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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
COMMISSION FILE NUMBER 0-16752
CYTOCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 66-0439440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Columbia, Suite 100, Aliso Viejo, California 92656
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 448-7700
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.004 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form-K. [ X ]
The number of shares of the Common Stock of the registrant outstanding as
of March 9, 1995 was 5,177,133. The number of shares of Common Stock held by
nonaffiliates on such date was 4,336,651 with an approximate aggregate market
value of $22,767,418.
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TABLE OF CONTENTS
<TABLE>
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Page
Item Number and Caption Number
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<S> <C> <C>
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 8
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 14
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 15
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 20
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Cytocare, Inc. (the "Company" or "Cytocare"), a Delaware corporation
formed in October 1984, develops, manufactures, markets and services medical
devices and therapeutic procedures primarily to treat urologic diseases.
The Company exercises active and substantial management and
operational controls over the two business units reporting to corporate
Cytocare - Medstone International, Inc. and Endocare, Inc.
MEDSTONE - Cytocare's wholly-owned manufacturing subsidiary,
Medstone International, Inc., performs engineering, manufacturing, marketing
and field service for its proprietary shockwave lithotripters as well as
supplies lithotripter services directly to providers on a fee-for-service
basis. Shockwave lithotripsy is the preferred therapy for kidney stone
disease.
ENDOCARE - Cytocare's wholly-owned subsidiary, Endocare, Inc.,
develops, manufactures and markets proprietary laser catheters. It also
developed a proprietary surgical diode laser and cryosurgical tools for
urological and general surgical use.
The Company's current business plan is to separate its operating
business units and revenue streams into independent public companies.
Management hopes that such a restructuring will benefit shareholders by
bringing about operational advantages as well as a more discriminating and
favorable valuation of Cytocare.
MARKETS
Urological diseases, particularly enlarged prostates, prostate
cancer and kidney stones, are major medical afflictions. The average urologist
spends about 35% of his time managing prostate diseases and 15% of his time in
stone management. The following are estimates of the number of procedures or
patients in each of these categories of urological diseases initially
identified by the Company as its target markets. The share of the target
markets that the Company will obtain will be dependent on successful
development of new products, obtaining appropriate regulatory agency approvals,
market acceptance of the products, the Company's ability to market, the
alternative sources of equivalent products and future developments.
ENLARGED PROSTATES - A majority of males will eventually suffer from
enlargement of the prostate, an affliction that progresses with age. It is
estimated that 75% of the men over the age of 50 years have symptoms arising
from an enlarged prostate and up to 30% of the men who live to age 80 require
surgical intervention.
Of the estimated 10 million men in the U.S. displaying symptoms of
enlarged prostate, approximately 5 million avoid seeing a doctor, 4.5 million
visit a doctor and are treated by "watchful waiting", 34,000 are treated with
5-alpha reductase inhibitor drugs, 100,000 are treated with alpha blocker drugs
and 400,000 are treated by surgery. Currently the most common surgical
procedure is transurethral resection of the prostate ("TURP"). This
prostatectomy is the most common surgical procedure performed by urologists.
Annually an estimated 400,000 men in the U.S. or 1.2 million men worldwide
undergo this procedure to reduce the size of the prostate.
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PROSTATE CANCER - Prostate cancer is the most common cancer in men,
being diagnosed in 14% - 16% of males over 50 years of age. Approximately 20%
of these become lethal through widespread metastasis resulting in prostate
cancer being the third most frequent cause of cancer death in males. In the
United States, more than 130,000 men are diagnosed with, and more than 33,000
die from, prostate cancer annually. This translates to approximately 1 in
every 11 men developing this disease in their lifetime.
KIDNEY STONES - In the United States, it is estimated that over
600,000 persons per year suffer from kidney stones and an estimated 300,000
patients per year are hospitalized with a primary kidney stone. Historically,
approximately 170,000 of these patients have been treated with shockwave
lithotripsy each year.
PRODUCTS
Cytocare's current and future pipeline of products includes devices,
and therapeutics for the treatment of prostate and kidney diseases. The
Company has regulatory approval to commercialize five devices including the
Medstone STS with a pre-market approval ("PMA") and the ProLase II, the ProLase
I, the CryoCare Surgical System and the DioLase 60 with a 510(k) notifications.
See "Government Regulation."
STATUS OF PRODUCTS
<TABLE>
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PRODUCT APPLICATION REGULATORY STATUS MARKET STATUS
<S> <C> <C> <C>
Medstone STS Renal Stone PMA received Marketed worldwide
ProLase I Urologic Obstruction 510(k) received Marketed worldwide
ProLase II Urologic Obstruction 510(k) received Marketed worldwide
DioLase 60 General Surgery and Urology Use 510(k) received Target release date 1995
CryoCare Surgical Cryosurgical Tissue and Tumor 510(k) received Target release date 1995
System Production or early 1996
</TABLE>
MEDSTONE STS - The Medstone STS ("System") is presently being used
to treat kidney stones, without invasive surgery, in the U.S. and foreign
locations. The Company received a PMA from the United States Food and Drug
Administration ("FDA") in 1988 authorizing commercial use of the device for
treating patients with kidney stones.
A series of shockwaves are created outside the patient's body and
focused to travel through water-based fluids until they enter the body and
disintegrate the stone. Each successive shockwave serves to further break
apart the stone into smaller particles until, in the case of kidney stones,
they are small enough to be passed in the patient's urine. A treatment
typically requires 1200-1600 shockwaves in a procedure which lasts 45 to 60
minutes.
In addition to the shockwave generator, the Medstone STS's
components include a customized X-ray table on which the patient lies
horizontally with his or her kidney positioned above the shockwave generator, a
computer, an X-ray system, an ultrasound system, and an electrocardiogram
("ECG") monitor. The computer generates information regarding the treatment and
monitors the patient's condition. The X-ray/ultrasound system produces images
that are converted and analyzed by the computer and then used by the physician
for proper positioning and to determine when the kidney stone has been
sufficiently disintegrated to terminate the treatment. The ECG monitor
supplies the data that allows the computer to synchronize the shockwaves with
phases of the patient's heartbeat.
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The Company has developed and copyrighted all the software that
controls the Medstone STS. This software, an integral part of the system and
therefore subject to review by regulatory agencies, is licensed for use on a
per procedure basis.
The Company also has developed and manufactures its own disposable
components for use with the Medstone STS. Electrodes manufactured by the
Company are used to produce electrical sparks in the shockwave generator part
of the device. A disposable coupling bag containing fluid for transmission of
the shockwave is placed between the shockwave generator and the patient's back
or stomach during the treatment. One complete set of the supplies is normally
used in each patient procedure.
PROLASE I - The Endocare Prolase I side-firing disposable laser
catheter is sold under a 510(k) exemption from the FDA authorizing commercial
use of the device in conjunction with a Nd:YAG (neodymium) laser or equivalent
to deliver higher energy for quicker vaporization of tissue and allows
physician to apply high wattage therapy in direct contact to tissue for
extended periods of time. See "Government Regulation." The Company's general
sales of the device began in July 1994.
PROLASE II - The Endocare Prolase II side-firing disposable laser
catheter is sold under a 510(k) exemption from the FDA authorizing commercial
use of the device in conjunction with a Nd:YAG (neodymium) laser or equivalent
to deliver energy for incision, excision, ablation and coagulation of
urological tissues. See "Government Regulation." The Company's general sales
of the device began in January 1993.
CRYOCARE SURGICAL SYSTEM - The cryosurgical delivery system is
designed for the treatment of prostate tumors and other organ confined tumors.
The delivery system is a reusable cryoprobe that is introduced transperennially
using ultrasound guidance. The cryo system has received a 510(k) exemption and
may be released for general sale in 1995 or early 1996.
DIOLASE 60 - Cytocare's fiber-coupled diode laser system is a
compact, air cooled unit designed for surgical laser applications. The diode
laser system has received a 510(k) exemption and will be marketed in 1995.
DISEASES AND TREATMENTS
ENLARGED PROSTATE AND TREATMENT - Enlargement of the prostate,
commonly called benign prostatic hyperplasia ("BPH"), is the noncancerous
enlargement of the innermost part of the prostate and is more accurately a true
hyperplastic process in that there is an actual increase in the number of
cells. This enlargement of the prostate gland appears to occur with aging in
combination with certain pathophysiologic influences. Such enlargement
frequently results in a gradual squeezing of the urethra where it runs through
the prostate, and becomes symptomatic when it obstructs the outflow of urine
from the bladder. Side firing laser catheters, such as ProLase I and ProLase
II, are used in a procedure called visual laser ablation prostatectomy
("VLAP"). This technique is just one of many therapies urologists use to treat
BPH.
KIDNEY STONES AND TREATMENT - A kidney stone develops when the salt
and mineral substances in urine form crystals that stick together and grow in
size. In most cases, these crystals are removed from the body by the flow of
urine, but they sometimes stick to the lining of the kidney or settle in places
where the urine flow fails to carry them away. These crystals may gather and
grow into a stone ranging in size from that of a grain of sand to a golf ball.
Most stones start to form in the kidney. Some may travel to other parts of the
urinary system, such as the ureter or bladder, and grow there.
Stones vary in size, composition, and the ease with which they can
be dissolved. In some cases, certain medications may be used to lower the
amount of acidity or alkalinity in the urine, thereby dissolving the stones.
At present, stones that contain calcium cannot be dissolved. Most stones can
be treated with conservative methods.
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This includes increased fluid intake, changes in diet, and
medications. About 90 percent of stones that leave the kidney will pass through
the ureter within three to six weeks. Stones that do not pass through the
ureter may be removed with the aid of a grasping device (basket). The device
is passed through a telescopic instrument (cystoscope) that the doctor inserts
into the bladder or ureter (urethroscope). In some cases, the stones are
removed whole, but sometimes they must be broken into smaller pieces with
ultrasound before they can be removed with the basket.
The Medstone STS is a minimally invasive nonsurgical treatment for
stones in the kidney and ureter called extracorporeal shockwave lithotripsy.
In this method, X-rays are used to target the stone, and then, high energy
shockwaves are used to break down the stones into gravel which passes out with
urine within a few weeks.
Although most stones can be treated with nonsurgical methods,
certain stones still require conventional surgery, particularly when there is
internal scarring and obstruction. With conventional surgery, an incision is
made over the stone site. The hospital stay and recovery period are several
weeks longer than when more conservative techniques are used. Therefore,
stones are treated with nonsurgical methods when possible.
PRODUCTION
Cytocare manufactures, under FDA mandated Good Manufacturing
Practice ("GMP") requirements, its devices at its plant in Aliso Viejo,
California. The Company moved into a new facility in March 1994. Subsequent
to that move the Company was audited by the FDA and has received notification
from the FDA enabling it to manufacture and market devices in the new facility.
The Company has existing capacity to produce sufficient quantities of its
shockwave lithotripters and side firing laser catheters to support commercial
needs for the foreseeable future.
PRODUCT DEVELOPMENT
The Company has focused its research and development on the products
believed to have significant commercial potential in the treatment of
urological diseases, as well as developments intended to improve performance
and convenience of the lithotripter system and side- firing laser catheter. In
addition, the engineering staff is developing a diode laser and cryosurgical
products. The Company devotes significant resources to research and
development, and will continue to invest significantly in proprietary products.
During the years ended December 31, 1992, 1993, and 1994, the Company's
expenditures for research and development totalled $2,192,756, $2,333,421, and
$1,076,033 respectively.
PRODUCT LIABILITY AND INSURANCE
The Company currently has in force commercial liability insurance,
with coverage limits of $1 million per incident, and $2 million on an annual
aggregate basis. It also has general umbrella liability insurance with
coverage limits of $4 million per incident for a total aggregate amount of
$5,000,000 per incident. The Company's insurance policies provide coverage on
a claims-made basis and are subject to annual renewal.
GOVERNMENT REGULATION
Governmental regulations in the United States and other countries
are a significant factor affecting the research and development, manufacture
and marketing of the Company's products. In the United States, the FDA has
broad authority under the Federal Food, Drug and Cosmetic Act and the Public
Health Service Act to regulate the distribution, manufacture and sale of drugs,
including biologics, and medical devices. Foreign sales of drugs and medical
devices are subject to foreign governmental regulation and restrictions which
vary from country to country.
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DEVICES - Medical devices intended for human use in the United
States are classified into three categories, depending upon the degree of
regulatory control to which they will be subject. Such devices are classified
by regulation into either class I (general controls), class II (performance
standards) or class III (pre-market approval) depending upon the level of
regulatory control required to provide reasonable assurance of the safety and
effectiveness of the device. A class III product, such as the Medstone STS,
and class I and II devices for which a PMA is necessary generally require
initial Investigational Device Exemption ("IDE") approval by the FDA. An IDE
permits limited clinical evaluation of the product under controlled conditions.
Extensive reporting and monitoring of patient treatments made pursuant to the
IDE are required. After the PMA is obtained, the product may be marketed to an
unrestricted number of users in the United States, but general medical device
regulations regarding FDA inspection of facilities, Good Manufacturing
Practices, labeling, maintenance of records and filings with the FDA continue
to be applicable.
A subset of medical devices categorized as class I or II and
classified as "old" devices, that is, commercially distributed before March 28,
1976 or substantially equivalent to a device that was in commercial
distribution before that date, may be marketed after the acceptance of the
premarket notification under a 510(k) exemption. The 510(k) section of the
Federal Food, Drug and Cosmetic Act allows an exemption from the requirement of
premarket notification.
Cytocare has obtained from the California Department of Health
Services a license to manufacture medical devices and is subject to periodic
inspections and other regulation by that agency.
Certificate of Need ("CON") laws and regulations are in effect in
many states. Under such laws, a CON issued by a governmental agency is
generally required before the introduction of certain new health care services
or before a hospital or other provider can acquire certain new medical
equipment or facilities having values exceeding specified amounts. Failure to
obtain a required CON may prohibit the purchase of desired equipment or cause
the denial of Medicare or other governmental reimbursements or payments for
patient treatments. In recent years several states have repealed their CON
laws and many other states have made or are considering possible amendments to
the laws. Most of the revisions involve raising the thresholds for review,
eliminating certain types of facilities or services from review or streamlining
the review process.
PATENTS, COPYRIGHTS, TRADE SECRETS AND LICENSES
The Company's policy is to secure and protect intellectual property
rights relating to its technology. While Cytocare believes that the protection
of patents or licenses is important to its business, it also relies on trade
secrets, know-how and continuing technological innovation to maintain its
competitive position. The Company has received or filed for certain patents or
copyrights for some of the products described under "Products."
The Company seeks to preserve the confidentiality of its technology
by entering into confidentiality agreements with its employees, consultants,
customers, and key vendors and by other means. No assurance can be given,
however, that these measures will prevent the unauthorized disclosure or use of
such technology.
COMPETITION
The Company's products currently marketed and under development will
be competing with many existing products and therapies for market share. The
Company competes with fully integrated device companies, many of which have
substantially more experience, financial and other resources and superior
expertise in research and development, manufacturing, testing, obtaining
regulatory approvals, marketing and distribution.
Products under development by the Company are expected to address
the urological market. The Company's competition will be determined in part by
the particular urological disease to which the Company's
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potential products relate. An important factor in competition may be
the timing of market introduction of its or competitive products. Accordingly,
the relative speed with which Cytocare can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market are expected to be important competitive factors. The
Company expects that competition among products approved for sale will be based
on, among other things, product efficacy, safety, reliability, availability,
price, patent position and sales, marketing and distribution capabilities. The
development by others of new treatment methods could render the Company's
products under development non-competitive or obsolete.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between technological conception and
commercial sales.
SHOCKWAVE LITHOTRIPTERS - The Company's two principal competitors in
shockwave lithotripsy are Dornier, which is part of the Daimler Benz group of
German companies, and Siemens GmbH, a German electronic company. In addition,
a number of other companies, both in the U.S. and foreign countries, have PMAs
to sell their lithotripters for the treatment of kidney stones in the U.S. or
are conducting clinical studies on the use of lithotripters for the treatment
of kidney stones.
The Company believes that, in addition to the obtaining of FDA and
other governmental approvals, important competitive factors in the markets for
shockwave lithotripters include the reliability, effectiveness in treating
patients and pricing of particular systems. The Company believes the Medstone
System compares favorably with other lithotripters presently being offered by
competitors with respect to the precision of its imaging systems, its ease of
patient handling, its simplicity of operation design, its safety features and
its success rate in treating patients.
DISPOSABLE CATHETERS - No less than eight companies are currently
marketing or seeking approval to market laser based delivery systems for
surgical intervention to release bladder obstructive disease. The principal
competitors are C.R. Bard/Trimedyne, Coherent, Intra- Sonix, Laser
Sonics/Circon Acmi, Laserscope and Surgical Laser Technologies. Key
differences among the competing products include visualization (direct or
ultrasound), control (balloon, surface contact, hand-guided standoff), power
and clinical results (safety and efficacy).
The Company believes that its side-firing laser catheters with
direct visualization, hand guided placement, up to 100 watts of power and a
510(k) exemption provide a good combination of features available in the
market.
SALES AND MARKETING
The Company's current products and pipeline of products are targeted
at the urology market. Cytocare has a small, direct sales force, as well as
independent sales representatives within the United States. Outside the United
States, the Company uses a network of distributors.
The Company generates revenue from the sale of equipment, and also
from the sale of software licenses, disposable supplies, procedure fees and
service contracts to hospitals, physicians, and other health care providers.
Marketing for the Company's products is accomplished through
advertisement in medical journals, direct mail, direct physician contact,
company participation in various associations, product exhibition and
telephonic marketing.
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BACKLOG - SHOCKWAVE LITHOTRIPSY
The Company's lithotripsy equipment sale backlog was $440,000 as of
March 20, 1995 and $1,375,000 as of March 7, 1994. Due to the high per unit
price of the Medstone Systems, equipment backlog can vary significantly from
period to period based upon the number of systems on order. Backlog consists
only of orders evidenced by signed contracts for equipment scheduled for
delivery and installation within 12 months and does not include revenues for
maintenance and per procedure charges, or ProLase II orders.
With the maturity of Medstone's lithotripsy business, recurring
revenues from fee for service and procedure fees and maintenance services have
become a major source of Medstone's revenue stream. Maintenance services are
generally provided under annual service contracts, and procedure and fee for
service fees are earned based upon usage of the System.
HUMAN RESOURCES
As of March 3, 1995, Cytocare had 60 employees. Of the 60
employees, 6 are engaged directly in research and development activities, 12
are engaged in manufacturing, 14 are engaged in field service, 14 are engaged
in sales and marketing and 14 are employed in general and administrative
positions.
Although Cytocare conducts most of its research and development
using its own employees, the Company has funded, and plans to continue to fund,
research using consultants. Consultants provide services under written
agreements and are paid based on the amount of time spent on Company matters.
Under their consulting agreements, Cytocare's consultants are required to
disclose and assign to the Company any ideas, discoveries and inventions
developed by them in the course of providing consulting services.
ITEM 2. PROPERTIES
In March 1994, the Company took occupancy of new office,
manufacturing, engineering, and warehouse space, and research and development
laboratories, located in Aliso Viejo, California, under an operating lease with
an initial term of two years. The monthly lease rate is $12,500. Upon
expiration of the initial two-year term of the above lease in March 1996, the
Company has the option to extend the lease in one year segments through March
1999 for modest price increases.
ITEM 3. LEGAL PROCEEDINGS
The Company does not carry director and officer liability insurance,
but does have indemnification agreements with its officers and directors and
reciprocal indemnifications with the underwriter for its initial public
offering.
In October 1989 and January 1990, two lawsuits were filed by two
shareholders of the Company in the United States District Court for the Central
District of California. These lawsuits were filed against the Company, certain
current and former officers and the underwriter for the initial public offering
in June 1988. The complaints, which seek unspecified amounts in damages,
allege principally that adverse material information was not disclosed at the
time of the initial public offering and in subsequent periods. Both of the
suits were consolidated by the District Court in February, 1990 under the case
name Kaplan v. Freeman Rose, et al. ("Kaplan Action"). On May 4, 1992, the
district court granted summary judgment in favor of the Company on all claims.
Plaintiffs filed an appeal of the summary judgment to the Ninth Circuit Court
of Appeals.
There is a related shareholder class action alleging claims
virtually identical to those pled in the Kaplan Action discussed above. In
this action entitled Kramer v. Freeman Rose, et al. ("Kramer Action"), however,
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plaintiff alleged an additional claim under Section 12(2) of the 1933
Securities Act, 15 U.S.C.S. Section 771(2). The Company sought and obtained a
dismissal of the Kramer Action on October 7, 1991, on the ground that the
claims were barred by the applicable statute of limitations. Plaintiffs filed
a First Amendment Complaint on March 17, 1992. On July 9, 1992, the district
court granted the Company's motion to dismiss the First Amended Complaint in
the Kramer Action. Plaintiffs filed a notice of appeal to the Ninth Circuit
Court of Appeals. The Kramer Action and the Kaplan Action have been
consolidated for purposes of appeal only. The Company has opposed the appeal
of this litigation of the Kramer action as well.
In October 1994, the Company received the opinion of the Ninth
Circuit Court of Appeals affirming in part and reversing in part the United
States District Court's decision granting summary judgment in favor of the
Company and several officers. The Company views this lawsuit as an abusive
securities suit diverting resources that could otherwise be used for technical
innovation, capital investment and job creation. The Company intends to appeal
the Ninth Circuit Court of Appeals opinion to the U.S. Supreme Court.
In connection with their manufacture and marketing of the Medstone
STS and the ProLase II, the Company is subject to legal actions and claims for
personal injuries or property damage related to patients who use its products.
The Company has obtained a liability insurance policy providing coverage for
product liability and other claims. Management does not believe that the
resolution of any such current proceedings will have a material financial
impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on June 22,
1994. At the meeting Errol G. Payne, Frank R. Pope and Paul D. Quadros were
elected directors.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to January 24, 1991, the Company's common stock was traded on
the NASDAQ Stock Market under the symbol MSHK. On January 24, 1991, the
Company changed its name to Cytocare, Inc. and began trading on the Company's
common stock on the NASDAQ Stock Market under the symbol CYTI. The following
table sets forth the high and low sales prices of the Company's common stock
for the two years ended December 31, 1993 and December 31, 1994 as reported in
the NASDAQ National Market System for the quarter indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1993
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<S> <C> <C>
First quarter $ 8-1/4 $ 5
Second quarter 7-3/8 5-1/2
Third quarter 7 3-7/8
Fourth quarter 7 3-1/8
YEAR ENDED DECEMBER 31, 1994
----------------------------
First quarter $ 5-9/16 $ 4
Second quarter 4-13/16 3-1/2
Third quarter 5-9/32 3-3/8
Fourth quarter 6-1/8 5
</TABLE>
At March 9, 1995, there were 445 stockholders of record of the
Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock.
The future payment by the Company of such dividends, if any, rests within the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements and financial condition, applicable legal
restrictions and other factors deemed relevant by the Board.
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ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1994 1993 1992 1991 1990
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<S> <C> <C> <C> <C> <C>
Revenues:
Net equipment sales $ 3,125 $ 2,317 $ 5,407 $ 2,685 $ 5,456
Procedure and maintenance fees
and laser catheters 12,538 10,875 7,530 6,423 5,501
Interest and dividends 642 481 631 667 731
---------- --------- -------- --------- ---------
Total revenues 16,305 13,673 13,568 9,775 11,688
Costs and expenses:
Cost of sales 6,004 5,506 5,994 4,702 7,083
Research and development 1,076 2,334 2,193 962 1,483
Selling 2,551 2,674 1,619 1,518 4,987
General and administrative 2,105 2,226 1,583 1,524 2,713
Other expense 35 338 868 106 1,019
---------- --------- -------- --------- ---------
Total costs and expenses 11,771 13,078 12,257 8,812 17,285
---------- --------- -------- --------- ---------
Income (loss) from operations before income taxes 4,534 595 1,311 963 (5,597)
Provision (benefit) for income taxes 150 65 142 101 (494)
---------- --------- -------- --------- ---------
Net income (loss) $ 4,384 $ 530 $ 1,169 $ 862 $ (5,103)
========== ========= ======== ========= =========
Earnings (loss) per share:
Primary:
Net income (loss) $ .82 $ .10 $ .22 $ .18 $ (1.09)
========== ========= ======== ========= =========
Fully diluted:
Net income $ .81 $ .10 $ .21 $ .17
========== ========= ======== =========
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1994 1993 1992 1991 1990
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working capital $ 16,658 $ 12,406 $ 11,434 $ 10,373 $ 9,260
Total assets 22,260 17,709 17,817 17,217 18,622
Total liabilities 2,809 2,935 3,707 4,365 6,685
Stockholders' equity 19,451 14,774 14,110 12,852 11,936
</TABLE>
-10-
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Cytocare has transitioned from a company solely in the medical
capital equipment business to one offering devices and therapeutics for
urological diseases. While Endocare is focused on prostate diseases, Medstone
continues to manufacture, market and maintain lithotripters, and expand its
Fee-for-Service Program to supply lithotripsy equipment to providers on per
procedure basis. To date, the Company's consolidated revenues have come
primarily from Medstone's lithotripsy business.
During 1994, the Company received 510(k) notification for the
ProLase I, the CryoCare Surgical System, and the Diolase 60 allowing the
Company to manufacture and sell these products in the United States. ProLase I
has already started contributing to revenue while both the CryoCare Surgical
System and Diolase 60 are expected to go to market in 1995.
In March of 1994, the Company moved into a smaller, more efficient
facility at a substantial cost saving. This move did require a PMA supplement
to be filed with the FDA and an audit from the FDA. The Company has received
notification from the FDA that the PMA Supplement was approved for
manufacturing at the new facility. The Company expects to receive the benefit
of a full year of cost savings in 1995 as a result of this move.
The Company as a manufacturer of a capital medical devices has been
vertically integrating by offering its medical devices directly to the provider
on a per procedure basis. Medstone, the Company's wholly-owned subsidiary,
currently offers mobile lithotripsy procedures using five mobile systems in the
Western United States on a per procedure basis. With the ability to offer
quality equipment at reasonable prices, Medstone intends to continue the growth
of this manufacturer direct business.
By most financial indicators the Company is in a strong position.
The Company has just completed 1994 reporting revenue increased, expenses
decreased and net income increased compared to 1993. With a positive cash
flow, stable inventories, a conservative asset acquisition strategy, and no
long-term debt, the balance sheet ratios have improved.
The Company began the year with approximately $11.6 million in cash
and marketable securities, no debt, inventories of $1.6 million, and total
assets of $17.7 million. The Company ended the year with approximately $14.4
million in cash and marketable securities, no debt, inventories of $1.6
million, total assets of $22.3 million as well as four consecutive profitable
years.
Through its continuing research and development, management of the
Company is putting in place the scientific and engineering base it believes is
necessary to carry it through the next phases of its growth plans.
ASSETS
Cash and equivalents and short-term investments increased by
$2,848,000 at December 31, 1994 from December 31, 1993 due to the Company's
increased sales and efforts to streamline operations and its move into a new,
lower-cost facility. All of the Company's invested cash balance is invested in
U.S. Treasury Bills at rates of 3.45% to 6.7% with staggered maturities through
February of 1996.
Accounts receivable increased by $208,000 from December 31, 1993 to
December 31, 1994 due to the increase in the revenue from the mobile
lithotripsy operations and the resulting higher number of customers with
receivable balances.
-11-
<PAGE> 14
Deferred tax assets increased by $1,005,000 in the current year due
to the Company's acknowledgement of the probability of continued profitability
and the utilization of these assets in future periods. The recognition of this
deferred tax asset resulted in an extremely low tax provision for 1994.
Prepaid expenses decreased by $147,000 in the current year due to
the utilization of an equipment deposit with a mobile van manufacturer as the
Company completed the purchase of two additional vans in 1994.
Fixed assets, cost, increased by $1,300,000 from December 31, 1993
to December 31, 1994 primarily as a result of additions of mobile vans used in
the mobile lithotripsy operations.
Other assets decreased by $110,000 in the current year due to the
refund of several deposits held by state taxation agencies and a building
landlord of the facility vacated in March 1994.
LIABILITIES
Accounts payable at December 31, 1994 decreased by $136,000 compared
to December 31, 1993 due to lower spending levels for operating expenses.
Accrued income taxes decreased $227,000 in the current year due to
the recognition of the current year tax provision less prepayments.
Accrued payroll expenses at December 31, 1994 increased by $102,000
compared to December 31, 1993 due to an increased bonus pool established as a
result of profits for the current year.
Deferred revenue increased $140,000 in the current year due to the
increased number of sites under maintenance contract and one two year
maintenance agreement.
Customer deposits at December 31, 1994 decreased by $141,000
compared to December 31, 1993 due to the recognition of revenue in 1994.
Deferred tax liabilities increased by $225,000 in the current year
due to the Company's recording of its deferred tax assets and liabilities.
This amount represents the Company's book/tax depreciation timing differences.
SHAREHOLDERS' EQUITY
Additional paid-in-capital increased $139,000 in the current year
due to the exercise of common stock options held by employees.
RESULTS OF OPERATIONS
Year Ended December 31, 1994 Compared to Year ended December 31, 1993
Total revenue increased to $16.3 million for the year ended December
31, 1994, a 19% increase from the 1993 revenue of $13.7 million. The increased
net equipment sales resulted from an increase in both lithotripsy systems
shipped, and an increase in the average lithotripter unit selling price. This
equipment revenue gain was slightly offset by a decline in 1994 of upgrades in
the Company's installed base of lithotripters from 1993 levels.
Revenue from procedure and maintenance fees, or recurring revenue,
increased in 1994 by $1.7 million, or 15%, from 1993 levels due to the
continued expansion of the Company's mobile lithotripsy services and increased
revenue from the procedure fees on third-party owned equipment. The volume on
mobile lithotripsy services in the Company's vans increased by 81% in 1994
compared to the number of patients treated in 1993. Procedure revenue
increased by 18% in 1994 as the utilization for the Company's equipment owned
by third parties continues to increase. The number of procedures performed on
third party-owned lithotripters in the United States increased
-12-
<PAGE> 15
by 27% from 1993 to 1994. A 16% decrease in 1994 revenues from the laser
catheters was due to lower unit prices.
Interest income in 1994 increased by 33% from 1993 levels due to
increases in both average invested cash balances due to higher cash flow from
operations, and higher yields due to the interest rate increases as a result of
market conditions.
Cost of equipment sales in 1994 decreased by 31% from 1993 due to
the shipment of lower cost content foreign lithotripsy units. Gross margins on
equipment and equipment upgrades increased due to the combination of lower cost
units and higher average unit selling prices.
Cost of recurring revenues increased in 1994 by $1,015,000 from 1993
due to the Company's expansion of its mobile lithotripsy services and the
requisite equipment investment and expenses related to their operations.
Maintenance expenses also increased by 33% as more sites were under maintenance
contract in 1994.
Research and development costs decreased in 1994 compared to the
same period in 1993 due to the scaling back of the biochemical research.
Selling expenses decreased in 1994 compared to the same period in
the prior year, due to the decreased costs in the sales and marketing effort
for the laser catheter products as the product's introductory stage in the
marketplace has been completed.
General and administrative expenses decreased in 1994 compared to
the same period in 1993 due to the reduced bad debt expenses for the funding of
Cardiac Science advances in the current year.
Other expenses decreased primarily due to the expenses in 1993 for
the write-down to market value of the Company's holdings in a mutual fund and
expenses relating to the class action lawsuit against the Company.
As a result of recognizing deferred tax assets and the utilization
of net operating loss carryforwards, the provision for taxes was minimal in
1994. The Company expects the tax provision in 1995 to approximate the
statutory rates.
Year Ended December 31, 1993 Compared to Year ended December 31, 1992
The Company recognized revenue of $13.7 million for 1993 compared to
$13.6 million for 1992, a 1% increase. The increase in revenue was the result
of several changes in the Company's revenue streams. Shipments of
lithotripters decreased to four systems in 1993 from eight systems in 1992.
Shipment of system upgrades to the Company's installed base of lithotripters
increased by 21% from 1992 levels.
The Company recognized interest and dividend income of $481,000
during 1993 compared to $631,000 in 1992, a 24% decline. Although average
investable balances remained relatively constant during the periods, the
revenues decreased as the economy continued to push interest rate yields lower
throughout 1993.
Equipment cost of sales decreased by 39% in 1993 compared to 1992,
reflecting the lower equipment sales volume. Gross margins on equipment sales
and equipment upgrades decreased to 28% in 1993 from 50% in 1992 as a direct
result of lower average unit selling prices.
The cost of sales related to recurring revenues decreased to 35% in
1993 from 43% in 1992 due to increased volume of recurring revenues from the
Prolase product and increased Medstone patient volume.
Research and development expenses increased by $141,000, or 6%, in
1993 compared to the same period in 1992 due to additional headcount as the
Company continued its efforts to expand its product line offerings for the
treatment of urological diseases.
-13-
<PAGE> 16
Selling expenses increased by $1,055,000, or 65%, as the Company
introduced its laser catheter product line with the associated expenses of
advertising, headcount additions, and sales commissions necessary to
successfully launch its effort to attract new customers and retain current
users with new applications.
General and administrative expenses increased by $644,000, or 41%,
as the Company established its separate Divisions and the respective management
teams to increase focus on these increasing efforts. Specifically, increases
in expenses came in the areas of headcount additions, travel, and legal
expenses.
Other expenses decreased by approximately $530,000 primarily due to
the expenses in 1992 for both the class action lawsuit and the settlement of
the litigation with a former distributor.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had cash and short-term
investments of approximately $14.4 million. These funds were generated from
operating activities and from the Company's initial public offering in June
1988, in which 1,150,000 shares of common stock were issued for net proceeds of
approximately $12.9 million. Cash generated from the offering and from
operations financed substantial increases in levels of inventory, capital
assets and was used to retire debt.
The Company's long-term capital expenditure requirements will depend
upon numerous factors, including the progress of the Company's research and
development programs, the time required to obtain regulatory approvals, the
resources that the Company devotes to the development of self-funded products,
proprietary manufacturing methods and advanced technologies, the length and
outcome of its existing securities litigation, the ability of the Company to
obtain additional licensing arrangements and to manufacture products under
those arrangements, and the demand for its products if and when approved and
possible acquisitions of products, technologies and companies.
The Company believes that its existing working capital and funds
anticipated to be generated from operations will be sufficient to meet the cash
needs for continuation of its present operations during 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14. "Exhibits, Financial Statement Schedules, and Reports
on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-14-
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following are the directors of the Company:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Errol G. Payne 57 Chairman of the Board and
Chief Executive Officer of the Company
Frank R. Pope 45 General Partner
Technology Funding
Paul D. Quadros 47 Senior Vice President and
Chief Financial Officer
Thermatrix, Inc.
</TABLE>
Mr. Payne has served as a director of the Company since November 1984 and
as its Chairman of the Board and Chief Executive Officer since January 1991.
He served as a consultant to the Company from July 1988 through July 1989. He
was also the Company's Chairman of the Board and Chief Executive Officer from
October 1985 to July 1988.
Mr. Pope is a general partner and officer of the Technology Funding
venture capital management firms. Before joining Technology Funding in March
1981, he was a Tax Manager with the accounting firm of Coopers and Lybrand.
Mr. Pope is a C.P.A. and a member of the California Bar.
Mr. Quadros has served as a Director of the Company since June 1988. He
has been the Senior Vice President and Chief Financial Officer of Thermatrix,
Inc. from June 1994 to the present. From January 1985 until May 1994 he was a
general partner and officer of the Technology Funding venture capital
management firms. Prior to joining Technology Funding in January 1985, he was
Executive Vice President of AMREAL Securities Corporation, a real estate
affiliate of Home Federal Savings and Loan. Mr. Quadros is a director of
Cardiac Science, Inc., a publicly-owned corporation.
EXECUTIVE OFFICERS
The names, ages and positions of all the executive officers of the Company
as of March 1995 are listed below, followed by a brief account of their
business experience during the past five years. Officers are normally
appointed annually by the Board of Directors at a meeting of the directors
immediately following the Annual Meeting of Shareholders. There are no family
relationships among these officers nor any arrangements or understandings
between any officer and any other person pursuant to which an officer was
selected. None of these officers has been involved in any court or
administrative proceeding within the past five years adversely reflecting on
his or her ability or integrity.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Errol G. Payne 57 Chief Executive Officer and Chairman of the Board
David V. Radlinski 50 Chief Financial Officer, Corporate Secretary
and President, Medstone International, Inc.
Thomas W. Gardner 41 President, Endocare, Inc.
</TABLE>
-15-
<PAGE> 18
Mr. Payne has served as a director of the Company since November
1984 and as its Chairman of the Board and Chief Executive Officer since January
1991. He served as a consultant to the Company from July 1988 through July
1989. He was also the Company's Chairman of the Board and Chief Executive
Officer from October 1985 to July 1988.
Mr. Radlinski is currently the President of Medstone International,
Inc. and Chief Financial Officer and Secretary of the Company. He had been the
Company's Executive Vice President of Finance, Chief Financial Officer and
Secretary from July 1987 until January 1991. From 1984 to 1987, he was Vice
President of Finance and Chief Financial Officer of Printronix, Inc., a
publicly-owned company which manufactures computer printers.
Mr. Gardner served as the President of the Company's Medical Biology
Division from March 1, 1993 to January 1995, at which time he was appointed
President of Endocare, Inc., a position he currently holds. He had been a Vice
President of Domestic Sales for the Company from November 1990 until February
1993. Prior to that he had served as the Vice President of Sales since
November 1984.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company is not aware of any director, officer, or 10%
shareholder who during 1994 failed to file on a timely basis any report
regarding the Company's securities required by Section 16(a) of the Securities
Exchange Act of 1934.
-16-
<PAGE> 19
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company during each of the Company's last three fiscal
years to the Company's Chief Executive Officer and to each of the Company's
executive officers who received salary and bonus payments in excess of $100,000
during fiscal 1994.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------ ---------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARDS(S) OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) ($) (#)(2) ($) ($)
----------- -------- -------- ------- ------------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Errol G. Payne 1994 200,000 --- --- --- --- --- ---
Chairman of the Board and 1993 200,000 --- --- --- --- --- ---
Chief Executive Officer 1992 200,000 --- --- --- --- --- ---
1991 150,000 --- --- --- 250,000 --- ---
David V. Radlinski 1994 175,000 --- --- --- --- --- ---
Chief Financial Officer 1993 162,500 12,500 --- --- --- --- ---
and Secretary and 1992 125,000 50,000 --- --- 14,250 --- ---
President of Medstone 1991 125,000 --- --- --- 100,000 --- ---
International, Inc.
Mark G. Cherney (3) 1994 140,000 --- --- --- --- --- ---
President 1993 127,500 12,500 --- --- --- --- ---
Endocare, Inc. 1992 90,000 50,000 --- --- 25,000 --- ---
1991 110,000 --- --- --- 50,000 --- ---
Thomas W. Gardner (3) 1994 95,000 --- --- --- --- --- ---
Vice President 1993 127,500 12,500 1,724 --- --- --- ---
Cytocare, Inc. 1992 90,000 50,000 --- --- 25,000 --- ---
1991 105,875 --- --- --- 50,000 --- ---
</TABLE>
_____________________
(1) In addition to the cash compensation shown in the table, executive
officers of the Company may receive indirect compensation in the form of
perquisites and other personal benefits. For each of the named
executive officers, the amount of this indirect compensation in 1990,
1991 and 1992 did not exceed the lesser of $50,000 or 10% of the
executive officer's total salary and bonus for that year.
(2) Options to acquire shares of Common Stock.
(3) Subsequent to December 31, 1994, Mr. Cherney resigned as President of
Endocare, Inc. Mr. Gardner has been appointed President of Endocare,
Inc.
STOCK OPTION EXTENSIONS DURING 1994
No new stock options were granted to the named executives officers during
the year ended December 31, 1994. The following table provides information
related to the stock options in March 1993 that had their expiration date
extended one year until April 2, 1994 at the original exercise price. In March
1994, the expiration date of such options was again extended until April 2,
1995.
-17-
<PAGE> 20
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL EXTENSIONS OPTION TERM
------------------------------------------------------------------------------- ------------------
% OF TOTAL
SHARES EMPLOYEE
UNDERLYING OPTIONS
OPTIONS GRANTED OR EXERCISE
EXTENDED EXTENDED IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ---------- ----------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Errol G. Payne --- --- --- --- --- ---
David V. Radlinski 11,750 11% 4.43 4/2/95 5,287 10,928
25,000 23% 5.00 4/2/95 12,750 26,250
Thomas W. Gardner 5,000 5% 5.00 4/2/95 2,550 5,250
Mark G. Cherney (1) 15,000 14% 4.43 4/2/95 6,750 13,950
10,000 9% 5.00 4/2/95 5,100 10,500
</TABLE>
(1) Subsequent to December 31, 1994, Mr. Cherney resigned from the Company.
STOCK OPTIONS HELD AT END OF FISCAL YEAR
The following table provides information related to options held by the
named executive officers at December 31, 1994. No options were exercised by
such officers during 1994.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
SHARES ACQUIRED --------------------------- ------------------------------
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
- ---------------------- --------------- ------------------ ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Errol G. Payne --- --- 195,834 54,166 865,195 239,305
David V. Radlinski (2) --- --- 159,417 1,583 537,518 4,559
Thomas W. Gardner (2) --- --- 82,222 2,778 301,299 8,001
Mark G. Cherney (3) --- --- 97,222 2,778 323,049 8,001
</TABLE>
(1) The closing price for the Company's Common Stock as reported by the
National Association of Securities Dealers (NASD) on December 31, 1994 was
$5.88. Value is calculated on the basis of the difference between the
option exercise price and $5.88, multiplied by the number of shares of
Common Stock underlying the option.
(2) Subsequent to December 31, 1994, Mr. Radlinski and Mr. Gardner exercised
100,000 and 50,000 options, respectively.
(3) Subsequent to December 31, 1994, Mr. Cherney resigned from the Company and
exercised all of his exercisable options.
COMPENSATION OF DIRECTORS
The Company currently does not compensate Messrs. Quadros and Pope for
their services, but they are reimbursed for expenses incurred by them in
connection with the Company's business.
Under the Nonemployee Director Stock Option Plan, each new nonemployee
director is automatically granted an option to purchase up to 5,000 shares as
of the effective date of his or her first appointment to the Board or first
-18-
<PAGE> 21
election to the Board by the shareholders, whichever is earlier. Subject to
acceleration of the option exercises in the event of certain events specified
in the plan, each such option becomes exercisable with respect to 1/60 of the
shares issuable for each elapsed full month during the five-year period after
its grant date, but will not be initially exercisable until six months after
the grant date. The exercise price of each option will equal the fair market
value of the underlying Common Stock on the date the option is granted. Each
option will expire six years after its grant, except that the expiration will
be extended until one year after the optionee's death if it occurs less than
one year before the option's expiration date. An option granted under the plan
is not transferrable during the grantee's lifetime and must be exercised within
one year following his or her death, or within 90 days after the grantee ceases
to be a member of the Board for any other reason, and will only be exercisable
to the extent it is exercisable on the date the grantee leaves the Board.
Under this plan, Mr. Pope was granted 5,000 shares in January 1992.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock known to the Company to be beneficially owned as of March 9, 1995
by each person who owns beneficially more than 5 percent of the outstanding
shares of Common Stock, by each of the present directors and nominees for
director, by each of the executive officers named in the Executive Compensation
table above and by all executive officers and directors of the Company as a
group, and the percentage of the total outstanding shares of Common Stock such
shares represented as of March 9, 1995.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OWNERSHIP
------------------------------------ ---------------- -------------
<S> <C> <C>
Paul D. Quadros(2) 20,000 (9)
3590 North 1st Street, Suite 310
San Jose, CA 95134
Frank R. Pope(2) 428,619(3)(4) 8.3%
2000 Alameda de las Pulgas
San Mateo, CA 94402
Technology Funding 422,702(3) 8.2%
2000 Alameda de las Pulgas
San Mateo, CA 94402
Errol G. Payne(2)(5) 457,667(6) 8.5%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Hathaway & Associates, Ltd. 375,000 7.2%
119 Rowayton Avenue
Rowayton, CT 06853
David V. Radlinski(5) 142,124(7) 2.7%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Thomas W. Gardner(5) 108,656(8) 2.1%
100 Columbia, Suite A
Aliso Viejo, CA 92656
All executive officers and directors
as a group (5 persons)(10) 1,050,256 19.12%
</TABLE>
- ---------------
(1) All such shares were held of record with sole voting and investment
power, subject to applicable community property laws, by the named
individual and/or by his wife, except as indicated in the following
footnotes.
(2) Director of the Company.
-19-
<PAGE> 22
(3) Includes 211,351 shares held by Technology Funding Partners I and
211,351 shares held by Technology Funding Partners II. Technology
Funding, Inc. and Technology Funding Ltd. (together, "Technology
Funding"), of which Frank R. Pope is an officer or general partner,
are the managing general partners of Technology Funding Partners I and
Technology Funding Partners II. Technology Funding and Mr. Pope are
entitled to exercise voting and investment power with respect to all
shares owned by Technology Funding Partners I and Technology Funding
Partners II and therefore are deemed to be beneficial owner of such
shares.
(4) Includes 3,917 shares issuable upon exercise of presently outstanding
stock options under the Company's Non-employee Director Stock Option
Plan.
(5) Executive officer of the Company.
(6) Includes 216,667 shares issuable upon exercise of presently
outstanding stock options.
(7) Includes 61,000 shares issuable upon exercise of presently outstanding
stock options.
(8) Includes 35,000 shares issuable upon exercise of presently outstanding
stock options.
(9) Percentage information is omitted because the beneficially owned
shares represent less than 1% of the outstanding shares of the
Company's Common Stock
(10) Includes 316,584 shares issuable upon exercise of presently
outstanding stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1991, the Company was a party to the formation of Cardiac
Science, Inc., for which the Company purchased 5,353,031 shares of common
stock, for a cash payment of $.0016 per share. This purchase represented 77.3%
of the outstanding stock. As of July 8, 1991, the Company distributed a
dividend to its shareholders of record on that date, one share of Cardiac
Science, Inc. stock for each share of Cytocare stock held. The Company
retained 629,768 shares of common stock of Cardiac Science, Inc.
In June 1991, the Company agreed to loan Cardiac Science, Inc. up to
$220,000 to provide working capital pursuant to the terms of a revolving note
agreement. The unpaid principal amount of the loan, together with interest
accrued thereon at the rate of 10% per annum, was due and payable to Cytocare
in December 1991. Cytocare then agreed to extend this note and to loan
additional amounts to Cardiac Science, Inc. As of April 30, 1992, the Company
had loaned Cardiac Science, Inc. approximately $310,000. In April 1992, the
Company agreed to extend its initial loan to Cardiac Science, Inc. and to loan
Cardiac Science, Inc. an additional $200,000. These loans bear interest at a
rate of 8% per annum, payable quarterly, are secured by Cardiac Science's
assets and mature on the earlier of April 1, 1995 or the closing of the initial
public offering of Cardiac Science's common stock. Cardiac Science, Inc. has
the option to pay the interest on the notes in either cash or shares of its
common stock valued at $.15 per share. To pay such interest, Cardiac Science,
Inc. had issued 419,054 shares of its common stock to the Company as of
December 31, 1994. In connection with such loan extension and the agreement to
make additional loans, Cardiac Science issued to Cytocare 3,400,000 warrants to
purchase shares of its common stock at $.15 per share for an aggregate exercise
price of up to $510,000.
In September 1994, Cardiac Science reached an agreement with Cytocare
pursuant to which, and concurrently with the closing of a Private Placement of
Cardiac Science's Common Stock (i) Cytocare exercised the warrants to the
extent of 2,720,000 shares, (ii) Cardiac Science utilized the proceeds
therefrom ($408,000) to pay an equivalent portion of the note, (iii) the due
date for the remaining principal balance on the note ($102,000) was extended to
April 1, 1996, (iv) Cytocare maintains its current lien on the assets of the
Company until the balance of the note is paid, (v) the expiration date for the
remaining warrants to purchase 680,000 shares of Cardiac Science common stock
was changed to March 31, 1996, and (vi) all outstanding unsecured obligations
owing by Cardiac Science to Cytocare (approximately $270,000) were satisfied by
the issuance to Cytocare of 1,800,000 shares of common stock and a ten year
warrant to purchase 1,000,000 shares of common stock at $.001 per share.
As of December 31, 1994, Cardiac Science's outstanding note balance
was $104,335, including accrued interest. A reserve of $104,335 has been
provided for non-payment of the note.
-20-
<PAGE> 23
Separately, the Company advanced amounts to Cardiac Science for
accounting, operational expenses, payroll and health insurance of employees
working part-time on Cardiac Science projects. These amounts were to be repaid
by Cardiac Science on a month-to-month basis. As of December 31, 1994, $8,948
had been advanced to Cardiac Science. A reserve of $4,023 has been provided
for non-payment of the advances.
In September 1994, Cardiac Science received additional financing and
effective October 7, 1994, all Cardiac Science business is conducted at a
location completely independent of Cytocare.
-21-
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO CONSOLIDATED FINANCIAL STATEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Consolidated Financial Statements
Report of Independent Auditors 23
Consolidated Balance Sheets at December 31, 1994 and 1993 24
Consolidated Statements of Income for the
years ended December 31, 1994, 1993 and 1992 25
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1994, 1993 and 1992 26
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992 27
Notes to Consolidated Financial Statements 28
2. Schedule to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts 36
All other schedules are omitted because they are not applicable
or the required information is included in the consolidated
financial statements or notes thereto.
</TABLE>
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed with the Commission during
the quarter ended December 31, 1994.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended (1)
3.2 Bylaws of the Company, as amended (1)
4.2 Specimen Certificate of the Company's Common Stock (2)
10.26 1989 Stock Incentive Plan (3)(4)
10.27 Non employee Director Stock Option Plan (3)(4)
10.28 Facility Lease on 100 Columbia (5)
11.1 Schedule of Computation of Per Share Information (See page 38 hereof)
22.1 Subsidiaries (see page 39 hereof)
23.1 Consent of Independent Auditors (see page 40 hereof)
28.2 Form of Cytocare, Inc. Information Statement - Distribution to Shareholders
of Cardiac Science, Inc. (6)
</TABLE>
-----------------------------------
(1) Previously filed with the same exhibit number with the
Company's Registration Statement on Form S-1 under the
Securities Act
of 1933, Reg. No 33-16340 and with the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988, and
incorporated herein by reference.
(2) Previously filed with the same exhibit number with the
Company's Registration Statement on Form S-1 under the
Securities Act of 1933, Reg. No. 33-16340 and incorporated
herein by reference.
(3) Previously filed with the same exhibit number with the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, and incorporated herein by reference.
(4) Compensatory plan or arrangement.
(5) Previously filed with the same exhibit number with the
Company's annual report on Form 10-K for the year ended
December 31, 1993.
(6) Previously filed with the same exhibit number with the
Company's current report on Form 8-K dated June 26, 1991, and
incorporated herein by reference.
-22-
<PAGE> 25
Report of Independent Auditors
The Board of Directors
Cytocare, Inc.
We have audited the accompanying consolidated balance sheets of Cytocare, Inc.
as of December 31, 1994 and 1993, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1994. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). 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 consolidated financial position of Cytocare, Inc. at
December 31, 1994 and 1993, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994, 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.
As discussed in the first paragraph of Note 8 to the financial statements, the
Company is a defendant in a class action lawsuit. Management of the Company
believes that the allegations are without merit and intends to continue to
vigorously defend against this action. The ultimate outcome of the litigation
cannot presently be determined. Accordingly, no provision for any liability
that may result, if any, has been made in the financial statements.
ERNST & YOUNG LLP
Orange County, California
February 15, 1995
-23-
<PAGE> 26
CYTOCARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1994 1993
--------------- ----------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,261,596 $ 2,410,363
Short-term investments 13,148,586 9,151,679
Accounts receivable, less allowance for
doubtful accounts of $257,000 and
$168,000 in 1994 and 1993, respectively 1,825,150 1,617,477
Inventories 1,607,090 1,620,078
Deferred tax assets 1,005,000 ---
Prepaid expenses and other current assets 394,595 541,852
--------------- --------------
Total current assets 19,242,017 15,341,449
Property and equipment:
Lithotripters 3,775,120 2,285,232
Equipment 1,681,765 1,596,316
Furniture and fixtures 1,176,072 1,176,153
Leasehold improvements 89,764 364,799
--------------- --------------
6,722,721 5,422,500
Less accumulated depreciation and amortization (3,727,123) (3,186,888)
--------------- --------------
Net property and equipment 2,995,598 2,235,612
Other assets, net 22,500 132,061
--------------- --------------
$ 22,260,115 $ 17,709,122
=============== ==============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable $ 521,496 $ 657,727
Accrued expenses 368,942 458,701
Accrued income taxes 601,776 828,738
Accrued payroll expenses 408,884 306,932
Deferred revenue 642,551 502,421
Customer deposits 40,000 180,750
--------------- --------------
Total current liabilities 2,583,649 2,935,269
Deferred tax liabilities 225,000 ---
Commitments and contingencies (Notes 3 and 8)
Stockholders' equity:
Common stock - $.004 par value, 20,000,000
shares authorized, 4,944,603 and 4,871,268
shares issued and outstanding at
December 31, 1994 and 1993, respectively 19,778 19,485
Additional paid-in capital 17,675,642 17,336,245
Unrealized loss on short-term investments (46,279) ---
Accumulated earnings (deficit) 1,802,325 (2,581,877)
--------------- --------------
Total stockholders' equity 19,451,466 14,773,853
--------------- --------------
$ 22,260,115 $ 17,709,122
=============== ==============
</TABLE>
See accompanying notes
-24-
<PAGE> 27
CYTOCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1993 1992
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Net equipment sales $ 3,125,495 $ 2,316,805 $ 5,406,821
Procedures and maintenance fees
and laser catheters 12,537,264 10,874,799 7,529,432
Interest and dividend income 642,058 481,319 631,378
-------------- --------------- ---------------
Total revenues 16,304,817 13,672,923 13,567,631
Costs and expenses:
Cost of equipment sales 1,139,805 1,657,488 2,722,074
Costs related to procedure
and maintenance fees and
laser catheters 4,863,595 3,848,715 3,271,865
Research and development 1,076,033 2,333,421 2,192,756
Selling 2,551,088 2,673,794 1,619,194
General and administrative 2,105,324 2,226,293 1,582,592
Other expense 34,770 337,977 868,151
-------------- --------------- ---------------
Total costs and expenses 11,770,615 13,077,688 12,256,632
-------------- --------------- ---------------
Income before provision for
income taxes 4,534,202 595,235 1,310,999
Provision for income taxes 150,000 65,000 142,000
-------------- --------------- ---------------
Net income $ 4,384,202 $ 530,235 $ 1,168,999
============== =============== ===============
Earnings per share:
Primary earnings per share $ .82 $ .10 $ .22
============== =============== ===============
Fully diluted earnings per share $ .81 $ .10 $ .21
============== =============== ===============
Number of shares used in the computation
of earnings per share:
Primary 5,350,404 5,398,257 5,222,568
============== =============== ===============
Fully diluted 5,427,685 5,398,257 5,461,230
============== =============== ===============
</TABLE>
See accompanying notes
-25-
<PAGE> 28
CYTOCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL ACCUMULATED UNREALIZED LOSS
NUMBER OF PAID-IN EARNINGS ON SHORT-TERM
SHARES AMOUNT CAPITAL (DEFICIT) INVESTMENTS TOTAL
----------- -------- ----------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 4,763,263 $19,053 $17,114,320 $(4,281,111) $ --- $12,852,262
Common stock options exercised 58,397 234 88,887 --- --- 89,121
Net income --- --- --- 1,168,999 --- 1,168,999
--------- ------- ----------- ----------- -------- -----------
Balance at December 31, 1992 4,821,660 19,287 17,203,207 (3,112,112) --- 14,110,382
Common stock options exercised 49,608 198 133,038 --- --- 133,236
Net income --- --- --- 530,235 --- 530,235
--------- ------- ----------- ----------- -------- -----------
Balance at December 31, 1993 4,871,268 19,485 17,336,245 (2,581,877) --- 14,773,853
Common stock options exercised 73,335 293 139,397 --- --- 139,690
Income tax benefit from stock options --- --- 200,000 --- --- 200,000
Unrealized loss on short-term
investments --- --- --- --- (46,279) (46,279)
Net income --- --- --- 4,384,202 --- 4,384,202
--------- ------- ----------- ----------- -------- -----------
Balance at December 31, 1994 4,944,603 $19,778 $17,675,642 $ 1,802,325 $(46,279) $19,451,466
========= ======= =========== =========== ======== ===========
</TABLE>
See accompanying notes
-26-
<PAGE> 29
CYTOCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,384,202 $ 530,235 $ 1,168,999
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 914,021 1,078,130 911,207
Provision for doubtful accounts 140,000 272,900 97,269
Provision for related party loan 34,849 183,551 257,817
Unrealized losses on short-term investments --- 228,316 113,014
Changes in operating assets and liabilities:
Accounts receivable (336,390) (538,325) (765,064)
Inventories (616,946) (407,889) 38,146
Deferred taxes (780,000) --- ---
Prepaid expenses and other 147,257 (214,824) (34,216)
Accounts payable (136,231) (94,561) 369,157
Accrued expenses (89,759) (853,817) 442,294
Accrued income taxes (26,962) 23,588 104,999
Accrued payroll expenses 101,952 (69,131) 18,511
Deferred revenue 140,130 147,810 (299,341)
Customer deposits (140,750) 74,623 (1,293,873)
Other, net 28,203 (51,131) (30,223)
-------------- --------------- --------------
Net cash provided by
operating activities 3,763,576 309,475 1,098,696
-------------- --------------- --------------
Cash flows from investing activities:
Purchases of investments available for sale (23,165,800) --- (2,996,009)
Proceeds from sales of investments available for sale 19,122,614 --- ---
Related party loan (39,774) (112,500) (257,817)
Purchases of property and equipment (1,009,218) (998,261) (877,529)
Disposals of property and equipment 40,145 451,614 268,310
-------------- --------------- --------------
Net cash used in investing
activities (5,052,033) (659,147) (3,863,045)
-------------- --------------- --------------
Cash flows from financing activities-
proceeds from issuance of common stock 139,690 133,236 89,121
-------------- --------------- --------------
Net decrease in cash and equivalents (1,148,767) (216,436) (2,675,228)
Cash and equivalents at beginning of year 2,410,363 2,626,799 5,302,027
-------------- --------------- --------------
Cash and equivalents at end of year $ 1,261,596 $ 2,410,363 $ 2,626,799
============== =============== ==============
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest $ --- $ --- $ ---
Income taxes $ 956,962 $ 68,268 $ 37,001
Supplemental schedule of noncash investing
and financing activities:
Tax benefit of employee stock options $ 200,000 $ --- $ ---
</TABLE>
See accompanying notes
-27-
<PAGE> 30
CYTOCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
Cytocare, Inc. (formerly Medstone International, Inc. prior to
renaming and reorganization of the Company in January 1991) was incorporated in
Delaware in October 1984. The Company's wholly-owned subsidiary Medstone
International, Inc. ("Medstone") designs, manufactures and markets the Medstone
STS(TM) Shockwave Therapy System (the "System") for the noninvasive
disintegration of kidney stones in human patients. In addition to sales of the
System, Medstone generates recurring revenue from procedure fees and fee for
service arrangements for use of the System and from repairs and maintenance of
the Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company, Medstone International, Inc. and Medstone Sales Corporation, a foreign
sales corporation.
Reclassifications
-----------------
Certain prior period balances have been reclassified to conform with
the December 31, 1994 presentation.
Statement of cash flows
-----------------------
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
The Company had net non-cash transfers of inventory into fixed assets
of $630,000, $168,000 and $468,000 for the years ended December 31, 1994, 1993
and 1992, respectively.
Short-term Investments
----------------------
Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The adoption did not have a
significant impact on the Company's consolidated financial statements.
Management determines the appropriate classification of such securities at the
time of purchase and reevaluates such classification as of each balance sheet
date. Based on its intent, the Company's investments are classified as
available-for-sale and are carried as fair value, with unrealized gains and
losses, net of tax, reported as a separate component of
-28-
<PAGE> 31
stockholders' equity. The investments are adjusted for amortization of
premiums and discounts to maturity and such amortization is included in
interest income. Realized gains and losses and declines in value judged to
be other than temporary are determined based on the specific identification
method and are reported in the consolidated statements of operations.
The Company invests primarily in U.S. government securities, and
corporate obligations. As of December 31, 1994 and December 31, 1993,
investments are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1994
U.S. Treasury Bills $13,194,865 $ --- $ 46,279 $13,148,586
1993
Mutual Funds 9,493,009 --- 341,330 9,151,679
</TABLE>
Gross realized gains and losses were $0 and $331,817, respectively in
1994.
The amortized cost and estimated fair value of investments at December
31, 1994 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuer of the securities may
have the right to repurchase such securities.
<TABLE>
<CAPTION>
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $13,194,865 $13,148,586
</TABLE>
Concentrations of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
marketable securities and accounts receivable. The Company's marketable
securities consist principally of U.S. Treasury Bills.
The Company sells its products primarily to hospitals worldwide.
Credit is extended based on an evaluation of the customer's financial condition
and collateral generally is not required. The Company's ten largest customers
accounted for approximately 47% of accounts receivable at December 31, 1994.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1993
---------- ----------
<S> <C> <C>
Raw materials $1,194,369 $1,149,785
Work in process 181,416 67,951
Finished goods 231,305 402,342
---------- ----------
$1,607,090 $1,620,078
========== ==========
</TABLE>
-29-
<PAGE> 32
Property and equipment
----------------------
Property and equipment are carried at cost. Depreciation and
amortization are computed on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Lithotripters 5 years
Equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements Life of lease
</TABLE>
Revenue recognition
-------------------
Revenues are recognized in accordance with the underlying contractual
terms of each sale. Typically, revenue recognition requires the transfer of
title upon shipment, customer acceptance, receipt of specified down payments
and performance of all significant contractual obligations. All foreign sales
contracts are negotiated with payment terms in U.S. dollars so the Company has
no exposure to foreign currency price fluctuations.
Service and maintenance contract revenues are deferred and amortized
over the terms of the related contracts.
The results for the year ended December 31, 1992 include two systems
shipped in November 1990 to a foreign customer in the amount of $1.4 million.
This revenue, with related costs of $324,000, was recognized in December 1992
upon resolution of a dispute with a distributor.
Per share information
---------------------
Per share information is presented in the accompanying consolidated
statements of income based upon the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares result from the
assumed exercise of outstanding dilutive securities when applying the treasury
stock method. Fully diluted per share information is not presented for periods
in which the effect is antidilutive.
3. COMMITMENTS
In March 1994, the Company took occupancy of new office,
manufacturing, engineering, warehouse space, and research and development
laboratories under an operating lease with an initial term of two years. The
monthly lease rate is $12,500. Upon expiration of the initial two- year term,
the Company has the option to extend the lease in one year segments through
March 1999 for modest price increases. The future minimum lease payments under
the initial non-cancelable term of the lease are as follows:
-30-
<PAGE> 33
<TABLE>
<CAPTION>
Minimum Rental
--------------
<S> <C>
1995 $151,000
1996 $ 25,000
</TABLE>
Total net rent expense under all operating leases for the years ended
December 31, 1994, 1993 and 1992 was $237,000, $495,000, and $328,000,
respectively.
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal $1,256,000 $ 84,000 $ 56,000
State 45,000 15,000 86,000
Utilization of tax credits (373,000) (34,000) ---
---------- --------- --------
Total Current 928,000 65,000 142,000
---------- ------- --------
Deferred:
Federal (484,000) --- ---
State (294,000) --- ---
---------- ------- --------
Total deferred (778,000) --- ---
---------- ------- --------
Provision for
income taxes $ 150,000 $ 65,000 $142,000
========== ======== ========
</TABLE>
The following is a reconciliation of the provision for income taxes at
the federal statutory rate compared to the Company's effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------------ ----------------- -----------------
<S> <C> <C> <C>
Income tax at the
statutory rate $1,542,000 $ 202,000 $ 446,000
State income taxes
(net of federal benefit) (164,000) 36,000 57,000
Change in valuation allowance (775,000) --- ---
Losses with current
tax benefit --- (121,000) (376,000)
Tax credits with current benefit (373,000) (34,000) ---
Accruals with tax benefit --- (29,000) ---
Other (80,000) 11,000 15,000
---------- --------- ---------
Provision for income
taxes $ 150,000 $ 65,000 $ 142,000
========== ========= =========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
-31-
<PAGE> 34
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
DEFERRED TAXES:
Accruals and reserves not currently deductible for tax $ 888,000 $ 921,000
Net operating loss carryforward 58,000 233,000
Credit for increasing research activities 50,000 244,000
Depreciation --- 38,000
Other credits 9,000 37,000
---------- ----------
Total gross deferred tax assets 1,005,000 1,473,000
Less valuation allowance --- 1,473,000
---------- ----------
Net deferred assets 1,005,000 ---
---------- ----------
Depreciation 225,000 ---
---------- ----------
Total gross deferred tax liabilities 225,000 ---
---------- ----------
Net deferred tax assets and liabilities $ 780,000 $ ---
========== ==========
</TABLE>
At December 31, 1994, the Company has a California net operating loss
carryforward of approximately $950,000 and a California research and
development credit carryforward of approximately $50,000. These net operating
losses and credits expire in 1997 through 2008. As a result of continued
profitability, the Company recognized all of its deferred tax assets in the
current year as management believes it is more likely than not that such
deferred tax assets will be realized.
The Tax Reform Act of 1986 contains provisions which could
substantially limit the availability of the net operating loss carryforward as
well as the research and development credit carryforward if there is a greater
than 50% change of ownership during a three-year period. As of December 31,
1994, the Company has experienced less than a 5% ownership change.
5. STOCK OPTIONS
In 1987, the Company adopted the 1987 Stock Option Plan (1987 Plan)
under which options could be granted to key employees or directors of the
Company by a committee appointed by the Company's Board of Directors (the
Committee) to purchase up to 476,323 shares of the Company's common stock. The
exercise prices for options granted under the 1987 Plan were equal to the fair
market value of the common stock on the date of grant. During 1988 and 1989,
the Committee granted options which generally become exercisable with respect
to 1/60th of the issuable shares for each elapsed month during the five-year
period commencing with dates determined by the Committee. All options granted
in 1988 and 1989 terminate one year after the end of the five-year period. In
June 1989, the Company terminated the 1987 Plan as to the granting of
additional options. In April 1994, the termination date of the remaining
76,250 options exercisable under this Plan was extended for an additional year
from the previously extended termination date.
-32-
<PAGE> 35
In June 1989, the Company's stockholders approved the 1989 Stock
Incentive Plan which provides for the granting of a variety of stock- related
securities, including shares of common stock, stock options and stock
appreciation rights to employees and other selected individuals. In May 1991,
the Company's stockholders amended the Plan to increase the number of shares
issuable to 1,593,783 and eliminated the provision for an automatic increase in
the number of shares issuable on January 1 of each year by one percent of the
then outstanding shares. As of December 31, 1994, 753,698 options for shares
of common stock had been granted and are outstanding under this plan.
In June 1989, the Company's stockholders also approved the Nonemployee
Director Stock Option Plan. This plan provides for the issuance of up to
50,000 shares of the Company's common stock upon exercise of options granted
under the plan. As of December 31, 1994, 10,000 options for shares of common
stock had been granted under this plan.
Stock option activity under the Company's plans is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NUMBER OF OPTIONS DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Outstanding, beginning of year 946,251 997,079 769,293
Granted 43,000 119,834 318,250
Exercised (73,335) (49,608) (58,397)
Cancelled (75,968) (121,054) (32,067)
------------- ------------- -------------
Outstanding, end of year 839,948 946,251 997,079
============= ============= =============
OPTION PRICE PER SHARE
----------------------
Granted $5.47 $5.00 - $5.50 $2.37 - $4.88
Exercised $1.31 - $5.00 $1.31 - $5.00 $1.31 - $1.50
Outstanding, end of year $1.31 - $5.50 $1.31 - $5.50 $1.31 - $5.00
</TABLE>
At December 31, 1994, 1993 and 1992, the number of unoptioned shares
reserved and available for issuance under the plans was 880,085, 776,782 and
674,367, respectively. Outstanding options for 677,539 shares were
exercisable at December 31, 1994.
Effective March 2, 1990, the Company changed the exercise price of all
outstanding options granted with exercise prices exceeding the closing market
value of the stock on that date. Accordingly, the exercise price of these
options was reduced to $5.00 per share.
6. EMPLOYEE BENEFIT PLAN
In January 1990, the Company established a defined contribution profit
sharing 401(k) plan for all eligible employees. The plan provides for the
deferral of up to 15% of an employee's qualifying compensation under Section
401(k) of the Internal Revenue Code.
-33-
<PAGE> 36
Contributions by the Company may be made to the plan at the discretion of the
Board of Directors. No such contributions were made to the plan during the
years ended December 31, 1994, 1993 and 1992.
7. MAJOR CUSTOMERS AND FOREIGN SALES
During the year ended December 31, 1994, one foreign customer
accounted for 10% of total revenue of the Company and the Company derived 13%
of its total revenues from sales to foreign customers. During the year ended
December 31, 1993, no single customer accounted for 10% or more of the total
revenue and the Company derived 8% of its total revenues from sales to foreign
customers. During the year ended December 31, 1992, the Company recorded
revenues from two customers, one domestic and one foreign, each greater than
10% of the total revenue and derived 25% of its total revenue from sales to
foreign customers.
8. CONTINGENCIES
The Company is a defendant in two related class action lawsuits filed
by two shareholders of the Company alleging that adverse material information
was not disclosed at the time of the initial public offering and in subsequent
periods. On May 4, 1992, the district court granted summary judgment in one of
the actions in favor of the Company on all claims. On July 9, 1992, the
district court granted the Company's motion to dismiss the second action. In
October 1994, the Company received the opinion of the Ninth Circuit of Appeals
affirming in part and reversing in part the United States District Court's
decision granting summary judgment in favor of the Company and several
officers. The complaints allege principally that adverse material information
was not disclosed at the time of the initial public offering in June 1988. The
Company intends to proceed to trial on any remaining matters. The ultimate
outcome of the litigation cannot presently be determined. Accordingly, no
provision for any liability that may result, if any, has been made in the
financial statements.
From time to time, the Company is subject to legal actions and claims
for personal injuries or property damage related to patients who use its
products. The Company has obtained a liability insurance policy providing
coverage for product liability and other claims. Management does not believe
that the resolution of any current proceedings will have a material financial
impact on the Company.
9. RELATED PARTY TRANSACTIONS
During 1991, the Company was a party to the formation of Cardiac
Science, Inc., for which the Company purchased 5,353,031 shares of common
stock, for a cash payment of $.0016 per share. This purchase represented 77.3%
of the outstanding stock. As of July 8, 1991, the Company distributed a
dividend to its shareholders of record on that date, one share of Cardiac
Science, Inc. stock for each share of Cytocare stock held. The Company
retained 629,768 shares of common stock of Cardiac Science, Inc.
-34-
<PAGE> 37
In June 1991, the Company agreed to loan Cardiac Science, Inc. up to
$220,000 to provide working capital pursuant to the terms of a revolving note
agreement. The unpaid principal amount of the loan, together with interest
accrued thereon at the rate of 10% per annum, was due and payable to Cytocare
in December 1991. Cytocare then agreed to extend this note and to loan
additional amounts to Cardiac Science, Inc. As of April 30, 1992, the Company
had loaned Cardiac Science, Inc. approximately $310,000. In April 1992, the
Company agreed to extend its initial loan to Cardiac Science, Inc. and to loan
Cardiac Science, Inc. an additional $200,000. These loans bore interest at a
rate of 8% per annum, payable quarterly, are secured by Cardiac Science's
assets and were to mature on the earlier of April 1, 1995 or the closing of the
initial public offering of Cardiac Science's common stock.
In September 1994, Cardiac Science completed a private placement
offering, and in conjunction with that offering, the Company exercised warrants
to purchase 2,720,000 shares of Cardiac Science Common Stock at $.15 per share.
The proceeds of $408,000 were used to pay down a portion of the loans described
above. The due date for the remaining principal balance of $102,000 has been
extended to April 1, 1996. The expiration date for the remaining warrants was
changed to March 31, 1996. In addition, the Company was issued 1,800,000
shares of Cardiac Science Common Stock and a ten year warrant to purchase
1,000,000 shares at $.001 per share in full payment of unsecured obligations of
approximately $176,000. At December 31, 1994, $104,335, which includes accrued
interest, has been loaned to Cardiac Science. A reserve of $104,335 has been
provided for non-payment of the loan.
As of December 31, 1994, the Company held warrants to purchase 680,000
shares of Cardiac Science's common stock at $.15 per share which expire March
31, 1996 and warrants to purchase 1,000,000 shares at $.001 per share, which
expire September 10, 2004.
Separately, the Company advanced amounts to Cardiac Science for some
operational expenses including (but not limited to) accounting services and
health insurance. These amounts were to be repaid by Cardiac Science on a
month-to-month basis. As of December 31, 1994, $8,947 had been advanced to
Cardiac Science. A reserve of $4,023 has been provided for non-payment of the
advances.
Effective March 15, 1994, all Cardiac Science business is conducted at
a location completely independent of Cytocare. This will insure that Cardiac
Science cannot be perceived as lacking autonomy over its own business and
technical operations.
-35-
<PAGE> 38
CYTOCARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1994:
- ------------------
Allowance for
doubtful accounts $ 168,390 $ 140,000 $ --- $ 50,972 $ 257,418
========== ============ ============= ============== ==============
Allowance for
inventory obsolescence $ 668,111 $ --- $ --- $ 2,562(a) $ 665,549
========== ============ ============= ============== ==============
Allowance for
related party loan $ 693,072 $ 34,849 $ --- $ 619,564(c) $ 108,357
========== ============ ============= ============== ==============
Allowance for investment
in related party $ 23,436 $ --- $ --- $ (619,564)(c) $ 643,000
========== ============ ============= ============== ==============
FOR THE YEAR ENDED
DECEMBER 31, 1993:
- ------------------
Allowance for
doubtful accounts $ 746,368 $ 272,900 $ --- $ 850,878(b) $ 168,390
========== ============ ============= ============== ==============
Allowance for
inventory obsolescence $ 678,123 $ --- $ --- $ 10,012(a) $ 668,111
========== ============ ============= ============== ==============
Allowance for
related party loan $ 509,521 $ 183,551 $ --- $ --- $ 693,072
========== ============ ============= ============== ==============
FOR THE YEAR ENDED
DECEMBER 31, 1992:
- ------------------
Allowance for
doubtful accounts $ 949,992 $ 97,269 $ --- $ 300,893(b) $ 746,368
========== ============ ============= ============== ==============
Allowance for
inventory obsolescence $ 742,670 $ --- $ --- $ 64,547(a) $ 678,123
========== ============ ============= ============== ==============
Allowance for
related party loan $ 251,704 $ 257,817 $ --- $ --- $ 509,521
========== ============ ============= ============== ==============
</TABLE>
(a) Write-off of inventory
(b) Write-off of bad debt including $642,000 for one significant customer
(c) Reserve transferred from loan provision to investment provision due to
restructuring.
-36-
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CYTOCARE, INC.
By: /s/ Errol Payne
-------------------------------------
Errol Payne
Chief Executive Officer
Dated: March 22, 1995
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 indicated on March 22, 1994.
SIGNATURE TITLE
--------- -----
<TABLE>
<S> <C>
Chairman of the Board and
Chief Executive Officer
and Director
/s/ Errol Payne (Principal Executive Officer)
- -------------------------------------------
Errol Payne
Chief Financial Officer
/s/ David V. Radlinski (Principal Financial and Accounting Officer)
- -------------------------------------------
David V. Radlinski
/s/ Paul D. Quadros Director
- -------------------------------------------
Paul D. Quadros
/s/ Frank Pope Director
- -------------------------------------------
Frank Pope
</TABLE>
-37-
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended (1)..................
3.2 Bylaws of the Company, as amended (1)........................................
4.2 Specimen Certificate of the Company's Common Stock (2).......................
10.26 1989 Stock Incentive Plan (3)(4).............................................
10.27 Non employee Director Stock Option Plan (3)(4)...............................
10.28 Facility Lease on 100 Columbia (5)...........................................
11.1 Schedule of Computation of Per Share Information (See page 38 hereof)........
22.1 Subsidiaries (see page 39 hereof)............................................
23.1 Consent of Independent Auditors (see page 40 hereof).........................
28.2 Form of Cytocare, Inc. Information Statement - Distribution to Shareholders
of Cardiac Science, Inc. (6).................................................
</TABLE>
-----------------------------------
(1) Previously filed with the same exhibit number with the
Company's Registration Statement on Form S-1 under the
Securities Act
of 1933, Reg. No 33-16340 and with the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988, and
incorporated herein by reference.
(2) Previously filed with the same exhibit number with the
Company's Registration Statement on Form S-1 under the
Securities Act of 1933, Reg. No. 33-16340 and incorporated
herein by reference.
(3) Previously filed with the same exhibit number with the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, and incorporated herein by reference.
(4) Compensatory plan or arrangement.
(5) Previously filed with the same exhibit number with the
Company's annual report on Form 10-K for the year ended
December 31, 1993.
(6) Previously filed with the same exhibit number with the
Company's current report on Form 8-K dated June 26, 1991, and
incorporated herein by reference.
<PAGE> 1
Exhibit 11.1
CYTOCARE, INC.
COMPUTATION OF PER SHARE INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
------------ ------------ -------------
<S> <C> <C> <C>
Earnings:
Net income . . . . . . . . . . . . . . $ 4,384,202 $ 530,235 $ 1,168,999
============ ============ ============
Computation of primary per share
information:
Shares:
Weighted average number
of shares outstanding . . . . . . 4,912,620 4,851,779 4,801,575
Add effect of outstanding
options and warrants (a) . . . . 437,784 546,478 420,993
------------ ------------ ------------
Number of shares outstanding, as
adjusted . . . . . . . . . . . . . . 5,350,404 5,398,257 5,222,568
============ ============ ============
Primary earnings per share . . . . . $ .82 $ .10 $ .22
============ ============ ============
Computation of fully diluted per
share information:
Shares:
Weighted average number
of shares outstanding . . . . . . 4,912,620 4,851,779 4,801,575
Add effect of outstanding
options and warrants (a) . . . . 515,065 546,478 659,655
------------ ------------ ------------
Number of shares outstanding as
adjusted . . . . . . . . . . . . 5,427,685 5,398,257 5,461,230
============ ============ ============
Fully diluted earnings per share . $ .81 $ .10 $ .21
============ ============ ============
</TABLE>
___________
(a) As determined by the application of the treasury stock method.
-38-
<PAGE> 1
Exhibit 22.1
CYTOCARE, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION
---- ------------
<S> <C>
Medstone International, Inc. Delaware
Endocare, Inc. Delaware
</TABLE>
-39-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-32890, 33-32891, 33-45470 and 33-32892) pertaining to the
1987 Stock Option Plan and the 1989 Stock Incentive Plan (as amended), and the
Nonemployee Director Stock Option Plan of Cytocare, Inc. of our report dated
February 15, 1995, with respect to the consolidated financial statements and
schedule of Cytocare, Inc. included in this Annual Report (Form 10-K) for the
year ended December 31, 1994.
ERNST & YOUNG LLP
Orange County, California
February 15, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,261,596
<SECURITIES> 13,148,586
<RECEIVABLES> 1,825,150
<ALLOWANCES> 257,000
<INVENTORY> 1,607,090
<CURRENT-ASSETS> 19,242,017
<PP&E> 6,722,721
<DEPRECIATION> 3,727,123
<TOTAL-ASSETS> 22,260,115
<CURRENT-LIABILITIES> 2,583,649
<BONDS> 0
<COMMON> 19,778
0
0
<OTHER-SE> 19,431,688
<TOTAL-LIABILITY-AND-EQUITY> 22,260,115
<SALES> 15,662,759
<TOTAL-REVENUES> 16,304,817
<CGS> 6,003,400
<TOTAL-COSTS> 5,732,445
<OTHER-EXPENSES> 34,770
<LOSS-PROVISION> 174,849
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,534,202
<INCOME-TAX> 150,000
<INCOME-CONTINUING> 4,384,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,384,202
<EPS-PRIMARY> .82
<EPS-DILUTED> .31
</TABLE>
