-----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, T+j+rbDwkGl859L7bg/0R3SUNcwYKk2VNEnJ1cruNcOpkeR7Yw0FOaY7PMZcFRaG LwSrzTur5ko7U6zsrUaBfQ== 0000950133-98-001523.txt : 19980424 0000950133-98-001523.hdr.sgml : 19980424 ACCESSION NUMBER: 0000950133-98-001523 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980423 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRYOMEDICAL SCIENCES INC CENTRAL INDEX KEY: 0000834365 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 943076866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10KSB40/A SEC ACT: SEC FILE NUMBER: 000-18170 FILM NUMBER: 98599879 BUSINESS ADDRESS: STREET 1: 1300 PICARD DR STE 102 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3014177070 MAIL ADDRESS: STREET 1: 1300 PICCARD DRIVE SUITE 102 CITY: ROCKVILLE STATE: MD ZIP: 20850 10KSB40/A 1 AMENDMENT NO. 1 TO FORM 10-KSB 405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------- FORM 10-KSB / A NO. 1 (MARK ONE) [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 28, 1997 ----------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-18170 ------- -------------------------- CRYOMEDICAL SCIENCES, INC. ( Name of Small Business Issuer in its Charter) DELAWARE 94-3076866 -------- ---------- (State of Incorporation) (IRS Employer Identification Number) 1300 PICCARD DRIVE, ROCKVILLE, MARYLAND 20850 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) -------------------------- Issuer telephone number, including area code: (301) 417-7070 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share --------------------------------------- Title of Class Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [ X ] Issuers revenues for the fiscal year ended December 28, 1997 were $3,571,386. As of March 31, 1998, the aggregate market value of voting stock held by nonaffiliates of the registrant was $11,499,916. As of March 31, 1998, there were 33,454,302 shares of Common Stock (par value $.001 per share) outstanding. Documents Incorporated by Reference ----------------------------------- Not Applicable =============================================================================== 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Cryomedical Sciences, Inc. (the "Company") is engaged in the research, development, manufacture and marketing of products for use in the field of low-temperature medicine. The Company has developed cryosurgical systems called the CMS AccuProbe(R) System (the "AccuProbe") and the CryoLite(R) Series (the "CryoLite" ). Both the AccuProbe and the CryoLite are sophisticated cryosurgical devices 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 and CryoLite in the various fields for which the devices have received clearance from the FDA. The Company completed initial development of the AccuProbe in 1992 and has marketed this system to hospitals, surgeons and radiologists in the United States and abroad. In addition to the AccuProbe, the Company sells single use probes and other disposables used with the AccuProbe and offers service warranty contracts. Although the CryoLite received FDA clearance in July 1997, no CryoLite devices have been shipped for commercial sale. Sales and other revenues totaled $3,571,386, $2,224,541, and $6,843,950 for the twelve month period ended December 28, 1997, the six-month period ended December 29, 1996, and the fiscal year ended June 30, 1996, respectively. The Company is also attempting to develop and commercialize a series of hypothermic preservative solutions (the "Solutions"). Some of these Solutions are designed to maintain the fluid and chemical balances of human organs while body temperature is significantly lowered. Other Solutions have been developed that may be utilized in preserving certain cells and tissues utilized by scientists in research labs and academic institutions. All of these Solutions continue to be tested in laboratory settings. Commercialization of certain Solutions is presently being contemplated for those markets not subject to the United States Food and Drug Administration (the "FDA") regulations through the Company's wholly owned subsidiary BioLife Technologies Inc. ("BioLife"), formed in 1998. At present, development of the Solutions for human organ transplantation is at the laboratory and preclinical stage. The Company is attempting to fund the continuing development of the Solutions through funds it is seeking from third party investors in its wholly owned subsidiary BioLife. The total research and development expenses of the Company were $1,293,470, $492,794, and $1,484,042 for the year ended December 28, 1997, the six-month transition period ended December 29, 1996 and the fiscal year ended June 30, 1996, 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. The Company created a wholly owned subsidiary BioLife in March of 1998. Unless the context requires otherwise, references to the Company include BioLife and 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. 3 CMS CRYOSURGICAL SYSTEMS Background and Technological Overview Cryosurgery is a surgical procedure that uses freezing temperatures to destroy unwanted tissue by circulating a refrigerant through the tip of a cryoprobe (an instrument for applying extreme cold to tissue) applied directly to the tissue to be destroyed. Some surgeons have commenced targeting diseased tissue in the fields of urology, general surgery, and gynecology by use of cryosurgery. 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 and CryoLite Series The Company has developed certain proprietary designs intended to make its cryosurgical instrumentation more efficient and more precise than previous cryosurgical instrumentation. The CMS AccuProbe System and Cryolite Series are two of the Company's cryosurgical instrument product lines. In April 1991, the FDA accepted the Company's 510(k) premarket notification for the AccuProbe, thus allowing commercial marketing of the product at the Company's discretion. See "Governmental Regulation." The prototype of the CMS AccuProbe was first used on patients in October 1991. The commercial development of the CMS AccuProbe was completed in 1992 and marketing of the AccuProbe commenced. In addition, the Company markets a full complement of accessory products for the AccuProbe which are being marketed along with the AccuProbe system and single-use probes. In July 1997 the Company received FDA clearance for its CryoLite series of cryosurgical instrumentation. The CryoLite Series differs from the AccuProbe Systems in that CryoLite is capable of utilizing cryogens (refrigerants) other than liquid nitrogen. The AccuProbe was designed to use only liquid nitrogen as a cryogen. The backlog of orders at December 28, 1997 totaled $41,200, as compared to $4,804,994 at December 29, 1996. Back orders totaled $5,116,339 in June 1996. The change in the total back orders between December 29, 1996 and December 28, 1997 is due primarily to the discontinuance of the Company's relationship with its major distributor who had a blanket purchase order for both AccuProbe Systems and cryoprobes. The Company expects all of December 28, 1997 back order to generate revenues in the fiscal year ending December 1998. 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. 4 HYPOTHERMIC PRESERVATIVE SOLUTIONS Background and Technological Overview Lowering body temperature during certain surgical procedures helps to minimize the chance of damage to the patient's organs by reducing the patient's metabolic rate, thereby decreasing the patient's needs during surgery for oxygen and nutrients that normally flow through the blood. This is also true with respect to the preservation of individual organs and tissues to be used in transplant surgery during the interval between removal from the donor and transplant into the recipient. Grant subsidized research and development activities with respect to development of the Solutions for cell and tissue preservation have previously taken place at Allegheny-Singer Research Institute ("ASRI"), a subsidiary of Allegheny Health Services, Pittsburgh Pennsylvania and State University of New York at Binghamton ("SUNY"). The company continues to fund work at SUNY, but is not currently funding research at ASRI. The Solutions have not been fully tested nor has the regulatory clinical testing and approval process begun for human organ transplantation. Accordingly, there is no assurance that any of the proposed applications will prove viable in human surgical procedures. The Company anticipates that upon successful completion of funding it is seeking for its subsidiary, BioLife, for which there can be no assurance, clinical trials will begin to support FDA approval of the Solutions for purposes of human organ transplantation The Solutions The Solutions are complex synthetic, aqueous solutions containing, in part, minerals and other elements found in human blood which are necessary to maintain fluids and chemical balances throughout the body at near freezing temperatures. The use of the fluid is limited to low temperature applications because the Solutions do not carry sufficient oxygen to maintain organ integrity at warm temperatures. At lower temperatures, scientists have determined that human organs require less oxygen primarily because of the resulting reduced metabolism. The products which may result from the development of the Solutions include, but are not limited to, media for preservation of organs used in human transplantation procedures, cardioplegia ( stopping of the heart) applications, and media utilized in cell and tissue culture preservation. FUTURE PRODUCT DEVELOPMENT The Company's primary focus has been on the development and marketing of its cryosurgical instrumentation. The Company intends to continue development of its cryosurgical instrumentation as well as the Solutions. The development of the Solutions will be done with the funds the Company is seeking for its subsidiary BioLife. The Company contemplates that a variety of applications of hypothermic perservative solutions or other products for use in hypothermic medical procedures could ultimately be developed from the Solutions. The Company expects that any significant funding activities with respect to the Solutions would entail sales of equity securities in its subsidiary BioLife, 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 5 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 January 1997, the Company entered into a Research Project Agreement with Dr. Robert van Buskirk of SUNY, pursuant to which Dr. van Buskirk conducted research at SUNY's Center for Cryobiological Research in Binghamton, New York, with respect to the Solutions. The Company had agreed to fund Dr. van Buskirk in the amount of $42,200 for research associated with the Solutions MARKETS AND MARKETING The Company currently markets its AccuProbe system to hospitals, surgeons, and radiologists through its own sales department. The Company has signed contracts with independent contractors for purposes of selling and distributing the Company's product lines of cryosurgical instrumentation. The Company may also arrange with other third parties to market or distribute its products in the United States or other countries. The Company has expended significant resources educating surgeons and healthcare professionals in formal training programs as to the uses and benefits of the Company's cryosurgical instrumentation through both in-house educational seminars and practical applications outside the Company's training facility. Sales of the AccuProbe are increasingly affected by the level of reimbursement by public and private insurers in connection with procedures in which the AccuProbe is utilized. The availability of consistent, uniform insurance reimbursement guidelines for hospitals and physicians is an important factor often considered by some potential customers when making a decision regarding the purchase of any new medical device, including the AccuProbe system. Reimbursement of hospitals and urologists by public and private insurers such as Medicare and Blue Cross and Blue Shield is a necessary part of gaining general acceptance for use of the AccuProbe for urological cryosurgery. Medicare's Health Care Financing Administration ("HCFA") put into effect its technology advisory committee's recommendation that a national non-coverage policy be adopted in regard to cryoablation of the prostate. 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 that are covered by their insurers. The uncertainty and added efforts required for the Company's customers or potential customers to secure payment has constrained sales and utilization of AccuProbe systems to a large degree and may continue to do so until 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. The American Urological Association ("AUA") now terms the use of cryosurgery in urology as "one of the methods of management of adenocarcinoma of the prostate." This position by the AUA may have a 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 the AccuProbe System, the Cryolite Series, single-use probes and other accessory products. The Company presently uses third party vendors to manufacture certain parts 6 and subassemblies of the AccuProbe System, the CryoLite Series, single-use probes and other accessory products. While the typical lead time required for suppliers varies depending upon the components, the quantity required, and other factors, the lead times in some cases can be as long as three months. However, because the Company typically purchases components in advance in anticipation of future orders, the Company is generally able to deliver AccuProbe systems within 30 days of its receipt of an order, and single-use probes and other accessory products immediately upon receipt of an order. Although the Company generally uses standard parts and components for its products, certain components, such as liquid nitrogen dewars and probe tips, are currently available only from a limited number of sources. The Company does not have long-term agreements with all of these suppliers. To date, the Company has been able to obtain adequate supplies of such components in a timely manner from its existing sources. Although the Company believes it could develop alternative sources of supply for most of these components within a reasonable period of time, the inability to develop alternative sources, or a reduction or interruption in supply or a significant increase in the price of materials, parts or components, could materially and adversely affect the Company's results of operations. The Company also maintains an inventory of finished goods consisting primarily of single-use probes and other accessory products in anticipation of future orders. The Company believes it has sufficient capital to manufacture and market the 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, record-keeping and reporting and marketing of the AccuProbe, CryoLite, 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. 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. 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 7 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. In the event the Company intends to test clinically, produce or market the Solutions for human organ transplantation, safety standards and mandatory premarketing review and approval procedures established by the FDA for drugs, medical devices, and biologicals must be satisfied. In general, manufacturers must prove a product is safe and effective. Drugs must obtain approval by means of a New Drug Application ("NDA"), biologicals by means of a Product License Application ("PLA") and Establishment License Application ("ELA"), and medical devices must obtain a marketing clearance 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. Congress enacted legislation on June 10, 1993, providing that the Department of Health and Human Services (HHS) promulgate regulations defining the circumstances that constitute financial interest in a project that may create a bias for certain results. On June 28, 1994, the Public Health Service (PHS) published a Notice of Proposed Rulemaking which would require institutions that apply for research funding to ensure that the financial interests of investigators do not compromise the objectivity of such research. The proposed rules would apply to institutions applying for PHS grants or cooperative agreements for research and to any significant financial interest, including salary, consulting fees, equity interests such as stock or stock options, and patent rights, of an investigator responsible for the design, conduct or reporting of research. The proposed rules would require that all such significant financial interests be disclosed prior to applying for research funding, that disclosures be updated, records be maintained, and that institutions applying for such funding ensure that significant financial interests of investigators be managed, reduced or eliminated, including the divestiture of significant financial interests or the severance of relationships that create actual or potential conflicts. Such rules, if adopted, may impact any research funding the Company may obtain from the National Institutes of Health (NIH). Additionally, institutions in which Company-sponsored research is conducted may adopt similar rules, which could apply regardless of whether federal funding is involved. On September 22, 1994, FDA published a similar proposed regulation requiring that the sponsor of any drug, biological or device submit information concerning the compensation to, and financial interests of, any clinical investigator conducting clinical studies involving human subjects or establishing bioavailability or bioequivalence, for marketing approval. Under FDA's proposed rule, sponsors would be required to submit a list of clinical investigators and make one of two alternative submissions for each investigator who is not a full-time employee of the sponsor at the time reports of clinical studies are submitted to FDA. The alternative submissions would be: (1) a certification that the clinical investigator has not entered into any financial arrangement with the sponsoring company whereby the value of compensation could be affected by the outcome of the study, that the investigator has not received significant payments of other sorts from the sponsor, such as grants, equipment, retainers or honoraria; and that the investigator does not have significant financial interests of any kind in the sponsor; or (2) disclosure of the specific financial arrangements made with the clinical investigator, the investigator's proprietary, patent and equity interests in the tested product and the sponsoring company, and a description of steps taken to minimize the potential for bias in data submitted in support of the marketing application. Both the PHS and FDA rules, if adopted, could require disclosure of, limit, or in some cases, prohibit equity ownership by individuals conducting research for the Company, including consultants, some of whom may have equity interests in the Company. Such rules, if adopted, could have the effect of limiting such research between the Company and individuals with equity interests in the Company. The FDA rules, if adopted, could also impact 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 8 marketing of products, cause the Company to undertake costly procedures, and thereby furnish a competitive advantage to more substantially capitalized companies with which the Company may compete. In September 1997 the Company was advised by FDA that it could no longer promote its products for gynecological applications which referenced endometrial ablation. It is FDA's opinion that there is not enough clinical data to support the use of cryosurgical techniques in the uterus, specifically endometrial ablation. The Company is complying with this new FDA directive, even though it does have intended use clearance in the field of gynecology. In December 1997 the FDA performed a General Manufacturing Practices ("GMP") audit at the Company's manufacturing facility. The Company was not cited for any deficiencies related to GMP for Medical Devices Regulations. PROPRIETARY RIGHTS The Company relies on a combination of trade secret, patent and trademark law, and confidentiality and non-disclosure agreements to establish and protect its proprietary rights in its products. Despite these precautions, it may be possible for unauthorized third parties to copy certain aspects of the Company's products or to obtain and use information that the Company regards as proprietary. The laws of some foreign countries in which the Company may sell its products do not protect the Company's proprietary rights to the same extent as do the laws of the United States. In total the Company owns ten issued U. S. patents and seven issued or allowed foreign patents. At least one additional pending U. S. patent application has been allowed or has been found to contain patentable subject matter. There can be no assurance that any additional patents will be granted. In addition, to the extent that any unique applications of the Company's technologies are developed by the Company's scientists, such applications or procedures may not be subject to any protection. There can also be no assurance that the Company will develop additional patentable processes or products or, if developed, that the Company would be able to obtain patents with respect thereto, or that others may not assert claims successfully with respect to such patents or patent applications. Furthermore, the Company might not be able to afford the expense of any litigation which might be necessary to enforce its rights under any patents it may obtain, and there can be no assurance that the Company would be successful in any such suit. There is also no assurance that the Company's proposed products will not infringe patents owned by others, licenses to which may not be available to the Company. The Company intends to rely to a large extent on the technological expertise of its scientific staff. There can be no assurance that others will not independently develop such technological expertise or otherwise obtain access to the Company's technological expertise. 9 COMPETITION The medical products industry is highly competitive. Most of the Company's potential competitors have considerably greater financial, technical, marketing, and other resources than the Company. With respect to the Company's cryosurgical instrumentation, the Company faces competition from other firms engaged in the business of developing or marketing cryosurgical devices. 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 Company's cryosurgical instrumentation also competes with other techniques for destroying diseased 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 that the Company's cryosurgical instrumentation or the Solutions do not offer unique technologies and that, in fact, the techniques employed by the Company's scientists were responsible for results of the Company tests and not the technologies contained in the Company's AccuProbe or the Solutions, then competitors of the Company who have developed products with similar properties may be able to duplicate the performance of the Company's cryosurgical instrumentation and Solutions by applying similar techniques. The Company expects competition to intensify with respect to the areas in which it is involved as technical advances are made and become more widely known. EMPLOYEES The Company's business is highly dependent upon its ability to attract and retain qualified scientific, technical and management personnel. The Company had 33 full-time employees at December 28, 1997. The Company is not a party to any collective bargaining agreements. ITEM 2. DESCRIPTION OF PROPERTY The Company's administrative, manufacturing and research and development facilities consist of approximately 21,000 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 12-month period ended December 28, 1997 totaled $227,607. At December 28, 1997, the monthly rental was $23,358. 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 twelve-month period ended December 28, 1997. ITEM 3. LEGAL PROCEEDINGS In November 1996, the Company filed suit against EndoCare, Inc., ("EndoCare") and ZhaoHua Chang in the Circuit Court for Montgomery County, Maryland (Case No. 161496). The lawsuit alleges, among other things that EndoCare misappropriated trade secrets of the Company, and that EndoCare tortuously interfered with the Company's contracts, its relationships with its employees, and the Company's contractual and potential business relationships with customers. The lawsuit, which contains six counts, also alleges that Dr. Chang and EndoCare engaged in unfair competition against the Company and civil conspiracy, and that Dr. Chang, who was formerly employed as a Vice President of Cryosurgical Engineering 10 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. An agreement in principle has been reached with Endocare to resolve this suit. The Company is presently waiting for Endocare to communicate with Dr Chang in regard to the terms and conditions of settlement. If these mediation efforts fail, the Company intends to pursue and defend this case vigorously. In June 1997, Concept Group, Inc. (`Concept") filed suit against the company in the United States District Court for the Eastern District of Pennsylvania. The Company successfully transferred venue to the United States District for the District of Maryland, Southern Division. The suit involves the manufacture of cryosurgical probes allegedly developed by Concept which are used in certain surgical procedures. Concept alleges that in December 1992 the parties entered into a confidentiality agreement regarding certain proprietary and technical information relating to the cryoprobe. Concept further alleges that in January 1994 the parties entered into a Development and Manufacturing Agreement ("Development Agreement") in which Concept was to perform vacuum brazing on the cryoprobe according to a detailed set of design specification. After a dispute arose regarding defects in the vacuum brazing process performed by Concept, the parties executed a release in August 1996 which discharged both parties from all business obligations to each other. Concept alleges that the Company violated the terms of the confidentiality agreement and the Development Agreement by subsequently applying for and receiving a United States patent on the cryoprobe. Concept contends it has a proprietary interest in the design of the cryoprobe. Further, Concept alleges that the Company fraudulently induced it into signing the release in order to secure the patent. Concept is demanding $1,500,000.00 plus costs and interest it claims it expended manufacturing the cryoprobes. The Company has denied all liability and damages, and intends to defend this matter. After evidence was found to show that the plaintiff failed to manufacture the probes in accordance with the design specification set out in the agreement, the Company filed a counterclaim against Concept. The counterclaim requests a judicial determination that the release was valid as well as damages for repairs to the cryoprobes due to the Concept's failure to conform with the design specifications set out in the agreement. Although the Company believes it has meritorious defenses and that the counterclaim asserts valid claims, no prediction concerning the ultimate outcome or amount or range of damages, if any, can be made at this time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the year ended December 28, 1997. 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock, par value $.001 per share, of the Company ("Common Stock") has been traded on the over-the-counter market with quotations reported on the National Association of Securities Dealers Automatic Quotation System (NASDAQ) under the symbol "CMSI" since November 22, 1989. From the period May 19, 1992 to November 21, 1996, the Common Stock has traded on the NASDAQ National Market System and on November 22, 1996, the Common Stock commenced trading on the NASDAQ SmallCap Market System. All corresponding prices represent high and low closing prices for the Common Stock for the periods indicated.
Price Range ----------- High Low ---- --- Quarter Ended: -------------- March 30, 1997 5/8 9/16 June 29, 1997 1/2 1/2 September 28, 1997 3/8 3/8 December 28, 1997 1/4 3/16 March 31, 1996 2 7/16 1 5/8 June 30, 1996 3 5/16 2 September 29, 1996 2 9/16 1 9/16 December 29, 1996 1 11/16 9/32
HOLDERS As of March 31, 1998, there were 1,193 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 ITEM 6. 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. In March 1998 the Company created a wholly owned subsidiary, BioLife Technologies, Inc for the purposes of commercializing the company's preservative Solutions. The company is presently seeking funding for this subsidiary and although it has contacted a number of parties who have expressed an interest in potentially providing such funding, there can be no assurance that such funding will be obtained. On July 25, 1996, the Board of Directors of the Company authorized a change in the Company's fiscal year from a period beginning July 1 and ending on June 30 to a variable period that usually ends on the last Sunday of the calendar year. 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 The company continues to have its revenues negatively influenced by the lack of reimbursement by HCFA in regard to cryoablation of the prostate and FDA's prohibition on the promotion of cryosurgical techniques that may be used in the uterus. The company has made reductions in expenses and personnel in an attempt to maintain its viability as an operating entity. Sales and other revenues for the year ended December 28, 1997, six months ended December 29, 1996, and the year ended June 30, 1996 ("fiscal year 1996") are $3,571,386, $2,224,541, and $6,843,950, respectively. The decrease in revenue results from a decline in the number of AccuProbe systems sold and fewer procedures performed using single-use AccuProbe accessories due primarily to the lack of formal Medicare reimbursement for prostate cryosurgery. In view of the operating losses suffered by the Company and the level of the Company's current liquid resources (see "Liquidity and Capital Resources" below) the Company undertook certain actions to reduce expense levels. Such actions include staff reductions, a reduction in the amount of leased office space, reductions in the levels of research grants to outside facilities and reductions in other overhead expenses. The goal of these cost reduction measures is to reduce operating expenses to a level whereby the Company can achieve operating profits and a positive cash flow from operations. There can be no assurance of achieving these results. Gross profits for the for the year ended December 28, 1997, six months ended December 29, 1996, and fiscal year 1996 are $1,652,784, $1,164,380 and $3,079,828, respectively. Gross profits as a percentage of revenues in 1997 were 46%, 52% for the six months ended December 29, 1996, and 45% for the fiscal year 1996. 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 27, 1998. Research and development expenses for the year ended December 28, 1997, six months ended December 29, 1996, and Fiscal year 1996 are $1,293,470, $492,794 and $1,484,042, respectively. The research and development expense for 1997 were incurred primarily in the development of the CryoLite series and other non liquid nitrogen based products. Sales and marketing expenses for the year ended December 28, 1997, six months ended December 29, 1996, and fiscal year 1996 are $806,435, $658,416, and $2,439,636, respectively. The trend in reducing sales and marketing expenses is primarily due to decreased staffing and a reduced participation in marketing and trade shows. 13 General and administrative expenses for year ended December 28, 1997, six months ended December 29, 1996, and fiscal year 1996 are $1,209,884, $875,965, and $2,570,604, respectively. This trend in reducing general and administrative expenses is primarily due to staff reductions and reduced professional and consulting fees. The Company sustained net losses for the year ended December 28, 1997, six months ended December 29, 1996, and fiscal year 1996 in the amount of $1,589,993, $840,132, and $3,404,247, respectively. Although the Company continues to decrease its operating costs, the decrease in gross profits, due to significantly lower revenues, has resulted in continued annual net losses. The Company intends to continue reducing its operating expenses in view of the trend of continuing declines in revenues. There can be no assurance that with continued reductions in operating expenses, the Company will experience a net profit in 1998. LIQUIDITY AND CAPITAL RESOURCES At December 28, 1997, the Company had cash and cash equivalents totaling $124,000 and working capital of $1,588,368. The working capital of the Company was $3,164,304 and $2,279,406 at December 29, 1996 and June 30, 1996, respectively. The Company's working capital position increased in the six months ended December 29, 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 totaled $1,924,935. Each share of Series D Preferred Stock was convertible into that number of shares of common Stock as determined by dividing $10,000 by a price equal to 82.5% of the average of the closing bid prices for the Common Stock for the five (5) trading days immediately preceding the date upon which the holder of the Series D Preferred Stock transmitted a conversion notice to the Company. The holders of the Series D Preferred Stock could convert one-third of their shares of Series D Preferred Stock commencing forty (40) days after the Series D Preferred Stock Closing Date, up to an additional one-third of the Series D Preferred Stock commencing seventy-five (75) days after the Series D Preferred Stock Closing Date, and the balance thereof commencing one hundred (100) days after the Series D Preferred Stock Closing Date. 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 5,508,168 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 totaled $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 equaled 82.5% of the Average Bid Price. If the Average Bid Price was $2.01 or more, then the Conversion Price equaled 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. 14 Capital expenditures for leasehold improvements, furniture and equipment totaled $447,020 in the year ended December 28, 1997 compared to $61,859 in the six months ended December 29, 1996 and $60,447 in the fiscal year ended June 30, 1996. The Company has budgeted $100,000 for additional equipment in the year ending December 27, 1998. 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 1998 sales may be less than the level experienced in comparable periods of 1997 and 1996 and believes that its current cash and working capital position will be sufficient to fund the operations of the Company for 12 months, dependent, in part, on the level of sales and marketing activity engaged in by the Company and the amounts of research funded by the Company. However, the Company expects to reduce expenditures and to pursue various forms of short term financing and possibly additional equity financing to supplement working capital during fiscal 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. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CRYOMEDICAL SCIENCES, INC. Index to Consolidated Financial Statements Page Number ----------- Independent Auditor's Report 16 Balance Sheet 17 Consolidated Statements of Operations 18 Consolidated Statements of Cash Flows 19 Consolidated Statements of Stockholders' Equity 20 Notes to Consolidated Financial Statements 21-38
16 Independent Auditor's Report To the Board of Directors and Stockholders of CRYOMEDICAL SCIENCES, INC. Rockville, MD We have audited the accompanying balance sheet of Cryomedical Sciences, Inc. as of December 28, 1997, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of Cryomedical Sciences, Inc. at December 28, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring operating losses and negative cash flows from operations. Additionally, the Company's revenue is based upon a singular technology which, in the principal area of use, the Medicare Health Care Financing Administration has adopted a policy of noncoverage which has had the effect of discouraging use by physicians that rely on Medicare funding for patients. These conditions raise substantial doubt as to the Company's ability to generate sufficient sales to enable it to realize its assets and continue as a going concern. Management's plans regarding these conditions are also discussed in Note 1. The financial statements do not include any adjustments that might be required as a result of the outcome of the uncertainty. ARONSON, FETRIDGE & WEIGLE Rockville, Maryland March 18, 1998 17 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY BALANCE SHEET
December 28, 1997 ---- ASSETS - ------ Current assets Cash and cash equivalents $ 124,000 Receivables, net allowance for doubtful accounts of $407,495 989,908 Inventories 1,654,106 Prepaid expenses and other current assets 98,030 ---------------- Total current assets 2,866,044 Fixed assets, net accumulated depreciation and amortization of $2,032,959 994,296 Other assets 18,727 ---------------- Total assets $ 3,879,067 ================ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities Accounts payable $ 533,674 Accrued expenses 428,324 Unearned revenues 135,262 Warranty reserves 50,598 Extended warranties - current portion 92,837 Capital leases - current portion 36,981 ---------------- Total current liabilities 1,277,676 ---------------- Long term liabilities Extended warranties, net of current portion 4,500 Capital leases, net of current portion 103,106 Deferred rent 33,330 ---------------- Total liabilities 1,418,612 ---------------- Stockholders' equity Preferred stock, $.001 par value per share, 9,378,800 authorized; no shares issued - Common stock, par value $.001 per share, 50,000,000 shares authorized; 33,454,302 issued and outstanding 33,454 Additional paid-in capital 30,551,263 Unearned compensation (39,525) Accumulated deficit (28,084,737) ---------------- Total stockholders' equity 2,460,455 ---------------- Total liabilities and stockholders' equity $ 3,879,067 ================
The accompanying notes are an integral part of these financial statements. 18 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Six Months Ended Year ended December 28, December 29, June 30, ---------------- ----------------- ----------------- 1997 1996 1996 ---- ---- ---- Revenues Product sales $ 2,348,909 $ 1,631,936 $ 5,652,403 Services and other 1,222,477 592,605 1,191,547 ---------------- ----------------- ----------------- Total Revenue 3,571,386 2,224,541 6,843,950 Cost of sales Product sales 1,410,592 763,890 3,131,440 Services and other 508,010 296,271 632,682 ---------------- ----------------- ----------------- Total cost of sales 1,918,602 1,060,161 3,764,122 Gross profit 1,652,784 1,164,380 3,079,828 Expenses Research and development 1,293,470 492,794 1,484,042 Sales and marketing 806,435 658,416 2,439,636 General and administrative 1,209,884 875,965 2,570,604 ---------------- ----------------- ----------------- Total expenses 3,309,789 2,027,175 6,494,282 ---------------- ----------------- ----------------- Operating loss (1,657,005) (862,795) (3,414,454) Interest income, net of interest expense 67,012 22,663 10,207 ---------------- ----------------- ----------------- Net loss $ (1,589,993) $ (840,132) $ (3,404,247) ================ ================= ================= Net loss per common share $ (0.05) $ (0.03) $ (0.13) ================ ================= ================= Weighted average number of common shares outstanding 33,158,999 26,850,325 25,277,944 ================ ================= =================
The accompanying notes are an integral part of these financial statements. 19 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Six Months Ended Year ended December 28, December 29, June 30, -------------- ---------------- -------------- 1997 1996 1996 ---- ---- ---- Cash flows from operating activities: Net loss $ (1,589,993) $ (840,132) $ (3,404,247) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 420,993 234,849 398,294 Provision for bad debt 334,303 231,908 30,000 Write-off of accounts receivable (12,211) (30,000) - Forgiveness of loan to officer - 44,283 - Sale of rental equipment 45,847 - - Write-off of fixed assets - - 29,023 Loss on disposal of fixed assets - 3,797 - Changes in operating assets and liabilities: Decrease (increase) in receivables 62,814 (7,354) 1,581,968 Decrease (increase) in inventories 37,195 (197,561) 637,984 (Increase) decrease in prepaid and other current assets (31,635) 120,874 110,715 Increase (decrease) in accounts payable 173,015 113,275 (685,050) (Decrease) increase in accrued expenses (376,750) (702,915) 65,896 (Decrease) increase in unearned revenue (18,948) 85,387 18,823 Decrease in warranty reserves (47,002) (2,400) (148,000) Decrease in extended warranties (420,351) (338,099) (835,237) (Decrease) increase in deferred rent (72,194) (56,022) 157,856 -------------- -------------- ------------- Net cash used in operating activities (1,494,917) (1,340,110) (2,041,975) -------------- -------------- ------------- Cash flows from investing activities: Purchases of short term investments - (110,150) (4,761) Maturities of short term investments 110,150 105,071 - Purchase of equipment (355,293) (61,859) (60,447) -------------- -------------- ------------- Net cash used in investing activities (245,143) (66,938) (65,208) -------------- -------------- ------------- Cash flows from financing activities: Reg "S" Offering - 1,924,935 - Issuance of shares for employee stock purchase plan 30,101 13,433 37,011 Issuance of common stock - - 1,910,000 Exercise of employee stock options - - 326,304 Increase in unearned compensation (16,937) - - Issuance of warrants 43,000 - - Proceeds from notes payable 57,310 - - Principal payments on capital leases and notes payable (18,656) (12,948) (31,082) Increase in notes receivable from officers - - (1,562) -------------- -------------- ------------- Net cash provided by financing activities 94,818 1,925,420 2,240,671 -------------- -------------- ------------- Net (decrease) increase in cash and cash equivalents (1,645,243) 518,372 133,488 Cash and cash equivalents at beginning of period 1,769,243 1,250,871 1,117,383 -------------- -------------- ------------- Cash and cash equivalents at end of period $ 124,000 $ 1,769,243 $ 1,250,871 ============== ============== ============= Supplemental Cash Flow Information: Cash paid for interest $ 23,160 $ 4,853 $ 15,392 ============== ============== ============= Supplemental disclosure of noncash activity: Lease equipment acquired under capital lease $ 91,727 $ - $ - ============== ============== =============
The accompanying notes are an integral part of these financial statements. 20 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Convertible Preferred Stock --------------------------- -------------------------------- Shares Amount Shares Amount - --------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1995 24,845,631 $ 24,846 - - Exercise of stock options 503,134 503 - - Employee Stock Purchase Plan 16,079 16 - - Reg "S" offering of Convertible Preferred Stock, net - - 1,332,633 1,333 Conversion of Convertible Preferred Stock from Reg "S" 1,332,633 1,333 (1,332,633) (1,333) Shareholder suit settlement 175,549 175 - - Interest on loan to officer - - - - Net loss - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 26,873,026 26,873 - - Employee Stock Purchase Plan 7,024 7 - - Reg "S" offering of Convertible Preferred Stock, net - - 196 - Conversion of Convertible Preferred Stock from Reg "S" 969,695 970 (40) - Forgiveness of loan to officer - - - - Issuance of Warrants - - - - Amortization of unearned compensation - - - - Net loss - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 29, 1996 27,849,745 27,850 156 - Employee Stock Purchase Plan 96,389 96 - - Conversion of Convertible Preferred Stock from Reg "S" 5,508,168 5,508 (156) - Issuance of Warrants - - - - Amortization of unearned compensation - - - - Net loss - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 28, 1997 33,454,302 $ 33,454 - - =================================================================================================================================
Additional Notes Total paid-in Accumulated Unearned Receivable stockholders' capital deficit Compensation from Officers equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 $ 26,248,915 $ (22,250,365) - $ (41,471) $ 3,981,925 Exercise of stock options 325,801 - - - 326,304 Employee Stock Purchase Plan 36,995 - - - 37,011 Reg "S" offering of Convertible Preferred Stock, net 1,908,667 1,910,000 Conversion of Convertible Preferred Stock from Reg "S" - - - - 0 Shareholder suit settlement (175) - - - 0 Interest on loan to officer - - - (1,562) (1,562) Net loss - (3,404,247) (3,404,247) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1996 28,520,203 (25,654,612) - (43,033) 2,849,431 Employee Stock Purchase Plan 15,797 - - - 15,804 Reg "S" offering of Convertible Preferred Stock, net 1,924,935 - - - 1,924,935 Conversion of Convertible Preferred Stock from Reg "S" (970) - - - 0 Forgiveness of loan to officer - - - 43,033 43,033 Issuance of Warrants 23,800 - $ (23,800) - 0 Amortization of unearned compensation - - 1,212 - 1,212 Net loss - (840,132) - - (840,132) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 29, 1996 30,483,765 (26,494,744) (22,588) - 3,994,283 Employee Stock Purchase Plan 30,006 - - - 30,102 Conversion of Convertible Preferred Stock from Reg "S" (5,508) - - - 0 Issuance of Warrants 43,000 - (20,408) - 22,592 Amortization of unearned compensation - - 3,471 - 3,471 Net loss - (1,589,993) - - (1,589,993) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 28, 1997 $ 30,551,263 $ (28,084,737) $ (39,525) - $ 2,460,455 ====================================================================================================================================
The accompanying notes are an integral part of these financial statements. 21 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (A) Organization Cryomedical Sciences, Inc. (the Company) is engaged in the research and development of products for use in the field of hypothermic (low-temperature) medicine by surgeons and radiologists in the United States and abroad. The Company is engaged in the development, manufacturing and marketing of cryosurgical devices used to freeze and destroy diseased tissue through the application of subfreezing temperatures. The first such device was shipped in June 1992. Hypothermic blood substitute solutions, also being developed by the Company, may allow heretofore difficult or impossible surgical techniques to be performed and may be useful in increasing the period in which organs may be preserved for transplantation. The Company was organized November 5, 1987, as a Delaware corporation. On 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 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, during 1996, 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 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. 22 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (A) Organization (continued) 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, during 1996, the Company enhanced its liquidity through a $1.9 million preferred stock offering (see Note 5) 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. (B) 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 that usually ends on the last Sunday of the calendar year. 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. (C) Principles of Consolidation The 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. 23 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (D) Basic Net Loss Per Share In 1997, the Company adopted Statement of Financial Accounting Standard No. 128, Earnings Per Share. The adoption of this Standard had no effect on current period or previously reported net loss per share. The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Because the Company has incurred losses, fully diluted per share amounts are not presented. (E) Cash Equivalents Cash equivalents consist primarily of interest-bearing bank deposits. The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. At times the Company maintains cash balances which may exceed Federally insured limits. The Company does not believe that this results in any significant credit risk. (F) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. (G) Equipment and Leasehold Improvements Furniture and equipment are stated at cost and are depreciated using the straight-line method overestimated 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. (H) Revenue Recognition The Company receives revenue from sales of products, extended warranties and from the rental of Cryo Surgical Systems. 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. Revenue from the lease of Cryo Surgical Systems is recognized over the course of the non-cancelable lease term. 24 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (I) 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. (J) Income Taxes The Company accounts for income taxes using an asset and liability method which generally requires recognition of deferred tax assets and liabilities for the expected future tax 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. (K) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (L) Employee Stock Options The Company has chosen to 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. 25 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (M) Accounting Pronouncements In June 1997 the Financial Accounting Standard Board issued Statement of Financial Accounting No. 130 Reporting Comprehensive Income. This standard requires the reporting of the components of comprehensive income, which includes net income, and is effective for years beginning after December 15, 1997. The Company believes that had the standard been adopted for the year ended December 28, 1997, that the presentation would not differ significantly from the presentation contained in its Statement of Operations. (N) Fair Value of Financial Instruments The fair value of the financial instruments included in the consolidated financial statements, except as otherwise discussed in the notes to financial statements, approximates their carrying value. (O) Reclassifications Certain reclassifications of the prior year financial statements have been made to conform to the current period presentation. NOTE 2. - INVENTORIES Inventories consist of the following at December 28, 1997: Raw materials and purchased parts $ 859,674 Work in process 243,431 Finished goods 594,746 ---------- 1,697,851 Less: Reserves (43,745) ---------- $1,654,106 ==========
26 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 3. - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 28, 1997: Leasehold improvements $ 201,521 Furniture and office equipment 769,535 Manufacturing and other equipment 2,056,199 ---------- 3,027,255 Less accumulated depreciation and amortization (2,032,959) ---------- $ 994,296 ==========
NOTE 4. - INCOME TAXES The Company has not realized any taxable income since its inception and as of December 28, 1997, has net operating loss carryforwards for both federal and state tax purposes and research and development tax credit carryforwards for federal income tax purposes approximately as follows:
Net R&D Year of Operating Tax Expiration Losses Credits ---------- ------ ------- 2003 $ 76,000 $ - 2004 472,000 20,000 2005 1,747,000 42,000 2006 2,523,000 88,000 2007 4,505,000 125,000 2008 5,893,000 150,000 2009 1,433,000 114,000 2010 1,562,000 145,000 2011 5,131,000 33,000 2012 1,600,000 - ----------- ---------- Total $24,942,000 $ 717,000 ============ ==========
At December 28, 1997, the Company has a deferred tax asset related primarily to the net operating loss carryforwards and the R&D tax credit carryforwards of approximately $10,200,000, against which the Company has provided an allowance for the full amount because management has determined that it is not more likely than not that the deferred tax asset will be realized. In the event of a significant change in the ownership of the Company, the utilization of such loss carryforwards could be substantially limited. 27 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 5 - STOCKHOLDERS' EQUITY 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 of the Securities Act of 1933, as amended. The net proceeds of the offering totaled $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 equaled 82.5% of the Average Bid Price. If the Average Bid Price was $2.01 or more, then the Conversion Price equaled 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. On that date, 1,332,633 shares of Common Stock were issued pursuant to the conversion provisions. 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 of the Securities Act of 1933, as amended. The net proceeds of the offering totaled $1,924,935. Each share of Series D Preferred Stock was convertible into that number of shares of Common Stock as determined by dividing $10,000 by a price equal to 82.5% of the average of the closing bid prices for the Common Stock for the five (5) trading days immediately preceding the date upon which the holder of the Series D Preferred Stock transmitted a conversion notice to the Company. The holders of the Series D Preferred Stock could convert one-third of their shares of Series D Preferred Stock commencing forty (40) days after the Series D Preferred Stock Closing Date, up to an additional one-third of the Series D Preferred Stock commencing seventy-five (75) days after the Series D Preferred Stock Closing Date, and the balance thereof commencing one hundred (100) days after the Series D Preferred Stock Closing Date. Any share of Series D Preferred Stock outstanding on October 2, 1998 automatically will 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, the Company issued 969,695 shares of Common Stock in accordance with the terms of the first conversion of the preferred stock offering. In January 1997, the second and third Preferred Stock conversions of the offering, representing the remaining 156 shares of Series D Preferred Stock were converted into 5,508,168 shares of Common Stock, completing the offering. 28 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) 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 on the date of grant. The terms of such warrants have ranged from three to ten years with various vesting arrangements (see Note 7 regarding warrants granted to a director). In November 1996, the Company granted warrants to two consultants in connection with limited period consulting agreements. In total, the Company granted the consultants warrants to purchase 85,000 shares of Common Stock at $0.53 per share. The warrants had a grant date fair value of $0.28 per share of Common Stock, lapse after ten years and may be exercised one-third each on the first, second, and third anniversary dates of the grant. In March 1997, the Company granted warrants to a consultant to the Company to purchase 50,000 shares of the Company's common stock at a price of $.53125. The fair value of the company's common stock at the date of the grant was $.375. The warrants are exercisable into 25,000 shares immediately with the remainder exercisable one-third on each of the first, second and third anniversary dates of the grant. In July 1997, the Company granted warrants to two consultants to the Company to purchase an aggregate of 80,000 shares (40,000 shares each) of common stock of the Company at a purchase price of $.50 per share. The fair value of the Company's common stock at the date of the grant was $.375. The warrants are exercisable one-third each on each of the first, second and third anniversary dates of the grant. 29 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes warrant activity for the year ended December 28, 1997, the six month transition period ended December 29, 1996 and the year ended June 30, 1996 with respect to warrants granted to consultants excluding warrants granted to directors of the Company. (See Note 7):
Transition Period Year Ended Ended Fiscal Year Ended December 28, 1997 December 29, 1996 June 30, 1996 ------------------- ----------------- ------------------- Wgtd. Avg. Wgtd. Avg. Wgtd. Avg. Exer. Exer. Exer. Shares Price Shares Price Shares Price ------- ---------- ------- ---------- ------ ---------- Outstanding at beginning of 237,000 $ 3.82 152,000 $ 5.66 152,000 $ 5.66 year Granted 130,000 .51 85,000 0.53 - - Exercised - - - - - - Terminated - - - - - - Outstanding at end of year 367,000 2.65 237,000 3.82 152,000 5.66 Warrants exercisable at 198,333 5.16 145,000 5.83 145,000 5.80 year end
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. 30 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) The following table provides information pertaining to stock options:
Transition Period Year Ended Ended Fiscal Year Ended December 28, 1997 December 29, 1996 June 30, 1996 ------------------- ----------------- ------------------ Wgtd. Avg. Wgtd. Avg. Wgtd. Avg. Exer. Exer. Exer. Shares Price Shares Price Shares Price ------- ---------- ------ ---------- ------ ---------- Outstanding at beginning 1,689,250 $ 3.32 1,931,650 $ 3.01 1,890,334 $ 3.01 of year Granted 400,000 .50 - - 884,950 2.28 Exercised 96,389 .31 - - 528,334 0.62 Terminated 149,261 12.80 242,400 4.48 315,300 4.92 Outstanding at end of year 1,843,600 2.12 1,689,250 2.80 1,931,650 3.01 Stock options exercisable 999,350 2.56 800,472 3.32 852,900 3.68 at year end
The following table summarizes information about stock options outstanding at December 28, 1997:
Range of Number Weighted Average Exercise Outstanding Remaining Weighted Average Prices at December 28, 1997 Contractual Life Exercise Price ------ -------------------- ---------------- -------------- $ .50 400,000 9.0 $ .50 .51 -3.00 1,252,000 7.4 2.16 3.01 -6.00 116,600 7.0 3.13 6.01 -9.25 75,000 4.7 8.51 ------ --- ---- 1,843,600 7.6 2.12 ========= === ====
Number Exercisable at Weighted Average December 28, 1997 Exercise Price ----------------- -------------- 999,350 2.56
31 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) The 1993 Employee Stock Purchase Plan was adopted by the Board of Directors in August 1993, and made available 250,000 shares of Common Stock of the Company to be purchased voluntarily through payroll deductions of one to ten percent of base pay by participating employees (excluding directors and officers) of the Company through a series of Offerings. Each employee at the completion of an offering is eligible to purchase Common Stock at 85% of its fair market value at either the beginning or end of the six-month offering, whichever is lower. The Plan expired on June 30, 1997. Transactions related to the Plan are summarized as follows:
Weighted Average Exercise Shares Price ------ ----- Available at June 30, 1996 219,499 Exercised 16,079 $ 2.30 Available at December 29, 1996 212,475 Exercised 7,024 $ 2.25 Available at December 28, 1997 - 0 - Exercised 96,389 $ .31
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%. 32 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its employee stock option and purchase plans. The compensation costs charged against income under the Company's plans for the year ended December 28, 1997, the six month transition period ended December 29, 1996 and the year ended June 30, 1996 were insignificant. Had compensation cost for the Company's stock option plans and its stock purchase plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Financial Accounting Standards Board Statement No. 123, the Company's net loss and loss per share for the year ended December 28, 1997, 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 Year Period Year Ended Ended Ended December December June 30, 28, 1997 29, 1996 1996 ---------- ---------- ---------- Net loss to common shareholders As reported $1,589,993 $ 840,132 $3,404,247 Pro forma 2,191,011 1,142,141 3,662,868 Net loss per basic common share As reported .05 0.03 0.13 Pro forma .07 0.04 0.15
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. 33 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED) 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. NOTE 6 - EMPLOYEE BENEFIT PLAN The Company established a 401(k) savings plan effective July 1, 1992 covering all eligible employees. Company contributions are discretionary and none were made the year ended December 28, 1997, during the six month transition period ended December 29, 1996, or the year ended June 30, 1996. NOTE 7 - 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. 34 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED) 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. 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 Chief Executive Officer had resigned. The severance package associated with this officer's resignation included a payout of $216,000 which was 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 totaling $55,800 was 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, he borrowed funds from the Company to exercise the options, evidenced by a promissory note secured by the shares. The loan was for a period of five years with interest at the rate of 5% per annum. During the period ending December 29, 1996, the balance of $44,283 in principal and interest was converted to compensation by 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 continued to provide consulting services to the Company, one-third maybe 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 January 1997, the Company granted each of two Directors of the Company options to purchase 25,000 shares of the Company's common stock for $.50 per share. The warrants expire in ten years. 35 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED) 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. The Company paid fees to two stockholders for consulting services in the amount of $6,000 and $128,655 for the six month transition period ended December 29, 1996 and the year ended June 30, 1996, respectively. The Company paid $27,641, $52,574 and $77,735 in legal fees during the year ended December 28, 1997, the six month transition period ended December 29, 1996 and the year ended June 30, 1996, respectively, to a law firm in which a director and stockholder of the Company is a partner. NOTE 8 - COMMITMENTS AND CONTINGENCIES (A) Employment Agreement In May 1996, the Company entered into an employment agreement with its new President and Chief Executive Officer that has an original term that expires December 31, 1997. The agreement provides for two automatic one year extensions unless the Company acts not to extend the agreement. The agreement provides for annual bonuses to the officer based upon a percentage of "Pre-Tax Profits of the Company" as follows:
Percent of Pre-Tax Year Profits ---- --------- 1996 10.0% 1997 10.0 1998 7.5 1999 5.0 2000 4.0 2001 3.0
36 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) (B) Leases The Company rents office, lab and manufacturing space as lessee under a five year operating lease that commenced May 1, 1995. Effective August 1996, the Company entered into an addendum to the lease whereby the Company released a portion of the space included in the lease which the landlord then relet to another tenant. Under the letter agreement, the Company paid for certain improvements required by the new tenant and is paying the landlord a $1 per square foot differential rent charge over the term of the lease. In March 1997, the Company agreed to release additional space covered by its lease to its landlord who then relet the space to another tenant. The Company has guaranteed the rental payments of the new tenant to the landlord for the remainder of the term of the Company's lease. Future minimum payments under the line, including the $1 per square foot differential are as follows:
Year Amount ------------- ---------- 1998 $ 303,398 1999 315,172 2000 105,040 ---------- Total $ 723,610 ==========
Rental expenses for facilities and equipment for the year ended December 28, 1997, the six month transition period ended December 29, 1996 and the year ended June 30, 1996 totaled $246,485, $127,813 and $568,331, respectively. 37 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 9 - LONG-TERM DEBT Long-term debt consisted of the following at December 28, 1997: (A) Capital lease obligations Three leases for office equipment entered into in 1997 requiring aggregate monthly payments of $3,215. The leased equipment is included in property and equipment at a cost of $91,727 less accumulated amortization of $3,293 at December 28, 1997. A summary of future payments required under the leases and the present value of the lease obligations in interest rates ranging from 12 to 25% that are implicit in the leases are as follows:
Year Amount ----------- ---------- 1998 $ 28,582 1999 38,582 2000 33,948 ---------- Total 111,112 Imputed interest 22,054 ---------- Net obligations $ 89,058 ==========
(B) Note payable The note payable is to a vendor for an equipment purchase, requires 60 monthly payments of $1,183 including interest at 8.76% and is collateralized by the equipment. (C) Future maturities Future maturities of long-term debt is as follows:
Year Amount ---------- ---------- 1998 $ 37,512 1999 42,148 2000 43,677 2001 13,252 2002 3,498 ---------- Total $ 140,087 ==========
38 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, THE SIX MONTHS ENDED DECEMBER 29, 1996 AND THE YEAR ENDED JUNE 30, 1996 NOTE 10 - 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 this employment by EndoCare, his retention and misuse of Cryomedical Sciences' confidential information, and his improper solicitation of the Company's employees to disclose trade secret information and/or to become employed by EndoCare. EndoCare and Dr. Chang have denied the allegations in the lawsuit. In March 1997, Dr. Chang filed a counter-suit in the Circuit Court for Montgomery County, Maryland (Case No. 161496-V) regarding numerous claims of a breach of contract by the Company. On November 3, 1997, the parties agreed to stay all proceedings pending the results of mediation efforts. In June 1997, Concept Group, Inc. filed an action against the Company in Federal Court alleging that the Company violated certain confidentiality agreements by applying for and receiving a United States patent on a cryoprobe. Concept Group alleges it has a proprietary interest in the design of the cryoprobe and that the Company fraudulently induced them into signing a release in order to secure the patent. Concept Group demands $1,500,000 plus costs and interest it claims it has expended in manufacturing the probes. The Company believes that Concept Group failed to manufacture the cryoprobes in accordance with its specifications and has filed a counter claim against Concept Group. No trial date has been set for these actions. The Company believes that it has meritorious defenses and that its counter claim is valid. However, the Company is not presently able to predict the ultimate outcome of these actions. 39 ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On December 12, 1997, Deloitte & Touch LLP ("D&T") resigned as the principal accountant to audit the financial statements of the Company. D&T's report on the financial statements for either of the past two years did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles. In view of the fact that D&T resigned, this matter was not presented for recommendation or approval by the board of directors of the Company or any committee thereof. During the Company's two most recent fiscal years there were no disagreements with D&T on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of D&T, would have caused D&T to make reference to the subject matter of the disagreement in connection with its report. On December 31, 1997, Aronson, Fetridge & Weigle was engaged as the principal accountant to audit the financial statements of Cryomedical Sciences, Inc. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT The directors and executive officers of the Company are as follows:
Position and Offices Name Age With the Company - ---- --- ---------------- Richard J. Reinhart, Ph.D. 57 President, Chief Executive Officer and Director John G. Baust, Ph.D. 56 Senior Vice President and Chief Scientific Officer Alan F. Rich 45 Vice President, Sales and Marketing Howard S. Breslow 59 Director, Secretary J. Donald Hill 66 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 40 University of New York at Binghamton, and since July 1994, Dr. Baust has also been Adjunct Professor of Surgery, Medical College of Pennsylvania. From 1984 to 1987, he was a Professor and the Director of the Institute of Low Temperature Biology at the University of Houston. Alan Rich 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. 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. J. Donald Hill has been a director of the Company since November 1995. Mr. Hill was a consultant to the Company from 1992 to 1995. He currently serves as Chairman and Chief Executive Officer of Excel Technology, Inc., a manufacturer of laser products and systems, where he has been employed since 1992. From January 1991 to October 1991, Mr. Hill was the Chief Executive Officer of Medstone International, and Corporate Secretary and Director of CytoCare, Inc., companies engaged in the development of medical therapy devices. From 1988 to 1990, Mr. Hill was Director of Corporate Finance at Weeden & Company, a securities firm. Mr. Hill also served as Vice Chairman of First Affiliated Securities, Inc. and as General Partner of Loeb, Rhoades and Company, also securities firms. All directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors are elected and qualified. Executive officers hold office until their successors are elected and qualified, subject to earlier removal by the Board of Directors. No family relationship exists between any director or executive officer and any other director or executive officer of the Company. The Company is not aware of any late filings of, or failures to file, during the fiscal year ended December 28, 1997 the reports required by Section 16(a) of the Exchange Act. Options shown in tables below. 41 ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation for the Company's 1997 fiscal year, its transitional period and its last two completed fiscal years with respect to its Chief Executive Officer and to each of the Company's named executive officers. SUMMARY COMPENSATION TABLE
Long Term Compensation --------------------------------------------------- Annual Compensation Awards Payouts ---------------------------------------- ---------------------- ---------- Restricted Other Annual Stock Options/ LTIP All Other Name and Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation Position Year(1) ($) (2) ($) ($) ($) (#) (3) ($) ($) - ----------------- ------ ------- ---- ------------ ---------- --------- --------- ------------- Richard J. Reinhart, Ph.D. 1997 159,964 - - - 250,000 - - Current President, Chief 1996.5 75,481 (5) - - 750,000 - - Executive Officer and 1996 9,712 - - - - - - Director (4) John G. Baust, Ph.D. 1997 115,140 - 46,349 (7) - 50,000 - 9,750 (6) Senior Vice 1996.5 57,668 - - - - - 6,162 (6) President, Research 1996 108,646 - - - - - - and Development 1995 104,429 - - - - - 9,243 (6) Alan F. Rich 1997 100,450 - 30,053 - 50,000 - - Vice President, 1996.5 50,012 - 23,073 - - - - Sales and Marketing 1996 87,600 - 66,015 - - - - 1995 94,417 - 132,596 - - -
- ---------------------- (1) The six-month transition period is identified as Fiscal 1996.5 for purposes of this table. (2) Salaries for fiscal year 1996 reflect a 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. (7) Includes pension payments made for John Baust, Ph.D. 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 $0.50. These options vest immediately and expire in ten years. 42 OPTION/SAR GRANTS IN YEAR-ENDED DECEMBER 28, 1997 In 1997, the Company issued the following options to purchase common stock to the executive officers named in the Summary Compensation Table:
- ------------------------------------- -------------------------- -------------------------- ------------------- ------------------ Number of Securities Percent of Total Underlying Options Options/SARs Granted to Exercise or Base Name Granted Employees in Fiscal Year Price Expiration Date - ------------------------------------- -------------------------- -------------------------- ------------------- ------------------ Richard J. Reinhart, Ph.D. 250,000 62.5% .50 12-31-06 - ------------------------------------- -------------------------- -------------------------- ------------------- ------------------ John G. Baust, Ph.D. 50,000 12.5% .50 12-31-06 - ------------------------------------- -------------------------- -------------------------- ------------------- ------------------ Alan F. Rich 50,000 12.5% .50 12-31-06 - ------------------------------------- -------------------------- -------------------------- ------------------- ------------------
AGGREGATED OPTION/SAR EXERCISES DURING THE 1997 FISCAL YEAR AND THE 1997 FISCAL YEAR OPTION/SAR VALUES The following table provides information related to options exercised by each of the named executive officers during the 1997 Fiscal Year and the number and value of options held at December 28, 1997. The Company does not have any outstanding stock appreciation rights. None of the options were in the money at period ended December 28, 1997.
Value of Unexercised Number of Unexercised In-the-Money Options/SARs Options/SARS at Fiscal Year End (#) at Fiscal Year End ($) (1) ----------------------------- ------------------------------- Shares Acquired Value Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---------- --------------- ------------ ----------- ------------- ----------- ------------- Richard J. Reinhart, Ph.D. - - 150,000 850,000 - - John G. Baust, Ph.D. - - 330,000 50,000 - - Alan F. Rich - - 100,000 80,000 - -
- ------------------------------- (1) The closing price for the Company's Common Stock as reported on the NASDAQ National Market System on December 28, 1997 was $.25. Value is calculated on the basis of the difference between the option exercise price and $.25 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 28, 1997, 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 43 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 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. 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 28, 1997, 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 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. No consultant has agreed to devote any specified amount of time to Company activities. The consultants of the Company (and the commencement dates of their consulting agreements) are as follows: Jeffrey K. Cohen, M.D., (January 1997), is Director, Division of Urology, Allegheny General Hospital in Pittsburgh, Pennsylvania, and Associate Professor of Surgery, Allegheny University. Robert Van Buskirk, Ph.D. (January 1997), Associate Professor of Biology, Binghamton University, advises the Company with respect to the use of the Solutions. David Olive, M.D. (November 1996), Director, Reproductive Endocrinology and Infertility, Yale University School of Medicine in New Haven, Connecticut. 44 Thomas Rutherford, M.D. (November 1996), Assistant Professor, Gynecologic Oncology, Yale University School of Medicine in New Haven, Connecticut. Jay Pashrica, M.D. (July 1997), Chairman and Professor of Gastroenterology, University of Texas, Medical Branch, Galveston, Texas. Anthony Kallo, M.D. (July 1997), Director of Therapeutic Endoscopy, Johns Hopkins School of Medicine, Baltimore, Maryland. Dr. Jeffrey Cohen was granted warrants to purchase 50,000 shares for his service during the fiscal year ended December 28, 1997, 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 28, 1997, warrants to purchase an aggregate of 287,000 shares of Common Stock had been exercised by various consultants and such consultants have an additional 367,000 warrants to purchase additional shares of Common Stock, which includes Warrants held by persons who are no longer consultants with the company. 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. 45 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 28, 1997, 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.............. 1,000,000 (2) 2.9% Howard S. Breslow................ 318,000 (3) * J. Donald Hill................... 75,000 (4) * John G. Baust.................... 400,000 (5) 1.2% Alan F. Rich..................... 185,500 (6) * All officers and directors as a group (5 persons).......... 1,978,500 (7) 5.6% --------------------------------------- * Less than 1%
(1) Unless otherwise indicated below, all shares are owned beneficially and of record. (2) Includes an aggregate of 1,000,000 shares underlying stock options. (3) Includes an aggregate of 100,000 shares underlying stock options. (4) Includes an aggregate of 75,000 shares underlying stock options and warrants. (5) Includes an aggregate of 380,000 shares underlying stock options and warrants. (6) Includes an aggregate of 180,000 shares underlying stock options. (7) Includes an aggregate 1,560,000 shares underlying options which the Company has granted to the three executive officers of the Company and an aggregate of 175,000 shares underlying options and warrants granted to two directors of the Company. 46 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Howard S. Breslow, a director of the Company, is a member of Breslow & Walker, LLP, general counsel to the Company. Mr. Breslow currently owns 218,000 shares of Common Stock of the Company and holds options to purchase an aggregate of 100,000 additional shares pursuant to stock options issued to him. During the year ended December 28, 1997 and the transitional period ended December 29, 1996, Breslow & Walker, LLP billed legal fees of $27,647 and $52,574, respectively. 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 June 1997, Mr. Hill was granted an additional 25,000 options to purchase shares of Common Stock of the Company. PART IV ITEM 13. EXHIBITS, LIST, 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) 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) (d) 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) (e) 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)
47 (f) 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) (g) Consulting and Proprietary Information Agreement dated as of December 1, 1991, between the Company and Dr. Jeffrey K. Cohen. (5) (h) Employment Agreement, dated as of March 1, 1994, between the Company and Alan F. Rich.(7) (i) 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) (j) Severance Agreement, dated as of May 30, 1996, between the Company and J. J. Finkelstein.(8) (k) Employment Agreement, dated as of May 24, 1996, between the Company and Richard J. Reinhart, Ph.D.(8) 23 Consent of Independent Auditors. 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a Form 8-K (and 8-KA thereto) the date of report being December 12, 1997, relating to the resignation of its accountants.
- ------------------------------ (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, 1996. 48 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRYOMEDICAL SCIENCES, INC. Date: April 20, 1998 By: /s/Richard J. Reinhart --------------------------- Richard J. Reinhart, Ph.D. President and Chief Executive Officer (Principal Executive Financial and Accounting Officer) In accordance with the Exchange Act, 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 20, 1998 /s/Richard J. Reinhart ---------------------------- Richard J. Reinhart, Ph.D. Director Date: April 20, 1998 /s/Howard S. Breslow ---------------------------- Howard S. Breslow Director Date: April 20, 1998 /s/J. Donald Hill ---------------------------- J. Donald Hill Director EX-23 2 CONSENT OF INDEPENDENT AUDITORS 1 [ARONSON, FETRIDGE & WEIGLE LETTERHEAD] Independent Auditors' Consent We consent to the inclusion of our report dated March 18, 1998 as independent certifying accountants to the financial statements of Cryomedical Sciences, Inc. as of and for the year ended December 28, 1997 filed on Form 10-KSB. Aronson, Fetridge & Weigle /s/ ARONSON, FETRIDGE & WEIGLE Rockville, Maryland April 23, 1998 EX-27 3 FINACIAL DATA SCHEDULE
5 YEAR DEC-28-1997 DEC-30-1996 DEC-28-1997 124,000 0 1,397,403 407,495 1,654,106 2,866,044 3,027,255 2,032,959 3,879,067 1,277,676 103,106 0 0 33,454 2,427,001 3,879,067 3,571,386 3,571,386 1,918,602 1,918,602 3,309,789 0 67,012 (1,589,993) 0 0 0 0 0 (1,589,993) (.05) (.05)
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