SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended April 30, 1998
Transition Report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from ___________________ to ___________________.
Commission File No. 1-13713
EMBRYO DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3832099
(State of or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
750 Lexington Avenue
New York, New York 10022
(Address of Principal (Zip Code)
Executive Officers)
Registrant's telephone number, including area code: (212) 355-8484
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
-----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10K-SB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $800,494.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock as of
July 20, 1998, was approximately $605,625.
Number of shares outstanding of the issuers common stock, as of July
20, 1998, was 6,995,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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PART I
Item 1. BUSINESS.
Embryo Development Corporation, is a development stage Delaware corporation
(the "Company" or "Embryo"), which was organized in March 1995 to develop,
acquire, manufacture and market various bio-medical devices. The Company
currently markets products in two (2) distinct market segments; emergency
medical equipment and peritoneal dialysis warming devices. In addition, the
Company has licensed several patents for products one (1) of which is being
developed to be sold in the medical field. The Company has not derived any
significant revenues since its inception.
The Company is a licensee to seven (7) license agreements (the "License
Agreements") and two (2) royalty sharing agreements (the "Royalty Sharing
Agreements") with Dr. Lloyd Marks which provide for the exclusive license of
seven medical devices and the sharing of royalties of two (2) medical
devices, all of which have been developed by Dr. Marks ("Marks Medical
Devices"). Five (5) of the Marks Medical Devices have been patented in the
United States, and one (1) is subject to a pending patent application. Both
of the Royalty Sharing Agreements are in connection with Marks Medical
Devices for which Dr. Marks has received patents in the United States. The
Marks Medical Devices include a self-shielding needle, adjustable blood pressure
cuff, a multi-function fluid communication control system and stereoscopic
fluoroscopy apparatus. As of July 20, 1998 the Company did not make the
minimum payments required under the License Agreements with respect to six
(6) of the devices including the adjustable blood pressure cuff, a multi-
function fluid communication control system and stereoscopic fluoroscopy
apparatus, and thus Dr. Marks has the option to revoke the applicable
licenses. As of July 20 , 1998 the Company has not received any notification
from Dr. Marks regarding any such revocation. The minimum payment
obligations with respect to the self-shielding needle were made in accordance
with the terms of the original agreement.
Dr. Marks has also entered into a consulting agreement with the Company to
assist in the commercial exploitation of the licensed devices. On June 22,
1998 the Company gave Dr. Marks thirty days notice that it was terminating
the consulting agreement. The termination of the consulting agreement with
Dr. Marks and the non-payment of the minimum royalties under the above six
license agreements follows a determination by management to conserve capital
and that the six products licensed could not profitably be developed and
commercially marketed by the Company at this time. However, management of
the Company believes its relationship with Dr. Marks continues to be good.
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In addition, Dr. Marks has given the Company a right of first refusal on
any devices he should develop in the future.
The Company owns five (5) medical devices and is the exclusive licensee of
one (1) medical device in the areas of emergency medical equipment and
peritoneal dialysis warming devices ("C.F. Medical Devices"). Two (2) of the
devices, the Hot-Sack II(TM) and Hot-Sack II+(TM), are used in connection with
the warming of peritoneal dialysis solution. Four (4) of the devices,
Hot-Sack(R), Res-Q-Air(R), Therm-O-Drug(TM) and an electronic stethoscope, are
devices used for emergency rescue operations and by other emergency medical
technicians. Three of the devices (Hot-Sack(R), Res-Q-Air(R) and Therm-O-
Drug(TM) have received all necessary regulatory approval under the "510(k)
review" process of the U.S. Food and Drug Administration (" FDA") and the
Company believes that the additional two (2) products (Hot-Sack II(TM) and
Hot-Sack II+ (TM) are covered by the FDA's approval of Hot-Sack(R) or would
independently qualify for 510(k) approval. The Company has received minimal
sales revenues from such product sales.
The Company also holds a 31.3% minority equity interest, which was
previously a 50.4% majority interest in Hydrogel Design Systems, Inc. ("HDS"),
a company engaged in the manufacturing, marketing, selling and distribution
of hydrogel materials. Hydrogel is a product used in wound care as well as
a component of a variety of medical devices including, cardiac defibrillator
pads and various types of electrodes. HDS was partially financed through a
long-term note and security agreement between HDS and Becton Dickinson
Transdermal Systems, a division of Becton Dickinson and Company, a customer
of HDS and a manufacturer and distributor of medical devices and diagnostic
systems. See "Certain Transactions."
MARKS MEDICAL DEVICES.
The Company has seven (7) licensing agreements with Dr. Lloyd Marks which
provide for the exclusive license to commercially exploit medical devices that
have been developed by Dr. Marks. Five (5) of the devices are the subject of
existing United States patents and one (1) device has a patent application
pending.
Each of the Licensing Agreements provide that the Company receives the
exclusive right to develop, commercialize and sell each of the seven (7)
medical devices. In addition, the Company has two (2) Royalty Sharing
Agreements with Dr. Marks for patented medical devices. To date, the
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Company has focused its resources on the development of the self-shielding
needle and has not pursued the development of the other Marks Medical Devices.
On September 30, 1997, the agreements for six (6) of the devices were amended to
extend the minimum royalty payment obligation from September 30, 1997 to
March 31, 1998. As of July 20, 1998 the Company did not make the minimum
payments required under the License Agreements with respect to six (6) of the
devices including the adjustable blood pressure cuff, a multi function fluid
communication control system and stereoscopic fluoroscopy apparatus, and
thus Dr. Marks has the option to revoke the applicable licenses. As of
July 20 , 1998 the Company has not received any notification from Dr.Marks
regarding any such revocation. The minimum payment obligations with respect
to the self-shielding needle was made in accordance with the terms of the
original agreement. The termination of the consulting agreement with Dr.
Marks and the non-payment of the minimum royalties under the above six
license agreements follows a determination by management to conserve capital
and that the six products licensed could not profitably be developed and
commercially marketed by the Company at this time. However, management of
the Company believes its relationship with Dr. Marks continues to be good.
See "Certain Transactions."
Self-Shielding Needle (formerly referred to as the Safety Needle)
The Company has aggressively pursued the development and exploitation of Dr.
Marks' patented self-shielding needle design. The self-shielding needle is a
needle which prevents accidental skin punctures, thereby preventing the spread
of infections or diseases to medical personnel. Although there are several
self-shielding needles developed and on the market, almost all require a
specific act by the user to place it in its safe state. The Company believes
that the few designs which automatically cap the needle are mechanically
complex and too expensive to achieve commercial success. As a result, safety
needles are neither generally acceptable nor in common use.
The Company's self-shielding needle requires no affirmative act on the part
of the user to deploy the protective mechanism. In addition, it is mechanically
simple and therefore inexpensive to manufacture. The needle tip is never
exposed from its protective mechanism except when it is in the patient or an
Intramuscular ("IM") injection is about to be administered.
In May 1996, the Company entered into contract with two (2) different firms
to commence final design and manufacture of the Self-Shielding Needle.
Subsequently, the Company terminated one of the contracts and the other
contract has been completed. In January, 1998 the Company entered into a
contract with ACT Medical, Inc. a medical device consulting and manufacturing
firm located in Newton, MA. to assist in the preparation of its 510(k)
notification for its Self-Shielding Needle. On May 26, 1998 the Company
completed its 510(k) notification for its Self-Shielding Needle and submitted
it to the FDA. On June 22,1998 the Company received a request for additional
information from the FDA regarding the 510(k) submission. On July 13, 1998
the Company responded to the FDA's request. With this step in the development
process complete, management will begin to develop its long-term strategy
regarding the sale and marketing of the product. To further this effort the
Company intends to market the product to both potential distributors and end
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users such as hospitals and clinics as well as explore potential joint venture
opportunities. However, the Company, has not, at this time, determined the
actual means by which it will implement all such plans.
CF MEDICAL DEVICES
Emergency Medical Devices
The Company owns three (3) medical devices, Hot-Sack(R), Therm-o-Drug(TM)
and an electronic stethoscope, and is the exclusive licensee of one (1)
medical device, Res-Q-Air(TM), all of which are used in medical rescue
operations by ambulances and other emergency medical technicians.
The Company has received minimal revenues from sales of such products.
The following is a detailed explanation of these medical devices.
The Hot-Sack(R) -The Hot-Sack(R) warms two (2), one (1) liter intravenous
("IV") bags in one hour. The Hot-Sack(R) reduces the temperature loss of the
IV solution given to patients in extreme weather conditions and is particularly
useful in the treatment of patients suffering from hypothermia. This device
has received United States, Patent No. DES352606. The trademark Hot-Sack(R)
is a registered trademark as evidenced by United States Trademark Certificate
No. 1742230. The Hot-Sack(R) has received approval from the FDA, and has been
marketed since 1993 subject to the general control provisions of the Federal
Food, Drug and Cosmetic Act.
Res-Q-Air(R) - The Res-Q-Air(R) inhaled delivery system is an effective
method of core rewarming in cases of hypothermia giving the patient the
ability to inhale warm saturated air. This product makes warm saturated air
available for any emergency rescue operation. The Res-Q-Air was designed and
developed at the University of Victoria, British Columbia. The Company has
licensed the exclusive right to manufacture, market and sell the Res-Q-Air(R)
in the United States, Canada and Worldwide, pursuant to a license agreement
which expires on May 8, 2000. In consideration for such license, the Company
has agreed to pay Rescue Products, Inc. a royalty of ten (10%) percent of the
factory selling price of all Res-Q-Air(R)'s sold. This device has received
United States, Patent No. 5,148,801. The Res-Q-Air(R) received approval from
the FDA in 1993 and has been marketed since 1993 subject to the general
control provisions of the Federal Food, Drug and Cosmetic Act.
Therm-O-Drug(TM) - Therm-O-Drug(TM) is a heated drug box which enables
medications to be stored at between 65 degrees and 85 degrees even when the
temperature outside the box is as low as 10 degrees. The Therm-O- Drug(TM) is
powered by either a 115 VAC or through a 12 volt vehicle power with an
optional cigarette lighter cable. Therm-O-Drug(TM) received required approval
from the FDA under Section 510(k) in 1993 and has been marketed since 1993.
Therefore the Company may market the device subject to the general control
provisions of the Federal Food, Drug and Cosmetic Act.
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Smartmed Electronic Stethoscope - an electronic stethoscope which allows a
medical technician to hear a patient's heart and lungs clearly in a high noise
environment (up to 100db levels), without removing any of the patient's
clothing. The stethoscope also makes it possible to hear fetal sounds
clearly and to monitor blood pressure through clothing layers. Direct
amplification through the stethoscope combined with fixed and adjustable
filters block out excessive ambient noise and extraneous sounds which cause
massive interference with conventional stethoscopes. This allows monitoring
of a patient's condition and blood pressure during medivac or ambulance
transportation. The electronic stethoscope was developed by Dr. Andrew
Weinberg, M.D. in cooperation with C.F. The Company has acquired all rights to
the stethoscope and an agreement with Dr. Weinberg which has a term of
twenty (25) years and under which the Company will pay Dr. Weinberg a royalty
of three (3%) percent of the retail price of each stethoscope sold by the
Company.
Peritoneal Dialysis Devices
The Company owns two (2) devices that are used in the warming of peritoneal
dialysis solution.
The Hot-Sack II(TM) - The Hot-Sack II(TM) is a portable and safe method for
warming peritoneal dialysis solutions. The Hot-Sack II(TM) warms one (1) 2000
milliliter bag of peritoneal dialysis solution in approximately one and
one-half (1 1/2) hours providing even heating with no hot spots and no
overheating. The device has an automatic temperature gauge to maintain the
solution at 98 degrees Fahrenheit with no operator adjustments. It enables
peritoneal dialysis patients to have a convenient way to warm the dialysis
solution. The Company believes that this device is protected by the
Company's Patent for The Hot-Sack(R) and may be marketed based upon the
FDA approval of The Hot-Sack(R) subject to the control provisions of the
Federal, Food, Drug and Cosmetic Act.
Hot-Sack II+(TM) - The Hot-Sack II+(TM) is a modified version of the Hot
- -Sack II(TM) device for the heating of peritoneal dialysis solution. The
Hot-Sack II+(TM) was developed in cooperation with a worldwide distributor of
health products. The Company believes that this device is protected by the
Company's Patent on the Hot-Sack(R) and may be marketed based upon the FDA's
approval of Hot-Sack(R), subject to the general control provisions of the
Federal Food, Drug and Cosmetic Act.
Hydrogel Design Systems
The major focus of HDS, in which the Company has a 31.3% equity interest,
is the manufacture of hydrogel materials, on an original equipment manufacturer
("OEM") basis, for the manufacture of medical devices, drug delivery products,
wound care and cosmetics products. Hydrogel is manufactured by introducing a
polymer (solid) into water, creating a feed mix. The feed mix is used to coat
a web material (or scrim) and two outer linings are applied creating sheets
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of hydrogel. These sheets are then introduced to a high energy field, which is
accomplished by using an electron beam accelerator. The introduction of a high
energy field causes the release of hydrogen atoms which in turn causes carbon
molecule covalent bonding. This is commonly referred to as crosslinking. This
creates longer chains of the polymer in the gel which increases its molecular
integrity, giving the gel unique characteristics which make it useful in a
variety of products. By varying the percent of solids in the feed mix, the
amount of crosslinking (which is determined by the amount of energy
introduced), the type of polymer, scrim and lining used, a wide variety of
gels with distinctly different characteristics may be produced.
The Company believes that HDS's proprietary mixing and beam operation
technology allow it to make superior quality products at competitive prices.
HDS currently provides product to several Fortune 500 companies, as well as
other, smaller companies. These customers are using the HDS hydrogel for
wound dressings, transdermal drug delivery systems and electrodes.
HDS has purchased an electron beam and has leased space from the
Company in Langhorne, PA, where it is has completed building an electron beam
irradiation facility. The facility became operational in the fourth quarter
of calendar year 1997. In addition to housing the electron beam and hydrogel
mixing room, the facility also houses the warehousing and distribution
operations of the Company's emergency medical and peritoneal dialysis products.
Hydrogel and other electron beam accelerator processed products are being
marketed both through internal contacts with a few world-wide health
distributors and through an outside sales force. HDS has entered into a
contract with a sales consultant experienced in electron beam accelerator
processed products and an outside agency.
Sales and Marketing
The Company markets its C.F. Medical Devices through independent
distributors worldwide. The Company does not have written agreements with
these distributors and pays these distributors between 15-30% of the sales
price of each device. The Company also markets its products through
print and media advertising directed at consumers, health care professionals
and long-term care facilities and product literature directed at distributors
of medical products, and by exhibiting its products at appropriate medical
conventions and meetings.
On July 25, 1995, the Company entered into a distributorship agreement with
Medical Marketplace, Inc., ("MMI") which provided that MMI would act as a
distributor of certain Marks Medical Devices in the State of California. In
consideration for such distribution, the Company agreed to sell to MMI the
Marks Medical Devices at fifty (50%) percent of their retail sales price.
The Distributorship Agreement has a term of five (5) years and may be terminated
upon the mutual consent of the parties upon thirty (30) days written notice.
To date, no sales have been generated under this agreement.
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Management will determine the appropriate marketing strategy for the
products which are currently in the development stage as these products come to
market.
Manufacturing
The Company's medical devices must be manufactured in compliance with
applicable regulatory requirements and at acceptable cost. Many of the
Company's competitors rely on third party manufacturers to produce and
assemble some or all of the components of their products. The Company's
success depends to a material degree upon its ability to contract with third
parties to manufacture the Company's proposed products according to the
Company's designs and specifications, in accordance with applicable
regulations, and at a unit cost to the Company that will permit the Company
to market its products at an acceptably competitive purchase price to its
customers.
Management believes, although there can be no assurance, that the Company
will be able to maintain sources of manufacturing supply for its products that
will satisfy the foregoing requirements.
Competition
Competition in the medical device industry is intense. There are many
companies and academic institutions that are capable of developing products of
similar design, and that have developed and are capable of developing
products based on other technologies, that are or may be competitive with the
Company's medical devices. Many of those companies and academic institutions
are well-established, have substantially greater financial and other resources
than the Company, and have established reputations for success in the
development, sale and service of products. These companies and academic
institutions may succeed in developing competing products that are more
effective than those of the Company or that receive FDA approval more
quickly than the Company's products. The Company's ability to compete will
be dependent upon its ability to get products approved by regulatory
authorities and introduced to the market, including the arrangement of a
distribution network, and to provide products with advanced performance
features, none of which can be assured. In addition, the Company must
compete with other existing and new technologies in the allocation of
hospitals' capital spending budgets.
Government Regulation
The majority of the Company's products are subject to regulation by, among
other governmental entities, the United States Food and Drug Administration
("FDA") and, to a lesser extent, correspondent state agencies. If a device
is subject to FDA regulation, compliance with its requirements usually
constitutes compliance with state regulation. In order to ensure that medical
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products distributed for human use in the United States are safe and effective,
the FDA regulates the introduction, manufacture, advertising, labeling,
packaging, marketing and distribution of and record-keeping for such products.
In manufacturing some of its products, the Company must comply with FDA
regulations and is subject to various other FDA record-keeping requirements and
to inspections by the FDA. The Company believes that the manufacturing and
quality control procedures it will follow, will meet the requirements of
these regulations. The FDA would have the authority, in addition to less
drastic remedies, to order the Company to cease production of its products
and to request that the Company recall products already sold by the Company.
The FDA may conduct periodic inspections of the Company's facilities in order
to confirm regulatory compliance by the Company, but has not yet done so. If
the FDA believes that its regulations and other guidelines have not been
followed, it may seek to implement extensive enforcement powers, which were
recently strengthened by the enactment of the Safe Medical Devices Act of
1990. The FDA's powers include the ability to ban products from the market,
prohibit the operation of manufacturing facilities and effect recalls of
products from customer locations and impose monetary civil penalties. The
Company believes that it is in substantial compliance with applicable FDA
regulations.
Three (3) of the medical devices that the Company acquired from C.F. have
been approved by the FDA for commercial sale under a review process known as
"510(k) review" and the Company believes that an additional two (2) products
(Hot-Sack II(TM) and Hot-Sack II+(TM) are covered by the FDA's approval of
Hot Sack(R) or would qualify independently for 510(k) approval. In the 510(k)
review process, a manufacturer is mandated to demonstrate that a proposed
product is "substantially equivalent" to another product that was in commercial
distribution in the United States before May 26, 1976, in which event the
review process can take anywhere from three months to more than one year
before FDA grants clearance of the 510(k) pre-market notification. In cases
where there is no existing FDA-approved product "substantially equivalent" to
the new proposed product, the product is considered a "new" product. The new
product requires a Pre-Market Application ("PMA") which is a lengthier and
more burdensome process and a process which will require FDA approval prior
to the product entering commercial distribution. On May 26, 1998 the
Company completed its 510(k) notification for its Self-Shielding Needle and
submitted it to the FDA. On June 22,1998 the Company received a request for
additional information from the FDA regarding the 510(k) submission. On July
13, 1998 the Company responded to the FDA's request. To date, the Company,
has not received the approval of the FDA to market any of Marks Medical
Devices.
After clearance is given, the FDA has the power to withdraw the clearance
or require the Company to change the device or its manufacturing process or
labeling, to supply additional proof of its safety and effectiveness or to
recall, repair, replace or refund the cost of the medical device if it is
shown to be hazardous or defective. The process of obtaining clearance to
market products is costly and time consuming and can delay the marketing and
sale of the Company's products.
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Health Care Industry
Legislation and regulations at both the federal and state levels may be
enacted which may change the methods by which health care providers, including
hospitals, physicians and home care dealers, are reimbursed for costs of
providing services to Medicare and Medicaid program beneficiaries. Changes
may also be made by third-party payors in coverage policies for various
items.
Patents, Proprietary Rights and Trademarks
The Company's policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company also relies on trade secret protection for its
confidential and proprietary information.
The Company has the exclusive license to six (6) medical devices of which
five (5) have been issued United States patents and the exclusive license to one
(1) medical device that has a U.S. patent application pending. There can be
no assurance that pending patent applications will be approved or that any
patents will provide competitive advantages for the Company's products or will
not be challenged or circumvented by competitors. The Company also relies on
trade secrets and proprietary know-how which it seeks to protect, in part,
through confidentiality agreements with employees, consultants and other
parties. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. The Company also holds a registered
trademark on Hot-Sack(R) and on SmartMed(TM) which is used on current
products and may be used on future products.
Product Liability Insurance
Companies in the health care market are subject to lawsuits alleging
negligence, product liability and other legal theories, many of which
involve large claims and significant defense costs. The Company could be
subject to claims alleging personal injuries resulting from the use of its
products. The Company has obtained product liability insurance since it has
commenced sales of its products. However, there can be no assurance that
such policies will be sufficient to cover potential claims or the costs of
any resulting litigation or that a policy can be maintained in force at
an acceptable cost to the Company. A successful claim against the Company
in excess of the Company's insurance coverage could have a material adverse
effect upon the Company's business and results of operations. In addition,
claims against the Company, regardless of their merit or eventual outcome,
also may have a material adverse effect upon the Company's reputation. The
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Company currently has product liability coverage of $1,000,000 and a $10,000,000
umbrella policy.
Employees
As of July 31, 1998, the Company employed three (3) full time persons,
including one (1) in sales marketing and product development, and two (2) in
general administration and finance. The Company has never had a work
stoppage and its employees are not represented by a labor organization. The
Company considers its employee relations to be good.
Item 2. PROPERTIES.
The Company's corporate headquarters are in New York City. The Company's
lease was on a month to month basis. In April 1998, the Company along with
other co-tenants entered into a fourteen month lease for this office space with
an entity controlled by the former Chairman of the Company. The Company's
share of the monthly lease payment is $3,600. The total lease payments
of $50,400 are being held in escrow by the landlords attorney. The Company
has sublet a portion of this space to an unrelated third party for $1,700
per month on a month to month basis. See "Certain Transactions."
The Company believes that these facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available as
needed in the future on commercially reasonable terms.
In addition, in February 1997, the Company leased a 16,500 square foot
facility in Langhorne, PA. The lease is for a term of seven years with an
annual rent of $116,000 which increase to $119,000 per annum over the term of
the lease. The entire facility is presently subleased to HDS for the full
rental amount for the remainder of the lease term.
Item 3. LEGAL PROCEEDINGS.
The Company has been named as a defendant in a consolidated class action
pending before the U.S. District Court for the Eastern District of New York. In
a consolidated complaint, plaintiffs assert claims against the Company and
others 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"), which is also a defendant, manipulated
secondary market trading in shares of the Company's common stock following
the offering and covered certain short positions it created through such
manipulation bypurchasing shares of Company stock from persons who owned such
stock prior to the offering pursuant to an arrangement with such persons that
was not disclosed in the registration statement and prospectus distributed in
connection with the offering. The complaint seeks unspecified
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damages. The Company has denied the material allegations of the consolidated
complaint and intends 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. On November 24,
1997, the Essmyers served an answer to HDS's complaint. Such answer contained
certain counter-claims against HDS.
On January 21, 1998, HDS entered into a Settlement Agreement
(the "Agreement") with John and Janice Essmyer settling in all regards its
outstanding litigation. In connection with the Agreement, the Essmyer's
received a cash payment of $450,000 and a promissory note from HDS
in the amount of $950,000 which is due and payable upon the earlier of the
(a) initial public offering of securities of HDS, (b) completion of a
private financing by HDS in the aggregate amount of at least $4,000,000,
(c) the sale or transfer of all, or substantially all of the assets of HDS, or
(d) January 10, 2002. In addition, the Essmyers surrendered their rights to the
150,000 shares of Embryo Common Stock formerly granted to them and John
Essmyer surrendered the 250,000 shares of HDS Common Stock formerly issued to
him. Further, the Agreement provides that the Essmyer's will resume the sale
of apnea monitoring equipment through Alternative Designs Systems, Inc. (an
entity controlled by the Essmyers') and HDS will immediately satisfy all
outstanding payables incurred since February 6, 1997 with respect to
Alternative Design Systems, Inc. vendors while retaining all accounts
receivables and all inventory as of December 15, 1997.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was
held on April 7, 1998. At the annual meeting, the shareholders of the Company
(i) elected each of the persons listed below to serve as a director of the
Company until the 1999 Annual Meeting of Shareholders or until his successor is
elected, (ii) ratified the selection of Holtz Rubenstein, LLP as independent
accountants of the Company for its fiscal year ending April 30, 1998, (iii)
did not approve a reverse stock split of one (1) new share of Common Stock for
each nine (9) shares of Common Stock outstanding and a reverse stock split of
Series A Preferred Stock on the basis of (1) new share of Preferred Stock for
each nine (9) shares of Preferrred stock outstanding.
The Company had 4,845,000 shares of Common Stock and 6,000,000 shares of
Series A Preferred Stock outstanding as of February 6, 1998, the record date for
the Annual Meeting. At the Annual Meeting, holders of a total of 4,688,421
shares of Common Stock were present in person or represented by proxy. The
following sets forth information regarding the results of the voting at the
annual meeting:
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Proposal 1: Election of Directors
Voting Shares Voting Shares Voting Shares
Director In Favor Against Withheld
______________ ____________ ____________ ____________
Michael Lulkin (1) 4,442,983 245,438 6,000,000 Preferred
Matthew Harriton 4,456,283 232,138 6,000,000 Preferred
Daniel Durchslag 4,459,783 228,638 6,000,000 Preferred
Andrew Fabrikant 4,456,283 232,138 6,000,000 Preferred
(1) = Resigned May 22, 1998.
Proposal 2: Ratification of Selection of Independent Accountants
Votes in favor: 4,388,711
Votes against: 192,822
Abstentions - Common: 106,888
Abstentions - Preferred: 6,000,000
Proposal 3: Reverse Stock Split
Votes in favor: 4,353,729
Votes against: 255,872
Abstentions - Common 78,820
Abstentions - Preferred: 6,000,000
13
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's securities commenced trading in the over-the-counter market
on the effectiveness of the Company's Initial Public Offering on November 18,
1995 in the form of Common Stock. The Common Stock is regularly quoted and
traded on the NASDAQ system.
The following table indicates the high and low bid prices for the Company's
Common Stock for the period up to June 30, 1998 based upon information supplied
by the NASDAQ system. Prices represent quotations between dealers without
adjustments for retail markups, markdowns or commissions, and may not represent
actual transactions.
Common Stock
Quoted Bid Price
High Low
1996 Calendar Year
First Quarter 12 5/8 5 1/4
Second Quarter 6 7/8 4 3/4
Third Quarter 5 3/4 2 1/2
Fourth Quarter 2 5/8 1/2
1997 Calendar Year
First Quarter 2 1/2 1/2
Second Quarter 11/16 1/4
Third Quarter 11/16 3/16
Fourth Quarter 1/2 1/16
1998 Calendar Year
First Quarter 5/16 1/8
Second Quarter 3/16 1/8
On July 20, 1998, the closing price of the Common Stock as reported on the
NASDAQ System was $.125. On July 20, 1998, there were 156 holders of record of
common stock.
The Company was advised by The Nasdaq Stock Market that it failed to meet
the continued listing requirements of The Nasdaq SmallCap Market. The Company
is exploring various alternatives which would satisfy The Nasdaq SmallCap Market
continued listing requirements.
14
<PAGE>
There is, however, no assurance that the Company will be successful in
satisfying such requirements. Failure to meet the requirements may result in the
Company's securities being traded on the OTC Bulletin Board. As a result,
the price of, and the volume of trading in, the Company's securities may
be negatively effected. The Company was advised in July, 1998 that the NASD
had denied the Company's submission for continued listing. The Company has
filed an appeal to that decision. A hearing on continued listing is expected to
be held in late August or early September, 1998. If the appeal is denied,
the Company will make application to be listed on the OTC-Bulletin Board.
15
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
The Company had net working capital of $452,834 at April 30, 1998.
Approximately $423,000 of current assets represents cash and marketable
securities. 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 year ended April 30, 1998
reflects cash used in operating activities of approximately $1,136,000 which
includes approximately nine months of the operations of HDS. 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 $381,000 representing the sale of
investments of approximately $1,320,000, of which $861,000 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 $609,000 is the result of
a $350,000 loan to HDS evidenced by a demand promissory note with a third party
affilitated with certain stockholders of the Company and HDS and $259,000 repaid
by HDS to the Company after January 21, 1998. As additional consideration for
making the loan to HDS, the lender also received options to purchase 100,000
shares of HDS Common Stock at $.40 per share. This cash was also used to
fund current operations.
On January 21, 1998, the Company's equity interest in HDS, which previously
represented a 50.04% majority common interest and 92.9% voting interest, was
reduced to 45.6% common ownership as a result of the Company surrendering all
15,000,000 shares of voting Preferred Stock in exchange for 21,500 shares of
Common Stock. The exchange was done at the request of certain third party in
vestors of a Private Placement by HDS, under which HDS issued approximately
475,000 additional common shares. The proceeds from the placement were used
to pay off accounts payable of HDS and its $450,000 obligation under the terms
of the litigation settlement with the former owners of the entities HDS
acquired on February 6, 1997. In February and April, 1998, the Private
Placement was completed and an additional 1,027,000 shares of HDS stock were
issued, thereby reducing the Company's ownership to 31.3%. As a result of
the Company's reduced ownership in HDS and surrender of the voting Preferred
Stock, the assets, liabilities and operations of HDS after January 21, 1998
are not included in the financial statements of the Company.
The Company expects to incur additional expenditures over the next 6 to 12
months for product development and to implement its sales and marketing plans.
The Company's management believes that the Company's investments, reduction in
general and administrative expenses, and anticipated paydown of the HDS line
of credit will be sufficient to fund its liquidity needs for the
16
<PAGE>
next 12 months. Management believes the outstanding amount due from HDS of
$621,000 will be at least substantially repaid during the next (12) months
although it has been classified as a long-term asset based on the current
financial condition of HDS. In the event that no repayment can be made
in the next (12) months, the Company may have to look for alternative methods
of raising additional capital or liquidiating assets.
The Company was advised by The Nasdaq Stock Market that it failed to meet
the continued listing requirements of The Nasdaq SmallCap Market. The Company
is exploring various alternatives which would satisfy The Nasdaq SmallCap Market
continued listing requirements. There is, however, no assurance that the Company
will be successful in satisfying such requirements. Failure to meet the
requirements may result in the Company's securities being traded on the OTC
Bulletin Board. As a result, the price of, and the volume of trading in, the
Company's securities may be negatively effected. The Company was advised in
July, 1998 that the NASD had denied the Company's submission for continued
listing. The Company has filed an appeal to that decision. A hearing on
continued listing is expected to be held in late August or early September,
1998. If the appeal is denied, the Company will make application to be listed
on the OTC-Bulletin Board.
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. In March 1998, the Company decided not to make the
minimum payment obligations due on six (6) of the medical devices developed
by Dr. Lloyd Marks due to capital constraints. Accordingly, the unamortized
cost of these licenses of $487,000 was charged to operations in the current
year, and Dr. Marks may terminate the licenses.
The Company has not derived significant revenues since its inception in
March 1995. The total revenue earned from inception through April 30, 1998 is
$1,235,754. This is a result of the sale of the C.F. Medical Devices of
approximately $501,000 and HDS sales of hydrogel and apnea monitor products
of approximately $735,000 which are included through January 21, 1998. 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 $6,774,457 as of April 30, 1998. 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
The Company intends to continue with the sales and marketing of its
emergency medical equipment and plans to aggressively market the Safety Needle
upon approval by the FDA. On May 26, 1998 the Company completed its 510(k)
17
<PAGE>
notification for its Safety Needle (due to regulatory restrictions and liability
issues the Safety Needle is now referred to as the Self-Shielding Needle)
and submitted it to the FDA. The notification was prepared with the assistance
of ACT Medical, Inc. a medical device consulting and manufacturing firm located
in Newton, MA. The Company's primary focus since inception has been the
development of the Self-Shielding Needle. The submission of the 510(k)
notification was a critical step in the development process. On June
22,1998 the Company received a request for additional information from the
FDA regarding the 510(k) submission. On July 13, 1998 the Company responded to
the FDA's request. With this step in the development process complete,
management will begin to develop its long-term strategy regarding the sale and
marketing of the product. To further this effort the Company intends to
market the product to both potential distributors and end users such as
hospitals and clinics.
Management believes that the Company's current cash and short term
investments totaling approximately $423,000 and the repayment of its
revolving line of credit, which is due in January 1999, from HDS will be
sufficient to fund the Company's operations for the next twelve (12)
months with a reduction in operating expenses. Management believes the
outstanding amount due from HDS of $621,000 will be at least substantially
repaid during the next (12) months although it has been classified as a long-
term asset based on the current financial condition of HDS. In the
event that no repayment can be made in the next (12) months, the Company will
seek alternative methods of raising additional capital.
In an effort to strengthen the Company's position until a meaningful
revenue stream and positive cash flow can be achieved, management has undertaken
a significant cost reduction program. The program includes payroll reductions,
the termination of two consulting contracts, the reduction of rental expense,
the reduction of expenses related to the development of the needle as
it is substantially complete, and other administrative expenses. These
reductions account for more than a $325,000 savings in annual expenses.
Additionally, the Company anticipates an additional reduction of approximately
$200,000 in cash outlay for professional fees which represents non-recurring
legal expenses.
The Company also has a 31.3% equity interest in its nonconsolidated
affiliate HDS. The manufacturing facility of HDS became fully operational in
late 1997. The Company anticipates that this investment will have a positive
effect on operations in the next fiscal year.
However, no assurance can be made with respect to the viability of the
Company in the long term. Realization of the revenue potential of the Self-
Shielding Needle may require additional capital expenditures and other expenses.
Management anticipates that to meet such needs would require raising additional
funds from either the debt or equity markets. Alternatively, the Company
may need for the long term to consider liquidating some of its assets to
meet cash requirements. No assurances can be made as to the success of these
capital raising alternatives.
18
<PAGE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements following Item 13 of this Annual Report on Form 10-KSB.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Changes in Registrant's Certifying Accountant
(a) Holtz Rubenstein & Co., LLP, Registrant's former independent accountant
previously engaged as the principal accountant to audit the Registrant's
financial statements, was dismissed on May 5, 1998. On May 5, 1998, the Board of
Directors of Registrant appointed Moore Stephens, P.C. as independent auditors
of Registrant for the fiscal year ending April 30, 1998.
(b) During the two most recent fiscal years and interim period subsequent to
April 30, 1997, there have been no disagreements with Holtz Rubenstein & Co.,
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events.
(c)Holtz Rubenstein & Co., LLP's report on the financial statements for the past
two years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
(d) The Registrant has requested that Holtz Rubenstein & Co., LLP furnish it
with a letter addresed to the SEC stating whether it agrees with the above
statements. A copy of Holtz Rubenstein's letter to the SEC, dated May 7, 1998,
was filed as Exhibit 16 to the Form 8-K filed on May 8, 1998.
19
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE
REGISTRANT.
Directors and Executive Officers
The names and ages of the directors, executive officers and
significant employees, and promoters of the Company are set forth below. All of
the directors are elected annually.
Name Age Position Held
------------------ --- -------------------------------------
Matthew L. Harriton 34 President, Chief Executive Officer, Chief
Financial Officer and Director
Michael Lulkin 45 Chairman of the Board of Directors
and Secretary
Andrew Fabrikant 33 Director
Dr. Daniel Durchslag 53 Director
Background of Executive Officers and Directors
Matthew L. Harriton has served as the Chief Financial Officer of the
Company since January 1996. In April 1997, Mr. Harriton became the Chief
Executive Officer and a Director of the Company, and assumed the position of
President. Mr. Harriton also serves as President and Chief executive Officer of
Hydrogel Design Systems, Inc., in which the Company has a 31.3% equity
interest, since October 1996. Prior to joining Embryo Development Corporation,
Mr. Harriton's professional experience included positions at CIBC Wood Gundy
Securities Corporation from June 1994 until December 1995, Coopers & Lybrand
from September 1990 until May 1994, and The First Boston Corporation from June
1986 until May 1988. He is a graduate of Lehigh University and received his
M.B.A. from Duke University's Fuqua School of Business.
Michael Lulkin has served as a Chairman of the Board of Directors of
the Company from March 1995 until May 22, 1998. Since May 1995, Mr. Lulkin has
served as the general counsel for PDK Labs, Inc., a manufacture of over-the-
counter pharmaceuticals which trades on The Nasdaq SmallCap Market. Prior to
joining PDK Labs, Mr. Lulkin was engaged in the private practice of law
20
<PAGE>
as a sole practitioner for over 13 years. Mr. Lulkin also serves as a director
of Decor Group, Inc. Decor is a public company which trades on the OTC Bulletin
Board and is in the home decorating industry. He graduated from State
University of New York at Buffalo and received his J.D. from Emory University
School of Law.
Dr. Daniel Durchslag, DDS,, has been practicing General, Cosmetic and
Sports Dentistry in Beverly Hills, CA, since 1980. From 1973 until 1979, he was
an Associate Professor and Director of Clinics at the University of Southern
California School of Dentistry. He is a graduate of the University of Wisconsin
and Loyola University/Chicago College of Dental Surgery. He is presently
Team Dentist for the Los Angeles Raiders.
Andrew Fabrikant has served as a member of the Board of Directors
since February, 1998. Mr. Fabrikant is currently the President of Fabrikant
Fine Diamonds, an estate jewelry business, a position he has held for the past
five years. In addition, from May 1988 to May 1998 Mr. Fabrikant served as
the Managing Partner of The International Jewelers Exchange. He is a graduate
of Boston University.
Each director of the Company is entitled to receive reasonable
expenses incurred in attending meetings of the Board of Directors of the
Company. In June, 1998 Messrs. Frabrikant and Durchslag were granted options,
(which were subsequently exercised), to purchase 250,000 shares of the
Company's common stock, and Mr. Harriton, the President and Chief Executive
Officer of the Company was granted options, (which were subsequently exercised)
to purchase 750,000 shares of the Company's common stock, all at an exercise
price equal to the market price on the date of the grant ($0.0938) exercisable
for a period of [four (4)] years. The Directors receive no other compensation
for serving on the Board of Directors. The members of the Board of Directors
intend to meet at least quarterly during the Company's fiscal year, and at such
other times duly called.
21
<PAGE>
Item 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
_________________________________ _______ _________________
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted All
Other Stock LTIP Other
Annual Awards Options/ Payouts Compensation
Name and Principal Position Year Salary($) Bonus($) Compensation($) ($) SARs(#) ($) ($)
- --------------------------- ---- -------- -------- -------------- ------ --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donn Gordon, CEO (2) 1998 0 0 0 --- 0 0 0
1997 $91,000 $13,650 $6,000(1) --- 100,000 0 0
1996 77,250 11,400 7,575(1) --- 100,000 0 0
Matthew L. Harriton, CEO 1998 $80,000 $9,000 0 --- 400,000 0 0
1997 90,000 0 0 --- 100,000 0 0
____________________
</TABLE>
(1) Represents auto allowance in accordance with March 1995 employment agreement
(2) Employment of Donn M. Gordon was terminated on March 31, 1997.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e)
% of Total Options
Number of Securities Options/SARs Granted Exercise or
Underlying Option/ to Employees in Base Price Expiration
Name SARs Granted (#) Fiscal Year (# Share) Date
- ---------------- ------------------ ------------------- --------- -----------
<S> <C> <C> <C> <C>
Matthew Harriton 400,000 89% .59 (1) 9/16/01
</TABLE>
(1) Options were repriced June 1998 to .0938 per share.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SARs EXERCISES IN
LAST FISCAL YEAR AND FY-END
OPTIONS/SAR VALUES
(a) (b) (c) (d) (e)
Number of Value of
Securities Underlying Unexercised
Unexercised Options/ In-the-Money
SARs at FY-End (#) Options/SARs at
Shares Acquired Value Exercisable/ FY-End Exercisable
Name on Exercise (#) Realized($) Unexercisable Unexercisable
- ----------- ---------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Donn Gordon 0 $ -0- 200,000/-0- $-0-/$-0-
Matthew Harriton 0 -0- 500,000/-0- -0-/-0-
</TABLE>
22
<PAGE>
Employment Agreements
Employment Agreements and Consulting Agreements
On March 31, 1995, the Company entered into a two (2) year employment
agreement with Donn Gordon to serve as the Company's Chief Executive Officer.
The agreement provided for Mr. Gordon to receive a salary of $76,000 per annum
the first year and $91,000 per annum the second year, and for Mr. Gordon to
devote all of his time to the performance of duties to the Company. The
agreement also provided for the payment of a bonus to Mr. Gordon, at the sole
discretion of the Board of Directors, which will be at least 15% of his base
salary and the issuance of options to purchase the aggregate amount of 200,000
shares of Common Stock, 100,000 of which were issued upon the completion of
the Company's initial public offering exercisable at the initial public offering
price of $5.00 and 100,000 of which were issued on March 31, 1997 and are
exercisable at $.5625. Mr. Gordon's contract expired on March 31, 1997
and was not renewed by the Company.
The Company has entered into a four (4) year consulting agreement with Dr.
Lloyd Marks which provides for compensation of $75,000 per year. The agreement
also provides for the issuance to Dr. Marks of warrants to purchase 600,000
shares of the Company's Common Stock at $3.00 per share from January 1, 1996
through December 31, 1999. The agreement requires Dr. Marks to provide 12 hours
of consulting services to the Company per month. On June 22, 1998 the Company
gave Dr. Marks thirty days notice that it was terminating the consulting
agreement.
On August 29, 1995, the Company entered into a three (3) year consulting
agreement with David Meridor. The consulting agreement provides for Mr. Meridor
to render advice to the Company specifically concerning strategic planning
involving development of strategic sales and marketing plans in the United
States and internationally. The agreement which initially provided
for a monthly consulting fee of $5,000, was amended in March 1996 at which
time the Company issued 60,000 shares of Common Stock in lieu of the
consulting fee. The value of the Common Stock granted ($240,000) is being
charged to operations ratably over the remaining life of the consulting
agreement. The agreement may be terminated by either party upon thirty (30)
days written notice.
On January 1, 1997 the Company entered into a two (2) year employment
agreement with Matthew L. Harriton which provides for a base salary of $90,000
for the first year and $100,000 for the second year, with provisions for a
discretionary bonus. The agreement also provides for the issuance to Mr.
Harriton of options to purchase 100,000 shares of the Company's Common
Stock at ($.65) per share. In September 1997, the Company amended the January
1, 1997 employment agreement. The agreement, as amended, provides for annual
compensation of $60,000 effective January 1, 1998. Mr. Harriton was also
granted options to purchase an additional 400,000 shares of the Company's
common stock at an exercise price equal to the market price on the date of
23
<PAGE>
the amendment ($0.59) exercisable for a period of four (4) years. In
June 1998, the options to purchase the aggregate of 500,000 shares of
the Company's common stock were repriced to an exercise price equal to the
market price in June of 1998 of $.0938.
In September, 1997, 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)
Stock Option Plans and Agreements
Incentive Option and Stock Appreciation Rights Plan -- As of March,
1995, the Directors of the Company adopted and the stockholders of the Company
approved the adoption of the Company's 1995 Incentive Stock Option and Stock
Appreciation Rights Plan ("Incentive Option Plan"). The purpose of the
Incentive Option Plan is to enable the Company to encourage key employees and
Directors to contribute to the success of the Company by granting such
employees and Directors incentive stock options ("ISOs") as well as non-
qualified options and stock appreciation rights ("SARs").
The Incentive Option Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors (the "Committee") which will
determine, in its discretion, among other things, the recipients of grants,
whether a grant will consist of ISOs, non-qualified options or SARs or a
combination thereof, and the number of shares to be subject to such options
and SARs.
The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price to be determined by the Board of Directors or
the Committee not less than the fair market value of the Common Stock on the
date the option is granted. Non-qualified options and freestanding SARs may
be granted with any exercise price. SARs granted in tandem with an option
have the same exercise price as the related option.
The total number of shares with respect to which options and SARs may be
granted under the Incentive Option Plan is 2,000,000. ISOs may not be
granted to an individual to the extent that in the calendar year in which
such ISOs first become exercisable the shares subject to such ISOs have a
fair market value on the date of grant in excess of $100,000. No option or SAR
may be granted under the Incentive Option Plan after March 15, 2005 and no
option or SAR may be outstanding for more than ten years after its grant.
Additionally, no option or SAR can be granted for more than five (5) years
to a shareholder owning 10% or more of the Company's outstanding Common Stock.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
24
<PAGE>
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations, or in its discretion, accept payment by non-recourse promissory
note. SARs may be settled, in the Board of Directors' discretion, in cash,
Common Stock, or in a combination of cash and Common Stock. The exercise of SARs
cancels the corresponding number of shares subject to the related option, if
any, and the exercise of an option cancels any associated SARs. Subject to
certain exceptions, options and SARs may be exercised any time up to three
months after termination of the holder's employment.
The Incentive Option Plan may be terminated or amended at any time by the
Board of Directors, except that, without stockholder approval, the Incentive
Option Plan may not be amended to increase the number of shares subject to the
Incentive Option Plan, change the class of persons eligible to receive options
or SARs under the Incentive Option Plan or materially increase the benefits
of participants.
As of June, 1998 options to purchase 1,650,000 shares of common stock, and
no SARs have been granted under the Incentive Option Plan and otherwise. No
determinations have been made regarding the persons to whom options or SARs will
be granted in the future, the number of shares which will be subject to such
options or SARs or the exercise prices to be fixed with respect to any
option or SAR.
Non-Qualified Option Plan -- As of March 1995, the Directors and
stockholders of the Company adopted the 1995 Non-Qualified Stock Option Plan
(the "Non-Qualified Option Plan"). The purpose of the Non-Qualified Option Plan
is to enable the Company to encourage key employees, Directors, consultants,
distributors, professionals and independent contractors to contribute to the
success of the Company by granting such employees, Directors, consultants,
distributors, professionals and independent contractors non-qualified options.
The Non-Qualified Option Plan will be administered by the Board of Directors or
the Committee in the same manner as the Incentive Option Plan.
The Non-Qualified Option Plan provides for the granting of non-qualified
options at such exercise price as may be determined by the Board of Directors,
in its discretion. The total number of shares with respect to which options may
be granted under the Non-Qualified Option Plan is 2,000,000.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. Subject to certain exceptions, options may be exercised any time up
to three months after termination of the holder's employment or relationship
with the Company.
25
<PAGE>
The Non-Qualified Option Plan may be terminated or amended at any time by
the Board of Directors, except that, without stockholder approval, the Non-
Qualified Option Plan may not be amended to increase the number of shares
subject to the Non-Qualified Option Plan, change the class of persons
eligible to receive options under the Non-Qualified Option Plan or materially
increase the benefits of participants.
27
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of July 20, 1998
with respect to the beneficial ownership of the outstanding Common Stock by (i)
any holder of more than five (5%) percent; (ii) each of the Company's officers
and directors; and (iii) the directors and officers of the Company as a
group:
<TABLE>
<CAPTION>
Percentage Percentage
Shares of (%) of (%) of Total
Name and Address Common Common Shares of Combined
of Beneficial Owner Stock Owned Stock Preferred Stock(2) Vote(2)
- ------------------ ----------- -------- ------------------ ------------
<S> <C> <C> <C> <C>
M.D. Funding, Inc.(1) -- -- 6,000,000 46.2
5 Old Woods Drive
Harrison, NY 10528
Michael Lulkin(4) -- -- --- --
305 Broadway
New York, NY 10007
Lloyd Marks(3) 600,000 7.9 --- 4.4
27 Great Springs Road
Bryn Mawr, PA 19010
Daniel Durchslag(6) 250,000 3.6 --- 1.9
9400 Brighton Way
Suite 402
Beverly Hills, CA 90210
Matthew L. Harriton(6) 1,250,000 17.9 --- 9.6
750 Lexington Avenue
New York, NY 10022
Andrew Fabrikant(6) 250,000 3.6 --- 1.9
555 Fifth Avenue
New York, NY 1002
Karen Nazzareno(5)(6) 450,000 6.4 --- 3.4
750 Lexington Avenue
New York, NY 10022
All directors and 1,750,000 25.0 --- 13.5
offficer as a group (3 persons)
</TABLE>
(1) M.D. Funding, Inc. is a corporation which is wholly-owned by Donna Field,
whose address is 5 Old Woods Drive, Harrison, NY 10528, the beneficial
owner of such shares. M.D. Funding, Inc. is not affiliated with any of the
officers or directors of the Company.
27
<PAGE>
(2) Holders of preferred stock are entitled to vote on all matters of the
Company submitted to a vote of stockholders with one share of preferred
stock equalling the same voting rights as one share of common stock.
(3) Includes a warrant to purchase 600,000 shares of Common Stock at an
exercise price of $3.00 per share commencing January 1, 1996 through
December 31, 1999.
(4) Does not include Class B Warrants to purchase 15,000 shares of Common
Stock.
(5) Includes an option to purchase 50,000 shares of Common Stock at $.25 per
share.
(6) See "Subsequent Events" herein.
28
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 31, 1995 the Company entered into seven (7) License Agreements
with Lloyd A. Marks for the exclusive license of seven (7) separate medical
devices. The License Agreements provided for the following aggregate payments:
(i) $230,000 paid to Dr. Marks, at the closing of the Company's
initial public offering;.
(ii) issued to Dr. Marks of 400,000 shares of the Company's Common
Stock; and
(iii) payment to Dr. Marks of 6% to 8% of the amount of the net
sales of the medical device.
Each of the agreements also provides for minimum payment obligations
commencing 2 1/2 years after the date of the agreement. The minimum payment
obligations are for each license as follows:
Agreement Minimum Payment
Year Obligation
--------- ---------------
9/30/97 $25,000
3/31/98 $25,000
9/30/98 $50,000
3/31/99 $50,000
9/30/99 $100,000
3/31/00 $100,000
3/31/01+ $200,000
On September 30, 1997, the agreements for six (6) of the devices were
amended to extend the date of 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.
As of July 20, 1998 the Company did not make the minimum payment
obligations required under the License Agreements with respect to six (6) of the
devices including the adjustable blood pressure cuff, a multi-function fluid
communication control system and stereoscopic fluoroscopy apparatus. Dr. Marks
29
<PAGE>
has the option to revoke the applicable licenses. As of July 20 , 1998 the
Company has not received any notification from Dr. Marks regarding any such
revocation. The minimum payment obligations with respect to the self-shielding
needle were made in accordance with the terms of the original agreement.
On March 31, 1995, the Company entered into two (2) royalty sharing
agreements with Dr. Marks covering two (2) medical devices he had previously
licensed to unaffiliated third parties. The royalty sharing agreements provided
for the Company to pay Dr. Marks the aggregate amount of $20,000 paid at the
closing of the Company's initial public offering and the issuance of 50,000
shares of the Company's Common Stock. The agreements provide for the Company to
receive from Dr. Marks 50% of all royalties he should receive on each of these
medical devices.
On March 31, 1995, the Company entered into a consulting agreement with Dr.
Marks for Dr. Marks to provide consulting services to the Company for a period
of four (4) years. Dr. Marks has agreed to provide the Company at least 12
hours per month of consulting services in connection with the exploitation
of the License Agreement. The agreement provides for annual payments to Dr.
Marks of $75,000 per year and the issuance of a warrant to purchase 600,000
shares of the Company's Common Stock at a purchase price of $3.00 per share.
On June 22, 1998 the Company gave Dr. Marks thirty days notice that it was
terminating the consulting agreement.
In 1995, the Company entered into a month to month lease with Michael
Lulkin, former Chairman of the Board of Directors, for the Company's
headquarters at $5,000.00 per month. In April 1998, the Company along with
other co-tenants entered into a fourteen month lease for this office space
with an entity controlled by Michael Lulkin. The Company's portion of the
monthly lease payment amounted to $3,600. At April 30, 1998, the total lease
payments of $50,400 were held in escrow by the landlords attorney.
On September 14, 1995, the Company acquired five (5) medical devices
and the exclusive licensing rights to one (1) medical device from C.F.
Electronics, Inc. (the "C.F. Medical Devices"). Two (2) of the acquired
medical devices, the Hot-Sack II(TM) and Hot-SackII+(TM) are used in
connection with the warming of peritoneal dialysis solution. Four (4) of the
medical devices, Hot-Sack(R) , Res-Q-Air(R) , Therm-O-Drug(TM) and an
electronic stethoscope, are devices used for emergency rescue operations and
by other emergency medical technicians. All of the medical devices acquired
from C.F. have received all necessary regulatory approvals and are in
commercial distribution.
In November, 1995, the Company completed a public offering of 1,000,000
shares of Common Stock at $5.00 per share for an aggregate of $5,000,000. An
additional 150,000 shares were sold for gross proceeds of $750,000 to the
underwriter to cover over-allotments. In addition, the underwriter received an
option, for a nominal fee, to acquire 100,000 shares of Common Stock at an
exercise price of $6.75 per share. The option expires in November 2001.
30
<PAGE>
Effective with the closing of the offering, the Company entered into a five
year consulting agreement with the underwriter. The unamortized balance of the
consulting fee of $91,667 was fully charged to operations in 1997 as a result of
the termination of the underwriter's operations.
In February 1996, the Company entered into two separate multi-year
consulting agreements. As consideration for these services, the Company issued
225,000 shares of Common Stock to each of the parties. The value of the Common
Stock granted ($1,800,000) is being charged to operations ratably over the lives
of the consulting agreements.
In January 1997, the Company entered into a subscription agreement to
acquire 50.04% of the Common Stock and 15,000,000 shares of Preferred Stock for
a combined voting interest of 92.9% of Hydrogel Design Systems, Inc. (HDS).
HDS was formed in October 1996 to effect the asset acquisition described
below. As consideration for its interest, the Company paid $150,000
cash, 150,000 shares of its Common Stock and made available to HDS a $500,000
line of credit, which was increased to $850,000 in August 1997.
On February 6, 1997 HDS, acquired substantially all of the assets of two
(2) related companies, Novatech, Inc. and Alternative Design Systems R & D
Group. In consideration for the payment of $150,000, and the issuance of 150,000
shares of the Company's Common Stock (subject to certain adjustments), the
Company acquired certain rights and assets, including proprietary formulas
and methodology, necessary to manufacture, market, sell and distribute
Hydrogel and associated products. Hydrogel is a product used in the
manufacture of a variety of medical devices including, cardiac defibrillator
pads and various types of electrodes. HDS has also entered into a contract
for the purchase of manufacturing equipment for $600,000 which has been
financed through a long-term note and security agreement between HDS and
Becton Dickinson, a customer of HDS and a manufacturer and distributor of
medical devices and diagnostic systems.
On January 21, 1998, the Company's equity interest in HDS, which previously
represented a 50.04% majority common interest and 92.9% voting interest, was
reduced to 45.6% common ownership as a result of the Company surrendering all
15,000,000 shares of voting Preferred Stock in exchange for 21,500 shares of
Common Stock. The exchange was done at the request of certain third party
investors of a Private Placement by HDS, under which HDS issued approximately
475,000 additional common shares. In February and April, 1998, the Private
Placement was completed and an additional 1,027,000 shares of HDS stock were
issued, thereby reducing the Company's ownership to 31.3%. As a result of
the Company's reduced ownership in HDS and surrender of the voting Preferred
Stock, the assets, liabilities and operations of HDS after January 21, 1998 are
not included in the on a consolidated basis in the financial statements of the
Company. In January 1998, as a result of subsequent litigation between HDS and
the former owners of the entitities HDS acquired, the terms of the original
purchase were modified and the Embryo shares were returned to HDS.
31
<PAGE>
In February 1997, HDS entered into a seven-year sublease with the Company,
which provides for minimum monthly rental payments of $9,625 and expires in
2004.
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. In May, 1998, HDS notified the Company that the agreement
will not be renewed in August 1998.
M.D. Funding, Inc. may be deemed a parent of the Company as a result of its
control of the Company voting stock. M.D. Funding, Inc. is a corporation which
is wholly owned by Donna Field, the beneficial owner of such shares. M.D.
Funding, Inc. is not affiliated with any of the officers or directors of the
Company. See "Principal Stockholders."
Subsequent Events
In June, 1998 the Company granted options to purchase 750,000 shares of the
Company's common stock to Matthew Harriton, President of the Company, options to
purchase 250,000 shares of common stock to each of Andrew Frabrikant and Dr.
Daniel Durchslag, Directors of the Company, and options to purchase 400,000
shares of common stock to Karen Nazzareno, an employee of the Company. All
such options were granted under the Company's Incentive Stock Option Plan and
at the then market price of $.0938 per share. Also, options to purchase 500,000
shares which were previously granted to Matthew Harriton, under the terms of his
prior employment agreement with the Company, were amended to change the exercise
price thereof to $.0938 per share and to allow for payment upon exercise, in the
same manner as under the Incentive Stock Option Plan.
The above options were exercised in June, 1998 and an aggregate of
2,150,000 shares of common stock of the Company were issued. Payment to the
Company of an aggregate amount of $201,670 was made by delivery by all such
persons by the delivery to the Company of non-recourse promissory notes, which
are due in five (5) years, bear interest at 8% per annum and are secured by
the common stock purchased.
While the exercise of the options resulted in the issuance of 2,150,000
shares of common stock, the Company does not believe there has been a change of
control since the Company's Articles of Incorporation provide that the shares of
common stock vote together as one class with the shares of the Company's
preferred stock. As of July 20, 1998, the holders of the preferred stock
held 46.2% of the voting power.
32
<PAGE>
Although the persons exercising the options may be deemed to operate as a
group, they disclaim they are operating as a group. While no immediate changes
in the direction of the Company are presently contemplated, depending upon
future circumstances, the persons exercising the options may in the future
attempt to influence the direction of the Company.
General
The Company believes that material affiliated transactions and loans
between the Company and its directors, officers, principal shareholders or any
affiliates thereof have been and will be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.
33
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The following financial statements are included in Part II, Item 7:
Index to Financial Statements and Schedules
Report of Independent Certified Public Accountants F-1 - F2
Balance sheet as of April 30, 1998 F-3
Statements of operations for the years ended
April 30, 1998 and 1997 F-4
Statements of stockholders' equity for the years
ended April 30, 1998 and 1997 F-5 - F-6
Statements of cash flows for the years ended
April 30, 1998 and 1997 F-7 - F-8
Notes to financial statements F-9 - F-24
34
<PAGE>
(a)(3) Exhibits.
1.01* Form of Underwriting Agreement.
1.02* Form of Selected Dealers Agreement.
3.01* Certificate of Incorporation of the Company.
3.02* By-Laws of the Company.
4.01* Form of Warrant Agreement by and among the Company and American
Stock Transfer & Trust Company.
4.02 * Form of Underwriter's Share Purchase Option.
10.01* March 1995 Bridge Loan Agreements.
10.02* Consulting Agreement by and between Dr. Lloyd Marks and the
Company dated as of March 31, 1995.
10.03* Licensing Agreement by and between Dr. Lloyd Marks and the Company
re: SmartMonitor dated of March 31,1995.
10.04* Licensing Agreement by and between Dr. Lloyd Marks and the Company
re: Multi-Function Fluid Communication Control System dated as of
March 31, 1995.
10.05* Licensing Agreement by and between Dr. Lloyd Marks and the Company
re: Adjustable Blood Pressure Cuff and Method of Measuring Blood
Pressure dated of March 31,1995.
10.06* Licensing Agreement by and between Dr. Lloyd Marks and the Company
re: Stereoscopic Fluoroscopy Apparatus dated of March 31,1995.
10.07* Licensing Agreement by and between Dr. Lloyd Marks and the Company
re: Adjustable Blood Pressure Cuff and Method of Using Same dated
as of March 31,1995.
10.08* Licensing Agreement by and between Dr. Lloyd Marks and the Company
re: Multiple Cuff Blood Pressure System dated of March 31,1995.
35
<PAGE>
10.09* Licensing Agreement by and between Dr. Lloyd Marks and the Company
re: Safety Needle dated of March 31,1995.
10.10* Royalty Sharing Agreement by Dr. Lloyd Marks and the Company re:
Computer Assisted Admittance Plethysmography dated as of March 31,
1995.
10.11* Royalty Sharing Agreement by Dr. Lloyd Marks and the Company re:
Method of and Apparatus of Detecting Cardiac Rhythm Disturbance
dated as of March 31, 1995.
10.12* Employment Agreement by and between Donn Gordon and the Company
dated as of March 31, 1995.
10.13* Asset Purchase Agreement by and between C.F. Electronics, Inc. and
the Company dated September 14, 1995.
10.14* Supply Agreement by and between C.F. Electronics, Inc. and the
Company dated September 14, 1995.
10.15* Supplier - Produced Finished Goods Purchase Agreement (the Company
has filed a request seeking confidential treatment of this
agreement).
10.16* Consulting Agreement by and between the Company and David Meridor
dated August 29 1995.
10.17* Sublicensing Agreement by and between the Company and Advanced
Technologies International, Ltd. dated July 1995.
10.18* Distributorship Agreement by and between the Company and Medical
Marketplace, Inc. dated July 25, 1995.
10.19** Consulting Agreement by and between the Company and Stanley
Krasnoff dated February 12, 1996.
10.20** Consulting Agreement by and between the Company and Randolph K.
Pace dated February 12, 1996.
10.21+ Asset Purchase Agreement by and between Hydrogel Design Systems,
Inc. and Alternative Design Systems R & D Group dated February
6, 1997.
36
<PAGE>
10.22+ Asset Purchase Agreement by and between Hydrogel Design Systems,
Inc. and Novatech, Inc. dated February 6, 1997.
10.23+ Employment Agreement by John Essmyer and Hydrogel Design
Systems, Inc. dated February 6, 1997.
10.24+ Employment Agreement by Michael Periera and Hydrogel Design
Systems, Inc. dated February 6, 1997.
10.25*** Employment Agreement by Matthew Harriton and the Company dated
January 1, 1997.
10.26*** Equipment Financing Agreement by Becton Dickinson and Hydrogel
Design Systems, Inc. dated January 24, 1997.
10.27+ Real Property Lease by and between the Company and Circon
Corporation dated January 1997.
10.28++ Revolving Credit Agreement between Hydrogel Design Sytems, Inc.
and the Company dated January 1997.
10.29++ Amended Revolving Credit Agreement between Hydrogel Design
Systems, Inc. and the Company dated August 31, 1997.
10.30++ Management Agreement between Hydrogel Design Systems, Inc.
and the Company dated August 31, 1997.
10.31++ Amendment No. 1 to Licensing Agreement by and between Dr.
Lloyd Marks and the Company dated September 30, 1997.
10.32++ Loan Agreement and Promissory Note between Hydrogel Design
Systems, Inc. And BH Funding, LLC dated October 1, 1997.
10.33++ Amendment #1 to Employment Agreement by Matthew Harriton
and the Company dated September 16, 1997.
10.34 Stock Option Agreement between the Company and Andrew Frabrikant
dated June 17, 1998 (filed herewith).
10.35 Stock Option Agreement between the Company and Dr. Daniel
Durchslag dated June 17, 1998 (filed herewith).
37
<PAGE>
10.36 Stock Option Agreement between the Company and Matthew Harriton
dated June 17, 1998 (filed herewith).
10.37 Stock Option Agreement between the Company and Karen Nazzareno
dated June 17, 1998 (filed herewith).
16+++ Letter from Holtz Rubensteiin & Co., LLP re Change in Certifying
Accountant dated May 7, 1998.
99^ Letter from the Nadaq SmallCap Market dated March 16, 1998.
27 Financial Data Schedule (filed herewith).
* Incorporated by reference to the Company's Registration Statement
on Form SB-2 No. 33-92366.
** Incorporated by reference to the Company's Form S-8 dated March 8,
1996.
*** Incorporated by reference to the Company's Form 10QSB dated January
31, 1997.
+ Incorporated by reference to the Company's Form 10KSB dated
April 30, 1997.
++ Incorporated by reference to the Company's Form 10QSB dated October
31, 1997.
^ Incorporated by reference to the Company's Form 8-K filed on April
16, 1998.
+++ Incorporated by reference to the Company's Form 8-K filed on May 8,
1998.
(B) Reports on Form 8-K.
On February 5, 1998, the Company filed a report on Form 8-K,
reporting under Item 5, disclosing the terms of the litigation settlement
between HDS and John and Janice Essmyer. Also reported under Item 5, the Company
disclosed its change in ownership of HDS from a majority interest to a
minority interest and that the assets, liabilities and operations of HDS
after January 21, 1998 are not included in the financial statements of the
Company. In regard to this transaction, the Company also reported under
Item 7, pro forma financial information giving effect to the reduced ownership.
39
<PAGE>
On April 16, 1998, the Company filed a report on Form 8-K, reporting under
Item 5, disclosing that the Company had been advised by NASDAQ that it failed to
meet the continued listing requirements regarding public float. The Company
also disclosed that the stockholders failed to approve a proposed one-for-nine
(1-for-9) reverse stock split at its annual meeting on April 7, 1998.
On May 8, 1998, the Company filed a report on Form 8-K, reporting under
Item 4, disclosing that the Company had changed independent auditors for the
fiscal year ending April 30, 1998.
39
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: New York, New York
August 11, 1998
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew L. Harriton
-----------------------
Matthew L. Harriton
Chief Executive Officer, Chief Financial Officer
Principal Accounting Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendments thereto has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- -------------------- ----------
/s/ Matthew L. Harriton Chief Executive Officer, August 11, 1998
- -----------------------
Matthew L. Harriton Chief Financial Officer,
Principal Accounting Officer
and Director
/s/ Daniel Durchslag Director August 11, 1998
- --------------------
Daniel Durchslag
/s/ Andrew Fabrikant Director August 11, 1998
- --------------------
Andrew Fabrikant
40
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
Independent auditors' reports F-1 - F2
Balance sheet F-3
Statements of operations F-4
Statements of stockholders' equity F-5 - F-6
Statements of cash flows F-7 - F-8
Notes to financial statements F-9 - F-24
41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Embryo Development Corporation
New York, New York
We have audited the accompanying balance sheet of Embryo Development
Corporation [a development stage company] as of April 30, 1998, and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Embryo Development
Corporation [a development stage company] as of April 30, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. We express no
opinion on the cumulative period from inception [March 3, 1995] through
April 30, 1998 as shown in the cumulative columns on the statement of operations
and the statement of cash flows, nor on the statement of stockholders' equity
[deficit] for the period from inception [March 3, 1995] through April 30, 1997.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1,
Embryo Development Corporation is in the development stage and the Company's
ability to continue in the normal course of business is dependent upon the
success of future operations. These uncertainties raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Moore Stephens, P.C.
-------------------------
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
June 22, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Embryo Development Corporation and Subsidiary
New York, New York
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Embryo Development Corporation and
Subsidiary for the year ended April 30, 1997. These statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Embryo
Development Corporation and Subsidiary for the year ended April 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Holtz Rubenstein & Co., LLP
-------------------------------
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
June 12, 1997
F-2
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
<TABLE>
BALANCE SHEET AS OF APRIL 30, 1998.
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $134,508
Short-Term Investments 288,000
Accounts Receivable 34,106
Interest Receivable 2,782
Inventories 71,851
Prepaid Legal Fees 80,000
Prepaid Expenses and Other Current Assets 115,120
--------
Total Current Assets 726,367
Property and Equipment -
Net of Accumulated Depreciation of $14,176 17,264
Licensed Technology -
Net of Accumulated Amortization of $293,809 446,191
Investment in Unconsolidated Investee 380,250
Other Assets:
Due from Unconsolidated Investee 620,793
Cash in Escrow 50,400
Deposits 80,497
--------
Total Other Assets 751,690
Total Assets $2,321,762
==========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $273,533
--------
Commitments and Contingencies --
Stockholders' Equity:
Preferred Stock, $.0001 Par Value; Authorized 15,000,000
Shares; 6,000,000 Issued and Outstanding 600
Common Stock, $.0001 Par Value, Authorized 30,000,000
Shares; 4,845,000 Issued and Outstanding 485
Additional Paid-in Capital 9,774,101
Unearned Compensation (952,500)
Deficit Accumulated During the Development Stage (6,774,457)
-----------
Total Stockholders' Equity 2,048,229
Total Liabilities and Stockholders' Equity $2,321,762
==========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
From Inception
Years Ended March 3, 1995 to
April 30, April 30,
1998 1997 1998
---------------------- ----------------
<S> <C> <C> <C>
Revenues $ 800,494 $ 287,487 $ 1,235,754
Costs and Expenses:
Cost of Sales 750,734 237,839 1,080,623
General and Administrative 1,947,356 1,814,174 4,198,956
Royalties 82,752 -- 82,752
Research and Development 199,251 185,678 917,695
Amortization 230,000 230,000 677,025
Equity Loss for Three Months of
Operations Of Unconsolidated Investee 366,744 -- 366,744
Loss on Write-off of Licensed Technology 486,785 -- 486,785
Interest Income - Related Party (11,022) -- (11,022)
Interest and Other [Income] Expense 57,758 (133,729) 415,606
--------- ----------- ----------
Total Costs and Expenses 4,110,358 2,333,962 8,215,164
--------- ----------- ----------
Loss Before Minority Interest (3,309,864) (2,046,475) (6,979,410)
Minority Interest in Net
Loss of Subsidiary 65,881 139,072 204,953
Net Loss $(3,243,983) $ (1,907,403) $(6,774,457)
============== ============= ============
Basic Net Loss Per Share $ (.67) $ (.40) $ (1.57)
============== ============= =============
Weighted Average Number of Shares of
Common Stock Outstanding 4,845,000 4,728,274 4,320,680
========== ========== ============
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Amount Additional
Per Common Stock Preferred Stock Paid-in Unearned
Share Shares Amount Shares Amount Capital Compensation
------ -------------- --------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Stock for Cash at Inception
March 3, 1995:
Common $ .05 2,400,000 $ 240 -- $ -- $ 108,936 $ --
Preferred .002 -- -- 6,000,000 600 10,224 --
Issuance of Stock for Licensed
Technology 3.00 325,000 33 -- -- 974,967 --
Issuance of Stock for Research
and Development 3.00 125,000 12 -- -- 374,988 --
Issuance of Stock in Connection
with Subscription Agreement 3.00 180,000 18 -- -- 539,982 --
Net Loss -- -- -- -- -- -- --
--------- ---- ---------- ------- -------- --------
Balance - April 30, 1995 3,030,000 303 6,000,000 600 2,009,097 --
Issuance of Stock in Connection
with Initial Public Offerin 5.00 1,150,000 115 -- -- 4,337,093 --
Issuance of Stock in Connection
with Consulting Agreements 4.00 510,000 51 -- -- 2,039,949 (2,040,000)
Compensation Earned in
Connection with Consulting
Agreements -- -- -- -- -- -- 97,500
Net Loss -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ----------
Balance - April 30, 1996 -
Forward 4,690,000 $469 6,000,000 $ 600 $8,386,139 $(1,942,500)
</TABLE>
<TABLE>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
----------- --------------
<S> <C> <C>
Issuance of Stock for Cash at Inception
March 3, 1995:
Common $ -- $ 109,176
Preferred -- 10,824
Issuance of Stock for Licensed
Technology -- 975,000
Issuance of Stock for Research
and Development -- 375,000
Issuance of Stock in Connection
with Subscription Agreement -- 540,000
Net Loss (483,310) (483,310)
----------- ------------
Balance - April 30, 1995 (483,310) 1,526,690
Issuance of Stock in Connection
with Initial Public Offering -- 4,337,208
Issuance of Stock in Connection
with Consulting Agreements -- --
Compensation Earned in
Connection with Consulting
Agreements -- 97,500
Net Loss (1,139,761) (1,139,761)
------------ -----------
Balance - April 30, 1996 -
Forward $(1,623,071) $ 4,821,637
</TABLE>
F-5
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Amount Additional
Per Common Stock Preferred Stock Paid-in Unearned
Share Shares Amount Shares Amount Capital Compensation
------ --------------- ----------------- ---------- ------------
<C> <C> <C> <C> <C> <C> <C>
Balance - April 30, 1996 -
Forwarded 4,690,000 $ 469 6,000,000 $ 600 $ 8,386,139 $(1,942,500)
Issuance of Stock for Service 3.50 5,000 1 -- -- 17,499 --
Issuance of Stock in Connection
with Investment in Subsidiary .50 150,000 15 -- -- 74,985 --
Compensation Earned in
Connection with Consulting
Agreements -- -- -- -- -- -- 495,000
Issuance of Stock by Subsidiary
to Minority Holders -- -- -- -- -- (37,350) --
Amortization of Unearned
Compensation of Minority
Holders-Subsidiary -- -- -- -- -- 2,502 --
Net Loss -- -- -- -- -- -- --
---------- ----- --------- ----- ----------- -----------
Balance - April 30, 1997 4,845,000 485 6,000,000 600 8,443,775 (1,447,500)
Compensation Earned in
Connection with Consulting
Agreements -- -- -- -- -- -- 495,000
Issuance of Stock by Investee
in Connection with
Private Placement -- -- -- -- -- 1,330,326 --
Net Loss -- -- -- -- -- -- --
---------- ----- --------- ------ ---------- -----------
Balance - April 30, 1998 4,845,000 $485 6,000,000 $600 $ 9,774,101 $(952,500)
========= ==== ========= ==== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
------------ ------------
<S> <C> <C>
Balance - April 30, 1996 -
Forwarded $(1,623,071) $ 4,821,637
Issuance of Stock for Services -- 17,500
Issuance of Stock in Connection
with Investment in Subsidiary -- 75,000
Compensation Earned in
Connection with Consulting
Agreements -- 495,000
Issuance of Stock by Subsidiary
to Minority Holders -- (37,350)
Amortization of Unearned
Compensation of Minority
Holders-Subsidiary -- 2,502
Net Loss (1,907,403) (1,907,403)
------------ ------------
Balance - April 30, 1997 (3,530,474) 3,466,886
Compensation Earned in
Connection with Consulting
Agreements -- 495,000
Issuance of Stock by Investee
in Connection with
Private Placement -- 1,330,326
Net Loss (3,243,983) (3,243,983)
----------- ------------
Balance - April 30, 1998 $(6,774,457) $ 2,048,229
============ ===========
</TABLE>
F-6
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
From Inception
Years Ended March 3, 1995 to
April 30, April 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net Loss $ (3,243,983) $ (1,907,403) $ (6,774,457)
Adjustments to Reconcile Net Loss to Net
Cash [Used for] Operating Activities:
Depreciation and Amortization 326,048 241,203 1,325,211
Write-Off of Licensed Technology 486,785 -- 486,785
Minority Interest in Loss of Subsidiary (65,881) (139,072) (204,953)
Equity Loss in Operations of Unconsolidated
Investee 366,744 -- 366,744
Non-Cash Consideration - Other 528,733 517,500 1,143,733
Non-Cash Consideration - Research and
Development -- -- 440,000
Changes in Assets and Liabilities:
[Increase] Decrease:
Accounts Receivable 3,795 (91,838) (113,803)
Interest Receivable 43,445 14,580 25,400
Inventories (95,386) 775 (116,887)
Prepaid Expenses and Other Current Assets (48,836) (71,340) (205,620)
Other Assets (82,321) 3,771 (150,216)
Increase [Decrease]:
Accounts Payable and Accrued Expenses 643,944 280,879 963,481
Customer Deposits (25,000) 25,000 --
------------ ----------- -----------
Total Adjustments 2,082,070 781,458 3,959,875
----------- ----------- -----------
Net Cash - Operating Activities- Forward (1,161,913) (1,125,945) (2,814,582)
----------- ----------- -----------
Investing Activities:
Purchase of Short-Term Investments (288,000) (559,000) (847,000)
Proceeds from Sale of Short-Term Investments 559,000 -- 559,000
Purchase of Investments in Available-for Sale
Securities -- (1,832,697) (6,129,521)
Proceeds from Sale of Investments in Available-
for-Sale Securities 1,049,380 3,587,621 6,129,521
Net Cash Paid for Asset Acquisition -- (200,588) (200,588)
Purchase of Licensed Technology -- -- (450,000)
Purchase of Property and Equipment (861,435) (148,059) (1,026,807)
Divestiture of Cash of Subsidiary (77,794) -- (77,794)
----------- ----------- ---------------
Net Cash - Investing Activities - Forward $ 381,151 $ 847,277 $ (2,043,189)
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENTS OF CASH FLOWS
<TABLE>
Cumulative
From Inception
Years ended March 3, 1995 to
April 30, April 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net Cash - Operating Activities - Forwarded$(1,161,913) $(1,125,945) $(2,814,582)
------------ ------------ ------------
Net Cash - Investing Activities - Forwarded 381,151 847,277 (2,043,189)
------------ ------------ ------------
Financing Activities:
Proceeds from Issuance of Debt 350,000 -- 650,000
Proceeds from Issuance of Stock -- -- 120,000
Proceeds from Issuance of Subsidiary Stock to
Minority Shareholder -- 150,000 150,000
Repayment of Loans to Unconsolidated Investee 258,821 -- 258,821
Repayment of Debt -- -- (550,000)
Proceeds of Stock Offering, Net of Deferred Costs-- -- 4,337,208
Due from Unconsolidated Investee 26,250 -- 26,250
------------ ------------ ------------
Net Cash - Financing Activities 635,071 150,000 4,992,279
------------ ------------ ------------
Net [Decrease] Increase in Cash and Cash
Equivalents (145,691) (128,668) 134,508
Cash and Cash Equivalents-Beginning of Periods 280,199 408,867 --
----------- ------------ ------------
Cash and Cash Equivalents - End of Periods$ 134,508 $ 280,199 $ 134,508
=========== ============ =============
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS
[1] Organization and Nature of Operations
Embryo Development Corporation [the "Company"] is a Delaware Corporation which
was formed to develop, acquire, manufacture and market various bio-medical
devices throughout the United States.
In January 1997, the Company acquired a majority interest in Hydrogel Design
Systems, Inc. ["HDS"] which was subsequently reduced to a minority interest on
January 21, 1998 [See Note 3]. 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.
The Company and HDS are in the development stage, as defined in Statement of
Financial Accounting Standard No. 7, "Accounting and Reporting for Development
Stage Enterprises." To date, the Company has generated minimal sales and
devoted its efforts primarily to various organizational activities, including
negotiating of license agreements, developing its business strategy, hiring
management personnel, raising capital through an initial public offering which
was completed in November 1995 [See Note 5], and undertaking preliminary
activities for the commencement of operations. In February 1997, HDS acquired
certain assets and the business of a group of companies engaged in the
manufacture and distribution of hydrogel and after-market apnea monitoring
components. HDS has devoted substantial efforts to the establishment of a
manufacturing facility for its accelerator beam equipment used in the
production of hydrogel, which was completed during the year ended April 30,
1998, and in contacting prospective customers of hydrogel and related
accelerator beam products. In September 1995, the Company purchased certain
assets and the on-going business of a medical products division of an existing
business [See Note 7]. The Company has not generated any significant revenue to
date and is presently evaluating the commercial value of the products obtained
under its business acquisitions license agreements. There can be no
assurance that the Company will be successful in marketing any such products.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has incurred cumulative losses of
approximately $6,774,000 and utilized cash of approximately $1,162,000 for
operating activities for the year ended April 30, 1998. Management recognizes
that the Company must generate additional revenue to achieve profitable
operations and obtain equity and debt financing. Management's plans to
increase revenues and reduce expenses to achieve profitable operations include
the development of a marketing strategy of the safety needle, one of its
licensed products, which is currently awaiting 510(K) approval by the FDA.
Management believes that the Company's current and short-term investments
totaling approximately $423,000 and the repayment of its revolving line of
credit, which is due in January 1999, from HDS will be sufficient to fund the
Company's operations for the next twelve (12) months with a reduction in
operating expenses. Management believes the outstanding amount due from HDS of
$621,000 will be at least substantially repaid during the next (12) months
although it has been classified as a long-term asset based on the current
financial condition of HDS. In the event that no repayment can be made in
F-9
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS Sheet #2
[1] Organization and Nature of Operations [Continued]
the next (12) months, the Company will seek alternative methods of raising
additional capital.
In an effort to strengthen the Company's position until a meaningful revenue
stream and positive cash flow can be achieved, management has undertaken a
significant cost reduction program.
However, no assurance can be made with respect to the viability of the Company
in the long-term. Realization of the revenue potential of the Self-Shielding
Needle may require additional capital expenditures and other expenses.
Management anticipates that to meet such needs would require raising additional
funds from either the debt or equity markets. Alternatively, the Company may
need in the long-term to consider liquidating some of its assets to meet
cash requirements. No assurance can be made as to the success of these
capital raising alternatives.
The accompanying financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying financial statements include the
accounts of the Company and its subsidiary, Hydrogel Design Systems, Inc.
["HDS"] through January 21, 1998. The assets, liabilities and operations of HDS
after January 21, 1998 are not included on a consolidated basis in the financial
statements of the Company as a result of a reduction in ownership, voting
interest and the lack of management control. This investment is being
accounted for using the equity method of accounting subsequent to January 21,
1998 [See Note 12B].
Upon consolidation, all significant intercompany accounts and transactions
have been eliminated.
Depreciation and Amortization - Depreciation is computed principally by the
straight-line method over the estimated useful lives of the related assets.
Amortization of licensed technology is computed using the straight-line method
over the estimated useful life of the related technology [7 years].
The Company provides for depreciation for office equipment and fixtures over 3-7
years, the estimated useful lives.
Depreciation expense for the years ended April 30, 1998 and 1997 and the
cumulative period from inception [March 3, 1995] through April 30, 1998 amounted
to $94,632, $10,990 and $106,557, respectively.
Inventories - Inventories, consisting principally of finished goods, are stated
at the lower ofcost [first-in, first-out method] or market.
Investments - Short-term investments consist of bank certificates of deposits.
F-10
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS Sheet #3
[2] Summary of Significant Accounting Policies [Continued]
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk are cash and accounts receivable
arising from its normal business activities. The Company routinely assesses the
financial strength of its customers and third party payors and, believes that
its accounts receivable credit risk exposure is limited. The Company places its
cash and cash equivalents with high credit quality financial institutions.
The amount on deposit in any one institution that exceeds federally insured
limits is subject to credit risk. As of April 30, 1998, the Company did not
maintain cash or cash equivalents with financial institutions subject to credit
risk beyond the insured amount. The Company does not require collateral or
other security to support financial instruments subject to credit risk.
Income Taxes - Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Cash Equivalents - The Company's policy is to considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. At April 30, 1998, cash equivalents amounted to approximately
$108,000.
Research and Development Costs - Research and development costs are expensed
as incurred.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Advertising - The Company charges to expense, advertising costs as incurred.
Advertising costs approximated $4,000, $71,000 and $76,000 for the years ended
April 30, 1998 and 1997, and the cumulative period from inception [March 3,
1995] through April 30, 1998, respectively.
Stock Options - The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity instruments [collectively,
"Options"] issued to employees, however, the Company will continue to apply the
intrinsic value based method of accounting for options issued to employees
prescribed by Accounting Principles Board ["APB"] Opinion No. 25, "Accounting
for Stock Issued to Employees" rather than the fair value based method
of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
F-11
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[2] Summary of Significant Accounting Policies [Continued]
Impairment - Certain long-term assets [including licensed technology] of the
Company are reviewed at least annually as to whether there are indications their
carrying value has become impaired, pursuant to guidance established in
Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations [undiscounted
and without interest charges]. If impairment is deemed to exist, the assets
will be written down to fair value. Management also reevaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of April 30, 1998, management expects
these assets to be fully recoverable.
Earnings Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended April 30, 1998, have been calculated in accordance
with SFAS No. 128. Prior periods earnings per share data have been recalculated
as necessary to conform prior years data to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period.
SFAS No. 128 also requires a dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all companies with complex
capital structures. Diluted earnings per share reflects the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period, while giving effect to all dilutive potential
common shares that were outstanding during the period, such as common shares
that could result from the potential exercise or conversion of securities
into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e., increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
[3] Investment in HDS
In January 1997, the Company entered into a subscription agreement to acquire
1,251,000 shares of HDS common stock and 15,000,000 shares of HDS Series A
preferred stock. HDS was formed to effect the asset acquisition described in
F-12
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[3] Investment in HDS [Continued]
Note 7B. As consideration for its interest, the Company contributed $150,000 in
cash, 150,000 shares of its common stock, and the commitment to make available
to HDS a $500,000, 8% revolving line of credit.
At April 30, 1997, the Company's ownership of HDS represented 50.04% of the
common stock and 92.9% of total voting shares.
On January 21, 1998, the Company's equity interest in HDS, was reduced to 45.6%
common ownership as a result of the Company surrendering all 15,000,000 shares
of voting preferred stock in exchange for 21,500 shares of common stock. The
exchange was done at the request of certain third party investors of a Private
Placement by HDS, under which HDS issued approximately 475,000 additional
common shares. As of January 21, 1998, these transactions resulted in the
Company retaining approximately 45.6% of the common stock of HDS. In
February and April 1998, the Private Placement was fully subscribed, and the
Company's ownership decreased to approximately 31.3% of common interest.
As a result of the surrender of the voting preferred stock and the issuance of
additional common stock, the Company's ownership in HDS was reduced to below 50%
interest and therefore, the assets, liabilities and operations of HDS after
January 21, 1998 are not included on a consolidated basis in the financial
statements of the Company.
Approximately $287,000 of the loss applicable to minority interest for the
period May 1, 1997 through January 21, 1998 was in excess of minority interest
in capital, and accordingly has been charged to the Company's operations.
Summarized financial information for HDS, which commencing January 21, 1998, the
Company accounts for using the equity method, is as follows:
Summarized financial information:
April 30, 1998
----------------
Balance Sheet:
Current Assets $ 887,000
Property, Plant and Equipment - Net 1,771,000
Purchased Technology 769,000
Other Assets 68,000
---------
Total Assets $3,495,000
=========
Current Liabilities $ 743,000
Long-Term Notes Payable 1,611,000
Shareholders' Equity 1,141,000
---------
Total Liabilities and Stockholders' Equity $3,495,000
==========
Statement of Operations:
Revenues $ 755,000
=========
Cost of Sales $ 786,156
=========
Net Loss $(1,580,000)
============
F-13
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[3] Investment in HDS [Continued]
Approximately $134,000 of the revenue and $879,000 of the loss relate to the
period subsequent to January 21, 1998 and are accounted for using the equity
method.
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 April 30, 1998, borrowings under the revolver approximated
$546,000.
In February 1997, HDS entered into a seven-year sublease with the Company, which
provides for minimum monthly rental payments of $9,625 and expires in 2004 [See
Note 6D].
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. General and administrative expenses have been reduced
by $18,750 for the year ended April 30, 1998 as a result of the agreement.
In May 1998, HDS notified the Company that the agreement will not be renewed in
August 1998.
[4] License Agreements
In March 1995, the Company entered into seven license agreements for the rights
to manufacture and market seven medical devices for an aggregate purchase price
of $1,430,000. The consideration consisted of the issuance of $230,000 in notes
and 400,000 shares of the Company's common stock. In addition, the seller is
entitled to royalties, ranging from 6% - 8% of net revenues, as defined, of the
licensed products sold. The agreements are in effect over the lives of the
respective patents.
Each of the seven agreements also provide for minimum payment obligations
commencing 2 1/2 years after the date of the agreements. The agreements
provide that the licensor may terminate the licenses if the minimum royalty
payments are not made. The minimum payment obligations for each license are as
follows:
Agreement Year Minimum Payment Obligation
- ------------------ --------------------------
September 30, 1997 $ 25,000
March 31, 1998 25,000
September 30, 1998 50,000
March 31, 1999 50,000
September 30, 1999 100,000
March 31, 2000 100,000
March 31, 2001 200,000
F-14
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[4] License Agreements [Continued]
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. These payments have not been made as of
April 30, 1998. The payments on (1) of the devices of $50,000 were made in
accordance with the terms of the original agreement.
The Company did not make the minimum payments required under the License
Agreements with respect to six (6) of the devices including the adjustable blood
pressure cuff, a multi-function fluid communication control system and
stereoscopic fluoroscopy apparatus, and thus the licensor has the option to
revoke the applicable licenses. The Company has not received any notification
from the licensor regarding any such revocation. The minimum payment
obligations with respect to the self-shielding needle were made in accordance
with the terms of the original agreement.
The Company also entered into royalty sharing agreements under which it is
entitled to 50% of the royalties received by the licensor under license
agreements for two medical devices. Consideration under these agreements
consisted of the issuance of $20,000 in notes and 50,000 shares of the
Company's common stock. The royalty sharing agreements are in effect
over the lives of the underlying agreements. In addition, the Company has
the right to license the patents for the products in the event the underlying
licenses are terminated.
The common stock issued under these agreements were valued at $3 per share.
The medical devices underlying five of these license and royalty sharing
agreements were deemed to be in the development stage, and accordingly, the
consideration paid ($440,000) was charged to operations [research and
development] in the period ended April 30, 1995. The consideration for the
remaining four agreements $(1,160,000) was recorded as licensed technology.
At April 30, 1998, the unamortized cost of $486,785 for three of these
agreements was charged to operations as the minimum royalty payments were not
made as per the terms of the agreements and the licensor may terminate the
licenses.
[5] Stockholders' Equity
[A] Capitalization - The Company's authorized capitalization consists of
30,000,000 shares of common stock and 15,000,000 shares of preferred stock. All
stock has a $.0001 par value. Each share of common and preferred has one vote in
all matters. In the event of any liquidation, holders of the issued and
outstanding shares of preferred stock will be entitled to receive, prior to
any distribution to the holders of common stock, the sum of $.10 per share.
[B] Initial Capitalization - In March 1995, the Company issued 2,400,000 shares
of common stock and 6,000,000 shares of preferred stock ["Founders' Stock"] for
an aggregate amount of $120,000.
F-15
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[5] Stockholders' Equity [Continued]
[C] Subscription Agreements - In March 1995, the Company entered into
subscription agreements in connection with a bridge loan in the aggregate amount
of $300,000, [the "Bridge Loans"]. In connection with the Bridge Loan, the
Company issued the aggregate amount of 180,000 Bridge Units, each Bridge Unit
consisting of one share of common stock and one Class B Warrant. Each Class
B Warrant entitles the holder to acquire one share of common stock at an
exercise price of $10 per share. The promissory notes issued in connection with
the Bridge Loan were repaid with interest at 8% on November 22, 1995, with
the proceeds from the public offering. The 180,000 shares of the Company's
common stock represented a financing cost of $540,000 [$3 per share] which was
amortized in full upon the successful completion of the public offering.
[D] Public Offering - In November 1995, the Company completed a public offering
of 1,000,000 shares of common stock at $5.00 per share for an aggregate of
$5,000,000. An additional 150,000 shares were sold for gross proceeds of
$750,000 to the underwriter to cover over-allotments. In addition, the
underwriter received an option, for a nominal fee, to acquire 100,000 shares of
common stock at an exercise price of $6.75 per share. The option expires in
November 2001.
Effective with the closing of the offering, the Company entered into a
consulting agreement with the underwriter. The underwriter ceased operations in
1997, and the unamortized balance of the consulting fee ($91,667) was charged to
operations in the year ended April 30, 1997.
[E] Issuance of Securities - In July 1996, the Company issued 5,000 shares of
common stock to its medical advisory board of services. The value of the common
stock granted ($17,500) was charged to operations.
In May 1996, the Company issued a five-year warrant, exercisable at any time,
for the purchase of 100,000 shares of common stock of the Company at $6 per
share. The warrant was issued in connection with the termination of a
sublicensing agreement.
[F] Consulting Agreements - In February 1996, the Company entered into two
separate multi-year consulting agreements. As consideration for these services,
the Company issued 225,000 shares of common stock to each of the parties. The
value of the common stock granted ($1,800,000) is being charged to operations
ratably over the lives of the consulting agreements which range between four and
five years.
In August 1995, the Company entered into a three-year consulting agreement for
services related to the development of strategic sales and marketing plans in
the United States, and internationally. The agreement, which initially provided
for a monthly consulting fee of $5,000, was amended in March 1996, at which time
the Company issued 60,000 shares of common stock in lieu of the monthly
consulting fee. The value of the common stock granted ($240,000) is being
charged to operations ratably over the remaining life of the consulting
agreement which is thirty-two months.
F-16
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[5] Stockholders' Equity [Continued]
[G] Stock Option Plans - The Company has adopted a Non-Qualified Option Plan
[the "Plan"] covering 2,000,000 shares of common stock of the Company. Options
under the Plan are granted at terms set by the Board of Directors at the time of
issuance.
The Company has also adopted an Incentive Option and Stock Appreciation Rights
Plan [the "Incentive Option Plan"] covering 2,000,000 shares of the Company's
common stock. Incentive stock options under the Incentive Option Plan are
granted at an exercise price [not less than the fair market value] at the date
of grant. Non-qualified options and freestanding stock appreciation rights
may also be granted with any exercise price.
[H] Loss Per Share - Loss per share was computed by dividing net loss by the
weighted number of shares outstanding. Potential common shares of 1,630,000
have been excluded as their effect would be anti-dilutive.
As noted in Note 5D, the Company has completed an Initial Public Offering
["IPO"]. Pursuant to SEC rules, common stock issued for consideration below the
IPO price during the 12 months before the filing of the registration statement
has been included in the weighted average number of shares, using the treasury
stock method, as if such shares had been outstanding for all periods presented.
[i] Reserved Shares - Common shares reserved at April 30, 1998 are as follows:
Incentive Stock Option Plan 2,000,000
Non-Qualified Stock Option Plan 2,000,000
Class B Warrants 180,000
Consultant Warrants 600,000
Key Employee Options 750,000
Other 100,000
---------
Total 5,630,000
=========
[6] Commitments and Contingencies
[A] Class Action Lawsuits - A consolidated Class Action complaint has been filed
naming as defendants the Company and others. The Class Action asserts 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
others 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.
F-17
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[6] Commitments and Contingencies [Continued]
[B] Employment Agreements - In September 1997, the Company amended an employment
agreement with an officer dated January 1, 1997. The two-year agreement, as
amended,dprovides 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
to the options to purchase 100,000 shares at an exercise price of $(.65) in
the original agreement. In June of 1998, the options to purchase the aggregate
of 500,000 shares of the Company's common stock were repriced to an exercise
price equal to the market price in June of 1998 of $.0938.
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 1995, the Company granted an officer an option to purchase 100,000 shares of
the Company's common stock at an exercise price of $5 per share and 100,000
shares exercisable commencing March 1997, at an exercise price equal to the fair
market value at March 31, 1997 ($.5625). These options are exercisable over a
four-year period.
[C] Consulting Agreement - In 1995, the Company entered into a four-year
consulting agreement with the licensor of the medical devices discussed in
Note 4. The agreement provides for an annual consulting fee of $75,000. In
addition, the consultant was issued warrants to purchase 600,000 shares of
the Company's common stock at an exercise price of $3 per share [See Note 12C].
[D] Lease - On February 14, 1997, the Company entered into a seven-year
operating lease for premises to be used for offices and manufacturing. The
lease provides for monthly minimum lease payments of $9,625. The lease
contains a five-year renewal option and provides that the Company shall pay
for insurance, taxes and maintenance. In addition, the lease contains an
escalation clause based upon increases in the consumer price index for years
four through seven. Effective February 14, 1997, the Company entered into a
seven year sub-lease with Hydrogel which provides for minimum monthly rental
payments at $9,625 to be received, and expires in 2004.
The Company leased office space from a former executive on a month-to-month
basis. Rent expense under this lease approximated $60,000 during each of the
years ended April 30, 1998 and 1997.
In April 1998, the Company along with other co-tenants entered into a fourteen
month lease for this office space with an entity controlled by the former
Chairman of Embryo. The Company's portion of the monthly lease payment amounted
to $3,600. At April 30, 1998, the total lease payments of $50,400 were held in
escrow by the landlords attorney.
Aggregate rent expense approximated $204,700, $113,700 and $347,300 for the
years ended April 30, 1998 and 1997, and the cumulative period from inception
[March 3, 1995] through April 30, 1998, respectively. Rental income on the
F-18
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #11
[6] Commitments and Contingencies [Continued]
sub-lease amounted to approximately $28,875, $-0- and $28,875 for the years
ended April 30,1998 and 1997, and the cumulative period from inception
[March 3, 1995] through April 30,1998, respectively.
Minimum annual rentals under the leases are as follows:
Year ended Rent Sub-Lease
April 30, Expense Income
- ---------------- --------- ---------
1999 $ 158,700 $ 115,500
2000 122,700 115,500
2001 115,500 115,500
2002 115,500 115,500
2003 115,500 115,500
Thereafter 86,625 86,625
---------- ----------
Totals $ 714,525 $ 664,125
========== ==========
[E] Product Liability Insurance
The Company has obtained product liability insurance since it has commenced
sales of its products. However, there can be no assurance that such policies
will be sufficient to cover potential claims or the costs of any resulting
litigation or that a policy can be maintained in force at an acceptable cost to
the Company. A successful claim against the Company in excess of the Company's
insurance coverage could have a material adverse effect upon the Company's
business and results of operations. In addition, claims against the Company,
regardless of their merit or eventual outcome, also may have a material
adverse effect upon the Company's reputation.
[7] Business Combinations
[A] In September 1995, the Company entered into an agreement to purchase certain
assets and the ongoing business of the Medical Division of C.F. Electronics,
Inc. ["CF"]. Under the agreement, the Company acquired CF's medical products
for consideration of $450,000, of which $45,000 was paid upon closing and
the balance ($405,000) was paid on December 12, 1995 from the proceeds from the
public offering. The Company also purchased CF's finished goods inventory and
demonstration equipment.
In addition, the Company entered into a five year "Supply Agreement" with CF,
which provides for CF to supply the Company with certain products at a price
equal to CF's cost [as defined] plus 10%. The Agreement provides for minimum
payments to CF during its first two years.
F-19
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #12
[7] Business Combinations [Continued]
[B] 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]. Assets acquired include property rights and
technical data, machinery and equipment, and inventory. 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. Expenses of approximately $51,000 were incurred in
connection with this acquisition. This acquisition has been accounted for as a
purchase.
In January 1998, as a result of subsequent litigation between HDS and the
former owners, the terms of the original purchase were modified. The Embryo
shares were returned to HDS for a cash payment of $450,000 and a long-term
promissory note in the amount of $950,000.
[8] Income Taxes
Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's net deferred tax asset as of April 30, 1998 are as follows:
Deferred Tax Assets:
Net Operating Loss Carryforward $ 1,774,000
Tax Basis of Intangible Assets in Excess of Book Basis 46,000
-----------
Total 1,820,000
Deferred Tax Liability:
Book Basis of Unearned Compensation
in Excess of Tax Basis 324,000
-----------
Deferred Tax Asset 1,496,000
Valuation Allowance 1,496,000
-----------
Net Deferred Tax Asset $ --
===========
The valuation allowance of $1,496,000 represents an increase of $259,000 over
the preceding year. Net operating loss carryforwards of $5,217,000 expire as
follows:
2010 $ 103,000
2011 873,000
2012 3,088,000
2013 1,153,000
--------------------
Total $ 5,217,000
====================
F-20
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #13
[8] Income Taxes [Continued]
A reconciliation between the statutory federal income tax rate and the effective
rate of income tax expense for the year ended April 30, 1998 and 1997 follows:
1 9 9 8 1 9 9 7
-------- -------
Statutory Federal Income Tax Rate (34)% (34) %
Unearned Compensation 9 % (30) %
Other 4 % 5 %
Change in Valuation Allowance 21 % 59 %
----------- ---------
Effective Income Tax Rate -- --
=========== ==========
[9] Major Customers
Sales to two customers approximated $246,000 and $174,000 of total revenues in
1998. Sales to two customers approximated $52,000 and $40,000 of total revenues
in 1997.
[10] Fair Value of Financial Instruments
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash, and cash equivalents, short-term investments, cash in escrow, and due from
unconsolidated investee it was estimated that the carrying amount approximated
fair value for the majority of these instruments because of their short
maturities.
[11] Supplementary Information - Statements of Cash Flows
Cash paid during the years for:
Cumulative
from
Inception
October 3,
Years ended 1996 to
April 30, April 30,
1998 1997 1998
------ ----- ----
Interest - Net of Capitalized Interest $ 3,578 $ 822 $ 4,400
======= ======= =========
Income Taxes $ -- $13,984 $ 14,276
======= ======== ========
HDS financed the acquisition of $600,000 of manufacturing equipment with a note
payable. Additionally, $12,500 of interest expense was capitalized during the
year ended April 30, 1997.
F-21
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #14
[12] Subsequent Events
[A] Issuance of Securities - On June 17, 1998, the Company issued options, to
three (3) directors and an employee, to purchase 1,650,000 shares of the
Company's common stock at an exercise price equal to the market price on the
date of the grant ($.0938) under the Incentive Stock Option Plan. In addition,
an aggregate of 500,000 options which were granted to an officer under the
terms of a prior employment agreement were amended to have an exercise price of
($.0938), the market price on the date of the amendment.
[B] Management Agreement - On May 4, 1998, notice was received from Hydrogel
to terminate the management agreement effective August 1998.
[C] Consulting Agreement - On June 22,1998, notice was given to the licensor of
the medical devices, discussed in Note 6C, to terminate the consulting agreement
effective July 22, 1998.
[13] New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated.
SFAS No. 131 need not be applied to interim financial statements in the initial
year of its application. SFAS No. 131 does not have a material impact on the
Company.
[14] Subsequent Events [Unaudited]
Options were exercised in June 1998 for an aggregate of 2,150,000 shares. The
Company issued promissory notes dated July 1, 1998 to the three (3) directors
and an employee in the aggregate of $201,670 for payment of the shares. The
notes mature in five (5) years, bear interest at 8%, and are secured by the
related securities.
F-22
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #15
[14] Stock Options and Warrants
A summary of common stock options and warrants is as follows:
Weighted
Average
Common Exercise Price
Shares Per Share
-------- --------------
Options and Warrants Outstanding at March 31, 1995 -- $--
Granted 780,000 4.62
Exercised -- --
Canceled -- --
-------- --------------
Options and Warrants Outstanding at April 30, 1995 780,000 4.62
Granted 300,000 4.10
Exercised -- --
Canceled -- --
-------- -------------
Options and Warrants Outstanding at April 30, 1996 1,080,000 4.47
Granted 200,000 3.33
Exercised -- --
Canceled (100,000) 6.75
--------- -------------
Options and Warrants Outstanding at April 30, 1997 1,180,000 4.09
Granted 450,000 .55
Exercised -- --
Canceled -- --
--------- ------------
Options and Warrants Outstanding at April 30, 1998 1,630,000 $ 3.11
========= ============
At April 30, 1998, all options and warrants were exercisable.
The following table summarizes information about common stock options and
warrants outstanding at April 30, 1998:
Options and Warrants Outstanding
-------------------------------------------
NumberWeighted Average
----------------------
Outstanding at Remaining Weighted
--------------- --------- --------
Average
------- April 30, 1998 Contractual Life Exercise Price
--------------- ---------------- --------------
$.25 - $.65 650,000 3.16 Years $ .57
$3.00 600,000 1.67 Years 3.00
$5.00 - $6.00 200,000 2.29 Years 5.50
$10.00 180,000 1.58 Years 10.00
-------- --------
Totals 1,630,000 2.33 Years $ 3.11
========== ========
The exercise prices of the options and warrants outstanding at April 30, 1998
range between $.25 and $10.00.
F-23
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #16
[14] Stock Options and Warrants [Continued]
No compensation expense was recorded for the years ended April 30, 1998 and
1997.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, the net loss and loss per share for the year ended April 30,1998
and cumulative from inception March 3, 1995 to April 30, 1998 would have been as
follows:
Cumulative
from Inception
March 3,1995 to
April 30, April 30,
1998 1998
--------- ---------------
Net Loss:
As Reported $ 3,243,983 $ 6,774,457
Pro Forma $ 3,433,814 $ 7,015,817
Net Loss Per Share:
As Reported $ .67 $ 1.57
Pro Forma $ .71 $ 1.62
At the grant dates, the weighted average fair value of the above options was
$.53 during 1998. Generally, stock options and warrants are exercisable upon
granting and expire four years from the date of grant.
The fair value of each option granted is estimated on the grant date using an
option pricing model which took into account as of the grant date, the exercise
price and the expected life of the option, the current price of the underlying
stock and its expected volatility, expected dividends on the stock and the risk-
free interest rate for the expected term of the option. The following is the
average of the data used for the following items:
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
------------- ------------- ---------- ---------
1998 6.04% 4 Years 123.22% N/A
The fair value of options granted to employees during the year ended April 30,
1997 was immaterial.
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION THAT IS EXTRACTED FROM FORM
10-KSB FOR THE YEAR ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<CASH> 134,508
<SECURITIES> 288,000
<RECEIVABLES> 34,106
<ALLOWANCES> 0
<INVENTORY> 71,851
<CURRENT-ASSETS> 726,367
<PP&E> 31,440
<DEPRECIATION> 14,176
<TOTAL-ASSETS> 2,321,762
<CURRENT-LIABILITIES> 273,533
<BONDS> 0
0
600
<COMMON> 485
<OTHER-SE> 2,047,144
<TOTAL-LIABILITY-AND-EQUITY> 2,321,762
<SALES> 800,494
<TOTAL-REVENUES> 800,494
<CGS> 750,734
<TOTAL-COSTS> 750,734
<OTHER-EXPENSES> 512,003
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,190
<INCOME-PRETAX> (3,243,983)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,243,983)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,243,983)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
</TABLE>
EMBRYO DEVELOPMENT CORPORATION
STOCK OPTION AGREEMENT
AGREEMENT, made as of the 17th day of June 1998, by and between
Embryo Development Corporation (herein after called the "Corporation"), a
corporation organized and existing under the laws of the State of Delaware,
with its principal place of business at 750 Lexington Avenue, New York,
New York, and Andrew Fabrikant (hereinafter called "Optionee").
W I T N E S S E T H :
WHEREAS, the Corporation has adopted an Incentive Stock Option Plan
which provides for grants of options to purchase common stock of the
Corporation; and
WHEREAS, Optionee is presently a director or employed by the
Corporation or one of its subsidiaries; and
WHEREAS, the Corporation considers it desirable and in its best
interest that Optionee be given an option to purchase common stock of the
Corporation; and
WHEREAS, the Board of Directors of the Corporation adopted a plan on
March 31, 1995 by which the Optionee was granted an option described herein,
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. This Agreement recites all the terms and conditions of the option
granted to Optionee by the Corporation pursuant to the Corporation's
Incentive Stock Option Plan (the "Plan") adopted on March 31, 1995.
2. The total number of shares with respect to which options may be
granted under the Incentive Option Plan is 2,000,000. No option may be
granted under the Incentive Option Plan after March 15, 2005.
3. Pursuant to the terms and conditions of the Plan, the Corporation
grants to Optionee an option (the "Option") to purchase 250,000 shares (the
"Option Shares") of its common stock, par value $0.0001 per share, at a
price of $0.0938 per share in the manner and subject to the provisions
hereinafter provided.
4. Subject to earlier termination as hereafter provided, the Option
shall terminate in all respects at, and no exercise as to any shares covered
by the Option shall be honored after the close of business ten years after
its grant ("Expiration Date"). Furthermore, the Option of shareholders owning
10% or more of the Company's voting power, shall terminate in all respects
at, and no exercise as to any shares covered by the Option shall be honored
after the close of business five years after its grant.
5. The Option is exercisable during the lifetime of the Optionee only
by the Optionee, and, subject to the provisions of Paragraph 6 hereof, only
if (i) at the time of any and every exercise of the Option Optionee is an
employee or director of an Employer Corporation and (ii) Optionee shall have
been in the continuous employ of an Employer Corporation from the date of the
Agreement to the date of exercise. As used herein, "Employer Corporation"
shall mean any of the Corporation or a "Subsidiary Corporation", as that
term is defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor statutory provision.
6. (a) The aggregate fair market value (determined at the time the
options are granted) of common stock with respect to which incentive stock
options (within the meaning of Section 422 of the Code) are exercisable for
the first time by Optionee under the Plan or any other plan of Optionee's
Employer Corporation or its parent and subsidiary corporations ( as defined
in Section 424 of the Code), shall not exceed $ 100,000.00 (or such other
individual employee maximum as may be in effect from time to time under the
Code at the time the options are granted) in any calendar year.
(b) If Optionee disposes of common stock acquired upon the exercise
of Options by sale or exchange either (a) within two years after the date of
grant of the Options under which the common stock was acquired or (b) within
one year after the acquisition of such shares, Optionee shall notify the
Corporation of such disposition and of the amount realized upon such
disposition.
7. (a) If Optionee shall cease to be employed by an Employer
Corporation by reason of death or any other reason other than voluntarily
quitting, discharge for cause or permanent and total disability as defined in
Section 22(e)(3) of the Code ("Disability"), as determined by the
administrator of the Plan, the Optionee or his duly appointed guardian or
other legal representative ("Legal Representative"), as the case may be, may,
but only within the three months next succeeding such cessation of employ-
ment, exercise the Option to the extent that the Optionee would have been
entitled to do so on the date of such cessation of his employment. If
Optionee voluntarily quits or is discharged for cause, the Option shall
terminate on the date of cessation of employment. In no event shall the
Option be exercisable after the Expiration Date specified in Paragraph 3
hereof.
(b) If Optionee shall cease to be employed by an Employer
Corporation by reason of a Disability, the Option shall be exercisable by
Optionee or Optionee's Legal Representative, to the extent that Optionee
would have been entitled to do so on the date of such cessation of
employment, but only within one year following such cessation of employment
due to said Disability. In no event shall the Option be exercisable after
the Expiration Date specified in Paragraph 3 hereof.
8. (a) Any exercise of the Option shall be made by the delivery by
Optionee (or his Legal Representative) to the Corporation at its principal
office at 750 Lexington Avenue, New York, New York, or such other place as
the Corporation may designate, of (i) written notice of such exercise stating
the number of shares with respect to which the Option is being exercised,
(ii) payment of the purchase price for such number of shares by cash, shares
of Common Stock, or promissory notes secured by assets including the shares
to be received on the exercise of the options, and (iii) a written
certificate of Optionee (or his Legal Representative) in form and substance
reasonably acceptable to the Corporation, to the effect that he will not
dispose of such shares in violation of the Securities Act of 1933, as amended,
or the rules of the stock exchanged upon which the shares of common stock of
the Corporation are listed; provided, however, if the Plan and the options
granted thereunder and the issuance of shares upon exercise of options is
registered under the Securities Act of 1933, as amended, Optionee (or his
Legal Representative) need not furnish the certification described in clause
(iii) of this sentence. Promptly after receipt of the foregoing, the
Corporation shall cause to be delivered to Optionee (or his Legal
Representative) stock certificates evidencing the number of shares as to which
the Option has then been exercised. Such certificates may contain such legend
reflecting any restrictions upon the transfer of the shares evidenced thereby
as in the opinion of counsel to the Corporation may be necessary to the
lawful and proper issuance of the certificate.
(b) Notwithstanding anything to the contrary herein contained, the
Corporation, in its discretion, may postpone the issuance and delivery of the
certificates for the shares issuable upon any exercise of the Option until
the completion of any stock exchange listing, or registration or other
qualification thereof under any state or federal law, rule or regulation
which the Corporation may deem necessary or appropriate; and may require the
person exercising an Option to make such representations and furnish such
information as it may deem appropriate in connection with the issuance of the
shares in compliance with applicable law or sound corporate practice. A
registration statement registering the shares issuable upon exercise of
Options under the Securities Act of 1933 may be in effect from time to time,
but the Corporation shall have no obligation to file or keep effective any
such registration statement.
9. Neither Optionee nor his Legal Representative shall have any of the
rights of a shareholder of the Corporation with respect to the shares of common
stock issuable upon the exercise of the Option, except to the extent that one or
more certificates for such shares shall have been issued upon the due
exercise of the Option.
10. The Option shall not be assigned, pledged or hypothecated in any way,
shall not be subject to execution, and is not transferable by Optionee
otherwise than by will or the laws of descent and distribution. Any attempt at
assignment, transfer, pledge, hypothecation or other disposition of the
Option contrary to the provisions hereof, and the levy of any attachment or
similar proceeding upon the Option, shall by null and void.
11. If any change is made in the shares subject to the Option by reason of
a stock dividend, stock split, recapitalization, merger, consolidation, sale
or exchange of assets or other change in the shares of common stock of the
Corporation at the time outstanding, the Board of Directors of the
Corporation may take such action as it determines to be appropriate to adjust
the kind and number of shares and price per share or both of the shares
of common stock subject to this Option if and to the extent determined to
be appropriate by the Board of Directors, whose determination shall be
conclusive.
12. Except in connection with any event described in Paragraph 10b as to
which the Board of Directors has determined to make an appropriate adjustment
as provided in paragraph 10, upon the complete liquidation of the Corporation,
the Option shall be deemed cancelled to the extent not exercised. In the event
of the complete liquidation of any Employer Corporation (Other than the
Corporation) employing Optionee, or in the event such Corporation ceases to
be an Employer Corporation, the Option shall be deemed cancelled to the
extent not exercised unless Optionee shall become employed by another
Employer Corporation (including the Corporation) concurrently with such event.
13. The Option granted hereby shall not impose any obligation on any
Employer Corporation to continue the employment of Optionee.
14. The Corporation may require a payment by Optionee to cover applicable
withholding for income and employment taxes in the event of the exercise of an
Option.
15. This Agreement is made under the provisions of the Corporation's
Incentive Stock Option Plan and all of the provisions of the Plan are also
provisions of this agreement. If there is a difference between the provisions of
this Agreement and the provisions of the Plan, the provisions of the Plan
shall govern.
16. The Plan may be terminated or amended at any time by the Board of
Directors, except that, without stockholder approval, the Plan may not be
amended to increase the number of shares subject to the Plan, change the class
of persons eligible to receive options or materially increase the benefits
of participants.
17. The place of administration of the Plan shall be in the State of New
York, and the validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined in accordance with the laws of the State of New
York and the General Corporation Law of Delaware.
18. The pronouns used herein and the words Optionee and Legal
Representative and the pronouns therefor, shall be construed as masculine,
feminine or neuter, and in the singular or plural, as the sense requires.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above set forth.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew Harriton
-----------------------------
Matthew Harriton, CEO
By: /s/ Andrew Frabrikant
-----------------------------
Andrew Frabrikant, Optionee
EMBRYO DEVELOPMENT CORPORATION
STOCK OPTION AGREEMENT
AGREEMENT, made as of the 17th day of June 1998, by and between
Embryo Development Corporation (herein after called the "Corporation"), a
corporation organized and existing under the laws of the State of Delaware,
with its principal place of business at 750 Lexington Avenue, New York,
New York, and Daniel Durchslag (hereinafter called "Optionee").
W I T N E S S E T H :
WHEREAS, the Corporation has adopted an Incentive Stock Option Plan
which provides for grants of options to purchase common stock of the
Corporation; and
WHEREAS, Optionee is presently a director or employed by the
Corporation or one of its subsidiaries; and
WHEREAS, the Corporation considers it desirable and in its best
interest that Optionee be given an option to purchase common stock of the
Corporation; and
WHEREAS, the Board of Directors of the Corporation adopted a plan on
March 31, 1995 by which the Optionee was granted an option described herein,
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. This Agreement recites all the terms and conditions of the option
granted to Optionee by the Corporation pursuant to the Corporation's
Incentive Stock Option Plan (the "Plan") adopted on March 31, 1995.
2. The total number of shares with respect to which options may be
granted under the Incentive Option Plan is 2,000,000. No option may be
granted under the Incentive Option Plan after March 15, 2005.
3. Pursuant to the terms and conditions of the Plan, the Corporation
grants to Optionee an option (the "Option") to purchase 250,000 shares (the
"Option Shares") of its common stock, par value $0.0001 per share, at a
price of $0.0938 per share in the manner and subject to the provisions
hereinafter provided.
4. Subject to earlier termination as hereafter provided, the Option
shall terminate in all respects at, and no exercise as to any shares covered
by the Option shall be honored after the close of business ten years after
its grant ("Expiration Date"). Furthermore, the Option of shareholders owning
10% or more of the Company's voting power, shall terminate in all respects
at, and no exercise as to any shares covered by the Option shall be honored
after the close of business five years after its grant.
5. The Option is exercisable during the lifetime of the Optionee only
by the Optionee, and, subject to the provisions of Paragraph 6 hereof, only
if (i) at the time of any and every exercise of the Option Optionee is an
employee or director of an Employer Corporation and (ii) Optionee shall have
been in the continuous employ of an Employer Corporation from the date of the
Agreement to the date of exercise. As used herein, "Employer Corporation"
shall mean any of the Corporation or a "Subsidiary Corporation", as that
term is defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor statutory provision.
6. (a) The aggregate fair market value (determined at the time the
options are granted) of common stock with respect to which incentive stock
options (within the meaning of Section 422 of the Code) are exercisable for
the first time by Optionee under the Plan or any other plan of Optionee's
Employer Corporation or its parent and subsidiary corporations ( as defined
in Section 424 of the Code), shall not exceed $ 100,000.00 (or such other
individual employee maximum as may be in effect from time to time under the
Code at the time the options are granted) in any calendar year.
(b) If Optionee disposes of common stock acquired upon the exercise
of Options by sale or exchange either (a) within two years after the date of
grant of the Options under which the common stock was acquired or (b) within
one year after the acquisition of such shares, Optionee shall notify the
Corporation of such disposition and of the amount realized upon such
disposition.
7. (a) If Optionee shall cease to be employed by an Employer
Corporation by reason of death or any other reason other than voluntarily
quitting, discharge for cause or permanent and total disability as defined in
Section 22(e)(3) of the Code ("Disability"), as determined by the
administrator of the Plan, the Optionee or his duly appointed guardian or
other legal representative ("Legal Representative"), as the case may be, may,
but only within the three months next succeeding such cessation of employ-
ment, exercise the Option to the extent that the Optionee would have been
entitled to do so on the date of such cessation of his employment. If
Optionee voluntarily quits or is discharged for cause, the Option shall
terminate on the date of cessation of employment. In no event shall the
Option be exercisable after the Expiration Date specified in Paragraph 3
hereof.
(b) If Optionee shall cease to be employed by an Employer
Corporation by reason of a Disability, the Option shall be exercisable by
Optionee or Optionee's Legal Representative, to the extent that Optionee
would have been entitled to do so on the date of such cessation of
employment, but only within one year following such cessation of employment
due to said Disability. In no event shall the Option be exercisable after
the Expiration Date specified in Paragraph 3 hereof.
8. (a) Any exercise of the Option shall be made by the delivery by
Optionee (or his Legal Representative) to the Corporation at its principal
office at 750 Lexington Avenue, New York, New York, or such other place as
the Corporation may designate, of (i) written notice of such exercise stating
the number of shares with respect to which the Option is being exercised,
(ii) payment of the purchase price for such number of shares by cash, shares
of Common Stock, or promissory notes secured by assets including the shares
to be received on the exercise of the options, and (iii) a written
certificate of Optionee (or his Legal Representative) in form and substance
reasonably acceptable to the Corporation, to the effect that he will not
dispose of such shares in violation of the Securities Act of 1933, as amended,
or the rules of the stock exchanged upon which the shares of common stock of
the Corporation are listed; provided, however, if the Plan and the options
granted thereunder and the issuance of shares upon exercise of options is
registered under the Securities Act of 1933, as amended, Optionee (or his
Legal Representative) need not furnish the certification described in clause
(iii) of this sentence. Promptly after receipt of the foregoing, the
Corporation shall cause to be delivered to Optionee (or his Legal
Representative) stock certificates evidencing the number of shares as to which
the Option has then been exercised. Such certificates may contain such legend
reflecting any restrictions upon the transfer of the shares evidenced thereby
as in the opinion of counsel to the Corporation may be necessary to the
lawful and proper issuance of the certificate.
(b) Notwithstanding anything to the contrary herein contained, the
Corporation, in its discretion, may postpone the issuance and delivery of the
certificates for the shares issuable upon any exercise of the Option until
the completion of any stock exchange listing, or registration or other
qualification thereof under any state or federal law, rule or regulation
which the Corporation may deem necessary or appropriate; and may require the
person exercising an Option to make such representations and furnish such
information as it may deem appropriate in connection with the issuance of the
shares in compliance with applicable law or sound corporate practice. A
registration statement registering the shares issuable upon exercise of
Options under the Securities Act of 1933 may be in effect from time to time,
but the Corporation shall have no obligation to file or keep effective any
such registration statement.
9. Neither Optionee nor his Legal Representative shall have any of the
rights of a shareholder of the Corporation with respect to the shares of common
stock issuable upon the exercise of the Option, except to the extent that one or
more certificates for such shares shall have been issued upon the due
exercise of the Option.
10. The Option shall not be assigned, pledged or hypothecated in any way,
shall not be subject to execution, and is not transferable by Optionee
otherwise than by will or the laws of descent and distribution. Any attempt at
assignment, transfer, pledge, hypothecation or other disposition of the
Option contrary to the provisions hereof, and the levy of any attachment or
similar proceeding upon the Option, shall by null and void.
11. If any change is made in the shares subject to the Option by reason of
a stock dividend, stock split, recapitalization, merger, consolidation, sale
or exchange of assets or other change in the shares of common stock of the
Corporation at the time outstanding, the Board of Directors of the
Corporation may take such action as it determines to be appropriate to adjust
the kind and number of shares and price per share or both of the shares
of common stock subject to this Option if and to the extent determined to
be appropriate by the Board of Directors, whose determination shall be
conclusive.
12. Except in connection with any event described in Paragraph 10b as to
which the Board of Directors has determined to make an appropriate adjustment
as provided in paragraph 10, upon the complete liquidation of the Corporation,
the Option shall be deemed cancelled to the extent not exercised. In the event
of the complete liquidation of any Employer Corporation (Other than the
Corporation) employing Optionee, or in the event such Corporation ceases to
be an Employer Corporation, the Option shall be deemed cancelled to the
extent not exercised unless Optionee shall become employed by another
Employer Corporation (including the Corporation) concurrently with such event.
13. The Option granted hereby shall not impose any obligation on any
Employer Corporation to continue the employment of Optionee.
14. The Corporation may require a payment by Optionee to cover applicable
withholding for income and employment taxes in the event of the exercise of an
Option.
15. This Agreement is made under the provisions of the Corporation's
Incentive Stock Option Plan and all of the provisions of the Plan are also
provisions of this agreement. If there is a difference between the provisions of
this Agreement and the provisions of the Plan, the provisions of the Plan
shall govern.
16. The Plan may be terminated or amended at any time by the Board of
Directors, except that, without stockholder approval, the Plan may not be
amended to increase the number of shares subject to the Plan, change the class
of persons eligible to receive options or materially increase the benefits
of participants.
17. The place of administration of the Plan shall be in the State of New
York, and the validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined in accordance with the laws of the State of New
York and the General Corporation Law of Delaware.
18. The pronouns used herein and the words Optionee and Legal
Representative and the pronouns therefor, shall be construed as masculine,
feminine or neuter, and in the singular or plural, as the sense requires.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above set forth.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew Harriton
-----------------------------
Matthew Harriton, CEO
By: /s/ Daniel Durchslag
-----------------------------
Daniel Durchslag, Optionee
EMBRYO DEVELOPMENT CORPORATION
STOCK OPTION AGREEMENT
AGREEMENT, made as of the 17th day of June 1998, by and between
Embryo Development Corporation (herein after called the "Corporation"), a
corporation organized and existing under the laws of the State of Delaware,
with its principal place of business at 750 Lexington Avenue, New York,
New York, and Matthew Harriton (hereinafter called "Optionee").
W I T N E S S E T H :
WHEREAS, the Corporation has adopted an Incentive Stock Option Plan
which provides for grants of options to purchase common stock of the
Corporation; and
WHEREAS, Optionee is presently a director or employed by the
Corporation or one of its subsidiaries; and
WHEREAS, the Corporation considers it desirable and in its best
interest that Optionee be given an option to purchase common stock of the
Corporation; and
WHEREAS, the Board of Directors of the Corporation adopted a plan on
March 31, 1995 by which the Optionee was granted an option described herein,
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. This Agreement recites all the terms and conditions of the option
granted to Optionee by the Corporation pursuant to the Corporation's
Incentive Stock Option Plan (the "Plan") adopted on March 31, 1995.
2. The total number of shares with respect to which options may be
granted under the Incentive Option Plan is 2,000,000. No option may be
granted under the Incentive Option Plan after March 15, 2005.
3. Pursuant to the terms and conditions of the Plan, the Corporation
grants to Optionee an option (the "Option") to purchase 750,000 shares (the
"Option Shares") of its common stock, par value $0.0001 per share, at a
price of $0.0938 per share in the manner and subject to the provisions
hereinafter provided.
4. Subject to earlier termination as hereafter provided, the Option
shall terminate in all respects at, and no exercise as to any shares covered
by the Option shall be honored after the close of business ten years after
its grant ("Expiration Date"). Furthermore, the Option of shareholders owning
10% or more of the Company's voting power, shall terminate in all respects
at, and no exercise as to any shares covered by the Option shall be honored
after the close of business five years after its grant.
5. The Option is exercisable during the lifetime of the Optionee only
by the Optionee, and, subject to the provisions of Paragraph 6 hereof, only
if (i) at the time of any and every exercise of the Option Optionee is an
employee or director of an Employer Corporation and (ii) Optionee shall have
been in the continuous employ of an Employer Corporation from the date of the
Agreement to the date of exercise. As used herein, "Employer Corporation"
shall mean any of the Corporation or a "Subsidiary Corporation", as that
term is defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor statutory provision.
6. (a) The aggregate fair market value (determined at the time the
options are granted) of common stock with respect to which incentive stock
options (within the meaning of Section 422 of the Code) are exercisable for
the first time by Optionee under the Plan or any other plan of Optionee's
Employer Corporation or its parent and subsidiary corporations ( as defined
in Section 424 of the Code), shall not exceed $ 100,000.00 (or such other
individual employee maximum as may be in effect from time to time under the
Code at the time the options are granted) in any calendar year.
(b) If Optionee disposes of common stock acquired upon the exercise
of Options by sale or exchange either (a) within two years after the date of
grant of the Options under which the common stock was acquired or (b) within
one year after the acquisition of such shares, Optionee shall notify the
Corporation of such disposition and of the amount realized upon such
disposition.
7. (a) If Optionee shall cease to be employed by an Employer
Corporation by reason of death or any other reason other than voluntarily
quitting, discharge for cause or permanent and total disability as defined in
Section 22(e)(3) of the Code ("Disability"), as determined by the
administrator of the Plan, the Optionee or his duly appointed guardian or
other legal representative ("Legal Representative"), as the case may be, may,
but only within the three months next succeeding such cessation of employ-
ment, exercise the Option to the extent that the Optionee would have been
entitled to do so on the date of such cessation of his employment. If
Optionee voluntarily quits or is discharged for cause, the Option shall
terminate on the date of cessation of employment. In no event shall the
Option be exercisable after the Expiration Date specified in Paragraph 3
hereof.
(b) If Optionee shall cease to be employed by an Employer
Corporation by reason of a Disability, the Option shall be exercisable by
Optionee or Optionee's Legal Representative, to the extent that Optionee
would have been entitled to do so on the date of such cessation of
employment, but only within one year following such cessation of employment
due to said Disability. In no event shall the Option be exercisable after
the Expiration Date specified in Paragraph 3 hereof.
8. (a) Any exercise of the Option shall be made by the delivery by
Optionee (or his Legal Representative) to the Corporation at its principal
office at 750 Lexington Avenue, New York, New York, or such other place as
the Corporation may designate, of (i) written notice of such exercise stating
the number of shares with respect to which the Option is being exercised,
(ii) payment of the purchase price for such number of shares by cash, shares
of Common Stock, or promissory notes secured by assets including the shares
to be received on the exercise of the options, and (iii) a written
certificate of Optionee (or his Legal Representative) in form and substance
reasonably acceptable to the Corporation, to the effect that he will not
dispose of such shares in violation of the Securities Act of 1933, as amended,
or the rules of the stock exchanged upon which the shares of common stock of
the Corporation are listed; provided, however, if the Plan and the options
granted thereunder and the issuance of shares upon exercise of options is
registered under the Securities Act of 1933, as amended, Optionee (or his
Legal Representative) need not furnish the certification described in clause
(iii) of this sentence. Promptly after receipt of the foregoing, the
Corporation shall cause to be delivered to Optionee (or his Legal
Representative) stock certificates evidencing the number of shares as to which
the Option has then been exercised. Such certificates may contain such legend
reflecting any restrictions upon the transfer of the shares evidenced thereby
as in the opinion of counsel to the Corporation may be necessary to the
lawful and proper issuance of the certificate.
(b) Notwithstanding anything to the contrary herein contained, the
Corporation, in its discretion, may postpone the issuance and delivery of the
certificates for the shares issuable upon any exercise of the Option until
the completion of any stock exchange listing, or registration or other
qualification thereof under any state or federal law, rule or regulation
which the Corporation may deem necessary or appropriate; and may require the
person exercising an Option to make such representations and furnish such
information as it may deem appropriate in connection with the issuance of the
shares in compliance with applicable law or sound corporate practice. A
registration statement registering the shares issuable upon exercise of
Options under the Securities Act of 1933 may be in effect from time to time,
but the Corporation shall have no obligation to file or keep effective any
such registration statement.
9. Neither Optionee nor his Legal Representative shall have any of the
rights of a shareholder of the Corporation with respect to the shares of common
stock issuable upon the exercise of the Option, except to the extent that one or
more certificates for such shares shall have been issued upon the due
exercise of the Option.
10. The Option shall not be assigned, pledged or hypothecated in any way,
shall not be subject to execution, and is not transferable by Optionee
otherwise than by will or the laws of descent and distribution. Any attempt at
assignment, transfer, pledge, hypothecation or other disposition of the
Option contrary to the provisions hereof, and the levy of any attachment or
similar proceeding upon the Option, shall by null and void.
11. If any change is made in the shares subject to the Option by reason of
a stock dividend, stock split, recapitalization, merger, consolidation, sale
or exchange of assets or other change in the shares of common stock of the
Corporation at the time outstanding, the Board of Directors of the
Corporation may take such action as it determines to be appropriate to adjust
the kind and number of shares and price per share or both of the shares
of common stock subject to this Option if and to the extent determined to
be appropriate by the Board of Directors, whose determination shall be
conclusive.
12. Except in connection with any event described in Paragraph 10b as to
which the Board of Directors has determined to make an appropriate adjustment
as provided in paragraph 10, upon the complete liquidation of the Corporation,
the Option shall be deemed cancelled to the extent not exercised. In the event
of the complete liquidation of any Employer Corporation (Other than the
Corporation) employing Optionee, or in the event such Corporation ceases to
be an Employer Corporation, the Option shall be deemed cancelled to the
extent not exercised unless Optionee shall become employed by another
Employer Corporation (including the Corporation) concurrently with such event.
13. The Option granted hereby shall not impose any obligation on any
Employer Corporation to continue the employment of Optionee.
14. The Corporation may require a payment by Optionee to cover applicable
withholding for income and employment taxes in the event of the exercise of an
Option.
15. This Agreement is made under the provisions of the Corporation's
Incentive Stock Option Plan and all of the provisions of the Plan are also
provisions of this agreement. If there is a difference between the provisions of
this Agreement and the provisions of the Plan, the provisions of the Plan
shall govern.
16. The Plan may be terminated or amended at any time by the Board of
Directors, except that, without stockholder approval, the Plan may not be
amended to increase the number of shares subject to the Plan, change the class
of persons eligible to receive options or materially increase the benefits
of participants.
17. The place of administration of the Plan shall be in the State of New
York, and the validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined in accordance with the laws of the State of New
York and the General Corporation Law of Delaware.
18. The pronouns used herein and the words Optionee and Legal
Representative and the pronouns therefor, shall be construed as masculine,
feminine or neuter, and in the singular or plural, as the sense requires.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above set forth.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Andrew Frabrikant
-----------------------------
Andrew Frabrikant, Director
By: /s/ Matthew Harriton
-----------------------------
Matthew Harriton, Optionee
EMBRYO DEVELOPMENT CORPORATION
STOCK OPTION AGREEMENT
AGREEMENT, made as of the 17th day of June 1998, by and between
Embryo Development Corporation (herein after called the "Corporation"), a
corporation organized and existing under the laws of the State of Delaware,
with its principal place of business at 750 Lexington Avenue, New York,
New York, and Karen Nazzareno (hereinafter called "Optionee").
W I T N E S S E T H :
WHEREAS, the Corporation has adopted an Incentive Stock Option Plan
which provides for grants of options to purchase common stock of the
Corporation; and
WHEREAS, Optionee is presently a director or employed by the
Corporation or one of its subsidiaries; and
WHEREAS, the Corporation considers it desirable and in its best
interest that Optionee be given an option to purchase common stock of the
Corporation; and
WHEREAS, the Board of Directors of the Corporation adopted a plan on
March 31, 1995 by which the Optionee was granted an option described herein,
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. This Agreement recites all the terms and conditions of the option
granted to Optionee by the Corporation pursuant to the Corporation's
Incentive Stock Option Plan (the "Plan") adopted on March 31, 1995.
2. The total number of shares with respect to which options may be
granted under the Incentive Option Plan is 2,000,000. No option may be
granted under the Incentive Option Plan after March 15, 2005.
3. Pursuant to the terms and conditions of the Plan, the Corporation
grants to Optionee an option (the "Option") to purchase 400,000 shares (the
"Option Shares") of its common stock, par value $0.0001 per share, at a
price of $0.0938 per share in the manner and subject to the provisions
hereinafter provided.
4. Subject to earlier termination as hereafter provided, the Option
shall terminate in all respects at, and no exercise as to any shares covered
by the Option shall be honored after the close of business ten years after
its grant ("Expiration Date"). Furthermore, the Option of shareholders owning
10% or more of the Company's voting power, shall terminate in all respects
at, and no exercise as to any shares covered by the Option shall be honored
after the close of business five years after its grant.
5. The Option is exercisable during the lifetime of the Optionee only
by the Optionee, and, subject to the provisions of Paragraph 6 hereof, only
if (i) at the time of any and every exercise of the Option Optionee is an
employee or director of an Employer Corporation and (ii) Optionee shall have
been in the continuous employ of an Employer Corporation from the date of the
Agreement to the date of exercise. As used herein, "Employer Corporation"
shall mean any of the Corporation or a "Subsidiary Corporation", as that
term is defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor statutory provision.
6. (a) The aggregate fair market value (determined at the time the
options are granted) of common stock with respect to which incentive stock
options (within the meaning of Section 422 of the Code) are exercisable for
the first time by Optionee under the Plan or any other plan of Optionee's
Employer Corporation or its parent and subsidiary corporations ( as defined
in Section 424 of the Code), shall not exceed $ 100,000.00 (or such other
individual employee maximum as may be in effect from time to time under the
Code at the time the options are granted) in any calendar year.
(b) If Optionee disposes of common stock acquired upon the exercise
of Options by sale or exchange either (a) within two years after the date of
grant of the Options under which the common stock was acquired or (b) within
one year after the acquisition of such shares, Optionee shall notify the
Corporation of such disposition and of the amount realized upon such
disposition.
7. (a) If Optionee shall cease to be employed by an Employer
Corporation by reason of death or any other reason other than voluntarily
quitting, discharge for cause or permanent and total disability as defined in
Section 22(e)(3) of the Code ("Disability"), as determined by the
administrator of the Plan, the Optionee or his duly appointed guardian or
other legal representative ("Legal Representative"), as the case may be, may,
but only within the three months next succeeding such cessation of employ-
ment, exercise the Option to the extent that the Optionee would have been
entitled to do so on the date of such cessation of his employment. If
Optionee voluntarily quits or is discharged for cause, the Option shall
terminate on the date of cessation of employment. In no event shall the
Option be exercisable after the Expiration Date specified in Paragraph 3
hereof.
(b) If Optionee shall cease to be employed by an Employer
Corporation by reason of a Disability, the Option shall be exercisable by
Optionee or Optionee's Legal Representative, to the extent that Optionee
would have been entitled to do so on the date of such cessation of
employment, but only within one year following such cessation of employment
due to said Disability. In no event shall the Option be exercisable after
the Expiration Date specified in Paragraph 3 hereof.
8. (a) Any exercise of the Option shall be made by the delivery by
Optionee (or his Legal Representative) to the Corporation at its principal
office at 750 Lexington Avenue, New York, New York, or such other place as
the Corporation may designate, of (i) written notice of such exercise stating
the number of shares with respect to which the Option is being exercised,
(ii) payment of the purchase price for such number of shares by cash, shares
of Common Stock, or promissory notes secured by assets including the shares
to be received on the exercise of the options, and (iii) a written
certificate of Optionee (or his Legal Representative) in form and substance
reasonably acceptable to the Corporation, to the effect that he will not
dispose of such shares in violation of the Securities Act of 1933, as amended,
or the rules of the stock exchanged upon which the shares of common stock of
the Corporation are listed; provided, however, if the Plan and the options
granted thereunder and the issuance of shares upon exercise of options is
registered under the Securities Act of 1933, as amended, Optionee (or his
Legal Representative) need not furnish the certification described in clause
(iii) of this sentence. Promptly after receipt of the foregoing, the
Corporation shall cause to be delivered to Optionee (or his Legal
Representative) stock certificates evidencing the number of shares as to which
the Option has then been exercised. Such certificates may contain such legend
reflecting any restrictions upon the transfer of the shares evidenced thereby
as in the opinion of counsel to the Corporation may be necessary to the
lawful and proper issuance of the certificate.
(b) Notwithstanding anything to the contrary herein contained, the
Corporation, in its discretion, may postpone the issuance and delivery of the
certificates for the shares issuable upon any exercise of the Option until
the completion of any stock exchange listing, or registration or other
qualification thereof under any state or federal law, rule or regulation
which the Corporation may deem necessary or appropriate; and may require the
person exercising an Option to make such representations and furnish such
information as it may deem appropriate in connection with the issuance of the
shares in compliance with applicable law or sound corporate practice. A
registration statement registering the shares issuable upon exercise of
Options under the Securities Act of 1933 may be in effect from time to time,
but the Corporation shall have no obligation to file or keep effective any
such registration statement.
9. Neither Optionee nor his Legal Representative shall have any of the
rights of a shareholder of the Corporation with respect to the shares of common
stock issuable upon the exercise of the Option, except to the extent that one or
more certificates for such shares shall have been issued upon the due
exercise of the Option.
10. The Option shall not be assigned, pledged or hypothecated in any way,
shall not be subject to execution, and is not transferable by Optionee
otherwise than by will or the laws of descent and distribution. Any attempt at
assignment, transfer, pledge, hypothecation or other disposition of the
Option contrary to the provisions hereof, and the levy of any attachment or
similar proceeding upon the Option, shall by null and void.
11. If any change is made in the shares subject to the Option by reason of
a stock dividend, stock split, recapitalization, merger, consolidation, sale
or exchange of assets or other change in the shares of common stock of the
Corporation at the time outstanding, the Board of Directors of the
Corporation may take such action as it determines to be appropriate to adjust
the kind and number of shares and price per share or both of the shares
of common stock subject to this Option if and to the extent determined to
be appropriate by the Board of Directors, whose determination shall be
conclusive.
12. Except in connection with any event described in Paragraph 10b as to
which the Board of Directors has determined to make an appropriate adjustment
as provided in paragraph 10, upon the complete liquidation of the Corporation,
the Option shall be deemed cancelled to the extent not exercised. In the event
of the complete liquidation of any Employer Corporation (Other than the
Corporation) employing Optionee, or in the event such Corporation ceases to
be an Employer Corporation, the Option shall be deemed cancelled to the
extent not exercised unless Optionee shall become employed by another
Employer Corporation (including the Corporation) concurrently with such event.
13. The Option granted hereby shall not impose any obligation on any
Employer Corporation to continue the employment of Optionee.
14. The Corporation may require a payment by Optionee to cover applicable
withholding for income and employment taxes in the event of the exercise of an
Option.
15. This Agreement is made under the provisions of the Corporation's
Incentive Stock Option Plan and all of the provisions of the Plan are also
provisions of this agreement. If there is a difference between the provisions of
this Agreement and the provisions of the Plan, the provisions of the Plan
shall govern.
16. The Plan may be terminated or amended at any time by the Board of
Directors, except that, without stockholder approval, the Plan may not be
amended to increase the number of shares subject to the Plan, change the class
of persons eligible to receive options or materially increase the benefits
of participants.
17. The place of administration of the Plan shall be in the State of New
York, and the validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined in accordance with the laws of the State of New
York and the General Corporation Law of Delaware.
18. The pronouns used herein and the words Optionee and Legal
Representative and the pronouns therefor, shall be construed as masculine,
feminine or neuter, and in the singular or plural, as the sense requires.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above set forth.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew Harriton
-----------------------------
Matthew Harriton, CEO
By: /s/ Karen Nazzareno
-----------------------------
Karen Nazzareno, Optionee
