UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27028
EMBRYO DEVELOPMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-3832099
(State or other jurisdiction of (State or I.R.S. Employer
incorporation of organization) Identification Number)
750 Lexington Avenue, Suite 2750
New York, New York 10022
(Address of principal executive offices)
10022
(Zip Code)
(212) 355-8484
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Class Outstanding at December 12, 1997
Common Stock 4,845,000
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
FORM 10-QSB
QUARTERLY REPORT
For the Six Months Ended October 31, 1997
TABLE OF CONTENTS
Page to Page
Consolidated Financial Statements:
Balance sheet..........................................1
Statements of operations...............................2
Statements of cash flows...............................3
Notes to financial statements........................4-7
Management's discussion and analysis
of financial condition and result
of operations.......................................8-10
Part II. - Other information.......................11-12
Signatures............................................13
<TABLE>
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
(Unaudited)
October 31, 1997
<CAPTION>
ASSETS
-------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 456,267
Investments in available-for-sale securities 299,765
Accounts receivable 115,386
Interest receivable 3,812
Inventories 80,836
Prepaid expenses and other current assets 219,382
---------
Total current assets 1,175,448
INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES 250,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $53,914 1,714,234
LICENSED TECHNOLOGY, net of accumulated
amortization of $562,025 1,047,975
OTHER ASSETS 101,645
------------
$ 4,289,302
============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 682,269
Customer deposits 3,795
Note payable 350,000
------------
Total current liabilities 1,036,064
NOTE PAYABLE 600,000
INTEREST OF MINORITY HOLDERS IN SUBSIDIARY -0-
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value; authorized 30,000,000
shares; 4,845,000 issued and outstanding 485
Preferred stock, $.0001 par value; authorized 15,000,000
shares; 6,000,000 issued and outstanding 600
Additional paid-in-capital 8,458,903
Unearned compensation (1,200,000)
Deficit accumulated during the development stage (4,606,750)
-----------
Total equity 2,653,238
-----------
$ 4,289,302
============
</TABLE>
-1-
<TABLE>
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED Cumulative
OCTOBER 31, OCTOBER 31, During
1997 1996 1997 1996 Development
Stage
(Unaudited)(Unaudited)(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $569,521 $31,831 $235,241 $25,266 $ 1,004,781
-------- ------- -------- ------- -----------
COSTS AND EXPENSES:
Cost of sales 460,382 22,483 228,832 17,406 790,271
General, selling
and administrative 984,892 641,552 516,766 319,676 3,236,492
Royalties 57,752 -0- 57,752 -0- 57,752
Research and development 87,977 93,782 46,541 55,254 806,421
Amortization 115,000 115,000 57,500 57,500 562,025
Interest and other
(income)expense 5,675 (43,684) 10,208 (5,249) 363,523
--------- -------- ------ ------- ---------
1,711,678 829,133 917,599 444,587 5,816,484
--------- ------- ------- ------- ---------
LOSS BEFORE
MINORITY INTEREST (1,142,157)(797,302) (682,358) (419,321) (4,811,703)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY 65,881 -0- 22,219 -0- 204,953
---------- -------- --------- -------- -----------
NET LOSS $(1,076,276)(797,302) $(660,139)$(419,321)$(4,606,750)
=========== ======== ========= ========= ============
NET LOSS PER SHARE $ (.22) $ (.17) $ (.14) $ (.09) $ (1.09)
============ ======== ============ ======= ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 4,845,000 4,693,342 4,845,000 4,695,000 4,223,244
========= ========= ========= ========= ==========
</TABLE>
-2-
<TABLE>
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
SIX MONTHS ENDED Cumulative
OCTOBER 31, During
1997 1996 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,076,276)$(797,302) $(4,606,750)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 156,988 117,820 1,156,151
Minority interest in loss of subsidiary (65,881) (204,953)
Non-cash consideration - other 269,483 265,000 884,483
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 2,212 (4,779) (115,386)
Interest receivable 14,233 (5,748) (3,812)
Inventories (32,340) (45,492) (53,841)
Prepaid expenses and other
current assets (29,348) 3,284 (186,132)
Other assets (49,969) (15,001) (117,864)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 362,731 57,231 682,268
Customer deposits (21,205) - 3,795
-------- ------- -- --------
Total adjustments 606,904 372,315 2,484,709
------- ------- ----------
Net cash used in operating activities (469,372)(424,987) (2,122,041)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments 559,000 - -
Net sale (purchase) of investments
in available-for-sale securities 499,615 189,098 (549,765)
Net cash paid for asset acquisition - - (200,588)
Purchase of licensed technology - - (450,000)
Purchase of plant, equipment and
construction projects in progress (763,175) (7,887) (928,547)
--------- ------- ---------
Net cash provided by (used in)
investing activities 295,440 181,211 (2,128,900)
-------- ------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 350,000 - 650,000
Proceeds from issuance of stock - - 120,000
Proceeds from issuance of subsidiary
stock to minority shareholder - - 150,000
Repayment of debt - - (550,000)
Proceeds of stock offering, net of
deferred costs - - 4,337,208
--------- ------- ---------
Net cash provided by financing
activities 350,000 - 4,707,208
-------- ------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 176,068 (243,776) 456,267
CASH AND CASH EQUIVALENTS at
beginning of period 280,199 408,867 -
------- -------- -------
CASH AND CASH EQUIVALENTS at end of period $ 456,267 $165,091 $ 456,267
========== ======== ==========
</TABLE>
-3-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1997
1. Organization and Basis of Consolidation:
Embryo Development Corporation (the Company) is a Delaware Corporation
which was formed to develop, acquire, manufacture and market various bio
- -medical devices. The accompanying financial statements include the accounts
of the Company and its majority-owned subsidiary, Hydrogel Design Systems,
Inc.(HDS). HDS is engaged in the manufacture, marketing, selling and
distribution of hydrogel, an aqueous polymer-based radiation ionized
medical/consumer product, and after-market components for apnea monitoring.
Upon consolidation, all significant intercompany accounts and
transactions have been eliminated.
2. Basis of Presentation:
The interim financial statements furnished reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
the financial position and results of operations for the six and three month
periods ended October 31, 1997 and October 31, 1996. The financial
statements should be read in conjunction with the summary of significant
accounting policies and notes to financial statements included in the
Company's Form 10-KSB for the fiscal year ended April 30, 1997. The results
of operations for the six month periods ended October 31, 1997 and 1996 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories:
Inventories at October 31, 1997 consist principally of finished goods.
4. Investment in HDS:
At October 31, 1997, the Company's ownership of HDS represented 49.16%
of the common stock and 92.6% of total voting shares.
Approximately $11,500 of the loss applicable to minority interest for
the six and three months ended October 31, 1997 was in excess of minority
interest in capital, and accordingly has been charged to EDC's operations.
In the event HDS generates future earnings, EDC's interest in HDS will be
credited to the extent of the losses previously absorbed.
In January 1997, the Company entered into a commitment to make available
to HDS a $500,000, 8% revolving line of credit as part of its investment
interest. In August, 1997, the Company increased the amount of the revolving
line of credit to $850,000. At October 31, 1997, borrowings under the
revolver approximated $755,000.
In August 1997, HDS entered into a one year management agreement with the
Company subject to automatic renewal each year. The management agreement
provides for an annual fee of the greater of $75,000 per annum or ten (10%)
percent of the gross sales generated by the Company's sales representatives
in consideration for Embryo providing HDS with administrative, marketing and
management services.
-4-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1997
(Continued)
5. Investments in Available-for-Sale Securities:
Investments in available-for-sale securities consist of the following at
October 31, 1997:
Current:
Guaranteed by the U.S. Government:
Federal National Mortgage Notes $ 299,765
==========
Non-current:
Guaranteed by the U.S. Government:
Federal Farm Credit Notes $ 250,000
==========
6. License Agreements:
In March 1995, the Company entered into seven (7) license agreements for
the rights to manufacture and market seven medical devices which provide for
minimum payment obligations which commenced September 30, 1997. On September
30, 1997, the agreements for six (6) of the devices were amended to extend
the date for the first minimum payment obligation to March 31, 1998. In
consideration for the extension, the aggregate first minimum payment
obligation increased from $150,000 to $165,000. The payment due on (1) of
the devices of $25,000 was made in accordance with the terms of the original
agreement.
7. Note Payable:
On October 1, 1997, HDS entered into a loan agreement in the amount of
$350,000 with a third party affiliated with certain stockholders of the
Company and HDS. The loan is evidenced by a promissory note payable on
demand and bears interest at 8% per annum. As additional consideration for
making the loan, the lender also received options to purchase 100,000 shares
of HDS Common Stock exercisable for a period of five (5) years at $.40 per
share. The fair value of the options($9,900) has been recorded as additional
interest and is being amortized over the estimated life of the loan.
8. Stockholders' Equity:
a. Issuance of securities
On September 16, 1997, HDS issued an aggregate of 25,000 shares of
common stock to four (4) employees as additional compensation. The value of
the common stock granted ($10,000) was charged to operations.
b. Loss per share
Net loss per share was computed by dividing net loss by the weighted
average number of shares outstanding. Common stock equivalents have been
excluded as their effect would be anti-dilutive.
-5-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1997
(Continued)
9. Commitments:
In September 1997, the Company amended an employment agreement with an
officer dated January 1, 1997. The agreement, as amended, provides for
annual compensation of $60,000 effective January 1, 1998. The officer was
also granted options to purchase 400,000 shares of the Company's common stock
at an exercise price equal to the market price on the date of the amendment
($.59)exercisable for a period of four (4) years.
In addition, the Company entered into a two-year employment agreement
with an executive which provides for annual compensation of $30,000
commencing January 1, 1998. The executive was also granted options to
purchase 50,000 shares of the Company's common stock at an exercise price
equal to the market price on August 1, 1997 ($.25).
In September 1997, HDS entered into multi-year employment agreements
with two executives. The agreements, which take effect January 1, 1998,
provide for minimum annual compensation of $80,000, which may increase to
$150,000 bassed upon earnings and other contingencies, and minimum bonuses.
Further, the executives were granted (i) options to purchase 200,000 shares
of HDS common stock at an exercise price of $.40 per share and (ii) 20,000
shares of HDS common stock (valued at $8,000). The agreements provide for
the reimbursement of any tax liability arising from the grant of securities.
10. Litigation:
a. Class action complaints:
Class Action complaints have been filed naming as defendants the
Company and certain Board members. The Class Actions assert that the
underwriter of the Company's initial public offering and other defendants
engaged in various violations of the federal securities laws. The Company
and Board members deny that they engaged in any improper conduct or any
violations of any federal securities laws and intend to vigorously defend the
action. Although the ultimate disposition of legal proceedings cannot be
predicted with certainty, management does not believe that they should result
in a materially adverse effect on the Company's financial position.
-6-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1997
(Continued)
11. Subsequent Event:
On February 6, 1997, HDS acquired certain assets from a group of
entities for an aggregate purchase price of $150,000 in cash and 150,000
shares of Embryo Common Stock (valued at $75,000). The Embryo shares vest on
the second anniversary date of the agreement only if HDS has earned $500,000
in cumulative gross revenue derived from the sale of certain products during
the two (2) year period. If, on the vesting date, the fair market value of
the shares is less than $900,000, the parties may demand that HDS purchase
all of the shares at an aggregate purchase price of $900,000 in either cash
and/or marketable securities.
On November 6, 1997, HDS brought action in New York State Court
against the former owners of the acquired entities alleging breach of
contract, negligence and other charges. As a result of these charges, HDS is
disputing the issuance of its securities to the former owners and has placed
into escrow 150,000 shares of the Embryo Common Stock, which have not yet
vested, and 250,000 shares of HDS Common Stock, which were granted as part of
an employment agreement with one of the former owners. On November 24, 1997,
the former owners filed their Answer and counterclaim against HDS. The
Company denies all allegations.
On December 15, 1997, HDS and the former owners entered into a
Memorandum of Understanding pursuant to which the parties reached agreement
on the material terms of a settlement of the dispute pending the execution of
a formal settlement agreement. The Memorandum of Understanding provides that
(i) the former owners shall receive a cash payment of $450,000 upon the
closing of the settlement agreement (the "Closing"); (ii) at the Closing HDS
shall issue a promissory note in the amount of $950,000 to the former owners
which shall be due and payable upon the earliest of (a) an initial public
offering of securities of HDS, (b) HDS completes a private financing in the
aggregate amount of $4,000,000, (c) HDS sells or transfers all, or
substantially all, of the assets of HDS, or (d) January 10, 2002; (iii) the
former owners will resume control over the operations of Alternative Design
Systems, Inc., with HDS immediately satisfying all outstanding accounts
payable while retaining all accounts receivable and all inventory; (iv) the
former owners are free to compete with HDS and that any and all non-compete
covenants are null and void; (v) mutual general releases shall be executed
by all parties to the dispute, as well as those parties against whom claims
were referred to by the former owners, but who were not sued in this
dispute; and (vi) the former owners shall return all securities of the
Company and HDS which were previously issued to them.
12. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $2,053 and $138 for the six months ended
October 31, 1997 and 1996 and $1,207 and $138 for the three months ended
Ocotber 31, 1997 and 1996, respectively.
The Company paid income taxes of $2,961 and $8,088 for the six months
ended October 31, 1997 and 1996 and -0- and $3,058 for the three months
ended October 31, 1997 and 1996, respectively.
-7-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had net working capital of $139,384 at October 31, 1997 which
is primarily due to the remainder of the proceeds from the public offering
which was completed in November 1995. Additionally, the Company has invested
approximately $250,000 of these proceeds in long-term investments. The
Company remains in its development stage as it has not yet derived
significant revenues from the sale of its products.
The Company's statement of cash flows for the six months ended October
31, 1997 reflects cash used in operating activities of approximately
$469,000. This use of cash is primarily attributable to general and
administrative expenses, product development and advertising and marketing
expenses. Net cash provided by investing activities approximated $295,000
representing the sale of investments of approximately $1,059,000, of which
$763,000 was used to purchase property and equipment for HDS through its
revolving credit line with the Company. The remaining cash from sale of
investments was used to fund current operations. Cash provided by financing
activities of $350,000 is the result of a loan evidenced by a demand
promissory note with a third party affilitated with certain stockholders of
the Company and HDS. As additional consideration for making the loan, the
lender also received options to purchase 100,000 shares of HDS Common Stock
at $.40 per share. This cash was used to fund current operations and has
resulted in an increase in cash and cash equivalents of $176,000.
At October 31, 1997, the balance on the revolving line of credit between
HDS and the Company approximated $755,000. In August 1997, the Company
increased the amount of the revolving line of credit to $850,000. In
addition, the Company entered into a management agreement with HDS which
provides for an annual minimum fee of $75,000 per year in consideration for
Embryo providing HDS with administrative, marketing and management services.
The Company expects to incur substantial expenditures over the next 6 to
12 months for product development, to implement its sales and marketing plans
and to complete the manufacturing facility for HDS. The Company's management
believes that the Company's short and long-term investments will not be
sufficient to fund its liquidity needs for the next 12 months and as a result
is in the process of raising additional capital through a private placement
of common stock of HDS. Terms of the private placement are currently under
negotiation with third party investors.
-8-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Results of Operations
Since its inception, the Company's primary activities have consisted of
obtaining the exclusive license to seven (7) medical devices developed by Dr.
Lloyd Marks, developing a marketing strategy for the C.F. Medical Devices and
the start-up of HDS.
The Company has not derived significant revenues since its inception in
March 1995. The total revenue earned from inception through October 31, 1997
is $1,004,781. This is a result of the sale of the C.F. Medical Devices of
approximately $396,000 and HDS sales of hydrogel and apnea monitor products
of approximately $609,000. As a result of the Company's start-up expenses
and acquisition of licenses and royalty rights for the products in the
development stage, the Company had an accumulated deficit of $4,606,750 as of
October 31, 1997. The Company expects to continue to incur operating losses
until such time it can generate significant revenues from the sale of its
products.
Plan of Operation
On February 6, 1997, the Company, through its majority owned subsidiary,
HDS, entered into asset purchase agreements pursuant to which it has acquired
certain assets from two entities. The two companies were engaged in the
business of manufacturing, marketing, selling and distributing hydrogel, a
aqueous polymer-based radiation ionized medical/consumer product, as well as
after-market components for apnea monitoring. Assets acquired include
property rights and technical data, machinery and equipment, and inventory.
The Company has also leased a facility in Langhorne, PA where it has
established a manufacturing facility for the in-house production of hydrogel
and electronic beam processing of medical, cosmetic and pharmaceutical
products. The facility was completed and became operational in October of
of 1997.
In May of 1996 the Company entered into contracts with two different
firms to commence final design and manufacture of the Safety Needle, one of
the medical devices developed by Dr. Lloyd Marks. Toward that end, the
Company has implemented the manufacture of prototypes for this medical device
and has held focus groups with various medical professionals to refine and
enhance the device. The Company anticipates the development of a marketing
strategy and submitting a 510(k) to the FDA for approval for this device
within the next nine (9) months.
-9-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Plan of Operation (Cont'd)
The Company is continuing to conduct market research studies on the
other six (6) medical devices it has licensed from Dr. Marks in order to
determine which of the devices are most commercially marketable. The review
will also include an analysis of the most efficient way to market each of the
devices. The Company will determine if it is more efficient to license the
products to third parties for development or to develop and market the
products itself. Within 9 months the Company intends to implement the
development and marketing of the most commercially viable and potentially
profitable medical devices. The Company also intends to undertake clinical
and beta tests to evaluate the products as they are being developed. The
Company may enter into discussions with unaffiliated third parties that may
be able to utilize, develop or market the devices in either a cooperative
joint venture or as a licensee. The relationship may also assist the Company
in the preparation of applications to the Food and Drug Administration in
order to receive approval to market the devices in the United States.
The Company is also seeking to increase revenues from the sale of the
C.F. Medical Devices primarily through increased demonstrations to the
appropriate interest groups.
The Company's management believes that the Company's short and long-term
investments will not be sufficient to fund its liquidity needs for the next
12 months and as a result is in the process of raising additional capital
through a private placement of common stock of HDS. Terms of the private
placement are currently under negotiation with third party investors.
-10-
PART II- OTHER INFORMATION
Item 1. - Legal Proceedings
The Company has been named in three (3) actions seeking class
certification of claims against the Company and various other defendants.
Morehead, et al. v. Advanced Voice Technologies, et al., (New York
Supreme Court, New York County); Control Touch Systems, Inc. v. Advanced
Voice Technologies, Inc., et al, (New York Supreme Court, New York County);
Petit, et al. v. Sterling Foster & Co., Inc., et al., (United States District
Court, Eastern District of New York). These actions, together with certain
others in which the Company is not named as a defendant, have been
consolidated before the U.S. District Court for the Eastern District of New
York. In a consolidated complaint, plaintiffs assert claims against the
Company under the Securities Act of 1933, the Securities Exchange Act of 1934
and New York common and statutory law arising out of the November 1995
initial public offering of 1 million shares of the Company's common stock.
According to the complaint, the underwriter of the offering, Sterling Foster
& Co., Inc. ("Sterling Foster"), manipulated secondary market trading in
shares of the Company's common stock following the offering and covered
certain short positions it created thereby by purchasing shares of Company
stock from persons who owned such stock prior to the offering pursuant to an
undisclosed arrangement with such persons. The complaint seeks unspecified
damages. The Company and its officers and directors deny the material
allegations of the complaint and intend to vigorously defend this action.
In addition, on November 6, 1997, HDS brought action in New York State
Court against John Essmyer and Janice Essmyer alleging breach of contract,
breach of fiduciary duty, common law fraud and negligence. Pursuant to the
underlying facts of the above causes of action, Mr. Essmyer and Mrs. Essmyer
were terminated for cause from the Company on November 4,1997. On November
14, 1997, Mr. Essmyer and Mrs. Essmyer removed the action from New York State
court to the United States District Court (Southern District of New York.)
As a result of the Essmyers' breaches, the Company has placed into escrow
250,000 shares of HDS Common Stock which Mr. Essmyer may have been entitled
to under his employment contract. On November 24, 1997, the Essmyers served
an answer to HDS's complaint. Such answer contained certain counter-claims
against HDS. The Company denies all allegations.
On December 15, 1997 HDS and John Essmyer and Janice Essmyer entered
into a Memorandum of Understanding pursuant to which the parties reached
agreement on the material terms of a settlement of the dispute pending the
execution of a formal settlement agreement. The Memorandum of Understanding
provides that (i) the Essmyers shall receive a cash payment of $450,000 upon
the closing of the settlement agreement (the "Closing"); (ii) at the Closing
HDS shall issue a promissory note in the amount of $950,000 to the Essmyers
which shall be due and payable upon the earliest of (a) an initial public
offering of securities of HDS, (b) HDS completes a private financing in the
aggregate amount of $4,000,000, (c) HDS sells or transfers all, or
substantially all, of the assets of HDS, or (d) January 10, 2002; (iii) the
Essmyers will resume control over the operations of Alternative Design
Systems, Inc., with HDS immediately satisfying all outstanding accounts
-11-
PART II- OTHER INFORMATION (Cont'd)
Item 1. - Legal Proceedings (Cont'd)
payable while retaining all accounts receivable and all inventory; (iv) the
Essmyers are free to compete with HDS and that any and all non-compete
covenants are null and void; (v) mutual general releases shall be executed by
all parties to the dispute, as well as those parties against whom claims were
referred to by the Essmyers, but who were not sued in this dispute; and (vi)
the Essmyers shall return all securities of the Company and HDS which were
previously issued to them.
Item 2. - Changes in Securities.
Not applicable.
Item 3. - Defaults Upon Senior Securities.
Not applicable.
Item 4. - Submission Of Matters To A Vote Of Security Holders.
Not applicable.
Item 5. - Other Information.
Not applicable.
Item 6. - Exhibits And Reports on Form 8-K.
(A) Exhibits:
10. Material Contracts
(a) Revolving Credit Agreement between Hydrogel Design
Systems, Inc. and Embryo Development Corporation dated
January, 1997.
(b) Amended Revolving Credit Agreement between Hydrogel
Design Systems, Inc. and Embryo Development Corporation dated
August 31, 1997.
(c) Management Agreement between Hydrogel Design Systems and
Embryo Development Corporation dated August 31, 1997.
(d) Amendment No. 1 to Licensing Agreement by and between Dr. Lloyd
Marks and the Company dated September 30, 1997.
(e) Loan agreement and Promissory Note between Hydrogel Design
Systems, Inc. And BH Funding, LLC dated October 1, 1997.
(f) Amendment #1 to Employment Agreement by Matthew Harriton and the
Company dated September 16, 1997.
27. Financial data schedule
(B) Reports on Form 8-K:
None
-12-
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew L. Harriton
-------------------------
Matthew L. Harriton
President and Chief
Executive Officer
Chief Financial Officer
Dated: December 15, 1997
-13-
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION THAT IS EXTRACTED FROM
FORM 10-QSB FOR THE QUARTER ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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<PERIOD-END> OCT-31-1997
<CASH> 456,267
<SECURITIES> 299,765
<RECEIVABLES> 115,386
<ALLOWANCES> 0
<INVENTORY> 80,836
<CURRENT-ASSETS> 1,175,448
<PP&E> 1,768,148
<DEPRECIATION> 53,914
<TOTAL-ASSETS> 4,289,302
<CURRENT-LIABILITIES> 1,036,064
<BONDS> 600,000
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600
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<TOTAL-LIABILITY-AND-EQUITY> 4,289,302
<SALES> 569,521
<TOTAL-REVENUES> 569,521
<CGS> 460,382
<TOTAL-COSTS> 460,382
<OTHER-EXPENSES> 260,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,279
<INCOME-PRETAX> (1,076,276)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,076,276)
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</TABLE>
$500,000
REVOLVING CREDIT AGREEMENT
between
HYDROGEL DESIGN SYSTEMS, INC.
and
EMBRYO DEVELOPMENT CORPORATION
Dated January__, 1997
<PAGE>
REVOLVING CREDIT AGREEMENT
THIS AGREEMENT is made as of January___, 1997, by and between
Hydrogel Design Systems, Inc., a Delaware corporation (the "Borrower"),
and Embryo Development Corporation, a Delaware corporation (the
"Lender").
SECTION 1. DEFINITIONS
-----------
1.1 Definitions. As used in this Agreement, the following terms
have the respective meanings set forth below:
"Affiliate" of a Person shall mean any Person controlling,
controlled by, or under common control with, such person.
"Bankruptcy Law" shall mean Title 11 of the U.S. Code, as in effect
from time to time, or any similar Federal or state law for the relief of
debtors.
"Borrowing Date" shall mean the date of any borrowing by the
Borrower pursuant hereto.
"Business Day" shall mean any day other than a Saturday, Sunday or
other day on which commercial banks are authorized or required by law to
close in New York City.
"Custodian" shall have the meaning assigned to it in Section 7.1.
"Debt" shall mean any indebtedness, contingent or otherwise, of the
Borrower, including, without limitation, (i) indebtedness evidenced by
guarantees or in effect guarantees by the Borrower of Debt of any other
Person, (ii) indebtedness evidenced by notes, debentures, bonds or
similar instruments or letters of credit, (iii) indebtedness representing
the deferred and unpaid balance of the purchase price of any property or
interest therein and obligations of the Borrower under any agreement to
lease, or lease of, any real or personal property in each case which, in
accordance with generally accepted accounting principles then in effect,
appears as a liability upon a balance sheet of the Borrower, and (iv)
obligations of the Borrower under interest rate swaps, caps, collars,
calls and similar arrangements, and foreign currency hedges entered into
in respect of any indebtedness or obligations.
"Default" shall mean any event which, with the giving of notice or
lapse of time or both, would constitute an Event of Default.
"Event of Default" shall have the meaning assigned to it in Section
7.1.
"Governmental or Regulatory Body" shall mean any government or
political subdivision thereof, whether federal, state, county, local or
foreign, or any agency, authority or instrumentality of any such
government or political subdivision.
"Initial Loan" shall have the meaning assigned to it in Section
2.1.
"Lender Group" shall have the meaning assigned to it in Section
8.11.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), or
preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of
the foregoing, and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction in respect
of any of the foregoing).
"Loan" or "Loans" shall have the respective meanings assigned to
such terms in Section 2.1.
"Loan Commitment" shall have the meaning assigned to it in Section
2.1.
"Loan Commitment Period" shall mean the period from the date hereof
through the Termination Date.
"Loss" or "Losses" shall have the respective meaning assigned to
such terms in Section 8.11.
"Material Adverse Effect" or "Material Adverse Change" shall mean
any change or changes or effect or effects that individually or in the
aggregate are or may reasonably be expected to be materially adverse to
(a) the business or the assets, operations, income, prospects or
conditions (financial or otherwise) of the Borrower or its Subsidiaries
or (b) the ability of the Borrower to perform its obligations under this
Agreement.
"Note" shall have the meaning assigned to it in Section 2.2.
"Person" shall mean an individual, a corporation, a partnership, a
joint venture, a firm, an enterprise, a trust, an unincorporated
organization, a government or any agency or political subdivision
thereof.
"Termination Date" shall mean the date falling 2 years following the
date hereof.
<PAGE>
SECTION 2. AMOUNT AND TERMS OF LOAN COMMITMENT AND LOANS
---------------------------------------------
2.1 The Loan Commitment. Subject to the terms and conditions
of this Agreement, the Lender agrees to make revolving credit loans
(individually, a "Loan"; the first such Loan, the "Initial Loan";
and, collectively, the "Loans") to the Borrower from time to time
during the Loan Commitment Period in an aggregate principal amount
at any one time outstanding not to exceed $500,000 (the "Loan
Commitment").
2.2 The Note. The Loans made by the Lender shall be
evidenced by a promissory note of the Borrower substantially in the
form of Exhibit A, with appropriate insertions, which shall be
payable to the order of the Lender and shall represent the
obligation of the Borrower to pay the amount of the Loan Commitment
or, if less, the aggregate unpaid principal amount of all Loans
made by the Lender, with interest thereon as prescribed in Section
2.5. The date and amount of each Loan made by the Lender and each
payment of principal with respect thereto may be endorsed by the
Lender on the schedule annexed to and constituting a part of the
Note, which endorsement, absent manifest error, shall constitute
prima facie evidence of the accuracy of the information endorsed.
The Note shall (a) be dated the date hereof, (b) be stated to
mature on the Termination Date and (c) bear interest for the period
from the date hereof until paid in full on the unpaid principal
amount thereof from time to time outstanding at the rates
prescribed in Section 2.5.
2.3 Procedure for Borrowing Under Loan Commitment. The
Borrower may borrow under the Loan Commitment at any time during
the Loan Commitment Period, provided that the Borrower shall give
the Lender irrevocable notice at least five (5) Business Days prior
to the requested Borrowing Date, specifying (i) the requested
Borrowing Date (which shall be a Business Day) and (ii) the amount
of the requested borrowing. Not later than 12:00 noon, New York
time, on the date specified in such notice from the Borrower, the
Lender shall make available to the Borrower at such account of the
Borrower as the same may designate from time to time, in
immediately available funds, the amount to be then loaned by it;
provided that the aggregate amount of any outstanding Loans and the
requested borrowing do not exceed the Loan Commitment.
2.4 Optional Prepayment The Borrower may, at its option,
prepay the Note without premium or penalty, in whole or in part,
upon at least two Business Day's prior notice to the Lender,
specifying the date and amount of prepayment. Such notice shall be
irrevocable and the payment amount specified in such notice shall
be due and payable on the date specified.
2.5 Interest Rates. (a) The Loans shall bear interest
(calculated on the basis of a 360-day year for the actual number of
days elapsed) on the unpaid principal amount thereof at a rate per
annum equal to 8%, payable quarterly in arrears on the last day of
each June, September, December and March in each year.
(b) If all or a portion of the principal amount of any of the
Loans shall not be paid when due (whether at the stated maturity,
by acceleration or otherwise), such overdue principal amount shall
bear interest at the rate of 12% per annum, to the extent permitted
by law.
2.6 Use of Proceeds. The Borrower covenants that it will
apply all of the proceeds of the Loan for the Borrower's general
corporate purposes.
2.7 Payment. All payments made by the Borrower to the Lender
shall be made in federal or other immediately available funds in
lawful money of the United States for credit, not later than 12:00
noon, New York time, on the day when due, or in any case by such
other reasonable method or at such other address as the Lender
shall have from time to time notified the Borrower.
2.8 Maturity of Loans. The aggregate outstanding principal
amount of the Loans shall be due and payable on the Termination
Date.
SECTION 3. COVENANTS
---------
3.1 Payment of Note. The Borrower shall pay the principal
of, and interest on, the Note on the dates and in the manner
provided herein and in the Note.
3.2 Financial and Business Information. The Borrower
covenants and agrees that so long as the Loan Commitment shall be
in effect or any debt under the Note shall be outstanding, the
Borrower will deliver to the Lender:
(a) as soon as available, but not later than one hundred
twenty (120) days after the close of each fiscal year of the
Borrower, the consolidated balance sheet of the Borrower as at the
end of such fiscal year and the related consolidated statements of
income and retained earnings and changes in financial position of
the Borrower for such fiscal year, setting forth in each case in
the comparative form the figures for the previous year, reported on
by independent certified public accountants of nationally
recognized standing selected by the Borrower;
(b) promptly on their becoming available, any such other
financial data, information or reports as from time to time may be
furnished to all stockholders of the Borrower in their capacity as
stockholders.
3.3 Notice of Default. If any one or more events occur which
constitute a Default or an Event of Default, upon obtaining
knowledge thereof, the Borrower will forthwith give notice to the
Lender, specifying the nature and status of the Default or Event of
Default.
<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce the Lender to enter into this Agreement and
to make the Loans hereunder, the Borrower hereby represents and
warrants as follows:
4.1 Organization and Qualification. The Borrower is a
corporation validly existing and in good standing under the laws of
the state of Delaware, and has all requisite corporate power and
authority to (a) own, lease and operate its properties and assets
as they are now owned, leased and operated and (b) carry on its
business as now presently conducted and as proposed to be
conducted. The Borrower is duly qualified to do business in each
jurisdiction in which the nature of its business or properties
makes such qualification necessary, except where the failure to do
so would not have a Material Adverse Effect. The jurisdictions in
which the Borrower is qualified are set forth on Schedule 4.1.
4.2 Capitalization; Subsidiaries and Affiliates. Schedule
4.2 sets forth the par value, number of authorized shares of
capital stock and number of issued and outstanding shares of each
class of its capital stock of the Borrower. All of the issued and
outstanding shares of capital stock of the Borrower are duly
authorized, validly issued, fully paid and non-assessable. All of
the issued and outstanding shares of the Borrower are owned of
record by the shareholders attached to Schedule 4.2 as of May 31,
1997. There are no securities outstanding which are exchangeable or
exercisable for, or convertible into shares of capital stock of the
Borrower. Except as set forth on Schedule 4.2, the Borrower has no
subsidiaries nor does any Affiliate of the Borrower or any
subsidiaries thereof own any equity interest in any other
corporation, partnership, joint venture or other entity. To the
best knowledge of the Borrower, no officer, director or five
percent (5%) or greater stockholder of the Borrower has been
convicted of any felony, securities law violation or been a party
to any agreement, understanding or consent with any state or
federal securities commission or the National Association of
Securities Dealers.
4.3. Validity and Execution of Agreement. The Borrower has
the full legal right, capacity and power and all requisite
corporate authority and approval required to enter into, execute
and deliver this Agreement and any other agreement or instrument
contemplated hereby, and to perform fully its respective
obligations hereunder and thereunder. The board of directors of
the Borrower has approved the transactions contemplated pursuant to
this Agreement and each of the other agreements required to be
entered into pursuant hereto by the Borrower. This Agreement and
such other agreements and instruments have been duly executed and
delivered by the Borrower and each constitutes the valid and
binding obligation of the Borrower enforceable against it in
accordance with its terms, subject to the qualifications that
enforcement of the rights and remedies created hereby is subject to
(i) bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting the rights and remedies of
creditors, and (ii) general principals of equity (regardless of
whether such enforcement is considered in a proceedings in equity
or at law).
4.4. No Conflict. Neither the execution and delivery of this
Agreement nor the performance by the Borrower of the transactions
contemplated hereby will violate or conflict with (a) any of the
provisions of the Articles of Incorporation or By-Laws of the
Borrower; (b) or result in the acceleration of, or entitle any
party to accelerate the maturity or the cancellation of the
performance of any obligation under, or result in the creation or
imposition of any Lien in or upon the assets of the Borrower or
constitute a default (or an event which might, with the passage of
time or the giving of notice, or both, constitute a default) under
any contract, (c) to the best of Borrower's knowledge, any order,
judgment, regulation or ruling of any Governmental or Regulatory
Body to which the Borrower is a party or by which any of its
property or assets may be bound or affected or to the best of
Borrower's knowledge, with any provision of any law, rule,
regulation, order, judgment, or ruling of any Governmental or
Regulatory Body applicable to the Borrower.
4.5 Disclosure. To the best knowledge of the Borrower,
neither this Agreement, nor any Schedule or Exhibit to this
Agreement contains an untrue statement of a material fact or omits
a material fact necessary to make the statements contained herein
or therein not misleading. To the best knowledge of the Borrower,
all statements, documents, certificates or other items prepared or
supplied by the Borrower with respect to the transactions
contemplated hereby are true, correct and complete and contain no
untrue statement of a material fact or omit a material fact
necessary to make the statements contained therein not misleading.
4.6 Survival. All of the representations and warranties of
the Borrower contained herein shall survive the Closing Date until
the date upon which the liability to which any claim relating to
any such representation or warranty is barred by all applicable
statutes of limitations.
SECTION 5. CONDITIONS TO INITIAL LOAN
--------------------------
The obligation of the Lender to make the Initial Loan pursuant
to this Agreement shall be subject to compliance by the Borrower
with its agreements herein contained, and, to the satisfaction,
prior to or substantially contemporaneously with, the making of
such Initial Loan, of the following conditions:
5.1 Note. The Borrower shall have executed and delivered to
the Lender the Note in the form of Exhibit A hereto (appropriately
completed).
5.2 Corporate Proceedings. The Lender shall have received a
copy of the resolutions, in form and substance reasonably
satisfactory to the Lender, of the board of directors of the
Borrower authorizing the execution, delivery and performance of
thus this Agreement and the Note, in each case, certified by a duly
authorized officer of the Borrower as of the date hereof; and such
certificate shall state that the resolutions thereby certified have
not been amended, modified, revoked or rescinded as of the date of
such certificate.
5.3 Representations and Warranties. Each of the
representations and warranties made by the Borrower pursuant to
this Agreement shall be true and correct in all material respects
on and as of the date hereof, as if made on and as of such date.
SECTION 6. CONDITIONS TO ALL LOANS
-----------------------
Except with respect to the Initial Loan, the obligation of the
Lender to make a Loan on any Borrowing Date is subject to
fulfillment of the following conditions precedent to the
satisfaction of the Lender:
6.1 Representations and Warranties. The representations and
warranties made by the Borrower in this Agreement and in any
certificate, document or financial or other statement furnished at
any time hereunder shall be true and correct in all material
respects unless stated to relate to a specific earlier date.
6.2 No Default or Event of Default. No Default or Event of
Default shall have occurred and be continuing on such Borrowing
Date.
SECTION 7. DEFAULTS AND REMEDIES
---------------------
7.1 Events of Default. "Event of Default" whenever used
herein means any of the following events:
(a) the Borrower defaults in the due and punctual payment of
principal of, interest on, or any other amount owing in respect of,
the Note when and as the same shall become due and payable, and
such default continues for a period of five (5) Business Days after
receipt of notice thereof; or
(b) the Borrower defaults in the performance or observance of
any covenant or agreement of the Borrower in this Agreement or the
Note and such default continues for a period of thirty (30)
calendar days after a written notice specifying such default and
requiring it to be remedied has been given to the Borrower by the
Lender; or
(c) the Borrower shall (i) default in any payment of
principal of or interest on any Debt or (ii) default in the
observance or performance of any agreement or condition relating to
any such Debt or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause
(immediately or with the giving of notice or lapse of time or both)
any such Debt to become due prior to its stated maturity; or
(d) the Borrower, either pursuant to or within the meaning
of any Bankruptcy Law: (i) commences a voluntary case, (ii)
consents to the entry of an order for relief against it in an
involuntary case, (iii) consents to the appointment of a Custodian
of it or for all or substantially all of its property, or (iv)
makes a general assignment for the benefit of its creditors; or
(e) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that: (i) is for relief against the
Borrower in an involuntary case, (ii) appoints a custodian of the
Borrower for any substantial part of all the property of the
Borrower, or (iii) orders the liquidation of the Borrower; and the
order or decree remains unstayed and in effect for sixty (60) days
or more.
The term "Custodian" means any receiver, trustee, assignee,
custodian, liquidator or similar official under any Bankruptcy Law.
7.2 Acceleration of Maturity. If an Event of Default occurs
and is continuing, then and in every such case the Lender may,
declare the principal of the Note to be due and payable immediately
and the Loan Commitment to be terminated, by a notice in writing to
the Borrower, and upon any such declaration the principal of the
Note shall become immediately due and payable and the Loan
Commitment shall be terminated.
SECTION 8. MISCELLANEOUS
-------------
8.1 Amendments and Waiver. This Agreement and the Note may
be amended, and the terms hereof waived, only by a written
instrument signed by the parties hereto or, in the case of a
waiver, by the party waiving compliance.
8.2 Notices. Any notice, demand or delivery pursuant to the
provisions hereof shall be sufficiently given or made if sent by
hand or by registered or certified mail, postage prepaid, addressed
to the Lender at its principal place of business or, except as
otherwise expressly provided herein, to the Borrower at its
principal place of business or such other address as shall have
been furnished to the party giving or making such notice, demand or
delivery. Any such notice shall be deemed given when so delivered
personally or, if mailed, three days after the date of deposit in
the United States mails or one day following the deposit with a
reputable overnight courier.
8.3 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York
without regard to principles of conflicts of law.
8.4 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Lender, any right,
remedy, power or privilege hereunder, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right,
remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power
or privilege. The rights, remedies, powers and privileges herein
provided are cumulative and not exclusive of any rights, remedies,
powers and privileges provided by law.
8.5 Successors and Assigns. This Agreement and each
document and certificate delivered pursuant thereto shall be
binding upon and inure to the benefit of the Borrower and the
Lender and their respective successors and permitted assigns,
except that neither the Borrower nor the Lender may assign or
transfer any of its rights under this Agreement or the Note without
the prior written consent of the other.
8.6 Counterparts. This Agreement may be executed by one or
more of the parties to this Agreement in any number of separate
counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. A set of the
copies of this Agreement signed by all the parties shall be lodged
with the Borrower and the Lender.
8.7 Severability. Any provision of this Agreement or the
Note which is prohibited, invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition, invalidity or unenforceability without
invalidating the remaining provisions hereof, and any such
prohibition, invalidity or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any
other jurisdiction or any other provision of this Agreement or the
Note.
8.8 Investment. The Lender is acquiring the Note for its own
account and not with a view to resale.
8.9 Entire Agreement. This Agreement (including the Exhibits
and Schedules hereto) and the agreements, certificates and other
documents delivered pursuant to this Agreement contain the entire
agreement among the parties with respect to the transactions
described herein, and supersede all prior agreements, written or
oral, with respect thereto.
8.10 Agreement Regarding Transaction. The Lender represents
and warrants that it has had the opportunity to ask questions of
and receive answers from management of the Borrower. The Lender
represents and warrants that it has received any and all materials,
documents, certificates, and other matters it requested be made
available and has reviewed and evaluated the same and, based upon
such review and evaluation as well as the representations,
warranties and covenants of the Borrower contained in this
Agreement and the Exhibits hereto, the Lender has entered into this
Agreement with the Borrower. Lender hereby acknowledges that given
the current financial condition of the Borrower as of the date of
this Agreement and that as a result of such financial condition,
the Borrower is in immediate need for cash in order to continue its
operations. The Borrower hereby acknowledges and agrees that the
transaction contemplated hereby is based on the Borrower's
independent review and analysis of the abilities (financial or
otherwise) of the Lender to perform its respective obligations
hereunder. The Borrower also agrees that any and all schedules
attached to this Agreement and any documents referred to therein
have been prepared and thoroughly reviewed by the Borrower and that
the Borrower is responsible for its own due diligence in connection
with preparing such items, executing this Agreement and agreeing to
the transactions contemplated hereby. The Borrower has made its
independent analysis of such information and has not relied on any
factors, conversations or communications made by any other party.
8.11 Indemnification. The Borrower agrees to indemnify,
defend and hold harmless the Lender and its respective
shareholders, officers, directors, employees, and any Affiliates of
the foregoing, and their successors and assigns (collectively, the
"Lender Group") from and against any and all losses, liabilities
(including punitive or exemplary damages and fines or penalties and
any interest thereon), expenses (including reasonable fees and
disbursements of counsel and expenses of investigation and
defense), claims, Liens or other obligations of any nature
whatsoever (hereinafter individually, a "Loss" and collectively,
"Losses") which, directly or indirectly, arise out of, result form
or relate to, (i) any inaccuracy in or any breach of any
representation or warranty of the Borrower contained in Section 4,
and (ii) any breach of any covenant of the Borrower contained in
this Agreement or in any other document contemplated by this
Agreement.
8.12 Recourse. Except with respect to any potential claim
based on any fraud, any obligation or liability whatsoever of
Borrower which may arise at any time under this Agreement shall be
satisfied, if at all, out of the Borrower's assets only. No such
obligation or liability shall be personally binding upon, nor shall
resort for the enforcement thereof be had to, the property of any
of Borrower's shareholders, directors, officers, employees or
agents, regardless of whether such obligation or liability is in
the nature of contract, tort or otherwise, unless such obligation
or liability relates to fraudulent conduct on the part of such
entity or individuals. Notwithstanding the foregoing, nothing in
this Section shall be interpreted or construed as an agreement or
admission by the Borrower, its shareholders, directors, officers,
employees or agents that any such entity or person is or may be
personally liable for any obligation or liability (whether the
result of fraud or otherwise) with respect to this Agreement.
8.13 Validity and Execution of Agreement. The Lender has the
full legal right, capacity and power and all requisite corporate
authority and approval required to enter into, execute and deliver
this Agreement and any other agreement or instrument contemplated
hereby, and to perform fully its respective obligations hereunder
and thereunder. The board of directors of the Lender has approved
the transactions contemplated pursuant to this Agreement and each
of the other agreements required to be entered into pursuant hereto
by the Lender. This Agreement and such other agreements and
instruments have been duly executed and delivered by the Lender and
each constitutes the valid and binding obligation of the Lender
enforceable against it in accordance with its terms, subject to the
qualifications that enforcement of the rights and remedies created
hereby is subject to (i) bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting the
rights and remedies of creditors, and (ii) general principles of
equity (regardless of whether such enforcement is considered in a
proceedings in equity or at law).
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and
duly authorized officers as of the day and year first above
written.
HYDROGEL DESIGN SYSTEMS, INC.
By: /s/ Matthew Harriton
Name: Matthew Harriton
Title: President
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Michael Lulkin
Name: Michael Lulkin
Title: Chairman
EXHIBIT A
PROMISSORY NOTE
---------------
$500,000 January ___, 1997
FOR VALUE RECEIVED, the undersigned, Hydrogel Design Systems, Inc.,
a Delaware corporation, hereby unconditionally promises to pay on January
___, 1999, to the order of Embryo Development Corporation, a Delaware
corporation (the "Lender"), at the account of the Lender maintained
at_________________________________Bank Account Number ___________ (or at
such other account in the United States as the Lender shall notify the
undersigned), in lawful money of the United States of America and in
immediately available funds, the principal amount of the lesser of (i)
FIVE HUNDRED THOUSAND DOLLARS ($500,000) and (ii) the aggregate unpaid
principal amount of all Loans made by the Lender to the undersigned
pursuant to Section 2.1 of the Revolving Credit Agreement, dated as of
the date hereof, between the undersigned and the Lender (the "Credit
Agreement"). Capitalized terms used herein shall have the same meanings
as set forth in the Credit Agreement, unless otherwise defined herein.
The undersigned further agrees to pay interest in like money at such
office on the unpaid principal amount hereof from time to time from the
date hereof until such amount shall be paid (whether at the stated
maturity, by acceleration or otherwise) on the dates and at the
applicable rates per annum as provided in Section 2.5 of the Credit
Agreement.
The holder of this Note is authorized to endorse the date and amount
of each Loan pursuant to Section 2.2 of the Credit Agreement, the date
and amount of each payment or prepayment of principal thereof and the
interest rate with respect thereto, on the schedule annexed hereto and
made a part hereof or on a continuation thereof, which endorsement,
absent manifest error, shall constitute prima facie evidence of the
accuracy of the information so endorsed.
If any payment on this Note becomes due and payable on a day other
than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day, and, with respect to payments of principal,
interest thereon shall be payable at the then applicable rate during such
extension.
This Note is the Note referred to in the Credit Agreement and is
entitled to the benefits thereof and is subject to the terms and
conditions provided therein.
Except as expressly provided herein, the undersigned hereby
waives presentation, demand, protest and all other notices of any
kind.
This Note shall be governed by, and construed in accordance
with, the laws of the State of New York without regard to
principles of conflicts of law.
HYDROGEL DESIGN SYSTEMS, INC.
By: /s/ Matthew Harriton
Name: Matthew Harriton
Title: President
<PAGE>
Schedule 4.1
JURISDICTIONS
-------------
<PAGE>
Schedule 4.2
CAPITAL STOCK OF BORROWER
-------------------------
Stockholder Class of Capital Stock Number Owned
Embryo Development
Corporation Common Stock 1,251,000
Preferred Stock 15,000,000
Dune Holdings, Inc. Common Stock 749,000
John Essmyer Common Stock 250,000
Michael Periera Common Stock 250,000
AMENDED REVOLVING CREDIT AGREEMENT
THIS AMENDED REVOLVING CREDIT AGREEMENT is made as of
August 31, 1997 and hereby amends that certain Revolving
Credit Agreement dated January 31, 1997 by and between
Hydrogel Design Systems, Inc., a Delaware corporation (the
"Borrower"), and Embryo Development Corporation, a Delaware
corporation (the "Lender").
WITTNESETH
----------
WHEREAS, the Borrower and Lender are parties to that
certain Revolving Credit Agreement dated January 31, 1997;
and
WHEREAS, the Borrower and Lender desire to amend that
certain Revolving Credit Agreement to effect the changes
provided for herein.
NOW, THEREFORE, in consideration of the premises and
mutual covenants contained herein, the receipt and
sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
1. Effective as of the date hereof, Section 2.1 is
hereby amended to read as follows:
"2.1 The Loan Commitment. Subject to the terms and
--------------------
conditions of this Agreement, the Lender agrees to
make revolving credit loans (individually, a
"Loan" the first such Loan, the "Initial Loan":
and, collectively, the "Loans") to the Borrower
from time to time during the Loan Commitment
Period in an aggregate principal amount at any one
time outstanding not to exceed $850,000 (the "Loan
Commitment")."
2. This Amendment shall be governed by and construed
in accordance with the laws of the State of New
York, without regard to principles of conflicts of
law.
3. Except as otherwise specifically set forth herein,
all of the terms and provisions of the Revolving
Credit Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have caused
this Amended Revolving Credit Agreement to be duly
executed and delivered by their proper and duly
executed and delivered by their proper and duly
authorized officers as of the day and year first above
written.
HYDROGEL DESIGN SYSTEMS, INC.
By:/s/Matthew Harriton
Name:Matthew Harriton
Title:President
EMBRYO DEVELOPMENT CORPORATION
By:/s/ Michael Lulkin
Name:Michael Lulkin
Title: Chairman
MANAGEMENT AGREEMENT
This Management Agreement (the "Agreement") is made and
entered into as of August 31, 1997 by and between Embryo
Development Corporation, a Delaware corporation ("Embryo"), and
Hydrogel Design Systems, Inc., a Delaware corporation
("Hydrogel").
W I T N E S S E T H:
--------------------
WHEREAS, Embryo maintains an experienced bookkeeping, order
processing and computer facility at its headquarters; and
WHEREAS, Hydrogel is a corporation engaged in the business
of manufacturing and distributing certain hydrogel and related
products; and
WHEREAS, Embryo and Hydrogel desire that Embryo provide
Hydrogel with certain management services in consideration for
the fees described herein.
NOW, THEREFORE, the parties for good and valuable
consideration the receipt and sufficiency of which is hereby
acknowledged, agree as follows:
1. Management Services. Embryo shall provide to Hydrogel
management services (the "Services"), including
(i) bookkeeping;
(ii) order processing;
(iii) general administrative services;
(iv) computer services; and
(v) telephone sales representatives.
2. Cooperation by the Parties. Hydrogel shall cooperate
fully with Embryo so that Embryo may render the services in a
timely and professional manner. Hydrogel shall at all times
provide Embryo with access to (i) the books and records of
Hydrogel, (ii) the employees of Hydrogel and its outside advisors
or consultants and (iii) any other materials Embryo may
reasonably request in order to render the services. If at any
time the services to be rendered by Embryo shall in any way
conflict with a current or proposed policy, practice or approach
conducted or proposed to be conducted by Hydrogel, Embryo shall
have the right to pursue and implement its service in lieu of
such policy, practice or approach of Hydrogel. Embryo agrees to
periodically provide Hydrogel with information regarding the
services rendered by Embryo.
3. Fees and Disbursements. In full consideration for the
Services, for each calendar year of this Agreement (pro-rated for
each part thereof), Hydrogel shall pay Embryo the greater of
Seventy Five Thousand Dollars ($75,000) per annum or Ten (10%)
percent of the gross sales generated by Embryo's sales
representatives; provided that, if Embryo is required to provide
additional services in connection with special projects or
unanticipated services, Embryo shall be entitled to charge an
additional fee. All payments made hereunder shall be made,
within thirty (30) days of receipt by Hydrogel of an invoice from
Embryo.
4. Representations and Warranties of Hydrogel. Hydrogel
represents and warrants to Embryo as follows:
4.1 Organization and Qualification. Hydrogel is a
corporation validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power
and authority to (a) own, lease and operate its properties and
assets as they are now owned, leased and operated and (b) carry
on its business as now presently conducted. Hydrogel is duly
qualified to do business in each jurisdiction in which the nature
of its business or properties makes such qualification necessary,
except where the failure to do so would not have a material
adverse effect on the business of Hydrogel.
4.2 Subsidiaries. Hydrogel has no subsidiaries.
4.3 Validity and Execution of Agreement. Hydrogel has the
full legal right, capacity and power and all requisite corporate
authority and approval required to enter into, execute and
deliver this Agreement and any other agreement or instrument
contemplated hereby, and to perform fully its obligations
hereunder and thereunder. The board of directors of Hydrogel has
approved the transactions contemplated pursuant to this
Agreement. This Agreement has been duly executed and delivered
by Hydrogel and constitutes the valid and binding obligation of
Hydrogel enforceable against it in accordance with its terms.
4.4 No Conflict. Neither the execution and delivery of
this Agreement nor the performance by Hydrogel of the
transactions contemplated hereby will violate or conflict with:
(a) any of the provisions of the Articles of Incorporation or By-laws or
other organizational documents of Hydrogel; (b) or result
in the acceleration of, or entitle any party to accelerate the
maturity or the cancellation of the performance of any obligation
under, or result in the creation or imposition of any lien in or
upon their respective assets or constitute a default (or an event
which might, with the passage of time or the giving of notice, or
both, constitute a default) under any contract, (c) any order,
judgment, regulation or ruling of any governmental or regulatory
body to which Hydrogel is a party or by which any of its property
or assets may be bound or affected or with any provision of any
law, rule, regulation, order, judgment, or ruling of any
governmental or regulatory body applicable to Hydrogel.
4.5 Licenses and Permits. Hydrogel maintains all
governmental permits, licenses, registrations and other
governmental consents (federal, state and local) which are
necessary in connection with its operations and properties, and
no others are required. All such permits, licenses,
registrations and consents are in full force and effect and in
good standing and shall continue to be in full force and effect
and in good standing following the consummation of the
transactions contemplated by this Agreement.
4.6 Compliance with Laws. Hydrogel has complied in all
respects with all applicable federal, state and local laws,
regulations and ordinances or any requirement of any governmental
or regulatory body, court or arbitrator affecting the business or
the assets the failure to comply with which could have a material
adverse effect on the business of Hydrogel.
4.7 Products. There are no statements, citations or
decisions by any governmental or regulatory body that any product
marketed or distributed at any time by Hydrogel ("Product") is
defective or fails to meet in any material respect any standards
promulgated by any such governmental or regulatory body. There
have been no recalls ordered by any such governmental or
regulatory body with respect to any product. To the best
knowledge of Hydrogel, there is no (a) fact relating to any
product that may impose upon Hydrogel a duty to recall any
product or a duty to warn customers of a defect in any product,
other than defects about which Hydrogel has issued appropriate
and adequate warnings or (b) latent or overt design,
manufacturing or other defect in any product.
4.8 Survival. All of the representations and warranties of
Hydrogel contained herein shall survive the date hereof until the
date upon which the liability to which any claim relating to any
such representation or warranty is barred by all applicable
statutes of limitations.
5. Representations and Warranties of Embryo. Embryo
represents and warrants to Hydrogel as follows:
5.1 Organization and Qualification. Embryo is a
corporation validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power
and authority to (a) own, lease and operate its properties and
assets as they are now owned, leased and operated and (b) carry
on its business as now presently conducted. Embryo is duly
qualified to do business in each jurisdiction in which the nature
of its business or properties makes such qualification necessary,
except where the failure to do so would not have a material
adverse effect on the business of Embryo.
5.2 Validity and Execution of Agreement. Embryo has the
full legal right, capacity and power and all requisite corporate
authority and approval required to enter into, execute and
deliver this Agreement and any other agreement or instrument
contemplated hereby, and to perform fully its obligations
hereunder and thereunder. The board of directors of Embryo has
approved the transactions contemplated pursuant to this
Agreement. This Agreement has been duly executed and delivered
by Embryo and constitutes the valid and binding obligation of
Embryo enforceable against it in accordance with its terms.
5.3 No Conflict. Neither the execution and delivery of
this Agreement nor the performance by Embryo of the transactions
contemplated hereby will violate or conflict with: (a) any of
the provisions of the Articles of Incorporation or By-laws or
other organizational documents of Embryo; (b) or result in the
acceleration of, or entitle any party to accelerate the maturity
or the cancellation of the performance of any obligation under,
or result in the creation or imposition of any lien in or upon
their respective assets or constitute a default (or an event
which might, with the passage of time or the giving of notice, or
both, constitute a default) under any contract, (c) any order,
judgment, regulation or ruling of any governmental or regulatory
body to which Embryo is a party or by which any of its property
or assets may be bound or affected or with any provision of any
law, rule, regulation, order, judgment, or ruling of any
governmental or regulatory body applicable to Embryo.
5.4 Licenses and Permits. Embryo maintains all
governmental permits, licenses, registrations and other
governmental consents (federal, state and local) which are
necessary in connection with its operations and properties, and
no others are required. All such permits, licenses,
registrations and consents are in full force and effect and in
good standing and shall continue to be in full force and effect
and in good standing following the consummation of the
transactions contemplated by this Agreement.
5.5 Compliance with Laws. Embryo has complied in all
respects with all applicable federal, state and local laws,
regulations and ordinances or any requirement of any governmental
or regulatory body, court or arbitrator affecting the business or
the assets the failure to comply with which could have a material
adverse effect on the business of Embryo.
5.6 Survival. All of the representations and warranties of
Embryo contained herein shall survive the date hereof until the
date upon which the liability to which any claim relating to any
such representation or warranty is barred by all applicable
statutes of limitations.
6. Term of Agreement. The term of this Agreement shall
commence on the date hereof and shall continue for a period of
one (1) year and thereafter will be automatically renewed for
successive one (1) year terms unless either party provides
written notice of intent to terminate the Agreement of at least
ninety (90) days.
7. Miscellaneous. This Agreement shall be governed by
and construed in accordance with the internal laws of the State
of New York, without regard to principles of conflicts of law,
and the parties irrevocably agree to submit any controversy or
claim arising out of or relating to this Agreement to a court of
competent jurisdiction located in the State of New York. This
Agreement may be executed simultaneously in counterparts, each of
which will be deemed to be an original but all of which together
will constitute one and the same instrument. The invalidity or
unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of
this Agreement, which shall remain in full force and effect. This
Agreement contains the entire understanding of the parties hereto
with respect to its subject matter. This Agreement may be
amended only by a written instrument duly executed by the
parties.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the first date written above.
EMBRYO DEVELOPMENT CORPORATION
By:/s/Michael Lulkin
-----------------
Name:Michael Lulkin
Its: Chairman
HYDROGEL DESIGN SYSTEMS, INC.
By:/s/ Matthew Harriton
---------------------
Name:Matthew Harriton
Its: President
AMENDMENT NO. 1 TO LICENSING AGREEMENTS
This Amendment No.1 dated as of September 30, 1997 to those
certain Licensing Agreements (this "Amendment"), dated as of
March 31, 1995, by and between EMBRYO DEVELOPMENT CORPORATION, a
Delaware corporation (the "Company" or "Licensee"), and LLOYD A. MARKS, M.D.
(the "Licensor").
W I T N E S S E T H :
=====================
WHEREAS, the Company and the Licensor have entered into six (6) Licensing
Agreements, each dated as of March 31, 1995 (the "Licensing Agreements"),
whereby the Licensor has licensed the exclusive rights to develop,
manufacture and sell six (6) medical devices (including, the Multiple Cuff
Blood Pressure System; Adjustable Blood Pressure Cuff and Method
of Using Same; Adjustable Blood Pressure Cuff and Method of Measuring Blood
Pressure; Multi-Function Fluid Communication Control System and Fluid
Communication Manifold and Control System; SmartMonitor; and Stereoscopic
Fluoroscopy Apparatus and Method of Producing Stereoscopic X-Ray Images, the
"Inventions"); and
WHEREAS, the Company and the Licensor desire to amend the Licensing
Agreements to effect the changes provided for herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Effective as of the date hereof, the Licensing Agreements are
hereby amended by extending the date upon which the first "Minimum Payment
Obligation," as that term is defined in the Licensing Agreements, to March 31,
1998.
2. In consideration for extending the date upon which the first
Minimum Payment Obligation is due, the Company hereby agrees to increase the
amount owed pursuant to such first Minimum Payment Obligation from $25,000
per Licensing Agreement to $ 27,500 per Licensing Agreement, for an aggregate
obligation of $165,000 which is due and payable to the Licensor on March 31,
1998.
3. This Amendment shall be governed by and construed in accordance
with the laws of the State of New York, without regard to principles of
conflicts of law.
4. Except as otherwise specifically set forth herein, all of the terms
and provisions of the Licensing Agreements shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the day and year first above written.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew Harriton
---------------------
Name:Matthew Harriton
Title:CEO
/s/ Lloyd A. Marks
----------------------
Lloyd A. Marks, M.D.
- ---------------------------------------------------------------------------
- ----------------------------------------------------------------------------
AGREEMENT
between
HYDROGEL DESIGN SYSTEMS, INC.
and
BH FUNDING, LLC
Dated October 1, 1997
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
LOAN AGREEMENT
THIS AGREEMENT is made as of October 1, 1997, by and
among BH Funding, LLC (the "Lender") and Hydrogel Design Systems,
Inc., a Delaware corporation (the "Borrower").
SECTION 1. DEFINITIONS
-----------
1.1 Definitions. As used in this Agreement, the following
terms have the respective meanings set forth below:
"Affiliate" of a Person shall mean any Person controlling,
controlled by, or under common control with, such person.
"Bankruptcy Law" shall mean Title 11 of the U.S. Code, as in
effect from time to time, or any similar Federal or state law for
the relief of debtors.
"Borrowing Date" shall mean the date of any borrowing
by the Borrower pursuant hereto.
"Business Day" means any day other than a Saturday, Sunday
or other day on which commercial banks are authorized or required
by law to close in New York City.
"Debt" shall mean any indebtedness, contingent or
otherwise, of the Borrower, including, without limitation, (i)
indebtedness evidenced by guarantees or in effect guarantees by
the Borrower of Debt of any other Person, (ii) indebtedness
evidenced by notes, debentures, bonds or similar instruments or
letters of credit, (iii) indebtedness representing the deferred
and unpaid balance of the purchase price of any property or
interest therein and obligations of the Borrower under any
agreement to lease, or lease of, any real or personal property in
each case which, in accordance with generally accepted accounting
principles then in effect, appears as a liability upon a balance
sheet of the Borrower, and (iv) obligations of the Borrower under
interest rate swaps, caps, collars, calls and similar
arrangements, and foreign currency hedges entered into in respect
of any indebtedness or obligations.
"Default" shall mean any event which, with the giving
of notice or lapse of time or both, would constitute an Event of
Default.
"Event of Default" shall have the meaning assigned to it in
Section 7.1.
"Governmental or Regulatory Body" means any government
or political subdivision thereof, whether federal, state, county,
local or foreign, or any agency, authority or instrumentality of
any such government or political subdivision.
"Lien" shall mean any mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other
title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing,
and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction in respect
of any of the foregoing).
"Loan" shall have the meaning assigned to it in Section
2.1.
"Material Adverse Effect" or "Material Adverse Change" means
any change or changes or effect or effects that individually or
in the aggregate are or may reasonably be expected to be
materially adverse to (a) the business or the assets, operations,
income, prospects or conditions (financial or otherwise) of the
Borrower or its Subsidiaries or (b) the ability of the Borrower
to perform its obligations under this Agreement.
"Note" shall have the meaning assigned to it in Section 2.2.
"Person" shall mean an individual, a corporation, a
partnership, a joint venture, a firm, an enterprise, a trust, an
unincorporated organization, a government or any agency or
political subdivision thereof.
"Repayment Date" shall mean the date upon which the Lender
demands payment by and from the Borrower.
"Tax" or "Taxes" mean all taxes, charges, fees, levies or
other assessments imposed by any federal, state, local or foreign
Taxing Authority, including, without limitation, gross income,
gross receipts, income, capital, excise, property (tangible and
intangible), sales, transfer, value added, employment, payroll
and franchise taxes and such terms shall include any interest,
penalties or additions attributable to or imposed on or with
respect to such assessments.
SECTION 2. AMOUNT AND TERMS OF LOAN
------------------------
2.1 The Loan. Subject to the terms and conditions
contained in Section 6 of this Agreement, the Borrower
acknowledges the receipt of a loan in the principal amount of
Three Hundred Fifty Thousand ($350,000) Dollars made by Lender to
Borrower (the "Loan").
2.2 The Note. The Loan made by the Lender shall be
evidenced by a promissory note of the Borrower substantially in
the form of Exhibit A, with appropriate insertions, which shall
be payable to the order of the Lender and shall represent the
obligation of the Borrower to pay the amount of the Loan to the
Lender (the "Note"). The Note shall (i) be dated the date hereof,
(ii) be payable upon the demand of the Lender (the "Repayment
Date") and (iii) bear interest for the period from the date of
the Loan until paid in full on the unpaid principal amount
thereof from time to time outstanding at the rate prescribed in
Section 2.3.
2.3 Interest Rate. The Loan shall bear interest (calculated
on the basis of a 360-day year for the actual number of days
elapsed) on the unpaid principal amount thereof at a rate per
annum equal to eight (8%) percent, payable quarterly.
2.4 Payment. All payments made by the Borrower to the
Lender shall be made in federal or other immediately available
funds in lawful money of the United States for credit, not later
than 12:00 noon, New York time, on the day when due, or in any
case by such other reasonable method or at such other address as
the Lender shall have from time to time notified the Borrower.
2.5 Repayment of Loan. The outstanding principal amount of
the Loan shall be due and payable upon the demand of Lender at
any time (the "Repayment Date").
2.6 Commitment Fee. As and in consideration for making
the Loan to the Borrower, the Lender shall receive options to
purchase one hundred thousand (100,000) shares of the Borrower's
Common Stock, par value $.0001 per share (the "Commitment Fee").
Such options shall be exercisable in whole or in part for a
period of five (5) years and are exercisable at $0.40 per share.
The shares of Common Stock underlying the option shall be
"restricted stock" as that term is defined in the Securities Act
of 1933, as amended (the "Securities Act"), and shall bear a
legend restricting the distribution, resale, transfer, pledge,
hypothecation or other disposition of the shares unless and until
the shares of Common Stock are registered under the Securities
Act or an opinion of counsel for the Company is received that
registration is not required under the Securities Act. The legend
will read substantially as follows:
THE SECURITIES WHICH ARE REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES
ONLY AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND
MAY NOT BE SOLD, TRANSFERRED, MADE SUBJECT TO A
SECURITY INTEREST, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF UNLESS AND UNTIL REGISTERED UNDER THE ACT,
OR AN OPINION OF COUNSEL FOR THE COMPANY IS RECEIVED
THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
SECTION 3. The Closing
-----------
3.1 The Closing. The closing hereunder shall take place
simultaneously upon the execution hereof, at the offices of
Bernstein & Wasserman, LLP, 950 Third Avenue, 10th Floor, New
York, New York 10022, or at such other time and in such other
fashion that may be mutually agreed upon by the parties hereto
(the "Closing") The Closing shall be subject to the parties
hereto complying with all the terms and conditions hereof, and
all of the obligations to Closing.
SECTION 4. COVENANTS
---------
4.1 Payment of Note. The Borrower shall pay the principal
of, and interest on, the Note on the date and in the manner
provided in the Note.
4.2 Financial and Business Information. The Borrower
covenants and agrees that so long as the Loan shall be in effect
or any Debt under the Note shall be outstanding, the Borrower
will deliver to the Lender:
(a) as soon as available, but not later than 45 days
after the close of each fiscal year of the Borrower, the
consolidated balance sheet of the Borrower as at the end of such
fiscal year and the related consolidated statements of income and
retained earnings and changes in financial position of the
Borrower for such fiscal year, setting forth in each case in the
comparative form the figures for the previous year, reported on
by independent certified public accountants of nationally
recognized standing selected by the Borrower;
(b) promptly on their becoming available, any such
other financial data, information or reports as from time to time
may be furnished to all stockholders of the Borrower in their
capacity as stockholders.
4.3 Notice of Default. If any one or more events occur
which constitute a Default or an Event of Default, upon obtaining
knowledge thereof, the Borrower will forthwith give notice to the
Lender, specifying the nature and status of the Default or Event
of Default.
4.4 Covenant of the Borrower. The Borrower covenants and
agrees that from and after the date hereof the Borrower shall
continue to conduct its business and affairs in the ordinary
course of business and shall not enter into any agreement,
commitment, instrument or contract or take any action out of the
ordinary course of business.
SECTION 5. REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce the Lender to enter into this Agreement
and to make the Loan hereunder, the Borrower hereby represents
and warrants as follows:
5.1 Organization and Qualification. Each of the Borrower
and its direct and indirect subsidiaries ("Subsidiaries") is a
corporation validly existing and in good standing under the laws
of the state of its incorporation, and has all requisite
corporate power and authority to (a) own, lease and operate its
properties and assets as they are now owned, leased and operated
and (b) carry on its business as now presently conducted and as
proposed to be conducted. Each of the Borrower and its
Subsidiaries is duly qualified to do business in each
jurisdiction in which the nature of its business or properties
makes such qualification necessary, except where the failure to
do so would not have a Material Adverse Effect.
5.2 Validity and Execution of Agreement. The Borrower has
the full legal right, capacity and power and all requisite
corporate authority and approval required to enter into, execute
and deliver this Agreement and any other agreement or instrument
contemplated hereby, and to perform fully its respective
obligations hereunder and thereunder. The board of directors of
the Borrower has approved the transactions contemplated pursuant
to this Agreement and each of the other agreements required to be
entered into pursuant hereto by the Borrower. This Agreement and
such other agreements and instruments have been duly executed and
delivered by the Borrower and each constitutes the valid and
binding obligation of the Borrower enforceable against it in
accordance with its terms, subject to the qualifications that
enforcement of the rights and remedies created hereby is subject
to (i) bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting the rights and
remedies of creditors, and (ii) general principals of equity
(regardless of whether such enforcement is considered in a
proceedings in equity or at law).
5.3 No Conflict. Neither the execution and delivery of
this Agreement nor the performance by the Borrower of the
transactions contemplated hereby will violate or conflict with
(a) any of the provisions of the Articles of Incorporation or By-Laws of the
Borrower; (b) or result in the acceleration of, or
entitle any party to accelerate the maturity or the cancellation
of the performance of any obligation under, or result in the
creation or imposition of any Lien in or upon the assets of the
Borrower or constitute a default (or an event which might, with
the passage of time or the giving of notice, or both, constitute
a default) under any contract, (c) to the best of Borrower's
knowledge, any order, judgment, regulation or ruling of any
Governmental or Regulatory Body to which the Borrower is a party
or by which any of its property or assets may be bound or
affected or to the best of Borrower's knowledge, with any
provision of any law, rule, regulation, order, judgment, or
ruling of any Governmental or Regulatory Body applicable to the
Borrower.
5.4 Litigation. Except as previously disclosed by Borrower
to Lender, there are no material outstanding orders, judgments,
injunctions, investigations, awards or decrees of any court,
Governmental or Regulatory Body or arbitration tribunal by which
the Borrower or its Subsidiaries, or any of its securities,
assets, properties or business is bound. Except as previously
disclosed by Borrower to Lender, there are no material actions,
suits, claims, legal, administrative or arbitration proceedings
pending or, to the best knowledge of the Borrower, overtly
threatened (whether or not the defense thereof or liabilities in
respect thereof are covered by insurance) against or affecting
the Borrower or any Affiliate or Subsidiary thereof, or any of
its assets or properties, that, individually or in the aggregate,
could, if determined adversely to the Borrower or such Affiliate
have a Material Adverse Effect, nor, to the best knowledge of the
Borrower, are there any facts which are likely to give rise to
any such action, suit, claim, investigation or legal,
administrative or arbitration proceeding.
5.5 Undisclosed Liabilities. To the best of Borrower's
knowledge, the Borrower does not have any material liabilities
that is not fully and adequately reflected or reserved against on
the Borrower's financial statements or covered in full by
insurance.
5.6 Survival. All of the representations and warranties of
the Borrower contained herein shall survive the date hereof until
the date upon which the liability to which any claim relating to
any such representation or warranty is barred by all applicable
statutes of limitations.
SECTION 6. CONDITIONS TO ALL LOANS
-----------------------
The obligation of the Lender to make the Loan is subject to
fulfillment of the following conditions precedent to the
satisfaction of the Lender:
6.1 Representations and Warranties. The representations
and warranties made by the Borrower in this Agreement and in any
certificate, document or financial or other statement furnished
at any time hereunder shall be true and correct in all material
respects unless stated to relate to a specific earlier date.
6.2 No Default or Event of Default. No Default or Event of
Default shall have occurred and be continuing on such date.
SECTION 7. DEFAULTS AND REMEDIES
---------------------
7.1 Events of Default. "Event of Default" whenever used
herein means any of the following events:
(a) the Borrower defaults in the due and punctual
payment of principal of, interest on, or any other amount owing
in respect of, the Note when and as the same shall become due and
payable, and continuance of such default for a period of five (5)
Business Days after receipt of notice; or
(b) the Borrower defaults in the performance or
observance of any covenant or agreement of the Borrower in this
Agreement, the Note, or any agreement contemplated by this
Agreement and the continuance of such default for a period of 30
calendar days after there has been given to the Borrower by the
Lender a written notice specifying such default and requiring it
to be remedied; or
(c) the Borrower shall (i) allow to exist an uncured
judgement against Borrower in excess of $50,000 for more than
thirty (30) days or (ii) default in the observance or performance
of any agreement or condition relating to any such Debt or any
other event shall occur or condition exist, the effect of which
default or other event or condition is to cause (immediately or
with the giving of notice or lapse of time or both) any such Debt
to become due prior to its stated maturity; or
(d) the Borrower, either pursuant to or within the
meaning of any Bankruptcy Law: (i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it in
an involuntary case, (iii) consents to the appointment of a
Custodian of it or for all or substantially all of its property,
or (iv) makes a general assignment for the benefit of its
creditors; or
(e) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that: (i) is for relief
against the Borrower in an involuntary case, (ii) appoints a
custodian of the Borrower for any substantial part of all the
property of the Borrower, or (iii) orders the liquidation of the
Borrower; and the order or decree remains unstayed and in effect
for 60 days.
The term "Custodian" means any receiver, trustee, assignee,
custodian, liquidator or similar official under any Bankruptcy
Law.
7.2 Acceleration of Repayment Date. If an Event of Default
occurs and is continuing, then and in every such case the Lender
may, declare the principal of the Note and any accrued interest
on the Note to be due and payable immediately and the Loan to be
terminated, by a notice in writing to the Borrower, and upon any
such declaration the principal of the Note together with any
accrued interest shall become immediately due and payable and the
Loan shall be terminated.
SECTION 8. MISCELLANEOUS
-------------
8.1 Amendments and Waiver. This Agreement and the Note may
be amended, and the terms hereof waived, only by a written
instrument signed by the parties hereto or, in the case of a
waiver, by the party waiving compliance.
8.2 Notices. Any notice, demand or delivery pursuant to
the provisions hereof shall be sufficiently given or made if sent
by hand, facsimile transmission or by registered or certified
mail, postage prepaid, addressed to the Lender at
_______________________________ or, except as otherwise expressly
provided herein, to the Borrower at 750 Lexington Avenue, 27th
Floor, New York, NY 10022, or such other address as shall have
been furnished to the party giving or making such notice, demand
or delivery. Any such notice shall be deemed given when so
delivered personally or, if mailed, three days after the date of
deposit in the United States mails or one day following the
deposit with a reputable overnight courier.
8.3 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New
York without regard to principles of conflicts of law.
8.4 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Lender, any right,
remedy, power or privilege hereunder, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right,
remedy, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right,
remedy, power or privilege. The rights, remedies, powers and
privileges herein provided are cumulative and not exclusive of
any rights, remedies, powers and privileges provided by law.
8.5 Successors and Assigns. This Agreement and each
document and certificate delivered pursuant thereto shall be
binding upon and inure to the benefit of the Borrower, SIPCO and
the Lender and their respective successors and permitted assigns,
except that neither the Borrower nor the Lender may assign or
transfer any of its rights under this Agreement or the Note
without the prior written consent of the other.
8.6 Counterparts. This Agreement may be executed by one or
more of the parties to this Agreement in any number of separate
counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. A set of the
copies of this Agreement signed by all the parties shall be
lodged with the Borrower and the Lender.
8.7 Severability. Any provision of this Agreement or the
Note which is prohibited, invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition, invalidity or unenforceability
without invalidating the remaining provisions hereof, and any
such prohibition, invalidity or unenforceability in any juris-
diction shall not invalidate or render unenforceable such
provision in any other jurisdiction or any other provision of
this Agreement or the Note.
8.8 Entire Agreement. This Agreement (including the
Exhibits and Schedules hereto) and the agreements, certificates
and other documents delivered pursuant to this Agreement contain
the entire agreement among the parties with respect to the
transactions described herein, and supersede all prior
agreements, written or oral, with respect thereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and
duly authorized officers as of the day and year first above
written.
BH FUNDING, LLC
By:/s/ Randolph Pace
-----------------
Name: Randolph Pace
Title:
HYDROGEL DESIGN SYSTEMS, INC.
By:/s/ Matthew Harriton
--------------------
Name: Matthew Harriton
Title: President/CEO
EXHIBIT A
PROMISSORY NOTE
---------------
$350,000 October 1, 1997
New York, NY
FOR VALUE RECEIVED, HYDROGEL DESIGN SYSTEMS, INC.,
together with its successors and assigns (the "Borrower" or
"Maker"), hereby unconditionally promises to pay to the order of
BH Funding, LLC together with their successors and assigns (the
"Lender" or "Holder"), in lawful currency of the United States of
America, at the Lender's offices at 750 Lexington Avenue, New
York, New York, or at such other address as shall be designated
by the Lender in a written notice to the Borrower, the principal
sum of $350,000 together with simple interest at the rate of
eight percent (8%) per annum, upon the demand of the Lender (the
"Repayment Date") at which time all of the indebtedness or any
portions thereof shall be immediately due and payable, together
with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
All payments of principal and interest hereunder shall be
payable in lawful money of the United States.
If this Note is not paid when due, whether at maturity or by
acceleration, Maker agrees to pay all reasonable costs of
collection and such costs shall include without limitation all
costs, attorneys' fees and expenses incurred by Holder hereof in
connection with any insolvency, bankruptcy, reorganization,
arrangement or similar proceedings involving Holder, or involving
any endorser or guarantor hereof, which in any way affects the
exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notices of protest, dishonor
and non-payment of this Note and all notices of every kind are
hereby waived.
The terms "Maker" and "Holder" shall be construed to include
their respective heirs, personal representatives, successors,
subsequent holders and assigns.
Regardless of the place of execution or performance, this
Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such
<PAGE>
state's conflicts of laws provisions. Each of the parties hereto
irrevocably consents to the jurisdiction and venue of the federal
and state courts located in the State of New York, County of New
York.
HYDROGEL DESIGN SYSTEMS, INC
By: /s/Matthew Harriton
-------------------
Matthew L. Harriton
President
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No.1 dated as of September 16, 1997 to that
certain Employment Agreement (this "Amendment"), dated as of
January 1, 1997, by and between EMBRYO DEVELOPMENT CORPORATION, a
Delaware corporation (the "Company"), and MATTHEW L. HARRITON
(the "Executive").
W I T N E S S E T H :
WHEREAS, the Company and the Executive entered into that
certain Employment Agreement dated as of January 1, 1997 (the
"Agreement"); and
WHEREAS, the Company and the Executive desire to amend the
Agreement to effect the changes provided for herein.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. Effective as of the date hereof, the Agreement is
hereby amended by deleting Section 1 and replacing it with the
following:
"Section 1. Employment. The Company hereby employs
Executive and the Executive hereby accepts such employment, as
Chief Executive Officer and Chief Financial Officer of the
Company, subject to the terms and conditions set forth in this
Agreement."
2. Effective as of the date hereof, the Agreement is
hereby amended by deleting Section 2 and replacing it with the
following:
"Section 2. Duties. The Executive shall serve as Chief
Executive Officer and Chief Financial Officer and shall properly
perform such duties as may be assigned to him from time to time
by the Board of Directors of the Company. If requested by the
Company, the Executive shall serve on the Board of Directors or
any committee thereof without additional compensation. During
the term of this Agreement, the Executive is not required to
devote all of his business time to the performance of his duties
and may pursue other activities which do not conflict with his
obligations to the Company under this Agreement."
3. Effective as of the date hereof, the Agreement is
hereby amended by deleting Section 4.1 and replacing it with the
following:
"4.1 Salary. Effective as of January 1, 1998 the Company
shall pay to the Executive an annual salary equal to sixty
thousand dollars ($60,000) per annum (the "Base Salary")less such
deductions as shall be required to be withheld by applicable law
and regulations. All salaries payable to Executive shall be paid
at such regular weekly, biweekly or semi-monthly time or times as
the Company makes payment of its regular payroll in the regular
course of business. In addition, the Company shall pay to the
Executive an annual bonus on December 31, 1997 and December 31,
1998 if the Executive is employed by the Company on those dates,
at the discretion of Directors which shall be at least ten (10%)
of the previous years Base Salary."
4. Effective as of the date hereof, the Agreement is
hereby amended by deleting Section 4.3 and replacing it with the
following:
"4.3 Options. As additional consideration, the Company
shall deliver to Executive an option to purchase 100,000 shares
of the Company's Common Stock exercisable at $.65 per share on
January 1, 1997. Further, the Company shall deliver to Executive
an option to purchase 400,000 shares of the Company's Common
Stock exercisable at the market price of such Common Stock as of
September 16, 1997. Both such options are immediately exercisable
and expire four (4) years from the date of issuance."
5. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without regard
to principles of conflicts of law.
6. Except as otherwise specifically set forth herein, all
of the terms and provisions of the Existing Agreement shall
remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Amendment as of the day and year first above written.
EMBRYO DEVELOPMENT CORPORATION
By:/s/ Michael Lulkin
Name: Michael Lulkin
Title:Chairman
/s/ Matthew L. Harriton
Matthew L. Harriton
