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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-18170
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CRYOMEDICAL SCIENCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3076866
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(State of Incorporation) (IRS Employer Identification Number)
1300 PICCARD DRIVE, ROCKVILLE, MARYLAND 20850
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 417-7070
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
As of September 16, 1996, the aggregate market value of voting stock
held by nonaffiliates of the registrant was $49,525,683.
As of September 16, 1996, there were 26,880,050 shares of Common Stock
(par value $.001 per share) outstanding.
Documents Incorporated by Reference
-----------------------------------
Not Applicable
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PART I
ITEM 1. BUSINESS
GENERAL
Cryomedical Sciences, Inc. (the "Company") is engaged in the research,
development, manufacture and marketing of products for use in the field of
low-temperature medicine.
The Company has developed a cryosurgical system, called the CMS
AccuProbe(R) System (the "AccuProbe"), which is a sophisticated cryosurgical
device designed to freeze and destroy diseased tissue, including that which
cannot be removed surgically or in which typical surgery offers extensive
adverse side effects. The Company plans to utilize its AccuProbe in the
various fields for which the device received clearance from the FDA in April
1991, including the fields of dermatology, general surgery, neurosurgery,
thoracic surgery, ENT, gynecology, proctology, oncology, and urology.
The Company completed initial development of the AccuProbe in 1992 and
has marketed this system to hospitals, surgeons and radiologists in the United
States and abroad. The first AccuProbe system was shipped to a customer in
June 1992; 17 systems were sold in the fiscal year ended June 30, 1996, 41
systems were sold in the fiscal year ended June 30, 1995, and 46 systems were
sold in fiscal year ended June 30, 1994. In addition to the AccuProbe, the
Company sells single use probes and other disposables used with the AccuProbe
and offers service warranty contracts. Sales and other revenues totaled
$6,843,950, $13,594,186, and $13,438,494 in the fiscal years ended June 30,
1996, June 30, 1995 and June 30, 1994, respectively.
The Company is also attempting to develop hypothermic synthetic blood
substitute solutions (the "Solutions") designed to maintain the fluid and
chemical balances of human organs while body temperature is significantly
lowered. Although the Solutions continue to be tested in laboratory settings,
development for commercial application has not been completed. Development of
the Solutions is at the laboratory and preclinical stage and is expected to
remain so for the foreseeable future. In view of the Company's emphasis on the
marketing of the AccuProbe, in the recent past the Company has not devoted
significant resources to the development of the Solutions and does not
contemplate doing so for at least the near term. Currently, the Company
expects to fund the development of the Solutions by utilizing funds secured
through research grants pertaining to such purpose. The Company hopes to
market the Solutions, if successfully developed, to hospitals, clinics,
transplant centers, and surgeons in the United States and abroad.
For the fiscal years ended June 30, 1996, June 30, 1995 and June 30,
1994, the total research and development expenses of the Company were
$1,484,042, $2,899,686 and $2,506,349, respectively.
The Company was incorporated in Delaware in November 1987. On August
31, 1989, the Company completed the acquisition of Cryo Instruments, Inc.
("CII"), and CII became a wholly owned subsidiary of the Company. Unless the
context requires otherwise, references to the Company include CII. The
Company's principal executive offices are located at 1300 Piccard Drive,
Rockville, Maryland 20850, and its telephone number is (301) 417-7070.
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CMS ACCUPROBE SYSTEM
BACKGROUND AND TECHNOLOGICAL OVERVIEW
Cryosurgery is a surgical procedure that uses freezing temperatures to
destroy unwanted tissue by circulating a refrigerant through the tip of a
cryoprobe (an instrument for applying extreme cold to tissue) applied directly
to the tissue to be destroyed.
Some surgeons have commenced targeting diseased tissue in the fields
of urology, general surgery, and gynecology by use of cryosurgery. These
surgeons believe that cryosurgery has a number of advantages over other options
for managing such diseased tissue. First, unlike surgical resection,
cryosurgery does not require removal of large volumes of healthy surrounding
tissue. Second, because freezing temperatures can be applied to certain areas
and not others, multiple diseased tissue sites can be targeted individually,
leaving more healthy tissue. However, many surgeons continue to use
traditional methods because cryosurgery has not yet proved to be effective over
an extended period of time.
THE CMS ACCUPROBE SYSTEM
The Company has developed certain proprietary designs intended to make
the CMS AccuProbe more efficient and more precise than previous cryosurgical
instrumentation.
In April 1991, the United States Food and Drug Administration (the
"FDA") accepted the Company's 510(k) premarket notification for the AccuProbe,
thus allowing commercial marketing of the product at the Company's discretion.
See "Governmental Regulation." The prototype of the CMS AccuProbe was first
used on patients in October 1991. The commercial development of the CMS
AccuProbe was completed in 1992 and marketing of the AccuProbe commenced. In
addition, the Company markets a full complement of accessory products for the
AccuProbe which are being marketed along with the AccuProbe system and
single-use probes.
The first AccuProbe system was shipped in June 1992. This system was
accepted by the customer and the sale recorded in August 1992. A total of 46
systems were sold during the year ended June 30, 1994, 41 systems were sold in
the year ended June 30, 1995, and an additional 17 systems were sold during the
year ended June 30, 1996. Sales to one U.S. distributor, U. S. Medical
Corporation, constituted 5.2%, 6.5%, and 21.7% of total sales for the fiscal
years ended June 30, 1996, 1995, and 1994, respectively.
The backlog of orders at June 30, 1996 totaled $5,116,359, as compared
to $7,919,005 and $8,092,277 for the fiscal years ended June 30, 1995 and 1994.
The Company expects that approximately 13% of the June 30, 1996 backlog will
generate revenues during the fiscal year ending June 30, 1997. The Company's
backlog at June 30, 1996 included orders for 22 AccuProbe systems,
approximately 6,400 single-use probes and extended warranties totaling over
$850,000. These totals include a blanket order from a distributor with a
balance at June 30, 1996 of 22 systems and approximately 6,400 probes, against
which order the distributor is anticipated to issue periodic releases over a
period of two or more years.
A substantial portion of the Company's revenue in each quarter results
from orders received in that quarter. Generally, orders placed directly by
customers are shipped within 30 days of the order date. Historically, the
Company's backlog has not been a significant indicator of future sales and the
Company does not believe that its backlog, at any particular point in time, is
indicative of future sales.
To date, AccuProbe systems have been used by hospitals and clinics for
over 8,000 patients, including over 7,000 patients in the field of urology and
over 1,000 patients in general surgery and other approved fields.
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HYPOTHERMIC BLOOD SUBSTITUTE SOLUTIONS (HYPOTHERMOSOL(R))
BACKGROUND AND TECHNOLOGICAL OVERVIEW
Lowering body temperature during certain surgical procedures helps to
minimize the chance of damage to the patient's organs by reducing the patient's
metabolic rate, thereby decreasing the patient's needs during surgery for
oxygen and nutrients which normally flow through the blood. This is also true
with respect to the preservation of individual organs to be used in transplant
surgery during the interval between removal from the donor and transplant into
the recipient.
The Company is currently endeavoring to develop the Solutions for use
in bloodless surgery and other medical applications.
Grant subsidized research and development activities with respect to
development of the Solutions for cell and tissue preservation are taking place
at Allegheny-Singer Research Institute ("ASRI"), a subsidiary of Allegheny
Health Services, Pittsburgh Pennsylvania and State University of New York at
Binghamton ("SUNY"). In view of the Company's emphasis on the marketing of the
AccuProbe, the Company has not devoted significant resources to the development
of the Solutions and does not contemplate doing so for at least the near term.
The Solutions have not been fully tested nor has the regulatory
clinical testing and approval process begun. Accordingly, there is no
assurance that any of the proposed applications will prove viable in surgical
procedures. The Company is unable to predict the date or year when it would
expect to begin clinical trials to support FDA approval of the Solutions.
THE SOLUTIONS
The Solutions are complex synthetic, aqueous solutions containing, in
part, minerals and other elements found in human blood which are necessary to
maintain fluids and chemical balances throughout the body at near freezing
temperatures. The use of the fluids is limited to low temperature applications
because the Solutions do not carry sufficient oxygen to maintain organ
integrity at warm temperatures. At lower temperatures, scientists have
determined that human organs require less oxygen primarily because of the
resulting reduced metabolism.
Although solutions have been developed which could be used to
supplement the blood during the performance of certain limited surgical
procedures, the Company is not aware of the performance of bloodless surgery in
current surgical practice. If successfully developed, the Solutions would be
introduced into the patient's body during the cooling process. Once the
patient's body temperature is near 7 to 10(o)C, and the heart temporarily
arrested, the surgeon would perform the operation. During the surgery, the
Solutions would be circulating throughout the body in place of blood. Upon
completion of the surgery, the patient would be slowly warmed, his blood
reintroduced into his vascular system, and then rewarmed and revived, requiring
little or no donated blood transfusion. Bloodless surgery would be primarily
suitable for removal of tumors from the brain, head, neck, or heart, and
operations to repair major vascular disorders, such as aneurysms. Another
benefit of bloodless surgery would be that the amount of blood loss could be
reduced, thus reducing the need for blood transfusions from donors and reducing
the risk of infection from such diseases as AIDS or hepatitis.
The Company is also developing hypothermic blood substitute solutions
for use in the preservation of organs and tissue (synthetic and natural) for
transplant and for use during the lowering of body temperature. The Solutions
are under development for both multiple organ preservation within donors and
for individual organ preservation once the organs are removed from the donor.
The Company anticipates marketing the Solutions, if developed and
approved, under the name Hypothermosol(R).
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FUTURE PRODUCT DEVELOPMENT
The Company's primary focus has been on the development and marketing
of the CMS AccuProbe System. While the Company intends to continue development
of the Solutions, substantial additional development is not currently expected
to be undertaken unless and until profitability of the AccuProbe and related
single-use products attain targeted levels and requisite funding is available.
In this respect, in the fiscal year ended June 30, 1996, the Company expended
approximately $52,285 on research and development efforts on the Solutions.
Currently, the Company expects to fund the development of the Solutions by
utilizing funds secured through research grants. Although the Company
currently has secured research grants totalling over $150,000, a large portion
of these research monies have already been expended on the development of
Solutions and there can be no assurance that additional research grants can be
secured in the future.
The Company contemplates that a variety of applications of hypothermic
blood substitutes or other products for use in hypothermic medical procedures
could ultimately be developed from the Solutions. Any such applications of the
Solutions are not expected to be developed for a number of years, and the
Company has not performed any experiments or clinical studies to indicate the
efficacy of such applications. The Company expects that any significant
funding activities with respect to the Solutions would entail sales of equity
securities, which there can be no assurance of achieving.
RESEARCH PROJECT AGREEMENTS
In August 1989, the Company entered into a Research Project Management
Services Agreement with ASRI, pursuant to which ASRI agreed to conduct research
on the Company's behalf on a project-by-project basis over a two-year period
which period had been extended, by amendment, to June 30, 1995. At that time,
the agreement was not renewed. ASRI and Allegheny General Hospital,
Pittsburgh, Pennsylvania, are non-profit subsidiary corporations of Allegheny
Health Services. The Company had agreed to fund ASRI with at least $1,000,000
to conduct such research and expended $2,095,670 through June 30, 1995, and an
additional $72,115 was expended during the fiscal year ended June 30, 1996. The
amount paid during fiscal year 1996 was in arrears for work completed at ASRI
during the year ended June 30, 1995. ASRI's major project was with respect to
the Solutions in connection with bloodless surgery and organ transplants.
Other projects were focused on evaluating the utility of the CMS AccuProbe for
certain clinical indications within its cleared fields of use. Subject to the
agreement of both parties, additional projects may be undertaken with respect
to the Company's Solutions and AccuProbe system.
In August 1991, the Company entered into a Research Project Agreement
with the SUNY, pursuant to which SUNY conducted research at its Center for
Cryobiological Research in Binghamton, New York, with respect to the Solutions.
The Company had agreed to fund SUNY with at least $363,675 to conduct research
under this agreement, all of which had been expended through June 30, 1995.
This agreement had been extended, by amendment, to August 31, 1995, and was
renewed at that time for a one year term with no monetary commitment by the
Company.
MARKETS AND MARKETING
The Company currently markets its AccuProbe system to hospitals,
surgeons, and radiologists through its own sales department, as well as through
two regional distributors in the United States. During the fiscal year ended
June 30, 1995, the Company entered into distribution agreements with
distributors in Canada, South Korea, Taiwan, and Republic of China and is
currently reviewing other opportunities. In addition, in November 1994, the
Company entered into a distribution agreement with B&K Medical, A/S, of
Copenhagen, Denmark. Under this agreement, B&K Medical, A/S, will distribute
the CMS AccuProbe cryosurgical system in seventeen European and Scandinavian
countries. The Company may also arrange with other third parties to market or
distribute this or other products in the United States or other countries.
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The Company expends significant resources educating surgeons and
healthcare professionals in formal training programs as to the uses and
benefits of the Company's AccuProbe system in cryosurgery through both in-house
educational seminars and practical applications outside the Company's training
facility.
Sales of the AccuProbe are increasingly affected by the level of
reimbursement by public and private insurers in connection with procedures in
which the AccuProbe is utilized. The availability of consistent, uniform
insurance reimbursement guidelines for hospitals and physicians is an important
factor often considered by some potential customers when making a decision
regarding the purchase of any new medical device, including the AccuProbe
system. Reimbursement of hospitals and urologists by public and private
insurers such as Medicare and Blue Cross and Blue Shield is a necessary part of
gaining general acceptance for use of the AccuProbe for urological cryosurgery.
No national payment guidelines for such surgery have yet been established by
either Medicare's Health Care Financing Administration ("HCFA") or by the
National Blue Cross and Blue Shield Association. Therefore, insurer's
reimbursement decisions are made on an insurer-by-insurer or case-by-case
basis. While payments received by customers vary significantly by region and
insurer, widespread formal reimbursement acceptance has yet to be achieved.
When insurance coverage is not available, patients may either elect to pay for
treatment themselves or undergo traditional therapies which are covered by
their insurers. The Company cannot predict if or when national coverage
guidelines from Medicare and Blue Cross and Blue Shield will be instituted for
this form of surgery. The uncertainty and added efforts required for the
Company's customers or potential customers to secure payment has constrained
sales and utilization of AccuProbe systems to a large degree and may continue
to do so until formal national coverage guidelines are established. There can
be no assurance that such guidelines will be established or, if established,
that reimbursement will be sufficient to encourage use of the AccuProbe System
by hospitals and physicians. Recently, the American Urological Association
("AUA") reversed a previous position by the organization classifying
cryosurgery in the field of urology as an experimental or investigational type
surgery. The AUA now terms the use of cryosurgery in urology as "one of the
methods of management of adenocarcinoma of the prostate." All references to
the procedure as experimental and investigational have been removed. This new
position by the AUA may have positive influence on the Company's efforts
towards reimbursement, but there can be no assurance in this regard.
MANUFACTURING
The Company's manufacturing operations are conducted at its
facilities in Rockville, Maryland, and consist primarily of the purchase and
quality control of materials, components and subassemblies, and the final
assembly and testing of products including CMS AccuProbe systems, single-use
probes and other accessory products. The Company presently uses third party
vendors to manufacture certain parts and subassemblies of the AccuProbe system,
single-use probes and other accessory products. While the typical lead time
required for suppliers varies depending upon the components, the quantity
required, and other factors, the lead times in some cases can be as long as
three months. However, because the Company typically purchases components in
advance in anticipation of future orders, the Company is generally able to
deliver AccuProbe systems within 30 days of its receipt of an order, and
single-use probes and other accessory products immediately upon receipt of an
order.
Although the Company generally uses standard parts and components for
its products, certain components, such as liquid nitrogen dewars and probe
tips, are currently available only from a limited number of sources. The
Company does not have long-term agreements with all of these suppliers. To
date, the Company has been able to obtain adequate supplies of such components
in a timely manner from its existing sources. Although the Company believes it
could develop alternative sources of supply for most of these components within
a reasonable period of time, the inability to develop alternative sources, or a
reduction or interruption in supply or a significant increase in the price of
materials, parts or components, could materially and adversely affect the
Company's results of operations. The Company also maintains an inventory of
finished goods consisting primarily of single-use probes and other accessory
products in anticipation of future orders. The Company believes it has
sufficient capital to manufacture and market the CMS AccuProbe in the
quantities anticipated, however, it is possible that substantial additional
capital may be necessary to effectively carry out these objectives, and there
is no assurance that such additional capital can be raised on favorable terms
or at all. To the extent that other parties are manufacturing parts or
subassemblies for the
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Company, the Company has less control over the quality of products and
timeliness of delivery than if manufactured by the Company.
GOVERNMENTAL REGULATION
The development, testing, manufacturing processes, recordkeeping and
reporting and marketing of the AccuProbe, the Solutions, and related
instrumentation are regulated by the United States Food and Drug Administration
(the "FDA") pursuant to the federal Food, Drug and Cosmetic ("FD&C") Act and in
some instances, the Public Health Service ("PHS") Act, and similar health
authorities in foreign countries. Product testing and marketing requires
regulatory review and clearance or approval by the FDA. Companies producing
FDA-regulated products also are subject to FDA inspection of records and
manufacturing practices. Non-compliance with applicable requirements of the
FDA or other government authorities can result in various administrative and
legal remedies including fines, recalls, product seizure, injunction, import or
export restrictions, refusal by FDA to approve product applications or to allow
the Company to enter into government supply contracts, withdrawal of previously
approved applications and criminal prosecution.
In April 1991, the FDA accepted the Company's 510(k) premarket
notification for the AccuProbe, thus allowing commercial marketing of the
product. Any significant change or modification in the device could require
additional review and clearance by the FDA. The nature and extent of regulation
may differ with respect to other of the Company's products. Currently the
testing and regulatory approval process usually takes at least several years
and requires the expenditure of substantial resources, for which the Company
may seek third party funding for some products. There can be no assurance that
regulatory approvals or clearances will be obtained for any of the intended
applications of the Company's proposed technologies once developed or that the
FDA will not impose additional post-marketing requirements.
Accessory devices developed by the Company for use with the CMS
AccuProbe system may also require review and clearance or approval by the FDA.
In this connection, the Company submitted a 510(k) premarket notification to
the FDA in October 1992 for the CMS Urethral Warmer (the "Warmer"), an
optional accessory device used to maintain normal urethral temperature and thus
aim to protect the patient's urethral tissue from the freezing temperatures
associated with certain urological cryosurgical procedures. In January 1993,
the FDA requested that the Company supply additional clinical data concerning
the safety and efficacy of the Warmer and in August 1993, the Company amended
the 510(k) premarket notification to include the data requested.
In January 1994, the Company received correspondence from the FDA
denying 510(k) premarket clearance for the Warmer.
On April 1, 1994, the Company submitted an Investigational Device
Exemption ("IDE") application for the Warmer containing the results of
laboratory and other preclinical data and a proposed study protocol. On May 2,
1994, the Company received conditional approval from the FDA for the IDE and
began a clinical study to determine the Warmer's ability to maintain normal
urethral temperatures during general urological cryosurgeries.
On June 23, 1995, the Company submitted a new 510(k) application for the
Warmer, designating the Warmer as an "accessory" to the previously cleared
AccuProbe or other cryosurgical devices for use in general urological
procedures. On September 12, 1995, the FDA responded to the application with a
request for additional information regarding certain technical and design
specifications, test results, and labeling. Subsequently, in October 1995 the
Company received 510(k) marketing clearance from the FDA for the Warmer and
began marketing the product in the United States.
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The Company previously received FDA 510(k) premarket clearance for its
AccuProbe and will continue to market it in accordance therewith in the fields
currently cleared by FDA including: dermatology, general surgery, neurosurgery,
thoracic surgery, ENT, gynecology, oncology, proctology, and urology.
On August 2, 1995, the Company submitted to the FDA (510(k) premarket
notification of two new models of the AccuProbe system. These represent
evolutionary advances of the presently marketed AccuProbe, incorporating
numerous technical refinements and improvements to facilitate improved
manufacturability and serviceability. In December 1995, the Company received
510(k) marketing approval from the FDA for the new models of the AccuProbe
system.
On March 31, 1994, the Company received a warning letter from the FDA
concerning promotional materials for the AccuProbe system cryosurgical device.
The letter stated that FDA "has determined that these materials contain
statements, suggestions, and implications which are misleading because they
promote the product beyond its intended use." The Company does not believe the
FDA's position to be appropriate or practical. However, the Company agreed to
modify its promotional materials in order to be in compliance with the Agency's
request. The Company does not believe that the modifications to its
promotional materials will have a significant long term impact on future sales
of the AccuProbe system. The Company will continue to market the AccuProbe in
the fields indicated by its 510(k) and physicians may continue to utilize the
AccuProbe for cryosurgery as they deem appropriate for their patients in their
practice of medicine.
The Company's AccuProbe is considered a medical device by the FDA.
Because the AccuProbe is considered substantially equivalent to prior devices,
the 510(k) premarket notification for the AccuProbe system was cleared by the
FDA.
In the event the Company intends to test clinically, produce or market
the Solutions, safety standards and mandatory premarketing review and approval
procedures established by the FDA for drugs, medical devices, and biologicals
must be satisfied. In general, manufacturers must prove a product is safe and
effective. Drugs must obtain approval by means of a New Drug Application
("NDA"), biologicals by means of a Product License Application ("PLA") and
Establishment License Application ("ELA"), and medical devices must obtain a
marketing clearance or, for this product more likely, a Premarket Approval
("PMA"). The inability to obtain, or delays in obtaining, such approvals or
clearances would materially adversely affect the Company's ability to commence
marketing any products of its technology which may be developed.
Other medical products which may be developed by the Company will also
undergo rigorous FDA review.
Congress enacted legislation on June 10, 1993, providing that the
Department of Health and Human Services (HHS) promulgate regulations defining
the circumstances that constitute financial interest in a project that may
create a bias for certain results. On June 28, 1994, the Public Health Service
(PHS) published a Notice of Proposed Rulemaking which would require
institutions that apply for research funding to ensure that the financial
interests of investigators do not compromise the objectivity of such research.
The proposed rules would apply to institutions applying for PHS grants or
cooperative agreements for research and to any significant financial interest,
including salary, consulting fees, equity interests such as stock or stock
options, and patent rights, of an investigator responsible for the design,
conduct or reporting of research. The proposed rules would require that all
such significant financial interests be disclosed prior to applying for
research funding, that disclosures be updated, records be maintained, and that
institutions applying for such funding ensure that significant financial
interests of investigators be managed, reduced or eliminated, including the
divestiture of significant financial interests or the severance of
relationships that create actual or potential conflicts. Such rules, if
adopted, may impact any research funding the Company may obtain from the
National Institutes of Health (NIH). Additionally, institutions in which
Company-sponsored research is conducted may adopt similar rules, which could
apply regardless of whether federal funding is involved.
On September 22, 1994, FDA published a similar proposed regulation
requiring that the sponsor of any drug, biological or device submit information
concerning the compensation to, and financial interests of, any clinical
investigator conducting clinical studies involving human subjects or
establishing bioavailability or bioequivalence, for marketing approval. Under
FDA's proposed rule, sponsors would be required to submit
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a list of clinical investigators and make one of two alternative submissions
for each investigator who is not a full-time employee of the sponsor at the
time reports of clinical studies are submitted to FDA. The alternative
submissions would be:
(1) a certification that the clinical investigator has not entered into
any financial arrangement with the sponsoring company whereby the
value of compensation could be affected by the outcome of the study,
that the investigator has not received significant payments of other
sorts from the sponsor, such as grants, equipment, retainers or
honoraria; and that the investigator does not have significant
financial interests of any kind in the sponsor; or
(2) disclosure of the specific financial arrangements made with the
clinical investigator, the investigator's proprietary, patent and
equity interests in the tested product and the sponsoring company,
and a description of steps taken to minimize the potential for bias
in data submitted in support of the marketing application.
Both the PHS and FDA rules, if adopted, could require disclosure of, limit, or
in some cases, prohibit equity ownership by individuals conducting research for
the Company, including consultants or scientific advisory board members, some
of whom may have equity interests in the Company. Such rules, if adopted,
could have the effect of limiting such research between the Company and
individuals with equity interests in the Company. The FDA rules, if adopted,
could also impact product review and approval, and in some cases, if the agency
deems data are biased, FDA could require that a study be repeated.
There can be no assurance that any required FDA or other regulatory
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of products, cause
the Company to undertake costly procedures, and thereby furnish a competitive
advantage to more substantially capitalized companies with which the Company
may compete.
In April and June 1996, the FDA performed a General Manufacturing
Practices ("GMP") audit at the Company's manufacturing facility. The Company
received a warning letter from the FDA for several deficiencies related to GMP
for Medical Devices Regulations, as specified in Table 21, Code of Federal
Regulations (CFR), Part 820. The Company responded to the warning letter in
full within the stated time frame. On September 20, 1996 the Company received
correspondence stating the Company had "adequately addressed their concerns
stated in the Warning Letter."
PROPRIETARY RIGHTS
The Company relies on a combination of trade secret, patent and trademark
law, and confidentiality and non-disclosure agreements to establish and protect
its proprietary rights in its products. Despite these precautions, it may be
possible for unauthorized third parties to copy certain aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. The laws of some foreign countries in which the Company may sell
its products do not protect the Company's proprietary rights to the same extent
as do the laws of the United States.
In August 1990, a United States patent was issued with respect to the
Company's proprietary cryoprobe technology. Two United States and two foreign
patent applications for the Company's AccuProbe system and component parts
issued into patents during 1993 and 1994. Corresponding applications in
several foreign countries have been allowed or have already been patented. One
additional U. S. patent application has issued and two other U. S. patent
applications have been allowed during 1995 for other aspects and components of
the Company's AccuProbe system while several other patent applications have
been filed during 1995 or otherwise remain pending in the United States and
abroad.
In May 1990, a United States patent was issued with respect to the first
generation Solutions, and the methods of use thereof. In April 1995, a United
States patent issued with respect to the second generation Solutions, and
methods of use thereof. A related U. S. application was filed during 1994 and
a United States patent issued in May 1996. Corresponding foreign applications
were filed during the fiscal year ended June 30, 1996. The Company's
Hypothermosol federal trademark application was allowed in 1995 and the
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registration was issued in May 1996. Hypothermosol is the name under which the
Company will market, the Solutions products, if they are successfully
developed.
In total the Company owns ten issued U. S. patents and seven issued or
allowed foreign patents. At least one additional pending U. S. patent
application has been allowed or has been found to contain patentable subject
matter.
There can be no assurance that any additional patents will be granted.
In addition, to the extent that any unique applications of the Company's
technologies are developed by the Company's scientists, such applications or
procedures may not be subject to any protection. There can also be no
assurance that the Company will develop additional patentable processes or
products or, if developed, that the Company would be able to obtain patents
with respect thereto, or that others may not assert claims successfully with
respect to such patents or patent applications. Furthermore, the Company might
not be able to afford the expense of any litigation which might be necessary to
enforce its rights under any patents it may obtain, and there can be no
assurance that the Company would be successful in any such suit. There is also
no assurance that the Company's proposed products will not infringe patents
owned by others, licenses to which may not be available to the Company.
The Company intends to rely to a large extent on the technological
expertise of its scientific staff. There can be no assurance that others will
not independently develop such technological expertise or otherwise obtain
access to the Company's technological expertise.
COMPETITION
The medical products industry is highly competitive. Most of the
Company's potential competitors have considerably greater financial, technical,
marketing, and other resources than the Company.
With respect to the CMS AccuProbe, the Company faces competition from
other firms engaged in the business of developing or marketing cryosurgical
devices. The Company is aware that such devices used to freeze tissue have
been available for at least 20 years, although with limited market acceptance.
Engaged in the business of developing, manufacturing and marketing of
instruments used to freeze tissue are Endocare Incorporated and Frigitronics
Incorporated, American companies; a German company, Erbe Incorporated and
Cryogenic Technology LTD., an English company, currently in receivership, whose
products are marketed by Candela Laser Corporation, an American company. The
AccuProbe also competes with other techniques for destroying diseased tissue.
Competition with other firms which market instruments used to freeze
tissue is based primarily on technological superiority and performance. The
AccuProbe's unique technology uses liquid nitrogen circulating through a
cryoprobe to freeze diseased tissue. The AccuProbe is capable of freezing
tissue with a volume approximately seven times that which can be frozen using
gaseous nitrogen and produces colder temperatures within the frozen tissue.
With respect to the Solutions, the Company also faces competition in the
overlapping areas of research with respect to blood substitutes, organ
preservation, and hypothermic medicine. Currently, there are four known organ
preservation solutions marketed as Viaspan, Collins Solutions, Euro Collins
Solutions, and Ringers Lactate solution. These solutions are marketed by
DuPont Co., Abbott Laboratories, Kendall-McGaw Laboratories, and Baxter, Inc.,
respectively. The Company understands that other groups or companies are also
researching and developing organ preservation techniques and solutions.
Scientists or doctors performing research for the Company, including
members of the Company's scientific advisory board and consultants, can be
expected to publish in journals or otherwise publish information concerning
applications of the Company's technology. If it were determined that the
Company's AccuProbe or the Solutions do not offer unique technologies and that,
in fact, the techniques employed by the Company's scientists were responsible
for results of the Company tests and not the technologies contained in the
Company's AccuProbe or the Solutions, then competitors of the Company who have
developed products
10
<PAGE> 11
with similar properties may be able to duplicate the performance of the
Company's AccuProbe and Solutions by applying similar techniques.
The Company expects competition to intensify with respect to the areas in
which it is involved as technical advances are made and become more widely
known.
EMPLOYEES
The Company's business is highly dependent upon its ability to attract
and retain qualified scientific, technical and management personnel. The
Company had 51 full-time employees at June 30, 1996, including five executive
officers, seven employees in research and development, 15 in operations
(engineering and manufacturing), 13 in sales and marketing, seven in field
service, and four in finance and administration. The Company has also retained
three individuals as consultants. Two of the consultants and six of the
employees of the Company are Ph.D.s or M.D.s. Although there is intense
competition for qualified personnel in the Company's industry, the Company has
not experienced a problem to date in recruiting or retaining qualified
scientific and management personnel. The Company is not a party to any
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's administrative, manufacturing and research and development
facilities consist of approximately 28,800 square feet located in Rockville,
Maryland. The Company rents these facilities under a five year lease
commencing in May 1995. Rental expense for facilities for the year ended June
30, 1996 totaled $369,349. At June 30, 1996, the monthly rental was $31,830.
The Company believes that the current facilities are adequate for current needs
and would be adequate for sales at approximately twice the level experienced in
the year ended June 30, 1996.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings are required to be reported under this Item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of fiscal year ended June 30, 1996.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock, par value $.001 per share, of the Company ("Common
Stock") has been traded on the over-the-counter market with quotations reported
on the National Association of Securities Dealers Automatic Quotation System
(NASDAQ) under the symbol "CMSI" since November 22, 1989. Since May 19, 1992,
the Common Stock has traded on the NASDAQ National Market System and all
corresponding prices represent high and low closing prices for the Common Stock
for the periods indicated.
<TABLE>
<CAPTION>
Price Range
-----------
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended June 30, 1995
-------------------------------
1st Quarter 4 11/16 2 1/16
2nd Quarter 4 1/4 3
3rd Quarter 3 11/16 2 7/8
4th Quarter 3 1/2 2
Fiscal Year Ended June 30, 1996
-------------------------------
1st Quarter 3 5/8 2 1/8
2nd Quarter 3 3/8 2
3rd Quarter 2 7/16 1 5/8
4th Quarter 3 5/16 2
</TABLE>
HOLDERS
As of September 19, 1996, there were 1,215 holders of record of the Common
Stock.
DIVIDEND HISTORY AND POLICY
The Company has never paid cash dividends on its Common Stock and
does not anticipate that any cash dividends will be paid for the foreseeable
future.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the
fiscal years ended June 30, 1996, 1995, 1994, 1993 and 1992, have been derived
from the Company's consolidated financial statements, which were audited by
Deloitte & Touche LLP, Independent Public Accountants. This data should be
read in conjunction with the Consolidated Financial Statements, related notes
and other financial information included herein.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
(In Thousands, Except Per Share Data)
1996 1995 1994 1993 1992
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total Revenues $ 6,844 $13,594 $13,438 $ 5,876 $ -
Gross Profit (Loss) 3,080 7,832 6,310 1,029 (198)
Loss from Operations (3,414) (1,812) (2,658) (6,837) (5,027)
Net Loss (3,404) (2,231) (2,637) (6,588) (4,750)
Per Share Data:
Net Income (Loss) Per Share (0.13) (0.09) (0.12) (0.29) (0.26)
Balance Sheet Data (end of period):
Working Capital 2,533 3,776 5,116 4,975 11,609
Total Assets 5,814 8,403 9,106 8,353 12,971
Long Term Notes Payable and
Capital Lease Obligations 5 23 31 11 14
Accumulated Deficit 25,655 22,250 20,020 17,383 10,794
Stockholders' Equity 2,849 3,982 5,323 5,642 12,038
</TABLE>
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cryomedical Sciences, Inc. ("CMS") and its wholly owned subsidiary
Cryo Instruments, Inc. ("CII"), collectively referred to as the "Company," is
engaged in the research, development, marketing and manufacturing of products
for use in the field of hypothermic (low-temperature) medicine. The Company
was incorporated on November 5, 1987. On August 31, 1989, CMS completed the
acquisition of CII and CII became a wholly-owned subsidiary of CMS. CII has
been inactive since June 30, 1990.
RESULTS OF OPERATIONS
Since inception and through June 30, 1992, the Company was a
development stage company which focused primarily on research and development
activities in connection with its cryosurgical systems and hypothermic blood
substitute solutions. Through June 30, 1992, the Company did not generate any
operating revenues and incurred cumulative losses of $9,861,102.
Prior to fiscal year 1993, the Company's sole source of revenues has
been interest income. In October 1991, the Company announced the first use of
the AccuProbe prototype for patients and the first AccuProbe system was shipped
in June 1992.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Sales and other revenues for the fiscal year ended June 30, 1996
totaled $6,843,950, compared to revenues of $13,594,186 for the prior fiscal
year. The decreased revenue results from a decline in the number of
AccuProbe(R) systems sold and fewer procedures performed using single-use
AccuProbe accessories due primarily to lack of formal Medicare reimbursement
for urologic cryosurgery.
Sales of the AccuProbe are affected by the level of reimbursement by
public and private insurers in connection with procedures in which the
AccuProbe is utilized. The availability of consistent, uniform insurance
reimbursement guidelines for hospitals and physicians is an important factor
often considered by potential customers when making a decision regarding the
purchase of any new medical device, including the AccuProbe System.
Reimbursement of hospitals and urologists by public and private insurers such
as Medicare and Blue Cross and Blue Shield is a necessary part of gaining
general acceptance for use of the AccuProbe for urological cryosurgery.
Currently Medicare considers urological cryosurgical procedures to be
investigational and excludes such procedures from reimbursement, although
Medicare carriers may pay for such procedures if the carriers decide that the
use of the AccuProbe is appropriate for the patients involved. No national
payment guidelines for such surgery have yet been established by either
Medicare's Health Care Financing Administration ("HCFA") or by the National
Blue Cross and Blue Shield Association. Therefore, insurer's reimbursement
decisions are made on an insurer-by-insurer or case-by-case basis. While
payments received by customers vary significantly by region and insurer,
widespread formal reimbursement acceptance has yet to be achieved. When
insurance coverage is not available, patients may either elect to pay for
cryosurgical procedures themselves or undergo traditional therapies which are
covered by their insurers. The Company cannot predict if or when national
coverage guidelines for Medicare, Blue Cross and Blue Shield or any other
insurance carriers will be instituted for this form of surgery. The
uncertainty and added efforts required for the Company's customers to secure
payment are impacting sales growth and utilization of AccuProbe Systems and,
may continue to do so unless and until formal national coverage guidelines are
established. In this respect, the number of single-use probes sold in the year
ended June 30, 1996 decreased 39% compared with the number of probes sold in
the prior fiscal year. In addition, the cumulative number of systems sold
since the introduction of the AccuProbe increased only 14% from 122 at June 30,
1995 to 139 at June 30, 1996. The Company believes such a reduced rate of
AccuProbe System sales and probe usage is likely due to the lack of uniform
medical insurance reimbursement policies. Changes in probe inventories
14
<PAGE> 15
maintained by hospitals using AccuProbe Systems may influence the rate of sales
of single-use probes, but the Company is usually not aware of such changes in
hospital probe inventories.
In view of the operating losses suffered by the Company and the level
of the Company's current liquid resources (see "Liquidity and Capital
Resources" below), commencing in May 1995 and continuing throughout fiscal
1996, the Company undertook certain actions to reduce expense levels. Such
actions include staff reductions, a reduction in the amount of leased office
space, reductions in the levels of research grants to outside facilities and
reductions in other overhead expenses. The goal of these cost reduction
measures is to reduce operating expenses to a level whereby the Company can
achieve operating profits and a positive cash flow from operations, for which
there can be no assurance of achieving.
Gross profits for the year ended June 30, 1996 totaled $3,079,828 or
45% of sales, compared to $7,832,188 or 58% of sales in the prior fiscal year.
Gross profits as a percentage of sales in fiscal 1996 ranged from a low of 45%
of sales in the quarter ended June 30, 1996 to a high of 56% of sales in the
quarter ended December 31, 1995. Gross profits as a percent of sales decreased
during fiscal 1996 as the number of AccuProbe Systems sold declined. The
Company can give no assurance that there will be a stabilization in gross
profits as a percent of sales during the year ending June 30, 1997.
Research and development expenses for the fiscal year ended June 30,
1996 totaled $1,484,042, a reduction of $1,415,644 (49%) compared to $2,899,686
for the prior fiscal year. This decrease was primarily due to staff
reductions and reductions in the levels of research grants.
Sales and marketing expenses totaled $2,439,636 in the fiscal year
ended June 30, 1996, a reduction of $1,283,532 (35%) compared to $3,723,168 in
the prior fiscal year. This reduction was primarily as a result of decreased
staffing and a reduced participation at marketing and trade shows.
General and administrative expenses for the fiscal year ended June
30, 1996 totaled $2,570,604, a reduction of $450,262 (15%) compared to
$3,020,866 in the prior fiscal year. This reduction was due to staff
reductions and reduced professional and consultants fees.
As a result of the decreased gross profits, due to significantly
lower revenues, and offset in part by reduced costs and expenses in all
departments, the Company sustained an increased net loss of $3,404,247 for the
year ended June 30, 1996 compared to a net loss of $2,230,725 in the prior
fiscal year.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Sales and other revenues for the fiscal year ended June 30, 1995
totaled $13,594,186, compared to revenues of $13,438,494 for the prior fiscal
year. The flat revenue growth results from a decline in the number of
AccuProbe(R) systems sold and fewer procedures performed using single-use
AccuProbe accessories due primarily to lack of formal Medicare reimbursement
for urologic cryosurgery.
In view of the operating losses suffered by the Company and the level
of the Company's current liquid resources as described above , in May 1995 the
Company commenced certain actions to reduce expense levels.
Gross profits for the year ended June 30, 1995 totaled $7,832,188 or
58% of sales, compared to $6,309,797 or 47% of sales in the prior fiscal year.
Gross profits as a percentage of sales in fiscal 1995 ranged from a low of 51%
of sales in the quarter ended September 30, 1994 to a high of 73% of sales in
the quarter ended June 30, 1995. Gross profits as a percent of sales increased
during fiscal 1995 and 1994 as product costs were reduced. Gross profits as a
percentage of sales increased in the fourth quarter as a result of a year-end
inventory revaluation to current cost levels and a fourth quarter reduction in
accrued manufacturing expenses.
15
<PAGE> 16
Research and development expenses for the fiscal year ended June 30,
1995 totaled $2,899,686, compared to $2,506,349 for the prior fiscal year.
Research and development expenses increased by $393,337 (16%) in the fiscal
year ended June 30, 1995 primarily due to a $422,000 increase in research
grants to customers.
Sales and marketing expenses totaled $3,723,168 in the fiscal year
ended June 30, 1995, compared to $3,444,153 in the prior fiscal year. Sales
and marketing expenses increased by $279,015 (8%) in the fiscal year, primarily
as a result of increased staffing and increased marketing activity.
General and administrative expenses for the fiscal year ended June
30, 1995 totaled $3,020,866, essentially unchanged from $3,017,306 for the
prior fiscal year.
The Company recorded a $450,000 expense to settle the stockholder
class action suit in the year ended June 30, 1995.
As a result of the increased gross profits, offset in part by an
increase in costs and expenses and the expense of settling the stockholder
class action suit, the Company sustained a decreased net loss of $2,230,725 for
the year ended June 30, 1995 compared to a net loss of $2,636,802 in the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash, cash equivalents, and
short-term investments totaling $1,355,942 and working capital of $2,533,029,
as compared to $1,217,693 and $3,775,893, respectively, at June 30, 1995. The
Company's working capital position decreased from June 30, 1995 due primarily
to the net loss of $3,404,247 sustained by the Company for the year ended June
30, 1996, which was offset in part by the net proceeds of $1,910,000 obtained
from the execution of a Reg "S" equity placement.
On October 2, 1996, subsequent to the fiscal year end June 30, 1996,
the Company received $1,924,935 of net proceeds related to a convertible
Preferred Stock sale to several foreign investors. According to the terms of
the convertible Series D Preferred Stock, investors may convert one-third of
their shares into Common Stock forty days subsequent to the October 1, 1996
closing date at a conversion rate determined equal to 82.5% of the average
closing bid prices for five days immediately preceding the date the holder
notifies the Company of their intention to convert preferred shares into common
shares (the "Conversion Formula"). Investors may convert an additional
one-third of the Series D Preferred Stock into Common Stock seventy-five days
after the Closing Date, and the balance thereof may be converted into shares of
Common Stock one hundred days after the Closing Date in each case utilizing the
Conversion Formula. Any share of Series D Preferred Stock outstanding on
October 2, 1998 shall automatically be converted into Common Stock.
On January 17, 1996, the Company received $1,910,000 of net proceeds
related to a convertible Preferred Stock sale to several foreign investors.
According to the terms of the Series C Preferred Stock, investors could convert
50% of their shares into Common Stock forty days subsequent to the January 16,
1996 closing at a conversion rate determined by the average closing bid prices
for five days immediately preceding the date the holder notifies the Company of
their intention to convert preferred shares into common shares (the average of
such closing bid prices being referred to as "average bid price"). If the
average bid price was $2.00 or less, then the conversion price would equal
82.5% of the average bid price. If the average bid price was $2.01 or more,
the conversion price would equal 80% of the average bid price. Investors could
convert the balance of their Preferred Stock into Common Stock seventy-five
days after the closing. Any shares of the convertible Preferred Stock
outstanding on January 16, 1997 would automatically be converted into Common
Stock. On March 13, 1996, 684,914 shares of Common Stock of the Company were
issued in accordance with the terms of the offering. On April 8, 1996 and May
23, 1996, respectively, 618,308 and 29,411 shares of Common Stock were issued
to investors completing the conversion of all of the shares of Series C
Preferred Stock issued.
16
<PAGE> 17
Capital expenditures for leasehold improvements, furniture and
equipment totaled $60,447 in the year ended June 30, 1996, compared to $317,240
in the prior fiscal year and $218,612 in the fiscal year ended June 30, 1994.
The Company has budgeted $55,000 for additional equipment and furniture in the
year ending December 31, 1996.
The Company expects to incur expenditures over the next 12 months
related to research, development, manufacturing and testing of its products,
and for sales and marketing efforts and other operating expenses. The
Company's management assumes that fiscal 1997 sales may be less than the level
experienced in fiscal 1996 and 1995 and believes that its current cash and
working capital position will be sufficient to fund the operations of the
Company for 12 months, dependent, in part, on the level of sales and marketing
activity engaged in by the Company and the amounts of research funded by the
Company. However, the Company expects to reduce expenditures if necessary and
to pursue various forms of short term financing to supplement working capital
during fiscal 1997 and possibly additional equity financing. Except for the
proceeds from the sale of its products, the Company has no other major sources
of liquidity and has no commitments with regard to obtaining any additional
funds.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CRYOMEDICAL SCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Public Accountants 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Cash Flows 21
Consolidated Statements of Changes in Stockholders' Equity 22
Notes to Consolidated Financial Statements 23
</TABLE>
17
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cryomedical Sciences, Inc.
Rockville, MD
We have audited the accompanying consolidated balance sheets of Cryomedical
Sciences, Inc. and Subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cryomedical Sciences, Inc. and
Subsidiary at June 30, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Washington, D.C.
October 4, 1996
18
<PAGE> 19
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS June 30, 1996 June 30, 1995
- ------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,250,871 $ 1,117,383
Short-term investments 105,071 100,310
Receivables - net of allowance for doubtful accounts
of $48,304 and $78,209 1,566,064 3,178,032
Inventories 1,990,548 2,628,532
Prepaid expenses and other 187,269 297,984
----------- -----------
Total current assets 5,099,823 7,322,241
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Less accumulated
depreciation and amortization of $1,408,503 and $1,010,209 695,065 1,061,935
OTHER ASSETS 18,727 18,727
----------- -----------
$ 5,813,615 $ 8,402,903
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses 1,635,140 $ 2,096,696
Accrued settlement of stockholder class action suit - 100,000
Accrued vacation 120,233 177,831
Customer deposits 10,000 50,000
Deferred revenue 58,823 -
Warranty reserves 100,000 248,000
Extended warranties - current 624,575 842,738
Current portion of capital lease obligations and notes payable 18,023 31,083
----------- -----------
Total current liabilities 2,566,794 3,546,348
EXTENDED WARRANTIES 231,212 848,286
DEFERRED RENT 161,546 3,690
CAPITAL LEASE OBLIGATIONS AND NOTES PAYABLE,
net of current portion 4,632 22,654
----------- -----------
Total liabilities 2,964,184 4,420,978
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $ .001; authorized,
9,379,000 shares; issued and outstanding, none - -
Common stock, par value $ .001; authorized,
50,000,000 shares; issued and outstanding,
26,873,026 and 24,845,631 shares 26,873 24,846
Additional paid-in capital 28,520,203 26,248,915
Accumulated deficit (25,654,612) (22,250,365)
Notes receivable from officers, including
accrued interest (43,033) (41,471)
----------- -----------
Total stockholders' equity 2,849,431 3,981,925
------------ -----------
$ 5,813,615 $ 8,402,903
=========== ===========
See notes to consolidated financial statements.
</TABLE>
19
<PAGE> 20
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Product Sales $ 5,652,403 $ 11,775,112 $ 12,685,536
Services and Other 1,191,547 1,819,074 752,958
------------ ------------ ------------
TOTAL REVENUES $ 6,843,950 $ 13,594,186 $ 13,438,494
COST OF SALES:
Product Sales 3,131,440 4,959,675 6,379,351
Services and Other 632,682 802,323 749,346
------------ ------------ ------------
TOTAL COST OF SALES 3,764,122 5,761,998 7,128,697
------------ ------------ ------------
GROSS PROFIT 3,079,828 7,832,188 6,309,797
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 1,484,042 2,899,686 2,506,349
Sales and marketing 2,439,636 3,723,168 3,444,153
General and administrative 2,570,604 3,020,866 3,017,306
------------ ------------ ------------
TOTAL OPERATING EXPENSES 6,494,282 9,643,720 8,967,808
------------ ------------ ------------
OPERATING LOSS (3,414,454) (1,811,532) (2,658,011)
SETTLEMENT OF STOCKHOLDER
CLASS ACTION SUIT - (450,000) -
INTEREST INCOME, NET OF
INTEREST EXPENSE 10,207 30,807 21,209
------------ ------------ ------------
NET LOSS $(3,404,247) $ (2,230,725) $ (2,636,802)
=========== ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 25,277,944 24,705,564 22,795,088
============ ============ ===========
NET LOSS PER SHARE $ (0.13) $ (0.09) $ (0.12)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,404,247) $ (2,230,725) $ (2,636,802)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 398,294 425,804 337,368
(Decrease) increase in warranty reserves (148,000) 2,200 (36,200)
Write-off of accounts receivable - 72,827 126,607
Write-off of fixed assets 29,023 - -
Settlement cost for
stockholder class action suit - 450,000 -
(Gain) loss on disposal of fixed assets - (210) 10,696
Changes in assets and liabilities:
Decrease (increase) in receivables 1,611,968 (279,660) (504,021)
Decrease (increase) in inventories 637,984 (497,243) (869,424)
Decrease (increase) in prepaid expenses and other assets 110,715 (6,953) (151,001)
(Decrease) increase in accounts payable,
accrued expenses, accrued vacation, and deferred rent (433,557) 282,817 234,269
Decrease in customer deposits (40,000) (10,000) (40,000)
(Decrease) increase in extended warranties (835,237) 248,903 887,812
------------ ------------ ------------
Total Adjustments 1,331,190 688,485 (3,894)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,073,057) (1,542,240) (2,640,696)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments - (100,310) (97,424)
(Reinvestment) maturities of short-term investments (4,761) 97,424 1,094,548
Purchase of equipment (60,447) (317,240) (218,612)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (65,208) (320,126) 778,512
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from officers (1,562) (1,875) (1,875)
Exercise of Employee Stock Options 326,304 - -
Common stock issued for cash 1,910,000 111,042 122,140
Issuance of shares for employee stock purchase plan 37,011 - -
Increase (decrease) in notes payable - 14,125 (6,208)
Common stock issuance costs - - (38,565)
Exercise of "A" warrants - - 312,500
Exercise of "B" warrants - - 500,000
Exercise of private placement Unit Purchase Options - - 121,500
Exercise of Unit Purchase Options and
underlying Class A and Class B Warrants - 429,990 1,302,375
------------- ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,271,753 553,282 2,311,867
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 133,488 (1,309,084) 449,683
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,117,383 2,426,467 1,976,784
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,250,871 $ 1,117,383 $ 2,426,467
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 15,392 $ 22,690 $ 13,482
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY:
Capitalization of inventories into plant and equipment $ - $ 89,484 $ 99,286
============ ============ ============
Equipment purchased under financing $ - $ 45,914 $ 32,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Convertible Preferred Stock
------------ --------------------------- Notes
Additional Receivable
Number of Paid-In Number of Accumulated from
Shares Amount Capital Shares Amount Deficit Officers
-------- ------ ----------- ------------- ------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993 . . . . . . . . 22,486,509 22,487 23,040,292 - - (17,382,838) (37,721)
Exercise of warrants,
net of offering costs . . . . . . . 62,000 62 119,086 - - - -
Exercise of Class "A" Warrants,
net of offering costs . . . . . . . 250,000 250 300,183 - - - -
Exercise of Class "B" Warrants,
net of offering costs . . . . . . . 250,000 250 487,683 - - - -
Exercise of Private Placement
Unit Purchase Options,
net of offering costs . . . . . . . 81,000 81 77,010 - - - -
Conversion of 9% Series A
redeemable convertible preferred
stock at $.50 per share, net of
offering costs . . . . . . . . . . 81,000 81 36,510 - - - -
Concurrent exercise of Unit Purchase
Options and underlying Class A
and Class B Warrants, net of
offering costs 1,216,500 1,216 1,297,538 - - - -
Interest on loan to officer . . . . . - - - - - - (1,875)
Net loss . . . . . . . . . . . . . . - - - - - (2,636,802) -
---------- ------- ----------- ---------- ----------- ------------- ------------
Balance, June 30, 1994 . . . . . . . 24,427,009 24,427 25,358,302 - - (20,019,640) (39,596)
Exercise of warrants . . . . . . . . 88,000 88 81,772 - - - -
Exercise of stock options . . . . . . 25,200 25 1,575 - - - -
Employee Stock Purchase Plan . . . . 14,422 15 27,567 - - - -
Exercise of Unit Purchase Options and
all underlying Class A and Class B
Warrants . . . . . . . . . . . . . 291,000 291 429,699 - - - -
Interest on loan to officer . . . . . - - - - - - (1,875)
Increase from settlement
of stockholder class action suit . - - 350,000 - - - -
Net loss . . . . . . . . . . . . . . - - - - (2,230,725) -
---------- ------- ----------- ---------- ----------- ------------ ------------
Balance, June 30, 1995 . . . . . . . 24,845,631 $24,846 $26,248,915 - - $(22,250,365) $(41,471)
Exercise of stock options . . . . . . 503,134 503 325,801 - - - -
Employee Stock Purchase Plan . . . . 16,079 16 36,995 - - - -
Reg "S" offering of Convertible
Preferred Stock net of offering
costs - - - 1,332,633 1,910,000 - -
Conversion of Convertible Preferred
Stock from Reg "S" offering . . . . 1,332,633 1,333 1,908,667 (1,332,633) (1,910,000) - -
Shareholder suit settlement . . . . . 175,549 175 (175) - - - -
Interest on loan to officer . . . . . - - - - - (1,562)
Net loss . . . . . . . . . . . . . . - - - - (3,404,247) -
---------- ------- ----------- ---------- ----------- ------------- ------------
Balance, June 30, 1996 . . . . . . . 26,873,026 $26,873 $28,520,203 - - $(25,654,612) $ (43,033)
========== ======= =========== ========== =========== ============= ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
- --------------------------------------------------------------------------------
1. GENERAL
Cryomedical Sciences, Inc. ("CMS") and its wholly owned subsidiary,
Cryo Instruments, Inc. ("CII"), collectively referred to as "the
Company," is engaged in the research and development of products for
use in the field of hypothermic (low-temperature) medicine. The
Company is engaged in the development, manufacturing and marketing of
cryosurgical devices used to freeze and destroy diseased tissue
through the application of subfreezing temperatures and shipped the
first such device in June 1992. Hypothermic blood substitute
solutions also being developed by the Company may allow heretofore
difficult or impossible surgical techniques to be performed and may be
useful in increasing the period in which organs may be preserved for
transplantation.
CMS was organized November 5, 1987, as a Delaware corporation. Since
inception and through June 30, 1992, the Company was a development
stage company which did not generate any operating revenues and
incurred cumulative losses of $9,861,102. In July 1992, the Company
began generating revenue from the sale of its products. Management
intends to fund operations including future research and development,
primarily through the proceeds from sales of the Company's products
and through other forms of financing.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Cryomedical Sciences, Inc., and its wholly
owned subsidiary Cryo Instruments, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Net Loss Per Share - Net loss per share is based on the weighted
average number of common shares outstanding during the years ended
June 30, 1996, 1995, and 1994. No effect has been given to
unexercised stock options and warrants because the effect would be
antidilutive.
Cash Equivalents - Cash equivalents consist primarily of
interest-bearing bank certificates of deposit. The Company considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out ("FIFO") method.
Equipment and Leasehold Improvements - Furniture and equipment are
stated at cost and are depreciated using the straight-line method over
estimated useful lives of three to five years. Leasehold improvements
are stated at cost and are amortized using the straight-line method
over the lesser of the life of the asset or the remaining term of the
lease.
Revenue Recognition - The Company receives revenue both from sales of
products and from extended warranties. The Company generally
recognizes revenue related to the sales of its products, primarily its
cryosurgical systems and disposable probes, at the time of shipment.
Revenue from extended warranties is deferred and recognized on a
straight-line basis over the warranty contract periods. Sales to one
major customer in the years ended June 30, 1996, 1995 and 1994 were
$355,388, $886,664 and $2,910,827, respectively.
Warranties - The Company generally warrants its cryosurgical systems
for one year. The estimated cost to repair or replace systems under
warranty is provided by charges to cost of sales in the period in
which the related revenue is recognized.
Research and Development Costs - Research and development costs are
expensed as incurred.
23
<PAGE> 24
Income Taxes - The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For
Income Taxes". Under SFAS No. 109 deferred income taxes are
recognized for the future tax consequences of differences between tax
bases of assets and liabilities, and financial reporting amounts,
based upon enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to amounts expected to be realized.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements - During 1995, the Financial
Accounting Standards Board issued Statement No. 123, "Accounting for
Stock-Based Compensation", which is effective for years beginning
after December 15, 1995. This statement requires footnote disclosure
of the proforma impact on net income (loss) and earnings (loss) per
share of the compensation costs that would have been recognized if the
fair value of all stock based awards was recorded in the income
statement. The disclosure provisions of this statement will be
adopted during the year ended June 30, 1997.
Reclassifications - Certain reclassifications of the prior year
financial statements have been made to conform to the 1996
presentation.
3. SHORT-TERM INVESTMENTS
Short-term investments at June 30, 1996 and 1995 consist of
interest-bearing certificates of deposit.
4. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Raw materials and purchased parts $ 838,531 $1,296,445
Work in process 340,798 628,302
Finished goods 737,596 789,090
Consignment inventory 253,623 53,706
---------- ----------
2,170,548 2,767,543
Less reserves (180,000) (139,011)
---------- ---------
$1,990,548 $2,628,532
========== ==========
</TABLE>
During the year, the Company reduced the inventory reserve
approximately $120,000 related to the reworking of Warmers and
accessories after the FDA's clearance for marketing of the Warmers.
In addition, the Company increased the inventory reserve by
approximately $160,000 reflecting an estimate for the potential
obsolescence of a portion of the existing probe stock due to
technological improvements in the probe.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Leasehold improvements $ 201,521 $ 222,922
Furniture and office equipment 754,545 710,664
Manufacturing and other equipment 1,147,502 1,138,558
----------- ----------
2,103,568 2,072,144
Less accumulated
depreciation and amortization (1,408,503) (1,010,209)
----------- ----------
$ 695,065 $1,061,935
=========== ==========
</TABLE>
24
<PAGE> 25
Furniture and office equipment includes assets under capital leases of
$77,914 less accumulated amortization of $46,175 at June 30, 1996.
6. INCOME TAXES
The approximate tax effect of each type of temporary difference and
carryforward that gave rise to the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Accrued vacation $ 39,046 $ 68,678
Warranty reserve 41,000 95,778
Extended warranties 350,873 653,074
Inventory obsolescence reserve 73,800 53,686
Depreciation (29,713) (36,499)
Tax loss carryforward 7,377,546 7,051,997
R&D credit 784,482 639,533
Settlement of stockholder class action suit - 173,790
Accrued severance 51,751 -
Allowance for bad debt 19,805 -
Deferred rent 66,234 -
Other (1,537) (2,713)
Less: valuation allowance (8,773,287) (8,697,534)
---------- ----------
Net deferred $ - $ -
=========== ==========
</TABLE>
The Company has not realized any taxable income since its inception
and as of June 30, 1996, has net operating loss carryforwards for both
federal and state tax purposes approximately as follows:
<TABLE>
<CAPTION>
Year of Federal
Expiration and State
---------- ---------
<S> <C>
2003 $ 76,000
2004 472,000
2005 1,747,000
2006 2,205,000
2007 4,820,000
2008 5,893,000
2009 1,433,000
2010 1,562,000
2011 3,490,000
-----------
$21,698,000
===========
</TABLE>
The Company has research and development tax credit carryforwards of
approximately $20,000 expiring in 2004, $42,000 expiring in 2005,
$88,000 expiring in 2006, $125,000 expiring in 2007, $150,000 expiring
in 2008, $114,000 expiring in 2009, $100,000 expiring in 2010 and
$100,000 expiring in 2011.
In the event of a significant change in the ownership of the Company,
the utilization of such loss carryforwards could be substantially
limited.
7. STOCKHOLDERS' EQUITY
Common Stock - In December 1989, the Company completed an underwritten
public offering of 1,150,000 Units consisting of 5,750,000 shares of
Common Stock and 5,750,000 Redeemable Class A Warrants. Each Class A
Warrant entitled the registered holder to purchase one share of Common
Stock and one Redeemable Class B Warrant through November 21, 1994.
Each Class B Warrant entitled the registered holder to purchase one
share of Common Stock through November 21, 1994. Both Class A and
Class B Warrants were subject to redemption by the Company at $.05 per
warrant under certain conditions.
25
<PAGE> 26
All of the Class A Warrants were exercised on or before May 15, 1991,
resulting in the issuance of 5,750,000 shares of Common Stock of the
Company and 5,750,000 Redeemable Class B Warrants. All of the Class B
Warrants were exercised on or before April 21, 1992, resulting in the
issuance of 5,750,000 shares of Common Stock of the Company.
In connection with the initial public offering, the underwriter
received options to purchase up to 100,000 Units, exercisable over a
period of three years commencing two years from the effective date of
the offering. These Units were identical to the Units sold in the
Company's initial public offering except that the Class A and Class B
Warrants were not redeemable. On May 27, 1994, the Company entered
into an agreement with the successor-in-interest to the underwriter
regarding exercise of 76,100 Unit Purchase Options. Pursuant to the
Agreement, (i) 76,100 Unit Purchase Options issued in connection with
the Company's initial public offering, (ii) 380,500 Class A Warrants
(the "Class A Warrants") included in the Units and (iii) 380,500 Class
B Warrants issuable upon the exercise of the Class A Warrants were
concurrently exercised at an aggregate discount of 30.7%, resulting in
the issuance of 1,141,500 shares of Common Stock of the Company.
On June 15, 1994, the Company entered into agreements with two
non-affiliated holders of Unit Purchase Options regarding exercise of
an aggregate of 5,000 Unit Purchase Options owned by them (the
"Agreements"). Pursuant to the Agreements, (i) an aggregate of 5,000
Unit Purchase Options issued in 1989 in connection with the Company's
initial public offering, (ii) 25,000 Class A Warrants (the "Class A
Warrants") included in the Units and (iii) 25,000 Class B Warrants
issuable upon the exercise of the Class A Warrants were concurrently
exercised at an aggregate discount of 10%, resulting in issuance of
75,000 shares of Common Stock of the Company.
All of the remaining Unit Purchase Options, all of the Class A
Warrants included in the Units, and all of the underlying Class B
Warrants were exercised in August, October and November 1994,
resulting in the issuance of 291,000 shares of Common Stock of the
Company.
On January 17, 1996, the Company received $1,910,000 of net proceeds
related to a convertible Preferred Stock sale to several foreign
investors. According to the terms of the Series C Preferred Stock,
investors could convert 50% of their shares into Common Stock forty
days subsequent to the January 16, 1996 closing at a conversion rate
determined by the average closing bid prices for five days immediately
preceding the date the holder notifies the Company of their intention
to convert preferred shares into common shares (the average of such
closing bid prices being referred to as "average bid price"). If the
average bid price was $2.00 or less, then the conversion price would
equal 82.5% of the average bid price. If the average bid price was
$2.01 or more, the conversion price would equal 80% of the average bid
price. Investors could convert the balance of their Preferred Stock
into Common Stock seventy-five days after the closing. Any shares of
the convertible Preferred Stock outstanding on January 16, 1997 would
automatically be converted into Common Stock. On March 13, 1996,
684,914 shares of Common Stock of the Company were issued in
accordance with the terms of the offering. On April 8, 1996 and May
23, 1996, respectively, 618,308 and 29,411 shares of Common Stock were
issued to investors completing the conversion of all of the shares of
Series C Preferred Stock issued.
Warrants - In June 1989, the Company completed an offering of 20 Units
("Units"), each Unit consisting of a $25,000 principal amount note
payable ("Notes"). When the Notes were repaid in November 1989, each
Unit holder received $26,250 ($25,000 principal repayment plus $1,250
interest) and 12,500 Redeemable Class A Warrants. Each warrant
entitled the holder, upon exercising the warrant, to purchase one
share of Common Stock and one Redeemable Class B Warrant at a price of
$1.25. The Class A Warrants were exercisable for a period of five
years from the effective date of registration of the initial public
offering. Each Class B Warrant entitled the holder, upon exercising
the warrant, to purchase one share of the Company's Common Stock at a
price of $2.00. The Class B Warrants were exercisable from the date
of issuance and expired on the date the Class A Warrants expired.
Both Class A and Class B Warrants were subject to redemption by the
Company at $.05 per warrant under certain conditions.
On March 22, 1994, the Company called for the redemption on April 22,
1994 of all of the 250,000 outstanding Class A Warrants issued when
the Notes were repaid in 1989. All holders of the Class A Warrants
chose to exercise the warrants prior to the expiration of the notice
period of redemption, and
26
<PAGE> 27
in April 1994, the Company issued 250,000 shares of Common Stock and
250,000 Class B Warrants in exchange for the 250,000 Class A Warrants
outstanding on March 21, 1994.
On May 3, 1994 the Company called for the redemption on June 7, 1994
of all of the 250,000 outstanding Class B Warrants issued in April
1994 when the Company's Class A Warrants were exercised. On June 6,
1994, the Company extended the notice period of redemption to June 21,
1994 with respect to 75,000 Class B Warrants which remained
outstanding and unexercised. All holders of the Class B Warrants
chose to exercise the Warrants prior to the expiration of the extended
notice period of redemption, and in May and June 1994, the Company
issued 250,000 shares of Common Stock in exchange for the 250,000
Class B Warrants outstanding on May 2, 1994.
The Company has granted warrants at an exercise price per share equal
to the market price of the stock on the date of grant to members of
the Company's Scientific Advisory Board and to consultants and others
who have provided, or will provide, services to the Company. In
general, one-half of the granted warrants may be exercised from the
date of grant and, in the event that the recipient continues to serve
as a member of the Scientific Advisory Board, one-half may be
exercised after one year of service.
The Company has also granted warrants to consultants and others who
have provided, or will provide, services to the Company, at an
exercise price per share equal to the market price of the Common Stock
on the date of grant. The terms of such warrants have ranged from
three to five years with various vesting arrangements (see Note 10
regarding warrants granted to a director).
The following table summarizes warrant activity for each of the three
years in the period ended June 30, 1996 with respect to warrants
granted to Scientific Advisory Board members and consultants
(excluding warrants granted to a director of the Company in connection
with consulting services. See Note 10):
<TABLE>
<CAPTION>
Number
of Warrants Price Per Share
----------- ------------------
<S> <C> <C> <C>
Balance, July 1, 1993 299,000 0.75 - 9.25
Granted 82,000 2.625 - 4.125
Exercised (62,000) 1.97
Lapsed (55,000) 1.97
----------
Balance, June 30, 1994 264,000 0.75 - 9.25
Granted - -
Exercised (88,000) 0.75 - 1.97
Lapsed (24,000) 9.25
---------
Balance, June 30, 1995 152,000 $2.125 - 8.75
Granted - -
Exercised - -
Lapsed ( - ) -
Balance, June 30, 1996 152,000 $2.125 - 8.75
==========
Warrants exercisable
at June 30, 1996 145,000 $2.125 - 8.75
==========
</TABLE>
Stock Options - The Company has adopted a stock option plan for
issuance of options to employees, directors and consultants of the
Company. The options may be designated incentive or non-incentive, as
determined by the Board of Directors, and incentive options may not be
granted at less than the fair market value of the underlying shares at
date of grant, as determined by the Board of Directors. The plan
provides that all options granted shall be exercisable during a period
within ten years from the date of grant, subject to certain
restrictions. At June 30, 1996, 158,916 shares were available for
future grants under the stock option plan.
The following table summarizes plan activity for each of the three
years in the period ended June 30, 1996:
27
<PAGE> 28
<TABLE>
<CAPTION>
Number of Price
Options per Share
------------- ---------
<S> <C> <C>
Balance, July 1, 1993 1,362,734 0.05 - 11.75
Granted 815,500 2.13 - 5.75
Exercised - -
Cancelled (264,000) 3.00 - 9.625
---------
Balance, June 30, 1994 1,914,234 0.05 - 11.75
Granted 49,800 2.75 - 3.563
Exercised (25,200) 0.05 - 1.75
Cancelled (73,600) 3.375 - 8.25
---------
Balance, June 30, 1995 1,865,234 0.05 - 11.75
Granted 884,450 1.688 - 2.938
Exercised (503,134) 0.05 - 2.125
Cancelled (314,900) 2.125 - 11.75
---------
Balance, June 30, 1996 1,931,650
=========
Options exercisable
at June 30, 1994 911,538 $0.05 - 11.75
=========
Options exercisable
at June 30, 1995 1,266,434 $0.05 - 11.75
=========
Options exercisable
at June 30, 1996 784,600 $1.688 - 9.250
=========
</TABLE>
In August 1993 the Board of Directors approved the 1993 Employee Stock
Purchase Plan which was subsequently approved by the stockholders of the
Company on January 31, 1994. The Plan allows substantially all
non-executive employees of the Company to purchase Common Stock upon
exercise of options granted. The options are exercisable at of the fair
market value of the Common Stock at either the date of grant or exercise
price, whichever is lower. The Plan was implemented on July 1, 1994.
Purchases under the Plan are subject to certain limitations and may not
exceed 250,000 shares during the term of the Plan which expires on June 30,
1997. A total of 16,079 shares were purchased by employees during the
year ended June 30, 1996 on two separate occasions. The issue dates for
the year ended June 30, 1996, were July 3, 1995 and January 3, 1996, in
which certificates representing 8,552 and 7,527 shares of Common Stock of
the Company were purchased by employees at $2.0187 and $1.8859 per share
respectively.
Stockholder Rights Plan - On August 21, 1995, the Board of Directors of
Cryomedical Sciences, Inc. declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock for
stockholders of record on September 11, 1995. Each Right entitles the
holder to purchase from the Company one one-hundredth of a share of Series
B Junior Preferred Stock, par value $.001 per share (the "Preferred
Shares"), of the Company at a price of $10.00 per one one-hundredth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The Rights
will be exercisable (i) 10 days following a public announcement that a
person or group acquires beneficial ownership of 20% or more of the
outstanding Common Stock of the Company (an "Acquiring Person"), or (ii) 10
business days (or later as determined by the Board of Directors) following
the commencement of, or an announcement of an intention to make, a tender
offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person or group of 20% or more of the outstanding
Common Stock of the Company (the earlier of such dates being called the
"Distribution Date"). Until a Right is exercised, the holder thereof will
have no rights as a stockholder of the Company. Until the Distribution
Date (or earlier redemption or expiration of the Rights), the Rights will
be transferred with and only with the Common Stock.
28
<PAGE> 29
In the event that any person or group becomes an Acquiring Person, each
holder of a Right, other than Rights beneficially owned by the Acquiring
Person, will thereafter have the right to receive upon exercise that number
of shares of Common Stock of the Company having a market value of two times
the Purchase Price, and in the event that the Company is acquired in a
business combination transaction or 50% or more of its assets are sold,
each holder of a Right will thereafter have the right to receive upon
exercise that number of shares of Common Stock of the acquiring company
which at the time of the transaction will have a market value of two times
the Purchase Price.
At any time after any person becomes an Acquiring Person, and prior to the
acquisition by such person or group of 50% or more of the outstanding
Common Stock of the Company, the Board of Directors of the Company may
cause the Rights (other than Rights owned by such person or group) to be
exchanged, in whole or in part, for Common Stock at an exchange rate of one
share of Common Stock per Right. At any time prior to the acquisition by a
person or group of beneficial ownership of 20% or more of the outstanding
Common Stock, the Board of Directors of the Company may redeem the Rights
in whole at a price of $.001 per Right. The Rights have certain
anti-takeover effects, in that they will cause substantial dilution to a
person or group that attempts to acquire a significant interest in the
Company on terms not approved by the Board of Directors.
8. EMPLOYEE BENEFIT PLAN
The Company established a 401(k) savings plan effective as of July 1, 1992
covering all eligible employees. Company contributions are discretionary
and none were made in the years ended June 30, 1996, 1995 and 1994. The
Company incurred $6,189, $7,347 and $5,848 of plan administration expenses
in the years ended June 30, 1996, 1995 and 1994, respectively.
9. RELATED PARTY TRANSACTIONS
In January 1993, the Company entered into an employment agreement with the
former President to continue his employment as President and Chief
Executive Officer. Of the 560,000 shares of Common Stock of the Company
that the former President had received in November 1989 pursuant to his
original employment agreement, 373,334 shares remained subject to
forfeiture. Under the new employment agreement, these 373,334 shares were
exchanged for a non-incentive stock option, granted to the former
President, to purchase 373,334 shares of Common Stock at a price of $.05
per share, which option may be exercised in whole or in part commencing
July 14, 1993 until its expiration date in January 1998. The option was
exercised with respect to 25,000 shares in February 1995.
In May 1994, the former President and Chief Executive Officer borrowed
$25,000 from the Company, evidenced by a promissory note and secured by
20,000 shares of Common Stock of the Company. The President borrowed an
additional $10,000 in August 1994. Each of the loans was for a period of
one year with interest at the rate of 7.5% per annum. In April 1995 each
of the loans was extended for an additional one year term.
Over the months of April, May and June 1996 the former President and Chief
Executive Officer exercised options to purchase a total of 448,334 shares
of Common Stock of the Company. Over this period, options to purchase
348,334 shares were exercised at $0.05 per share and 100,000 shares were
exercised at $2.125 per share.
On May 7, 1996 the Company announced that the President and CEO had
resigned. The severance package associated with this officer's resignation
included a payout of $216,000 which has been expensed in the year ended
June 30, 1996. Under the terms of the agreement, the former President and
Chief Executive Officer's indebtedness to the Company totalling $55,800
will be deducted from the proceeds of the consulting payout. The final
terms of the agreement included the maintenance in full force and effect of
the Proprietary Information and Invention Agreement between the former
officer of the Company and the Non-Competition section of the former
officer's Employment Agreement.
In May 1993, the Vice President, Research and Development exercised options
to purchase 20,000 shares of Common Stock of the Company. Under the terms
of his employment contract, the Vice
29
<PAGE> 30
President, Research and Development, borrowed funds from the Company to
exercise the options, evidenced by a promissory note secured by the shares.
The loan is for a period of five years with interest at the rate of 5% per
annum.
In August 1993, in connection with the execution of a three-year consulting
agreement, the Company granted a Director warrants to purchase 25,000
shares of Common Stock at $5.75 per share. The warrants lapse after five
years and in the event the Director continues to provide consulting
services to the Company, one-third may be exercised after one year, an
additional one-third may be exercised at the end of the second year, and an
additional one-third may be exercised at the end of the third year.
In October 1995, in connection with a limited period consulting agreement,
the Company granted a Director options to purchase an aggregate of 20,000
shares in eight individual grants at an exercise price per share ranging
from $1.688 to $2.938.
On May 24, 1996 a new President and Chief Executive Officer commenced his
employment with the Company by signing an employment agreement through
December 1999, which agreement included a grant of non-incentive stock
options to purchase 750,000 shares of Common Stock at a price of $2.1875
per share. These options vest evenly over five years, commencing one year
from employment.
The Company paid consulting fees to three stockholders for consulting
services. For the years ended June 30, 1996, 1995 and 1994, these fees
totaled $128,655, $89,900 and $159,833, respectively.
The Company paid $77,735, $104,046 and $103,986 of legal fees in the years
ended June 30, 1996, 1995 and 1994, respectively, to a law firm in which a
director and stockholder of the Company is a partner.
10. COMMITMENTS AND CONTINGENCIES
Since 1987, the Vice President, Research and Development of the Company,
has also been a Professor and the Director of the Center for Cryobiological
Research at State University of New York at Binghamton ("SUNY"). In
October 1993, the Company entered into an agreement with SUNY pursuant to
which SUNY released the Company's Vice President, Research and Development
from undergraduate teaching responsibilities for the year ended June 30,
1994 in return for reimbursements totaling $39,000 for the fiscal year.
The Company entered into similar agreements with SUNY for the years ending
June 30, 1995 and 1996 in return for annual reimbursement totaling $39,000.
The Company has funded research grants to various hospitals and individuals
to conduct research, develop new medical procedures, or compile clinical
data in connection with the use of AccuProbe Systems purchased from the
Company. The following table summarizes the research grant activity to
customers for each of the three years in the period ended June 30, 1996:
<TABLE>
<CAPTION>
Year Number Aggregate
Ended of Research Value of
June 30, Grants Grants ($)
-------- --------------- ----------
<S> <C> <C>
1994 3 127,000
1995 15 549,000
1996 2 47,225
</TABLE>
The Company is obligated by employee agreements over varying terms of one
to five years for a total of $1,328,255.
The Company rents office, lab, and manufacturing facilities under a
five-year lease. The Company partially occupied these facilities in May
1991 and fully occupied the facilities in November 1991; the five year term
of the lease commenced when the facilities were completed and fully
occupied. The lease was amended in August 1991, February 1992, December
1992, July 1993 and October 1993 to add additional space. The Company
negotiated a new five-year lease in May 1995, which included a reduction in
the amount of leased office space. This lease superseded the previous
lease and
30
<PAGE> 31
amendments. The new lease was amended on July 1, 1995 to include
additional unimproved storage space. In June 1996, the Company, with
the permission of its landlord, released a portion of the rental space
occupied by its administrative offices. This space was leased by the
landlord to an unrelated third-party tenant. The Company is currently
paying a one dollar per square foot charge for this released portion
of space for the remainder of its lease.
Future minimum lease payments for facilities and equipment at June 30,
1996, are as follows:
<TABLE>
<CAPTION>
Fiscal Years Operating Capital
Ending June 30, Leases Leases
--------------- ---------- --------
<S> <C> <C>
1997 348,349 20,102
1998 348,408 4,666
1999 351,751 0
2000 301,554 0
2001 0 0
---------- --------
$1,350,062 24,768
==========
Less interest expense (2,173)
--------
Capital lease obligation at June 30, 1996 $ 22,595
========
</TABLE>
Rental expenses for facilities and equipment for the years ended June
30, 1996, 1995, and 1994 totaled $568,331, $527,402 and $506,065,
respectively.
11. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the quarter ended June 30, 1996, the Company accrued certain
costs totalling $89,715 related to the termination of a business
agreement with a vendor. During the fourth quarter of 1996, the
Company incurred a onetime expense of $137,180 relating to a lease
charge it is paying to its landlord for the space the Company formerly
occupied and is now currently leased to an unrelated third party. A
portion of this expense also represents a one-time charge relating to
surplus space. Lastly, the Company accrued $119,360 for the
anticipated pay back of reduced employees' salaries.
12. SUBSEQUENT EVENTS
On October 2, 1996, subsequent to the fiscal year end June 30, 1996,
the Company received $1,924,935 of net proceeds related to a
convertible Preferred Stock sale to several foreign investors.
According to the terms of the convertible Series D Preferred Stock,
investors may convert one-third of their shares into Common Stock
forty days subsequent to the October 1, 1996 closing date at a
conversion rate determined equal to 82.5% of the average closing bid
prices for five days immediately preceding the date the holder
notifies the Company of their intention to convert preferred shares
into common shares (the "Conversion Formula"). Investors may convert
an additional one-third of the Series D Preferred Stock into Common
Stock seventy-five days after the Closing Date, and the balance
thereof may be converted into shares of Common Stock one hundred days
after the Closing Date in each case utilizing the Conversion Formula.
Any share of Series D Preferred Stock outstanding on October 2, 1998
shall automatically be converted into Common Stock.
* * * * * *
31
<PAGE> 32
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Position and Offices
Name Age With the Company
- ---- --- --------------------
<S> <C> <C>
Richard J. Reinhart, Ph.D. 55 President, Chief Executive Officer
and Director
John G. Baust, Ph.D. 53 Senior Vice President
and Chief Scientific Officer
Alan F. Rich 43 Vice President,
Sales and Marketing
William A. Zenner 49 Vice President,
Manufacturing
Howard S. Breslow 57 Director, Secretary
Sam Carl 65 Director
J. Donald Hill 64 Director
Robert A. Schoellhorn 68 Director
Henry T. Pietraszek 49 Director
</TABLE>
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by them:
Richard J. Reinhart, Ph.D., has been President, Chief Executive
Officer and a director of the Company since May 1996. From 1994 to 1996, Dr.
Reinhart was a consultant to Medical Resources, Inc., a diagnostic imaging
company, while also working with several other health care companies. From
1988 to 1994, Dr. Reinhart was Managing Director for Medical Resources, Inc.
From 1981 through 1988, Dr. Reinhart was Chief Executive Officer of several
small entrepreneurial medical device and instrumentation companies. From 1969
to 1981, Dr. Reinhart was employed by Roche Medical Electronics (a subsidiary
of Hoffman La Roche) where, after serving in several senior management
positions, he became President and Chief Executive Officer in 1978.
John G. Baust, Ph.D., has been Senior Vice President of the Company
since January 1995, Chief Scientific Officer since August 1993, served as Vice
President, Research and Development, of the Company from July 1990 to January
1995, and served as a consultant to the Company from April 1990 to July 1990.
Since 1987, Dr. Baust has also been a Professor and the Director of the Center
for Cryobiological Research at State University of New York at Binghamton, and
since July 1994, Dr. Baust has also been Adjunct Professor of Surgery, Medical
College of Pennsylvania. From 1984 to 1987, he was a Professor and the
Director of the Institute of Low Temperature Biology at the University of
Houston.
Alan Rich has been Vice President, Sales and Marketing, of the Company
since March 1994. Mr. Rich joined the Company in May 1992 as a regional sales
manager. From 1987 to May 1992, Mr. Rich was employed as Luminary
32
<PAGE> 33
Accounts Manager by Spacelabs, Inc., a publicly-held corporation engaged in the
development, manufacture and marketing of patient monitoring systems.
William A. Zenner has been Vice President, Manufacturing of the
Company since October 1995. Mr. Zenner joined the Company as Director of Field
Engineering in January 1992. From 1982 to 1992, Mr. Zenner was employed by
Roche Diagnostic Systems, Inc., a biomedical corporation engaged in medical
diagnostics.
Howard S. Breslow has served as a director of the Company since July
1988. He has been a practicing attorney in New York City for more than 29
years and is a member of the law firm of Breslow & Walker, New York, New York,
which firm serves as general counsel to the Company. Mr. Breslow currently
serves as a director of Excel Technology, Inc., a publicly-held company engaged
in the development and sale of laser products; FIND/SVP, Inc., a publicly-held
company engaged in the development and marketing of information services and
products; Vikonics, Inc., a publicly-held company engaged in the design and
sale of computer-based security systems; and Lucille Farms, Inc., a
publicly-held company engaged in the manufacture and marketing of dairy
products.
Sam Carl has been a director of the Company since January 1990. For
more than the past five years, Mr. Carl has been a private investor and the
owner of a seat on the Chicago Mercantile Exchange.
J. Donald Hill has been a director of the Company since November 1995.
Mr. Hill was a consultant to the Company from 1992 to 1995. He currently
serves as Chairman and Chief Executive Officer of Excel Technology, Inc., a
manufacturer of laser products and systems, where he has been employed since
1992. From January 1991 to October 1991, Mr. Hill was the Chief Executive
Officer of Medstone International, and Corporate Secretary and Director of
CytoCare, Inc., companies engaged in the development of medical therapy
devices. From 1988 to 1990, Mr. Hill was Director of Corporate Finance at
Weeden & Company, a securities firm. Mr. Hill also served as Vice Chairman of
First Affiliated Securities, Inc. and as General Partner of Loeb, Rhoades and
Company, also securities firms.
Robert A. Schoellhorn has been a director of the Company since
September 1992. Since June 1994, Mr. Schoellhorn has been the owner of
Marathon Coach, Inc., a privately held manufacturer of luxury motor coaches.
Since August 1990, Mr. Schoellhorn has been retired from Abbott Laboratories, a
publicly-held corporation engaged in the discovery, development, manufacture
and sale of a broad and diversified line of human health care products and
services. From 1973 to August 1990, Mr. Schoellhorn was employed by Abbott
Laboratories, including as Chairman of the Board (1981 to March 1990), Chief
Executive Officer (1979 to January 1990) and President (1976 to 1981). Mr.
Schoellhorn currently serves as a director of SunPharm Corporation, a publicly
held company engaged in the development of small molecule pharmaceutical
products; and First Community Bank of the Desert in Southern California.
Henry T. Pietraszek has served as a director of the Company since
April 1995. Since January 1996, Mr. Pietraszek has been President of DMS
Corporation, a privately-held medical diagnostic marketing firm in Naples,
Florida. Mr. Pietraszek was President and Chief Executive Officer of BioStar,
Inc., a privately held medical diagnostic company in Boulder, Colorado, from
March 1994 to August 1995. From 1986 to 1994, Mr. Pietraszek served as the
President and Chief Executive Officer of TAP Pharmaceuticals, a joint venture
between Abbott Laboratories and Takeda Chemical Industries of Japan.
All directors of the Company hold office until the next annual meeting
of stockholders of the Company or until their successors are elected and
qualified. Executive officers hold office until their successors are elected
and qualified, subject to earlier removal by the Board of Directors.
No family relationship exists between any director or executive
officer and any other director or executive officer of the Company.
The Company is not aware of any late filings of, or failures to file,
during the fiscal year ended June 30, 1996, the reports required by Section
16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company during each of the Company's last three fiscal
years to the Company's former Chief Executive Officer, current Chief Executive
33
<PAGE> 34
Officer and to each of the Company's executive officers who received salary,
commission and bonus payments in excess of $100,000 during the fiscal year
ended June 30, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
------------------------------- -------------------------- ----------
Restricted
Other Annual Stock Options/ LTIP All Other
Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Positions Year ($) (1) ($) ($) ($) (#) (2) ($) ($)
- ------------------ ------- ------- ----- ----------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. J. Finkelstein 1996 149,464 - - - - - 216,000 (4)
Former President, 1995 166,893 - - - - - -
Chief Executive 1994 162,036 - - - 200,000 - -
Officer and Director (3)
Richard J. Reinhart, Ph.D. 1996 9,712 (6) - (7) - - 750,000 - -
Current President, Chief - - - - - - - -
Executive Officer and - - - - - - - -
Director (5)
John G. Baust, Ph.D. 1996 108,646 - - - - - -
Senior Vice 1995 104,429 - - - - - 9,243 (8)
President, Research 1994 108,927 - - - 50,000 - 8,234 (8)
and Development
Alan F. Rich 1996 87,600 - 66,015 (9)
Vice President, 1995 94,417 - 132,596(10) - - -
Sales and Marketing 1994 76,667 - 158,818(11) - 100,000 - -
</TABLE>
- ----------------
(1) Salaries for fiscal years 1995 and 1996 reflect 10% salary
reductions for executive officers of the Company commencing April
1, 1995. Such salary reductions were reinstated in July 1996.
(2) Options to acquire shares of Common Stock.
(3) Mr. Finkelstein's employment with the Company ceased in May 1996.
(4) Consists of a twelve month severance agreement between Mr.
Finkelstein and the Company which commenced June 1, 1996.
(5) Dr. Reinhart's employment with the Company commenced in May 1996.
(6) Dr. Reinhart was paid $9,712 by the Company during fiscal year
1996. Dr. Reinhart's annual salary is $150,000 per year.
(7) Dr. Reinhart's contract contains a potential bonus provision based
upon a "percentage of pretax profits of the Company." For the
remainder of calendar 1996 (June 1 - December 31, 1996), his bonus
potential is ten percent of the Company's pretax profit.
(8) Consists of Company contributions to Dr. Baust's retirement account
at State University of New York at Binghamton in accordance with
the employment agreement between Dr. Baust and the Company.
(9) Consists of $60,015 of commissions and a $6,000 automobile
allowance.
(10) Consists of $126,846 of commissions and a $5,750 automobile
allowance.
(11) Consists of $153,618 of commissions and a $5,200 automobile
allowance.
COMPENSATION OF DIRECTORS
34
<PAGE> 35
Through June 1996, the Company compensated outside directors for their
service in such capacity at an annual fee of $5,000 plus $1,000 for each Board
meeting attended and $500 for each committee meeting attended. Effective July
1996 through December 1996, the Company has determined it will compensate each
outside director $500 for each Board meeting attended and $500 for each
committee meeting attended, with additional compensation for outside directors
currently under review. In addition to such cash compensation, in June 1994
three of the Company's outside directors (Messrs. Breslow, Carl and
Schoellhorn) were each granted non-incentive options to purchase 50,000 shares
of Common Stock at an exercise price of $2.125 per share and in April 1995, Mr.
Pietraszek was granted non-incentive options to purchase 25,000 shares of
Common Stock at an exercise price of $3.00 per share. In November 1995, Mr.
Hill was granted non-incentive options to purchase 25,000 shares of Common
Stock at an exercise price of $2.938 per share. During the period October 1995
through May 1996, Mr. Pietraszek was granted 2,500 non-incentive options per
month at an exercise price ranging from $1.688 to $2.938.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information related to stock options
granted to each of the named executive officers during fiscal 1996.
<TABLE>
<CAPTION>
Potential Realizable Value
At Assumed Annual Rates
of Stock Price Appreciation
Individual Grants For Option Term (1)
- --------------------------------------------------------------------------------------- ---------------------------
% of Total
Options/ Options/SARs
SARs Granted to Exercise or
Granted Employees in Base Price
Name ( #) (2) Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)
------------------- ------------- ------------- --------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
J.J. Finkelstein - - - -
Richard J. Reinhart, Ph.D. 750,000 (3) 84.8% 2.1875 May 23, 2006 557,969 1,265,842
John G. Baust, Ph.D. - - - -
Alan F. Rich - - - -
</TABLE>
- --------------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be received upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options.
These numbers do not take into account provisions of certain options
providing for termination of the option following termination of
employment.
(2) Options to acquire shares of Common Stock.
(3) Options are exercisable in their entirety in May 2002, six years after the
date of grant.
35
<PAGE> 36
AGGREGATED OPTION/SAR EXERCISES DURING FISCAL YEAR 1996
AND FISCAL YEAR END OPTION/SAR VALUES
The following table provides information related to options exercised by each
of the named executive officers during the 1996 fiscal year and the number and
value of options held at fiscal year end. The Company does not have any
outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs Options/SARS
at Fiscal Year End (#) at Fiscal Year End ($) (2)
----------------------------- ----------------------------------
Shares Acquired Value
Name On Exercise (#) Realized ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- ---------- ---------------- -------------- ------------ -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
J.J. Finkelstein (3) 448,334 (4) $875,779 - - - -
Richard J. Reinhart, Ph.D. (5) - - - 750,000 - -
John G. Baust, Ph.D. - - 280,000 50,000 78,000 3,125
Alan F. Rich - - 75,000 55,000 - -
</TABLE>
- ----------------------------------
(1) Value realized is calculated on the basis of the difference between the
option exercise price and the fair market value of the Common Stock on the
date of exercise.
(2) The closing price for the Company's Common Stock as reported on the NASDAQ
National Market System on June 30, 1996 was $2.1875. Value is calculated
on the basis of the difference between the option exercise price and
$2.1875 multiplied by the number of shares of Common Stock underlying the
option.
(3) Mr. Finkelstein's employment with the Company ceased in May 1996.
(4) The exercise price per share with respect to 348,334 of the shares was
$0.05 and with respect to 100,000 of the shares was $2.125; the closing
prices of the Common Stock on the dates of exercise ranged from $2.0000 to
$2.4375.
(5) Dr. Reinhart's employment with the Company commenced in May 1996.
- ----------------------------------
Employment Agreements
On May 5, 1996 Mr. Finkelstein resigned as the President and Chief
Executive Officer of the Company. In accordance with Mr. Finkelstein's
resignation, the Company agreed to pay him $216,000 representing one year's
salary (as per Mr. Finkelstein's prior employment agreement) less approximately
$56,000 which was owned to the Company by Mr. Finkelstein at the time of his
departure. The payments of the $216,000 will be made over 12 months and will
culminate in June 1997. The Company has accrued the full amount of Mr.
Finkelstein's severance in the year ended June 30, 1996.
In May 1996, the Company and Richard J. Reinhart, Ph.D. entered into an
employment agreement through December 31, 1999 pursuant to which Dr. Reinhart
was employed as President, Chief Executive Officer and a director of the
Company. In accordance to his employment agreement, Dr. Reinhart was granted
options to purchase 750,000 shares of Common Stock at an exercise price of
$2.1875 per share pursuant to the Company's 1988 Stock Option Plan. The option
vests one-fifth each year, for five years, commencing one year from employment.
At June 30, 1996, Dr. Reinhart's salary was $150,000, and in addition to base
salary, Dr. Reinhart is entitled to a bonus based upon a percentage of "pretax
profits of the Company." Such bonus ranges from 10% for the period ended
December 31, 1996 to 3% for 2001. In the event the term of the employment
agreement is terminated due to Dr. Reinhart's resignation from the Company with
the written consent of the Board, or for a reason other than death, disability,
discharge for cause or resignation without the written consent of the Board,
36
<PAGE> 37
or if at the end of any one-year period the employment agreement is not renewed
for any reason other than death, disability, discharge for cause or resignation
with the consent of the Board, the Company is required to pay Dr. Reinhart as
follows: (a) if such termination occurs within the first six months of the
Employment Period, Dr. Reinhart shall be entitled to receive the salary due him
up to the date of termination and (b) if termination occurs after the initial
six months, Dr. Reinhart shall be entitled to the salary due him for (i) the
balance of his Employment Period, (ii) a period of two and a half years, or
(iii) until subsequently employed, whichever is sooner.
In July 1990, the Company and John G. Baust, Ph.D. entered into a three
year employment agreement (as amended in December 1991 and July 1993),
automatically renewable for additional one year periods (absent notice to the
contrary by either party). At June 30, 1996, Dr. Baust's annual salary was
$109,060. The agreement provides that Dr. Baust shall retain his affiliation
with the State University of New York at Binghamton, where he is the Director
of the Center for Cryobiological Research. For the year ended June 30, 1996,
the Company entered into an agreement with the Department of Biological
Sciences of the State University of New York at Binghamton ("SUNY") under which
agreement SUNY released Dr. Baust from undergraduate teaching responsibilities
reimbursement totaling $39,000 for the fiscal year. In accordance with the
employment agreement, in July 1990, Dr. Baust was granted an option to purchase
an aggregate of 200,000 shares of Common Stock at $1.875 per share pursuant to
the Company's 1988 Stock Option Plan. The option vested one-third each year
for three years, commencing one year from the date of the agreement. Among
other things, the employment agreement also provided for the Company to loan to
Dr. Baust the funds required for the exercise of the options at the time of
exercise. Such loans would be for terms of five years, accrue interest at a
rate of 5% per annum and be secured by shares obtained from the option
exercise. In accordance with the terms of the agreement, in May 1993 the
Company lent $37,500 to Dr. Baust to exercise options to purchase 20,000 shares
of Common Stock.
Alan F. Rich joined the Company in May 1992 as a regional sales manager.
On March 1, 1994, the Company and Mr. Rich entered into a one year employment
agreement, automatically renewable for additional one year periods (absent
notice to the contrary by either party), pursuant to which Mr. Rich is employed
as Vice President, Sales and Marketing, of the Company. At June 30, 1996, Mr.
Rich's annual salary was $98,000, which salary is to increase each year to the
extent of any cost of living increases based upon the Consumer Price Index
increase for the immediate preceding year. In addition, Mr. Rich is entitled
to commissions of up to 1% of the sales revenue of the Company. In accordance
with the employment agreement, in March 1994, Mr. Rich was granted options to
purchase 100,000 shares of Common Stock at $3.125 per share pursuant to the
Company's 1988 Stock Option Plan. The options vest with respect to 20,000
shares after one year, an additional 25,000 shares after two years, an
additional 25,000 shares after three years, and an additional 30,000 shares
after four years.
In connection with the execution of the employment agreements between the
Company and each of its executive officers, each officer executed a Proprietary
Information and Inventions Agreement, pursuant to which each agreed, among
other things, to keep the Company's information confidential and assigned all
inventions to the Company, except for certain personal inventions not related
to the Company's work, whether existing or later developed.
SCIENTIFIC ADVISORY BOARD; CONSULTANTS
The Company currently has six scientific advisory board members who have
agreed to advise the Company from time to time with respect to technological
matters in fields in which the Company is involved. Pursuant to agreements
between the Company and each of the advisory board members (except Dr. Meryman,
who has not executed an agreement), each advisor was granted warrants to
purchase 12,000 shares of Common Stock at the fair market value at the date of
grant (except for the Chairman, Dr. Julian Bailes, whose warrants were for
25,000 shares) and is entitled to a fee of $750 for each advisory board meeting
attended, plus reimbursement for out-of-pocket expenses. In addition to the
warrants granted upon commencement of scientific advisory board membership, Dr.
Cohen was granted warrants to purchase 45,000 additional shares for his service
during the fiscal year ended June 30, 1994, as a Scientific Advisory Board
member and as a consultant, and Dr. Taylor was granted warrants to purchase
13,000 for his services as a consultant. At June 30, 1996, warrants to
purchase 287,000 shares of Common Stock held by scientific advisory board
members had been exercised, warrants to purchase 114,000 shares of Common Stock
had expired and warrants to purchase 152,000 shares were outstanding.
The members of the Company's scientific advisory board are as follows:
37
<PAGE> 38
Julian E. Bailes, M.D., is Chief, Cerebral Vascular Surgery, Allegheny
General Hospital in Pittsburgh, Pennsylvania and Associate Professor of
Neurosurgery at the Medical College of Pennsylvania. Dr. Bailes is currently
serving as Chairman of the Company's scientific advisory board.
Jeffrey K. Cohen, M.D., is Director, Division of Urology, Allegheny
General Hospital in Pittsburgh, Pennsylvania, and Associate Professor of
Surgery, Allegheny University.
Andrew A. Gage, M.D., is Medical Director of the Company.
Hau C. Kwaan, M.D., Ph.D., is a Professor of Medicine at Northwestern
University Medical School in Chicago, Illinois.
Harold T. Meryman, M.D., is Program Director, Transfusion and
Cryopreservation Research, Naval Medical Research Institute in Bethesda,
Maryland.
Michael J. Taylor, Ph.D, is a senior scientist and Director of the
Cryobiology Research Program at Allegheny Singer Research Institute,
Pittsburgh, Pennsylvania. Dr. Taylor is also Professor of Surgery
(Neurosurgery) at Allegheny University of the Health Sciences.
The Company has also obtained the services of consultants (one of whom,
Dr. Cohen, is also a member of the scientific advisory board) to render advice
with respect to various areas of the Company's research. Each of the
consultants has entered into a one year consulting agreement with the Company,
with automatic one year renewals (absent notice to the contrary by either
party), and has either received warrants to purchase Common Stock or is
entitled to cash compensation effective July 1996. Consultants related to the
Solutions technology will be paid by the Company with monies secured by
grants. There can be no assurance that the Company will continue to secure
grant subsidized work in the future. No consultant has agreed to devote any
specified amount of time to Company activities. The consultants of the Company
(and the commencement dates of their consulting agreements) are as follows:
Jeffrey K. Cohen, M.D. (December 1991), advises the Company with respect
to its AccuProbe and related technology.
Alan Nicoletta (January 1995), President of ACN International, a
consulting firm specializing in medical technologies, advises the Company with
respect to the use of the Solutions.
Robert Van Buskirk, Ph.D. (June 1993), Associate Professor of Biology,
Binghamton University, advises the Company with respect to the use of the
Solutions.
Members of the Company's scientific advisory board and the consultants to
the Company may be employed by or have consulting agreements with entities
other than the Company, some of which may conflict or compete with the Company,
and the advisors and consultants are expected to devote only a small portion of
their time to the Company. Most are not expected to actively participate in
the Company's development. Certain of the institutions with which the advisors
and consultants are affiliated may have regulations and policies which are
unclear with respect to the ability of such personnel to act as part-time
consultants or in other capacities for a commercial enterprise. Regulations or
policies now in effect or adopted in the future might limit the ability of the
advisors and consultants to consult with the Company. The loss of the services
of certain of the advisors and consultants could adversely affect the Company.
Furthermore, inventions or processes discovered by the advisors and
consultants will not, unless otherwise agreed, become the property of the
Company but will remain the property of such persons or of such persons'
full-time employers. In addition, the institutions with which the advisors and
consultants are affiliated may make available the research services of their
scientific and other skilled personnel, including the advisors and consultants,
to entities other than the Company. In rendering such services, such
institutions may be obligated to assign or license to a competitor of the
Company patents and other proprietary information which may result from such
services, including research performed by an advisor or consultant for a
competitor of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
38
<PAGE> 39
The following table sets forth, as of June 30, 1996, certain information
concerning stock ownership of all persons known by the Company to own
beneficially 5% or more of the outstanding shares of the Company's Common
Stock, each director, and all officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name (and Address of 5% Holder) Beneficial Ownership (1) of Class
------------------------------- ------------------------ --------
<S> <C> <C>
Richard J. Reinhart . . . . . . . . . . . . 750,000 (2) 2.7%
Howard S. Breslow . . . . . . . . . . . . . 243,000 (3) *
Sam Carl . . . . . . . . . . . . . . . . . 345,600 (3) 1.3%
J. Donald Hill . . . . . . . . . . . . . . . 50,000 (4) *
Robert A. Schoellhorn . . . . . . . . . . . 103,000 (5) *
Henry T. Pietraszek . . . . . . . . . . . . 45,000 (6) *
D. H. Blair Investment Banking Corp. . . . . 1,840,950 6.9%
44 Wall Street, NY, NY 10005
All officers and directors
as a group (9 persons) . . . . . . . . . . 2,070,452 (7) 7.3%
</TABLE>
---------------------------------------
* Less than 1%
(1) Unless otherwise indicated below, all shares are owned
beneficially and of record.
(2) Includes an aggregate of 750,000 shares underlying stock options.
(3) Includes an aggregate of 75,000 shares underlying stock options.
(4) Includes an aggregate of 50,000 shares underlying stock options
and warrants.
(5) Includes an aggregate of 100,000 shares underlying stock options
and warrants.
(6) Includes an aggregate of 45,000 shares underlying stock options.
(7) Includes an aggregate 1,259,100 shares underlying options which
the Company has granted to the four executive officers of the
Company and an aggregate of 345,000 shares underlying options and
warrants granted to five directors of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Howard S. Breslow, a director of the Company, is a member of Breslow &
Walker, general counsel to the Company. Mr. Breslow currently owns 168,000
shares of Common Stock of the Company and holds options to purchase an
aggregate of 75,000 additional shares pursuant to stock options issued to him
in October 1991 and June 1994. During the year ended June 30, 1996, Breslow &
Walker received legal fees of $77,735.
In September 1992, in connection with a three-year consulting
agreement, the Company granted to J. Donald Hill, a director of the Company,
warrants to purchase 25,000 shares of Common Stock of the Company. The
warrants lapse after five years, and in the event that Mr. Hill continues to
provide consulting services to the Company, one-third may be exercised after
one year, an additional one-third may be exercised at the end of the second
year, and an additional one-third may be exercised at the end of the third
year. In November 1995, Mr. Hill became a director of the Company, at which
time he was granted 25,000 options to purchase shares of Common Stock of the
Company.
39
<PAGE> 40
In May 1993, in accordance with the terms of the employment agreement
between the Company and John G. Baust, Ph.D., Vice President, Research and
Development of the Company, the Company loaned $37,500 to Dr. Baust which Dr.
Baust utilized to exercise stock options to purchase 20,000 shares of Common
Stock of the Company for $1.875 per share, or a total purchase price of
$37,500. The loan is for a term of five years, accrues interest at the rate of
5% per annum, and is secured by the shares obtained by the option exercise. At
June 30, 1996 Dr. Baust owed, inclusive of interest, $43,033 to the Company.
In August 1993, in connection with a three-year consulting agreement,
the Company granted to Robert A. Schoellhorn, a director of the Company,
warrants to purchase 25,000 shares of Common Stock of the Company. The
warrants lapse after five years, and in the event that Mr. Schoellhorn
continues to provide consulting services to the Company, one-third may be
exercised after one year, an additional one-third may be exercised at the end
of the second year, and an additional one-third may be exercised at the end of
the third year.
During the period October 1995 through May 1996, pursuant to a limited
period consultancy agreement, the Company granted Hank Pietraszek non-incentive
options to purchase 2,500 shares of Common Stock per month at an exercise price
ranging from $1.688 to $2.938 per share. In addition, the Company paid Mr.
Pietraszek $13,000 for consulting services, per the agreement.
40
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements filed as part of this report are
listed in the Index to Consolidated Financial Statements on
page 17.
(2) Schedules
No Schedules are furnished as the information is presented
elsewhere in this document or is inapplicable.
(3) Exhibits
Exhibit
Number Document
3 (a) Certificate of Incorporation, as amended. (1)
(b) By-Laws(1), and amendment, dated March 19, 1990, thereto.(2)
4 (a) Specimen of Common Stock Certificate.(1)
(b) Certificate of Designation of 9% Series A Redeemable
Convertible Preferred Stock, as amended.(1)
10 (a) Stock Option Plan, dated July 7, 1988, and amendment,
dated July 19, 1989.(1)
(b) Stockholders' Agreement and amendments.(1)
(c) Form of Scientific Advisory Board Member Agreement.(1)
(d) Research Project Management Services Agreement, dated as
of August 29, 1989, between the Company and
Allegheny-Singer Research Institute,(1) and amendments
thereto dated August 29, 1991(5), August 29, 1992(5),
October 31, 1992(6), December 30, 1992(6), April 30,
1993(6), and July 1, 1993.(8)
(e) Employment Agreement, dated as of July 15, 1990, between
the Company and John G. Baust(2), as amended by letter
agreement dated December 3, 1991,(5) and as amended July
14, 1993.(7)
(f) Agreement, dated as of December 18, 1990, among the
Company, Paul E. Segall, Hal Sternberg, Harold D. Waitz,
Larry Cohen, Trans Time, Inc., BioTime, Inc., and Donna
Cohen.(3)
(g) Research Project Agreement, dated as of August 1, 1991,
between the Company and Research Foundation of the State
University of New York,(4) as amended by proposal letter
dated August 20, 1992 (5) and acceptance letter dated
September 3, 1992. (5)
(h) Consulting and Proprietary Information Agreement dated as
of December 1, 1991, between the Company and Dr. Jeffrey
K. Cohen. (5)
(i) Consulting and Proprietary Information Agreement dated as
of December 1, 1991, between the Company and Dr. Tse-Chao
Hua. (5)
41
<PAGE> 42
(j) Loan and Pledge Agreement dated May 19, 1993, between the
Company and John G. Baust, Ph.D.(6)
(k) Promissory Note dated May 19, 1993, of John G. Baust,
Ph.D., in favor of the Company.(6)
(l) Employment Agreement, dated as of March 1, 1994, between
the Company and Alan F. Rich.(7)
(m) Lease Agreements, dated May 1, 1995, between Ward
Corporation and the Company, and addendum thereto dated
June 21, 1995, relating to the Company's executive
offices, laboratory facilities and manufacturing
facilities in Rockville, Maryland.(8)
(n) Memorandum of Understanding, Cryomedical Sciences, Inc.
securities litigation, dated as of September 15, 1995,
between the Company and certain of its officers and
directors and Plaintiffs in Cryomedical Sciences, Inc.
Securities Litigation, C.A. No. AW 94-873 (D. Md.).(8)
(o) Severance Agreement, dated as of May 30, 1996, between the
Company and J. J. Finkelstein.
(p) Employment Agreement, dated as of May 24, 1996, between
the Company and Richard J. Reinhart, Ph.D.
21 Cryo Instruments, Inc., a California corporation.
23 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports on Form 8-K
- ----------------------
(1) Incorporated by reference to the Company's Registration Statement
on Form S-1 (Reg. No. 33-31420) which became effective with the
Securities and Exchange Commission on November 22, 1989.
(2) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1990.
(3) Incorporated by reference to the Company's Current Report on Form
8-K, the Date of Report of which is December 18, 1990.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1991.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1992,
(6) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993.
(7) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1994.
(8) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1995.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRYOMEDICAL SCIENCES, INC.
Date: October , 1996 By: /s/Richard J. Reinhart
------------------------------------------
Richard J. Reinhart, Ph.D.
President and Chief Executive
Officer (Principal Executive
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: October , 1996 /s/Richard J. Reinhart
-----------------------------------------
Richard J. Reinhart, Ph.D.
Director
Date: October , 1996 /s/Howard S. Breslow
-----------------------------------------
Howard S. Breslow
Director
Date: October , 1996 /s/Sam Carl
-----------------------------------------
Sam Carl
Director
Date: October , 1996 /s/J. Donald Hill
-----------------------------------------
J. Donald Hill
Director
Date: October , 1996 /s/Robert A. Schoellhorn
-----------------------------------------
Robert A. Schoellhorn
Director
Date: October , 1996 /s/Henry T. Pietraszek
-----------------------------------------
Henry T. Pietraszek
Director
43
<PAGE> 1
May 30, 1995 Exhibit 10(o)
J.J. Finkelstein
9009 Burning Tree Road
Bethesda, Maryland 20817
Dear Mr. Finkelstein:
When agreed to and accepted by you, the following shall set forth the terms
upon which you shall render consulting services to Cryomedical Sciences, Inc.
("CMSI").
1. Consulting Services. During the term of this Agreement you shall
consult with CMSI on an "as needed" and "as available" basis; provided, however
that (a) you shall be given at least three days prior notice of CMSI's desire
to utilize your services hereunder, (b) you shall not be required to consult
with CMSI for more than five hours in any one week or 10 hours in any one month
and such consulting may be rendered on weekends, and (c) you may accept
full-time employment which requires you to devote your business time and
efforts to such employment.
2. Consideration.
2.1 As full consideration for the consulting services to be
rendered by you hereunder, CMSI shall pay to you the sum of $216,000 in 12
equal consecutive monthly installments of $18,000, as follows:
(a) Commencing June 1, 1996, six equal consecutive
monthly installments of $18,000, payable by check to your order.
(b) Commencing December 1, 1996, six equal consecutive
monthly installments of $18,000, payable (i), as to each of the first two
payments, by check payable to your order in the amount of $18,000; (ii), as to
the third payment, by (A) check payable to your order in the amount of $16,200,
and (B) forgiveness of $1,800 of indebtedness which you have to CMSI, and
(iii), as to each of the next three payments, by forgiveness of $18,000 of
indebtedness which you have to CMSI.
(c) You and CMSI agree that (i) your current indebtedness
to CMSI totals $55,800, of which a portion (the "Loan Amount") bears interest
at the rate of 7-1/2% per annum and is secured by 20,000 shares of CMSI common
stock (the "Collateral") owned by you, and (ii) interest shall cease to accrue
on the Loan Amount and the Collateral shall be returned to you on the date
hereof.
2.2 As consideration for CMSI entering into the Agreement, you
hereby waive any and all vacation pay that may have accrued to your benefit
while you were employed by CMSI.
2.3 CMSI shall reimburse you for reasonable out-of-pocket expenses
incurred in rendering the consulting services hereunder, provided that you
present to CMSI an itemized account or other evidence of those expenses for
which reimbursement is being sought.
<PAGE> 2
3. Term. The term of the agreement ("Agreement") shall be for a period
of one year, commencing June 1, 1996. This Agreement may not be terminated by
CMSI other than for a willful breach of the Agreement by you. In the event of
a wrongful termination of this Agreement by CMSI, your death, or permanent
disability, you shall be entitled to the payments provided for herein in the
manner in which they are to be paid and shall have no further obligation to
render consulting services hereunder.
4. Proprietary Information and Non-Competition. The Proprietary
Information and Inventions Agreement and Section 9.1 of your Employment
Agreement remain in full force and effect.
5. Waivers. If either of us should waive any breach of any provision of
this Agreement, we shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
6. Complete Agreement; Amendments. We agree that with respect to the
subject matter hereof it is our entire agreement, superseding any previous
oral or written communications, representations, understandings, or agreements.
Any amendment to this Agreement or waiver by either of us of any right
hereunder shall be effective only if evidenced by a written instrument executed
by us, and, in the case of CMSI, upon written authorization of CMSI's Board of
Directors.
7. Successors and Assigns. This Agreement shall be binding upon and is
for the benefit of CMSI and its successors and assigns. This Agreement may not
be assigned by you.
8. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware.
/s/ J.J. FINKELSTEIN
- ------------------------------
J.J. Finkelstein
CRYOMEDICAL SCIENCES, INC.
By: /s/ RICHARD J. REINHART
--------------------------
Richard J. Reinhart, Ph.D.
President and CEO
<PAGE> 1
EXHIBIT 10(p)
EMPLOYMENT AGREEMENT made as of the 24th day of May, 1996 by and
between CRYOMEDICAL SCIENCES, INC., a Delaware corporation (hereinafter
referred to as the "Company"), and Richard J. Reinhart, residing at 9 Garden
Road, Lawrenceveille, New Jersey 08648 (hereinafter referred to as "Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Employee, and Employee is
willing to accept such employment, all on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the terms and conditions
hereinafter set forth, the parties hereto agree as follows:
1. Employment
The Company hereby employs Employee, and Employee hereby
accepts employment with the Company, as President and Chief Executive Officer,
on the terms and conditions herein set forth.
2. Term of Agreement
Unless terminated sooner pursuant to the express provisions
hereof, the term of employment hereunder shall commence on the date hereof (the
"Commencement Date"), shall continue through December 31, 1999 (the "Original
Term"), and shall be automatically extended for two additional one-year periods
unless (a) the Original Term is terminated pursuant to Section 6 hereof (or
otherwise), or (b) not less than 90 days prior to the commencement of any such
one-year period the Company notifies Employee, in writing, that the term of
employment shall not be extended. The period commencing with the Commencement
Date through the end of the term of Employee's employment hereunder is
hereinafter referred to as the "Employment Period."
3. Duties
1
<PAGE> 2
During the Employment Period, Employee shall perform such
functions as are normally carried out by the President and Chief Executive
Officer of a business of the type in which the Company is engaged, and such
other functions as the Board of Directors of the Company (the "Board") shall
from time to time reasonably determine. Employee shall devote his full-time,
energies and abilities exclusively to the Company's business pursuant to, and
in accordance with, reasonable business policies and procedures, as fixed from
time to time by the Board. Employee covenants and agrees that he will
faithfully adhere to and fulfill such policies as are established from time to
time by the Board of Directors of the Company. Employee shall not be assigned,
by the Board, responsibilities, in any material manner, inconsistent with his
position as President and Chief Executive Officer.
4. Compensation
4.1 During the Employment Period, Employee's base salary
shall be in the amount of $150,000 per annum, payable in accordance with the
Company's normal payroll procedures.
4.2 During the Employment Period, in addition to
Employee's base salary, Employee shall be entitled to a bonus for the period
June 1, 1996 through December 31, 1996 ("1996"), and thereafter an annual
bonus, payable on or before March 31st of the year next following the year for
which such bonus is determined, based upon a percentage of "Pre-Tax Profits of
the Company," as follows:
<TABLE>
<CAPTION>
Percent of
----------
Year Pre-Tax Profits
---- ---------------
<S> <C>
1996 10%
1997 10%
1998 7 1/2%
1999 5%
2000 4%
2001 3%
</TABLE>
As used herein, the term "Pre-Tax Profits of the Company"
shall mean the pre-tax profits of the Company and any consolidated
subsidiaries as determined in accordance with generally accepted accounting
principles, without taking into account (a) any payments made or to be made
pursuant to this Section 4.2, and (b) any extraordinary gains or losses. The
Company shall use its best efforts to change the Company's fiscal year to a
calendar year.
2
<PAGE> 3
4.3 During the Employment Period, Employee shall be
entitled to a non-accountable automobile allowance of $650 per month.
4.4 During the Employment Period, Employee shall be
entitled to family coverage for Blue Cross/Blue Shield (or equivalent thereof)
and major medical insurance coverage.
4.5 Employee shall also be eligible, to the extent he
qualifies, to participate in such fringe benefit plans (including retirement,
pension, life or other similar employee benefit plans), if any, which the
Company may from time to time make available to its employees, provided that
the Company shall have the right from time to time to modify, terminate or
replace any and all of such plans.
4.6 The Company shall reimburse Employee for all
reasonable business expenses incurred by Employee in connection with the
performance of his duties hereunder (including reimbursement for a hotel room
or an apartment in the Rockville, Maryland locale for the first six months of
the Employment Period, to accommodate his travel to and from his home to the
Company's executive offices), provided Employee submits supporting vouchers for
such expenses.
4.7 Employee shall be entitled to a four-week paid
vacation each year during the Employment Period, to be taken at such time as is
consistent with the needs of the Company and the convenience of Employee.
5. Stock Options
5.1 On the Commencement Date, Employee shall be granted a
10 year Stock Option, under the Company's 1988 Stock Option Plan, to purchase
750,000 shares of the Company's common stock, par value $.001 per share (the
"Common Stock"), at a price per share equal to the fair market value thereof
(i.e., the closing bid price per share) on the date of grant. The Stock Option
shall be exercisable over a 10-year period to the extent of 150,000 shares
commencing with the first anniversary date of the Commencement Date and an
additional 150,000 shares commencing with each of the next four anniversary
dates thereof. A copy of the Stock Option Agreement containing all of the
terms and conditions of the Stock Option has been delivered to and received by
the Employee. The shares underlying the Stock Option have been registered
pursuant to a Registration Statement of Form S-8, and the Company will use its
best efforts to maintain the effectiveness of such Registration
3
<PAGE> 4
Statement or file a new Registration Statement of Form S-8, if necessary, to
cover the shares underlying the 1988 Stock Option Plan.
5.2 Notwithstanding the foregoing vesting provisions, in
the event of a "Change of Control," one-half of the balance of the Stock
Options not already vested, shall vest immediately. "Change of Control" shall
mean:
(a) The acquisition by any person, entity or
"group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act") (excluding, for this purpose,
Employee, any group (as defined above) of which Employee is a member, the
Company of its subsidiaries, or any employee benefit plan of the Company or its
subsidiaries which acquires beneficial ownership of voting securities of the
Company) of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 30% or more of either the then outstanding shares of
common stock of the Company or the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in the election of
directors; or
(b) Individuals who, as of the date hereof,
constitute the Board (as of the date hereof the "Incumbent Board" ) cease for
any reason to constitute at least a majority of the Board, provided that any
person becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent Board
(other than an election or nomination of an individual whose initial assumption
of office is in connection with an actual or threatened election contest
relating to the election of the Directors of the Company, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall
be, for purposes of this Agreement, considered as though such person were a
member of the Incumbent Board.
6. Termination
The Employment Period shall terminate upon the happening of
any of the following events:
6.1 Automatically and without notice upon the death of
Employee.
6.2 Employee leaves the employ of the Company.
4
<PAGE> 5
6.3 Upon written notice of termination from the board to
Employee in the event that Employee becomes physically or mentally disabled
("Disability") during the Employment Period such that (a) in the Board's good
faith judgment, Employee is permanently incapable of properly performing each
of the duties customarily performed by him hereunder, or (b) such Disability
lasts for a period of 60 consecutive days or 90 days in any 150 day period and
the Board elects to treat such Disability as being permanent in nature.
6.4 Upon discharge of Employee, or written notice, by the
Board for cause. For purposes of this Agreement, "cause" shall mean the
following: the commission of a felony, crime involving moral turpitude or
other act causing material harm to the Corporation's standing and reputation,
failure to carry out, after reasonable notice of such failure, the reasonable
policies of the Board as they may relate to Employee's duties hereunder (other
than for reasons beyond his control), persistent absenteeism, a material
default or breach of any of the covenants made by Employee in this Agreement, a
breach of Employee's duty of loyalty to the Company or any act of dishonesty or
fraud with respect to the Company, the willful engaging by Employee in
misconduct materially injurious to the Company, or for any other reason which
may constitute "cause" under applicable law.
6.5 In the event any one of the foregoing events shall
occur, the Company shall be obligated to pay to Employee the compensation due
him under Section 4 hereof up to the date of termination only and Employee
shall not be entitled to receive any additional compensation of any nature
whatsoever.
6.6 In the event that Employee's employment with the
Company is terminated by the Board during the Employment Period for a reason
other than as is set forth above in Sections 6.1 through 6.4, the Company shall
be required to continue to pay Employee the salary provided for in Section 4.1
hereof, as follows: (a) if such termination occurs within the first six months
of the Employment Period, Employee shall be entitled to receive the salary due
him under Section 4.1 hereof up to the date of termination only and Employee
shall not be entitled to receive any additional compensation of any nature
whatsoever, and (b) if such termination occurs after the first six months of
the Employment Period, Employee shall be entitled to receive the salary due him
under Section 4.1
5
<PAGE> 6
hereof for (i) the balance of the Employment Period, (ii) a period of two and
one-half (2 1/2) years, or (iii) until Employee is subsequently employed,
whichever is sooner, and Employee shall not be entitled to receive any
additional compensation of any nature whatsoever; provided, however that
Employee shall have an affirmative obligation to seek comparable employment and
mitigate the Company's damages.
7. Non-Competition
7.1 In view of the unique and valuable services that
Employee has rendered and is expected to render to the Company, and Employee's
knowledge of the business of the Company and proprietary information relating
to the business of the Company and similar knowledge regarding the Company that
Employee has obtained and is expected to obtain during the course of his
employment with the Company and in consideration of the compensation to be
received by Employee hereunder, Employee agrees that during the Employment
Period and for a period of eighteen months immediately following the
termination or expiration thereof (the Employment Period and the subsequent
eighteen month period being hereinafter collectively referred to as the
"Covenant Period"), he will not compete with, or, directly or indirectly, own,
manage, operate, control, loan money to, or participate in the ownership,
operation or control of, or be connected with as a director, partner,
consultant, agent, independent contractor or otherwise, or acquiesce in the use
of his name in any other business or organization which is in competition with
the Company in any geographical area in which the Company is then conducting
business or any geographical area in which, to the knowledge of Employee at the
time of cessation of employment, the Company plans to conduct business within
eighteen months from the date thereof; provided, however, that Employee shall
be permitted after the cessation of his employment but during the Covenant
Period to own less than a 5% interest as a shareholder in any company which is
listed on any national securities exchange even thought it may be in
competition with the Company.
7.2 Employee will not, during the Covenant Period,
solicit or interfere with, or endeavor to entice away from the Company, any of
its employees or customers without the written consent of the Company or unless
such employee is Employee's personal secretary.
7.3 Since a breach of the provisions of this Section 7
could not adequately be compensated by money damages and will cause irreparable
injury to the Company, the Company shall
6
<PAGE> 7
be entitled, in addition to any other right or remedy available to it, to an
injunction or restraining order restraining such breach or a threatened breach,
and no bond or other security shall be required in connection therewith, and
Employee hereby consents to the issuance of any such injunction or restraining
order. Employee agrees that the provisions of this Section 7 are reasonable
and necessary to protect the Company and its business. It is the desire and
intent of the parties that the provisions of this Section 7 shall be enforced
to the fullest extent permitted under the public policies and laws applied in
each jurisdiction in which enforcement is sought. If any restriction contained
in the Section 7 shall be deemed to be invalid, illegal or unenforceable by
reason of the extent, duration or geographical scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, geographical scope or other provision hereof and in its
reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
7.4 No provision of this Agreement shall be deemed to
preclude Employee from serving as a director on the board of companies not in
competition with the Company or of charitable organizations, provided, that any
such directorship or consulting activities do not reduce Employee's ability to
attend to his duties on behalf of the Company.
8. Entire Agreement
The provisions hereof and the agreements referred to herein
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede any prior oral understanding, and no modification,
supplement or discharge hereof shall be effective unless in writing and
executed on behalf of the Company and Employee.
9. Assignability
This Agreement, and its rights and obligations may not be
assigned by Employee. The Company may assign any of its rights and obligations
hereunder to a successor or surviving corporation resulting from a merger or
consolidation of the Company, the sale by the Company of all or substantially
all of its assets or other similar corporate reorganization, upon condition
that the assignee shall assume, either expressly or by operation of law, all of
the Company's obligations hereunder.
10. Waiver
7
<PAGE> 8
No waiver by either party of any condition, term or provision
of this Agreement shall be deemed to be a waiver of any prior or succeeding
breach of the same or of any other condition, term or provision thereof.
11. Notices
All notices required or permitted to be given by either party
hereunder shall be in writing and mailed by registered mail, return receipt
requested, to the other party at the address set forth above or such different
address as may be given by notice as provided for herein. Any notice mailed as
provided above shall be deemed given seven (7) days after the date of mailing
or on the date of receipt, whichever is sooner.
12. Counterparts
This Agreement may be executed in several counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
13. Construction
This Agreement shall be construed in accordance with the laws
of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
/s/ Richard J. Reinhart
-------------------------------------------
RICHARD J. REINHART
CRYOMEDICAL SCIENCES, INC.
By: /s/ John G. Baust
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8
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 2 to Registration
Statement No. 33-34076 and Registration Statement No. 333-04874 of Cryomedical
Sciences, Inc. and Subsidiary on Forms S-8 and Registration Statement No.
33-76078 of Cryomedical Sciences, Inc. and Subsidiary on Form S-3, of our
report dated October 4, 1996, appearing in the Annual Report on Form 10-K of
Cryomedical Sciences, Inc. and Subsidiary for the year ended June 30, 1996.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of Registration Statement No. 33-76078 of Cryomedical
Sciences, Inc. and Subsidiary on Form S-3.
/s/ DELOITTE & TOUCHE LLP
Washington, D.C.
October 9, 1996
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