-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FNNDGcDnU3Qj6kRr5HYjFVdE2mnsaHd0pbPYzMmsJIifBlJo3n3OusxoLBir1RaK dY7/B0s3C68T5v9ww9Y3oA== 0000950133-99-001299.txt : 19990413 0000950133-99-001299.hdr.sgml : 19990413 ACCESSION NUMBER: 0000950133-99-001299 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRYOMEDICAL SCIENCES INC CENTRAL INDEX KEY: 0000834365 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 943076866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-18170 FILM NUMBER: 99592125 BUSINESS ADDRESS: STREET 1: 1300 PICARD DR STE 102 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3014177070 MAIL ADDRESS: STREET 1: 1300 PICCARD DRIVE SUITE 102 CITY: ROCKVILLE STATE: MD ZIP: 20850 10KSB40 1 FORM 10-KSB 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-KSB (MARK ONE) [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 27, 1998 ----------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-18170 ------- -------------------- CRYOMEDICAL SCIENCES, INC. ( Name of Small Business Issuer in its Charter) DELAWARE 94-3076866 -------- ---------- (State of Incorporation) (IRS Employer Identification Number) 1300 PICCARD DRIVE, ROCKVILLE, MARYLAND 20850 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code)
-------------------- Issuer telephone number, including area code: (301) 417-7070 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share --------------------------------------- Title of Class Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and will not 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 the fiscal year ended December 27, 1998 were $2,369,748. As of March 31, 1999, the aggregate market value of voting stock held by nonaffiliates of the registrant was $16,205,263. As of March 31, 1999, there were 33,454,302 shares of Common Stock (par value $.001 per share) outstanding. Documents Incorporated by Reference ----------------------------------- None =============================================================================== 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Cryomedical Sciences, Inc. (the "Company") is engaged in the research, development, manufacture and marketing of products for use in the field of low-temperature medicine. The Company has developed cryosurgical systems called the CMS AccuProbe(R) System (the "AccuProbe"), the CMS Blizzard(TM) Series (the "Blizzard"), and the Cryo-Lite(R) Series (the "Cryo-Lite"). The AccuProbe, the Blizzard and the Cryo-Lite are sophisticated cryosurgical devices designed to freeze and destroy diseased tissue. They are particularly applicable where diseased tissue cannot be removed surgically or where surgery is likely to have extensive adverse side effects. The Company plans to utilize its AccuProbe, Blizzard and Cryo-Lite in the various fields for which the devices have received clearance from the United States Food and Drug Administration (the "FDA"). The Company completed initial development of the AccuProbe in 1992 and has marketed this system to hospitals, surgeons and radiologists in the United States and abroad. In addition to the AccuProbe, the Company sells single use probes and other disposables used with the AccuProbe and offers service warranty contracts. Although the Cryo-Lite received FDA clearance in July 1997 and the Blizzard received FDA clearance in February 1998, no Blizzard or Cryo-Lite devices have been shipped for commercial sale. Sales and other revenues totaled $2,369,748 and $3,571,386 for the twelve-month period ended December 27, 1998 and the twelve-month period ended December 28, 1997, respectively. The Company is also attempting to develop and commercialize a series of hypothermic preservative solutions (the "Solutions"). Some of these Solutions are designed to maintain the fluid and chemical balances of human organs while body temperature is significantly lowered. Other Solutions have been developed that may be utilized in preserving certain cells and tissues utilized by scientists in research labs and academic institutions. All of these Solutions continue to be tested in laboratory settings. Commercialization of certain Solutions is presently being pursued for those markets not subject to FDA regulations through the Company's wholly-owned subsidiary, BioLife Technologies, Inc. ("BioLife"), formed in 1998. At present, development of the Solutions for human organ transplantation is at the laboratory and preclinical stage. The Company is seeking from various government and non-government granting agencies as well as third party investors to continue the development of the Solutions. The total research and development expenses of the Company for the twelve-month period ended December 27, 1998 were $674,160. For the twelve-month period ending December 28, 1997 total research and development expenses were $1,293,470. The Company was incorporated in Delaware in November 1987. BioLife was incorporated in March of 1998. Unless the context requires otherwise, references to the Company include BioLife. The Company's principal executive offices are located at 1300 Piccard Drive, Rockville, Maryland 20850, and its telephone number is (301) 417-7070. CMS CRYOSURGICAL SYSTEMS BACKGROUND AND TECHNOLOGICAL OVERVIEW Cryosurgery is a surgical procedure that uses freezing temperatures to destroy unwanted tissue by circulating a refrigerant through the tip of a cryoprobe (an instrument for applying extreme cold to tissue) applied directly to the tissue to be destroyed. Some surgeons have commenced targeting diseased tissue in the fields of urology, general surgery, and gynecology by use of cryosurgery. The Company believes that cryosurgery has a number of advantages over other options for managing such diseased tissue. First, unlike surgical resection, cryosurgery does not require removal of large volumes of healthy surrounding tissue. Second, because freezing temperatures can be applied to certain areas and not others, multiple diseased tissue sites can be targeted individually, leaving more healthy tissue. However, many surgeons continue to use traditional methods because of their belief that cryosurgery has not yet proved to be effective over an extended period of time. 2 3 THE CMS ACCUPROBE SYSTEM, BLIZZARD SERIES AND CRYO-LITE SERIES The Company has developed certain proprietary designs intended to make its cryosurgical instrumentation more efficient and more precise than previous cryosurgical instrumentation. The CMS AccuProbe System, the Blizzard Series, and the Cryo-Lite Series are the Company's three cryosurgical instrument product lines. In April 1991, the FDA accepted the Company's 510(k) premarket notification for the AccuProbe, thus allowing commercial marketing of the product at the Company's discretion. See "Governmental Regulation." The prototype of the CMS AccuProbe was first used on patients in October 1991. The commercial development of the CMS AccuProbe was completed in 1992 and marketing of the AccuProbe commenced. In addition, the Company markets a full complement of accessory products for the AccuProbe which are being marketed along with the AccuProbe system and single-use probes. In July 1997 the Company received FDA clearance for its Cryo-Lite series of cryosurgical instrumentation. The Cryo-Lite Series differs from the AccuProbe Systems in that Cryo-Lite is a hand held device capable of utilizing cryogens (refrigerants) other than liquid nitrogen. The AccuProbe was designed to use only liquid nitrogen as a cryogen. In February 1998 the Company received FDA clearance for its Blizzard series of cryosurgical instrumentation. The Blizzard Series also differs from the AccuProbe Systems in that Blizzard devices are capable of utilizing cryogens (refrigerants) other than liquid nitrogen. The AccuProbe was designed to use only liquid nitrogen as a cryogen. The backlog of orders at December 27, 1998 totaled $14,560, as compared to $41,200 at December 28, 1997. The Company expects all of December 27, 1998 back order to generate revenues in the fiscal year ending December 1999. A substantial portion of the Company's revenue in each quarter results from orders received in that quarter. Generally, orders placed directly by customers are shipped within 30 days of the order date. CMS HYPOTHERMIC PRESERVATIVE SOLUTIONS BACKGROUND AND TECHNOLOGICAL OVERVIEW Lowering body temperature during certain surgical procedures helps to minimize the chance of damage to the patient's organs by reducing the patient's metabolic rate, thereby decreasing the patient's needs during surgery for oxygen and nutrients that normally flow through the blood. This is also true with respect to the preservation of individual organs and tissues to be used in transplant surgery during the interval between removal from the donor and transplant into the recipient. Grant subsidized research and development activities with respect to development of the Solutions for cell and tissue preservation have previously taken place at Allegheny-Singer Research Institute ("ASRI"), a subsidiary of Allegheny Health Services, Pittsburgh Pennsylvania and State University of New York at Binghamton ("SUNY"). The company continues to fund work at SUNY, but is not currently funding research at ASRI. The Solutions have not been fully tested nor has the regulatory clinical testing and approval process begun for human organ transplantation. Accordingly, there is no assurance that any of the proposed applications will prove viable in human surgical procedures. The Company anticipates that upon successful completion of funding of BioLife, for which there can be no assurance, clinical trials will begin to support FDA approval of the Solutions for purposes of human organ transplantation. THE SOLUTIONS The Solutions are complex synthetic, aqueous solutions containing, in part, minerals and other elements found in human blood which are necessary to maintain fluids and chemical balances throughout the body at near freezing temperatures. The use of the fluid is limited to low temperature applications because the Solutions do not carry sufficient oxygen to maintain organ integrity at warm temperatures. At lower temperatures, scientists have determined that human organs require less oxygen primarily because of the resulting reduced metabolism. The products which may result from the development of the Solutions include, but are not limited to media for preservation of organs used in human transplantation procedures, cardioplegia (stopping of the heart) applications, 3 4 and media utilized in cell and tissue culture preservation. Additional applications my include cryogenic preservation (-196 degrees Celsius) of certain tissues and organs. FUTURE PRODUCT DEVELOPMENT The Company's primary focus has been on the development and marketing of its cryosurgical instrumentation. The Company intends to continue development of its cryosurgical instrumentation as well as the Solutions. The Company contemplates that a variety of applications of hypothermic preservative solutions, or other products for use in hypothermic or cryogenic medical procedures, could ultimately be developed from the Solutions. The Company expects that any significant funding activities with respect to the Solutions would entail sales of equity securities in BioLife, which there can be no assurance of achieving. RESEARCH PROJECT AGREEMENTS In January 1997, the Company entered into a Research Project Agreement with Dr. Robert van Buskirk of SUNY, pursuant to which Dr. van Buskirk conducted research at SUNY's Center for Cryobiological Research in Binghamton, New York, with respect to the Solutions. In January 1998 an extension to the Agreement with Dr. Robert van Buskirk was agreed to whereby he would continue to work through September 1, 1999. In March 1999, BioLife signed an Incubator Licensing Agreement with SUNY whereby BioLife will be able to do research and development in the field of cryogenic science and in particular solution technology. The Company will pay the University $1,005 per month during the five year term of the License and all inventions conceived as a result of these research and development efforts will belong to BioLife. MARKETS AND MARKETING The Company currently markets its AccuProbe system to hospitals, surgeons, and radiologists through its own sales department. The Company has signed contracts with independent contractors for purposes of selling and distributing the Company's product lines of cryosurgical instrumentation. In November 1998, the Company signed a distribution agreement with Sino America Commerce Corporation for marketing, sales and distribution of its products in mainland China and other far east countries. The Company may also arrange with other third parties to market or distribute its products in the United States or other countries. The Company has expended significant resources educating surgeons and healthcare professionals in formal training programs as to the uses and benefits of the Company's cryosurgical instrumentation through both in-house educational seminars and practical applications outside the Company's training facility. Sales of the AccuProbe are increasingly affected by the level of reimbursement by public and private insurers in connection with procedures in which the AccuProbe is utilized. The availability of consistent, uniform insurance reimbursement guidelines for hospitals and physicians is an important factor often considered by some potential customers when making a decision regarding the purchase of any new medical device, including the AccuProbe system. Reimbursement of hospitals and urologists by public and private insurers such as Medicare and Blue Cross and Blue Shield is a necessary part of gaining general acceptance for use of the AccuProbe for urological cryosurgery. Medicare's Health Care Financing Administration ("HCFA") put into effect its technology advisory committee's recommendation that a national non-coverage policy be adopted in regard to cryoablation of the prostate. However, in February 1999 HCFA announced that it was going to provide coverage for cryosurgery of the prostate for localized prostate cancer. According to HCFA, the codes for reimbursement and details of the coverage will be announced at a later time. When insurance coverage is not available, patients may either elect to pay for treatment themselves or undergo traditional therapies that are covered by their insurers. The uncertainty and added efforts required for the Company's customers or potential customers to secure payment has constrained sales and utilization of AccuProbe systems to a large degree and may continue to do so until the completion of formal national coverage guidelines are established by HCFA. There can be no assurance as to when such guidelines will be completely established or, when established, that reimbursement will be sufficient to encourage use of the AccuProbe System by hospitals and physicians. 4 5 MANUFACTURING The Company's manufacturing operations are conducted at its facilities in Rockville, Maryland, and consist primarily of the purchase and quality control of materials, components and subassemblies, and the final assembly and testing of products including the AccuProbe, the Blizzard, and the Cryo-Lite, single-use probes and other accessory products. The Company presently uses third party vendors to manufacture certain parts and subassemblies of the AccuProbe, the Blizzard, the Cryo-Lite, single-use probes and other accessory products. While the typical lead time required for suppliers varies depending upon the components, the quantity required, and other factors, the lead times in some cases can be as long as three months. However, because the Company typically purchases components in advance in anticipation of future orders, the Company is generally able to deliver AccuProbe systems within 30 days of its receipt of an order, and single-use probes and other accessory products immediately upon receipt of an order. Although the Company generally uses standard parts and components for its products, certain components, such as liquid nitrogen dewars and probe tips, are currently available only from a limited number of sources. The Company does not have long-term agreements with all of these suppliers. To date, the Company has been able to obtain adequate supplies of such components in a timely manner from its existing sources. Although the Company believes it could develop alternative sources of supply for most of these components within a reasonable period of time, the inability to develop alternative sources, or a reduction or interruption in supply or a significant increase in the price of materials, parts or components, could materially and adversely affect the Company's results of operations. The Company also maintains an inventory of finished goods consisting primarily of single-use probes and other accessory products in anticipation of future orders. The Company believes it has sufficient capital to manufacture and market the AccuProbe in the quantities anticipated, however, it is possible that substantial additional capital may be necessary to effectively carry out these objectives, and there is no assurance that such additional capital can be raised on favorable terms or at all. To the extent that other parties are manufacturing parts or subassemblies for the Company, the Company has less control over the quality of products and timeliness of delivery than if manufactured by the Company. GOVERNMENTAL REGULATION The development, testing, manufacturing processes, record-keeping and reporting and marketing of the AccuProbe, the Blizzard, the Cryo-Lite, the Solutions, and related instrumentation are regulated by the FDA pursuant to the federal Food, Drug and Cosmetic Act and in some instances, the Public Health Service Act, and similar health authorities in foreign countries. Product testing and marketing requires regulatory review and clearance or approval by the FDA. Companies producing FDA-regulated products also are subject to FDA inspection of records and manufacturing practices. Non-compliance with applicable requirements of the FDA or other government authorities can result in various administrative and legal remedies including fines, recalls, product seizure, injunction, import or export restrictions, refusal by FDA to approve product applications or to allow the Company to enter into government supply contracts, withdrawal of previously approved applications and criminal prosecution. In April 1991, the FDA accepted the Company's 510(k) premarket notification for the AccuProbe (400 Series), thus allowing commercial marketing of the product. Any significant change or modification in the device could require additional review and clearance by the FDA. The nature and extent of regulation may differ with respect to other of the Company's products. There can be no assurance that regulatory approvals or clearances will be obtained for any of the intended applications of the Company's proposed technologies once developed or that the FDA will not impose additional post-marketing requirements. Accessory devices developed by the Company for use with the CMS AccuProbe system may also require review and clearance or approval by the FDA. In August, 1995, the Company submitted to the FDA 510(k) premarket notification of two new models of the AccuProbe system (500 series). In December 1995, the Company received 510(k) marketing approval from the FDA for two new models of the AccuProbe system (Model 530 and Model 550). In October, 1996, the Company submitted to the FDA 510(k) premarket notification of a new model of the AccuProbe System (the 600 series). The new device represents evolutionary advances of the currently marketed AccuProbe, incorporating numerous technical refinements. In March 1997, the Company received 510(k) marketing approval from the FDA for the 600 series model of the AccuProbe System and will continue to market it in accordance therewith in the fields currently cleared by FDA. 5 6 In February, 1998 the Company submitted to the FDA 510(k) premarket notification of a new series of cryosurgical instrumentation called the Blizzard Series. The new device represents a series of devices that utilize cryogens (refrigerants) other than liquid nitrogen. In June, 1998 the Company received 510(k) marketing approval from the FDA for the Blizzard Series and will market it in accordance therewith in the fields currently cleared by FDA. In June, 1998 the Company submitted to the FDA 510(k) premarket notification of a new model of the AccuProbe System (the 800 series). The new device represents evolutionary advances of the currently marketed AccuProbe, incorporating numerous technical refinements. In September, 1998 the Company received 510(k) marketing approval from the FDA for the 800 series model of the AccuProbe System and will market it in accordance therewith in the fields currently cleared by FDA. In the event the Company intends to test clinically, produce or market the Solutions for human organ transplantation, safety standards and mandatory premarketing review and approval procedures established by the FDA for drugs, medical devices, and biologicals must be satisfied. In general, manufacturers must prove a product is safe and effective. Drugs must obtain approval by means of a New Drug Application ("NDA"), biologicals by means of a Product License Application ("PLA") and Establishment License Application ("ELA"), and medical devices must obtain a marketing clearance. The use of Solutions for human organ transplantation would, most likely, require a Premarket Approval ("PMA"). The inability to obtain, or delays in obtaining, such approvals or clearances would materially adversely affect the Company's ability to commence marketing any products developed with this technology. Congress enacted legislation on June 10, 1993, providing that the Department of Health and Human Services (HHS) promulgate regulations defining the circumstances that constitute financial interest in a project that may create a bias for certain results. On June 28, 1994, the Public Health Service (PHS) published a Notice of Proposed Rulemaking which would require institutions that apply for research funding to ensure that the financial interests of investigators do not compromise the objectivity of such research. The proposed rules would apply to institutions applying for PHS grants or cooperative agreements for research and to any significant financial interest, including salary, consulting fees, equity interests such as stock or stock options, and patent rights, of an investigator responsible for the design, conduct or reporting of research. The proposed rules would require that all such significant financial interests be disclosed prior to applying for research funding, that disclosures be updated, records be maintained, and that institutions applying for such funding ensure that significant financial interests of investigators be managed, reduced or eliminated, including the divestiture of significant financial interests or the severance of relationships that create actual or potential conflicts. Such rules, if adopted, may impact any research funding the Company may obtain from the National Institutes of Health (NIH). Additionally, institutions in which Company-sponsored research is conducted may adopt similar rules, which could apply regardless of whether federal funding is involved. On September 22, 1994, FDA published a similar proposed regulation requiring that the sponsor of any drug, biological or device submit information concerning the compensation to, and financial interests of, any clinical investigator conducting clinical studies involving human subjects or establishing bioavailability or bioequivalence, for marketing approval. Under FDA's proposed rule, sponsors would be required to submit a list of clinical investigators and make one of two alternative submissions for each investigator who is not a full-time employee of the sponsor at the time reports of clinical studies are submitted to FDA. The alternative submissions would be: (1) a certification that the clinical investigator has not entered into any financial arrangement with the sponsoring company whereby the value of compensation could be affected by the outcome of the study, that the investigator has not received significant payments of other sorts from the sponsor, such as grants, equipment, retainers or honoraria; and that the investigator does not have significant financial interests of any kind in the sponsor; or (2) disclosure of the specific financial arrangements made with the clinical investigator, the investigator's proprietary, patent and equity interests in the tested product and the sponsoring company, and a description of steps taken to minimize the potential for bias in data submitted in support of the marketing application. Both the PHS and FDA rules, if adopted, could require disclosure of, limit, or in some cases, prohibit equity ownership by individuals conducting research for the Company, including consultants, some of whom may have equity interests in the Company. Such rules, if adopted, could have the effect of limiting such research between the Company and individuals with equity interests in the Company. The FDA rules, if adopted, could also impact 6 7 product review and approval, and in some cases, if the agency deems data are biased, FDA could require that a study be repeated. There can be no assurance that any required FDA or other regulatory approval will be granted or, if granted, will not be withdrawn. Governmental regulation may prevent or substantially delay the marketing of products, cause the Company to undertake costly procedures, and thereby furnish a competitive advantage to more substantially capitalized companies with which the Company may compete. In September 1997 the Company was advised by FDA that it could no longer promote its products for gynecological applications which referenced endometrial ablation. It is FDA's opinion that there is not enough clinical data to support the use of cryosurgical techniques in the uterus, specifically endometrial ablation. The Company is complying with this new FDA directive, even though it does have intended use clearance in the field of gyncology. PROPRIETARY RIGHTS The Company relies on a combination of trade secret, patent and trademark law, and confidentiality and non-disclosure agreements to establish and protect its proprietary rights in its products. Despite these precautions, it may be possible for unauthorized third parties to copy certain aspects of the Company's products or to obtain and use information that the Company regards as proprietary. The laws of some foreign countries in which the Company may sell its products do not protect the Company's proprietary rights to the same extent as do the laws of the United States. In total, the Company owns ten issued U. S. patents and seven issued or allowed foreign patents. At least one additional pending U. S. patent application has been allowed or has been found to contain patentable subject matter. There can be no assurance that any additional patents will be granted. In addition, to the extent that any unique applications of the Company's technologies are developed by the Company's scientists, such applications or procedures may not be subject to any protection. There can also be no assurance that the Company will develop additional patentable processes or products or, if developed, that the Company would be able to obtain patents with respect thereto, or that others may not assert claims successfully with respect to such patents or patent applications. Furthermore, the Company might not be able to afford the expense of any litigation which might be necessary to enforce its rights under any patents it may obtain, and there can be no assurance that the Company would be successful in any such suit. There is also no assurance that the Company's proposed products will not infringe patents owned by others, licenses to which may not be available to the Company. The Company intends to rely to a large extent on the technological expertise of its scientific staff. There can be no assurance that others will not independently develop such technological expertise or otherwise obtain access to the Company's technological expertise. COMPETITION The medical products industry is highly competitive. Most of the Company's potential competitors have considerably greater financial, technical, marketing, and other resources than the Company. With respect to the Company's cryosurgical instrumentation, the Company faces competition from other firms engaged in the business of developing or marketing cryosurgical devices as well as other firms engaged in developing or marketing medical devices that destroy diseased tissues by means other than freezing. The Company is aware that cryogenic devices used to freeze tissue have been available for at least 20 years, although with limited market acceptance. Engaged in the business of developing, manufacturing and marketing of instruments used to freeze tissue are Endocare, Inc. and Frigitronics Incorporated, American companies; a German company, Erbe Incorporated and Candela Laser Corporation, an American company which distributes products manufactured by Spembly, an English company. The Company's cryosurgical instrumentation also competes with other companies that employ techniques for destroying diseased tissue by, but not limited to, radiofrequency and thermal (hot) devices. With respect to the Solutions, the Company also faces competition in the overlapping areas of research with respect to blood substitutes, organ preservation, and hypothermic medicine. Currently, there are four known organ 7 8 preservation solutions marketed as Viaspan, Collins Solutions, Euro Collins Solutions, and Ringers Lactate solution. These solutions are marketed by DuPont Co., Abbott Laboratories, Kendall-McGaw Laboratories, and Baxter, Inc., respectively. The Company understands that other groups or companies are also researching and developing organ preservation techniques and solutions. Scientists and doctors performing research as consultants can be expected to publish in journals or otherwise publish information concerning applications of the Company's technology. If it were determined that the Company's cryosurgical instrumentation or the Solutions do not offer unique technologies and that, in fact, the techniques employed by the Company's scientists were responsible for results of the Company tests and not the technologies contained in the Company's AccuProbe or the Solutions, then competitors of the Company who have developed products with similar properties may be able to duplicate the performance of the Company's cryosurgical instrumentation and Solutions by applying similar techniques. The Company expects competition to intensify with respect to the areas in which it is involved as technical advances are made and become more widely known. EMPLOYEES The Company's business is highly dependent upon its ability to attract and retain qualified scientific, technical and management personnel. The Company had 15 full-time employees at December 27, 1998. The Company is not a party to any collective bargaining agreements. ITEM 2. DESCRIPTION OF PROPERTY The Company's administrative, manufacturing and research and development facilities consisted of approximately 21,000 square feet located in Rockville, Maryland for the 12-month period ended December 27, 1998. In February 1999 the Company reduced its facilities space to approximately 10,000 square feet. The Company rents these facilities under a five-year lease commencing in May 1995. Rental expense for facilities for the 12-month period ended December 27, 1998 totaled $255,309. At December 27, 1998, the monthly rental was $19,804 net of subleases for space previously occupied by the Company. The Company believes that the current facilities are adequate for current needs and would be adequate for sales at approximately twice the level experienced in the period ended December 27, 1998. ITEM 3. LEGAL PROCEEDINGS In November 1996, the Company filed suit against EndoCare, Inc. ("EndoCare") and ZhaoHua Chang in the Circuit Court for Montgomery County, Maryland (Case No. 161496). The lawsuit alleges, among other things, that EndoCare misappropriated trade secrets of the Company, and that EndoCare tortuously interfered with the Company's contracts, its relationships with its employees, and the Company's contractual and potential business relationships with customers. The lawsuit, which contains six counts, also alleges that Dr. Chang and EndoCare engaged in unfair competition against the Company and civil conspiracy, and that Dr. Chang, who was formerly employed as a Vice President of Cryosurgical Engineering by the Company, breached contractual and fiduciary obligations owed to the Company by his employment by EndoCare, his retention and misuse of the Company's confidential information, and his improper solicitation of the Company's employees to disclose trade secret information and/or to become employed by EndoCare. EndoCare and Dr. Chang have denied the allegations in the lawsuit. In March 1997, Dr. Chang filed a counter-suit in the Circuit Court for Montgomery County, Maryland (Case No. 161496-V) regarding numerous claims of a breach of contract by the Company. On March 1999 the lawsuit against Endocare was dismissed by stipulation of the parties and order of the Court. On the same date, the Court dismissed Dr. Chang's counterclaim against the Company with prejudice. In order to bring closure to the case the Company intends to voluntarily dismiss the claim against Dr. Chang without prejudice. In June 1997, Concept Group, Inc. ("Concept") filed suit against the Company in the United States District Court for the Eastern District of Pennsylvania. The Company successfully transferred venue to the United States District for the District of Maryland, Southern Division. The suit involves the manufacture of cryosurgical probes allegedly developed by Concept which are used in certain surgical procedures. Concept alleges that in December 1992 the parties entered into a confidentiality agreement regarding certain proprietary and technical information 8 9 relating to the cryoprobe. Concept further alleges that in January 1994 the parties entered into a Development and Manufacturing Agreement ("Development Agreement") in which Concept was to perform vacuum brazing on the cryoprobe according to a detailed set of design specification. After a dispute arose regarding defects in the vacuum brazing process performed by Concept, the parties executed a release in August 1996 which discharged both parties from all business obligations to each other. Concept alleges that the Company violated the terms of the confidentiality agreement and the Development Agreement by subsequently applying for and receiving a United States patent on the cryoprobe. Concept contends it has a proprietary interest in the design of the cryoprobe. Further, Concept alleges that the Company fraudulently induced it into signing the release in order to secure the patent. Concept is demanding $1,500,000.00 plus costs and interest it claims it expended manufacturing the cryoprobes. The Company has denied all liability and damages, and intends to defend this matter. After evidence was found to show that the plaintiff failed to manufacture the probes in accordance with the design specification set out in the agreement, the Company filed a counterclaim against Concept. The counterclaim requests a judicial determination that the release was valid as well as damages for repairs to the cryoprobes due to the Concept's failure to conform with the design specifications set out in the agreement. Although the Company believes it has meritorious defenses and that the counterclaim asserts valid claims, no prediction concerning the ultimate outcome or amount or range of damages, if any, can be made at this time. In February, 1999, Alan A. Rich, formerly Vice President of Sales and Marketing for the Company, filed a suit against the Company in the Superior Court of the Commonwealth of Massachusetts, Middlesex County, for breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel and violation of the Maryland Wage Payment and Collection Law based upon the allegation that the Company constructively discharged the plaintiff from his employment with the Company. The complaint seeks appropriate damages. The suit has been removed to the Federal District Court. Although the Company believes it has meritorious defenses, no prediction concerning the ultimate outcome or amount of damages, if any, can be made at this time. In March, 1999, Endocare filed a suit against the Company, Dr. Richard J. Reinhart, the Company's President and Chief Executive Officer, and Dr. John G. Baust, the Company's Senior Vice President of Research and Development, in the Superior Court of California, County of Orange (Case No. 806794), for libel, slander, trade libel, false advertising, and unfair business practices based upon the alleged dissemination of information in press releases, and otherwise, to the effect that Endocare's cryosurgical devices are unsafe and have a history of putting patients, upon which the devices were used, in danger. The Complaint seeks damages in an amount subject to proof, injunctive relief and a return of all profits made as a result of the alleged unfair business practices. The Company believes there is no merit to the claims and intends to defend the suit vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special shareholders meeting was held on December 16, 1998 for the purpose of ratifying and approving each of the matters contained in a Plan of Recapitalization and Financing (the "Plan"). The Plan was adopted by the Company's Board of Directors ("Board") pursuant to the terms and conditions of a Stock Purchase Agreement with ValorInvest, Ltd. The Stock Purchase Agreement provided for the Plan to be submitted to the Company's stockholders for their approval. The Plan consisted of the following proposals to be voted on at the meeting. (a) Amend the Company's certificate of incorporation to affect a one-for-five, one-for-six, one-for-seven, one-for-eight, one-for-nine, one-for-ten, one-for-eleven, one-for twelve, one-for-thirteen, one-for fourteen, one-for-fifteen, or one-for sixteen reverse stock split of the issued and outstanding shares of Common Stock with one of such approved alternatives to be chosen by the Board (the "Reverse Stock Split Proposal"). (b) Amend the Company's certificate of incorporation to reduce the number of authorized shares of Common Stock from 50,000,000 shares to 25,000,000 (the "Common Stock Reduction Proposal"). (c) Amend the Company's certificate of incorporation to reduce the number of authorized shares of Preferred Stock from 9,378,800 shares to 1,000,000 shares (the "Preferred Stock Reduction Proposal"). (d) Ratify and approve the Company's Stock Option Plan (the "1998 Stock Option Plan Proposal"). (e) Ratify and approve the grant of stock options/warrants to purchase an aggregate of 19,155,000 shares (pre-Reverse Stock Split) of Common Stock, exercisable at $.25 per share (pre Reverse Stock Split) to 9 10 management, others who have performed services for the Company, and directors, to appropriately incentivize and/or compensate them for the services provided to the Company (the "Option/Warrant Grant Proposal"). (f) Approve the preparation and filing of a registration statement with the Securities and Exchange Commission for the sale of securities by the Company (the "SEC Filing Proposal"). All of the proposals were approved at the meeting. With respect to the Reverse Stock Proposal, 17,625,697 shares of Common Stock were voted FOR the proposal, 1,026,572 shares of Common Stock were voted AGAINST the proposal, and 76,058 shares of Common Stock ABSTAINED. With respect to the Common Stock Reduction Proposal, 17,643,159 shares of Common Stock were voted FOR the proposal, 984,272 shares of Common Stock were voted AGAINST the proposal, and 100,896 shares of Common Stock ABSTAINED. With respect to the Preferred Stock Reduction Proposal, 17,682,102 shares of Common Stock were voted FOR the proposal, 941,812 shares of Common Stock were voted AGAINST the proposal, and 104,413 shares of Common Stock ABSTAINED. With respect to the Stock Option Plan Proposal, 17,125,856 shares of Common Stock were voted FOR the proposal, 1,465,868 shares of Common Stock were voted AGAINST the proposal, and 136,603 shares of Common Stock ABSTAINED. With respect to the Stock Option/Warrant Grant Proposal, 17,057,571 shares of Common Stock were voted FOR the proposal, 1,526,870 shares of Common Stock were voted AGAINST the proposal, and 143,886 shares of Common Stock ABSTAINED. With respect to the SEC Filing Proposal, 17,655,884 shares of Common Stock were voted FOR the proposal, 918,917 shares of Common Stock were voted AGAINST the proposal, and 153,529 shares of Common Stock ABSTAINED. All shares of Series E Preferred Stock (the only class of preferred stock then outstanding and entitled to vote), representing 1,280,000 votes, were voted FOR each of the proposals. 10 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock, par value $.001 per share, of the Company ("Common Stock") has been traded on the over-the-counter market with quotations reported on the National Association of Securities Dealers Automatic Quotation System (NASDAQ) under the symbol "CMSI" since November 22, 1989. From the period May 19, 1992 to November 21, 1996, the Common Stock has traded on the NASDAQ National Market System and on November 22, 1996, the Common Stock commenced trading on the NASDAQ SmallCap Market System. In December 1998 the Common Stock commenced trading on the OTC Bulletin Board. The following table sets forth the high and low closing prices for the Common Stock for the periods indicated.
Price Range ----------- High Low ---- --- Quarter Ended: - -------------- March 29, 1998 .4062 .1562 June 28, 1998 .4688 .1250 September 27, 1998 .3750 .0938 December 27, 1998 .1562 .0469 March 30, 1997 .7188 .2812 June 29, 1997 .5000 .3438 September 28, 1997 .5938 .3125 December 28, 1997 .4375 .1250
HOLDERS As of March 1, 1999, there were more than 1,000 holders of record of the Common Stock. DIVIDEND HISTORY AND POLICY The Company has never paid cash dividends on its Common Stock and does not anticipate that any cash dividends will be paid for the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES On October 13, 1999, the Company sold 128 Series E Units to ValorInvest, Ltd., a corporation based in Geneva, Switzerland ("ValorInvest"), for an aggregate purchase price of $200,000 pursuant to Regulation S promulgated under the Securities Act of 1933. Each Series E Unit consists of one share of Series E Convertible Preferred Stock, convertible into 10,000 shares of Common Stock, and a warrant to purchase 5,000 shares of Common Stock at $.25 per share, the exercise of which is subject to the consummation of a public offering of the Company's securities on certain minimum terms and conditions. In February, 1999, the Company sold to ValorInvest an additional 256 Series E Units for an aggregate purchase price of $400,000 pursuant to Regulation S. 11 12 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The Company is engaged in the research, development, marketing and manufacturing of products for use in the field of hypothermic (low-temperature) medicine. In March 1998 the Company created a wholly owned subsidiary, BioLife Technologies, Inc for the purposes of commercializing the company's preservative Solutions. The company is presently seeking funding for this subsidiary and although it has contacted a number of parties who have expressed an interest in potentially providing such funding, there can be no assurance that such funding will be obtained. On July 25, 1996, the Board of Directors of the Company authorized a change in the Company's fiscal year from a period beginning July 1 and ending on June 30 to a variable period that usually ends on the last Sunday of the calendar. Such change was made to make the Company's year end consistent with its quarterly accounting periods which, in the case of 52-week years, consists of two four week and one five week periods per quarter ending on a Sunday. In addition to conforming the Company's yearly and quarterly accounting periods, the change in the Company's fiscal year conforms to an annual reporting period more closely associated with the calendar year and, to the fiscal years utilized by a majority of the public companies in the sales and manufacturing industries. RESULTS OF OPERATIONS In the 1998 fiscal year the Company continued to have its revenues negatively influenced by the lack of reimbursement by HCFA in regard to cryoablation of the prostate and FDA's prohibition on the promotion of cryosurgical techniques that may be used in the uterus. The company has made reductions in expenses and personnel in an attempt to maintain its viability as an operating entity. In February 1999 HCFA announced a new national coverage policy for cryosurgery of the prostate for patients with localized prostate cancer. It is anticipated that such a coverage policy will provide the company with an opportunity to realize revenues from cryosurgical operations of the prostate, but there can be no assurance that such revenues will be realized. Sales and other revenues for the year ended December 27, 1998 and the year ended December 28, 1997 are $2,369,748 and $3,751,386, respectively. The decrease in revenue results from a decline in the number of AccuProbe systems sold and fewer procedures performed using single-use AccuProbe accessories due primarily to the lack of formal Medicare reimbursement for prostate cryosurgery. In view of the operating losses suffered by the Company and the level of the Company's current liquid resources (see "Liquidity and Capital Resources" below) the Company undertook certain actions to reduce expense levels. Such actions include staff reductions, a reduction in the amount of leased office space, reductions in the levels of research grants to outside facilities and reductions in other overhead expenses. The goal of these cost reduction measures is to reduce operating expenses to a level whereby the Company can achieve operating profits and a positive cash flow from operations. There can be no assurance of achieving these results. Gross profits for the year ended December 27, 1998 and the year ended December 28, 1997 are $1,093,607 and $1,652,784 respectively. Gross profits as a percentage of revenues in 1998 were 46% and 46% for the fiscal year 1997. The company can give no assurance that there will be stabilization in gross profits as a percent of sales during the year ending December 26, 1999. Research and development expenses for the year ended December 27, 1998 and Fiscal year 1997 were $674,160 and $1,293,470 respectively. The research and expense revenues for 1998 were incurred primarily in the development of the Blizzard Series and other non-liquid nitrogen based products. Sales and marketing expenses for the year ended December 27, 1998 and Fiscal year 1997 were $548,480 and $806,435 respectively. The trend in reducing sales and marketing expenses is primarily due to reduced participation in marketing and trade shows and general travel expenses. General and administrative expenses for year ended December 27, 1998 and fiscal year 1997 were $1,114,490 and $1,209,884 respectively. This trend in reducing general and administrative expenses is primarily due to staff reductions and reduced professional and consultants fees. The Company sustained net losses for the year ended December 27, 1998 and fiscal year 1997 in the amount of $1,268,341 and $1,589,993 respectively. Although the Company continues to decrease its operating costs, the decrease in gross profits, due to significantly lower revenues, has resulted in continued annual net losses. 12 13 The Company intends to continue reducing its operating expenses in view of the trend of continuing declines in revenues. There can be no assurance that with continued reductions in operating expenses, the Company will experience a net profit in 1999. LIQUIDITY AND CAPITAL RESOURCES On October 13, 1998 the Company entered into a Stock Purchase Agreement with ValorInvest, Ltd. ("ValorInvest") a Geneva, Switzerland based corporation, pursuant to which, among other things, ValorInvest (a) purchased from the Company, 128 Series E Units at price of $1,526.50 per Unit (an aggregate of $200,000), and (b) agreed to purchase an additional 256 Series E Units at a price of $1,562.50 per Unit (an aggregate of $400,000), each Unit to consist of one share of Series E Convertible Preferred Stock, convertible into 10,000 shares of Common Stock, and a warrant to purchase 5,000 shares of Common Stock at $.25 per share, the exercise of which is subject to the consummation of a public offering of the Company's securities on certain minimum terms and conditions. ValorInvest completed the purchase of the additional 256 Series E Units in February 1999. At December 27, 1998 the Company had cash and cash equivalents totaling $135,183 and working capital of $722,620 The working capital of the Company was $1,588,368 at December 28, 1997. The Company's working capital position decreased in the period ended December 27, 1998 as a result of a 12 month net loss of $1,268,341 net of the proceeds of $200,000 obtained from the ValorInvest equity placement. Capital expenditures for leasehold improvements, furniture and equipment totaled $249,619 in the year ended December 27, 1998 compared to $355,294 in fiscal year 1997. The Company has budgeted $150,000 for additional equipment in the year ending December 26, 1999. The Company expects to incur expenditures over the next 12 months related to research, development, manufacturing and testing of its products, and for sales and marketing efforts and other operating expenses. The Company's management assumes that fiscal 1999 sales may be less than the level experienced in comparable periods of 1998 and 1997 and believes that its current cash and working capital position will be sufficient to fund the operations of the Company for 12 months, dependent, in part, on the level of sales and marketing activity engaged in by the Company and the amounts of research funded by the Company. However, the Company expects to reduce expenditures and to pursue various forms of short term financing and possibly additional equity financing to supplement working capital during fiscal year 1999. Except for the proceeds from the sale of its products, the Company has no other major sources of liquidity and has no commitments with regard to obtaining any additional funds. 13 14 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CRYOMEDICAL SCIENCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number ----------- Independent Auditor's Report 15 Balance Sheet 16 Consolidated Statements of Operations 17 Consolidated Statements of Cash Flows 18 Consolidated Statements of Changes in Stockholders' Equity 19 Notes to Consolidated Financial Statements 20 - 35
14 15 Independent Auditor's Report To the Board of Directors and Stockholders of CRYOMEDICAL SCIENCES, INC. Rockville, MD We have audited the accompanying Consolidated Balance Sheet of Cryomedical Sciences, Inc. and Subsidiary as of December 27, 1998, and the related Consolidated Statements of Operations, Cash Flows and Stockholders' Equity, for the years ended December 27, 1998 and December 28, 1997. 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 consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Cryomedical Sciences, Inc. and Subsidiary at December 27, 1998, and the results of their operations and their cash flows for the years ended December 27, 1998 and December 28, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring operating losses and negative cash flows from operations. Additionally, the Company's revenue is based upon a singular technology which, in the principal area of use, prior to February 12, 1999, the Medicare Health Care Financing Administration adopted a policy of noncoverage which has had the effect of discouraging use by physicians that rely on Medicare funding for patients. On February 12, 1999, the Medicare Health Care Financing Administration announced a new policy providing for Medicare reimbursement in the principal area of use of the Company's products and technology. This announcement is expected to substantially improve the Company's position in the market place for the future. However, there remain conditions which raise substantial doubt as to the Company's ability to generate sufficient sales in the near future to enable it to realize its assets and continue as a going concern. Management's plans regarding these conditions are also discussed in Note 1. The financial statements do not include any adjustments that might be required as a result of the outcome of this uncertainty. ARONSON, FETRIDGE & WEIGLE Rockville, Maryland March 12, 1999 15 16 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
December 27, 1998 ---- ASSETS - ------ Current assets Cash and cash equivalents $ 135,183 Receivables, net allowance for doubtful accounts of $677,634 486,773 Inventories 1,225,982 Prepaid expenses and other current assets 80,510 -------------- Total current assets 1,928,448 Fixed assets, net accumulated depreciation and amortization of $2,334,375 780,307 Other assets 18,727 -------------- Total assets $ 2,727,482 ============== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities Accounts payable $ 593,021 Accrued expenses 367,104 Short-term credit facility 120,000 Unearned revenues 60,839 Warranty reserves 11,400 Extended warranties - current portion 16,179 Long-term debt - current portion 37,285 -------------- Total current liabilities 1,205,828 -------------- Long term liabilities Extended warranties, net of current portion 14,096 Long-term debt, net of current portion 50,035 Deferred rent 25,884 -------------- Total liabilities 1,295,843 -------------- Stockholders' equity Preferred stock, $.001 par value per share, 9,378,800 authorized; 128 shares issued and outstanding - Common stock, par value $.001 per share, 50,000,000 shares authorized; 33,454,302 issued and outstanding 33,454 Additional paid-in capital 30,751,263 Accumulated deficit (29,353,078) -------------- Total stockholders' equity 1,431,639 -------------- Total liabilities and stockholders' equity $ 2,727,482 ==============
The accompanying notes are an integral part of these financial statements. 17 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 27, December 28, -------------- ------------- 1998 1997 ---- ---- Revenues Product sales $ 1,461,942 $ 2,348,909 Services and other 907,806 1,222,477 -------------- ------------- Total Revenue 2,369,748 3,571,386 Cost of sales Product sales 821,247 1,410,592 Services and other 454,894 508,010 -------------- ------------- Total cost of sales 1,276,141 1,918,602 Gross profit 1,093,607 1,652,784 Expenses Research and development 674,160 1,293,470 Sales and marketing 548,480 806,435 General and administrative 1,114,490 1,209,884 -------------- ------------- Total expenses 2,337,130 3,309,789 -------------- ------------- Operating loss (1,243,523) (1,657,005) Interest income, net of interest expense (24,818) 67,012 -------------- ------------- Net loss $ (1,268,341) $ (1,589,993) ============== ============= Basic net loss per common share $ (0.04) $ (0.05) ============== ============= Weighted average number of common shares outstanding 33,454,302 33,158,999 ============== =============
The accompanying notes are an integral part of these financial statements. 18 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 27, December 28, -------------- -------------- 1998 1997 ---- ---- Cash flows from operating activities: Net loss $ (1,268,341) $ (1,589,993) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 342,288 420,993 Provision for bad debt 154,427 334,303 Write-off of accounts receivable (45,793) (12,211) Sale of rental equipment 54,000 45,847 Loss on disposal of fixed assets, net 22,394 - Changes in operating assets and liabilities: Decrease in receivables 394,501 62,814 Decrease in inventories 428,124 37,195 Decrease (increase) in prepaid and other current assets 17,520 (31,635) Increase in accounts payable 59,347 173,015 Increase (decrease) in accrued expenses (61,220) (376,750) Increase in short-term credit facility 120,000 Decrease in unearned revenue (74,423) (18,948) Decrease in warranty reserves (39,198) (47,002) Decrease in extended warranties (67,062) (420,351) Decrease in deferred rent (7,446) (72,194) -------------- -------------- Net cash provided by (used in) operating activities 29,118 (1,494,917) -------------- -------------- Cash flows from investing activities: Maturities of short term investments - 110,150 Proceeds from sale of fixed assets 44,926 - Purchase of fixed assets (249,619) (355,294) -------------- -------------- Net cash used in investing activities (204,693) (245,144) -------------- -------------- Cash flows from financing activities: Issuance of shares for employee stock purchase plan - 30,101 Issuance of preferred stock 200,000 - Decrease (increase) in unearned compensation 39,525 (16,937) Issuance of warrants - 43,000 Proceeds from notes payable 32,407 57,310 Principal payments on capital leases and notes payable (85,174) (18,656) -------------- -------------- Net cash provided by financing activities 186,758 94,818 -------------- -------------- Net increase (decrease) in cash and cash equivalents 11,183 (1,645,243) Cash and cash equivalents at beginning of period 124,000 1,769,243 -------------- -------------- Cash and cash equivalents at end of period $ 135,183 $ 124,000 ============== ============== Supplemental Cash Flow Information: Cash paid for interest $ 28,278 $ 23,160 ============== ============== Supplemental disclosure of noncash activity: Lease equipment acquired under capital lease $ - $ 91,727 ============== ==============
The accompanying notes are an integral part of these financial statements. 19 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Convertible Preferred Stock ----------------------------- ------------------------------ Shares Amount Shares Amount - --------------------------------------------------------------------------------------------------------- Balance, December 29, 1996 27,849,745 27,850 156 - Employee Stock Purchase Plan 96,389 96 - - Conversion of Series D Preferred Stock 5,508,168 5,508 (156) - Issuance of Warrants - - - - Amortization of unearned compensation - - - - Net loss - - - - - --------------------------------------------------------------------------------------------------------- Balance, December 28, 1997 33,454,302 33,454 - - Issuance of Series E Convertible Preferred Stock 128 - Amortization of unearned compensation - - - - Net loss - - - - - --------------------------------------------------------------------------------------------------------- Balance December 27, 1998 33,454,302 $ 33,454 128 - =========================================================================================================
Additional Total paid-in Accumulated Unearned stockholders' capital deficit Compensation equity - ----------------------------------------------------------------------------------------------------------------- Balance, December 29, 1996 30,483,765 (26,494,744) (22,588) 3,994,283 Employee Stock Purchase Plan 30,006 - - 30,102 Conversion of Series D Preferred Stock (5,508) - - 0 Issuance of Warrants 43,000 - (20,408) 22,592 Amortization of unearned compensation - - 3,471 3,471 Net loss - (1,589,993) - (1,589,993) - ----------------------------------------------------------------------------------------------------------------- Balance, December 28, 1997 30,551,263 (28,084,737) (39,525) 2,460,455 Issuance of Series E Convertible Preferred Stock 200,000 - - 200,000 Amortization of unearned compensation - - 39,525 39,525 Net loss - (1,268,341) - (1,268,341) - ----------------------------------------------------------------------------------------------------------------- Balance December 27, 1998 $ 30,751,263 $ (29,353,078) - $ 1,431,639 =================================================================================================================
The accompanying notes are an integral part of these financial statements. 20 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (A) Organization and condition of the Company Cryomedical Sciences, Inc. (the Company) is engaged in the research and development of products for use in the field of hypothermic (low-temperature) medicine by surgeons and radiologists in the United States and abroad. The Company is engaged in the development, manufacturing and marketing of cryosurgical devices used to freeze and destroy diseased tissue through the application of subfreezing temperatures. The first such device was shipped in June 1992. Hypothermic blood substitute solutions, also being developed by the Company, may allow heretofore difficult or impossible surgical techniques to be performed and may be useful in increasing the period in which organs may be preserved for transplantation. The Company was organized November 5, 1987, as a Delaware corporation. On March 25, 1998, BioLife Technologies, Inc. (BioLife) was incorporated under the laws of the State of Delaware and is wholly owned by the Company. The Company has experienced recurring operating losses and continuing negative cash flows from its business activities. Additionally, past and expected future revenue is based upon a singular technology, cryomedical devices used to freeze and destroy diseased tissue. There can be no assurance that this technology will continue to be attractive to the market or that procedures performed using the technology will be subject to reimbursement by public and private insurers. Except for the proceeds from the sale of its products, the Company has no other major sources of liquidity. On February 10, 1999, an investor purchased an additional 256 units of the Company's Series E Convertible Preferred Stock for an aggregate amount of $400,000. Additionally, Management intends to fund its operations, including future research and development, through the profitable sales of the Company's products and services, and continues to search for additional financing, either in the form of debt or the sale of equity securities. The Company has assessed its current position and has taken steps to increase the utilization of its technology in areas other than urology, including general surgery and gynecology. In attempting to achieve this goal, the Company spends significant resources to educate surgeons and healthcare professionals in formal training programs as to the uses and benefits of the Company's cryomedical technology and has developed focused technology for other cryosurgical applications. The Company has no significant long-term debt outstanding. These financial statements assume that the Company will be able to continue as a going concern. If the Company is unable to continue as a going concern, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and 20 21 classification of liabilities that may be necessary should the entity be unable to continue as a going concern. 21 22 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (B) Principles of Consolidation The financial statements include the accounts of Cryomedical Sciences, Inc., and its wholly owned subsidiary BioLife Technologies, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. (C) Fiscal year The Company and its subsidiary have adopted a 52-53 week year ending on the Sunday nearest to December 31st for financial reporting purposes. (D) Basis net loss per share The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Because the Company has incurred losses, fully diluted per share amounts are not presented. (E) Cash Equivalents Cash equivalents consist primarily of interest-bearing money market accounts. The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains cash balances which may exceed Federally insured limits. The Company does not believe that this results in any significant credit risk. (F) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. (G) Equipment and Leasehold Improvements Furniture and equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the lesser of the life of the asset or the remaining term of the lease. Equipment also includes Accuprobe Consoles on rent or on loan which are depreciated using the straight-line method over an estimated useful life of five years. 22 23 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (H) Revenue Recognition The Company receives revenue from sales of products, services and from the rental of Accuprobe Consoles. The Company generally recognizes revenue related to the sales of its products, primarily its Accuprobe Consoles and disposable probes, at the time of shipment. Revenue from extended warranties and service contracts is deferred and recognized on a straight-line basis over the contract periods. Revenue from the lease of Accuprobe Consoles is recognized over the course of the non-cancelable lease term. (I) Warranties The Company generally warrants its Accuprobe Consoles for one year. The estimated cost to repair or replace systems under warranty is provided by charges to cost of sales in the period in which the system is shipped. (J) Income Taxes The Company accounts for income taxes using an asset and liability method which generally requires recognition of deferred tax assets and liabilities for the expected future tax effects of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of differences between tax bases of assets and liabilities, and financial reporting amounts, based upon enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. (K) 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 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. (L) Employee Stock Options The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of the grant over the amount an employee must pay to acquire the stock. 23 24 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (M) Fair Value of Financial Instruments The fair value of the financial instruments included in the consolidated financial statements, except as otherwise discussed in the notes to financial statements, approximates their carrying value. NOTE 2 - INVENTORIES Inventories consist of the following at December 27, 1998: Raw materials and purchased parts $ 702,758 Work in process 111,140 Finished goods 412,084 ----------- $ 1,225,982 ===========
NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 27, 1998: Leasehold improvements $ 201,521 Furniture and office equipment 766,150 Manufacturing and other equipment 2,147,011 ----------- 3,114,682 Less accumulated depreciation and amortization (2,334,375) ----------- $ 780,307 ===========
24 25 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 4 - INCOME TAXES The Company has not realized any taxable income since its inception and as of December 27, 1998, has net operating loss carryforwards for both federal and state tax purposes and research and development tax credit carryforwards for federal income tax purposes approximately as follows:
Net R&D Year of Operating Tax Expiration Losses Credits ---------- --------- ---------- 2003 $ 76,000 $ - 2004 472,000 20,000 2005 1,747,000 42,000 2006 2,523,000 88,000 2007 4,505,000 125,000 2008 5,893,000 150,000 2009 1,431,000 114,000 2010 1,562,000 145,000 2011 5,137,000 33,000 2012 1,570,000 - 2013 1,260,000 - ----------- ----------- Total $26,176,000 $ 717,000 =========== ===========
At December 27, 1998, the Company has a deferred tax asset related primarily to the net operating loss carryforwards and the R&D tax credit carryforwards of approximately $10,757,000, against which the Company has provided an allowance for the full amount because management has determined that there is doubt that the deferred tax asset will be realized. In the event of a significant change in the ownership of the Company, the utilization of such loss carryforwards could be substantially limited. 25 26 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 5 - STOCKHOLDERS' EQUITY On October 2, 1996, the Company consummated a private placement of 196 shares of Series D Convertible Preferred Stock (the "Series D Preferred Stock") pursuant to Regulation S of the Securities Act of 1933, as amended. The net proceeds of the offering totaled $1,924,935. Each share of Series D Preferred Stock was convertible into that number of shares of common stock as determined by dividing $10,000 by a price equal to 82.5% of the average of the closing bid prices for the common stock for the five (5) trading days immediately preceding the date upon which the holder of the Series D Preferred Stock transmitted a conversion notice to the Company. The holders of the Series D Preferred Stock could convert one-third of their shares of Series D Preferred Stock commencing forty (40) days after the Series D Preferred Stock Closing Date, up to an additional one-third of the Series D Preferred Stock commencing seventy-five (75) days after the Series D Preferred Stock Closing Date, and the balance thereof commencing one hundred (100) days after the Series D Preferred Stock Closing Date. In November 1996, the Company issued 969,695 shares of Common Stock in accordance with the terms of the first conversion of the preferred stock offering. In January 1997, the second and third preferred stock conversions of the offering, representing the remaining 156 shares of Series D preferred stock were converted into 5,508,168 shares of common stock, completing the offering. On October 20, 1998, the Company entered into an agreement for the private placement of 384 Series E Units. Each Unit consists of one share of Series E Convertible Preferred Stock (the "Series E Preferred Stock"), convertible into 10,000 shares of Common Stock and a warrant to purchase 5,000 shares of common stock at $.25 per share, pursuant to Regulation S of the Securities Act of 1933, as amended. The net proceeds of the offering is to total $600,000, of which $200,000 was received in 1998 and the remaining $400,000 was received on February 10, 1999. The Company has granted warrants to consultants and others who have provided, or will provide, services to the Company, at an exercise price per share equal to the market price of the common stock on the date of grant. The terms of such warrants have ranged from three to ten years with various vesting arrangements (see Note 7 regarding warrants granted to a director). In November 1996, the Company granted warrants to two consultants in connection with limited period consulting agreements. In total, the Company granted the consultants warrants to purchase 85,000 shares of Common Stock at $0.53 per share. The warrants had a grant date fair value of $0.28 per share of common stock, lapse after ten years and may be exercised one-third each on the first, second, and third anniversary dates of the grant. In March 1997, the Company granted warrants to a consultant to the Company to purchase 50,000 shares of the Company's common stock at a price of $.53125. The fair value of the Company's common stock at the date of grant was $.375. The warrants are exercisable into 25,000 shares immediately with the remainder exercisable one-third on each of the first, second and third anniversary dates of the grant. 26 27 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) In July 1997, the Company granted warrants to two consultants to the Company to purchase an aggregate of 80,000 shares (40,000 shares each) of common stock of the Company at a purchase price of $.50 per share. The fair value of the Company's common stock at the date of the grant was $.375. The warrants are exercisable one-third each on each of the first, second and third anniversary dates of the grant. In August 1998, the Company granted warrants to two consultants to the Company to purchase 6,480,000 shares of the Company's common stock at a price of $.25. The fair value of the Company's common stock at the date of the grant was $.1562. The warrants are exercisable immediately after issuance and until the termination date of August 30, 2008. The following table summarizes warrant activity for the years ended December 27, 1998 and December 28, 1997, with respect to warrants granted to consultants excluding warrants granted to directors of the Company. (See Note 7):
Year Ended Year Ended December 27, 1998 December 28, 1997 ----------------------------- ------------------------- Wgtd. Avg. Wgtd. Avg. Exer. Exer. Shares Price Shares Price ------------ --------------- ------------ ----------- Outstanding at beginning of year 367,000 $ 2.65 237,000 $ 3.82 Granted 6,480,000 .25 130,000 .51 Exercised - - - - Terminated 152,000 5.66 - - Outstanding at end of year 6,695,000 .26 367,000 2.65 Warrants exercisable at year end 6,632,900 .26 198,333 5.16
Stock Compensation Plans The Company's 1988 Stock Option Plan was approved and adopted by the Board of Directors in July 1988 and had a term of ten years. The plan expired in 1998. The options expire ten years from the date the options are granted. During 1998, the Board of Directors adopted the 1998 Stock Option Plan, and obtained approval of the shareholders at a special meeting held on December 16, 1998. Under the 1998 Stock Option Plan, an aggregate of 20,000,000 shares of common stock are reserved for issuance upon the exercise of options granted under the plan. The purchase price of the common stock underlying each option may not be less than the fair market value at the date the option is granted (110% of fair market value optionees that own more than 10% of the voting power of the Company). The options are exercisable for up ten years from the grant date. The plan expires August 30, 2008. The stock option agreements are issued with immediate vesting or vesting provisions. 27 28 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) The following table provides information pertaining to stock options under both plans:
Year Ended Year Ended December 27, 1998 December 28, 1997 ----------------------------- ------------------------- Wgtd. Avg. Wgtd. Avg. Exer. Exer. Shares Price Shares Price ------------ --------------- ------------ ----------- Outstanding at beginning of year 1,843,600 $ 2.12 1,689,250 $ 3.32 Granted 11,525,000 .25 400,000 .50 Exercised - - 96,389 .31 Terminated 294,000 3.00 149,261 12.80 Outstanding at end of year 13,074,600 .45 1,843,600 2.12 Stock options exercisable at year end 11,655,225 .40 999,350 2.56
The following table summarizes information about stock options outstanding at December 27, 1998:
Range of Number Weighted Average Exercise Outstanding Remaining Weighted Average Prices at December 27, 1998 Contractual Life Exercise Price - --------------------- ------------------------------ ---------------------------- ---------------------------- .25 11,525,000 9.0 $ .25 .26 -3.00 1,519,500 6.7 1.82 3.01 -6.00 1,100 7.0 3.38 6.01 -9.25 29,000 3.3 8.98 --------- --- ---- 13,074,600 8.8 .45 ========== === ====
Number Exercisable at Weighted Average December 27, 1998 Exercise Price ------------------------------- -------------------------- 11,655,225 .40
28 29 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) The 1993 Employee Stock Purchase Plan was adopted by the Board of Directors in August 1993, and made available 250,000 shares of Common Stock of the Company to be purchased voluntarily through payroll deductions of one to ten percent of base pay by participating employees (excluding directors and officers) of the Company through a series of Offerings. Each employee at the completion of an offering is eligible to purchase Common Stock at 85% of its fair market value at either the beginning or end of the six-month offering, whichever is lower. The Plan expired on June 30, 1997. Transactions related to the Plan are summarized as follows:
Weighted Average Exercise Shares Price ---------------- ------------------ Available at December 28, 1997 - $ - Exercised 96,389 .31
The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its employee stock option and purchase plans. The compensation costs charged against income under the Company's plans for the year ended December 27, 1998 and the year ended December 28, 1997 were insignificant. Had compensation cost for the Company's stock option plans and its stock purchase plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Financial Accounting Standards Board Statement No. 123, the Company's net loss and loss per share for the year ended December 27, 1998 and the year ended December 28, 1997 would have been the pro forma amounts indicated below:
1998 1997 -------------- ------------- Net loss to common shareholders As reported $(1,268,341) $(1,589,993) Pro forma (2,704,067) (2,191,011) Net loss per basic common share As reported (.04) (.05) Pro forma (.08) (.07)
29 30 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) Stockholder Rights Plan - On August 21, 1995, the Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock for stockholders of record on September 11, 1995. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series B Junior Preferred Stock, par value $.001 per share(the "Preferred Shares"), of the Company at a price of $10 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. The Rights will be exercisable (i) 10 days following a public announcement that a person or group acquires beneficial ownership of 20% or more of the outstanding Common Stock of the Company (an "Acquiring Person"), or (ii) 10 business days (or later as determined by the Board of Directors) following the commencement of, or an announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Common Stock of the Company (the earlier of such dates being called the "Distribution Date"). Until a Right is exercised, the holder thereof will have no rights as a stockholder of the Company. Until the Distribution Date (or earlier redemption or expiration of the Rights),the Rights will be transferred with and only with the Common Stock. In the event that any person or group becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person, will thereafter have the right to receive upon exercise that number of shares of Common Stock of the Company having a market value of two times the Purchase Price, and in the event that the Company is acquired in a business combination transaction or 50% or more of its assets are sold, each holder of a Right will thereafter have the right to receive upon exercise that number of shares of common stock of the acquiring company which at the time of the transaction will have a market value of two times the Purchase Price. At any time after any person becomes an Acquiring Person, and prior to the acquisition by such person or group of 50% or more of the outstanding common stock of the Company, the Board of Directors of the Company may cause the Rights (other than Rights owned by such person or group) to be exchanged, in whole or in part, for common stock at an exchange rate of one share of Common Stock per Right. At any time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the outstanding common stock, the Board of Directors of the Company may redeem the Rights in whole at a price of $.001 per Right. The Rights have certain anti-takeover effects, in that they will cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. At a special meeting of the stockholder on December 16, 1998, approval was given to amend the Company's charter to reduce the number of authorized shares of common stock of the Company from 50 million shares to 25 million shares; reduce the number of authorized shares of preferred stock of the Company, par value $.001 per share, from 9,378,800 shares to 1 million shares; and authorized the Board of Directors to effect, at its option, a reverse stock split of the Company's common stock of anywhere from one-for-five to one-for-sixteen. The Company has not acted to amend its charter for the reductions in the common and preferred stock as of March 12, 1999, and the Board of Directors has taken no action to effect a reverse split as approved by the stockholders. 30 31 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) As of December 31, 1998, the Company does not have sufficient authorized but unissued common stock to fulfill the requirements for issuance of common stock under all of its outstanding options, warrants and conversion provisions. The Company expects that after the Board of Directors selects and effects the reverse stock split authorized that the Company will have sufficient authorized and unissued shares to reserve for issuance under its outstanding option, warrant and conversion obligations on a post reverse split basis. NOTE 6 - EMPLOYEE BENEFIT PLAN The Company established a 401(k) savings plan effective July 1,1992 covering all eligible employees. Company contributions are discretionary and no contributions were made for the years ended December 27, 1998 or December 28, 1997. NOTE 7 - RELATED PARTY TRANSACTIONS In August 1993, in connection with the execution of a three-year consulting agreement, the Company granted a Director warrants to purchase 25,000 shares of Common Stock at $5.75 per share. The warrants lapsed during 1998. In January 1997, the Company granted to each of two Directors of the Company options to purchase 25,000 shares of the Company's common stock for $.50 per share. The warrants expire in ten years. On May 24, 1996, the President and Chief Executive Officer entered into an employment agreement for a period running through December 1999, which included a grant of non-incentive stock options to purchase 750,000 shares of Common Stock at a price of $2.1875 per share. These options vest evenly over five years, commencing one year from the date of employment. The Company incurred $58,793 and $27,641 in legal fees during the year ended December 27, 1998 and December 28, 1997, respectively, to a law firm in which a director and stockholder of the Company is a partner. 31 32 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 8 - COMMITMENTS AND CONTINGENCIES (A) Employment Agreement In May 1996, the Company entered into an employment agreement with its President and Chief Executive Officer that has an original term that expired December 31, 1997. The agreement provided for two automatic one year extensions unless the Company acts not to extend the agreement. The agreement provides for annual bonuses to the officer based upon a percentage of "Pre-Tax Profits of the Company" as follows:
Percent of Pre-Tax Year Profits - ---- ------------ 1998 7.5% 1999 5.0 2000 4.0 2001 3.0
(B) Leases The Company rents office, lab and manufacturing space as lessee under a five year operating lease that commenced May 1, 1995. Effective August 1996, the Company entered into an addendum to the lease whereby the Company released a portion of the space included in the lease which the landlord then relet to another tenant. Under the letter agreement, the Company paid for certain improvements required by the new tenant and is paying the landlord a $1 per square foot differential rent charge over the term of the lease. In March 1997, the Company agreed to release additional space covered by its lease to its landlord who then relet the space to another tenant. The Company has guaranteed the rental payments of the new tenant to the landlord for the remainder of the term of the Company's lease. Future minimum payments under the agreement, including the $1 per square foot differential are as follows:
Year Amount - -------------- ----------- 1999 $ 212,000 2000 70,000 ----------- Total $ 282,000 ===========
Rental expenses for facilities and equipment for the year ended December 27, 1998 and December 28, 1997, totaled $257,349 and $246,485, respectively. 32 33 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Effective February 1, 1999, the Company released additional space to its landlord. The square footage was reduced by 7,300 square feet. The effect of the reduced space is reflected above. NOTE 9 - LONG-TERM DEBT Long-term debt consisted of the following at December 27, 1998: (A) Capital lease obligations Two leases for equipment entered into in 1997 requiring aggregate monthly payments of $2,955. The leased equipment is included in property and equipment at a cost of $91,727 less accumulated amortization of $19,691 at December 27, 1998. A summary of future payments required under the leases and the present value of the lease obligations in interest rates ranging from 12 to 25% that are implicit in the leases are as follows:
Year Amount - -------------- ----------- 1999 $ 35,472 2000 32,897 ---------- Total 68,369 Imputed interest 13,456 ---------- Net obligations $ 54,913 ==========
(B) Note payable The Company entered into a note agreement with a bank for $32,407. The note is secured by an automobile and requires monthly payment of $1,033. The note bears interest at 9.153% and matures November 2001. (C) Future maturities Future maturities of long-term debt is as follows:
Year Amount - -------------- ----------- 1999 $ 37,285 2000 39,177 2001 10,858 ----------- Total $ 87,320 ===========
Interest expense for the year ending December 27, 1998 was $28,278. 33 34 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 10 - SHORT-TERM CREDIT FACILITY The Company entered into a short term credit facility agreement on May 18, 1998 for one year whereby the Company assigns and factors its accounts receivable. Advances are made under the agreement at 65% of the invoice amount and the credit facility bears interest at prime plus 11.5%. The outstanding balance at December 27, 1998 was $120,000. NOTE 11 - LITIGATION In November 1996, the Company filed suit against EndoCare, Inc. and ZhaoHua Chang in the Circuit Court for Montgomery County, Maryland. The lawsuit alleges, among other things, that EndoCare misappropriated trade secrets of Cryomedical Sciences, Inc., and that EndoCare tortuously interfered with the Company's contracts, its relationships with its employees, and Cryomedical Sciences, Inc.'s contractual and potential business relationships with customers. The lawsuit, which contains six counts, also alleges that Dr. Chang and EndoCare engaged in unfair competition against the Company and civil conspiracy, and that Dr. Chang, who was formerly employed as a Vice President of Cryosurgical Engineering by Cryomedical Sciences, Inc., breached contractual and fiduciary obligations owed to the Company by this employment by EndoCare, his retention and misuse of Cryomedical Sciences' confidential information, and his improper solicitation of the Company's employees to disclose trade secret information and/or to become employed by EndoCare. EndoCare and Dr. Chang have denied the allegations in the lawsuit. In March 1997, Dr. Chang filed a counter-suit in the Circuit Court for Montgomery County, Maryland regarding numerous claims of a breach of contract by the Company. On March 26, 1999 the lawsuit against EndoCare was dismissed by stipulation of the parties and Order of the Court. On the same date, the court dismissed Dr. Chang's counterclaim against the Company with prejudice. In order to bring closure to the case, the Company is voluntarily dismissing the claim against Dr. Chang without prejudice. In June 1997, Concept Group, Inc. filed an action against the Company in Federal Court alleging that the Company violated certain confidentiality agreements by applying for and receiving a United States patent on a cryoprobe. Concept Group alleges it has a proprietary interest in the design of the cryoprobe and that the Company fraudulently induced them into signing a release in order to secure the patent. Concept Group demands $1,500,000 plus costs and interest it claims it has expended in manufacturing the probes. The Company believes that Concept Group failed to manufacture the cryoprobes in accordance with its specifications and has filed a counter claim against Concept Group. No trial date has been set for these actions. The Company believes that it has meritorious defenses and that its counter claim is valid. However, the Company is not presently able to predict the ultimate outcome of these actions. 34 35 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 NOTE 11 - LITIGATION (CONTINUED) In February 1999, Alan A. Rich, formerly Vice President of Sales and Marketing for the Company, filed a suit against the Company based upon the allegation that the Company constructively discharged him from his employment with the Company. The suit has been removed to the Federal District Court. Although the Company believes it has meritorious defenses, no prediction concerning the ultimate outcome or amount of damages, if any, can be made at this time. In March 1999, EndoCare, Inc. ("EndoCare") filed a suit against the Company, Dr. Richard J. Reinhart, the Company's President and Chief Executive Officer and John G. Baust, the Company's Senior Vice President of Research and Development in the Superior Court of California, County of Orange based upon the alleged dissemination of information to the effect that EndoCare's cryosurgical devices are unsafe and have a history of putting patients, upon which the devices were used, in danger. The Company believes there is no merit to the claims and intends to defend the suit vigorously. 35 36 ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company during the 1998 fiscal year were as follows:
Position and Offices Name Age With the Company - ---- --- -------------------- Richard J. Reinhart, Ph.D. 58 President and Chief Executive Officer and Director John G. Baust, Ph.D. 57 Senior Vice President and Chief Scientific Officer Alan F. Rich 46 Vice President, Sales and Marketing Howard S. Breslow 60 Director, Secretary J. Donald Hill 67 Director
Set forth below is a biographical description of each of the directors and executive officers identified above based on information supplied by them. Richard J. Reinhart, Ph.D., has been President, Chief Executive Officer and a director of the Company since May 1996. From 1994 to 1996, Dr. Reinhart was a consultant to Medical Resources, Inc., a diagnostic imaging company, while also working with several other health care companies. From 1988 to 1994, Dr. Reinhart was Managing Director for Medical Resources, Inc. From 1981 through 1988, Dr. Reinhart was Chief Executive Officer of several small entrepreneurial medical device and instrumentation companies. From 1969 to 1981, Dr. Reinhart was employed by Roche Medical Electronics (a subsidiary of Hoffman La Roche) where, after serving in several senior management positions, he became President and Chief Executive Officer in 1978. John G. Baust, Ph.D., has been Senior Vice President of the Company since January 1995, Chief Scientific Officer since August 1993, served as Vice President, Research and Development, of the Company from July 1990 to January 1995, and served as a consultant to the Company from April 1990 to July 1990. Since 1987, Dr. Baust has also been a Professor and the Director of the Center for Cryobiological Research at State University of New York at Binghamton, and since July 1994, Dr. Baust has also been Adjunct Professor of Surgery, Medical College of Pennsylvania. From 1984 to 1987, he was a Professor and the Director of the Institute of Low Temperature Biology at the University of Houston. Alan Rich was Vice President, Sales and Marketing, of the Company from March 1994 until January 1999. Mr. Rich joined the Company in May 1992 as a regional sales manager. From 1987 to May 1992, Mr. Rich was employed as Luminary Accounts Manager by Spacelabs, Inc., a publicly-held corporation engaged in the development, manufacture and marketing of patient monitoring systems. Howard S. Breslow has served as a director of the Company since July 1988. He has been a practicing attorney in New York City for more than 30 years and is a member of the law firm of Breslow & Walker, LLP, New York, New York, which firm serves as general counsel to the Company. Mr. Breslow currently serves as a director of Excel Technology, Inc., a publicly-held company engaged in the development and sale of laser products; FIND/SVP, Inc., a publicly-held company engaged in the development and marketing of information services and products; Vikonics, Inc., a publicly-held company engaged in the design and sale of computer-based security 36 37 systems; and Lucille Farms, Inc., a publicly-held company engaged in the manufacture and marketing of dairy products. J. Donald Hill has been a director of the Company since November 1995. Mr. Hill was a consultant to the Company from 1992 to 1995. He currently serves as Chairman and Chief Executive Officer of Excel Technology, Inc., a manufacturer of laser products and systems, where he has been employed since 1992. From January 1991 to October 1991, Mr. Hill was the Chief Executive Officer of Medstone International, and Corporate Secretary and Director of CytoCare, Inc., companies engaged in the development of medical therapy devices. From 1988 to 1990, Mr. Hill was Director of Corporate Finance at Weeden & Company, a securities firm. Mr. Hill also served as Vice Chairman of First Affiliated Securities, Inc. and as General Partner of Loeb, Rhoades and Company, also securities firms. All directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors are elected and qualified. Executive officers hold office until their successors are elected and qualified, subject to earlier removal by the Board of Directors. No family relationship exists between any director or executive officer and any other director or executive officer of the Company. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company's executive officers, directors, and beneficial owners of more than 10% of any class of its equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (collectively, the "Reporting Persons") are required to file reports of ownership and changes in beneficial ownership of the Company's equity securities with the Securities Exchange Commission. Copies of those reports also must be furnished to the Company. Based solely on a review of copies of the reports furnished to the Company, the Company believes that during the fiscal year ended December 27, 1998 all of these filing requirements have been satisfied. 37 38 ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company to its Chief Executive Officer and to each of its executive officers (other than the Chief Executive Officer) who received salary and bonus payments in excess of $100,000 during the fiscal year ended December 27, 1998 (collectively the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
Long Term Compensation ----------------------------------------------------- Annual Compensation Awards Payouts ----------------------------------------- ----------------------- ------- Restricted Other Annual Stock Options/ LTIP All Other Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs Payouts Compensation Positions Year ($) (4) ($) ($) ($) (#) (1) ($) ($) - ------------------ ---- ------- ----- ------------ ---------- -------- ------- -------------- Richard J. Reinhart, Ph.D. 1998 113,461 - 8,384 - 7,200,000 - - Current President, Chief 1997 159,964 (2) - - 250,000 - - Executive Officer and Director John G. Baust, Ph.D. 1998 98,790 - 15,316 - 2,160,000 - - Senior Vice 1997 115,140 - - - 50,000 - 9,750 (3) President, Research and Development Alan F. Rich 1998 100,450 - 14,344 - - - Vice President, 1997 100,450 - 30,053 - 50,000 - - Sales and Marketing
- ----------------------------- (1) Options to acquire shares of Common Stock. (2) Dr. Reinhart's contract contains a potential bonus provision based upon a "percentage of pretax profits of the Company." (3) Consists of Company contributions made in Dr. Baust's name to the State University of New York at Binghamton. (4) Salaries for fiscal year 1998 reflect voluntary salary reductions by Reinhart and Baust. 38 39 OPTION/SAR GRANTS IN YEAR-ENDED DECEMBER 27, 1998 In 1998, the Company issued the following options to purchase Common Stock to the Names Executive Officers:
Name Number of Percent of Total Exercise or Expiration - ---- Securities Options/SARs Base Price Date Underlying Issued to ---------- ---- Options Employees in Issued Fiscal year ------ ----------- Reinhart 7,200,000 71.4% .25 August 30, 2008 Baust 2,160,000 21.4% .25 August 30, 2008
AGGREGATED OPTION/SAR EXERCISES DURING THE 1998 FISCAL YEAR AND THE 1998 FISCAL YEAR OPTION/SAR VALUES The following table provides information related to options exercised by each of the Named Executive Officers during the 1998 fiscal year and the number and value of options held at December 27, 1998. The Company does not have any outstanding stock appreciation rights. None of the options were in the money at period ended December 27, 1998.
Value of Unexercised Number of Unexercised In-The-Money Options/SARs Options/SARs at Fiscal Year End (#) at Fiscal Year End ($) (1) ------------------------------ ---------------------------- Shares Acquired Value Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---------- --------------- ------------ ----------- ------------- ----------- ------------- Richard J. Reinhart, Ph.D. - - 7,550,000 650,000 - - John G. Baust, Ph.D. - - 2,500,000 40,000 - - Alan F. Rich - - - - - -
- ---------------------------------- (1) The closing price for the Company's Common Stock as reported on the OTC Bulletin Board on December 27, 1998 was $.0938. Value is calculated on the basis of the difference between the option exercise price and $.0938 multiplied by the number of shares of Common Stock underlying the option. - ---------------------------------- EMPLOYMENT AGREEMENTS In May 1996, the Company and Richard J. Reinhart, Ph.D. entered into an employment agreement through December 31, 1999 pursuant to which Dr. Reinhart was employed as President, Chief Executive Officer and a director of the Company. In accordance to his employment agreement, Dr. Reinhart was granted options to purchase 750,000 shares of Common Stock at an exercise price of $2.1875 per share pursuant to the Company's 1988 Stock Option Plan. The option vests one-fifth each year, for five years, commencing one year from employment. At December 29, 1996, Dr. Reinhart's salary was $150,000, and in addition to base salary, Dr. Reinhart is entitled to a bonus based upon a percentage of "pretax profits of the Company." Such bonus ranges from 10% for the period ended December 31, 1996 to 3% for 2001. In the event the term of the employment agreement is terminated for a reason other than death, disability, or discharge for cause or resignation, the Company is required to pay Dr. Reinhart as follows: (a) if such termination occurs within the first six months of the Employment Period, Dr. Reinhart shall be entitled to receive the salary due him up to the date of termination and (b) if termination occurs after the initial six months, Dr. Reinhart shall be entitled to the salary due him for (i) the balance of his Employment Period, (ii) a period of two and a half years, or (iii) until subsequently employed, whichever is sooner; provided, however, Dr. Reinhart shall have an affirmative obligation to seek comparable employment and mitigate the Company's damages. In July 1990, the Company and John G. Baust, Ph.D. entered into a three year employment agreement (as amended in December 1991 and July 1993), automatically renewable for additional one year periods (absent notice 39 40 to the contrary by either party). The agreement provides that Dr. Baust shall retain his affiliation with the State University of New York at Binghamton, where he is the Director of the Center for Cryobiological Research. In accordance with Dr. Baust's employment agreement, in July 1990, Dr. Baust was granted an option to purchase an aggregate of 200,000 shares of Common Stock at $1.875 per share pursuant to the Company's 1988 Stock Option Plan. The option vested one-third each year for three years, commencing one year from the date of the agreement. Among other things, the employment agreement also provided for the Company to loan to Dr. Baust the funds required for the exercise of the options at the time of exercise. Such loans would be for terms of five years, accrue interest at a rate of 5% per annum and be secured by shares obtained from the option exercise. In accordance with the terms of the agreement, in May 1993 the Company lent $37,500 to Dr. Baust to exercise options to purchase 20,000 shares of Common Stock. At December 29, 1996, Dr. Baust's annual salary was $115,140. Alan F. Rich joined the Company in May 1992 as a regional sales manager. On March 1, 1994, the Company and Mr. Rich entered into a one year employment agreement, automatically renewable for additional one year periods (absent notice to the contrary by either party), pursuant to which Mr. Rich is employed as Vice President, Sales and Marketing, of the Company. At December 29, 1996, Mr. Rich's annual salary was $100,450, which salary is to increase each year to the extent of any cost of living increases based upon the Consumer Price Index increase for the immediate preceding year. In addition, Mr. Rich is entitled to commissions of up to 1% of the sales revenue of the Company. In accordance with the employment agreement, in March 1994, Mr. Rich was granted options to purchase 100,000 shares of Common Stock at $3.125 per share pursuant to the Company's 1988 Stock Option Plan. The options vest with respect to 20,000 shares after one year, an additional 25,000 shares after two years, an additional 25,000 shares after three years, and an additional 30,000 shares after four years. Mr. Rich is no longer employed by the Company and is suing the Company for breach of contract and several other causes of action. In connection with the execution of the employment agreements between the Company and each of its executive officers, each officer executed a Proprietary Information and Inventions Agreement pursuant to which each agreed, among other things, to keep the Company's information confidential and assigned all inventions to the Company, except for certain personal inventions not related to the Company's work, whether existing or later developed. CONSULTANTS At December 27, 1998, the various consultants to the Company held warrants to purchase an aggregate of 6,695,000 shares of Common Stock. The Company has obtained the services of consultants to render advice with respect to various areas of the Company's research. Each of the consultants has entered into a one year consulting agreement with the Company with automatic one year renewals (absent notice to the contrary by either party), and has either received warrants to purchase Common Stock or is entitled to cash compensation. No consultant has agreed to devote any specified amount of time to Company activities. The consultants of the Company (and the commencement dates of their consulting agreements) are as follows: Jeffrey K. Cohen, M.D., (January 1997), is Director, Division of Urology, Allegheny General Hospital in Pittsburgh, Pennsylvania, and Associate Professor of Surgery, Allegheny University. Robert Van Buskirk, Ph.D. (January 1997), Associate Professor of Biology, Binghamton University, advises the Company with respect to the use of the Solutions. David Olive, M.D. (November 1996), Director, Reproductive Endocrinology and Infertility, Yale University School of Medicine in New Haven, Connecticut. Thomas Rutherford, M.D. (November 1996), Assistant Professor, Gynecologic Oncology, Yale University School of Medicine in New Haven, Connecticut. Jay Pashrica, M.D. (July 1997), Chairman and Professor of Gastroenterology, University of Texas, Austin, Texas. Anthony Kallo, M.D. (July 1997), Johns Hopkins School of Medicine, Baltimore, Maryland. 40 41 Consultants to the Company may be employed by or have consulting agreements with entities other than the Company, some of which may conflict or compete with the Company, and the advisors and consultants are expected to devote only a small portion of their time to the Company. Most are not expected to actively participate in the Company's development. Certain of the institutions with which the advisors and consultants are affiliated may have regulations and policies which are unclear with respect to the ability of such personnel to act as part-time consultants or in other capacities for a commercial enterprise. Regulations or policies now in effect or adopted in the future might limit the ability of the advisors and consultants to consult with the Company. The loss of the services of certain of the advisors and consultants could adversely affect the Company. Furthermore, inventions or processes discovered by the advisors and consultants will not, unless otherwise agreed, become the property of the Company but will remain the property of such persons or of such persons' full-time employers. In addition, the institutions with which the advisors and consultants are affiliated may make available the research services of their scientific and other skilled personnel, including the advisors and consultants, to entities other than the Company. In rendering such services, such institutions may be obligated to assign or license to a competitor of the Company patents and other proprietary information which may result from such services, including research performed by an advisor or consultant for a competitor of the Company. COMPENSATION OF DIRECTORS There are no standard arrangements pursuant to which the directors are compensated. In December 1998, each of the three directors was granted options to purchase 720,000 shares of Common Stock at .25 per share. These options vest immediately and expire in ten years. 41 42 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 27, 1998, certain information regarding beneficial ownership of Common Stock and Preferred Stock by (i) all persons known by the Company to own beneficially 5% or more of the outstanding shares of the Company's Common Stock, (ii) each director, (iii) each Named Executive Officer, and (iv) all executive officers and directors of the Company as a group.
Amount and Nature of Percent Name (and Address of 5% Holder) Beneficial Ownership (1) of Class - ------------------------------- ------------------------ -------- Richard J. Reinhart....................... 8,200,000 (2) 20% Howard S. Breslow......................... 7,568,000 (3) 18% J. Donald Hill............................ 795,000 (4) 2% John G. Baust............................. 2,560,000 (5) 7% Alan F. Rich ............................. 5,500 * ValorInvest, Ltd.......................... 128 (7) 100% All officers and directors as a group (5 persons)................... 19,078,500 (6) 36%
- --------------------------------------- * Less than 1% (1) Unless otherwise indicated below, all shares are owned beneficially and of record. (2) Includes an aggregate of 8,200,000 shares underlying stock options. (3) Includes an aggregate of 720,000 shares underlying stock options and 6,580,000 shares underlying warrants owned indirectly through Breslow & Walker, LLP and BWM Investments. (4) Includes an aggregate of 795,000 shares underlying stock options and warrants. (5) Includes an aggregate of 2,540,000 shares underlying stock options. (6) Includes an aggregate 18,835,000 shares underlying options and warrants. (7) ValorInvest, Ltd., 29 Quai des Bergues, 1201 Geneva, Switzerland, is the only holder of Preferred Stock. 42 43 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Howard S. Breslow, a director of the Company, is a member of Breslow & Walker, LLP, general counsel to the Company. Mr. Breslow currently owns 218,000 shares of Common Stock of the Company and holds options to purchase an aggregate of 7,300,000 additional shares pursuant to stock options and warrants issued to him. During the period ended December 1998, Breslow & Walker, LLP billed the Company $58,793 for legal fees. 43 44 PART IV ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements The financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements on page 18. (2) Schedules No Schedules are furnished as the information is presented elsewhere in this document or is inapplicable. (3) Exhibits
Exhibit ------- Number Document ------ -------- 3 (a) Certificate of Incorporation, as amended. (1) (b) By-Laws(1), and amendment, dated March 19, 1990, thereto.(2) 4 (a) Specimen of Common Stock Certificate.(1) 10 (a) Stock Option Plan, dated July 7, 1988, and amendment, dated July 19, 1989.(1) (b) 1998 Stock Option Plan.(10) (c) Form of Scientific Advisory Board Member Agreement.(1) (d) Research Project Management Services Agreement, dated as of August 29, 1989, between the Company and Allegheny-Singer Research Institute,(1) and amendments thereto dated August 29, 1991(5), August 29, 1992(5), October 31, 1992(6), December 30, 1992(6), April 30, 1993(6), and July 1, 1993.(8) (e) Employment Agreement, dated as of July 15, 1990, between the Company and John G. Baust(2), as amended by letter agreement dated December 3, 1991,(5) and as amended July 14, 1993.(7) (f) Agreement, dated as of December 18, 1990, among the Company, Paul E. Segall, Hal Sternberg, Harold D. Waitz, Larry Cohen, Trans Time, Inc., BioTime, Inc., and Donna Cohen.(3) (g) Research Project Agreement, dated as of August 1, 1991, between the Company and Research Foundation of the State University of New York,(4) as amended by proposal letter dated August 20, 1992 (5) and acceptance letter dated September 3, 1992. (5) (h) Consulting and Proprietary Information Agreement dated as of December 1, 1991, between the Company and Dr. Jeffrey K. Cohen. (5) (i) Consulting and Proprietary Information Agreement dated as of December 1, 1991, between the Company and Dr. Tse-Chao Hua. (5) (j) Loan and Pledge Agreement dated May 19, 1993, between the Company and John G. Baust, Ph.D.(6)
44 45 (k) Promissory Note dated May 19, 1993, of John G. Baust, Ph.D., in favor of the Company.(6) (l) Employment Agreement, dated as of March 1, 1994, between the Company and Alan F. Rich.(7) (m) Lease Agreements, dated May 1, 1995, between Ward Corporation and the Company, and addendum thereto dated June 21, 1995, relating to the Company's executive offices, laboratory facilities and manufacturing facilities in Rockville, Maryland.(8) (n) Memorandum of Understanding, Cryomedical Sciences, Inc. securities litigation, dated as of September 15, 1995, between the Company and certain of its officers and directors and Plaintiffs in Cryomedical Sciences, Inc. Securities Litigation, C.A. No. AW 94-873 (D. Md.). (8) (o) Stock Purchase Agreement dated September 30, 1998 between the Company and ValorInvest, Ltd. (p) Employment Agreement, dated as of May 24, 1996, between the Company and Richard J. Reinhart, Ph.D.(9) 21 BioLife Technologies, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K (1) During the period ended 12-23-1998, the Company filed one report on form 8-K. The form 8-K 10-13-98 related to the sale of equity securities pursuant to reg S
- ------------------------------ (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 33-31420) which became effective with the Securities and Exchange Commission on November 22, 1989. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990. (3) Incorporated by reference to the Company's Current Report on Form 8-K, the Date of Report of which is December 18, 1990. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994. (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. (10) Incorporated by reference to the Company's Definitive Proxy Statement for the Special Meeting of Stockholders held on December 16, 1998. 45 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRYOMEDICAL SCIENCES, INC. Date: April 9, 1998 By: /s/Richard J. Reinhart ------------------------- Richard J. Reinhart, Ph.D. President and Chief Executive Officer (Principal Executive Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 9, 1998 /s/Richard J. Reinhart -------------------------- Richard J. Reinhart, Ph.D. Director Date: April 9, 1998 /s/Howard S. Breslow -------------------------- Howard S. Breslow Director Date: April 9, 1998 /s/J. Donald Hill -------------------------- J. Donald Hill Director
46 EX-10.O 2 STOCK PURCHASE PLAN 1 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement"), dated September __, 1998, by and between Cryomedical Sciences, Inc., a Delaware corporation with an office at 1300 Piccard Drive, Suite 102, Rockville, Maryland 20850 (the "Company"), and ValorInvest, Ltd., a corporation formed pursuant to the laws of Ireland with an address at 29 Quai des Bergues, 1201 Geneva, Switzerland (the "ValorInvest"). W I T N E S S E T H : WHEREAS, the Company is desirous of obtaining capital through a bridge financing of $600,000 (the "Bridge Financing") and a public offering of $4,000,000 to $10,000,000 (the "Public Offering") to further its business development and purposes; and WHEREAS, the Company has a current capitalization consisting of (a) 50,000,000 shares of common stock, par value $.001 per share ("Common Stock"), of which 33,454,302 shares are issued and outstanding and (b) 9,378,800 shares of preferred stock, par value $.001 per share ("Preferred Stock"), of which no shares are issued and outstanding; and WHEREAS, ValorInvest is a merchant banking organization that is willing to provide the Company with the Bridge Financing and, subject to the adoption by the Company and its shareholders of a Plan of Recapitalization and Financing, use its best efforts to arrange for the Public Offering through an underwriter to be designated or approved by ValorInvest (the "Underwriter"); NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants contained herein, the parties agree as follows: 1. Plan of Recapitalization and Financing. (a) On or as of the date hereof, the Company's Board of Directors shall adopt or shall have adopted the following Plan of Recapitalization and Financing(the "Plan"), pursuant to which: (i) the Company's certificate of incorporation shall be amended to (A) reduce the authorized number of shares of (1) Common Stock from 50,000,000 shares to 25,000,000 shares, and (2) Preferred Stock from 9,378,800 shares to 1,000,000 shares, and (B) effectuate a reverse stock split of either (1) one for five, (2) one for six, (3) one for seven, (4) one for eight, (5) one for nine, (6) one for ten, (7) one for eleven, (8) one for twelve, (9) one for thirteen, (10) one for fourteen, (11) one for fifteen, or (12) one for sixteen, each of such alternatives to be approved by the shareholders of the Company and one of such approved alternatives to be chosen by the Board of Directors of the Company; 2 (ii) to appropriately incentivize and compensate management, the Board of Directors and others who have performed services for the Company, the Company shall (A) adopt a 1998 Stock Option Plan containing 20,000,000 shares (on a pre-reverse stock split basis) of Common Stock, options for which may be issued at an exercise price of not less than the fair market value, and (B) grant 10 year stock options/warrants (on a pre-reverse stock split basis), exercisable at $.25 per share (on a pre-reverse stock split basis), the vesting of which shall be subject to the approval of the Plan by the Company's shareholders, in the following amounts to the following persons or entities: each director - 720,000 shares of Common Stock; Dr. Richard Reinhart - 6,480,000 shares of Common Stock; John Baust - 2,160,000 shares of Common Stock; Breslow & Walker, LLP - 2,880,000 shares of Common Stock; BWM Investments - 3,600,000 shares of Common Stock; and to other employees of the Company - up to an aggregate of 2,500,000 shares of Common Stock; and (iii) the Company will prepare and file a registration statement (the "Registration Statement") with the Securities and Exchange Commission ("SEC") for the sale of securities of the Company on such terms and conditions as may be mutually agreed to between the Company and the Underwriter. (b) Within 60 days from the date hereof, the Company shall call a shareholders meeting to approve the Plan. 2. Bridge Financing. (a) Concurrently with the execution and delivery of this Agreement, the Company is selling to ValorInvest or its designee, and ValorInvest or its designee is purchasing from the Company, 128 Units ("Series E Units") at a price of $1,562.50 per Unit (an aggregate of $200,000), each Unit to consist of (1) one share of Series E Convertible Preferred Stock ("Series E Preferred Stock") each share of which Series E Preferred Stock (A) is convertible into 10,000 shares (pre-reverse stock split) of Common Stock, (B) has one vote for each share of Common Stock into which it is convertible, and (C) automatically converts into Common Stock upon the effectuation of the reverse stock split pursuant to the Plan, and (2) a warrant to purchase 5,000 shares (pre-reverse stock split) of Common Stock at $.25 per share (pre-reverse stock split). (b) On or before December 28, 1998, the Company shall sell to ValorInvest or its designee, and ValorInvest or its designee will purchase from the Company, an additional 256 Series E Units at a price of $1,562.50 per Unit (an aggregate of $400,000). (c) The Company covenants and agrees to (i) include the shares of Common Stock issuable upon conversion of the Series E Preferred Stock sold hereunder in the Registration Statement at the Company's cost and expense, and to keep such Registration 2 3 Statement effective until such time as such shares of Common Stock may be sold pursuant to an exemption from registration pursuant to the Securities Act of 1933, as amended (the "Securities Act"), and (ii), at the request of ValorInvest, redeem the Series E Units at a price, as to each Unit, equal to the price paid under this Agreement plus an additional amount determined by multiplying the price paid under this Agreement by a fraction, the denominator of which is the number "120" and the numerator of which is the number of months (rounded to a higher whole number) elapsed between the date on which such Units were purchased and the redemption date, in the event the Plan is not approved by the Company's shareholders within 120 days from the date hereof. 3. Representations and Warranties by the Company. The Company represents and warrants to ValorInvest as follows: (a) Organization and Qualification. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has the full corporate power and authority to own, lease, and operate its properties as it now does and to carry on its business as it presently is being conducted. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the property owned or leased by it or the nature of the activities conducted by it requires qualification, except where the failure to be so qualified would not have a material adverse effect on the Company's business, operations, financial condition, properties, or assets (a "Material Adverse Effect"). (b) Authorization. (i) This Agreement constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Company has the power and authority to execute, deliver, and perform this Agreement and to consummate the transactions contemplated herein. The execution and delivery of this Agreement and the performance by the Company of its obligations hereunder has been duly authorized by the Company's Board of Directors. No approval by the shareholders of the Company is required. (ii) The Series E Units have been duly authorized and, when issued in accordance with this Agreement, shall be validly issued, fully paid, and nonassessable. The issuance, sale, and delivery of the Series E Units is not subject to any preemptive right of any shareholder of the Company or to any right of first refusal or other right in favor of any person. (c) Required Filings and Consents; No Conflict. Except for applicable requirements of the Securities and Exchange Act of 1934, as amended, (the "Exchange Act") and the Securities Act, the Company is not required to submit any notice, report or other filing with any governmental authority in connection with the execution, delivery or performance of this Agreement. The execution and delivery of this Agreement and consummation of the 3 4 transactions contemplated herein do not and will not (i) conflict with or violate any law, regulation, judgment, order or decree binding upon the Company or the provision of its Certificate of Incorporation or By-laws, or (ii) conflict with or result in a breach of any condition or provision of, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or result in the creation of imposition of any lien or charge upon any of the properties or assets of the Company pursuant to, any contract, agreement, permit, license, franchise or other instrument to which the Company is a party or which is or purports to be binding upon the Company or any of its property; nor will the same result in the loss of any license, legal privilege or legal right enjoyed or possessed by the Company. (d) Capitalization. The authorized capital stock of the Company consists of (a) 50,000,000 shares of common stock, par value $.001 per share, of which 33,454,302 shares are issued and outstanding, and (b) 9,378,800 shares of preferred stock, par value $.001 per share, none of which are issued and outstanding. Except as disclosed in the documents referred to in Section 3(e) hereof and as contemplated by this Agreement, there are no outstanding subscriptions, options, warrants, calls, commitments, agreements or rights of any kind or nature in respect of the authorized but unissued shares of capital stock of the Company and none of such shares are reserved for issuance for any purpose. (e) Securities and Exchange Commission Filings; Financial Statements. (i) The Company has filed all forms, reports and documents required to be filed with the Securities and Exchange Commission ("SEC") since January 1, 1996 and has heretofore delivered to ValorInvest true and complete copies of the Company's (i) Form 10-KSB for the fiscal year ended December 28, 1997, and (ii) Quarterly Report on Form 10-QSB for each of the quarters ended March 29, 1998 and June 28, 1998 (collectively, "the SEC Reports"). The SEC Reports (x) were prepared in accordance with the requirements of the Exchange Act, and (y) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (ii) The financial statements contained in the SEC Reports have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present the financial position of the Company as at the respective dates thereof and the results of operations of the Company for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. Since the date of the Form 10-QSB for the quarter ended June 28, 1998, there has not been any material adverse change in the financial condition of the Company. (f) Litigation; Claims; Investigations. There are no suits, actions, or claims, or any investigations or inquiries, by any administrative agency or governmental body, or legal, 4 5 administrative agency or governmental body, or legal administrative or arbitration proceedings pending or, to the best knowledge of the Company, threatened against the Company or to which the Company is or, in the case of threatened proceedings, might become a party and which if decided adversely to the Company would have a Material Adverse Effect, and the Company does not know or have any grounds to know of any basis or grounds for any such suit, action, claim, investigation, inquiry or proceeding. There is no outstanding order, writ, judgment, injunction or decree of any court, administrative agency or governmental body or arbitration tribunal against or affecting the Company or any of the properties, rights, assets or business of the Company. (g) No Series E Units Offered in U.S. or to any U.S. Person. The Company has not offered the Series E Units to ValorInvest in the United States or to any other person in the United States or to any U.S. person ("U.S. Person") as that term is defined in Regulation S ("Regulation S") promulgated under the Securities Act of 1933, as amended (the "Act"), unless such U.S. Person is a professional fiduciary of a non-U.S. Person (as described in Regulation S). (h) No Directed Selling Efforts in Regard to this Transaction. Neither the Company, nor any person acting for the Company, has conducted any "directed selling efforts" in the United States (as such term is defined in Regulation S) with respect to the offering of the Series E Units. (i) Taxes. (i) The Company has filed all tax reports and returns required to be filed by it, including all federal, state, local, and foreign tax returns and reports (the "Tax Returns"), and has paid all taxes shown to be due by such Tax Returns as well as all other taxes, assessments, and governmental charges which have become due or payable, including all taxes which the Company has been required to withhold from amounts owing to employees, creditors, and third parties. (ii) The Tax Returns have not been examined by the Internal Revenue Service for any period during the past five years. No audits, inquiries, investigations, or examinations relating to the Tax Returns are pending or, to the Company's knowledge, threatened by any Governmental Authority and no claims have been asserted relating to any of the Tax Returns filed for any year which, if determined adversely, would result in the assertion by any Governmental Authority of any tax deficiency against the Company. (j) Personal Property; Inventory; Other Assets. The Company has valid title, free and clear of any Liens, to all personal property used in its business or presently located on its premises, including, but not limited to, all items of personal property reflected in its financials. The assets owned by the Company, together with those leased or licensed from unrelated third parties on an arm's-length basis, constitute all of the assets, tangible and intangible, used in or needed to conduct the Company's business in the manner in which it is 5 6 presently conducted by the Company. (k) Real Property. The company owns no real property. The Company enjoys peaceful and undisturbed possession under all real property leases under which it is operating and all such real property leases are valid and subsisting and in full force and effect. The transactions contemplated by this Agreement will not materially adversely affect the Company's right to use those properties for the same purpose and to the same extent as they were being used by the Company prior to the date of this Agreement. (l) Contracts and Commitments. Each material contract, lease, commitment, and other agreement to which the Company is a party (the "Contracts") is set forth in the SEC Reports and other filings with the SEC and is in full force and effect in accordance with its terms. Neither the Company nor, to Company's knowledge, any other party is in default in any material respect under any of the provisions of any of the Contracts, and no condition exists that, with notice or lapse of time or both, would constitute a default by the Company or, to Company's knowledge, any other party to any Contract. No party to any Contract has made, asserted, or, to Company's knowledge, has any defense, set off, or counterclaim under any Contract or has exercised any option granted to it to cancel or terminate its Contract, to shorten the term of its Contract, or to renew or extend the term of its Contract, and the Company has not received any notice to that effect. (m) Employee Matters. (i) Except as disclosed in the SEC Reports and other filings with the SEC, the Company (A) is not a party to or bound by any pension, annuity, retirement, stock option, stock purchase, savings, profit sharing, or deferred compensation plan or agreement, or any retainer, consultant, bonus, group insurance, or other incentive or benefit contract, plan, or arrangement applicable to employees of the Company an (B) does not have any severance policy and no employee or former employee of the company is entitled to any severance payment (or similar payment), either by law or by agreement, upon the termination of his or her employment. No employee of the Company is represented by any union or other collective bargaining agent, there are no collective bargaining or other labor agreements with respect to such employees, and to the best of the knowledge of the Company, no union is attempting to organize any such employees. The transactions contemplated by this Agreement will not trigger any payments of any kind to any employee of the Company. (ii) Neither the Company nor any predecessor has ever contributed to, contributes to, has ever been required to contribute to, or otherwise participated in or participates in or in any way, directly or indirectly, has any liability with respect to any "multi-employer plan" (within the meaning of Sections 3(37) or 4001(a)(3) of the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 414(f) of the Internal Revenue Code of 1986, as amended (the "Code")) or any single employer pension plan (within the meaning of Section 4001(a)(15) or ERISA) which is subject to Title IV of ERISA or Section 412 of the Code. 6 7 (iii) No third party has claimed that any employee of or consultant to the Company has (A) violated or may be in violating the terms and conditions of an agreement between such employee or consultant and the third party, (B) disclosed any trade secret of the third party during the course of their employment by the Company, or (C) interfered with the employment relationship between the employee or consultant and the third party. (n) Permits and Licenses. The Company has all material permits, licenses, franchises, and other authorizations (collectively, "Licenses") necessary for the conduct of its business as currently conducted, and all such Licenses are valid and in full force and effect. (o) Insurance. The Company maintains such insurance policies as is customary for a Company engaged in the business in which the Company is engaged. (p) Intellectual Property. The Company owns or possesses adequate licenses or other rights to use all material trademarks, trade names, service marks, service names, domain names, copyrights, logos, slogans, patents, licenses (including software licenses), and other intellectual property (collectively, "Intellectual Property") necessary for the conduct of its business as currently conducted. Except as disclosed on the Company's filings with the SEC, no claim is pending or, to the Company's knowledge, threatened to the effect that the operations of the Company infringe upon or conflict with the asserted rights of any other person under any Intellectual Property, and, to the knowledge of the Company, there is no basis for any such claim. (q) Illegal Payments. Neither the Company, nor any officer, director, or employee of the Company, directly or indirectly, has paid or delivered any fee, commission, or other sum of money or item or property, however characterized, to any finder, agent, government official, or other party, in the United States or any other country, which is in any manner related to the business or operations of the Company, which the Company or such person knows or has reason to believe to have been illegal under any federal, state, or local laws of the United States or any other country having jurisdiction, and the Company has not participated, directly or indirectly, in any boycotts or other similar practices affecting any of its actual or potential customers. (r) Material Misstatements or Omissions. No representation, warranty, or statement made by the Company in this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to be stated in order to make such representation, warranty, or statement not misleading. All documents delivered on behalf of the Company in connection with this Agreement and the transaction contemplated herein are true, complete, and correct. 4. Representations and Warranties by ValorInvest. ValorInvest represents and warrants to the Company as follows: (a) Organization. ValorInvest is a corporation duly organized, validly 7 8 existing, and in good standing under the laws of Ireland. (b) Authorization of Agreement. The execution, delivery, and performance of this Agreement by ValorInvest has been duly authorized by all necessary action of ValorInvest and this Agreement constitutes a valid and binding obligation of ValorInvest enforceable against ValorInvest in accordance with its terms, except as may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) Consents of Third Parties. (i) The execution, delivery and performance of this Agreement by ValorInvest will not (A) conflict with or result in the breach or termination of, or constitute a default (or an event which, with notice or lapse of time or both, would become a default) under, any lease, agreement, commitment or other instrument, or any order, judgment or decree, to which ValorInvest is a party or by which it or any of its properties is bound; or (B) constitute a violation by ValorInvest of any law, regulation, order, writ, judgment, injunction or decree applicable to it. (ii) No consent, approval or authorization of, or designation, declaration or filing with, any court, governmental authority, or any other person or entity is required on the part of ValorInvest in connection with the execution, delivery, and performance of this Agreement. (d) Offshore Transaction. (a) ValorInvest is not a U.S. Person; (b) the Series E Units were not offered to ValorInvest in the United States; (c) at the time of execution of this Agreement and the time of any offer to ValorInvest to purchase the Series E Units hereunder, ValorInvest was physically outside the United States; (d) ValorInvest is purchasing the Series E Units for its own account and not on behalf of or for the benefit of any U.S. Person, and the sale and resale of the Series E Units have not been prearranged with any U.S. Person or buyer in the United States; and (e) ValorInvest is not an underwriter, dealer, distributor, or other person who is participating, pursuant to a contractual arrangement, in the distribution of the Series E Units offered or sold in reliance on Regulation S. (e) ValorInvest's Investment Decision. In making its investment decision to purchase the Series E Units, ValorInvest is not relying on any oral or written representations or assurances from the Company or any other person other than as set forth in this Agreement and SEC Reports. ValorInvest has such experience in business and financial matters that it is capable of evaluating the risk of its investment and determining the suitability of its investment. ValorInvest is an accredited investor as defined in Rule 501 of Regulation D promulgated under the Act. (f) ValorInvest's Economic Risk. ValorInvest understands and acknowledges that an investment in the Series E Units and Common Stock issuable upon conversion/exercise 8 9 thereof involves a high degree of risk. ValorInvest understands and acknowledges that there are limitations on the liquidity of the Series E Units and the Common Stock issuable upon conversion/exercise thereof. ValorInvest represents that ValorInvest is able to bear the economic risk of an investment in the Series E Units and the Common Stock issuable upon conversion/exercise thereof, including a possible total loss of investment. In making this statement ValorInvest hereby represents and warrants to the Company that ValorInvest has adequate means of providing for its current needs and contingencies; and that ValorInvest is able to afford to hold the Series E Units and the Common Stock issuable upon conversion/exercise thereof for an indefinite period. Further, ValorInvest represents, as of the date of signing this Agreement, that ValorInvest has no present need for liquidity in the Series E Units or the Common Stock issuable upon conversion/exercise thereof and ValorInvest is willing to accept such investment risks. (g) No Government Recommendation or Approval. ValorInvest understands that no United States federal or state agency, or similar agency of any other country, has reviewed, approved, passed upon, or made any recommendation or endorsement of the Company or the purchase of the Series E Units. (h) No Directed Selling Efforts in Regard to This Transaction. To the actual knowledge of ValorInvest, without any independent investigation, neither the Company, nor any person acting for the Company, has conducted any "directed selling efforts" in the United States as such term is defined in Regulation S, which in general, means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Series E Units being offered in reliance on Regulation S. Such activity includes, without limitation, the mailing of printed material to investors residing in the United States, the holding of promotional seminars in the United States, and the placement of advertisements with radio or television stations broadcasting in the United States or in publications with a general circulation in the United States, that refers to the offering of the Series E Units in reliance on Regulation S. (i) Company's Reliance on Representations of ValorInvest. ValorInvest understands that the Series E Units is being offered and sold to it in reliance on specific exemptions from the registration requirements of U.S. securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments, and understandings of ValorInvest set forth herein in order to determine the applicability of such exemptions and the suitability of ValorInvest to acquire the Series E Units. (j) Series E Units Not Registered Under the Act or Any State Act. ValorInvest understands that the offer and sale of the Series E Units have not been registered under the Securities Act or any state securities laws ("State Acts") and is being offered and sold pursuant to Regulation S based in part upon the representations of ValorInvest contained herein. (k) No Public Solicitation. ValorInvest knows of no public solicitation or 9 10 advertisement of an offer in connection with the issuance and sale of the Series E Units. (l) Investment Intent. ValorInvest is acquiring the Series E Units and the Common Stock issuable upon conversion/exercise thereof for its own account for investment and not as a nominee and not with a view to the distribution thereof. ValorInvest understands that ValorInvest must bear the economic risk of this investment indefinitely unless the Series E Units or the Common Stock issuable upon conversion/exercise thereof is registered pursuant to the Act and any applicable State Acts, or an exemption from such registration is available, and that the Company has no present intention of registering any such sale of the Series E Units, except as provided in Section 2(c) with respect to the Common Stock issuable upon conversion of the Series E Units. ValorInvest represents and warrants to the Company, as of the date of this Agreement, that ValorInvest has no present plan or intention to sell the Series E Units or the Common Stock issuable upon conversion/exercise thereof in the United States at any predetermined time, and has made no predetermined arrangements to sell the Series E Units or the Common Stock issuable upon conversion/exercise thereof. (m) No Tax Advice From Company or Its Agents. ValorInvest has had an opportunity to review with its own tax advisors the foreign, U.S. federal, state and local tax consequences of this investment, and the transactions contemplated by this Agreement. ValorInvest is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that ValorInvest (and not the Company) shall be responsible for ValorInvest's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. (n) No Legal Advice from Company or Its Agents. ValorInvest acknowledges that it has had the opportunity to review this Agreement and the transactions contemplated by this Agreement with its own legal counsel. ValorInvest is relying solely on such counsel and not on any statements or representations of the Company or any of its agents for legal advice with respect to this investment or the transactions contemplated by this Agreement, except for representations, warranties and covenants set forth herein. (o) No Scheme to Evade Registration. ValorInvest's acquisition of the Series E Units is not a transaction (or any element of a series of transactions) that is part of a plan or scheme to evade the registration provisions of the Act. 5. Resales; Stock Legends. (a) Resales of Series E Units. ValorInvest cannot resell the Series E Units, or the Common Stock issuable upon conversion/exercise thereof, in the U.S. or to a U.S. Person unless such sales are made (a) pursuant to an exemption from registration under the Act and applicable State Acts after the Distribution Compliance Period (as defined below); or (b) pursuant to an effective and current registration statement under the Act. A transferee of the Series E Units, or the Common Stock issuable upon conversion/exercise thereof, during the Distribution Compliance Period shall execute an agreement containing provisions substantially 10 11 similar to this Section 5. For purposes hereof, the term Distribution Compliance Period shall be, with respect to the Series E Units purchased pursuant to Section 2(a) hereof, the period commencing on the date hereof (the "Closing Date") and ending one year after the Closing Date, and, with respect to the transaction contemplated by Sections 2(b) and 2(c) hereof, the period commencing on the date of such transaction and ending one year after the date thereof. (b) Legend. To insure compliance with the provisions of the Act and State Acts, the certificate(s) evidencing the Series E Units, and the Common Stock issuable upon conversion/exercise thereof, shall bear a legend (the "Regulation S Restrictive Legend") substantially as follows: "THE ISSUANCE OF THE SECURITIES EVIDENCED HEREBY HAS NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THE SECURITIES WERE ISSUED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION S ("REGULATION S") PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S) UNLESS SUCH OFFERS, SALES, AND TRANSFERS ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR ARE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS." (c) Removal of Legend. (i) The Regulation S Restrictive Legend may be removed (and the restrictions on the transferability of the Series E Units and the Common Stock, issuable upon conversion/exercise thereof shall terminate) when (i) such securities have been registered under the Act and sold by the holder thereof in accordance with such registration, (ii) a written opinion to the effect that such restrictions are no longer required or necessary under any federal or state securities law or regulation has been received from counsel for the holder thereof (provided that such counsel, and the form and substance of such opinion, are reasonably satisfactory to the Company) or counsel for the Company, (iii) the Series E Units or the Common Stock issuable upon conversion/exercise thereof has been sold without registration under the Act in compliance with Rule 144 or Rule 144A promulgated under the Act, (iv) the Company is reasonably satisfied that the holder of the Series E Units or the Common Stock issuable upon conversion/exercise thereof, in accordance with the terms of Subsection (k) of Rule 144 or of Rule 144A promulgated under the Act, shall be entitled to sell the Series E Units or the Common Stock issuable upon conversion/exercise thereof pursuant to such Subsection, or (v) a letter or an order has been issued to the holder thereof by the staff of the Securities and Exchange Commission (the "Commission") stating that no enforcement action shall be 11 12 recommended by such staff or taken by the Commission, as the case may be, if the Series E Units or the Common Stock issuable upon conversion/exercise thereof are transferred in the United States or to a U.S. Person without registration under the Act in accordance with the conditions set forth in such letter or order and such letter or order specifies that no subsequent restrictions on transfer are required. (vi) Whenever the restrictions imposed by this Section 5 shall terminate as hereinabove provided, the holder of a certificate representing any of the Series E Units or the Common Stock issuable upon conversion/exercise thereof then outstanding as to which such restrictions shall have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for Series E Units or the Common Stock issuable upon conversion/exercise thereof not bearing the restrictive legend set forth in Section 5(b). 6. Covenants of the Company. (a) Until March 31, 1999, ValorInvest shall have a right of first refusal with respect to bona fide third party financing offer received by the Company. If the Company receives such an offer of financing, then the Company will promptly give ValorInvest written notice of such offer, and will offer ValorInvest the opportunity to provide financing to the Company on the same terms and conditions. If ValorInvest fails to exercise its right of first refusal with respect to such offer within ten business days after notice thereof, then ValorInvest shall have no further claim or right with respect thereto provided that such offer is accepted within ninety (90) days after notice shall have been given to ValorInvest. If the offer is not accepted within such 90-day period or is modified, the Company shall adopt the same procedure as with respect to the original offer. An offer to purchase securities of the Company by an entity with whom the Company is entering into a partnering arrangement for manufacturing, distribution, etc., shall not be deemed to be a third party financing offer. (b) Except with the prior agreement of ValorInvest, through March 31, 1999 the Company agrees not to issue additional shares of any type, or right thereto, except as contemplated by this Agreement (including the last sentence of Section 6(a) hereof), and each of the persons listed in Section 1(a)(ii) hereof agrees not to sell, transfer or otherwise dispose of their shares or any interest therein (and the Company agrees to cause such persons listed or otherwise referred to in Section 1(a)(ii) to deliver a letter to such effect to ValorInvest within 30 days from the date hereof). (c) Prior to March 31, 1999, the Company will: (i) conduct business only in the normal and ordinary course and in substantially the same manner as conducted previously; (ii) use best efforts to preserve intact its business organization and goodwill; (iii) keep ValorInvest advised of significant business developments and of any significant decisions concerning business operation; (iv) not make any dividend or other unusual distributions of any kind to stockholders; (v) use its best efforts to retain the services of Richard J. Reinhart, Ph.D. as its Chief Executive Officer; and (vi) not make any material change to any material agreements or incur any material liabilities without ValorInvest's prior written consent. 12 13 (d) In consideration for the expenditures of time, effort and expense to be undertaken by ValorInvest in connection with the financings contemplated by this Agreement, the Company agrees that so long as ValorInvest is providing financing and complying with its covenants as provided herein, the Company will not, between the date of the execution of this Agreement and March 31, 1999, solicit, entertain or enter into any agreement or understanding with, or furnish any nonpublic information to, any person or entity other than ValorInvest or its representative with respect to the acquisition (by purchase, merger or otherwise) of any or all of the capital stock of the Company or the sale of any material portion of its assets. The Company will promptly notify ValorInvest if it receives an unsolicited offer for such a transaction, or obtain information that such an offer is likely to me made, which notice will include the identity of the prospective offeror and the price and terms of the proposed offer. (e) For such period of time that ValorInvest or its designee owns Series E Preferred Stock or shares of Common Stock issuable upon conversion thereof, and provided that ValorInvest is not in breach of its representations, warranties, covenants and agreements contained herein, the Company agrees, at the request of ValorInvest, to nominate and use its best efforts to elect a designee of ValorInvest as a director of the Company. 7. Covenants of ValorInvest. ValorInvest hereby covenants and agrees that: (a) ValorInvest will not knowingly make any sale, transfer, or other disposition of the Series E Units or the Common Stock issuable upon conversion/exercise thereof, or engage in hedging transactions with respect to the Series E Units or the Common Stock issuable upon conversion/exercise thereof, in violation of the Act (including Regulation S), the Securities Exchange Act of 1934, as amended, any applicable State Acts, or the rules and regulations of the Commission or of any state securities commissions or similar state authorities promulgated under any of the foregoing; and (b) ValorInvest will use its best efforts to arrange for the Underwriting through the Underwriter on the following terms and conditions: (i) in the event the Company's Common Stock is trading at a price of $.50 or more (pre-reverse stock split), 16,000,000 shares (pre-reverse stock split) of Common Stock at not less than $.50 per share (pre-reverse stock split), or (ii), in the event the Company's Common Stock is trading at a price of less than $.50 per share (pre-reverse stock split), 16,000 Units ("Series F Units") at $500 per Unit, each Series F Unit to consist of (1) one share of Series F Convertible Preferred Stock ("Series F Preferred Stock"), each share of which Series F Preferred Stock shall be (x) convertible into 1,000 shares (pre-reverse stock split) of Common Stock and automatically converted into Common Stock if the closing and bid price of the Common Stock on any day is $.50 or more (pre-reverse stock split), and (y) entitled to one vote for each share of Common Stock into which it is convertible, and (2) a warrant to purchase 250 shares (pre-reverse stock split) of Common Stock at $.75 per share (pre-reverse stock split). The parties acknowledge that the final terms of the Underwriting will be as negotiated between the Company and the Underwriter and that there is no assurance that the terms of the Underwriting will be as set forth herein. The exercise of the warrants included in the Series E Units shall be conditioned upon the Underwriting being completed in 13 14 accordance with (b)(i) or (ii) hereunder. 8. Indemnification. (a) Company's Indemnity. The Company agrees to indemnify and hold harmless ValorInvest and its officers, directors, shareholders, agents, and employees, from and against, for and in respect of, and promptly shall reimburse them for, any and all claims, losses, costs, and expenses (including the cost of any investigation and reasonable attorneys' fees), damages, lawsuits, obligations, deficiencies, and liabilities (collectively "Losses") which arise or result from or are related to (b) the inaccuracy or breach of any representation or warranty made by the Company herein, (c) any breach or failure of the Company to perform any of its covenants or agreements set forth herein, or (d) any claim against ValorInvest arising out of or relating to events occurring prior to the date hereof. (b) ValorInvest's Indemnity. ValorInvest agrees to indemnify and hold harmless the Company and its officer, directors, shareholders, agents, and employees, from and against, for and in respect of, and shall promptly reimburse them for, any and all Losses which arise or result from or are related to (a) the inaccuracy or breach of any representation or warranty made by ValorInvest herein, or (b) any breach or failure of ValorInvest to perform any of its covenants or agreements set forth herein. (c) Indemnification Procedure. An indemnifying party shall not be liable under this Section 7 with respect to any claim made against an indemnified party unless such indemnifying party shall be notified in writing of the nature of the claim within a reasonable time after the assertion thereof, but failure so to notify such indemnifying party shall not relieve it from any liability which it may have otherwise than on account of this Section 8. If a claim is made against an indemnified party and it notifies the indemnifying party as herein provided, then the indemnifying party, subject to the provisions set forth herein, shall be entitled to participate at its own expense in the defense thereof or, if it so elects within a reasonable time after receipt of such notice, to assume the defense thereof, which defense shall be conducted by counsel chosen by it and reasonably satisfactory to the indemnified party defendant or defendants in any suit so brought. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses, and other charges of such counsel will be at the expense of such indemnified party unless (a) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (b) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (c) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party), or (d) the indemnifying party has not employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements, and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party 14 15 shall not, in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for the indemnified parties. (d) Cumulative Remedies. All remedies provided herein shall be cumulative and shall not preclude the assertion by any party hereto of any other rights or the seeking of any other remedies against the other parties hereto. (e) Survival of Representations and Warranties. The representations, warranties, covenants, and agreements made by the parties in this Agreement, or in any certificate, agreement, or document furnished pursuant hereto, and the obligation to indemnify hereunder shall survive the date hereof and the consummation of the transactions contemplated hereby, notwithstanding any investigation made by or on behalf of any party; provided, however, (i) except as set forth in (ii) hereof, no action (other than an action for fraud) shall be brought by any party hereto against any other party hereto more than three (3) years after the date hereof, and (ii) with respect to an action for breach of the representations and warranties of Section 3(i) hereof (Taxes), no action shall be brought against the Company after the end of the statute of limitations for such actions. 9. Miscellaneous. (a) Notices. Any notice or other communication under this Agreement shall be in writing and shall be considered given when delivered personally, two days after being sent by a major overnight courier, or five days after being mailed by registered air mail, to the parties at their respective addresses set forth above (or at such other address as a party may specify by notice to the other), with copies as follows: If to the Company, to: Breslow & Walker, LLP 100 Jericho Quadrangle, Suite 230 Jericho, NY 11753 Attn: Howard S. Breslow, Esq. If to ValorInvest, to: Powell, Goldstein, Frazer & Murphy LLP 1001 Pennsylvania Avenue, N.W. 6th Floor Washington, D.C. 20004 Attn: Michael H. Chanin, Esq. (b) Expenses. Each party shall bear its own expenses in connection with this 15 16 Agreement and in connection with all obligations required to be performed by it under this Agreement. (c) Finders. ValorInvest and the Company each represent and warrant to the other that it has not retained or dealt with any broker or finder in connection with the transactions contemplated by this Agreement, except that the Company acknowledges that the transaction was brought about by BWM Investments. (d) Entire Agreement. This Agreement contains a complete statement of all the arrangements between the parties with respect to its subject matter and supersedes any previous agreements between them relating to that subject matter. (e) Headings. The section headings of this Agreement are for reference purposes only and are to be given no effect in the construction or interpretation of this Agreement. (f) Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware. (g) Separability. If any provision of this Agreement is invalid or unenforceable, the balance of this Agreement shall remain in effect. (h) Amendment; Waiver. This Agreement cannot be altered, amended, changed, waived, terminated, or modified in any respect unless the same shall be in writing and signed by the party to be charged therewith. No waiver of any provision shall be construed as a waiver of any other provision. (i) No Third Party Beneficiaries; Assignments. Nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any person or entity (including, without limitation, any employees of the Company) not a party to this Agreement. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the consent of ValorInvest and any attempted assignment or delegation in violation of this provision shall be void. ValorInvest may not assign any of its rights or delegate any of its duties under this Agreement without the consent of the Company, except that ValorInvest may assign any of its rights and delegate any of its duties under this Agreement to any affiliate of ValorInvest, provided that no assignment shall relieve ValorInvest of any of its obligations under this Agreement. As used herein, the term "affiliate" means any person or entity directly or indirectly controlled by, controlling, or under common control with, any other person or entity. (j) Counterparts. This Agreement may be executed in counterparts, which together shall constitute the same instrument. 16 17 IN WITNESS WHEREOF, this Agreement has been duly executed by the respective parties as of the day and year first above written. CRYOMEDICAL SCIENCES, INC. By: /s/ Richard J. Reinhart, Ph.D. --------------------------------- VALORINVEST, LTD. By: /s/ --------------------------------- Authorized Signature 17 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-27-1998 DEC-29-1997 DEC-27-1998 135,183 0 1,164,407 (677,634) 1,225,982 80,510 3,114,682 2,334,375 2,727,482 1,205,828 90,015 0 0 33,454 1,398,185 2,727,482 1,481,942 2,369,748 821,247 1,276,141 2,337,130 0 (24,818) (1,268,341) 0 0 0 0 0 (1,268,341) (.04) (.04)
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