarily
through our own internal sales and sales support efforts and through independent
manufacturers' sales representatives, third party distributors and marketing
partners. We currently have engaged Handl-It Inc. to provide customer service,
warehousing and distribution services for us, including order taking via
telephone, fax and electronic data interchange ("EDI"), warehousing,
distribution and customer invoicing and accounting. We also have distribution
relationships with third party distributors covering the United States and
twelve foreign countries.
The microbicidal contraceptive gel has been accepted by the National
Institutes of Health to undergo Phase III clinical trials to prove its safety
and its effectiveness against STDs and as a contraceptive. The purposes of the
Phase I and II clinical trials were to study the safety of the contraceptive gel
when used in women and its effectiveness against STDs in an in vitro
environment. The first two phases of the three phase clinical trials have been
completed with seemingly positive results from the standpoint of safety and in
vitro effectiveness. The results of the Phase I and II studies, which were not
conducted by the NIH, have been confirmed by the NIH. The Phase III study and
the confirmations of the Phase I and Phase II studies have and will continue to
be funded by the NIH.
Future products could include deodorant, shaving cream, moist towelettes,
toothpaste and mouthwash products.
We are a defendant in an action which was filed by Optima Holding Co., Ltd.
and Mercury Technology Corp. on July 28, 1998 in the Circuit Court of the
Eleventh Judicial District, Dade County, Florida. This action alleges that we
tortiously interfered with Optima and Mercury's contractual relationship with
IBC. Optima and Mercury claim that they had prior rights to the IBC formulation
and products and that we induced IBC to breach that agreement. Optima and
Mercury have requested an unspecified amount of damages against us. In a
separate action that has now been consolidated with the first action in the same
court, IBC has requested a declaratory judgement that IBC properly terminated
its development and distribution contract with Optima and Mercury. Plaintiffs
also seek injunctive relief to prevent IBC and its managers and directors from
allowing IBC to have further dealings with us. If we are not successful in this
action, we could lose the right to market, sell or manufacture worldwide our
hand sanitizer product and other products currently under development. The
discovery in this action is proceeding.
INDUSTRY BACKGROUND
HAND SANITIZER PRODUCTS
Sales of all hand and body lotions (including those making sanitizing
claims) were estimated to be approximately $850 million in the United States in
1999 ("Mass Market Retailers/Information Resources Inc. Health and Beauty Aids
Report", 1999/1998). We believe that the growth in the sanitizer market, a
subset of the hand and body lotion market will be driven by the availability of
effective products that are both safe and free of undesirable side effects.
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The dominant products in the sanitizer market today are topically applied
hand sanitizing lotions or creams containing alcohol. These products are sold
primarily in the over-the-counter market, typically in plastic bottles ranging
from two to sixteen ounces each, and in larger volume or bulk forms in
industrial and institutional settings, such as large pump dispensers and wall
mounted dispensers.
Currently marketed hand sanitizers or antimicrobial lotions are designed to
sanitize the skin against various disease causing microorganisms, including E.
Coli, Salmonella, Staph Aureas, K-Pneumonia, and Pseudomonas Aeruginosa. These
products typically are not intended as a cleaner, like soap products, but are
intended solely to kill germs on contact. Sanitizer products can be used in a
number of situations where the spread of disease is a particular concern, such
as in the food service, health care and public accommodation industries, and in
settings where water or facilities are not available for conventional hand or
body washing. The market for personal sanitizing or antimicrobial products has
increased rapidly in recent years due in part to increasing public awareness and
media reports of dangerous and sometimes deadly bacterial or viral contamination
in common or frequently populated areas.
Of the hand sanitizer products currently on the market today, most use
either alcohol or triclosan as their active ingredient. The typical alcohol
concentration in these products is over 60%. Institutional use hand sanitizers
may also utilize chloroxylenol or nonoxynol-9 as active ingredients. Products
based on these active ingredients may cause a number of undesirable side
effects, including dry skin conditions and other skin irritations such as
burning, itching and stinging. Many of these products, including all alcohol
based products, are flammable until dry (which can lead to limitations on use
and to risks of serious personal injury) and may be painful when applied to
existing cuts, burns, or abrasions. Products using alcohol and triclosan may
have limited effectiveness, as the range of infectious disease-causing germs
with which they react are more limited, and often do not include STDs. In fact,
due primarily to their drying effect, products containing alcohol or triclosan
can actually increase vulnerability to infection after repeated use.
Triclosan based products also must be compounded with a form of alcohol or
organic solvent because they are not water soluble and the presence of water can
prevent the release of bactericidal potency in them. This can lead to the
development of environments where bacteria can mutate and the re-growth of
antiseptic tolerant bacteria can occur. In recent years, there have been at
least three product recalls of triclosan-based products, two of which were the
result of Pseudomonas found growing in the product.
BABY WIPE PRODUCTS
Sales of baby wipes by drug stores, discount stores and supermarkets in the
United States totaled $596 million in 1998. Well-known brand names dominate this
category and include Huggies, Luvs and Pampers. Products are classified as
super-premium, premium, private label, average and low end. Only two
manufacturers offer an anti-bacterial feature and neither of them are
long-lasting nor are they alcohol-free.
Our baby wipes will be sold as a super premium product due to the benefits
that they will offer to the consumer. Utilizing a formulation very similar to
that found in the hand sanitizer, we believe our baby wipes will be
alcohol-free, non-irritating, non-toxic, anti-bacterial and long-lasting.
Through additional testing to be performed by IBC, we also believe we will be
able to present the product as aiding in the prevention of diaper rash. As a
result, we believe that our product will have significant advantages over
products on the market today.
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DISINFECTANT SURFACE SPRAY PRODUCTS
Current products in the disinfectant surface spray category include well
known brand names such as Lysol and Dial. It is a large market with no one
product dominating the segment. Our disinfectant surface spray, which is similar
to our hand sanitizer, is designed to be used in personal spray-size
applications. It can be used on surface areas typically containing large amounts
of bacterial or other contamination such as public telephones, toilet areas, and
diaper changing areas. It can also be used in institutional applications for
surface areas such as medical patient care areas, food service preparation areas
such as sinks and counter tops, and similar locations.
Existing sales of household cleaners (including all household cleaning
related products) were approximately $2.3 billion in the United States in 1998
according to MMR/IRI Reports (1999/1998). We believe that our disinfectant
surface spray product can increase the market for disinfectant surface spray
products due to its non-toxic qualities, which make it available for more
extensive use in the food service and health care industries, among others.
CONTRACEPTIVE PRODUCTS
The contraceptive market consists of two general categories, oral
contraceptives which are available only through prescription and
over-the-counter contraceptive products such as gels, condoms and similar
products that do not require a prescription. Sales of over-the-counter
contraceptive products in 1998 were approximately $261 million in the United
States. We expect to compete in and expand the over-the-counter segment of the
contraceptive market with our microbicidal contraceptive gel, which has
completed the first two of three-phases of clinical trials to determine its
safety and effectiveness as a contraceptive and as a means of preventing STDs.
To our knowledge, all over-the-counter and prescription contraceptive
products on the market today are effective only as a spermicide and are not
designed or claim to act as a barrier against STDs or other infectious diseases.
It has been widely reported that the United States, like many other
countries, is experiencing an epidemic of STDs, including the HIV virus,
gonorrhea, syphilis, chlamydia, trichomonas vaginalis, and herpes. According to
statistics compiled by the World Health Organization in 1997 and by the United
States Center for Disease Control in 1998, approximately 5.8 million new cases
of HIV infection, 170 million new cases of trichomonas, 89 million new cases of
chlamydia, 62 million new cases of gonorrhea, 12 million new cases of syphilis
and 40 million new cases of genital herpes are experienced worldwide each year.
One in five adults in the United States now has genital herpes. In the December
14, 1998 issue of U.S. News and World Report, it was reported that according to
a leading public health study, at least one in every three sexually active
people will contract an STD by the age of 24. The estimates of the number of
people contracting STDs are thought by many experts to be conservative, since it
is believed that many people either choose not to discuss these diseases with
their physicians or are unaware of them.
The most common front-line defense against STDs among over-the-counter
alternatives is the condom. Condoms do not kill STDs or other infectious
disease, but can act as a barrier against disease transmission and are often
purchased by consumers for that purpose. Condoms are relatively porous,
containing pore sizes ranging from 5 to 70 microns in size. In contrast, an HIV
particle is typically as small as .005 microns in size and can easily penetrate
condom surfaces, as can some other STDs.
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Other over-the-counter gels and salves have recently been introduced which
are intended to kill bacteria and viruses that cause STDs, primarily the HIV
virus. Currently, most of these products utilize nonoxynol-9 as an active
ingredient. Recent studies have indicated that although products containing
nonoxynol-9 have been shown to kill HIV and other STDs in vitro, nonoxynol-9 may
not have the same effect in vivo and might actually increase the risk of
contracting HIV. At a high enough dosage, nonoxynol-9 also can cause
ulcerations, lesions, and other uncomfortable irritations. As a result of
current research findings, the New York State Health Department is reconsidering
its prior endorsement of nonoxynol-9, and the United States Center for Disease
Control and Prevention currently does not endorse the use of nonoxynol-9 without
a condom for protection from HIV.
MARKET OPPORTUNITIES
Infectious disease is the leading health problem in the world, leading to
more deaths and serious health conditions than any other high profile disease,
including heart disease and cancer. In 1997, there were over 2 million
infections and 90,000 deaths in the United States alone resulting from
nosocomial contamination, defined as infections contracted at a hospital or
doctor's office that are unrelated to the purpose of a patient's visit. There
were another 80 million cases of food poisoning in the United States, 10,000 of
which resulted in death. According to industry studies, the average cost of
treating nosocomial infections in the United States was $2,300 per incident, or
$4.5 billion in annual direct costs. Developing inexpensive, effective and safe
solutions to these diseases will, we believe, satisfy a large unmet market need
that is being driven by the frequency and seriousness of public reports of
infectious disease contamination in common public venues, such as hotels, public
restrooms, and food service establishments. According to a December 1998 report
of the American Social Health Association, there are approximately 15 million
new cases of STDs in the U.S. annually. The direct medical cost of treating
these STDs and their complications is reported to be $8.4 billion annually.
OUR SOLUTION
Our current and proposed preventative products utilize the same active
ingredient, benzalkonium chloride, and have the potential to provide safety and
efficacy qualities lacking in most competitive products, while at the same time
addressing limitations of competitive products. Our microbicidal contraceptive
gel will also utilize Octoxynol-9, a detergent-like chemical that attacks the
outer membrane of microorganisms allowing benzalkonium chloride to reduce
harmful microorganisms.
Most microorganisms are reduced after application or contact with the
product. The IBC product formulation does not utilize alcohol, triclosan or
other organic solvents, which are commonly used in competitive products. Our
alcohol and triclosan-free products do not appear to cause many of the skin
conditions and side effects of competitive products, such as dry skin and
burning and itching irritations. Our products offer protection against the
spread of nearly all harmful microorganisms on the skin. In addition, our
products are non-flammable, allowing for use in many settings otherwise
unsuitable for competitive products. All of the products currently under
development by IBC, and all of the product innovations planned for development
in the future by IBC, will be based upon IBC's existing basic product
formulations, thus creating an opportunity for faster entry into compatible
market opportunities.
BUSINESS STRATEGY
Our goal is to achieve a position in the retail, commercial and
institutional markets for over-the-counter infectious disease preventative and
contraceptive products, and to leverage our position to enter other markets. We
intend to pursue this goal by increasing the demand for effective and safe
disease preventative products and by increasing the number of our products used
to prevent infectious disease. Our business strategy consists of the following
key elements:
DEVELOP BRAND AWARENESS AND MARKET ACCEPTANCE FOR PREVENTX(R). We believe
that we can develop brand awareness and market acceptance of our unique
antimicrobial products among consumers as well as commercial and
institutional customers. We intend to develop brand awareness and
acceptance by offering superior products that are more effective in
protecting against infectious disease and safer with more pleasing
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qualities than competitive products. We also intend to develop brand
awareness and market acceptance of our products through advertising and by
expanding our network of United States and international distributors and
by entering into strategic relationships with other parties who can
significantly increase our marketing, sales and distribution resources.
APPLY CORE IBC FORMULATIONS TO ADDITIONAL PRODUCT APPLICATIONS. All of our
infectious disease preventative products are based on a common product
formulation, which is licensed to us by IBC and contains octoxynol-9 and
benzalkonium chloride as its active ingredients. We intend to continue to
leverage the brand awareness and market acceptance of our hand sanitizer
product to create market demand for our baby wipes, disinfectant surface
spray and our microbicidal contraceptive gel. We may leverage the future
success of these products through the introduction of a variety of
compatible personal care product formulations, such as deodorant, shaving
cream, moist towelettes, toothpaste and mouthwash products.
LEVERAGE RESOURCES THROUGH STRATEGIC RELATIONSHIP AND ACQUISITIONS. We
intend to build our business in part through the acquisition of
complementary technologies, products and businesses and by entering into
strategic collaborations, including additional licensing and marketing
arrangements, with other biotechnology companies and research institutions.
We believe that these acquisitions and relationships will better enable us
to enter markets more quickly and extensively. We also believe that
significant acquisition and strategic partnering opportunities exist in the
infectious disease industry. We are not currently in active discussions
with possible acquisition or strategic partnering candidates.
PRODUCTS AND TECHNOLOGIES
To date, we have introduced one product which is marketed as both the
Preventx(R) hand sanitizer and the Coleman(R) hand sanitizer and first aid
antiseptic with the Advanced Preventx(R) Formula. IBC is presently developing at
least three additional preventative products for us, our disinfectant surface
spray, baby wipes and microbicidal contraceptive gel, each of which must comply
with applicable regulatory requirements or obtain regulatory approval (which may
include clinical trials) prior to marketing. Each of these products is described
below.
CURRENT DISEASE PREVENTATIVE PRODUCT
PREVENTX(R) HAND SANITIZER
Our hand sanitizer is commonly applied in small quantities and rubbed into
the hands. We also recommend use of the product in the medical and food service
industries along with latex gloves as a secondary barrier against infection. Our
product decreases the risks associated with glove degradation, tears or cuts,
and large latex pore sizes. Because we believe the IBC formula is virtually
non-toxic, it can be used safely in food preparation areas and around medical
patients. Our hand sanitizer will not damage latex gloves or other products.
Our hand sanitizer product, unlike most competitive products, does not
include alcohol, triclosan, or other organic solvents as its active ingredient.
The benefits of utilizing an alcohol free and triclosan free formulation
include:
* The protection provided by our hand sanitizer is long lasting (up to
four hours). In contrast, alcohol and triclosan based products
typically lose effectiveness after drying (approximately fifteen
seconds).
* The IBC formulation does not dry out the skin and does not cause any
decreased germ resistance. Alcohol and triclosan based products have
been shown to actually increase the risk of infectious disease after
repeated use, as the drying nature of these ingredients can strip skin
of its natural barrier and cause microscopic cracks in the skin, which
provides a conducive environment for disease-causing germs that
colonize the skin. In addition, triclosan based products have been
found to cause decreased resistance to bacteria and the mutation of
some germs.
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* Our product is non-flammable and thus reduces the risk of personal
injury associated with alcohol-based products and increases the
institutional and consumer settings where a hand sanitizer product can
safely and conveniently be applied and stored. At concentrations of
60% or greater, alcohol-based hand sanitizer products are highly
flammable.
* Our hand sanitizer not only alleviates dry skin conditions caused by
alcohol or triclosan based products, it actually helps nourish,
moisturize, and heal damaged skin and does not cause many of the skin
irritations associated with competitive products, including itching,
stinging and burning. We incorporate aloe vera into our hand sanitizer
product to further promote its soothing effects. In addition, our
product helps to heal minor cuts, burns, and abrasions, in contrast to
alcohol based products which can cause painful discomfort when in
contact with minor skin injuries. Our hand sanitizer also does not
cause irritation to mucosal tissues in the nose, unlike alcohol and
triclosan based products.
Presently, our hand sanitizer is sold at retail stores in 2 and 8 ounce
plastic bottles, and in the commercial, industrial and institutional markets in
2, 8 and 16 ounce plastic bottles. We also intend to offer a bulk refillable
dispenser that dispenses a pre-measured amount of the product.
Our hand sanitizer product was launched in the United States in March 1999.
In April 1999, we entered into an exclusive distribution agreement for Southeast
Asia with Durstrand International Limited. The agreement includes minimum
product purchase requirements that must be met in order to retain exclusivity,
as well as sub-distribution fee requirements. The minimum purchase requirement
of $400,000 must be satisfied by April 2000. To date no inventory has been
purchased.
INFECTIOUS DISEASE PREVENTATIVE PRODUCTS UNDER DEVELOPMENT
BABY WIPES
Utilizing the same active ingredient as our hand sanitizer, IBC is
developing for us a non-toxic, long lasting baby wipe for the retail market. We
believe that FDA regulatory approval of a benzalkonium chloride-containing baby
wipe product which aids in the prevention of diaper rash, if obtained, would
give the Preventx(R) baby wipe a significant advantage over alcohol-based wipes
on the market today.
The baby wipe formulation has been developed and IBC intends to conduct
further testing in the near future to substantiate our additional claims. We are
hopeful that IBC will be able to deliver a baby wipe product which meets the
claim that it aids in the prevention of diaper rash and we will introduce the
product in fiscal year 2000.
SURFACE SPRAY DISINFECTANT
IBC has developed a disinfectant surface spray which utilizes the same key
active ingredient formulation as our hand sanitizer product. Our disinfectant
surface spray does not contain the thickening and aloe vera additives contained
in our hand sanitizer, making it suitable for a pump spray application. The pump
spray will be packaged in smaller dispensers for personal use applications
around common dangerous germ concentrations such as public telephones, public
restrooms, and diaper changing areas, and larger dispensers for institutional
applications such as food service surfaces, hotel facilities, and surfaces where
medical services are performed.
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Our disinfectant surface spray will have all of the same advantages as our
hand sanitizer product, and is particularly suited for uses in the food service,
medical and hotel industries where safety and toxicity are major concerns.
Current competitive products include a variety of household or industrial
surface cleaning products, all of which are toxic and generally cannot be used
in contact with food preparation or medical care areas without caution. In
addition, our disinfectant surface spray product is not harmful to common
surfaces such as sinks, counters, trays, furniture, or other objects.
We expect to launch our disinfectant surface spray product in the United
States after IBC has obtained approval from the Environmental Protection Agency.
We are hopeful that IBC will deliver the disinfectant surface spray by the end
of fiscal year 2000.
The disinfectant surface spray will require EPA approval because we want to
claim that the spray has the ability to eliminate viruses, bacteria and fungi on
surfaces. Under EPA guidelines, the disinfectant surface spray is classified as
a pesticide since it kills viruses, fungi and bacteria on surfaces. Therefore,
EPA approval must be obtained under the rules and regulations governing
pesticides.
MICROBICIDAL CONTRACEPTIVE GEL
Our microbicidal contraceptive gel has been developed by IBC and we
anticipate initiation of a Phase III clinical trial with the National Institute
of Allergy and Infectious Disease of the National Institutes of Health. The
clinical trial will determine whether the gel effectively kills a host of STDs
and other infectious diseases, in addition to its contraceptive properties, and
is safe. Upon initiation and successful completion of the Phase III clinical
trial and results showing safety and effectiveness, a new drug application will
be filed with the FDA for its approval. We anticipate approval will take at
least 18 months from the time that Phase III trials commence.
Once approved, the gel would be marketed primarily in the retail,
over-the-counter market in single use, pre-filled applicators as well as larger
tubes. We also intend to market the product in bulk quantities to condom
manufacturers to be used as a coating inside the condom wrapper, thus enhancing
the effectiveness of condoms as a means of contraception and as a disease
preventative and enabling condom manufacturers to make additional product
claims.
Existing contraceptive gel products utilize active ingredients such as
nonoxynol-9 that can cause lesions, ulcerations, and other skin irritations.
These irritations can, in turn, facilitate infections. Our gel's active
ingredients act synergistically as a microbicide and spermicide. In addition,
only small amounts are needed, limiting the possibility of skin irritations. In
pre-clinical safety studies, our gel was found to cause no damage to squamous or
columnar mucosa cells. The gel is compatible with latex condoms. We are aware of
no other approved competitive products that make these claims, which would, if
successful, make the gel a unique product in the over-the-counter contraceptive
market.
We believe that if the NIH studies are successfully completed and FDA
approval is obtained, we will be able to offer a product that can capture
significant market share and also increase the market for non-prescription
contraceptive products. We expect to launch our contraceptive gel product if we
receive FDA approval, although we may never obtain approval.
The microbicidal contraceptive gel will not be sold in the United States
until a Phase III study is completed and approved by the FDA. The Phase III
study has yet to begin and will address the effectiveness of the product in
preventing the transmission of gonorrhea, chlamydia, and trichomonas vaginalis.
The second part of the Phase III testing will address the effectiveness of the
product in preventing the transmission of HIV. It will then be submitted to the
FDA for approval.
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SALES AND MARKETING
We currently market our products in the United States to both the retail
over-the-counter market utilizing internal sales personnel and third party
manufacturers representatives, and to commercial, industrial and institutional
customers through distributors and sales agents. Effective in the first quarter
of fiscal year 2000, we began selling our product to Wal-Mart Stores, Inc. Prior
to that time, we had experienced a limited amount of sales that were largely to
smaller commercial and institutional customers.
Within the United States our existing product is distributed direct to
retailers and institutionally through third-party distributors. Upon IBC
obtaining regulatory approval, we plan to distribute the products currently
under development through the same channels. Internationally, we are represented
by a third party distributor in Southeast Asia. Our foreign distributors are
generally granted exclusive rights (subject to minimum purchase requirements) in
designated territories and are responsible for obtaining and maintaining
required foreign regulatory approvals for our products.
We typically sell inventories to third party distributors at negotiated
prices. The products are then re-sold by the distributors to a variety of
customers.
Our hand sanitizer product is currently being launched at Wal-Mart and a
regional drug chain in the United States. We plan to rely heavily on
point-of-purchase merchandising programs ("POP") in our marketing and
advertising efforts. We feel this strategy will be very effective for the hand
sanitizer product as consumers are already drawn to the health and beauty aids
area within the retail store. Therefore, our POPs will tell the consumer about
the many advantages of our hand sanitizer over alchohol-based competitors. This
strategy will be supplemented with print and other forms of advertising as funds
permit. We also operate an Internet web site which provides useful information
about our current products, those under development and the Company.
DEPENDENCE ON SIGNFICANT CUSTOMERS
Wal-Mart Stores, Inc. and a one-time sale to a large pharmaceutical company
comprised 13% and 38% of our 1999 product sales, respectively. In fiscal year
2000 through March 24, 2000, nearly all of our sales are to Wal-Mart Stores,
Inc. However, we believe by the end of the second quarter we will have developed
relationships with other national retail, drug, grocery or discount chains,
which will lessen our dependence on Wal-Mart beginning in the second half of
2000.
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STRATEGIC RELATIONSHIPS
INTERNATIONAL BIOSCIENCE CORPORATION LICENSE
We currently license our product and manufacturing formulations used in our
disease preventative products from International Bioscience Corporation
(formerly known as Geda International Marketing Co., Ltd.), a Bahamian company
("IBC"). The license agreement allows us to manufacture, use, and sell the
products formulated on this technology and to sub-license others to do so. The
license agreement requires us to pay royalties and a portion of some of our
sub-licensing fees and other payments collected by us from joint venture
relationships. The license agreement covers the world except for Hong Kong,
Taiwan, Canada, Africa, Mexico, the Dominican Republic, and, as to the sale of
the anti-microbial hand lotion ("hand sanitizer"), the United States. We
subsequently acquired sub-licensing rights for the hand sanitizer in the United
States from Prevent-X, Inc. Additionally, we subsequently acquired the
distribution rights for the IBC formulation for Canada from Farida Darbar. The
term of the license extends to April 29, 2007, subject to renewal options for
additional 10 year terms if we meet the guaranteed minimum royalty requirements.
Under the license agreement, we are required to pay the greater of minimum
royalties or 2% of net sales in order to maintain exclusivity. These minimum
royalties increase each year of the contract as shown below:
Future Minimum
Year Ending Guaranteed
December 31, Payments
------------ ----------
2000 $ 735,000
2001 915,000
2002 1,215,000
2003 1,458,000
2004 1,758,000
2005 2,108,000
2006 2,508,000
2007 2,960,000
The agreement also grants us a right of first refusal to acquire the
licensed technology if IBC decides to sell it.
PREVENT-X SUB-LICENSE
In July 1998, we entered into a sub-license agreement with Prevent-X, Inc.,
a Miami, Florida based marketing company. This agreement provides us with
exclusive rights to manufacture, market, and sell our hand sanitizer product in
the United States, which rights were previously licensed to Prevent-X by IBC.
This sub-licensing agreement also provided for the acquisition of the
Preventx(R) trade name, marks and logos. We acquired these rights in exchange
for up-front payments of 225,000 shares of our common stock, $50,000 cash, and
continuing royalty payments of 5% of net sales of the hand sanitizer sold in the
United States. The initial term of the agreement is ten years, based on Empyrean
meeting the conditions of the agreement.
HANDL-IT INC. ALLIANCE
Effective March 2, 2000, we engaged Handl-It Inc. of Cleveland, Ohio to
provide us with a portfolio of outsourcing services including finished goods
warehousing, distribution, customer service, order processing, invoicing and
accounts receivable management. The arrangement covers all of our infectious
disease preventative products. Handl-It is able to provide these services more
efficiently and at a more competitive cost than our previous provider of these
services. We have no long-term agreement with Handl-It.
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DURSTRAND INTERNATIONAL LIMITED
On April 28, 1999, we entered into a distribution agreement with Durstrand
International Limited, a British Virgin Islands company. The agreement provides
Durstrand with exclusive rights for three years (and automatic renewal for two
additional ten-year terms if the agreement's provisions are met by both
parties), to distribute the Preventx(R) hand sanitizer and, when approved by the
appropriate regulatory bodies, our contraceptive gel in The Phillippines,
Singapore, Thailand, Indonesia, Malaysia, Cambodia, Myanmar and Vietnam.
Durstrand paid $500,000 for the exclusive rights to the Preventx(R) hand
sanitizer product and will pay $600,000 for the exclusive rights for the
microbicidal contraceptive gel 120 days following approval of claims related to
our products by the FDA. There have been no purchases to date. Durstrand must
purchase a minimum annual amount of either product to maintain its exclusive
rights as follows:
Future Minimum
Year Ending Guaranteed
April 28, Payments
--------- ----------
2000 $ 400,000
2001 1,000,000
2002 3,000,000
2003 and thereafter 115% of annual minimum
guaranteed payments in the
immediately preceding year
SUNBEAM(R) AND COLEMAN(R) LICENSES
On October 1, 1999, we entered into separate license agreements with
Sunbeam Corporation and The Coleman Company, Inc. The licenses are
non-exclusive. They allow us to use the Sunbeam(R) and Coleman(R) Trademarks in
connection with the sale and distribution, throughout the United States and
Canada, of our hand sanitizer and first aid antiseptic, sanitizing wet wipes,
disinfectant surface spray and sanitizing baby wipes. The licenses expire on
December 31, 2002. We can renew the licenses until December 31, 2005 if we meet
the renewal terms under the agreements.
We are required to pay Sunbeam a royalty based on net sales of the Sunbeam
licensed products. Sunbeam has the right to terminate the agreement if we fail
to timely pay the higher of the applicable royalty percentage based on net sales
or annual minimum royalties in the amounts of $20,000, $60,000 and $120,000 in
2000, 2001 and 2002, respectively, or if we fail to achieve minimum sales for
the Sunbeam licensed products.
We are required to pay Coleman a royalty based on net sales of the Coleman
licensed products. Coleman has the right to terminate the agreement if we fail
to timely pay the higher of the applicable royalty percentage based on net sales
or annual minimum royalties in the amounts of $25,000, $50,000 and $100,000 in
2000, 2001 and 2002, respectively, or if we fail to achieve minimum sales for
the Coleman licensed products.
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MANUFACTURING AND QUALITY CONTROL
PREVENTATIVE PRODUCTS
The manufacturing of our hand sanitizer, licensed to us by IBC, is
performed to the specification set forth by IBC by an independent manufacturer,
Canadian Custom Packaging ("CCP"), a Canadian entity located in Toronto,
Ontario. CCP performs production and filling of product into tubes and bottles,
labeling and packaging. All of the raw materials used in the formulation are
acquired by CCP to IBC's specifications. We believe that the raw materials
required for our products are readily obtainable from a variety of sources and
we have experienced no difficulties or unexpected costs to date in acquiring the
raw materials. CCP's manufacturing facility is required to meet, and currently
meets, good manufacturing practices including regulations adopted by the FDA and
is subject to periodic inspection by the agency. It is also ISO 9001 certified.
RESEARCH AND DEVELOPMENT
The primary new product research and development is undertaken by IBC. We
also retain the right to perform research and development. We currently focus
all of our limited research and development resources and efforts on the
identification of additional applications for the Preventx(R) antimicrobial and
contraceptive products licensed to us by IBC. In addition, we intend to pursue
strategic relationships with biotechnology companies and research institutions
with respect to other products which will complement our line of Preventx(R)
products. We have expended $14,500 and $31,500 for research and development
activities in 1999 and 1998, respectively.
PROPRIETARY RIGHTS
We license all of the product and manufacturing formulas used in our
disease preventative products from IBC. Although we believe the formulas are
proprietary, they are subject to current litigation by a third party claiming a
prior worldwide licensing and marketing rights. To date, we hold no patents on
our products and formulas. These products utilize common compounds in formulas
that we believe are difficult to copy and manufacture. The IBC formulas are
primarily protected by trade secret protections and through contractual
confidentiality obligations of our employees, contracting parties, independent
contractors and other collaborators. We rely on trade secret protection,
confidentiality obligations, know-how, and continuing technological innovations
and licensing opportunities to develop and maintain our competitive position.
GOVERNMENT REGULATION
The products we market and intend to market are subject to regulatory
approval in both the United States and in foreign countries. The following
discussion outlines the various kinds of reviews to which our products may be
subjected prior to receiving approval for marketing in the United States and
abroad. Some of our collaborative partners in foreign countries will be
responsible for preparing and processing regulatory submissions for countries
located in their respective territories.
REQUIREMENTS IN THE UNITED STATES
The production, distribution and marketing of our products and our research
and development activities are subject to regulation for safety, effectiveness
and quality by numerous governmental authorities. In the United States, drugs
are subject to extensive federal regulation, ordinarily including the
requirement of approval by the Food and Drug Administration ("FDA") before
marketing may begin, and, to a lesser extent, state regulation. The Federal
Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, and
other federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, distribution, storage, record
keeping, approval, advertising, marketing, and sale of our products. Product
development and approval within the regulatory scheme will vary based on the
type of product, required testing and the desired product claims and could take
a number of years and involve the expenditure of substantial resources.
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The standard process required by the FDA before a drug may be marketed in
the United States includes:
* preclinical laboratory and animal tests;
* submission to the FDA of an application for an investigational new
drug;
* preliminary testing of the drug in people to evaluate the drug and its
manner of use; and
* adequate and well-controlled testing of the drug in people to
establish the safety and effectiveness of the drug for its intended
use.
If the product is regulated as a prescription drug, or in some cases as an
over-the-counter drug, the Food and Drug Act ordinarily requires the submission
and approval of a New Drug Application ("NDA") or an abbreviated NDA, for
duplicate versions of a "pioneer" drug product, before commercial marketing may
begin. As part of the NDA process, the manufacturer is required to accumulate,
and submit to the FDA for review and approval in the form of a NDA, a
significant amount of safety and effectiveness data from laboratory and animal
testing and clinical studies; detailed information concerning product
composition, stability, and manufacturing; and other information including
proposed labeling. Abbreviated NDAs do not require their own clinical safety and
effectiveness data. Each domestic and foreign manufacturing establishment
including contract manufacturers for us must also be registered with the FDA and
pass an inspection by the FDA prior to approval for commercial distribution.
Domestic and foreign manufacturing establishments are subject to
inspections by the FDA and by other federal agencies and by state and local
agencies, and must comply with current good manufacturing practice requirements.
If violations of applicable requirements are noted by the FDA or other agencies
during an inspection, distribution of clinical materials for investigational use
or production lots for commercial use may be halted and, possibly, other
sanctions imposed. Commercial marketing of existing and proposed products (other
than our disinfectant surface spray), depending on the ingredients, claims, and
the outcome of the FDA's Over-the-Counter Drug Review, may occur only after
approval of NDAs following the submission of a complete application. The NDA
internal review process frequently takes two to four years or longer to complete
and the FDA may require us to perform additional studies to gain approval which
may take several years to complete.
Moreover, we are, or may become, subject to various federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, storage, handling and disposal of waste and hazardous substances used in
conjunction with our research work.
In 1972, the FDA instituted an ongoing review process to evaluate the
safety and effectiveness of over-the-counter drugs. Through this process, the
FDA issues regulations called monographs, that set forth the specific active
ingredients, dosages, indications and labeling statements for over-the-counter
drugs that the FDA generally recognizes as safe, effective and branded properly
and therefore not subject to premarket approval. Over-the-counter drugs not
covered by proposed or final regulations are subject to premarket review and
approval through the NDA or abbreviated NDA process. We currently market our
hand sanitizer product under two separate proposed monographs, a hand sanitizer
monograph and a first-aid antiseptic monograph.
The active ingredient in our hand sanitizer product, benzalkonium chloride,
is included in an FDA proposed regulation for first aid antiseptic drug
products. However, the proposed regulation does not permit naming the product a
hand sanitizer and does not provide for the claims that we make in marketing our
product's hand sanitizing capabilities that it is long-lasting. Claims that we
wish to make that are not specifically allowed in the hand sanitizer monograph
may require us to independently substantiate the claims to the FDA through a New
Drug Application. We believe that all of our current claims are allowable under
the proposed hand sanitizer and first aid antiseptic monographs.
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We are subject to federal, state and local environmental laws. We believe
that we are in material compliance with applicable environmental laws in
connection with our current operations.
REQUIREMENTS IN FOREIGN COUNTRIES
There is a wide variation in the approval or clearance requirements
necessary to market products in foreign countries. The requirements range from
virtually no requirements to a level comparable to those of the FDA. For
example, many countries in South America have minimal regulatory requirements,
while many developed countries, such as Japan, have conditions as stringent as
those of the FDA. Many lesser developed countries, including many countries in
Africa, allow products evaluated and accepted by the World Health Organization
("WHO") to be sold. WHO acceptance must be requested by a country before the WHO
will evaluate the product. FDA acceptance is not a substitute for foreign
governmental approval or clearance.
We have obtained all necessary governmental approvals required to market
our current product in Canada. Currently, our Southeast Asia distributor has yet
to obtain applicable approvals in any of the countries within its territory.
COMPETITION
PREVENTX(R) HAND SANITIZER
There are a number of competitors in the consumer hand sanitizer market,
including Dial Corporation, GoJo Industries, Colgate-Palmolive Company, Andrew
Jergens Co. and Reckitt & Coleman, Inc. Most current products use a 60% or
higher concentration of either alcohol or triclosan as their active ingredients.
Some of the competitive products have active ingredients similar to Preventx(R).
Alcohol-based hand sanitizers in the United States are sold largely based on
price competition. However, we feel that the benefits of the IBC alcohol free
formula justifies a slight premium over the alcohol-based products.
BABY WIPES
Together, Kimberly-Clark Corporation and Proctor and Gamble Co. account for
approximately 69% of the baby wipe market. All other manufacturers, including
Drypers Corporation and Playtex Products, Inc. share the remaining 31% of the
market. Products are classified as super-premium, premium, private label,
average and low end. We believe that our baby wipe will be sold as a super
premium product due to the benefits that it is expected to offer to the
consumer. Utilizing a formulation very similar to that found in the hand
sanitizer, our baby wipes will be alcohol-free, non-irritating, non-toxic,
anti-bacterial and long-lasting. Through additional testing to be performed by
IBC, we also believe we will be able to present the product as aiding in the
prevention of diaper rash. As a result, we believe that our product will have
significant advantages over products on the market today and permit us to
command a premium price.
DISINFECTANT SURFACE SPRAY
There are numerous competitors in the surface cleaning market, both in the
United States and worldwide, including Reckitt & Coleman Inc. (which markets the
Lysol(R) brand), Clorox Corporation and Dial Corporation.
We plan to sell the disinfectant surface spray as an anti-bacterial surface
spray that is safe to be used near food and that does not give any after taste
or odor. We expect that it will be as strong and as effective as other sprays
which cannot be used near food because they are lethal to ingest. We intend to
sell the product at a premium price. We believe that our Surface Spray will
compete against other surface cleaners based on product differentiation and, to
a lesser extent, price. Price competition would place us at a competitive
disadvantage.
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MICROBICIDAL CONTRACEPTIVE GEL
There are a number of microbicidal products that are in various stages of
development, several of which we believe are in Phase III clinical trials at
this time. However, all of the other products in Phase III trials utilize
nonoxynol-9 in their formulas, which can cause genital irritation. Our gel,
which does not contain nonoxynol-9 and, in a clinical trial, did not cause
genital irritation, has been accepted by the National Institutes of Health to
undergo a Phase III clinical trial to prove its safety and its effectiveness
against STDs and as a contraceptive. The purpose of the first two phases of the
trials were to study the safety of the contraceptive gel when used in women and
its effectiveness against STDs in an in vitro environment. These first two
phases have been completed with positive results from the standpoint of safety
and in vitro effectiveness. The third phase of the trials will be funded by the
NIH and will demonstrate the efficacy of the gel in vivo. Most competitive
products currently on the market recommend the use of a condom or diaphragm with
their product and do not include claims that they kill STDs or other infectious
disease.
The microbicidal contraceptive gel, if approved in the United States, will
be sold as a vaginal contraceptive gel and anti-infective barrier. The product
will be sold at a premium over contraceptive gels that cannot claim an
anti-infective barrier. We believe that our gel will compete against other
contraceptive products on the basis of product differentiation and, to a lesser
extent, price. To the extent we compete based on price, we will be at a
competitive disadvantage.
Many of our competitors have substantially greater financial and marketing
resources than we have.
EMPLOYEES
As of March 24, 2000, we employed eight full-time personnel. These
employees are involved in executive, corporate administration, operations, and
sales and marketing functions.
ITEM 2. PROPERTIES
Our corporate facility is located in a suburb of Cleveland, Ohio and
consists of approximately 2,000 square feet of executive office space. We lease
this facility for a monthly base rent of $1,850. The lease expires in January
2002. We believe that our facilities are adequate for our needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in an action which was filed by Optima Holding Co., Ltd.
and Mercury Technology Corp. on July 28, 1998 in the Circuit Court of the
Eleventh Judicial District, Dade County, Florida. This action alleges that we
tortiously interfered with Optima and Mercury's contractual relationship with
IBC. Optima and Mercury claim that they had prior rights to the IBC formulation
and products and that we induced IBC to breach that agreement. Optima and
Mercury have requested an unspecified amount of damages against us. In a
separate action that has now been consolidated with the first action in the same
court, IBC has requested a declaratory judgment that IBC properly terminated its
development and distribution contract with Optima and Mercury. Plaintiffs also
seek injunctive relief to prevent IBC and its managers and directors from
allowing IBC to have further dealings with us. If we are not successful in this
action, we could lose the right to market, sell or manufacture worldwide our
hand sanitizer product and other products currently under development. The
discovery in this action is proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the security holders for a vote during
the last quarter of the Company's fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is publicly traded on the over-the-counter bulletin board
under the ticker symbol "EMDG." We have approximately 4,100 holders of our
common stock. We have never paid dividends on our common stock and have no plans
to do so. The following table presents the high and low bid prices of the common
stock for the periods indicated. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual
transactions.
HIGH LOW
------ ------
1999
Fourth Quarter $ 0.80 $ 0.45
Third Quarter $ 1.00 $ 0.62
Second Quarter $ 1.01 $ 0.48
First Quarter $ 1.03 $ 0.35
1998
Fourth Quarter $ 1.00 $ 0.30
Third Quarter $ 1.00 $ 0.50
Second Quarter $ 1.50 $ 0.59
First Quarter $ 0.94 $ 0.44
RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH
We sold common stock for cash at the prices and during the periods provided
as follows: during the fourth quarter of 1998, 1,000,000 shares at a price of
$0.50 per share and warrants to purchase 1,000,000 shares at an exercise price
of $0.50 per share were issued to 9 purchasers; during the first quarter of
1999, 360,000 shares at price of $0.50 per share and warrants to purchase
360,000 shares at an exercise price of $0.50 per share were issued to 4
purchasers; during the second quarter of 1999, 600,000 shares at a price of
$0.50 per share and warrants to purchase 600,000 shares at an exercise price of
$0.50 per share were issued to 3 purchasers; and during the fourth quarter of
1999, 2,175,000 shares at an exercise price of $0.50 per share were purchased by
12 subscribers. During January and February 2000, 3,876,050 shares at a price of
$0.50 were purchased by 22 subscribers. Subscribers to the 2,175,000 shares in
the fourth quarter of 1999 and the 3,876,050 shares in the first two months of
2000 are also entitled to warrants to purchase 1,512,762 shares at $0.50 per
share for 24 months. Of the above purchasers, approximately ten invested in more
than one of the above private placements. The offers and sales of the above
securities were deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of Regulation D promulgated thereunder. No
advertising or general solicitation was employed in offering the securities. The
securities were offered to a limited number of persons all of whom were business
associates of Empyrean or its executive officers and directors, and transfers of
the shares were appropriately restricted by Empyrean. All persons were
accredited investors, were capable of analyzing the merits and risks of their
investment, acknowledged in writing that they were acquiring the securities for
investment and not with a view toward distribution or resale and understood the
speculative nature of their investment.
SALES OF DEBT AND WARRANTS FOR CASH
Convertible debentures were issued to 4 accredited purchasers during the
third quarter of 1998. The debentures were in the original principal amount of
$600,000. The debentures were convertible into common stock at a conversion
price of the lower of $0.8588 or 70% of the per share market value of the common
stock for the five trading days immediately preceding the conversion date. In
addition, these same purchasers received warrants to purchase common stock at an
adjustable exercise price of $0.8588. All of these convertible debentures were
converted into common stock and all of these warrants are currently outstanding.
The offering of convertible debentures and warrants were deemed to be exempt
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from registration under Rule 504 of Regulation D and under Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The securities were offered to a limited number of persons all
of whom were business associates of Empyrean or its executive officers and
directors, and transfers of the shares were appropriately restricted by
Empyrean. All persons were accredited investors, were capable of analyzing the
merits and risks of their investment, acknowledged in writing that they were
acquiring the securities for investment and not with a view toward distribution
or resale and understood the speculative nature of their investment.
During the last two years, convertible debentures and warrants have been
converted into or exercised for an aggregate of 3,154,376 shares of common
stock. Currently, we have no convertible debt securities outstanding and
warrants to purchase 3,603,254 shares of our common stock are outstanding.
OPTION GRANTS
During the preceding two years, we granted to directors, executive
officers, employees, advisors and consultants options to purchase an aggregate
of 7,374,125 shares of common stock at a weighted average exercise price of
$0.64 per share. The offer of these securities was deemed to be exempt from
registration under the Securities Act under Rule 701 of Section 3(b) of the
Securities Act and Section 4(2) of the Securities Act. The options were granted
under compensatory benefit plans and contracts relating to compensation. Options
issued in the above transactions have been exercised for 507,500 shares. Options
to purchase 6,888,289 shares remain outstanding.
ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS
In April 1998, as an inducement to enter into a contract to provide
financial advisory services, we issued to Uptic Investment Corp., a company
controlled by Lawrence D. Bain, now the Chairman of the Board of Directors,
warrants to purchase 250,000 shares of common stock at an exercise price of
$0.01 per share. The warrants were exercised in June 1998.
In July 1998, as partial payment for the exclusive marketing and
manufacturing rights to IBC products, we issued 100,000 shares of common stock
to IBC.
In July 1998, in exchange for exclusive distribution rights for the
Preventx lotion, we issued 225,000 shares of common stock to Prevent-X, Inc.
In the third quarter of 1998, as fees for services related to the
introduction of our current product, we issued 25,000 shares to Mr. Ed Rolquin.
In the third quarter of 1998, as a fee for research and development services, we
issued 25,000 shares of common stock to Mr. Al Rubenstein.
In November 1998, in settlement for incurred and assumed debt in the amount
of $89,236, Empyrean issued 114,405 shares of common stock to one of our
creditors.
In November 1998, in settlement for an obligation resulting from an
attempted business venture with another party, we issued 197,247 shares to five
owners of the other party. This venture related to our attempt to distribute HIV
and Trichomonas diagnostic test kits in Europe. We were not able to complete the
venture due to a lack of funding and we have since exited the diagnostic test
kit business.
In January and May 1999, Empyrean issued warrants to purchase 250,000
shares of common stock at $.01 per share and 500,000 shares of common stock at
$0.50 per share to Uptic Investments Corp. (an entity controlled by Lawrence D.
Bain, now the Chairman of the Board of Directors) for financial advisory
services and for Uptic's introductions of Empyrean to distributors and
customers.
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In March 1999, in exchange for exclusive rights to licensed products in
Canada, we issued 100,000 shares of common stock to Farida Darbar.
In May 1999, in settlement for incurred and assumed debt in the amount of
$49,230, we issued 71,660 shares of common stock to one of our creditors.
The above offerings and sales were deemed to be exempt under Regulation D
and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were business associates of Empyrean or
its executive officers and directors, and the transfer thereof was appropriately
restricted by Empyrean. All persons were accredited or sophisticated investors,
were capable of analyzing the merits and risks of their investment, acknowledged
in writing that they were acquiring the securities for investment and not with a
view toward distribution or resale and understood the speculative nature of
their investment.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
This Form 10-KSB, including the notes to the consolidated financial
statements and this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," contains forward looking statements. We may make
additional written and oral forward looking statements from time to time in
filings with the Securities and Exchange Commission, in our press releases, or
otherwise. The words "believe," "expect," "anticipate," "intends," "forecast,"
"project," and similar expressions identify forward looking statements. These
statements may include, but are not limited to, the anticipated outcome of
contingent events, including litigation, regulatory proceedings or rulemaking,
projections of revenues, income, loss, or capital expenditures, plans for future
operations, growth and acquisitions, financing needs or plans and the
availability of financing, and plans relating to products or product development
as well as assumptions relating to the above subjects.
Forward looking statements reflect our current views concerning future events
and financial performance and speak only as of the date the statements are made.
These forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward looking statements. Statements in this annual
report, including the notes to the consolidated financial statements and this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward looking statements are as
follows:
* Based upon FDA pronouncements regarding the active ingredient in our
hand sanitizer product, developed and licensed to us by IBC, we
believe the FDA could seek to alter the way we currently market this
product, which could result in a loss of sales of this product, which
may result in us going out of business.
* We may not be able to obtain sufficient capital to fund our operations
and, as a result, we may cut back or discontinue operations or limit
our business strategies.
* Current litigation may adversely affect one of our primary licenses
and we could lose our rights to make or sell our products and be
unable to generate revenues.
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* We expect to incur losses for the foreseeable future and continued
losses could result in our inability to fund business operations and
cause our stock price to decline.
* Existing or potential markets may not accept our products and we may
experience an inability to generate revenue or profits.
* Adverse product publicity and product recalls of other products may
have a negative effect on the sales or acceptance of our products and
could result in a loss of revenues or our inability to ever become
profitable.
* We may incur significant liabilities and expenses if our products
cause personal injury or property damage.
* We have limited sales, marketing and distribution capabilities and
rely extensively on third parties to market and distribute our
products, and the failure or unwillingness of these parties to market
our products could limit our ability to generate revenues or profits.
* We have no internal manufacturing capability and depend heavily upon
third party suppliers, and the inability or unwillingness of these
third parties to supply our products could result in interruptions of
our product supply capability and a loss of customers and revenues.
* We are subject to intense competition and pricing pressures from
substantially larger competitors which can limit our ability to ever
make a profit.
* We depend on key employees for our success and the loss of our key
employees could limit our success.
* Government regulation of our products may prevent us from selling our
current product or may result in delays in launching or selling future
products, and can significantly increase our costs.
* The protection of our rights to our products may not be complete and
this could impair our ability to successfully compete against others.
* We have a limited product line and our inability to successfully
market any one or a few of our products could cause a significant
decline in our revenues or future profitability.
* We have limited research and development resources and our success
depends in part on the research and development efforts of IBC and as
a result their inability to develop new products or improvements of
our products may harm our future profitability and ability to generate
revenues.
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<PAGE>
* Our inability to manage growth may strain our resources and systems.
* International sales of our products could expose us to currency
fluctuations and other special risks which could limit our ability to
generate profits or cause us to incur operating losses.
* The lack of a mature trading market for our common stock and because
our common stock is subject to "penny stock" rules of the SEC,
transactions in our stock are cumbersome and may reduce the value of
an investment in our stock.
* There are a large number of shares underlying our warrants and options
that may be available for future sale and the sale of these shares may
depress the market price of our common stock.
* Our stock price may be volatile due to factors beyond our control
which could subject the value of our shares to rapid decline.
In addition, new factors emerge from time to time and it is not possible
for management to predict all of these factors, nor can it assess the impact of
each factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from forward looking
statements. We undertake no obligation to publicly update or review any forward
looking statements, whether as a result of new information, future events, or
otherwise.
The following discussion and analysis provides information regarding
Empyrean's financial position and its results of operations for the periods
shown. This discussion should be read in conjunction with Empyrean's
Consolidated Financial Statements and related Notes thereto included elsewhere
in this document.
INTRODUCTION
In 1998, we discontinued the distribution and marketing of our Trichomonas
diagnostic test kit. This shift in focus coincided with our acquisition of
certain rights to use a microbicide formulation from International Bioscience
Corporation utilized in our Preventx hand sanitizer and proposed products. Since
that time, we no longer actively market any of our diagnostic products. The
decision to discontinue active marketing of our prior line of diagnostic
products and the limited revenues and substantial start-up costs associated with
introducing our new line of preventative products have significantly affected
our current financial condition and operations.
We have had limited revenues and have sustained substantial losses from
operations in recent years, have a negative stockholders equity, and at December
31, 1999, had current liabilities substantially in excess of current assets.
We incurred net losses in 1998 and 1999 and expect to incur net losses at
least through the second quarter of 2000 and we have a negative net worth
through December 31, 1999. We expect operations to generate negative cash flow
through at least the first two quarters of 2000 and we currently have no credit
line available to us. These factors raise doubts about our ability to continue
as a going concern and our audit report contains an explanatory paragraph with
respect to this matter.
We expect to generate substantially all of our revenues in the future from
increased sales of our current line of preventative products. We are also
relying on IBC to develop additional preventative products that we can market.
In addition to cost of goods sold, which is anticipated to vary somewhat
proportionately with our level of sales, significant cost and expense items
include salaries and benefits, consulting fees, royalties and distribution
rights, office and administration, advertising, and legal and accounting, all of
which significantly exceeded Empyrean's total revenues for 1999 . Accordingly,
we do not believe comparing costs as a percentage of revenues from year to year
is meaningful.
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RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED 1999 AND 1998
Our total revenues in 1999 were $662,000 compared with $10,000 in 1998.
Revenues in 1999 consisted of sales of the Preventx hand sanitizer product
introduced in late February 1999 in the amount of $112,000 and proceeds of the
sale of Southeast Asia distribution rights in the amount of $550,000. Deferred
revenue in the amount of $100,000 will be recorded as revenue at the earlier of
the first $100,000 of product shipped to Durstrand, our Southeast Asia
distributor, or June 2000. In 1998, revenues of $10,000 represented sales of
products under development for use as samples.
Cost of sales for 1999 includes a write-down of inventory of $71,000 which
pertains to certain products in inventory which were deemed to be unsaleable.
We incurred a net loss in 1999 of $4,785,000 compared to a net loss of
$3,147,000 in 1998. The losses in 1999 and 1998 were due primarily to limited
revenues that were substantially exceeded by our costs of operation. Our net
loss per share for 1999 was $0.17 compared to a net loss per share of $0.14 in
1998. The loss per share increased primarily as a result of the increase in 1999
net loss.
Selling, general and administrative expenses increased to $4,814,000 in
1999 from $2,913,000 in 1998 primarily due to the following:
* Administrative fees relating to our relationship with Integrated
Commercialization Solutions (ICS), a division of Bergen Brunswig
Corporation, were $453,000 in 1999 compared to $40,000 in 1998. ICS
provided infrastructure services including distribution, order entry,
warehousing, billing, customer service and marketing services. We
terminated this relationship on March 2, 2000.
* We incurred advertising expenses of $581,000 in 1999 compared to
$155,000 in 1998. The advertising expenses incurred in 1999 were
primarily due to our emphasis on marketing and selling our hand
sanitizer.
* Legal and accounting expenses increased to $534,000 in 1999 compared
to $198,000 in 1998. The increase in 1999 resulted primarily from
legal and accounting expenses related to our registration statement
and filings with the SEC and costs associated with defending various
lawsuits, all but one of which has been resolved.
* Expenses for royalties increased to $505,000 in 1999 from $245,000 in
1998 primarily due to a guaranteed minimum royalty payment of $490,000
in 1999 compared with $245,000 in 1998. Our agreement with
International Bioscience Corporation, under which we acquired the
rights to market and distribute our current line of preventative
products, provides for future minimum guaranteed payments that
increase significantly in each year of the contract. See Note 9 to our
Consolidated Financial Statements. As a result, we expect our expenses
for royalties to increase significantly on an annual basis. Unless we
are successful in generating substantial additional sales of our
preventative products, we are also likely to continue to generate
substantial losses from operations.
* Expenses for distribution rights decreased to $70,000 in 1999 from
$273,000 in 1998 due to the 1998 payment for exclusive worldwide
distribution rights to the IBC formula except in Hong Kong, Taiwan and
Africa and the 1999 payment for Canadian IBC formula distribution
rights.
* Consulting expenses increased to $1,199,000 in 1999 from $849,000 in
1998. This increase resulted primarily from consulting services in the
amount of $330,000 provided on behalf of the Company in conjunction
with the Durstrand distribution agreement.
The Company recorded a restructuring charge of $345,000 in 1999 consisting
of involuntary termination benefits of $263,000 and other related reorganization
costs of $82,000. This charge resulted from a business reorganization approved
by the Board of Directors in December 1999 that included a facility closure,
relocation of the corporate headquarters into a more cost effective location,
severance costs for two Arizona based personnel and the write down of abandoned
fixed assets to estimated fair value less cost to sell. As of March 24, 2000,
both employees have been terminated and we have paid involuntary termination
benefits in the amount of $49,000 and other related reorganization costs in the
amount of $44,000. All reorganization costs including severance payments are
expected to be paid prior to December 31, 2000.
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Interest expense increased to $174,000 in 1999 compared to $0 in 1998 due
to interest accrued on promissory notes and the amortization of the fair value
of warrants issued to promissory note holders in 1999.
COMPARISON OF YEARS ENDED 1998 AND 1997
Our total revenues in 1998 were $10,000 compared to total revenues in 1997
of $13,000. The 1998 amount was attributable primarily to sample sales of our
preventative products in development. As a result of the shift in focus in 1997
and 1998 to developing, marketing and distributing only disease preventative
products, we do not believe a comparison of our revenues for the fiscal years
ended December 31, 1998 and 1997 are meaningful or that a comparison is
indicative of any future trend in our financial performance.
We incurred a net loss in 1998 of $3,147,000 compared to a net loss of
$2,596,000 in 1997. These losses were due primarily to limited revenues that
were substantially less than our costs of operation. Our net loss per share was
$0.14 in 1998 and 1997, respectively.
Selling, general and administrative expenses increased to $2,913,000 in the
year ended December 31, 1998 from $1,875,000 in the year ended December 31, 1997
primarily due to the following:
* Management fees and consulting expenses increased to $849,000 in 1998
from $119,000 in 1997. This increase resulted from a greater reliance
on independent contractors in 1998 compared to 1997 due to use of
contract sales representatives and product launch consultants.
* Expenses for royalties and distribution rights increased to $518,000
in 1998 from $275,000 in 1997, an increase of approximately 88% over
the prior year. This increase was due in large part to a $245,000
guaranteed minimum payment in 1998 versus a guaranteed minimum payment
of $0 in 1997. Our agreement with International Bioscience
Corporation, under which we acquired the rights to market and
distribute our current line of preventative products, provides for
future minimum guaranteed payments that increase significantly in each
year of the contract. See Note 9 to our Consolidated Financial
Statements. As a result, we expect our expenses for royalties and
distribution rights to continue to increase significantly on an annual
basis. Unless we are successful in generating substantial additional
sales of our preventative products, we are also likely to continue to
generate substantial losses from operations.
* As a result of consolidating operations into one leased facility in
March 1998, total rent expense, net of sublease income received,
declined to $58,000 in 1998 from $92,000 in 1997.
* Office and administration expenses, which consist primarily of
day-to-day operational expenses, increased to $182,000 in 1998 from
$164,000 in 1997. This increase was due primarily to product launch
related expenses.
* We incurred advertising expenses of $155,000 in 1998. No advertising
expenses were recorded in 1997. The advertising expenses incurred in
1998 were primarily due to our emphasis on marketing and selling our
new line of preventative products in order to generate increased
sales.
* Slightly offsetting the above increases, costs associated with
salaries and benefits declined to $710,000 in 1998 from $806,000 in
the prior year. This decline was primarily due to staff turnover
associated with shifting the organization from an R&D based
organization to an emphasis on sales and marketing.
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Research and development expenses decreased to $31,000 in 1998 from
$137,000 in 1997, representing a decline of approximately 77%. This decline
represents our shift in focus from research and development of new diagnostic
test kit products to sales and marketing of our new line of preventative
products.
Prior to 1997 we made a $600,000 advance to Emerald Diagnostics, a company
controlled by a former director, for product development. In 1997 we wrote off
the remaining $105,000 advance because it had no future economic benefit.
We reported a $29,000 loss on inventory obsolescence in 1998 versus a
$459,000 loss in the prior year. The loss recorded in 1998 primarily reflects a
write-off of PEMVIEW Trichomonas test kits while the loss recorded in 1997
primarily reflects a write-off of HIV test kit components.
We incurred a $210,000 loss on fixed asset disposal in 1998. This loss was
due to a one-time noncash charge for a write-off of fixed assets used in
manufacturing and research associated with our discontinued line of diagnostic
products. We recorded a $31,000 loss on fixed asset disposal in 1997 due to
write-offs of abandoned leasehold improvements.
LIQUIDITY AND FINANCIAL POSITION
To date, we have been unable to date to generate significant cash flows
from our business operations. As a result, we have funded our operations through
investor financing, including private placements of common stock, convertible
debentures, warrants and options. Until such time as we are able to generate
significant cash flow from operations through increased sales of our products,
we will be required to continue our reliance on investor financing to fund our
operations. At December 31, 1999, cash and cash equivalents totaled $286,000, an
increase of $223,000 from December 31, 1998. Also as of December 31, 1999,
current liabilities, consisting primarily of accounts payable and accrued
liabilities, exceeded current assets by $1,714,000.
During 1999, net cash used in operating activities was $2,328,000 which
primarily resulted from a net loss from continuing operations of $4,785,000 less
non-cash charges relating to warrant and option grants in the amount of
$814,000, a $1,607,000 increase in accounts payable and accrued liabilities and
other net working capital changes in the amount of $36,000.
In 1999, net cash flow from financing activities increased by 42% to
$2,561,000 resulting from the sale of common stock and the exercise of options
and warrants in the amount of $1,807,000 and from the issuance of short-term
promissory notes totaling $900,000, with offsetting payments of the notes in the
amount of $146,000.
On February 23, 2000, we completed a private placement of 6,151,050 shares
that generated gross proceeds of $3,076,000. These funds were used for the
payment of royalties, minimum license fees, outstanding short-term promissory
notes and for working capital. As of March 24, 2000, the Company has paid all of
its debt with cash or by converting promissory notes into the Company's common
stock. After making these debt reduction payments and reducing past due accounts
payable, the Company has a cash balance of approximately $1,500,000.
Our future minimum royalty requirements will significantly effect
liquidity. For example, regarding fiscal year 2000, we will owe at least
$735,000 to IBC by January 2001 for distribution rights to their formula.
Additionally, we are required to pay royalties to various licensors, depending
on the product and country of sale, of up to 14% of net sales.
As of March 24, 2000, we have no debt service or capital expenditure
obligations.
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We anticipate incurring a substantial increase in cash outlays associated
with increased marketing and sales of our Preventx preventative product line.
These cash outlays could include, but are not limited to, product registration
costs, advertising, inventory purchases and a sales and marketing campaign. To
maintain our current expenses of approximately $3-4 million per year and meet
the costs associated with our increased marketing and sales efforts, we will
need to raise additional capital during fiscal year 2000.
We do not have existing capital resources or credit lines available that
are sufficient to fund our operations and capital requirements as presently
planned over the next twelve months. We plan to pursue a working capital line of
credit to be secured by our accounts receivable and inventory. We may also raise
funds through the issuance of either debt or equity instruments. However, such
funds may not be available on favorable terms or at all. Given the company's
history of successfully attracting investors to fund operations, management
believes that seeking additional equity and debt financing is a viable plan.
Additionally, we believe our relationship with Wal-Mart Stores, Inc. will
provide a more stable foundation on which to promote and obtain future funding.
Recently, funds have been raised from the exercise of outstanding stock
options and warrants. We expect to raise in excess of $500,000 from these
capital raising efforts. However, this will not negate the need to raise
additional funds through issuance of debt and equity instruments or with credit
lines.
YEAR 2000 COMPLIANCE
As of March 24, 2000, the Company did not experience material disruption or
other significant problems in its information technology systems. In addition,
as of the same date, we are not aware of any material year 2000 compliance
issues relating to information technology systems of third parties which the
Company maintains material relationships including our contract manufacturer,
independent warehouse and third party billing provider.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 9. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Lawrence D. Bain, Richard C. Adamany, Bennett S. Rubin, Robert G.J. Burg
II, Michael Cicak, Andrew Fishleder MD and Stephen D. Hayter inadvertently
failed to timely report their Form 3 ten days after becoming "reporting persons"
on November 17, 1999. Lawrence D. Bain inadvertently failed to timely report his
December 1999 and February 2000 Form 4s for purchases of units in the Company's
private placement, a grant of stock options and an issuance of common stock by
the Company in lieu of cash payment of board fees. Richard C. Adamany and
Bennett S. Rubin inadvertently failed to timely report their December 1999 and
February 2000 Form 4s for purchases of units in the Company's private placement
and a grant of stock options. Michael Cicak and Andrew Fishleder MD
inadvertently failed to timely report their February 2000 Form 4s for purchases
of units in the Company's private placement and an issuance of common stock by
the Company in lieu of cash payment of board fees. Robert G.J. Burg II
inadvertently failed to timely report his February 2000 Form 4 for an issuance
of common stock by the Company in lieu of cash payment of board fees. Stephen D.
Hayter inadvertently failed to timely report his January 2000 Form 4 for a grant
of stock options. These individuals plan on filing the required forms prior to
April 10, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The following table is a summary of the compensation paid to our Chief
Executive Officer and each executive officer who earned over $100,000 in total
salary and bonus for each of our three most recently completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------ -----------
Securities
Under Options
Name and Other Annual Granted/sars All Other
Principal Position Year Salary($) Bonus($) Compensation($) Granted(#) Compensation($)
------------------ ---- --------- -------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Adamany 1999 $ 49,039 -- -- 1,500,000 --
President and Chief
Executive Officer(1)
Bennett S. Rubin 1999 $ 49,039 -- -- 1,500,000 --
Executive Vice President
and Chief Operating
Officer(1)
Stephen D. Hayter 1999 $183,160 -- -- 329,942 --
Former President and Chief 1998 $186,923 -- -- 1,400,000 --
Executive Officer (2) 1997 $189,539 -- -- 300,000 --
Raymond E. Dean 1999 $160,300 -- -- 174,905 --
Former Chief Operations 1998 $135,000 -- -- 700,000 --
Officer (3) 1997 $ 40,500 -- -- 300,000 --
</TABLE>
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- ----------
(1) Mssrs. Adamany and Rubin joined Empyrean in September 1999 and therefore no
compensation information for 1998 and 1997 is provided.
(2) Mr. Hayter resigned as president and chief executive officer in December
1999. Currently, he remains a director of the Company.
(3) Mr. Dean resigned as a director in November 1999 and as chief operations
officer in December 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of Total
Securities Options/SARS
Underlying Granted to Exercise or
Options/SARS Employees in Base Price
Name Granted # Fiscal Year ($/Share) Expiration Date
---- --------- ----------- --------- ---------------
Richard C. Adamany 1,500,000 34.5% $0.45 December 8, 2009
Bennett S. Rubin 1,500,000 34.5% $0.45 December 8, 2009
Stephen D. Hayter 329,942 7.6% $0.38 February 5, 2009
We have never issued stock appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-money
Shares Unexercised Options/SARS Options/SARS
Acquired On Value At Fiscal Year-end At Fiscal Year-end
Name Exercise Realized Exercisable/unexercisable Exercisable/unexercisable
---- -------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard C. Adamany -- -- 250,000/1,250,000 $22,500/$112,500
Bennett S. Rubin -- -- 250,000/1,250,000 $22,500/$112,500
Stephen D. Hayter -- -- 1,350,570/0 $56,091/$0
</TABLE>
EMPLOYMENT AGREEMENTS
Richard C. Adamany, our President and Chief Executive Officer, works under
an employment agreement effective as of September 7, 1999. Mr. Adamany's
agreement provides for a base salary of $150,000 for the first six months of the
agreement. His annual base salary increased to $180,000 on January 1, 2000.
Under the employment agreement, Mr. Adamany is to become a director. The board
plans to nominate Mr. Adamany for election as a director by the shareholders as
soon as practicable. Mr. Adamany would be entitled to participate in an
incentive compensation program in the future if so approved by our Board of
Directors. Under the employment agreement, we have agreed to register shares
issuable upon exercise of options granted to Mr. Adamany under our stock plan
and have agreed to register the resale of those shares under an effective Form
S-3 Registration Statement, if available. If Mr. Adamany is terminated without
cause, we are obligated to provide Mr. Adamany twenty-four months of severance
pay, including two years of salary and a pro rata portion of his annual bonus
and accelerated vesting of options, unless Mr. Adamany is terminated less than
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twelve months from the date of execution of the employment agreement, in which
case his severance pay would be limited to twelve months. Mr. Adamany has the
option upon termination of accepting a lump sum payment for severance pay,
calculated by discounting the stream of payments owed to him using a discount
rate of 15%. Mr. Adamany's bonus will be payable no later than ninety days
following the close of the fiscal year that he is terminated. Mr. Adamany's
agreement also contains confidentiality and non-compete covenants. We have
agreed to indemnify Mr. Adamany for actions taken by him as an Empyrean officer
or director and this indemnification will survive his termination. We have
agreed to continue liability insurance until five years following Mr. Adamany's
termination with us.
In addition, under his employment agreement, Mr. Adamany was granted
options to purchase 1.5 million shares of common stock at an exercise price
equivalent to the fair market value on December 8, 1999. The first option to
purchase 50,000 shares of common stock vested upon execution of the employment
agreement. Options to purchase 90,000 shares each vested on the last day of each
of the second, third, fifth and sixth months following the execution of the
employment agreement. Options to purchase 20,000 and 70,000 shares vested on the
last day of the fourth month and the first day of the fifth month respectively.
The remaining options will vest according to mutually agreed upon performance
criteria. The agreement provides that options granted to other members of
management will vest upon the same performance criteria as the criteria for Mr.
Adamany.
Bennett S. Rubin, our Executive Vice President and Chief Operating Officer,
works under an employment agreement effective as of September 7, 1999. Mr.
Rubin's agreement provides for a base salary of $150,000 for the first six
months of the agreement. His annual base salary increased to $170,000 on January
1, 2000. Under the employment agreement, Mr. Rubin is to become a director. The
board plans to nominate Mr. Rubin for election as a director by the shareholders
as soon as practicable. Mr. Rubin would be entitled to participate in an
incentive compensation program in the future if so approved by our Board of
Directors. Under the employment agreement, we have agreed to register shares
issuable upon exercise of options granted to Mr. Rubin under our stock plan and
have agreed to register the resale of shares under an effective Form S-3
Registration Statement, if available. If Mr. Rubin is terminated without cause,
we are obligated to provide Mr. Rubin twenty-four months of severance pay,
including two years of salary and a pro rata portion of his annual bonus and
accelerated vesting of options, unless Mr. Rubin is terminated less than twelve
months from the date of execution of the employment agreement, in which case his
severance pay would be limited to twelve months. Mr. Rubin has the option upon
termination of accepting a lump sum payment for severance pay, calculated by
discounting the stream of payments owed to him using a discount rate of 15%. Mr.
Rubin's bonus will be payable no later than ninety days following the close of
the fiscal year that he is terminated. Mr. Rubin's agreement also contains
confidentiality and non-compete covenants. We have agreed to indemnify Mr. Rubin
for actions taken by him as an Empyrean officer or director and this
indemnification will survive his termination. We have agreed to continue
liability insurance until five years following Mr. Rubin's termination with us.
In addition, under his employment agreement, Mr. Rubin was granted options
to purchase 1.5 million shares of common stock at an exercise price equivalent
to the fair market value on December 8, 1999. The first option to purchase
50,000 shares of common stock vested upon execution of the employment agreement.
Options to purchase 90,000 shares each vested on the last day of each of the
second, third, fifth and sixth months following the execution of the employment
agreement. Options to purchase 20,000 and 70,000 shares vested on the last day
of the fourth month and the first day of the fifth month respectively. The
remaining options will vest according to mutually agreed upon performance
criteria. The agreement provides that options granted to other members of
management will vest upon the same performance criteria as the criteria for Mr.
Rubin.
Stephen D. Hayter, our former President, Chief Executive Officer, and
Chairman of the Board, worked under an employment agreement effective as of
September 1, 1999 with a base salary of $180,000 per year. Effective December
31, 1999, Mr. Hayter resigned as President and Chief Executive Officer of the
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<PAGE>
Company and executed a Confidential Settlement Agreement and Release with the
Company. Under this agreement Mr. Hayter remains a director of the Company and
is entitled to receive as severance his base salary of $180,000 per year and
benefits through December 31, 2000. The Stock Option Agreements and Stock Option
Certificates between the Company and Mr. Hayter were also amended to provide
that the expiration date for each of the vested options shall be the earlier to
occur of: (a) the date which is twelve months after Mr. Hayter ceases to be a
director of the Company or (b) the first business day prior to the ten year
anniversary of the date of grant of each option. Under the Confidential
Settlement agreement, we have agreed to register shares issuable upon exercise
of options granted to Mr. Hayter under our stock plan and have agreed to
register the resale of those shares under an effective Form S-3 Registration
Statement, if available.
Raymond E. Dean, our former Chief Operations Officer, resigned in December
1999 and executed a Confidential Settlement Agreement and Release with the
Company. Under this agreement Mr. Dean was entitled to receive as severance his
base salary of $130,000 per year and benefits through February 29, 2000. The
Stock Option Agreements and Stock Option Certificates between the Company and
Mr. Dean were also amended to provide that the expiration date for each of the
vested options shall be the earlier to occur of: (a) the date which is nine
months after the effective date of a "Registration Statement" or (b) the first
business day prior to the ten year anniversary of the date of grant of each
option. Under the Confidential Settlement agreement, we have agreed to register
shares issuable upon exercise of options granted to Mr. Dean under our stock
plan and have agreed to register the resale of those shares under an effective
Form S-3 Registration Statement, if available
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 24, 2000 information about the
amount and nature of beneficial ownership of the common stock held by:
* Each person who we know is a beneficial owner of more than 5% of our
outstanding common stock;
* Each person who is a director or executive officer of Empyrean; and
* All of our directors and executive officers as a group.
The business address of each person listed is c/o Empyrean Bioscience,
Inc., 23800 Commerce Park Road, Suite A, Cleveland, Ohio 44122.
Beneficial ownership is determined in accordance with the rules of the SEC
and includes generally voting powers and investment power with respect to
securities. We believe that each individual named has sole investment and voting
power with respect to shares of common stock indicated as beneficially owned by
him, subject to community property laws, where applicable and except where
otherwise noted.
Beneficial ownership is calculated based on 36,064,551 common shares issued
and outstanding as of March 24, 2000, under Rule 13d-3(d) of the Securities
Exchange Act of 1934. Shares subject to unexercised options, warrants, rights or
conversion privileges exercisable within 60 days of March 24, 2000, are deemed
outstanding for the purpose of calculating the number and percentage owned by
that person, but not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed. The first column of the following
chart represents the total number of actual outstanding shares owned by the
named individual, including options and warrants exercisable within 60 days of
March 24, 2000. The second column titled "Portion Represented by Options and
Warrants" shows the portion of the column one figure represented by options and
warrants exercisable within 60 days of March 24, 2000. The totals for Mr. Bain
include 1,558,750 shares owned beneficially by Uptic Investments Corp., a
company owned 100% by Mr. Bain.
29
<PAGE>
Portion
Total Amount Represented
Name of of Beneficial by Options Percent of
Beneficial Owner Ownership and Warrants Class
---------------- --------- ------------ -----
Lawrence D. Bain 1,915,598 903,750 5.3%
Richard C. Adamany 875,000 575,000 2.4%
Bennett S. Rubin 875,000 575,000 2.4%
Robert G.J. Burg II 149,098 100,000 *
Michael Cicak 1,524,098 -- 4.2%
Dr. Andrew J. Fishleder 307,098 145,000 *
Stephen D. Hayter 1,742,305 1,450,570 4.8%
Directors and executive officers
as a group (seven persons) 7,388,197 3,749,320 20.5%
* less than 1%
As of March 24, 2000, to our knowledge, there are no arrangementsthat may,
at a subsequent date, result in a change in control of Empyrean.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The following table sets forth the names of all of our current directors
and executive officers as of the date of this Registration Statement, with each
position and office held by them and their periods of service in the capacities
listed.
<TABLE>
<CAPTION>
Name Age Position With the Company Date First Elected
---- --- ------------------------- ------------------
<S> <C> <C> <C>
Lawrence D. Bain 50 Chairman of the Board of Directors August 1999
Richard C. Adamany 47 President and Chief Executive Officer September 1999
Bennett S. Rubin 42 Executive Vice President and Chief September 1999
Operating Officer
Robert G.J. Burg II 43 Director November 1998
Michael Cicak 64 Director May 1999
Andrew J. Fishleder, M.D. 47 Director November 1998
Stephen D. Hayter 61 Director August 1996
</TABLE>
30
<PAGE>
MR. BAIN was appointed a director on August 6, 1999 and became our Chairman
of the Board on December 31, 1999. Mr. Bain is a senior vice president in the
investment banking division of Stifel, Nicolaus & Company, Incorporated.
Previously, Mr. Bain was a managing director with Everen Securities and a senior
vice president with both Morgan Stanley Dean Witter and E.F. Hutton Company. Mr.
Bain also wholly owns Uptic Investment Corp. which provides financial advisory
services. He currently serves as a trustee for Cleveland's Leprechaun Society
Charity and is a past board member of the Better Business Bureau.
MR. ADAMANY was appointed Executive Vice President and Chief Operating
Officer on September 7, 1999 and was promoted to President and Chief Executive
Officer on January 1, 2000. Prior to joining Empyrean, Mr. Adamany was a 50%
owner of Premier Enterprise Partners, LLC, a company formed to acquire, operate
and grow companies pursuing long-term capital gains. Mr. Adamany was Executive
Vice President and Chief Operating Officer of Advanced Lighting Technologies
from 1997 to 1998. From 1992 to 1996, Mr. Adamany was Senior Vice President,
Treasurer and Chief Financial Officer of Health O Meter Products Inc. which
acquired Mr. Coffee, Inc. where he held the same position. Mr. Adamany is
entitled under his employment agreement with us to become a director. The board
plans to nominate Mr. Adamany for election as a director by the shareholders as
soon as practicable.
MR. RUBIN was appointed Executive Vice President and Chief Marketing
Officer on September 7, 1999 and was promoted to Executive Vice President and
Chief Operating Officer on January 1, 2000. Prior to joining Empyrean, Mr. Rubin
was a 50% owner of Premier Enterprise Partners, LLC, a company formed to
acquire, operate and grow companies pursuing long-term capital gains. During
1998, Mr. Rubin was Senior Vice President, Sales of Advance Lighting
Technologies, Inc. From 1995 to 1998, Mr. Rubin held several senior management
positions at Invacare Corporation, including Vice President, Marketing and
Marketing Services. From 1989 to 1995, Mr. Rubin was Vice President of Sales and
Marketing of The Genie Company. Mr. Rubin is entitled under his employment
agreement with us to become a director. The board plans to nominate Mr. Rubin
for election as a director by the shareholders as soon as practicable.
MR. BURG was appointed a director on November 20, 1998. Mr. Burg has over
twenty-years experience in sales and marketing. Mr. Burg is currently the
President and CEO of SwimEX, a manufacturer of hydrotherapy pools designed for
rehabilitation and sports specific training. Between January 1998 and 1999, Mr.
Burg was the President of Profile Sports, a golf networking company. Between
1990 and 1998, Mr. Burg was employed by Royal Grip, Inc./Roxxi Caps, which
manufacturers and distributes golf grips and sports headwear, and was its
President between February 1995 and January 1998. Between June 1998 and 1999,
Mr. Burg was a director of Royal Precision, Inc. which manufactures and
distributes golf grips.
MR. CICAK was appointed a director on May 26, 1999. Mr. Cicak is currently
the president of Solar Cells, Inc., a private holding company and president and
director of McMaster Motor Inc., a newly formed private company and was the
president and CEO of GlassTech, Inc., a privately held manufacturer and
distributor of window manufacturing equipment, from 1983 to 1993. He is
currently a member of the Board of Directors of the University of Findlay in
Ohio and serves on several corporate boards including First Solar, LLC and
Autom.
DR. FISHLEDER was appointed a director on November 20, 1998. Dr. Fishleder
has been the Chairman of the Division of Education of the Cleveland Clinic
Foundation since 1991 and currently serves on the institution's Board of
Governors and Medical Executive Committee. Dr. Fishleder is a pathologist and
has been a member of the staff of the Cleveland Clinic Department of Clinical
Pathology since 1982.
MR. HAYTER was appointed as our director, President and Chief Executive
Officer in August 1996. Effective December 31, 1999 Mr. Hayter resigned as our
President and Chief Executive Officer. He remains a director. From 1994 through
August 1996, Mr. Hayter served as President of Sedona Biotechnology, a
consulting practice with clients such as Fisher Scientific USA, Colby Group
International Japan and Durimport Marine Canada.
31
<PAGE>
The directors have served in their respective capacities since their
election or appointment and will serve until the next annual shareholders
meeting or until a successor is duly elected, unless the office is vacated in
accordance with our Articles of Incorporation. The executive officers are
appointed by the Board of Directors to serve until the earlier of their
resignation or removal with or without cause by the directors.
There are no family relationships between any two or more directors or
executive officers. Under their employment agreements with us, we are required
to elect Mr. Adamany and Mr. Rubin as directors. The board plans to nominate Mr.
Adamany and Mr. Rubin for election as directors by the shareholders as soon as
practicable. Other than as described for these individuals, there are no
arrangements or understandings regarding election between any two or more
directors or executive officers.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and a Compensation Committee.
No committee meetings occurred in 1998 or 1999. The Audit Committee is
responsible for evaluating the Company's accounting principles and its system of
accounting controls. The Compensation Committee acts on matters related to the
compensation of directors, senior management and key employees. Dr. Fishleder
and Mr. Burg each served on our Audit Committee and Compensation Committee. On
February 9, 2000, the Board of Directors appointed Lawrence D. Bain as Chairman
of the Compensation Committee and Dr. Andrew J. Fishleder as Chairman of the
Audit Committee.
Director Compensation
Non-employee directors receive:
* a quarterly retainer of $2,500, plus $500 per committee meeting
attended to be issued quarterly in the form of common stock at the
prevailing market rate;
* an annual grant of stock options to purchase 100,000 shares of our
common stock subject to board approval; and
* reimbursement for out-of-pocket expenses associated with attending
Board and committee meetings.
Employee directors receive no additional compensation for serving on the
Board.
The stock options granted to non-employee directors are granted at an
exercise price equal to the fair market value of the common stock on the date of
grant, are fully vested at date of grant, and expire ten years from the date of
grant.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years we have entered into the following
transactions with our directors, officers, holders of 5% or more of our common
stock, or their affiliates:
DAVID TEWS
Mr. Tews was a director between January 27, 1997 and November 20, 1998. We
entered into a consulting services agreement with International Trade Group,
Inc. which is a private company controlled by Mr. Tews. ITG, under the
agreement, provided consulting services to us with respect to strategic planning
and business development for a monthly fee of $6,000 and a one-time grant of
250,000 stock options exercisable for three years at $0.83 per share. The
250,000 stock options were granted on June 16, 1998 and remain outstanding. The
agreement was for a term of three years starting June 16, 1998. Effective
October 15, 1999, we terminated this agreement.
32
<PAGE>
ANDREW POLLET
Mr. Pollet was one of our directors between March 24, 1997 and November 20,
1998. Pollet Law, a law firm which Mr. Pollet founded and is the principal
shareholder, provided us with legal services. We incurred legal expenses from
Pollet Law in the amount of $64,518, $127,329 and $93,975 in 1999, 1998 and
1997, respectively. We entered into a settlement agreement ending our
relationship with Pollet Law in January 2000.
LAWRENCE D. BAIN
Mr. Bain was appointed a director on August 6, 1999 and was appointed the
Chairman of the Board on January 1, 2000. In April 1998, we entered into an
engagement agreement with Uptic Investments Corp., which is controlled by Mr.
Bain. Uptic provided financial advisory services to us with respect to obtaining
strategic corporate or institutional investors and also facilitated
introductions to key customers and distributors. Uptic has been issued warrants
to purchase 1,000,000 shares of common stock, of which it has purchased upon
exercise of the warrant 250,000 shares that were granted and fully exercisable
in April 1998 at an exercise price of $0.01 per share, and 250,000 shares that
were granted and fully exercisable in January 1999 at an exercise price of $0.01
per share. The remaining 500,000 warrants were granted and fully exercisable on
May 5, 1999 and have an exercise price of $0.50 per share. Consulting expenses
in the amounts of $213,275 and $301,000 were recorded in 1998 and 1999,
respectively, in accordance with SFAS 123 for the fair value of the warrants.
INDEBTEDNESS OF MANAGEMENT AND OTHERS TO THE COMPANY
In 1997, Mr. Stephen D. Hayter, a Director and Former President and Chief
Executive Officer, delivered to us a promissory note in the original principal
amount of $120,873 with interest at 8.5% per annum, as payment for the exercise
of 200,000 stock options. The promissory note was paid in full during the first
quarter of 1998.
33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Empyrean Bioscience, Inc.
We have audited the accompanying consolidated balance sheets of Empyrean
Bioscience, Inc., and its wholly-owned subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Empyrean
Bioscience, Inc., and subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared
assuming that Empyrean Bioscience, Inc., will continue as a going concern. As
shown in the consolidated financial statements, Empyrean Bioscience, Inc.,
incurred a net loss of $4,785,000 during the year ended December 31, 1999, and,
as of that date Empyrean Bioscience, Inc. has a deficit in stockholders' equity
of $1,662,000. These factors, among others, as discussed in Note 2 to the
financial statements, raise substantial doubt about Empyrean Bioscience, Inc.'s
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
GRANT THORNTON LLP
San Francisco, California
February 10, 2000
F-1
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
December 31,
----------------------
1999 1998
-------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 286 $ 63
Accounts receivable 7 --
Prepaid expenses and deposits 49 168
Inventory 284 16
Other 3 10
-------- --------
Total current assets 629 257
EQUIPMENT AND IMPROVEMENTS 52 57
-------- --------
Total assets $ 681 $ 314
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,045 $ 438
Deferred revenue 100 --
Short-term notes payable 198 --
-------- --------
Total current liabilities 2,343 438
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 100,000,000
shares, without par value; issued and
outstanding (1999: 31,522,109; 1998: 26,399,824) 21,494 18,247
Accumulated deficit (23,156) (18,371)
-------- --------
Total stockholders' deficit (1,662) (124)
-------- --------
Total liabilities and stockholders' deficit $ 681 $ 314
======== ========
See accompanying notes to financial statements
F-2
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Years Ended December 31,
------------------------
1999 1998
-------- --------
Net revenues $ 662 $ 10
Cost of sales 109 3
-------- --------
Gross profit 553 7
Selling, general and administrative 4,814 2,913
Research and development 15 31
Restructuring charge 345 --
Write-down of inventory -- 29
-------- --------
5,174 2,973
-------- --------
Loss from operations (4,621) (2,966)
Interest expense (174) --
Loss on disposal of fixed assets -- (210)
Other, net 10 29
-------- --------
Other income -(expense) (164) (181)
-------- --------
Net loss $ (4,785) $ (3,147)
======== ========
Basic and diluted loss per share $ (0.17) $ (0.14)
======== ========
Weighted average number of shares outstanding 28,108 22,884
======== ========
See accompanying notes to financial statements
F-3
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common Stock
------------------ Accumulated
Shares Amount Deficit Total
------- ------- -------- -------
<S> <C> <C> <C> <C>
Balances, January 1, 1998 21,227 $15,431 $(15,224) $ 207
Common stock issued for cash 2,680 1,078 -- 1,078
Stock options and warrants exercised for cash 1,799 725 -- 725
Common stock issued for debt 197 124 -- 124
Common stock issued for expenses 171 114 -- 114
Common stock issued for license rights 325 223 -- 223
Fair value of option and warrant grants -- 552 -- 552
Net loss -- -- (3,147) (3,147)
------- ------- -------- -------
Balances, December 31, 1998 26,399 18,247 (18,371) (124)
Common stock issued for cash 2,460 1,230 -- 1,230
Stock options and warrants exercised for cash 1,125 577 -- 577
Common stock issued for license rights 100 70 -- 70
Common stock issued for debt 1,485 556 -- 556
Cancellation of escrow shares (47) -- -- --
Fair value of option and warrant grants -- 814 -- 814
Net loss -- -- (4,785) (4,785)
------- ------- -------- -------
Balances, December 31, 1999 31,522 $21,494 $(23,156) $(1,662)
======= ======= ======== =======
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
------------------------
1999 1998
------- -------
Cash flows from operating activities:
Net loss $(4,785) $(3,147)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 15 79
Options and warrants issued for services 814 553
Loss on write-downs and allowances 71 213
Issuance of common stock for expenses
and license rights 70 337
Changes in operating assets and liabilities:
Accounts receivable (7) --
Prepaid expenses and deposits 119 (153)
Inventory (339) --
Other receivables 7 19
Accounts payable and accrued liabilities 1,607 298
Deferred revenue 100 --
------- -------
Net cash used by operating activities (2,328) (1,801)
------- -------
Cash flows from investing activities:
Payments on note receivable -- 51
Proceeds from sales of fixed assets -- 3
Purchase of fixed assets (10) (41)
------- -------
Net cash provided (used) by investing activities (10) 13
------- -------
Cash flows from financing activities:
Issuance of common stock 1,807 1,803
Proceeds of short-term notes payable 900 --
Payment of short-term notes payable (146) --
------- -------
Net cash provided by financing activities 2,561 1,803
------- -------
Net increase in cash and cash equivalents 223 15
Cash and cash equivalents at beginning of period 63 48
------- -------
Cash and cash equivalents at end of period $ 286 $ 63
======= =======
Noncash financing and investing activities:
Conversion of debt to common stock $ 556 $ 124
See accompanying notes to financial statements
F-5
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Empyrean Bioscience, Inc. (the "Company"), previously known as Empyrean
Diagnostics Ltd., was originally a Canadian entity, which in 1995 was a
fully operational organization. The Company became a Wyoming corporation
during 1997. Through its wholly-owned subsidiary, the Company distributes
and markets products designed to prevent diseases. The Company is
identifying strategic corporate partners to both fund and distribute the
Preventx(R) line of products, which was licensed to the Company and
developed by International Bioscience Corporation ("IBC").
The Company's summary of significant accounting policies applied in the
preparation of these financial statements follows:
* REVENUE RECOGNITION
The Company recognizes revenues upon shipment or when no significant
obligations remain and collectability of the amount is probable.
* PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All intercompany accounts and
transactions are eliminated in consolidation.
* CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash
equivalents.
* INVENTORY
Inventory is recorded at the lower of average cost or market.
Management performs periodic assessments to determine the existence of
obsolete, slow moving and non-salable inventories, and records
necessary provisions to reduce such inventories to their net
realizable value.
* EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are recorded at cost. Depreciation is
provided from the dates the assets are placed in service on a
declining balance basis at the following rates:
Office equipment and furniture - 20% declining balance
Leasehold improvements - lesser of 5 years or the term
of the lease
* ADVERTISING
The Company recognizes advertising expenses as they are incurred.
* INCOME TAXES
The Company accounts for income taxes on the liability method, as
provided by Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes."
F-6
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
* EARNINGS (LOSS) PER SHARE
Loss per share has been calculated using the weighted average number
of shares outstanding. A total of 9,039 and 6,985 options, warrants
and contingent share issuances for 1999 and 1998, respectively, have
been excluded from the calculation of loss per share as their
inclusion would be anti-dilutive.
* STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation to employees and
members of the board of directors using the intrinsic value method in
accordance with the APB No. 25, "Accounting for Stock Issued to
Employees." Stock-based compensation to consultants and others are
accounted for using the fair value method of SFAS No. 123 "Stock-based
Compensation."
* USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
* FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of an entity's
financial instruments. These instruments consist of cash, cash
equivalents, accounts receivable, accounts payable and short-term
notes payable. The balance sheet carrying amounts of these instruments
approximate the estimated fair values based on the short-term nature
of such instruments.
* SEGMENT REPORTING
The Company's business is currently conducted in a single operating
segment. In the future, we expect to operate in several segments based
on the type of customer such as commercial, institutional and retail.
The Company's chief operating decision maker is the Chief Executive
Officer who reviews a single set of financial data that encompasses
our entire operation for the purpose of making operating decisions and
assessing performance.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has sustained
substantial losses from operations in recent years and has a deficit in
stockholders' equity.
As a result, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's
ability to meet its financing requirements on a continuing basis and to
succeed in its future operations. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
F-7
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 2 - GOING CONCERN (CONTINUED)
We do not have existing capital resources or credit lines available that
are sufficient to fund our operations and capital requirements as presently
planned over the next twelve months. We plan to pursue a working capital
line of credit to be secured by our accounts receivable and inventory. We
may also raise funds through the issuance of either debt or equity
instruments. However, such funds may not be available on favorable terms or
at all. Given the company's history of successfully attracting investors to
fund operations, management believes that seeking additional equity and
debt financing is a viable plan. Additionally, our relationship with
Wal-Mart Stores, Inc. should provide a more stable foundation on which to
promote and obtain future funding.
NOTE 3 - EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are comprised of the following as of December
31:
1999 1998
----- -----
Office equipment and furniture $ 117 $ 107
Leasehold improvements 10 10
----- -----
Accumulated depreciation 127 117
(75) (60)
----- -----
$ 52 $ 57
===== =====
NOTE 4 - DISTRIBUTION AGREEMENT
In May 1999, the Company executed a distribution agreement with Durstrand
International Limited ("Durstrand") granting Durstrand the exclusive right
to distribute the Company's licensed products in certain Southeast Asian
markets. Durstrand paid a non-refundable fee of $600 for these rights of
which $100 was deferred pending shipment of product to Durstrand. The
Company recognized $500 of the fee paid as revenue in quarter ended June
30, 1999, as the Company had performed all of its obligations under the
agreement. Durstrand is obligated to make an additional $600 payment once
approval for additional products is received from the US Food and Drug
Administration. No royalties are payable to IBC as a result of this
agreement.
In connection with the distribution agreement, the Company paid $330 in the
quarter ended June 30, 1999, for consulting services provided on behalf of
the Company and recorded the amount paid as a prepaid expense. After
considering the terms of the agreement and the nature of the consulting
services received, the Company determined the $330 should have been
recognized as an expense in the quarter ended June 30, 1999, as the fee
paid would not benefit future periods. Had the fee been expensed in the
quarter ended June 30, 1999, the previously reported interim financial
information for the quarter ended June 30, 1999, would be restated as
follows:
Previously As
Reported Restated
(unaudited) (unaudited)
----------- -----------
Net revenues $ 534 $ 534
Selling, general and
adminstrative expense 1,121 1,451
Net loss 671 1,001
Loss per share $ (0.02) $ (0.04)
NOTE 5 - SHORT-TERM NOTES PAYABLE
In February 1999, the Company entered into promissory note agreements in
the aggregate amount of $800, of which $500 was with current directors. The
promissory notes were due and payable six months from the loan date and
have a fixed interest rate of 10%, payable monthly. The Company also issued
320,000 warrants to the promissory note holders, exercisable for two years
expiring February 15, 2001, at an exercise price of $0.10 per share. The
fair value of the warrants was estimated on the date of grant using the
Black-Scholes option pricing model to be $117 and was recorded as interest
expense over the term of the promissory notes. Promissory notes in the
amount of $218 were settled by offsetting the amounts payable against the
proceeds receivable from the exercise of 810,000 previously issued
warrants. An additional $238 was settled by issuance of 475,000 shares of
the Company's common stock and $146 was settled by cash payments. As of
December 31, 1999, promissory notes in the amount of $198 are currently due
and payable.
F-8
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 5 - SHORT-TERM NOTES PAYABLE (CONTINUED)
In November 1999, the Company entered into promissory note agreements with
two officers of the Company in the aggregate amount of $100. The promissory
notes were due and payable one month from the loan date and have a fixed
interest rate of 10%, payable at the end of the loan period. As of December
31, 1999, the $100 loan balance was converted into 200,000 shares of common
stock.
NOTE 6 - STOCKHOLDERS' EQUITY
The Company's authorized preferred stock consists of 100,000,000 shares of
Class "A" with a par value of $10 per share and 100,000,000 shares of Class
"B" with a par value of $50 per share. No preferred stock has been issued.
The Company's Stock Plan provides that up to 6,000,000 stock options may be
granted to employees, board members and persons providing services to the
Company. The stock options may be exercised at the rate of 25%
semi-annually, on a cumulative basis during a vesting period of two years
and generally expire ten years after the grant date. The stock options are
exercisable during involvement with the Company and after involvement has
ceased, if the Board of Directors so approve. The exercise price of the
options is not less than the fair market value of the Company's stock on
the date of the grant. Accordingly, no compensation cost has been
recognized for grants from the plan. Had compensation cost for the option
grants been determined based on the fair value of the options at the grant
dates consistent with SFAS No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
1999 1998
---- ----
Net loss
As reported $ (4,785) $ (3,147)
Pro forma (5,947) (3,932)
Basic and diluted loss per share
As reported $ (0.17) $ (0.14)
Pro forma (0.21) (0.17)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions: dividend yield of 0%; a risk-free interest rate of 6% ,
expected lives of 2 years; and volatility of 94% in 1999 and 96% in 1998.
F-9
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1999 and 1998, and changes during the years ended on those dates is
presented below:
1999 1998
------------------ -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 4,970,000 $ 0.81 2,391,000 $ 0.64
Granted 4,449,000 0.46 2,925,000 0.91
Exercised (375,000) 0.40 (133,000) 0.47
Expired (2,411,000) 0.84 (213,000) 0.55
---------- ---------
Outstanding at end of year 6,633,000 0.70 4,970,000 0.81
========== =========
Weighted-average fair value of
options granted during the year $ 0.66 $ 0.56
The following table summarizes information concerning options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
- ---------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
- ------------- ----------- ------------ ----- ----------- -----
$ 0.38 - 0.45 3,898,000 9.0 $ 0.43 1,383,000 $ 0.41
0.55 - 0.69 1,150,000 2.4 0.59 1,150,000 0.59
0.80 - 0.95 1,585,000 1.1 0.85 1,585,000 0.85
--------- ---------
6,633,000 0.70 4,118,000 0.66
========= =========
F-10
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company generally has issued one warrant for the purchase of one share
of common stock with each share of common stock that it has issued for
cash, except for shares issued upon exercise of options or warrants. The
following table summarizes the warrant activity for the years then ended
December 31, 1999 and 1998:
1999 1998
------------------ -------------------
Weighted Weighted
Average Average
Exercise Exercise
Warrants Price Warrants Price
-------- ----- -------- -----
Outstanding at beginning of year 2,015,000 $0.57 2,637,000 $0.46
Issued 3,030,000 0.48 1,045,000 0.57
Exercised (1,488,000) 0.40 (1,667,000) 0.40
Expired (1,152,000) 0.75 -- --
---------- ----------
Outstanding at end of year 2,405,000 0.48 2,015,000 0.57
========== ==========
NOTE 7 - INCOME TAXES
Deferred tax assets consist of the following at December 31,:
1999 1998
------- -------
Net operating loss and tax credit carryforwards $ 8,069 $ 5,615
Other 12 17
Intangible asset - tax basis 647 1,094
------- -------
8,728 6,726
Less valuation allowance (8,728) (6,726)
------- -------
$ -- $ --
======= =======
The increase in the valuation allowance was $2,002 in 1999 and $1,325 in
1998.
Cumulative net operating losses of approximately $20,960 in 1999 are being
carried forward for Federal tax return purposes. The earliest carryforwards
begin to expire in 2007.
F-11
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 7 - INCOME TAXES (CONTINUED)
The following is a reconciliation between the federal statutory rate and
the reported taxes:
1999 1998
------- -------
Loss before income taxes $ 4,785 $ 3,147
======= =======
Tax benefit at statutory federal income tax rate (34%) 1,627 1,070
State tax, net of federal benefit 375 255
Change in valuation allowance (2,002) (1,325)
------- -------
$ -- $ --
======= =======
NOTE 8 - LEASES
The Company conducts its business primarily in leased facilities. On March
26, 1998, the Company entered into a commercial lease for 4,343 square feet
in Phoenix, Arizona. This lease was terminated with no future obligations
on January 31, 2000. On February 1, 2000, the Company entered into a two
year commercial lease for 2,000 square feet at its current facility in
Cleveland, Ohio.
The Company is a co-signer on leased office space in Vancouver, B.C.,
occupied by a former director. All payments associated with this lease are
paid directly to the landlord by the director.
The schedule of minimum future rental payments and future sublease income
follows:
Future
Minimum Future
Year Ending Rental Sublease
December 31, Payments Income
------------ -------- ------
2000 $ 58 $ 26
2001 22 --
2002 2 --
---- ----
$ 82 $ 26
==== ====
Total rent expense, net of sublease income received, was $58 and $42 for
the years ended December 31, 1998 and 1999, respectively.
F-12
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 9 - LICENSES AND ROYALTIES
The Company entered into an agreement on April 29, 1997, and subsequently
amended in February 1998 with IBC, formerly known as Geda International
Marketing Co. Ltd., whereby the Company obtained the marketing and
distribution rights for a 10-year period to a microbiocide formulation
developed by IBC in certain geographic areas. The formulation stops the
transmission of communicable diseases through bodily contact. The Company
is required to pay royalties equal to the greater of 2% of net sales or
$1.35 per liter manufactured of the IBC products or minimum guaranteed
royalties, as follows.
Future
Minimum
Year ending Guaranteed
December 31, Payments
------------ --------
2000 $ 735
2001 915
2002 1,215
2003 1,458
2004 1,758
Thereafter 7,576
--------
$ 13,657
========
We are a defendant in an action which was filed by Optima Holding Co., Ltd.
and Mercury Technology Corp. on July 28, 1998, in the Circuit Court of the
Eleventh Judicial District, Dade County, Florida. This action alleges that
we tortuously interfered with Optima and Mercury's contractual relationship
with IBC. Optima and Mercury claim that they had prior rights to the IBC
formulation and that we induced IBC to breach that agreement. Optima and
Mercury have requested an unspecified amount of damages against us.
Plaintiffs also seek injunctive relief to prevent IBC and its managers and
directors from allowing IBC to have further dealings with us. In a separate
action that has now been consolidated with the first action in the same
court, IBC has requested a declaratory judgment that IBC properly
terminated its development and distribution contract with Optima and
Mercury. If we are not successful in this action, we could lose the right
to market, sell or manufacture products containing the formulation. The
discovery in these actions is proceeding. Although IBC has represented that
it has the exclusive right and authority to license the formula to the
Company, and has agreed to pay any legal fees incurred by the Company
arising out of the Company's investigation and any defense of this matter,
there can be no assurance as to the outcome of this matter or that it will
not materially or adversely impact the Company.
In 1998, the Company obtained license distribution and manufacturing rights
from third parties related to the IBC products. In consideration for these
rights, the Company paid $50 in cash and issued 325,000 shares of common
stock valued at $223. The Company is required to pay a royalty equal to 5%
of the net revenues of certain products that contain the lotion.
In 1999, the Company purchased the distribution rights from a third party
to sell the IBC products in Canada. In consideration for these rights, the
Company issued 100,000 shares of common stock valued at $70 and is required
to pay a royalty equal to 5% of its net sales in Canada for certain
products that contain the IBC formulation.
F-13
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 9 - LICENSES AND ROYALTIES (CONTINUED)
On October 1, 1999, we entered into separate license agreements with
Sunbeam Corporation and The Coleman Company, Inc. The licenses are
non-exclusive. They allow us to use the Sunbeam(R) and Coleman(R)
Trademarks in connection with the sale and distribution, throughout the
United States and Canada, of our hand sanitizer and first aid antiseptic,
sanitizing wet wipes, disinfectant surface spray and sanitizing baby wipes.
The licenses expire on December 31, 2002. We can renew the licenses until
December 31, 2005 if we meet the renewal terms under the agreement. As
consideration, the Company paid to Coleman and Sunbeam prepaid royalties in
the amount of $15. For the period of October 1, 1999 through December 31,
2000, the Company is required to pay royalties ranging from 5%-6% of net
sales of licensed products sold and for the period of January 1, 2001
through December 31, 2002 the Company is required to pay 7% of net sales.
The Company is required to pay guaranteed minimum amounts comprised of
royalties, as follows.
Future
Minimum
Year Ending Guaranteed
December 31, Payments
------------ --------
2000 $ 45
2001 110
2002 220
-----
$ 375
=====
NOTE 10 - RELATED PARTY TRANSACTIONS
On June 16, 1998, the Company entered into a three year agreement with a
company controlled by former director to provide strategic planning and
business development services for a monthly fee of $6 and a one-time grant
of 250,000 immediately exercisable stock options at $0.83 per share
expiring three years from the date of the grant. The Company incurred total
expenses on this contract of $162 in 1998 of which $36 was payable in cash
and the balance of $126 represents the fair value of the stock options
granted. Additionally, $64 was payable in cash under this contract in 1999.
The contract was cancelled by the Company effective in October 1999.
During 1998, the Company entered into an agreement with a company
controlled by a current director who was appointed in August 1999. The
agreement provided for financial advisory services to the Company with
respect to obtaining strategic corporate or institutional investors and
also facilitated introductions to key customers and distributors in
exchange for the issuance of warrants to purchase 1,000,000 shares of
common stock, of which 250,000 warrants were fully exercisable in April
1998 at an exercise price of $0.01 per share, 250,000 warrants were fully
exercisable in January 1999 at an exercise price of $0.01 per share and the
remaining 500,000 were exercisable in May 1999 at an exercise price of
$0.50 per share. Consulting expenses, representing the fair value of the
stock warrants issued in accordance with SFAS 123, of $213 and $301 were
recorded in 1998 and 1999, respectively.
The company incurred legal expenses of $127 in 1998 and $64 in 1999 with a
law firm founded by a former director. Accrued and outstanding expenses to
this firm were $64 at December 31, 1999.
F-14
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands except per share amounts)
NOTE 11 - REVENUES
Net revenues are comprised of the following for the year ending December
31:
1999 1998
----- ----
Distribution rights $ 550 $ --
Product sales 112 10
----- ----
Net revenues $ 662 $ 10
===== ====
NOTE 12 - RESTRUCTURING CHARGES
The Company recorded a restructuring charge of $345 in 1999 consisting of
involuntary termination benefits of $263 and other related reorganization
costs of $82. This charge resulted from a business reorganization approved
by the Board of Directors in December 1999 that included a facility
closure, relocation of the corporate headquarters into a more cost
effective location, severance costs for two Arizona based personnel and the
write down of abandoned fixed assets to estimated fair value less cost to
sell. As of December 31, 1999, both employees had been terminated and
severance payments and benefits are payable to December 31, 2000. At
December 31, 1999, no other reorganization costs had been paid. All
reorganization costs including severance payments are expected to be paid
prior to December 31, 2000.
F-15
<PAGE>
INDEX TO EXHIBITS
2.1 Articles of Incorporation and Bylaws of Empyrean Wyoming.*
2.2 Convertible Debenture and Warrant Purchase Agreement dated July 9,
1998 by and among Empyrean and purchasers thereof and related
Warrant.*
2.3 Form of Warrant between Empyrean and the Purchasers thereof dated
February 15, 1999.*
2.4 Form of "Series K" Warrant Certificate dated March 17, 1999 between
Empyrean and the Purchasers thereof.*
2.5 Form of "Series L" Warrant Certificate, with dates ranging from
December 1999 through February 2000, between Empyrean and the
Purchasers thereof.*
10.1 License Agreement dated as of February 21, 1998 between Empyrean and
Geda International Marketing, Co., Ltd.*
10.2 Sub-license Agreement dated as of July 20, 1998 between Empyrean and
Prevent-X, Inc.*
10.3 Agreement and Assignment of Distribution Rights, between GEDA
International Marketing Co., Ltd., Farida Darbar, Empyrean Diagnostics
Inc., and Empyrean Diagnostics, Ltd., dated August 31, 1998.*
10.4 1998 Stock Option Plan and Form of Stock Option Agreement.*
10.5 Employment Agreement for Stephen D. Hayter dated September 1, 1999.*
10.6 Confidential Settlement Agreement and Release for Stephen D. Hayter
dated December 31, 1999.
10.7 Employment Agreement for Richard C. Adamany dated September 7, 1999.*
10.8 Employment Agreement for Bennett S. Rubin dated September 7, 1999.*
10.9 Distribution Agreement between Empyrean and Durstrand International
dated April 28, 1998.*
10.10 License Agreement between The Coleman Company, Inc. and Empyrean dated
October 1, 1999.*
10.11 License Agreement between Sunbeam Corporation and Empyrean dated
October 1, 1999.*
27.1 Financial Data Schedule
- ----------
* Previously filed
<PAGE>
SIGNATURES
Accordance with the Exchange Act, including Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EMPYREAN BIOSCIENCE, INC.
By /s/ Lawrence D. Bain
---------------------------------
Lawrence D. Bain - Chairman of the Board
Date: March 29, 2000
By /s/ Richard C. Adamany
---------------------------------
Richard C. Adamany - President,
Chief Executive Officer
and Chief Financial Officer
Date: March 29, 2000
By /s/ Bennett S. Rubin
---------------------------------
Bennett S. Rubin - Executive Vice President
and Chief Operating Officer
Date: March 29, 2000
By /s/ Robert G.J. Burg II
---------------------------------
Robert G.J. Burg II - Director
Date: March 29, 2000
By /s/ Andrew J. Fishleder
---------------------------------
Andrew J. Fishleder, MD - Director
Date: March 29, 2000
By /s/ Michael Cicak
---------------------------------
Michael Cicak - Director
Date: March 29, 2000
By /s/ Stephen D. Hayter
---------------------------------
Stephen D. Hayter - Director
Date: March 29, 2000
VOID AFTER 5:00 P.M., NEW YORK TIME ON ____________, 2001
WARRANT TO PURCHASE _____________ SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
WARRANT TO PURCHASE COMMON STOCK
OF
EMPYREAN BIOSCIENCE, INC.
- --------------------------------------------------------------------------------
THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE PURSUANT TO THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE.
FOR VALUE RECEIVED, Empyrean Bioscience, Inc., a Wyoming corporation (the
"Company"), grants the following rights to
_______________________________________ ("Holder'):
ARTICLE I.
DEFINITIONS.
As used herein, the following terms shall have the following meanings,
unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock, without par value, of
the Company.
(b) "Corporate Office" shall mean the office of the Company (or its
successor) at which at any particular time its principal business shall be
administered.
(c) "Exercise Date" shall mean any date upon which the Holder shall
give the Company a Notice of Exercise.
1
<PAGE>
(d) "Exercise Price" shall mean the price to be paid to the Company
for each share of Common Stock to be purchased upon exercise of this Warrant in
accordance with the terms hereof which shall be $0.60.
(e) "Expiration Date" shall mean 5:00 p.m. (New York time) on
__________, 2001.
(f) "Subscription Agreement" shall mean that certain Subscription
Agreement dated _______, 1999 pursuant to which this Warrant has been issued.
(g) "SEC" shall mean the United States Securities and Exchange
Commission.
(h) "Transfer Agent" shall mean the Company's transfer agent or its
authorized successor.
(i) "Underlying Shares" shall mean the shares of Common Stock issuable
upon exercise of the Warrant.
ARTICLE 2.
EXERCISE AND AGREEMENTS
2.1 EXERCISE OF WARRANT. This Warrant shall entitle Holder to purchase up
to __________ shares of Common Stock (the "Shares") at the Exercise Price. This
Warrant shall be exercisable at any time and from time to time on or after
__________, 1999 and prior to the Expiration Date (the "Exercise Period"). This
Warrant and the right to purchase shares of Common Stock hereunder shall expire
and become void at the Expiration Date.
2.2 MANNER OF EXERCISE.
(a) Holder may exercise this Warrant at any time and from time to time
during the Exercise Period, in whole or in part (but not in denominations of
fewer than 10,000 shares, except upon an exercise of this Warrant with respect
to the remaining balance of shares purchasable hereunder at the time of
exercise), by delivering to the Company (i) a duly executed Notice of Exercise
in substantially the form attached as Appendix 1 hereto and (ii) a bank
cashiers, certified check, or wire transfer for the aggregate Exercise Price of
the shares being purchased.
(b) From time to time upon exercise of this Warrant, in whole or part,
in accordance with its terms, the Company will deliver stock certificates to the
Holder representing the number of shares of Common Stock being purchased
pursuant to such exercise, subject to adjustment as described herein.
2
<PAGE>
(c) Promptly following any exercise of this Warrant, if the Warrant
has not been fully exercised and has not expired, the Company will deliver to
the Holder a new Warrant for the balance of the shares of Common Stock covered
hereby.
2.3 TERMINATION. All rights of the Holder in this Warrant, to the extent
they have not been exercised, shall terminate on the Expiration Date.
2.4 NO RIGHTS PRIOR TO EXERCISE. Prior to its exercise pursuant to Section
2.2 above, this Warrant shall not entitle the Holder to any voting or other
rights as a holder of shares of Common Stock.
2.5 ADJUSTMENTS. In case of any reclassification, capital reorganization,
stock dividend or other change of outstanding shares of Common Stock, or in case
of any consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization, stock dividend or other change of outstanding shares or Common
Stock) or in case of any sale or conveyance to another corporation of the
property of the Company as, or substantially as, an entirety (other than a
sale/leaseback, mortgage or other financing transaction), the Company shall
cause effective provision to be made so that the Holder shall have the right
thereafter, by exercising this Warrant, to purchase the kind and number of
shares of stock or other securities or property (including cash) receivable upon
such reclassification, capital reorganization, stock dividend or other change,
consolidation, merger, sale or conveyance as the Holder would have been entitled
to receive had the Holder exercised this Warrant in full immediately before such
reclassification, capital reorganization, stock dividend or other change,
consolidation, merger, sale or conveyance. Any such provision shall include
provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2.5. The foregoing
provisions shall similarly apply to successive reclassifications, capital
reorganizations, stock dividends and other changes of outstanding shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
2.6 FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issuable upon exercise or conversion of this Warrant and the number of shares to
be issued shall be rounded down to the nearest whole share. If a fractional
share interest arises upon any exercise or conversion of the Warrant, the
Company shall eliminate such fractional share interest by paying Holder the
amount computed by multiplying the fractional interest by the closing bid price
of a full share of Common Stock on the date of the Notice of Exercise.
3
<PAGE>
ARTICLE 3.
REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Holder as follows:
(a) All shares of Common Stock which may be issued upon the exercise
of the purchase right represented by this Warrant shall, upon issuance, be duly
authorized, validly issued, fully-paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws, and not subject to any
pre-emptive rights.
(b) The Company is a corporation duly organized and validly existing
under the laws of the State of Wyoming, and has the full power and authority to
issue this Warrant and to comply with the terms hereof. The execution, delivery
and performance by the Company of its obligations under this Warrant, including,
without limitation, the issuance of the shares of Common Stock upon any exercise
of the Warrant have been duly authorized by all necessary corporate action. This
Warrant has been duly executed and delivered by the Company and is a valid and
binding obligation of the Company, enforceable in accordance with its terms,
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws affecting enforceability of creditors' rights
generally and except as the availability of the remedy of specific enforcement,
injunctive relief or other equitable relief is subject to the discretion of the
court before which any proceeding therefore may be brought.
(c) The Company is not subject to or bound by any provision of any
certificate or articles of incorporation or by-laws, mortgage, deed of trust,
lease, note, bond, indenture, other instrument or agreement, license, permit,
trust, custodianship, other restriction or any applicable provision of any law,
statute, rule, regulation, judgment, order, writ, injunction or decree of any
court, governmental body, administrative agency or arbitrator which could
prevent or be violated by or under which there would be a default (or right of
termination) as a result of the execution, delivery and performance by the
Company of this Warrant.
ARTICLE 4.
SECURITIES LAW COMPLIANCE.
The shares of Common Stock will be acquired for Holder's own account for
investment and not with a view to, or for resale in connection with, any
distribution of the shares within the meaning of the Securities Act of 1933.
Holder acknowledges that it is aware that the issuance of the shares of Common
Stock upon exercise of this Warrant has not been registered pursuant to the
Securities Act of 1933 (the "Act"), nor is it intended that they be registered
and the Holder has no right to require that they be registered, under the Act or
under any state securities laws. The Holder agrees that the shares of Common
Stock may not be sold in the absence of registration unless such sale is exempt
4
<PAGE>
from registration under the Act and any applicable state securities laws. The
Holder also acknowledges that he shall be responsible for compliance with all
conditions on transfer imposed by any Commissioner of Securities of any state
and for any expenses incurred by the Company for legal or accounting services in
connection with reviewing such proposed transfer or issuing opinions in
connection therewith. The certificate for the shares of Common Stock shall bear
the following restrictive legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OF THE UNTIED STATES OF AMERICA
(THE "ACT") OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
("STATE ACT"). THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR
VALUE, DIRECTLY OR INDIRECTLY, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE ACT AND COMPLIANCE WITH APPLICABLE
STATE ACTS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
UNDER APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS ESTABLISHED TO
THE SATISFACTION OF THE COMPANY.
If (but without any obligation to do so under this Agreement) the Company
proposes to register (including for this purpose a registration effected by the
Company for shareholders other than the Holder) any of its stock or other
securities under the Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan, or a registration on
any form which does not include substantially the same information as would be
required to be included in a registration statement covering the issuance of the
Underlying Shares, or a registration of an offering of securities, the
underwriter of which objects to registration of additional securities), the
Company shall, at such time, promptly give to Holder written notice of such
registration. Upon the written request of the Holder given within twenty days
after mailing of such notice by the Company, the Company shall cause to be
registered under such registration statement such Underlying Shares as the
Holder has requested to be registered.
ARTICLE 5.
MISCELLANEOUS.
5.1 TRANSFER. This Warrant may not be transferred or assigned, in whole or
in part, at any time, except in compliance with applicable federal and state
securities laws by the transferor and the transferee (including, without
limitation, the delivery of an investment representation letter and a legal
opinion reasonably satisfactory to the Company), provided that this Warrant may
not be transferred or assigned such that either the Holder or any transferee
will, following such transfer or assignment, hold a Warrant for the right to
purchase fewer than 5,000 shares of Common Stock.
5
<PAGE>
5.2 TRANSFER PROCEDURE. Subject to the provisions of Section 5.1, Holder
may transfer or assign this Warrant by giving the Company notice setting forth
the name, address and taxpayer identification number of the transferee or
assignee, if applicable (the "Transferee") and surrendering this Warrant to the
Company for reissuance to the Transferee (and the Holder, in the event of a
transfer or assignment of this Warrant in part). (Each of the persons or
entities in whose name any such new Warrant shall be issued is herein referred
to as a Holder").
5.3 LOSS, THEFT, DESTRUCTION OR MUTILATION. If this Warrant shall become
mutilated or defaced or be destroyed, lost or stolen, the Company shall execute
and deliver a new Warrant in exchange for and upon surrender and cancellation of
such mutilated or defaced Warrant or, in lieu of and in substitution for such
Warrant so destroyed, lost or stolen, upon the Holder filing with the Company
evidence to it that such Warrant has been so mutilated, defaced, destroyed, lost
or stolen. However, the Company shall be entitled, as a condition to the
execution and delivery of such new Warrant, to demand indemnity satisfactory to
it and payment of the expenses and charges incurred in connection with the
delivery of such new Warrant. Any Warrant so surrendered to the Company shall be
canceled.
5.4 NOTICES. All notices and other communications from the Company to the
Holder or vice versa shall be deemed delivered and effective when given
personally, by facsimile transmission and confirmed in writing or mailed by
first-class registered or certified mail, postage prepaid at such address and/or
facsimile number as may have been furnished to the Company or the Holder, as the
case may be, in writing by the Company or the Holder from time to time.
5.5 WAIVER. This Warrant and any term hereof may be changed, waived, or
terminated only by an instrument in writing signed by the party against which or
whom enforcement of such change, waiver, discharge or termination is sought.
5.6 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Arizona, without giving effect to its
principles regarding conflicts of law.
Dated: Empyrean Bioscience, Inc.
----------------------------
Attest: By: /s/ Stephen Hayter
---------------------------- ------------------------------------
Stephen Hayter, President & CEO
6
<PAGE>
NOTICE OF EXERCISE
TO: EMPYREAN BIOSCIENCE, INC.
(1) The undersigned hereby elects to purchase ________ shares of the Common
Stock of Empyrean Bioscience, Inc., a Wyoming corporation, pursuant to the
provisions of Article 2 of the attached Warrant, and tenders herewith payment of
the purchase price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon this exercise are
being acquired solely for the account of the undersigned and not as a nominee
for any other party, and for investment, and that the undersigned will not
offer, sell or otherwise dispose of any such shares of Common Stock except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any applicable state securities laws.
(3) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
Date:
----------------------------- ----------------------------------------
(Name)
7
CONFIDENTIAL SETTLEMENT AGREEMENT AND RELEASE
This Confidential Settlement Agreement and Release ("Agreement") is made
and entered into between Stephen D. Hayter, 7025 E. Stone Raven Trail,
Scottsdale, Arizona 85262, and Empyrean Bioscience, Inc., 2238 West Lone Cactus
Drive, Suite 200, Phoenix, Arizona 85027, this 31st day of December, 1999.
WHEREAS, Stephen D. Hayter ("Hayter") has been employed by Empyrean
Bioscience, Inc. (the "Company");
WHEREAS, Hayter has decided to resign from the Company;
WHEREAS, Hayter and the Company have reached an agreement regarding
Hayter's resignation upon the terms and subject to the conditions set forth in
this Agreement.
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound by this Agreement, Hayter and
the Company agree as follows:
1. Hayter agrees to resign his positions as President and Chief
Executive Officer and Chairman of the Board effective December 31, 1999 and to
execute all documents necessary to effectuate same.
2. Hayter agrees that his employment by the Company is concluded
effective December 31, 1999. 1.
3. The Company agrees to pay Hayter severance in an amount equivalent
to twelve months pay, for a total payment of $180,000, less ordinary deductions
for taxes and withholdings, which compensation includes payment for all unused
accrued vacation, sick and personal days. Payment will be made in twenty-six
(26) consecutive, equal, biweekly installments mailed to Hayter on the same date
when the Company customarily issues paychecks to its employees and shall be
mailed to Hayter's home address, which Hayter shall allow the Company to
designate as its place of business in Arizona beginning January 9, 2000 and
<PAGE>
ending December 31, 2000. The Company commenced issuing checks to Hayter in
January, 2000 and all checks issued to Hayter, during 2000, including those
issued prior to the date when Hayter signed this Agreement, constitute severance
paid pursuant to this Agreement.
4. The Company agrees to continue Hayter's current benefits package
including company-sponsored group health and dental insurance (including
prescription drug plan), at the Company's expense, for a period beginning
January 1, 2000 and concluding December 31, 2000. Thereafter, Hayter may obtain
health insurance coverage at his own expense. The Company is not subject to the
Consolidated Omnibus Budget Reconciliation Act, the federal law known as
"COBRA".
5. The Company agrees to pay Hayter the sum of $2,400 as reimbursement
for the cost of automobile lease payments incurred by Hayter. The foregoing
reimbursement will be paid in a lump sum in a check mailed to Hayter at his home
address on the Company's first occurring payday following expiration of the
seven (7) day revocation period subsequent to the date when Hayter signs this
Agreement.
6. A schedule of Hayter's 1,351,045 vested incentive stock options and
their prices is as follows:
NUMBER OF
VESTED OPTIONS DATE OF GRANT EXPIRATION DATE EXERCISE PRICE
- -------------- ------------- --------------- --------------
175,000 September 6, 1996 September 6, 2000 0.38
300,000 October 3, 1997 October 3, 2000 0.55
450,000 April 28, 1998 April 28, 2001 0.95
250,000 April 28, 1998 April 28, 2001 0.95
21,197 February 5, 1999 February 4, 2009 0.38
154,373 February 5, 1999 February 4, 2009 0.38
=========
1,351,045 Total Number of Vested Options as of December 31, 1999
2
<PAGE>
The Stock Option Agreements and Stock Option Certificates between the Company
and Hayter (collectively the "Option Agreements"), pursuant to which the
foregoing options were granted, are hereby amended to provide that the
expiration date for each of the vested options described above shall be the
earlier to occur of: (a) the date which is twelve (12) months after Hayter
ceases to be a director of the Company or (b) the first business day prior to
the ten (10) year anniversary of the date of grant of such option. If a
Registration Statement (as hereinafter defined) becomes effective and Hayter
determines to exercise part or all of his vested options described above and to
sell the shares which are issued upon exercise of such vested options (the
"Option Shares"), Hayter hereby agrees to limit his sale of Option Shares, plus
any other shares of the Company beneficially owned by Hayter, during any period
of ninety (90) consecutive days following the effective date of the Registration
Statement to not more than one percent (1%) of the issued and outstanding shares
of the Company. As used herein, the term "Registration Statement" means a
registration statement on Form S-8 which registers securities of the Company to
be offered pursuant to its 1998 Empyrean Diagnostics, Ltd. Stock Plan (the
"Stock Option Plan") as well as the reoffer or resale of such securities. The
Company agrees to name Hayter as a selling shareholder in any reoffer prospectus
which is prepared relating to the Registration Statement. Notwithstanding the
provisions of Section 7 of this Agreement, the Option Agreements, as modified by
this Agreement, remain in full force and effect according to their respective
terms.
7. In consideration of the payments and other benefits being provided
to Hayter pursuant to this Agreement, Hayter, for himself and his heirs,
executors, administrators and assigns, does hereby release, acquit and forever
discharge Empyrean Bioscience, Inc., its successors, predecessors, affiliates,
parent companies and past, present and future officers, directors, shareholders,
employees, agents, attorneys and assigns and Richard C. Adamany and Bennett
S.Rubin (hereinafter collectively referred to as "Employer") of and from any and
3
<PAGE>
all charges, claims, demands, damages, lawsuits, actions or causes of action, of
any kind or description whatsoever, whether arising out of tort, contract or
otherwise, in law or in equity, which Hayter now has, has had or may hereafter
have against Employer (and/or its past, present and future officers, directors,
shareholders, employees and agents) resulting from any matter whatsoever arising
in connection with Hayter's employment relationship with Employer, the
termination thereof and all past, present and future consequences, losses,
negotiations, injuries, expenses (including attorneys' fees), and damages of any
kind, nature or description relating thereto from the beginning of the world to
the date of this Agreement. Hayter, for himself and for his heirs, executors,
successors and assigns, does hereby further covenant and agree not to bring,
commence, prosecute, maintain, continue to maintain or cause or permit to be
brought, commenced, prosecuted, maintained or continued to be maintained, any
suit, action or administrative proceeding, either at law or in equity, in any
court or administrative body of the United States or in any state thereof or
elsewhere with respect to any matter embraced within this release of claims, it
being expressly understood that this release of claims and covenant not to sue
specifically include, but are not limited to, all claims arising under the Civil
Rights Act of 1866, the Fair Labor Standards Act of 1938, the Equal Pay Act of
1963, the Civil Rights Act of 1964, the Age Discrimination in Employment Act of
1967, the Rehabilitation Act of 1973, the Older Workers Benefit Protection Act
of 1990, the Americans With Disabilities Act of 1990, the Civil Rights Act of
1991 and the Family and Medical Leave Act of 1993, and all other federal or
state laws governing employers and employees.
8. ACKNOWLEDGMENT. By entering into this Agreement, and in connection
with Hayter's release of claims and covenant not to sue set forth in the
foregoing paragraphs, Hayter acknowledges that:
4
<PAGE>
A. Hayter is knowingly and voluntarily entering into this Agreement;
B. Company and Employer are not admitting any liability or violation
of any law, contract or other agreement;
C. No promise or inducement has been offered to Hayter except as
stated here and the benefits being provided to Hayter pursuant to
this Agreement are more than that to which Hayter would otherwise
be entitled;
D. This Agreement is being executed by Hayter without reliance upon
any statements by Company or Employer or their representatives
concerning the nature or extent of any claims or damages or legal
liability therefor;
E. This Agreement has been written in understandable language, and
all provisions hereof are understood by Hayter;
F. Hayter has been advised in writing to consult with an attorney
prior to executing this Agreement;
G. Hayter has had a period of at least twenty-one (21) days within
which to consider this Agreement before accepting the same and,
by signing this Agreement earlier than 21 days following receipt
of it, Hayter acknowledges that he has knowingly and voluntarily
waived the 21 day period and has accelerated the date when he may
begin receiving the severance payments following expiration of
the revocation period referenced in Paragraph H; and
5
<PAGE>
H. Hayter has the right to revoke this Agreement for a period of
seven (7) days following his acceptance hereof, and this
Agreement shall not become effective or enforceable until such
seven (7) day period has expired.
Should Hayter desire to revoke this Agreement, he must notify the Company in
writing at 23800 Commerce Park Road, Suite A, Cleveland, Ohio 44122, prior to
the close of business on the 7th day following the date when he signs this
Agreement. In the event Hayter declines to accept the terms of this Agreement
or, having accepted them, effectively revokes his acceptance thereof, this
Agreement shall have no force or effect and neither its terms, nor any of the
discussions of the parties relative to its negotiation shall be admissible in
evidence in any proceeding brought by or on behalf of Hayter against Company
and/or Employer.
9. Hayter agrees not to issue any communication or statement, written,
oral or otherwise, that disparages, criticizes or otherwise infers or reflects
adversely or encourages adverse action against the Company and/or Employer and
Hayter agrees not to take any action to injure or harm the Company or its
reputation or business relationships. Hayter further agrees not to initiate
discussions regarding matters pertaining to the Company with investors, analysts
or shareholders and, in the event Hayter receives inquiries about the Company
from any of the foregoing or from other curious or inquiring parties, Hayter
agrees to refer all such inquires, including questions regarding his
resignation, to the Company's investor relations agency and/or Richard Adamany
and Hayter agrees that, in the course of referring such inquiries, any remarks
or communications by Hayter shall be consistent with the Company's press release
regarding his decision to accelerate his retirement.
6
<PAGE>
10. Hayter further agrees that he shall have no contact whatsoever
regarding any matter whatsoever with any parties related to International
Bioscience Corporation, formerly known as Geda International Marketing Co., Ltd.
(GIMCO), Geda International, S.A., Prevent-X, Inc., anyone associated with
Mercury Technology, Inc., Optima Holding Co., Ltd. or Bioserv, Inc. and the
litigation related thereto, any persons associated with The Alliance for
Microbicide Development, National Institutes of Health (NIH), National
Institutes of Allergic and Infectious Diseases (NIAID), the Food & Drug
Administration (FDA) including, but not limited to, current and former
employees, consultants and independent contractors. Hayter understands and
acknowledges that any communications he makes, however well-intentioned, are a
violation of this paragraph of this Agreement and that the Company need not
demonstrate any adverse impact arising from Hayter's communications before
invoking its rights under paragraph 12 to cease payments to Hayter and demand
repayment from Hayter of all sums paid pursuant to this Agreement.
11. Hayter warrants that he has not disclosed the terms of this
Agreement to date and he further agrees to keep confidential the terms of this
Agreement and not publicize, disclose or discuss it or its terms with any person
other than his attorney, spouse, financial advisor or accountant in this matter
provided Hayter first informs such individuals of their obligation to keep that
information confidential and obtains their assurance to do so. In the event
Hayter is served with a subpoena or other legal process seeking or purporting to
require disclosure of information which is prohibited by this Agreement, Hayter
will provide Company with prompt written notice (describing the information
being sought and the party seeking same) so that Company may seek a protective
order or take other action to prevent or limit said disclosure and/or waive
Hayter's obligation to comply with this provision of the Agreement. Pending the
Company's receipt of notice from Hayter, Hayter will use all lawful means
7
<PAGE>
reasonably available to him to resist disclosing the information which this
Agreement requires him to keep confidential.
12. Hayter acknowledges and agrees that the Company's obligation to
pay the settlement amounts and benefits set forth in paragraphs 3, 4 and 5 and
to amend the Option Agreements as set forth in paragraph 6 is conditioned upon
Hayter's compliance with this Agreement and Release, including, but not limited
to the non-disparagement, nondisclosure and confidentiality provisions of
paragraphs 9, 10 and 11. Hayter acknowledges that his agreements to comply with
the provisions of paragraphs 9, 10 and 11 are material inducements for the
Company to enter into this Agreement and Release and that any violation thereof
shall be deemed to be a material breach of this Agreement and Release and that
in such event the Company shall immediately be relieved of any further
obligation pursuant to this Agreement or otherwise, and that the Company shall
cease making any payments pursuant to paragraph 3 and that Hayter shall be
liable to repay to the Company without deduction, any and all of the settlement
amounts and benefits already paid to or on behalf of Hayter pursuant to
paragraphs 3, 4 and 5 and that the provisions of paragraph 6 shall become void
and the stock options listed in paragraph 6 shall revert to their original
expiration dates. Upon notice to Hayter from the Company of any violation of the
provisions of paragraphs 9, 10 and 11 of this Agreement, Hayter shall resign as
a member of the Board of Directors immediately. Attached to this Confidential
Settlement Agreement and Release is an undated Letter of Resignation which
Hayter agrees to sign and deliver to the Company to hold in the event of a
violation of the provisions of paragraphs 9, 10 and 11 of this Agreement and
Release and Hayter acknowledges and understands that upon receiving notice from
the Company of any such violation, the Company is authorized to date the Letter
of Resignation and deliver it to the Chairman of the Board and the Board of
Directors and thereby effectuate Hayter's resignation. Hayter further
acknowledges that the Company shall be entitled to pursue any and all remedies
8
<PAGE>
available to it including, but not limited to, filing suit, seeking temporary,
preliminary and permanent injunctive relief as well as money damages, an
equitable accounting of all earnings, profits and other benefits arising from
such violation and damages for defamation, breach of contract, and tortious
interference with business relationships.
13. The parties agree that this Agreement and Release may be
specifically enforced in court and may be used in evidence in a subsequent
proceeding in which any of the parties allege a breach of this Agreement and
Release. In the event any claim, defense, action, suit or other proceeding is
brought to interpret, enforce or obtain relief from a breach of this Agreement
and Release, the prevailing party shall recover all such party's costs, expenses
and attorneys fees incurred in each and every such claim, defense, action, suit
or other proceeding, including any and all appeals or petitions from therefrom.
14. In the event any provision of this Agreement and Release shall be
held to be void, voidable, unlawful or, for any reason, unenforceable, the
remaining portion shall remain in full force and effect.
15. This Agreement constitutes the entire understanding between Hayter
and the Company with respect to the subject matter contained herein and it
supersedes and replaces all prior understandings and agreements (both oral and
written), except for the Stock Option Agreements and Stock Option Certificates
referenced in paragraph 6 above. All prior and contemporaneous discussions and
negotiations have been and are merged and integrated into, and are superceded
by, this Agreement and Release. No waiver of a provision or condition of this
Release at any time shall be deemed a waiver of such provision or condition, or
any other provision or condition, at any prior or subsequent time. This
Agreement cannot be modified except by means of a written document signed by
both Hayter and the Company.
9
<PAGE>
------------------------------------------
Stephen D. Hayter
------------------------------------------
Date (to be supplied by Stephen D. Hayter)
SWORN TO and subscribed by Stephen D. Hayter before me, a Notary Public, on
this ____ day of ______________, 2000.
------------------------------------------
Notary Public
PLEASE SEND THE CHECKS TO ME AT THE FOLLOWING ADDRESS:
- ----------------------------------
- ----------------------------------
10
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 286
<SECURITIES> 0
<RECEIVABLES> 7
<ALLOWANCES> 0
<INVENTORY> 284
<CURRENT-ASSETS> 629
<PP&E> 127
<DEPRECIATION> 75
<TOTAL-ASSETS> 681
<CURRENT-LIABILITIES> 2,343
<BONDS> 0
0
0
<COMMON> 21,494
<OTHER-SE> (23,156)
<TOTAL-LIABILITY-AND-EQUITY> 681
<SALES> 662
<TOTAL-REVENUES> 662
<CGS> 109
<TOTAL-COSTS> 5,174
<OTHER-EXPENSES> 10
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<INTEREST-EXPENSE> 174
<INCOME-PRETAX> (4,785)
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<NET-INCOME> (4,785)
<EPS-BASIC> (0.17)
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