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, 1999
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. 0-27028
EMBRYO DEVELOPMENT CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3832099
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(State of or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
565 Fifth Avenue
New York, New York 10017
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(Address of Principal (Zip Code)
Executive Officers)
Registrant's telephone number, including area code: (212) 808-0607
Securities registered pursuant to Section 12(b) of the Act: None.
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
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(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 10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $113,999.
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 23, 1999, was approximately $318,437.
Number of shares outstanding of the issuers common stock, as of July 23,
1999, was 6,995,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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PART I
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Item 1. BUSINESS.
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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 a patent for a product which is being developed to be
sold in the medical field. The Company has not derived any significant
revenues since its inception.
The Company was 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 provided for the exclusive
license of seven medical devices and the sharing of royalties of
two (2) medical devices, all of which had been developed by Dr. Marks ("Marks
Medical Devices"). The Marks Medical Devices included a self-shielding
needle, adjustable blood pressure cuff, a multi-function fluid communication
control system and stereoscopic fluoroscopy apparatus. On August 21, 1998
the Company notified Dr. Marks that it was terminating the License agreements
with respect to six (6) of the devices as it could not make the minimum payments
required under the agreements; these devices included the adjustable blood
pressure cuff, a multi-function fluid communication control system and
stereoscopic fluoroscopy apparatus. The minimum payment obligations with
respect to the self-shielding needle were made in accordance with the terms
of the original agreement and that License Agreement was retained and later
amended as to the minimum payment obligations on January 22, 1999. See
"Certain Transactions".
The termination of 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.
In addition, Dr. Marks has given the Company a right of first refusal on
any devices he should develop in the future.
The Company markets five (5) other 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").
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Two (2) of the devices, the Hot-Sack IITM and Hot-Sack II+TM, are used in
connection with the warming of peritoneal dialysis solution. Four (4) of the
devices, Hot-Sack , Res-Q-Air , Therm-O-DrugTM and an electronic stethoscope,
are devices used for emergency rescue operations and by other emergency
medical technicians. Three of the devices (Hot-Sack , Res-Q-Air and Therm-O
- -DrugTM ) 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 and Hot-
Sack II+TM) are covered by the FDA's approval of Hot-Sack or would
independently qualify for 510(k) approval. The Company has received minimal
sales revenues from such product sales.
The Company also holds a 14.4% minority investment interest, which was
originally 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 DEVICE.
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The Company has a licensing agreement with Dr. Lloyd Marks which provides
for the exclusive license to commercially exploit a medical device that has
been developed by Dr. Marks. The device is the subject of an existing United
States patent.
The Licensing Agreement provides that the Company receive the exclusive
right to develop, commercialize and sell the medical device. In addition,
the Company has two (2) Royalty Sharing Agreements with Dr. Marks for
patented medical devices. To date, the Company has focused its resources on
the development of this device, the Self-Shielding Needle.
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.
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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. Subsequently,
the Company was notified by the FDA that its application was rejected due
primarily to deficiencies in clinical studies and bench test data. The
Company made design changes to the Self-Shielding Needle and performed a new
clinical study. A new 510(k) submission was completed on October 16, 1998. On
October 26, 1998, the Company was notified by the FDA that the device is
considered a class III and requires a premarket approval application (PMA).
The Company is currently evaluating whether to submit a PMA application or to
modify the device further and submit a new 510(k) application. Once this is
completed,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 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
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Emergency Medical Devices
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The Company owns three (3) medical devices, Hot-Sack , Therm-o-DrugTM and
an electronic stethoscope, and is the exclusive licensee of one (1) medical
device, Res-Q-AirTM, 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 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.
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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 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 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 's sold. This device has received United
States Patent No. 5,148,801. The Res-Q-Air 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 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.
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
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The Company owns two (2) devices that are used in the warming of peritoneal
dialysis solution.
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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 approximately body temperature 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 and may be marketed based upon the FDA
approval of The Hot-Sack 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 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
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The major focus of HDS, in which the Company has a 14.4% minority
investment 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 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.
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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 its own internal sales force.
Sales and Marketing
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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 a
dvertising 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.
Management will determine the appropriate marketing strategy for the
products which are currently in the development stage as these products come to
market.
Manufacturing
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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.
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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
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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
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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
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.
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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. Subsequently, the Company was
notified by the FDA that its application was rejected due primarily to
deficiencies in clinical studies and bench test data. The Company made design
changes to the Self-Shielding Needle and performed a new clinical study. A new
510(k) submission was completed on October 16, 1998. On October 26, 1998,
the Company was notified by the FDA that the device is considered a class III
and requires a premarket approval application (PMA). The Company is
currently evaluating whether to submit a PMA application or to modify the
device further and submit a new 510(k) application. To date, the Company, has
not received the approval of the FDA to market the Marks Medical Device.
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.
Health Care Industry
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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.
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Patents, Proprietary Rights and Trademarks
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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 the Marks Medical Device, the Self
- -Shielding Needle, which has been issued a United States patent. The Company
also owns the patent for the Hot Sack and the exclusive license to the Res-Q-
Air, which has been issued a United States patent. There can be no assurance
that future 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
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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 Company currently has
product liability coverage of $1,000,000 and a $10,000,000 umbrella policy.
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Employees
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As of July 31, 1999, 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.
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The Company's corporate headquarters are in New York City. The Company's
lease initially 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 was $3,600. The total lease
payments of $50,400 were being held in escrow by the landlords attorney. The
Company had sublet a portion of this space to an unrelated third party for
$1,700 per month on a month to month basis through February 1999. On March
1, 1999, the Company vacated these premises. On February 10, 1999, the
Company entered into a sixteen (16) month lease commencing March 1, 1999, for
office space which was personally guaranteed by an officer of the Company. 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 increases to $119,000 per annum over the term of
the lease. The entire facility was subleased to HDS for the full rental
amount through April 30, 1999. On May 1, 1999, the amount of the sublease to
HDS was reduced to approximately 82% pro-rata share as the Company began to
utilize a portion of the premises.
Item 3. LEGAL PROCEEDINGS.
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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
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the offering and covered certain short positions it created through such
manipulation by purchasing 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 damages. The
Company intends to vigorously defend this action.
In November 1998, it was announced that Michael Lulkin, a director and
Chairman of the Board of Directors of the Company at the time of the Company's
initial public offering, had plead guilty to, among other things, conspiracy to
commit securities fraud. The charges to which Mr. Lulkin plead were premised on
allegations that Mr. Lulkin, Sterling Foster, and others had entered into an
undisclosed agreement pursuant to which, upon conclusion of the Company's
initial public offering, they would (a) cause Sterling Foster to release Mr.
Lulkin and others who owned Embryo stock prior to the offering from certain
"lock up" agreements restricting them from selling such stock; and (b) cause
Mr. Lulkin and such other persons to sell their Embryo stock to Sterling Foster
at prearranged prices to enable Sterling Foster to use such stock to cover
certain short positions it had created.
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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matters were submitted to the Company's shareholders for vote during the
last quarter of its fiscal year.
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PART II
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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 was regularly quoted and
traded on the NASDAQ system through October 1998.
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
submitted an application for continued listing. The Company was advised in
July, 1998 that the NASD had denied the Company's submission for continued
listing. The Company filed an appeal to that decision. A hearing on continued
listing was held on September 17, 1998 whereby the appeal was denied.
Effective October 21, 1998, the Company's common stock is now listed on the
OTC-Bulletin Board.
The following table indicates the high and low bid prices for the Company's
Common Stock for the period up to June 30, 1999 based upon information supplied
by the NASDAQ and OTC-Bulletin Board 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
---- ---
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
Third Quarter 1/8 1/16
Fourth Quarter 1/5 1/32
1999 Calendar Year
------------------
First Quarter 1/16 .02
Second Quarter .08 .03
14
<PAGE>
On July 23, 1999, the closing price of the Common Stock as reported on the
OTC-Bullletin Board was $.0625. On July 23, 1999, there were 678 holders of
record of common stock.
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 $331,115 at April 30, 1999.
Approximately $361,000 of current assets represents cash on hand. 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, 1999
reflects cash used in operating activities of approximately $764,000. This use
of cash is primarily attributable to general and administrative expenses,
product development and advertising and marketing expenses. Net cash provided
by investing activities approximated $990,000 representing the sale of
general investments and the sale of a portion of the Company's investment in HDS
which was used to fund current operations. In addition, the cash and cash
equivalents balance increased in the year ended April 30, 1999 by $226,000,
which will be utilized for future operations.
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. Between November 20, 1998 and January 31, 1999, the Company sold an
aggregate of 710,000 of its 1,272,500 common shares of its investment in HDS for
an aggregate of $710,000. The Company's management believes that the
Company's cash on hand and the possible repayment of a portion of its
revolving line of credit from HDS will be sufficient to fund the Company's
operations for the next twelve (12) months with a further reduction in
general and administrative expenses. Management believes that the outstanding
amount due from HDS of approximately $747,000 will be at least partially
repaid during the next (12) months although it has been classified as a
long-term asset based on the current financial condition of HDS and the
two-year extension on the credit line to January, 2001 which was agreed upon in
February, 1999. In addition, the Company's management has set up a reserve of
approximately $373,000 or approximately 50% of the outstanding balance at April
30, 1999, based upon anticipated probable collectibility. In the event that no
repayment can be made in the next (12) months, the Company will seek
alternative methods of raising additional capital.
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
submitted an application for continued listing. The Company was advised in
July, 1998 that the NASD had denied the Company's submission for continued
listing. The Company filed an appeal to that decision. A hearing on continued
listing was held on September 17, 1998 whereby the appeal was denied.
Effective October 21, 1998, the Company's common stock is now listed on the
OTC-Bulletin Board.
16
<PAGE>
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 year
ended April 30, 1998. In August 1998, the Company notified Dr. Marks that it was
terminating these six (6) license agreements due to financial constraints.
On January 22, 1999, the Company amended the Licensing Agreement dated
March 31, 1995 pertaining to the seventh device, for the manufacture and
marketing of the self-shielding needle. The amendment eliminates the "Minimum
Payment Obligation" as defined in the original agreement. The last such payment
which was due on September 30, 1998 in the amount of $50,000 was paid on
January 26, 1999 upon execution of the amendment.
In consideration for eliminating all future and any prior minimum payment
obligations on this invention and any other products or inventions currently or
previously licensed by the Company from the licensor, the Company agreed to (a)
increase the royalty on future sales from8% to 10%; and (b) pay the licensor a
"cap" on minimum royalty payments of $450,000. Such payments shall be
payable at the rate of $2,500 per month plus 10% of the proceeds received by
the Company from any capital raised which exceeds $600,000, and 10% of annual
pre-tax income until the aggregate "cap" payment is made. The aggregate royalty
of $450,000 has been charged to operations in the year ended April 30, 1999.
In addition, if the Licensor terminates the agreement for any reason, the
maximum royalty shall be reduced by $125,000 and all information with respect to
the invention (the "Know-How") shall be returned to the licensor free and clear
of any liens. If the Company terminates the agreement, the licensor may acquire
the Know-How for a reduction in the remaining balance due equal to the lesser
amount of $125,000 or the remaining balance due. If the Company does not
obtain the necessary government approval to market the self-sheilding needle
within (2) two years, the agreement shall terminate unless the Company pays the
licensor an additional $250,000, which will extend the regulatory approval
requirement by (2) two additional years.
The Company has not derived significant revenues since its inception in
March 1995. Thetotal revenue earned from inception through April 30, 1999 is
$1,349,753. This is a result of the sale of the C.F. Medical Devices of
17
<PAGE>
approximately $615,000 and HDS sales of hydrogel and apnea monitor products of
approximately $735,000 which are included in the statement of operations
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 $8,473,245 as of
April 30, 1999. 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 Self-Shielding
Needle upon approval by the FDA. On May 26, 1998 the Company completed its
510(k) 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. Subsequently, the Company was notified by the FDA that its
application was rejected due primarily to deficiencies in clinical studies
and bench test data. The Company made design changes to the Safety Needle and
performed a new clinical study. A new 510(k) submission was completed on
October 16, 1998. On October 26, 1998, the Company was notified by the FDA
that the device is considered a class III and requires a premarket approval
application (PMA). The Company is currently evaluating whether to submit a
PMA application or to modify the device further and submit a new 510(k)
application. Once this is completed, 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.
The Company's management believes that the Company's cash on hand and the
possible repayment of a portion of its revolving line of credit from HDS will be
sufficient to fund the Company's operations for the next twelve (12) months with
a further reduction in general and administrative expenses. Management
believes that the outstanding amount due from HDS of approximately $747,000
will be at least partially repaid during the next (12) months although it
has been classified as a long-term asset based on the current financial
condition of HDS and the two-year extension on the credit line to January, 2001
which was agreed upon in February, 1999. In addition, the Company's
management has set up a reserve of approximately $373,000 or approximately 50% \
18
<PAGE>
of the outstanding balance at April 30, 1999, based upon anticipated probable
collectibility. 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 further cost reduction program. In addition to payroll reductions, the
termination of two consulting contracts, the reduction of rental expense, and
the reduction of expenses related to the development of the needle which
accounted for more than approximately $250,000 savings in annual expenses, the
Company continues to reduce expenses through cash royalty reductions achieved
with the amended license agreement, insurance reductions, and reduced
professional fees .
The Company also has retained a 14.4% investment, after the sale of 710,000
shares of stock, in its nonconsolidated affiliate HDS, which is accounted for
under the cost method commencing January 31, 1999. The manufacturing facility
of HDS became fully operational in late 1997. The Company anticipates that the
future operations of HDS could allow HDS to repay its obligations to the
Company in the future.
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.
Year 2000
- ----------
General Description of the Year 2000 Problem. The year 2000 problem
concerns the inability of certain computer systems to appropriately recognize
the year 2000 when the last two digits of the year are entered in the date
field. Our date critical functions related to the Year 2000 and beyond, may
be adversely affected unless these computer systems are or become Year 2000
compliant.
Our State of Readiness. We are a development stage company and do not use
major computer systems in our business. Our computer needs are satisfied
through personal computers, all of which are Year 2000 compliant and purchased
software, all of which is Year 2000 compliant.
19
<PAGE>
Effect of Third Party Readiness. Our Year 2000 compliance is partially
dependent upon key third parties also being Year 2000 compliant on a timely
basis. We could be adversely affected by the Year 2000 problem if computer
systems of third parties such as banks, suppliers and others with whom we do
business fail to address the Year 2000 problem successfully. For example,
we may be adversely affected by the disruption or inaccuracy of data provided to
us bynon-Year 2000 compliant third parties, and the failure of our service
providers to become Year 2000 compliant.
Our management believes that the purchasing patterns of customers and
prospective customers might be affected by Year 2000 issues. Many companies may
need to modify or upgrade their information systems to address the Year 2000
problem. The effects of this issue and of the efforts by other companies to
address it are unclear. Many companies are expending significant resources
to correct their current software systems for Year 2000 compliance. These
expenditures might result in reduced funds available to purchase services and
products such as those that we offer.
Risks. We have no reason to believe that our exposure to the risks or lack
of supplier and customer Year 2000 readiness is any greater than the exposure to
such risks that affect our competitors generally. However, if a significant
number of our key vendors, customers and other business partners experience
business disruptions as a result of their lack of Year 2000 readiness,
their problems could have a material adverse effect on our financial position
and operations. In addition, if all Year 2000 issues within our business are
not properly identified there can be no assurance that the Year 2000 issue
will not have a material adverse effect on our results of operations or
financial position.
Our cost estimates and time frames will be influenced by our ability to
identify Year 2000 problems, the nature of programming required to fix any
problems, and the compliance success of third parties. For those reasons, no
assurance can be given at this point that our computer system will be Year
2000 compliant in a timely manner or that we will not incur significant
additional expenses pursuing Year 2000 compliance.
20
<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 addressed 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.
21
<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 35 President, Chief Executive Officer,
Chief Financial Officer and Director
Michael Lulkin 46 Chairman of the Board of Directors
and Secretary
Andrew Fabrikant 34 Director
Dr. Daniel Durchslag 54 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 14.4% minority
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(1). Since May 1995, Mr.
Lulkin has served as the general counsel for PDK Labs, Inc., a manufacturer
22
<PAGE>
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 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 from
February, 1998 until October 23, 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 ($0.0938) exercisable for a period of
[four (4)] years. The Directors receive no other compensation for serving on
the Board of Directors. The members of the Board of Directors intend to
meet at least quarterly during the Company's fiscal year, and at such other
times duly called.
(1) See "Legal Proceedings" for matters regarding Mr. Lulkin subsequent to
May 22, 1998.
23
<PAGE>
Item 10. EXECUTIVE COMPENSATION
-----------------------
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Long Term Compensation
_____________________________
Annual Compensation Awards Payouts
_________________________________ ______ _________________
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted All
Other Stock LTIP Other
Annual Awards Options/ Payouts Compensation
Name and Principal Position Year Salary($) Bonus($) Compensation($) ($) SARs(#) ($) ($)
- --------------------------- ---- --------- -------- --------------- ------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donn Gordon, CEO (2) 1999 0 0 0 --- 0 0 0
1998 0 0 0 --- 0 0 0
1997 $91,000 $13,650 $6,000(1) --- 100,000 0 0
Matthew L. Harriton, CEO 1999 $60,000 $6,000 0 --- 750,000 0 0
1998 $80,000 $9,000 0 --- 400,000 0 0
1997 $90,000 0 0 --- 100,000 0 0
____________________
</TABLE>
(1) Represents auto allowance in accordance with March 1995 employment agreement
(2) Employment of Donn M. Gordon was terminated on March 31, 1997.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
(a) (b) (c) (d) (e)
% of Total Options
Number of Securities Options/SARs Granted Exercise or
Underlying Option/ to Employees in Base Price Expiration
Name SARs Granted (#) Fiscal Year (# Share) Date
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Matthew Harriton 100,000 6% .0938 (1) 1/01/01
400,000 24% .0938 (2) 9/16/01
750,000 46% .0938 6/17/02
</TABLE>
(1) Options originally granted 1/1/97 at .65 were repriced June 1998 to
.0938 per share, the current market value.
(2) Options originally granted 9/16/97 at .59 were repriced June 1998
to .0938 per share, the current market value.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SARs EXERCISES IN
LAST FISCAL YEAR AND FY-END
OPTIONS/SAR VALUES
------------------
(a) (b) (c) (d) (e)
Number of Value of
Securities Underlying Unexercised
Unexercised Options/ In-the-Money
SARs at FY-End (#) Options/SARs at
Shares Acquired Value Exercisable/ FY-End Exercisable
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donn Gordon 0 $ -0- 200,000/-0- $-0-/$-0-
Matthew Harriton 1,250,000 $ 117,250(1) -0-0- -0-/-0-
</TABLE>
(1) See "Certain Transactions" regarding Mr. Harriton.
24
<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) was charged to
operations ratably over the remaining life of the consulting agreement.
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
25
<PAGE>
common stock at an exercise price equal to the market price on the date of
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 January 1999, the Company renewed this
employment agreement for an additional two years. The agreement provides for
annual compensation of $60,000 effective January 1, 1999. Mr. Harriton was
also granted rights to purchase 200,000 shares of HDS common stock from the
Company at a price of $1.00 per share for a period of two (2) years.
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
26
<PAGE>
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
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, 1999 options to purchase 1,650,000 shares of common stock, and
no SARs have been granted and exercised 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.
27
<PAGE>
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.
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.
28
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
------------------------------------
The following table sets forth certain information, as of July 20, 1999
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)(6) -- -- --
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 250,000 3.6 -- 1.9
9400 Brighton Way
Suite 402
Beverly Hills, CA 90210
Matthew L. Harriton 1,250,000 17.9 -- 9.6
565 Fifth Avenue
New York, NY 10017
Andrew Fabrikant(7) 250,000 3.6 -- 1.9
555 Fifth Avenue
New York, NY 10017
Karen Nazzareno(5) 450,000 6.4 -- 3.4
565 Fifth Avenue
New York, NY 10017
All directors
and officers 1,750,000 25.0 -- 13.5
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.
29
<PAGE>
M.D. Funding, Inc. is not affiliated with any of the officers or directors
of the Company.
(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) Resigned from Board of Directors on May 22, 1998.
(7) Resigned from Board of Directors on October 23, 1998.
30
<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.
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
31
<PAGE>
system and stereoscopic fluoroscopy apparatus and on August 21, 1998, the
Company notified Dr. Marks that it was terminating the License agreements
pertaining to these devices. The minimum payment obligations with respect to
the remaining device, the self-shielding needle, were made in accordance with
the terms of the original agreement.
On January 22, 1999, the Company amended the Licensing Agreement dated
March 31, 1995 pertaining to the seventh device, for the manufacture and
marketing of the self-shielding needle. The amendment eliminates the
"Minimum Payment Obligation" as defined in the original agreement. The
last such payment which was due on September 30, 1998 in the amount of
$50,000 was paid on January 26, 1999 upon execution of the amendment.
In consideration for eliminating all future and any prior minimum payment
obligations on this invention and any other products or inventions currently or
previously licensed by the Company from the licensor, the Company agreed to
(a) increase the royalty on future sales from 8% to 10%;and (b) pay the
licensor a "cap" on minimum royalty payments of $450,000. Such payments shall
be payable at the rate of $2,500 per month plus 10% of the proceeds received by
the Company from any capital raised which exceeds $600,000, and 10% of annual
pre-tax income until the aggregate "cap" payment is made. The aggregate
royalty of $450,000 has been charged to operations in the year ended April
30, 1999.
In addition, if the Licensor terminates the agreement for any reason, the
maximum royalty shall be reduced by $125,000 and all information with respect to
the invention (the "Know-How") shall be returned to the licensor free and
clear of any liens. If the Company terminates the agreement, the licensor
may acquire the Know-How for a reduction in the remaining balance due equal to
the lesser amount of $125,000 or the remaining balance due. If the Company does
not obtain the necessary government approval to market the self-sheilding needle
within (2) two years, the agreement shall terminate unless the Company pays the
licensor an additional $250,000, which will extend the regulatory approval
requirement by (2) two additional years.
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.
32
<PAGE>
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. The Company
vacated the premises on March 1, 1999.
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-Sack II+(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.
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.
33
<PAGE>
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. The credit line, which expired
on January 31, 1999, was extended to January 31, 2001, in February 1999 due to
the financial condition of HDS, with no further cash advances allowed.
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 ofmedical 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 33.3% 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 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.
Between November 20, 1998 and January 31, 1999, the Company sold an
aggregate of 710,000 shares of the common stock of HDS for $710,000 reducing its
investment to an aggregate of 562,500 shares or 14.4% common ownership of HDS.
As a result of this transaction, as of January 31, 1999, this investment is
no longer included as an equity investment in the financial statements of the
Company, but is reported at cost.
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 May, 1999, the minimum rental payment was reduced to $7,892 per month
due to a utilization of a portion of the premises by the Company.
34
<PAGE>
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.
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 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, 1999, the holders of the preferred stock
held 46.2% of the voting power.
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.
On February 10, 1999, the Company entered into a sixteen (16) month lease
commencing March 1, 1999, for office space which was personally guaranteed by an
officer of the Company.
35
<PAGE>
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."
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.
36
<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
Balance sheet as of April 30, 1999 F-2
Statements of operations for the years ended
April 30, 1999 and 1998 F-3
Statements of stockholders' equity for the years
ended April 30, 1999 and 1998 F-4 - F-6
Statements of cash flows for the years ended
April 30, 1999 and 1998 F-7 - F-8
Notes to financial statements F-9 - F-24
37
<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.
38
<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.
39
<PAGE>
10.21+ Asset Purchase Agreement by and between Hydrogel Design Systems,
Inc. and Alternative Design Systems R & D Group dated
February 6, 1997.
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.
40
<PAGE>
10.35^^ Stock Option Agreement between the Company and Dr. Daniel
Durchslag dated June 17, 1998.
10.36^^ Stock Option Agreement between the Company and Matthew Harriton
dated June 17, 1998.
10.37^^ Stock Option Agreement between the Company and Karen Nazzareno
dated June 17, 1998
10.38^^^ Amendment No. 1 to Licensing Agreement of Safety Needle by and
between Dr. Lloyd Marks and the Company dated January 22,
1999.
10.39 Employment Agreement by Matthew Harriton and the Company dated
January 1, 1999 (filed herewith).
10.40 Amendment #2 to Revolving Credit Agreement between Hydrogel Design
Systems, Inc. and the Company dated February 1, 1999 (filed
herewith).
16+++ Letter from Holtz Rubenstein & 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.
41
<PAGE>
^^ Incorporated by reference to the Company's Form 10KSB dated April 30,
1998.
^^^ Incorporated by reference to the Company's Form 8-K filed on February 12,
1999.
(B) Reports on Form 8-K.
On February 12, 1999, the Company filed a report on Form 8-K, reporting
under Item 2, disclosing the terms of the disposition of a portion of its
investment in HDS resulting in a change of reporting for the investment from the
equity method to the cost method. Proforma financial statements were reported
under Item 7giving effect to the reduced ownership and change in accounting
method. Also reported under Item 5, the Company disclosed that it had amended
a license agreement between the Company and Dr. Lloyd Marks regarding the
manufacture and marketing of the self-shielding needle.
42
<PAGE>
<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 9, 1999
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 9, 1999
Matthew L. Harriton Chief Financial Officer,
Principal Accounting Officer
and Director
/s/ Daniel Durchslag
- ---------------------
Daniel Durchslag Director August 9, 1999
43
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
---------------------------------
Independent auditors' report F-1
Balance sheet F-2
Statements of operations F-3
Statements of stockholders' equity F-4 -F-6
Satements of cash flows F-7 -F-8
Notes to financial statements F-9 - F-24
44
<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, 1999, and the related
statements of operations, stockholders' equity, and cash flows for each of the
two fiscal years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Embryo Development
Corporation [a development stage company] as of April 30, 1999, and the
results of its operations and its cash flows for each of the two fiscal
years 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, 1999 as shown in the cumulative columns on the statements
of operations and the statements of cash flows, nor on the statement of
stockholders' equity 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. The Company has utilized during the two years ended April
30, 1999 approximately $1,926,000 in cash for operations, primarily as
a result of net losses totaling approximately $4,943,000 for the two years
ended April 30, 1999 and has a cash balance of approximately $361,000 as of
April 30, 1999. 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 17, 1999
F-1
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
<TABLE>
BALANCE SHEET AS OF APRIL 30, 1999.
- ------------------------------------
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 360,516
Accounts Receivable 24,358
Inventories 32,655
Prepaid Expenses and Other Current Assets 25,619
------------
Total Current Assets 443,148
Property and Equipment - At Cost -
Net of Accumulated Depreciation of $21,989 17,559
Licensed Technology - At Cost -
Net of Accumulated Amortization of $399,524 340,476
Investment in Unconsolidated Investee - At Cost 40,841
Other Assets:
Due from Unconsolidated Investee - Net of Reserve of $373,342 373,342
Interest Receivable 13,437
Deposits 94,882
-------
Total Other Assets 481,661
-------
Total Assets $ 1,323,685
==============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 82,033
Royalty Payable 30,000
------
Total Current Liabilities 112,033
-------
Royalty Payable - Long-Term 411,500
-------
Commitments and Contingencies --
-------
Stockholders' Equity:
Preferred Stock, $.0001 Par Value; Authorized 15,000,000
Shares; 6,000,000 Issued and Outstanding,
Liquidation Preference $ 600,000 600
Common Stock, $.0001 Par Value, Authorized 30,000,000
Shares; 6,995,000 Issued and Outstanding 700
Additional Paid-in Capital 9,991,267
Unearned Compensation (517,500)
Deficit Accumulated During the Development Stage (8,473,245)
Notes Receivable (201,670)
-----------
Total Stockholders' Equity 800,152
-----------
Total Liabilities and Stockholders' Equity $ 1,323,685
===============
</TABLE>
See Notes to Financial Statements.
F-2
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,
1 9 9 9 1 9 9 8 1 9 9 9
------- --------- ------------
<S> <C> <C> <C>
Revenues $ 113,999 $ 800,494 $ 1,349,753
----------- ----------- ------------
Costs and Expenses:
Cost of Sales 103,802 750,734 1,184,425
General, Selling and Administrative 960,483 1,947,356 5,159,439
Royalties 500,841 82,752 583,593
Research and Development 145,904 199,251 1,063,599
Amortization 105,714 230,000 782,739
Loss on Write-off of Licensed Technology -- 486,785 486,785
Interest Income - Related Party (45,183) (11,022) (56,205)
Interest and Other [Income] Expense 22,764 57,758 438,370
Equity Loss of Operations of Unconsolidated
Investee 298,630 366,744 665,374
Adjustment for Collectibility of Amount Due
from Unconsolidated Investee 373,342 -- 373,342
Gain on Sale of Stock of Unconsolidated
Investee (653,510) -- (653,510)
---------- ---------- -----------
Total Costs and Expenses 1,812,787 4,110,358 10,027,951
---------- --------- ----------
Loss Before Minority Interest (1,698,788) (3,309,864) (8,678,198)
Minority Interest in Net Loss of Subsidiary -- 65,881 204,953
----------- ----------- -----------
Net Loss $ (1,698,788) $(3,243,983) $ (8,473,245)
=============== ============ =============
Basic Net Loss Per Share $ (.26) $ (.67) $ (1.74)
=============== =========== =============
Weighted Average Number of Shares of
Common Stock Outstanding 6,635,685 4,845,000 4,876,586
============= ============ ============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid-in
Shares Amount Shares Amount Capital
------ ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Stock for Cash at
Inception March 3, 1995:
Common 2,400,000 $ 240 -- $ -- $ 108,936
Preferred -- -- 6,000,000 600 10,224
Issuance of Stock for Licensed
Technology 325,000 33 -- -- 974,967
Issuance of Stock for Research
and Development 125,000 12 -- -- 374,988
Issuance of Stock in Connection
with Subscription Agreement 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 Offering 1,150,000 115 -- -- 4,337,093
Issuance of Stock in Connection
with Consulting Agreements 510,000 51 -- -- 2,039,949
Compensation Earned in
Connection with Consulting
Agreements -- -- -- -- --
Net Loss -- -- -- -- --
---------- ------- -------- -------- -----------
Balance - April 30, 1996 -
Forward 4,690,000 $ 469 6,000,000 $ 600 $ 8,386,139
</TABLE>
See Notes to Financial Statements.
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Unearned Development Notes Stockholders'
Compensation Stage Receivable Equity
----------- ------------ ---------- -------------
<S> <C> <C> <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 (2,040,000) -- -- --
Compensation Earned in
Connection with Consulting
Agreements 97,500 -- -- 97,500
Net Loss -- (1,139,761) -- (1,139,761)
----------- ------------- --------- ------------
Balance - April 30, 1996 -
Forward $(1,942,500) $(1,623,071) $ -- $4,821,637
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid-in
Shares Amount Shares Amount Capital
------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Balance - April 30, 1996 -
Forwarded 4,690,000 $ 469 6,000,000 $ 600 $ 8,386,139
Issuance of Stock for Services 5,000 1 -- -- 17,499
Issuance of Stock in Connection
with Investment in Subsidiary 150,000 15 -- -- 74,985
Compensation Earned in
Connection with Consulting
Agreements -- -- -- -- --
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
Compensation Earned in
Connection with Consulting
Agreements -- -- -- -- --
Issuance of Stock by Investee
in Connection with
Private Placement - April 1998 -- -- -- -- 1,330,326
Net Loss -- -- -- -- --
---------- -------- ---------- -------- -----------
Balance - April 30, 1998 -
Forward 4,845,000 $ 485 6,000,000 $ 600 $ 9,774,101
</TABLE>
See Notes to Financial Statements.
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
- -----------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Unearned Development Notes Stockholders'
Compensation Stage Receivable Equity
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
Balance - April 30, 1996 -
Forwarded $(1,942,500) $(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 -- -- 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 (1,447,500) (3,530,474) -- 3,466,886
Compensation Earned in
Connection with Consulting
Agreements 495,000 -- -- 495,000
Issuance of Stock by Investee
in Connection with
Private Placement - April 1998 -- -- -- 1,330,326
Net Loss -- (3,243,983) -- (3,243,983)
------------- ----------- --------- ------------
Balance - April 30, 1998 -
Forward $ (952,500)$ (6,774,457) $ -- $ 2,048,229
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
- -----------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid-in
Shares Amount Shares Amount Capital
------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance - April 30, 1998 -
Forwarded 4,845,000 $ 485 6,000,000 $ 600 $ 9,774,101
Exercise of Options July 1998
with Notes Receivable 2,150,000 215 -- -- 201,455
Compensation Earned in
Connection with Consulting
Agreements -- -- -- -- --
Amortization of Unearned
Compensation of Minority
Holders - Investee -- -- -- -- 3,437
Issuance of Stock by Investee
in Connection with Exercise
of Options - January 1999 -- -- -- -- 12,274
Net Loss -- -- -- -- --
---------- -------- --------- -------- ------------
Balance - April 30, 1999 6,995,000 $ 700 6,000,000 $ 600 $ 9,991,267
=========== ======= ========= ======== ==============
</TABLE>
See Notes to Financial Statements.
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
STATEMENT OF STOCKHOLDERS' EQUITY
- -----------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Unearned Development Notes Stockholders'
Compensation Stage Receivable Equity
------------ ------------- ---------- --------------
<S> <C> <C> <C> <C>
Balance - April 30, 1998 -
Forwarded $ (952,500) $ (6,774,457) $ -- $ 2,048,229
Exercise of Options July 1998
with Notes Receivable -- -- (201,670) --
Compensation Earned in
Connection with Consulting
Agreements 435,000 -- -- 435,000
Amortization of Unearned
Compensation of Minority
Holders - Investee -- -- -- 3,437
Issuance of Stock by Investee
in Connection with Exercise
of Options - January 1999 -- -- -- 12,274
Net Loss -- (1,698,788) -- (1,698,788)
------------ ------------ --------- ------------
Balance - April 30, 1999 $ (517,500) $ (8,473,245) $ (201,670) $ 800,152
============ ============== =========== ============
</TABLE>
See Notes to Financial Statements.
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,
1 9 9 9 1 9 9 8 1 9 9 9
------------ ------------ -------------
<S> <C> <C> <C>
Operating Activities:
Net Loss $(1,698,788) $(3,243,983) $(8,473,245)
------------ ------------ -------------
Adjustments to Reconcile Net Loss to Net
Cash [Used for] Operating Activities:
Depreciation and Amortization 113,529 326,048 1,438,740
Write-Off of Licensed Technology -- 486,785 486,785
Gain on Sale of Stock of Unconsolidated
Investee (653,510) -- (653,510)
Adjustment for Collectibility of Amount
Due from Unconsolidated Investee 373,342 -- 373,342
Minority Interest in Loss of Subsidiary -- (65,881) (204,953)
Equity Loss in Operations of Unconsolidated
Investee 298,630 366,744 665,374
Non-Cash Consideration - Other 435,000 528,733 1,578,733
Non-Cash Consideration - Research and
Development -- -- 440,000
Changes in Assets and Liabilities:
[Increase] Decrease:
Accounts Receivable 9,748 3,795 (104,055)
Interest Receivable (10,655) 43,445 14,745
Inventories 39,196 (95,386) (77,691)
Prepaid Expenses and Other Current Assets 169,501 (48,836) (36,119)
Other Assets (89,876) (82,321) (240,092)
Increase [Decrease]:
Accounts Payable and Accrued Expenses (191,500) 643,944 771,981
Royalty Payable 441,500 -- 441,500
Customer Deposits -- (25,000) --
------------ ------------- ------------
Total Adjustments 934,905 2,082,070 4,894,780
------------ ------------- ------------
Net Cash - Operating Activities - Forward (763,883) (1,161,913) (3,578,465)
------------ ------------- ------------
Investing Activities:
Proceeds from Sale of Stock of
Unconsolidated Investee 710,000 -- 710,000
Purchase of Short-Term Investments -- (288,000) (847,000)
Proceeds from Sale of Short-Term Investments 288,000 559,000 847,000
Purchase of Investments in Available-for-Sale
Securities -- -- (6,129,521)
Proceeds from Sale of Investments in Available-
for-Sale Securities -- 1,049,380 6,129,521
Net Cash Paid for Asset Acquisition -- -- (200,588)
Purchase of Licensed Technology -- -- (450,000)
Purchase of Property and Equipment (8,109) (861,435) (1,034,916)
Divestiture of Cash of Subsidiary -- (77,794) (77,794)
----------- ------------ -------------
Net Cash - Investing Activities - Forward $ 989,891 $ 381,151 $ (1,053,298)
</TABLE>
See Notes to Financial Statements.
F-7
<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,
1 9 9 9 1 9 9 8 1 9 9 9
-------- -------- -----------------
<S> <C> <C> <C>
Net Cash - Operating Activities -
Forwarded $ (763,883) $ (1,161,913) $ (3,578,465)
----------- ------------- --------------
Net Cash - Investing Activities -
Forwarded 989,891 381,151 (1,053,298)
------------ ------------- --------------
Financing Activities:
Proceeds from Issuance of Debt -- 350,000 650,000
Proceeds from Issuance of Stock -- -- 120,000
Proceeds from Issuance of Subsidiary Stock to
Minority Shareholder -- -- 150,000
Repayment of 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 4,992,279
------------- ------------- --------------
Net Increase [Decrease] in Cash and Cash
Equivalents 226,008 (145,691) 360,516
Cash and Cash Equivalents -
Beginning of Periods 134,508 280,199 --
------------- ------------- --------------
Cash and Cash Equivalents -
End of Periods $ 360,516 $ 134,508 $ 360,516
============= ============= ==============
</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 a consolidated subsidiary of the Company until
January 21, 1998. On that date, the Company's ownership of HDS dropped to
45.6%, and the investment was accounted for under the equity method. In
January 1999, the Company's share of HDS dropped to 14.4% and is being presented
on the cost basis from then onward. HDS is engaged in the manufacture,
marketing, selling and distribution of hydrogel, an aqueous polymer-based
radiation ionized medical/consumer product.
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 anddistribution of hydrogel and after-market apnea monitoring
components. HDS has devoted substantialefforts 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 $8,473,000 and utilized cash of approximately $764,000 for
operating activities for the year ended April 30, 1999. 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 undergoing final design changes for a 510(K)
resubmission to the FDA.
Management believes that the Company's cash balance totaling approximately
$361,000 and the possible repayment of a portion of its revolving line of
credit from HDS will be sufficient to fund the Company's operations for the
next twelve (12) months with a further reduction in operating expenses.
Management believes the outstanding amount due from HDS of approximately
$747,000 will be at least partially repaid during the next (12) months
although it has been classified as a long-term asset based on the current
financial condition of HDS and the two year extension to January 2001. 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.
F-9
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------
[1] Organization and Nature of Operations [Continued]
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 was
accounted for using the equity method of accounting from January 21, 1998
through January 31, 1999 and accounted for using the cost method subsequent
to January 31, 1999.
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, 1999 and 1998 and the
cumulative period from inception [March 3, 1995] through April 30, 1999
amounted to $7,814, $94,632 and $114,371, respectively.
Inventories - Inventories, consisting principally of finished goods, are stated
at the lower of cost [first-in, first-out method] or market.
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 andcash 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, 1999, the Company had
approximately $260,000 with a financial institution 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.
F-10
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- ----------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
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 considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. At
April 30, 1999, the Company had no cash equivalents.
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 $2,000, $4,000, and $78,000 for the years
ended April 30, 1999 and 1998, and the cumulative period from inception
[March 3, 1995] through April 30, 1999, respectively.
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,
1999, 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 years ended April 30, 1999 and 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
duringthe 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.
F-11
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- ----------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Earnings Per Share [Continued] - 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. Options and warrants disclosed in
Note 13 may dilute earnings per share in the future.
Stock Options and Similar Equity Instruments - On May 1, 1997, 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 and directors, 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 and 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.
[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
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. In February and April 1998, the Private Placement
was fully subscribed, and the Company's ownership decreased to approximately
33.3% 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 were not included on a consolidated basis in the
financial statements of the Company subsequent to January 21, 1998.
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.
F-12
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- ----------------------------------------
[3] Investment in HDS [Continued]
Between November 20, 1998 and January 31, 1999, the Company sold an aggregate of
710,000 shares of the common stock of HDS for $710,000. The Company previously
held a total investment of 1,272,500 shares of HDS which represented 33.3%
common ownership. As a result of this transaction, the Company held 562,500
shares or 14.4% common ownership of HDS. On January 31, 1999, as a result of
this transaction, the ownership decreased below 20% and the Company changed the
accounting for this investment from the equity method to the cost method.
Summarized financial information for HDS, which prior to January 21, 1998 was
consolidated, commencing January 21, 1998 through January 31, 1999 was
accounted for using the equity method, and subsequent to January 31, 1999 is
being accounted for on the cost method is as follows:
April 30,
1 9 9 9 1 9 9 8
-------- ---------
Balance Sheet:
Current Assets $ 204,000 $ 887,000
Property, Plant and Equipment - Net 1,575,000 1,771,000
Purchased Technology 655,000 769,000
Other Assets 20,000 68,000
------------- ------------
Total Assets $ 2,454,000 $ 3,495,000
============= ============
Current Liabilities $ 870,000 $ 743,000
Long-Term Notes Payable 1,697,000 1,611,000
Shareholders' quity (113,000) 1,141,000
Total Liabilities and Stockholders'
Equity $ 2,454,000 $ 3,495,000
============= ============
Statement of Operations:
Revenues $ 528,000 $ 755,000
============= ============
Cost of Sales $ 790,000 $ 786,156
============= ============
Net Loss $ (1,311,000)$ (1,580,000)
============= =============
Approximately $134,000 of the revenue and $879,000 of the loss relate to the
period January 21, 1998 through April 30, 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, 1999, borrowings under the revolver approximated
$747,000 including accrued interest.
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 May 1999, these payments were reduced to $7,892 per month due
to utilization of a portion of the premises by the Company.
F-13
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- -----------------------------------------
[3] Investment in HDS [Continued]
In August 1997, HDS entered into a one-year management agreement with the
Company subject to automatic renewal each year. The management agreement
provided 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 $25,000, $18,750 and $43,750 for the years ended April 30, 1999 and 1998 and
for the cumulative period from inception [March 3, 1995] through April 30, 1999,
respectively. On May 4, 1998, HDS notified the Company that the agreement
would not be renewed effective August 1998.
On January 31, 1999, all amounts under the revolver became due. The Company
requested payment from HDS for an aggregate of $667,000 which represented all
monies due inclusive of interest under the revolver and all monies due under
the terms of the management agreement. HDS was unable to make the required
payment due to its current financial condition. The original line of credit
which expired on January 31, 1999 was extended to January 31, 2001. The
terms of the extension prohibit any future cash advances on the credit line
and provide for repayment of an amount equal to 50% of any cash flow from
operations in excess of $500,000 annually to be paid within 45 days of the
fiscal year end of HDS, with any remaining outstanding balance due on January
31, 2001. The Company's management has set up a reserve of approximately
$373,000 or approximately 50% of the outstanding balance at April 30, 1999
of approximately $747,000, based upon anticipated probable collectibility.
[4] License Agreements
In March 1995, the Company entered into seven license agreements for the rights
to manufacture and market seven medical devices. Each of the seven agreements
also provide for minimum payment obligations commencing 2 1/2 years after the
date of the agreements. On September 30, 1997, the agreements for six (6) of
the devices were amended to extend the date for the first minimum payment
obligation to March 31, 1998. In consideration for the extension, the aggregate
first minimum payment obligation increased from $150,000 to $165,000.
The 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. The minimum payment obligations with
respect to the self-shielding needle were made in accordance with the terms of
the original agreement through March 31, 1998. On August 21, 1998, the Company
notified the licensor that it was terminating the agreements with respect to
these six (6) devices. The remaining unamortized cost of $486,785 for these
agreements was charged to operations in the year ended April 30, 1998.
On January 22, 1999, the Company amended the Licensing Agreement dated March 31,
1995 pertaining to the seventh device, for the manufacture and marketing of the
self-shielding needle. The amendment eliminates the "Minimum Payment
Obligation" as defined in the original agreement. The last such payment
which was due on September 30, 1998 in the amount of $50,000 was paid on January
26, 1999 upon execution of the amendment.
In consideration for eliminating all future and any prior minimum payment
obligations on this invention and any other products or inventions currently or
previously licensed by the Company from the licensor, the Company agreed to
(a) increase the royalty on future sales from 8% to 10%, and (b) pay the
licensor a maximum royalty of $450,000. Such payments shall be payable at the
rate of $2,500 per month plus 10% of the proceeds received by the Company
from any capital raised which exceeds $600,000, and 10% of annual pre-tax
income. The aggregate royalty of $450,000 was charged to operations in the year
ended April 30, 1999.
F-14
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #7
- -----------------------------------------
[4] License Agreements [Continued]
In addition, if the Licensor terminates the agreement for any reason, the
maximum royalty shall be reduced by $125,000 and all information with respect to
the invention [the "Know-How"] shall be returned to the licensor free and clear
of any liens. If the Company terminates the agreement, the licensor may
acquire the Know-How for a reduction in the remaining balance due equal to the
lesser amount of $125,000 or the remaining balance due. If the Company does not
obtain the necessary government approval to market the self-shielding needle
withing two (2) years, the agreement shall terminate unless the Company pays
the licensor an additional $250,000, which will extend the regulatory approval
requirement by two (2) additional years.
In March 1995, 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 and the agreements were effectively terminated on August 21,
1998.
[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.
[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.
F-15
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #8
- -----------------------------------------
[5] Stockholders' Equity [Continued]
[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 $6 per
share. The warrant was issued in connection with the termination of a
sublicensing agreement.
On June 17, 1998, the Company issued options, to three (3) directors and an
employee, to purchase 1,650,000 shares of the Company's common stock at an
exercise price equal to the market price on the date of the grant ($.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. These options were exercised in
June 1998 for an aggregate of 2,150,000 shares.
The Company received 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] 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) was
charged to operations ratably over the remaining life of the consulting
agreement which was thirty-two months.
[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.
F-16
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #9
- ----------------------------------------
[5] Stockholders' Equity [Continued]
[H] Loss Per Share - Loss per share was computed by dividing net loss by the
weighted number of shares outstanding. Potential common shares of 1,130,000
have been excluded as their effect would be anti-dilutive.
[I] Reserved Shares - Common shares reserved at April 30, 1999 are as follows:
Incentive Stock Option Plan 350,000
Non-Qualified Stock Option Plan 2,000,000
Class B Warrants 180,000
Consultant Warrants 600,000
Key Employee Options 250,000
Other 100,000
---------
Total 3,480,000
==========
[6] Commitments and Contingencies
[A] Litigation - The Company has been named 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 by purchasing 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 damages. The
Company intends to vigorously defend this action.
In November 1998, it was announced that Michael Lulkin, a director and chairman
of the Board of Directors of the Company at the time of the Company's initial
public offering, had plead guilty to, among other things, conspiracy to
commit securities fraud. The charges to which Mr. Lulkin plead were
premised on allegations that Mr. Lulkin, Sterling Foster, and other had
entered into an undisclosed agreement pursuant to which, upon conclusion of
the Company's initial public offering, they would (a) cause Sterling Foster
to release Mr. Lulkin and others who owned Embryo stock prior to the offering
from certain "lock up" agreements restricting them from selling such stock;
and (b) cause Mr. Lulkin and such other persons to sell their Embroy stock to
Sterling Foster at prearranged prices to enable Sterling Foster to use such
stock to cover certain short positions it had created.
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 January 1999, the Company renewed an employment
agreement with an officer. The two-year agreement provides for annual
compensation of $60,000 effective January 1, 1999. The officer was also
granted rights to purchase 200,000 shares of HDS common stock from the
Company at a price of $1.00 per share for a period of two (2) years.
In addition, the Company entered into a two-year employment agreement with an
executive which provides for annual compensation of $30,000 commencing
January 1, 1998. The executive was also granted options to purchase 50,000
shares of the Company's common stock at an exercise price equal to
the market price on August 1, 1997 ($.25).
In 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 provided 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. On June 22, 1998,
notice was given to the licensor to terminate the agreement effective July
22, 1998.
[D] Operating Leases - 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 HDS which provides for minimum monthly rental
payments of $9,625 to be received, and expires in 2004. On May 1, 1999, the
minimum rental payment on the sub-lease with HDS was reduced to $7,892 due to
utilization of a portion of the premises by the Company.
The Company leased office space from a former executive on a month-to-month
basis. Rent expense under this lease approximated $-0- and $60,000 during the
years ended April 30, 1999 and 1998, respectively.
In April 1998, the Company along with other co-tenants entered into a fourteen
month lease for 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. The Company vacated the premises March 1, 1999 and the
total lease payments of $50,400 are included in operations in the year ended
April 30, 1999.
On February 10, 1999, the Company entered into a sixteen (16) month lease for
office space commencing March 1, 1999. The lease provides for minimum monthly
lease payments of $5,085 and is personally guaranteed by an officer of the
Company.
Aggregate rent expense approximated $176,071, $204,700 and $523,371 for the
years ended April 30, 1999 and 1998, and the cumulative period from inception
[March 3, 1995] through April 30, 1999, respectively. Rental income from the
sub-lease amounted to approximately $115,500, $28,875, and $144,375 for the
years ended April 30, 1999 and 1998, and the cumulative period from inception
[March 3, 1995] through April 30, 1999, respectively.
F-18
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #11
- ----------------------------------------
[6] Commitments and Contingencies [Continued]
Minimum annual rentals under the leases are as follows:
Year ending Rent Sub-Lease
April 30, Expense Income
- ------------- ------- ---------
2000 $ 176,520 $ 94,704
2001 125,670 94,704
2002 115,500 94,704
2003 115,500 94,704
2004 86,625 71,028
Thereafter -- --
------------- -----------
Totals $ 619,815 $ 449,844
============= ===========
[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 the rights to 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.
[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.
F-19
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------
[7] Business Combinations [Continued]
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, 1999 are as
follows:
Deferred Tax Assets:
Net Operating Loss Carryforward $ 1,956,000
Tax Basis of Intangible Assets in
Excess of Book Basis 58,000
---------
Total 2,014,000
Deferred Tax Liability:
Book Basis of Unearned Compensation in
Excess of Tax Basis 176,000
---------
Deferred Tax Asset 1,838,000
Valuation Allowance 1,838,000
-----------
Net Deferred Tax Asset $ --
- ----------------------------- ===========
The valuation allowance of $1,838,000 represents an increase of $342,000 over
the preceding year. Net operating loss carryforwards of $5,753,000 expire as
follows:
2010 $ 103,000
2011 873,000
2012 3,088,000
2013 1,144,000
2014 545,000
----------
Total $ 5,753,000
=========
A reconciliation between the statutory federal income tax rate and the effective
rate of income tax expense for the year ended April 30, 1999 and 1998 follows:
1 9 9 9 1 9 9 8
Statutory Federal Income Tax Rate (34) % (34) %
Unearned Compensation 11 % 9 %
Bad Debt Expense 9 % -- %
Other 1 % 4 %
Change in Valuation Allowance 13 % 21 %
------- -------
Effective Income Tax Rate -- --
- --------------------------- ======= =======
F-20
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #13
- ----------------------------------------
[9] Major Customers
Customers accounting for 10% or more of revenue for the years ended April 30,
1999 and 1998 are as follows:
April 30,
1 9 9 9 1 9 9 8
------- -------
Customer A $ 17,554 $ --
Customer B $ 15,089 $ --
Customer C $ 15,057 $ --
Customer D $ 14,667 $ --
Customer E $ 13,446 $ --
Customer F $ 12,121 $ --
Customer G $ -- $ 245,615
Customer H $ -- $ 174,000
[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, 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,
1 9 9 9 1 9 9 8 1 9 9 9
-------- ------- --------
Interest - Net of Capitalized Interest $ 2,457 $ 3,578 $ 6,857
======= ========= ========
Income Taxes $ -- $ -- $ 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.
In June 1998, the Company issued an aggregate of 2,150,000 shares of common
stock in exchange for an aggregate of $201,670 in promissory notes as payment
for the shares.
F-21
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #14
[12] New Authoritative Pronouncements
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged,
but it is permitted only as of the beginning of any fiscal quarter. SFAS No.
133 is not to be applied retroactively to financial statements of prior
periods. The Company does not currently have any derivative instruments and is
not currently engaged in any hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ["SOP"] 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs, and requires that such costs to be
expensed as incurred. SOP 98-5 applies to all nongovernmental entities and is
generally effective for fiscal years beginning after December 15, 1998.
Earlier application is encouraged in fiscal years for which annual
financial statements previously have not been issued. The adoption of SOP
98-5 is not expected to have a material impact on results of operations,
financial position, or cash flows of the Company as the Company's current
policy is substantially in accordance with SOP 98-5.
The Financial Accounting Standards Board ["FASB"] has had on its agenda a
project to address certain practice issues regarding Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The FASB
plans on issuing various interpretations of APB Opinion No. 25 to address
these practice issues. The proposed effective date of these interpretations
would be the issuance date of the final Interpretation, which is expected to be
in September 1999. If adopted, the Interpretation would be applied
prospectively but would be applied to plan modification and grants that occur
after December 15, 1998. The FASB's tentative interpretations are as follows:
* APB Opinion No. 25 has been applied in practice to include in its definition
of employees, outside members of the board or directors and independent
contractors. The FASB's interpretation of APB Opinion No. 25 will limit
the definition of an employee to individuals who meet the common law
definition of an employee [which also is the basis for the distinction
between employees and nonemployees in the current U.S. tax code]. Outside
members of the board of directors and independent contractors would be
excluded from the scope of APB Opinion No. 25 unless they qualify as employees
under common law. Accordingly, the cost of issuing stock options to board
members and independent contractors not meeting the common law definition of an
employee will have to be determined in accordance with FASB Statement No. 123,
"Accounting for Stock-Based Compensation," and usually recorded as an expense in
the period of the grant [the service period could be prospective, however, see
EITF 96-18].
F-22
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #15
- ----------------------------------------
[12] New Authoritative Pronouncements [Continued]
* Options [or other equity instruments] of a parent company issued to employees
of a subsidiary should be considered options, etc. issued by the employer
corporation in the consolidated financial statements, and, accordingly, APB
Opinion No. 25 should continue to be applied in such situations. This
interpretation would apply to subsidiary companies only; it would not apply to
equity method investees or joint ventures.
* If the terms of an option [originally accounted for as a fixed option] are
modified during the option term to directly change the exercise price, the
modified option should be accounted for as a variable option. Variable grant
accounting should be applied to the modified option from the date of the
modification until the date of exercise. Consequently, the final measurement of
compensation expense would occur at the date of exercise. The cancellation of
an option and the issuance of a new option with a lower exercise price
shortly thereafter [for example, within six months] to the same individual
should be considered in substance a modified [variable] option.
* Additional interpretations will address how to measure compensation expense
when a new measurement date is required
[13] 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
Granted 1,650,000 .0938
Exercised (2,150,000) .0938
Canceled -- --
----------- -------------
Options and Warrants Outstanding at April 30, 1999 1,130,000 $ 4.22
- ------------------------------------------------- ========== ==============
At April 30, 1999, all options and warrants were exercisable.
F-23
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO FINANCIAL STATEMENTS, Sheet #16
- -----------------------------------------
[13] Stock Options and Warrants [Continued]
The following table summarizes information about common stock options and
warrants outstanding at April 30, 1999:
Options and Warrants Outstanding
--------------------------------------------------
Number Weighted Average
Outstanding at Remaining Weighted Average
April 30, 1999 Contractual Life Exercise Price
------------- --------------- ----------------
$.25-$.56 150,000 1.44 Years $.46
$3.00 600,000 .67 Years 3.00
$5.00-$6.00 200,000 1.29 Years 5.50
$10.00 180,000 .58 Years 10.00
-------- --------
Totals 1,130,000 1.15 Years $4.22
========= =======
The exercise price of the options and warrants outstanding at April 30, 1999
range between $.25 and $10.00.
No compensation expense was recorded for the years ended April 30, 1999 and
1998.
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 years ended April 30, 1999
and cumulative from inception March 3, 1995 to April 30, 1999 would have been
as follows:
Cumulative
from Inception
March 3, 1995 to
April 30, April 30,
1 9 9 9 1 9 9 8 1 9 9 9
-------------- ------------- ---------------
Net Loss:
As Reported $ (1,698,788) $ (3,243,983) $ (8,473,245)
Pro Forma $ (1,698,788) $ (3,433,814) $ (8,714,605)
Net Loss Per Share:
As Reported $ (.26) $ (.67) $ (1.74)
Pro Forma $ (.26) $ (.71) $ (1.79)
At the grant dates, the weighted average fair value of the above options were
$.09 and $.53 during 1999 and 1998, respectively. 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
------------- ------------- ----------- ---------
1999 -- -- -- N/A
1998 6.04% 4 Years 123.22% N/A
. . . . . . . . .
F-24
<PAGE>
<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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 360,516
<SECURITIES> 0
<RECEIVABLES> 24,358
<ALLOWANCES> 0
<INVENTORY> 32,655
<CURRENT-ASSETS> 443,148
<PP&E> 39,548
<DEPRECIATION> 21,989
<TOTAL-ASSETS> 1,323,685
<CURRENT-LIABILITIES> 112,033
<BONDS> 411,500
0
600
<COMMON> 700
<OTHER-SE> 798,852
<TOTAL-LIABILITY-AND-EQUITY> 1,323,685
<SALES> 113,999
<TOTAL-REVENUES> 113,999
<CGS> 103,802
<TOTAL-COSTS> 103,802
<OTHER-EXPENSES> 752,459
<LOSS-PROVISION> 373,342
<INTEREST-EXPENSE> 2,457
<INCOME-PRETAX> (1,698,788)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,698,788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,698,788)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
EXHIBIT 10.39
- ----------------
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT, dated as of January 1, 1999, by and
between EMBRYO DEVELOPMENT CORPORATION, INC., a Delaware
corporation, with its offices at 565 Fifth Avenue, New York, NY
10017 (the "Company"), and Matthew Harriton, an individual
residing at 524 East 72nd Street, New York, New York 10021
(Executive").
W I T N E S S E T H :
---------------------
WHEREAS, the Company desires to secure the services of the
Executive upon the terms and conditions hereinafter set forth;
and
WHEREAS, the Executive desires to render services to the
Company upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties mutually agree as follows:
Section 1. Employment. The Company hereby employs
Executive and the Executive hereby accepts such employment, as
Chief Executive Officer and Chief Financial Officer of the
Company, subject to the terms and conditions set forth in this
Agreement.
<PAGE>
Section 2. Duties. The Executive shall serve as Chief
Executive Officer and Chief Financial Officer and shall properly
perform such duties as may be assigned to him from time to time
by the Board of Directors of the Company. If requested by the
Company, the Executive shall serve on the Board of Directors or
any committee thereof without additional compensation. During
the term of this Agreement, the Executive is not required to
devote all of his business time to the performance of his duties
and may pursue other activities which do not conflict with his
obligations to the Company under this Agreement.
Section 3. Term of Employment.
The term of the Executive's employment shall be for a
period of two (2) years commencing on the date hereof (the
"Term"), subject to earlier termination by the parties pursuant
to Section 6 hereof.
Section 4. Compensation of Executive.
4.1 Salary. The Company shall pay to the Executive an
annual salary equal to sixty thousand dollars ($60,000) per annum
(the "Base Salary")less such deductions as shall be required to
be withheld by applicable law and regulations. All salaries
payable to Executive shall be paid at such regular weekly,
biweekly or semi-monthly time or times as the Company makes
payment of its regular payroll in the regular course of business.
In addition, the Company shall pay to the Executive an annual
bonus on December 31, 1999 and December 31, 2000 if the Executive
is employed by the Company on those dates, at the discretion of
Directors which shall be at least ten (10%) of the previous years
Base Salary.
-2-
<PAGE>
4.2 Expenses. During the employment period, the
Company shall reimburse the Executive for all reasonable and
necessary travel expenses and other disbursements incurred by the
Executive on behalf of the Company, in performance of the
Executive's duties hereunder. The Executive shall also be
provided with the full use of an automobile (and cost of
insurance of such automobile) of the Executive's choosing at the
Company's expense, not to exceed $1,000.00 per month inclusive of
the cost of insurance.
4.3 Options. As additional consideration, the Company
hereby grants to Executive an option to purchase up to 200,000
shares of Common Stock of Hydrogel Design Systems, Inc., which
the Company owns, at a price at $1.00 per share (the "HDS Option
Shares"). This option shall be in effect for two (2) years
commencing on the date of this agreement, expiring on January 1,
2001. These purchases may be made at any time or from time to
time in parital increments over the term of the option. The
Company agrees that is shall not at any time during the term of
this option sell or encumber the HDS Option Shares.
-3-
<PAGE>
Section 5. Disability of the Executive. If the
Executive is incapacitated or disabled by accident, sickness or
otherwise so as to render the Executive mentally or physically
incapable of performing the services required to be performed
under this Agreement for a period of sixty (60) consecutive days
or longer or for any ninety (90) days in any period of one
hundred eighty (180) consecutive days (a "Disability"), the
Company may, at the time or any time thereafter, at its option,
terminate the employment of the Executive under this Agreement
immediately upon giving the Executive notice to that effect.
Section 6. Termination. The Company may terminate
the employment of the Employee and all of the Company's
obligations under this Agreement at any time for Cause (as
hereinafter defined) by giving the Employee notice of such
termination, with reasonable specificity of the details thereof.
"Cause" shall mean (i) the Employee's misconduct could reasonably
be expected to have a material adverse effect on the business and
affairs of the Company, (ii) the Employee's disregard of lawful
instructions of the Company's Board of Directors consistent with
-4-
<PAGE>
the Employee's position relating to the business of the Company
or neglect of duties or failure to act, which, in each case,
could reasonably be expected to have a material adverse effect on
the business and affairs of the Company, (iii) the commission by
the Employee of an act constituting common law fraud, or a
felony, or criminal act against the Company or any affiliate
thereof or any of the assets of any of them, (iv) the Employee's
abuse of alcohol or other drugs or controlled substances, or
conviction of a crime involving moral turpitude, (v) the
Employee's material breach of any of the agreements contained
herein or (vi) the Employee's resignation hereunder. A
termination pursuant to Section 6(i), (ii), (iv) (other than as a
result of a conviction of a crime involving moral turpitude) or
(v) shall take effect 30 days after the giving of the notice
contemplated hereby unless the Employee shall, during such 30-day
period, remedy to the satisfaction of the Board of Directors of
the Company the misconduct, disregard, abuse or breach specified
in such notice; provided, however, that such termination shall
take effect immediately upon the giving of such notice if the
Board of Directors of the Company shall have determined that such
misconduct, disregard, abuse or breach is not remediable (which
determination shall be stated in such notice). A termination
pursuant to Section 6(iii), (iv) (as a result of a conviction of
a crime involving moral turpitude) or (vi) shall take effect
immediately upon the giving of the notice contemplated hereby.
-5-
<PAGE>
Section 7. Effect of Termination of Employment.
Upon the termination of the Executive's employment for
a Disability neither the Executive nor the Executive's
beneficiaries or estate shall have any further rights under this
Agreement or any claims against the Company arising out of this
Agreement.
Section 8. Disclosure of Confidential Information.
Executive recognizes that he has had and will continue to have
access to secret and confidential information regarding the
Company, including but not limited to its customer list,
products, know-how, and business plans. Executive acknowledges
that such information is of great value to the Company, is the
sole property of the Company, and has been and will be acquired
by him in confidence. In consideration of the obligations
undertaken by the Company herein, Executive will not, at any
time, during or after his employment hereunder, reveal, divulge
or make known to any person, any information acquired by
Executive during the course of his employment, which is treated
as confidential by the Company, including but not limited to its
customer list, and not otherwise in the public domain. The
provisions of this Section 8 shall survive Executive's employment
hereunder.
-6-
<PAGE>
Section 9. Covenant Not To Compete.
(a) Executive recognizes that the services to be performed
by him hereunder are special, unique and extraordinary. The
parties confirm that it is reasonably necessary for the
protection of Company that Executive agree, and accordingly,
Executive does hereby agree, that he shall not, directly or
indirectly, at any time during the term of the Agreement and the
Restricted Period (as hereinafter defined):
(i) except as provided in Subsection (c) below, engage
in the sale, distribution or manufacture of any
products or provide technical assistance, advice
or counseling any products competitive to the
Company's products in any state in the United
States in which the Company or any affiliate
thereof is engaged in business, either on his own
behalf or as an officer, director, stockholder,
partner, consultant, associate, Executive, owner,
agent, creditor, independent contractor, or co-venturer of
any third party; or
-7-
<PAGE>
(ii) employ or engage, or cause or authorize, directly
or indirectly, to be employed or engaged, for or
on behalf of himself or any third party, any
Executive or agent of Company or any affiliate
thereof.
(b) Executive hereby agrees that he will not, directly or
indirectly, for or on behalf of himself or any third party, at
any time during the term of the Agreement and during the
Restricted Period solicit any customers of the Company or any
affiliate thereof.
(c) If any of the restrictions contained in this Section 9
shall be deemed to be unenforceable by reason of the extent,
duration or geographical scope thereof, or otherwise, then the
court making such determination shall have the right to reduce
such extent, duration, geographical scope, or other provisions
hereof, and in its reduced form this Section shall then be
enforceable in the manner contemplated hereby.
(d) The term "Restricted Period," as used in this Section
9, shall mean the period of Executive's actual employment
hereunder plus half of the time period the Executive is actually
employed by the Company not to exceed twelve (12) months.
-8-
<PAGE>
Section 10. Miscellaneous.
10.1 Injunctive Relief. Executive acknowledges that
the services to be rendered under the provisions of this
Agreement are of a special, unique and extraordinary character
and that it would be difficult or impossible to replace such
services. Accordingly, Executive agrees that any breach or
threatened breach by him of Sections 8 or 9 of this Agreement
shall entitle Company, in addition to all other legal remedies
available to it, to apply to any court of competent jurisdiction
to seek to enjoin such breach or threatened breach. The parties
understand and intend that each restriction agreed to by
Executive hereinabove shall be construed as separable and
divisible from every other restriction, that the unenforceability
of any restriction shall not limit the enforceability, in whole
or in part, of any other restriction, and that one or more or all
of such restrictions may be enforced in whole or in part as the
circumstances warrant. In the event that any restriction in this
Agreement is more restrictive than permitted by law in the
jurisdiction in which Company seeks enforcement thereof, such
restriction shall be limited to the extent permitted by law.
10.2 Assignments. Neither Executive nor the Company
may assign or delegate any of their rights or duties under this
Agreement without the express written consent of the other.
-9-
<PAGE>
10.3 Entire Agreement. This Agreement constitutes and
embodies the full and complete understanding and agreement of the
parties with respect to Executive's employment by Company,
supersedes all prior understandings and agreements, whether oral
or written, between Executive and Company, and shall not be
amended, modified or changed except by an instrument in writing
executed by the party to be charged. The invalidity or partial
invalidity of one or more provisions of this Agreement shall not
invalidate any other provision of this Agreement. No waiver by
either party of any provision or condition to be performed shall
be deemed a waiver of similar or dissimilar provisions or
conditions at the same time or any prior or subsequent time.
10.4 Binding Effect. This Agreement shall inure to the
benefit of, be binding upon and enforceable against, the parties
hereto and their respective successors, heirs, beneficiaries and
permitted assigns.
10.5 Headings. The headings contained in this
Agreement are for convenience of reference only and shall not
affect in any way the meaning or interpretation of this
Agreement.
10.6 Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given when
personally delivered, sent by registered or certified mail,
return receipt requested, postage prepaid, or by private
overnight mail service (e.g. Federal Express) to the party at the
address set forth above or to such other address as either party
may hereafter give notice of in accordance with the provisions
hereof. Notices shall be deemed given on the sooner of the date
actually received or the third business day after sending.
-10-
<PAGE>
10.7 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of New
York without giving effect to such State's conflicts of laws
provisions and each of the parties hereto irrevocably consents to
the jurisdiction and venue of the federal and state courts
located in the State of New York, County of New York.
10.8 Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute
one of the same instrument.
10.9 Arbitration. Any dispute which the parties hereto
are unable amicably to resolve shall be submitted to binding
arbitration in New York in accordance with the Rules and
Constitution of the American Arbitration Association. Either
party hereto may request that any decision of the arbitrators set
forth the findings of fact and conclusions of law upon which
their award is based. Judgment upon any such arbitration award
may be entered in any court of competent jurisdiction, and
Executive submits to the jurisdiction of any such court.
-11-
<PAGE>
In the event any suit or other action is commenced with
respect to the interpretation or enforcement of any provision of
this agreement, the prevailing party shall be entitled, in
addition to any other sums to which such party may be entitled,
to recover from the other party the reasonable fees and
disbursements of counsel retained to investigate and pursue such
matter.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date set forth above.
EMBRYO DEVELOPMENT
CORPORATION, INC.
By: /s/ Daniel Durchslag
---------------------
Name: Daniel Durchslag
Title: Director
/s/ Matthew Harriton
---------------------
Matthew Harriton
EXHIBIT 10.40
- -----------------
AMENDMENT #2 TO REVOLVING CREDIT AGREEMENT
-------------------------------------------
THIS AMENDMENT #2 TO THE REVOLVING CREDIT AGREEMENT is made as of
February 1, 1999 and hereby amends that certain Revolving Credit Agreememt dated
January 31, 1997 and Amendment #1 dated August 31, 1997 by and between Hydrogel
Design Systems, Inc., a Delaware corporation (the "Borrower"), and Embryo
Development Corporation, a Delaware corporation (the "Lender").
WITTNESETH
----------
WHEREAS, the Borrower and Lender are parties to that certain Revolving
Credit Agreement dated January 31, 1997 and Amendment dated August 31, 1997;
and
WHEREAS, the Borrower and Lender desire to futher amend that certain
Revolving Credit Agreement to effect the changes provided for herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Effective as of the date hereof, Section 1.1 is hereby amended to read
as follows:
"Termination Date" shall mean January 31, 2001, 2 years following the
date of this Amendment #2.
Effective as of the date hereof, Section 2.8 is hereby amended as
follows:
Maturity of Loans and Required Payment of Principal and Interest.
-----------------------------------------------------------------
The outstanding principal amount, and any accrued interest, shall
be due and payable as follows: (i) Fifty (50) % of any cash flow
from operations of Borrower (as defined by generally accepted
accounting principles) in excess of $500,000 during any fiscal year
of Borrower which ends prior to the Termination Date shall be
required to be paid to Lender. Such payment shall be made within
45 days of the fiscal year end of Borrower and; (ii) any remaining
outstanding principal and interest balance due shall be payable on
January 31, 2001.
Effective as of the date hereof, Section 2.9 is hereby inserted as
follows:
Additional Notes.
------------------
No additional promissory notes or cash advances shall be granted under
the revolving credit line as of the date hereof. Any other increases
to the amount outstanding shall be due to additional accrued interest
or payables due to Lender.
<PAGE>
2. This Amendment #2 shall be governed by and construed in accordance
with the laws of the State of New York, without regard to principles
of conflicts of law.
3. Except as otherwise specifically set forth herein, all of the terms
and provisions of the Revolving Credit Agreement and Amendment
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment #2 to the
Revolving Credit Agreement to be duly executed and delivered by their proper
and duly authorized officers as of the day and year first above written.
HYDROGEL DESIGN SYSTEMS, INC.
BY: /s/ Michael Pereira
--------------------
NAME: Michael Pereira
TITLE: Chief Operating Officer
EMBRYO DEVELOPMENT CORPORATION
BY: /s/ Matthew Harriton
---------------------
NAME: Matthew Harriton
TITLE: Chief Executive Officer
