-----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, Nh3Oo5LVlVyaEmwVvE/GWYwhQC84+4jqfQjw48J2/5rZ1/aW95chkNfcgyeL0Elq TP5/kSJBK5bsLxO8wE6A4g== 0000950133-97-001294.txt : 19971001 0000950133-97-001294.hdr.sgml : 19971001 ACCESSION NUMBER: 0000950133-97-001294 CONFORMED SUBMISSION TYPE: 10-KT PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970410 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRYOMEDICAL SCIENCES INC CENTRAL INDEX KEY: 0000834365 STANDARD INDUSTRIAL CLASSIFICATION: 3845 IRS NUMBER: 943076866 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-KT SEC ACT: SEC FILE NUMBER: 000-18170 FILM NUMBER: 97577852 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 FORM 10-K. 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- FORM 10-K (MARK ONE) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from July 1, 1996 to December 29, 1996 --------------------------------- 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, 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 March 12, 1997, the aggregate market value of voting stock held by nonaffiliates of the registrant was $12,276,276. As of March 12, 1997, there were 33,395,087 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 Company plans to utilize 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. On July 25, 1996, the Board of Directors of the Company authorized a change in the Company's fiscal year from a period beginning July 1 and ending on June 30 to a variable period ending on the Sunday nearest to December 31. Such change was made to make Cryomedical Sciences, Inc.'s year end consistent with its quarterly accounting periods which, in the case of 52-week years, consists of two four week and one five week periods per quarter ending on a Sunday. In addition to conforming the Company's yearly and quarterly accounting periods, the change in Cryomedical Sciences, Inc.'s fiscal year conforms to an annual reporting period more closely associated with the calendar year and, to the fiscal years utilized by a majority of the public companies in the sales and manufacturing industries. The Company completed initial development of the AccuProbe in 1992 and has marketed this system to hospitals, surgeons and radiologists in the United States and abroad. The first AccuProbe system was shipped to a customer in June 1992; 5 systems were sold, and an additional 5 systems were placed through rental or consignment loan agreements, during the six-month transition period ended December 29, 1996, 17 systems were sold in the fiscal year ended June 30, 1996, 41 systems were sold in the fiscal year ended June 30, 1995, and 46 systems were sold in fiscal year ended June 30, 1994. 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 $2,224,541, $6,843,950, $13,594,186, and $13,438,494 for the six-month period ended December 29, 1996, and the fiscal years ended June 30, 1996, 1995 and 1994, 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. Although the Solutions continue to be tested in laboratory settings, development 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. Currently, the Company expects to fund the development of the Solutions by utilizing funds secured through research grants pertaining to such purpose. The Company hopes to market the Solutions, if successfully developed, to hospitals, clinics, transplant centers, and surgeons in the United States and abroad. The total research and development expenses of the Company for the transition period ended December 29, 1996 were $492,794, and for the fiscal years ended June 30, 1996, 1995 and 1994, were $1,484,042, $2,899,686 and $2,506,349, 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. On December 19, 1996, the Company dissolved the CII subsidiary. Unless the context requires 2 3 otherwise, references to the Company include CII up to the date of dissolution. The Company's principal executive offices are located at 1300 Piccard Drive, 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) applied directly to the tissue to be destroyed. Some surgeons have commenced targeting diseased tissue in the fields of urology, general surgery, and gynecology by use of cryosurgery. 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 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 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. The backlog of orders at December 29, 1996 totaled $4,804,994, as compared to $5,116,359, $7,919,005 and $8,092,277 at June 30, 1996, 1995 and 1994, respectively. The Company expects that approximately 9% of the December 29, 1996 backlog will generate revenues during the fiscal year ending December 1997. The Company's backlog at December 29, 1996 included orders for 22 AccuProbe systems, approximately 6,200 single-use probes and extended warranties totaling over $500,000. These totals include a blanket order from a distributor with a balance at December 29, 1996 of 22 systems and approximately 6,200 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 30 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 and clinics for over 9,000 patients, including over 8,000 patients in the field of urology and over 1,100 patients in general surgery and other approved fields. 3 4 HYPOTHERMIC BLOOD SUBSTITUTE SOLUTIONS (HYPOTHERMOSOL(R)) BACKGROUND AND TECHNOLOGICAL OVERVIEW Lowering body temperature during certain surgical procedures helps to minimize the chance of damage to the patient's organs by reducing the patient's metabolic rate, thereby decreasing the patient's needs during surgery for oxygen and nutrients which normally flow through the blood. This is also true with respect to the preservation of individual organs and tissues to be used in transplant surgery during the interval between removal from the donor and transplant into the recipient. The Company is currently endeavoring to develop the Solutions for use in tissue and cell preservation, organ transplantation, bloodless surgery and other medical applications. Grant subsidized research and development activities with respect to development of the Solutions for cell and tissue preservation are taking place at Allegheny-Singer Research Institute ("ASRI"), a subsidiary of Allegheny Health Services, Pittsburgh Pennsylvania and State University of New York at Binghamton ("SUNY"). In view of the Company's emphasis on the marketing of the AccuProbe, 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 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 fluid is limited to low temperature applications because the Solutions do not carry sufficient oxygen to maintain organ integrity at warm temperatures. At lower temperatures, scientists have determined that human organs require less oxygen primarily because of the resulting reduced metabolism. 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 10oC, 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. 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 tissues (synthetic and natural) for transplantation. 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. The Company anticipates marketing the Solutions, if developed and approved, under the name Hypothermosol(R). 4 5 FUTURE PRODUCT DEVELOPMENT 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 related single-use products attain targeted levels and requisite funding is available. In this respect, in the transition period ended December 29, 1996, the Company expended approximately $2,474 on research and development efforts on the Solutions. Currently, the Company expects to fund the development of the Solutions by utilizing funds secured through research grants. Although the Company currently has secured research grants totalling over $150,000, a large portion of these research monies have already been expended on the development of Solutions and there can be no assurance that additional research grants can be secured in the future. The Company contemplates that a variety of applications of hypothermic blood substitutes or other products for use in hypothermic medical procedures could ultimately be developed from the Solutions. 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. The Company expects that any significant funding activities with respect to the Solutions would entail sales of equity securities, which there can be no assurance of achieving. RESEARCH PROJECT AGREEMENTS In August 1989, the Company entered into a Research Project Management Services Agreement with ASRI, pursuant to which ASRI agreed to conduct research on the Company's behalf on a project-by-project basis over a two-year period which period had been extended, by amendment, to June 30, 1995. At that time, the agreement was not renewed. 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 $2,095,670 through June 30, 1995, and an additional $52,285 was expended during the fiscal year ended June 30, 1996. The amount paid during fiscal year 1996 was in arrears for work completed at ASRI during the year ended June 30, 1995. During the transition period ended December 29, 1996, $2,474 was expended in relation to ASRI funding. ASRI's major project was with respect to the Solutions in connection with bloodless surgery and organ transplants. Other projects were 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. In August 1991, the Company entered into a Research Project Agreement with the SUNY, pursuant to which SUNY conducted research at its Center for Cryobiological Research in Binghamton, New York, with respect to the Solutions. The Company had agreed to fund SUNY with at least $363,675 to conduct research under this agreement, all of which had been expended through June 30, 1995. This agreement had been extended, by amendment, to August 31, 1995, and was renewed at that time for a one year term with no monetary commitment by the Company. As of December 29, 1996, the agreement has not been renewed. 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, Taiwan, and Republic of China. During the six-month period ended December 29, 1996, no new agreements were completed, although the Company is currently reviewing other opportunities. In addition, in November 1994, the Company entered into a distribution agreement with B&K Medical, A/S, of Copenhagen, Denmark. Under this agreement, B&K Medical, A/S, distributes the CMS AccuProbe cryosurgical system in seventeen European and Scandinavian countries. The Company may also 5 6 arrange with other third parties to market or distribute this or other products in the United States or other countries. 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 in cryosurgery through both in-house educational seminars and practical applications outside the Company's training facility. Sales of the AccuProbe are increasingly affected by the level of reimbursement by public and private insurers in connection with procedures in which the AccuProbe is utilized. The availability of consistent, uniform insurance reimbursement guidelines for hospitals and physicians is an important factor often considered by some potential customers when making a decision regarding the purchase of any new medical device, including the AccuProbe system. Reimbursement of hospitals and urologists by public and private insurers such as Medicare and Blue Cross and Blue Shield is a necessary part of gaining general acceptance for use of the AccuProbe for urological cryosurgery. Although no national payment guideline for urological cryosurgery have been established by Medicare's Health Care Financing Administration ("HCFA"), the Company was advised in October 1996 that HCFA is planning to put into effect its technology advisory committee's recommendation that a national noncoverage policy be adopted in regard to cryoablation of the prostate. It is the Company's understanding that HCFA is exploring the possibility of working with various agencies, including the American Urological Association, in setting up a nationwide randomized prospective clinical study to collect data on a comparative basis between cryosurgery and radiation therapies. The results of this study will provide the basis on which a future determination regarding Medicare reimbursement will be made. 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 uncertainty and added efforts required for the Company's customers or potential customers to secure payment has constrained sales and utilization of AccuProbe systems to a large degree and may continue to do so until 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 System by hospitals and physicians. Recently, the American Urological Association ("AUA") reversed a previous position by the organization classifying cryosurgery in the field of urology as an experimental or investigational type surgery. The AUA now terms the use of cryosurgery in urology as "one of the methods of management of adenocarcinoma of the prostate." All references to the procedure as experimental and investigational have been removed. This new position by the AUA may have positive influence on the Company's efforts towards reimbursement, but there can be no assurance in this regard. 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 three months. However, because the Company typically purchases components in advance in anticipation of future orders, the Company is generally able to deliver AccuProbe systems within 30 days of its receipt of an order, and single-use probes and other accessory products immediately upon receipt of an order. Although the Company generally uses standard parts and components for its products, certain components, such as liquid nitrogen dewars and probe tips, are currently available only from a limited number of sources. The Company does not have long-term agreements with all of these suppliers. To date, the Company has been able to obtain adequate supplies of such components in a timely manner from its existing sources. Although the Company believes it could develop alternative sources of supply for most of these components within a reasonable period of time, the inability to develop alternative sources, or a reduction or interruption in supply or a significant increase in the price of materials, parts or components, could materially and adversely affect the Company's results of operations. The Company also maintains an inventory of 6 7 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 (400 Series), thus allowing commercial marketing of the product. Any significant change or modification in the device could require additional review and clearance by the FDA. The nature and extent of regulation may differ with respect to other of the Company's products. 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 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. On April 1, 1994, the Company submitted an Investigational Device Exemption ("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 began a clinical study to determine the Warmer's ability to maintain normal urethral temperatures during general urological cryosurgeries. On June 23, 1995, the Company submitted a new 510(k) application for the Warmer, 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. Subsequently, in October 1995 the Company received 510(k) marketing clearance from the FDA for the Warmer and began marketing the product in the United States. 7 8 On August 2, 1995, the Company submitted to the FDA 510(k) premarket notification of two new models of the AccuProbe system (500 series). These represent evolutionary advances of the presently marketed AccuProbe, incorporating numerous technical refinements and improvements to facilitate improved manufacturability and serviceability. In December 1995, the Company received 510(k) marketing approval from the FDA for the new models of the AccuProbe system. On October 31, 1996, the Company submitted to the FDA 510(k) premarket notification of a new model of the AccuProbe System (the 600 series). The new device represents evolutionary advances of the currently marketed AccuProbe, incorporating numerous technical refinements. In March 1997, the Company received 510(k) marketing approval from the FDA for the 600 series model of the AccuProbe System and will continue to market it in accordance therewith in the fields currently cleared by FDA including: dermatology, general surgery, neurosurgery, thoracic surgery, ENT, gynecology, oncology, proctology, and urology. 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." The Company does not believe the FDA's position to be appropriate or practical. However, the Company agreed to modify its promotional materials in order to be in compliance with the Agency's request. The Company does not believe that the modifications to its promotional materials have had 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. The Company's AccuProbe is considered a medical device by the FDA. Because the AccuProbe is considered substantially equivalent to prior devices, the 510(k) premarket notification for the AccuProbe system was cleared by the FDA. In the event 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. Other medical products which may be developed by the Company will also undergo rigorous FDA review. Congress enacted legislation on June 10, 1993, providing that the Department of Health and Human Services (HHS) promulgate regulations defining the circumstances that constitute financial interest in a project that may create a bias for certain results. On June 28, 1994, the Public Health Service (PHS) published a Notice of Proposed Rulemaking which would require institutions that apply for research funding to ensure that the financial interests of investigators do not compromise the objectivity of such research. The proposed rules would apply to institutions applying for PHS grants or cooperative agreements for research and to any significant financial interest, including salary, consulting fees, equity interests such as stock or stock options, and patent rights, of an investigator responsible for the design, conduct or reporting of research. The proposed rules would require that all such significant financial interests be disclosed prior to applying for research funding, that disclosures be updated, records be maintained, and that institutions applying for such funding ensure that significant financial interests of investigators be managed, reduced or eliminated, including the divestiture of significant financial interests or the severance of relationships that create actual or potential conflicts. Such rules, if adopted, may impact any research funding the Company may obtain from the National Institutes of Health (NIH). Additionally, institutions in which Company-sponsored research is conducted may adopt similar rules, which could apply regardless of whether federal funding is involved. 8 9 On September 22, 1994, FDA published a similar proposed regulation requiring that the sponsor of any drug, biological or device submit information concerning the compensation to, and financial interests of, any clinical investigator conducting clinical studies involving human subjects or establishing bioavailability or bioequivalence, for marketing approval. Under FDA's proposed rule, sponsors would be required to submit a list of clinical investigators and make one of two alternative submissions for each investigator who is not a full-time employee of the sponsor at the time reports of clinical studies are submitted to FDA. The alternative submissions would be: (1) a certification that the clinical investigator has not entered into any financial arrangement with the sponsoring company whereby the value of compensation could be affected by the outcome of the study, that the investigator has not received significant payments of other sorts from the sponsor, such as grants, equipment, retainers or honoraria; and that the investigator does not have significant financial interests of any kind in the sponsor; or (2) disclosure of the specific financial arrangements made with the clinical investigator, the investigator's proprietary, patent and equity interests in the tested product and the sponsoring company, and a description of steps taken to minimize the potential for bias in data submitted in support of the marketing application. Both the PHS and FDA rules, if adopted, could require disclosure of, limit, or in some cases, prohibit equity ownership by individuals conducting research for the Company, including consultants, some of whom may have equity interests in the Company. Such rules, if adopted, could have the effect of limiting such research between the Company and individuals with equity interests in the Company. The FDA rules, if adopted, could also impact product review and approval, and in some cases, if the agency deems data are biased, FDA could require that a study be repeated. There can be no assurance that any required FDA or other regulatory approval will be granted or, if granted, will not be withdrawn. Governmental regulation may prevent or substantially delay the marketing of products, cause the Company to undertake costly procedures, and thereby furnish a competitive advantage to more substantially capitalized companies with which the Company may compete. In April and June 1996, the FDA performed a General Manufacturing Practices ("GMP") audit at the Company's manufacturing facility. The Company received a warning letter from the FDA for several deficiencies related to GMP for Medical Devices Regulations, as specified in Table 21, Code of Federal Regulations (CFR), Part 820. The Company responded to the warning letter in full within the stated time frame. On September 20, 1996 the Company received correspondence stating the Company had "adequately addressed their concerns stated in the Warning Letter." 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 was 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. 9 10 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 Solutions, and methods of use thereof. A related U.S. application was filed during 1994 and a United States patent issued in May 1996. Corresponding foreign applications were filed during the fiscal year ended June 30, 1996. The Company's Hypothermosol federal trademark application was allowed in 1995 and the registration was issued in May 1996. Hypothermosol is the name under which the Company will market, the Solutions products, if they are successfully developed. In total the Company owns ten issued U.S. patents and seven issued or allowed foreign patents. At least one additional pending U.S. patent application has been allowed or has been found to contain patentable subject matter. There can be no assurance that any additional patents will be granted. In addition, to the extent that any unique applications of the Company's technologies are developed by the Company's scientists, such applications or procedures may not be subject to any protection. There can also be no assurance that the Company will develop additional patentable processes or products or, if developed, that the Company would be able to obtain patents with respect thereto, or that others may not assert claims successfully with respect to such patents or patent applications. Furthermore, the Company might not be able to afford the expense of any litigation which might be necessary to enforce its rights under any patents it may obtain, and there can be no assurance that the Company would be successful in any such suit. There is also no assurance that the Company's proposed products will not infringe patents owned by others, licenses to which may not be available to the Company. The Company intends to rely to a large extent on the technological expertise of its scientific staff. There can be no assurance that others will not independently develop such technological expertise or otherwise obtain access to the Company's technological expertise. COMPETITION The medical products industry is highly competitive. Most of the Company's potential competitors have considerably greater financial, technical, marketing, and other resources than the Company. With respect to the 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 Endocare Incorporated and Frigitronics Incorporated, American companies; a German company, Erbe Incorporated and Candela Laser Corporation, an American company which distributes products manufactured by Spembly, an English company. The 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. 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 and doctors performing research as consultants, can be expected to publish in journals or otherwise publish information concerning applications of the Company's technology. If it were determined 10 11 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. 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 37 full-time employees at December 29, 1996, including four executive officers, five employees in research and development, 13 in operations (engineering and manufacturing), four in sales and marketing, seven in field service, and four in finance and administration. The Company has also retained three individuals as consultants. Two 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 25,442 square feet located in Rockville, Maryland. The Company rents these facilities under a five year lease commencing in May 1995. Rental expense for facilities for the transition period ended December 29, 1996 totaled $168,814. At December 29, 1996, the monthly rental was $27,397. 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 transition period ended December 29, 1996. ITEM 3. LEGAL PROCEEDINGS In November 1996, the Company filed suit against EndoCare, Inc., ("EndoCare") and ZhaoHua Chang in the Circuit Court for Montgomery County, Maryland (Case No. 161496). The lawsuit alleges, among other things that EndoCare misappropriated trade secrets of the Company, and that EndoCare tortiously interfered with the Company's contracts, its relationships with its employees, and the Company's contractual and potential business relationships with customers. The lawsuit, which contains six counts, also alleges that Dr. Chang and EndoCare engaged in unfair competition against the Company and civil conspiracy, and that Dr. Chang, who was formerly employed as a Vice President of Cryosurgical Engineering by the Company, breached contractual and fiduciary obligations owed to the Company by his employment by EndoCare, his retention and misuse of the Company's confidential information, and his improper solicitation of the Company's employees to disclose trade secret information and/or to become employed by EndoCare. EndoCare and Dr. Chang have denied the allegations in the lawsuit. In March 1997, Dr. Chang filed a counter-suit in the Circuit Court for Montgomery County, Maryland (Case No. 161496-V) regarding numerous claims of a breach of contract by the Company. The lawsuit is in the early stages of discovery. The Company intends to defend this case vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the transition period ended December 29, 1996. 11 12 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. From the period May 19, 1992 to November 21, 1996, the Common Stock has traded on the NASDAQ National Market System and on November 22, 1996, the Common Stock commenced trading on the NASDAQ SmallCap Market System. All corresponding prices represent high and low closing prices for the Common Stock for the periods indicated.
Price Range ----------- High Low ---- --- Quarter Ended: ------------- September 27, 1996 2 9/16 1 9/16 December 29, 1996 1 11/16 9/32 September 30, 1995 3 5/8 2 1/8 December 31, 1995 3 3/8 2 March 31, 1996 2 7/16 1 5/8 June 30, 1996 3 5/16 2 September 30, 1994 4 11/16 2 1/16 December 31, 1995 4 1/4 3 March 31, 1995 3 11/16 2 7/8 June 30, 1995 3 1/2 2
HOLDERS As of March 12, 1997, there were 1,203 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. 12 13 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data for the transition period and for each of the full fiscal years in the five year period ended June 30, 1996. The financial data has been derived from the Company's consolidated financial statements, included elsewhere in this report. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
Six Months Ended December 29, Year Ended June 30 ---------------- ----------------------------------------------------- (In Thousands, Except Per Share Data) 1996(1) 1996 1995 1994 1993 1992 ------- ---- ---- ---- ---- ---- Statement of Operations Data: Total Revenues $ 2,225 $ 6,844 $13,594 $13,438 $ 5,876 - Gross Profit (Loss) 1,164 3,080 7,832 6,310 1,029 (198) Loss from Operations (863) (3,414) (1,812) (2,658) (6,837) (5,027) Net Loss (840) (3,404) (2,231) (2,637) (6,588) (4,750) Per Share Data: Net Loss Per Share (0.03) (0.13) (0.09) (0.12) (0.29) (0.26) Balance Sheet Data (end of period): Working Capital 3,164 2,279 3,722 5,116 4,975 11,609 Total Assets 6,045 5,814 8,403 9,106 8,353 12,971 Long Term Notes Payable and Capital Lease Obligations 10 5 23 31 11 14 Accumulated Deficit 26,495 25,655 22,250 20,020 17,383 10,794 Stockholders' Equity 3,994 2,849 3,982 5,323 5,642 12,038
(1)Effective July 1996, the Company's year end was changed to the Sunday closest to December 31. Therefore, the Company's transition period 1996 ended on December 29, 1996. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, the Company completed the acquisition of CII and CII became a wholly-owned subsidiary of the Company. CII has been inactive since June 30, 1990, and was dissolved by the Company on December 19, 1996. On July 25, 1996, the Board of Directors of the Company authorized a change in the Company's fiscal year from a period beginning July 1 and ending on June 30 to a variable period ending on the Sunday nearest to December 31. Such change was made to make the Company's year end consistent with its quarterly accounting periods which, in the case of 52-week years, consists of two four week and one five week periods per quarter ending on a Sunday. In addition to conforming the Company's yearly and quarterly accounting periods, the change in the Company's fiscal year conforms to an annual reporting period more closely associated with the calendar year and, to the fiscal years utilized by a majority of the public companies in the sales and manufacturing industries. RESULTS OF OPERATIONS 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 had 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. SIX MONTHS ENDED DECEMBER 29, 1996 COMPARED WITH SIX MONTHS ENDED DECEMBER 31, 1995 Sales and other revenues for the six months ended December 29, 1996 totaled $2,224,541, compared to revenues of $3,682,150 for the comparable period of the prior year, a decrease of 40%. The decreased revenue 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 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. Although no national payment guidelines for urological cryosurgery have been established by Medicare's Health Care Financing Administration ("HCFA"), the Company was advised in October 1996 that HCFA is planning to put into effect its technology advisory committee's recommendation that a national noncoverage policy be adopted in regard to cryoablation of the prostate. It is the Company's understanding that HCFA is exploring the possibility of working with various agencies, including the American Urological Association, in setting up a nationwide randomized prospective clinical study to collect data on a comparative basis between cryosurgery and radiation therapies. The results of this study will provide the basis on which a future determination regarding Medicare reimbursement will be made. 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 uncertainty and added efforts 14 15 required for the Company's customers or potential customers to secure payment has constrained sales and utilization of AccuProbe systems to a large degree and may continue to do so until formal national coverage guidelines are established. In this respect, the number of single-use probes sold in the six months ended December 29, 1996 decreased 40% compared with the number of probes sold in the prior comparable six-month period. In addition, the cumulative number of systems sold since the introduction of the AccuProbe increased only 12% from 131 at December 31, 1995 to 147 at December 29, 1996. The Company believes such a reduced rate of AccuProbe System sales and probe usage is likely due to the lack of uniform medical insurance reimbursement policies. Changes in probe inventories maintained by hospitals 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) , commencing in May 1995 and continuing throughout 1996, the Company undertook certain actions to reduce expense levels. Such actions include staff reductions, a reduction in the amount of leased office space, reductions in the levels of research grants to outside facilities and reductions in other overhead expenses. The goal of these cost reduction measures is to reduce operating expenses to a level whereby the Company can achieve operating profits and a positive cash flow from operations, for which there can be no assurance of achieving. Gross profits for the six months ended December 29, 1996 totaled $1,164,380 or 52% of sales, compared to $2,042,474 or 55% of sales in the prior comparable period. Gross profits as a percentage of sales in the six-month period ended December 29, 1996 ranged from a low of 51% of sales in the quarter ended September 27, 1996 to a high of 52% of sales in the quarter ended December 29, 1996. Gross profits as a percent of sales increased during the six-month period ended December 29, 1996 as the product cost per AccuProbe System sold declined. The Company can give no assurance that there will be a stabilization in gross profits as a percent of sales during the year ending December 28, 1997. Research and development expenses for the six months ended December 29, 1996 totaled $492,794, a reduction of $213,111 (30%) compared to $705,905 for the prior comparable period. This decrease was primarily due to staff reductions and reductions in the levels of research grants. Sales and marketing expenses totaled $658,416 in the six months ended December 29, 1996, a reduction of $608,020 (48%) compared to $1,266,436 in the prior comparable period. This reduction was primarily a result of decreased staffing and a reduced participation at marketing and trade shows. General and administrative expenses for the six months ended December 29, 1996 totaled $875,965, a reduction of $201,945 (19%) compared to $1,077,910 in the prior comparable period. This reduction was due to staff reductions and reduced professional and consultants fees. As a result of the decreased gross profits, due to significantly lower revenues, which were more than offset in part by reduced costs and expenses in all departments, the Company sustained a decreased net loss of $840,132 for the six months ended December 29, 1996 compared to a net loss of $1,003,497 in the prior comparable period. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 Sales and other revenues for the fiscal year ended June 30, 1996 totaled $6,843,950, compared to revenues of $13,594,186 for the prior fiscal year. The decreased revenue 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. 15 16 Gross profits for the year ended June 30, 1996 totaled $3,079,828 or 45% of sales, compared to $7,832,188 or 58% of sales in the prior fiscal year. Gross profits as a percentage of sales in fiscal 1996 ranged from a low of 45% of sales in the quarter ended June 30, 1996 to a high of 56% of sales in the quarter ended December 31, 1995. Gross profits as a percent of sales decreased during fiscal 1996 as the number of AccuProbe Systems sold declined. The Company can give no assurance that there will be a stabilization in gross profits as a percent of sales during the year ending June 30, 1997. Research and development expenses for the fiscal year ended June 30, 1996 totaled $1,484,042, a reduction of $1,415,644 (49%) compared to $2,899,686 for the prior fiscal year. This decrease was primarily due to staff reductions and reductions in the levels of research grants. Sales and marketing expenses totaled $2,439,636 in the fiscal year ended June 30, 1996, a reduction of $1,283,532 (35%) compared to $3,723,168 in the prior fiscal year. This reduction was primarily as a result of decreased staffing and a reduced participation at marketing and trade shows. General and administrative expenses for the fiscal year ended June 30, 1996 totaled $2,570,604, a reduction of $450,262 (15%) compared to $3,020,866 in the prior fiscal year. This reduction was due to staff reductions and reduced professional and consultants fees. As a result of the decreased gross profits, due to significantly lower revenues, and offset in part by reduced costs and expenses in all departments, the Company sustained an increased net loss of $3,404,247 for the year ended June 30, 1996 compared to a net loss of $2,230,725 in the prior fiscal year. 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. 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. 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. 16 17 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. LIQUIDITY AND CAPITAL RESOURCES At December 29, 1996, the Company had cash, cash equivalents, and short-term investments totaling $1,879,393 and working capital of $3,164,304, as compared to $1,355,942 and $2,279,406 respectively, at June 30, 1996. The Company's working capital position increased from June 30, 1996 despite a six-month net loss of $840,132 due to the net proceeds of $1,924,935 obtained from the execution of a Reg "S" equity placement. On October 2, 1996 (the "Series D Preferred Stock Closing Date"), the Company consummated a private placement of 196 shares of Series D Convertible Preferred Stock (the "Series D Preferred Stock") pursuant to Regulation S promulgated under the Securities Act of 1933, as amended. The net proceeds of the offering totalled $1,924,935. Each share of Series D Preferred Stock was convertible into that number of shares of common Stock as determined by dividing $10,000 by a price equal to 82.5% of the average of the closing bid prices for the Common Stock for the five (5) trading days immediately preceding the date upon which the holder of the Series D Preferred Stock transmitted a conversion notice to the Company. The holders of the Series D Preferred Stock could convert one-third of their shares of Series D Preferred Stock commencing forty (40) days after the Series D Preferred Stock Closing Date, up to an additional one-third of the Series D Preferred Stock commencing seventy-five (75) days after the Series D Preferred Stock Closing Date, and the balance thereof commencing one hundred (100) days after the Series D Preferred Stock Closing Date. Any share of Series D Preferred Stock outstanding on October 2, 1998 automatically would be converted on the same basis as the holder of such shares of Series D Preferred Stock could convert such shares pursuant to the provisions set forth above. In November 1996, 969,695 shares of Common Stock of the Company were issued in accordance with the terms of the first conversion of the preferred stock offering. Subsequently, in January 1997, the second and third Preferred Stock conversions of the offering, representing the remaining 156 shares of Series D Preferred Stock converted into 5,763,400 shares of Common Stock, completing the offering. On January 16, 1996 (the "Series C Preferred Stock Closing Date"), the Company consummated a private placement of 40 shares of Series C Convertible Preferred Stock (the "Series C Preferred Stock"), pursuant to Regulation S promulgated under the Securities Act of 1933, as amended. The net proceeds of the offering totalled $1,910,000. Each share of Series C Preferred Stock was convertible into that number of shares of Common Stock as determined by dividing $50,000 by the Conversion Price. The Conversion Price was determined as follows: if the average of the closing bid prices for the Common Stock for the five (5) trading days immediately preceding the date upon which the holder of the Series C Preferred Stock transmitted a conversion notice to the Company (the "Average Bid Price") was $2.00 or less, then the Conversion Price equalled 82.5% of the Average Bid Price. If the Average Bid Price was $2.01 or more, then the Conversion Price equalled 80% of the Average Bid Price. The holders of the Series C Preferred Stock could convert up to one-half of their shares of Series C Preferred Stock commencing forty (40) days after the Series C Preferred Stock Closing Date, and the balance thereof commencing seventy-five (75) days after the Series C Preferred Stock Closing Date. Any share of Series C Preferred Stock outstanding on January 16, 1997 automatically would be converted on the same basis as the holder of such shares of Series C Preferred Stock could convert such shares pursuant to the provisions set forth above. 1,332,633 shares of Common Stock were issued pursuant to the provisions set forth above. Capital expenditures for leasehold improvements, furniture and equipment totaled $61,859 in the six months ended December 29, 1996, compared to $60,447 in the fiscal year ended June 30, 1996 and $317,240 in the fiscal year ended June 30, 1995. The Company has budgeted $105,000 for additional equipment and furniture in the year ending December 28, 1997. 17 18 The Company expects to incur expenditures over the next 12 months related to research, development, manufacturing and testing of its products, and for sales and marketing efforts and other operating expenses. The Company's management assumes that fiscal 1997 sales may be less than the level experienced in comparable periods of 1996 and 1995 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 and possibly additional equity financing to supplement working capital during fiscal 1997. 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 Auditors 19 Consolidated Balance Sheets 20 Consolidated Statements of Operations 21 Consolidated Statements of Cash Flows 22 Consolidated Statements of Changes in Stockholders' Equity 23 Notes to Consolidated Financial Statements 24
18 19 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 December 29, 1996, and June 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for the six month period ended December 29, 1996, and each of the three years in the period ended June 30, 1996. 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 December 29, 1996, and June 30, 1996 and 1995, and the results of their operations and their cash flows for the six month period ended December 29, 1996, and each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Washington, D.C. March 28, 1997 20 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 29, 1996 AND JUNE 30, 1996 AND 1995 - - --------------------------------------------------------------------------------
December 29, ASSETS 1996 June 30, 1996 June 30, 1995 - - ------ ----------- ------------- ------------- CURRENT ASSETS: Cash and cash equivalents $1,769,243 $1,250,871 $1,117,383 Short-term investments 110,150 105,071 100,310 Receivables - net of allowance for doubtful accounts of $246,908, $48,304 and $78,209 1,374,814 1,566,064 3,178,032 Inventories 1,691,301 1,736,925 2,574,826 Prepaid expenses and other 66,395 187,269 297,984 ---------- ---------- ---------- Total current assets 5,011,903 4,846,200 7,268,535 EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Less accumulated depreciation and amortization of $1,625,635, $1,408,503 and $1,010,209 1,014,114 948,688 1,115,641 OTHER ASSETS 18,727 18,727 18,727 ---------- ---------- ---------- $6,044,744 $5,813,615 $8,402,903 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - - ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $1,070,786 $1,635,140 $2,096,696 Accrued settlement of stockholder class action suit -- -- 100,000 Accrued vacation 94,947 120,233 177,831 Customer deposits 10,000 10,000 50,000 Deferred revenue 144,210 58,823 -- Warranty reserves 97,600 100,000 248,000 Extended warranties - current 420,350 624,575 842,738 Current portion of capital lease obligations and notes payable 9,706 18,023 31,083 ---------- ---------- ---------- Total current liabilities 1,847,599 2,566,794 3,546,348 EXTENDED WARRANTIES, net of current portion 97,338 231,212 848,286 DEFERRED RENT 105,524 161,546 3,690 CAPITAL LEASE OBLIGATIONS AND NOTES PAYABLE, net of current portion -- 4,632 22,654 ---------- ---------- ---------- Total liabilities 2,050,461 2,964,184 4,420,978 ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $ .001; authorized, 9,378,800, 9,379,000 and 9,379,000 shares, issued and outstanding, none -- -- -- Series D Convertible Preferred Stock, par value $.001 per share, liquidation value $10,000 per share, authorized 200, 0, 0; issued and outstanding 156, 0, 0. Common stock, par value $ .001; authorized, 50,000,000 shares; issued and outstanding, 27,849,745, 26,873,026 and 24,845,631 shares 27,850 26,873 24,846 Additional paid-in capital 30,483,765 28,520,203 26,248,915 Accumulated deficit (26,494,744) (25,654,612) (22,250,365) Unearned compensation (22,588) -- -- Notes receivable from officers, including accrued interest -- (43,033) (41,471) ---------- ---------- ---------- Total stockholders' equity 3,994,283 2,849,431 3,981,925 ---------- ---------- ---------- $6,044,744 $5,813,615 $8,402,903 ========== ========== ========== See notes to consolidated financial statements
20 21 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 29, 1996 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 - - --------------------------------------------------------------------------------
Six Months Ended Year Ended Year Ended Year Ended December 29, 1996 June 30, 1996 June 30, 1995 June 30, 1994 ----------------- ------------- ------------- ------------- REVENUES: Product Sales $ 1,631,936 $ 5,652,403 $11,775,112 $12,685,536 Services and Other 592,605 1,191,547 1,819,074 752,958 ----------- ----------- ----------- ----------- TOTAL REVENUES 2,224,541 6,843,950 13,594,186 13,438,494 COST OF SALES: Product Sales 763,890 3,131,440 4,959,675 6,379,351 Services and Other 296,271 632,682 802,323 749,346 ----------- ----------- ----------- ----------- TOTAL COST OF SALES 1,060,161 3,764,122 5,761,998 7,128,697 ----------- ----------- ----------- ----------- GROSS PROFIT 1,164,380 3,079,828 7,832,188 6,309,797 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Research and development 492,794 1,484,042 2,899,686 2,506,349 Sales and marketing 658,416 2,439,636 3,723,168 3,444,153 General and administrative 875,965 2,570,604 3,020,866 3,017,306 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 2,027,175 6,494,282 9,643,720 8,967,808 ----------- ----------- ----------- ----------- OPERATING LOSS (862,795) (3,414,454) (1,811,532) (2,658,011) SETTLEMENT OF STOCKHOLDER -- -- (450,000) -- CLASS ACTION SUIT INTEREST INCOME, NET OF INTEREST EXPENSE 22,663 10,207 30,807 21,209 ----------- ----------- ----------- ----------- NET LOSS $ (840,132) $(3,404,247) $(2,230,725) $(2,636,802) =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,850,325 25,277,944 24,705,564 22,795,088 =========== =========== =========== =========== NET LOSS PER SHARE $ (0.03) $ (0.13) $ (0.09) $ (0.12) =========== =========== =========== ===========
See notes to consolidated financial statements. 21 22 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 29, 1996 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 - - --------------------------------------------------------------------------------
Six Months Ended Year Ended Year Ended Year Ended December 29, 1996 June 30, 1996 June 30, 1995 June 30, 1994 ----------------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (840,132) $(3,404,247) $ (2,230,725) $ (2,636,802) ----------- ----------- ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 234,849 398,294 425,804 337,368 Provision for bad debt 231,908 30,000 72,827 126,607 Write-off of accounts receivable (30,000) -- -- -- Forgiveness of loan to officer 44,283 -- -- -- Write-off of fixed assets -- 29,023 -- -- Settlement cost for stockholder class action suit -- -- 450,000 -- Loss (gain) on disposal of fixed assets 3,797 -- (210) 10,696 Changes in assets and liabilities: (Increase) decrease in receivables (7,354) 1,581,968 (279,660) (504,021) (Increase) decrease in inventories (197,561) 637,984 (497,243) (869,424) Decrease (increase) in prepaid expenses and other assets 120,874 110,715 (6,953) (151,001) (Decrease) increase in warranty reserves (2,400) (148,000) 2,200 (36,200) (Decrease) increase in accounts payable, accrued expenses, accrued vacation, and deferred rent (573,223) (433,557) 282,817 234,269 Decrease in customer deposits -- (40,000) (10,000) (40,000) (Decrease) increase in extended warranties (338,099) (835,237) 248,903 887,812 ----------- ----------- ----------- ----------- Total Adjustments (512,926) 1,331,190 688,485 (3,894) ----------- ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (1,353,058) (2,073,057) (1,542,240) (2,640,696) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (110,150) -- (100,310) (97,424) Maturities (reinvestment) of short-term investments 105,071 (4,761) 97,424 1,094,548 Purchase of equipment (61,859) (60,447) (317,240) (218,612) ----------- ----------- ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (66,938) (65,208) (320,126) 778,512 ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in notes receivable from officers -- (1,562) (1,875) (1,875) Exercise of Employee Stock Options -- 326,304 -- -- Common stock issued for cash -- 1,910,000 111,042 122,140 Issuance of shares for employee stock purchase plan 13,433 37,011 -- -- Increase (decrease) in notes payable -- -- 14,125 (6,208) Reg "S" offering 1,924,935 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 1,938,368 2,271,753 553,282 2,311,867 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 518,372 133,488 (1,309,084) 449,683 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,250,871 1,117,383 2,426,467 1,976,784 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,769,243 $ 1,250,871 $ 1,117,383 $ 2,426,467 =========== =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 4,853 $ 15,392 $ 22,690 $ 13,482 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY: Capitalization of inventories into equipment $ 243,185 $ 199,917 $ 143,190 $ 99,286 =========== =========== =========== =========== Equipment purchased under financing $ -- $ -- $ 45,914 $ 32,000 =========== =========== =========== ===========
See notes to consolidated financial statements. 22 23 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 29, 1996 AND YEARS ENDED JUNE 30, 1996, 1995 AND 1994 - - --------------------------------------------------------------------------------
Common Stock Convertible Preferred Stock ------------ --------------------------- Additional Number of Number of Paid-In Accumulated Shares Amount Shares Amount Capital Deficit -------- ------ -------- ------ ------------ -------------- Balance, July 1, 1993 . . . . . . 22,486,509 $22,487 - $ - $ 23,040,292 $(17,382,838) 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 . . . - - - - - - Net loss . . . . . . . . . . . . - - - - - (2,636,802) ---------- ------- ---------- ------- ------------ ------------- Balance, June 30, 1994 . . . . . 24,427,009 24,427 - - 25,358,302 (20,019,640) 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 . . . - - - - - - 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) Exercise of stock options . . . . 503,134 503 - - 325,801 - Employee Stock Purchase Plan . . 16,079 16 - - 36,995 - Reg "S" offering of Convertible Preferred Stock net of offering costs - - 1,332,633 1,333 1,908,667 - Conversion of Convertible Preferred Stock from Reg "S" offering . . 1,332,633 1,333 (1,332,633) (1,333) - - Shareholder suit settlement . . . 175,549 175 - - (175) - Interest on loan to officer . . . - - - - - - Net loss . . . . . . . . . . . . - - - - - (3,404,247) ---------- ------- ---------- ------- ------------ ------------- Balance, June 30, 1996 . . . . . 26,873,026 26,873 - - 28,520,203 (25,654,612) Employee Stock Purchase Plan . . 7,024 7 - - 15,797 - Reg "S" offering of Convertible Preferred Stock net of offering costs - - 196 - 1,924,935 - Conversion of Convertible Preferred Stock from Reg "S" offering . . 969,695 970 (40) - (970) - Forgiveness of loan to officer . - - - - - - Issuance of Warrants . . . . . . - - - - 23,800 - Amortization of unearned compensation - - - - - - Net loss . . . . . . . . . . . . - - - - - (840,132) ---------- ------- ---------- ------- ------------ ------------- Balance, December 29, 1996 . . . 27,849,745 $27,850 156 $ - $ 30,483,765 $(26,494,744) ========== ======= ========== ======= ============ =============
Notes Receivable Unearned from Compensation Officers ------------ -------- Balance, July 1, 1993 . . . . . . $ - $ (37,721) Exercise of warrants, net of offering costs . . . . . - - Exercise of Class "A" Warrants, net of offering costs . . . . . - - Exercise of Class "B" Warrants, net of offering costs . . . . . - - Exercise of Private Placement Unit Purchase Options, net of offering costs . . . . . - - Conversion of 9% Series A redeemable convertible preferred stock at $.50 per share, net of offering costs . . . . . . . . - - Concurrent exercise of Unit Purchase Options and underlying Class A and Class B Warrants, net of offering costs - - Interest on loan to officer . . . - (1,875) Net loss . . . . . . . . . . . . - - --------- --------- Balance, June 30, 1994 . . . . . - (39,596) Exercise of warrants . . . . . . - - Exercise of stock options . . . . - - Employee Stock Purchase Plan . . - - Exercise of Unit Purchase Options and all underlying Class A and Class B Warrants . . . . . . . . . . . - - Interest on loan to officer . . . - (1,875) Increase from settlement of stockholder class action suit - - Net loss . . . . . . . . . . . . - - --------- --------- Balance, June 30, 1995 . . . . . - (41,471) Exercise of stock options . . . . - - Employee Stock Purchase Plan . . - - Reg "S" offering of Convertible Preferred Stock net of offering costs - - Conversion of Convertible Preferred Stock from Reg "S" offering . . - - Shareholder suit settlement . . . - - Interest on loan to officer . . . - (1,562) Net loss . . . . . . . . . . . . - - --------- --------- Balance, June 30, 1996 . . . . . - (43,033) Employee Stock Purchase Plan . . - - Reg "S" offering of Convertible Preferred Stock net of offering costs - - Conversion of Convertible Preferred Stock from Reg "S" offering . . - - Forgiveness of loan to officer . - 43,033 Issuance of Warrants . . . . . . (23,800) - Amortization of unearned compensation 1,212 - Net loss . . . . . . . . . . . . - - --------- --------- Balance, December 29, 1996 . . . $(22,588) $ - ========= =========
See notes to consolidated financial statements. 23 24 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE TRANSITION PERIOD ENDED DECEMBER 29, 1996 AND THE YEARS ENDED JUNE 30, 1996 AND 1995, AND 1994 - - -------------------------------------------------------------------------------- 1. GENERAL Cryomedical Sciences, Inc. ("CMS") is engaged in the research and development of products for use in the field of hypothermic (low-temperature) medicine by surgeons and radiologists in the United States and abroad. The Company is engaged in the development, manufacturing and marketing of cryosurgical devices used to freeze and destroy diseased tissue through the application of subfreezing temperatures 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. On August 31, 1989, the Company completed the acquisition of Cryo Instruments, Inc. ("CII"), and CII became a wholly owned subsidiary of the Company. On December 19, 1996, the Company dissolved the CII subsidiary. Since inception and through June 30, 1992, the Company was a development stage company which 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. The Company has experienced recurring operating losses and continuing negative cash flows from business activities. Additionally, past and expected future revenue is based upon one singular technology, cryomedical devices used to freeze and destroy diseased tissue. There can be no assurance that this technology will continue to be attractive to the market or that procedures performed using the technology will be subject to reimbursement by public and private insurers. Specifically, in the past a preponderance of equipment sold was used in the field of urology and, in the current period, Medicare's Health Care Financing Administration ("HCFA") announced plans to continue a noncoverage policy in regard to cryoablation of the prostate. There can be no assurance that sales of urology products will continue at present levels because of the HCFA noncoverage policy. Finally, except from 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. The Company has assessed its current position and, in order to attempt to mitigate the effect of the HCFA noncoverage policy, has taken steps to increase the utilization of its technology in areas other than urology, including general surgery and gynecology. In attempting to achieve this goal, the Company spends significant resources to educate surgeons and healthcare professionals in formal training programs as to the uses and benefits of the Company's cryomedical technology and has developed focused technology for other cryosurgical applications. Additionally, in the current period, the Company enhanced its liquidity through a $1.9 million preferred stock offering (see Note 8) and has reduced its operating expenses. Finally, the Company has no significant long-term debt outstanding. These financial statements assume that the Company will be able to continue as a going concern. If the Company is unable to continue as a going concern, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary should the entity be unable to continue as a going concern. 24 25 2. CHANGE IN FISCAL YEAR On July 25, 1996, the Board of Directors of the Company authorized a change in the Company's fiscal year from a period beginning July 1 and ending on June 30 to a variable period ending on the Sunday nearest to December 31. Such change was made to make Cryomedical Sciences, Inc.'s year end consistent with its quarterly accounting periods which, in the case of 52-week years, consists of two four week and one five week periods per quarter ending on a Sunday. In addition to conforming the Company's yearly and quarterly accounting periods, the change in Cryomedical Sciences, Inc.'s fiscal year conforms to an annual reporting period more closely associated with the calendar year, and to the fiscal years utilized by a majority of the public companies in the sales and manufacturing industries. This Form 10-K filing represents the six month transition period from June 30, 1996 to December 29, 1996. The following table states selected comparable data for the six month transition period ended December 29, 1996 and the previous year's comparable period.
December 29, 1996 December 31, 1995 ----------------- ----------------- Revenues $ 2,224,541 $ 3,682,150 Gross Profits $ 1,164,380 $ 2,042,474 Operating Loss $ (862,795) $ (1,007,777) Net Loss $ (840,132) $ (1,003,497)
3. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Cryomedical Sciences, Inc., and, until dissolved on December 19, 1996, 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 six month transition period ended December 29, 1996 and the years ended June 30, 1996, 1995, and 1994. 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 an initial 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. Equipment also includes cryosurgical systems on rent or on loan which are depreciated using the straight-line method over an estimated useful life of five years. 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 six month transition period ended December 29, 1996 were $70,142 and in the years ended June 30, 1996, 1995 and 1994 were $355,388, $886,664 and $2,910,827, respectively. The Company also receives revenue from the rent of cryosurgical systems which is recognized over the course of the non-cancelable lease term. 25 26 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 system is shipped. Research and Development Costs - Research and development costs are expensed as incurred. Income Taxes - The Company accounts for income taxes using an asset and liability method which generally requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between tax bases of assets and liabilities, and financial reporting amounts, based upon enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements - During 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation", which is effective for years beginning after December 15, 1995. This statement encourages, but does not require, companies to record compensation costs for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The disclosure provisions of this statement have been adopted during the transition period ended December 29, 1996. These provisions require footnote disclosure of the proforma impact on net income (loss) and earnings (loss) per share of the compensation costs that would have been recognized if the fair value of all stock-based awards was recognized in the income statement. See Note 8. Reclassifications - Certain reclassifications of the prior year financial statements have been made to conform to the transition period presentation. 4. SHORT-TERM INVESTMENTS Short-term investments at December 29, 1996 and June 30, 1996 and 1995, respectively, consist of interest-bearing certificates of deposit. 5. INVENTORIES Inventories consist of the following:
December 29, 1996 June 30, 1996 June 30, 1995 ----------------- ------------- ------------- Raw materials and purchased parts $1,068,645 $ 838,531 $1,296,445 Work in process 216,254 340,798 628,302 Finished goods 586,402 737,596 789,090 ---------- ---------- ---------- 1,871,301 1,916,925 2,713,837 Less reserves (180,000) (180,000) (139,011) ---------- ---------- ---------- $1,691,301 $1,736,925 $2,574,826 ========== ========== ==========
26 27 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
December 29, 1996 June 30, 1996 June 30, 1995 ----------------- ------------- ------------- Leasehold improvements $ 201,521 $ 201,521 $ 222,922 Furniture and office equipment 752,857 754,545 710,664 Manufacturing and other equipment 1,685,371 1,401,125 1,192,264 ---------- ----------- ----------- 2,639,749 2,357,191 2,125,850 Less accumulated depreciation and amortization (1,625,635) (1,408,503) (1,010,209) ---------- ----------- ----------- $1,014,114 $ 948,688 $1,115,641 ========== =========== ==========
Furniture and office equipment includes assets under capital leases of $77,914 less accumulated amortization of $57,827 at December 29, 1996. Manufacturing and other equipment includes cryosurgical systems on rent of $224,949 and merchandise on loan of $187,087 at December 29, 1996. 7. 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:
December 29, 1996 June 30, 1996 June 30, 1995 ----------------- ------------- ------------- Accrued vacation $ 38,588 $ 39,046 $ 68,678 Warranty reserve 30,176 41,000 95,778 Extended warranties 212,252 350,873 653,074 Inventory obsolescence reserve 73,800 73,800 53,686 Depreciation 78,378 (29,713) (36,499) Tax loss carryforward 7,936,120 7,377,546 7,051,997 R&D credit 717,454 784,482 639,533 Settlement of stockholder class action suit - - 173,790 Accrued severance 17,721 51,751 - Allowance for bad debt 4,258 19,805 - Deferred rent 62,061 66,234 - Other 170 (1,537) (2,713) Less: valuation allowance (9,170,978) (8,773,287) (8,697,534) ---------- ---------- ---------- Net deferred $ - $ - $ - ========== ========== ==========
The Company has not realized any taxable income since its inception and as of December 29, 1996, has net operating 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 2,523,000 2007 4,505,000 2008 5,893,000 2009 1,433,000 2010 1,562,000 2011 5,131,000 ----------- $23,342,000 ===========
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, $145,000 expiring in 2010 and $33,000 expiring in 2011. 27 28 In the event of a significant change in the ownership of the Company, the utilization of such loss carryforwards could be substantially limited. 8. 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 through November 21, 1994. Each Class B Warrant entitled the registered holder to purchase one share of Common Stock 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. 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. On January 16, 1996 (the "Series C Preferred Stock Closing Date"), the Company consummated a private placement of 40 shares of Series C Convertible Preferred Stock (the "Series C Preferred Stock"), pursuant to Regulation S promulgated under the Securities Act of 1933, as amended. The net proceeds of the offering totalled $1,910,000. Each share of Series C Preferred Stock was convertible into that number of shares of Common Stock as determined by dividing $50,000 by the Conversion Price. The Conversion Price was determined as follows: if the average of the closing bid prices for the Common Stock for the five (5) trading days immediately preceding the date upon which the holder of the Series C Preferred Stock transmitted a conversion notice to the Company (the "Average Bid Price") was $2.00 or less, then the Conversion Price equalled 82.5% of the Average Bid Price. If the Average Bid Price was $2.01 or more, then the Conversion Price equalled 80% of the Average Bid Price. The holders of the Series C Preferred Stock could convert up to one-half of their shares of Series C Preferred Stock commencing forty (40) days after the Series C Preferred Stock Closing Date, and the balance thereof commencing seventy-five (75) days after the Series C Preferred Stock Closing Date. Any share of Series C Preferred Stock outstanding on January 16, 1997 automatically would be converted on the same basis as the holder of such shares of Series C Preferred Stock could convert 28 29 such shares pursuant to the provisions set forth above. 1,332,633 shares of Common Stock were issued pursuant to the conversion of all the shares of Series C Preferred Stock. On October 2, 1996, (the "Series D Preferred Stock Closing Date"), the Company consummated a private placement of 196 shares of Series D Convertible Preferred Stock (the "Series D Preferred Stock") pursuant to Regulation S promulgated under the Securities Act of 1933, as amended. The net proceeds of the offering totalled $1,924,935. Each share of Series D Preferred Stock was convertible into that number of shares of Common Stock as determined by dividing $10,000 by a price equal to 82.5% of the average of the closing bid prices for the Common Stock for the five (5) trading days immediately preceding the date upon which the holder of the Series D Preferred Stock transmitted a conversion notice to the Company. The holders of the Series D Preferred Stock could convert one-third of their shares of Series D Preferred Stock commencing forty (40) days after the Series D Preferred Stock Closing Date, up to an additional one-third of the Series D Preferred Stock commencing seventy-five (75) days after the Series D Preferred Stock Closing Date, and the balance thereof commencing one hundred (100) days after the Series D Preferred Stock Closing Date. Any share of Series D Preferred Stock outstanding on October 2, 1998 automatically would be converted on the same basis as the holder of such shares of Series D Preferred Stock could convert such shares pursuant to the provisions set forth above. In November 1996, 969,695 shares of Common Stock of the Company were issued in accordance with the terms of the first conversion of the preferred stock offering. Subsequently, in January 1997, the second and third Preferred Stock conversions of the offering, representing the remaining 156 shares of Series D Preferred Stock converted into 5,763,400 shares of Common Stock, completing the offering. 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 at an exercise price per share equal to the market price of the stock on the date of grant to members of the Company's Scientific Advisory Board and to consultants and others who have provided, or will provide, services to the Company. In general, one-half of the granted 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 an exercise price per share equal to the market price of the Common Stock 29 30 on the date of grant. The terms of such warrants have ranged from three to ten years with various vesting arrangements (see Note 10 regarding warrants granted to a director). In November 1996, the Company granted warrants to two consultants in connection with limited period consulting agreements. In total, the Company granted the consultants warrants to purchase 85,000 shares of Common Stock at $0.53 per share. The warrants had a grant date fair value of $0.28 per share of Common Stock, lapse after ten years and may be exercised one-third on the first anniversary of the grant, one-third on the second anniversary of the grant, and one-third on the third anniversary of the grant. The following table summarizes warrant activity for the six month transition period ended December 29, 1996 and each of the three years in the period ended June 30, 1996 with respect to warrants granted to consultants (excluding warrants granted to a director of the Company in connection with consulting services. See Note 10):
Transition Period Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended December 29, 1996 June 30, 1996 June 30, 1995 June 30, 1994 ----------------- ------------------ ------------------ ----------------- Wgtd. Wgtd. Wgtd. Wgtd. Avg. Avg. Avg. Avg. Exer. Exer. Exer. Exer. Shares Price Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- ------ ----- Outstanding at beginning of year: 152,000 5.66 152,000 5.66 264,000 4.41 299,000 3.76 Granted: 85,000 0.53 - - 82,000 3.30 Exercised: - - - 88,000 0.93 62,000 1.97 Terminated: - - - 24,000 9.25 55,000 1.97 Outstanding at end of year: 237,000 3.82 152,000 5.66 152,000 5.66 264,000 4.41 Warrants exercisable at year end: 145,000 5.83 145,000 5.83 118,666 5.93 177,333 4.03
The following table summarizes information about stock warrants outstanding at December 29, 1996:
Range of Number Weighted Exercise Outstanding Average Remaining Weighted Average Prices at 12/29/96 Contractual Life Exercise Price - - -------- ----------- ----------------- =================== 0.50 -2.00 85,000 9.9 0.53 2.01 -4.00 37,000 1.1 2.29 4.01 -6.00 45,000 1.8 4.13 8.00 -9.25 70,000 0.5 8.43 -------- --- ---- 237,000 4.2 3.82 ======== === ====
Number Exercisable Weighted Average at 12/29/96 Exercise Price ------------------ ---------------- 145,000 5.83
30 31 Stock Compensation Plans The Company currently has two fixed option plans: the Cryomedical Sciences, Inc. 1988 Stock Option Plan and the 1993 Employee Purchase Plan. The 1988 Stock Option Plan was approved and adopted by the Board of Directors in July 1988. At the Plan's inception 1,100,000 shares of Common Stock were allotted for distribution to employees, including officers and directors of the Company. Options granted under the Plan are designated as incentive stock options (which may not be granted at less than the fair market value of the underlying shares at that date) or non-incentive stock options by the Board of Directors who also have discretion as to the persons to be granted the options, the number of shares subject to the options and the terms of the option agreements. The option vesting period is determined at the time of each grant, and all options expire a minimum of ten years from the grant date. Stock options generally vest over a three to four year period, with one-third to one-quarter of the shares becoming exercisable on each of the first three or four anniversaries of the grant date, respectively. The Plan was amended in July 1992 to increase the amount of options available for issuance by 500,000 to 1,600,000 and amended in June 1994 increasing the shares of Common Stock issuable by 600,000 to 2,200,000. Currently there are 401,416 shares of Common Stock available under the Plan. The following table provides information pertaining to stock options:
Transition Period Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended December 29, 1996 June 30, 1996 June 30, 1995 June 30, 1994 Wgtd. Wgtd. Wgtd. Wgtd. Avg. Avg. Avg. Avg. Exer. Exer. Exer. Exer. Shares Price Shares Price Shares Price Shares Price Outstanding at beginning of year: 1,931,650 3.01 1,890,334 3.01 1,914,234 3.12 1,389,734 3.87 Granted: - - 884,950 2.28 49,800 3.18 815,500 2.67 Exercised: - - 528,334 0.62 - - - - Terminated: 242,400 4.48 315,300 4.92 73,700 6.18 291,000 5.47 Outstanding at end of year: 1,689,250 2.80 1,931,650 3.01 1,890,334 3.01 1,914,234 3.12 Stock options exercisable at year end: 800,475 3.32 852,900 3.68 1,239,584 2.65 660,084 2.63
The following table summarizes information about stock options outstanding at December 29, 1996:
Range of Number Weighted Exercise Outstanding Average Remaining Weighted Average Prices at 12/29/96 Contractual Life Exercise Price - - ------ ----------- ---------------- -------------- 1.68 -3.00 1,424,750 7.8 2.21 3.01 -6.00 123,000 7.2 3.17 6.01 -9.25 141,500 5.4 8.41 ---------- --- ---- 1,689,250 7.6 2.80 ========== === ====
Number Exercisable Weighted Average at 12/29/96 Exercise Price ------------------ ---------------- 800,475 3.32
31 32 The 1993 Employee Stock Purchase Plan was adopted by the Board of Directors in August 1993, and made available 250,000 shares of Common Stock of the Company to be purchased voluntarily through payroll deductions of one to ten percent of base pay by participating employees (excluding directors and officers) of the Company through a series of Offerings. The Company will make six semi-annual Offerings to employees to purchase Common Stock under the Plan. The Offering periods have been from July 1 to the next succeeding December 31 and from January 1 to the next succeeding June 30. The first Offering commenced on July 1, 1994. Each employee at the completion of an offering is eligible to purchase Common Stock at 85% of its fair market value at either the beginning or end of the six-month offering, whichever is lower. The Plan currently has 212,475 shares available and will expire on June 30, 1997. Transactions related to the Plan are summarized as follows:
Weighted Average Shares Exercise Price ------ ----------------- Available at June 30, 1994 Authorized 250,000 Exercised 14,422 1 .913 Available at June 30, 1995 235,578 Exercised 16,079 1 .957 Available at June 30, 1996 219,499 Exercised 7,024 1 .913 Available at December 29, 1996 212,475
The weighted average fair value of the stock options granted during the year ended June 30, 1996 was $1,353,153. No options were granted during the six months ended December 29, 1996. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used from grants in 1995-96: risk-free interest rate ranging from a high of 6.65% in May 1996 to a low of 5.60% in January 1996; expected dividend yield of 0%; expected life of five years and expected volatility ranging from 80-82%. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its employee stock option and purchase plans. The compensation costs charged against income under the Company's plans were $2,371, $5,549, $4,135 and $0 for the six month transition period ended December 29, 1996 and the years ended June 30, 1996, 1995 and 1994, respectively. Had compensation cost for the Company's stock option plans and its stock purchase plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Financial Accounting Standards Board Statement No. 123, the Company's net loss and loss per share for the six month transition period ended December 29, 1996 and the year ended June 30, 1996 would have been the pro forma amounts indicated below:
Transition period ended Year ended December 29, 1996 June 30, 1996 ----------------- ------------- Net loss to common shareholders As reported $ 840,132 $ 3,404,247 Pro forma $ 1,142,141 $ 3,662,868 Net loss per common and common equivalent share As reported $ 0.03 $ 0.13 Pro forma $ 0.04 $ 0.15
32 33 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 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. 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 during the six month transition period ended December 29, 1996 or the years ended June 30, 1996, 1995 and 1994. The Company incurred $3,165, $6,189, $7,347 and $5,848 of plan administration expenses in the six month transition period ended December 29, 1996 and the years ended June 30, 1996, 1995 and 1994, respectively. 10. RELATED PARTY TRANSACTIONS In January 1993, the Company entered into an employment agreement with the former President to continue his employment as President and Chief Executive Officer. Of the 560,000 shares of Common Stock of the Company that the former 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 former 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. 33 34 In May 1994, the former 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. Over the months of April, May and June 1996 the former President and Chief Executive Officer exercised options to purchase a total of 448,334 shares of Common Stock of the Company. Over this period, options to purchase 348,334 shares were exercised at $0.05 per share and 100,000 shares were exercised at $2.125 per share. On May 7, 1996 the Company announced that the President and CEO had resigned. The severance package associated with this officer's resignation included a payout of $216,000 which has been expensed in the year ended June 30, 1996. Under the terms of the agreement, the former President and Chief Executive Officer's indebtedness to the Company totalling $55,800 will be deducted from the proceeds of the payout. The final terms of the agreement included the maintenance in full force and effect of the Proprietary Information and Invention Agreement between the former officer of the Company and the Non-Competition section of the former officer's Employment Agreement. 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 Senior 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. During the period ending December 29, the balance of $44,283 in principal and interest was forgiven and recorded as compensation expense to the Company. 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 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. On May 24, 1996 a new President and Chief Executive Officer commenced his employment with the Company by signing an employment agreement through December 1999, which agreement included a grant of non-incentive stock options to purchase 750,000 shares of Common Stock at a price of $2.1875 per share. These options vest evenly over five years, commencing one year from employment. On December 29, 1996, the Company had advanced $30,000 to the President and Chief Executive Officer for travel expenses to be incurred in the course of business. As of March 27, 1997, there are no amounts currently outstanding. The Company paid consulting fees to two stockholders for consulting services. For the six month transition period ended December 29, 1996 and the years ended June 30, 1996, 1995 and 1994, these fees totaled $6,000, $128,655, $89,900 and $159,833, respectively. The Company paid $52,574, $77,735, $104,046 and $103,986 of legal fees in the six month transition period ended December 29, 1996 and the years ended June 30, 1996, 1995 and 1994, respectively, to a law firm in which a director and stockholder of the Company is a partner. 11. COMMITMENTS AND CONTINGENCIES Since 1987, the Senior 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 Senior 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 agreements with 34 35 SUNY for the years ending June 30, 1995 and 1996 in return for annual reimbursement totaling $39,000. During the transition period ended December 29, 1996, the Company made no payments to SUNY. In January 1997, the Company determined it would pledge a gift amount of $39,000, consisting of four quarterly payments of $9,750 in the name of the Senior Vice President for calendar 1997. The Company has funded research grants to various hospitals and individuals to conduct research, develop new medical procedures, or compile clinical data in connection with the use of AccuProbe Systems purchased from the Company. The following table summarizes the research grant activity to customers for the six month transition period ending December 29, 1996 and each of the three years in the period ended June 30, 1996:
Number Aggregate Year of Research Value of Ended Grants Grants ($) ----- --------------- ---------- June 30, 1994 3 127,000 June 30, 1995 15 549,000 June 30, 1996 2 47,225 December 29, 1996 1 15,000
The Company is obligated by employee agreements over varying terms of one to five years for a total of $1,726,780. 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 superseded the previous lease and amendments. The new lease was amended on July 1, 1995 to include additional unimproved storage space. In June 1996, the Company, with the permission of its landlord, released a portion of the rental space occupied by its administrative offices. This space was leased by the landlord to an unrelated third-party tenant. The Company is currently paying a one dollar per square foot charge for this released portion of space for the remainder of its lease. Future minimum lease payments for facilities and equipment at December 29, 1996, are as follows:
Calendar Years Operating Capital Ending 12/31, Leases Leases ---------------- ---------- -------- 1997 349,575 10,526 1998 354,333 0 1999 357,820 0 2000 120,622 0 2001 0 0 ---------- --------- $1,182,350 10,526 ========== Less interest expense (820) --------- Capital lease obligation at December 29, 1996 $ 9,706 =========
Rental expenses for facilities and equipment for the six month transition period ended December 29, 1996 and the years ended June 30, 1996, 1995, and 1994 totaled $127,813, $568,331, $527,402 and $506,065, respectively. 12. SIGNIFICANT FINAL QUARTER ADJUSTMENTS During the six month transition period ended December 29, 1996, the Company recorded certain costs totaling $231,295 related to increasing the allowance for doubtful accounts for estimated uncollectible receivables. The Company also wrote-off one receivable in the amount of $30,000. 35 36 13. LITIGATION In November 1996, the Company filed suit against EndoCare, Inc. and ZhaoHua Chang in the Circuit Court for Montgomery County, Maryland (Case No. 161496). The lawsuit alleges, among other things, that EndoCare misappropriated trade secrets of Cryomedical Sciences, Inc., and that EndoCare tortiously interfered with the Company's contracts, its relationships with its employees, and Cryomedical Sciences, Inc.'s contractual and potential business relationships with customers. The lawsuit, which contains six counts, also alleges that Dr. Chang and EndoCare engaged in unfair competition against the Company and civil conspiracy, and that Dr. Chang, who was formerly employed as a Vice President of Cryosurgical Engineering by Cryomedical Sciences, Inc., breached contractual and fiduciary obligations owed to the Company by his employment by EndoCare, his retention and misuse of Cryomedical Sciences' confidential information, and his improper solicitation of the Company's employees to disclose trade secret information and/or to become employed by EndoCare. EndoCare and Dr. Chang have denied the allegations in the lawsuit. In March 1997, Dr. Chang filed a counter-suit in the Circuit Court for Montgomery County, Maryland (Case No. 161496-V) regarding numerous claims of a breach of contract by the Company. The lawsuit is in the early stages of discovery. The Company intends to defend this case vigorously. 36 37 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 - - ---- --- -------------------- Richard J. Reinhart, Ph.D. 55 President, Chief Executive Officer and Director John G. Baust, Ph.D. 54 Senior Vice President and Chief Scientific Officer Alan F. Rich 44 Vice President, Sales and Marketing William A. Zenner 50 Vice President, Manufacturing Howard S. Breslow 57 Director, Secretary Sam Carl 65 Director J. Donald Hill 64 Director Robert A. Schoellhorn 68 Director
Set forth below is a biographical description of each director and executive officer of the Company based on information supplied by them: Richard J. Reinhart, Ph.D., has been President, Chief Executive Officer and a director of the Company since May 1996. From 1994 to 1996, Dr. Reinhart was a consultant to Medical Resources, Inc., a diagnostic imaging company, while also working with several other health care companies. From 1988 to 1994, Dr. Reinhart was Managing Director for Medical Resources, Inc. From 1981 through 1988, Dr. Reinhart was Chief Executive Officer of several small entrepreneurial medical device and instrumentation companies. From 1969 to 1981, Dr. Reinhart was employed by Roche Medical Electronics (a subsidiary of Hoffman La Roche) where, after serving in several senior management positions, he became President and Chief Executive Officer in 1978. John G. Baust, Ph.D., has been Senior Vice President of the Company since January 1995, Chief Scientific Officer since August 1993, served as Vice President, Research and Development, of the Company from July 1990 to January 1995, and served as a consultant to the Company from April 1990 to July 1990. Since 1987, Dr. Baust has also been a Professor and the Director of the Center for Cryobiological Research at State University of New York at Binghamton, and since July 1994, Dr. Baust has also been Adjunct Professor of Surgery, Medical College of Pennsylvania. From 1984 to 1987, he was a Professor and the Director of the Institute of Low Temperature Biology at the University of Houston. 37 38 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. William A. Zenner has been Vice President, Manufacturing of the Company since October 1995. Mr. Zenner joined the Company as Director of Field Engineering in January 1992. From 1982 to 1992, Mr. Zenner was employed by Roche Diagnostic Systems, Inc., a biomedical corporation engaged in medical diagnostics. Howard S. Breslow has served as a director of the Company since July 1988. He has been a practicing attorney in New York City for more than 30 years and is a member of the law firm of Breslow & Walker, LLP, New York, New York, which firm serves as general counsel to the Company. Mr. Breslow currently serves as a director of Excel Technology, Inc., a publicly-held company engaged in the development and sale of laser products; FIND/SVP, Inc., a publicly-held company engaged in the development and marketing of information services and products; Vikonics, Inc., a publicly-held company engaged in the design and sale of computer-based security 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. J. Donald Hill has been a director of the Company since November 1995. Mr. Hill was a consultant to the Company from 1992 to 1995. He currently serves as Chairman and Chief Executive Officer of Excel Technology, Inc., a manufacturer of laser products and systems, where he has been employed since 1992. From January 1991 to October 1991, Mr. Hill was the Chief Executive Officer of Medstone International, and Corporate Secretary and Director of CytoCare, Inc., companies engaged in the development of medical therapy devices. From 1988 to 1990, Mr. Hill was Director of Corporate Finance at Weeden & Company, a securities firm. Mr. Hill also served as Vice Chairman of First Affiliated Securities, Inc. and as General Partner of Loeb, Rhoades and Company, also securities firms. Robert A. Schoellhorn has been a director of the Company since September 1992. Since June 1994, Mr. Schoellhorn has been the owner of Marathon Coach, Inc., a privately held manufacturer of luxury motor coaches. 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, and First Community Bank of the Desert in Southern California. 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, 1996, the reports required by Section 16(a) of the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation for the Company's transition period and its last three completed fiscal years with respect to its Chief Executive Officer and to each of the Company's named executive officers. No officer of the Company received salary, commission and bonus payments in excess of $100,000 during the transition period ended December 29, 1996. 38 39 SUMMARY COMPENSATION TABLE
Long Term Compensation --------------------------------------- Annual Compensation Awards Payouts ------------------------------- ----------------------- ---------- Restricted Other Annual Stock Options/ LTIP All Other Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs Payouts Compensation Positions Year(1) ($) (2) ($) ($) ($) (#) (3) ($) ($) - - -------------------------- ------- ------- ----- ------------ ---------- -------- ------- ------------ Richard J. Reinhart, Ph.D. 1996.5 75,481 - - - - - - Current President, Chief 1996 9,712 - (5) - - 750,000 - - Executive Officer and - - - - - - - - Director (4) - - - - - - - - John G. Baust, Ph.D. 1996.5 57,668 - - - - - 6,162 (6) Senior Vice 1996 108,646 - - - - - - President, Research 1995 104,429 - - - - - 9,243 (6) and Development 1994 108,927 - - - 50,000 - 8,234 (6) Alan F. Rich 1996.5 50,012 - 23,073 - - - - Vice President, 1996 87,600 - 66,015 - - - - Sales and Marketing 1995 94,417 - 132,596 - - - 1994 76,667 - 158,818 - 100,000 - -
- - --------------------------- (1) The transition period is identified as Fiscal 1996.5 for purposes of this table. (2) Salaries for fiscal years 1995 and 1996 reflect 10% salary reductions for executive officers of the Company commencing April 1, 1995. Such salary reductions were reinstated in July 1996. (3) Options to acquire shares of Common Stock. (4) Dr. Reinhart's employment with the Company commenced in May 1996. (5) Dr. Reinhart's contract contains a potential bonus provision based upon a "percentage of pretax profits of the Company." (6) Consists of Company contributions made in Dr. Baust's name to the State University of New York at Binghamton. COMPENSATION OF DIRECTORS Through June 1996, the Company compensated outside directors for their service in such capacity at an annual fee of $5,000 plus $1,000 for each Board meeting attended. As of January 15, 1997, it was determined that the Company would compensate Messrs. Breslow and Hill for board meetings held during the transition period and Board meetings held during 1997 with a grant of warrants to purchase 25,000 shares of Common Stock at an exercise price of $0.50. These options vest immediately and expire in ten years. 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 and 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. In November 1995, Mr. Hill was granted non-incentive options to purchase 25,000 shares of Common Stock at an exercise price of $2.938 per share. During the period October 1995 through May 1996, Mr. Pietraszek was granted 2,500 non-incentive options per month at an exercise price ranging from $1.688 to $2.938. 39 40 OPTION/SAR GRANTS IN SIX-MONTH TRANSITION PERIOD No stock options were granted to any of the named executive officers during the six-month transition period. AGGREGATED OPTION/SAR EXERCISES DURING SIX-MONTH TRANSITION PERIOD AND TRANSITION PERIOD END OPTION/SAR VALUES The following table provides information related to options exercised by each of the named executive officers during the six-month transition period ended December 29, 1996 and the number and value of options held at the end of the transition period. The Company does not have any outstanding stock appreciation rights. None of the options were in the money at period ended December 29, 1996.
Value of Unexercised Number of Unexercised In-the-Money Options/SARs Options/SARS at Fiscal Year End (#) at Fiscal Year End ($) (1) -------------------------- --------------------------- Shares Acquired Value Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - - ---------- --------------- ------------ ----------- ------------- ----------- ------------- Richard J. Reinhart, Ph.D. - - - 750,000 - - John G. Baust, Ph.D. - - 330,000 - - - Alan F. Rich - - 100,000 30,000 - -
- - ---------------------------------- (1) The closing price for the Company's Common Stock as reported on the NASDAQ National Market System on December 27, 1996 was $0.313. Value is calculated on the basis of the difference between the option exercise price and $0.313 multiplied by the number of shares of Common Stock underlying the option. - - ---------------------------------- Employment Agreements In May 1996, the Company and Richard J. Reinhart, Ph.D. entered into an employment agreement through December 31, 1999 pursuant to which Dr. Reinhart was employed as President, Chief Executive Officer and a director of the Company. In accordance to his employment agreement, Dr. Reinhart was granted options to purchase 750,000 shares of Common Stock at an exercise price of $2.1875 per share pursuant to the Company's 1988 Stock Option Plan. The option vests one-fifth each year, for five years, commencing one year from employment. At December 29, 1996, Dr. Reinhart's salary was $150,000, and in addition to base salary, Dr. Reinhart is entitled to a bonus based upon a percentage of "pretax profits of the Company." Such bonus ranges from 10% for the period ended December 31, 1996 to 3% for 2001. In the event the term of the employment agreement is terminated for a reason other than death, disability, or discharge for cause or resignation, the Company is required to pay Dr. Reinhart as follows: (a) if such termination occurs within the first six months of the Employment Period, Dr. Reinhart shall be entitled to receive the salary due him up to the date of termination and (b) if termination occurs after the initial six months, Dr. Reinhart shall be entitled to the salary due him for (i) the balance of his Employment Period, (ii) a period of two and a half years, or (iii) until subsequently employed, whichever is sooner; provided, however, Dr. Reinhart shall have an affirmative obligation to seek comparable employment and mitigate the Company's damages. In July 1990, the Company and John G. Baust, Ph.D. entered into a three year employment agreement (as amended in December 1991 and July 1993), automatically renewable for additional one year periods (absent notice to the contrary by either party). The agreement provides that Dr. Baust shall retain his affiliation with the State University of New York at Binghamton, where he is the Director of the Center for Cryobiological Research. During the transition period ended December 29, 1996, the Company made no payments to SUNY. In January 1997, the Company determined it would pledge a gift amount of $39,000, consisting of four quarterly payments of $9,750 in the name of the Senior Vice President for calendar 1997. In accordance with Dr. Baust's employment agreement, in July 1990, Dr. Baust was granted an option to purchase an aggregate of 200,000 shares of Common Stock at $1.875 per share pursuant to the Company's 1988 Stock Option Plan. The option vested one-third each year for three years, commencing one year from the date of the agreement. Among other things, the 40 41 employment agreement also provided for the Company to loan to Dr. Baust the funds required for the exercise of the options at the time of exercise. Such loans would be for terms of five years, accrue interest at a rate of 5% per annum and be secured by shares obtained from the option exercise. In accordance with the terms of the agreement, in May 1993 the Company lent $37,500 to Dr. Baust to exercise options to purchase 20,000 shares of Common Stock. At December 29, 1996, Dr. Baust's annual salary was $115,140. Alan F. Rich joined the Company in May 1992 as a regional sales manager. On March 1, 1994, the Company and Mr. Rich entered into a one year employment agreement, automatically renewable for additional one year periods (absent notice to the contrary by either party), pursuant to which Mr. Rich is employed as Vice President, Sales and Marketing, of the Company. At December 29, 1996, Mr. Rich's annual salary was $100,450, which salary is to increase each year to the extent of any cost of living increases based upon the Consumer Price Index increase for the immediate preceding year. In addition, Mr. Rich is entitled to commissions of up to 1% of the sales revenue of the Company. In accordance with the employment agreement, in March 1994, Mr. Rich was granted options to purchase 100,000 shares of Common Stock at $3.125 per share pursuant to the Company's 1988 Stock Option Plan. The options vest with respect to 20,000 shares after one year, an additional 25,000 shares after two years, an additional 25,000 shares after three years, and an additional 30,000 shares after four years. In connection with the execution of the employment agreements between the Company and each of its executive officers, each officer executed a Proprietary Information and Inventions Agreement, pursuant to which each agreed, among other things, to keep the Company's information confidential and assigned all inventions to the Company, except for certain personal inventions not related to the Company's work, whether existing or later developed. CONSULTANTS Dr. Jeffrey Cohen was granted warrants to purchase 57,000 shares for his service during the fiscal year ended June 30, 1994, as a consultant. In November 1996, Dr. David Olive and Dr. Thomas Rutherford were granted 60,000 and 25,000 shares, respectively, for research to be conducted during 1997. At December 29, 1996, warrants to purchase 287,000 shares of Common Stock held by various consultants had been exercised, warrants to purchase 114,000 shares of Common Stock had expired and warrants to purchase 237,000 shares were outstanding. The Company has obtained the services of consultants to render advice with respect to various areas of the Company's research. Each of the consultants has entered into a one year consulting agreement with the Company (with the exception of Mr. Nicoletta, who has not had his contract renewed in January 1997), 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 effective January 1997. Consultants related to the Solutions technology will be paid by the Company with monies secured by grants. There can be no assurance that the Company will continue to secure grant subsidized work in the future. No consultant has agreed to devote any specified amount of time to Company activities. The consultants of the Company (and the commencement dates of their consulting agreements) are as follows: Jeffrey K. Cohen, M.D., (December 1991), is Director, Division of Urology, Allegheny General Hospital in Pittsburgh, Pennsylvania, and Associate Professor of Surgery, Allegheny University. Alan Nicoletta (January 1995), President of ACN International, a consulting firm specializing in medical technologies, advises the Company with respect to the use of the Solutions. Robert Van Buskirk, Ph.D. (June 1993), Associate Professor of Biology, Binghamton University, advises the Company with respect to the use of the Solutions. David Olive, M.D. (November 1996), Director, Reproductive Endocrinology and Infertility, Yale University School of Medicine in New Haven, Connecticut. Thomas Rutherford, M.D. (November 1996), Assistant Professor, Gynecologic Oncology, Yale University School of Medicine in New Haven, Connecticut. 41 42 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. 42 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 29, 1996, 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, each named executive officer 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 ------------------------------- ------------------------ -------- Richard J. Reinhart . . . . . . . . . . . . 750,000 (2) 2.6% Howard S. Breslow . . . . . . . . . . . . . 293,000 (3) 1.0% Sam Carl . . . . . . . . . . . . . . . . . 345,600 (3) 1.2% J. Donald Hill . . . . . . . . . . . . . . . 50,000 (4) * Robert A. Schoellhorn . . . . . . . . . . . 243,000 (5) * Henry T. Pietraszek . . . . . . . . . . . . 45,000 (6) * John G. Baust . . . . . . . . . . . . . . . 350,000 (7) 1.2% Alan F. Rich . . . . . . . . . . . . . . . . 135,500 (8) * D. H. Blair Investment Banking Corp. . . . . 1,840,950 6.6% 44 Wall Street, NY, NY 10005 All officers and directors as a group (9 persons) . . . . . . . . . . 2,262,452 (9) 7.7%
--------------------------------------- * Less than 1% (1) Unless otherwise indicated below, all shares are owned beneficially and of record. (2) Includes an aggregate of 750,000 shares underlying stock options. (3) Includes an aggregate of 75,000 shares underlying stock options. (4) Includes an aggregate of 50,000 shares underlying stock options and warrants. (5) Includes an aggregate of 100,000 shares underlying stock options and warrants. (6) Includes an aggregate of 45,000 shares underlying stock options. (7) Includes an aggregate of 330,000 shares underlying stock options. (8) Includes an aggregate of 130,000 shares underlying stock options. (9) Includes an aggregate 1,259,100 shares underlying options which the Company has granted to the four executive officers of the Company and an aggregate of 395,000 shares underlying options and warrants granted to five directors of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 43 44 Howard S. Breslow, a director of the Company, is a member of Breslow & Walker, LLP, general counsel to the Company. Mr. Breslow currently owns 218,000 shares of Common Stock of the Company and holds options to purchase an aggregate of 75,000 additional shares pursuant to stock options issued to him in October 1991. During the transition period ended December 1996, Breslow & Walker, LLP received legal fees of $52,574. In September 1992, in connection with a three-year consulting agreement, the Company granted to J. Donald Hill, 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. Hill 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 November 1995, Mr. Hill became a director of the Company, at which time he was granted 25,000 options to purchase shares of Common Stock of the Company. 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. During the period ending December 29, 1996 the balance of $44,283 in principal and interest was forgiven and recorded as compensation expense 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. During the period October 1995 through May 1996, pursuant to a limited period consultancy agreement, the Company granted Hank Pietraszek non-incentive options to purchase 2,500 shares of Common Stock per month at an exercise price ranging from $1.688 to $2.938 per share. In addition, the Company paid Mr. Pietraszek during the year ended December 28, 1996, $13,000 for consulting services, per the agreement. 44 45 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 18. (2) Schedules No Schedules are furnished as the information is presented elsewhere in this document or is inapplicable. (3) Exhibits
Exhibit - - ------- Number Document - - ------ -------- 3 (a) Certificate of Incorporation, as amended. (1) (b) By-Laws(1), and amendment, dated March 19, 1990, thereto.(2) 4 (a) Specimen of Common Stock Certificate.(1) 10 (a) Stock Option Plan, dated July 7, 1988, and amendment, dated July 19, 1989.(1) (b) Stockholders' Agreement and amendments.(1) (c) Form of Scientific Advisory Board Member Agreement.(1) (d) Research Project Management Services Agreement, dated as of August 29, 1989, between the Company and Allegheny-Singer Research Institute,(1) and amendments thereto dated August 29, 1991(5), August 29, 1992(5), October 31, 1992(6), December 30, 1992(6), April 30, 1993(6), and July 1, 1993.(8) (e) Employment Agreement, dated as of July 15, 1990, between the Company and John G. Baust(2), as amended by letter agreement dated December 3, 1991,(5) and as amended July 14, 1993.(7) (f) Agreement, dated as of December 18, 1990, among the Company, Paul E. Segall, Hal Sternberg, Harold D. Waitz, Larry Cohen, Trans Time, Inc., BioTime, Inc., and Donna Cohen.(3) (g) Research Project Agreement, dated as of August 1, 1991, between the Company and Research Foundation of the State University of New York,(4) as amended by proposal letter dated August 20, 1992 (5) and acceptance letter dated September 3, 1992. (5) (h) Consulting and Proprietary Information Agreement dated as of December 1, 1991, between the Company and Dr. Jeffrey K. Cohen. (5) (i) Consulting and Proprietary Information Agreement dated as of December 1, 1991, between the Company and Dr. Tse-Chao Hua. (5) (j) Loan and Pledge Agreement dated May 19, 1993, between the Company and John G. Baust, Ph.D.(6) (k) Promissory Note dated May 19, 1993, of John G. Baust, Ph.D., in favor of the Company.(6)
45 46 (l) Employment Agreement, dated as of March 1, 1994, between the Company and Alan F. Rich.(7) (m) Lease Agreements, dated May 1, 1995, between Ward Corporation and the Company, and addendum thereto dated June 21, 1995, relating to the Company's executive offices, laboratory facilities and manufacturing facilities in Rockville, Maryland.(8) (n) Memorandum of Understanding, Cryomedical Sciences, Inc. securities litigation, dated as of September 15, 1995, between the Company and certain of its officers and directors and Plaintiffs in Cryomedical Sciences, Inc. Securities Litigation, C.A. No. AW 94-873 (D. Md.).(8) (o) Severance Agreement, dated as of May 30, 1996, between the Company and J. J. Finkelstein.(9) (p) Employment Agreement, dated as of May 24, 1996, between the Company and Richard J. Reinhart, Ph.D.(9) 21 Cryo Instruments, Inc., a California corporation. 23 Consent of Independent Auditors. 27 Financial Data Schedule (b) Reports on Form 8-K
- - -------------------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 33-31420) which became effective with the Securities and Exchange Commission on November 22, 1989. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990. (3) Incorporated by reference to the Company's Current Report on Form 8-K, the Date of Report of which is December 18, 1990. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994. (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 46 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRYOMEDICAL SCIENCES, INC. Date: April 10, 1997 By: /s/Richard J. Reinhart ----------------------------------------- Richard J. Reinhart, Ph.D. President and Chief Executive Officer (Principal Executive Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 10, 1997 /s/Richard J. Reinhart ----------------------------------------- Richard J. Reinhart, Ph.D. Director Date: April 10, 1997 /s/Howard S. Breslow ----------------------------------------- Howard S. Breslow Director Date: April 10, 1997 /s/Sam Carl ----------------------------------------- Sam Carl Director Date: April 10, 1997 /s/J. Donald Hill ----------------------------------------- J. Donald Hill Director Date: April 10, 1997 ----------------------------------------- Robert A. Schoellhorn Director 47 EX-23 2 INDEPENDENT AUDITOR'S CONSENT 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Amendment No. 2 to Registration Statement No. 33-34076 and Registration Statement No. 333-04874 of Cryomedical Sciences, Inc. on Forms S-8 and Registration Statement No. 33-76078 of Cryomedical Sciences, Inc. on Form S-3, of our report dated March 28, 1997, appearing in this Annual Report on Form 10-K of Cryomedical Sciences, Inc. for the six month period ended December 29, 1996. 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. on Form S-3. DELOITTE & TOUCHE LLP Washington, D.C. April 7, 1997 EX-27 3 FDS.
5 YEAR DEC-29-1996 JAN-01-1996 DEC-29-1996 1,769,243 110,150 1,621,722 246,908 1,691,301 5,011,903 2,639,749 1,625,635 6,044,744 1,847,599 0 0 0 27,850 3,966,433 6,044,744 1,736,641 2,224,541 761,490 1,060,161 2,027,175 0 4,853 (840,132) 0 (840,132) 0 0 0 (840,132) (.03) (.03)
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