-----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, S8ezEe+EoTwcIfyjkhHXB6A93aGRBFN42t9cytntekkj7d32OeZKMVAQpjvPqrWU 0ypNATP5061afwyPQY093Q== 0000950133-95-000575.txt : 19951016 0000950133-95-000575.hdr.sgml : 19951016 ACCESSION NUMBER: 0000950133-95-000575 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19951013 SROS: NONE 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: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18170 FILM NUMBER: 95580533 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 10-K405 1 CRYOMEDICAL SCIENCES 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K (MARK ONE) / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1995 ------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-18170 ------- ----------------- CRYOMEDICAL SCIENCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3076866 -------- ---------- (State of Incorporation) (IRS Employer Identification Number) 1300 PICCARD DRIVE, SUITE 102, ROCKVILLE, MARYLAND 20850 - -------------------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
----------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 417-7070 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE ---- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE --------------------------------------- TITLE OF CLASS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, 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-K or any amendment to this Form 10-K. / X / As of September 20, 1995, the aggregate market value of voting stock held by nonaffiliates of the registrant was $74,267,076. As of September 20, 1995, there were 24,854,383 shares of Common Stock (par value $.001 per share) outstanding. Documents Incorporated by Reference ----------------------------------- Not Applicable ================================================================================ 2 PART I ITEM 1. 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 a cryosurgical system, called the CMS AccuProbe(R) System (the "AccuProbe"), which is a sophisticated cryosurgical device designed to freeze and destroy diseased tissue, including that which cannot be removed surgically or in which typical surgery offers extensive adverse side effects. The initial clinical focus of physicians with respect to the AccuProbe has been in the field of urology and general surgery. The Company plans to further test its AccuProbe in the various fields for which the device received clearance from the FDA in April 1991, including the fields of dermatology, general surgery, neurosurgery, thoracic surgery, ENT, gynecology, proctology, oncology, and urology. The Company completed initial development of the AccuProbe in 1992 and has commenced marketing this system to hospitals, surgeons and radiologists in the United States and abroad. The first AccuProbe system was shipped to a customer in June 1992; 41 systems were sold in the fiscal year ended June 30, 1995, 46 systems were sold in the fiscal year ended June 30, 1994, and 35 systems were sold in fiscal year ended June 30, 1993. In addition to the AccuProbe, the Company sells single use probes and other disposables used with the AccuProbe and offers service warranty contracts. Sales and other revenues totaled $13,594,186, $13,438,494, and $5,875,827 in the fiscal years ended June 30, 1995, June 30, 1994 and June 30, 1993, respectively. The Company is also attempting to develop hypothermic synthetic blood substitute solutions (the "Solutions") designed to maintain the fluid and chemical balances of human organs while body temperature is significantly lowered. The Company hopes to develop applications for the Solutions which may enable surgeons to perform certain medical procedures at reduced temperatures. The use of the Solutions in lieu of blood at low temperatures may extend the time during which the body can survive extended periods of cardiac arrest, and thereby permit certain lengthy and complex surgical procedures. The Solutions may also be useful for increasing the period of time during which organs or other tissue may be preserved for transplantation and may be useful in the treatment of trauma victims. Although the Solutions continue to be tested in laboratory settings, development of products for commercial application has not been completed. Development of the Solutions is at the laboratory and preclinical stage and is expected to remain so for the foreseeable future. In view of the Company's emphasis on the marketing of the AccuProbe, in the recent past the Company has not devoted significant resources to the development of the Solutions and does not contemplate doing so for at least the near term. The Company hopes to market the Solutions, if successfully developed, to hospitals, clinics, transplant centers, and surgeons in the United States and abroad. Because of the high cost of medical research and development, the Company is required to utilize the facilities and services of one or more hospitals and universities to supplement its research and development efforts. In this regard, certain limited experimentation with respect to the AccuProbe and the Solutions has been conducted on the Company's behalf at Allegheny-Singer Research Institute ("ASRI"), a subsidiary of Allegheny Health Services, Pittsburgh, Pennsylvania and, with respect to the Solutions, at the State University of New York at Binghamton ("SUNY"). In August 1989, the Company entered into a Research Project Management Services Agreement with ASRI, pursuant to which ASRI agreed to conduct further research on behalf of the Company over a two year period, which period was extended, by amendment, to June 30, 1995. The research relationship between the Company and ASRI has continued, and the Company is considering whether or not to request a further extension of the agreement. The Company has expended $2,095,670 through June 30, 1995 in connection with this agreement and subsequent activities with ASRI. 2 3 For the fiscal years ended June 30, 1995, June 30, 1994, and June 30, 1993, the total research and development expenses of the Company were $2,899,686, $2,506,349, and $3,151,368, respectively. The Company was incorporated in Delaware in November 1987. On August 31, 1989, the Company completed the acquisition of Cryo Instruments, Inc. ("CII"), and CII became a wholly owned subsidiary of the Company. Unless the context requires otherwise, references to the Company include CII. The Company's principal executive offices are located at 1300 Piccard Drive, Suite 102, Rockville, Maryland 20850, and its telephone number is (301) 417-7070. CMS ACCUPROBE SYSTEM 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) inserted directly into the tissue to be destroyed. Historically, there were three major problems that hindered the efficient application of cryosurgery to the destruction of diseased tissue. First, surgeons had been unable to observe the extent of the frozen region during cryosurgery; second, there had been inadequate understanding of the mechanism by which tissue is destroyed during freezing; and third, instrumentation had not progressed to take full advantage of newly developed techniques addressing the first two problems. In order to correct the first major problem, a number of surgeons have applied ultrasound imaging techniques during surgery to determine both the extent of the diseased tissue and the extent of the tissue frozen during cryosurgery. The use of these imaging techniques allows more efficient use of cryosurgery in the fields for which the device received clearance. With respect to the second major problem, advances have been made in the understanding of the mechanism by which tissue is destroyed during freezing and the effects of various low temperatures on such tissues. The advances focused on a clearer understanding of the cascade of damaging effects associated with cell hypothermia, intra- and extracellular ice formation and post-freeze damage, including severe tissue necrosis. As a result of this new understanding, research was funded by the Company which led to the development of the CMS AccuProbe system. The Company believes that it has addressed the third major problem by developing the CMS AccuProbe system, a cryosurgical instrument which the Company believes enables surgeons to more precisely and efficiently destroy many types of diseased tissue. Traditional options for management of certain diseased tissue in the urological field currently include immunotherapy, radiation coupled with chemotherapy and surgical resection. Each of these alternatives achieves certain limited success for a variety of reasons. Immunotherapy, a process by which the body's immune system is stimulated to destroy malignant cells, is believed by some to lack a firm theoretical base from which to conduct experiments, and has had limited success to date. Radiotherapy and chemotherapy have had limited success due, for the most part, to toxicity caused by low tolerance of certain tissues to radiation and the extreme toxicity induced by chemotherapeutic agents. Surgical resection requires the removal of substantial amounts of healthy tissue in some instances and often involves high blood loss. In addition, certain diseased tissues and organs in fields covered by the 510(k) clearance for the AccuProbe may be unresectable (unable to be removed surgically) for a variety of reasons, including the amount and location of the diseased tissue. More recently, some surgeons have commenced targeting such diseased tissue in the fields of urology and general surgery by use of cryosurgery. These surgeons believe 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 3 4 targeted individually, leaving more healthy tissue. However, many surgeons continue to use traditional methods because cryosurgery has not yet proved to be effective over an extended period of time. THE CMS ACCUPROBE SYSTEM The Company has developed certain proprietary designs intended to make the CMS AccuProbe more efficient and more precise than previous cryosurgical instrumentation. In particular, the AccuProbe system includes multiple single-use probes, and a design to allow circulation of liquid nitrogen through the probes rather than nitrogen gas, which the Company believes makes the AccuProbe at least 25% more efficient than other cryosurgical devices. The Company believes that tissue deep within the body can be destroyed more efficiently at lower temperatures using the CMS AccuProbe. In April 1991, the United States Food and Drug Administration (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 March 1992, the Company announced that it had received orders for ten AccuProbe systems, and the first AccuProbe system was shipped in June 1992. This system was accepted by the customer and the sale recorded in August 1992. A total of 35 systems were sold during the year ended June 30, 1993, 46 systems were sold in the year ended June 30, 1994, and an additional 41 systems were sold during the year ended June 30, 1995. Sales to one U.S. distributor, U. S. Medical Corporation, constituted 6.5%, 21.7%, and 24.7% of total sales for the fiscal years ended June 30, 1995, 1994, and 1993, respectively. The backlog of orders at June 30, 1995 totaled $7,919,005, as compared to $8,092,277 and $10,137,445 for the fiscal years ended June 30, 1994 and 1993. The Company expects that approximately 36% of the June 30, 1995 backlog will generate revenues during the fiscal year ending June 30, 1996. The Company's backlog at June 30, 1995 included orders for 26 AccuProbe systems, approximately 7,900 single-use probes and extended warranties totaling over $1,600,000. These totals include a blanket order from the distributor described in the immediately preceding paragraph with a balance at June 30, 1995 of 22 systems and approximately 7,500 probes, against which order the distributor is anticipated to issue periodic releases over a period of two or more years. 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 60 days of the order date. Historically, the Company's backlog has not been a significant indicator of future sales and the Company does not believe that its backlog, at any particular point in time, is indicative of future sales. To date, AccuProbe systems have been used by hospitals for over 5,200 patients, including over 4,800 patients in the field of urology and over 400 patients in general surgery. The Company believes that its AccuProbe can also be useful in connection with other fields of medicine. In particular, the Company believes that the AccuProbe system can be used in other fields covered by the 510(k) for the AccuProbe where surgery is not currently possible or where a minimally invasive technique is more advantageous. These include new AccuProbe applications in the fields of general surgery and gynecology. HYPOTHERMIC BLOOD SUBSTITUTE SOLUTIONS BACKGROUND AND TECHNOLOGICAL OVERVIEW Certain modern surgical procedures require a patient's body temperature to be lowered to below normal during surgery. Lower body temperature helps to minimize the chance of damage to the patient's 4 5 organs by reducing the patient's metabolic rate, thereby decreasing the patient's needs during surgery for oxygen and nutrients which normally flow through the blood. This is also true with respect to the preservation of individual organs to be used in transplant surgery during the interval between removal from the donor and transplant into the recipient. The Company is currently endeavoring to develop the Solutions for use in bloodless surgery and other medical applications. At the present time, certain surgical procedures are limited because of the surgeon's inability to operate while blood is flowing throughout the body. These operations primarily include the removal of tumors that compromise the circulation of blood to the brain, head, neck, or heart, and operations to repair major vascular disorders, such as aneurysms. The Company believes that many of these operations could be performed if the patient's body temperatures were greatly reduced, and the heart and brain functions temporarily arrested. However, a patient's blood would not flow properly at these reduced temperature levels. In some cases, operations have been performed where the patient's body temperature was reduced to some degree, but only for relatively short periods. By using temporary blood substitute solutions, which could carry nutrients to the organs while the heart and brain are temporarily arrested during hypothermia, surgeons may have the opportunity to perform surgery in otherwise inoperable conditions. In addition, surgeons may be able to extend the period of time during which surgery may be performed in those cases where surgery is currently performed at low temperatures. Organ transplant surgery is frequently limited by the difficulty of timely delivery of compatible organs from donors, primarily cadavers, to recipients. Currently, if a compatible donor organ is found, once the organ is removed from the donor, the organ is flushed with an ice cold solution to deactivate the organ and preserve its tissues and is then transported on ice to the recipient patient. The cold solutions currently used, together with ice used during transportation, generally keep a heart, for example, healthy for only 3 or 4 hours. Therefore, it is often difficult to transport particular organs before deterioration of the organ can occur. In addition, surgeons are often unable to recover more than one viable organ from a donor because once one organ is removed, the other organs quickly deteriorate. The Company is not aware of any current method which is successful in keeping the remaining organs healthy within the donor's body once the first organ is removed. The ability to maintain the integrity of organs within a multiple donor for the purpose of harvesting organs would substantially increase the number of viable organs available for transplantation. Research and development activities with respect to development of the Solutions for cell and tissue preservation are taking place at ASRI and SUNY. The Company also hopes to conduct Solution research at other research facilities. The activities at ASRI and SUNY with respect to cell and tissue preservation are preclinical in nature. Other research activities will involve basic research related to optimizing the composition and defining the limits and efficacy of the Solutions. Other than as described in this paragraph and in "Research Project Agreements," the Company has not entered into any agreements for research and development of the Solutions. In view of the Company's emphasis on the marketing of the AccuProbe, in the recent past the Company has not devoted significant resources to the development of the Solutions and does not contemplate doing so for at least the near term. The Solutions have not been fully tested nor has the regulatory clinical testing and approval process begun. Accordingly, there is no assurance that any of the above proposed applications will prove viable in surgical procedures. The Company is unable to predict the date or year when it would expect to begin clinical trials to support FDA approval of the Solutions. 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 fluids is limited to low temperature applications because the Solutions do not carry sufficient oxygen to maintain organ integrity at warm temperatures. At lower 5 6 temperatures, scientists have determined that human organs require less oxygen primarily because of the resulting reduced metabolism. Although solutions have been developed which could be used to supplement the blood during the performance of certain limited surgical procedures, the Company is not aware of the performance of bloodless surgery in current surgical practice. If successfully developed, the Solutions would be introduced into the patient's body during the cooling process. Once the patient's body temperature is near 7 to 10 degrees C, and the heart temporarily arrested, the surgeon would perform the operation. During the surgery, the Solutions would be circulating throughout the body in place of blood. Upon completion of the surgery, the patient would be slowly warmed, his blood reintroduced into his vascular system, and then rewarmed and revived, requiring little or no donated blood transfusion. Bloodless surgery would be primarily suitable for removal of tumors from the brain, head, neck, or heart, and operations to repair major vascular disorders, such as aneurysms. Another benefit of bloodless surgery would be that the amount of blood loss could be reduced, thus reducing the need for blood transfusions from donors and reducing the risk of infection from such diseases as AIDS or hepatitis. The Company is also developing hypothermic blood substitute solutions for use in the preservation of organs and tissue (synthetic and natural) for transplant and for use during the lowering of body temperature. The Solutions are under development for both multiple organ preservation within donors and for individual organ preservation once the organs are removed from the donor. In order to allow for multiple organ preservation, it is intended that a donor's body would be perfused with the appropriate Solution during inducement of hypothermia until the optimal low body temperature is reached. The Company's other Solutions would then be mechanically pumped through the donor's body in lieu of blood in order to maintain the organs. The Solutions are designed to slow down the process of organ deterioration by a number of hours so that a surgeon can remove more than one organ for donation and transplant. The Company is unaware of any current method for keeping remaining organs healthy within a donor's body once one organ is removed. The Company has conducted limited testing on laboratory animals, but further testing is still necessary on these animals as well as primates and humans. Even if the Company successfully completes initial development of the Solutions, it will likely not have enough funds to conduct clinical studies to obtain regulatory approval, which will likely be an extremely costly, time consuming process. The Company expects that funding activities with respect to the Solutions would entail sales of equity securities, which there can be no assurance of achieving. The Company also believes that in addition to the Solutions use for preserving full donor cadavers, they may also be utilized to preserve individual organs and tissue outside of donors for longer periods of time than other solutions currently available. This application, if successfully developed, may increase the chances of a viable organ or tissue being transported from a donor to a recipient in time to be surgically implanted. The application of the Solutions to individual organ and tissue preservation has only undergone minimal testing on organs removed from animals and synthetic skin produced in the laboratory. The Company will be required to complete preclinical and clinical testing, further develop the Solutions and obtain any required regulatory approvals before it may commence marketing of such proposed products. FUTURE PRODUCT DEVELOPMENT The Company contemplates that a variety of applications of hypothermic blood substitutes or other products for use in hypothermic medical procedures, in addition to those discussed above, could ultimately be developed from the Solutions. For example, another potential application of the Solutions is in trauma care. The Company believes that this technology may be used to rapidly cool a patient's body temperature, thus reducing metabolic rate and decreasing organ system damage until appropriate treatment could be administered. Any such applications of the Solutions are not expected to be developed for a number of years, and the Company has not performed any experiments or clinical studies to indicate the efficacy of such applications. 6 7 The Company's primary focus has been on the development and marketing of the CMS AccuProbe system. While the Company intends to continue development of the Solutions, substantial additional development is not currently expected to be undertaken unless and until profitability of the AccuProbe and associated single-use products attain targeted levels and requisite funding is available. In this respect, in the fiscal year ended June 30, 1995, the Company expended approximately $289,301 on research and development efforts on the Solutions. Before human clinical testing can be initiated for the use of the Solutions in bloodless surgery and trauma care, significant amounts of basic research and development must first be successfully completed. The Company may utilize the facilities and services of one or more hospitals with respect to its research and development efforts in addition to the limited experimentation which has been conducted on the Company's behalf at ASRI and SUNY. In addition, the Company will be faced with stringent regulatory approval procedures. Accordingly, commercial product introduction for bloodless surgery, trauma care and in the surgical areas described above and other surgical areas will take several years at a minimum, and require substantial additional funding, if it occurs at all. Even if the Company achieves commercial product introduction, for which there can be no assurance, there remains a significant risk of lack of market acceptance of those new products. Accordingly, there can be no assurance of success for these applications. See "Markets" and "Governmental Regulation." RESEARCH PROJECT AGREEMENTS In August 1989, the Company entered into a Research Project Management Services Agreement with ASRI, pursuant to which ASRI has agreed to conduct research on the Company's behalf on a project-by-project basis over a two-year period which period has been extended, by amendment, to June 30, 1995. The research relationship has continued, and the Company is considering whether or not to request a further extension of the agreement. ASRI and Allegheny General Hospital, Pittsburgh, Pennsylvania, are non-profit subsidiary corporations of Allegheny Health Services. The Company had agreed to fund ASRI with at least $1,000,000 to conduct such research and expended $1,863,670 through June 30, 1994, and an additional $232,000 was expended during the fiscal year ended June 30, 1995. ASRI's major project is with respect to the Solutions in connection with bloodless surgery and organ transplants. Other projects are focused on evaluating the utility of the CMS AccuProbe for certain clinical indications within its cleared fields of use. Subject to the agreement of both parties, additional projects may be undertaken with respect to the Company's Solutions and AccuProbe system. Among other things, the agreement provides for the ownership and all rights of technology to be retained by the Company, except that new products and techniques developed by ASRI personnel that are not improvements or a part of the Company's technology, inventions, or techniques, and are separately identifiable and patentable, are governed by ASRI's Intellectual Property Policy and will be owned by ASRI. ASRI and the Company have agreed that the Company will have a right of first refusal to obtain an exclusive license for any new product or technique so owned by ASRI. Any license agreement pursuant thereto shall contain, among other things, a provision for royalty payments to be made by the Company to ASRI. In August 1991, the Company entered into a Research Project Agreement with the Research Foundation of the State University of New York ("SUNY"), pursuant to which SUNY conducts research at its Center for Cryobiological Research in Binghamton, New York, with respect to the Solutions. The Company has agreed to fund SUNY with at least $363,675 to conduct research under this agreement, all of which has been expended through June 30, 1995. This agreement has been extended, by amendment, to August 31, 1995, and the budget for additional funding for the fiscal year ending June 30, 1996 is currently under review. Because of the significant costs involved in the development of medical technology products, including the cost of test equipment and laboratory facilities, and in order to verify the results obtained from the Company's testing and application of the AccuProbe system and the Solutions, the Company anticipates that it may enter into arrangements with parties in addition to ASRI and SUNY. Any such arrangement will generally require the Company to fund such testing and may require the Company to give up a portion of its rights to the technology being tested and/or to pay for the use of new developments in the form of royalties 7 8 or otherwise. There can be no assurance that the Company will be able to enter into any such arrangement on favorable terms or at all. MARKETS AND MARKETING The Company currently markets its AccuProbe system to hospitals, surgeons, and radiologists through its own sales department, as well as through two regional distributors in the United States. During the fiscal year ended June 30, 1995, the Company entered into distribution agreements with distributors in Canada, South Korea, and Taiwan, Republic of China. In addition, the Company entered into a distribution agreement with B&K Medical, A/S, of Copenhagen, Denmark. Under this agreement, B&K Medical, A/S, will distribute the CMS AccuProbe cryosurgical system in seventeen European and Scandinavian countries. The Company may also arrange with other third parties to market or distribute this or other products in the United States or other countries. The Company also participates as an exhibitor at medical seminars and meetings of various medical professional organizations to educate healthcare professionals as to the uses and benefits of the AccuProbe system. The Company is soliciting certain hospitals, surgeons, and radiologists in the United States to participate in a multi-institutional post-marketing evaluation of the CMS AccuProbe for use in urological and general surgery. The Company believes that evaluations will be submitted over a period of several months to several years and will be reported to the Company in the form of periodic written reports. The Company expends significant resources educating surgeons and healthcare professionals in formal training programs as to the uses and benefits of the Company's AccuProbe system and cryosurgery in general. 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. No national payment guidelines for such surgery have yet been established by either Medicare's Health Care Financing Administration ("HCFA") or by the National Blue Cross and Blue Shield Association. Therefore, insurer's reimbursement decisions are made on an insurer-by-insurer or case-by-case basis. While payments received by customers vary significantly by region and insurer, widespread formal reimbursement acceptance has yet to be achieved. When insurance coverage is not available, patients may either elect to pay for treatment themselves or undergo traditional therapies which are covered by their insurers. The Company cannot predict if or when national coverage guidelines from Medicare and Blue Cross and Blue Shield will be instituted for this form of surgery. 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 some degree and may continue to do so until formal national coverage guidelines are established. There can be no assurance that such guidelines will be established or, if established, that reimbursement will be sufficient to encourage use of the AccuProbe by hospitals and physicians. Solutions designed for use in bloodless surgery and in trauma care, if successfully developed and approved, will be marketed to hospitals, surgical facilities, and physicians. Prior to any marketing efforts, however, the Company must complete substantial additional research and development, undergo, in some cases, at least several years of regulatory approval procedures, and may require substantial additional financing. The Company also intends the Solutions to be marketed to the limited number of organ transplant centers in the United States, as well as to other hospitals and clinics. Currently the number of organ transplants performed each year is relatively small and therefore the overall market size for this use of the Solutions is limited. In order for the Company to realize significant revenues from the marketing of its Solutions for organ preservation, the number of transplants performed each year will have to increase significantly. The Company hopes that its Solutions, if developed and approved for this use, may expand the 8 9 transplantation market. Nevertheless, the number of organ transplants will always be limited by the number of organ donors. 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 CMS AccuProbe systems, single-use probes and other accessory products. The Company presently uses third party vendors to manufacture certain parts and subassemblies of the AccuProbe system, 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 four 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 60 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 attempts to reduce the risk of these adverse effects by relying on forecasting of sales of various products to secure an adequate inventory of materials, components and subassemblies. 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 CMS 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, recordkeeping and reporting and marketing of the AccuProbe, the Solutions, and related instrumentation are regulated by the United States Food and Drug Administration (the "FDA") pursuant to the federal Food, Drug and Cosmetic ("FD&C") Act and in some instances, the Public Health Service ("PHS") 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, thus allowing commercial marketing of the product. A 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. Currently the testing and regulatory approval process usually takes at least several years and requires the expenditure of substantial resources, for which the Company may seek third party funding for some products. There can be no assurance that regulatory approvals or clearances will be 9 10 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 this connection, the Company submitted a 510(k) premarket notification to the FDA in October 1992 for the CMS Urethral Warmer (the "Warmer"), an optional accessory device used to maintain normal urethral temperature and thus aim to protect the patient's urethral tissue from the freezing temperatures associated with certain urological cryosurgical procedures. In January 1993, the FDA requested that the Company supply additional clinical data concerning the safety and efficacy of the Warmer and in August 1993, the Company amended the 510(k) premarket notification to include the data requested. In January 1994, the Company received correspondence from the FDA denying 510(k) premarket clearance for the Warmer. According to such correspondence, the Warmer would require approval through the more burdensome premarket approval ("PMA") process prior to its marketing. Currently, urological cryosurgery procedures represent a substantial portion of AccuProbe usage. Company representatives met with the FDA in February 1994 to discuss the FDA's action and the FDA indicated at that meeting that it would reconsider 510(k) clearance for the Warmer if the Company met certain conditions, including: 1) submission of an Investigational Device Exemption (IDE) application to the FDA for continuing and further studies of the Warmer; 2) submission of a new 510(k) notification designating the Warmer as an "accessory" to the already cleared AccuProbe or other cryosurgical devices for use in general urological procedures (as opposed to specific procedures). The FDA indicated that the submission would be expeditiously reviewed; 3) submission in the 510(k) of clinical data from sites which have investigated the Warmer showing that the Warmer protects the urethra from damage during a variety of urological cryosurgery procedures; and 4) notification of all existing Warmer investigational sites that because FDA regards the Warmer to be an accessory to a marketed surgical device, the agency considers the study a "significant risk device study" and therefore requires FDA preclearance of the investigational protocol and plan. Such designation does not, however, suggest or imply that the CMS Warmer is in any way unsafe. On April 1, 1994, in accordance with one of the FDA conditions, the Company submitted an IDE application for the Warmer containing the results of laboratory and other preclinical data and a proposed study protocol. On May 2, 1994, the Company received conditional approval from the FDA for the IDE and has begun a clinical study of the device involving 50 patients at up to 5 hospitals. The purpose of the IDE is to study the Warmer's ability to maintain normal urethral temperatures during general urological cryosurgeries. A previous study conducted under an "abbreviated" IDE, submitted to the FDA in August 1993, supports use of the Warmer to maintain normal urethral temperatures during prostate cryosurgery. Upon receipt of conditional approval from the FDA for the IDE, the Company began immediately to recruit investigators at five hospitals to perform this clinical study. The Institutional Review Board ("IRB") at each hospital must approve the protocol submitted by the principal investigator. Four hospitals have received IRB approval of the research protocol and at least 40 of the 50 patients allowed by the IDE underwent cryosurgical procedures utilizing the Warmer. Any investigational sites which were using the Warmer under an "abbreviated" IDE and are not part of the current study cannot continue using the Warmer unless and until CMS receives 510(k) clearance subsequent to the completion of the current study. Therefore, until such time, physicians at these other sites wishing to use a warmer in connection with urological cryosurgery are using other methods to warm the urethra. All Warmers previously distributed to U.S. hospitals which are not part of the current study have been 10 11 retrieved by the Company. The Company believes that, as of September 1995, only five hospitals (out of a total of 122 sites with installed AccuProbe systems) have stopped using the AccuProbe since the FDA's action regarding the Warmer. The Company compiled clinical data from sites which have investigated the Warmer to attempt to show that the Warmer maintains normal urethral temperatures during a variety of urological cryosurgery procedures. On June 23, 1995, the Company submitted a new 510(k) application for the Warmer, another one of the FDA's conditions, designating the Warmer as an "accessory" to the previously cleared AccuProbe or other cryosurgical devices for use in general urological procedures. On September 12, 1995, the FDA responded to the application with a request for additional information regarding certain technical and design specifications, test results, and labeling. The Company anticipates a timely response to these requests. The Company previously received FDA 510(k) premarket clearance for its AccuProbe and will continue to market it in accordance therewith in the fields currently cleared by FDA including: dermatology, general surgery, neurosurgery, thoracic surgery, ENT, gynecology, oncology, proctology, and urology. However, until regulatory clearance is received for the Warmer, the Company will market the AccuProbe without providing any such Warmers. AccuProbe system sales in the urological field slowed in the quarter ended March 31, 1994, due in part to the uncertainty regarding the status of the Warmer, but have since returned to more normal levels. Accordingly, at this time the Company does not believe that this uncertainty will have a significant long term impact on sales of AccuProbe systems. On August 2, 1995, the Company submitted to the FDA (510(k) premarket notification of two new models of the AccuProbe system. These represent evolutionary advances of the presently marketed AccuProbe, incorporating numerous technical refinements and improvements to facilitate improved manufacturability and serviceability. On March 31, 1994, the Company received a warning letter from the FDA concerning promotional materials for the AccuProbe system cryosurgical device. The letter stated that FDA "has determined that these materials contain statements, suggestions, and implications which are misleading because they promote the product beyond its intended use." While confirming that the Company obtained 510(k) marketing clearance from the FDA for use of the AccuProbe "as a cryosurgical tool in the fields of dermatology, general surgery, neurosurgery, thoracic surgery, ENT, gynecology, oncology, proctology and urology," the letter from the FDA took issue with the promotion of the AccuProbe system specifically for the implied "treatment" of "prostate cancer," and generally for the implied "treatment" of "any specific disease state." The Company does not believe the FDA's position to be appropriate or practical. However, the Company responded to the FDA by notifying the FDA of its intent to modify its promotional materials in order to be in compliance with the Agency's request. At this time, the Company does not believe that the modifications to its promotional materials will have a significant long term impact on future sales of the AccuProbe system. The Company will continue to market the AccuProbe in the fields indicated by its 510(k) and physicians may continue to utilize the AccuProbe for cryosurgery as they deem appropriate for their patients in their practice of medicine. In the event that the Company intends to test clinically, produce or market the Solutions, 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 or, for this product more likely, 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 of its technology which may be developed. The Company's AccuProbe is considered a medical device by the FDA. Unlike new drugs and biologicals, medical devices may sometimes be marketed without obtaining a complete review of safety and effectiveness, such as a PMA. A medical device which is "substantially equivalent" to a similar product which was commercially marketed in the United States prior to May 28, 1976, and (i) has been classified as Class I or Class II; or (ii) has not yet been classified; or (iii) has been classified as Class III, but has not been required to obtain premarket approval, may itself be marketed without obtaining FDA premarketing approval. Pursuant 11 12 to Section 510(k) of the FD&C Act, such "substantially equivalent" devices may be marketed several months after the submission of a 510(k) premarket notification to the FDA, if the agency clears the submission. Because the AccuProbe is considered substantially equivalent to prior devices, the 510(k) premarket notification for the AccuProbe system was cleared by the FDA. Other devices not considered by the FDA to be "substantially equivalent" to an appropriate previously marketed product will require approval pursuant to the more burdensome and lengthy PMA process. Since the Solutions intended for use in effectuating multiple and individual organ preservation would affect the functions of the body and would be used to treat disease in humans but would not achieve their principal purposes through chemical action in the body, it is also likely that the Solutions for these purposes will be viewed as medical devices by the FDA. As the Company has achieved with the CMS AccuProbe system, the Company may seek to market its Solutions for organ preservation pursuant to a Section 510(k) premarket notification. However, since the Solutions for organ preservation have some characteristics which differ from previously marketed devices, the FDA may consider the Solutions not to be "substantially equivalent" to products marketed in the U.S. prior to 1976 and thus require the more stringent PMA process. The PMA process involves lengthy and detailed laboratory testing, the obtaining of an Investigational Device Exemption to conduct clinical testing, as well as other costly and time-consuming procedures. The PMA clinical testing and review and approval process generally takes at least several years and substantial financial resources to accomplish. Furthermore, the FDA may consider the Solutions used for organ preservation to be drugs or biologicals and scrutinize the products under a different set of procedures as discussed below. Other medical products which may be developed by the Company will also undergo rigorous FDA review. For example, if the Company develops the Solutions for a different indication - use in bloodless surgery or for trauma care - the Solutions would likely be classified as drugs or biologicals by the FDA. Similar products, including plasma expanders and cardioplegia solutions, are currently regulated by the FDA as drugs or biologicals. Such products which are intended to treat disease, or to affect the structure or function of the body, and which depend upon chemical action and being metabolized in the body are generally regulated as drugs. A product which has a similar purpose but is a blood component or derivative or analogous product would be regulated as a biological product pursuant to the PHS Act. Approval of a drug or biological would require preclinical evaluation, the filing of an Investigational New Drug Application ("IND"), conducting three phases of human clinical investigations and filing of and approval by the FDA of an NDA or PLA. The manufacturer of a biological product would also be required to obtain an establishment license from the FDA, demonstrating that the product can be properly manufactured at a particular facility. The clinical testing for drugs and biologicals generally takes at least several years and FDA review and approval several additional years. Additionally, Congress has authorized user fees applicable to NDAs and PLAs, thus increasing the potential costs to the Company. It is possible such fees would also be imposed on medical device submissions in the future. Final NDA or PLA approval will require a substantial monetary investment by the Company far in excess of the funds available to the Company, funds which the Company may not be able to raise. 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. 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 12 13 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 or scientific advisory board members, 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 product review and approval, and in some cases, if the agency deems data are biased, FDA could require that a study be repeated. 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 August 1990, a United States patent issued with respect to the Company's proprietary cryoprobe technology. Two United States and two foreign patent applications for the Company's AccuProbe system and component parts issued into patents during 1993 and 1994. Corresponding applications in several foreign countries have been allowed or have already been patented. One additional U. S. patent application has issued and two other U. S. patent applications have been allowed during 1995 for other aspects and components of the Company's AccuProbe system while several other patent applications have been filed during 1995 or otherwise remain pending in the United States and abroad. In May 1990, a United States patent was issued with respect to the first generation solutions, and the methods of use thereof. In April 1995, a United States patent issued with respect to the second generation solution, and methods of use thereof. A related U. S. application was filed during 1994. Corresponding foreign applications are due to be filed during the fiscal year ending June 30, 1996. The Company's Hypothermosol federal trademark application was allowed in 1995 and a registration should issue shortly. Hypothermosol is the name under which the Company markets, or will market, Solutions products. 13 14 In total the Company owns seven issued U. S. patents and seven issued or allowed foreign patents. At least three additional pending U. S. patent applications have been allowed or have 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 CMS AccuProbe, the Company faces competition from other firms engaged in the business of developing or marketing cryosurgical devices. The Company is aware that such 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 Frigitronics Incorporated; Erbe Incorporated, a German company; and Cryogenic Technology LTD., an English company, currently in receivership, whose products are marketed by Candela Laser Corporation, an American company. The AccuProbe also competes with other techniques for destroying diseased tissue. Competition with other firms which market instruments used to freeze tissue is based primarily on technological superiority and performance. The AccuProbe's unique technology uses liquid nitrogen circulating through a cryoprobe to freeze diseased tissue. Liquid nitrogen provides 88 times the heat-extracting capability of gaseous nitrogen. In most competing cryosurgical devices, nitrogen is in a gaseous state as it circulates through the cryoprobe. Consequently the AccuProbe is capable of freezing tissue with a volume approximately seven times that which can be frozen using gaseous nitrogen and produces colder temperatures within the frozen tissue. 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 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 or doctors performing research for the Company, including members of the Company's scientific advisory board and 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 AccuProbe 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 AccuProbe and Solutions by applying similar techniques. 14 15 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 67 full-time employees at June 30, 1995, including six executive officers, 12 employees in research and development, 19 in operations (engineering and manufacturing), 13 in sales and marketing, nine in field service, and 8 in finance and administration. The Company has also retained three individuals as consultants. All of the consultants and five of the employees of the Company are Ph.D.s or M.D.s. Although there is intense competition for qualified personnel in the Company's industry, the Company has not experienced a problem to date in recruiting or retaining qualified scientific and management personnel. The Company is not a party to any collective bargaining agreement. ITEM 2. PROPERTIES The Company's administrative, manufacturing and research and development facilities consist of approximately 28,800 square feet located in Rockville, Maryland. The Company rents these facilities under a five year lease contract. The Company occupied corporate offices in these facilities in May, 1991; the five year term of the lease commenced when the balance of the facilities, consisting of laboratory and manufacturing space, was completed and fully occupied in November 1991. The Company negotiated a new five-year lease in May 1995 which included a reduction in the amount of leased office space and which superseded the previous lease and amendments. Rental expense for facilities for the year ended June 30, 1995 totaled $452,878. At June 30, 1995, the monthly rental was $29,916. 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 year ended June 30, 1995. ITEM 3. LEGAL PROCEEDINGS In April 1994, present or former stockholders of the Company filed several suits against the Company, its President and CEO and two other directors in the United States District Court for the District of Maryland. The suits were subsequently consolidated under Case No. AW-94-873, and a consolidated amended complaint was filed. The plaintiffs sought to have the consolidated action designated as a class action on behalf of all persons who purchased the Company's stock between September 13, 1991 and April 4, 1994. The plaintiffs claimed that, during that period, the defendants violated the federal securities laws and the common law by failing to make accurate public disclosures regarding the need for, and status of, FDA clearance of the CMS Urethral Warmer, an optional accessory device intended to protect the urethra during urological cryosurgery procedures, and by failing to make accurate public disclosures regarding the prospect that FDA would later take the position that it was improper for the Company to promote the CMS AccuProbe System for the "treatment" of "prostate cancer," and generally for the "treatment" of "any specific disease state." The plaintiffs claimed that the market price of the Company's stock was inflated as a result of the defendants' alleged failure to make accurate public disclosures. In addition, the plaintiffs asserted that the individual defendants violated the federal securities laws by selling Company stock at inflated prices during the alleged class period. The plaintiffs sought damages in unspecified amounts, prejudgment interest, and an award of attorneys' fees and experts' fees. On November 4, 1994, the defendants moved to dismiss the consolidated amended complaint. On April 26, 1995, the Court dismissed a major portion of the action. The Court dismissed the plaintiffs' claims against the individual defendants in their entirety. The Court also dismissed the plaintiffs' claims relating to the Company's 1991 and 1993 annual reports and dismissed the plaintiffs' state law claims in their entirety. The Court ruled that the plaintiffs were entitled to proceed solely with regard to the question of whether the Company should have made a public disclosure in October 1992 when it applied for FDA clearance for the CMS Urethral Warmer, and whether the Company should have included a description in its 1992 annual report of the relationship between the Urethral Warmer and the CMS AccuProbe. On or about September 15, 1995, the parties reached an agreement in principle to settle the 15 16 case. The agreement provides that a class consisting of all persons who purchased the Company's stock between September 13, 1991 and April 4, 1994 will be certified solely for settlement purposes. In return for a general release of all claims which members of the class may have against the Company and its past and present officers, directors, employees and other agents, the Company will pay $100,000 and issue shares of common stock of the Company with a market value of $350,000, based on the average closing price on the ten trading days prior to district court approval of the settlement. The Company has accrued the entire $450,000 settlement cost of the stockholder class action suit as of June 30, 1995. The plaintiffs' counsel intend to apply to the Court for an award of fees equal to approximately one third of the gross amount of the settlement proceeds, as well as for reimbursement of the out of pocket expenses they incurred during the course of the litigation. The remainder of the settlement proceeds, minus the costs of administering the settlement, including the costs of notice to the class, will be distributed to those members of the class who submit timely claims, in proportion to the investment losses they have suffered on shares they purchased during the class period. The settlement is subject to approval by the Court after notice to the class. The Company has settled the litigation solely to avoid the expenses that would be involved in defending the suit between now and its conclusion. Those expenses were expected to exceed the amount of the cash consideration being paid in the settlement. The defendants have admitted no liability and continue to believe that the suits are without merit. In the event that the settlement is not finally approved, the Company will continue to defend its position vigorously. On April 26, 1995, the Company received notice that Cryogenic Technology Limited ("CryoTech"), a competitor of the Company, had filed suit against the Company in the United States District Court for the District of Maryland, Civil Action No. JFM-95-1018. CryoTech sought a declaration that one of the Company's patents is invalid or that CryoTech was not infringing any valid claims of the patent. The patent covers certain aspects of the cryoprobes which are used with the CMS AccuProbe System. The action was prompted by repeated correspondence from the Company to CryoTech in which the Company asserted that the cryoprobes which are used with CryoTech's cryosurgical system were infringing the Company's patent. The Company believes that CryoTech's claims of invalidity and lack of infringement were without merit. On or about May 30, 1995, the Company filed a counterclaim for infringement against CryoTech and Candela Laser Corporation ("Candela"), which the Company believed was the exclusive distributor of CryoTech's surgical systems and probes. The Company sought a declaration that the Company's patent is valid and that CryoTech and Candela were infringing the patent, an injunction barring CryoTech and Candela from infringing the patent, and an award of damages and attorneys' fees. In mid-July 1995, the Company was informed that CryoTech had been placed in receivership in the United Kingdom, that its business was being sold to another, unrelated entity and that the new entity would be using a new design for its cryoprobes that, it was asserted, would not involve any infringement of the Company's patents. Based on the information that the Company has received, the Company has tentatively agreed with CryoTech that the litigation pending between them will be discontinued. This agreement is subject to the Company's receiving written confirmation from CryoTech that its business has been sold to another, unrelated entity and that it has ceased manufacturing, using or selling the infringing probes. As for Candela, it has formally notified the Company that it has discontinued purchasing the allegedly infringing cryoprobes. Candela has also notified the Company that, by October 17, 1995, it will discontinue all use of the allegedly infringing probes for promotional, marketing and demonstration purposes or as replacement parts for any customers returning defective probes. Based on this information, the patent litigation between the Company and Candela has been discontinued. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1995. 16 17 PART II ITEM 5. MARKET FOR REGISTRANT'S 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. Since May 19, 1992, the Common Stock has traded on the NASDAQ National Market System and all corresponding prices represent high and low closing prices for the Common Stock for the periods indicated.
Price Range ----------- High Low ---- --- Fiscal Year Ended June 30, 1994 1st Quarter 6 1/8 3 7/8 2nd Quarter 5 4 3rd Quarter 4 1/8 2 7/8 4th Quarter 2 7/8 1 7/8 Fiscal Year Ended June 30, 1995 1st Quarter 4 11/16 2 1/16 2nd Quarter 4 1/4 3 3rd Quarter 3 11/16 2 7/8 4th Quarter 3 1/2 2
HOLDERS As of June 30, 1995, there were 1,281 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. 17 18 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below for the fiscal years ended June 30, 1995, 1994, 1993, 1992, and 1991 have been derived from the Company's consolidated financial statements, which were audited by Deloitte & Touche LLP, Independent Public Accountants. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
Year Ended June 30, --------------------------------------------------- (In Thousands, Except Per Share Data) 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Statement of Operations Data: Total Revenues $13,594 $13,438 $ 5,876 $ - $ - Gross Profit (Loss) 7,832 6,310 1,029 (198) - Income (Loss) from Operations (1,812) (2,658) (6,837) (5,027) (2,776) Net Income (Loss) (2,231) (2,637) (6,588) (4,750) (2,581) Per Share Data: Net Income (Loss) Per Share (0.09) (0.12) (0.29) (0.26) (0.18) Balance Sheet Data (end of period): Working Capital 3,776 5,116 4,975 11,609 5,363 Total Assets 8,403 9,106 8,353 12,971 5,598 Long Term Notes Payable and Capital Lease Obligations 23 31 11 14 - Accumulated Deficit 22,250 20,020 17,383 10,794 6,044 Stockholders' Equity 3,982 5,323 5,642 12,038 5,456
18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cryomedical Sciences, Inc. ("CMS") and its wholly owned subsidiary Cryo Instruments, Inc. ("CII"), collectively referred to as the "Company," is engaged in the research, development, marketing and manufacturing of products for use in the field of hypothermic (low-temperature) medicine. The Company was incorporated on November 5, 1987. On August 31, 1989, CMS completed the acquisition of CII and CII became a wholly-owned subsidiary of CMS. CII has been inactive since June 30, 1990. RESULTS OF OPERATIONS Since inception and through June 30, 1992, the Company was a development stage company which focused primarily on research and development activities in connection with its cryosurgical systems and hypothermic blood substitute solutions. Through June 30, 1992, the Company did not generate any operating revenues and incurred cumulative losses of $9,861,102. Prior to fiscal year 1993, the Company's sole source of revenues has been interest income. In October 1991, the Company announced the first use of the AccuProbe prototype for patients and the first AccuProbe system was shipped in June 1992. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 Sales and other revenues for the fiscal year ended June 30, 1995 totaled $13,594,186, compared to revenues of $13,438,494 for the prior fiscal year. The flat revenue growth results from a decline in the number of AccuProbe(R) systems sold and fewer procedures performed using single-use AccuProbe accessories due primarily to lack of formal Medicare reimbursement for urologic cryosurgery. Sales of the AccuProbe are 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 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. Currently Medicare considers urological cryosurgical procedures to be investigational and excludes such procedures from reimbursement, although Medicare carriers may pay for such procedures if the carriers decide that the use of the AccuProbe is appropriate for the patients involved. No national payment guidelines for such surgery have yet been established by either Medicare's Health Care Financing Administration ("HCFA") or by the National Blue Cross and Blue Shield Association. Therefore, insurer's reimbursement decisions are made on an insurer-by-insurer or case-by-case basis. While payments received by customers vary significantly by region and insurer, widespread formal reimbursement acceptance has yet to be achieved. When insurance coverage is not available, patients may either elect to pay for cryosurgical procedures themselves or undergo traditional therapies which are covered by their insurers. The Company cannot predict if or when national coverage guidelines for Medicare, Blue Cross and Blue Shield or any other insurance carriers will be instituted for this form of surgery. The uncertainty and added efforts required for the Company's customers to secure payment may be impacting sales growth and utilization of AccuProbe Systems to some degree and, if so, may continue to do so unless and until formal national coverage guidelines are established. In this respect, the number of single-use probes sold in the year ended June 30, 1995 decreased 8% compared with the number of probes sold in the prior fiscal year. However, the cumulative number of systems sold since the introduction of the AccuProbe increased 50% from 81 at June 30, 1994 to 122 at June 30, 1995, which could indicate a significantly reduced rate of probe usage per system on average. The Company believes such reduced rate of probe usage is likely due to the lack of uniform medical insurance reimbursement policies. Changes in probe inventories maintained by hospitals 19 20 using AccuProbe Systems may influence the rate of sales of single-use probes, but the Company is usually not aware of such changes in hospital probe inventories. 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) , in May 1995 the Company undertook certain actions to reduce expense levels. Such actions include staff reductions, salary reductions and other cost control measures. Such other cost control measures include 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, for which there can be no assurance of achieving. Gross profits for the year ended June 30, 1995 totaled $7,832,188 or 58% of sales, compared to $6,309,797 or 47% of sales in the prior fiscal year. Gross profits as a percentage of sales in fiscal 1995 ranged from a low of 51% of sales in the quarter ended September 30, 1994 to a high of 73% of sales in the quarter ended June 30, 1995. Gross profits as a percent of sales increased during fiscal 1995 and 1994 as product costs were reduced. Gross profits as a percentage of sales increased in the fourth quarter as a result of a year-end inventory revaluation to current cost levels and a fourth quarter reduction in accrued manufacturing expenses. The Company anticipates the stabilization in gross profits as a percent of sales during the year ending June 30, 1996. Research and development expenses for the fiscal year ended June 30, 1995 totaled $2,899,686, compared to $2,506,349 for the prior fiscal year. Research and development expenses increased by $393,337 (16%) in the fiscal year ended June 30, 1995 primarily due to a $422,000 increase in research grants to customers. Sales and marketing expenses totaled $3,723,168 in the fiscal year ended June 30, 1995, compared to $3,444,153 in the prior fiscal year. Sales and marketing expenses increased by $279,015 (8%) in the fiscal year, primarily as a result of increased staffing and increased marketing activity. General and administrative expenses for the fiscal year ended June 30, 1995 totaled $3,020,866, essentially unchanged from $3,017,306 for the prior fiscal year. The Company recorded a $450,000 expense to settle the stockholder class action suit in the year ended June 30, 1995. As a result of the increased gross profits, offset in part by an increase in costs and expenses and the expense of settling the stockholder class action suit, the Company sustained a decreased net loss of $2,230,725 for the year ended June 30, 1995 compared to a net loss of $2,636,802 in the prior fiscal year. FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 The results for the years ended June 30, 1994 and 1993 reflect the transition from a development stage company to an operating company with expanded manufacturing and marketing capabilities. Sales and other revenues increased 129% in the year ended June 30, 1994 to $13,438,494 and included 46 AccuProbe systems, as well as single-use probes and other accessory products. Sales and other revenues for the year ended June 30, 1993 totaled $5,875,827 and included 35 CMS AccuProbe systems as well as single-use probes, other accessory products and $100,000 from research grants. The increase in revenues in fiscal 1994 reflected not only the increased sales of AccuProbe systems, but also the substantial increase in sales of single-use probes and warranty revenues due to the larger installed base of AccuProbe systems and, to a lesser extent, price increases. 20 21 Commencing with the hiring of a Vice President, Operations, in March 1992, the Company began to incur its initial manufacturing expenses. The Company expanded the manufacturing and engineering staff in the year ending June 30, 1993, from 18 to 48 people, to meet the demand for AccuProbe systems and single-use probes and accessories. In the year ended June 30, 1994 the manufacturing and engineering staff was reduced to 34 people despite increased production levels as initial product development was completed and production cycle times were reduced. Gross profits for the year ended June 30, 1994 totaled $6,309,797 or 47% of sales compared to $1,028,540 or 18% of sales in the prior fiscal year. Gross profits as a percentage of sales in fiscal 1994 ranged from a low of 40% of sales in the quarter ended September 30, 1993 to a high of 54% of sales in the quarter ended June 30, 1994. Quarterly gross profits and losses in fiscal 1993 ranged from a loss of $314,934 in the quarter ended September 30, 1992 to a gross profit of $1,139,998 (36% of sales) in the quarter ended June 30, 1993. Gross profits increased during fiscal 1994 and 1993 as sales volume increased and product costs were reduced. Research and development expenses for the fiscal year ended June 30, 1994 totaled $2,506,349, compared to $3,151,368 for the prior fiscal year. Research and development expenses decreased by $645,019 (20%) in the fiscal year ended June 30, 1994 primarily due to reduced product development expenses for the AccuProbe system, as well as reduced funding of external research at ASRI and SUNY for both AccuProbe and blood substitute solution research projects, and a reduction in research grants to customers. Sales and marketing expenses totaled $3,444,153 in the fiscal year ended June 30, 1994, compared to $2,034,209 in the prior fiscal year. The substantial increases in sales and marketing expenses in fiscal 1994 (69%) were primarily the result of additions to the Company's sales, marketing and sales support staff and increased sales and marketing activity related to the introduction to market of the CMS AccuProbe. General and administrative expenses for the fiscal year ended June 30, 1994 totaled $3,017,306, compared to $2,680,322 for the prior fiscal year. General and administrative expenses increased in fiscal 1994 (13%) due to additional staffing, higher professional and consulting fees and additional insurance expenses. As a result of the significant increase in revenues and gross profits, offset in part by increases in costs and expenses, the Company sustained decreased net losses of $2,636,802 for the year ended June 30, 1994 compared to a net loss of $6,588,418 in the prior fiscal year. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1995, the Company had cash, cash equivalents, and short-term investments totaling $1,217,693 and working capital of $3,775,893, as compared to $2,523,891 and $5,116,245, respectively, at June 30, 1994. The Company's cash and working capital positions decreased from June 30, 1994 due primarily to the net loss of $2,230,725 sustained by the Company for the year ended June 30, 1995, which was offset in part by the proceeds obtained from exercise of warrants and options. The Company's initial public offering of securities was completed in November 1989 (December 1989, with respect to the overallotment option) and resulted in net proceeds of $4,646,406. The Company has funded its research and development, sales and marketing, manufacturing and other operating costs to date primarily from the proceeds of its initial public offering and from proceeds from the exercise of 5,750,000 Redeemable Class A Warrants which were issued as a part of the public offering and the exercise of 5,750,000 Redeemable Class B Warrants which were issued upon the exercise of the Class A Warrants. Net proceeds from the exercise of the 5,750,000 Class A Warrants in fiscal 1990 and 1991 totaled $7,101,669. Net proceeds from the exercise of the 5,750,000 Class B Warrants in fiscal 1990, 1991 and 1992 totaled $11,417,339. 21 22 In connection with the initial public offering, the underwriter received options to purchase up to 100,000 Units, exercisable over a period of three years commencing two years from the effective date of the offering. These Units were identical to the Units sold in the Company's initial public offering except that the Class A and Class B Warrants were not redeemable. Options to purchase 23,900 Units were subsequently transferred to certain employees of the underwriter and on May 27, 1994, the Company entered into an agreement with the successor-in-interest to the underwriter regarding exercise of the remaining 76,100 Unit Purchase Options. Pursuant to the Agreement, (i) 76,100 Unit Purchase Options issued in connection with the Company's initial public offering, (ii) 380,500 Redeemable Class A Warrants (the "Class A Warrants") included in the Units and (iii) 380,500 Redeemable Class B Warrants issuable upon the exercise of the Class A Warrants were concurrently exercised at an aggregate discount of 30.7%, resulting in the issuance of 1,141,500 shares of Common Stock of the Company and proceeds to the Company of $1,200,000. On June 15, 1994, the Company entered into agreements with two non-affiliated holders of Unit Purchase Options issued in 1989 in connection with the Company's initial public offering, regarding exercise of an aggregate of 5,000 Unit Purchase Options owned by them. Pursuant to these agreements, (i) an aggregate of 5,000 Unit Purchase Options (ii) 25,000 Class A Warrants (the "Class A Warrants") included in the Units and (iii) 25,000 Class B Warrants issuable upon the exercise of the Class A Warrants were concurrently exercised at an aggregate discount of 10%, resulting in issuance of 75,000 shares of Common Stock of the Company and net proceeds to the Company of $98,754. All of the remaining Unit Purchase Options issued in 1989 in connection with the Company's initial public offering, all of the Class A Warrants included in the Units, and all the underlying Class B Warrants were exercised in August, October and November 1994, resulting in the issuance of 291,000 shares of Common Stock of the Company and proceeds to the Company of $429,990. The Company received net proceeds of $113,682 during October 1993 from the exercise of Unit Purchase Options issued in connection with a private placement of the Company's securities completed in October and December 1988. The exercise of these Unit Purchase Options resulted in the issuance of 81,000 shares of Common Stock of the Company and 81,000 shares of 9% Series A Redeemable Convertible Preferred Stock, which preferred shares were convertible into a like number of shares of Common Stock of the Company. On November 19, 1993 the Company called for the redemption on December 20, 1993 of the 81,000 shares of 9% Redeemable Convertible Preferred Stock then outstanding. All holders of the 9% Redeemable Convertible Preferred Stock chose to convert their shares to a like number of shares of Common Stock prior to the expiration of the notice period of redemption and, in December 1993, the Company issued 81,000 shares of Common Stock upon conversion of 81,000 shares of 9% Redeemable Convertible Preferred Stock. Subsequent to the exercise of the private placement Unit Purchase Options, the Company received a demand registration request with respect to the securities issued upon the exercise of these Unit Purchase Options and the Company filed a registration statement on March 4, 1994 in connection with these securities, which registration statement was declared effective on March 15, 1994. The Company also registered 500,000 shares of Common Stock of the Company underlying (i) 250,000 Class A Warrants issued to certain investors in connection with a bridge financing completed in June 1989 and (ii) 250,000 Class B Warrants issuable upon exercise of such Class A Warrants. Each Class A Warrant entitled the holder, upon exercising the warrant, to purchase one share of Common Stock and one Class B Warrant for $1.25. Each Class B Warrant entitled the holder, upon exercise of the Warrant, to purchase one share of Common Stock for $2.00. On March 22, 1994, the Company called for the redemption on April 22, 1994 of the 250,000 redeemable Class A Warrants then outstanding. All holders of the outstanding Class A Warrants chose to exercise the Warrants prior to the expiration of the notice period of redemption, and, in April 1994, the Company issued 250,000 shares of Common Stock and 250,000 Redeemable Class B Warrants. The exercise of the outstanding Class A Warrants resulted in net proceeds to the Company of $300,433. On May 3, 1994, the Company called for the redemption on June 7, 1994 of all of the 250,000 Redeemable Class B Warrants issued in April 1994 when the Company's Class A Warrants were exercised. On June 6, 1994, the Company extended the notice period of redemption to June 21, 1994 with respect to 75,000 Class B Warrants which 22 23 remained outstanding and unexercised. All holders of the Class B Warrants chose to exercise the Warrants prior to the expiration of the notice period of redemption, and in May and June 1994, the Company issued 250,000 shares of Common Stock. The exercise of the Class B Warrants resulted in net proceeds to the Company of $487,933. Capital expenditures for leasehold improvements, furniture and equipment totaled $317,240 in the year ended June 30, 1995, compared to $218,612 in the prior fiscal year and $932,279 in the fiscal year ended June 30, 1993. The Company has budgeted $985,000 for additional equipment and furniture in the year ending June 30, 1996. The Company expects to incur substantial 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 1996 sales may be less than the level experienced in fiscal 1995 and 1994 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 if necessary and to pursue various forms of short term financing to supplement working capital during fiscal 1996 and possibly additional equity financing. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CRYOMEDICAL SCIENCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number ----------- Report of Independent Public Accountants 24 Consolidated Balance Sheets 25 Consolidated Statements of Operations 26 Consolidated Statements of Cash Flows 27 Consolidated Statements of Changes in Stockholders' Equity 28 Notes to Consolidated Financial Statements 29
23 24 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Cryomedical Sciences, Inc. Rockville, MD We have audited the accompanying consolidated balance sheets of Cryomedical Sciences, Inc. and Subsidiary as of June 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1995. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Cryomedical Sciences, Inc. and Subsidiary at June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP - -------------------------- Washington, D.C. September 27, 1995 24 25 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JUNE 30, 1995 AND 1994 - --------------------------------------------------------------------------------
ASSETS June 30, 1995 June 30, 1994 - ------ ------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 1,117,383 $ 2,426,467 Short-term investments 100,310 97,424 Receivables - net of allowance for doubtful accounts of $78,209 and $6,743 3,178,032 2,969,837 Inventories 2,628,532 2,131,289 Prepaid expenses and other 297,984 291,031 ----------- ------------ Total current assets 7,322,241 7,916,048 EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Less accumulated depreciation and amortization of $1,010,209 and $593,030 1,061,935 1,171,651 OTHER ASSETS 18,727 18,727 ----------- ------------ $ 8,402,903 $ 9,106,426 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses 2,096,696 $ 1,823,298 Accrued settlement of stockholder class action suit 100,000 - Accrued vacation 177,831 153,941 Customer deposits 50,000 60,000 Warranty reserves 248,000 245,800 Extended warranties - current 842,738 507,750 Current portion of capital lease obligations and notes payable 31,083 9,014 ----------- ------------ Total current liabilities 3,546,348 2,799,803 EXTENDED WARRANTIES 848,286 934,371 DEFERRED RENT 3,690 18,161 CAPITAL LEASE OBLIGATIONS AND NOTES PAYABLE, net of current portion 22,654 30,598 ----------- ------------ Total liabilities 4,420,978 3,782,933 ----------- ------------ COMMITMENTS AND CONTINGENCIES 9% SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, Par value $ .001, liquidation value $ .50 per share; authorized, 621,000 shares; issued and outstanding, none - - STOCKHOLDERS' EQUITY: Preferred stock, par value $ .001; authorized, 9,379,000 shares; issued and outstanding, none - - Common stock, par value $ .001; authorized, 50,000,000 shares; issued and outstanding, 24,845,631 and 24,427,009 shares 24,846 24,427 Additional paid-in capital 26,248,915 25,358,302 Accumulated deficit (22,250,365) (20,019,640) Notes receivable from officers, including accrued interest (41,471) (39,596) ----------- ------------ Total stockholders' equity 3,981,925 5,323,493 ----------- ------------ $ 8,402,903 $ 9,106,426 =========== ===========
See notes to consolidated financial statements. 25 26 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended June 30, 1995 June 30, 1994 June 30, 1993 ------------- ------------- ------------- SALES & OTHER REVENUES $ 13,594,186 $ 13,438,494 $ 5,875,827 COST OF SALES 5,761,998 7,128,697 4,847,287 ----------- ----------- ----------- GROSS PROFIT 7,832,188 6,309,797 1,028,540 ----------- ----------- ----------- OPERATING EXPENSES: Research and development 2,899,686 2,506,349 3,151,368 Sales and marketing 3,723,168 3,444,153 2,034,209 General and administrative 3,020,866 3,017,306 2,680,322 ----------- ----------- ----------- TOTAL OPERATING EXPENSES 9,643,720 8,967,808 7,865,899 ----------- ----------- ----------- OPERATING LOSS (1,811,532) (2,658,011) (6,837,359) SETTLEMENT OF STOCKHOLDER CLASS ACTION SUIT (450,000) - - INTEREST INCOME, NET OF INTEREST EXPENSE 30,807 21,209 248,941 ----------- ----------- ----------- NET LOSS $(2,230,725) $(2,636,802) $(6,588,418) =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 24,705,564 22,795,088 22,673,032 =========== =========== =========== NET LOSS PER SHARE $ (0.09) $ (0.12) $ (0.29) =========== =========== ===========
See notes to consolidated financial statements. 26 27 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended June 30, 1995 June 30, 1994 June 30, 1993 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (2,230,725) $ (2,636,802) $ (6,588,418) ------------ ------------ ------------ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 425,804 337,368 265,655 Increase (decrease) increase in warranty reserves 2,200 (36,200) 282,000 Write-off of accounts receivable 72,827 126,607 - Settlement cost for stockholder class action suit 450,000 - - Accretion of unearned discounts on short term investments - - (199,387) Loss (gain) on disposal of fixed assets (210) 10,696 475 Changes in assets and liabilities: Increase in receivables (279,660) (504,021) (2,508,971) Increase in inventories (497,243) (869,424) (1,122,246) Increase in prepaid expenses and other assets (6,953) (151,001) (16,884) Increase in accounts payable, accrued expenses, accrued vacation, and deferred rent 282,817 234,269 864,633 (Decrease) increase in customer deposits (10,000) (40,000) 80,000 Increase in extended warranties 248,903 887,812 554,309 ------------- ------------ ------------ Total Adjustments 688,485 (3,894) (1,800,416) ------------- ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (1,542,240) (2,640,696) (8,388,834) ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (100,310) (97,424) (10,577,422) Maturities of short-term investments 97,424 1,094,548 19,490,273 Purchase of equipment (317,240) (218,612) (932,279) -------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (320,126) 778,512 7,980,572 -------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: (Increase) decrease in notes receivable from officers (1,875) (1,875) 30,033 Increase (decrease) in notes payable 14,125 (6,208) (2,859) Common stock issued for cash 111,042 122,140 60,325 Warrants issued - - 25,000 Common stock issuance costs - (38,565) - Exercise of "A" warrants - 312,500 - Exercise of "B" warrants - 500,000 - Exercise of private placement Unit Purchase Options - 121,500 - Exercise of Unit Purchase Options and underlying Class A and Class B Warrants 429,990 1,302,375 - -------------- ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 553,282 2,311,867 112,499 -------------- ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,309,084) 449,683 (295,763) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,426,467 1,976,784 2,272,547 -------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,117,383 $ 2,426,467 $ 1,976,784 ============= ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 22,690 $ 13,482 $ 1,599 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY: Common stock received and retired in exchange of shares for options $ 0 $ - $ 373 ============= ============= ============= Common stock received and retired in payment of notes receivable from officer $ 0 $ - $ 102,784 ============= ============= ============= Capitalization of inventories into plant and equipment $ 89,484 $ 99,286 $ 342,824 ============= ============= ============= Equipment purchased under financing $ 45,914 $ 32,000 $ - ============= ============= =============
See notes to consolidated financial statements. 27 28 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
Common Stock ------------ Notes Additional Receivable Deferred Number of Paid-In Accumulated from Compensa- Shares Amount Capital Deficit Officers tion ------ ------ ------- ----------- -------- ------ Balance, June 30, 1992 . . . . . . . . . . . 22,844,000 $22,844 $23,057,393 $(10,794,420) $(170,538) $(77,775) Exercise of stock options . . . . . . . . . . 26,000 26 56,425 - - - Exercise of warrants . . . . . . . . . . . . 3,000 3 3,872 - - - Payment of notes receivable by officer . . . (13,157) (13) (102,771) - 102,784 - Exchange of shares for options . . . . . . . (373,334) (373) 373 - - - Issuance of non-incentive option priced below market . . . . . . . . . . . - - 25,000 - - - Loan to officer . . . . . . . . . . . . . . . - - - - (37,500) - Interest on loans to officers . . . . . . . . - - - - (5,316) - Payment of note receivable by former officer - - - - 72,849 - Amortization of deferred compensation . . . . - - - - - 77,775 Net loss . . . . . . . . . . . . . . . . . . - - - (6,588,418) - - ---------- ------- ----------- ------------ --------- -------- Balance, June 30, 1993 . . . . . . . . . . . 22,486,509 22,487 23,040,292 (17,382,838) (37,721) - Exercise of warrants, net of offering costs . . . . . . . . . . . 62,000 62 119,086 - - - Exercise of Class "A" Warrants, net of offering costs . . . . . . . . . . . 250,000 250 300,183 - - - Exercise of Class "B" Warrants, net of offering costs . . . . . . . . . . . 250,000 250 487,683 - - - Exercise of Private Placement Unit Purchase Options, net of offering costs . . . . . . . . . . . 81,000 81 77,010 - - - Conversion of 9% Series A redeemable convertible preferred stock at $.50 per share, net of offering costs . . . . . . . . . . . . . . 81,000 81 36,510 - - - Concurrent exercise of Unit Purchase Options and underlying Class A and Class B Warrants, net of offering costs . . 1,216,500 1,216 1,297,538 - - - Interest on loan to officer . . . . . . . . . - - - - (1,875) - Net loss . . . . . . . . . . . . . . . . . . - - - (2,636,802) - ---------- ------- ----------- ------------ --------- -------- Balance, June 30, 1994 . . . . . . . . . . . 24,427,009 24,427 25,358,302 (20,019,640) (39,596) - Exercise of warrants . . . . . . . . . . . . 88,000 88 81,772 - - - Exercise of stock options . . . . . . . . . . 25,200 25 1,575 - - - Employee Stock Purchase Plan . . . . . . . . 14,422 15 27,567 - - - Exercise of Unit Purchase Options and all underlying Class A and Class B Warrants . . . . . . . . . . . . . . . . . 291,000 291 429,699 - - - Interest on loan to officer . . . . . . . . . - - - - (1,875) - Increase from settlement of stockholder class action suit . . . . . - - 350,000 - - - Net loss . . . . . . . . . . . . . . . . . . - - - (2,230,725) - - ---------- ------- ----------- ------------ --------- -------- Balance, June 30, 1995 . . . . . . . . . . . 24,845,631 $24,846 $26,248,915 $(22,250,365) $(41,471) - ========== ======= =========== ============ ========= ========
See notes to consolidated financial statements. 28 29 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995, 1994, AND 1993 - -------------------------------------------------------------------------------- 1. GENERAL Cryomedical Sciences, Inc. ("CMS") and its wholly owned subsidiary, Cryo Instruments, Inc. ("CII"), collectively referred to as "the Company," is engaged in the research and development of products for use in the field of hypothermic (low-temperature) medicine. 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 and shipped the first such device 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. CMS was organized November 5, 1987, as a Delaware corporation. Since inception and through June 30, 1992, the Company was a development stage company engaged in organizational activities, including recruiting personnel, establishing office, laboratory and manufacturing facilities, and conducting research and development activities in connection with its cryosurgical probe and its hypothermic blood substitute solutions. Since inception and through June 30, 1992, the Company did not generate any operating revenues and incurred cumulative losses of $9,861,102. In July 1992, the Company began generating revenue from the sale of its products. Management intends to fund operations including future research and development, primarily through the proceeds from sales of the Company's products and through other forms of financing. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Cryomedical Sciences, Inc., and its wholly owned subsidiary Cryo Instruments, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Net Loss Per Share - Net loss per share is based on the weighted average number of common shares outstanding during the years ended June 30, 1995, 1994, and 1993. No effect has been given to unexercised stock options and warrants because the effect would be antidilutive. Cash Equivalents - Cash equivalents consist primarily of interest-bearing bank certificates of deposit. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. 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 five 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. Revenue Recognition - The Company receives revenue both from sales of products and from extended warranties. The Company generally recognizes revenue related to the sales of its products, primarily its cryosurgical systems and disposable probes, at the time of shipment. Revenue from extended warranties is deferred and recognized on a straight-line basis over the warranty contract periods. Sales to one major customer in the years ended June 30, 1995, 1994 and 1993 were $886,664, $2,910,827 and $1,452,392, respectively. 29 30 Warranties - The Company generally warrants its cryosurgical systems 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 related revenue is recognized. Research and Development Costs - Research and development costs are expensed as incurred. Income Taxes - The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes". SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes. Reclassifications - Certain reclassifications to the prior year financial statements have been made to conform to the 1995 presentation. 3. SHORT-TERM INVESTMENTS Short-term investments at June 30, 1995 and 1994 consist of interest-bearing certificates of deposit. 4. INVENTORIES Inventories consist of the following:
June 30, 1995 June 30, 1994 ------------- ------------- Raw materials and purchased parts $1,296,445 $ 1,222,429 Work in process 628,302 711,841 Finished goods 789,090 560,288 Consignment inventory 53,706 45,793 ---------- ---------- 2,767,543 2,540,351 Less reserves (139,011) (409,062) ---------- ---------- $2,628,532 $2,131,289 ========== ==========
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
June 30, 1995 June 30, 1994 ------------- ------------- Leasehold improvements $ 222,922 $ 205,139 Furniture and office equipment 710,664 687,226 Manufacturing and other equipment 1,138,558 872,316 ------------ ----------- 2,072,144 1,764,681 Less accumulated depreciation and amortization (1,010,209) (593,030) ------------ ----------- $1,061,935 $1,171,651 ========== ==========
Furniture and office equipment includes assets under capital leases of $77,914 less accumulated amortization of $22,870 at June 30, 1995. 30 31 6. INCOME TAXES The approximate tax effect of each type of temporary difference and carryforward that gave rise to the Company's deferred tax assets and liabilities are as follows:
June 30, 1995 June 30, 1994 ------------- ------------- Accrued vacation $ 68,678 $ 59,452 Warranty reserve 95,778 94,928 Extended warranties 653,074 556,947 Inventory obsolescence reserve 53,686 157,980 Depreciation (36,499) (23,441) Tax loss carryforward 7,051,997 6,435,251 R&D credit 639,533 575,000 Settlement of stockholder class action suit 173,790 - Other (2,713) (68,547) Less: valuation allowance (8,697,534) (7,787,570) ----------- ------------- Net deferred $ - $ - =========== =============
The Company has not realized any taxable income since its inception and as of June 30, 1995, has loss carryforwards for both federal and state tax purposes approximately as follows:
Year of Federal Expiration and State ---------- --------- 2003 $ 76,000 2004 472,000 2005 1,747,000 2006 2,205,000 2007 4,820,000 2008 5,893,000 2009 1,433,000 2010 1,616,000 ----------- $18,262,000 ===========
The Company has research and development tax credit carryforwards of approximately $20,000 expiring in 2004, $42,000 expiring in 2005, $88,000 expiring in 2006, $125,000 expiring in 2007, $150,000 expiring in 2008, $114,000 expiring in 2009 and $100,000 expiring in 2010. In the event of a significant change in the ownership of the Company, the utilization of such loss carryforwards could be substantially limited. 7. STOCKHOLDERS' EQUITY Common Stock - In December 1989, the Company completed an underwritten public offering of 1,150,000 Units consisting of 5,750,000 shares of Common Stock and 5,750,000 Redeemable Class A Warrants. Each Class A Warrant entitled the registered holder to purchase one share of Common Stock and one Redeemable Class B Warrant at a price of $1.25, subject to adjustment, at any time through November 21, 1994. Each Class B Warrant entitled the registered holder to purchase one share of Common Stock at a price of $2.00, subject to adjustment, at any time from the date of issuance through November 21, 1994. Both Class A and Class B Warrants were subject to redemption by the Company at $.05 per warrant under certain conditions. All of the Class A Warrants were exercised on or before May 15, 1991, resulting in the issuance of 5,750,000 shares of Common Stock of the Company and 5,750,000 Redeemable Class B Warrants. All of the Class B Warrants were exercised on or before April 21, 1992, resulting in the issuance of 5,750,000 shares of Common Stock of the Company. 31 32 In connection with the initial public offering, the underwriter received options to purchase up to 100,000 Units, exercisable over a period of three years commencing two years from the effective date of the offering. These Units were identical to the Units sold in the Company's initial public offering except that the Class A and Class B Warrants were not redeemable. On May 27, 1994, the Company entered into an agreement with the successor-in-interest to the underwriter regarding exercise of 76,100 Unit Purchase Options. Pursuant to the Agreement, (i) 76,100 Unit Purchase Options issued in connection with the Company's initial public offering, (ii) 380,500 Class A Warrants (the "Class A Warrants") included in the Units and (iii) 380,500 Class B Warrants issuable upon the exercise of the Class A Warrants were concurrently exercised at an aggregate discount of 30.7%, resulting in the issuance of 1,141,500 shares of Common Stock of the Company. On June 15, 1994, the Company entered into agreements with two non-affiliated holders of Unit Purchase Options regarding exercise of an aggregate of 5,000 Unit Purchase Options owned by them (the "Agreements"). Pursuant to the Agreements, (i) an aggregate of 5,000 Unit Purchase Options issued in 1989 in connection with the Company's initial public offering, (ii) 25,000 Class A Warrants (the "Class A Warrants") included in the Units and (iii) 25,000 Class B Warrants issuable upon the exercise of the Class A Warrants were concurrently exercised at an aggregate discount of 10%, resulting in issuance of 75,000 shares of Common Stock of the Company. All of the remaining Unit Purchase Options, all of the Class A Warrants included in the Units, and all of the underlying Class B Warrants were exercised in August, October and November 1994, resulting in the issuance of 291,000 shares of Common Stock of the Company. Warrants - In June 1989, the Company completed an offering of 20 Units ("Units"), each Unit consisting of a $25,000 principal amount note payable ("Notes"). When the Notes were repaid in November 1989, each Unit holder received $26,250 ($25,000 principal repayment plus $1,250 interest) and 12,500 Redeemable Class A Warrants. Each warrant entitled the holder, upon exercising the warrant, to purchase one share of Common Stock and one Redeemable Class B Warrant at a price of $1.25. The Class A Warrants were exercisable for a period of five years from the effective date of registration of the initial public offering. Each Class B Warrant entitled the holder, upon exercising the warrant, to purchase one share of the Company's Common Stock at a price of $2.00. The Class B Warrants were exercisable from the date of issuance and expired on the date the Class A Warrants expired. Both Class A and Class B Warrants were subject to redemption by the Company at $.05 per warrant under certain conditions. On March 22, 1994, the Company called for the redemption on April 22, 1994 of all of the 250,000 outstanding Class A Warrants issued when the Notes were repaid in 1989. All holders of the Class A Warrants chose to exercise the warrants prior to the expiration of the notice period of redemption, and in April 1994, the Company issued 250,000 shares of Common Stock and 250,000 Class B Warrants in exchange for the 250,000 Class A Warrants outstanding on March 21, 1994. On May 3, 1994 the Company called for the redemption on June 7, 1994 of all of the 250,000 outstanding Class B Warrants issued in April 1994 when the Company's Class A Warrants were exercised. On June 6, 1994, the Company extended the notice period of redemption to June 21, 1994 with respect to 75,000 Class B Warrants which remained outstanding and unexercised. All holders of the Class B Warrants chose to exercise the Warrants prior to the expiration of the extended notice period of redemption, and in May and June 1994, the Company issued 250,000 shares of Common Stock in exchange for the 250,000 Class B Warrants outstanding on May 2, 1994. The Company has granted warrants to members of the Company's Scientific Advisory Board and to consultants and others who have provided, or will provide, services to the Company. The Company generally grants each new member of the Scientific Advisory Board three-year warrants to purchase 12,000 shares of Common Stock (25,000 shares with respect to the Chairman of the Scientific Advisory Board), at a price per share equal to the market price of the stock on the date of grant. One-half of the warrants may be exercised from the date of grant and, in the event that the recipient continues to serve as a member of the Scientific Advisory Board, one-half may be exercised after one year of service. The Company has also granted warrants to consultants and others who have provided, or will provide, services to the Company, at a price per share equal to the market price of the Common Stock on the 32 33 date of grant. The terms of such warrants have ranged from three to five years with various vesting arrangements (see Note 10 regarding warrants granted to a director). The following table summarizes warrant activity for each of the three years in the period ended June 30, 1995 with respect to warrants granted to Scientific Advisory Board members and consultants (excluding warrants granted to a director of the Company in connection with consulting services. See Note 10)
Number of Warrants Price Per Share ----------- ------------------ Balance, June 30, 1992 277,000 $0.75 - 9.25 Granted 25,000 8.75 Exercised (3,000) 1.00 - 1.875 --------- Balance, June 30, 1993 299,000 0.75 - 9.25 Granted 82,000 2.625 - 4.125 Exercised (62,000) 1.97 Lapsed (55,000) 1.97 ---------- Balance, June 30, 1994 264,000 0.75 - 9.25 Granted - - Exercised (88,000) 0.75 - 1.97 Lapsed (24,000) 9.25 --------- Balance, June 30, 1995 152,000 $2.125 - 8.75 ========= Warrants exercisable at June 30, 1995 118,666 $2.125 - 8.75 =========
Stock Options - The Company has adopted a stock option plan for issuance of options to employees, directors and consultants of the Company. The options may be designated incentive or non-incentive, as determined by the Board of Directors, and incentive options may not be granted at less than the fair market value of the underlying shares at date of grant, as determined by the Board of Directors. The plan provides that all options granted shall be exercisable during a period within ten years from the date of grant, subject to certain restrictions. At June 30, 1995, 228,566 shares were available for future grants under the stock option plan. 33 34 The following table summarizes plan activity for each of the three years in the period ended June 30, 1995:
Number of Price Options per Share ------------- --------- Balance, June 30, 1992 854,000 $1.75 - 11.75 Granted 561,734 0.05 - 8.25 Exercised (26,000) 1.88 - 3.19 Cancelled (27,000) 3.00 - 9.25 ---------- Balance, June 30, 1993 1,362,734 0.05 - 11.75 Granted 815,500 2.13 - 5.75 Exercised - - Cancelled (264,000) 3.00 - 9.625 -------- Balance, June 30, 1994 1,914,234 0.05 - 11.75 Granted 49,800 2.75 - 3.563 Exercised (25,200) 0.05 - 1.75 Cancelled (73,600) 3.375 - 8.25 ---------- Balance, June 30, 1995 1,865,234 0.05 - 11.75 ========= Options exercisable at June 30, 1993 346,332 $1.75 - 11.75 ========== Options exercisable at June 30, 1994 911,538 $0.05 - 11.75 ========== Options exercisable at June 30, 1995 1,266,434 $0.05 - 11.75 ==========
In August 1993 the Board of Directors approved the 1993 Employee Stock Purchase Plan which was subsequently approved by the stockholders of the Company on January 31, 1994. The Plan allows substantially all non-executive employees of the Company to purchase Common Stock upon exercise of options granted. The options are exercisable at the lower of 85% of the fair market value of the Common Stock at either the date of grant or exercise. The Plan was implemented on July 1, 1994. Purchases under the Plan are subject to certain limitations and may not exceed 250,000 shares during the term of the Plan which expires on June 30, 1997. A total of 14,422 shares of Common Stock were purchased by employees during the year ended June 30, 1995 at a price of $1.9125 per share. Stockholder Rights Plan - On August 21, 1995, the Board of Directors of Cryomedical Sciences, Inc. 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 $10.00 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 34 35 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. 8. PRIVATE PLACEMENT OF COMMON STOCK AND 9% SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company has authorized 621,000 shares of 9% Series A Redeemable Convertible Preferred stock having a par value of $.001 per share and a liquidation value of $.50 per share. During October and December 1988, the Company completed the sale of an aggregate of 9 Units through a private placement offering. Each Unit consisted of 60,000 shares of the Company's Common Stock and 60,000 shares of 9% Series A Redeemable Convertible Preferred Stock ("Preferred Stock"). In connection with the above offering, the placement agent was granted an option to purchase an additional 15% of the Units placed (1.35 Units) at the offering price through October 30, 1993. Each share of preferred stock was convertible, at the holder's option at any time, into one share of Common Stock. In addition, upon the consummation of the Company's initial public offering, the preferred stock was redeemable at the holder's option for $.50 per share. In March 1990, the Company called for redemption, at $.50 per share, all of the outstanding shares of the 9% Series A Redeemable Convertible Preferred Stock. All holders of the preferred shares chose to convert to Common Stock prior to the expiration of the notice period of redemption, and in April 1990, the Company issued 540,000 shares of Common Stock in exchange for the 540,000 preferred shares. In October 1993, holders of the options to purchase 1.35 Units exercised the options, resulting in the issuance of 81,000 shares of Common Stock of the Company and 81,000 shares of 9% Series A Redeemable Convertible Preferred Stock. On November 19, 1993 the Company called for the redemption, at $.50 per share, of all of the 81,000 shares of 9% Redeemable Convertible Preferred Stock then outstanding. All holders of the 9% Redeemable Convertible Preferred Stock chose to convert their shares to a like number of shares of Common Stock prior to the expiration of the notice period of redemption, and in December 1993, the Company issued 81,000 shares of Common Stock in exchange for the 81,000 shares of Redeemable Convertible Preferred Stock then outstanding. 9. EMPLOYEE BENEFIT PLAN The Company established a 401(k) savings plan effective as of July 1, 1992 covering all eligible employees. Company contributions are discretionary and none were made in the years ended June 30, 1995, 1994 and 1993. The Company incurred $7,347, $5,848 and $3,403 of plan administration expenses in the years ended June 30, 1995, 1994 and 1993, respectively. 10. RELATED PARTY TRANSACTIONS In November 1989, the President and Chief Executive Officer commenced his employment with the Company and received 560,000 shares of Common Stock of the Company. The fair market value of the 560,000 shares at the date of employment was deemed to be compensation to the President and was amortized over the three year term of his employment contract. Under the terms of his employment 35 36 contract, the President borrowed funds from the Company for payment of federal and state income taxes on this compensation, evidenced by promissory notes secured by 522,500 of the shares. The loans were for a period of five years with interest at the rate of 9% per annum. In January 1993, the President repaid the loans owed by him to the Company by tendering 13,157 of the shares of Common Stock owned by him valued at the market value at the date of payment. In January 1993, the Company entered into a new employment agreement with the President to continue his employment as President and Chief Executive Officer. Of the 560,000 shares of Common Stock of the Company that the President had received in November 1989 pursuant to his original employment agreement, 373,334 shares remained subject to forfeiture. Under the new employment agreement, these 373,334 shares were exchanged for a non-incentive stock option, granted to the President, to purchase 373,334 shares of Common Stock at a price of $.05 per share, which option may be exercised in whole or in part commencing July 14, 1993 until its expiration date in January 1998. The option was exercised with respect to 25,000 shares in February 1995. In August 1991, the Vice President, Marketing and Sales, exercised options to purchase 40,000 shares of Common Stock of the Company. Under the terms of his employment contract, the Vice President, Marketing and Sales borrowed funds from the Company to exercise the options, evidenced by a promissory note secured by the 40,000 shares. The loan was for a period of five years with interest at the rate of 5% per annum and was paid in full in November 1992. In May 1993, the Vice President, Research and Development, exercised options to purchase 20,000 shares of Common Stock of the Company. Under the terms of his employment contract, the Vice President, Research and Development borrowed funds from the Company to exercise the options, evidenced by a promissory note secured by the shares. The loan is for a period of five years with interest at the rate of 5% per annum. 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 lapse after five years and in the event that the Director continues to provide consulting services to the Company, one-third may be exercised after one year, an additional one-third may be exercised at the end of the second year, and an additional one-third may be exercised at the end of the third year. In May 1994, the President and Chief Executive Officer borrowed $25,000 from the Company, evidenced by a promissory note and secured by 20,000 shares of Common Stock of the Company. The President borrowed an additional $10,000 in August 1994. Each of the loans was for a period of one year with interest at the rate of 7.5% per annum. In April 1995 each of the loans was extended for an additional one year term. The Company paid consulting fees to three stockholders for consulting services. For the years ended June 30, 1995, 1994 and 1993, these fees totaled $89,900, $159,833 and $120,500, respectively. The Company paid $104,046, $103,986 and $77,989 of legal fees in the years ended June 30, 1995, 1994 and 1993, respectively, to a law firm in which a director and stockholder of the Company is a partner. 11. COMMITMENTS AND CONTINGENCIES In connection with its obtaining the right and interest to certain inventions, the Company has agreed to grant a nonexclusive, nontransferable license to another company for any products developed for use in certain defined applications. In August 1989, the Company entered into a Research Project Management Services Agreement with Allegheny-Singer Research Institute ("ASRI"), pursuant to which ASRI has agreed to conduct research on the Company's behalf on a project-by-project basis over a two-year period, which period was extended to June 30, 1995. The Company agreed to fund ASRI with at least $1,000,000 to conduct such research, and expended $2,095,670 through June 30, 1995. Among other things, the agreement provides for the ownership and all rights of technology to be retained by the Company, except that new 36 37 products and techniques developed by ASRI personnel that are not improvements or a part of the Company's technology, inventions, or techniques, and are separately identifiable and patentable, are governed by ASRI's Intellectual Property Policy and will be owned by ASRI. ASRI and the Company have agreed that the Company will have a right of first refusal to obtain an exclusive license for any new product or technique so owned by ASRI. Any license agreement pursuant thereto shall contain, among other things, a provision for royalty payments to be made by the Company to ASRI. In connection with the repurchase of an aggregate of 2,765,000 shares of its Common Stock in December 1990 and April 1991 from certain non-affiliated stockholders and three former employees, the Company granted a non-exclusive license to another company for certain limited and specified uses of the Company's hypothermic blood substitute solutions, which uses the Company has no intention of pursuing. Since 1987, the Vice President, Research and Development of the Company, has also been a Professor and the Director of the Center for Cryobiological Research at State University of New York at Binghamton ("SUNY"). In October 1993, the Company entered into an agreement with SUNY pursuant to which SUNY released the Company's Vice President, Research and Development, from undergraduate teaching responsibilities for the year ended June 30, 1994 in return for reimbursements totaling $39,000 for the fiscal year. The Company entered into similar agreement with SUNY for the year ending June 30, 1995 in return for reimbursement totaling $39,000. The Company has funded research grants to various hospitals and individuals to conduct research, develop new medical procedures, or compile clinical data in connection with the use of AccuProbe Systems purchased from the Company. The following table summarizes the research grant activity to customers for each of the three years in the period ended June 30, 1995:
Year Number Aggregate Ended of Research Value of June 30, Grants Grants ($) -------- --------------- ---------- 1993 4 $240,000 1994 3 127,000 1995 15 549,000
In January 1994, the Company received correspondence from the Food and Drug Administration (FDA) denying 510(k) premarket clearance for the CMS Urethral Warmer ("Warmer"), an optional cryosurgical accessory device intended to protect the urethra from low temperature damage during urological cryosurgery procedures. According to such correspondence, the Warmer would require premarket approval ("PMA") prior to commencement of the marketing thereof. Subsequently, the FDA indicated that it would reconsider 510(k) clearance for the Warmer if the Company met certain conditions. On April 1, 1994, in accordance with one of the FDA conditions, the Company submitted an Investigational Device Exemption ("IDE") application for its Urethral Warmer. The Company received conditional approval from the FDA for the IDE on May 2, 1994. Any investigational sites which were using the Warmer pursuant to the prior "abbreviated" IDE and which are not part of the current study under the IDE cannot continue using the Warmer unless and until CMS receives 510(k) clearance subsequent to the completion of the current study. The Company submitted a new 510(k) application for the Warmer, another one of the FDA's conditions, in June 1995, designating the Warmer as an "accessory" to the previously cleared CMS AccuProbe System or other cryosurgical devices for use in general urological procedures. In September 1995, the FDA responded to the application with a request for additional information regarding certain specifications, test results and labeling. The Company anticipates a timely response to the request. Until regulatory clearance is received for the Warmer, the Company will market the CMS AccuProbe system without providing any such Warmers. During the quarter ended March 31, 1994, in which quarter the Company announced receipt of the correspondence from the FDA denying 510(k) premarket clearance, CMS AccuProbe system sales in the urological field slowed significantly. The Company believes that this was due, in part, to the 37 38 uncertainty regarding the status of the Warmer and the availability of alternatives. For the quarter ended June 30, 1994, sales of AccuProbe systems in the urological field returned to more normal levels and continued at such levels for the year ended June 30, 1995. Various factors in addition to the Warmer issue, such as a lack of uniform medical insurance reimbursement policies, could have an effect on CMS AccuProbe system sales. At this time the Company does not believe that the uncertainty regarding the status of the Warmer will have a significant long term impact on sales of AccuProbe systems. On March 31, 1994, the Company received a warning letter from the FDA concerning promotional materials for the CMS AccuProbe system. The letter stated that FDA "has determined that these materials contain statements, suggestions, and implications which are misleading because they promote the product beyond its intended use." The letter from the FDA took issue with the promotion of the AccuProbe system specifically for the "treatment" of "prostate cancer," and generally for the "treatment" of "any specific disease state." The Company responded to the FDA by notifying FDA that it did not promote the AccuProbe for the "treatment" of any disease and that correspondence with other agency officials had led the Company to believe that use of the words "prostate" and "cancer" were permitted in this instance given the 510(k) submission, the nature of the predicate device upon which the 510(k) was based, and the fact that the device had received clearances in the fields of urology and oncology. Nonetheless, the Company agreed to modify its promotional materials in a way which it believes would bring it into compliance with the Agency's request. The Company does not believe that the modifications to its promotional materials will have a significant long term impact on future sales of the AccuProbe system. In April 1994, present or former stockholders of the Company filed several suits against the Company, its President and CEO and two other directors in the United States District Court for the District of Maryland. The suits were subsequently consolidated under Case No. AW-94-873, and a consolidated amended complaint was filed. The plaintiffs sought to have the consolidated action designated as a class action on behalf of all persons who purchased the Company's stock between September 13, 1991 and April 4, 1994. The plaintiffs claimed that, during that period, the defendants violated the federal securities laws and the common law by failing to make accurate public disclosures regarding the need for, and status of, FDA clearance of the CMS Urethral Warmer, an optional accessory device intended to protect the urethra during urological cryosurgery procedures, and by failing to make accurate public disclosures regarding the prospect that FDA would later take the position that it was improper for the Company to promote the CMS AccuProbe System for the "treatment" of "prostate cancer," and generally for the "treatment" of "any specific disease state." The plaintiffs claimed that the market price of the Company's stock was inflated as a result of the defendants' alleged failure to make accurate public disclosures. In addition, the plaintiffs asserted that the individual defendants violated the federal securities laws by selling Company stock at inflated prices during the alleged class period. The plaintiffs sought damages in unspecified amounts, prejudgment interest, and an award of attorneys' fees and experts' fees. On November 4, 1994, the defendants moved to dismiss the consolidated amended complaint. On April 26, 1995, the Court dismissed a major portion of the action. The Court dismissed the plaintiffs' claims against the individual defendants in their entirety. The Court also dismissed the plaintiffs' claims relating to the Company's 1991 and 1993 annual reports and dismissed the plaintiffs' state law claims in their entirety. The Court ruled that the plaintiffs were entitled to proceed solely with regard to the question of whether the Company should have made a public disclosure in October 1992 when it applied for FDA clearance for the CMS Urethral Warmer, and whether the Company should have included a description in its 1992 annual report of the relationship between the Urethral Warmer and the CMS AccuProbe. On or about September 15, 1995, the parties reached an agreement in principle to settle the case. The agreement provides that a class consisting of all persons who purchased the Company's stock between September 13, 1991 and April 4, 1994 will be certified solely for settlement purposes. In return for a general release of all claims which members of the class may have against the Company and its past and present officers, directors, employees and other agents, the Company will pay $100,000 and issue shares of common stock of the Company with a market value of $350,000, based on the average closing price on the ten trading days prior to district court approval of the settlement. The Company has accrued the entire $450,000 settlement cost of the stockholder class action suit as of June 30, 1995. The $350,000 of common stock to be issued has been recorded as additional paid in capital at June 30, 1995. The plaintiffs' counsel intend to apply to the Court for an award of fees equal to approximately one third of the gross amount of the settlement proceeds, as well as for reimbursement of the out of pocket expenses they incurred during the course of the litigation. 38 39 The remainder of the settlement proceeds, minus the costs of administering the settlement, including the costs of notice to the class, will be distributed to those members of the class who submit timely claims, in proportion to the investment losses they have suffered on shares they purchased during the class period. The settlement is subject to approval by the Court after notice to the class. The Company has settled the litigation solely to avoid the expenses that would be involved in defending the suit between now and its conclusion. Those expenses were expected to exceed the amount of the cash consideration being paid in the settlement. The defendants have admitted no liability and continue to believe that the suits are without merit. In the event that the settlement is not finally approved, the Company will continue to defend its position vigorously. On April 26, 1995, the Company received notice that Cryogenic Technology Limited ("CryoTech"), a competitor of the Company, had filed suit against the Company in the United States District Court for the District of Maryland, Civil Action No. JFM-95-1018. CryoTech sought a declaration that one of the Company's patents is invalid or that CryoTech was not infringing any valid claims of the patent. The patent covers certain aspects of the cryoprobes which are used with the CMS AccuProbe System. The action was prompted by repeated correspondence from the Company to CryoTech in which the Company asserted that the cryoprobes which are used with CryoTech's cryosurgical system were infringing the Company's patent. The Company believes that CryoTech's claims of invalidity and lack of infringement were without merit. On or about May 30, 1995, the Company filed a counterclaim for infringement against CryoTech and Candela Laser Corporation ("Candela"), which the Company believed was the exclusive distributor of CryoTech's surgical systems and probes. The Company sought a declaration that the Company's patent is valid and that CryoTech and Candela were infringing the patent, an injunction barring CryoTech and Candela from infringing the patent, and an award of damages and attorneys' fees. In mid-July 1995, the Company was informed that CryoTech had been placed in receivership in the United Kingdom, that its business was being sold to another, unrelated entity and that the new entity would be using a new design for its cryoprobes that, it was asserted, would not involve any infringement of the Company's patents. The Company was further informed that Candela intended to make no further purchases or sales of the current version of the probe, although Candella to date has refused to state that it is ceasing certain uses of the current version of the probe in its sales activities that the Company believes constitute an infringement of the Company's patent. Based on the information that the Company has received, the Company has tentatively agreed with CryoTech that the litigation pending between them will be discontinued. This agreement is subject to the Company's receiving written confirmation from CryoTech that its business has been sold to another, unrelated entity and that it has ceased manufacturing, using or selling the infringing probes. In the absence of a satisfactory resolution of the issue concerning Candela's sales activities, the Company intends to continue prosecuting its claim for infringement against Candela. In addition, the Company will be vigilant to insure that the new version of the probe, if it is forthcoming, does not infringe the Company's patents. In the event that the dispute with Candela is not resolved by agreement, it can be anticipated that Candela will assert that the Company's patent is invalid and that Candela is not infringing any valid claims of the patent. The Company believes that claims of invalidity and lack of infringement would be without merit. The Company has salary commitments under employment contracts with six executives for approximately $690,000 annually in the aggregate, but has temporarily reduced the salaries for such executives to approximately $632,000. The Company rents office, lab, and manufacturing facilities under a five year lease. The Company partially occupied these facilities in May 1991 and fully occupied the facilities in November 1991; the five year term of the lease commenced when the facilities were completed and fully occupied. The lease was amended in August 1991, February 1992, December 1992, July 1993 and October 1993 to add additional space. The Company negotiated a new five-year lease in May 1995, which included a reduction in the amount of leased office space. This lease superceded the previous lease and amendments. The new lease was amended on July 1, 1995 to include additional unimproved storage space. 39 40 Future minimum lease payments for facilities and equipment at June 30, 1995, are as follows:
Fiscal Years Operating Capital Ending June 30, Leases Leases --------------- ---------- -------- 1996 $ 393,374 $ 37,221 1997 397,116 20,102 1998 401,608 4,666 1999 404,951 0 2000 345,887 0 ---------- -------- $1,942,936 61,989 ========== Less interest expense (8,252) -------- Capital lease obligation at June 30, 1995 $ 53,737 ========
Rental expenses for facilities and equipment for the years ended June 30, 1995, 1994, and 1993 totaled $527,402, $506,065, and $347,012, respectively. 12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS During the quarter ended June 30, 1995, the Company recorded an adjustment to increase inventory by $179,640 to reflect current cost levels and a $228,547 adjustment to reduce accrued manufacturing expenses. In addition, the Company recorded the entire $450,000 settlement cost of the stockholder class action suit which was settled subsequent to June 30, 1995. * * * * * * 40 41 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows:
Position and Offices Name Age With the Company - ---- --- -------------------- J. J. Finkelstein 43 President, Chief Executive Officer, and Director John G. Baust, Ph.D. 53 Vice President, Advanced Technology and Chief Scientific Officer Theodore D. Pennington 58 Vice President, Finance and Administration and Secretary Alan F. Rich 43 Vice President, Sales and Marketing Yuchi Huang, Ph.D. 45 Vice President, Operations ZhaoHua Chang, Ph.D. 32 Vice President, Cryosurgical Engineering Howard S. Breslow 56 Director Sam Carl 64 Director Robert A. Schoellhorn 67 Director Henry T. Pietraszek 48 Director
Set forth below is a biographical description of each director and executive officer of the Company based on information supplied by them: J. J. Finkelstein has been President and Chief Executive Officer of the Company since November 1989, and a director of the Company since August 1989. From 1982 to November 1989, Mr. Finkelstein was employed by Alpha 1 Biomedicals, Inc. ("Alpha 1"), a publicly-held corporation engaged in the research and development of pharmaceutical products for immune system deficiencies, including as President (1984 to November 1989), Chief Executive Officer and Treasurer (1986 to November 1989), and as Vice President for Administration (1982 to 1984). He also served as the President and as a director of Viral Technologies, Inc., a company 50% owned by Alpha 1 and engaged in the development of AIDS related technology. From 1982 to May 1991, Mr. Finkelstein also served as a director of Alpha 1. John G. Baust, Ph.D., has been Vice President, Advanced Technology 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 41 42 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. Theodore D. Pennington has been Vice President, Finance and Administration of the Company since May 1990 and Secretary of the Company since June 1992. From 1987 to 1989, Mr. Pennington was Corporate Controller at Netrix Corp., a company engaged in the development, manufacture, and sale of telecommunications hardware and software. From 1986 to 1987, he was Corporate Controller of Iomega Corp., a publicly-held company engaged in the manufacture and sale of disk drives for personal computers. Alan Rich has been Vice President, Sales and Marketing, of the Company since March 1994. 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. Yuchi Huang, Ph.D., has been Vice President, Operations of the Company since March 1992. From 1986 to March 1992, Dr. Huang was employed by Nicolet Instrument Corporation, a company engaged in development, manufacture and sale of medical, analytical, test, and measurement instruments, including as Product Manufacturing Engineering Manager from 1988 to March 1992 and as Engineering Manager from 1986 to 1988. ZhaoHua Chang, Ph.D., has been Vice President, Cryosurgical Engineering, of the Company since January 1995. Dr. Chang joined the Company in August 1991 and served as a senior engineer until April 1992 and Director, Developmental Engineering, of the Company from May 1992 until December 1994. Prior to joining the Company, Dr. Chang served as a consultant to the Company from August 1990 until August 1991. 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 28 years and is a member of the law firm of Breslow & Walker, New York, New York, which firm serves as general counsel to the Company. Mr. Breslow currently serves as a director of 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 systems; and Lucille Farms, Inc., a publicly-held company engaged in the manufacture and marketing of dairy products. Sam Carl has been a director of the Company since January 1990. For more than the past five years, Mr. Carl has been a private investor and the owner of a seat on the Chicago Mercantile Exchange. Robert A. Schoellhorn has been a director of the Company since September 1992. Since August 1990, Mr. Schoellhorn has been retired from Abbott Laboratories, a publicly-held corporation engaged in the discovery, development, manufacture and sale of a broad and diversified line of human health care products and services. From 1973 to August 1990, Mr. Schoellhorn was employed by Abbott Laboratories, including as Chairman of the Board (1981 to March 1990), Chief Executive Officer (1979 to January 1990) and President (1976 to 1981). Mr. Schoellhorn currently serves as a director of SunPharm Corporation, a publicly held company engaged in the development of small molecule pharmaceutical products. Henry T. Pietraszek has served as a director of the Company since April 1995. Mr. Pietraszek was President and CEO of BioStar, Inc., a privately held medical diagnostic company in Boulder, Colorado, from March 1994 to August 1995. From 1986 to 1994, Mr. Pietraszek served as the President and CEO of TAP Pharmaceuticals, a joint venture between Abbott Laboratories and Takeda Chemical Industries of Japan. 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. The Company is not aware of any late filings of, or failures to file, during the fiscal year ended June 30, 1995, the reports required by Section 16(a) of the Exchange Act. 42 43 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information regarding compensation paid by the Company during each of the Company's last three fiscal years to the Company's Chief Executive Officer and to each of the Company's executive officers who received salary, commission and bonus payments in excess of $100,000 during the fiscal year ended June 30, 1995. SUMMARY COMPENSATION TABLE
Long Term Compensation ------------------------------------------- Annual Compensation Awards Payouts ----------------------------------- ------------------------------ ---------- Restricted Other Annual Stock Options/ LTIP All Other Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs Payouts Compensation Positions Year ($)(1) ($) ($) ($) (#) (2) ($) ($) - ------------------- ------ ------ ------- ------------ ----------- --------- -------- ------------- J. J. Finkelstein 1995 166,893 - - - - - - President, Chief 1994 162,036 - - - 200,000 - - Executive Officer 1993 157,276 - - - 373,334 (3) - - and Director John G. Baust, Ph.D. 1995 104,429 - - - - - 9,243 (4) Vice President, 1994 108,927 - - - 50,000 - 8,234 (4) Advanced 1993 105,750 - - - - - 12,324 (4) Technology Yuchi Huang, Ph.D. 1995 106,979 - - - - - - Vice President, 1994 101,062 - - - 30,000 (5) - - Operations 1993 97,577 - - - - - - Alan F. Rich 1995 94,417 - 132,596 (6) - - - Vice President, 1994 76,667 - 158,818 (7) - 100,000 - - Sales and Marketing 1993 70,000 - 77,248 (8) - - - -
--------------------------- (1) Salaries for fiscal 1995 reflect 10% salary reductions for executive officers of the Company commencing April 1, 1995. Such salary reductions continue in effect. (2) Options to acquire shares of Common Stock. (3) Pursuant to his employment agreement, in November 1989, Mr. Finkelstein received 560,000 shares of Common Stock of the Company, a portion of which was subject to forfeiture under certain circumstances if he was not employed by the Company for the remaining term of the agreement. In January 1993 the Company entered into a new employment agreement with Mr. Finkelstein to continue his employment as President and Chief Executive Officer. Of the 560,000 shares of Common Stock of the Company that Mr. Finkelstein had received in 1989 pursuant to his original employment agreement, 373,334 shares remained subject to forfeiture. Under the new Employment Agreement these 373,334 shares were exchanged for a non-incentive stock option granted to Mr. Finkelstein to purchase a like amount of shares at a price of $0.05 per share. See "Employment Agreements." (4) Consists of Company contributions to Dr. Baust's retirement account at State University of New York at Binghamton in accordance with the employment agreement between Dr. Baust and the Company. (5) In June 1994, unvested options for 60,000 shares granted in 1992 were cancelled in connection with the grant of options for 30,000 additional shares. (6) Consists of $126,846 of commissions and a $5,750 automobile allowance. (7) Consists of $153,618 of commissions and a $5,200 automobile allowance. (8) Consists of $72,448 of commissions and a $4,800 automobile allowance. 43 44 COMPENSATION OF DIRECTORS The Company currently compensates outside directors for their service in such capacity at an annual fee of $5,000 plus $1,000 for each Board meeting attended and $500 for each committee meeting attended. In addition to such cash compensation, in October 1991 two of the Company's outside directors (Messrs. Breslow and Carl) were each granted non-incentive options to purchase 25,000 shares of Common Stock at an exercise price of $9.25 per share, in September 1992 Mr. Schoellhorn was granted a non-incentive option to purchase 25,000 shares of Common Stock at $7.75 per share, and in June 1994 three of the Company's outside directors (Messrs. Breslow, Carl and Schoellhorn) were each granted non-incentive options to purchase 50,000 shares of Common Stock at an exercise price of $2.125 per share. In April 1995, Mr. Pietraszek was granted non-incentive options to purchase 25,000 shares of Common Stock at an exercise price of $3.00 per share. OPTION/SAR GRANTS IN LAST FISCAL YEAR No stock options were granted to any of the named executive officers during fiscal 1995. AGGREGATED OPTION/SAR EXERCISES DURING FISCAL YEAR 1995 AND FISCAL YEAR END OPTION/SAR VALUES The following table provides information related to options exercised by each of the named executive officers during the 1995 fiscal year and the number and value of options held at fiscal year end. The Company does not have any outstanding stock appreciation rights.
Value of Unexercised Number of Unexercised In-the-Money Options/SARs Options/SARS at Fiscal Year End (#) at Fiscal Year End ($) (1) ----------------------------- ---------------------------- Shares Acquired Value Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---------- --------------- ------------ ----------- ------------- ----------- ------------- J.J. Finkelstein 25,000 $83,556 473,334 100,000 $834,877 (2) $25,000 John G. Baust, Ph.D. - - 230,000 100,000 110,250 32,750 Yuchi Huang, Ph.D. - - 50,000 20,000 2,500 5,000 Alan F. Rich - - 40,000 90,000 - -
- ---------------------------------- (1) The closing price for the Company's Common Stock as reported on the NASDAQ National Market System on June 30, 1995 was $2.375. Value is calculated on the basis of the difference between the option exercise price and $2.375 multiplied by the number of shares of Common Stock underlying the option. (2) In January 1993, Mr. Finkelstein, pursuant to an employment agreement entered into at that time, exchanged 373,334 shares of Common Stock of the Company owned by him for options to purchase 373,334 shares of Common Stock at $.05 per share. Employment Agreements In June 1989, the Company and Mr. Finkelstein entered into a three year employment agreement (as amended in November 1991 and November 1992) pursuant to which Mr. Finkelstein commenced employment as President and Chief Executive Officer of the Company in November 1989. Pursuant to his employment agreement, in November 1989, Mr. Finkelstein received 560,000 shares of Common Stock of the Company, a portion of which was subject to forfeiture under certain circumstances if he was not employed by the Company. In January 1993, the Company entered into a new employment agreement with Mr. Finkelstein to continue his employment as President and Chief Executive Officer. The new employment agreement commenced upon the expiration of the original employment agreement in November 1992 and is for a period of one year, which term is to be automatically renewed each year for an additional one year period, unless terminated sooner pursuant to the terms of the employment agreement. At June 30, 1995, Mr. Finkelstein's annual salary was $169,161, which salary is to 44 45 increase each year in November to the extent of any cost of living increases based upon the Consumer Price Index increase for the immediate preceding year, or 8%, whichever is greater. In the event the term of the employment agreement is terminated due to Mr. Finkelstein's resignation from the Company with the written consent of the Board, or for a reason other than death, disability, discharge for cause or resignation without the written consent of the Board, or if at the end of any one-year period the employment agreement is not renewed for any reason other than death, disability, discharge for cause or resignation without the written consent of the Board, the Company is required to pay Mr. Finkelstein an amount equal to 12 months salary. Of the 560,000 shares of Common Stock of the Company that Mr. Finkelstein had received in November 1989 pursuant to the original employment agreement, 373,334 shares remained subject to forfeiture. Under the new employment agreement, these 373,334 shares were exchanged for a non-incentive stock option, granted to Mr. Finkelstein, to purchase 373,334 shares of Common Stock at a price of $.05 per share, which option may be exercised in whole or in part commencing July 14, 1993 until its expiration date in January 1998, unless terminated sooner as provided in the non-incentive stock option agreement. 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 to the contrary by either party), pursuant to which Dr. Baust is employed as Vice President, Advanced Technology of the Company. At June 30, 1995, Dr. Baust's annual salary was $108,646. 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 October 1993, the Company entered into an agreement with the Department of Biological Sciences of the State University of New York at Binghamton ("SUNY") under which agreement SUNY released Dr. Baust from undergraduate teaching responsibilities for the year ended June 30, 1994 in return for reimbursement totaling $39,000 for the fiscal year. The Company entered into a similar agreement with SUNY for the year ending June 30, 1995 in return for reimbursements totaling $39,000. In accordance with the 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. In March 1992, the Company and Yuchi Huang, Ph.D. 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 Dr. Huang is employed as Vice President, Operations, of the Company. At June 30, 1995, Dr. Huang's annual salary was $103,500, 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 accordance with the employment agreement, in March 1992, Dr. Huang was granted options to purchase 100,000 shares of Common Stock at $9.625 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 20,000 shares after two years, an additional 20,000 shares after three years, an additional 20,000 shares after four years, and an additional 20,000 shares after five years. In June 1994, the options for the unvested 60,000 shares were cancelled at Dr. Huang's request, and additional options to purchase 30,000 shares of Common Stock at $2.125 per share were granted pursuant to the Company's 1988 Stock Option Plan. The additional options vest with respect to 10,000 shares on March 30, 1995, an additional 10,000 shares vest on March 30, 1996 and an additional 10,000 shares vest on March 30, 1996. 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 June 30, 1995, Mr. Rich's annual salary was $87,600, 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. 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, 45 46 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. SCIENTIFIC ADVISORY BOARD; CONSULTANTS The Company currently has seven scientific advisory board members who have agreed to advise the Company from time to time with respect to technological matters in fields in which the Company is involved. Pursuant to agreements between the Company and each of the advisory board members (except Dr. Meryman, whose agreement has not been executed), each advisor has been granted warrants to purchase 12,000 shares of Common Stock at the fair market value at the date of grant (except for the Chairman, whose warrants were for 25,000 shares) and is entitled to a fee of $750 for each advisory board meeting attended, plus reimbursement for out-of-pocket expenses. In addition to the warrants granted upon commencement of scientific advisory board membership, (i) during the fiscal year ended June 30, 1991, Dr. Bailes was granted warrants to purchase an additional 50,000 shares for his services as Chairman of the scientific advisory board, Dr. Cohen was granted warrants to purchase an additional 13,000 shares for his service as a Scientific Advisory Board member and as a consultant, (ii) during the fiscal year ended June 30, 1992, Dr. Cohen was granted warrants to purchase an additional 45,000 shares of Common Stock for his services as a scientific advisory board member and as a consultant and (iii) during the fiscal year ended June 30, 1994, Dr. Cohen was granted warrants to purchase 45,000 additional shares for his service as a Scientific Advisory Board member and as a consultant, and Dr. Taylor was granted warrants to purchase 13,000 for his services as a consultant. At June 30, 1995, warrants to purchase 272,000 shares of Common Stock held by scientific advisory board members had been exercised, warrants to purchase 72,000 shares of Common Stock had expired and warrants to purchase 127,000 shares were outstanding. The members of the Company's scientific advisory board are as follows: Julian E. Bailes, M.D., is Chief, Cerebral Vascular Surgery, Allegheny General Hospital in Pittsburgh, Pennsylvania and Associate Professor of Neurosurgery at the Medical College of Pennsylvania, with experience in the application of low temperature medicine. He has managed and participated in a number of cases in which patients have been operated upon for brain aneurysms using whole body deep hypothermia. Dr. Bailes is currently serving as Chairman of the Company's scientific advisory board. Jeffrey K. Cohen, M.D., is Director, Division of Urology, Allegheny General Hospital in Pittsburgh, Pennsylvania, and Assistant Professor of Surgery, Medical College of Pennsylvania. Andrew A. Gage, M.D., is Medical Director of the Company. Hau C. Kwaan, M.D., Ph.D., is a Professor of Medicine at Northwestern University Medical School in Chicago, Illinois. Harold T. Meryman, M.D., is Program Director, Transfusion and Cryopreservation Research Program, Naval Medical Research Institute in Bethesda, Maryland. Steven A. Shedd, M.D., is a neuroanesthesiologist at The Barrow Neurological Institute in Phoenix, Arizona and Clinical Associate Professor, University of Arizona. Michael J. Taylor, Ph.D, is a senior scientist and Director of the Cryobiology Research Program at Allegheny Singer Research Institute, Pittsburgh, Pennsylvania. Dr. Taylor is also Professor of Surgery (Neurosurgery), Medical College of Pennsylvania and Hahnemann University. The Company has also obtained the services of consultants (one of whom, Dr. Cohen, is also a member of the scientific advisory board) 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: 46 47 Jeffrey K. Cohen, M.D. (December 1991), advises the Company with respect to its AccuProbe and related technology. Joseph Maroon, M.D. (June 1989), Chairman of the Department of Neurosurgery at Allegheny General Hospital, Pittsburgh, Pennsylvania, Professor of Neurosurgery at the Medical College of Pennsylvania and Professor of Neurological Surgery at West Virginia University School of Medicine advises the Company with respect to the use of the Solutions in neurosurgery. Robert Van Buskirk, Ph.D. (June 1993), Associate Professor of Biology, Binghamton University, advises the Company with respect to the use of the Solutions. Members of the Company's scientific advisory board and the 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of June 30, 1995, certain information concerning stock ownership of all persons known by the Company to own beneficially 5% or more of the outstanding shares of the Company's Common Stock, each director, and all 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 ------------------------------- ------------------------ -------- J. J. Finkelstein . . . . . . . . . . . . . 709,343 (2) 2.8% Howard S. Breslow . . . . . . . . . . . . . 243,000 (3) 1.0% Sam Carl . . . . . . . . . . . . . . . . . 345,600 (3) 1.4% Robert A. Schoellhorn . . . . . . . . . . . 103,000 (4) 0.4% Henry T. Pietraszek . . . . . . . . . . . . 25,000 (5) 0.1% D. H. Blair Investment Banking Corp. . . . . 1,940,950 7.8% 44 Wall Street, NY, NY 10005 All officers and directors as a group (10 persons) . . . . . . . . . . 2,133,843 (6) 8.1%
--------------------------------------- (1) Unless otherwise indicated below, all shares are owned beneficially and of record. 47 48 (2) Includes 13,000 shares owned of record by the children of Mr. Finkelstein and an aggregate of 573,334 shares underlying stock options. See "Employment Agreements." (3) Includes an aggregate of 75,000 shares underlying stock options (4) Includes an aggregate of 100,000 shares underlying stock options and warrants. (5) Includes an aggregate of 25,000 shares underlying stock options. (6) Includes an aggregate 1,142,934 shares underlying options which the Company has granted to the six executive officers of the Company and an aggregate of 275,000 shares underlying options and warrants granted to four directors of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Howard S. Breslow, a director of the Company, is a member of Breslow & Walker, general counsel to the Company. Mr. Breslow currently owns 168,000 shares of Common Stock of the Company and holds options to purchase an aggregate of 75,000 additional shares pursuant to stock options issued to him in October 1991 and June 1994. During the year ended June 30, 1995, Breslow & Walker received legal fees of $104,046. In May 1993, in accordance with the terms of the employment agreement between the Company and John G. Baust, Ph.D., Vice President, Research and Development of the Company, the Company loaned $37,500 to Dr. Baust which Dr. Baust utilized to exercise stock options to purchase 20,000 shares of Common Stock of the Company for $1.875 per share, or a total purchase price of $37,500. The loan is for a term of five years, accrues interest at the rate of 5% per annum, and is secured by the shares obtained by the option exercise. At June 30, 1995 Dr. Baust owed, inclusive of interest, $41,471 to the Company. In August 1993, in connection with a three-year consulting agreement, the Company granted to Robert A. Schoellhorn, a director of the Company, warrants to purchase 25,000 shares of Common Stock of the Company. The warrants lapse after five years, and in the event that Mr. Schoellhorn continues to provide consulting services to the Company, one-third may be exercised after one year, an additional one-third may be exercised at the end of the second year, and an additional one-third may be exercised at the end of the third year. In May 1994, the Company loaned $25,000 to J. J. Finkelstein, President and Chief Executive Officer of the Company and in August 1994 the Company loaned an additional $10,000 to Mr. Finkelstein. The loans are evidenced by promissory notes and secured by 20,000 shares of Common Stock of the Company. The loans were for periods of one year with interest at the rate of 7.5% per annum. In April 1995 the terms of the loans were extended for one additional year. At June 30, 1995 Mr. Finkelstein owed, inclusive of interest, $37,735 to the Company. 48 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 23. (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) (b) Certificate of Designation of 9% Series A Redeemable Convertible Preferred Stock, as amended.(1) 10 (a) Lease Agreement, dated March 31, 1991, between Ward Corporation and the Company, and addendums thereto dated March 31, 1991 and August 13, 1991, relating to the Company's executive offices, laboratory facilities, and manufacturing facilities in Rockville, Maryland.(4) Third addendum to Lease Agreement dated February 28, 1992.(5) Fourth addendum to Lease Agreement dated December 23, 1992.(6) Fifth Addendum to Lease Agreement dated July 6, 1993.(6) Sixth addendum to lease agreement dated October 8, 1993.(7) (b) Employment Agreement, dated June 1, 1989, between the Company and J. J. Finkelstein,(1) and amendment thereto dated November 25, 1991, as amended by letter agreement dated May 28, 1992.(5) (c) Stock Option Plan, dated July 7, 1988, and amendment, dated July 19, 1989.(1) (d) Stockholders' Agreement and amendments.(1) (e) Consulting Agreement with Dr. Joseph Maroon.(1) (f) Form of Scientific Advisory Board Member Agreement.(1) (g) 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. (h) Employment Agreement, dated as of May 14, 1990, between the Company and Theodore D. Pennington(2) and amendments thereto dated January 28, 1993(6), May 13, 1993(6), and May 13, 1994.(7) 49 50 (i) 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) (j) 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) (k) 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) (m) Consulting and Proprietary Information Agreement dated as of December 1, 1991, between the Company and Dr. Jeffrey K. Cohen. (5) (n) Consulting and Proprietary Information Agreement dated as of December 1, 1991, between the Company and Dr. Tse- Chao Hua. (5) (o) Employment Agreement, dated as of March 30, 1992, between the Company and Yuchi Huang, Ph.D. (5) (p) Loan and Pledge Agreement dated May 19, 1993, between the Company and John G. Baust, Ph.D.(6) (q) Promissory Note dated May 19, 1993, of John G. Baust, Ph.D., in favor of the Company.(6) (r) Employment Agreement, dated as of January 14, 1993, between the Company and J.J. Finkelstein.(6) (s) Employment Agreement, dated as of March 1, 1994, between the Company and Alan F. Rich.(7) (t) Loan Agreement, dated as of May 24, 1994, between the Company and J. J. Finkelstein.(7) (u) Pledge Agreement, dated as of May 24, 1994, between the Company and J. J. Finkelstein and Linda Finkelstein.(7) (v) Escrow Agreement, dated August 12, 1994, among Breslow & Walker, Cryomedical Sciences, Inc. and J. J. Finkelstein and Linda Finkelstein as joint tenants.(7) (w) Promissory Notes (two), dated May 24, 1994, and August 12, 1994, of J. J. Finkelstein in favor of the Company.(7) (x) 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. (y) Employment Agreement, dated as of May 1, 1993 between the Company and ZhaoHua Chang, Ph.D. (z) 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.). 21 Cryo Instruments, Inc., a California corporation. 23 Consent of Independent Auditors. 27 Financial Data Schedule 50 51 (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1995. - ------------------------------ (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. 51 52 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: October 13, 1995 By: /s/J.J. Finkelstein ----------------------------------- J.J. Finkelstein, President and Chief Executive Officer (Principal Executive Officer) Date: October 13, 1995 By: /s/Theodore D. Pennington ----------------------------------- Theodore D. Pennington, Vice President, Finance and Administration (Principal Financial Officer and Principal 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: October 13, 1995 /s/J.J. Finkelstein -------------------------------------- J.J. Finkelstein Director Date: October 13, 1995 /s/Howard S. Breslow -------------------------------------- Howard S. Breslow Director Date: October 13, 1995 /s/Sam Carl -------------------------------------- Sam Carl Director Date: October 13, 1995 /s/Robert A. Schoellhorn -------------------------------------- Robert A. Schoellhorn Director Date: October 13, 1995 /s/Henry T. Pietraszek -------------------------------------- Henry T. Pietraszek Director 52 EX-10.G 2 RESEARCH PROJECT MGMT. SERVICES AGREEMENT/ AM. # 6 1 EXHIBIT 10(g) AMENDMENT #6 This Amendment #6, effective as of the 1st day of July, 1993, amends the Research Project Management Services Agreement ("Agreement"), entered into the twenty-ninth day of August, 1989, as previously amended by Amendments #1 through #5, is entered into by and between ALLEGHENY-SINGER RESEARCH INSTITUTE, a Pennsylvania nonprofit corporation ("ASRI"), and CRYOMEDICAL SCIENCES, INC., a Delaware corporation ("Company"), pursuant to Section 9.11 thereof, according to the following terms and conditions: 1. The Term of this Agreement is hereby extended for an additional two (2) year period ending June 30, 1995. 2. The term "Inventions" set forth in Section 1.9 of the Agreement shall include, in addition to the Solutions, the cryosurgical system designed to freeze and destroy cancerous tumors owned by the Company. 3. Subsection 5.1(a) of the Agreement is hereby deleted, effective as of the effective date of the Agreement, and is replaced in its entirety by following new subsection 5.1(a): "A reasonable royalty to be determined in good faith by the parties at the time the new product or technique (the "ASRI Invention") is available for licensing and shall be a percentage of net sales. Net sales shall mean the revenues from sales of a product actually received during such year by Company, after deducting returns, sales rebates, cash discounts, separately billed shipping and handling charges, sales taxes, value added taxes, and other taxes directly linked to the sale of such product. Royalties shall only be payable for commercial sales and not for research sales. Royalty rates for any such license shall be determined as a percentage of value added to Company products by the ASRI Invention to which the royalty is applicable, or as a proportion of the percentage of value added to the product in the case of joint ASRI/Company inventions. In the event the parties cannot agree on the amount of the royalty, then each party shall select one appraiser and said two appraisers shall select a third appraiser. The three appraisers shall determine the royalty and parties shall be bound to apply the royalty so determined. In determining a royalty, the parties (or appraisers) shall take into account increases in product sales, the license scope and rates conventionally granted for inventions with reasonably similar commercial potential, the relative contributions of the parties to the ASRI Invention and the cost of subsequent research and development needed to bring the ASRI Invention to the marketplace and the royalty obligations to other parties. Contingent royalty schemes (e.g. based on patent issuance or nonissuance) and other customary provisions may be provided. It is contemplated or believed by the parties that a reasonable range for royalties for a "stand-alone" invention would be between 2% and 6% of net sales of products that embody the ASRI Invention and that for improvement or "add on" ASRI Inventions the range would be prorated according to the value added to the products." 2 4. Company shall not use the name of ASRI or Allegheny General Hospital or the names of any Allegheny investigators in any publicity, press release, advertisement or other publication without the prior written consent of ASRI, except that Company is hereby authorized to make, without consent, disclosures required by law, including in connection with the offering to investors of its securities and as required in its filings with the Securities and Exchange Commission. The procedures for submission and review of use of name is provided in Appendix B, Guidelines for Submission and Review of Use of Name, attached hereto and incorporated herein, which Guideline shall apply only to the extent prior written consent is required by this paragraph 4. 5. All other terms and conditions of the original Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment in multiple originals as of the date above first written. ALLEGHENY-SINGER RESEARCH CRYOMEDICAL SCIENCES, INC. INSTITUTE: /s/ JAMES H. MCMASTER, M.D. /s/ J.J. FINKLESTEIN - ---------------------------- -------------------------- James H. McMaster, M.D. J. J. Finklestein President and President and Chief Executive Officer Chief Executive Officer 3 Appendix B Guidelines for Submission and Review of Use of Name Prior written consent of ASRI Vice President and AGH Vice President for Corporate Communications, or their designees, shall be obtained prior to the use of the name of any Allegheny Health, Education and Research Foundation subsidiary, including Allegheny-Singer Research Institute and Allegheny General Hospital' in any publicity, press release, advertisement, prospectus or any other investment or promotional material. Sufficient information shall be included with the text of paragraphs or sections containing references to an AHERF organization provided to the ASRI Vice President and the AGH Vice President for review to identify the context in which the information appears. ASRI's Vice President and AGH's Vice President will review and approve or,provide written explanations of any objection to material submitted to them for review of use of name within ten (10) working days of receipt of the information. 3 EX-10.X 3 LEASE AGREEMENT 1 EXHIBIT 10(x) LEASE AGREEMENT BETWEEN WARD CORPORATION, a Maryland Corporation, as Landlord AND CRYOMEDICAL SCIENCES, INC., a Delaware Corporation, as Tenant 2 TABLE OF CONTENTS
Section Description Page No. - ------- -------------------------------------------------------- 1. Definitions 3 2. Rent; Additional Rent 4 3. Additional Rent 4 4. Delivery and Condition of Premises 6 5. Operation of the Building and the Real Property 6 6. Conduct of Business by Tenant 6 7. Alterations and Tenant's Property 7 8. Repairs 7 9. Liens 8 10. Subordination and Modification 8 11. Inability to Perform; No Delay to Constitute Eviction 9 12. Destruction 9 13. Eminent Domain 10 14. Assignment and Subletting 10 15. Building Services 11 16. Default; Remedies 11 17. Insolvency or Bankruptcy 13 18. Fees and Expenses; Indemnity; Liability Insurance 13 19. Access to Premises; Landlord's Right to Enter 14 20. Waiver, Release 14 21. Tenant's Certificates 15 22. Rules and Regulations 15 23. Tax on Tenant's Personal Property 15 24. Authority 15 25. Signage 15 26. Parking 15 27. Miscellaneous 15 Exhibits "A", "C"
3 LEASE THIS LEASE is made and entered into as of this 1st day of May, 1995, by and between WARD CORPORATION, a Maryland corporation (herein called "Landlord"), and Cryomedical Sciences, Inc. a Delaware Corporation (herein called "Tenant"). W I T N E S S E T H: Upon and subject to the terms, covenants and conditions hereinafter set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises (as hereinafter defined) in the Building. 1. Definitions 1.1 Additional Rent: As defined in Section 3.2, below. 1.2 Basic Rent: As defined in Section 2.1, below. 1.3 Building: The building located at 1300 Piccard Drive, Rockville, Maryland 20850, upon the Real Property. 1.4 Guarantor(s): N/A 1.5 Lease: This Lease, as amended from time to time, and all Exhibits attached hereto. 1.6 Lease Commencement Date: May 1, 1995. 1.7 Lease Year: Each period of twelve (12) calendar months during the Term, commencing on the Lease Commencement Date and Partial Lease Year ending on the Term Expiration Date. 1.8 Operating Expenses Base Amount. The actual operating expenses of the 1994 calendar year. For purposes of redefinition, the operating expense base amount will be adjusted to reflect the first Lease Year that Tenant has occupied the Premises. Tenant will neither owe nor pay any sum of money attributable to operating expenses which accrue during its first Lease Year. 1.9 Premises: Approximately Five Thousand Four Hundred Ninety-Six (5,496) square feet of rentable floor area located on the First Floor and approximately Twenty Two Thousand One Hundred Twenty (22,120) square feet of rentable floor area located on the Lower Level, located within the Building, and outlined in red on Exhibit A, attached hereto. 1.10 Real Estate Taxes Base Amount. The actual real estate taxes of the 1994 fiscal year. For purposes of redefinition, the real estate tax base amount will be adjusted to reflect the first Lease Year that Tenant has occupied the Premises. Tenant will neither owe nor pay any sum of money attributable to real estate taxes which accrue during its first Lease Year. 1.11 Real Property: The land comprising all that certain parcel of land situated in Montgomery County, Maryland, and identified as Lot Six (6) in a subdivision known as "Lots Four (4), Five (5) and Six (6) and dedication of part of Piccard Drive, 70-S Industrial Park "as per plat thereof recorded in Plat Book 87 at plat 9281 among the land records of Montgomery County, Maryland (Tax Account Number 4-201-1457). 1.12 Term: The five year (5) period commencing on the Lease Commencement Date and ending on the Term Expiration Date, unless the Term shall sooner terminate as hereinafter provided. 1.13 Term Expiration Date: The Term Expiration Date shall be five (5) years from the Lease Commencement Date or April 30, 2000. 2. Rent; Additional Rent 2.1 Basic Rent. Commencing on the Lease Commencement Date, Tenant shall pay to Landlord during the Term a base rental ("Basic Rent") which shall be Sixteen and 50/100 Dollars ($16.50) per square foot for the Five Thousand Four Hundred Ninety Six (5,496) square feet located on the First Floor on a full service basis and Twelve and 13/100 Dollars ($12.13) per square foot for the Twenty Two Thousand One Hundred Twenty (22,120) square feet located on the Lower Level net of char service which shall both be further detailed in the schedule below. Basic Rent shall be payable by Tenant in lawful money of the United States in equal consecutive monthly installments of one-twelfth the Basic Rent on or before the first day of each calendar month, in advance, at the address specified for Landlord below, or such other place as Landlord shall designate, without any prior demand therefor and without any deductions or setoff whatsoever. Rent for any partial month shall be prorated at the rate of one-thirtieth (1/30th) of the monthly Basic Rent per day. 3 4
============================================================================= 5,496 square feet on 22,120 square feet on Total First Floor the Lower Level Date Rate Amount Rate Amount Monthly Amount - ----------------------------------------------------------------------------- 5/1/95 16.50 $7,557.00 $12.13 $22,359.63 $29,916.63 - ----------------------------------------------------------------------------- 5/1/96 $17.00 $7,786.00 $12.49 $23,023.23 $30,809.23 - ----------------------------------------------------------------------------- 5/1/97 $17.51 $8,019.58 $12.86 $23,705.27 $31,724.85 - ----------------------------------------------------------------------------- 5/1/98 $18.04 $8,262.32 $13.25 $24,424.17 $32,686.49 - ----------------------------------------------------------------------------- 5/1/99 $18.58 $8,509.64 $13.65 $25,161.50 $33,671.14 - ----------------------------------------------------------------------------- 5/1/2000 $19.14 $8,766.12 $14.06 $25,917.27 $34,683.39 =============================================================================
2.2 Adjustment of Rent. Commencing with the first anniversary of the Lease Year, The Basic Rent set forth in Paragraph 2.1 hereinabove shall be adjusted annually on each anniversary of the Lease Commencement Date during the balance of the Term by multiplying the Basic Rent for the immediately preceding Lease Year by three percent (3.0%) per annum, computed annually. 2.3 Additional Rent. Tenant shall pay to Landlord as Additional Rent (as such term is defined in Section 3.2) hereunder, all charges and other amounts required under this Lease including, without limitation, all charges specified in Section 3 hereof. All such amounts and charges shall be payable to Landlord at the time and at the place where Basic Rent is payable. Landlord shall have the same remedies for a default in the payment of Additional Rent as for a default in the payment of Basic Rent. 2.4 Right of First Offering. Upon the expiration of any lease space adjacent to Tenant's demised premises on the first floor or lower level of the building, or on space that is currently vacant within the building, Landlord will offer Tenant that space for lease, throughout the term of Tenant's then current lease and any extension thereof prior to offering the space to the general public. The above is subject to the Landlord and Tenant being able to negotiate a lease rate for the expansion space within ten (10) business days of the initial offering by the Landlord to the Tenant. Within thirty (30) days of the determination of the lease rate, Landlord and Tenant shall execute an amendment to the lease (the "Lease Amendment") which shall incorporate the lease terms for the expansion of space. 2.5 Late Payment Charge. If Tenant shall fail to pay any Basic Rent or Additional Rent within five (5) business days after the same is due and payable, such unpaid amounts shall be subject to a late payment charge equal to five percent (5%) of such unpaid amounts in each instance to cover Landlord's additional administrative costs resulting from Tenant's failure. Such late payment charge shall be paid to Landlord together with such unpaid amounts. Landlord shall waive the late charge set forth herein for the first Two (2) late payments during each Lease Year of the term of the Lease, provided that such payments shall be made within Ten (10) days of written notice to Tenant of such lateness. 2.6 Returned Check Charge. A service charge of Fifty and 00/100 Dollars ($50.00) will be automatically made for each instance in which a check is returned unpaid for any reason by the Tenant's bank, unless it is Tenant's bank error. 3. Additional Rent 3.1 For purposes of this Section 3, the following terms shall have the meanings hereinafter set forth: (a) "Tenant's Share" shall mean that proportion which the rentable floor area of Tenant's Premises bears to the total rentable floor area of the Building; i.e., 27,616 divided by 90,246 square feet or 31%. (b) "Real Estate Taxes" shall mean all taxes, assessments and charges levied upon or with respect to the Real Property and Building or any personal property of Landlord used in the operation thereof, or Landlord's interest in the Building or such personal property, and shall also include any other tax, fee or other excise, however described, that may be levied or assessed as a substitute for, or as an addition to, in whole or in part, any other Real Estate Taxes, whether or not now customary or in the contemplation of the parties on the date of this Lease. Real Estate Taxes shall not include franchise or income taxes measured by the net income of Landlord from all sources, unless, due to a change in the method of taxation, any of such taxes is levied or assessed against Landlord as a substitute for, or as an addition to, in whole or in part, any other tax that would otherwise constitute a Real Estate Tax. Real Estate Taxes shall also include reasonable legal fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Real Estate Taxes. Tenant will not be obligated for any amounts due in excess of the original Real Estate Tax bill. 4 5 (c) "Operating Expenses" shall mean the total of the amounts paid by Landlord in connection with the management, operation, maintenance and repair of the Building and the Real Property: (i) the amount paid by the Landlord for air conditioning, electricity, steam, heating, gas, mechanical, ventilating, and elevator systems and all other utilities and the cost of supplies and equipment and maintenance and service contracts in connection therewith, (ii) the amount paid by the Landlord for repairs and general maintenance and cleaning, (iii) the amount paid by the Landlord for fire, extended coverage, boiler, sprinkler, public liability, property damage, rent, earthquake and other insurance, (iv) the amount paid by the Landlord for wages, salaries and other labor costs, including taxes, insurance, medical and other employee benefits, excluding bonuses (v) Landlord's reasonable management fees not to exceed five percent (5%), (vi) the amount paid by Landlord for supplying, replacing and cleaning employee uniforms, (vii) the amount paid by Landlord for any capital improvements made to the Building and the Real Property as a labor-saving device or to effect other economies in the operation or maintenance of the Building and the Real Property, or made to the Building and the Real Property after the date of this Lease, that are required under any governmental law or regulation that was not applicable to the Building and the Real Property as of the date hereof, such cost to be amortized over such reasonable period as Landlord shall determine, together with interest on the unamortized balance at the rate of ten percent (10%) per annum or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements. Landlord will provide to Tenant an annual statement of actual operating costs as soon as it is available. Upon review of the annual statement, Tenant has the right to review Landlord's records relating to the actual operating costs in Landlord's office provided Tenant gives Landlord fifteen (15) days written notice of its desire to do so. (d) If during all or part of any calendar year, Landlord shall not furnish any particular item of work or service that would be included in the Operating Expenses to ninety-five percent (95%) of the rentable area of the Building because less than ninety-five percent (95%) of the Building is occupied or any other tenant is itself obtaining and providing such item of work or service, then an adjustment shall be made in the Operating Expenses for such calendar year so that the Tenant's Share of the Operating Expenses for such calendar year shall be increased to the amount that Landlord determines are reasonably attributable to the Tenant's use of the Premises. It is understood and agreed by Landlord and Tenant that the operation of the foregoing gross-up clause is not intended to enable Landlord to recover from Tenant any expenses attributable to any unoccupied space in the Building, but only to insure that Landlord recovers from Tenant a proportionate share of any increase in Operating Expenses over the Base Year Operating Expenses indicated in Section 1.8 hereof which are reasonably attributable to Tenant's occupancy of the Premises. (e) Operating Expenses shall exclude (i) costs attributable to specific tenants whether or not recovered from those tenants, (ii) the cost of any capital improvements except those stated in subparagraph 3.1(c)(vii), and (iii) interest and principal payments on mortgages. (f) "Monthly Expenses" with respect to each calendar month during the Term shall mean one-twelfth (1/12) of the total Real Estate Taxes and Operating Expenses for the calendar year in which such month occurs. 3.2 Payment of Tenant's Share. Commencing with the Second Lease Year, as of the first day of the month in which each anniversary of the Lease Commencement Date occurs, Tenant shall pay to Landlord as additional rent (The "Additional Rent") on or before the first day of each calendar month, an amount which is the sum of the Tenant's Share of (i) any amount by which the total Real Estate Taxes as estimated by Landlord in its reasonable judgement, levied during such Adjustment Year, is expected to exceed the Real Estate Taxes Base Amount specified in Section 1.10, plus (ii) any amount by which the total Operating Expenses for the Adjustment Year as estimated by Landlord in its reasonable judgement, is expected to exceed the Operating Expenses Base Amount specified in Section 1.8 (as the same may be adjusted pursuant to Section 3.3 below). After the expiration of each calendar year commencing or ending during the Term, Landlord shall furnish Tenant with a statement (herein called Landlord's Expense Statement") setting forth in reasonable detail the Operating Expenses and Real Estate Taxes for such calendar year. If the actual Operating Expenses and Real Estate Taxes for such calendar year exceed the estimated Operating Expenses and Real Estate Taxes used by Landlord in determining the Additional Rent paid by Tenant for such calendar year, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual Tenant's Share of the Operating Expenses and Real Estate Taxes within thirty (30) days after the receipt of Landlord's Expense Statement, and if the total amount of Additional Rent paid by Tenant for any such calendar year shall exceed the amount which would have been paid based on the actual Tenant's Share of the Operating Expenses and Real Estate Taxes for such calendar year, such excess shall be credited against any Basic Rent or Additional Rent due within thirty (30) days from Tenant to Landlord hereunder, if any, or shall be paid by Landlord to Tenant together with Landlord's Expense Statement. The obligations of Landlord and Tenant under this Section 3.2 shall survive any termination of this Lease. Landlord will provide Tenant with an annual statement of actual operating expenses as soon as it is available after the completion of the calendar year. Tenant has the right to inspect Landlord's records relating to the actual operating expenses in Landlord's offices by providing fifteen (15) days notice to Landlord of Tenant's desire to do so. 5 6 3.3 Excessive Increase in Operating Expenses Occasioned by Tenant. (a) Notwithstanding anything to the contrary in this Lease, in the event Tenant installs or operates any heavy duty mechanical or electrical equipment, including auxiliary cooling equipment, in the Premises or conducts any business or undertakes any activities in the Premises which causes Operating Expenses to otherwise increase by an excessive amount under the facts and circumstances, Tenant shall be solely responsible for the costs of any excess electrical consumption or other charges that may be occasioned thereby, in which event, the charges attributable to such excess electrical consumption or other charges shall not be considered an Operating Expense or allocated pro rata among the tenants of the Building but shall instead be added to and payable on a monthly basis as Additional Rent of the Tenant. (b) The total average consumption of electricity, including lighting, in excess of four (4) watts per square foot for the Premises shall be deemed excessive. Additionally, any individual piece of electrically operated machinery or equipment having a name plate rating in excess of two (2) kilowatts shall also be deemed as requiring excess electric current. (c) Landlord may require that one or more separate meters be installed to record the consumption or use of electricity or shall have the right to cause a reputable independent electrical engineer to survey and determine the quantity of electricity consumed by such excessive use. The cost of any such survey or meters and of installation, maintenance and repair thereof shall be paid for by Landlord. Tenant agrees to pay Landlord (or the utility company, if direct service is provided by the utility company), promptly upon demand therefor, for all such electric consumption and demand as shown by said meters, or a flat monthly charge determined by the survey, as applicable, at the rates charged for such service by the local public utility company. 4. Delivery and Condition of Premises. Tenant agrees to accept the Premises in an "as is" condition. 5. Operation of the Building and the Real Property 5.1 Maintenance of Building. The manner in which the Building and the Real Property are maintained and operated and the expenditures therefor shall be at the sole discretion of Landlord, in a manner consistent with similar office buildings in Montgomery County. 5.2 Alterations or Additions. Landlord hereby reserves the right, at any time and from time to time, to make alterations or additions to the Building and the Real Property. Landlord also reserves the right at any time and from time to time to construct other improvements in the Building and to enlarge same and make alterations therein or additions thereto. If Landlord chooses to make Alterations or Additions, Landlord will use its reasonable efforts to do so with no interference to Tenant or Tenant's business. If Landlord requires entry into Tenant's Premises, Landlord will provide Tenant with forty-eight (48) hours advance notice, except in the case of an emergency. If possible, any work will be scheduled at a time to cause the least interference to Tenant. In the event Landlord makes alterations to any area which is considered hallway or common area which thereby reduces the core factor for the entire building, Landlord agrees to recompute Tenant's share of the common areas. 6. Conduct of Business by Tenant 6.1 Permitted Use. Tenant shall use and occupy the Premises during the Term of the Lease solely for use as offices and laboratories consistent with Tenant's business and for sales, warehousing or manufacturing, as permitted by law, and for no other use or uses without the prior written consent of Landlord. 6.2 Uses not Permitted. Tenant shall not use or occupy, or permit the use or occupancy of, the Premises or any part thereof for any use other than the use specifically set forth in Section 6.1 hereof, or in any manner that, in Landlord's judgment, would adversely affect or interfere with any services required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Building, or with the proper and economical rendition of any such service, or with the use or enjoyment of any part of the Building by any other tenant or occupant. 6.3 Tenant's Compliance with Laws. Unless otherwise the Landlord's responsibility, Tenant, at Tenant's cost and expense, shall comply with all laws, orders and regulations of federal and municipal authorities, and with all directions, pursuant to law, of all public officers, that shall impose any duty upon Tenant with respect to the Premises or the use or occupancy thereof. 6.4 Tenant's Compliance with Insurance Requirements, etc. Tenant shall not do anything, or permit anything to be done, in or about the Premises which shall conflict with the provisions of any insurance policies covering the Building or any property located therein, or result in a refusal by any insurance company to insure the Building or any such property, in amounts reasonably satisfactory to Landlord, or subject Landlord to any liability or responsibility for injury to any person or property by reason of any business operation being conducted in the Premises, or cause any increase in the insurance rates applicable to the Building or property located therein. Tenant, at Tenant's expense, shall comply with all reasonable rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body that shall hereafter perform the function of such Association. 6 7 7. Alterations and Tenant's Property 7.1 Initial Improvements. Landlord is under no obligation to make structural or other alterations, decorations, additions or improvements in or to the Premises. 7.2 Approved Alterations. Tenant shall make no alterations, installations, additions or improvements in or to the Premises or any portion thereof or any alteration to the mechanical systems of the Premises or any portion thereof, including, without limitation, the plumbing and air conditioning systems of the Premises or any portion thereof or to the apparatus of the Premises or any portion thereof of other or like nature without Landlord's prior written consent which consent shall not be unreasonably withheld, delayed or conditioned (any such alteration, installation, addition or improvement for which Landlord's approval is required is hereinafter referred to as an "Approved Alteration"), and shall include Building Standard Improvements. Unless otherwise agreed in writing by Landlord, Tenant shall remove all such Approved Alterations and restore the portion of the Premises affected thereby to its former condition at its sole cost and expense on or before the Term Expiration Date. 7.3 Requirements for Approved Alterations. Each alteration, installation, addition or improvement, shall be subject to the limitations that such Alteration (a) does not adversely affect the structural strength of the Premises or any portion thereof; (b) does not adversely affect the mechanical, plumbing, electrical and HVAC systems of the Premises or any portion thereof; (c) does not materially affect the external appearance or value of the Premises or any portion thereof; and (d) does not diminish or impair the use of the Building as a first class office building. Prior to making any Approved Alteration, plans and specifications therefor in such detail as Landlord may request shall be submitted to Landlord and the mortgagees of the Building for approval, except for minor non structural improvements unless the cost is in excess of Five Hundred and 00/100 Dollars ($500.00). 7.4 Standards for Approved Alterations. All Alterations made by Tenant in the Premises or any portion thereof shall be constructed and completed in a good and workmanlike manner at Tenant's sole cost and expense by contractors approved by Landlord. Prompt payment shall be made by Tenant and Tenant shall keep the Premises free of mechanics' and materialmen's liens and cause the same to be promptly discharged or bonded. Tenant shall deliver to Landlord written and unconditional waivers of mechanics' and materialmen's liens upon the Real Property for all work, labor and services to be performed and material to be furnished in connection with the proposed Alterations. Tenant shall obtain all necessary governmental permits, licenses and approvals, and shall promptly comply with all applicable laws. The Alterations shall be completed in accordance with the approved plans and specifications where such approvals are required. 7.5 Tenant's Property. All appurtenances, fixtures, improvements, additions and other property attached to or installed in the Premises, whether by Landlord or by or on behalf of Tenant, and whether at Landlord's expense or Tenant's expense, or at the joint expense of Landlord and Tenant, shall be and remain the property of Landlord. Any furnishings and personal property placed in the Premises that are removable without material damage to the Building or the Premises, whether the property of Tenant or leased by Tenant, are herein called "Tenant's Property". Any replacements of any property of Landlord, whether made at Tenant's expense or otherwise, shall be and remain the property of Landlord. Any trade fixtures installed by Tenant can be removed at Tenant's expense at the termination of this Lease. 7.6 Removal of Tenant's Property. Any of Tenant's Property on the Premises prior to the Term Expiration Date shall be removed by Tenant at Tenant's cost and expense, and Tenant shall, at its cost and expense, repair any damage to the Premises or the Building caused by such removal, all on or before the Term Expiration Date. Any of Tenant's Property not removed from the Premises prior to the expiration of the Term shall, at Landlord's option, become the property of Landlord or Landlord may remove such Tenant's Property, and Tenant shall pay to Landlord Landlord's costs of removal and of any repairs in connection therewith within ten (10) days after the receipt of a bill therefor. Tenant's obligation to pay any such costs shall survive any termination of this Lease. 7.7 Improvements of Lower Level. Landlord will allow Tenant, at Tenant's sole expense, to perform alterations to the lower level of the building. Such alterations to be made only after Landlord's review and approval of said alterations, such approval not to be unreasonably withheld. 8. Repairs 8.1 Maintenance of Premises. Tenant shall maintain the Premises and, at Tenant's cost and expense, shall make all repairs and replacements to preserve the Premises in good working order and in clean, safe and sanitary condition. 7 8 8.2 Repairs by Tenant. All repairs and replacements made by or on behalf of Tenant shall be made and performed (a) at Tenant's cost and expense and at such time and in such manner as Landlord may designate, (b) by contractors or mechanics approved by Landlord, (c) so that same shall be at least equal in quality, value, and utility to the original work or installation, and (d) in accordance with the reasonable rules and regulations for the Building and the Real Property adopted by Landlord from time to time, and in accordance with all applicable laws and regulations of governmental authorities having jurisdiction over the Premises. If Landlord gives Tenant notice of the necessity of any repairs or replacements required to be made under Section 8.1 above and Tenant fails to commence diligently to effect the same within ten (10) business days thereafter, Landlord may proceed to make such repairs or replacements and the expenses incurred by landlord in connection therewith shall be due and payable from Tenant upon demand as Additional Rent; provided, that Landlord's making any such repairs or replacements shall not be deemed a waiver of Tenant's default in failing to make the same. 8.3 Maintenance of Common Areas. Landlord shall operate and maintain the common or public areas of the Real Property and the Building in a manner consistent with similar office buildings in Montgomery County. 9. Liens 9.1 Work Done on Tenant's Behalf. Any Alterations, repairs, replacements or other work done on the Premises shall be solely on behalf, and for the account, of Tenant and not of Landlord. Landlord's consent to any Alterations shall not be deemed or construed to be Landlord's consent or agreement to subject Landlord's interest in the Premises or the Real Property to any mechanics' or materialmen's liens which may be filed on account of such Alterations. Tenant shall keep the Premises free from any liens arising out of any work performed, material furnished or obligations incurred by or for Tenant or any person or entity claiming through or under Tenant, excluding any work performed by Landlord's sub-contractors to construct the initial improvements as outlined in Exhibit "B" of this Lease. 9.2 Landlord's Right to Release Lien. In the event that Tenant shall not, within thirty (30) days following the imposition of any lien described in Section 9.1 above, cause same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right but not the obligation to cause same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith shall be considered Additional Rent and shall be payable to it by Tenant on demand. Any such action by Landlord shall not in any event be deemed a waiver of Tenant's default with respect thereto. 9.3 Landlord's Right to Post Notices. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or that Landlord shall deem proper, for the protection of Landlord, the Premises, the Building, and any other party having an interest therein, from mechanics' and materialmen's liens, and Tenant shall give to Landlord at least ten (10) business days' prior notice of commencement of any construction on the Premises. 10. Subordination and Modification 10.1 Subordination of Lease. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, Tenant agrees that this Lease and Tenant's tenancy hereunder are and shall be automatically subject and subordinate at all times to (a) any underlying leases that may now exist or hereafter be executed affecting the Building or the Real Property or both, (b) the lien of any mortgage deed of trust or similar security instrument that may now exist or hereafter be executed in any amount for which the Building, the Real Property, or underlying leases, or Landlord's interest or estate in any of said items is specified as security, and (c) all renewals, modifications, consolidations, replacements and extensions of any of the foregoing. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents evidencing the subordination of this Lease with respect to any such ground lease or underlying lease, or the lien of any such mortgage or deed of trust. If Tenant fails to execute such instruments within thirty (30) days after written request therefor, Landlord is hereby appointed Tenant's attorney-in-fact to execute, acknowledge and deliver any and all such instruments for an on behalf of Tenant. Landlord will at Tenant's written request, attempt to obtain a Non Disturbance Agreement from all current or future mortgagees of the Building or Real Property which recognizes such lessor or mortgagee, as the case may be, and, among other things, provides that, notwithstanding any default with respect to any underlying lease, mortgage or any foreclosure thereof, Tenant's possession and right of use under this Lease in and to the Premises shall not be disturbed by such lessor or mortgagee, if Tenant attorns to such, unless and until Tenant shall breach any of the provisions hereof and this Lease or Tenant's right to possession hereunder shall have been terminated in accordance with the provisions of this Lease. Any and all costs involved in obtaining such a Non Disturbance Agreement will be the sole responsibility of Tenant. 8 9 10.2 Attornment. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination of any ground lease, underlying lease or lien to this Lease, attorn to and become the Tenant of the successor in interest to Landlord at the option of such successor in interest. 10.3 Amendment or Modification. If, in connection with any loan secured by a mortgage or deed of trust affecting the Building, Real Property or both, the lender should require any amendment or modification of the terms hereof, Tenant shall duly execute and deliver any instrument reasonably requested by such lender to affect such amendment or modification; provided, that such amendment or modification shall not enlarge or decrease the term hereof or increase the amount of Basic Rent or Additional Rent payable hereunder, or modify any of the business terms of this Lease. 11. Inability to Perform; No Delay to Constitute Eviction. If, for any reason, Landlord is unable to perform or make or is delayed in fulfilling any of its obligations under this Lease, and such failure arises from or through acts of God, strikes, lockouts, labor difficulties, explosions, sabotage, accidents, riots, civil commotions, acts of war or warlike conditions in this or any foreign country, fire and casualty, legal requirements, energy shortage or causes beyond the reasonable control of Landlord, assuming Landlord acts promptly thereafter, no such inability or delay shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of Basic Rent or Additional Rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant or by reason of injury to or interruption of Tenant's business, or otherwise. 12. Destruction 12.1 Repair by Landlord. If the Premises shall be damaged by fire or other casualty insured against by Landlord's fire and extended coverage insurance policy covering the Building, and if Tenant shall give prompt notice to Landlord of such damage, Landlord shall repair such damage; provided however, that Landlord shall have no obligation to repair any damage to or to replace Tenant's Property, Approved Alterations (except as described below) or any other property or effects of Tenant and Landlord shall have no liability for, or obligation to repair, water damage caused by sprinkler leakage, blocked or burst pipes or otherwise; provided further, Landlord's obligation to repair any damage to the Premises and the Approved Alterations shall be limited to the extent of the proceeds of any insurance policy carried by Landlord or Tenant which are disbursed to the Landlord. Except as otherwise provided in this Section 12, if the entire Premises shall be rendered untenantable by reason of any such damage, the Basic Rent shall abate for the period from the date of such damage to the date when the Premises shall again be available for occupancy by Tenant, which date shall not exceed one hundred twenty (120) days from the date of such damage and if the period of time does exceed this one hundred twenty (120) days, Tenant has the right to cancel this Lease with thirty (30) days written notice to Landlord. If only a part of the Premises shall be rendered untenantable, the Basic Rent shall abate for such period in the proportion that the rentable area of the part of the Premises so rendered untenantable bears to the total rentable area of the Premises. 12.2 Termination of Lease in the Event of Total Destruction. Notwithstanding the provisions of Section 12.1 hereof, if, prior to or during the Term (a) the Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, and if Landlord shall determine, in its sole discretion, not to restore the Premises, or (b) the Building shall be so damaged by fire or other casualty that, in Landlord's opinion, substantial alteration, demolition or reconstruction of the Building shall be required (whether or not the Premises shall have been damaged or rendered untenantable), then, in any of such events, Landlord, at Landlord's option, may give to Tenant within ninety (90) days after such fire or other casualty, a thirty (30) days' notice of termination of this Lease and, in the event such notice is given, this Lease and the Term shall terminate upon the expiration of such thirty (30) days with the same effect as if the date of expiration of such thirty (30) days were the Term Expiration Date; and the Basic Rent and Additional Rent shall be apportioned as of such date and any prepaid portion of Basic Rent or Additional Rent for any period after such date shall be refunded by Landlord to Tenant. 12.3 Landlord's Insurance. Landlord shall attempt to obtain and maintain, throughout the Term, in Landlord's casualty insurance policies, provisions to the effect that such policies shall not be invalidated should the insured waive, in writing, prior to loss, any or all right of recovery against any party for loss occurring to the Building. In the event that at any time Landlord's casualty insurance carriers shall exact an additional premium for the inclusion of such or similar provisions, Landlord shall give tenant notice thereof. In such event, if Tenant agrees, in writing, to reimburse Landlord for such additional premium for the remainder of the Term, Landlord shall require the inclusion of such or similar provisions by Landlord's casualty insurance carriers. As long as such or similar provisions are included in Landlord's fire insurance policies then in force, Landlord hereby waives any right of recovery against Tenant, any other permitted occupant of the Premises, and any of their servants, employees, agents or contractors, for any loss occasioned by fire or other casualty that is an insured risk under such policies. In the event that at any time Landlord's casualty insurance carriers shall not include such or similar provisions in Landlord's fire insurance policies, the waivers set forth in the foregoing sentence shall be deemed of no further force or effect. 9 10 12.4 Tenant not Relieved from Liability. Except to the extent expressly provided in Section 12.3 hereof, nothing contained in this Lease shall relieve Tenant of any liability to Landlord or to its insurance carriers which Tenant may have under law or under the provisions of this Lease in connection with any damage to the Premises or the Building by fire or other casualty. 12.5 No Abatement of Rent if Damage Caused by Tenant. Notwithstanding the foregoing provisions of Section 12 hereof, if any such damage is due to the fault or neglect of Tenant, any person claiming through or under Tenant, or any of their servants, employees, agents, contractors, visitors or licensees, then there shall be no abatement of Basic Rent or Additional Rent by reason of such damages, unless Landlord is reimbursed for such abatement of Basic Rent or Additional Rent pursuant to any rental insurance policies that Landlord may, in its sole discretion, elect to carry. 13. Eminent Domain 13.1 Total Condemnation. If all of the Premises is condemned or taken in any manner for public or quasi-public use, including but not limited to a conveyance or assignment in lieu of a condemnation or taking, this Lease shall automatically terminate as of the date of dispossession of Tenant as a result of such condemnation or other taking. If a part of the Premises is so condemned or taken, this Lease shall automatically terminate as to the portion of the Premises so taken as of the date of dispossession of Tenant as a result of such condemnation or taking. If such portion of the Building is condemned or otherwise taken so as to require, in the opinion of Landlord, a substantial alteration or reconstruction of the remaining portions thereof, this Lease may be terminated by Landlord, as of the date of dispossession of Tenant as a result of such condemnation or taking, by written notice to Tenant within sixty (60) days following notice to Landlord as of the date on which said dispossession will occur. 13.2 Landlord Entitled to Award. Landlord shall be entitled to the entire award in any condemnation proceeding or other proceeding for taking for public or quasi-public use, including, without limitation, any award made for the value of the leasehold estate created by this Lease. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in such condemnation or other taking, together with any and all rights of Tenant now or hereafter arising in or to same or any part thereof; provided, however, that nothing contained herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any separate award made to Tenant specifically for its relocation expenses, the taking of personal property and fixtures belonging to Tenant or the interruption of or damage to Tenant's business, provided such award does not otherwise diminish Landlord's award. 13.3 Partial Condemnation. In the event of a partial condemnation or other taking in any manner for public or quasi-public use that does not result in a termination of this Lease as to the entire Premises, the Basic Rent and Additional Rent shall abate in proportion to the portion of the Premises taken by such condemnation or other taking. It is understood and agreed that in the event of a partial condemnation, Landlord and Tenant will discuss in a reasonable businesslike manner, what space is useable for Tenant. 13.4 No Termination of Lease. If all or any portion of the Premises is condemned or otherwise taken for public or quasi-public use for a limited period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform all of the terms, conditions and covenants of this Lease, and Basic Rent and Additional Rent shall abate in proportion to the portion of the Premises taken during such temporary condemnation or other taking. It is understood and agreed that in the event of a partial condemnation, Landlord and Tenant will discuss in a reasonable businesslike manner, what space is useable for Tenant. 14. Assignment and Subletting 14.1 No Assignment or Subletting Permitted. Tenant shall not directly or indirectly, voluntarily or by operation of law, sell, assign, sublease, encumber, pledge or otherwise transfer or hypothecate all or any part of the Premises or Tenant's leasehold estate hereunder, without first obtaining Landlord's prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned. Notwithstanding the foregoing, a corporate reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986 shall not be considered an assignment or subletting within the meaning of this Section 14.1. Tenant agrees that any permitted assignment or subletting hereunder may be conditioned upon payment of consideration to be agreed upon by Landlord and Tenant. 14.2 Procedure for Assignment, Subletting. If Tenant desires at any time to assign, sublease or otherwise transfer the Premises or any portion thereof, it shall send a written notice to Landlord, which notice shall contain (a) the name of the proposed occupancy or subtenant, (b) the nature of the proposed occupant's or subtenant's business to be carried on in the Premises, (c) the portion(s) of the Premises to be subject to such assignment or sublease and the other terms and provisions of the proposed assignment or sublease, (d) such financial information as Landlord may reasonably request concerning the proposed occupant or subtenant, and (e) a true copy of a proposed assignment or sublease. 14.3 No Release of Tenant. No assignment or sublease by Tenant shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether arising before or after the assignment or sublease. Any assignment or sublease that is not in compliance with this Section 14 shall be void and, at the option of Landlord, shall constitute a default by Tenant under this Lease. 10 11 15. Building Services. 15.1 Standard Services. Landlord shall furnish reasonably adequate electrical power for all normal office machines and lighting, water and char services in a manner consistent with similar office buildings in Montgomery County without additional cost to Tenant. Landlord shall furnish hot and cold water at those points of supply provided for the general use of all of the tenants in the Building, as well as central heat and air-conditioning in season, at such time as Landlord normally furnishes these services to other tenants in the Building and at such temperatures and in such amounts as are considered by Landlord to be standard, Monday through Friday, from 8:30 A.M. to 6:00 P.M., and on Saturday from 9:00 A.M. to 1:00 P.M. or other such hours as Landlord may in its discretion broaden but not lessen, exclusive of Sundays and all Federally-designated and Maryland designated holidays which Landlord may choose to acknowledge during such seasons of the year when such services are normally and usually furnished in modern office buildings in the Washington, D.C. Metropolitan Area. Landlord shall provide routine maintenance, painting and electrical lighting service for all public areas and special service areas of the Building. In the event an air conditioner unit or units (in excess of Building Standard Improvements), for the purposes of cooling computers or other office machinery, are installed by Tenant, the operation of the unit(s) shall be under Tenant's control, and the maintenance costs shall be the obligation of Tenant. Failure by Landlord to any extent to furnish these defined services unless due to Landlord's gross negligence, or any cessation thereof, or delay thereof caused by breakdown, maintenance, repairs, strikes, scarcity of labor or materials, acts of God or from any other cause, shall not render Landlord liable in any respect for damages to either person or property, nor shall such events be construed an eviction of Tenant, nor work an abatement of Basic Rent or Additional Rent, nor relieve Tenant from the fulfillment of any term, condition, covenant or agreement contained in this Lease. Should any of the Building equipment or machinery break down, or for any cause or reason cease to function properly, Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no claim for rebate of Basic Rent or Additional Rent or for any damages on account of any interruptions in service occasioned thereby or resulting therefrom. Tenant shall furnish Landlord with a list of office equipment which shall become a part of this Lease and marked as Exhibit E. 15.2 Additional Services. Should Tenant require heating and cooling services beyond the hours and/or days stipulated in Section 15.1, provided Tenant gives Landlord notice of the nature and extent of additional services desired by 1:00 P.M. on any day it desires additional services in the evening, or by 1:00 P.M. on the Friday before it desires additional services on the succeeding Saturday or Sunday, or by 1:00 P.M. of the last normal business day preceding any holidays Landlord has indicated it will acknowledge, then, in any such event Landlord will furnish such additional services requested at $55.00 per hour; provided, further, that there will be a minimum charge of four (4) hours each time overtime services are required. 16. Default; Remedies 16.1 Events of Default. The following shall constitute an event of default under this Lease: (a) The failure to pay any amount of Basic Rent or Additional Rent in full within five (5) business days after the same is due. However, Landlord shall waive the late charge set forth herein for the first two (2) late payments during each Lease Year of the term of this Lease, provided that such payments shall be made within Ten (10) days of written notice to Tenant to such lateness. (b) The failure to perform or honor any other covenant or condition made under this Lease, provided Tenant shall have a grace period of ten (10) days from the date of written notice from Landlord within which to cure any such failure governed by this subparagraph but not specifically by the other subparagraphs of this Section 16-1; provided however, that with respect to any such default, that cannot reasonably be cured within such ten (10) day grace period, Tenant shall not be deemed in default if Tenant commences to cure within ten (10) days from Landlord's notice and continues to prosecute diligently the curing thereof to completion within a reasonable time; and provided, further, that if any such failures which would be deemed defaults hereunder upon expiration of such grace period occur more often that twice in any twelve month period, the foregoing requirements of written notice and a grace period shall be deemed waived with respect to any such subsequent failures for the remainder of the Term. (c) If any representation or warranty made by Tenant, or others on behalf of Tenant, under or pursuant to the Lease shall prove to have been false or misleading in any material respect (including by way of material omissions) as of the date on which such representation or warranty was made. (d) If Tenant makes or consents to an assignment for the benefit of creditors or a common law composition of creditors, or a receiver of Tenant's assets is appointed, or Tenant files a voluntary petition in any bankruptcy or insolvency proceeding, or an involuntary petition in bankruptcy or insolvency proceeding is filed against Tenant and not discharged or dismissed within thirty (30) days, or Tenant is adjudicated bankruptcy or admits in writing its inability to pay its debts or that it is insolvent. (e) Unless adequately covered by insurance in the reasonable opinion of the Landlord, the entry of a final judgment for the payment of money in excess of $50,000.00 against the Tenant and the failure by the Tenant to discharge the same, or cause it to be discharged, or bonded off to the Landlord's satisfaction, within thirty (30) days from the date of the order, decree or process under which or pursuant to which such judgment was entered. 11 12 (f) If Tenant shall dissolve or liquidate, and such dissolution or liquidation is not in connection with a reorganization, merger or consolidation approved in writing by Landlord. 16.2 Landlord's Remedies. Upon the occurrence of an Event of Default which is not cured by Tenant within the grace periods specified in Section 16.1 hereof, Landlord shall have the following rights and remedies in addition to all other rights or remedies available to Landlord in law or equity: (a) Landlord may terminate this Lease by notice to Tenant (and Tenant hereby expressly waives any other or additional notice to quit or notice of Landlord's intention to re-enter), whereupon this Lease and the Term shall terminate, Tenant shall quit, vacate and surrender the Premises and all amounts accrued and unpaid Basic rent and Additional Rent shall be due and payable in full. (b) Upon any termination of this Lease pursuant to Section 16.2(a) or Section 17, Landlord may (i) proceed to re-enter the Premises and recover possession thereof; (ii) as attorney-in-fact for Tenant, remove therefrom all persons and Tenant's Property, store such Tenant's Property in a public warehouse or elsewhere at the cost, and for the account, of Tenant, sell such Tenant's Property and apply the proceeds thereof to payment of Tenant's obligations and liabilities under this Lease, and hold the balance of such proceeds, if any, in trust for Tenant; (iii) restore the Premises to good order and repair or otherwise prepare the Premises for reletting by making such alterations, repairs or replacements in the Premises as Landlord, in its reasonable discretion deems necessary or appropriate; and (iv) relet the Premises for such rent, for such term (which may be longer or shorter than the Term originally reserved hereunder) and upon such other terms and conditions as are not unreasonable under the circumstances. Tenant shall be liable for all damages sustained by Landlord in connection with such termination of this Lease, including without limitation the excess of the aggregate amounts of Basic Rent and Additional Rent reserved under this Lease for the Term originally reserved hereunder over net amounts actually realized in reletting the Premises, reasonable attorneys' fees, brokerage commissions and the costs and expenses of recovering possession of the Premises and restoring the Premises to first class condition for reletting. Any such damages may, at Landlord's election, be recovered in one or more actions upon termination of the Term, at the time of any initial reletting or from time to time as such damages may become more easily ascertainable by successive relettings. In no event shall Landlord be liable for any failure to relet the Premises or for any failure to collect any amounts due on account of relettings and in no event shall Tenant have any right to any excess of amounts received by Landlord on account of relettings over amounts which Tenant may be liable hereunder. (c) Landlord may elect not to terminate this Lease but to recover the Basic Rent and Additional Rent accruing hereunder in one or more actions as the same become due or, in advance, the present value of Basic rent and Additional Rent to become due hereunder, discounted by a factor of eight percent (8%) per annum; or, as attorney-in-fact for Tenant, Landlord may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the Term) and at such rent and such other terms as Landlord in its reasonable discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each such subletting (i) Tenant shall be immediately liable for payment to Landlord of, in addition to Basic Rent and Additional Rent due hereunder, the cost of such subletting and such alterations and repairs incurred by landlord and the amount, if any, by which the Basic Rent and Additional Rent for the period of such subletting (to the extent such period does not exceed the Term) exceeds the amount to be paid as Basic Rent and Additional Rent for the Premises for such period, or (ii) at the option of Landlord, rents received from such subletting shall be applied, first, to payment of any indebtedness other than Basic Rent and Additional Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third, to payment of Basic Rent and Additional Rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future Basic Rent and Additional Rent as the same become due hereunder. If Tenant has been credited with any rent to be received by such subletting under clause (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under clause (ii) during any month are less than those to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No subletting of the Premises by Landlord, as attorney-in-fact for Tenant, shall be construed as an election on its part to terminate this Lease unless a notice of such termination is given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach; and (d) Landlord may have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord as attorney-in-fact for Tenant pursuant to Section 16.2(b) hereof. (e) Tenant hereby expressly and unconditionally waives, in connection with any suit, action or proceeding brought by Landlord under this Lease, any and every right it may have to (i) injunctive relief, (ii) a trial by jury, (iii) interpose any counterclaim therein, unless required by the Rules of Procedure and (iv) have the same consolidated with any other or separate suit, action or proceeding, unless required by the Rules of Procedure. Nothing herein contained shall prevent or prohibit Tenant from instituting or maintaining a separate action against Landlord with respect to any asserted claim. 12 13 17. Insolvency or Bankruptcy. Upon the appointment of a receiver to take possession of all or substantially all of the assets of Tenant, or an assignment by Tenant for the benefit of creditors, or any action taken or suffered by Tenant under any insolvency, bankruptcy, reorganization, moratorium or other debtor relief act or statute, whether now existing or hereafter amended or enacted, this Lease shall automatically terminate without notice or other action by Landlord or Tenant; provided further, that Landlord shall have the right, within thirty (30) days after Landlord has actual knowledge of the events effecting such termination, to revoke such termination and reinstate this Lease retroactively to the date of such termination. Upon, and at any time after, such termination, Landlord shall have the right to exercise the remedies reserved under Section 16.2(b). In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency, reorganization or other debtor relief proceedings. 18. Fees and Expenses; Indemnity; Liability Insurance 18.1 Performance by Landlord. If Tenant shall default in the performance of its obligations under this Lease, Landlord, at any time thereafter and with reasonable notice, may remedy such default for Tenant's account and at Tenant's expense, without thereby waiving any other rights or remedies of Landlord with respect to such default. 18.2 Indemnification by Tenant. Tenant agrees to indemnify Landlord, its employees, agents, contractors, mortgagees and successors in interest against and save Landlord, its employees, agents, contractors, mortgagees and successors in interest harmless from any and all loss, cost, liability, damage and expense including, without limitation, penalties, fires and reasonable counsel fees, incurred in connection with or arising from any cause whatsoever in, on or about the Premises, including, without limiting the generality of the foregoing (a) any default by Tenant in the observance or performance of any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, or (b) the use or occupancy or manner of use or occupancy of the Premises by Tenant or any person or entity claiming through or under Tenant, of (c) the condition of the Premises or any occurrence or happening on the Premises from any cause whatsoever, unless caused by Landlord's gross negligence, or (d) any acts, omissions or negligence of Tenant or any person or entity claiming through or under Tenant, or of the contractors, agents, servants, employees, visitors or licensees of Tenant or any such person or entity, in, on or about the Premises or the Building, either prior to, during, or after the expiration of the Term, including without limitation, any acts, omissions or negligence in the making or performing of any Alterations. Tenant further agrees to indemnify and save harmless Landlord, Landlord's agents, and the lessor or lessors under all ground or underlying leases, from and against any and all loss, cost, liability, damage and expense including, without limitation, reasonable counsel fees, incurred in connection with or arising from any claims by any persons by reason of injury to persons or damage to property occasioned by any use, occupancy, condition, occurrence, happening, act, omission or negligence referred to in the preceding sentence. 18.3 Liability Insurance. Tenant shall procure at its cost and expense and keep in effect during the Term comprehensive general liability insurance including contractual liability naming Landlord as an additional insured thereunder, with a minimum combined single limit of liability of One Million Dollars ($1,000,000.00). Such insurance shall specifically include the liability assumed hereunder by Tenant (provided that the amount of such insurance shall not be construed to limit the liability of Tenant hereunder), and shall provide that it is primary insurance, and not excess over or contributory with any other valid, existing and applicable insurance in force for or on behalf of Landlord, and shall provide that Landlord shall receive thirty (30) days' written notice from the insurer prior to any cancellation or change of coverage. 18.4 Delivery of Policies. Tenant shall deliver policies of all required insurance, or certificates thereof, to Landlord on or before the Lease Commencement Date, and thereafter at least thirty (30) days before the expiration dates of expiring policies. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at its option, after reasonable notice to Tenant, procure same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent within five (5) days after delivery to Tenant of bills therefor. Tenant's compliance with the provisions of this Section 18.4 shall in no way limit Tenant's liability under any of the other provisions of this Section. 18.5 Landlord Not Liable. Landlord shall not be responsible for or liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises or any part of the premises adjacent to or connection with the Premises or any part of the Building or of third parties either legally or illegally within the Premises or the Building or for any loss or damage resulting to Tenant or its property from burst, stopped or leaking water, gas, sewer or steam pipes or for any damage or loss or property within the Premises from any causes whatsoever, including theft or vandalism, unless caused by Landlord's gross negligence. 13 14 18.6 Payment by Tenant. Except as specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, within five (5) days after notice by Landlord to tenant of the amount thereof: (a) sums equal to all expenditures made and monetary obligations incurred by Landlord including, without limitation, expenditures made and obligations incurred for reasonable counsel fees, in connection with the remedying by Landlord for Tenant's account pursuant to the provisions of Section 18.1 hereof; (b) sums equal to all losses, costs, liabilities, damages and expenses referred to in Section 18.2 hereof; and (c) sums equal to all expenditures made and monetary obligations incurred by Landlord, including, without limitation, expenditures made and obligations incurred for reasonable counsel fees, in collecting or attempting to collect the Basic Rent, Additional Rent or any other sum of money accruing under this Lease or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, if Landlord prevails. Any sum of money (other than Basic Rent) accruing from Tenant to Landlord pursuant to any provision of this Lease, whether prior to or after the Lease Commencement Date, may, at Landlord's option, be deemed Additional Rent. Tenant's obligations under this 18.6 shall survive the expiration or earlier termination of the Term. 19. Access to Premises; Landlord's Right to Enter. Landlord reserves and shall have the right to enter the Premises at all reasonable times with Landlord providing forty-eight (48) hours advance notice to Tenant, except in the case of an emergency, and Landlord will to the extent possible, make a diligent effort not to inconvenience Tenant to respect same, to show the Premises to prospective purchasers, mortgagees or tenants, to post notices of nonresponsibility, and to alter, improve or repair the Premises, adjacent premises and any other portion of the Building or any systems serving any of the same, without abatement of Basic Rent or Additional Rent, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures in and through the Premises where reasonably required by the character of the work to be performed; provided that the entrance to the Premises shall not be blocked thereby. Landlord and its agents shall also have unrestricted access to the Premises at any time in the event of an emergency, without abatement of Basic Rent or Additional Rent. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes, or special security areas (designated as such by Tenant in advance), and Landlord shall have the right to use any and all means that Landlord may deem necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the Premises, and any entry to the Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time, without same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor, to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets and other public parts of the Building. 20. Waiver, Release 20.1 No Waiver. No failure by Landlord to insist upon the strict performance of any obligation of Tenant under this Lease or to exercise any right, power or remedy consequent upon a breach thereof, no acceptance of full or partial Basic rent or Additional Rent during the continuance of any such breach, and no acceptance of the keys to or possession of the Premises prior to the termination of the Term by any employee of Landlord shall constitute a waiver of any such breach or of such term, covenant or condition or operate as a surrender of this Lease. No payment by Tenant or receipt by Landlord or a lesser amount than the aggregate of all Basic Rent and Additional Rent then due under this Lease shall be deemed to be other than on account of the first items of such Basic Rent and Additional Rent then accruing or becoming due, unless Landlord elects otherwise; and no endorsement or statement on any check and no letter accompanying any check or other payment of Basic Rent or Additional Rent in any such lesser amount and no acceptance of any such check or other such payment by Landlord shall constitute an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Basic Rent or Additional Rent or to pursue any other legal remedy. 20.2 Modifications in Writing. Neither this Lease nor any term or provision hereof may be changed, waived, discharged or terminated orally, and no breach thereof shall be waived, altered or modified, except by a written instrument signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. No waiver of any breach shall affect or alter this Lease, but each and every term, covenant and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. 14 15 21. Tenant's Certificates. Tenant, at any time and from time to time upon not less than fifteen (15) days' prior written notice from Landlord, will execute, acknowledge and deliver to Landlord and, at Landlord's request, to any prospective purchaser, ground or underlying lessor or mortgagee of any part of the Building and Real Property, a certificate of Tenant stating: (a) that Tenant has accepted the Premises (or, if Tenant has not done so, that Tenant has not accepted the Premises and specifying the reasons therefor), (b) the Commencement and Term Expiration Dates of this Lease, (c) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that same is in full force and effect as modified and stating the modifications), (d) whether or not there are then existing any defenses against the enforcement of any of the obligations of Tenant under this Lease (and, if so, specifying same), (f) the dates, if any, to which the Basic Rent and Additional Rent and other charges under this Lease have been paid, including but not limited to current financial statements for Tenant (and any Guarantors of Tenant's obligation hereunder), which is a condition of Landlord's loan documents and may be required in writing by Landlord's lender. If any documents are requested from Tenant that are considered to be confidential or proprietary in nature, Landlord and its lenders will keep such information private. It is intended that any such certificate of Tenant delivered pursuant to this Section 21 may be relied upon by Landlord and any prospective purchaser, ground or underlying lessor or mortgagee of any part of the Real Property. 22. Rules and Regulations. Tenant, its agents, employees, invitees, licensees, customers, clients and guests shall at all times faithfully observe and comply with the reasonable rules and regulations attached hereto as Exhibit C, and such other reasonable rules and regulations as may be promulgated from time to time by Landlord, and all modifications thereof and additions thereto, from time to time, put into effect by Landlord. Landlord shall not be responsible for the nonperformance by any other tenant or occupant of the Building of any said rules and regulations. In the event of an express and direct conflict between the terms, covenants, agreements and conditions of this Lease and the terms, covenants, agreements and conditions of such rules and regulations, as modified and amended from time to time by Landlord, this Lease shall control. 23. Tax on Tenant's Personal Property. At least ten (10) days prior to delinquency, Tenant shall pay all taxes levied or assessed upon Tenant's equipment, furniture, fixtures and other personal property located in or about the Premises. If the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon Tenant's equipment, furniture, fixtures or other personal property, Tenant shall pay to Landlord, upon demand and proof, the taxes so levied against Landlord, or the portion thereof resulting from said increase in assessment. 24. Authority. The persons executing this Lease on behalf of Tenant hereby covenant and warrant that Tenant is a duly authorized and existing entity, that Tenant has and is qualified to do business in the State of Maryland and Delaware, that Tenant has full right and authority to enter into this Lease, and each person signing on behalf of Tenant is authorized to do so. Upon Landlord's request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties. 25. Signage. At no cost to Tenant, Tenant shall be allowed one listing in the directory for the Building in the main entrance lobby and lettering on the main entry door to the Premises, as approved by Landlord. No other sign, advertising or notice shall be inscribed, affixed or displayed on any part of the outside or inside or the Building, unless such sign specifications and location are approved in writing in advance by Landlord. If any sign, advertisement or notice is improperly exhibited Landlord shall have the right to remove the same, and Tenant shall be liable for any and all expenses incurred by Landlord in such removal. 26. Parking. Tenant's shall have the right without charge to use the parking facilities of the Building. Tenants use of such facilities shall be in common with other tenants or occupants of the Building and their respective licensees and permitees and Tenant shall not be entitled to assigned parking spaces. In any event, Tenant's use of the parking facilities shall be in accordance with the rules and regulations of Landlord or any operator of such facilities in effect from time to time. The parking facilities shall be lighted during evening hours. Tenant shall be allowed the use of 70 parking spaces. Landlord has the right to restrict the use of the parking area to this number. 27. Miscellaneous 27.1 Notices. Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests or other communications given or required to be given under this Lease shall be effective only if rendered or given in writing, sent by mail or delivered personally as follows: to Tenant: Cryomedical Sciences, Inc. 1300 Piccard Drive Suite 102 Rockville, MD 20850 Attention: J.J. Finkelstein to Landlord: Ward Corporation 1300 Piccard Drive Rockville, MD 20850 Attention: Richard E. Ward 15 16 or to such other address as either Landlord or Tenant may designate as its new address for such purpose by notice to the other in accordance with the provisions of this Section. Any such bill, statement notice, demand, request or other communication shall be deemed to have been rendered or given two (2) days after the date when it shall have been mailed as provided in this Section if sent by registered or certified mail, or upon the date personal delivery is made. If Tenant is notified of the identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee or ground or underlying lessor notice of any default by Landlord under the terms of this Lease in writing sent by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given a reasonable opportunity to cure such default prior to Tenant's exercising any remedy available to it. 27.2 Interpretation. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. The words used in the neuter gender include the masculine and the feminine. The captions preceding the articles of this Lease have been inserted solely as a matter of convenience and such captions in no way define or limit the scope or intent of any provision of this Lease. 27.3 Successors and Assigns. The terms, covenants and conditions contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided herein, their respective personal representatives and successors and assigns; provided, however, upon the sale, assignment or transfer by the Landlord named herein (or by any subsequent landlord) of its interest in the building as owner or lessee, including any transfer by operation of law, the Landlord (or subsequent landlord) shall be relieved from all subsequent obligations or liabilities under this Lease, and all obligations subsequent to such sale, assignment or transfer (but not any obligations or liabilities that have accrued prior to the date of such sale, assignment or transfer) shall be binding upon the grantee, assignee or other transferee of such interest, and any such grantee, assignee or transferee, by accepting such interest, shall be deemed to have assumed such subsequent obligations and liabilities. 27.4 Severability. If any provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provisions to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and be enforced to the full extent permitted by law. 27.5 Applicable Law. This Lease shall be construed and enforced in accordance with the laws of the State of Maryland. 27.6 No Option to Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 27.7 Entire Agreement. This instrument, including the Exhibits hereto, which are made a part of this Lease, contains the entire agreement between the parties and all prior negotiations and agreements are merged herein. Neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises, the Building, the Real Property or this Lease except as expressly set forth herein, and no rights, easements or licenses are or shall be acquired by Tenant by implication or otherwise unless expressly set forth herein. 27.8 Inspection by Landlord. The review, approval, inspection or examination by Landlord of any item to be reviewed, approved, inspected or examined by Landlord under the terms of this Lease or the Exhibits attached hereto shall not constitute the assumption of any responsibility by Landlord for either the accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use. Any such review, approval, inspection or examination by Landlord is for the sole purpose of protecting Landlord's interests in the Building and under this Lease, and no third parties, including, without limitation, Tenant or any person or entity claiming through or under Tenant, or the contractors, agents, servants, employees, visitors or licensees of Tenant or any such person or entity, shall have any rights hereunder. 27.9 Legal Fees Paid by Prevailing Party. In the event that either Landlord or Tenant fails to perform any of its obligations under this Lease or in the event a dispute arises concerning the meaning or interpretation of any provision of this Lease, the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable counsel fees. 27.10 Surrender of Premises. Upon the expiration or sooner termination of the Term, Tenant will quietly and peacefully surrender to Landlord the Premises in the condition in which they are required to be kept as provided hereunder, ordinary wear and tear excepted. 27.11 Quiet Enjoyment. Upon Tenant paying the Basic Rent and Additional Rent and performing all of Tenant's obligations under this Lease, Tenant may peacefully and quietly enjoy the Premises during the Term as against all persons or entities lawfully claiming by or through Landlord; subject, however, to the provisions of this Lease and to any mortgages, ground or underlying lease referred to herein. 16 17 27.12 No Reduction in Rent. Tenant covenants and agrees that no diminution of light, air or view by any structure that my hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of Basic Rent or Additional Rent under this Lease, result in any liability of Landlord to Tenant, or in any other way affect this Lease or Tenant's obligations hereunder. 27.13 Holding Over by Tenant. Any holding over after the Term Expiration Date or the termination of the Term if sooner with the consent of Landlord shall be construed to be a tenancy from month to month at a rental equal to One Hundred Twenty-Five percent (125%) of the Basic Rent herein specified, together with an amount estimated by Landlord for the monthly Additional Rent payable under this Lease, and shall otherwise be on the terms and conditions herein specified so far as applicable. Any holding over without Landlord's consent shall constitute a default by Tenant and entitle Landlord to reenter the Premises as provided in Section 16 hereof. 27.14 Broker; Indemnification Therefor. Tenant warrants that they have not engaged any Broker with relation to this transaction, therefore no commission will be due. 27.15 No Recordation of Lease by Tenant. Tenant will not record this Lease or any memorandum or short form hereof, but at the request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord in proper form for recordation a memorandum of this Lease, setting forth the terms and provisions hereof in summary form. 27.16 No Merger of Estates. The fee title of Landlord and the leasehold estate of Tenant shall at all times be separate and apart, and shall in no event be merged, notwithstanding the fact that this Lease or the leasehold estate created hereby, or any interest in either thereof, may be held directly or indirectly by or for the account of any person who shall own the fee estate in the Premises or any portion thereof; and no such merger of estates shall occur by operation of law, or otherwise, unless and until all persons at the time having any interest in the fee estate and all persons having any interest in the Lease or the leasehold estate, including any mortgagee or leasehold mortgagee, shall join in the execution of a written instrument affecting such merger of estates. 27.17 Security Deposit. Simultaneously with the execution of this Lease, Landlord hereby acknowledges existence of previously deposited Security Deposit in the sum of Eighteen Thousand Seven Hundred Twenty-Seven and 00/100 Dollars ($18,727.00), as a security deposit for the performance by Tenant of the provisions of this Lease. Such deposit shall be considered as security for the payment and performance by Tenant of all Tenant's obligations, covenants, conditions and agreements under this Lease. In the event of any default by Tenant hereunder, landlord shall have the right, but shall not be obligated to apply all or any portion of the deposit to cure such default, in which event Tenant shall be obligated to promptly deposit with Landlord the amount necessary to restore the deposit to its original amount. If Tenant is not in default at the expiration of the Term, Landlord shall return the security deposit to Tenant. 27.18 Right to Relocate. Intentionally Deleted. 27.19 Additional Documents. This Lease includes and incorporates the Exhibits listed in the Table of Contents and the following additional documents, all of which are attached hereto and made a part hereof (check if applicable): ( ) First Addendum to Lease ( ) Guarantee of Lease ( X ) Other: Exhibit "A", "C" IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Agreement as of the day and year first above written. LANDLORD: TENANT: WARD CORPORATION CRYOMEDICAL SCIENCES, INC. By: /s/ RICHARD E. WARD By: /s/ J.J. FINKELSTEIN -------------------------- ------------------------- Richard E. Ward J.J. Finkelstein Its President Its President and CEO ATTEST: ATTEST: By: /s/ CARRIE W. ACCARDI By: /s/ THEODORE D. PENNINGTON -------------------------- ---------------------------- Carrie W. Accardi ______________, Its Secretary [Corporate Seal] [Corporate Seal] 17 18 [FIGURE 1] WARD BUILDING LOWER LEVEL 19 [FIGURE 2] WARD BUILDING FIRST FLOOR 20 EXHIBIT C RULES AND REGULATIONS Reference is made to a certain Lease dated May 1, 1994 to which these Rules and Regulations are attached. Definition of terms is set forth in the Lease. 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors, halls or other parts of the Building not occupied by any tenant shall not be obstructed or encumbered by any tenant or used for any purpose other than ingress and egress to and from the Premises. Landlord shall have the right to control and operate the public portions of the Building, and the facilities furnished for the common use of the tenants, in such manner as Landlord deems best for the benefit of the tenants generally. No tenant shall permit the visit to the Premises of persons in such numbers or under such conditions as to interfere with the use and enjoyment by other tenants of the entrances, passages, courts, elevators, vestibules, stairways, corridors, halls and other public portions or facilities of the Building. 2. No awnings or other projections shall be attached to the outside walls of the Building without the prior written consent of the Landlord. No drapes, blinds, shades or screens shall be attached to, hung in, or used in connection with any window or door of the Premises, without the prior written consent of the Landlord. Such awnings, projections, curtains, blinds, shades, screens or other fixtures must be of a quality, type, design and color, and attached in the manner approved by Landlord. 3. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any tenant on any part of the outside or inside of the Premises or the Building without the prior written consent of the Landlord. In the event of the violation of the foregoing by any tenant, Landlord may remove same without incurring any liability, and may charge the expense incurred by such removal to the tenant or tenants violating this rule. Interior signs on doors and directory tablets shall be inscribed, painted or affixed for each tenant by the Landlord at the expense of such tenant, and shall be of a size, color and style acceptable to the Landlord. 4. No showcases or other articles shall be put in front of or affixed to any part of the exterior of the Building, not placed in the halls, corridors or vestibules without the prior written consent of the Landlord. 5. The water, wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 6. There shall be no marking, painting, drilling into or in any way defacing any part of the Premises or the Building. No boring, cutting or stringing of wires shall be permitted. Tenant shall not construct, maintain, use or operate within the Premises or elsewhere within or on the outside of the Building, any electric device, wiring or apparatus in connection with a loud speaker system or other sound system. 1 21 7. No bicycles, vehicles or animals, except those small animals which may be used for experimental purposes, birds or pets of any kind shall be brought into or kept in or about the Premises, and no cooking shall be done or permitted by any tenant on said Premises. No tenant shall cause or permit any unusual or objectionable odors to be produced upon or permeate from the Premises. 9. No tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises of those having business with them, whether by the use of any musical instrument, radio, talking machine, unmusical noise, whistling, singing, or in any other way. No tenant shall throw anything out of the doors or windows or down the corridors or stairs. 10. No inflammable, combustible or explosive fluid, chemical or substance shall be brought or kept upon the Premises, unless approved within the building's I-3 zoning. 11. No additional locks or bolts of any kind shall be placed upon any of the doors, or windows by any tenant, nor shall any changes be made in existing locks or the mechanisms thereof. The doors leading to the corridors or main halls shall be kept closed except as they may be used for ingress or egress. Each tenant shall, upon the termination of his tenancy, restore to Landlord all keys of stores, offices, storage and toilet rooms either furnished to, or otherwise procured by such tenant, and in the event of the loss of any key, so furnished, such tenant shall pay to the Landlord the cost thereof. 12. All removals, or the carrying in or out of any safes, freight, furniture or bulky matter or any description must take place only at the loading dock during the hours which the Landlord or its agent may determine from time to time. There shall be no loading or unloading at the main entrance of the Building. The Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations or the Lease of which these Rules and Regulations are a part. 13. Any person employed by any tenant to do janitor work within the Premises must obtain Landlord's consent and such person shall, while in the Building and outside of said Premises, comply with all instructions issued by the Landlord, its agents or employees. 14. Intentionally Deleted. 15. The Landlord reserves the right to exclude from the Building at all times any person who is not known or does not property identify himself to any building management or watchman on duty. Each tenant shall be responsible for all persons from whom he authorizes entry into or exit out of the Building, and shall be liable to the Landlord for all acts of such persons. 16. The Premises shall not be used for lodging or sleeping or for any immoral or illegal purpose. 17. Each tenant, before closing and leaving the Premises at any time, shall see that all lights are turned off. 18. Canvassing, soliciting and peddling in the Building is 2 22 prohibited and each tenant shall cooperate to prevent the same. 20. There shall not be used in any space, or in the public halls of the Building, either by any tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. 21. Access plates to underfloor conduits shall be left exposed. Where carpet is installed, carpet shall be cut around access plates. 22. Mats, trash or other objects shall not be placed in the public corridors. 23. The tenant shall refer to the Building only by the name from time to time designated by the Landlord, and shall use such name only for the business address of the Premises and not for any promotional or other purposes. 24. Violation of these rules and regulations, or any amendments thereto, shall be sufficient cause for termination of this Lease at the option of the Landlord. 25. Landlord may, upon request by any tenant, waive the compliance by such tenant of any of the foregoing rules and regulations, provided that (i) no waiver shall be effective unless signed by Landlord or Landlord's authorized agent, (ii) any such waiver shall not relieve such tenant from the obligation to comply with such rule or regulation in the future unless expressly consented to by Landlord, (iii) no waiver granted to any tenant shall relieve any other tenant from the obligation of complying with the foregoing rules and regulations unless such other tenant has received a similar waiver in writing from Landlord, and (iv) any such waiver by Landlord shall not relieve tenant from any obligation or liability of tenant to Landlord pursuant to the Lease for any loss or damage occasioned as a result of tenant's failure to comply with any such rule or regulation. 3 23 ADDENDUM THIS ADDENDUM dated June 21, 1995 is incorporated in and made a part of the Lease dated May 1, 1995 (the "Lease") between Ward Corporation (the "Landlord") and Cryomedical Sciences, Inc. (the "Tenant") covering approximately Five Thousand Four Hundred Ninety-Six (5,496) square feet of rentable floor area on the first floor and Twenty Two Thousand One Hundred Twenty (22,120) square feet of rentable floor area on the lower level in Landlord's building known by the street address of 1300 Piccard Drive, Rockville, MD 20850, the provisions of this Addendum being as follows: NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto acknowledge that the Lease Agreement is amended as follows: 1. Section 1.9 of the Lease Agreement is hereby amended by adding the following sentence at the end thereof: "Effective June 15, 1995, the Premises shall contain an additional One Thousand One Hundred Fifty-One (1,151) square feet (hereinafter the "Additional Lease Space") of rentable floor area located on the Lower Level which space is shown on Exhibit "A-1", thereby causing the entire Leased Premises to contain a total of Twenty-Eight Thousand Seven Hundred Sixty-Seven (28,767) net rentable square feet." 2. Section 2.1 of the Lease Agreement is hereby amended by adding the following sentence at the end thereof: "Basic Rent for the Additional Lease Space (as defined in this Addendum) shall be Eight and 50/100 Dollars ($8.50). Such Additional Lease Space shall be subject to the same terms and conditions as outlined in the Lease. 3. Section 3.1(a) of the Lease Agreement is hereby amended by deleting the words "27,616 divided by 90,246 square feet or 31%" and substituting the following therefor: "28,767 divided by 90,246 square feet or 32%" 4. Except as expressly modified hereby, the terms and conditions of the Lease Agreement shall remain in full force and effect; provided however, that if any term or condition of the Lease Agreement conflicts with or is inconsistent with any term or condition of this Addendum, the terms and conditions of this Addendum shall prevail. IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum as of the __ day of __________, 1995. LANDLORD: TENANT: Ward Corporation Cryomedical Sciences, Inc. By: /s/ RICHARD E. WARD By: /s/ J.J. FINKELSTEIN ------------------------- ----------------------- Richard E. Ward J.J. Finkelstein, Its President Its President and CEO ATTEST: ATTEST: By: /s/ CARRIE W. ACCARDI By: /s/ T.D. PENNINGTON ------------------------- ----------------------- Carrie W. Accardi T.D. Pennington, Its Assistant Secretary [Corporate Seal] [Corporate Seal] EX-10.Y 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(y) EMPLOYMENT AGREEMENT made as of the 1st day of May, 1993, by and between CRYOMEDICAL SCIENCES, INC., a Delaware corporation (hereinafter referred to as the "Company"), and ZhaoHua Chang, Ph.D., residing at 19125 Hempstone Avenue, Poolesville, MD 20837 (hereinafter referred to as "Employee"). W I T N E S S E T H : WHEREAS, the Company desires to employ Employee, and Employee is willing to accept such employment, all on the terms and subject to the conditions hereinafter set forth, NOW, THEREFORE, in consideration of the terms and conditions hereinafter set forth, the parties hereto agree as follows: 1. Employment The Company hereby employs Employee, and Employee hereby accepts employment with the Company as Director of Developmental Engineering Research, and Senior Biomedical Research Engineer on the terms and conditions herein set forth. 2. Term of Agreement The term of this Agreement shall commence as of the date hereof and shall continue for a period of three years, and shall thereafter be automatically renewed on each anniversary date of this Agreement for an additional one year period, unless the term of such employment shall be terminated sooner pursuant to the 1 2 express provisions hereof or be terminated by written notice by any party to the other within 90 days of any anniversary date of this Agreement that this Agreement shall not extend beyond such anniversary date (the "Term"). 3. Duties Effective upon the date hereof, Employee shall perform such functions as are normally carried out by the Director of Developmental Engineering Research in a business of the type in which the Company is engaged, including those functions specified in Schedule A hereto, and such other functions as the Chief Executive Officer or other executive officers shall from time to time reasonably determine in keeping with Employee's office and capacity. Employee's full time, energies and abilities shall be devoted exclusively to the Company's business pursuant to, and in accordance with, reasonable business policies and procedures, as fixed from time to time by the Chief Executive Officer or other executive officers of the Company. Employee covenants and agrees that he will faithfully adhere to and fulfill such policies as are established from time to time by the Chief Executive Officer or other executive officers of the Company. 4. Compensation 4.1 Subject to the provisions of Section 6 hereof, for the period from May 1, 1993 to April 30, 1994, Employee's annual salary shall be $80,000. On each anniversary date of this Agreement, Employee shall receive a minimum of a cost of living increase equal to the prior year's annual salary times the percentage increase 2 3 in the Consumer Price Index for All Urban Consumers, Washington D.C. for the 12 month period ended on December 31st immediately preceding such anniversary date. 4.2 The Company shall reimburse Employee within 30 days for all reasonable expenses incurred by Employee in connection with the performance of his duties to the Company hereunder for which Employee submits supporting vouchers. 4.3 Employee shall be entitled to family coverage under the Company's group medical and dental insurance plan, which shall become effective upon commencement of full-time employment with the Company. 4.4 Employee shall also be eligible, to the extent he qualifies, for any retirement, pension, life or other similar employee benefit plans which may be adopted by the Company for its employees. 4.5 Employee shall be entitled to a two-week paid vacation each year during the Term, to be taken at such time as is consistent with the needs of the Company. 5. Stock Options 5.1 As of April 19, 1993, Employee shall receive options to purchase an aggregate of 20,000 shares of common stock, par value $.001 per share, of the Company at a purchase price equal to $6.875 per share, the fair market value on the date thereof. The option shall be subject to and governed by such other terms and conditions as set forth in the respective option agreements. 6. Termination 3 4 The Term shall terminate upon the happening of any of the following events: 6.1 Automatically and without notice upon death of Employee during the Term; 6.2 Employee leaves the employ of the Company with or without the consent of the Company; 6.3 Upon written notice of termination from the Company to Employee, in the event that Employee becomes disabled, either totally or partially, for a period of 90 consecutive days or 120 days in any 150 day period, so that he is prevented from performing all or substantially all of his duties pursuant to this Agreement. For purposes of this Agreement, disability shall be defined as Employee's mental or physical inability to perform effectively the regular duties of his employment for the aforesaid periods of time; 6.4 Upon discharge of Employee, on written notice, by the Company's Chief Executive Officer on grounds of any of the following: conviction of a crime which would bear on Employee's character for employment as distinguished from a minor offense or minor traffic infraction; failure to carry out the reasonable policies of the Chief Executive Officer or other executive officers of the Company as they may relate to Employee's duties hereunder; persistent absenteeism; insubordination; alcohol or drug abuse; fraud, embezzlement or misappropriation of Company assets or the like; disloyal, dishonest or illegal conduct; or a default or material breach of any of the covenants made by Employee in this Agreement; 4 5 6.5 Upon notice as specified in Section 2 hereof. In the event any one of the foregoing events shall occur, the Company shall be obligated to pay to Employee the compensation due him under Section 4 hereof up to the date of termination only and Employee shall not be entitled to receive any additional compensation of any nature whatsoever. In the event this Agreement is terminated by the Company for a reason other than one of those set forth above, the Company shall be required to continue to pay Employee a salary for six months at the rate of Employee's salary immediately prior to the time of termination. Any compensation received by Employee from any employment which Employee takes on shall be utilized to mitigate payment required under this paragraph. 7. Notices All notices required or permitted to be given by either party hereunder shall be in writing and either delivered by hand or mailed by registered or certified mail, return receipt requested, to the other party at the address set forth above or such different address as may be given by notice as provided for herein (or, in the case of notice to Employee, at his then current residence or business address). Any notice mailed as provided above shall be deemed given three (3) days after the date of mailing or on the date of receipt, whichever is sooner. 5 6 8. Proprietary Information Simultaneously herewith, Employee is entering into a Proprietary Information and Inventions Agreement with the Company, the terms of which are included herein by reference and made a part hereof as Exhibit A, 9. Non-Competition 9.1 In view of the unique and valuable services it is expected Employee will render to the Company, Employee's knowledge of the business of the Company and proprietary information relating to the business of the Company and similar knowledge regarding the Company, which knowledge it is expected that Employee will obtain during the course of his employment with the Company and in consideration of the compensation to be received by Employee hereunder, Employee agrees that during the Term and for a period of three years immediately following the termination thereof (the Term and the subsequent three year period being hereinafter collectively referred to as the "Covenant Period"), he will not compete with the Company, or, directly or indirectly, own, manage, operate, control, loan money to, or participate in the ownership, operation or control of, or be connected with as a director, partner, consultant, agent, independent contractor or otherwise, or acquiesce in the use of his name in any other business or organization which is in competition with the Company in any geographical area in which the Company is then conducting business or any geographical area in which, to the knowledge of Employee at the time of cessation of employment, the Company plans to conduct business within three years from the date thereof; provided however, that Employee shall be permitted after the cessation of his 6 7 employment to own less than a 5% interest as a shareholder in any company which is listed on any national securities exchange even though it may be in competition with the Company. 9.2 Employee will not, during the Covenant Period, solicit or interfere with, or endeavor to entice away from the Company any of its employees or customers without the written consent of the Company. 9.3 Since a breach of the provisions of this Section 9 could not be adequately compensated by money damages and will cause irreparable injury to the Company, the Company shall be entitled, in addition to any other right or remedy available to it, to an injunction or restraining order restraining such breach or a threatened breach, and no bond or other security shall be required in connection therewith, and Employee hereby consents to the issuance of any such injunction or restraining order. Employee agrees that the provisions of this Section 9 are reasonable and necessary to protect the Company and its business. It is the desire and intent of the parties that the provisions of this Section 9 shall be enforced to the fullest extent permitted under the public policies and laws applied in each jurisdiction in which enforcement is sought. If any restriction contained in this Section 9 shall be deemed to be invalid, illegal or unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, geographical scope or other provision hereof and in its reduced form such restriction shall then be enforceable in the manner contemplated hereby. 7 8 10. Entire Agreement The provisions hereof (including the agreements being, or to be entered into, between the parties hereto as referred to herein) constitute the entire agreement between the parties with respect to the subject matter hereof and supersede any prior oral understanding, and no modification, supplement or discharge hereof shall be effective unless in writing and executed on behalf of the Company and Employee. 11. Waiver No waiver by either party of any condition, term or provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or of any other condition, term or provision hereof. 12. Assignability This Agreement and its rights and obligations may not be assigned by Employee. The Company may assign any of its rights and obligations hereunder to a successor or surviving corporation resulting from a merger, consolidation, sale of assets or stock, or other corporate reorganization, upon condition that the assignee shall assume, either expressly or by operation of law, all of the Company's obligations hereunder. 13. Counterparts This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8 9 14. Construction This Agreement shall be construed in accordance with the laws of the State of Maryland. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. /s/ ZhaoHua Chang ----------------------- ZhaoHua Chang, Ph.D. CRYOMEDICAL SCIENCES, INC. By: /s/ ------------------------ 10 SCHEDULE A Subject to the directions of the Board of Directors and the Chief Executive Officer of the Company, the functions of Employee shall include, but are not limited to, the following: - - Dr. Chang's official title is Senior Biomedical Research Engineer and Director of Developmental Engineering Research. He directs the day-to- day activities of the Research and Development staff of engineers, technicians, and machinists; organizes and procures the necessary materials for each project; coordinates the use of proprietary cryosurgical systems with cooperating surgical centers; and assists in the operation of new cryosurgical apparatuses during surgical procedures. Dr. Chang is also responsible for the promotion of these proprietary systems within the medical and scientific community which includes giving lectures at international conferences, obtaining patents, and publishing manuscripts. - - Dr. Chang regularly works with a variety of cryosurgical apparatuses and high-performance vacuum systems as well as with heat-transfer software and the MS DOS, Macintosh, and CAD-CAM computer systems. He has experience in differential scanning calorimetry, mass spectrometry, helium-leak detection, tissue cultures, and nuclear magnetic-resonance spectroscopy. EX-10.Z 5 MEMORANDUM OF UNDERSTANDING 1 EXHIBIT 10(z) CRYOMEDICAL SCIENCES, INC. SECURITIES LITIGATION MEMORANDUM OF UNDERSTANDING This Memorandum of Understanding ("MOU"), entered into as of September 15, 1995, contains the material terms of a settlement ("the Settlement"), between Cryomedical Sciences, Inc. and certain of its officers and directors (former and current) (collectively, "Defendants") and Plaintiffs in Cryomedical Sciences, Inc. Securities Litigation, C. A. No. AW 94-873 (D.Md.) ("the Action"). Defendants and Plaintiffs (collectively, "the Parties") will cooperate expeditiously and in good faith to prepare a Stipulation of Settlement and appropriate accompanying exhibits embodying this MOU. 1. The MOU is binding upon the Parties. 2. Plaintiffs will provide Defendants with a release of all claims arising out of, in connection with, or related to the Action. 3. In full settlement of all claims, Defendants will pay: (a) $100,000 (One Hundred Thousand Dollars) in cash. The cash payment by Defendants will be made into an escrow fund within five (5) business days from the date of this MOU to be governed in accordance with a standard escrow agreement for such settlement of class litigation. (b) Cryomedical Sciences, Inc. common stock with total value of $350,000. The number of shares of common stock shall be calculated based on the average closing price of Cryomedical common stock on the ten trading days prior to the date that the district court enters a Final Order of Dismissal in this action. The stock shall be transferred to an agent named by Plaintiffs' Counsel three business days after the district court enters a Final Order of Dismissal of this action, and shall be freely tradable immediately. In return, all claims will be dismissed with prejudice pursuant to appropriate order of the court. 4. This Settlement is contingent on approval by the court. If the Settlement is not approved, the Settlement funds shall be returned to Defendants (less the costs of notice actually incurred, up to a maximum amount of $30,000), and the proposed Settlement shall be without prejudice to any party. If the costs of notice exceed $30,000, the excess shall be the responsibility of plaintiffs' counsel in the event that the settlement is not approved by the Court. 2 5. All parties to bear their own costs, except as provided above. Class counsel's attorneys' fees and expenses, subject to court approval, shall be paid out of the Settlement proceeds. 6. The stipulation of settlement will contain a customary "quickpay" provision for attorneys' fees, subject to a mutually satisfactory undertaking by Berger & Montague, P.C. to repay such fees with interest if later modified or reversed. The quick pay provision shall provide that plaintiffs' counsel will be paid their awarded attorneys, fees and costs two days after entry of District Court orders approving the settlement and awarding counsel fees and costs. /s/ SHERRIE R. SAVETT /s/ DAVID CLARKE, JR. --------------------------- --------------------------- For Plaintiffs For Defendants 2 EX-23 6 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-80960 and Amendment No. 2 to Registration Statement No. 33-34076 of Cryomedical Sciences, Inc. and Subsidiary on Forms S-8 and Registration Statement No. 33-76078 of Cryomedical Sciences, Inc. and Subsidiary on Form S-3, of our report dated September 27, 1995, appearing in the Annual Report on Form 10-K of Cryomedical Sciences, Inc. and Subsidiary for the year ended June 30, 1995. We also consent to the reference to us under the heading "Experts" in the Prospectus, which is part of Registration Statement No. 33-76078 of Cryomedical Sciences, Inc. and Subsidiary on Form S-3. /s/ DELOITTE & TOUCHE LLP - ------------------------- Washington, D.C. October 11, 1995 EX-27 7 FINANCIAL DATA SCHEDULE
5 1 1 YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 1 1,117,383 100,310 3,256,241 78,209 2,628,532 7,322,241 2,072,144 1,010,209 8,402,903 3,896,348 0 24,846 0 0 3,607,079 8,402,903 12,558,891 13,594,186 4,959,675 5,761,998 9,962,015 78,209 22,690 (2,230,725) 0 (2,230,725) 0 0 0 (2,230,725) (.09) (.09)
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