SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1997 Commission File Number: 0-16375
THERMOGENESIS CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3018487
(State of Incorporation) (I.R.S. Employer
Identification No.)
3146 GOLD CAMP DRIVE
RANCHO CORDOVA, CA 95670
(916) 858-5100
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.001 Par Value Nasdaq SmallCap Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes <checked-box> No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. <checked-box>
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price on September 25, 1997, was
$53,558,540.00.
The number of shares of the registrant's common stock, $.001 par value,
outstanding on June 30, 1997 was 15,864,769.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
TABLE OF CONTENTS
PAGE NUMBER
ITEM 1. Business...................................... 3
(a) New Developments in Business............. 3
(b) General Development of Business.......... 6
(c) Description of the Business.............. 6
ITEM 2. Description of Properties.................... 16
ITEM 3. Legal Proceedings........................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders... 17
ITEM 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 18
ITEM 6. Selected Consolidated Financial Data.................. 19
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 20
(a) Overview........................................ 20
(b) Results of Operations........................... 20
(c) Liquidity and Capital Resources........... 24
(d) Factors Affecting Operating Results and
Market Price of Common Stock .. 25
ITEM 8. Financial Statements and Supplementary Data........... 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure......................... 44
ITEM 10. Directors and Executive Officers of the Registrant... 44
(a) Corporate Directors.............................. 44
(b) Corporate Officers.............................. 46
ITEM 11. Executive Compensation............................. 48
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management ............... 51
ITEM 13. Certain Relationships and Related Transactions...... 52
ITEM 14. Exhibits......................................... 53
(a) Financial Statements........................ 53
(b) Reports on Form 8-K......................... 53
(c) Exhibits..................................... 53
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PART I
ITEM 1. BUSINESS
The Company was incorporated in Delaware on September 26, 1986 as Insta Cool
Inc. of North America. In January 1995, the Company changed its name to
THERMOGENESIS CORP. ("Company") to better reflect the thermodynamic blood
processing segment of the biotechnology industry that it hopes to service
through development of new products. The Company designs and sells products
and devices which utilize its proprietary thermodynamic technology for the
processing of biological substances including the cryopreservation, thawing,
and harvesting of blood components ("Proprietary Technology"). Historically,
the Company's primary revenues have been from sales of its Class I blood plasma
freezers and thawers ("Core Line Products") to hospitals, blood banks and blood
transfusion centers in 32 countries. The Company has under development five new
FDA Class II blood and/or tissue processing systems ("Pipe Line Products"),
each consisting of a thermodynamic device designed to process blood and/or
tissues through use of proprietary, sterile, disposable processing containers.
(A) NEW DEVELOPMENTS IN BUSINESS
FDA DEVELOPMENTS
(I) HEMOMATIC<trademark> BLOOD COLLECTION MONITOR
In April 1997, the Company received marketing clearance from the U.S. Food and
Drug Administration ("FDA") to market the Hemo-Matic Blood Collection Monitor
("Hemo-Matic") in the United States. The Company is the exclusive distributor
in the United States and Canada for the Hemo-Matic, which is manufactured by
HemoPharm Services S.A. ("HemoPharm") in France. The Hemo-Matic is an
automated blood weigher/mixer used by phlebotomists to collect blood donations.
The device is capable of simultaneously weighing and mixing blood, and will
assist in the collection of blood donations by automating the process to some
degree.
The Company placed eight monitors in a single center field trial with the
American Red Cross in April 1997 with sufficiently favorable results to justify
an expanded regional field trial of the device using thirty blood collection
monitors, beginning in October 1997. The Company has begun to market the
product to the American Red Cross Blood Centers, the Canadian Red Cross Blood
Centers, and other independent blood collection centers, community blood banks,
and hospitals across the country, which represents a potential market for
approximately 11,000 Hemo-Matic units.
(II) CRYOSEAL<trademark> SYSTEM
In September 1996, the Company submitted a 510(k) Premarket Notification
("510(k)") to the FDA for permission to market the CryoSeal System as an
automated rapid method of preparing cyroprecipitated AHF ("Cryo") -- a
biological product licensed by the FDA for intravenous treatment of hemophilia.
The FDA requested further clarification of certain items in a request for
additional information received in April 1997, and the Company responded in
writing in May of 1997. Following review of the additional information that
was submitted to the FDA, a telephone conference was held to answer preliminary
questions raised by one reviewer. The Company is taking all steps to expedite
and conclude the review process, and anticipates that the FDA will reach a
decision in the second quarter of fiscal 1998.
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(III) BIOARCHIVE<trademark> SYSTEM
In September 1997, Pall Medsep, the licensee for the manufacture and
distribution of the three inter-related placental cord blood ("PCB") bag sets,
submitted a New Drug Application ("NDA") with the FDA for the PCB collection
bag set, and a 510(k) application for the PCB processing and transfusion bag
sets. These bag sets streamline the New York Blood Center ("NYBC") protocol
for collecting, cryopreserving and transfusing PCB stem cells and feature a
novel freezing bag which is designed to be controlled-rate frozen and stored in
the BioArchive device at -196{o} C.
The Company is targeting the submission of its 510(k) application for the
BioArchive device to be completed in the second quarter of fiscal 1998, but
will begin supplying the device to cord blood banks with Investigational New
Drug ("IND") exemptions under the Investigational Device Exemption ("IDE")
regulation.
NEW CORPORATE DEVELOPMENTS
(I) STRATEGIC PARTNERS
In March 1997, the Company and the NYBC, as co-licensors, entered into a
license agreement with Pall Corporation and Medsep Corporation, a subsidiary of
Pall (collectively "Pall Medsep"), as Licensees through which Pall Medsep
became the exclusive world-wide manufacturer and distributor (excluding Japan)
for the system of sterile, disposable containers developed by the Company and
NYBC for the processing of hematopoietic stem cells sourced from PCB. Pall
Corporation is the international leader in the design, manufacture and
marketing of fine disposable filters, membranes and other fluid clarification
and separation devices for the health care, aeropower and fluid processing
markets.
The system of containers is designed to simplify and streamline harvesting of
stem-cell rich blood from the placental/umbilical cords of healthy newborns,
and the concentration, cryopreservation (freezing) and transfusion of the PCB
stem cells while maintaining the highest stem cell population and viability
from each PCB donation. These units of PCB stem cells are designed to be
"banked" in frozen storage in a BioArchive robotic storage device at liquid
nitrogen temperature (-196*C) for "on demand" hematopoietic reconstitution of
patients afflicted with diseases such as leukemia, aplastic anemia,
hypoproliferative stem and progenitor cell disorders, leukemia, lymphomas and
gaucher disease.
In 1996, the manufacture and distribution rights to the same sterile,
disposable PCB processing containers were licensed to Nissho Corporation for
exclusive manufacture and marketing in Japan. Nissho is a leading
manufacturer of medical equipment, blood-related disposable containers, and
pharmaceuticals in Japan. In 1995, the distribution of the BioArchive was
licensed to Daido Hoxan for the territory of Japan.
The advantages of PCB stem cell banks to patients and transplant physicians
include the following: (1) the PCB stem cell donations can be easily harvested
from the postpartum placenta and umbilical cord resulting from the birth of
the millions of babies born each year; (2) PCB stem cell treated patients, on
the average, demonstrate lower incidence of graft-versus-host disease (GVHD)
and improved probability of event-free survival than patients treated with bone
marrow; and (3) PCB stem cell donations can be stored in frozen inventory for
use immediately on demand in contrast to the average 6-9 month delay in finding
a suitable HLA- matched bone marrow donor who must then undergo an invasive
surgical procedure to harvest the bone marrow.
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Under the license agreement with Pall Medsep, the Company received an advance
license payment, and NYBC and the Company will receive a running royalty equal
to ten percent (10%) of Pall Medsep's net sales resulting from the sale of the
licensed product for use in stem cell blood collection, and a running royalty
equal to five percent (5%) of net sales for non-cord blood stem cell use. Under
the terms of the license agreement with Nissho, NYBC received certain advance
license payments, and NYBC and the Company will receive a running royalty equal
to ten percent (10%) of Nissho's sale of the licensed products in Japan.
(II) NATIONAL HEART LUNG AND BLOOD INSTITUTE STUDY
The National Heart Lung Blood Institute clinical research program will
establish PCB progenitor cell banks at three key medical research facilities,
Duke University Medical Center ("Duke University"), Children's Hospital of
Orange County and UCLA Medical Center. In addition to the three PCB cell
banks, the study will consist of seven transplant centers for the clinical
transplantation of the PCB units. The five-year, $30 million multi-center study
was authorized by NHLBI Director, Dr. Claude Lenfant in October 1996 and is
supervised by Dr. Paul McCurdy, Director, Blood Resources Program of the
Division of Blood Diseases and Resources.
In June 1997, Pall Medsep was awarded an exclusive contract to provide the
THERMOGENESIS/NYBC sterile collection, processing and storage systems for the
NHLBI study of PCB transplants. The Company believes that the practical effect
of this award is that a standardization in the procedures utilized to collect,
process, cryopreserve and transfuse cord blood stem cells may now take place.
In August 1997, the Company announced that its BioArchive was selected by Duke
University and Children's Hospital of Orange County, two of the NHLBI
collection centers, for use in the NHLBI clinical study to freeze, store and
manage donated units of PCB progenitor cells. In September 1997, the Company
received additional orders for the BioArchive from the NYBC and Daido Hoxan of
Japan. The FDA's pre-market human clinical investigation rules govern the
research program and the BioArchive Systems will be delivered to Duke
University, Children's Hospital of Orange County and the NYBC under the
Investigational Device Exemption (IDE) regulation, and cost recovery provisions
will be utilized for the equipment. The second quarter of fiscal 1998 is the
projected target date for the submission to the FDA of a 510(k) application for
the BioArchive System.
(III) EQUITY FINANCING
In November 1996, the Company completed a private placement raising a total of
$8,268,006, before direct expenses. The net funds of approximately $7,300,000
are being used for general corporate purposes that include, but are not limited
to, payment of existing accounts payable and short-term debt, testing of
products, continued research and development, preclinical trials, production
costs and inventory, advertising and promotional materials related to new
products in development, working capital, and increased payroll due to the
addition of personnel necessary to bring the new products in development to
market.
Assuming the exercise of all Warrants issued as part of the Units in the
private placement at $3.885 per share, the Company would receive an additional
$5,353,534, which would be used to support general operations and continued
research and development for additional products and markets. The Company does
not, however, anticipate that the Warrants will be exercised immediately, based
on the current trading price of $3.50 on September 25, 1997.
5
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(B) GENERAL DEVELOPMENT OF BUSINESS
During the fiscal years 1988 through 1994, the Company focused its efforts on
research and development and on refining Core Line Products. Since July 1994,
the Company has aggressively sought new applications for its Proprietary
Technology, which culminated in five FDA Class II products, two of which the
Company expects to market launch in fiscal 1998. The new FDA Class II products
are indicative of the Company's efforts to develop systems and processes for
therapeutic use in larger markets; products which by their inherent nature
require consumable disposable components for the processing of blood and/or
tissue.
HISTORICAL AND PROSPECTIVE
The Company's strategy has been to develop superior FDA Class I blood
processing devices for facilities, such as the Red Cross and other blood
transfusion societies of various countries, which process blood components,
inventory blood components, or fractionate blood plasma, thereby quickly
establishing credibility for the Company's Proprietary Technology. Early
products which were designed for blood banks and hospitals have received rapid
510(k) permission to market, and the Company sells them directly and through
its distribution network in 32 countries.
From 1988 to 1992 the Company's products were designed to transfer heat by
circulating refrigerated heat transfer liquids directly into contact with
plastic sealed containers of blood plasma. These initial designs used liquids
containing chloro-flouro-carbons ("CFC") which the Company phased out in the
fall of 1992. Thereafter, the Company developed an alternative heat transfer
method which automatically interposed a thin flexible membrane between the heat
transfer liquid and biological substances which process allowed for use of non-
CFC based heat transfer liquids. The Company continues to refine these plasma
freezers and thawers in order to maintain its market leadership.
The five Pipe Line Products under development each consist of a thermodynamic
device designed to process blood and/or tissues through use of proprietary,
sterile, disposable processing containers. The disposable components are an
integral part of most blood processing systems, and related medical devices
that come into contact with blood and tissue. The proprietary, sterile,
disposable containers and other disposable components of the new systems will
potentially generate continuing revenue streams for the Company through each
use of the equipment, compared to current revenues generated from the sale of
Core Line Products which are purchased as capital equipment. Based on its
current market research of surgical and medical procedures, and reimbursement
costs for those procedures, the Company estimates that its new Pipe Line
Products will collectively compete in markets where annual revenues are in
excess of $2 billion annually.
The Company operates in one industry segment, and reports the results of its
operations for only one industry segment.
(C) DESCRIPTION OF THE BUSINESS
BACKGROUND OF MARKETS AND PRODUCTS
The Company's Core Line Products of ultra rapid plasma freezers use heat
transfer liquids, rather than gases such as air, carbon dioxide or nitrogen to
transfer heat to and from a biological substance. From 1988 to 1992, the
Company's devices were designed to transfer heat by causing these heat transfer
liquids to directly contact the plastic container within which the blood
components were sealed. However, since these liquids contained a CFC chemical,
an improved heat transfer method was developed and patented which automatically
interposed a thin flexible plastic membrane between the heat transfer liquid
and the container housing the blood component. This flexible membrane allowed
the use of low viscosity silicone based heat transfer liquids, thereby allowing
the Company to produce CFC-free devices.
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The Company's blood plasma thawers utilize algecide treated water to transfer
heat through the patented flexible membrane system. In tests performed by the
Company's research and development ("R&D") staff, the Company compared the rate
and homogenous quality of temperature rise in four bags of frozen plasma in a
THERMOGENESIS plasma thawer and a microwave oven. The Company found that the
frozen plasma in the THERMOGENESIS thawer rose to a transfusible temperature
(20{o}C), faster than the thaw rate for frozen plasma in a microwave oven, and
the plasma in the THERMOGENESIS thawer had less temperature variation
throughout its volume after thawing than the plasma thawed in the microwave
oven. The Company currently manufactures the following Core Line Products of
blood plasma freezers and thawers:
<TABLE>
<CAPTION>
MODEL CAPACITY APPLICATION TARGET MARKET
<S> <C> <C> <C>
MP2000 168 Plasma Bags/Hr. Freeze Blood Plasma Blood Banks,
Transfusion Boards,
Red Crosses
MP1000 64 Plasma Bags/Hr.
MP750 32 Plasma Bags/Hr.
MP500 24 Plasma Bags/Hr.
MPIII 12 Plasma Bags/Day Portable Blood Blood Banks,
Plasma Freezing Transfusion Boards,
and Storage Red Crosses
MPII 6 Plasma Bags/Day
MPIIIt 24 Plasma Bags/load
MT202 2 Plasma Bags/12 Min. Thaw Blood Plasma Blood Banks, Hospitals
MT204 4 Plasma Bags/12 Min.
MT210 10 Plasma Bags/12 Min.
</TABLE>
The freezers differ in size and capacity and have suggested retail prices which
range from $10,000 to $65,000 for the larger capacity plasma freezers. The
price also varies within each model depending upon configuration and accessory
equipment purchased. The Company sometimes offers discounts from its list price
to meet competitive conditions.
Materials used to produce the Company's products are readily available from
numerous sources. Based upon current information available from its vendors,
the Company does not anticipate any shortage of supplies required to
manufacture its products. In 1992, the Company introduced a replacement heat
transfer liquid and refrigerant which is free of chloro-fluoro-carbons (CFC)
for use in the Proprietary Technology. The replacement chemicals are readily
available and the Company does not anticipate any shortages or constraints on
supplies.
The Company has targeted the commercial blood fractionators manufacturers, Red
Cross facilities, hospitals and independent blood collection facilities as the
primary customer for its freezers and thawers, which are marketed on the basis
of speed of operation, energy savings, precision of temperature control and the
increased yields of important blood proteins.
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The Company expects limited growth in the market for blood plasma freezers and
thawers and, as a result, the continued growth of the Company is dependent upon
the development of new applications for the Proprietary Technology in the
medical blood processing field and other markets. It is management's belief
that its freezers and thawers have an approximate service life of between 6-10
years and the Company is beginning to experience a replacement market within
the blood plasma industry.
The Company has five unique Class II medical systems under development, each of
which features not only a thermodynamic platform to process blood products in a
closed system, but use of various sterile, disposable plastic containers and
applicators that come into direct contact with the blood product. These
disposables must be replaced after each use, thereby potentially transforming
the sale of each system into a long term revenue stream. The Company is on
schedule to complete development of the first two of these Class II systems -
CryoSeal and N{2} BioArchive - by the second quarter of fiscal 1998, and has
formed strategic business relationships with major medical companies to assist
its manufacturing and marketing efforts. See "Research and Development" below
for a summary of the current Class II medical systems in development.
MARKETING, SALES AND DISTRIBUTION
The Company sells its medical products to blood banks and hospitals including
the Red Cross or Blood Transfusion agencies of the United States, Australia,
Belgium, Canada, China, Denmark, France, Germany, Japan, Korea, the
Netherlands, Singapore, Sweden, Switzerland, and Taiwan. The plasma thawers
have suggested retail prices between $2,850 to $10,000 and are marketed in the
U.S. and Canada predominately through inside direct telemarketing sales staff
and distributors in most foreign markets.
The Company has primarily targeted the blood processing industry which consists
of approximately 7,000 hospitals and blood collection centers in the United
States and approximately 20,000 hospitals and blood collection centers in the
industrial nations outside the United States. The Company has formulated its
marketing strategy based, in part, on the fact that United States accounts are
serviced either by employees of the Company or a manufacturing representative,
and internationally by regional manufacturing representatives or distributors.
The primary thrust of the Company's marketing efforts has been focused on
hospitals and blood banks run or managed by either the Red Cross, private or
public blood collection/transfusion agencies of the United States, Australia,
Belgium, Canada, China, Denmark, France, Germany, Japan, Korea, the
Netherlands, Singapore, Sweden, Switzerland, and Taiwan. In 1993, the Company
instituted a comprehensive telemarketing program to increase market coverage in
the United States and Canada, and in September, 1994, the Company began to
upgrade its customer service department with telemarketing support.
The Company has already formed strategic business relationships to assist its
manufacturing and marketing efforts for the FDA Class II Pipeline Products, and
will seek other similar relationships in the future. See "License and
Distribution Rights" below.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $447,000, $1,317,000 and $3,562,000 in
research and development ("R&D") expenses for the years ended June 30, 1995,
1996 and 1997, respectively. The R&D expenditures in 1997 increased by
approximately 170% over the 1996 year. The R&D expenditures were principally
related to final development of two Class II medical devices nearing product
launch. The Company anticipates expenses to continue as a significant
percentage of revenues until new product launches are complete. See Item 7
below, entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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CRYOSEAL SYSTEM. The CryoSeal System is a small, floor-standing thermodynamic
device and special blood processing container which harvests Cryo from a
donor's blood plasma. Cryo is licensed by the FDA for the intravenous
treatment of clotting protein deficient patients (hemophilia). As the CryoSeal
System prepares Cryo in less than one hour compared to two to three days when
utilizing current conventional blood bank procedures and equipment, the
CryoSeal System may also be suitable for the harvesting of adhesive and
clotting proteins, and growth factors from a surgical patient's own blood for
use by the surgeon to stop surface bleeding, bond tissues and augment or
replace sutures. Should the FDA permit this practice, the Cryo harvested by
the CryoSeal System -- called CryoSealant<trademark>, would become an
autologous biological adhesive containing the adhesive and/or clotting proteins
fibrinogen, fibronectin, von Willebrand's Factor, factor VIII, and the clot
stabilizing protein, factor XIII, as well as platelet derived growth factors
(PDGF). The Company believes that the CryoSeal System may become an effective,
safe and less expensive alternative to the current commercial tissue sealant
known as "Fibrin Glue" which, the Company estimates has annual sales of $400
million in Europe and Japan, but which has been licensed by the FDA for sale in
the United States. The license for Fibrin Glue has since been rescinded.
Medical literature documents important practical applications for Fibrin Glue
in thirteen distinct surgical areas, including plastic, thoracic,
cardiovascular, orthopaedic, and opthamalogic surgery. Commercially available
Fibrin Glue predominantly includes fibrinogen proteins which have been
harvested from plasma pooled from thousands of donors. Fibrin Glue is sold
outside the United States in kits which include a simple applicator and cost
the hospital $100 to $220 per milliliter, depending on the country. Although
Fibrin Glue sourced from pooled plasma has not yet been licensed by the FDA for
sale in the USA, perhaps, due to concerns over contamination by viruses such as
HIV and hepatitis, The Marketing Research Bureau's Report, "Market Assessment
of the Commercial Fibrin Sealant Market in the United States: 1996," estimates
the potential annual U.S. market for such a biological adhesive to be in excess
of $400 million. No assurances can be given that the Company will receive FDA
permission to market its CryoSeal System as a device to produce autologous
fibrin glue, or that it will obtain significant market share or revenues from
the distribution of its system.
The Company believes that there is a significant need for a tissue sealant that
fulfills the surgeon's requirement for effectiveness and ease of use while
accomryoSeal System, which can produce 8 to 10 ml of harvested clotting and
adhesive proteins, requires the use of two or more of the following disposables
which are integral components to the System:
CP-1: A sterile, plastic bag set for harvesting the proteins and growth
factors from the patient's blood plasma.
SA-1: A small, sterile, hand-held spray applicator for precisely
depositing CryoSealant on large bleeding wound sites.
DA-1: A small, sterile, hand-held plastic line or dot applicator for
precisely depositing CryoSealant on small or narrow bleeding wound
sites.
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Clinical studies with the CryoSeal System, which are exploring CryoSealant as
an autologous fibrin glue, are now taking place in the United States and
Canada under the direction of Dr. Dean Toriumi, a leading specialist in
reconstructive surgery at the Medical School of the University of Illinois at
Chicago, and Dr. Gail Rock, a leading specialist in hematology and coagulation
at the Ottawa Civic Hospital. Additional clinical trials are also scheduled to
begin in Italy and Japan in the second quarter of fiscal 1998.
In September 1996, the Company applied to the FDA for 510(k) clearance to
market its CryoSeal System for the rapid automated preparation of Cryo
harvested from a single donor's unit of blood plasma, a biological product
licensed by the FDA for intravenous treatment of hemophilia.
The second and more critical stage of the regulatory process will be to submit
additional clinical findings to support the use of the CryoSeal System as an
autologous topical hemostatic and tissue bonding agent during surgery. The
Company is currently in the process of identifying specific surgical protocols
which would provide the data to submit to the FDA for permission to expand the
applications of the CryoSeal System.
N{2} BIOARCHIVE SYSTEM. This System is a highly evolved means for collecting,
processing, controlled-rate freezing, storing and retrieving biological
thermolabile substances such as stem and progenitor cells, corneas, heart
valves, sperm cells, virus samples, biopsy specimens, cell lines and blood,
tissue and saliva samples for DNA matching. It features a liquid nitrogen
dewar equipped with a robotic insertion and retrieval arm with remote optical
bar code reading, controlled rate freezing and a computerized inventory
management system with proprietary disposable containers tailored to the
specific biological item. The need to accurately validate that the freezing
rate and storage and retrieval of these precious biological tissues is
paramount. For example:
<circle> Both sperm banks and prospective mothers need to be sure that the
implanted sperm has been correctly frozen and stored and then correctly
identified and retrieved from the thousands of similar inventory items.
<circle> Both police departments and suspects need to be assured that DNA-
typed blood, tissue or saliva samples have been correctly frozen and
stored and then correctly identified for forensic purposes.
<circle> Both pathologists and patients need to be assured that biopsy
samples have been correctly frozen and stored and then correctly
identified and retrieved from the thousands of similar inventory items.
<circle> Both transplant surgeons and patients need to be assured that the
genetically-typed stem cells for transplantation have been correctly
frozen and stored and then correctly identified and retrieved from the
thousands of similar inventory items.
The first biological substance for which N{2} BioArchive disposables have been
designed is stem and progenitor cells from placental blood drawn from blood
within the placenta and umbilical cord that is normally discarded after every
birth. Placental stem and progenitor cells have been identified by researchers
as a superior replacement alternative to bone marrow for the reconstitution of
the immune system. Recent articles in THE NEW ENGLAND JOURNAL OF MEDICINE
verify the improvements in patient mortality that result from the intrinsic
advantages of cord blood stem cells over bone marrow stem cells. For example,
cord blood stem cells can be easily collected, frozen and stored in "banks" for
immediate use and cord blood stem cells are more tolerant of a mismatch
resulting in lower levels of graft vs. host disease for the patient.
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For optimum therapeutic benefit, it will be necessary to harvest and inventory
many thousands of cryopreserved placental stem cell donations, all genetically
typed. In cooperation with a pioneer and leading expert in this field, Dr.
Pablo Rubinstein of the NYBC, the Company has developed three disposable
components that optimize the marriage of stem cell collection with the N{2}
BioArchive System:
SCP-1: A sterile plastic bag set for harvesting and cryopreserving the stem
cells in a closed system and transferring them to the detachable
freezing bag.
TR-1: A sterile, plastic disposable bag set for optimally preparing the
frozen stem cells for transfusion.
PC-1: A small disposable metal container to hold and protect the stem cell
freezing bag during storage in the N{2} BioArchive System and
subsequent transport to the transplant site.
No assurances can be given that the Company's N{2} BioArchive System will be
accepted by the market as new uses for the product are implemented.
JRC BLOOD SAMPLE STORAGE AND RETRIEVAL SYSTEM. The JRC System is designed as a
long-term storage freezer, computer inventory system and blood sample container
for use by the Japanese Red Cross for storing samples of all blood donations
that occur in Japan each year. The blood sample storage program has been
mandated by the Japanese government in an effort to comply with new product
liability laws in Japan, where approximately 6,600,000 blood donations occur
annually. The Company shipped the prototype JRC System to Daido-Hoxan, the
Company's Japanese distributor, in November 1996 for tests and performance
review. In February 1997, Daido Hoxan placed an order for five (5) additional
systems for installation at the five (5) JRC collection centers in Hokkaido as
an expanded pilot program. No assurance can be given that the Company's Blood
Sample Storage and Retrieval System will ultimately be purchased in quantity by
the Japanese Government.
A brief description of the other three Class II products under varying levels
of development, all of which utilize the same thermodynamic technology already
refined for the CryoSeal System, are listed as follows:
MICROSEAL<trademark> SYSTEM. MicroSeal is a bench top system that requires
less than 50 ml of blood, drawn in a syringe to harvest up to 1 ml of
CryoSealant for the hundreds of thousands of microsurgeries that occur each
year that could benefit from a safe, effective biological tissue sealant or
hemostatic agent, such as: closing macular holes in the eye, minimizing
scarring in fallopian tube surgery, sealing excised cataract wounds, bonding
skin flaps in minor cosmetic surgery, and repairing ruptured eardrums.
CRYOFACTOR<trademark> SYSTEM. The CryoFactor System is intended to harvest
a full array of autologous PDGF immersed in a solution of adhesive proteins
from a patient's own blood donation for the treatment of chronic wounds such
as diabetic and venous insufficiency ulcers and for the healing and joining
of severed nerves.
CRYOPLATELET<trademark> SYSTEM. The CryoPlatelet System is intended to
cryopreserve blood platelets which retain their viability when thawed
utilizing novel freezing rates, proprietary disposable containers and
transfusable, biodegradable cryoprotectants. Currently, platelets cannot
successfully be frozen and remain viable, and, unfrozen, have a shelf life
of only five (5) days. As a result, 400,000 bags (10% of total bags
produced in the United States) are discarded annually due to outdating.
11
<PAGE>
MANUFACTURING
The Company has in-house manufacturing capabilities and is currently
manufacturing approximately 70-80% of its products for sale. The Company
believes that vendors used by the Company are capable of producing sufficient
quantities of all required components. The Company moved to a larger 11,000
square foot facility in July 1994 where it has consolidated its activities and
is in the process of upgrading its manufacturing practices to ISO 9000
standards. In February 1997, the Company moved its sales, marketing and
administrative functions, and its research and development engineering offices
into a 17,400 square foot facility, thereby dedicating the 11,000 square foot
and 5,000 square foot facilities to manufacturing and manufacturing
engineering. Current manufacturing facilities are adequate to handle
anticipated sales volumes for both Core Line Products and Pipeline Products.
Products manufactured or sold by the Company are warranted against defects in
manufacture for a period of 12 months from delivery when used for the
equipment's intended purpose, which warranties exclude consequential and
incidental damages to the extent allowed by law.
LICENSES AND DISTRIBUTION RIGHTS
In June 1995, the Company licensed the Japanese distribution rights to its N{2}
BioArchive System and the Vial BioArchive System to Daido-Hoxan, Japan.
In June, 1996, the Company awarded an exclusive manufacturing license and
distribution agreement for the CryoSeal System for the country of Japan to
Asahi Medical Co., Ltd., of Japan, a division of Asahi Chemical. Asahi Medical
is a leading supplier of artificial kidneys, blood purification systems and
leukocyte removal systems, with annual revenues of $270 million. Asahi will
manufacture the CP-1 disposable bag set, purchase the CryoSeal System
thermodynamic processing device (CS-1) and SA-1 and DA-1 surgical applicators
from the Company, and market the CryoSeal System in Japan.
In March 1997, the Company and NYBC licensed Pall Medsep as the exclusive
world-wide manufacturer and distributor (excluding Japan) for the PCB system
of sterile, disposable containers developed by the Company and NYBC. In 1996,
the manufacture and distribution rights to the same sterile, disposable PCB
processing containers were licensed to Nissho Corporation for manufacture and
distribution by Nissho in the territory of Japan.
COMPETITION
The Company hopes to develop a competitive advantage in the medical
applications of its Proprietary Technology, but it realizes that there are many
companies engaged in related areas which are substantially larger and possess
greater financial resources and personnel which could compete with the Company.
There are approximately 13 companies with sales in excess of $50,000,000 which
manufacture blast air chillers and freezers or liquid nitrogen and carbon
dioxide systems.
The Company's principal market is the users of ultra-rapid blood plasma
freezing and thawing equipment. Based upon attendance at trade shows and
discussions with customers and potential customers, management has identified
four companies which sell freezers in the industry: Revco, a division of Rheem
Manufacturing, Forma Scientific, a division of Mallinckrodt, Inc., Harris
Corporation, and the Company. The Company is unable to ascertain its specific
competitive position within the blood plasma freezer industry and management
has no knowledge of whether Harris Corporation is a subsidiary of another
Company. The Company competes primarily based on performance of its products.
Based upon conversations with customers and potential customers and attendance
at trade shows, management believes that the Company's products are generally
more expensive than its competitors, ranging in price from $10,000 to $65,000
for the Company's plasma freezing products compared to $2,000 to $25,000 for
competing products.
12
<PAGE>
The Company may face substantial competition for all of its Pipe Line Products.
The CryoSeal System, should the Company receive FDA permission to claim tissue
adhesion and hemostasis for the CryoSealant, may face competition from major
plasma fractionaters which currently sell fibrin glue sourced from pooled
plasma outside the United States. Fibrin glue currently sourced from pooled
plasma may also eventually receive permission from the FDA for marketing in the
United States. The fractionaters currently producing fibrin glue are
significantly larger and better financed than the Company.
Although the Company believes that the BioArchive System is currently unique in
its ability to utilize computers, optics and proprietary disposable bag sets to
store sterile, processed biologicals in liquid nitrogen, numerous larger and
better financed medical device manufacturers may choose to enter this market as
it develops. If such companies enter this market, the Company would most
likely face formidable competition and be required to rely significantly on its
Proprietary Technology and patents covering the processes.
PATENTS
The Company believes that patent protection is important for products and
potential segments of its current and proposed business. The Company currently
holds six (6) patents, and has four (4) patents pending to protect the designs
of additional products which the Company intends to market. There can be no
assurance, however, as to the breadth or degree of protection afforded to the
Company or the competitive advantage derived by the Company from current
patents and future patents, if any. Although the Company believes that its
patents and the Company's existing and proposed products do not infringe upon
patents of other parties, it is possible that the Company's existing patent
rights may be challenged and found invalid or found to violate proprietary
rights of others. In the event any of the Company's products are challenged as
infringing, the Company whe issue. There is no assurance that the Company
would be able to finance costly patent litigation, or that it would be able to
obtain licenses or modify its products in a timely manner. Failure to defend a
patent infringement action or to obtain a license or implementation of
modifications would have a material adverse effect on the Company's continued
operations.
13
<PAGE>
The following table sets forth the status of the Company's patents covering its
products:
<TABLE>
<CAPTION>
#. PATENT DESCRIPTION USA FILING USA ISSUED JAPAN EEC
DATE DATE
<S> <C> <C> <C> <C> <C>
1 Flexible membrane heat 1992 1993 Pending Pending
transfer
2 Portable heat transfer 1991 1993 Pending Pending
and storage device
3 Blood component thawing 1992 1993 Pending Pending
device
4 Cryoprecipitating device 1993 1994 Not Filed Not Filed
5 Device and method for 1993 1996 Pending Pending
harvesting and producing
fibrinogen-rich
cryoprecipitate
6 Sterile bag set for 1995 Pending Filed, 1996 Filed, 1996
harvesting, processing
and cryoprotecting
placental stem and
progenitor cells*
7 Computer controlled 1995 1997 Filed, 1996 Filed, 1996
device and disposable
container for the
storage and retrieval of
thermolabile
substances**
8 Apparatus, method and 1996 Pending Will be Filed, 1997
container for Filed, 1998
fibrinogen-rich
cryosealant
9 Freezing and thawing 1996 Pending Will be Filed, 1997
bag, mold, apparatus and Filed, 1998
method**
10 Transfussion bag set, 1997 Pending Will be Will be Filed,
and method** Filed, 1998 1998
</TABLE>
* Jointly developed with The New York Blood Center.
** Jointly developed with The New York Blood Center, and assigned to
the Company.
14
<PAGE>
While patents have been issued or are pending, the Company realizes (a) that
the Company will benefit from patents issued, if any, only if it is able to
market its products in sufficient quantities of which there is no assurance;
(b) that substitutes for these patented items, if not already in existence, may
be developed; (c) that the granting of a patent is not determinative of the
validity of a patent; such validity can be attacked in litigation or the
Company or owner of the patent may be forced to institute legal proceedings to
enforce validity; and (d) that the costs of patent litigation, if any, could be
substantial and could adversely affect the Company.
REGULATION OF BUSINESS
FDA regulations govern the Company's operations at its facilities in connection
with the manufacture of its products, and govern the sale and distribution of
those products. Essentially, all medical devices marketed after May 28, 1976,
the date of the Medical Device Amendments to the Food, Drug and Cosmetic Act
("FDCA"), must receive clearance or approval from the FDA, unless exempt by
regulation, prior to the marketing or sale of such products or distribution in
interstate commerce. Most of the Company's products require FDA clearance
through a 510(k) submission. This regulatory process requires that the Company
demonstrate substantial equivalence to a product which was on the market prior
to May 28, 1976, or which has been found substantially equivalent after that
date. Today, the process of obtaining FDA clearance can be lengthy, expensive,
and generally requires submission of extensive preclinical data and, in certain
cases, in-use or clinical data, to support a finding of substantial
equivalence.
Under FDA regulations, medical devices are classified in one of three
categories: Class I, Class II or Class III devices, based on the health risk
posed by such device. Each class of device must comply with certain regulatory
requirements established by the FDA in order to ensure the safe and effective
use of the devices. Class I devices are subject to General Controls, which
includes a good manufacturing practices ("cGMP") quality system, labeling, and
in some instance 510(k) submissions. Class II devices are also subject to the
General Controls, and in addition must comply with Special Controls established
at the discretion of the FDA. Special Controls may include application of
performance and safety standards, product type standards, clinical or in-use
studies, post-market surveillance and reporting, and other FDA guidelines
established at the time of product submission review. Class III devices are
higher risk devices that are generally associated with invasive procedures and
must receive FDA pre-market application ("PMA") approval prior to distribution.
The product development, preclinical and clinical testing, manufacturing,
labeling, distribution, sales, marketing, advertising and promotion of the
Company's research, investigational, and medical devices are subject to
extensive government regulation in the United States, and also in other
countries. Products manufactured in the United States which have not been
cleared by the FDA through a 510(k) submission, or which have not been approved
through the PMA process, must comply with the requirements of Section 801 of
the FDCA prior to export. Class I and Class II devices which are capable of
being cleared by the FDA under a 510(k) submission do not require FDA approval
for export; however, the Company's products must still comply with certain
safety and quality system requirements in foreign countries where the products
are proposed to be sold.
Non-compliance with applicable FDA requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, distribution, sales and marketing, or refusal of the
FDA to grant approval of a PMA or clearance of a 510(k). Actions by the FDA
might also include withdrawal of marketing approvals and criminal prosecution.
Such actions could have a material adverse effect on the Company's business,
financial condition, and results of operation.
15
<PAGE>
ENVIRONMENTAL MATTERS
The Company has a California Environmental Protection Agency Identification
number for the disposal of biohazardous waste from its research and development
biolab. The Company does not anticipate that compliance with federal, state
and local environmental protection laws will have a material impact on the
Company or require any material capital expenditures under present regulation.
EMPLOYEES
As of June 30, 1997, the Company had 85 full time employees. The full time
employees were assigned to the following areas in general: administrative
support, 13; sales and marketing support, 17; manufacturing 30; research and
development, 21; regulatory and quality control 4. The Company also utilizes
temporary employees throughout the year to address significant fluctuations in
orders and product manufacturing. The Company has a full time human resources
manager and considers its employee relations to be good.
FINANCIAL INFORMATION ON FOREIGN SALES AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company has no foreign manufacturing operations. For the fiscal year 1997,
foreign sales were approximately $1,024,000, or fifteen percent (15%) of net
sales. For the fiscal year 1996, foreign sales were approximately $1,692,000,
or forty-one percent (41%) of net sales for the year. See Note 5 to the
Financial Statements contained in this report on Form 10-K for further
discussion of foreign operations.
BACKLOG
The Company's cancelable backlog at June 30, 1997 was $360,000.
ITEM 2. DESCRIPTION OF PROPERTIES
In July 1994, the Company leased an approximately 11,000 square foot facility
located in Rancho Cordova, California. This facility is used for the
manufacturing assembly of the Company's medical devices, and was upgraded
during fiscal 1997 as part of the Company's efforts to obtain ISO 9000
certification. In August 1997, the Company extended that lease for 26 months,
and it will expire in January 2002. Annual lease expense is $52,860 for this
facility.
In December 1996, the Company leased an approximately 17,400 square foot
facility, also located in Rancho Cordova, California, which is used as the main
administrative and sales office, and used as the Company's research and
development engineering office. This lease expires in December 2001, and the
average annual lease expense is $147,934 for this facility.
In May 1997, the Company also leased an approximately 5,000 square foot
facility located adjacent to its manufacturing facility in Rancho Cordova,
California. This facility is used for the manufacture and preparation of
certain components and parts of the Company's medical devices that are
assembled at the main manufacturing facility. The lease expires in June 2000,
and the average annual lease expense is $21,756 for this facility.
16
<PAGE>
At fiscal year end, the Company did not own or lease any other facilities and,
with the exception of short term warehouse space leased and utilized from time
to time, management believes that current facilities are adequate to handle
current and expected operations, including future growth in the number of
products manufactured.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal proceedings, nor
is its property subject to any legal proceedings.
The Company's products are relied upon by medical personnel and lab technicians
as part of blood collection process from a donor, and in some instances
treatment of a patient. If injury were to result from the operation of the
equipment, the Company, along with others, may be sued and, whether or not the
Company is found liable, it may incur legal expenses associated with defending
such actions. The Company carries product liability insurance in the
amount of $2,000,000 to help insulate against such risk. While management
of the Company believes that current insurance coverage is sufficient, there
can be no assurance that such coverage will ultimately be adequate to cover
liabilities which may occur. Moreover, the Company may be unable to
obtain product liability insurance in amounts and on terms that it finds
favorable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 29, 1997. The
following is a summary of the results of managements proposals submitted to the
stockholders for approval:
PROPOSAL 1 AFFIRMATIVE WITHHELD
Election of Directors
Philip H. Coelho 11,598,181 233,647
Charles de B. Griffiths 11,643,993 187,835
Walter J. Ludt, III 11,642,393 189,435
Hubert Huckel 11,643,993 187,835
Patrick McEnany 11,578,233 253,595
PROPOSAL 2 AFFIRMATIVE AGAINST ABSTAIN NOT VOTED
Amendment to 1994
Stock Option Plan to
Increase Number of Shares 10,812,766 825,489 54,146 139,427
Based on the foregoing tabulation of votes, the directors nominated were
elected and Proposal 2 was approved. No other matters were submitted.
EXECUTIVE OFFICERS OF THE CORPORATION
The information concerning the Company's Officers required by this Item is
incorporated by reference to the section in Part III of this report entitled
"Directors and Executive Officers of the Registrant".
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq SmallCap
Market under the symbol KOOL. The following table sets forth the range of high
and low bid prices for the Company's common stock for the past two fiscal
years as reported by Nasdaq. The ranges listed represent actual transactions,
without adjustment for retail markups, markdowns or commissions, as reported by
Nasdaq.
<TABLE>
<CAPTION>
HIGH{ } LOW { } HIGH {(1)} LOW[(1)]
FISCAL 1997: FISCAL 1996:
<S> <C> <C> <C> <C> <C>
First Quarter (Sept.30) $4.25 $4.0625 First Quarter (Sept. 29) $2.1325 $2.125
Second Quarter (Dec. 31) $3.875 $3.6875 Second Quarter (Dec. 29) $1.8125 $1.625
Third Quarter (Mar. 31) $3.0625 $2.875 Third Quarter (Mar. 29) $3.4375 $3.25
Fourth Quarter (June 30) $2.78125 $2.78125 Fourth Quarter (June 28) $4.3125 $4.0625
</TABLE>
__________
{ (1) }Restated to reflect a 1 for 2 stock consolidation effective June
14, 1996.
The Company has not paid cash dividends on its common stock and does not intend
to pay a cash dividend in the foreseeable future. There were approximately 525
stockholders of record on June 30, 1997.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
THERMOGENESIS CORP.
FIVE-YEAR REVIEW OF SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SUMMARY
<S> <C> <C> <C> <C> <C>
OF OPERATIONS 1997 1996 1995 1994 1993
Net sales $6,614,044 $4,124,634 $3,311,880 $2,678,192 $2,018,466
Cost of sales (4,326,964) (1,759,659) (2,096,116) (1,454,727) (1,166,523)
Gross profit 2,287,080 2,364,975 1,215,764 1,223,465 851,943
General and
administrative (1,370,401) (426,318) (334,028) (300,379) (457,682)
Selling and
marketing (2,143,523) (1,173,254) (827,269) (781,603) (551,645)
Research and
development (3,562,280) (1,317,330) (446,780) (391,794) (153,980)
Other income 114,372 84,847 304,017 265,028 64,555
Other expense (131,070) (101,454) - (3,471) (14,213)
Net loss ($4,805,822) ($568,534) ($88,296) $11,246 ($261,022)
Net loss per share ($0.32) ($0.05) ($0.01) $0.00 ($0.02)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Cash $3,510,861 $1,243,079 $ 325,965 $ 347,769 $ 236,539
Working capital 6,407,237 3,589,057 1,413,156 1,438,579 1,222,908
Total assets 10,187,726 5,937,140 2,662,839 2,500,399 2,290,398
Total liabilities 2,163,084 1,562,829 662,256 429,762 328,332
Long-term debt 164,283 282,919 -- -- --
Total shareholders'
equity 8,024,642 4,374,311 2,000,583 2,070,637 1,962,066
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS SECTION AND OTHER PARTS OF THIS REPORT ON
FORM 10-K WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT
ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE PROJECTED RESULTS DISCUSSED IN THE FORWARD-
LOOKING STATEMENTS. FACTORS THAT MIGHT AFFECT ACTUAL RESULTS INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION ENTITLED "FACTORS AFFECTING
OPERATING RESULTS AND MARKET PRICE OF COMMON STOCK" BEGINNING ON PAGE 25, AND
OTHER FACTORS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH
THE U.S. SECURITIES AND EXCHANGE COMMISSION.
The following discussion should be read in conjunction with the Company's
financial statements contained in this report.
(A) OVERVIEW
The Company's core business is the sale of ultra-rapid blood plasma freezing
and thawing systems. Including the April 1997 FDA permission to market the
Hemo-Matic blood collection monitor, the Company has FDA permission to market a
total of five Core Line medical devices. The Company's primary revenues have
been from sales of its Core Line Products to blood banks and blood plasma
thawers to hospitals and transfusion centers. In addition to blood plasma
thawers and freezers, the Company received minor revenues from the sale of
related blood processing products in the same market. These Core Line Products
have been purchased during past years by major blood banks in more than 32
countries. All core line products are FDA Class I medical devices purchased as
capital equipment.
At the start of fiscal 1996 (July 1995), management initiated a three-year plan
to develop the new category of Pipeline Products, each of which would require
consumable disposable components, and each of which will compete in markets
where annual revenues exceed $100 million. These new Pipeline Products would
all be based on the Proprietary Technology developed and refined during the
previous seven years.
In contrast to the Company's Core Line Products, the new Pipeline products are
all FDA Class II products which feature a sophisticated thermodynamic platform
device and one or more sterile, disposable plastic blood processing containers
and/or applicators which will be utilized and replaced every time the systems
are operated - thereby potentially providing a continuing revenue stream from
each use or therapeutic application of each system sold. Upon regulatory
approval, the Company intends that these Pipeline Products will be sold to
hospitals, surgicenters, wound care centers, tissue banks and transplant
centers.
(B) RESULTS OF OPERATIONS
THE YEARS ENDED JUNE 30, 1996 AND 1997:
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying financial
statements.
20
<PAGE>
To design, manufacture and market the Company's new pipeline products to GMP
and ISO 9000 series standards, the Company needed to undergo a significant
upgrading throughout its facilities and organization. In order to provide some
indication of how the costs of upgrading for the new FDA Class II Pipeline
Products have impacted its financial statements, the Company has prepared the
following information related to its fiscal 1996 and fiscal 1997 Statements of
Operations by Core Line and Pipe Line Products:
<TABLE>
<CAPTION>
FISCAL 1996{ (1)} (unaudited)
Core Pipeline Total
Products Products
<S> <C> <C> <C> <C>
Total Expenses:
G & A (426,318) (426,318)
S & M (1,173,254) (1,173,254)
R & D (123,739) (1,193,591) (1,317,330)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997{(1)} (unaudited)
Core Pipeline
Products Products Total
<S> <C> <C> <C> <C>
Expenses:
G & A (447,634) (922,767) (1,370,401) S & M
S & M (1,208,452) (935,071) (2,143,523) R & D
R & D (198,395) (3,363,885) (3,562,280)
</TABLE>
{(1) }Where actual data was not recorded, management has made
appropriate estimates based on a consistent treatment with
historical information from the available data.
SALES AND REVENUES:
Net sales increased from fiscal 1995 to fiscal 1996 by 25%. This sales increase
was primarily due to increased sales of human blood plasma freezers and
$400,000 for a license fee.
Net sales increased from fiscal 1996 to fiscal 1997 by 60% primarily from
similar increases in human blood plasma freezer sales.
COST OF SALES:
The decrease in cost of sales as a percent of sales from 63% in fiscal 1995 to
47% before license fees in fiscal 1996 is primarily attributable to increased
production efficiencies as the Company increased inventory levels from
approximately $1,014,000 in 1995 to $2,137,000 in 1996 and a 36% increase in
freezer sales which have a higher gross margin than other Company products.
21
<PAGE>
The increase in cost of sales as a percent of sales from 47% in fiscal 1996 to
65% in fiscal 1997 was primarily attributable to increases in manufacturing
overhead and lower than anticipated margins on the Company's $4 million sale to
a single customer, due principally to additional installation costs, partially
caused by unexpected failures of vendor-supplied condensing units and
compressors for these installations of the Company's largest blood
plasma freezer systems. In addition, manufacturing added new expanded
facilities and added expanded quality control and document control functions
in anticipation of producing the BioArchive and CryoSeal Class II FDA products.
The Company has sometimes used discount programs to induce customers to
purchase the Company's freezers over competing freezers. The Company plans to
continue these programs only as long as market conditions dictate such programs
are necessary. The Company is not aware of any specific industry-wide
practices utilizing discount programs. Sales discounts for fiscal 1997 were
approximately $288,000, for fiscal 1996 were approximately $6,000, and for
fiscal 1995 were approximately $278,000.
GENERAL AND ADMINISTRATIVE EXPENSES:
This expense category includes Business Development, Finance, Administration
and General Support departments.
General and administrative expenses increased in fiscal 1996 by 28% over those
of fiscal 1995. While general and administrative expenses increased in total
dollars, they remained fairly constant at approximately 10% of sales. This
increase was due to increased salaries for temporary personnel. Administrative
expenses in fiscal 1995 and 1996 include approximately $55,000 for amortization
of prepaid royalties and professional fees of approximately $67,000 for fiscal
1995 and $107,000 for fiscal 1996.
Fiscal 1997 general and administrative expenses increased by 221% over those of
fiscal 1996. This increase was due to expansion of facilities and management
required of a company preparing to manufacture and market Class II medical
systems, such as the BioArchive and CryoSeal Systems. With the addition of a
human resources department and business development department, as well as the
full allocation of the salaries for President/CEO and Vice President/COO
instead of partially allocating them to the R&D department and the Sale &
Marketing department, the fiscal 1997 general and administrative salaries
increased more than 400% over those of fiscal 1996. In addition, professional
fees for management information systems and other management services increased
by approximately $230,000 in fiscal 1997 over fiscal 1996.
SELLING AND MARKETING EXPENSES:
This expense category includes Sales & Marketing and Customer service
departments.
Fiscal 1996 selling and marketing expenses increased by 42% over those of
fiscal 1995. This increase was due to increased salaries from added personnel
as sales volume increased. Selling and marketing and $95,000 for professional
fees, $147,000 and $49,000 for sales promotions, and provision for doubtful
accounts of $25,000 and $23,000.
Selling and marketing expenses increased in fiscal 1997 by 83% over fiscal
1996. Increases were due to an 88% increase in salaries to add new personnel to
plan and implement the market introduction of the N{2} BioArchive System and
the CryoSeal System, and addition of personnel for customer service to meet the
needs of the new products. The Company also added new expanded facilities to
meet the growth needs of the added personnel. Additionally, the Company
incurred $250,000 for market research associated with the introduction of the
CryoSeal System.
22
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES:
This expense category includes R&D, Regulatory Affairs and Manufacturing
Engineering departments.
Research and development expenses increased in fiscal 1996 by 195% over
fiscal 1995. The increase was
due to increases in development efforts for the CryoSeal System, which harvests
fibrinogen-rich cryoprecipitate from a donor's blood plasma, a blood component
that is currently licensed by the FDA for the intravenous treatment of clotting
protein-deficient patients. Fiscal 1996 R&D expenses also included the
development and FDA 510(k) filing for the CryoSeal, DA-1 surgical drop
applicator and SA-1 spray applicator, for which FDA permission to market was
received. Additionally, significant resources were dedicated to accelerate the
development of two BioArchive Systems: (1) N{2} BioArchive System for the
storage and preservation of biological samples, such as placental stem and
progenitor cells, sperm cells and cell lines which require -196*C storage
temperatures, and (2) Vial BioArchive System for the storage and preservation
of 6 ml vials of blood samples for the Japanese Red Cross. Field trials for
the Vial BioArchive System began in Japan in October 1996 with the installation
of a beta site system at Hokkaido Center, Japanese Red Cross. Additionally, a
beta site N{2} BioArchive System was installed in October 1996 at The New York
Blood Center to investigate the freezing and storage in nitrogen of 25 ml stem
cell donations sourced from placental blood. In conjunction with the
development of the N{2} BioArchive System as an optimum storage system for
placental stem and progenitor cells, the Company has also developed three
sterile disposable bag sets for use in the collection, processing, and
transfusing of PCB stem cells which will be stored in the BioArchive System.
This increased development activity necessitated expenses, increases for
compensation, consulting, depreciation for state of the art computer
equipment, and purchases of supplies.
Research and development expenses increased in fiscal 1997 by 170% from fiscal
1996. This reflects substantially accelerated development of the above
projects. At fiscal 1997 year end, the Company: (i) had delivered five Japanese
Vial BioArchive Systems in January 1997 for expanded field trials in Hokaido
which are currently under way, (ii) began the first pre-production run of the
CryoSeal System and is currently awaiting FDA permission to market the device
in the United States, (iii) began clinical trials of the CryoSeal System in
Canada and the United States, (iv) arranged for trial of the CryoSeal System in
Sweden and Italy to initiate European distribution, (v) completed prototype
development of the N{2} BioArchive System and began a production run, (vi)
received orders for four N{2} BioArchive Systems, (vii) began preparing the
510(k) for the N{2} BioArchive System.
This increased development and product launch activity in 1997 led to the
addition of new facilities and engineering staff, as well as the hiring of a
Vice President of Regulatory Affairs and Quality Systems.
Currently the Company's primary R&D efforts are focused on ongoing product
development, refinement, of existing Core Line Products, preparation of FDA
applications for the pipeline products, and clinical tests of the CryoSeal and
BioArchive Systems.
Management believes that product development and refinement is essential to
maintaining the Company's market position. Therefore, the Company considers
these costs as continuing costs of doing business. No assurances can be given
that the products or markets under development will be successful.
23
<PAGE>
ISSUANCE OF STOCK OPTIONS FOR SERVICES:
In fiscal year 1996, the Company recorded $60,000 for consulting expense
relating to the issuance of stock options with exercise prices equal to the
market value on the date of grant for financial consulting services to BioVest
Research, Inc. While the $60,000 is a non-monetary transaction, the Company
recorded the estimated "fair value" under generally accepted accounting
principles. BioVest assists the Company in financial public relations and
potential equity investments.
In fiscal year 1997, the Company recorded $56,000 of consulting expense
relating to the issuance of stock options with exercise prices equal to the
market value on the date of grant for technical assistance from two researchers
in Canada and the United States for the development of the CryoSeal System.
While the $56,000 is a non-monetary transaction, the Company recorded the
estimated "fair value" under generally accepted accounting principles.
(C) LIQUIDITY AND CAPITAL RESOURCES
The Company consumed significant cash resources for operating activities since
its formation in 1987 primarily in developing new products and markets.
During fiscal 1994, the Company realized the benefits of its product and market
developments. Freezer sales increased by 36% and plasma thawing equipment sales
increased by 62% as the Company achieved profitable operations. During fiscal
1995 and 1996, the Company's sales continued to expand, growing by 24% and 25%,
respectively. The Company began development of new generation products (see
Research and Development expenses) and consumed more resources, which resulted
in losses for fiscal 1995 and 1996.
In fiscal 1997, the Company raised net proceeds in the aggregate of
approximately $7,882,000 from a warrant exercise and a private placement. The
Company used the proceeds to expand the Company's facilities, regulatory and
manufacturing control functions, and to fund continued R&D. Although the
Company believes that Core Line product operations might have resulted in a
nominal profit if R&D expenses and marketing expenses associated with the new
FDA Class II Pipeline Products were eliminated, the Company believes that the
significantly increased expenses for the new Pipeline Products, which are
directed at new and larger markets, is essential to future growth and long term
profitability of the Company. Accordingly, management believes that the losses
sustained in the current fiscal year ended are consistent with the prospect for
future growth and the Company's movement towards new, larger markets.
The Company does not require extensive capital equipment to produce or sell its
current product. However, when significant capital equipment is required, the
Company purchases from a vendor base or is pursuing strategic partners.
Production of the Company's blood plasma freezer and thawer products are more
labor intensive due to the small production runs and, therefore, manufacturing
expenditures for can expanding the Company's R&D efforts for fiscal year 1996,
the Company expended approximately $450,000 on state of the art engineering
design computer systems for its expanded engineering staff. In fiscal 1997, the
Company expended $873,000 for the purchase of capital equipment and expansion
of facilities for operations.
24
<PAGE>
The Company continues to search for further funding and new products that may
provide future growth opportunities and is currently evaluating financing
options to provide working capital to fund expected growth in fiscal 1998. The
Company has no significant outstanding capital commitments at June 30, 1997.
Currently, the Company is contemplating additional equity financing to fund the
product launch of two Pipeline Products, (1) CryoSeal System, (2) N{2} and
Vial BioArchive Systems, and the further research and development of three
Pipeline Products: (1) CryoFactor System, (2) MicroSeal System, and (3)
CryoPlatelet System. There can be no assurances that adequate financing will
be available on satisfactory terms, if at all.
Working capital increased from $1,413,156 at June 30, 1995 to $3,589,057 at
June 30, 1996 primarily due to equity investments and financing of fixed asset
purchases.
Working capital increased from $3,589,057 at June 30, 1996 to $6,407,237 at
June 30, 1997 primarily due to equity investments from warrant conversions and
a private placement which raised a combined total of $7,882,000.
Management does not believe that inflation has had a significant impact on the
Company's results of operations.
(D) FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF COMMON STOCK
DEPENDENCE UPON NEW PRODUCTS FOR FUTURE GROWTH. Historically, substantially
all of the Company's revenue has been from the sales of a Core Line of products
which freeze, thaw or store blood plasma. Because the Company expects this
portion of the blood plasma market to have limited growth, the future success
of the Company will be dependent upon new applications of its technology. The
Company intends to concentrate on developing and marketing novel FDA Class II
thermodynamic blood processing systems such as: (1) CryoSeal System; (2) Vial
BioArchive System; (3) N{2} BioArchive System; (4) Cryofactor System; (5)
Cryoplatelet System. Although these five potential products use technology
evolved from the freezing, thawing and storage of blood plasma, development of
these new FDA Class II products represents a departure from the Company's
current core business. No assurance can be given that all of these potential
products can be successfully developed, and if developed, that a market will
develop for them.
POSSIBLE NEED FOR ADDITIONAL FINANCING. Based on current sales and projected
development costs for products currently in development, the Company believes
that it will have sufficient working capital for its operations for the 1998
fiscal year. In the event actual sales of the Company's products do not meet
the Company's expectations in any given period, or development and production
costs increase significantly, the Company may need to secure additional
financing to complete and fully implement its business objectives. The Company
has been establishing a working relationship with its bank, and is working
towards securing a line of credit secured by its accounts receivable. There
can be no assurance that the Company will be able to obtain a working line of
credit or that it will be able to obtain one on terms that would be beneficial
to the Company. In the event that the Company's working capital forecast falls
short of its needs, additional equity financing would be reuired. Although the
Company is developing relationships
with investment banking firms, no assurance can be given that such financing
would be available if needed, and if available, that it will be obtained on
terms favorable to the Company.
25
<PAGE>
LACK OF TESTING DATA. The Company has completed certain in vitro laboratory
testing of its CryoSeal System and is currently performing in vivo clinicals in
otolaryngology under Investigational Review Board ("IRB") approval at the
University of Illinois, Chicago, and initial clinical studies are to begin in
the near future in Italy, Japan, Canada, and the United States. There can be
no assurance that the clinical studies can be successfully completed within the
Company's expected time frame and budget, or that the Company's products will
prove effective in the required clinical trials. If the Company is unable to
conclude successfully the clinical trials of its products in development, the
Company's business, financial condition and results of operation could be
adversely affected.
GOVERNMENT REGULATION ASSOCIATED WITH PRODUCTS. The majority of the Company's
products require clearance to market from the FDA for sale in the United States
and from comparable agencies in foreign countries, which may limit or
circumscribe applications for U.S. or foreign markets in which the Company's
products may be sold. Further, if the Company cannot establish that its
product is substantially equivalent, or superior, in safety and efficacy to a
previously approved product in the United States, delays may result in final
clearance from the FDA for marketing its products. No assurance can be given
that FDA clearance to market in the United States will be obtained, or that
regulatory approval will be received in all foreign countries. Although the
standards established by the FDA are generally more encompassing, the Company's
products may also be required to meet certain additional criteria or recen
governments for marketing and sales.
Dependence on Key Personnel and Obtaining Additional Engineering Personnel.
The Company is dependent on the experience and services of Philip H. Coelho,
President and Chief Executive Officer, and Charles de B. Griffiths, Vice
President, Marketing and Sales and Walter Ludt, Chief Operating Officer. The
loss of any of these persons would adversely affect the Company's operations.
The Company has obtained key man life insurance covering Mr. Coelho in the
amount of $1,000,000 as some protection against this risk. Furthermore, to
implement its new product development, the Company will have to recruit and
retain additional experienced engineers. There is no assurance that the
Company will be able to find and retain engineers required to meet its self-
imposed deadlines for product development.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE NUMBER
Report of Ernst & Young LLP, Independent Auditors.. 28
Balance Sheets at June 30, 1997 and 1996........... 29
Statements of Operations for the years
ended June 30, 1997, 1996, and 1995 .............. 31
Statements of Shareholders' Equity for
the years ended June 30, 1997, 1996 and 1995..... 32
Statements of Cash Flows for the
years ended June 30, 1997, 1996 and 1995......... 33
Notes to Financial Statements.................... 34
27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
THERMOGENESIS CORP.
We have audited the accompanying balance sheets of THERMOGENESIS CORP. as of
June 30, 1997 and 1996, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1997. Our audits also included the financial statement schedule listed in the
Index at Item 14(a)2. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of THERMOGENESIS CORP. at June
30, 1997 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Sacramento, California
August 27, 1997
28
<PAGE>
THERMOGENESIS CORP.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1997 JUNE 30, 1996
Current Assets:
<S> <C> <C>
Cash and cash equivalents $3,510,861 $1,243,079
Accounts receivable, net of allowance for
doubtful accounts of $97,913 2,067,990 1,441,148
Inventory 2,579,368 2,137,198
Other current assets 247,819 44,177
Total current assets 8,406,038 4,865,602
Equipment, at cost less accumulated depreciation
of $670,269 ($413,644 at June 30, 1996) 1,358,747 709,790
Prepaid royalties, net of accumulated
amortization of $388,185 ($332,733 at June 166,315 221,767
30, 1996)
Other assets 256,626 139,981
$10,187,726 $5,937,140
</TABLE>
See accompanying notes.
29
<PAGE>
THERMOGENESIS CORP.
Balance Sheets (Continued)
LIABILITIES AND
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY JUNE 30, 1997 JUNE 30, 1996
Current liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $1,523,647 $931,944
Accrued payroll and related expenses 274,008 184,660
Customer deposits 49,310 35,891
Current portion of capital lease obligations 151,836 124,050
Total current liabilities 1,998,801 1,276,545
Deferred rent - 3,365
Long term capital lease obligations 164,283 282,919
Commitments
Shareholders' equity:
Preferred stock, $.001 par value;
2,000,000 shares authorized; no shares
issued and outstanding - -
Common stock, $.001 par value;
50,000,000 shares authorized:
15,865,305 issued and outstanding
(12,708,967 at June 30, 1996) 15,866 12,709
Paid in capital in excess of par 19,197,526 10,744,530
Accumulated deficit (11,188,750) (6,382,928)
Total shareholders' equity 8,024,642 4,374,311
$10,187,726 $5,937,140
</TABLE>
See accompanying notes.
30
<PAGE>
THERMOGENESIS CORP.
Statements of Operations
Years ended June 30,
<TABLE>
<CAPTION>
1997 1996 1995
Net sales $6,614,044 $4,124,634 $3,311,880
<S> <C> <C> <C>
Cost of sales 4,326,964 1,759,659 2,096,116
Gross profit 2,287,080 2,364,975 1,215,764
Development and distribution fees - 60,000 280,000
Expenses:
General and administrative 1,370,401 426,318 334,028
Selling and marketing 2,143,523 1,173,254 827,269
Research and development 3,562,280 1,317,330 446,780
Issuance of stock options for 56,000 60,000 -
services
Interest 75,070 41,454 -
Total expenses 7,207,274 3,018,356 1,608,077
Interest income 114,372 24,847 11,498
Other income - - 12,519
Net loss ($4,805,822) ($568,534) ($88,296)
Net loss per share ($0.32) ($0.05) ($0.01)
Shares used in computing net loss per 14,805,000 11,491,000 10,170,000
share
</TABLE>
See accompanying notes.
31
<PAGE>
THERMOGENESIS CORP.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Paid in capital in Accumulated Total shareholders'
COMMON STOCK EXCESS OF PAR DEFICIT EQUITY
Balance at June 30, 1994 $10,166 $7,786,569 $ (5,726,098 $2,070,637
<S> <C> <C> <C> <C>
Issuance of 10,000 common shares
for exercise of options 10 10,590 - 10,600
Issuance of 2,352 common shares
for patent services 2 7,640 - 7,642
Net loss - - (88,296) (88,296)
Balance at June 30, 1995 10,178 7,804,799 (5,814,394) 2,000,583
Issuance of 5,000 common shares
for exercise of options 5 5,295 - 5,300
Issuance of 2,200,000 common
shares in private placement 2,200 1,896,012 - 1,898,212
Issuance of 326,250 common
shares for exercise of warrants 326 978,424 - 978,750
Issuance of options for services - 60,000 - 60,000
Net loss - - (568,534) (568,534)
Balance at June 30, 1996 12,709 10,744,530 (6,382,928) 4,374,311
Issuance of 217,500 common
shares for exercise of warrants 218 607,318 - 607,536
Issuance of 37,250 common shares
for exercise of options 37 73,783 - 73,820
Issuance of 145,586 common
shares for inventory 146 444,151 - 444,297
Issuance of 2,756,002 common
shares in private placement 2,756 7,271,744 - 7,274,500
Issuance of options for services - 56,000 - 56,000
Net loss - - (4,805,822) (4,805,822)
Balance at June 30, 1997 $ 15,866 $19,197,526 $(11,188,750) $8,024,642
</TABLE>
See accompanying notes.
32
<PAGE>
THERMOGENESIS CORP.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30
<S> <C> <C> <C>
1997 1996 1995
Cash flows from operating activities:
Net loss ($4,805,822) ($568,534) ($88,296)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization 312,077 190,356 162,811
Issuance of common stock for inventory 444,297 - -
Issuance of stock options for services 56,000 60,000 -
Net changes in operating assets and
liabilities:
Accounts receivable (626,842) (790,908) 198,912
Allowance for doubtful accounts - 25,000 14,458
Inventory (442,170) (1,122,889) (460,222)
Other current assets (203,642) (34,466) 34,235
Other assets (116,645) 497 (37,496)
Accounts payable and accrued 591,703 419,013 199,514
liabilities
Accrued payroll and related expenses 89,348 129,314 (7,320)
Customer deposits 13,419 16,368 (34,156)
Deferred revenue - (60,000) 60,000
Deferred rent (3,365) (11,091) 14,456
Net cash (used in) provided by operating (4,691,642) (1,747,340) 56,896
activities
Cash flows from investing activities:
Capital expenditures (873,582) (152,547) (141,942)
Sale of investment - - 45,000
Net cash used in investing activities (873,582) (152,547) (96,942)
Cash flows from financing activities:
Principle payments on long-term lease (122,850) (65,261) -
obligations
Exercise of stock options and warrants 681,356 - -
Issuance of common stock 7,274,500 2,882,262 18,242
Net cash provided by financing activities 7,833,006 2,817,001 18,242
Net increase (decrease) in cash and cash 2,267,782 917,114 (21,804)
equivalents
Cash and cash equivalents at beginning of period 1,243,079 325,965 347,769
Cash and cash equivalents at end of period $3,510,861 $1,243,079 $325,965
Supplemental cash flow information:
Cash paid during year for interest
Cash paid during the year for interest $75,070 $41,454 -
Supplemental non-cash flow information:
Equipment acquired by capital lease obligations
Equipment acquired by capital lease $32,000 $472,000 -
obligations
</TABLE>
See accompanying notes.
33
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
THERMOGENESIS CORP. ("the Company") was incorporated in Delaware on September
26, 1986. The Company designs and sells devices which utilize its proprietary
technology for the processing of biological substances including the
cryopreservation, thawing and harvesting of blood components (Proprietary
Technology). Currently, the Company is manufacturing six core line, FDA Class I
thermodynamic devices which are being sold to the blood collection industry
with FDA approval. Other potential applications for the technology include
medical and pharmaceutical uses, and industrial applications. During fiscal
1988 through 1997, the Company has focused on refining product design of the
core line Products and developing a pipeline of five FDA Class II devices which
utilize sterile disposable containers for processing of blood components.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market and includes the cost of
material, labor and manufacturing overhead. Cost is determined on the first-
in, first-out basis.
EQUIPMENT
Depreciation is computed under the straight-line method over the useful lives
of 3 to 5 years.
PREPAID ROYALTIES
Prepaid royalties are amortized on a straight line basis over an estimated
useful life of 10 years.
REVENUE RECOGNITION
Revenues from the sale of the Company's products are recognized at the time of
shipment. All foreign sales are denominated in U.S. dollars.
34
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CREDIT RISK
The Company manufactures and sells thermodynamic devices principally to the
blood component processing industry and performs ongoing evaluations of the
credit worthiness of its customers. The Company believes that adequate
provisions for uncollectible accounts have been made in the accompanying
financial statements.
INCOME TAXES
The liability method is used for accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company uses the flow-through method
to account for income tax credits.
NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding. Common stock equivalents have not been
included because the effect would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (SFAS 128), which is effective for the Company's
fiscal year ending June 30, 1998. At that time, the Company will be required
to change the method currently used to compute net income per share and to
restate all prior periods. Under SFAS 128, the dilutive effect of stock
options and warrants will be excluded in the calculation of primary or basic
earnings per share. The adoption of SFAS 128 is expected to have no impact on
the net loss per share for the years ended June 30, 1997, 1996, and 1995.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), was issued in October 1995. SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and stock-based awards or, as the Company has elected,
to continue to account for such items using the intrinsic value method as
outlined under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Consequently, the adoption of SFAS 123
did not have any impact on the financial position or results of operations of
the Company but pro forma disclosures of net loss and net loss per share have
been provided in Note 4 as if the fair value method had been applied.
RECLASSIFICATIONS
Certain amounts in the prior years financial statements have been reclassified
to conform with the
1997 presentation.
35
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. INVENTORY
Inventory consisted of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $1,574,388 $1,158,108
Work in process 525,067 117,271
Finished goods 479,913 861,819
Total $2,579,368 $2,137,198
</TABLE>
3. COMMITMENTS
ROYALTY COMMITMENT
In July 1990 the Company acquired the Proprietary Technology including but not
limited to all patents, drawings, know-how, trademarks and trade names and
prepaid all future royalties for a total consideration which was recorded at
$554,500. This amount represents the present value of the future royalty
payment obligation. The consideration was comprised of $50,000 cash, a 10% four
year convertible note for $200,000 and 900,000 shares of the Company's common
stock. The transaction has been accounted for as a prepayment of future
royalties and is being amortized on a straight line basis over an estimated
useful life of 10 years.
OPERATING LEASES
The Company leases its manufacturing and corporate facilities and certain
equipment pursuant to operating leases. The annual future cash obligations
under these leases are as follows:
1998 $244,542
1999 224,634
2000 201,191
2001 182,580
2002 97,890
Total $950,837
Rent expense was $221,986, $78,587 and $53,560 for the years ended June 30,
1997, 1996 and 1995.
36
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. COMMITMENTS (CONTINUED)
CAPITAL LEASES
The Company leases certain equipment under capital leases. The following
amounts are included in equipment as assets under these capital leases as of
June 30:
1997 1996
Cost $526,713 $494,713
Less: accumulated amortization 119,587 71,038
Net assets under capital leases $407,126 $423,675
The future minimum lease payments under these capital leases along with the
present value of the minimum lease payments as of June 30, 1997 are as follows:
1998 $195,346
1999 142,928
2000 38,993
2001 37,336
2002 2,349
Total minimum lease payments 416,952
Less amount representing interest 100,833
Present value of minimum lease payments 316,119
Less current portion of capital lease 151,836
obligations
Long-term capital lease obligations $164,283
37
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. SHAREHOLDERS' EQUITY
Common Stock
The Company completed a minimum equity offering of units in a private placement
on November 27, 1996, in which it received proceeds of $7,274,500, net of
expenses. The proceeds from the offering were received from the sale of
1,378,001 units at $6.00 per unit. Each unit consisted of two shares of common
stock and a seven year warrant representing the right to acquire one additional
share of common stock at an exercise price of $3.885 per share. No warrants
have been exercised as of June 30, 1997.
On July 30, 1996, the Company entered into an agreement with a vendor to
produce up to $2,500,000 of product for the Company. Under the terms of the
agreement, the vendor can elect to receive payment in restricted common stock
of the Company at a 25% discount from the market price on the date the election
to receive stock is made. During fiscal 1997, the Company issued 145,586 shares
of common stock for this product. The Company recorded these transactions at
the estimated fair value of $444,297 on the date of the transaction and
recorded the 25% discount from market price as operating expense. The Company
is not obligated to purchase product that is not required or at a price that is
not competitive and built to all required standards.
On May 29, 1996, the Company's Board of Directors approved to amend the
Certificate of Incorporation to effect a one-for-two reverse stock split which
was effective on June 14, 1996 to holders of record on June 14, 1996. The
authorized shares of common stock was unchanged and remained at 50,000,000.
All share and per share data have been restated for all periods presented to
reflect the reverse stock split.
The Company completed a private placement of 2,200,000 common shares on
December 9, 1995 and received $1,890,212 net of expenses. The placement
consisted of 88 units. Each unit consisted of 25,000 common shares and 6,250
warrants to purchase common shares at $3.00 per share for six months. The
Company filed a registration statement covering the shares issued within 90
days of completion of the offering as required by the terms of the financing.
During years ended June 30, 1996 and 1997, warrants to purchase 506,250 shares
of common stock were exercised, and the remaining warrants expired.
As of June 30, 1997, the Company had 3,582,083 shares of common stock reserved
for issuance under options and warrants.
WARRANTS
As part of the placement agent's compensation in the 1995 private placement of
units, additional warrants to purchase 8.8 units at an exercise price of
$60,000 per unit were also issued, each unit consisting of twenty-five thousand
(25,000) shares of common stock. The warrants expire in December 2000.
In conjunction with the placement of Series C Preferred stock in 1993, the
placement agent, Paradise Valley Securities, received warrants to purchase
42,500 shares of the Company's common stock at $1.20 per share. There were
37,500 warrants converted in fiscal 1997. The remaining warrants expire in
February 1998.
38
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
On July 31, 1996 and May 29, 1996, the Company issued options to purchase
200,000 and 100,000
shares, respectively, of the Company's common stock for consulting services.
The exercise price is equal to the fair market value as determined by the
closing bid price for the Company's common stock as quoted by the Nasdaq
SmallCap market on the date of grant. The Company has recorded stock
compensation expense recognizing the estimated fair value of the options of
$56,000 and $60,000 for the years ended June 30, 1997 and 1996.
The Company has issued options to purchase shares of common stock pursuant to
its Amended 1994 Stock Option Plan (1994 Plan). A maximum of 1,450,000 options
may be granted under the 1994 Plan. These options are granted at prices which
are equal to 100% of the fair market value on the date of grant, and expire
over a term not to exceed ten years. Options generally vest ratable over a five
year period.
In addition to the 1994 Plan, the Company has issued options to directors,
employees and consultants as compensation for services. These options vest and
are exercisable over a variety of periods as determined by the Company's Board
of Directors.
A summary of stock option activity for the Company for the three years ended
June 30, 1997 follows:
Number of Weighted-Average
Options Exercise
Outstanding Price Per Share
Balance at June 30, 1994 945,000 $1.81
Options canceled (67,500) 1.06
Options exercised (10,000) 1.06
Balance at June 30, 1995 867,500 1.88
Options granted 606,000 2.14
Options canceled (304,167) 1.06
Options exercised (5,000) 1.06
Balance at June 30, 1996 1,164,333 2.23
Options granted 1,184,000 3.16
Options canceled (344,501) 3.31
Options exercised (37,250) 1.98
Balance at June 30, 1997 1,966,582 2.61
39
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted
Average Weighted Weithted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$1.64-$2.40 1,310,583 3.01 years $2.24 1,107,932 $2.24
$2.65-$3.60 506,000 4.01 years $2.96 248,668 $3.05
$4.00-$5.63 149,999 3.52 years $4.60 101,999 $4.65
Total 1,966,582 3.31 years $2.61 1,458,599 $2.55
</TABLE>
SFAS 123 requires the use of option valuation models to provide supplemental
information regarding options granted after June 30, 1995. Pro forma
information regarding net loss and net loss per share shown below was
determined as if the Company had accounted for its employee stock options under
the fair value method of that statement.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see below) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
provide a reliable single measure of the fair value of its employee stock
options.
40
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The pro forma effect on net
loss for fiscal 1997 and 1996 is not representative of the pro forma effect on
operations in future years because it does not take into consideration pro
forma compensation expense related to grants made prior to July 1, 1995. The
Company's pro forma information is as follows:
Year ended June 30,
1997 1996
Net loss
As reported ($4,805,822) ($ 568,534)
Pro forma ( 5,325,270) ( 1,764,651)
Net loss per share
As reported ($0.32) ($0.05)
Pro forma ( 0.36) ( 0.15)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 85%; an expected life of 4.73 years; a
risk-free interest rate of 6.15% and no expected dividends. The weighted
average grant date fair value of options granted during the years ended June
30, 1997 and 1996 was $1.80 and $1.79, respectively.
5. MAJOR CUSTOMERS AND FOREIGN SALES
During the fiscal year ended June 30, 1997, sales from a significant customer
totaled $4,044,489 or 61% of net sales and foreign sales were 15% of net sales.
During the fiscal year ended June 30, 1996, sales to two significant customers
each represented 10% of the Company's net sales and foreign sales were 41% of
net sales. During fiscal 1995, sales from a significant customer accounted for
10% of net sales and foreign sales were 55% of net sales.
6. SALE OF DISTRIBUTION RIGHTS FOR BIOARCHIVE FREEZER SYSTEM
In June 1995, the Company sold the Japanese distribution rights to N{2}
BioArchive System and the Vial BioArchive System to Daido-Hoxan, Japan for
$350,000. Of the $350,000, $280,000 was received at the time of signing the
agreement and is non-refundable, and $70,000 was due when the Company delivered
a prototype of the Vial BioArchive System. The Company has recognized $280,000
of revenue and offset $10,000 in expenses in fiscal 1995 and recognized $60,000
of revenue in fiscal 1996.
41
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. SALE OF LICENSE RIGHTS FOR CRYOSEAL SYSTEM
In June 1996, the Company entered into an exclusive manufacturing and
distribution agreement for the territory of Japan for the CryoSeal System with
Asahi Medical Co., Ltd., of Japan, a division of Asahi Chemical. Asahi Medical
is a leading supplier of artificial kidneys, blood purification systems and
leukocyte removal systems. Under the terms of the agreement, Asahi will
manufacture the CP-1 disposable processing container, purchase the CS-1 device
and SA-1 and DA-1 surgical applicators from the Company, and market the
CryoSeal System in Japan. The Company received a $400,000 license fee, a
commitment from Asahi to purchase the CryoSeal System and related fibrin
applicators from the Company and a 10% royalty on the sale of the CP-1
container. The Company recognized $400,000 of revenue for the license fee in
fiscal 1996.
8. INCOME TAXES
The reconciliation of federal income tax attributable to operations computed at
the federal statutory tax rates of 34% to income tax expense is as follows for
the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax benefit $(1,630,000) $ (197,000) $(30,000)
Net operating loss with no tax benefit 1,630,000 197,000 30,000
Total federal income tax $ - $ - $ -
</TABLE>
At June 30, 1997, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $10,567,000 and $5,125,000
respectively, that are available to offset future income. The federal and state
loss carryforwards expire between the years 2002 and 2012, and 1998 and 2002,
respectively.
At June 30, 1997, the Company has research and experimentation credit
carryforwards of approximately $63,000 for federal tax purposes that expire
between the years of 2002 and 2008 and $39,000 for state income tax purposes
that do not have an expiration date.
42
<PAGE>
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes are as follows:
JUNE 30, 1997 JUNE 30, 1996
Deferred tax assets:
Net operating loss carryforwards $3,897,000 $2,154,000
Research credits 102,000 102,000
Other 164,000 137,000
Total deferred taxes 4,163,000 2,393,000
Valuation Allowance (4,163,000) (2,393,000)
Net deferred taxes $ - $ -
Because of the "change of ownership" provisions of the Tax Reform Act of 1986,
a portion of the Company's federal net operating loss and credit carryovers may
be subject to an annual limitation regarding their utilization against taxable
income in future periods. The Company expects that this limitation should not
have a material adverse effect on the Company's ability to utilize the net
operating loss and credit carryovers prior to the expiration of the carryover
periods.
9. EMPLOYEE RETIREMENT PLAN
The Company sponsors an Employee Retirement Plan, generally available to all
employees, in accordance with Section 401(k) of the Internal Revenue Code.
Employees may elect to contribute up to the Internal Revenue Service annual
contribution limit. Under this Plan, at the discretion of the Board of
Directors, the Company may match a portion of the employees' contributions. No
Company contributions have been made to the Plan as of June 30, 1997.
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) CORPORATE DIRECTORS
The following is the business background for the directors of the Company:
PHILIP H. COELHO was named President of the Company on September 1989. From
October 1986 to September 1989, Mr. Coelho was Vice President and Director of
Research, Development and Manufacturing. Mr. Coelho was President of
Castleton, Inc. from October 1983 until October 1986. Castleton developed and
previously licensed the Insta Cool Technology to the Company. Mr. Coelho has a
Bachelor of Science degree in Mechanical Engineering from the University of
California, Davis, and is the inventor or co-inventor on all of the Company's
patents.
CHARLES DE B. GRIFFITHS was elected to the Board of Directors in December 1989
and became Director of International Sales in January 1990. He is a Chartered
Accountant and holds a degree in Economics from the University of Manchester,
U.K. From January 1980 until December 1987 he was the Managing Director of a
number of successful overseas manufacturing subsidiaries of the Cloride Group,
including a $25,000,000 joint venture with the government of Egypt which he
steered to profitability in its first year of operation. In his last
appointment with Cloride he was in charge of the Scandinavian manufacturing
operations based in Denmark and was concurrently responsible for all European
automotive marketing activities. Mr. Griffiths is an internationally oriented
businessman with appropriate experience in industrial marketing and
manufacturing enhanced by studies at Harvard and Cranfield Business Schools.
He conducted a consulting practice in the United Kingdom from January 1988
until December 1989.
WALTER J. LUDT, III rejoined the Company as its Chief Operating Officer and
Vice President in February 1995. From March 1994 until February 1995, Mr. Ludt
was a consultant (acting Chief Financial Officer) to the Omohundro Company, a
manufacturer of state of the art carbon fiber spars for sail boats, where he
was instrumental in raising $5,000,000 in capital and restructuring $2,500,000
in bank debt. From June 1992 to February 1994, Mr. Ludt was Vice President and
Chief Financial Officer of Protel Technology, a developer and marketer of
sophisticated EDA software. Prior to June 1992, Mr. Ludt was a Director, Chief
Financial Officer, and Secretary of the Company. Mr. Ludt holds a Bachelor of
Science Degree in Business/Accounting from California State University at Long
Beach.
PATRICK MCENANY has been the President of Royce Laboratories since June 1991
and its Chairman since February 1994. In April 1997, Royce Laboratories merged
with and became a subsidiary of Watson Pharmaceuticals, Inc. Mr. McEnany
continues to serve as President of Royce Laboratories as well as the V.P. of
Corporate Development for Watson Pharmaceuticals, Inc. From 1973 to 1985,
Mr. McEnany was the President, Chief Executive Officer and Chief Financial
Officer of Zenex Synthetic Lubricants, Inc. ("Zenex"), a company engaged in the
distribution of synthetic lubricants. In February 1985, Zenex merged with Home
Intensive Care, Inc. ("HIC"), a provider of home infusion therapy services and
Mr. McEnany continued to serve as a director and chairman of the audit
committee until HIC was acquired by WR Grace & Co. In 1993. From December 1984
through 1991, Mr. McEnany also served as the President of Equisource Capital,
Inc., a consulting company in the areas of corporate finance and investment
banking. He currently serves as Vice Chairman and director of the National
Association of Pharmaceutical Manufacturers. Mr. McEnany was a director of the
Company in 1991.
44
<PAGE>
HUBERT E. HUCKEL, M.D. currently serves as a member of the Board of Directors
of Sano Corp., a Florida based company active in the field of transdermal
delivery systems for prescription drugs, and for Titan Pharmaceuticals, a South
San Francisco based company providing biotechnology products for the treatment
of neurological diseases and malignacies. In 1964, Dr. Huckel joined Hoechst
A.G., a Frankfurt, Germany based chemical-pharmaceutical company ranking in the
top 5 of such companies world wide. Dr. Huckel later moved to Hoechst US
subsidiaries in 1966 where he held various operations and executive management
positions, advancing to Chairman of Hoechst Roussel Pharmaceutical, Inc.,
president of the Life Sciences Group, and member of the Executive Committee at
Hoechst Celanese Corp., a Fortune 100 company. Dr. Huckel earned his medical
degree from the University of Vienna, Austria, in 1956.
BOARD MEETINGS
During the fiscal year ended June 30, 1997, the Board took action 24 times, by
meeting or consent. All directors were either present at the meeting or
consented in writing to the action. The Compensation Committee also took
action on 4 occasions, by meeting or consesnt, during the fiscal year ended
June 30, 1997. All members of the Compensation Committee were present or
consented to the actions in writing. The Audit Committee met once, and all
members of that committee were present at the meeting.
BOARD COMMITTEES
The Company currently has a Compensation Committee, an Executive Committee, and
an Audit Committee.
The Audit Committee coordinates and oversees the Company audit performed by
outside auditors. The Audit Committee currently consists of two non-employee
directors, Patrick McEnany and Dr. Hubert Huckel.
The Compensation Committee reviews and approves the executive compensation
policies and determines employee option grants. Following the fiscal year end,
the Compensation Committee members were Patrick McEnany and Hubert Huckel, the
Company's two outside directors.
The Executive Committee was re-created and established just prior to the fiscal
year ended June 30, 1997. The Executive Committee members are Philip H. Coelho
and Patrick McEnany. The Executive Committee assists the Chief Executive
Officer and management with efforts to increase sales, implement manufacturing
and budgeting controls, and other operational and investment banking matters.
The Executive Committee reports directly to the full Board for actions.
DIRECTORS COMPENSATION
All directors who are not employees of the Company are paid a fee of $1000 per
Board meeting attended in person ($500 for attendance by telephonic
conference). In addition, members of the Board's Compensation Committee
receive $500 per meeting in person ($250 for attendance by telephonic
conference) and options to purchase 4,000 shares of common stock upon
completion of each full year of service on the Compensation Committee pursuant
to the Amended 1994 Stock Option Plan. Members of the Audit and Executive
Committees receive $500 per meeting in person ($250 for attendance by
telephonic conference).
45
<PAGE>
(B) CORPORATE OFFICERS
The following table sets forth certain information with respect to executive
officers and certain key employees of the Company.
NAME POSITIONS WITH THE COMPANY AGE SINCE
Philip H. Coelho President, and Chief Executive Officer 53 1989{(1)}
Charles de B. Griffiths V.P. Marketing, Secretary and Director 47 1990
Walter J. Ludt, III C.O.O., V.P., and C.F.O. 53 1995{(2)}
David C. Adams V.P. Business Development 39 1996
and General Counsel
Michael Zmuda, PhD, RAC V.P. Regulatory Affairs 59 1997
and Quality Systems
KEY EMPLOYEES
Roger Kane Director of Research and Development 49 1996
Renee Ruecker Director of Finance 33 1997
NOTES TO TABLE
{(1) }Prior to becoming President, Mr. Coelho served as Vice President and
Director of Research, Development and Manufacturing from October 1986 to
September 1989.
{(2) }Mr. Ludt previously served as Chief Financial Officer, Secretary and
Treasurer of the Company prior to June 1992.
Executive officers are elected annually by the Board of Directors and serve at
the pleasure of the Board. Messrs. Coelho, Ludt, Griffiths and Adams have
entered into employment agreements with the Company which expire in 1999.
There is no family relationship between any of the officers and directors. None
of the officers or directors have been involved in a legal proceeding within
the past five years which is material to an evaluation of his ability or
integrity. Mr. Coelho is a member of the Board of Directors of Patient
Education Media, Inc. Mr. McEnany is currently a member of the Royce
Laboratories Board of Directors. Dr. Huckel is a member of the Sano Corporation
and Titan Pharmaceuticals, Inc. Board of Directors.
The biographies of Messrs. Coelho, Griffiths and Ludt can be found above under
the description and background for the directors of the Company.
46
<PAGE>
DAVID C. ADAMS joined the Company at the end of November 1996 as General
Counsel, and filled the newly created position of Vice President of Business
Development. Prior to joining the Company, Mr. Adams was in private practice
representing public and private corporations in the areas of intellectual
property, corporate finance, mergers and acquisitions, and regulatory matters.
Mr. Adams received his Bachelor of Arts Degree in Psychology, with High
Distinction, from the University of Colorado, Colorado Springs in 1984, and his
Juris Doctorate, with Distinction, from the University of the Pacific, McGeorge
School of Law in 1988.
MICHAEL ZMUDA joined the Company in February 1997 as V.P. of Regulatory Affairs
and Quality Systems. After serving as Assistant Professor of Pharmacology at
Southern Illinois University School of Medicine for five years, Dr. Zmuda
worked at Baxter-Travenol Laboratories, CD Medical, Inc., and American
Sterilizer Company ("AMSCO"). Prior to joining the Company, Dr. Zmuda held the
position of Director of Regulatory Affairs at AMSCO from 1989 through 1996 when
AMSCO merged with Steris Corporation. Dr. Zmuda received his Bachelor of Arts
Degree in Psychology in 1969, and his Physical Doctorate in Pharmacology in
1975, both from the University of Minnesota.
ROGER KANE, prior to joining the Company in December 1996, Mr. Kane worked as
the Director of Product Development and Manufacturing for Integrated Surgical
Systems, a position he had held since 1994. From 1993 through 1994, Mr. Kane
was a private Consultant to a start-up business that had designed a proprietary
anesthesia delivery system, and from 1986 through 1993, Mr. Kane served as V.P.
of Engineering for Bear Medical Systems in Southern California. Mr. Kane
received his Bachelor of Science Degree in Electrical Engineering from Ohio
State University in 1970 and his Masters Degree in Business Administration from
the University of Wisconsin in 1984.
RENEE M. RUECKER joined the Company in August 1997 as Director of Finance.
Prior to joining the Company, Ms. Ruecker was a manger in the Audit and
Business Advisory Department at Price Waterhouse LLP. Her clients included a
number in the science and health industries. A Certified Public Accountant,
Ms. Ruecker received her Bachelor of Science Degree in Business Administration
from the California Polytechnic State University in San Luis Obispo.
47
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid in the past
three years for all services of Executive Officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
OTHER ANNUAL
NAME AND PRINCIPAL COMP. RESTRICTED STOCK OPTIONS GRANTED
POSITION YEAR SALARY BONUS AWARD(S)
<S> <C> <C> <C> <C> <C> <C>
Philip H. Coelho, 1995 $ 110,000 $ 0 $ 27,296{(1)} $ 0 -0-
President and Chief
Executive Officer
1996 $ 110,000 $ 0 $ 27,296{(2)} $ 0 250,000{(4)}
1997 $ 160,000 $ 0 $ 52,764{(3)} $ 0 -0-
Charles de B. 1995 $ 80,000 $ 0 $ 12,000{(5)} $ 0 -0-
Griffiths,
V.P. Marketing and
Corporate Secretary
1996 $ 110,000 $ 0 $ 21,512{(6)} $ 0 100,000{(8)}
1997 $ 120,000 $ 0 $ 31,781{(7)} $ 0 -0-
Walter J. Ludt, III, 1995 $ 80,000 $ 0 $ 7,200{(9)} $ 0 -0-
Chief Operating
Officer, and Chief
Financial Officer
1996 $ 100,000 $ 0 $ 14,253{(10)} $ 0 150,000{(12)}
1997 $ 120,000 $ 0 $ 9,600{(11)} $ 0 -0-
</TABLE>
{(1)} Represents payments of $7,200 annual automobile allowance and $20,096 in
accrued vacation pay.
{(2)} Represents payments of $7,200 annual automobile allowance and $20,096 in
accrued vacation pay.
{(3) }Represents payments of $12,000 annual automobile allowance and $40,764 in
accrued vacation pay.
{(4) }Includes 200,000 stock options granted on October 23, 1995, and 50,000
stock options granted on May 29, 1996 which were repriced on April 2, 1997
to $2.3125 per share.
{(5) }Represents payments of $12,000 annual automobile allowance.
{(6) }Represents payments of $9,000 annual automobile allowance and $12,512 in
accrued vacation pay.
{(7)}Represents payments of $9,000 annual automobile allowance and $22,781 in
accrued vacation pay.
{(8)}Includes replacement option of 100,000.
{(9)}Represents payments of $7,200 annual automobile allowance.
{(10)}Represents payments of $8,100 annual automobile allowance and $6,153 in
accrued vacation pay.
{(11)}Represents payment of $9,000 annual automobile allowance.
{(12)}Includes 100,000 stock options granted on October 23, 1995, and 50,000
stock options granted on May 29, 1996 which were repriced on April 2, 1997 to
$2.3125 per share.
48
<PAGE>
EMPLOYMENT AGREEMENTS
In June 1996, the Company and Mr. Coelho entered into a new employment
agreement whereby Mr. Coelho agreed to serve as President and Chief Executive
Officer of the Company and receive compensation equal to $160,000 per year and
a $800 per month automobile allowance, subject to annual increases as may be
determined by the Board of Directors. The employment agreement may be
terminated by Mr. Coelho or by the Company with or without cause. In the event
Mr. Coelho is terminated by the Company without cause, Mr. Coelho will be
entitled to receive severance pay equal to the greater of six months of his
annual salary or the remaining term of the agreement. In addition, the
employment agreement provides that in the event Mr. Coelho is terminated other
than "for cause" upon a change of control, Mr. Coelho shall be paid an amount
equal to three times his annual salary. The phrase "change of control" is
defined to include (i) the issuance of 33% or more of the outstanding
securities to any individual, firm, partnership, or entity, (ii) the issuance
of 33% or more of the outstanding securities in connection with a merger, or
(iii) the acquisition of the Company in a merger or other business combination.
The employment agreement expires by its terms in June 1999.
In June 1996, the Company and Charles de B. Griffiths entered into a new
employment agreement whereby Mr. Griffiths agreed to serve as Vice-President of
Marketing and Sales of the Company and receive compensation equal to $120,000
per year and a $750 per month car allowance, subject to annual increases as may
be determined by the Board of Directors. The employment agreement may be
terminated by Mr. Griffiths or by the Company with or without cause. In the
event Mr. Griffiths is terminated by the Company without cause, Mr. Griffiths
will be entitled to receive severance pay equal to the greater of six months of
his annual salary, or the remaining term of the agreement. In addition, the
employment agreement provides that in the event Mr. Griffiths is terminated
following a change of control, Mr. Griffiths shall be paid an amount equal to
three times his annual salary. The phrase "change of control" is defined to
include (i) the issuance of 33% or more of the outstanding securities to any
individual, firm, partnership, or entity, (ii) the issuance of 33% or more of
the outstanding securities in connection with a merger, or (iii) the
acquisition of the Company in a merger or other business combination. The
employment agreement expires by its terms in June 1999.
In June 1996, the Company and Walter J. Ludt, III entered into an employment
agreement whereby Mr. Ludt agreed to serve as Chief Operating Officer and Chief
Financial Officer of the Company and receive compensation equal to $120,000 per
year and a $750 per month car allowance, subject to annual increases as may be
determined by the Board of Directors. The employment agreement may be
terminated by Mr. Ludt or by the Company with or without cause. In the event
Mr. Ludt is terminated by the Company without cause, he will be entitled to
receive severance pay equal to the greater of six months of his annual salary,
or the remaining term of the agreement. In addition, the employment agreement
provides that in the event Mr. Ludt is terminated following a change of
control, he shall be paid an amount equal to three times his annual salary. The
phrase "change of control" is defined e outstanding securities to any
individual, firm, partnership, or entity, (ii) the issuance of 33% or more of
the outstanding securities in connection with a merger, or (iii) the
acquisition of the Company in a merger or other business combination. The
employment agreement expires by its terms in June 1999.
In December 1996, the Company and David Adams entered into an employment
agreement whereby Mr. Adams agreed to serve as Vice President of Business
Development and General Counsel of the Company and receive compensation equal
to $110,000 per year and a $650 per month automobile allowance, subject to
annual increases as may be determined by the Board of Directors. The
employment agreement may be terminated by mutual consent of the Company and Mr.
Adams or by the Company with or without cause. In the event Mr. Adams is
terminated by the Company without cause, Mr. Adams will be entitled to receive
severance pay equal to the greater of six months of his annual salary,
excluding any amounts for benefits or automobile allowance or an amount equal
to the then current per month Base Salary multiplied by the number of calendar
months remaining in the Agreement. In addition, the employment agreement
provides that in the event Mr. Adams is terminated other than "for cause" upon
a change of control, Mr. Adams will be paid an amount equal to three times his
annual salary. The phrase "change of control" is defined to include (i) the
issuance of 33% or more of the outstanding securities to any individual, firm,
partnership, or entity, (ii) the issuance of 33% or more of the outstanding
securities in connection with a merger, or (iii) the acquisition of the Company
in a merger or other business combination. The employment agreement expires by
its terms in November 1999.
49
<PAGE>
In February 1997, the Company and Michael Zmuda entered into an at-will
employment agreement whereby Dr. Zmuda agreed to serve as Vice President of
Regulatory Affairs and Quality Systems of the Company and receive compensation
equal to $90,000 per year and a $850 per month automobile allowance, subject to
annual increases as may be determined by the Board of Directors. The
employment agreement may be terminated by the Company with or without cause.
In addition, the employment agreement provides that in the event Dr. Zmuda is
terminated other than "for cause" upon a change of control, he will be paid an
amount equal to three times his annual salary. The phrase "change of control"
is defined to include (i) the issuance of 33% or more of the outstanding
securities to any individual, firm, partnership, or entity, (ii) the issuance
of 33% or more of the outstanding securities in connection with a merger, or
(iii) the acquisition of the Company in a merger or other business combination.
OPTIONS GRANTED IN LAST FISCAL YEAR
No options were granted to named executive officers during the last fiscal
year. However, the following options were repriced during the fiscal year
ended June 30, 1997. The repricing was to compensate those officers for
entering into lock-up agreements during financing in the 1996 fiscal year,
which resulted in the expiration of significant options exercisable at $0.53
per share. All option grants and values have been adjusted to reflect the one-
for-two stock consolidation effected by the Company on June 14, 1996. No
officers or directors exercised any options during the year.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Percent of Total
Options Granted
Number of to Employees in Potential Realized Value at
Securities Fiscal Year Assumed Annual Rates of Stock
Underlying Exercise Base Expiration Price Appreciation for Option
Options Granted Price ($/sh){ (1)} Date Option te Term
Director 5%($){(2)} 10%($){(2)}
<S> <C> <C> <C> <C> <C> <C>
Philip Coelho 50,000 4.2% $ 2.3125{(3)} 5/29/01 $ 31,947 $ 70,589
Walter Ludt 50,000 4.2% $ 2.3125{(4)} 5/29/01 $ 31,947 $ 70,589
</TABLE>
FOOTNOTES TO TABLE
{(1)}The exercise price of the options repriced during fiscal year 1996 was
equal to the closing market price of the Company's common stock on the date the
option was repriced. All other terms remained the same.
{(2)}The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of future common stock prices, or actual performance.
{(3) } Options were repriced on April 2,1997 at $2.3125.
{(4) }Options were repriced on April 2, 1997 at $2.3125.
50
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth executive officer options exercised and option
values for fiscal year 1996, as adjusted for the Company's one-for-two stock
consolidation effected June 14, 1996 for all fiscal year executive officers.
Number of options Value of Unexercised
at FY end Options at FY End
Shares Acquired Value (Exercisable/ (Exercisable/
NAME OR EXERCISED REALIZED UNEXERCISABLE) UNEXERCISABLE){(1)}
Philip H. Coelho - - 425,000{(2)}/ $1,181,925/
-0- $ -0-
Charles de B. Griffiths- - 225,000{(3)}/ $ 625,725/
-0- $ -0-
Walter Ludt, III - - 250,000{(4)}/ $ 556,200/
-0- $ -0-
FOOTNOTES TO TABLE
{(1)} Based on June 30, 1997 year end closing bid price of $2.781 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is not aware of any stockholder of record who owns five percent
(5%) or more of the outstanding common stock, and the Company has not received
any Form 13d filings which would indicate that any stockholder owns
beneficially more than five percent (5%) or more of the Company's common stock.
The following table sets forth, as of June 30, 1997, certain information with
respect to the beneficial ownership of shares of the Company's common stock by
all directors and named executive officers of the Company individually, and all
directors and all executive officers of the Company as a group. There were
15,864,769 shares of common stock outstanding as of June 30, 1997.
5% STOCKHOLDERS, DIRECTORS SHARES BENEFICIALLY PERCENTAGE OF
AND NAMED EXECUTIVE OFFICERS OWNED {(1)} OWNERSHIP
Philip H. Coelho, President, CEO
and Chairman of the Board{(2)}...............584,500 3.48%
Charles de B. Griffiths, Vice President
Marketing & Sales, Director{(3)}.............507,500 3.02%
Walter J. Ludt, COO, CFO and Director {(4)}...200,000 1.19%
Hubert Huckel, Director {(5)}............. 47,000 *
Patrick McEnany, Director{(6)}................105,829 *
All directors and executive officers as
a group (7)..................................1,442,329 8.59%
51
<PAGE>
________________________
<circle>Represents beneficial ownership of less than 1%.
{(1)}Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as noted in the footnotes, and
subject to community property laws, the persons named have sole voting and
investment power with respect to all shares of the Company's common stock shown
as beneficially owned by them.
{(2)}Includes rights to purchase 175,000 common shares at $2.32 per share and
200,000 common shares at $2.125 per share pursuant to stock options granted
December 31, 1993, and October 23, 1995, respectively, and 50,000 common shares
granted on May 29, 1996 and repriced on April 2, 1997 at $2.3125 per share.
{(3)}Includes rights to purchase 125,000 common shares at $2.32 per share and
100,000 common shares at $2.125 per share pursuant to stock options granted
December 31, 1993 and October 23, 1995, respectively. Also includes 257,500
common shares held by the Beaufort Trust for the benefit of Mr. Griffiths.
Although he is the beneficiary of the trust, Mr. Griffiths has no voting or
dispositive power over the 257,500 shares held in the trust.
{(4)}Includes rights to purchase 100,000 common shares at $2.125 per share
pursuant to stock options granted on October 23, 1995, and rights to purchase
50,000 shares granted on May 29, 1996 and repriced on April 2, 1997 at $2.3125
per share, and rights to purchase 50,000 common shares at $3.00 per share
pursuant to stock options granted pursuant to employment in 1995.
{(5)}Includes rights to purchase 40,000 common shares at $3.3125 per share
pursuant to stock options granted on May 29, 1997.
{(6)}Includes rights to purchase 40,000 common shares at $3.3125 per share
pursuant to stock options granted on May 29, 1997. Includes 25,829 common
shares owned by Equisource Capital, Inc. Also, includes 2,500 common shares
owned by Mr. McEnany's wife to which he disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, the Company loaned the principal sum of $88,281.25 to Charles de
B. Griffiths, the Company's Vice President of Marketing and Sales and a
director of the Company, to assist with the purchase and renovation of a
residence in connection with Mr. Griffiths relocation to the Company's Rancho
Cordova office from France, where he previously resided. The loan bears simple
interest at the annual rate of eight percent (8%), and is due and payable upon
demand, and in no event later than February 1998. The loan was fully secured
by shares of common stock held by Mr. Griffiths at the time of the loan, and
was entered into to assist Mr. Griffiths relocate without needing to sell
shares of the Company's common stock beneficially owned by him.
52
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report on Form 10-K.
(A) 1) FINANCIAL STATEMENTS PAGE NUMBER
Report of Ernst & Young LLP, Independent Auditors .........28
Balance Sheets at June 30, 1997 and 1996 . ...............29
Statements of Operations for the years
ended June 30, 1997, 1996, and 1995......................31
Statements of Shareholders' Equity for
the years ended June 30, 1997 and 1996 ..................32
Statements of Cash Flows for the
years ended June 30, 1997, 1996 and 1995 ................33
Notes to Financial Statements..............................34
2) FINANCIAL STATEMENT SCHEDULES
Schedule II, Valuation and Qualifying Accounts ............56
All other schedules have been omitted because they are not applicable or
because the required information is disclosed in the financial statements and
notes thereto.
(B)REPORTS ON FORM 8-K
1) Current Report on Form 8-K for the event date November 27, 1996
(announcing closing of equity financing)
2) Current Report on Form 8-K for the event date March 27, 1997(announcing
license agreement with Pall/Medsep Corporation)
(C)EXHIBITS
1)Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index on the next page, which is incorporated herein by this reference.
2)Glossary
53
<PAGE>
THERMOGENESIS CORP.
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.
THERMOGENESIS CORP.
Philip H. Coelho, President
September 25, 1997 and Chief Executive 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.
By: Dated: SEPTEMBER 25, 1997
Philip H. Coelho, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
By: Dated: SEPTEMBER 25, 1997
Walter J. Ludt, III, CFO & Director
(Principal Financial and Accounting
Officer)
By: Dated: SEPTEMBER 25, 1997
Charles de B. Griffiths, Director
By: Dated: SEPTEMBER 25, 1997
Hubert Huckel, Director
By: Dated: SEPTEMBER 25, 1997
Patrick McEnany, Director
54
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------
3.1 (a)Amended and Restated Certificate of Incorporation {(5)}
(b)Amended Bylaws {(5)}
10.1 (a)Letter of Agreement between Liquid Carbonic, Inc.
Canada and THERMOGENESIS CORP. {(2)}
(b)Letter of Agreement between Fujitetsumo USA and
THERMOGENESIS CORP. {(2)}
(c)Letter of Agreement between Fujitetsumo
Japan and THERMOGENESIS CORP. {(2)}
(d)Letter of Agreement between THERMOGENESIS
CORP. and Liquid Carbonic, Inc. Sale of Convertible Debenture {(3)}
(e)License Agreement between Stryker Corp. and
THERMOGENESIS CORP.{ (7)}
(f)Lease of Office and Mfg. Space {(5)}
(g)Executive Development and Distribution Agreement
between THERMOGENESIS and Daido Hoxan Inc. {(4)}
(h)Administrative Office Lease {(8)}
(i)Employment Agreement for Philip H. Coelho {(9)}
(j)Employment Agreement for Charles de B. Griffiths {(9)}
(k)Employment Agreement for Walter Ludt {(9)}
(l)Employment Agreement for David C. Adams
(m)Manufacturing and License Agreement between
On-Time Manufacturing and THERMOGENESIS {(9)}
(n)License and Distribution Agreement between Asahi
Medical and THERMOGENESIS CORP. {(10)}
23.1Consent of Ernst & Young LLP, Independent Auditors
27 Financial Disclosure Statement
FOOTNOTES TO INDEX
{(1)} Incorporated by reference to Registration Stmt No. 33-12210-A of
THERMOGENESIS, CORP. filed on June 4, 1987.
{(2)} Incorporated by reference to Registration Statement No. 33-37242 of
THERMOGENESIS, CORP. filed on Feb. 7, 1991.
{(3)} Incorporated by reference to Form 8-K for July 19, 1993
{(4)} Incorporated by reference to Form 8-K for June 9, 1995.
{(5)} Incorporated by reference to Form 10-KSB for the year ended June 30,
1994
{(6)} Incorporated by reference to Form 10-KSB for the year ended June 30, 1995
{(7)} Incorporated by reference to Form 8-K for September 27, 1995
{(8)} Incorporated by reference to Form 10-QSB for the quarter ended
December 31, 1995
{(9)}Incorporated by reference to Form 10-KSB for the year ended June 30, 1996.
{(10)}Incorporated by reference to Form 8-K for May 29, 1996
55
<PAGE>
SCHEDULE II
THERMOGENESIS CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Write-offs Balance at
Beginning of Costs and (Net of End
PERIOD EXPENSES RECOVERIES) OF PERIOD
ALLOWANCE OF DOUBTFUL ACCOUNTS
<S> <C> <C> <C> <C>
For the year ended June 30, 1997 $ 97,913 $ -- $ -- $ 97,913
For the year ended June 30, 1996 72,913 25,000 -- 97,913
For the year ended June 30, 1995 58,454 23,328 8,869 72,913
</TABLE>
56
<PAGE>
GLOSSARY
510(K): formal notification to the Food and Drug Administration ("FDA") by
manufacturers of Class I or Class II devices to obtain clearance to market
the medical device.
AUTOLOGOUS: autogenous; related to self; originating within an organism
itself, as an autograft or autotransfusion.
CLASS II MEDICAL SYSTEM: those devices for which general controls alone are
insufficient to assure safety and effectiveness and for which mandatory
performance standards must be developed by the FDA.
COAGULATION: 1) the process of clot formation. 2) in surgery, the
disruption of tissue by physical means to form an amorphous residuum, as in
electrocoagulation and photocoagulation.
CORE LINE PRODUCTS: (1) device for the ultra-rapid cryopreservation of
human blood plasma, (2) portable device for the ultra-rapid
cryopreservation of human blood plasma, (3) device for the rapid thawing of
frozen plasma for hospital patient care, (4) device for the hermetic
sealing of blood tissue containers, (5) "smart" blood collection monitor,
(6) Vial BioArchive{TM} System for the Japanese Red Cross.
CRYOPRECIPITATE: any precipitate that results from cooling, as cryoglobulin
or antihemophilic factor.
CRYOPRECIPITATED AHF (CRYO): a biological product used for the intravenous
treatment of hemophilia.
CRYOPRESERVATION: the maintaining of the viability of excised tissue or
organs by storing at very low temperatures.
CRYOSEAL{TM}: system for harvesting fibrinogen-rich cryoprecipitate from a
donor's blood plasma, a blood component that is currently licensed by the
FDA for the treatment of clotting protein deficient patients.
DEWAR: container which keeps its contents at a constant and generally low
temperature by means of two external walls between which a vacuum is
maintained.
FACTOR VIII: antihemophilic factor (AHF): a relatively storage-labile
factor participating only in the intrinsic pathway of blood coagulation.
Deficiency of this factor, when transmitted as a sex-linked recessive
trait, causes classical hemophilia (hemophilia A). More than one molecular
form of this factor has been discovered. Called also antihemophilic
globulin (AHG) and antihemophilic factor A.
57
<PAGE>
FACTOR XIII: fibrin stabilizing factor (FSF): a factor that polymerizes
fibrin monomers so that they become stable and insoluble in urea, thus
enabling fibrin to form a firm blood clot. Deficiency of this factor
produces a clinical hemorrhagic diathesis. Called also fibrinase and Laki-
Lorand factor (LLF). The inactive form is also known as protransglutaminase
and the active form as transglutaminase.
FIBRONECTIN: an adhesive glycoprotein: one form circulates in plasma,
acting as an opsonin; another is a cell-surface protein which mediates
cellular adhesive interactions. Fibronectins are important in connective
tissue, where they cross-link to collagen, and they are also involved in
aggregation of platelets.
FIBRINOGEN: a sterile compound derived from normal human plasma and dried
from the frozen state; used to promote blood clotting.
GOOD MANUFACTURING PRACTICES: regulations for methods used in and the
facilities and controls used for the manufacture, packing, storage and
installation of all finished devices intended for human use; the
regulations assure that such devices will be safe and effective and
otherwise in compliance with the Federal Food, Drug and Cosmetic Act, as
amended.
HEMATOLOGY: that branch of medical science which treats of the morphology
of the blood and blood forming tissues.
HEMATOPOIETIC: pertaining to or affecting the formation of blood cells. As
agent that promotes the formation of blood cells.
HEMOSTATIC: 1) checking the flow of blood; 2) an agent that arrests the
flow of blood.
HEMOSTASIS: the arrest of bleeding, either by the physiological properties
of vasoconstriction and coagulation or by surgical means. Interruption of
blood flow through any vessel or to any anatomical area.
INVESTIGATION REVIEW BOARD: any board, committee or other group formally
designated by an institution to review biomedical research involving
subjects and established, operated and functioning in conformance with part
56 of 21 CFR.
IN VITRO: within a glass; observable in a test tube; in an artificial
environment.
IN VIVO: within the living body.
LEUKOCYTE: white cells; a colorless blood corpuscle capable of ameboid
movement whose chief function is to protect the body against microorganisms
causing disease and which may be classified in two main groups, granular
and nongranular.
MACULAR: pertaining to or characterized by the presence of macules;
pertaining to the macula retinae.
58
<PAGE>
N{2} BIOARCHIVE: system for controlled rate freezing, storage and retrieval
and inventory management of biological samples which require LN{2} storage
temperatures, such as placental, stem and progenitor cells.
OTOLARYNOLOGY: that branch of medicine dealing with disease of the ear,
nose and throat.
PIPELINE PRODUCTS: (1) CryoSeal{TM} System, thermodynamic processor, (2)
LN{2} BioArchive{TM} System, computerized LN{2} dewar with robotic arm, (3)
CryoFactor{TM} System, thermodynamic processor, (4) MicroSealant{TM}
System, bench top thermodynamic processor, (5) CryoPlatelet{TM} System,
thermodynamic processor.
PLATELET DERIVED GROWTH FACTOR (PDGF): a substance contained in the alpha
granules of platelets and capable of inducing proliferation of vascular
endothelial cells, vascular smooth muscle cells, fibroblasts and glia
cells; its action contributes to the repair of damaged vascular walls.
PRE-MARKET APPROVAL: any premarket approval application for a Class III
medical device, including all information submitted with or incorporated by
reference therein; PMA includes a new drug application for a device under
section 520(1) of the Federal, Food, Drug & Cosmetic Act, as amended.
PROGENITOR: a parent or ancestor.
THERMODYNAMIC: the branch of science dealing with heat, energy, their
interconversion, and problems related thereto.
THERMOLABILE: easily altered or decomposed by heat.
VON WILLEBRAND'S FACTOR: the attribute of Factor VIII necessary for the
adhesion of platelets to vascular elements. Deficiency of this factor
results in the prolonged bleeding time seen in von Willebrand's disease.
59
THERMOGENESIS CORP.
EMPLOYMENT AGREEMENT
FOR
DAVID C. ADAMS
THERMOGENESIS CORP. ("Employer"), and David C. Adams ("Employee"), agree as
follows:
1. EMPLOYMENT. Employer employs Employee and Employee accepts employment
with Employer on the terms and conditions set forth in this Employment
Agreement ("Agreement").
2. POSITION; SCOPE OF EMPLOYMENT. Employee shall have the position of
Vice-President of Business Development and General Counsel, and shall have
the duties and authority set forth below, and as detailed on the position
description attached as EXHIBIT "A", which duties and authority may be
modified from time to time by Employer. As General Counsel, Employee shall
report to the Board of Directors of Employer. As Vice-President Business
Development, Employee shall report to the Employer's Chief Executive
Officer.
2.1. ENTIRE TIME AND EFFORT. Employee shall devote Employee's full
working time, attention, abilities, skill, labor and efforts to the
performance of his employment. Employee shall not, directly or indirectly,
alone or as a member of a partnership or other organizational entity, or as
an officer or director of any corporation (other than any which are owned
by or affiliated with Employer) (i) be substantially engaged in or
concerned with any other commercial duties or pursuits, (ii) render
services to any third party for compensation, or other benefit, or
(iii) engage in any other business activity that will in any way interfere
with the performance of Employee's duties under this Agreement, except with
the prior written consent of Employer.
2.2. RULES AND REGULATIONS. Employee agrees to observe and comply
with Employer's rules and regulations as provided by Employer and as may be
amended from time to time by Employer and will carry out and perform
faithfully such orders, directions and policies of Employer. To the extent
any provision of this Agreement is contrary to an Employer rule or
regulation, as such may be amended from time to time, the terms of this
Agreement shall control.
2.3. LIMITATIONS UPON AUTHORITY TO BIND EMPLOYER. Employee shall not
engage in any of the following actions on behalf of Employer without the
prior approval of Employer: (i) borrow or obtain credit in any amount or
execute any guaranty, except for items purchased from vendors in the
ordinary course of Employer's operations; (ii) expend funds for capital
equipment in excess of expenditures expressly budgeted by Employer, if
applicable, or in the event not budgeted, not to exceed the amounts set
forth in subparagraph (iii); (iii) sell or transfer capital assets
exceeding Five Thousand Dollars ($5,000) in market value in any single
transaction or exceeding Ten Thousand Dollars ($10,000) in the aggregate
during any one fiscal year; (iv) execute any lease for real or personal
property; or (v) exercise any authority or control over the management of
any employee welfare or pension benefit plan maintained by Employer or over
the disposition of the assets of any such plan.
3. TERM. The term of this Agreement shall be for a period of three (3)
years which shall commence on December 1, 1996 and end on November 30,
1999; unless terminated earlier as provided below in section 5.
4. COMPENSATION. Employer shall pay to Employee an initial amount of
$5,000, and shall pay to or provide compensation to Employee as set forth
in this section 4. All compensation of every description shall be subject
to the customary withholding tax and other employment taxes as required
with respect to compensation paid to an employee.
4.1. BASE SALARY. Employer shall pay Employee a base salary of one
hundred and ten thousand Dollars ($110,000) per year commencing on December
1, 1996 ("Base Salary"). Employee's Base Salary shall be payable in
accordance with Employer's regular pay schedule, but not less frequently
than twice per month. In addition to the Base Salary provided herein, the
Employee shall also be paid a car allowance of $650 per month commencing on
December 1, 1996, and continuing during the term of this agreement.
4.2. ANNUAL REVIEW. On the date of the Employer's annual meeting of
shareholders, or within thirty (30) days thereafter, and on each subsequent
annual meeting of shareholders during the term of this Agreement, Employer
shall review the previous year's performance of Employee for the purpose of
making reasonable increases to Employee's Base Salary; PROVIDED that
Employer shall not be required to increase Employee's Base Salary, but may
do so at its discretion.
4.3. CASH BONUSES. In addition to the Base Salary provided for in
sections 4.1 and 4.2, Employee is eligible to receive bonuses based on
Employer performance and Employee's attainment of objectives periodically
established by Employer.
4.4. STOCK OPTION GRANTS. In addition to Base Salary provided for in
sections 4.1 and 4.2, Employee is eligible to receive in addition to any
cash bonus provided for in section 4.3. an award of stock options as may be
determined from time to time by Employer's Compensation Committee which
consists of disinterested directors who administer Employer's Amended 1994
Stock Option Plan. Pursuant to Employee's engagement under this Agreement,
Employee shall be granted an initial stock option to acquire 120,000 shares
of the Company's common stock, which grant and effective exercise price
will be established by the Company's compensation committee no later than
January 1997.
4.5. PROFESSIONAL DUES; PROFESSIONAL ASSOCIATION. Employer shall pay
annually Employee's California State Bar dues and annual dues for the
American Corporate Counsel Association. In addition to the foregoing,
Employer shall pay all costs and expenses for Employee to attend annual
continuing education seminars at a cost not to exceed $7,500 annually.
4.6. VACATION AND SICK LEAVE. Employee shall be entitled to accrue up
to four (4) weeks vacation annually; provided, however, that vacation time
may not accrue beyond two weeks of accrued and unused time. Vacation pay
shall not accrue beyond two (2) weeks at any given time. Employee shall be
entitled to sick leave in accordance with Employer's sick leave policy, as
amended from time to time. At the end of each anniversary of this
Agreement, subject to the limit on two weeks accrued and unused vacation,
all such unused and accrued vacation time shall be paid in cash.
4.7. OTHER FRINGE BENEFITS. Employee shall participate in all of
Employer's fringe benefit programs in substantially the same manner and to
substantially the same extent as other similar employees of Employer,
excluding only those benefits expressly modified by the terms hereof.
4.8. EXPENSES. Employee shall be reimbursed for his reasonable
business expenses; subject to the presentation of evidence of such expenses
in accordance with established policies adopted by Employer from time to
time.
4.9. COMPENSATION FROM OTHER SOURCES. Any proceeds that Employee
shall receive by virtue of qualifying for disability insurance, disability
benefits, or health or accident insurance shall belong to Employee.
Employee shall not be paid Base Salary in any period in which he receives
benefits as determined and paid under Employer's long-term disability
policy. Benefits paid to Employee under Employer's short-term disability
policy shall reduce, by the same amount, Base Salary payable to Employee
for such period.
5. EARLY TERMINATION. Employee's employment with Employer may be
terminated prior to the expiration of the term of this Agreement, upon any
of the following events: (i) the mutual agreement of Employer and Employee
in writing; (ii) the disability of Employee, which shall, for the purposes
of this Agreement, mean Employee's inability, for a period exceeding three
(3) months as determined by a qualified physician, and which qualifies
Employee for benefits under Employer's long-term disability policy, to
perform in the usual manner the material duties usually and customarily
pertaining to Employee's long-term employment; (iii) Employee's death;
(iv) notice of termination by Employer for cause; (v) Employer's cessation
of business; (vi) written notice of termination by Employer without cause
upon fourteen (14) days' notice, subject to the provisions for compensation
upon early termination in section 5.3(b); or (vii) upon a Change in
Control (as defined below) of Employer (as defined in and under the
circumstances described in section 5.4).
5.1. DEFINITION OF CAUSE. For purposes of this Agreement, any of the
following shall constitute cause: (i) willful or habitual breach of
Employee's duties; (ii) fraud or intentional material misrepresentation by
Employee to Employer or any others; (iii) theft or conversion by Employee;
(iv) unauthorized disclosure or other use of Employer's trade secrets,
customer lists or confidential information; (v) habitual misuse of alcohol
or any nonprescribed drug or intoxicant; or (vi) willful violation of any
other standards of conduct as set forth in Employer's employee manual.
5.2. DAMAGES. If Employer terminates Employee for cause, Employer
shall be entitled to damages and all other remedies to which Employer may
otherwise be entitled.
5.3. COMPENSATION UPON EARLY TERMINATION.
(a)If Employee resigns during the term of this Agreement, or if this
Agreement is terminated by Employer for cause, Employee shall be entitled
to all accrued but unpaid Base Salary and vacation pay accrued through the
date of delivery of notice of termination.
(b)If Employee is terminated without cause, Employer shall pay to
Employee the greater of (i) six (6) months of Employee's salary excluding
any amounts for benefits or automobile allowance; or (ii) an amount equal
to the then current per month Base Salary multiplied by the number of
calendar months remaining under the term of this Agreement. Employer's
payment pursuant to this subparagraph shall fully and completely discharge
any and all obligations of Employer to Employee arising out of or related
to this Agreement and shall constitute liquidated damages in lieu of any
and all claims which Employee may have against Employer not including any
obligation under the workers' compensation laws including Employer's
liability provisions.
Initials: Employee _________ Employer _________
(c)If Employee's employment is terminated as a result of death or
total disability, Employee shall be entitled to accrued but unpaid Base
Salary to date of termination. The date of termination shall be deemed the
date of death or, in the event of disability, the date Employee qualified
for total disability payments under Employer's long-term disability plan.
(d)If Employee's employment is terminated as a result of a Change in
Control of Employer, Employee shall be entitled to a lump-sum payment
equal to three times the Employee's Base Salary at the time. A "Change in
Control" shall mean an event involving one transaction or a related series
of transactions in which one of the following occurs: (i) Employer issues
securities equal to 33% or more of Employer's issued and outstanding voting
securities, determined as a single class, to any individual, firm,
partnership or other entity, including a "group" within the meaning of
section 13(d)(3) of the Securities Exchange Act of 1934; (ii) Employer
issues securities equal to 33% or more of the issued and outstanding common
stock of Employer in connection with a merger, consolidation or other
business combination; (iii) Employer is acquired in a merger or other
business combination transaction in which Employer is not the surviving
company; or (iv) all or substantially all of Employer's assets are sold or
transferred.
(e)Except as expressly provided in paragraph (d) above, all
compensation described in this section 5.3 shall be due and payable in
installments at least bi-weekly or at the time of the delivery of notice of
termination, at Employer's discretion.
6. CONFIDENTIAL INFORMATION OF CUSTOMERS OF EMPLOYER. Employee during
the course of his duties will be handling financial, accounting,
statistical, marketing and personnel information of customers of Employer.
All such information is confidential and shall not be disclosed, directly
or indirectly, or used by Employee in any way, either during the term of
this Agreement or at any time thereafter except as required in the course
of Employee's employment with Employer.
7. UNFAIR COMPETITION. During the term of this Agreement, Employee shall
not, directly or indirectly, whether as a partner, employee, creditor,
shareholder, or otherwise, promote, participate, or engage in any activity
or other business which is competitive in any way with Employer's business.
The obligation of the Employee not to compete with the Employer shall not
prohibit the Employee from owning or purchasing any corporate securities
that are regularly traded on a recognized stock exchange or on over-the-
counter market. In order to protect the trade secrets of Employer, after
the term, or upon earlier termination of this Agreement, the Employee shall
not, directly or indirectly, either as an employee, employer, consultants,
agent, principal, partner, stockholder, corporate officer, director, or any
other individual or representative capacity, engage or participate in any
business that is in direct competition with the business of the Employer
for a period of one (1) year from the date of the expiration of this
Agreement in the areas related to blood processing equipment or procedures.
8. TRADE SECRETS. Employee shall not disclose to any others, or take or
use for Employee's own purposes or purposes of any others, during the term
of this Agreement or at any time thereafter, any of Employer's trade
secrets, including without limitation, confidential information, customer
lists, computer programs or computer software of Employer. Employee agrees
that these restrictions shall also apply to (i) trade secrets belonging to
third parties in Employer's possession and (ii) trade secrets conceived,
originated, discovered or developed by Employee during the term of this
Agreement. Information of Employer shall not be considered a trade secret
if it is lawfully known outside of Employer by anyone who does not have a
duty to keep such information confidential.
8.1 INVENTIONS; OWNERSHIP RIGHTS. Employee agrees that all ideas,
techniques, inventions, systems, formulas, discoveries, technical
information, programs, prototypes and similar developments ("Developments")
developed, created, discovered, made, written or obtained by Employee in
the course of or as a result, directly or indirectly, of performance of his
duties hereunder, and all related industrial property, copyrights, patent
rights, trade secrets and other forms of protection thereof, shall be and
remain the property of Employer. Employee agrees to execute or cause to be
executed such assignments and applications, registrations and other
documents and to take such other action as may be requested by Employer to
enable Employer to protect its rights to any such Developments. If
Employer requires Employee's assistance under this section 8.1 after
termination of this Agreement, Employee shall be compensated for his time
actually spent in providing such assistance at an hourly rate equivalent to
the prevailing rate for such services and as agreed upon by the parties.
9. ARBITRATION. Any disputes regarding the rights or obligations of the
parties under this Agreement shall be conclusively determined by binding
arbitration. Any controversy or claim arising out of or relating to this
contract, or the breach thereof, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
10. ACTIONS CONTRARY TO LAW. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law, and
whenever there is any conflict between any provision of this Agreement and
any statute, law, ordinance, or regulation, contrary to which the parties
have no legal right to contract, then the latter shall prevail; but in such
event, the provisions of this Agreement so affected shall be curtailed and
limited only to the extent necessary to bring it within legal requirements.
11. MISCELLANEOUS.
11.1. NOTICES. All notices and demands of every kind shall be
personally delivered or sent by first class mail to the parties at the
addresses appearing below or at such other addresses as either party may
designate in writing, delivered or mailed in accordance with the terms of
this Agreement. Any such notice or demand shall be effective immediately
upon personal delivery or three (3) days after deposit in the United States
mail, as the case may be.
EMPLOYER: THERMOGENESIS CORP.
11431 Sunrise Gold Cir., Suite A
Rancho Cordova, California 95742
EMPLOYEE: David C. Adams
2 Jeresa Court
Elk Grove, CA 95758
11.2. ATTORNEYS' FEES; PREJUDGMENT INTEREST. If the services of an
attorney are required by any party to secure the performance hereof or
otherwise upon the breach or default of another party to this Agreement, or
if any judicial remedy or arbitration is necessary to enforce or interpret
any provision of this Agreement or the rights and duties of any person in
relation thereto, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and other expenses, in addition to any other relief
to which such party may be entitled. Any award of damages following
judicial remedy or arbitration as a result of the breach of this Agreement
or any of its provisions shall include an award of prejudgment interest
from the date of the breach at the maximum amount of interest allowed by
law.
11.3. CHOICE OF LAW, JURISDICTION, VENUE. This Agreement is drafted to
be effective in the State of California, and shall be construed in
accordance with California law. The exclusive jurisdiction and venue of
any legal action by either party under this Agreement shall be the County
of Sacramento, California.
11.4. AMENDMENT, WAIVER. No amendment or variation of the terms of
this Agreement shall be valid unless made in writing and signed by Employee
and Employer. A waiver of any term or condition of this Agreement shall
not be construed as a general waiver by Employer. Failure of either
Employer or Employee to enforce any provision or provisions of this
Agreement shall not waive any enforcement of any continuing breach of the
same provision or provisions or any breach of any provision or provisions
of this Agreement.
11.5. ASSIGNMENT; SUCCESSION. It is hereby agreed that Employee's
rights and obligations under this Agreement are personal and not
assignable. This Agreement contains the entire agreement and understanding
between the parties to it and shall be binding on and inure to the benefit
of the heirs, personal representatives, successors and assigns of the
parties hereto.
11.6. INDEPENDENT COVENANTS. All provisions herein concerning unfair
competition and confidentiality shall be deemed independent covenants and
shall be enforceable without regard to any breach by Employer unless such
breach by Employer is willful and egregious.
11.7. ENTIRE AGREEMENT. This document constitutes the entire agreement
between the parties, all oral agreements being merged herein, and
supersedes all prior representations. There are no representations,
agreements, arrangements, or understandings, oral or written, between or
among the parties relating to the subject matter of this Agreement that are
not fully expressed herein.
11.8. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the
remainder of the Agreement which can be given effect without the invalid
provision shall continue in full force and effect and shall in no way be
impaired or invalidated.
11.9. CAPTIONS. All captions of sections and paragraphs in this
Agreement are for reference only and shall not be considered in construing
this Agreement.
EMPLOYER: THERMOGENESIS CORP.
By:_______________________________________
(Philip H. Coelho, President and C.E.O.)
EMPLOYEE: DAVID C. ADAMS
By:
<PAGE>
EXHIBIT "A"
EMPLOYEE POSITION DESCRIPTION
7156\5596\DCA\132716.1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-28653, 333-08661, and 33-45532) pertaining to the
THERMOGENESIS CORP. Amended 1994 Stock Option Plan and in the Registration
Statements (Form S-3 Nos. 333-23097, 333-1479, and 33-63676) of
THERMOGENESIS CORP. and in the related Prospectuses of our report dated
August 27, 1997, with respect to the financial statements and schedule of
THERMOGENESIS CORP. included in the Annual Report (Form 10-K) for the year
ended June 30, 1997.
ERNST & YOUNG LLP
Sacramento, California
September 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,510,861
<SECURITIES> 0
<RECEIVABLES> 2,165,903
<ALLOWANCES> 97,913
<INVENTORY> 2,579,368
<CURRENT-ASSETS> 8,406,038
<PP&E> 2,029,016
<DEPRECIATION> 670,269
<TOTAL-ASSETS> 10,187,726
<CURRENT-LIABILITIES> 1,998,801
<BONDS> 0
0
0
<COMMON> 15,866
<OTHER-SE> 8,008,776
<TOTAL-LIABILITY-AND-EQUITY> 10,187,726
<SALES> 6,614,044
<TOTAL-REVENUES> 6,728,416
<CGS> 4,326,964
<TOTAL-COSTS> 4,326,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,070
<INCOME-PRETAX> (4,805,822)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,805,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,805,822)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
