-----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, HoEkqCm6l7gpAyQKmnj7h/7/3zpwFtIoN0RQFIifIZEOTb3UjVC3hezQIFx1Ft0W WRf7QGeyBrWx/Qo3iKArDw== 0001005150-02-000529.txt : 20020416 0001005150-02-000529.hdr.sgml : 20020416 ACCESSION NUMBER: 0001005150-02-000529 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020412 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: 1227 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-18170 FILM NUMBER: 02609387 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 10KSB 1 form_10ksb.txt FORM 10-KSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------------- FORM 10-KSB (MARK ONE) [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2001 ----------------- 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) 100 COBB PLACE BLVD., BUILDING 200, SUITE 270, KENNESAW, GEORGIA 30144 - ---------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) ------------------------------------ Issuer telephone number, including area code: (770) 426-0101 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share --------------------------------------- Title of Class Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X]. Issuer's revenues for the fiscal year ended December 31, 2001 were $1,344,016. As of April 10, 2002, the aggregate market value of voting stock held by nonaffiliates was $1,323,952. As of April 10, 2002, there were 12,413,209 shares of Common Stock (par value $.001 per share) outstanding. Documents Incorporated by Reference ----------------------------------- None ================================================================================ PART I ITEM 1. DESCRIPTION OF BUSINESS - -------------------------------- GENERAL Cryomedical Sciences, Inc. (the "Company") is engaged in the research, development, manufacture and marketing of low temperature technologies for use in the cryoablation of cancerous tissue and in preserving and prolonging the viability of cellular and genetic material for use in cell therapy and tissue engineering. The Company has been a leader in cryosurgical methods and devices which ablate unwanted tissue in minimally invasive procedures. The Company completed initial development of the AccuProbe(R) System (the "AccuProbe") in 1992, establishing the Company as a leader in the modern cryosurgical marketplace. The AccuProbe is a sophisticated cryosurgical device designed to freeze and destroy diseased tissue. It is particularly applicable where diseased tissue cannot be removed surgically or where surgery is likely to have extensive adverse side effects. The AccuProbe uses a patented design that maintains Super Cooled Liquid Nitrogen in a liquid state, resulting in superior freezing characteristics when compared to other cryosurgical systems. The Company has marketed this system through a direct sales force and through distributors 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 contracts. The Company has been developing the new AccuProbe 800 series, which received FDA clearance in September 1998, and the Company's Blizzard(TM) Series (the "Blizzard"), and the Cryo-Lite(R) Series (the "Cryo-Lite") cryosurgical systems, which received FDA clearance in July 1997 and February 1998, respectively. When developed, these cryosurgical systems are expected to replace the existing AccuProbe System. The Company will need to raise additional funds to complete the development of, and release for commercial sale, the AccuProbe 800 Series, Blizzard and Cryo-Lite products. Based on its understanding of the molecular basis for the cryogenic destruction of cells through apoptosis, through its wholly owned subsidiary, BioLife Solutions, Inc. ("BioLife"), the Company is developing a range of proprietary cell, tissue and organ specific hypothermic preservative solutions, based on BioLife's patented HypoThermosol(TM) platform technology. Initial clinical results suggest that BioLife's customized HypoThermosol solutions could significantly prolong cell, tissue and organ viability, which could, in turn, improve clinical outcomes for new and existing cell and tissue therapy applications, as well as for organ transplantation. BioLife has entered into research agreements with several emerging biotechnology companies engaged in the research and commercialization of cell and gene therapy technology and has received several government research grants in partnership with academic institutions involved in cell and tissue therapy research. BioLife currently markets its HypoThermosol line of solutions directly and through a distributor to companies and labs engaged in pre-clinical research, and to academic institutions. Sales and other revenues totaled $1,344,016 and $1,189,505 for the twelve months ended December 31, 2001 and December 31, 2000, respectively. Total research and development expenses were $1,773,119 and $1,373,500 for the twelve months ended December 31, 2001 and December 31, 2000, respectively. The backlog of orders were zero and $2,500 at December 31, 2001 and December 31, 2000, respectively. 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. The Company was incorporated in Delaware in November 1987. BioLife was incorporated in March of 1998. Unless the context requires otherwise, references to the Company include BioLife. The Company's principal executive offices are located at 100 Cobb Place Blvd., Building 200, Suite 270, Kennesaw, Georgia 30144 and its telephone number is (770) 426-0101. 2 TECHNOLOGY CRYOSURGICAL BACKGROUND AND TECHNOLOGICAL OVERVIEW Cryosurgery is an ablative therapy that is dependant on the destructive events associated with tissue exposure to freezing temperatures. The destructive events are known to include, among other effects, osmotic stress, the release of certain molecules, membrane disruption, and intracellular ice formation. Repetitive freeze-thaw cycles are thought to further exacerbate these destructive events. The freezing event also simultaneously damages the targeted tissue's vascularization, leading to severe ischemia and necrosis (localized cell death from the interruption of blood flow). In cryosurgery, the frozen tissue mass, the ice ball, is characterized by a temperature gradient extending from the lowest temperatures adjacent to the probe (area of the fastest cooling rates, up to 1,000(0)C per minute) to the highest temperature (-0(0)C) (lowest cooling rates) at the freeze zone edge. Accordingly, the damaging effects of this therapy occur over time and space. For example, intracellular freezing, which is totally destructive, occurs close to the probe but declines with distance toward the edge of the ice ball. Osmotic stress is experienced by cells throughout the freeze zone. Since cells near the freeze zone margin are not subjected to extensive intracellular ice formation, these peripheral regions experience less destructive effects. These freezing dynamics, along with procedure-specific variations (e.g., use of warming catheters), suggest that multiple zones of possible cell survival exist. One such zone extends from the ice ball surface to the approximate -40 to -50(0)C isotherm within the frozen tissue. In this outer region of the frozen lesion not all cells experience intracellular ice formation. Many cells, depending on their unique physiology and proximity to the freeze zone edge, only experience transient hypothermia and osmotic stress, which may be collectively insufficient to cause total cell destruction. Using cryosurgery, surgeons are targeting diseased and cancerous tissue in the following fields: urology, oncology, gynecology, neurosurgery, general surgery, thoracic surgery, dermatology, and proctology. The Company believes that cryosurgery has a number of advantages over other options for managing such diseased tissue. First, unlike surgical resection, cryosurgery does not require removal of large volumes of healthy surrounding tissue. Second, unlike other alternatives such as radiation therapy, the cryoprobe's freezing temperatures can be applied to certain areas and not to others, so that diseased tissue can be targeted individually, leaving more healthy tissue intact and unaffected by treatment. CRYOSURGERY IN THE TREATMENT OF PROSTATE CANCER Traditionally, radical prostatectomy has been the standard of care for the treatment of prostate cancer. In the last decade, prostate cryosurgery has emerged as a minimally invasive option for treatment of the disease. Refinements in both technique and technology have evolved to further improve the results of prostate cryotherapy. Studies have shown that, in conjunction with the use of a urethral warmer, the use of ultrasound to guide cryoprobe placement and the use of temperature monitoring to confirm targeted temperatures and monitor freezing of surrounding tissue, cryosurgery can improve patient outcomes. THE ACCUPROBE SYSTEM The Company's AccuProbe System ablates diseased prostate tissue by using extreme cold to freeze cancer cells within the prostate. It is a clinically proven, convenient treatment that costs less than radical prostatectomy and has a lower complication rate resulting in a shorter hospital stay and recovery period. Most patients resume normal activity within one to two days. Cryosurgery's limited complications compare favorably to those of brachytherapy, yet it kills cancer cells without injecting the patient with radioactive material. 3 The Company's AccuProbe System provides superior freezing capability through its patented proprietary design that maintains Supercooled Liquid Nitrogen in a liquid phase, even as it circulates through the cryoprobe, unlike competitive systems that use higher gaseous cryogens (such as argon), which do not achieve temperatures as low as liquid nitrogen. Using a liquid cryogen also enables surgeons to freeze difficult areas, such as lesions located in proximity to large blood vessels. Urologists who use the Company's AccuProbe System can use multiple cryoprobes, in sizes as small as 3mm in diameter. Since each probe can be controlled independently, the urologist can "sculpt" to the desired size and shape. The cryoprobes used with the AccuProbe System are designed for single-use and are disposable. The Company has been developing certain proprietary designs intended to make its cryosurgical instrumentation more efficient and more precise than previous cryosurgical instrumentation. The Company's next generation-AccuProbe systems - the Blizzard Series, and the Cryo-Lite Series, and the Company's next generation AccuProbe 800 Series of cryosurgical instruments, is intended to introduce new cryosurgical technology designed to further improve clinical results under cryosurgery. In April 1991, the FDA granted the Company 510(k) premarket notification for the AccuProbe and marketing commenced after commercial development of the AccuProbe was completed in 1992. In December 1995, the Company received two further 510(k) marketing approvals from the FDA for two new models of the AccuProbe series of cryosurgical devices (Blizzard and Cryo-Lite Series) and in September 1998 it received such approval for the AccuProbe 800 Series. The Cryo-Lite Series differs from the AccuProbe Systems in that Cryo-Lite is a hand held device capable of utilizing cryogens (refrigerants) other than liquid nitrogen. The Blizzard Series also differs from the AccuProbe Systems in that Blizzard devices are capable of utilizing cryogens (refrigerants) other than liquid nitrogen. The AccuProbe 800 series, which has also been in development by the Company, represents new technology, and is intended to replace all previous AccuProbe Systems. 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. HYPOTHERMIC PRESERVATIVE SOLUTIONS BACKGROUND AND TECHNOLOGICAL OVERVIEW Time management is a crucial aspect of many facets of clinical practice and, increasingly, cell and gene therapy. Modern therapies must be accomplished under time constraints if they are to be effective. This problem becomes especially critical in the field of cell and tissue therapy, where harvested cell culture and tissue, if maintained at body temperature (37(0)C), will not be viable for any reasonable length of time. To slow the "metabolic engine" of the harvested cell and tissue, chilling is required. However, chilling is of mixed benefit. Although cooling successfully reduces metabolism (i.e., lowers demand for oxygen), chilling, or hypothermia, is also damaging to cells. To solve this problem, transplant surgeons, for example, will flush the donor tissue with a cold solution designed to provide short-term preservation support after removal of the organ from the donor and during transportation. Clinicians engaged in cell and gene therapy will also attempt to maintain the original and derived cellular material in a cold solution before and after application of the specific cell or gene therapy technique, and during necessary transportation. Support solutions range from simple "balanced salt" (electrolyte) formulations to complex mixtures of electrolytes, energy substrates such as sugars, acid buffers, osmolytes and antibiotics. Clinically, there is not a great deal of protective difference between these various solutions and few offer long-term protection. Often, the basis for selection of a "preservation solution" is a matter of local preference rooted primarily in a hospital's traditional source of supply. HYPOTHERMOSOL(TM) PRESERVATION SOLUTIONS The Company's line of preservation solutions, based on its patented HypoThermosol technology, is composed of 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. 4 The HypoThermosol series of preservative solutions extends the preservation window for gene and cell therapy and tissue engineering, improving clinical outcomes for promising new research and for those undergoing cell and gene therapy. A full line of customized HypoThermosol solutions is available to researchers and clinicians to preserve cells and tissue in low temperature environments for extended periods after removal of the cells through minimally invasive biopsy or surgical extraction , as well as in shipping the propagated material for the application of cell or gene therapy or tissue engineering. By providing the field of cell therapy and regenerative medicine with the ability to preserve and maintain consistency of cell and genetic material for extended periods, BioLife has the potential to become a standard of care for use in packaging and storing cell and tissue cultures and to positively impact the lives of millions of Americans. BioLife is developing a range of preservation solutions based on its core HypoThermosol technology. The solutions are currently available as a "component" to clinicians and researchers interested in low temperature preservation of cellular material used in gene and cell therapy and tissue engineering. o HYPOTHERMOSOL BASE - A new generation of preservation media, demonstrating superior outcome in maintaining mammalian cell systems during ultra-profound hypothermic storage (4-10(degree)C). This variant has proven effective in maintaining abdominal and thoracic organs, blood vessels, muscular and neural tissues. HypoThermosol base also has proven applicability in trauma simulation studies; o HYPOTHERMOSOL DCC - This solution has been formulated with the appreciation that the loss of a form of homeostasis in cells at 4(degree)C can lead to activation of certain enzymes culminating in cell death. HypoThermosol DCC is especially designed to inhibit these activities.; o HYPOTHERMOSOL FRS - This solution has been formulated to decrease the free radical accumulation in cells undergoing prolonged hypothermic preservation. Numerous investigators have shown that an increase in free radicals can lead to either pathological cell death or apoptosis (programmed cell death) in clinical conditions. HypoThermosol -FRS is very effective at preserving myocardial and kidney tissues, both of which have high-energy demands that can lead to free radical accumulation; o HYPOTHERMOSOL CRYOSTOR(TM) - This is a family of cell-specific, optimized cryopreservation media that enhances cell survival allowing for focus on post-preservation (storage) studies. CryoStor is uniquely formulated to address the molecular-biological aspects of cells during the preservation process thereby directly reducing the level of Cryopreservation-Induced Delayed-Onset Cell Death (Baust, et al., 2001); and o HYPOTHERMOSOL PURGE - A flush solution designed to rinse culture media and native fluids from cell systems prior to suspension in preservation media. BioLife is also developing other proprietary solutions based on its core HypoThermosol technology, optimized to preserve specific mammalian cell and tissue systems. RESEARCH CONTRACTS AND GRANT AWARDS BioLife is engaged in various research and product development initiatives with public and private institutions that are focused on gene and cell therapy and tissue engineering research. In addition to private research contracts with leading-edge biotechnology concerns, BioLife has secured several government grant awards, in partnership with leading academic institutions, to conduct basic research, which could lead to further commercialization of technology to preserve human cells, tissues and organs. 5 In conjunction with academic investigators, BioLife has been awarded five National Institute of Health ("NIH") grants and one National Science Foundation grant, valued at $1.2 million, since 2000. These grants involve research based around BioLife's core HypoThermosol technology and includes work on optimizing preservation media for different cellular and tissue applications and more fundamental research into cellular apoptosis and cell and tissue preservation. In 2001, BioLife entered into a solutions optimization contract with a biotechnology company specializing in stem cell research. The company contracted for BioLife to supply an optimized HypoThermosol preservative solution to preserve immature myoblasts (skeletal muscle cells) that doctors injected into the damaged area of a woman's heart in the first autologous human clinical trials for heart muscle regeneration. Ten injections totaling 25 million cells were made into the damages cells. BioLife's HypoThermosol preservation solution was used both in shipping the original biopsy taken from the patient's thigh as well as in shipping the propagated immature muscle cells back to the surgeon for injection. In March 1999, BioLife signed an Incubator Licensing Agreement with SUNY whereby BioLife will conduct research and development in the field of cryogenic science and in particular solution technology. BioLife pays the University $1,005 per month during the five year term of the License and all inventions conceived as a result of these research and development efforts will belong to BioLife. MARKETS AND MARKETING THE CRYOSURGERY MARKETPLACE AND MARKETING OF THE ACCUPROBE SYSTEM Cryosurgical devices, like the Company's AccuProbe System, are used as an alternative to more invasive surgical methods and less precise radioactive therapy, to destroy diseased and cancerous tissue. Cryosurgery is currently used in the following areas: urology, oncology, gynecology, neurosurgery, general surgery, thoracic surgery, dermatology, and proctology. Although the Company is targeting other fields, the principal market in which it is focused is urology, and specifically the treatment of prostate cancer. The benefits of the Company focusing its sales and marketing efforts on this market is first, due to the sheer size of this market - according to the American Cancer Society, more than 100 men die of prostate cancer each day in the United States and, annually, 184,500 new cases are diagnosed, and second, to the degree of acceptance by many urologists in acknowledging the benefits of cryosurgery, which is due, in part, to the extensive body of research in this field - as an alternative to radiation, or for patients with failed radiation therapy, targeted ablation provides a clinically-effective choice. The use of cryosurgery as a therapy to treat patients is dependant on several factors, including the level of reimbursement by public and private insurers in connection with procedures for which the cryosurgical instrumentation is utilized, and by the perceived effectiveness of cryosurgery by clinicians over traditional therapy. 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, Blue Cross and Blue Shield, is a necessary part of gaining general acceptance for use of the AccuProbe for urological cryosurgery. After a national non-coverage policy was put into effect by the Health Care Financing Administration ("HCFA") in 1996, and guidelines were eased in February 1999, and effective January 2001, HCFA issued a national CPT code for cryosurgical ablation of the prostate, which provide reimbursement for both primary and salvage prostate cryosurgical procedures. In spite of HCFA's activities in regard to reimbursement for cryosurgery of the prostate there can be no assurance that reimbursement will be sufficient to encourage use of the AccuProbe System by hospitals and physicians. 6 The Company launched the first commercially available cryosurgical system in 1992 and since then, has built its reputation around comprehensive educational programs for the medical community and important research that explained the mechanism of cell death under extremely cold temperatures. 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. The Company currently markets its AccuProbe system directly to hospitals, surgeons, and radiologists and through distributors in international markets. The Company may also arrange with other third parties to market or distribute its products in the United States or other countries. BIOLIFE MARKETS AND MARKETING BioLife's marketing strategy is to serve the bio-therapeutic industry, which is developing products for a host of clinical indications ranging from liver failure to Alzheimer's disease. Unlike traditional pharmaceutical or biotechnology companies, bio-therapeutic companies utilize single or multiple cells, or tissues harvested from human or animal species, to treat various pathologies. For all of these companies, the therapeutic benefit they deliver to clinicians and patients is dependent on establishing a reasonable shelf-life for the end product. BioLife's line of HypoThermosol preservation solutions attempts to address this underlying and unmet need of providing a superior preservation or culture medium to the high growth bio-therapeutic industry. BioLife has identified several key markets: o FACILITATING CELLS. Currently, harvested organs must be matched with a potential donor in order to avoid rejection. A number of companies are isolating "facilitating" cells (a type of immune cell) from an organ donor's blood or bone marrow, purging them of rejection-inducing T-cells, and infusing them into the recipient's marrow at time of transplant. Once engrafted, the cells promote the development of a chimeric or hybrid donor-recipient immune state that prevents rejection of the donor tissue. o GENE THERAPY. Abnormal or problematic cells are removed from the patient, and after a preferred DNA sequence is inserted, the cells are re-inserted. Likely disease candidates include Parkinson's, Alzheimer's, Gaucher's, cystic fibrosis, and familial hyper-cholesterolemia o ISLET AND HEPATOCYTE CELL TRANSPLANTATION. Insulin-producing islet cells are isolated from a donor pancreas and injected into the recipient via the portal vein under local anesthesia (i.e., as an alternative to pancreas transplantation). The technique has thus far had mixed success due to limited functional grafts, which in turn is partially due to preservation issues. Various attempts have been made to do a similar procedure with liver hepatocytes, which can regenerate in vivo. o STEM CELLS. Human embryonic stem cells (and to a lesser extend adult stem cells) were first successfully cultured in vitro in 1998 at Johns Hopkins. Such cells can potentially differentiate into any type of cellular tissue in the body, and culturing them in-vitro may provide an unlimited supply of precursors for the development of transplantable tissue of all kinds. This field is marked by considerable political controversy and it is unlikely that marketable products will be available for at least several years. o EMBRYO & GAMETE PRESERVATION. Currently liquid nitrogen is used to preserve embryos, which provides tissue preservation for a limited time (generally less than five years). 7 o TISSUE TRANSPLANTS. A number of companies currently market tissues harvested from cadaver. Examples include human heart valves, cancellous bone (for orthopedic indications), cornea, and skin. As with whole-organ transplantation, some of these markets are controlled by quasi-public tissue banks. o IN-VITRO TISSUE ENGINEERING. Tissue engineering refers to the use of cultured cells to fabricate specific tissues (and eventually organs). The current approach requires the use of a polymeric 3-D scaffold, which allows for fabrication of a specific tissue size and shape. The target markets with the most promise include skin, cartilage, bone, ligament and tendon. o EXTRACORPOREAL ORGAN-SUPPORT DEVICES. Due to the shortage of donor organs, a number of cell-based technologies are being developed to replace organ functions by use of extracorporeal devices. The two most promising markets are for liver and pancreas replacements. As a component of other developed technology, HypoThermosol is not subject to specific FDA pre-market approval. In particular, the Company is not required to sponsor formal prospective, controlled clinical-trials in order to establish safety and efficacy. However, it is highly likely that all potential customers would require BioLife to comply with Good Manufacturing Procedures ("GMP") as mandated by FDA. The Company's current contract manufacturer, which manufactures the HypoThermosol line of preservative solutions for the Company, is GMP compliant. There can be no assurance, that the Company will not be required to obtain pre market approval from the FDA to market any of the Company's products in the future. Although BioLife does not market its products for use in embryo and gamete preservation or for tissue or organ transplants, the Company expects that it will need to obtain pre market approval from the FDA before it does so. This would entail substantial financial and other resources and could take several years before the products are approved, if at all. RECENT DEVELOPMENTS In March 2002, the Company borrowed $250,000, under a 12-month promissory note agreement. The principal balance on this promissory note accrues interest at the rate of 10% per annum. In connection with the promissory note, the Company issued warrants to purchase one million shares of the Company's common stock at $0.25 per share. In December 2001, the Company completed a private placement of 6,000 Units, raising approximately $1,200,000. Each Unit was priced at $200.01 and consisted of two shares of Series F Convertible Preferred Stock, convertible into 800 shares of Common Stock, and one warrant to purchase 400 shares of Common Stock, at $0.375 per share, on or about October 2006. The Units were placed with investors in the United States and Europe, and the sales of the Units were exempt from Registration under the Securities Act, pursuant to Rule 506 of Regulation D and Rule 903 of Regulation S. The proceeds from the Unit financing were used to increase the Company's presence in the cryosurgical marketplace, for product development initiatives and to provide working capital. In connection with the placement of Units, the Company retained an adviser (the "Adviser") to assist the Company in finding qualified investors to purchase the Units. The Adviser is entitled to a finder's fee equal to 10 percent of the monies raised, payable in Units and a seven percent cash fee with respect to the monies received upon the exercise of the warrants. 8 MANUFACTURING The Company has ceased manufacturing at its facilities that were located in Baltimore, Maryland, where the Company manufactured the AccuProbe System and related accessories, including probes, and expects to transition its manufacturing to an independent third party contract manufacturer, which management has yet to select. 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. During this period of manufacturing transition, the Company expects that it will have sufficient quantities of finished goods, consisting primarily of single-use probes and other accessory products, on hand to meet anticipated demand for its products. The Company is generally able to deliver single use probes from its inventory within 30 days of its 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. BioLife's HypoThermosol line of preservation solutions are manufactured in accordance with the Company's patented and proprietary formulas under confidentiality agreements by an independent third party contract manufacturer. The contract manufacturer follows current GMPs prescribed by the FDA and the Company anticipates using this contract manufacturer for the foreseeable future. The Company does not have a written agreement for the manufacture of the HypoThermosol line, but anticipates entering into a written agreement at such time that large quantities are required. There are multiple sources available from which the Company could have HypoThermosol manufactured. GOVERNMENTAL REGULATION Governmental regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of the Company's products. In the United States, the FDA has broad authority under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the distribution, manufacture and sale of medical devices. Foreign sales of medical devices are subject to foreign governmental regulation and restrictions which vary from country to country. The process of obtaining FDA and other required regulatory clearances or approvals is lengthy and expensive. There can be no assurance that the Company will be able to obtain necessary clearances or approvals for clinical testing or for manufacturing or marketing of those of its products that currently do not have clearance. Failure to comply with applicable regulatory approvals can, among other things, result in warning letters, fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, governmental regulations may be established which could prevent, delay, modify or rescind regulatory clearance or approval of the Company's products. Regulatory clearances or approvals, if granted, may include significant limitations on the indicated uses for which the Company's products may be marketed. In addition, to obtain such clearances or approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on the Company. FDA enforcement policy strictly prohibits the marketing of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing. There can be no assurance that the Company will be able to obtain regulatory clearances or approvals for products on a timely basis or at all, and delays in receipt of or failure to receive such approvals, the loss of previously obtained approvals, or failure to comply with existing or 9 future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. The Company first received 510(k) clearance for its AccuProbe 400 Series in April 1991, and received 510(k) clearance to market the AccuProbe 500 Series and AccuProbe 600 Series in December 1995 and March 1997, respectively. In July 1997, the Company received 510(k) clearance for the Cryo-Lite Series and for the Blizzard Series in June 1998. The Company's next generation cryosurgical system, the AccuProbe 800 Series, received 510(k) clearance in September 1998. INTELLECTUAL PROPERTY The Company owns twelve issued U.S. patents and seven issued or allowed foreign patents relating to the Company's AccuProbe System and related cryosurgical technology. The Company also owns six issued U.S. patents and three pending or allowed foreign patents relating to its HypoThermosol and cell preservation technology. CRYOSURGICAL-RELATED PATENTS The Company's portfolio of patents cover several key areas of the Company's design of the Company's core cryosurgical product, including U.S. Patent Nos. 5,254,116 and 5,520,692, both titled, "Cryosurgical Instrument with Vent Holes..." which allows for the Company's liquid nitrogen probes to freeze more rapidly than the competition, U.S. Patent No. 5,334,181, "Cryosurgical System for Destroying Tumors by Freezing," which covers the sub-cooling of liquid nitrogen refrigerant and U.S. Patent No. 5,400,602, "Cryogenic Transport Hose," which covers a design of the liquid nitrogen transport hose. The Company also has a key patent, U.S. Patent No. 5,437,673, "Closed Circulation Tissue Warming Apparatus and Method [for Use] in Prostate Surgery," otherwise known as an urethral warmer, which is an important device used during cryoblation of the prostate gland, to maintain temperature of the urethral tissues and to prevent damage to the urethra. U.S. Patent No. 5,573,532, "Cryogenic Surgical Instrument..." embodies the use of vacuum brazing in the manufacture of cryoprobes, to provide a layer of thermal insulation between the refrigerant and the exterior of the instrument. U.S. Patent No. 5,846,235, "Endoscopic Cryospray Device," cover the design of a cryoprobe device which delivers cryogenic liquid or gas in the form of a spray, which may have therapeutic utility in the gastrointestinal tract and bladder. U.S. Patent No. 5,916,212, "Hand Held Cryosurgical Probe System," covers a hand-held cryosurgical device that has changeable cryogen cylinders and supports cryogen mixtures. This patent is embodied by the Company's Cryo-Lite Series, currently under development. BIOLIFE-RELATED PATENTS BioLife's core HypoThermosol cell preservation technology is protected by U.S. Patent No. 6,045,990, "Inclusion of Apoptotic Regulators in Solutions for Cell Storage at Low Temperature," owned by the Company, and which covers the use of cell-free solution compositions for hypothermic cell storage supplemented with agents inhibiting apoptotic induced cell death. Additionally, solutions for cell storage at hypothermic temperatures supplemented with cell death inhibitors for cryopreservation are disclosed. 10 The Company also owns several issued U.S. patents relating to its novel blood substitute and bloodless surgery technology, the precursor to BioLife's core HypoThermosol technology. Although the Company intends to continue to develop and file patents relating to its core technology and to rigorously defend its patent position, there can be no assurance that any additional patents will be granted. 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 and 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 on patents owned by others. While the Company believes that the protection of patents and trademarks is important to its business, the Company also relies on a combination of copyright, trade secret, nondisclosure and confidentiality agreements, know-how and continuing technological innovation to maintain its competitive position. 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. COMPETITION The medical products industry is highly competitive. Most of the Company's potential competitors have considerably greater financial, technical, marketing, and other resources than the Company. With respect to the Company's cryosurgical instrumentation, the Company faces competition from other firms engaged in the business of developing or marketing cryosurgical devices as well as other firms engaged in developing or marketing medical devices that destroy diseased tissues by means other than freezing. Cryogenic devices have limited market acceptance, despite having been used to freeze tissue for more than 20 years. The Company faces competition from several companies engaged in the business of developing, manufacturing and marketing of instruments used to freeze tissue, including Endocare, Inc., Cryogen, Inc., Erbe Electromedicine, GmbH and Galil Medical. The Company's cryosurgical instrumentation also competes with other companies that employ techniques for destroying diseased tissue by, but not limited to, radiofrequency and thermal devices. BioLife faces competition in the markets for its line of HypoThermosol preservation solutions from several much larger companies, including Organ Recovery Systems, Inc., which is developing low temperature technologies for the preservation and transportation of tissue and Barr Laboratories, Inc., which is selling Viaspan, the organ preservation solution, under license from DuPont Pharmaceuticals Company. SangStat Medical Corporation has also developed a preservation medium, but which is only indicated for use in the U.S. for cardiac transplantation 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. 11 EMPLOYEES The Company's business is highly dependent upon its ability to attract and retain qualified scientific, technical and management personnel. The Company, which includes BioLife, had eight full-time and three part time employees and engaged five research and development contractors at December 31, 2001. The Company is not a party to any collective bargaining agreements. ITEM 2. DESCRIPTION OF PROPERTY - ------------------------------- The Company leases a 3,480 square foot facility in an office-industrial park in Kennesaw, Georgia, under a one-year lease expiring in October, 2002. Rental expense for all of the Company's facilities and equipment for the 12-month period ended December 31, 2001 totaled $137,752. In 1999, BioLife entered into an Incubator License agreement for approximately 720 square feet of space at the State University of New York at Binghamton at a rental of $1,005 per month. The license expires in February 2003. ITEM 3. LEGAL PROCEEDINGS - -------------------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. 12 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") is traded on the OTC Bulletin Board. The following table sets forth the high and low closing prices for the Common Stock for the periods indicated. Price Range ----------- High Low ---- --- Quarter Ended: ------------- March 26, 2000 $0.80 $0.16 1 for 5 reverse stock split on June 16, 2000 June 25, 2000 $4.75 $0.25 September 24, 2000 $1.88 $0.88 December 31, 2000 $1.81 $0.41 March 31, 2001 $0.69 $0.38 June 30, 2001 $0.48 $0.21 September 30, 2001 $0.30 $0.04 December 31, 2001 $0.35 $0.04 HOLDERS As of March 31, 2002, there were more than 1,100 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. PRIVATE PLACEMENTS In March 2002, the Company borrowed $250,000, under a 12-month promissory note agreement. The principal balance on this promissory note accrues interest at the rate of 10% per annum. In connection with the promissory note, the Company issued warrants to purchase one million shares of the Company's common stock at $0.25 per share. In December 2001, the Company completed a private placement of 6,000 Units, raising approximately $1,200,000. Each Unit was priced at $200.01 and consisted of two shares of Series F Convertible Preferred Stock, convertible into 800 shares of Common Stock, and one warrant to purchase 400 shares of Common Stock, at $0.375 per share, on or about October 2006. The Units were placed with investors in the United States and Europe, and the sales of the Units were exempt from Registration under the Securities Act, pursuant to Rule 506 of Regulation D and Rule 903 of Regulation S. 13 The proceeds from the Unit financing were used to increase the Company's presence in the cryosurgical marketplace, for product development initiatives and to provide working capital. In connection with the placement of Units, the Company retained an adviser (the "Adviser") to assist the Company in finding qualified investors to purchase the Units. The Adviser is entitled to a finder's fee equal to 10 percent of the monies raised, payable in Units and a seven percent cash fee with respect to the monies received upon the exercise of the warrants. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - -------------------------------------------------------------------- The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto set forth elsewhere herein. The Company is engaged in the research, development, manufacture and marketing of low temperature technologies for use in the cryoablation of cancerous tissue and in preserving and prolonging the life of cellular and genetic material for use in the fields of cell therapy and tissue reengineering. The Company has been a leader in cryosurgical methods and devices which ablate unwanted tissue in minimally invasive procedures. The Company completed initial development of the AccuProbe(R) System (the "AccuProbe") in 1992, establishing the Company as a leader in the modern cryosurgical marketplace. The AccuProbe is a sophisticated cryosurgical device designed to freeze and destroy diseased tissue. It is particularly applicable where diseased tissue cannot be removed surgically or where surgery is likely to have extensive adverse side effects. The AccuProbe uses a patented design that maintains Super Cooled Liquid Nitrogen in a liquid state, resulting in superior freezing characteristics when compared to other cryosurgical systems. The Company has marketed this system through a direct sales force and through distributors 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 contracts. The Company has been developing the new AccuProbe 800 series, which received FDA clearance in September 1998, and the Company's Blizzard(TM) Series (the "Blizzard"), and the Cryo-Lite(R) Series (the "Cryo-Lite") cryosurgical systems, which received FDA clearance in July 1997 and February 1998, respectively. When developed, these cryosurgical systems are expected to replace the existing AccuProbe System. The Company will need to raise additional funds to complete the development of, and release for commercial sale, the AccuProbe 800 Series, Blizzard and Cryo-Lite products. Based on its understanding of the molecular basis for the cryogenic destruction of cells, the Company's wholly owned subsidiary, BioLife, is developing a range of proprietary cell, tissue and organ specific hypothermic preservative solutions, based on BioLife's patented HypoThermosol(TM) platform technology. Initial clinical results suggest that BioLofe's derivative HypoThermosol solutions could significantly prolong cell, tissue and organ viability, which could, in turn, improve clinical outcomes for new and existing cell and tissue therapy applications, as well as for organ transplantation. BioLife has entered into research agreements with several emerging companies engaged in the research and commercialization of cell and gene therapy technology and has received several government research grants in partnership with academic institutions involved in cell and tissue therapy research. BioLife currently markets its HypoThermosol line of solutions directly and through a distributor to companies and labs engaged in pre-clinical research, and to academic institutions. 14 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements require the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. On an ongoing basis, the Company evaluates estimates including those related to bad debts, inventories, fixed assets, intangible assets, income taxes, warranty obligations, restructuring costs, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which for the basis of the Company's judgments on the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that following accounting policies involves more significant judgments and estimates in the preparation of the consolidated financial statements. The Company maintains an allowance for doubtful accounts for estimated losses that may result from the inability of its customers to make payments. If the financial condition of the Company's customers were to deteriorate, resulting in their inability to make payments, the Company may be required to make additional allowances. The Company writes down inventory for estimated obsolete or unmarketable inventory to the lower of cost or market based on assumptions of future demand. If the actual demand and market conditions are less favorable than projected, additional write-downs may be required. The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company is involved in extensive quality programs and processes, the warranty obligation is affected by future product quality issues or potential product failures. Should any of the Company's assumptions and estimates differ from actual results, a revision to the warranty liability would be required. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 Revenue for the year ended December 31, 2001 increased $154,511 or 13.0%, to $1,344,016, compared to $1,189,505 for the year ended December 31, 2000. The increase in revenue is primarily attributable to AccuProbe System sales of $389,950 in 2001, compared to no AccuProbe System sales in 2000, and higher grant and contract revenue. The increase in revenue was offset by a reduction in sales of AccuProbes, which was a result of fewer procedures performed using the Company's single-use AccuProbe accessories and lower field and mobile service revenues. Cost of goods sold, as a percentage of revenue, for the year ended December 31, 2001, increased to 58.7%, compared to 45.0% for the year ended December 31, 2000. This increase was due to a charge to inventory of $207,977 to reflect the decrease in market value to below cost of certain materials used for the production of AccuProbes Systems and single-use probes. The increase was also due to higher expenses relating to the Company's delivery of mobile services and fewer AccuProbe procedures performed using the Company's single-use AccuProbe, which spread the cost of these units over a reduced number of probes compared to the year ago period. The increase in cost of goods sold, as a percentage of revenue, was partially offset by sales of more profitable AccuProbe Systems. Research and development expense for the year ended December 31, 2001, increased $399,619, or 29.1%, to $1,773,119, compared to $1,373,500 for the year ended December 31, 2000. The increase was attributable to increases in product engineering expenses relating to the development of BioLife's Hyothermosol technology, which involved increased engineering headcount and a higher level of consulting expense, and increased costs of supplies and prototypes relating to the Company's AccuProbe 800 Series. These increases in research and 15 development expenses were offset by reduced engineering headcount on cryosurgical-related product development activities. Sales and marketing expense for the year ended December 31, 2001, increased $792,872, or 170.5%, to $1,257,973, compared to $465,101 for the year ended December 31, 2000. The increase in sales and marketing expense was due to an effort by the Company to capitalize on the new CPT code issued by the HCFA in January 2001, for the cryosurgical ablation of the prostate, which was expected to provide an additional incentive for physicians to purchase and utilize the Company's AccupProbe System. This higher level of sales and marketing activity was driven by the addition of independent sales representatives, resulting in an increase of $503,384 of sales and marketing expense, and higher promotion-related costs of $166,382. General and administrative expense for the year ended December 31, 2001, increased $239,068, or 14.2%, to $1,924,841, compared to $1,685,773 for the year ended December 31, 2000. The increase in general and administrative expense was due to higher expenses relating to increased headcount, higher consulting expenses and higher rental expense. The increase in general and administrative expense in 2001, was offset by a reduction in legal expense as compared to 2000, which included the settlement costs of a lawsuit with a former employee. Net loss for the year ended December 31, 2001, increased $1,638,330, or 59.1%, to $4,410,257, compared to a net loss of $2,771,927 for the year ended December 31, 2000. The increase in net loss was primarily attributable to higher sales and marketing and research and development expenses as a result of increased activity in 2001, as compared to activity in 2000. The Company expects to incur additional net losses for the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001 the Company had cash and cash equivalents of $286,105, and a working capital deficit of $614,626, compared to cash and cash equivalents of $2,150,112 and working capital of $2,666,295 at December 31, 2000. Capital expenditures for leasehold improvements, furniture and equipment for the year ended December 31, 2001 was $279,326, compared to $185,743 for the year ended December 31, 2000. During 2001, the Company raised approximately $1,200,000 in a private placement. In connection with this equity raise, the Company issued 12,000 shares of Series F Convertible Preferred Stock, each share convertible into 400 shares of Common Stock, and 6,000 warrants to purchase 400 shares each of the Common Stock at $0.375 per share. In March 2002, the Company borrowed an additional $250,000 under a 12-month promissory note agreement. In connection with this debt raise, the Company issued warrants to purchase one million shares of the Company's Common Stock at $0.25 per share. The Company has a working capital deficit of $614,626 and in order to ensure its viability, the Company will need to secure financing in the short term. In this respect, the Company is currently evaluating its strategic alternatives, including the sale of some or all of the Company's assets. There can be no assurance that any transaction will be available on terms acceptable to the Company, if at all, or that any financing transaction will not be dilutive to current stockholders. If the Company is not able to raise funds or achieve some other solution, it is expected that the Company will be required to significantly curtail or cease its operating activities. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company does not engage in any off-balance sheet financing activities, nor does the Company have any special purpose entities engaged in off-balance sheet activities. 16 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995; RISK FACTORS This Annual Report on Form 10-K and other reports, releases, and statements (both written and oral) issued by the Company and its officers from time to time may contain statements concerning the Company's future results, future performance, intentions, objectives, plans, and expectations that are deemed to be "forward-looking statements." Such statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance, and achievements may differ significantly from those discussed or implied in the forward-looking statements as a result of a number of known and unknown risks and uncertainties including, without limitation, those discussed below and in "Management's Discussion and Analysis or Plan of Operation." In light of the significant uncertainties inherent in such forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the Company's objectives and plans will be achieved. Words such as "believes," "anticipates," "expects," "intends," "may," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. The Company undertakes no obligation to revise any of these forward-looking statements. The risks presented below may not be all of the risks the Company may face. These are the factors that the Company believes could cause actual results to be different from expected and historical results. Other sections of this report include additional factors that could have an effect on the Company's business and financial performance. The industry that the Company competes in is very competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results. THE COMPANY REQUIRES FUNDING TO ENSURE ITS SHORT TERM VIABILITY. The Company has a working capital deficit and in order to ensure its viability, the Company will need to secure financing in the short term. In this respect, the Company is currently evaluating its strategic alternatives, including the sale of some or all of the Company's assets. The Company expects that to meet its future needs it will need to raise substantial additional funds through the sale of equity securities, the incurrence of debt, or through collaborative or other arrangements. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative or other arrangements, if necessary to raise additional funds, may require the Company to relinquish rights to certain of its technologies, products, marketing territories or other assets. The failure to raise capital when needed will have a significant negative effect on the Company's financial condition and may force the Company to curtail or cease its activities. THE COMPANY HAS A HISTORY OF LOSSES AND MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY. The Company has incurred annual operating losses since inception, and expects to continue to incur operating losses because new products will require substantial development, clinical, regulatory, manufacturing, marketing and other expenditures. For the fiscal years ended December 31, 2001 and December 31, 2000, the Company had net losses of $4,410,257 and $2,771,927, respectively. As of December 31, 2001, the Company's accumulated deficit was $37,710,984. The Company may not be able to successfully develop or commercialize its current or future products, achieve significant revenues from sales or procedures, or achieve or sustain profitability. Successful completion of the Company's development program and its transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure and obtaining additional financing adequate to fulfill its research and development activities to continue refining its existing products and developing and commercializing new products. 17 THE MARKET FOR THE COMPANY'S COMMON STOCK IS LIMITED AND ITS STOCK PRICE IS VOLATILE. The Company's Common Stock, traded on the OTC Bulletin Board, has historically traded at low average daily volumes, resulting in a limited market for the purchase and sale of the Company's Common Stock on the OTC Bulletin Board. The market prices of many publicly traded companies, including emerging companies in the health care industry, have been, and can be expected to be, highly volatile. The future market price of the Company's common stock could be significantly impacted by o future sales of the Company's common stock, o announcements of technological innovations for new commercial products by the Company's present or potential competitors, o developments concerning proprietary rights, o adverse results in the Company's field or with clinical tests, o adverse litigation, o unfavorable legislation or regulatory decisions, o public concerns regarding the Company's products, o variations in quarterly operating results, o general trends in the health care industry, and o other factors outside of the Company's control. THERE IS UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT, WHICH IS CRITICAL TO MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS. In the United States, healthcare providers, such as hospitals and physicians, that purchase the Company's products and use its mobile services generally rely on third party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of medical procedures involving the Company's products and services and on reimbursement for the Company's products and procedures. While some private health insurance companies pay for the procedures in which the Company's products are used in some areas of the United States, private insurance reimbursement may not be adopted nationally or by additional insurers and may be terminated by those private insurance companies currently paying for procedures in which the Company's products are used. If reimbursement levels from Medicare, Medicaid, other governmental healthcare programs or private insurers are not sufficient, physicians may choose not to recommend, and patients may not choose, procedures utilizing the Company's products. International market acceptance of the Company's products may depend, in part, upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government sponsored healthcare and private insurance. The Company may not obtain international reimbursement approvals in a timely manner, if at all. The Company's failure to receive international reimbursement approvals may negatively impact market acceptance of its products in the international markets in which those approvals are sought. Furthermore, significant attention is focused on reforming the healthcare system in the United States and other countries. Any changes in Medicare, Medicaid or third party medical expense reimbursement, which may arise from healthcare reform, may have a material adverse effect on reimbursement for the Company's products or procedures in which its products are used and may reduce the price the Company is able to charge for its products. In addition, changes to the healthcare system may also affect the commercial acceptance of products the Company is currently developing and products it may develop in the future. Potential approaches 18 that have been considered include controls on healthcare spending through limitations on the growth of private purchasing groups and price controls. Several proposals have been made in the United States Congress and various state legislatures recently that, if adopted, would potentially reduce healthcare spending which may result in a material adverse effect on the Company's business. THE COMPANY MAY NOT COMPLETE DEVELOPMENT OF IT NEW CRYOSURGICAL DEVICES, WHICH MAY ADVERSELY IMPACT THE COMPANY'S FUTURE PROSPECTS. Without sufficient financing to support its product development efforts, the Company may not be able to complete development of its new AccuProbe 800 Series cryosurgical device, or the Company's Blizzard and Cryo-Lite Series of cryosurgical systems. The successful introduction of new or improved products is often subject to delay as a result of technical difficulties and engineering or design issues which, in order to overcome, require significant amounts of financial and technical resources. Without the necessary resources to allocate to its product development program, the Company may not complete development of new products, including the AccuProbe 800, Blizzard and Cryo-Lite cryosurgical systems. Failure to commercialize these products, or any other products in development, may adversely impact the Company's market position and reputation as perceived by potential customers, and negatively impact the Company's operating results and financial position. THERE IS UNCERTAINTY SURROUNDING THE COMPANY'S ABILITY TO SUCCESSFULLY COMMERCIALIZE ITS PRESERVATIVE SOLUTIONS. The Company's growth depends, in part, on its continued ability to successfully develop, commercialize and market the Company's HypoThermosol preservative solutions. Even in markets that do not require the Company to undergo clinical trials and to obtain the necessary regulatory approvals, the Company's line of HypoThermosol preservative solutions will not be used unless they present an attractive alternative to competitive products and the benefits and cost savings achieved through their use outweigh the cost of the solutions. The Company believes that recommendations and endorsements of physicians will be essential for market acceptance of the HypoThermosol product line. THE SUCCESS OF THE COMPANY'S HYPOTHERMOSOL PRESERVATIVE SOLUTIONS IS DEPENDANT, IN PART, ON THE COMMERCIAL SUCCESS OF NEW CELL AND GENE THERAPY TECHNOLOGY. The Company is developing preservative media for, and marketing its HypoThermosol preservative solutions to, biotechnology companies and research institutions engaged in research and development of cell, gene and tissue reengineering therapy. Although the Company, as a component supplier may not be subject to the same regulatory factors, the commercialized end products or therapies developed by these biotechnology companies and research institutions are subject to formal prospective, controlled clinical-trials in order to establish safety and efficacy and to substantial regulatory oversight by the FDA and other regulatory bodies, thus the development of these therapies are years away from commercialization, and demand, if any, for the HypoThermosol preservative solutions in these markets, is expected to be limited for several years. THE COMPANY FACES SIGNIFICANT COMPETITION. The medical products industry is highly competitive. Most of the Company's competitors have considerably greater financial, technical, marketing, and other resources than the Company. With respect to the Company's cryosurgical instrumentation, the Company faces competition from other firms engaged in the business of developing or marketing cryosurgical devices as well as other firms engaged in developing or marketing medical devices that destroy diseased tissues by means other than freezing. The Company is aware that cryogenic devices used to freeze tissue have been available for more than 20 years, although with limited market acceptance. The Company faces competition from several companies engaged in the business of developing, manufacturing and marketing of instruments used to freeze tissue, including Endocare, Inc., 19 Cryogen, Inc., Erbe Electromedicine, GmbH and Galil Medical. The Company's cryosurgical instrumentation also competes with other companies that employ techniques for destroying diseased tissue by, but not limited to, radiofrequency and thermal devices. BioLife faces competition in the markets for its HypoThermosol preservation solution from several much larger companies, including Organ Recovery Systems, Inc., which is developing low temperature technologies for the preservation and transportation of tissue and Barr Laboratories, Inc., which is selling Viaspan, the organ preservation solution, under license from DuPont Pharmaceuticals Company. SangStat Medical Corporation has also developed a preservation medium, but which is only indicated for use for cardiac transplantation in the U.S. Many of the Company's competitors are significantly larger than the Company and have greater financial, technical, research, marketing, sales, distribution and other resources than the Company. Additionally, the Company believes there will be intense price competition with respect to the Company's products. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective or commercially attractive than any that are being developed or marketed by the Company, or that such competitors will not succeed in obtaining regulatory approval, introducing, or commercializing any such products prior to the Company. Such developments could have a material adverse effect on the Company's business, financial condition and results of operations. Further, there can be no assurance that, even if the Company is able to compete successfully, that it would do so in a profitable manner. THE COMPANY'S SUCCESS WILL DEPEND ON ITS ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL. In order to execute its business plan, the Company must attract, retain and motivate a highly qualified managerial, technical and sales personnel. If the Company fails to attract and retain skilled scientific and marketing personnel, the Company's research and development and sales and marketing efforts will be hindered. The Company's future success depends to a significant degree upon the continued services of key management personnel, including J. Andrew Greuling, the Company's Chief Executive Officer and John D. Baust, Ph.D., the Company's Chief Scientific Officer. Although Mr. Greuling is subject to an employment agreement, both individuals' employment is at-will and neither individual is covered by an insurance policy to which the Company is a beneficiary. If the Company does not attract and retain qualified personnel it will not be able to achieve its growth objectives. THE COMPANY MAY NOT BE ABLE TO MANUFACTURE ITS PRODUCTS IN SUFFICIENT QUANTITIES, WHICH MAY NEGATIVELY AFFECT ITS BUSINESS The Company has ceased manufacturing at its facilities that were located in Baltimore, Maryland, where the Company manufactured the AccuProbe System and related accessories, including probes, and expects to transition its manufacturing to an independent third party contract manufacturer, which management has yet to select. Although the Company expects that it will have sufficient quantities of finished goods on hand to meet anticipated demand for its products, if the manufacturing transition to a third party contract manufacturer lasts longer than expected, then the Company may not have sufficient quantities of its products to sell to customers, which would negatively affect its business and financial position. In addition, the Company may experience production difficulties and product delivery delays in the future as a result of changing process technologies, ramping production, installing new equipment at its manufacturing facilities, and shortage of key components. The Company's success will depend in part on its ability to manufacture its products in compliance with the FDA's Good Manufacturing Practices regulations and other regulatory requirements in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. Failure to increase production volumes in a timely or cost-effective manner or to maintain compliance with the FDA's Good Manufacturing Practices or other regulatory requirements could have a significant negative effect on our financial condition. 20 IF THE COMPANY FAILS TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, THE COMPANY'S COMPETITORS MAY TAKE ADVANTAGE OF ITS IDEAS AND COMPETE DIRECTLY AGAINST IT. The Company's success will depend to a significant degree on its ability to secure and protect intellectual proprietary rights and enforce patent and trademark protections relating to the Company's technology. While the Company believes that the protection of patents and trademarks is important to its business, the Company also relies on a combination of copyright, trade secret, nondisclosure and confidentiality agreements, know-how and continuing technological innovation to maintain its competitive position. From time to time, litigation may be advisable to protect its intellectual property position. However, these legal means afford only limited protection and may not adequately protect the Company's rights or permit it to gain or keep any competitive advantage. Any litigation in this regard could be costly, and it is possible that the Company will not have sufficient resources to fully pursue this litigation or to protect the Company's other intellectual property rights. It could result in the rejection or invalidation of the Company's existing and future patents. Any adverse outcome in litigation relating to the validity of its patents, or any failure to pursue litigation or otherwise to protect its patent position, could materially harm the Company's business and financial condition. In addition, confidentiality agreements with the Company's employees, consultants, customers, and key vendors may not prevent the unauthorized disclosure or use of the Company's technology. It is possible that these agreements will be breached or that they will not be enforceable in every instance, and that the Company will not have adequate remedies for any such breach. Enforcement of these agreements may be costly and time consuming. Furthermore, the laws of foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States. BECAUSE THE MEDICAL DEVICE INDUSTRY IS LITIGIOUS, THE COMPANY MAY BE SUED FOR ALLEGEDLY VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. The medical technology industry has in the past been characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property rights. In addition, many medical device companies have used litigation against emerging growth companies as a means of gaining a competitive advantage. Should third parties file patent applications or be issued patents claiming technology also claimed by us in pending applications, the Company may be required to participate in interference proceedings in the U.S. Patent and Trademark Office to determine the relative priorities of its inventions and the third parties' inventions. The Company could also be required to participate in interference proceedings involving its issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require the Company to cease using the technology or to license rights from prevailing third parties. Third parties may claim that the Company is using their patented inventions and may go to court to stop the Company from engaging in its normal operations and activities. These lawsuits are expensive to defend and conduct and would also consume and divert the time and attention of the Company's management. A court may decide that the Company is infringing on a third party's patents and may order the Company to cease the infringing activity. The court could also order the Company to pay damages for the infringement. These damages could be substantial and could harm the Company's business, financial condition and operating results. If the Company is unable to obtain any necessary license following an adverse determination in litigation or in interference or other administrative proceedings, the Company would have to redesign its products to avoid infringing a third party's patent and could temporarily or permanently have to discontinue manufacturing and selling some of its products. If this were to occur, it would negatively impact future sales. IF THE COMPANY FAILS TO OBTAIN OR MAINTAIN NECESSARY REGULATORY CLEARANCES OR APPROVALS FOR PRODUCTS, OR IF APPROVALS ARE DELAYED OR WITHDRAWN, THE COMPANY WILL BE UNABLE TO COMMERCIALLY DISTRIBUTE AND MARKET ITS PRODUCTS OR ANY PRODUCT MODIFICATIONS. 21 Government regulation has a significant impact on the Company's business. Government regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of the Company's products. In the United States, the FDA has broad authority under the Federal Food, Drug and Cosmetic Act to regulate the distribution, manufacture and sale of medical devices. Foreign sales of drugs and medical devices are subject to foreign governmental regulation and restrictions, which vary from country to country. The process of obtaining FDA and other required regulatory clearances and approvals is lengthy and expensive. The Company may not be able to obtain or maintain necessary approvals for clinical testing or for the manufacturing or marketing of its products. Failure to comply with applicable regulatory approvals can, among other things, result in fines, suspension or withdrawal of regulatory approvals, product recalls, operating restrictions, and criminal prosecution. In addition, governmental regulations may be established which could prevent, delay, modify or rescind regulatory approval of the Company's products. Any of these actions by the FDA, or change in FDA regulations, may adversely impact the Company's business and financial condition. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the Company's products may be marketed. In addition, to obtain such approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on the Company. FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory standards or unforeseen problems following initial marketing. The Company may not be able to obtain or maintain regulatory approvals for its products on a timely basis, or at all, and delays in receipt of or failure to receive such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements would have a significant negative effect on the Company's financial condition. THE COMPANY'S PRODUCTS MAY BE SUBJECT TO PRODUCT RECALLS EVEN AFTER RECEIVING FDA CLEARANCE OR APPROVAL, WHICH WOULD HARM THE COMPANY'S REPUTATION AND ITS BUSINESS. The FDA and similar governmental authorities in other countries have the authority to request and, in some cases, require the recall of the Company's products in the event of material deficiencies or defects in design or manufacture. A governmental mandated or voluntary recall by the Company could occur as a result of component failures, manufacturing errors or design defects. Any recall of product would divert managerial and financial resources and harm the Company's reputation with customers and its business. THE COMPANY IS DEPENDANT ON OUTSIDE SUPPLIERS FOR ALL OF ITS MANUFACTURING SUPPLIES. The Company relies on outside suppliers for all of its manufacturing supplies, parts and components. Most parts and components used by the Company currently are available from multiple sources. However, certain components, such as liquid nitrogen dewars and probe tips, currently are available 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, there can be no assurance that, in the future, its current or alternative sources will be able to meet all of the Company's demands on a timely basis. Unavailability of necessary parts or components could require the Company to re-engineer its products to accommodate available substitutions which would increase costs to the Company and/or have a material adverse effect on manufacturing schedules, products performance and market acceptance. 22 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- CRYOMEDICAL SCIENCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number Report of Independent Auditors 24 Consolidated Balance Sheet 25 Consolidated Statements of Operations 26 Consolidated Statements of Stockholders' Equity 27 Consolidated Statements of Cash Flows 28 Notes to Consolidated Financial Statements 29-38 23 REPORT OF INDEPENDENT AUDITORS INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of CRYOMEDICAL SCIENCES, INC. Kennesaw, Georgia We have audited the accompanying Consolidated Balance Sheet of CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY as of December 31, 2001, and the related Consolidated Statements of Operations, Cash Flows and Stockholders' Equity for the years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY as of December 31, 2001, and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. 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 suffered recurring losses from operations and may not have sufficient liquidity to meet its financial obligations in the future. This condition raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARONSON & COMPANY Rockville, Maryland March 28, 2002 24 CRYOMEDICAL SCIENCES, INC. CONSOLIDATED BALANCE SHEET
December 31, 2001 ---- ASSETS ------ Current assets Cash and cash equivalents $ 286,105 Receivables, net of allowance for doubtful accounts of $26,970 54,043 Inventories 487,858 Prepaid expenses and other current assets 23,192 ----------------------- Total current assets 851,198 Fixed assets, net of accumulated depreciation of $2,138,614 454,293 Intangible assets, net of accumulated amortization of $87,855 471,099 Total assets $ 1,776,590 ======================= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities Accounts payable $ 1,000,027 Accrued expenses 158,490 Accrued salaries 187,307 Accrued commissions 120,000 ----------------------- Total current liabilities 1,465,824 ----------------------- Commitments -- Total liabilities 1,465,824 ----------------------- Stockholders' equity Preferred stock, $.001 par value per share, 1,000,000 authorized; 12,000 shares issued and outstanding 12 Common stock, par value $.001 per share, 25,000,000 shares authorized; 12,413,209 issued and outstanding 12,413 Additional paid-in capital 38,009,325 Accumulated deficit (37,710,984) ----------------------- Total stockholders' equity 310,766 ----------------------- Total liabilities and stockholders' equity $ 1,776,590 =======================
The accompanying notes are an integral part of these consolidated financial statements 25 CRYOMEDICAL SCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year-ended December 31, ------------------------------------------------------ 2001 2000 ---- ---- Revenue Product sales $ 730,963 $ 586,401 Services and other 613,053 603,104 ------------------------- ------------------------- Total revenue 1,344,016 1,189,505 ------------------------- ------------------------- Cost of sales Product sales 508,205 305,679 Services and other 280,494 229,452 ------------------------- ------------------------- Total cost of sales 788,699 535,131 ------------------------- ------------------------- Gross profit 555,317 654,374 ------------------------- ------------------------- Expenses Research and development 1,773,119 1,373,500 Sales and marketing 1,257,973 465,101 General and administrative 1,924,841 1,685,773 ------------------------- ------------------------- Total expenses 4,955,933 3,524,374 ------------------------- ------------------------- Operating loss (4,400,616) (2,870,000) Interest income 32,021 156,116 Interest expense (41,662) (58,043) ------------------------- ------------------------- Net loss $ (4,410,257) $ (2,771,927) ========================= ========================= Basic net loss per common share $ (0.36) $ (0.28) ========================= ========================= Weighted average number of common shares outstanding 12,413,209 9,921,056 ========================= =========================
The accompanying notes are an integral part of these consolidated financial statements 26 CRYOMEDICAL SCIENCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Common stock Preferred Stock Additional Total ------------------- ------------------- paid-in Accumulated stockholders' Shares Amount Shares Amount capital deficit equity - ---------------------------------------------------------------------------------------------------------------------------- Balance December 26, 1999 6,770,889 $ 6,771 384 $ -- $ 31,340,426 $(30,528,800) $ 818,397 Issuance of common stock - offering 4,754,320 4,754 -- -- 5,392,488 -- 5,397,242 Issuance of common stock - settlement 120,000 120 -- -- 161,136 -- 161,256 Issuance of warrants and options -- -- -- -- 23,586 -- 23,586 Conversion of preferred shares 768,000 768 (384) -- (768) -- -- Net loss -- -- -- -- -- (2,771,927) (2,771,927) - ---------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2000 12,413,209 12,413 -- -- 36,916,868 (33,300,727) 3,628,554 Issuance of Series F Convertible Preferred Stock -- -- 12,000 12 1,068,871 -- 1,068,883 Issuance of warrants and options 23,586 23,586 Net loss -- -- -- -- -- (4,410,257) (4,410,257) - ---------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2001 12,413,209 $ 12,413 12,000 $ 12 $ 38,009,325 $(37,710,984) $ 310,766 ============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 27 CRYOMEDICAL SCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year-ended December 31, 2001 2000 ---- ---- Cash flows from operating activities: Net loss $ (4,410,257) $ (2,771,927) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 258,688 231,961 Amortization 41,221 34,213 Provision for bad debt 26,168 31,764 Write off of accounts receivable (12,216) (33,697) Stock based compensation 23,586 23,586 Loss on disposal of fixed assets -- 14,579 Changes in operating assets and liabilities: (Increase) decrease in: Receivables 18,961 161,413 Inventories 166,087 298,353 Prepaid and other current assets 112,355 (56,175) Other assets 16,284 (7,956) Increase (decrease) in: Accounts payable 879,961 (528,512) Accrued expenses 240,602 (259,278) Unearned revenue -- (19,608) Extended warranties (4,146) (9,949) Deferred rent -- (7,399) ------------------ ----------------- Net cash used in operating activities (2,642,706) (2,898,632) ------------------ ----------------- Cash flows from investing activities: Increase in intangible assets -- (15,000) Purchase of fixed assets (279,326) (185,743) ------------------ ----------------- Net cash used in investing activities (279,326) (200,743) ------------------ ----------------- Cash flows from financing activities: Principal payments on capital leases and notes payable (10,858) (35,707) Issuance of common stock -- 5,397,242 Issuance of preferred stock 1,068,883 -- Decrease in line of credit -- (120,000) ------------------ ----------------- Net cash provided by financing activities 1,058,025 5,241,535 ------------------ ----------------- Net (decrease) increase in cash and cash equivalents (1,864,007) 2,142,160 Cash and cash equivalents at beginning of period 2,150,112 7,952 ------------------ ----------------- Cash and cash equivalents at end of period $ 286,105 $ 2,150,112 ================== ================= Supplemental Cash Flow Information: Cash paid for interest $ 41,662 $ 30,883 ================== ================= Supplemental Schedule of Non-Cash Investing and Financing Activities: Common Stock issued for legal settlement in perfecting patent rights, capitalized as intangible assets $ -- $ 161,256 ================== =================
The accompanying notes are an integral part of these consolidated financial statements 28 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Cryomedical Sciences, Inc. ("the Company") was organized under the laws of the State of Delaware in November 1987. In March 1998, the Company formed BioLife Solutions, Inc. ("BioLife"), its wholly owned subsidiary, to develop and market its line of HypoThermosol(TM)preservative solutions. The Company is engaged in the research, development, manufacture and marketing of products for use in the field of cryoablation and preservation of cells and tissues in low temperature environments. The Company completed development of and began marketing the AccuProbe(R) System into the cryosurgical marketplace in 1992. The AccuProbe is a sophisticated cryosurgical device designed to freeze and destroy diseased tissue. It is particularly applicable where diseased tissue cannot be removed surgically or where surgery is likely to have extensive adverse side effects. Aspects of the design and method of the AccuProbe System is covered under proprietary technology, including several issued U.S. and international patents. The Company markets the AccuProbe System through a direct sales force and through distributors to hospitals, surgeons and radiologists in the United States and abroad. In addition to the AccuProbe System, the Company sells single use probes and other disposables used with the AccuProbe System and offers service contracts. The Company is engaged in the research, development, manufacture and marketing of products for use in the field of cryoablation and preservation of cells and tissues in low temperature environments. The Company completed development of and began marketing the AccuProbe(R) System into the cryosurgical marketplace in 1992. The AccuProbe is a sophisticated cryosurgical device designed to freeze and destroy diseased tissue. It is particularly applicable where diseased tissue cannot be removed surgically or where surgery is likely to have extensive adverse side effects. Aspects of the design and method of the AccuProbe System is covered under proprietary technology, including several issued U.S. and international patents. The Company markets the AccuProbe System through a direct sales force and through distributors to hospitals, surgeons and radiologists in the United States and abroad. In addition to the AccuProbe System, the Company sells single use probes and other disposables used with the AccuProbe System and offers service contracts. BioLife is developing a range of proprietary cell and tissue-specific hypothermic preservative solutions, based on the Company's patented HypoThermosol platform technology. Initial clinical results suggest that BioLife's derivative HypoThermosol solutions could significantly prolong cell, tissue and organ viability, which could, in turn, improve clinical outcomes for new and existing cell and tissue therapy applications, as well as for organ transplantation. BioLife has entered into research agreements with several emerging companies engaged in the research and commercialization of cell and gene therapy technology and has received several government research grants in partnership with academic institutions involved in cell and tissue therapy research. BioLife currently markets its HypoThermosol line of solutions directly and through a distributor to companies and labs engaged in pre-clinical research, and to academic institutions. 29 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 2001, BioLife was awarded a research grant from the National Institute of Health (the "NIH") for $804,014, titled, "Apoptosis Intervention in Cell and Organ Preservation." A portion of the funds from this grant were recognized in 2001, matching research related to this grant carried out in 2001. Additional funds from this grant are expected to be recognized in 2002 and 2003, as research relating to this grant is carried out in those years. Also in 2001, the Company received a research grant from the NIH for $100,000 titled, "Treating Cancer of the Gastro Intestinal Tract Using Cryomolecular Biology." Funds from this grant are expected to be recognized in 2002, matching the period in which research on this project is carried out. Total grant revenue recognized during the years ended December 31, 2001 and 2000 totaled $356,912 and $232,570, respectively, and is included in the Statement of Operations in "services and other" revenue. The Company's sales and other current sources of revenue are not sufficient to support the Company's current cost structure. In order to ensure its viability, the Company will need to secure financing in the short term. In this respect, the Company is currently evaluating its strategic alternatives, including the sale of some or all of the Company's assets. There can be no assurance that any transaction will be available on terms acceptable to the Company, if at all, or that any debt or equity financing, will be available on terms attractive to the Company, or that any transaction will not be dilutive to current stockholders. If the Company is not able to raise funds or achieve some other solution, it is expected that the Company will be required to significantly curtail or cease its operating activities. 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. PRINCIPLES OF CONSOLIDATION: The financial statements include the accounts of the Company and its wholly owned subsidiary BioLife. All significant intercompany accounts and transactions have been eliminated in consolidation. BASIC 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. If fully diluted per share amounts were reported, options, warrants and convertible preferred stock would be considered in the computations as dilutive common stock equivalents. CASH EQUIVALENTS: Cash equivalents consist primarily of interest-bearing money market accounts. The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains cash balances which may exceed Federally insured limits. The Company does not believe that this results in any significant credit risk. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. 30 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FIXED ASSETS: Furniture and equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the lesser of the life of the asset or the remaining term of the lease. Equipment also includes Accuprobe consoles on rent or on loan which are depreciated using the straight-line method over an estimated useful life of five years. REVENUE RECOGNITION: The Company receives revenue from sales of products, services and from the rental of Accuprobe consoles. The Company generally recognizes revenue related to the sales of its products, primarily its Accuprobe consoles and disposable probes, at the time of shipment. Revenue from extended warranties and service contracts is deferred and recognized on a straight-line basis over the contract periods. Revenue from the lease of Accuprobe consoles is recognized over the course of the non-cancelable lease term. The Company recognizes revenue on grant funds received from various government agencies in the same period that expenses relating to the grants are incurred by the Company. WARRANTIES: The Company generally warrants its United States sales of Accuprobe consoles for one year. The estimated cost to repair or replace systems under warranty is provided by charges to cost of sales in the period in which the system is shipped. INCOME TAXES: The Company accounts for income taxes using an asset and liability method which generally requires recognition of deferred tax assets and liabilities for the expected future tax effects of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of differences between tax bases of assets and liabilities, and financial reporting amounts, based upon enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized (Note 5). 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. EMPLOYEE STOCK OPTIONS: The Company has chosen to account for stock-based compensation to employees 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. 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. 31 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BUSINESS SEGMENTS: As described above, the Company's activities are directed at the fields of cryoablation devices and hypothermic solutions. These activities are conducted independently within the Company and represent separate business segments. The Company has not included separate segment disclosures because of the relative insignificance of the revenues, expenses, and assets associated with its hypothermic solutions segment. 2. INVENTORIES Inventories consist of the following at December 31, 2001: Raw materials and purchased parts $ 268,768 Finished goods 219,090 ------------------------------------------------------------------ $ 487,858 ================================================================== 3. FIXED ASSETS Fixed assets consist of the following at December 31, 2001: Leasehold improvements $ 16,783 Furniture and office equipment 190,939 Manufacturing and other equipment 2,385,185 ------------------------------------------------------------------ 2,592,907 Less accumulated depreciation and amortization (2,138,614) ------------------------------------------------------------------ $ 454,293 ================================================================== 4. INTANGIBLE ASSETS The Company perfected its rights to a patent on the cryoprobe during 1999. Legal and other costs associated with this action were capitalized and are being amortized on a straight-line basis over the remaining life of the patent of 168 months (Note 9). Intangible assets at December 31, 2001 are as follows: Patents $ 558,954 Less: Accumulated amortization (87,855) ------------------------------------------------------------------ $ 471,099 ================================================================== 32 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INCOME TAXES The Company has not realized any taxable income since its inception and as of December 31, 2001, has net operating loss carryforwards for both federal and state tax purposes and research and development (R&D) tax credit carryforwards for federal income tax purposes approximately as follows: Net R&D Year of Expiration Operating Losses Tax Credits ------------------ ---------------- ------------- 2003 $ 76,000 $ -- 2004 472,000 20,000 2005 1,747,000 42,000 2006 2,523,000 88,000 2007 4,505,000 125,000 2008 5,893,000 150,000 2009 1,431,000 114,000 2010 1,562,000 145,000 2011 5,137,000 33,000 2012 1,570,000 -- 2018 1,260,000 -- 2019 1,175,000 -- 2020 2,758,000 -- 2021 4,386,000 -- ---- --------------- --------------- TOTAL $ 34,495,000 $ 717,000 ====================================================================== At December 31, 2001, the Company has a deferred tax asset related primarily to the net operating loss carryforward and the R&D tax credit carryforward of approximately $13,584,000, against which the Company has provided an allowance for the full amount as management has determined that more likely than not the deferred tax asset will not be realized. In the event of a significant change in the ownership of the Company, the utilization of such loss and tax credit carryforwards could be substantially limited. 6. STOCKHOLDERS' EQUITY On June 16, 2000, the Company amended its Certificate of Incorporation to effect a one-for-five reverse stock split and reduced the number of authorized shares of common stock from 50 million shares to 25 million shares. It also reduced the number of authorized shares of preferred stock, par value $.001 per share, from 9,378,000 shares to 1 million shares. In connection with the reverse stock split, each share of Series E preferred stock was converted into 2,000 shares of common stock for a total of 768,000 shares. All references in the financial statements and related notes to shares and per share information for all years presented have been adjusted to reflect the reverse stock split. The Company has granted options and warrants to consultants and others who have provided, or will provide, services to the Company at an exercise price per share not greater than the market price of the common stock on the date of grant. The expiration of such options and warrants range from one to ten years with various vesting arrangements. 33 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 1999, the Company granted warrants to an independent third party to purchase 2,000 shares of the Company's common stock at a price of $2.00 for prior work performed. The market price of the Company's common stock at the date of the grant was $2.00. All of these warrants were exercisable at December 31, 2001. In 1999, the Company granted warrants to an investor to purchase 384,000 shares of the Company's common stock at a price of $1.25 per share. The warrants were contingent and were exercisable only upon the grantee providing access to the funding through a new common stock offering. No funding has been provided and the warrants were cancelled. On February 25, 2000, the Company entered into two Note Purchase Agreements with subscribers wherein the Company issued to the subscribers promissory notes aggregating $500,000, bearing interest at 10% per annum, due and payable three years from the date of issuance. The promissory notes plus accrued interest thereon were converted into common stock of the Company on April 10, 2000. During May 2000, the Company sold 2,234,000 units under unit purchase agreements with each unit consisting of two shares of the Company's common stock and one warrant to purchase a share of common stock on or before March 31, 2001 for $1.25 per share. The units were sold for $2.55 ($1.25 per common share plus $.05 per warrant) before expenses of sale. These warrants were not exercised and were subsequently cancelled. During 2000, the Company granted a ten year warrant to acquire 25,000 shares of the Company's common stock for $1.25 per share to an employee as consideration for the Company's right to the use of a patent. In October 2001, the Company completed a private placement of 5,000 Units, raising approximately $1,000,000. Each Unit was priced at $200.01 and consisted of two shares of Series F convertible preferred stock, convertible into 800 shares of common stock, and one warrant to purchase four hundred shares of common stock at $.375 per share, on or before October 2006. The Company retained an adviser to assist the Company in finding qualified investors to purchase the Units. The Adviser is entitled to a finder's fee equal to 10 percent of the monies received by the Company, payable in Units valued at $200.01 per Unit. The Adviser also is entitled to a cash fee of seven percent with respect to the monies received by the Company upon exercise of the warrants. The Units were placed with investors in the United States and Europe, and the sales of the Units were exempt from Registration under the Securities Act pursuant to Rule 506 of Regulation D and Rule 903 of Regulation S. In December 2001, the Company received an additional $200,000 after completing a private placement of an additional 1,000 Units under the same terms as the Units issued in October 2001. In connection with the private placement of Units in 2001, the Company has recorded a commission payable of $120,000 on its Consolidated Balance Sheet at December 31, 2001 and issued warrants to purchase 240,000 shares of the Company's common stock to the Adviser. The key rights of the Series F convertible preferred stock, par value $0.001, issued in the Unit financing include the following: 34 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DIVIDENDS - Series F preferred stockholders are entitled to annual cumulative dividends at the rate of $10.00 per share payable in the Company's common stock. The Series F preferred is adjusted for dividends paid to common stockholders so that each preferred stockholder will receive the same number of shares of common stock which the stockholder would have owned or been entitled to receive before the dividend. CONVERSION RIGHTS - Each Series F preferred share is convertible, at any time, into 400 shares of common stock, and the Company will reserve authorized and unissued shares of common stock in the event of conversion. In the event the closing price for the common stock is $0.75 or greater for 10 consecutive trading days, the Series F preferred stock shall automatically be converted into common stock at 400 shares of common stock for each share of preferred stock. VOTING RIGHTS - The Series F preferred stock has full voting rights on all matters that holders of common stock are entitled to vote and are entitled to one vote for each share of common stock into which the Series F preferred stock held is convertible. In the event of a proposed dissolution, liquidation or winding up of the Company, or a sale of all or substantially all of the assets of the Company (other than in connection with a consolidation or merger), the affirmative vote of the holders of at least two thirds of the outstanding shares of Series F preferred stock is required. SENIOR RANKING - The Company may not issue a security with rights and preferences that are senior to those of the holders of Series F preferred stock. LIQUIDATION PREFERENCE - In the event of any liquidation, dissolution, or winding up of the Company, the Series F preferred stockholders are entitled to receive, before any distribution to any other class of stock ranking junior to the Series F preferred stock, liquidating distributions in the amount of $150.00 per share and all unpaid dividends. The following table summarizes warrant activity for the years ended December 31, 2001 and 2000:
YEAR ENDED Year Ended DECEMBER 31, 2001 December 31, 2000 -------------------------------------------------------------- WGTD. AVG. Wgtd. Avg. EXERCISE Exercise SHARES PRICE Shares Price -------------------------------------------------------------- Outstanding at beginning of year $ 4,002,000 $ 1.40 1,743,000 $ 1.59 Granted 2,640,000 0.38 2,259,000 1.25 Exercised -- -- -- -- Cancelled (2,618,000) (1.25) -- -- -------------------------------------------------------------------------------------------------------- Outstanding at end of year 4,024,000 $ 0.82 4,002,000 $ 1.40 ======================================================================================================== WARRANTS EXERCISABLE AT YEAR END 4,024,000 $ 0.82 3,617,500 $ 1.41 ========================================================================================================
STOCK COMPENSATION PLANS: The Company's 1988 Stock Option Plan was approved and adopted by the Board of Directors in July 1988 and had a term of ten years. The plan expired in 1998. The options are exercisable for up to ten years from the grant date. 35 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1998, the Company adopted the 1998 Stock Option Plan. Under the plan, an aggregate of 4,000,000 shares of common stock are reserved for issuance upon the exercise of options granted under the plan. The purchase price of the common stock underlying each option may not be less than the fair market value at the date the option is granted (110% of fair market value for optionees that own more than 10% of the voting power of the Company). The options are exercisable for up to ten years from the grant date. The plan expires August 30, 2008. The following table provides information pertaining to stock options under both plans:
YEAR ENDED Year Ended DECEMBER 31, 2001 December 31, 2000 -------------------------------- -------------------------------- WGTD. AVG. Wgtd. Avg. EXERCISE Exercise SHARES PRICE Shares Price ----------------- -------------- ---------------- --------------- Outstanding at beginning of year 2,513,060 $ 2.04 2,588,840 $ 1.95 Granted 2,500,000 0.25 125,000 1.25 Exercised -- -- -- -- Cancelled (1,697,060) (2.30) (200,780) (1.80) ------------------------------------------------------------------------------------------- Outstanding at end of year 3,316,000 $ .56 2,513,060 $ 2.04 =========================================================================================== STOCK OPTIONS EXERCISABLE AT YEAR END 1,341,500 $ 0.99 2,403,560 $ 1.94 ===========================================================================================
The following table summarizes information about stock options outstanding at December 31, 2001:
Number Weighted Range of Outstanding Average Weighted Exercise at December Remaining Average Prices 31, 2001 Contractual Life Exercise Price ------------------------------------------------------------------------------------------- $ 0.25 2,500,000 9.60 $ 0.25 1.25 781,000 9.35 1.25 2.50 - 10.63 265,000 3.61 7.14 ------------------------------------------------------------------------------------------- 3,316,000 8.79 $ .56 ===========================================================================================
Number Exercisable at Weighted Average December 31, 2001 Exercise Price ---------------------------------------------------------------- 1,341,500 $ 0.99 36 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company uses the intrinsic value method in Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its employee stock options and warrants. Had compensation cost for the Company's stock options and warrants been determined based on the fair value method under Financial Accounting Standards Board Statement No. 123, the Company's net loss and loss per share for the years ended December 31, 2001 and 2000, would have been the pro forma amounts indicated below: 2001 2000 --------------- --------------- Net loss to common shareholders As reported $ (4,410,257) $ (2,771,927) Pro forma (4,496,137) (3,084,726) Net loss per basic common share As reported (.36) (.28) Pro forma (.36) (.31) The fair value of each option/warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal years 2001 and 2000: expected volatility of 93 percent; risk-free rate of approximately 5.0 and 5.3 percent, respectively; and expected lives of ten years. 7. RELATED PARTY TRANSACTIONS The Company incurred $93,786 and $261,271 in legal fees during the years ended December 31, 2001 and 2000, respectively, for services provided by a law firm in which a director and stockholder of the Company is a partner. At December 31, 2001 accounts payable includes $52,314 due to the related party. The Company incurred $60,000 of human resources consulting fees during the year ended December 31, 2000, for services provided by the spouse of a former officer, director, and stockholder of the Company. During the years ended December 31, 2001 and 2000, the Company paid $3,743 and $13,000, respectively, in consulting fees to the son of a former officer, director, and stockholder of the Company. 8. COMMITMENTS LEASES: The Company rents office space as lessee under an operating lease expiring on December 4, 2002. The lease requires monthly payments of approximately $2,800 plus the Company's pro-rata share of the landlord's expense in the operation of the property. Rental expense for facilities and equipment operating leases for the years ended December 31, 2001 and 2000, totaled $137,752 and $135,190, respectively. EMPLOYMENT AGREEMENT: The Company has an employment agreement with its president and chief executive officer which expires on December 31, 2002. The agreement provides for a salary of $21,000 per month and incentive bonuses at the discretion of the Board of Directors. The officer received a $95,000 "signing" bonus and ten-year incentive stock options to purchase 1,500,000 shares of common stock upon his acceptance of employment during the year ended December 31, 2001. The agreement also provides an automobile allowance of $500 per month. 37 CRYOMEDICAL SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER: In March 1999, BioLife signed an Incubator Licensing Agreement with SUNY whereby BioLife will conduct research and development in the field of cryogenic science and in particular solution technology. The Company will pay the University $1,005 per month during the five year term of the License and all inventions conceived as a result of these research and development efforts will belong to BioLife. 9. LITIGATION On July 12, 1999, the Company entered into a Settlement Agreement with Concept Group, Inc. ("Concept") in connection with a lawsuit filed in June 1997 by Concept against the Company in the United States District Court for the Eastern District of Pennsylvania. On July 12, 2000, 120,000 shares of the Company's common stock were issued to Concept in accordance with the agreement. The legal and settlement costs incurred to perfect the patent rights have been capitalized as an intangible asset on the Balance Sheet (Note 4). In early 2000, the Company paid Alan A. Rich, formerly Vice President of Sales and Marketing for the Company, $91,719 to satisfy his claim in a suit filed against the Company in February 1999, for unpaid compensation, vacation time and expenses plus prejudgment interest on that claim as discovery indicated there was no viable defense to the claim. On September 5, 2000, the Superior Court of the Commonwealth of Massachusetts found in part, in favor for the plaintiff. Under an agreement whereby both parties agreed to waive their right to appeal, the Company paid the officer $155,000 in full settlement of this matter. In December, 2000, Endocare, Inc. ("EndoCare") and the Company entered into a settlement agreement providing for (a) the cross licensing of certain patents, (b) dismissal of a lawsuit filed by EndoCare against the Company in April 2000 in the United States District Court, Central District of California, alleging that the Company is infringing United States Letters Patent No. 5,647,868, and (c) the filing of a Consent Judgment which states that (i) for purposes of the settlement agreement the Company has stipulated that the EndoCare patent is valid and enforceable, (ii) the Company has not proved that the EndoCare patent is either invalid or unenforceable, and (iii) EndoCare has not proved that the Company infringed the EndoCare patent. 38 ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------= None PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The directors and executive officers of the Company are as follows: Position and Offices Name Age With the Company - ---- --- -------------------- J. Andrew Greuling 49 President, Chief Executive Officer and Director John G. Baust, Ph.D. 59 Chief Scientific Officer and Director Howard S. Breslow 62 Director, Secretary Roderick de Greef 41 Director Set forth below is a biographical description of each of the directors and executive officers identified above based on information supplied by them. J. Andrew Greuling has been President and CEO and a director of Cryomedical Sciences Inc. since May 2001. Prior to joining the Company, Mr. Greuling was the General Manager of Karl Storz Lithotripsy-America, Inc. from 1994 to 2001, where he spearheaded the introduction of the Karl Storz MODULITH(TM) extracorporeal lithotripter into the U.S. market. From 1991 to 1994, Mr. Greuling was the Vice President of Sales and Marketing for Cryomedical Sciences, Inc. and directed the market launch of the original AccuProbe cryosurgical product line. Mr. Greuling also worked in upper level management with Candela Corporation, Johnson & Johnson, and Medical Electronics Corporation. Mr. Greuling has a Bachelor of Science degree in Animal Science from Purdue University, Indiana. 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. Dr. Baust became a director of the Company on October 13, 2000. Since 1987, Dr. Baust has also been a Professor and the Director of the Center for Cryobiological Research at State University of New York at Binghamton, and since July 1994, Dr. Baust has also been Adjunct Professor of Surgery, Medical College of Pennsylvania. From 1984 to 1987, he was a Professor and the Director of the Institute of Low Temperature Biology at the University of Houston. 39 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 35 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. Roderick de Greef has served as a director of the Company since June 19, 2000. From March 2001 to present, Mr. de Greef has served as Executive Vice President, Chief Financial Officer and Secretary of Cardiac Sciences, Inc., a public company. Since 1995 Mr. de Greef has provided corporate finance advisory services to a number of early stage companies, including the Company, where he was instrumental in securing the Company's equity capital beginning in June 2000, and advising on merger and acquisition activity. From 1989 to 1995, Mr. de Greef was Vice President and Chief Financial Officer of BioAnalogics, Inc. and International BioAnalogics, Inc., publicly held, development stage medical technology companies located in Portland, Oregon. From 1986 to 1989, Mr. de Greef was Controller and then Chief Financial Officer of Brentwood Instruments, Inc., a publicly held cardiology products distribution company based in Torrance, California. Mr. de Greef has a B.A. in Economics and International Relations from California State University at San Francisco and an M.BA. from the University of Oregon. All directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors are elected and qualified. Executive officers hold office until their successors are elected and qualified, subject to earlier removal by the Board of Directors. No family relationship exists between any director or executive officer and any other director or executive officer of the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company's executive officers, directors, and beneficial owners of more than 10% of any class of its equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (collectively, the "Reporting Persons") are required to file reports of ownership and changes in beneficial ownership of the Company's equity securities with the Securities Exchange Commission. Copies of those reports also must be furnished to the Company. Based solely on a review of copies of the reports furnished to the Company, the Company believes that during the fiscal year ended December 31, 2001 all of these filing requirements have been satisfied. 40 ITEM 10. EXECUTIVE COMPENSATION - -------------------------------- The following table sets forth certain information concerning the compensation paid by the Company to its Chief Executive Officer and to each of its executive officers (other than the Chief Executive Officer) who received salary and bonus payments in excess of $100,000 during the fiscal year ended December 31, 2001 (collectively the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation ------------------------------------------ -------------------------------------------------- Awards Payouts ------------------------ ------------------------ Restricted Name and Principal Fiscal Other Annual Stock Options/ LTIP All Other Positions Year Salary ($) Bonus ($) Compensation ($) Award(s) SARs (#)(1) Payouts Compensation - ------------------------ ---------- ---------- --------- ---------------- ----------- ----------- -------- ------------- J. Andrew Greuling 2001 133,754 95,000 3,570 -- 1,500,000 -- -- President, Chief 2000 -- -- -- -- -- -- -- Executive Officer and Director (2) Richard J. Reinhart, Ph.D. 2001 112,500 -- 6,983 -- -- -- -- Chairman, Chief 2000 195,000 -- 8,266 -- -- -- -- Executive Officer and Director (3) John G. Baust, Ph.D. 2001 180,000 -- 7,846 -- 1,000,000 -- -- Chief Scientific Officer 2000 180,000 -- 6,454 -- 100,000 -- -- and Director
- ---------------------------- (1) Options to acquire shares of Common Stock. (2) Mr. Greuling became an officer and director of the Company effective May 30, 2001 (3) Dr. Reinhart resigned as an officer and director of the Company effective May 30, 2001 41 OPTION/SAR GRANTS IN YEAR-ENDED DECEMBER 31, 2001 In 2001, the Company issued options to purchase shares of Common Stock to its executive officers as follows:
Number of Securities % of Total Options/ Name and Principal Underlying Options/ SARs granted to Exercise or Expiration Positions SARs granted(#)(1) Employees in Fiscal Year Base Price ($/sh) Date - ------------------------------ ----------------------- -------------------------- ------------------- ----------------- J. Andrew Greuling 1,500,000 60% -- 8/7/2011 President, Chief Executive Officer and Director (2) Richard J. Reinhart, Ph.D. -- -- -- -- Chairman, Chief Executive Officer and Director (3) John G. Baust, Ph.D. 1,000,000 40% -- 8/7/2011 Chief Scientific Officer and Director
- ----------------------------- (1) Options to acquire shares of Common Stock. (2) Mr. Greuling became an officer and director of the Company effective May 30, 2001 (3) Dr. Reinhart resigned as an officer and director of the Company effective May 30, 2001 AGGREGATED OPTION/SAR EXERCISES DURING THE 2001 FISCAL YEAR AND THE 2001 FISCAL YEAR OPTION/SAR VALUES The following table provides information related to options exercised by each of the Named Executive Officers during the 2001 fiscal year and the number and value of options held at December 31, 2001. The Company does not have any outstanding stock appreciation rights. None of the options were in the money at year ended December 31, 2001.
Number of Securities Value of Unexercised Underlying Unexercised in the money Options/SAR Options/SAR At Fiscal Year End (#) At Fiscal Year End ($) (1) -------------------------- --------------------------- Shares Acquired Value Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---------- --------------- ------------ ----------- ------------- ----------- ------------- J. Andrew Greuling(2) -- -- 350,000 1,150,000 -- -- Richard J. Reinhart, Ph.D.(3) -- -- -- -- -- John G. Baust, Ph.D. -- -- 750,000 802,000 -- --
- --------------------------------- (1) The closing price for the Common Stock as reported on the OTC Bulletin Board on December 31, 2001 was $0.21. Value is calculated on the basis of the difference between the option exercise price and $0.21 multiplied by the number of shares of Common Stock underlying the option. (2) Mr. Greuling became an executive officer and director of the Company effective May 30, 2001. (3) Dr. Reinhart resigned as an officer of the Company effective May 30, 2001. - --------------------------------- 42 EMPLOYMENT AGREEMENTS On May 30, 2001, the Company entered into an employment agreement with J. Andrew Greuling to serve as President and Chief Executive Officer of the Company, pursuant to which he will receive, among other things, (a) a salary of $21,000 per month, (b) a target bonus of $200,000, (c) a $95,000 signing bonus, (d) stock options to purchase 1,000,000 shares of the Company's common stock, par value, $.001 per share, at a price equal to no less than the fair market value thereof on the date of grant, (e) an auto allowance of $500 per month, and (f) four weeks of vacation time. Mr. Greuling's term of employment shall continue through December 31, 2002, and be automatically renewed for successive 12-month periods, unless otherwise terminated pursuant to the terms and conditions of his employment agreement. Each officer has executed a Proprietary Information and Inventions Agreement pursuant to which each agreed, among other things, to keep the Company's information confidential and assigned all inventions to the Company, except for certain personal inventions not related to the Company's work, whether existing or later developed. CONSULTANTS At December 31, 2001, various consultants to the Company held exercisable warrants to purchase an aggregate of 61,000 shares of Common Stock. Consultants to the Company have either received warrants to purchase Common Stock or are entitled to cash compensation. No consultant has agreed to devote any specified amount of time to Company activities. Consultants to the Company may be employed by or have consulting agreements with entities other than the Company, some of which may conflict or compete with the Company, and the advisors and consultants are expected to devote only a small portion of their time to the Company. Most are not expected to actively participate in the Company's development. Certain of the institutions with which the advisors and consultants are affiliated may have regulations and policies which are unclear with respect to the ability of such personnel to act as part-time consultants or in other capacities for a commercial enterprise. Regulations or policies now in effect or adopted in the future might limit the ability of the advisors and consultants to consult with the Company. The loss of the services of certain of the advisors and consultants could adversely affect the Company. Furthermore, inventions or processes discovered by the advisors and consultants will not, unless otherwise agreed, become the property of the Company but will remain the property of such persons or of such persons' full-time employers. In addition, the institutions with which the advisors and consultants are affiliated may make available the research services of their scientific and other skilled personnel, including the advisors and consultants, to entities other than the Company. In rendering such services, such institutions may be obligated to assign or license to a competitor of the Company patents and other proprietary information which may result from such services, including research performed by an advisor or consultant for a competitor of the Company. COMPENSATION OF DIRECTORS Outside directors are compensated at the rate of $1,000 for attending board meetings and $500 for telephonic board meetings. Howard S. Breslow, a director of the Company, is a member of Breslow & Walker, LLP, general counsel to the Company. Mr. Breslow currently owns 53,600 shares of Common Stock of the Company and holds options to purchase an aggregate of 1,465,000 additional shares pursuant to stock options and warrants issued to him and/or affiliates. During the period ended December 2001, Breslow & Walker, LLP billed the Company approximately $94,000 for legal fees. 43 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The following table sets forth, as of March 31, 2002, certain information regarding the beneficial ownership of Common Stock and Series F Preferred Stock by (i) each stockholder known by the Company to be the beneficial owner of more than 5% of the outstanding shares thereof; (ii) each director of the Company; (iii) each named executive officer of the Company; and (iv) all of the Company's current directors and executive officers as a group.
Title of Name and Address Amount and Nature of Percent of Class of Beneficial Owner Beneficial Ownership(1) Class (1) - --------------------- ----------------------------------------- ------------------------ -------------- Common Stock J. Andrew Greuling 350,000 (2) 2.7% c/o Cryomedical Sciences, Inc. 100 Cobb Pl. Blvd., Building 200 Kennesaw, GA 30144 Common Stock John G. Baust 779,000 (3) 5.9% c/o Cryomedical Sciences, Inc. 100 Cobb Pl. Blvd., Building 200 Kennesaw, GA 30144 Common Stock Howard S. Breslow, Esq. 1,508,600 (4) 10.9% c/o Breslow & Walker, LLP 767 Third Avenue New York, NY 10017 Common Stock Roderick de Greef 1,033,000 (5) 7.9% c/o Cryomedical Sciences, Inc. 100 Cobb Pl. Blvd., Building 200 Kennesaw, GA 30144 Series F Preferred Stock 1,000 8.3% Common Stock Richard J. Reinhart 0 (6) 0.0% 96 Garden Road Lawrenceville, NJ 08640 Common Stock Walter Villiger 3,400,000 (7) 22.1% Hurdnerstrasse 10 P.O. Box 1474 CH-8649 Hurden, Switzerland Series F Preferred Stock 5,000 41.7% Common Stock Clariden Bank 2,000,000 (8) 14.7% Claridenstrasse 26 Postfach 5080 CH-8022 Zurich, Switzerland Series F Preferred Stock 2,000 16.7% Common Stock Thomas Girschweiler 2,848,060 (9) 19.3% Wissmannstrasse 15 8057 Zurich, Switzerland Series F Preferred Stock 3,450 28.8% Common Stock All officers and directors as a group 3,746,600 (10) 23.5% (four persons)
44 Common Stock All beneficial owners of more than 5% 11,568,660 (11) 53.2% (six persons) Series F Preferred Stock All officers and directors as a group 1000 8.3% (one person) Series F Preferred Stock All beneficial owners of more than 5% 11,450 95.4% (four persons)
- ----------------------------------- (1) Shares of Common Stock subject to options and warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the number of shares and the percentage of the outstanding shares held by a person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the Company believes that the person named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. (2) Includes 350,000 shares of Common Stock issuable upon the exercise of outstanding stock options under the Company's 1998 Stock Option Plan. (3) Includes 750,000 shares of Common Stock issuable upon the exercise of outstanding stock options under the Company's 1988 and 1998 Stock Option Plans and 25,000 shares of Common Stock issuable upon the exercise of outstanding warrants. (4) Includes 159,000 shares of Common Stock issuable upon the exercise of outstanding stock options under the Company's 1988 and 1998 Stock Option Plans, and 1,296,000 shares of Common Stock issuable upon the exercise of outstanding warrants, which warrants are owned of record by Breslow & Walker, LLP (576,000) and B & W Investments (720,000), both of which are entities in which Mr. Breslow is a partner. (5) Includes 400,000 shares of Common Stock issuable upon the conversion of Series F Preferred Stock, and 200,000 shares of Common Stock issuable upon the exercise of outstanding warrants. Also, includes 80,000 shares of Common Stock owned of record by de Greef & Co., an entity in which Mr. de Greef is the sole shareholder and an officer and director. (6) Dr. Reinhart resigned from the Company effective May 30, 2001. All of his options have expired. (7) Includes 2,000,000 shares of Common Stock issuable upon the conversion of Series F Preferred Stock, and 1,000,000 shares of Common Stock issuable upon the exercise of outstanding warrants. (8) Includes 800,000 shares of Common Stock issuable upon the conversion of Series F Preferred Stock, and 400,000 shares of Common Stock issuable upon the exercise of outstanding warrants. (9) Includes 1,380,000 shares of Common Stock issuable upon the conversion of Series F Preferred Stock, and 930,000 shares of Common Stock issuable upon the exercise of outstanding warrants. (10) Includes 909,000 shares of Common Stock issuable upon the exercise of outstanding stock options, 1,521,000 shares of Common Stock issuable under outstanding warrants, and 400,000 shares of Common Stock issuable upon the conversion of Series F Preferred Stock. (11) Includes 909,000 shares of Common Stock issuable upon the exercise of outstanding stock options, 3,851,000 shares of Common Stock issuable under outstanding warrants, and 4,580,000 shares of Common Stock issuable upon the conversion of Series F Preferred Stock. 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 53,600 shares of Common Stock of the Company and holds options to purchase an aggregate of 1,465,000 additional shares pursuant to stock options and warrants issued to him and/or affiliates. During the period ended December 2001, Breslow & Walker, LLP billed the Company approximately $94,000 for legal fees. 45 PART IV ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements -------------------- The financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements on page 25. (2) Schedules --------- No Schedules are furnished as the information is presented elsewhere in this document or is inapplicable. (3) Exhibits Exhibit ------- Number Document ------ -------- 3 (a) Certificate of Incorporation, as amended. (1) (b) By-Laws(1), and amendment, dated March 19, 1990, thereto. (2) 4 (a) Specimen of Common Stock Certificate. (1) 10 (a) Stock Option Plan, dated July 7, 1988, and amendment, dated July 19, 1989. (1) (b) 1998 Stock Option Plan (5) (c) Form of Scientific Advisory Board Member Agreement (1) (d) Incubator License Agreement, dated the first day of March 1999, between BioLife Technologies, Inc. (the Company's wholly owned subsidiary - name subsequently changed to BioLife Solutions, Inc.) and The Research Foundation of the State University of New York, and extensions thereto, dated February 23, 2000 and February 7, 2001 relating to the incubator space at the State University of New York at Binghamton. (1) (e) Lease Agreement, dated the 4th day of December, 2001, between the Company and Southeast Office Partners, LLC, relating to the Company's executive offices in Kennesaw, Georgia. 46 21 BioLife Technologies, Inc., a Delaware corporation (b) Reports on Form 8-K ------------------- (1) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 47 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRYOMEDICAL SCIENCES, INC. Date: April 11, 2002 By: /s/ J. Andrew Greuling ---------------------------------------- J. Andrew Greuling Chief Executive Officer (Principal Executive Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 11, 2002 /s/ J. Andrew Greuling ------------------------- Andrew Greuling Director Date: April 11, 2002 /s/ Roderick de Greef ------------------------ Roderick de Greef Director Date: April 11, 2002 /s/ John G. Baust -------------------- John G. Baust Director Date: April 11, 2002 /s/ Howard S. Breslow ------------------------ Howard S. Breslow Director 48 EX-10.(J) 3 exh10j.txt EXHIBIT 10.(J) EXHIBIT 10.(j) OFFICE LEASE SUMMARY BAILEY PARK AT BARRETT THIS LEASE AGREEMENT (hereinafter referred to as the "Lease"), made and entered into on the 4th day of December, 2001, between SOUTHEAST OFFICE PARTNERS, L.L.C., 26 (hereinafter called "Landlord") and CRYOMEDICAL SCIENCES, INC., a Delaware Corporation, (hereinafter called "Tenant"); W I T N E S S E T H: -------------------- Summary of Lease: The following is a summary of certain portions of the Lease Landlord: Southeast Office Partners Landlord's Address: c/o The Hawkins Company 2303 Cumberland Parkway Suite 100 Atlanta, Georgia 30339 Tenant: Cryomedical Sciences, Inc., a Delaware Corporation Tenant's Address: ------------------------------------------------- Suite Number: Building 200, Suite 270 Lease Term: 1 year and 0 month Commencement Date: December 5, 2001 Expiration Date: December 4, 2002 Rental Rate: $8.00 per square foot - months 1-6 $10.75 per square foot - months 7-12 Base Rental: $27,840 per annum: $2,320 per month - months 1-6 $37,410 per annum: $3,117.50 per month - months 7-12 Area of Promises: 3,480 square feet. Tenants Percentage of Phase: 1.753 percent.
1 Security Deposit: $3,117.50 Broker: Resource Real Estate Partners, L.L.C. Co-Broker: CTR Partners, L.L.P.
It is understood that the foregoing is intended as a summary of the Lease for convenience only and if there is a conflict between the above summary and any provisions of this Lease hereinafter set forth, the latter shall control. 2 LEASE AGREEMENT --------------- Bailey Park At Barrett STATE OF GEORGIA COUNTY OF COBB THIS LEASE, made this 4th day December, 2001, by and between SOUTHEAST OFFICE PARTNERS, L.L.C., 26 (hereinafter called "Landlord") and CRYOMEDICAL SCIENCES, INC., a Delaware Corporation having its principal office located at _______________________________________________ (hereinafter called "Tenant"); W I T N E S S E T H: ------------------- 1. PREMISES -------- In consideration of the rents, covenants, agreements, and stipulations set forth below, Landlord hereby leases to Tenant and Tenant hereby rents and leases from Landlord the following described space (hereinafter called "Premises"): Approximately 3,480 square feet located in Suite 270, 200 Building (hereinafter called "Building"), Bailey Park At Barrett, Building 200, Suite 270, 1000 Cobb Place Boulevard, Kennesaw, Georgia 30144, the Premises being more particularly shown and outlined on the plan attached hereto as Exhibit "A" and made a part hereof. 2. TERM ---- To have and to hold said Premises for a term of 1 years and 0 months commencing on the 1st day of December, 2001 (hereinafter called "Commencement Date") and ending at 6:00 p.m. on the 30th day of November, 2002 (hereinafter called "Term"). 3. RENTAL ------ (a) Tenant shall pay to Southeast Office Partners, L.L.C., 26, 2303 Cumberland Parkway, Suite 100, Atlanta, Georgia 30339 or at such other place as Landlord may designate in writing, without notice, demand, deduction, or setoff, annual rental of ($32,625) (hereinafter called "Base Rental"), payable in monthly installments of $2,320 for months 1-6 and $3,117.50 for months 7-12 in advance on the first day of each calendar month during the Term, together with any rental adjustments as hereinafter provided. A pro rata monthly installment shall be due for the first and last month of the Term should the Term begin or end on other than the first or last day of the calendar month. The first installment of Base Rental shall be paid contemporaneously with the execution of this Lease. 3 (b) If the Base Rental and any additional rental as hereinafter provided is not received by Landlord on or before the fifth (5th) day of the month for which such Base Rental and additional rental is due, Tenant shall pay a service charge equal to ten percent (10%) of the amount due for each thirty- (30-) day period that such amount remains unpaid (but in no event shall the amount of such service charge exceed the highest legally permissible rate chargeable at any time by Landlord under the circumstances). Should Tenant make a partial payment of past due amounts, the amount of such partial payment shall be applied first to reduce all accrued and unpaid service charges, in inverse order of their maturity, and then to reduce all other past due amounts, in inverse order of their maturity. Application and payment of said service charge shall be in addition to all other available remedies as hereinafter provided for the nonpayment of Base Rental and additional rental owed, and Landlord shall have available to it all such remedies. 4. SECURITY DEPOSIT ---------------- Upon execution of this Lease by Landlord and Tenant, Tenant shall deposit with Landlord the sum of Three Thousand One Hundred Seventeen and 50/100ths ($3,117.50) Dollars as a security deposit (hereinafter called the "Security Deposit"). Landlord shall hold the Security Deposit without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this Lease, it being expressly understood that the Security Deposit shall not be considered an advance payment of Base Rental, an advance payment of any rental adjustment as provided herein, or a measure of the damages which would be suffered by Landlord in the case of a default by Tenant. Landlord may commingle the Security Deposit with Landlord's other funds. Landlord may, from time to time, without prejudice to any other remedy, use the Security Deposit to the extent necessary to make good any arrearages or nonpayment of Base Rental, any rental adjustment as provided herein, any other sum provided herein to be paid by Tenant, or to satisfy any other covenant or obligation of Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, the balance of the Security Deposit remaining after any such application shall be returned by Landlord to Tenant within thirty (30) days after such termination. If Landlord transfers its interest in the Premises during the Term, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit. 5. RENTAL ADJUSTMENT ----------------- (a) Intentionally Deleted. (b) Intentionally Deleted. 6. COMPLETION, DELIVERY, AND ACCEPTANCE OF PREMISES ------------------------------------------------ (a) Intentionally Deleted. (b) Intentionally Deleted. 4 (c) Intentionally Deleted. 7. USE OF PREMISES --------------- Tenant shall use and occupy the Premises for office purposes and for light assembly and testing of medical equipment and for no other purpose without Landlord's prior-written consent. Tenant's use of the Premises shall not violate any ordinance, law, order, or regulation of any government body, or the "Rules and Regulations" of Landlord, made a part hereof as Exhibit "D." Nor shall Tenant use the Premises in any manner that may vitiate the insurance, increase the rate of insurance on the Premises or Building, injure the Premises or Building, commit waste, or create a nuisance, trespass, menace, or disturbance of the quiet enjoyment of occupants of adjacent premises or buildings. 8. QUIET ENJOYMENT --------------- Provided the Tenant pays the Base Rental, all rental adjustments and all other sums herein provided to be paid by Tenant, and performs all of Tenant's covenants and agreements herein contained, Tenant shall at all times during the Term peaceably and quietly enjoy the Premises without any disturbance from Landlord or from any other person, subject to the terms, provisions, covenants, agreements, and conditions of this Lease and to the Deeds to Secure Debt, Security Deeds, and other matters to which this Lease is subordinate and subject. This covenant and any and all covenants of Landlord shall be binding upon Landlord and its successors only with respect to breaches occurring during its or their respective periods of ownership of the Landlord's interest hereunder. 9. COMMON AREA ----------- (a) The term "Common Area" is defined for all purposes of this Lease as those areas and parts of Bailey Park At Barrett intended for the common use and/or benefit of all occupants of Bailey Park At Barrett, including among other facilities, parking areas, sidewalks, driveways, service areas, trash dumpsters, common loading areas, and landscaped areas. Tenant shall have access with all other tenants to these areas, and agrees not to interfere with the use and access of the Common Area by other occupants of the Building or other Bailey Park At Barrett facility. (b) Landlord shall maintain and keep clean the Common Area, and shall be responsible for the operation, management, and maintenance of the Common Area, the manner and expenditures thereof to be in the sole discretion of Landlord. Tenant agrees to pay its proportionate share of the costs of Common Area Maintenance and operation (hereinafter called "CAM"), including, but not limited to, those expenses incurred for water, sewer, landscape maintenance, general maintenance and services, lighting, painting, cleaning, policing, inspecting, repair and replacement, management fees, together with a reasonable allowance for overhead and depreciation of necessary equipment. (c) Tenant's proportionate share of the CAM costs shall be computed by the ratio that the square footage of the Premises, indicated in Paragraph 1 hereof, bears to 197,987 square feet, the total square footage of the office-service facilities of Bailey Park At Barrett. Tenant shall pay to Landlord as additional rental each year an "Estimated CAM Charge," 5 payable in advance in equal monthly installments, beginning on the first day of the Term. The Estimated CAM Charge each year shall be based upon Landlord's reasonable estimate of the CAM costs for such year. The Estimated CAM Charge for the first calendar year in which the Term begins shall be $1.10 per square foot. Within ninety (90) days following the close of each calendar year during the Term, or any renewal or extension thereof, or as soon thereafter as practicable, Landlord shall furnish to Tenant a "CAM Statement," detailing the actual CAM costs for the preceding year, Tenant's proportionate share thereof, and the Estimated CAM Charge for which Tenant shall be responsible during the then-current calendar year. At such time, a lump-sum payment shall be made by one party to the other, as appropriate, consisting of any difference between Tenant's proportionate share of the actual CAM costs for the preceding year and the Estimated CAM Charge paid by Tenant for such year, plus any appropriate adjustment for the period of time between the close of the preceding calendar year and the date of said CAM Statement. 10. SERVICES AND UTILITIES ---------------------- (a) Tenant shall be solely responsible and shall pay for all janitorial services, gas, electricity, fuel, light, heat, power, and other utility services for the Premises, or used by Tenant in connection therewith. If Tenant does not pay the utility charges in a timely manner, Landlord may pay the same, and the costs for such payment shall be added to the rental of the Premises. Tenant shall not conduct any operation nor install any equipment which may exceed or overburden the capacity of any utility facilities serving the Premises. Should any of Tenant's operations or equipment require additional utility facilities, the same shall be installed by Tenant at Tenant's expense in accordance with plans and specifications approved in advance and in writing by Landlord. (b) Landlord shall contract for or otherwise provide water and sewer services to the Premises. If, in the sole judgment of Landlord, Tenant's use of the water and sewer overburdens the facilities of the same or is disproportionate to the use of said services by other occupants of the Building, Landlord may require that Tenant, at its sole expense, provide additional Landlord-approved service facilities and/or adjust Tenant's proportionate share of the CAM costs accordingly. (c) Landlord reserves the right to stop the supply of water, sewer, electrical current, gas, and other services without incurring any liability to Tenant, where necessary by reason of accident, breakdown, defect, or emergency, or for repairs, alterations, replacements, or improvements which in the judgment of Landlord are desirable or necessary, or when prevented from supplying such services by strikes, lockouts, difficulty of obtaining materials, accidents, or bylaws, orders, or inability by exercise of reasonable diligence to obtain said services. No diminution or abatement of rent, damages for failure to furnish such services, or other compensation shall be claimed by Tenant as a result of, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of, any such interruption, curtailment, cessation, or suspension. 6 11. HVAC EQUIPMENT MAINTENANCE -------------------------- Tenant shall obtain upon occupancy and keep current and in force during the Term, or any extension, or renewal thereof a contract, in a form and with a dealer-authorized contractor acceptable to Landlord, providing for the service and maintenance of the heating, ventilating, and air-conditioning ("HVAC") equipment serving the Premises. The contract shall at a minimum provide for an inspection, necessary repairs, filter, and lubrication service each calendar quarter and tune-up service each spring and fall season. Said contract shall provide that it shall not be canceled by either Tenant or contractor except upon thirty (30) days' prior-written notice to Landlord. A copy of the contract shall be delivered to Landlord upon the commencement of the Term, as shall any modification, extension, renewal, cancellation, or replacement within ten (10) days thereof. Landlord warrants that all HVAC equipment is in good working order at lease commencement. 12. REPAIR, MAINTENANCE, AND ALTERATION OF PREMISES ----------------------------------------------- (a) Landlord shall keep the foundation, roof, and exterior walls of the Premises (except windows, doors, door closure devices, window and door frames, molding, locks, and hardware) in good repair, except that Landlord shall not be required to make any repairs occasioned by the act or negligence of Tenant, its agents, employees, sublessees, invitees, and/or licensees. In the event the Premises should become in need of repairs which are required to be made by Landlord hereunder, Tenant shall give immediate written notice of such to Landlord, and Landlord shall have a reasonable time after the delivery of said notice to make such repair. 7 (b) Tenant agrees throughout the Term, any extension, or renewal thereof, to keep and maintain, at Tenant's sole cost and expense, the Premises and all fixtures and equipment therein, including all plumbing, heating, air conditioning, electrical, gas, water, sewer and like fixtures and equipment, and also including the Premises' window glass, service doors, entrance and personnel doors, door frames, locks, and hardware, interior ceilings, walls, floors, and all authorized signs visible from outside the Premises in good repair, order, and condition, making all repairs and replacements thereto as may be desired or required; all repairs and replacements to be of the same or better quality, design, and class as the original work and equipment. If any repairs required to be made by Tenant hereunder are not made within ten (10) days after written notice is delivered to Tenant by Landlord, Landlord may at its option make such repairs without liability to Tenant for loss or damage which may result to Tenant's equipment, fixtures, inventory, or business by reason of such repairs, and Tenant shall pay to Landlord upon demand as additional rental hereunder the cost of such repairs, plus interest at the rate of one and one-half (1-1/2%) percent per month from the date of payment by Landlord until repaid by Tenant. (c) Tenant shall not make any alterations, additions, repairs, improvements, or installations to the Premises without the prior-written consent of Landlord. All alterations, additions, repairs, improvements, installations, equipment, and fixtures, by whomever installed or erected, except such business trade fixtures belonging to Tenant as can be removed without damage to or leaving incomplete the Premises or Building, shall remain upon and be surrendered with the Premises and become the property of Landlord, at its option, at the termination of this Lease. Any floor tile, carpeting, or other floor covering shall, at Landlord's option, become its property without credit or compensation to Tenant. Landlord, however, reserves the right to require Tenant to remove any improvements or additions made to the Premises by Tenant, who further agrees to do so prior to the expiration of the Term or within thirty (30) days after notice from Landlord, whichever shall be later, provided Landlord gives such notice no later than thirty (30) days after the expiration of Tenant's occupancy of the Premises. (d) No later than the last day of the Term, Tenant will remove all Tenant's personal property and repair all injury done by or in connection with the installation or removal of said property and surrender Premises, together with all keys to Premises, in as good condition as existed at the beginning of the Term, reasonable wear alone excepted. All property of Tenant remaining on Premises after the expiration of the Term shall be deemed conclusively abandoned and may be removed by Landlord, and Tenant shall reimburse Landlord for the cost of removing the same, subject however, to Landlord's right to require Tenant to remove any improvements or additions made to Premises by Tenant pursuant to preceding Subparagraph (c). (e) All construction work done by Tenant within the Premises shall be performed in good and workmanlike manner, performed only by contractors or workmen approved by Landlord, in compliance with all governmental requirements, and in such a manner as to cause a minimum of interference with other construction in progress in the Building or with any other occupants in the Building or other Bailey Park At Barrett facility. Tenant agrees to indemnify and hold harmless Landlord against any loss, liability, or damage resulting from such work, and Tenant shall, if requested by Landlord, furnish a bond or 8 other security satisfactory to Landlord against any such loss, liability, or damage. Tenant shall notify Landlord in writing five (5) days prior to employing any contractor or workman to perform work resulting in any alteration or addition to the Premises, and Landlord must first approve in writing all plans and specifications prepared in connection with such work. (f) Tenant shall not suffer or permit any materialmen's, mechanics', artisans', or other liens to be filed or placed or exist against the land or Building of which the Premises are a part, or Tenant's interest in Premises by reason of work, services, or materials supplied or claimed to have been supplied to Tenant, or anyone holding the Premises or any part thereof through or under the Tenant, and nothing contained in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, expressed or implied, to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials for any improvements, alterations, or repairs of or to the Premises or any part thereof, nor as giving Tenant any right, power, or authority to contract for or permit the rendering of any services or the furnishings of any materials that would give rise to the filing of a materialmen's, mechanics', or other lien against the Premises. If any such lien should at any time be filed, Tenant shall cause the same to be discharged of record within fifteen (15) days after the date of filing the same. If Tenant fails to so discharge such lien, then, in addition to any other right or remedy available to Landlord, Landlord may, but shall not be obligated to, discharge the same either by paying the amount claimed, or by procuring the discharge of such lien by a deposit in court, or by posting a bond. Any amount paid by Landlord for any of the aforesaid purposes, or for the satisfaction of any other lien not caused by Landlord, and all reasonable expenses of Landlord in defending any such action or in procuring the discharge of such lien, shall be deemed additional rental hereunder, and shall be repaid by Tenant to Landlord on demand. 13. REAL ESTATE TAX AND INSURANCE INCREASE -------------------------------------- (a) If Tenant occupies the Premises beyond the original Lease Term Tenant agrees to pay to Landlord Tenant's proportionate share of the amount, if any, by which the total of all real estate taxes and costs of insurance attributable to Bailey Park At Barret's office-service buildings and property for each calendar year exceeds the "Base Amount," (herein defined as being the 2001 actual amount per square foot contained in Bailey Park At Barrett's office-service facilities). Tenant's proportionate share of any such real estate tax and insurance increase shall be computed by the ratio that the square footage of the Premises, indicated in Paragraph 1 hereof, bears to 197,987, the total square footage of all completed office-service facilities in Bailey Park At Barrett. (b) As used in this Paragraph "real estate taxes" shall mean all real estate taxes and assessments levied against, in respect to, or attributable to Bailey Park At Barrett office-service buildings and property, or any other tax levied against Landlord as a substitution for, or in lieu of, any tax which would otherwise constitute a real estate tax or a specific tax on rentals from the buildings, plus the cost, including attorneys' and appraisers' fees, of any negotiation, contest, or appeal pursued by Landlord in an effort to reduce the tax or assessment on which any tax provided for in this Paragraph is based. 9 (c) As used in this Paragraph, "insurance" shall mean all hazard, public liability, and property damage insurance attributable to Bailey Park At Barrett procured by Landlord in its sole and reasonable discretion. (d) Tenant shall pay to Landlord as additional rental each year following the first calendar year in which the Term begins an "Estimated Tax and Insurance Increase," payable in equal monthly installments in advance. The Estimated Tax and Insurance Increase each year shall be based upon Landlord's reasonable estimate of any increases in real estate taxes and insurance costs for such year over the Base Amount. As soon as practicable following the close of each calendar year during the Term, or any renewal, or extension thereof beginning after the first calendar year during the Term, Landlord shall furnish to Tenant a "Tax and Insurance Statement," detailing actual real estate taxes and insurance costs for the preceding year, Tenant's proportionate share of any increases over the Base Amount, and the Estimated Tax and Insurance Increase for which Tenant shall be responsible during the then-current calendar year. At such time, a lump-sum payment shall be made by one party to the other, as appropriate, to consist of any difference between Tenant's proportionate share of actual real estate tax and insurance costs in excess of the Base Amount and the Estimated Tax and Insurance Increase paid for the preceding calendar year, plus any appropriate adjustment for the period of time between the close of the preceding calendar year and the date of the Tax and Insurance Statement. For the purpose of the first Tax and Insurance Statement issued following the close of the first calendar year during the Term, the Base Amount shall be treated as the "Estimated Tax and Insurance Increase paid for the preceding calendar year." 14. OTHER TAXES ----------- Tenant shall be liable for and shall pay before delinquency any and all taxes, assessments, fees, or public charges assessed against, imposed, or levied upon the trade fixtures, furnishings, equipment, and all other personal property contained in the Premises. If any such taxes or charges are levied against Landlord or Landlord's property, and if Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by the inclusion of personal property contained in the Premises and Landlord elects to pay the taxes or charges based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes or charges for which Tenant is responsible hereunder. 15. INSURANCE, WAIVER OF SUBROGATION, INDEMNITY AND MUTUAL RELEASE -------------------------------------------------------------- (a) Landlord shall maintain during the Term, any extension, or renewal thereof fire and extended coverage insurance on the Building in an amount sufficient to repair or replace the Building in case of damage or destruction from perils normally covered by standard insurance. (b) Tenant shall carry and maintain at all times during the Term, any extension or renewal thereof, fire and extended coverage insurance with a carrier satisfactory to Landlord insuring Tenant's interest in Tenant's improvements, fixtures, and equipment in the Premises to the extent of at least eighty (80%) percent of their insurable value. The proceeds from such insurance policy or policies shall first be used for the repair or replacement of the above insured items, and Landlord shall sign all documents necessary 10 or proper in connection with the settlement of any claim or loss by Tenant. Tenant shall carry and maintain at all times during the Term, or any extension or renewal thereof, comprehensive public liability insurance for the benefit of Tenant and Landlord jointly against liability from bodily injury and property damage with a carrier satisfactory to Landlord in an amount of not less than $ 1,000,000.00 combined single limit per occurrence for bodily injury, death, or property damage. Prior to occupancy of the Premises, Tenant shall deliver to Landlord the policy or policies of such insurance, or a certificate, or certificates thereof, as well as any modification, extension, renewal, cancellation, or replacement at least ten (10) days prior to such modification, extension, renewal, cancellation, or replacement. The instruments shall evidence that such insurance is in force, that said insurance will not be canceled without thirty (30) days' prior notice to Landlord by the carrier, and that the carrier waives all rights to recovery by way of subrogation against Landlord. (c) If Landlord's property insurance premiums on the Building are increased due to Tenant's use of the Premises, Tenant shall pay such increase as additional rental. (d) Tenant hereby agrees to indemnify, defend, and hold Landlord harmless against all claims for damages to persons or property by reason of the use or occupancy of the Premises. (e) Landlord and Tenant mutually release the other from all liability or responsibility for any loss, injury, or damage covered or normally covered by insurance, unless caused by proven affirmative acts of negligence by the other party, or by one for whom such party may be responsible. 16. DESTRUCTION OR DAMAGE TO PREMISES --------------------------------- If during the Term, or any extension or renewal thereof, the Premises or Building suffer a "Major Casualty" (as that term is hereinafter defined) by storm, fire, earthquake, or other casualty, the Lease, at the option of either party exercised by giving written notice to the other within thirty (30) days of such destruction or damage, shall terminate as of the date of such Major Casualty, and rental shall be accounted for as between Landlord and Tenant as of that date. As used herein, "Major Casualty" shall mean destruction or damage to the Premises or Building which, in Landlord's reasonable estimation, cannot be restored within one hundred twenty (120) days of such destruction or damage. If the Premises or Building suffer a Major Casualty, and neither party elects to terminate this Lease, Landlord shall use its best efforts to restore the Premises or Building as promptly as practicable, subject to delays due to circumstances beyond Landlord's reasonable control. If the Premises or Building suffer a "Minor Casualty" (defined herein as destruction or damage by storm, fire, earthquake, or other casualty which, in Landlord's reasonable estimation, can be restored within one hundred twenty [120] days of such destruction or damage), Landlord shall use its best efforts to restore the Premises or Building as promptly as practicable, subject to delays due to circumstances beyond Landlord's reasonable control. All rentals shall abate from the date upon which said Major or Minor Casualty occurred until the Premises or Building are substantially restored, and the Term shall be extended by the extent of such abatement. If the Premises or Building are damaged by any such casualty, whether Major or Minor, when there are twelve (12) months or less remaining in the Term, Landlord may, at its option, terminate this Lease upon written notice to Tenant given within thirty (30) days after such 11 destruction or damage, and rental shall be accounted for as between Landlord and Tenant as of the date of such destruction or damage. In no event shall rental abate if damage or destruction to the Premises or Building is the result of negligence of Tenant, its agents, or employees. 17. EMINENT DOMAIN -------------- If the Premises, any substantial part thereof, the land on which the Building stands, or any estate therein shall be taken by any competent authority under the power of eminent domain, or is conveyed or leased in lieu of such taking, or is acquired for any public or quasi-public use or purpose, the Term of this Lease shall terminate upon the date when the possession of said Premises or the part thereof so taken, is taken, conveyed, or leased, without apportionment of the award, and Tenant shall have no claim against Landlord for the value of any unexpired Term. If any condemnation proceedings shall be instituted in which it is sought to take or damage any part of the Building or the land under it or contiguous thereto, or if the grade of any street or alley adjacent to the Building is changed by any competent authority, and such change of grade makes it necessary or desirable to remodel the Building to conform to the changed grade, Landlord shall have the right to cancel this Lease after having given written notice of cancellation to Tenant not less than ninety (90) days prior to the date of condemnation designated in the notice. In either of said events, rent at the then-current rate shall be apportioned as of the date of the termination. No money or other consideration shall be payable by Landlord to Tenant for the right of cancellation, and the Tenant shall have no right to share in the condemnation award or in any judgment for damages caused by the taking or the change of grade. Nothing in this Paragraph shall preclude an award being made to Tenant by the condemning authority for loss of business, or depreciation to, and cost of removal of, equipment or fixtures. 18. SUBORDINATION ------------- This Lease and all rights of Tenant hereunder shall be subject and subordinate to: (a) any Deeds to Secure Debt, Security Deeds, or similar security instruments (hereinafter collectively called the "Security Instrument") which do now or may hereafter affect the Premises or the Building or both (and which may also affect other property); and (b) any and all increases, renewals, modifications, consolidations, replacements, and extensions of any Security Instrument. This provision is hereby declared by Landlord and Tenant to be self-operative and no other instrument shall be required to effect such subordination of this Lease. Tenant shall, however, upon demand at any time or times execute, acknowledge, and deliver to Landlord any and all instruments and certificates that may be necessary or proper to more effectively subordinate this Lease and all rights of Tenant hereunder to any Security Instrument or to confirm or evidence such subordination. In the event Tenant shall fail or neglect to execute, acknowledge, and deliver any such subordination agreement or certificate, Landlord, in addition to any other remedies it may have, may, as the agent and attorney-in-fact of Tenant, execute, acknowledge, and deliver the same. Tenant hereby irrevocably nominates, constitutes, and appoints Landlord as Tenant's proper and legal agent and attorney-in-fact for such purposes. Such power of attorney is coupled with an interest and shall not terminate on disability of the principal. Tenant covenants and agrees, in the event any proceedings are brought for the foreclosure of any Security Instrument or if either the Premises or the Building or both are sold pursuant to any Security Instrument, to attorn to the purchaser upon any such sale if so requested by such purchaser and to recognize such purchaser as the Landlord under this Lease. Tenant agrees to execute and deliver at any time and from time to time upon the request of Landlord or any holder or holders of any of the 12 indebtedness or other obligations secured by any Security Instrument, any certificate or instrument which, in the sole judgment of Landlord or of such holder or holders, may be necessary or appropriate to evidence such attornment. Tenant hereby irrevocably appoints Landlord and the holder or holders of the indebtedness or other obligations secured by any Security Instrument, jointly and severally, as the agent and attorney-in-fact of Tenant, to execute and deliver for and on behalf of Tenant any such instrument or certificate. Such power of attorney is coupled with an interest and shall not terminate on disability of the principal. This Lease and all rights of Tenant hereunder are further subject and subordinate, to the extent that the same relate to the Building or the Premises, to: (a) all ground or underlying leases in existence as of the date hereof or which may relate to the Building or the Premises in the future, and to any and all supplements, modifications, and extensions thereof, (b) all applicable ordinances of Cobb County, Georgia, relating to easements, franchises, and other interests or rights upon, across, or appurtenant to the Premises or the Building; and (c) all utility easements and agreements. 13 19. ESTOPPEL CERTIFICATES --------------------- Tenant shall, at any time and from time to time, within ten (10) days after receipt of a written request from Landlord, execute, acknowledge, and deliver to Landlord or such other persons or entities as Landlord may request, a statement in a form reasonably satisfactory to Landlord, executed by Tenant, certifying: (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect as modified and setting forth such modifications); (b) the date or dates to which the Base Rental has been paid; (c) the Commencement Date; (d) the anticipated termination date of this Lease; (e) that no default exists under this Lease (or the existence of any known defaults, the particulars of such defaults and the action or actions required to remedy such defaults); (f) the existence of any setoffs against or defenses to the enforcement of the terms and conditions of this Lease, and the particulars of any such setoffs or defenses; and (g) any other information which Landlord may reasonably request. It is intended that any such statement by Tenant may be relied upon by any prospective purchaser or mortgagee of the Premises or the Building or both, or any assignee, sublessee, governmental authority, or public agency. 20. ABANDONMENT ------------ (a) Tenant agrees not to abandon the Premises during the Term. (b) Tenant agrees to remove from the Premises all equipment, merchandise, and personal property owned, used, or possessed by Tenant or any other person or entity (hereinafter collectively called the "Personal Property") upon vacating the Premises. If any Personal Property remains on the Premises after Tenant vacates the Premises, Landlord may provide Tenant with written notice stating that such Personal Property remains on the Premises (but Landlord shall be under no obligation to itemize such Personal Property). If Tenant has not removed such Personal Property within three (3) days after such notice, such Personal Property shall be conclusively deemed abandoned, notwithstanding that title to or a Security Interest in such Personal Property, may be held by an individual or entity other than Tenant, and Landlord may dispose of such Personal Property in any manner it deems proper, in its sole discretion. Tenant hereby waives and releases any claim against Landlord arising out of the removal and disposition of such Personal Property and waives and releases any claim to the Personal Property. Tenant shall indemnify, defend, and hold Landlord harmless for any costs, expenses, or fees incurred by Landlord in connection with the removal and disposition of such Personal Property. 21. ASSIGNMENT AND SUBLETTING ------------------------- (a) Tenant shall not, without Landlord's prior-written consent, assign this Lease or any interest hereunder, or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. In the case of a requested sublease Landlord's consent shall not be unreasonably withheld, conditioned or delayed. If Tenant desires to assign or sublet all or a part of the Premises, Landlord shall have the option to reacquire all or that portion of the Premises which Tenant desires to assign or sublet, or to lease all or that part of Premises which Tenant desires to assign or sublet directly to Tenants proposed assignee or subtenant. If Tenant desires to assign or sublet all or a part of the Premises, Tenant must give Landlord a minimum of fifteen (15) days prior-written notice 14 of such desire, which notice must set forth all relevant details concerning any proposed assignment or sublease, during which time Landlord shall have the right to determine whether it wishes to reacquire all or that part of the Premises which Tenant desires to assign or sublet, or to lease directly to Tenant's proposed assignee or subtenant, or consent to such assignment or sublet. (b) Assignees or subtenants shall become directly liable to Landlord for all obligations of Tenant hereunder, without relieving Tenants liability. If Landlord exercises either of its options to reacquire all or that portion of the Premises which Tenant desires to assign or sublet, or to lease directly to Tenant's proposed assignee or subtenant, Tenant shall be released from all liability with respect to the portion of the Premises so reacquired or leased by Landlord. If consent is once given by Landlord to any assignment or sublease, such consent shall not operate to destroy or waive the necessity of Landlord's consent to any subsequent assignment or sublease, or of Landlord's right to reacquire all or part of the Premises, or to lease directly to Tenant's proposed assignee or subtenant in conjunction therewith. (c) Any person or entity to which this Lease is assigned pursuant to the provisions of the United States Bankruptcy Code shall be deemed to have assumed all of the obligations of Tenant arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. (d) If this Lease is assigned to any person or entity pursuant to the provisions hereof or the provisions of the United States Bankruptcy Code, any and all monies or other consideration payable or otherwise to be delivered in connection with any such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord, and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the United States Bankruptcy Code. Any and all sums or other consideration constituting Landlord's property under this Paragraph, but which are not paid or delivered to Landlord, shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. 22. LANDLORD'S ENTRY ---------------- Landlord or Landlord's agent may enter the Premises at reasonable hours to show the Premises to mortgages, prospective purchasers or tenants, or to inspect Premises, or to make repairs required of Landlord under the terms hereof, or repairs to adjoining space within the Building. During the last sixty (60) days of this Lease, Landlord may display a "For Rent" sign on the Premises. 23. HOLDING OVER ------------ Should Tenant or any of its successors in interest continue to hold the Premises after termination of this Lease, whether such termination occurs by lapse of time or otherwise, such holding over shall constitute and be construed as a tenancy from month-to-month only, at a monthly rental equal to twice the monthly rent (including Base Rental and adjusted rental) provided herein at the time of such termination. During such time as Tenant shall continue to hold the Premises after the termination hereof, Tenant shall be regarded as a Tenant from month-to-month; subject, 15 however, to all the terms, provisions, covenants, and agreements on the part of the Tenant hereunder. No payments of money by Tenant to Landlord after the termination of this Lease shall reinstate, continue, or extend the Term and no extension of this Lease after the termination hereof shall be valid unless and until the same shall be reduced to writing and signed by both Landlord and Tenant. Tenant shall be liable to Landlord for all damage which Landlord shall suffer by reason of Tenant's holding over and Tenant shall indemnify Landlord against all claims made by any other tenant or prospective tenant against Landlord resulting from delay by Landlord in delivering possession of the Premises to such other tenant or prospective tenant. 24. EARLY TERMINATION ----------------- No termination of this Lease or the prosecution of a civil action by Landlord to obtain a writ of possession to dispossess Tenant prior to the normal ending thereof by the lapse of time or otherwise shall affect Landlord's right to collect rent and other charges due, by acceleration, or otherwise as provided hereunder. 25. DEFAULT ------- (a) If Tenant defaults by failing to pay rental or other charges within five (5) days after the date due hereunder, or if Tenant defaults in performing any other of Tenant's obligations hereunder, and fails to cure such default within thirty (30) days after written notice from Landlord; or if Tenant files for or is adjudicated a bankrupt; or if a permanent receiver is appointed for Tenant's property, including Tenant's interest in the Premises, and such receiver is not removed within sixty (60) days after written notice from Landlord to Tenant to obtain such removal; or if, whether voluntarily or involuntarily, Tenant takes advantage of any debtor relief proceedings under any present or future law, whereby the rent of any part thereof is or is proposed to be reduced, or payment thereof deferred; or if Tenant makes an assignment for the benefit of its creditors; or if the Premises or Tenant's effects or interest therein should be levied upon or attached under process against Tenant, and is not satisfied or dissolved within thirty (30) days after written notice from Landlord to Tenant to obtain satisfaction thereof-, then, and in any of said events, all rental and other charges then due or reserved herein shall immediately be due and payable by Tenant. (b) Upon the occurrence of any of the events described in Paragraph 25(a) above, Landlord shall have the right at its election, then or at any time thereafter, to pursue any one or more of the following remedies: (i) terminate this Lease by giving written notice thereof to Tenant, in which event Tenant shall immediately surrender the Premises to Landlord and, if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rental or other charges, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying said Premises, or any part thereof, by force, if necessary, without being liable for prosecution or any claim of damages therefor, and Tenant hereby agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise; (ii) enter upon and take possession of the Premises and expel or remove Tenant or any other person who may be occupying said Premises, or any part thereof, by force, if necessary, without having any civil or criminal liability therefor and, without terminating this Lease; and (iii) Landlord may (but shall be under no obligation to) relet the Premises or any part thereof for the account of Tenant, in the name of Tenant or Landlord or otherwise, without notice to Tenant, for such term or terms (which may be 16 greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on such conditions and for such uses as Landlord in its absolute discretion may determine and Landlord may collect and receive any rents payable by reason of such reletting, and Tenant agrees to pay Landlord on demand all reasonable expenses necessary to relet the Premises. After Landlord elects to pursue any of its remedies under this Paragraph 25, Tenant shall have no right to cure its default hereunder by tendering payment of rental. (c) The reentry or taking possession of the Premises by Landlord or the prosecution of a civil action by Landlord to obtain a writ of possession to dispossess Tenant shall not be construed as an election on Landlord's part to terminate this Lease unless a written notice of such termination is given to Tenant, and in all such events Tenant shall remain liable to Landlord for all rental and other charges reserved hereunder. Upon any reletting of the Premises by Landlord, Tenant shall be liable to Landlord for the deficiency, if any, between all rent reserved hereunder and the total rental applicable to the term obtained by Landlord in reletting the Premises, and for Landlord's expenses in restoring the Premises, and all costs incident to reletting. (d) Should any dispute arising under or out of the terms of this Lease result in litigation, Tenant hereby waives any and all rights to a jury trial in connection with such litigation. Tenant further waives any and all right to remain in possession of the Premises during such litigation and/or any appeals resulting therefrom. Tenant hereby agrees that this Lease or a copy thereof may be made part of the record in any such litigation. 26. BANKRUPTCY ---------- Neither this Lease, nor any interest herein, nor any estate hereby created shall pass to any trustee or receiver in bankruptcy or to any other receiver or assignee for the benefit of creditors by operation of law during the Term, or any renewal, or extension thereof. 27. LATE PAYMENT, ATTORNEYS' FEES, AND HOMESTEAD -------------------------------------------- Any amounts payable hereunder by Tenant to Landlord which are not paid on or before the date due shall bear interest at the rate of one and one-half (1-1/2%) percent per month from said due date. If any rent owing under this Lease is collected by or through an attorney-at-law, Tenant agrees to pay and amount equal to fifteen (15%) percent thereof as attorneys' fees. Tenant waives all homestead rights and exemptions which he may have under any law as against any obligation owing under this Lease, and hereby assigns to Landlord his homestead rights and exemptions. 28. NO ESTATE IN LAND ----------------- It is understood and agreed that Tenant has only a usufruct under this Lease, not subject to levy and sale, and that no estate shall pass out of Landlord to Tenant hereunder, Tenant's rights to the use of the Premises being solely contractual. 29. REMEDIES CUMULATIVE ------------------- The rights given herein are in addition to any rights that may be given by any statute or otherwise. 17 30. LANDLORD'S LIABILITY -------------------- Landlord shall have no liability or obligation to Tenant with respect to this Lease except insofar as Landlord may have any right, title, or interest in and to the real property or Premises which are the subject matter hereof 31. NOTICE ------ (a) Any notice by either party to the other shall be valid only if in writing, and shall be deemed to be duly given only if delivered personally or sent by registered or certified mail, return receipt requested, addressed: (i) if to Tenant, at the Building; and (ii) if to Landlord, at Landlord's address set forth in Paragraph 3 hereof, or at such other address for either party as that party may designate by written notice to the other. Any notice sent as hereinabove provided shall be deemed given or delivered: (i) upon receipt if personally delivered (provided that such delivery is confirmed by the courier delivery service); or (ii) if sent by United States Mail on the date appearing on the return receipt therefor, or if there is no date on such return receipt, the receipt date shall be presumed to be the postmark date appearing on such return receipt. (b) Tenant hereby appoints as its agent to receive service of all dispossessory, distraint, or other proceedings, any person employed by Tenant or acting as Tenant's agent and occupying the Premises; and if there is no such person occupying same, then such service may be made by attachment thereof on the main entrance of the Premises. 32. PARAGRAPH CAPTIONS ------------------ The paragraph captions in this Lease are included for convenience only, and shall not be taken into consideration in any construction or interpretation of this Lease or any of its provisions. 33. GENDER ------ The parties "Landlord," "Tenant," and "Agent" and pronouns relating thereto, as used herein, shall include male, female, singular and plural, corporation, partnership, or individual, as may fit the particular parties. 34. TENANT CORPORATION, PARTNERSHIP, OR INDIVIDUAL ---------------------------------------------- If Tenant executes this Lease as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby covenant, warrant, and represent that Tenant is a duly authorized and existing corporation, that Tenant has and is qualified to do business in Georgia, that the corporation has full right and authority to enter into this Lease, and that each and all persons signing on behalf of the corporation were authorized to do so. Upon Landlord's request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties. If Tenant executes this Lease as a partnership, Tenant does hereby covenant, warrant, and represent that all the persons who are general or managing partners in said partnership have executed this Lease on behalf of Tenant, or that this Lease has been executed and delivered pursuant to and in conformity with a valid and effective authorization therefor, by all of the general or managing partners of such partnership, and is and constitutes the valid and binding agreement of the partnership and each and every partner therein in accordance 18 with its terms. Also, it is agreed that each and every present and future partner of Tenant shall be and shall remain at all times jointly and severally liable hereunder, and that the death, resignation, or withdrawal of any partner shall not release the liability of such partner under the terms of this Lease unless and until Landlord consents in writing to such release. If Tenant executes this Lease as an individual, Tenant does hereby covenant, warrant and represent that his legal residence address is set forth below his signature on this Lease. 35. HEIRS AND ASSIGNS ----------------- The provisions of this Lease shall bind and inure to the benefit of Landlord, Tenant, Agent, and their respective successors, heirs, legal representatives, and, where permitted, assigns; it being understood that the term "Landlord," as used in this Lease, means only the owner of the land and Building of which Premises are a part, so that in the event of any sale or sales of said property or of any lease thereof, the Landlord named herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder accruing thereafter; and it shall be deemed without further agreement that the purchaser or the lessee, as the case may be, has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder during the period such party has ownership or leasehold rights of die land and Building. Should the land and the entire Building be severed as to ownership by sale and/or lease, then the owner of the entire Building or tenant of the entire Building who has the right to lease space in the Building to others shall be deemed the "Landlord." Tenant shall be bound to any succeeding party Landlord for all the terms, covenants, and conditions hereof, and shall execute any attornment agreement not in conflict herewith at the request of any such succeeding party Landlord. 36. TIME OF ESSENCE ---------------- Time is of the essence of this Agreement. 37. NO IMPLIED WAIVER ----------------- The failure of Landlord to insist at any time upon the strict performance of any covenant or agreement herein, or to exercise any option, right power, or remedy contained in this Lease, shall not be construed as a waiver of or a relinquishment thereof for the future. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of Base Rental, additional rental, or any other sum herein provided to be paid by Tenant shall be deemed to be other than on account of the earliest such payment due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Base Rental, additional rental, or any other sum herein provided to be paid by Tenant be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlords right to recover the balance of such Base Rental, additional rental, or any other sum herein provided to be paid by Tenant, or pursue any other remedy provided for in this Lease. 38. RULES AND REGULATIONS --------------------- Tenant and Tenant's agents, employees, and invitees shall fully comply with all requirements of the Rules and Regulations (as changed from time to time as hereinafter provided) which are 19 attached hereto as Exhibit "D" and made a part hereof. Landlord shall at all times have the right to change such Rules and Regulations or to promulgate other Rules and Regulations in such reasonable manner as Landlord, in its sole discretion, may deem advisable; provided, however, that such changes shall not become effective and a part of this Lease until a copy thereof shall have been delivered to Tenant. Tenant shall further be responsible for compliance with such Rules and Regulations by the employees, servants, agents, visitors, and invitees of Tenant. 39. COMMISSION ---------- (a) Landlord agrees to pay Resource Real Estate Partners, LLC, as compensation for services rendered in procuring this Lease, as further provided in that certain Exclusive Leasing Listing Agreement, dated November 1, 2001, by and between Southeast Office Partners, LLC, 26 and Resource Real Estate Partners, LLC. Resource Real Estate Partners agrees to pay CTR Partners as compensation for services rendered in procuring this Lease, as set forth in the Co-Brokerage Agreement between them. 40. RELOCATION ---------- (a) In order to facilitate Landlord's leasing program for the Project, Landlord shall be entitled at any time prior to Tenant's occupancy of the Premises to cause Tenant to relocate from the Premises to comparable space within Bailey Park At Barrett (hereinafter called "Center"). Any such relocation shall be entirely at the expense of Landlord or the third-party tenant replacing Tenant in the Premises. Such a relocation shall not terminate or otherwise affect or modify this Lease, except that from and after the date of such relocation, "Premises" shall refer to the relocation space into which Tenant has been moved, rather than the original Premises as herein defined. (b) At any time after Tenant's occupancy of the Premises, Landlord reserves the right to relocate Tenant in substitute premises of equivalent square footage and approximate configuration within the Center upon sixty (60) days written notice to the Tenant. If this right is exercised, Landlord shall, at its own expense, provide Tenant with paint, wallcovering, and carpeting at the new location, comparable to those in the original location, and shall at Landlord's expense, move Tenant' s office furnishings to the new location. If the then-current base rental rate at the new location is less than at the original location, Tenant's Base Rental shall be reduced accordingly, but if the then-current base rental rate at the new location is higher than at the original location, Tenant's Base Rental shall not be increased for the remainder of the Lease Term. If Landlord requests relocation of Tenant in accordance with the provisions of this Subparagraph 40(b) and Tenant gives written notice to Landlord of its objection thereto within twenty (20) days after receipt of the notice from Landlord, Landlord may, by written notice to Tenant within twenty (20) days after notice of Tenant's objection, withdraw the request for relocation. If the request is not withdrawn within said twenty (20) day period, Tenant shall have the option of terminating this Lease by written notice to Landlord within thirty (30) days after expiration of said twenty (20) day period. 20 41. JOINT AND SEVERAL LIABILITY --------------------------- If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several. 42. EFFECT OF DELIVERY OF THIS LEASE -------------------------------- Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or option to lease to Tenant. This Lease shall not be effective until a copy executed by both Landlord and Tenant is delivered to and accepted by Landlord. 43. RECORDATION ----------- Tenant agrees not to record this Lease, or any memorandum hereof. In the event Landlord's mortgagee may so require, Tenant agrees to execute a short form of this Lease for recording. 44. ENTIRE AGREEMENT ---------------- This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises, or agreements, oral or otherwise, between the parties not embodied herein, shall be of any force or effect. If any term or provision of this Lease shall be invalid or unenforceable, the remaining terms and provisions hereof shall not be affected thereby. If the application of any term or provision of this Lease to any person or circumstance shall to any extent be invalid or unenforceable, such term or provision shall remain applicable as to those persons or circumstances to which it shall be valid and enforceable. Each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 45. DISCLOSURES REGARDING AGENCY ---------------------------- Tenant represents and warrants to Landlord that, except with respect to CTR Partners (hereinafter referred to as "Co-Broker"), no agent, broker, or other person or entity has represented Tenant in the negotiations for procurement of this Lease and that no commissions or compensation of any kind are due and payable in connection herewith to any other agent, broker, or other person or entity. Tenant agrees to indemnity, defend, and hold Landlord harmless from any and all claims, suits, or judgments (including, but not limited to, reasonable attorneys' fees and court costs incurred in the enforcement of this indemnity or otherwise) for any commissions or compensation of any kind which arise out of or are in any way connected with any claimed agency relationship with Tenant (except for any agent or broker identified herein). Agent is the agent of Landlord in connection with this transaction and will be paid its commission by Landlord. Agent is not the agent of Tenant. If a Co-Broker is named above, Landlord and Tenant acknowledge, consent, and agree as follows: (i) although Co-Broker is the agent of Tenant in connection with this transaction, Co-Broker will be paid its commission by Landlord's Agent pursuant to a separate agreement between Landlord's Agent and the Co-Broker; (ii) Co-Broker is not the agent of Landlord; and (iii) the fact that Landlord's Agent is paying such commission to Co-Broker does not constitute Co-Broker as an agent of Landlord, nor does such fact constitute Co-Broker as a dual agent for both Landlord and Tenant. 21 46. HAZARDOUS SUBSTANCES -------------------- (a) Tenant hereby covenants that Tenant shall not cause or permit any "Hazardous Substances" (as hereinafter defined) to be placed, held, located, or disposed of in, on, or at the Premises or any part thereof, and neither the Premises nor any part thereof shall ever be used as a dump site or storage site (whether permanent or temporary) for any Hazardous Substances during the term of this Lease. (b) Tenant hereby agrees to indemnify and defend Landlord and hold Landlord harmless from and against any and all losses, liabilities (including strict liability), damages, injuries, expenses (including reasonable attorneys' fees), costs of any settlement or judgment, and claims of any and every kind whatsoever paid, incurred, suffered by, or asserted against Landlord by any person, entity, or governmental agency for, with respect to, or as a direct or indirect result of, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging, or release from the Premises of any Hazardous Substances (including, without limitation, any losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, costs of any settlement or judgment or claims asserted or arising under the Comprehensive Environmental Response, Compensation, and Liability Act, any so-called federal, state, or local "Superfund" or "Superlien" laws, or other statute, ordinance, code, rule, regulation, order, or decree regulating, relating to, or imposing liability, including strict liability, or standards of conduct concerning any Hazardous Substances); provided, however, that the foregoing indemnity is limited to matters arising directly or indirectly from Tenant's violation of the covenant contained in Subparagraph a. above. (c) For purposes of this Lease, "Hazardous Substances" shall mean and include those elements or compounds which are contained in the list of hazardous substances adopted by the United States Environmental Protection Agency (EPA) or the list of toxic pollutants designated by Congress or the EPA or which are defined as hazardous, toxic, pollutant, infectious, or radioactive by any other federal, state, or local statute, law, ordinance, code, rule, regulation, order, or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance, or material, as now or at any time hereafter in effect. (d) Landlord shall have the right but not the obligation, and without limitation of Landlord's rights under this Lease, to enter onto the Premises or to take such other actions as it deems necessary or advisable to cleanup, remove, resolve, or minimize the impact of, or otherwise deal with, any Hazardous Substances following receipt of any notice from any person or entity (including, without limitation, the EPA) asserting the existence of any Hazardous Substances in, or at the Premises, or any part thereof which, if true, could result in an order, suit or other action against Tenant and/or Landlord. All reasonable costs and expenses incurred by Landlord in the exercise of any such rights, which costs and expenses result from Tenant's violation of the covenant contained in Subparagraph a. above, shall be deemed additional rental under this Lease and shall be payable by Tenant upon demand. (e) The provisions of this Paragraph shall survive the expiration of this Lease and any termination or other enforcement of Landlord's remedies under this Lease. 22 47. SPECIAL STIPULATIONS -------------------- The Special Stipulations, if any, shall hereby be incorporated herein and made a part hereof as Exhibit "E", and in the event they conflict with any of the foregoing provisions, the Special Stipulations shall control. IN WITNESS WHEREOF, the parties herein have hereunto set their hands and seals, in triplicate, the day and year first above written. Signed, sealed, and delivered *TENANT: Cryomedical Sciences, Inc., a Delaware in the presence of: Corporation By: /s/ J. A. Grueling (SEAL) Witness ------------------------------- Name: J. A. Grueling [illegible] ----------------------------------- Title: President and CEO ---------------------------------- Signed, sealed, and delivered BROKER: Resource Real Estate Partners, L.L.C. in the presence of: By: /s/ Clint Glover (SEAL) [illegible] ------------------------------- Witness Name: Clint Glover ----------------------------------- Authorized Agent Signed, sealed, and delivered LANDLORD: Southeast Office Partners, L.L.C., 26 in the presence of: By: Bailey Office Partners, L.L.C., Victoria Steele Its Manager By: /s/ [illegible] (SEAL) Witness ------------------------------- Its: Manager ------------------------------------
23 * NOTE: 1. If Tenant is a corporation, an authorized corporate officer of Tenant must execute this Lease in his or her appropriate capacity, and another authorized Corporate officer must attest in the space marked "Witness" and affix the corporate seal. 2. If Tenant is a limited partnership, this Lease must be executed by all general partners. If the general partner is a corporation, please follow the instruction in No. 1 above. 3. If Tenant is a general partnership, all general partners of Tenant must execute this Lease. 4. If Tenant is a sole proprietorship or individual, this Lease must be executed by such sole proprietor or individual, and two (2) witnesses must also sign. 5. When executed, please return four (4) executed originals of this Lease to the Landlord for execution. The Landlord will then return one (1) fully-executed original to the Tenant. 24 EXHIBIT "A" (OUTLINE OF PREMISES) BAILEY PARK AT BARRETT BUILDING 200 SUITE 270 3,480 S.F. 25 Exhibit "B" ----------- Intentionally Blank 26 EXMBIT "C" TENANT ACCEPTANCE AGREEMENT --------------------------- Agreement made this __ day of _______________20__, between SOUTHEAST OFFICE PARTNERS, L.L.C., 26 (hereinafter referred to as "Landlord") and CRYOMEDICAL SCIENCES, INC., a Delaware Corporation (hereinafter referred to as "Tenant"). WHEREAS, Landlord and Tenant entered into a lease dated November __, 2001 (hereinafter referred to as the "Lease") for Suite 270 containing approximately 340 square feet in the Project known as Bailey Park At Barrett, Building 200, Suite 270, 1000 Cobb Place Boulevard, Kennesaw, Georgia 30144 (hereinafter referred to as the "Premises"). NOW THEREFORE, pursuant to the provisions of Paragraph 6(e) of the Lease, Landlord and Tenant mutually agree as follows: 1. The Commencement Date of the Lease Term is December 1, 2001. The Lease Term shall end on November 30,2001. 2. Tenant is in possession of, and has accepted, the Premises demised by the Lease, and acknowledges that all the work to be performed by the Landlord in the Premises as required by the terms of the Lease has been satisfactorily completed except for any punch list items described in Schedule "A" attached hereto. Tenant further certifies that all conditions of the Lease required of Landlord as of this date have been fulfilled and there are no defenses or setoffs; against the enforcement of the Lease by Landlord. IN WITNESS WHEREOF, the Parties hereto have signed and sealed this Agreement, the ___ of ___________________, 20__. Signed, sealed, and delivered TENANT: CRYOMEDICAL SCIENCES, INC., a in the presence of: Delaware Corporation. By: (SEAL) --------------------------- Witness Name: ------------------------------- Title: ------------------------------ By: (SEAL) --------------------------- Witness Name: ------------------------------- Title: ------------------------------ 27 Signed, sealed, and delivered LANDLORD: SOUTHEAST OFFICE PARTNERS, in the presence of: L.L.C., 26 By: Bailey Office Partners, L.L.C., Its Manager Witness By: --------------------------------- Its: --------------------------------- 28 EXHIBIT "D" RULES AND REGULATIONS --------------------- 1. Tenant shall have the nonexclusive right to park in common with Landlord, other occupants of the Building, their guests, and invitees in areas designated by Landlord. Tenant shall not overburden the parking facilities, and agrees to cooperate with Landlord and others in the use of the same. Landlord reserves the right, in its sole discretion, to allocate parking spaces among Bailey Park At Barrett occupants. Only vehicles which reasonably fit within the lined spaces may use the parking facilities, which may not be used for the continuous parking of any vehicle or trailer, regardless of size. No parking is allowed in roadways, driveways, fire lanes, service areas, walkways, building entrances, or any other area not designated for parking. Any trucks serving the Premises shall be parked directly in the rear of the Premises, and shall not interfere with other occupants' access to other premises, parking, or other common areas. Landlord shall not be responsible for any illegally-parked vehicle that Landlord shall have towed. 2. Landlord will provide at Tenant's expense identification signage for the Premises, such signage to be coordinated throughout Bailey Park At Barrett for uniformity and attractiveness. No sign, tag, label, picture, advertisement, or notice shall be displayed, distributed, inscribed, painted, or affixed on any part of the Premises visible from outside of the Building or the Premises without the prior-written consent of Landlord. 3. Landlord will, without charge, furnish Tenant with two keys for each lock on the entrance doors to the Premises when Tenant assumes possession, with the understanding that these keys shall be returned at the termination of the Lease. Landlord will not permit entrance to Tenant's Premises by use of a pass key to any person at any time without permission of Tenant, except employees, contractors, or service personnel directly supervised by Landlord. 4. Tenant will refer all contractors, contractors' representatives, and installation technicians rendering any service on or to the Premises to Landlord for approval and supervision before performing any contractual service. This provision shall apply to all work in the Building, including installation of telephones, telegraph equipment, security systems, electrical devices and attachments, and installations of any nature affecting floors, walls, woodwork, trim, doors, windows, ceilings, equipment, or other physical portion of the Premises or Building. 5. Tenant shall not place, install, or operate on the Premises or in any part of the Building any machine, equipment, or stove, or conduct mechanical operations, or place or use in or about the Premises any explosive, flammable, caustic, noxious, or hazardous material without the prior-written consent of Landlord. 6. No Tenant shall do or permit to be done within or about the Premises or Building anything which would annoy, disturb, or interfere with the rights of other Bailey Park At Barrett occupants. 7. There shall be no outside storage of goods, supplies, equipment, or any other material. All storage must be within the Premises, and, along with any other non-official use area, be kept at all times from view from outside of the Premises through doors, service doors, windows, or otherwise. 29 8. Exterior windows shall at all times be kept whole, clean, and lined with blinds provided by Landlord. 9. No Tenant shall at any time occupy any part of the Premises or Building as sleeping or lodging quarters. 10. No bicycles, boats, vehicles of any description (except for automobiles or small trucks through rear service doors for the purpose of and during loading or unloading), or animals shall be brought into the Premises or Building. 11. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed. No person shall waste water by interfering with the faucets or by other means. 12. Each Tenant agrees to keep the areas immediately in front, behind, and beside the Premises clean and free of all trash and debris. 13. Tenant shall not canvass or conduct surveys with or among Bailey Park At Barrett occupants without the prior-written consent of Landlord, and shall cooperate to prevent the same. 14. Tenant shall not paint or otherwise change the appearance of Premises' doors, door frames, windows, window frames, or hardware. is. Tenant shall not use the name "Bailey Park At Barrett" in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 16. Landlord shall not be responsible to any occupant for the nonobservance or violation of any of these "Rules and Regulations" by any other occupant. Landlord shall have the right from time to time to modify, add to, or delete from the "Rules and Regulations" at Landlord's sole discretion. Any additional "Rules and Regulations" shall be binding upon the parties hereto as if they had been present herein at the time of execution of this Lease. 30 EXHIBIT "E" SPECIAL STIPULATIONS -------------------- 1. Tenant shall have the right to extend the lease term for 12 months by providing at least 3 months written notice. The renewal base rate shall be $11.00 psf. 2. Landlord will provide Tenant an improvement allowance of $3,000 upon execution of the lease. 3. Landlord shall replace the missing base cove in the Premises. 4. Landlord shall be responsible for replacement costs to HVAC compressors during the first year of the lease. 31 -----END PRIVACY-ENHANCED MESSAGE-----