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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 28, 1997
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Commission file number 0-18170
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CRYOMEDICAL SCIENCES, INC.
(Exact name of registrant as specified in its charter)
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)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X ]
As of March 31, 1998, the aggregate market value of voting stock held
by nonaffiliates of the registrant was $11,499,916.
As of March 31, 1998, there were 33,454,302 shares of Common Stock
(par value $.001 per share) outstanding.
Documents Incorporated by Reference
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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 cryosurgical systems called the CMS
AccuProbe(R) System (the "AccuProbe") and the CryoLite(R) Series ("CryoLite").
Both the AccuProbe and the CryoLite are sophisticated cryosurgical devices
designed to freeze and destroy diseased tissue, including that which cannot be
removed surgically or in which typical surgery offers extensive adverse side
effects. The Company plans to utilize its AccuProbe and CryoLite in the
various fields for which the devices have received clearance from the FDA.
On July 25, 1996, the Board of Directors of the Company authorized a
change in the Company's fiscal year from a period beginning July 1 and ending
on June 30 to a variable period that usually ends on the last Sunday of the
calendar year. Such change was made to make Cryomedical Sciences, Inc.'s year
end consistent with its quarterly accounting periods which, in the case of
52-week years, consists of two four week and one five week periods per quarter
ending on a Sunday. In addition to conforming the Company's yearly and
quarterly accounting periods, the change in Cryomedical Sciences, Inc.'s fiscal
year conforms to an annual reporting period more closely associated with the
calendar year and, to the fiscal years utilized by a majority of the public
companies in the sales and manufacturing industries.
The Company completed initial development of the AccuProbe in 1992 and
has marketed this system to hospitals, surgeons and radiologists in the United
States and abroad. In addition to the AccuProbe, the Company sells single use
probes and other disposables used with the AccuProbe and offers service
warranty contracts. Although the CryoLite received FDA clearance in July 1997,
no CryoLite devices have been shipped for commercial sale. Sales and other
revenues totaled $3,571,386, $2,224,541, and $6,843,950 for the twelve month
period ended December 28, 1997, the six-month period ended December 29, 1996,
and the fiscal year ended June 30, 1996, respectively.
The Company is also attempting to develop and commercialize a series
of hypothermic preservative solutions (the "Solutions"). Some of these
Solutions are designed to maintain the fluid and chemical balances of human
organs while body temperature is significantly lowered. Other Solutions have
been developed that may be utilized in preserving certain cells and tissues
utilized by scientists in research labs and academic institutions. All of these
Solutions continue to be tested in laboratory settings. Commercialization of
certain Solutions is presently being contemplated for those markets not subject
to the United States Food and Drug Administration (the "FDA") regulations
through the Company's wholly owned subsidiary BioLife Technologies Inc.
("BioLife"), formed in 1998. At present, development of the Solutions for
human organ transplantation is at the laboratory and preclinical stage. The
Company is attempting to fund the continuing development of the Solutions
through funds it is seeking from third party investors in its wholly owned
subsidiary BioLife.
The total research and development expenses of the Company for the
twelve-month period ended December 28, 1997 were $1,293,470. For the six-month
transition period ending December 29, 1996 total research and development
expenses were $492,794, and for fiscal year ended June 30, 1996 they were
$1,484,042.
The Company was incorporated in Delaware in November 1987. On August
31, 1989, the Company completed the acquisition of Cryo Instruments, Inc.
("CII"), and CII became a wholly owned subsidiary of the Company. On December
19, 1996, the Company dissolved the CII subsidiary. Unless the context
requires otherwise, references to the Company include CII up to the date of
dissolution. The Company created a wholly owned subsidiary BioLife
Technologies, Inc. in March of 1998. 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 CRYOSURGICAL SYSTEMS
BACKGROUND AND TECHNOLOGICAL OVERVIEW
Cryosurgery is a surgical procedure that uses freezing temperatures to
destroy unwanted tissue by circulating a refrigerant through the tip of a
cryoprobe (an instrument for applying extreme cold to tissue) applied directly
to the tissue to be destroyed.
Some surgeons have commenced targeting diseased tissue in the fields
of urology, general surgery, and gynecology by use of cryosurgery. These
surgeons believe that cryosurgery has a number of advantages over other options
for managing such diseased tissue. First, unlike surgical resection,
cryosurgery does not require removal of large volumes of healthy surrounding
tissue. Second, because freezing temperatures can be applied to certain areas
and not others, multiple diseased tissue sites can be targeted individually,
leaving more healthy tissue. However, many surgeons continue to use
traditional methods because cryosurgery has not yet proved to be effective over
an extended period of time.
THE CMS ACCUPROBE SYSTEM AND CRYOLITE SERIES
The Company has developed certain proprietary designs intended to make
its cryosurgical instrumentation more efficient and more precise than previous
cryosurgical instrumentation.
In April 1991, the FDA accepted the Company's 510(k) premarket
notification for the AccuProbe, thus allowing commercial marketing of the
product at the Company's discretion. See "Governmental Regulation." The
prototype of the CMS AccuProbe was first used on patients in October 1991. The
commercial development of the CMS AccuProbe was completed in 1992 and marketing
of the AccuProbe commenced. In addition, the Company markets a full complement
of accessory products for the AccuProbe which are being marketed along with the
AccuProbe system and single-use probes.
In July 1997 the Company received FDA clearance for its CryoLite
series of cryosurgical instrumentation. The CryoLite Series differs from the
AccuProbe Systems in that CryoLite is capable of utilizing cryogens
(refrigerants) other than liquid nitrogen. The AccuProbe was designed to use
only liquid nitrogen as a cryogen.
The backlog of orders at December 28, 1997 totaled $41,200, as
compared to $4,804,994 at December 29, 1996. Back orders totaled $5,116,339 in
June 1996. The change in the total back orders between December 29, 1996 and
December 28, 1997 is due primarily to the discontinuance of the Company's
relationship with its major distributor who had a blanket purchase order for
both AccuProbe Systems and cryoprobes. The Company expects all of December 28,
1997 back order to generate revenues in the fiscal year ending December 1998.
A substantial portion of the Company's revenue in each quarter results
from orders received in that quarter. Generally, orders placed directly by
customers are shipped within 30 days of the order date. Historically, the
Company's backlog has not been a significant indicator of future sales.
However, the Company now believes that its backlog, at any particular point in
time, is fairly indicative of future sales.
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HYPOTHERMIC PRESERVATIVE SOLUTIONS
BACKGROUND AND TECHNOLOGICAL OVERVIEW
Lowering body temperature during certain surgical procedures helps to
minimize the chance of damage to the patient's organs by reducing the patient's
metabolic rate, thereby decreasing the patient's needs during surgery for
oxygen and nutrients that normally flow through the blood. This is also true
with respect to the preservation of individual organs and tissues to be used in
transplant surgery during the interval between removal from the donor and
transplant into the recipient.
Grant subsidized research and development activities with respect to
development of the Solutions for cell and tissue preservation have previously
taken place at Allegheny-Singer Research Institute ("ASRI"), a subsidiary of
Allegheny Health Services, Pittsburgh Pennsylvania and State University of New
York at Binghamton ("SUNY"). The company continues to fund work at SUNY, but
is not currently funding research at ASRI.
The Solutions have not been fully tested nor has the regulatory
clinical testing and approval process begun for human organ transplantation.
Accordingly, there is no assurance that any of the proposed applications will
prove viable in human surgical procedures. The Company anticipates that upon
successful completion of funding it is seeking for its subsidiary, BioLife,
clinical trials will begin to support FDA approval of the Solutions for
purposes of human organ transplantation
THE SOLUTIONS
The Solutions are complex synthetic, aqueous solutions containing, in
part, minerals and other elements found in human blood which are necessary to
maintain fluids and chemical balances throughout the body at near freezing
temperatures. The use of the fluid is limited to low temperature applications
because the Solutions do not carry sufficient oxygen to maintain organ
integrity at warm temperatures. At lower temperatures, scientists have
determined that human organs require less oxygen primarily because of the
resulting reduced metabolism.
FUTURE PRODUCT DEVELOPMENT
The Company's primary focus has been on the development and marketing
of its cryosurgical instrumentation. The Company intends to continue
development of its cryosurgical instrumentation as well as the Solutions. The
development of the Solutions will be done with the funds the Company is seeking
for its subsidiary BioLife.
The Company contemplates that a variety of applications of hypothermic
perservative solutions or other products for use in hypothermic medical
procedures could ultimately be developed from the Solutions. The Company
expects that any significant funding activities with respect to the Solutions
would entail sales of equity securities in its subsidiary BioLife, which there
can be no assurance of achieving.
RESEARCH PROJECT AGREEMENTS
In August 1989, the Company entered into a Research Project Management
Services Agreement with ASRI, pursuant to which ASRI agreed to conduct research
on the Company's behalf on a project-by-project basis over a two-year period
which period had been extended, by amendment, to June 30, 1995. At that time,
the agreement was not renewed. ASRI and Allegheny General Hospital,
Pittsburgh, Pennsylvania, are non-profit subsidiary corporations of Allegheny
Health Services. The Company had agreed to fund ASRI with at least $1,000,000
to conduct such research and expended $2,095,670 through June 30, 1995, and an
additional $52,285 was expended during the fiscal year ended June 30, 1996. The
amount paid during fiscal year 1996 was in arrears for work completed at ASRI
during the year ended June 30, 1995. During the transition period ended
December 29, 1996, $2,474 was expended in relation to ASRI funding. ASRI's
major project was with
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respect to the Solutions in connection with bloodless surgery and organ
transplants. Other projects were focused on evaluating the utility of the CMS
AccuProbe for certain clinical indications within its cleared fields of use.
Subject to the agreement of both parties, additional projects may be undertaken
with respect to the Company's Solutions and AccuProbe system.
In January 1997, the Company entered into a Research Project Agreement
with Dr. Robert van Buskirk of SUNY, pursuant to which Dr. van Buskirk
conducted research at SUNY's Center for Cryobiological Research in Binghamton,
New York, with respect to the Solutions. The Company had agreed to fund Dr.
van Buskirk in the amount of $42,200 for research associated with the
Solutions
MARKETS AND MARKETING
The Company currently markets its AccuProbe system to hospitals,
surgeons, and radiologists through its own sales department. The Company is
currently signing contracts with independent contractors for purposes of
selling and distributing the Company's product lines of cryosurgical
instrumentation. The Company may also arrange with other third parties to
market or distribute its products in the United States or other countries.
The Company has expended significant resources educating surgeons and
healthcare professionals in formal training programs as to the uses and
benefits of the Company's cryosurgical instrumentation through both in-house
educational seminars and practical applications outside the Company's training
facility.
Sales of the AccuProbe are increasingly affected by the level of
reimbursement by public and private insurers in connection with procedures in
which the AccuProbe is utilized. The availability of consistent, uniform
insurance reimbursement guidelines for hospitals and physicians is an important
factor often considered by some potential customers when making a decision
regarding the purchase of any new medical device, including the AccuProbe
system. Reimbursement of hospitals and urologists by public and private
insurers such as Medicare and Blue Cross and Blue Shield is a necessary part of
gaining general acceptance for use of the AccuProbe for urological cryosurgery.
Medicare's Health Care Financing Administration ("HCFA") put into effect its
technology advisory committee's recommendation that a national non-coverage
policy be adopted in regard to cryoablation of the prostate. It is the
Company's understanding that HCFA is exploring the possibility of working with
various agencies, including the American Urological Association, in setting up
a nationwide randomized prospective clinical study to collect data on a
comparative basis between cryosurgery and radiation therapies. The results of
this study will provide the basis on which a future determination regarding
Medicare reimbursement will be made. When insurance coverage is not available,
patients may either elect to pay for treatment themselves or undergo
traditional therapies that are covered by their insurers. The uncertainty and
added efforts required for the Company's customers or potential customers to
secure payment has constrained sales and utilization of AccuProbe systems to a
large degree and may continue to do so until formal national coverage
guidelines are established. There can be no assurance that such guidelines
will be established or, if established, that reimbursement will be sufficient
to encourage use of the AccuProbe System by hospitals and physicians.
The American Urological Association ("AUA") now terms the use of
cryosurgery in urology as "one of the methods of management of adenocarcinoma
of the prostate." This position by the AUA may have a positive influence on the
Company's efforts towards reimbursement, but there can be no assurance in this
regard.
MANUFACTURING
The Company's manufacturing operations are conducted at its
facilities in Rockville, Maryland, and consist primarily of the purchase and
quality control of materials, components and subassemblies, and the final
assembly and testing of products including the AccuProbe System, the Cryolite
Series, single-use probes and other accessory products. The Company presently
uses third party vendors to manufacture certain parts and subassemblies of the
AccuProbe System, the CryoLite Series, single-use probes and other accessory
products. While the typical lead time required for suppliers varies depending
upon the components, the
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quantity required, and other factors, the lead times in some cases can be as
long as three months. However, because the Company typically purchases
components in advance in anticipation of future orders, the Company is
generally able to deliver AccuProbe systems within 30 days of its receipt of an
order, and single-use probes and other accessory products immediately upon
receipt of an order.
Although the Company generally uses standard parts and components for
its products, certain components, such as liquid nitrogen dewars and probe
tips, are currently available only from a limited number of sources. The
Company does not have long-term agreements with all of these suppliers. To
date, the Company has been able to obtain adequate supplies of such components
in a timely manner from its existing sources. Although the Company believes it
could develop alternative sources of supply for most of these components within
a reasonable period of time, the inability to develop alternative sources, or a
reduction or interruption in supply or a significant increase in the price of
materials, parts or components, could materially and adversely affect the
Company's results of operations. The Company also maintains an inventory of
finished goods consisting primarily of single-use probes and other accessory
products in anticipation of future orders. The Company believes it has
sufficient capital to manufacture and market the CMS AccuProbe in the
quantities anticipated, however, it is possible that substantial additional
capital may be necessary to effectively carry out these objectives, and there
is no assurance that such additional capital can be raised on favorable terms
or at all. To the extent that other parties are manufacturing parts or
subassemblies for the Company, the Company has less control over the quality of
products and timeliness of delivery than if manufactured by the Company.
GOVERNMENTAL REGULATION
The development, testing, manufacturing processes, record-keeping and
reporting and marketing of the AccuProbe, CryoLite, the Solutions, and related
instrumentation are regulated by the United States Food and Drug Administration
(the "FDA") pursuant to the federal Food, Drug and Cosmetic ("FD&C") Act and in
some instances, the Public Health Service ("PHS") Act, and similar health
authorities in foreign countries. Product testing and marketing requires
regulatory review and clearance or approval by the FDA. Companies producing
FDA-regulated products also are subject to FDA inspection of records and
manufacturing practices. Non-compliance with applicable requirements of the
FDA or other government authorities can result in various administrative and
legal remedies including fines, recalls, product seizure, injunction, import or
export restrictions, refusal by FDA to approve product applications or to allow
the Company to enter into government supply contracts, withdrawal of previously
approved applications and criminal prosecution.
In April 1991, the FDA accepted the Company's 510(k) premarket
notification for the AccuProbe (400 Series), thus allowing commercial marketing
of the product. Any significant change or modification in the device could
require additional review and clearance by the FDA. The nature and extent of
regulation may differ with respect to other of the Company's products. There
can be no assurance that regulatory approvals or clearances will be obtained
for any of the intended applications of the Company's proposed technologies
once developed or that the FDA will not impose additional post-marketing
requirements.
Accessory devices developed by the Company for use with the CMS
AccuProbe system may also require review and clearance or approval by the FDA.
On August 2, 1995, the Company submitted to the FDA 510(k) premarket
notification of two new models of the AccuProbe system (500 series). These
represent evolutionary advances of the presently marketed AccuProbe,
incorporating numerous technical refinements and improvements to facilitate
improved manufacturability and serviceability. In December 1995, the Company
received 510(k) marketing approval from the FDA for the new models of the
AccuProbe system.
On October 31, 1996, the Company submitted to the FDA 510(k) premarket
notification of a new model of the AccuProbe System (the 600 series). The new
device represents evolutionary advances of the currently marketed AccuProbe,
incorporating numerous technical refinements. In March 1997, the Company
received 510(k) marketing approval from the FDA for the 600 series model of the
AccuProbe System and will continue to market it in accordance therewith in the
fields currently cleared by FDA.
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In the event the Company intends to test clinically, produce or market
the Solutions for human organ transplantation, safety standards and mandatory
premarketing review and approval procedures established by the FDA for drugs,
medical devices, and biologicals must be satisfied. In general, manufacturers
must prove a product is safe and effective. Drugs must obtain approval by
means of a New Drug Application ("NDA"), biologicals by means of a Product
License Application ("PLA") and Establishment License Application ("ELA"), and
medical devices must obtain a marketing clearance or, for this product more
likely, a Premarket Approval ("PMA"). The inability to obtain, or delays in
obtaining, such approvals or clearances would materially adversely affect the
Company's ability to commence marketing any products of its technology which
may be developed.
Congress enacted legislation on June 10, 1993, providing that the
Department of Health and Human Services (HHS) promulgate regulations defining
the circumstances that constitute financial interest in a project that may
create a bias for certain results. On June 28, 1994, the Public Health Service
(PHS) published a Notice of Proposed Rulemaking which would require
institutions that apply for research funding to ensure that the financial
interests of investigators do not compromise the objectivity of such research.
The proposed rules would apply to institutions applying for PHS grants or
cooperative agreements for research and to any significant financial interest,
including salary, consulting fees, equity interests such as stock or stock
options, and patent rights, of an investigator responsible for the design,
conduct or reporting of research. The proposed rules would require that all
such significant financial interests be disclosed prior to applying for
research funding, that disclosures be updated, records be maintained, and that
institutions applying for such funding ensure that significant financial
interests of investigators be managed, reduced or eliminated, including the
divestiture of significant financial interests or the severance of
relationships that create actual or potential conflicts. Such rules, if
adopted, may impact any research funding the Company may obtain from the
National Institutes of Health (NIH). Additionally, institutions in which
Company-sponsored research is conducted may adopt similar rules, which could
apply regardless of whether federal funding is involved.
On September 22, 1994, FDA published a similar proposed regulation
requiring that the sponsor of any drug, biological or device submit information
concerning the compensation to, and financial interests of, any clinical
investigator conducting clinical studies involving human subjects or
establishing bioavailability or bioequivalence, for marketing approval. Under
FDA's proposed rule, sponsors would be required to submit a list of clinical
investigators and make one of two alternative submissions for each investigator
who is not a full-time employee of the sponsor at the time reports of clinical
studies are submitted to FDA. The alternative submissions would be:
(1) a certification that the clinical investigator has not entered
into any financial arrangement with the sponsoring company
whereby the value of compensation could be affected by the
outcome of the study, that the investigator has not received
significant payments of other sorts from the sponsor, such as
grants, equipment, retainers or honoraria; and that the
investigator does not have significant financial interests of any
kind in the sponsor; or
(2) disclosure of the specific financial arrangements made with the
clinical investigator, the investigator's proprietary, patent and
equity interests in the tested product and the sponsoring
company, and a description of steps taken to minimize the
potential for bias in data submitted in support of the marketing
application.
Both the PHS and FDA rules, if adopted, could require disclosure of, limit, or
in some cases, prohibit equity ownership by individuals conducting research for
the Company, including consultants, some of whom may have equity interests in
the Company. Such rules, if adopted, could have the effect of limiting such
research between the Company and individuals with equity interests in the
Company. The FDA rules, if adopted, could also impact product review and
approval, and in some cases, if the agency deems data are biased, FDA could
require that a study be repeated.
There can be no assurance that any required FDA or other regulatory
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the 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.
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In December 1997 the FDA performed a General Manufacturing Practices
("GMP") audit at the Company's manufacturing facility. The Company was not
cited for any deficiencies related to GMP for Medical Devices Regulations.
PROPRIETARY RIGHTS
The Company relies on a combination of trade secret, patent and
trademark law, and confidentiality and non-disclosure agreements to establish
and protect its proprietary rights in its products. Despite these precautions,
it may be possible for unauthorized third parties to copy certain aspects of
the Company's products or to obtain and use information that the Company
regards as proprietary. The laws of some foreign countries in which the
Company may sell its products do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
In total the Company owns ten issued U. S. patents and seven issued or
allowed foreign patents. At least one additional pending U. S. patent
application has been allowed or has been found to contain patentable subject
matter.
There can be no assurance that any additional patents will be granted.
In addition, to the extent that any unique applications of the Company's
technologies are developed by the Company's scientists, such applications or
procedures may not be subject to any protection. There can also be no
assurance that the Company will develop additional patentable processes or
products or, if developed, that the Company would be able to obtain patents
with respect thereto, or that others may not assert claims successfully with
respect to such patents or patent applications. Furthermore, the Company might
not be able to afford the expense of any litigation which might be necessary to
enforce its rights under any patents it may obtain, and there can be no
assurance that the Company would be successful in any such suit. There is also
no assurance that the Company's proposed products will not infringe patents
owned by others, licenses to which may not be available to the Company.
The Company intends to rely to a large extent on the technological
expertise of its scientific staff. There can be no assurance that others will
not independently develop such technological expertise or otherwise obtain
access to the Company's technological expertise.
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COMPETITION
The medical products industry is highly competitive. Most of the
Company's potential competitors have considerably greater financial, technical,
marketing, and other resources than the Company.
With respect to the Company's cryosurgical instrumentation, the
Company faces competition from other firms engaged in the business of
developing or marketing cryosurgical devices. The Company is aware that such
devices used to freeze tissue have been available for at least 20 years,
although with limited market acceptance. Engaged in the business of
developing, manufacturing and marketing of instruments used to freeze tissue
are Endocare Incorporated and Frigitronics Incorporated, American companies; a
German company, Erbe Incorporated and Candela Laser Corporation, an American
company which distributes products manufactured by Spembly, an English company.
The Company's cryosurgical instrumentation also competes with other techniques
for destroying diseased tissue.
With respect to the Solutions, the Company also faces competition in
the overlapping areas of research with respect to blood substitutes, organ
preservation, and hypothermic medicine. Currently, there are four known organ
preservation solutions marketed as Viaspan, Collins Solutions, Euro Collins
Solutions, and Ringers Lactate solution. These solutions are marketed by
DuPont Co., Abbott Laboratories, Kendall-McGaw Laboratories, and Baxter, Inc.,
respectively. The Company understands that other groups or companies are also
researching and developing organ preservation techniques and solutions.
Scientists and doctors performing research as consultants, can be
expected to publish in journals or otherwise publish information concerning
applications of the Company's technology. If it were determined that the
Company's cryosurgical instrumentation or the Solutions do not offer unique
technologies and that, in fact, the techniques employed by the Company's
scientists were responsible for results of the Company tests and not the
technologies contained in the Company's AccuProbe or the Solutions, then
competitors of the Company who have developed products with similar properties
may be able to duplicate the performance of the Company's cryosurgical
instrumentation and Solutions by applying similar techniques.
The Company expects competition to intensify with respect to the areas
in which it is involved as technical advances are made and become more widely
known.
EMPLOYEES
The Company's business is highly dependent upon its ability to attract
and retain qualified scientific, technical and management personnel. The
Company had 33 full-time employees at December 28, 1997. The Company is not a
party to any collective bargaining agreements.
ITEM 2. PROPERTIES
The Company's administrative, manufacturing and research and
development facilities consist of approximately 21,000 square feet located in
Rockville, Maryland. The Company rents these facilities under a five-year
lease commencing in May 1995. Rental expense for facilities for the 12-month
period ended December 28, 1997 totaled $227,607. At December 28, 1997, the
monthly rental was $23,358. The Company believes that the current facilities
are adequate for current needs and would be adequate for sales at approximately
twice the level experienced in the twelve-month period ended December 28, 1997.
ITEM 3. LEGAL PROCEEDINGS
In November 1996, the Company filed suit against EndoCare, Inc.,
("EndoCare") and ZhaoHua Chang in the Circuit Court for Montgomery County,
Maryland (Case No. 161496). The lawsuit alleges, among other things that
EndoCare misappropriated trade secrets of the Company, and that EndoCare
tortuously interfered with the Company's contracts, its relationships with its
employees, and the Company's contractual and potential business relationships
with customers. The lawsuit, which contains six counts, also alleges that Dr.
Chang and EndoCare engaged in unfair competition against the Company and civil
conspiracy, and that Dr. Chang, who was formerly employed as a Vice President
of Cryosurgical Engineering
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by the Company, breached contractual and fiduciary obligations owed to the
Company by his employment by EndoCare, his retention and misuse of the
Company's confidential information, and his improper solicitation of the
Company's employees to disclose trade secret information and/or to become
employed by EndoCare. EndoCare and Dr. Chang have denied the allegations in
the lawsuit. In March 1997, Dr. Chang filed a counter-suit in the Circuit
Court for Montgomery County, Maryland (Case No. 161496-V) regarding numerous
claims of a breach of contract by the Company. An agreement in principle has
been reached with Endocare to resolve this suit. The Company is presently
waiting for Endocare to communicate with Dr Chang in regard to the terms and
conditions of settlement. If these mediation efforts fail, the Company intends
to pursue and defend this case vigorously.
In June 1997, Concept Group, Inc. ('Concept") filed suit against the
company in the United States District Court for the Eastern District of
Pennsylvania. The Company successfully transferred venue to the United States
District for the District of Maryland, Southern Division. The suit involves the
manufacture of cryosurgical probes allegedly developed by Concept which are
used in certain surgical procedures. Concept alleges that in December 1992 the
parties entered into a confidentiality agreement regarding certain proprietary
and technical information relating to the cryoprobe. Concept further alleges
that in January 1994 the parties entered into a Development and Manufacturing
Agreement ("Development Agreement") in which Concept was to perform vacuum
brazing on the cryoprobe according to a detailed set of design specification.
After a dispute arose regarding defects in the vacuum brazing process performed
by Concept, the parties executed a release in August 1996 which discharged both
parties from all business obligations to each other. Concept alleges that the
Company violated the terms of the confidentiality agreement and the Development
Agreement by subsequently applying for and receiving a United States patent on
the cryoprobe. Concept contends it has a proprietary interest in the design of
the cryoprobe. Further, Concept alleges that the Company fraudulently induced
it into signing the release in order to secure the patent. Concept is demanding
$1,500,000.00 plus costs and interest it claims it expended manufacturing the
cryoprobes. The Company has denied all liability and damages, and intends to
defend this matter. After evidence was found to show that the plaintiff failed
to manufacture the probes in accordance with the design specification set out
in the agreement, the Company filed a counterclaim against Concept. The
counterclaim requests a judicial determination that the release was valid as
well as damages for repairs to the cryoprobes due to the Concept's failure to
conform with the design specifications set out in the agreement. Although the
Company believes it has meritorious defenses and that the counterclaim asserts
valid claims, no prediction concerning the ultimate outcome or amount or range
of damages, if any, can be made at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
WHAT DO WE NEED HERE RELATIVE TO THE SHAREHOLDERS MEETING IN 1997
10
<PAGE> 11
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. From the period May
19, 1992 to November 21, 1996, the Common Stock has traded on the NASDAQ
National Market System and on November 22, 1996, the Common Stock commenced
trading on the NASDAQ SmallCap Market System. All corresponding prices
represent high and low closing prices for the Common Stock for the periods
indicated.
<TABLE>
<CAPTION>
Price Range
-----------
High Low
---- ---
Quarter Ended:
-------------
<S> <C> <C>
March 30, 1997 5/8 9/16
June 29, 1997 1/2 1/2
September 28, 1997 3/8 3/8
December 28, 1997 1/4 3/16
March 31, 1996 2 7/16 1 5/8
June 30, 1996 3 5/16 2
September 27, 1996 2 9/16 1 9/16
December 29, 1996 1 11/16 9/32
</TABLE>
HOLDERS
As of March 31, 1998, there were XXXXX 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.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth-selected consolidated financial data
for the transition period and for each of the full fiscal years in the
five-year period ended December 28, 1997, including the six-months ended
December 29, 1996. The financial data has been derived from the Company's
consolidated financial statements, included elsewhere in this report. This
data should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information included herein.
<TABLE>
<CAPTION>
Year Six Months
Ended Ended
December 28 December 29 Year Ended June 30
----------- ----------- ------------------------------------------
(In Thousands, Except Per Share Data)
1997 1996(1) 1996 1995 1994 1993
---- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total Revenues $ 3,571 $ 2,225 $ 6,844 $13,594 $13,438 $ 5,876
Gross Profit 1,653 1,164 3,080 7,832 6,310 1,029
Loss from Operations (1,657) (863) (3,414) (1,812) (2,658) (6,837)
Net Loss (1,590) (840) (3,404) (2,231) (2,637) (6,588)
Per Share Data:
Net Loss Per Share (0.05) (0.03) (0.13) (0.09) (0.12) (0.29)
Balance Sheet Data (end of period):
Working Capital 1,588 3,164 2,279 3,722 5,116 4,975
Total Assets 3,879 6,045 5,814 8,403 9,106 8,353
Long Term Notes, Capital
Leases, and Other Obligations 140 10 5 23 31 11
Accumulated Deficit 28,085 26,495 25,655 22,250 20,020 17,383
Stockholders' Equity 2,460 3,994 2,849 3,982 5,323 5,642
</TABLE>
(1) Effective July 1996, the Company's year-end was changed to the Sunday
closest to December 31. Therefore, the Company's 1996 transition period ended
on December 29, 1996.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is engaged in the research, development, marketing and
manufacturing of products for use in the field of hypothermic (low-temperature)
medicine. The Company was incorporated on November 5, 1987. On August 31,
1989, the Company completed the acquisition of CII and CII became a
wholly-owned subsidiary of the Company. CII has been inactive since June 30,
1990, and was dissolved by the Company on December 19, 1996.
In March 1998 the Company created a wholly owned subsidiary, BioLife
Technologies, Inc for the purposes of commercializing the company's
preservative Solutions. The company is presently seeking funding for this
subsidiary and although it has contacted a number of parties who have expressed
an interest in potentially providing such funding, there can be no assurance
that such funding will be obtained
On July 25, 1996, the Board of Directors of the Company authorized a
change in the Company's fiscal year from a period beginning July 1 and ending
on June 30 to a variable period that usually ends on the last Sunday of the
calendar. Such change was made to make the Company's year end consistent with
its quarterly accounting periods which, in the case of 52-week years, consists
of two four week and one five week periods per quarter ending on a Sunday. In
addition to conforming the Company's yearly and quarterly accounting periods,
the change in the Company's fiscal year conforms to an annual reporting period
more closely associated with the calendar year and, to the fiscal years
utilized by a majority of the public companies in the sales and manufacturing
industries.
RESULTS OF OPERATIONS
The company continues to have its revenues negatively influenced by
the lack of reimbursement by HCFA in regard to cryoablation of the prostate and
FDA's prohibition on the promotion of cryosurgical techniques that may be used
in the uterus. The company has made reductions in expenses and personnel in an
attempt to maintain its viability as an operating entity.
Sales and other revenues for the year ended December 28, 1997, six
months ended December 29, 1996, and Fiscal year 1996 are $3,571,386,
$2,224,541, and $6,843,950, respectively. The decrease in revenue results from
a decline in the number of AccuProbe systems sold and fewer procedures
performed using single-use AccuProbe accessories due primarily to the lack of
formal Medicare reimbursement for prostate cryosurgery.
In view of the operating losses suffered by the Company and the level
of the Company's current liquid resources (see "Liquidity and Capital
Resources" below) the Company undertook certain actions to reduce expense
levels. Such actions include staff reductions, a reduction in the amount of
leased office space, reductions in the levels of research grants to outside
facilities and reductions in other overhead expenses. The goal of these cost
reduction measures is to reduce operating expenses to a level whereby the
Company can achieve operating profits and a positive cash flow from operations.
There can be no assurance of achieving these results.
Gross profits for the for the year ended December 28, 1997, six months
ended December 29, 1996, and Fiscal year 1996 are $1,652,784, $1,164,380 and
$3,079,828, respectively. Gross profits as a percentage of revenues in 1997
were 46%. The company can give no assurance that there will be a stabilization
in gross profits as a percent of sales during the year ending December 27,
1998.
Research and development expenses for the year ended December 28,
1997, six months ended December 29, 1996, and Fiscal year 1996 are $1,293,470,
$492,794 and $1,484,042, respectively. The research and expense revenues for
1997 were incurred primarily in the development of the CryoLite series and
other non liquid nitrogen based products.
Sales and marketing expenses for the year ended December 28, 1997, six
months ended December 29, 1996, and Fiscal year 1996 are $806,435, $658,416,
and $2,439,636, respectively. The trend in reducing sales
13
<PAGE> 14
and marketing expenses is primarily due to decreased staffing and a reduced
participation in marketing and trade shows.
General and administrative expenses for year ended December 1997, six
months ended December 29, 1996, and Fiscal year 1996 are $1,209,884, $875,965,
and $2,570,604, respectively. This trend in reducing General and
administrative expenses is primarily due to staff reductions and reduced
professional and consultants fees.
The Company sustained a net loss for the year ended December 1997, six
months ended December 29, 1996, and Fiscal year 1996 in the amount of
$1,589,993, $840,132, and $3,404,247, respectively. Although the Company
continues to decrease its operating costs, the decrease in gross profits, due
to significantly lower revenues, has resulted in continued annual net losses.
The Company intends to continue reducing its operating expenses in view of the
trend of continuing declines in revenues. There can be no assurance that with
continued reductions in operating expenses, the Company will experience a net
profit in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997, the Company had cash and cash equivalents
totaling $124,000 and working capital of $1,588,368. The working capital of the
Company was $3,164,304 and $2,279,406 at December 29, 1996 and June 30, 1996,
respectively. The Company's working capital position increased in the six
months ended December 29, 1996 despite a six-month net loss of $840,132 due to
the net proceeds of $1,924,935 obtained from the execution of a Reg "S" equity
placement.
On October 2, 1996 (the "Series D Preferred Stock Closing Date"), the
Company consummated a private placement of 196 shares of Series D Convertible
Preferred Stock (the "Series D Preferred Stock") pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended. The net proceeds of
the offering totaled $1,924,935. Each share of Series D Preferred Stock was
convertible into that number of shares of common Stock as determined by
dividing $10,000 by a price equal to 82.5% of the average of the closing bid
prices for the Common Stock for the five (5) trading days immediately preceding
the date upon which the holder of the Series D Preferred Stock transmitted a
conversion notice to the Company. The holders of the Series D Preferred Stock
could convert one-third of their shares of Series D Preferred Stock commencing
forty (40) days after the Series D Preferred Stock Closing Date, up to an
additional one-third of the Series D Preferred Stock commencing seventy-five
(75) days after the Series D Preferred Stock Closing Date, and the balance
thereof commencing one hundred (100) days after the Series D Preferred Stock
Closing Date. Any share of Series D Preferred Stock outstanding on October 2,
1998 automatically would be converted on the same basis as the holder of such
shares of Series D Preferred Stock could convert such shares pursuant to the
provisions set forth above. In November 1996, 969,695 shares of Common Stock
of the Company were issued in accordance with the terms of the first conversion
of the preferred stock offering. Subsequently, in January 1997, the second and
third Preferred Stock conversions of the offering, representing the remaining
156 shares of Series D Preferred Stock converted into 5,508,168 shares of
Common Stock, completing the offering.
On January 16, 1996 (the "Series C Preferred Stock Closing Date"), the
Company consummated a private placement of 40 shares of Series C Convertible
Preferred Stock (the "Series C Preferred Stock"), pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended. The net proceeds of
the offering totaled $1,910,000. Each share of Series C Preferred Stock was
convertible into that number of shares of Common Stock as determined by
dividing $50,000 by the Conversion Price. The Conversion Price was determined
as follows: if the average of the closing bid prices for the Common Stock for
the five (5) trading days immediately preceding the date upon which the holder
of the Series C Preferred Stock transmitted a conversion notice to the Company
(the "Average Bid Price") was $2.00 or less, then the Conversion Price equaled
82.5% of the Average Bid Price. If the Average Bid Price was $2.01 or more,
then the Conversion Price equaled 80% of the Average Bid Price. The holders of
the Series C Preferred Stock could convert up to one-half of their shares of
Series C Preferred Stock commencing forty (40) days after the Series C
Preferred Stock Closing Date, and the balance thereof commencing seventy-five
(75) days after the Series C Preferred Stock Closing Date. Any share of Series
C Preferred Stock outstanding on January 16, 1997 automatically would be
converted on the same basis as the holder of such shares of Series C Preferred
Stock could convert
14
<PAGE> 15
such shares pursuant to the provisions set forth above. 1,332,633 shares of
Common Stock were issued pursuant to the provisions set forth above.
Capital expenditures for leasehold improvements, furniture and
equipment totaled $447,020 in the year ended December 28, 1997 compared to
$61,859 in the six months ended December 29, 1996 and $60,447 in the fiscal
year ended June 30. The Company has budgeted $100,000 for additional equipment
in the year ending December 27, 1998.
The Company expects to incur expenditures over the next 12 months
related to research, development, manufacturing and testing of its products,
and for sales and marketing efforts and other operating expenses. The
Company's management assumes that fiscal 1998 sales may be less than the level
experienced in comparable periods of 1997 and 1996 and believes that its
current cash and working capital position will be sufficient to fund the
operations of the Company for 12 months, dependent, in part, on the level of
sales and marketing activity engaged in by the Company and the amounts of
research funded by the Company. However, the Company expects to reduce
expenditures and to pursue various forms of short term financing and possibly
additional equity financing to supplement working capital during fiscal 1997.
Except for the proceeds from the sale of its products, the Company has no other
major sources of liquidity and has no commitments with regard to obtaining any
additional funds.
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CRYOMEDICAL SCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Independent Auditor's Report 19
Balance Sheet 20
Consolidated Statements of Operations 21
Consolidated Statements of Cash Flows 22
Consolidated Statements of Changes in Stockholders' Equity 23
Notes to Consolidated Financial Statements 24
</TABLE>
16
<PAGE> 17
Independent Auditor's Report
To the Board of Directors and Stockholders of
CRYOMEDICAL SCIENCES, INC.
Rockville, MD
We have audited the accompanying balance sheet of Cryomedical Sciences, Inc. as
of December 28, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Cryomedical Sciences, Inc. at
December 28, 1997, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring operating losses
and negative cash flows from operations. Additionally, the Company's revenue
is based upon a singular technology which, in the principal area of use, the
Medicare Health Care Financing Administration has adopted a policy of
noncoverage which has had the effect of discouraging use by physicians that
rely on Medicare funding for patients. These conditions raise substantial
doubt as to the Company's ability to generate sufficient sales to enable it to
realize its assets and continue as a going concern. Management's plans
regarding these conditions are also discussed in Note 1. The financial
statements do not include any adjustments that might be required as a result of
the outcome of the uncertainty.
ARONSON, FETRIDGE & WEIGLE
Rockville, Maryland
March 18, 1998
<PAGE> 18
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
BALANCE SHEET
<TABLE>
<CAPTION>
December 28,
1997
----
<S> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents $ 124,000
Receivables, net allowance for doubtful accounts of $407,495 989,908
Inventories 1,654,106
Prepaid expenses and other current assets 98,030
----------------
Total current assets 2,866,044
Fixed assets, net accumulated depreciation and amortization of $2,032,959 994,296
Other assets 18,727
----------------
Total assets $ 3,879,067
================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 533,674
Accrued expenses 428,324
Unearned revenues 135,262
Warranty reserves 50,598
Extended warranties - current portion 92,837
Capital leases - current portion 36,981
----------------
Total current liabilities 1,277,676
----------------
Long term liabilities
Extended warranties, net of current portion 4,500
Capital leases, net of current portion 103,106
Deferred rent 33,330
----------------
Total liabilities 1,418,612
----------------
Stockholders' equity
Preferred stock, $.001 par value per share,
9,378,800 authorized; no shares issued -
Common stock, par value $.001 per share,
50,000,000 shares authorized; 33,454,302 issued and outstanding 33,454
Additional paid-in capital 30,551,263
Unearned compensation (39,525)
Accumulated deficit (28,084,737)
----------------
Total stockholders' equity 2,460,455
----------------
Total liabilities and stockholders' equity $ 3,879,067
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 19
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Six Months Ended Year ended
December 28, December 29, June 30,
---------------- ----------------- -----------------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Product sales $ 2,348,909 $ 1,631,936 $ 5,652,403
Services and other 1,222,477 592,605 1,191,547
---------------- ----------------- -----------------
Total Revenue 3,571,386 2,224,541 6,843,950
Cost of sales
Product sales 1,410,592 763,890 3,131,440
Services and other 508,010 296,271 632,682
---------------- ----------------- -----------------
Total cost of sales 1,918,602 1,060,161 3,764,122
Gross profit 1,652,784 1,164,380 3,079,828
Expenses
Research and development 1,293,470 492,794 1,484,042
Sales and marketing 806,435 658,416 2,439,636
General and administrative 1,209,884 875,965 2,570,604
---------------- ----------------- -----------------
Total expenses 3,309,789 2,027,175 6,494,282
---------------- ----------------- -----------------
Operating loss (1,657,005) (862,795) (3,414,454)
Interest income, net of interest expense 67,012 22,663 10,207
---------------- ----------------- -----------------
Net loss $ (1,589,993) $ (840,132) $ (3,404,247)
================ ================= =================
Net loss per common share $ (0.05) $ (0.03) $ (0.13)
================ ================= =================
Weighted average number
of common shares outstanding 33,158,999 26,850,325 25,277,944
================ ================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 20
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six Months Ended Year ended
December 28, December 29, June 30,
-------------- ---------------- --------------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,589,993) $ (840,132) $ (3,404,247)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 420,993 234,849 398,294
Provision for bad debt 334,303 231,908 30,000
Write-off of accounts receivable (12,211) (30,000) -
Forgiveness of loan to officer - 44,283 -
Sale of rental equipment 45,847 - -
Write-off of fixed assets - - 29,023
Loss on disposal of fixed assets - 3,797 -
Changes in operating assets and liabilities:
Decrease (increase) in receivables 62,814 (7,354) 1,581,968
Decrease (increase) in inventories 37,195 (197,561) 637,984
(Increase) decrease in prepaid and other current assets (31,635) 120,874 110,715
Increase (decrease) in accounts payable 173,015 113,275 (685,050)
(Decrease) increase in accrued expenses (376,750) (702,915) 65,896
(Decrease) increase in unearned revenue (18,948) 85,387 18,823
Decrease in warranty reserves (47,002) (2,400) (148,000)
Decrease in extended warranties (420,351) (338,099) (835,237)
(Decrease) increase in deferred rent (72,194) (56,022) 157,856
-------------- -------------- -------------
Net cash used in operating activities (1,494,917) (1,340,110) (2,041,975)
-------------- -------------- -------------
Cash flows from investing activities:
Purchases of short term investments - (110,150) (4,761)
Maturities of short term investments 110,150 105,071 -
Purchase of equipment (355,293) (61,859) (60,447)
-------------- -------------- -------------
Net cash used in investing activities (245,143) (66,938) (65,208)
-------------- -------------- -------------
Cash flows from financing activities:
Reg "S" Offering - 1,924,935 -
Issuance of shares for employee stock purchase plan 30,101 13,433 37,011
Issuance of common stock - - 1,910,000
Exercise of employee stock options - - 326,304
Increase in unearned compensation (16,937) - -
Issuance of warrants 43,000 - -
Proceeds from notes payable 57,310 - -
Principal payments on capital leases and notes payable (18,656) (12,948) (31,082)
Increase in notes receivable from officers - - (1,562)
-------------- -------------- -------------
Net cash provided by financing activities 94,818 1,925,420 2,240,671
-------------- -------------- -------------
Net (decrease) increase in cash and cash equivalents (1,645,243) 518,372 133,488
Cash and cash equivalents at beginning of period 1,769,243 1,250,871 1,117,383
-------------- -------------- -------------
Cash and cash equivalents at end of period $ 124,000 $ 1,769,243 $ 1,250,871
============== ============== =============
Supplemental Cash Flow Information:
Cash paid for interest $ 23,160 $ 4,853 $ 15,392
============== ============== =============
Supplemental disclosure of noncash activity:
Lease equipment acquired under capital lease $ 91,727 $ - $ -
============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 21
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Convertible Preferred Stock
--------------------------- --------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1995 24,845,631 $ 24,846 - -
Exercise of stock options 503,134 503 - -
Employee Stock Purchase Plan 16,079 16 - -
Reg "S" offering of Convertible Preferred Stock, net - - 1,332,633 1,333
Conversion of Convertible Preferred Stock from Reg "S" 1,332,633 1,333 (1,332,633) (1,333)
Shareholder suit settlement 175,549 175 - -
Interest on loan to officer - - - -
Net loss - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 26,873,026 26,873 - -
Employee Stock Purchase Plan 7024 7 - -
Reg "S" offering of Convertible Preferred Stock, net - - 196 -
Conversion of Convertible Preferred Stock from Reg "S" 969,695 970 (40) -
Forgiveness of loan to officer - - - -
Issuance of Warrants - - - -
Amortization of unearned compensation - - - -
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 27,849,745 27,850 156 -
Employee Stock Purchase Plan 96,389 96 - -
Conversion of Convertible Preferred Stock from Reg "S" 5,508,168 5,508 (156) -
Issuance of Warrants - - - -
Amortization of unearned compensation - - - -
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 33,454,302 $ 33,454 - -
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Notes Total
paid-in Accumulated Unearned Receivable stockholders'
capital deficit Compensation from Officers equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ 26,248,915 $ (22,250,365) - $ (41,471) $ 3,981,925
Exercise of stock options 325,801 - - - 326,304
Employee Stock Purchase Plan 36,995 - - - 37,011
Reg "S" offering of Convertible Preferred Stock, net 1,908,667 1,910,000
Conversion of Convertible Preferred Stock from Reg "S" - - - - 0
Shareholder suit settlement (175) - - - 0
Interest on loan to officer - - - (1,562) (1,562)
Net loss - (3,404,247) (3,404,247)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 28,520,203 (25,654,612) - (43,033) 2,849,431
Employee Stock Purchase Plan 15,797 - - - 15,804
Reg "S" offering of Convertible Preferred Stock, net 1,924,935 - - - 1,924,935
Conversion of Convertible Preferred Stock from Reg "S" (970) - - - 0
Forgiveness of loan to officer - - - 43,033 43,033
Issuance of Warrants 23,800 - $ (23,800) - 0
Amortization of unearned compensation - - 1,212 - 1,212
Net loss - (840,132) - - (840,132)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 30,483,765 (26,494,744) (22,588) - 3,994,283
Employee Stock Purchase Plan 30,006 - - - 30,102
Conversion of Convertible Preferred Stock from Reg "S" (5,508) - - - 0
Issuance of Warrants 43,000 - (20,408) - 22,592
Amortization of unearned compensation - - 3,471 - 3,471
Net loss - (1,428,488) - - (1,428,488)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 30,551,263 $ (27,923,232) $ (39,525) - $ 2,621,960
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 22
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Cryomedical Sciences, Inc. (the Company) is engaged in the
research and development of products for use in the field of
hypothermic (low-temperature) medicine by surgeons and radiologists in
the United States and abroad. The Company is engaged in the
development, manufacturing and marketing of cryosurgical devices used
to freeze and destroy diseased tissue through the application of
subfreezing temperatures. The first such device was shipped in June
1992. Hypothermic blood substitute solutions, also being developed by
the Company, may allow heretofore difficult or impossible surgical
techniques to be performed and may be useful in increasing the period
in which organs may be preserved for transplantation.
The Company was organized November 5, 1987, as a Delaware
corporation. On August 31, 1989, the Company completed the
acquisition of Cryo Instruments, Inc. ("CII"), and CII became a wholly
owned subsidiary of the Company. On December 19, 1996, the Company
dissolved the CII subsidiary. Since inception and through June 30,
1992, the Company was a development stage company which did not
generate any operating revenues and incurred cumulative losses of
$9,861,102. In July 1992, the Company began generating revenue from
the sale of its products. Management intends to fund operations,
including future research and development, primarily through the
proceeds from sales of the Company's products and other forms of
financing.
The Company has experienced recurring operating losses and
continuing negative cash flows from business activities.
Additionally, past and expected future revenue is based upon one
singular technology, cryomedical devices used to freeze and destroy
diseased tissue. There can be no assurance that this technology will
continue to be attractive to the market or that procedures performed
using the technology will be subject to reimbursement by public and
private insurers. Specifically, in the past, a preponderance of
equipment sold was used in the field of urology and, during 1996,
Medicare's Health Care Financing Administration ("HCFA") announced
plans to continue a noncoverage policy in regard to cryoablation of
the prostate. There can be no assurance that sales of urology
products will continue at present levels because of the HCFA
noncoverage policy. Finally, except for the proceeds from the sale of
its products, the Company has no other major sources of liquidity and
has no commitments with regard to obtaining any additional funds.
<PAGE> 23
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(A) Organization (continued)
The Company has assessed its current position and, in order to
attempt to mitigate the effect of the HCFA noncoverage policy, has
taken steps to increase the utilization of its technology in areas
other than urology, including general surgery and gynecology. In
attempting to achieve this goal, the Company spends significant
resources to educate surgeons and healthcare professionals in formal
training programs as to the uses and benefits of the Company's
cryomedical technology and has developed focused technology for other
cryosurgical applications. Additionally, during 1996, the Company
enhanced its liquidity through a $1.9 million preferred stock offering
(see Note 5)and has reduced its operating expenses. Finally, the
Company has no significant long-term debt outstanding.
These financial statements assume that the Company will be able
to continue as a going concern. If the Company is unable to continue
as a going concern, the Company may be unable to realize its assets
and discharge its liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to
amounts and classification of liabilities that may be necessary should
the entity be unable to continue as a going concern.
(B) Change in fiscal year
On July 25, 1996, the Board of Directors of the Company
authorized a change in the Company's fiscal year from a period
beginning July 1 and ending on June 30 to a variable period that
usually ends on the last Sunday of the calendar year. Such change was
made to make Cryomedical Sciences, Inc.'s year end consistent with its
quarterly accounting periods which, in the case of 52-week years,
consists of two four week and one five week periods per quarter ending
on a Sunday. In addition to conforming the Company's yearly and
quarterly accounting periods, the change in Cryomedical Sciences,
Inc.'s fiscal year conforms to an annual reporting period more closely
associated with the calendar year, and to the fiscal years utilized by
a majority of the public companies in the sales and manufacturing
industries.
(C) Principles of Consolidation
The financial statements include the accounts of Cryomedical
Sciences, Inc., and, until dissolved on December 19, 1996, its wholly
owned subsidiary Cryo Instruments, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
<PAGE> 24
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) Basic Net Loss Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standard No. 128, Earnings Per Share. The adoption of this Standard
had no effect on current period or previously reported net loss per
share. The basic net loss per common share is computed by dividing
the net loss by the weighted average number of common shares
outstanding during the period. Because the Company has incurred
losses, fully diluted per share amounts are not presented.
(E) Cash Equivalents
Cash equivalents consist primarily of interest-bearing bank
deposits. The Company considers all highly liquid debt instruments
purchased with an initial maturity of three months or less to be cash
equivalents. At times, the Company maintains cash balances which may
exceed Federally insured limits. The Company does not believe that
this results in any significant credit risk.
(F) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method.
(G) Equipment and Leasehold Improvements
Furniture and equipment are stated at cost and are depreciated
using the straight-line method overestimated useful lives of three to
five years. Leasehold improvements are stated at cost and are
amortized using the straight-line method over the lesser of the life
of the asset or the remaining term of the lease. Equipment also
includes cryosurgical systems on rent or on loan which are depreciated
using the straight-line method over an estimated useful life of five
years.
(H) Revenue Recognition
The Company receives revenue from sales of products, extended
warranties and from the rental of Cryo Surgical Systems. The Company
generally recognizes revenue related to the sales of its products,
primarily its cryosurgical systems and disposable probes, at the time
of shipment. Revenue from extended warranties is deferred and
recognized on a straight-line basis over the warranty contract
periods. Revenue from the lease of Cryo Surgical Systems is
recognized over the course of the non-cancelable lease term.
<PAGE> 25
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) Warranties
The Company generally warrants its cryosurgical systems for one
year. The estimated cost to repair or replace systems under warranty
is provided by charges to cost of sales in the period in which the
system is shipped.
(J) Income Taxes
The Company accounts for income taxes using an asset and
liability method which generally requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of differences between tax
bases of assets and liabilities, and financial reporting amounts,
based upon enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to amounts expected to be realized.
(K) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(L) Employee Stock Options
The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the
quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
<PAGE> 26
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) Accounting Pronouncements
In June 1997 the Financial Accounting Standard Board issued
Statement of Financial Accounting No. 130 Reporting Comprehensive
Income. This standard requires the reporting of the components of
comprehensive income, which includes net income, and is effective for
years beginning after December 15, 1997. The Company believes that
had the standard been adopted for the year ended December 28, 1997,
that the presentation would not differ significantly from the
presentation contained in its Statement of Operations.
(N) Fair Value of Financial Instruments
The fair value of the financial instruments included in the
consolidated financial statements, except as otherwise discussed in
the notes to financial statements, approximates their carrying value.
(O) Reclassifications
Certain reclassifications of the prior year financial statements
have been made to conform to the current period presentation.
NOTE 2. - INVENTORIES
Inventories consist of the following at December 28, 1997:
<TABLE>
<S> <C>
Raw materials and purchased parts $ 859,674
Work in process 243,431
Finished goods 594,746
------------
1,697,851
Less: Reserves (43,745)
------------
$ 1,654,106
============
</TABLE>
<PAGE> 27
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 3. - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 28, 1997:
<TABLE>
<S> <C>
Leasehold improvements $ 201,521
Furniture and office equipment 769,535
Manufacturing and other equipment 2,056,199
-------------
3,027,255
Less accumulated depreciation and amortization (2,032,959)
-------------
$ 994,296
=============
</TABLE>
NOTE 4. - INCOME TAXES
The Company has not realized any taxable income since its inception
and as of December 28, 1997, has net operating loss carryforwards for both
federal and state tax purposes and research and development tax credit
carryforwards for federal income tax purposes approximately as follows:
<TABLE>
<CAPTION>
Net R&D
Year of Operating Tax
Expiration Losses Credits
---------- ------------- -------------
<S> <C> <C>
2003 $ 76,000 $ -
2004 472,000 20,000
2005 1,747,000 42,000
2006 2,523,000 88,000
2007 4,505,000 125,000
2008 5,893,000 150,000
2009 1,433,000 114,000
2010 1,562,000 145,000
2011 5,131,000 33,000
2012 1,600,000 -
------------- -------------
Total $ 24,942,000 $ 717,000
============= =============
</TABLE>
At December 28, 1997, the Company has a deferred tax asset related
primarily to the net operating loss carryforwards and the R&D tax credit
carryforwards of approximately $10,200,000, against which the Company has
provided an allowance for the full amount because management has determined
that it is not more likely than not that the deferred tax assets will be
realized.
In the event of a significant change in the ownership of the Company,
the utilization of such loss carryforwards could be substantially limited.
<PAGE> 28
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 5 - STOCKHOLDERS' EQUITY
On January 16, 1996 (the "Series C Preferred Stock Closing Date"), the
Company consummated a private placement of 40 shares of Series C Convertible
Preferred Stock (the "Series C Preferred Stock"), pursuant to Regulation S of
the Securities Act of 1933, as amended. The net proceeds of the offering
totaled $1,910,000. Each share of Series C Preferred Stock was convertible into
that number of shares of Common Stock as determined by dividing $50,000 by the
Conversion Price. The Conversion Price was determined as follows: if the
average of the closing bid prices for the Common Stock for the five (5) trading
days immediately preceding the date upon which the holder of the Series C
Preferred Stock transmitted a conversion notice to the Company (the "Average
Bid Price") was $2.00 or less, then the Conversion Price equaled 82.5% of the
Average Bid Price. If the Average Bid Price was $2.01 or more, then the
Conversion Price equaled 80% of the Average Bid Price. The holders of the
Series C Preferred Stock could convert up to one-half of their shares of Series
C Preferred Stock commencing forty (40) days after the Series C preferred Stock
Closing Date, and the balance thereof commencing seventy-five (75) days after
the Series C Preferred Stock Closing Date. Any share of Series C Preferred
Stock outstanding on January 16,1997 automatically would be converted on the
same basis as the holder of such shares of Series C Preferred Stock could
convert such shares pursuant to the provisions set forth above. On that date,
1,332,633 shares of Common Stock were issued pursuant to the conversion
provisions.
On October 2, 1996, (the "Series D Preferred Stock Closing Date"), the
Company consummated a private placement of 196 shares of Series D Convertible
Preferred Stock (the "Series D Preferred Stock") pursuant to Regulation S of
the Securities Act of 1933, as amended. The net proceeds of the offering
totaled $1,924,935. Each share of Series D Preferred Stock was convertible
into that number of shares of Common Stock as determined by dividing $10,000 by
a price equal to 82.5% of the average of the closing bid prices for the Common
Stock for the five (5) trading days immediately preceding the date upon which
the holder of the Series D Preferred Stock transmitted a conversion notice to
the Company. The holders of the Series D Preferred Stock could convert
one-third of their shares of Series D Preferred Stock commencing forty (40)
days after the Series D Preferred Stock Closing Date, up to an additional
one-third of the Series D Preferred Stock commencing seventy-five (75) days
after the Series D Preferred Stock Closing Date, and the balance thereof
commencing one hundred (100) days after the Series D Preferred Stock Closing
Date. Any share of Series D Preferred Stock outstanding on October 2, 1998
automatically will be converted on the same basis as the holder of such shares
of Series D Preferred Stock could convert such shares pursuant to the
provisions set forth above. In November 1996, the Company issued 969,695
shares of Common Stock in accordance with the terms of the first conversion of
the preferred stock offering. In January 1997, the second and third Preferred
Stock conversions of the offering, representing the remaining 156 shares of
Series D Preferred Stock were converted into 5,508,168 shares of Common Stock,
completing the offering.
<PAGE> 29
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company has granted warrants at an exercise price per share equal
to the market price of the stock on the date of grant to members of the
Company's Scientific Advisory Board and to consultants and others who have
provided, or will provide, services to the Company. In general, one-half of
the granted warrants may be exercised from the date of grant and, in the event
that the recipient continues to serve as a member of the Scientific Advisory
Board, one-half may be exercised after one year of service.
The Company has also granted warrants to consultants and others who
have provided, or will provide, services to the Company, at an exercise price
per share equal to the market price of the Common Stock on the date of grant.
The terms of such warrants have ranged from three to ten years with various
vesting arrangements (see Note 7 regarding warrants granted to a director).
In November 1996, the Company granted warrants to two consultants in
connection with limited period consulting agreements. In total, the Company
granted the consultants warrants to purchase 85,000 shares of Common Stock at
$0.53 per share. The warrants had a grant date fair value of $0.28 per share
of Common Stock, lapse after ten years and may be exercised one-third each on
the first, second, and third anniversary dates of the grant.
In March 1997, the Company granted warrants to a consultant to the
Company to purchase 50,000 shares of the Company's common stock at a price of
$.53125. The fair value of the company's common stock at the date of the
grant was $.375. The warrants are exercisable into 25,000 shares immediately
with the remainder exercisable one-third on each of the first, second and third
anniversary dates of the grant.
In July 1997, the Company granted warrants to two consultants to the
Company to purchase an aggregate of 80,000 shares (40,000 shares each) of
common stock of the Company at a purchase price of $.50 per share. The fair
value of the Company's common stock at the date of the grant was $.375. The
warrants are exercisable one-third each on each of the first, second and third
anniversary dates of the grant.
<PAGE> 30
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes warrant activity for the year ended
December 28, 1997, the six month transition period ended December 29, 1996 and
the year ended June 30, 1996 with respect to warrants granted to consultants
excluding warrants granted to directors of the Company. (See Note 7):
<TABLE>
<CAPTION>
Transition Period
Year Ended Ended Fiscal Year Ended
December 28, 1997 December 31, 1996 June 30, 1996
-------------------------- -------------------------- --------------------------
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Exer. Exer. Exer.
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 237,000 $ 3.82 152,000 $ 5.66 152,000 $ 5.66
Granted 130,000 .51 85,000 0.53 - -
Exercised - - - - - -
Terminated - - - - - -
Outstanding at end of year 367,000 2.65 237,000 3.82 152,000 5.66
Warrants exercisable at year end 198,333 5.16 145,000 5.83 145,000 5.8
</TABLE>
Stock Compensation Plans
The Company currently has two fixed option plans: the Cryomedical
Sciences, Inc. 1988 Stock Option Plan and the 1993 Employee Purchase Plan. The
1988 Stock Option Plan was approved and adopted by the Board of Directors in
July 1988. At the Plan's inception 1,100,000 shares of Common Stock were
allotted for distribution to employees, including officers and directors of the
Company. Options granted under the Plan are designated as incentive stock
options (which may not be granted at less than the fair market value of the
underlying shares at that date) or non-incentive stock options by the Board of
Directors who also have discretion as to the persons to be granted the options,
the number of shares subject to the options and the terms of the option
agreements. The option vesting period is determined at the time of each grant,
and all options expire a minimum of ten years from the grant date. Stock
options generally vest over a three to four-year period, with one-third to
one-quarter of the shares becoming exercisable on each of the first three or
four anniversaries of the grant date, respectively. The Plan was amended in
July 1992 to increase the amount of options available for issuance by 500,000
to 1,600,000 and amended in June 1994 increasing the shares of Common Stock
issuable by 600,000 to 2,200,000. Currently there are 401,416 shares of Common
Stock available under the Plan.
<PAGE> 31
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The following table provides information pertaining to stock options:
<TABLE>
<CAPTION>
Transition Period
Year Ended Ended Fiscal Year Ended
December 28, 1997 December 31, 1996 June 30, 1996
-------------------------- ------------------------- -------------------------
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Exer. Exer. Exer.
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,689,250 $ 3.32 1,931,650 $ 3.01 1,890,334 $ 3.01
Granted 400,000 .50 - - 884,950 2.28
Exercised 96,389 .31 - - 528,334 0.62
Terminated 149,261 12.80 242,400 4.48 315,300 4.92
Outstanding at end of year 1,843,600 2.12 1,689,250 2.80 1,931,650 3.01
Stock options exercisable at year end 999,350 2.56 800,472 3.32 852,900 3.68
</TABLE>
The following table summarizes information about stock options
outstanding at December 28, 1997:
<TABLE>
<CAPTION>
Range of Number Weighted Average
Exercise Outstanding Remaining Weighted Average
Prices at December 29, 1996 Contractual Life Exercise Price
- ------------------ -------------------- ---------------- ----------------
<S> <C> <C> <C>
$ .50 400,000 9.0 $ .50
.51 -3.00 1,252,000 7.4 2.16
3.01 -6.00 116,600 7.0 3.13
6.01 -9.25 75,000 4.7 8.51
--------- --- ----
1,843,600 7.6 2.12
========= === ====
</TABLE>
<TABLE>
<CAPTION>
Number Exercisable at Weighted Average
December 29, 1997 Exercise Price
--------------------- ----------------
<S> <C>
999,350 2.56
</TABLE>
<PAGE> 32
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The 1993 Employee Stock Purchase Plan was adopted by the Board of
Directors in August 1993, and made available 250,000 shares of Common Stock of
the Company to be purchased voluntarily through payroll deductions of one to
ten percent of base pay by participating employees (excluding directors and
officers) of the Company through a series of Offerings. Each employee at the
completion of an offering is eligible to purchase Common Stock at 85% of its
fair market value at either the beginning or end of the six-month offering,
whichever is lower. The Plan expired on June 30, 1997. Transactions related
to the Plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------- --------
<S> <C> <C>
Available at June 30, 1996 219,499
Exercised 7,024 $ 1.913
Available at December 29, 1996 212,475
Exercised - -
</TABLE>
The weighted average fair value of the stock options granted during
the year ended June 30, 1997 was $1,353,153. No options were granted during the
six months ended December 29, 1996. The fair value of each stock option granted
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used from grants in 1995-96:
risk-free interest rate ranging from a high of 6.65% in May 1996 to a low of
5.60% in January 1996; expected dividend yield of 0%; expected life of five
years and expected volatility ranging from 80-82%.
<PAGE> 33
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its employee stock option and
purchase plans. The compensation costs charged against income under the
Company's plans for the year ended December 28, 1997, the six month transition
period ended December 29, 1996 and the year ended June 30, 1996 were
insignificant. Had compensation cost for the Company's stock option plans and
its stock purchase plan been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of Financial
Accounting Standards Board Statement No. 123, the Company's net loss and loss
per share for the year ended December 28, 1997, the six month transition period
ended December 29, 1996, and the year ended June 30, 1996 would have been the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Transition
Year Period Year
Ended Ended Ended
December December June 30,
28, 1997 29, 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net loss to common shareholders
As reported $ 1,589,993 $ 840,132 $ 3,404,247
Pro forma 2,191,011 1,142,141 3,662,868
Net loss per basic common share
As reported .05 0.03 0.13
Pro forma .07 0.04 0.15
</TABLE>
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(en) titles 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.
<PAGE> 34
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
In the event that any person or group becomes an Acquiring Person,
each holder of a Right, other than Rights beneficially owned by the Acquiring
Person, will thereafter have the right to receive upon exercise that number of
shares of Common Stock of the Company having a market value of two times the
Purchase Price, and in the event that the Company is acquired in a business
combination transaction or 50% or more of its assets are sold, each holder of a
Right will thereafter have the right to receive upon exercise that number of
shares of Common Stock of the acquiring company which at the time of the
transaction will have a market value of two times the Purchase Price.
At any time after any person becomes an Acquiring Person, and prior to
the acquisition by such person or group of 50% or more of the outstanding
Common Stock of the Company, the Board of Directors of the Company may cause
the Rights (other than Rights owned by such person or group) to be exchanged,
in whole or in part, for Common Stock at an exchange rate of one share of
Common Stock per Right. At any time prior to the acquisition by a person or
group of beneficial ownership of 20% or more of the outstanding Common Stock,
the Board of Directors of the Company may redeem the Rights in whole at a price
of $.001 per Right. The Rights have certain anti-takeover effects, in that they
will cause substantial dilution to a person or group that attempts to acquire a
significant interest in the Company on terms not approved by the Board of
Directors.
NOTE 6 - EMPLOYEE BENEFIT PLAN
The Company established a 401(k) savings plan effective July 1, 1992
covering all eligible employees. Company contributions are discretionary and
none were made the year ended December 28, 1997, during the six month
transition period ended December 29, 1996, or the year ended June 30, 1996.
NOTE 7 - RELATED PARTY TRANSACTIONS
In January 1993, the Company entered into an employment agreement with
the former President to continue his employment as President and Chief
Executive Officer. Of the 560,000 shares of Common Stock of the Company that
the former President had received in November 1989 pursuant to his original
employment agreement, 373,334 shares remained subject to forfeiture. Under the
new employment agreement, these 373,334 shares were exchanged for a
non-incentive stock option, granted to the former President, to purchase
373,334 shares of Common Stock at a price of $.05 per share, which option may
be exercised in whole or in part commencing July 14, 1993 until its expiration
date in January 1998. The option was exercised with respect to 25,000 shares in
February 1995.
<PAGE> 35
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
In May 1994, the former President and Chief Executive Officer borrowed
$25,000 from the Company, evidenced by a promissory note and secured by 20,000
shares of Common Stock of the Company. The President borrowed an additional
$10,000 in August 1994. Each of the loans was for a period of one year with
interest at the rate of 7.5% per annum. In April 1995 each of the loans was
extended for an additional one year term.
Over the months of April, May and June 1996 the former President and
Chief Executive Officer exercised options to purchase a total of 448,334 shares
of Common Stock of the Company. Options to purchase 348,334 shares were
exercised at $0.05 per share and 100,000 shares were exercised at $2.125 per
share.
On May 7, 1996, the Company announced that the President and Chief
Executive Officer had resigned. The severance package associated with this
officer's resignation included a payout of $216,000 which was expensed in the
year ended June 30, 1996. Under the terms of the agreement, the former
President and Chief Executive Officer's indebtedness to the Company totaling
$55,800 was deducted from the proceeds of the payout. The final terms of the
agreement included the maintenance in full force and effect of the Proprietary
Information and Invention Agreement between the former officer of the Company
and the Non-Competition section of the former officer's Employment Agreement.
In May 1993, the Vice President, Research and Development exercised
options to purchase 20,000 shares of Common Stock of the Company. Under the
terms of his employment contract, he borrowed funds from the Company to
exercise the options, evidenced by a promissory note secured by the shares. The
loan was for a period of five years with interest at the rate of 5% per annum.
During the period ending December 29, 1996, the balance of $44,283 in principal
and interest was converted to compensation by the Company.
In August 1993, in connection with the execution of a three-year
consulting agreement, the Company granted a Director warrants to purchase
25,000 shares of Common Stock at $5.75 per share. The warrants lapse after
five years and in the event the Director continued to provide consulting
services to the Company, one-third maybe exercised after one year, an
additional one-third may be exercised at the end of the second year, and an
additional one-third may be exercised at the end of the third year.
In January 1997, the Company granted each of two Directors of the
Company options to purchase 25,000 shares of the Company's common stock for
$.50 per share. The warrants expire in ten years.
<PAGE> 36
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
On May 24, 1996 a new President and Chief Executive Officer commenced
his employment with the Company by signing an employment agreement through
December 1999, which agreement included a grant of non-incentive stock options
to purchase 750,000 shares of Common Stock at a price of $2.1875 per share.
These options vest evenly over five years, commencing one year from employment.
The Company paid fees to two stockholders for consulting services in
the amount of $6,000 and $128,655 for the six month transition period ended
December 29, 1996 and the year ended June 30, 1996, respectively.
The Company paid $27,641, $52,574 and $77,735 in legal fees during the
year ended December 28, 1997, the six month transition period ended December
29, 1996 and the year ended June 30, 1996, respectively, to a law firm in which
a director and stockholder of the Company is a partner.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
(A) Employment Agreement
In May 1996, the Company entered into an employment agreement
with its new President and Chief Executive Officer that has an
original term that expires December 31, 1997. The agreement provides
for two automatic one year extensions unless the Company acts not to
extend the agreement. The agreement provides for annual bonuses to
the officer based upon a percentage of "Pre-Tax Profits of the
Company" as follows:
<TABLE>
<CAPTION>
Percent of
Pre-Tax
Year Profits
---- -------
<S> <C>
1996 10.0%
1997 10.0
1998 7.5
1999 5.0
2000 4.0
2001 3.0
</TABLE>
<PAGE> 37
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) Leases
The Company rents office, lab and manufacturing space as lessee
under a five year operating lease that commenced May 1, 1995.
Effective August 1996, the Company entered into an addendum to the
lease whereby the Company released a portion of the space included in
the lease which the landlord then relet to another tenant. Under the
letter agreement, the Company paid for certain improvements required
by the new tenant and is paying the landlord a $1 per square foot
differential rent charge over the term of the lease. In March 1997,
the Company agreed to release additional space covered by its lease to
its landlord who then relet the space to another tenant. The Company
has guaranteed the rental payments of the new tenant to the landlord
for the remainder of the term of the Company's lease. Future minimum
payments under the line, including the $1 per square foot differential
are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1998 $ 303,398
1999 315,172
2000 105,040
----------
Total $ 723,610
==========
</TABLE>
Rental expenses for facilities and equipment for the year ended
December 28, 1997, the six month transition period ended December 29, 1996 and
the year ended June 30, 1996 totaled $246,485, $127,813 and $568,331,
respectively.
<PAGE> 38
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of the following at December 28, 1997:
(A) Capital lease obligations
Three leases for office equipment entered into in 1997 requiring
aggregate monthly payments of $3,215. The leased equipment is
included in property and equipment at a cost of $91,727 less
accumulated amortization of $3,293 at December 28, 1997. A summary of
future payments required under the leases and the present value of the
lease obligations in interest rates ranging from 12 to 25% that are
implicit in the leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ---------
<S> <C>
1998 $ 28,582
1999 38,582
2000 33,948
---------
Total 111,112
Imputed interest 22,054
---------
Net obligations $ 89,058
=========
</TABLE>
(B) Note payable
The note payable is to a vendor for an equipment purchase,
requires 60 monthly payments of $1,183 including interest at 8.76% and
is collateralized by the equipment.
(C) Future maturities
Future maturities of long-term debt is as follows:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1998 $ 37,512
1999 42,148
2000 43,677
2001 13,252
2002 3,498
----------
Total $ 140,087
==========
</TABLE>
<PAGE> 39
CRYOMEDICAL SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 28, 1997,
THE SIX MONTHS ENDED DECEMBER 29, 1996
AND THE YEAR ENDED JUNE 30, 1996
NOTE 10 - LITIGATION
In November 1996, the Company filed suit against EndoCare, Inc. and
ZhaoHua Chang in the Circuit Court for Montgomery County, Maryland (Case No.
161496). The lawsuit alleges, among other things, that EndoCare
misappropriated trade secrets of Cryomedical Sciences, Inc., and that EndoCare
tortiously interfered with the Company's contracts, its relationships with its
employees, and Cryomedical Sciences, Inc.'s contractual and potential business
relationships with customers. The lawsuit, which contains six counts, also
alleges that Dr. Chang and EndoCare engaged in unfair competition against the
Company and civil conspiracy, and that Dr. Chang, who was formerly employed as
a Vice President of Cryosurgical Engineering by Cryomedical Sciences, Inc.,
breached contractual and fiduciary obligations owed to the Company by this
employment by EndoCare, his retention and misuse of Cryomedical Sciences'
confidential information, and his improper solicitation of the Company's
employees to disclose trade secret information and/or to become employed by
EndoCare. EndoCare and Dr. Chang have denied the allegations in the lawsuit.
In March 1997, Dr. Chang filed a counter-suit in the Circuit Court for
Montgomery County, Maryland (Case No. 161496-V) regarding numerous claims of a
breach of contract by the Company. On November 3, 1997, the parties agreed to
stay all proceedings pending the results of mediation efforts.
In June 1997, Concept Group, Inc. filed an action against the Company
in Federal Court alleging that the Company violated certain confidentiality
agreements by applying for and receiving a United States patent on a cryoprobe.
Concept Group alleges it has a proprietary interest in the design of the
cryoprobe and that the Company fraudulently induced them into signing a release
in order to secure the patent. Concept Group demands $1,500,000 plus costs and
interest it claims it has expended in manufacturing the probes. The Company
believes that Concept Group failed to manufacture the cryoprobes in accordance
with its specifications and has filed a counter claim against Concept Group.
No trial date has been set for these actions. The Company believes that it has
meritorious defenses and that its counter claim is valid. However, the Company
is not presently able to predict the ultimate outcome of these actions.
<PAGE> 40
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In December 1997 the Company was advised by Deloitte and Touche, the
Company's public accounting firm, that they would no longer serve as the
Company's public accounting firm. No reason was given for the discontinuance of
the relationship between the Company and Deloitte & Touche. The Company sought
to retain another accounting firm and concluded an agreement with Aronson
Fetridge & Weigle, Certified Public Accounts and a member of Moores Rowland
International, in January 1997.
PART III
ITEM 9. 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. 57 President, Chief Executive Officer
and Director
John G. Baust, Ph.D. 56 Senior Vice President
and Chief Scientific Officer
Alan F. Rich 45 Vice President,
Sales and Marketing
Howard S. Breslow 59 Director, Secretary
J. Donald Hill 66 Director
</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.
1
<PAGE> 41
Alan Rich has been Vice President, Sales and Marketing, of the Company
since March 1994. Mr. Rich joined the Company in May 1992 as a regional sales
manager. From 1987 to May 1992, Mr. Rich was employed as Luminary Accounts
Manager by Spacelabs, Inc., a publicly-held corporation engaged in the
development, manufacture and marketing of patient monitoring systems.
Howard S. Breslow has served as a director of the Company since July
1988. He has been a practicing attorney in New York City for more than 30
years and is a member of the law firm of Breslow & Walker, LLP, New York, New
York, which firm serves as general counsel to the Company. Mr. Breslow
currently serves as a director of Excel Technology, Inc., a publicly-held
company engaged in the development and sale of laser products; FIND/SVP, Inc.,
a publicly-held company engaged in the development and marketing of information
services and products; Vikonics, Inc., a publicly-held company engaged in the
design and sale of computer-based security systems; and Lucille Farms, Inc., a
publicly-held company engaged in the manufacture and marketing of dairy
products.
J. Donald Hill has been a director of the Company since November 1995.
Mr. Hill was a consultant to the Company from 1992 to 1995. He currently
serves as Chairman and Chief Executive Officer of Excel Technology, Inc., a
manufacturer of laser products and systems, where he has been employed since
1992. From January 1991 to October 1991, Mr. Hill was the Chief Executive
Officer of Medstone International, and Corporate Secretary and Director of
CytoCare, Inc., companies engaged in the development of medical therapy
devices. From 1988 to 1990, Mr. Hill was Director of Corporate Finance at
Weeden & Company, a securities firm. Mr. Hill also served as Vice Chairman of
First Affiliated Securities, Inc. and as General Partner of Loeb, Rhoades and
Company, also securities firms.
All directors of the Company hold office until the next annual meeting
of stockholders of the Company or until their successors are elected and
qualified. Executive officers hold office until their successors are elected
and qualified, subject to earlier removal by the Board of Directors.
No family relationship exists between any director or executive
officer and any other director or executive officer of the Company.
The Company is not aware of any late filings of, or failures to file,
during the fiscal year ended December 28, 1997 the reports required by Section
16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation for the Company's 1997 fiscal year, its transitional period and
its last two completed fiscal years with respect to its Chief Executive Officer
and to each of the Company's named executive officers.
SUMMARY COMPENSATION TABLE
<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) ($) ($) ($) (#) (3) ($) ($)
- -------------------------- ------- -------- -------- ------------- ---------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Richard J. Reinhart, Ph.D. 1997 159,964 - - - 250,000 - -
Current President, Chief 1996.5 75,481 - (5) - - 750,000 - -
Executive Officer and 1996 9,712 - - - - - -
Director (4)
John G. Baust, Ph.D. 1997 115,140 - 46,349 - - 50,000 - 9,750 (6)
Senior Vice 1996.5 57,668 - - - - - 6,162 (6)
President, Research 1996 108,646 - - - - - -
and Development 1995 104,429 - - - - - 9,243 (6)
</TABLE>
2
<PAGE> 42
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alan F. Rich 1997 100,450 - 30,053 - 50,000 - -
Vice President, 1996.5 50,012 - 23,073 - - - -
Sales and Marketing 1996 87,600 - 66,015 - - - -
1995 94,417 - 132,596 - - -
</TABLE>
- -------------------------------
(1) The six-month transition period is identified as Fiscal 1996.5 for
purposes of this table.
(2) Salaries for fiscal year 1996 reflect a 10% salary reductions for
executive officers of the Company commencing April 1, 1995. Such salary
reductions were reinstated in July 1996.
(3) Options to acquire shares of Common Stock.
(4) Dr. Reinhart's employment with the Company commenced in May 1996.
(5) Dr. Reinhart's contract contains a potential bonus provision based upon a
"percentage of pretax profits of the Company."
(6) Consists of Company contributions made in Dr. Baust's name to the State
University of New York at Binghamton.
COMPENSATION OF DIRECTORS
Through June 1996, the Company compensated outside directors for their
service in such capacity at an annual fee of $5,000 plus $1,000 for each Board
meeting attended. As of January 15, 1997, it was determined that the Company
would compensate Messrs. Breslow and Hill for board meetings held during the
transition period and Board meetings held during 1997 with a grant of warrants
to purchase 25,000 shares of Common Stock at an exercise price of $0.50. These
options vest immediately and expire in ten years.
OPTION/SAR GRANTS IN YEAR-ENDED DECEMBER 28, 1997
In 1997, the Company issued the following options to executive officers to
purchase common stock:
<TABLE>
<S> <C>
Reinhart 250,000
Baust 50,000
Zenner 50,000
Rich 50,000
</TABLE>
AGGREGATED OPTION/SAR EXERCISES DURING THE 1997 FISCAL YEAR
AND THE 1997 FISCAL YEAR OPTION/SAR VALUES
The following table provides information related to options exercised by each
of the named executive officers during the 1997 Fiscal Year and the number and
value of options held at December 28, 1997. The Company does not have any
outstanding stock appreciation rights. None of the options were in the money
at period ended December 28, 1997.
3
<PAGE> 43
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs Options/SARS
at Fiscal Year End (#) at Fiscal Year End ($) (1)
----------------------------- -----------------------------
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Reinhart, Ph.D. - - - 1,000,000 - -
John G. Baust, Ph.D. - - 330,000 50,000 - -
Alan F. Rich - - 100,000 80,000 - -
</TABLE>
- ----------------------------------
(1) The closing price for the Company's Common Stock as reported on the NASDAQ
National Market System on December 28, 1997 was $XXX. Value is calculated
on the basis of the difference between the option exercise price and $XXXX
multiplied by the number of shares of Common Stock underlying the option.
Employment Agreements
In May 1996, the Company and Richard J. Reinhart, Ph.D. entered into an
employment agreement through December 31, 1999 pursuant to which Dr. Reinhart
was employed as President, Chief Executive Officer and a director of the
Company. In accordance to his employment agreement, Dr. Reinhart was granted
options to purchase 750,000 shares of Common Stock at an exercise price of
$2.1875 per share pursuant to the Company's 1988 Stock Option Plan. The option
vests one-fifth each year, for five years, commencing one year from employment.
At December 29, 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 for a reason other than death, disability,
or discharge for cause or resignation, the Company is required to pay Dr.
Reinhart as follows: (a) if such termination occurs within the first six months
of the Employment Period, Dr. Reinhart shall be entitled to receive the salary
due him up to the date of termination and (b) if termination occurs after the
initial six months, Dr. Reinhart shall be entitled to the salary due him for
(i) the balance of his Employment Period, (ii) a period of two and a half
years, or (iii) until subsequently employed, whichever is sooner; provided,
however, Dr. Reinhart shall have an affirmative obligation to seek comparable
employment and mitigate the Company's damages.
In July 1990, the Company and John G. Baust, Ph.D. entered into a three
year employment agreement (as amended in December 1991 and July 1993),
automatically renewable for additional one year periods (absent notice to the
contrary by either party). The agreement provides that Dr. Baust shall retain
his affiliation with the State University of New York at Binghamton, where he
is the Director of the Center for Cryobiological Research. During the
transition period ended December 29, 1996, the Company made no payments to
SUNY. In January 1997, the Company determined it would pledge a gift amount of
$39,000, consisting of four quarterly payments of $9,750 in the name of the
Senior Vice President for calendar 1997. In accordance with Dr. Baust's
employment agreement, in July 1990, Dr. Baust was granted an option to purchase
an aggregate of 200,000 shares of Common Stock at $1.875 per share pursuant to
the Company's 1988 Stock Option Plan. The option vested one-third each year
for three years, commencing one year from the date of the agreement. Among
other things, the employment agreement also provided for the Company to loan to
Dr. Baust the funds required for the exercise of the options at the time of
exercise. Such loans would be for terms of five years, accrue interest at a
rate of 5% per annum and be secured by shares obtained from the option
exercise. 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. At December 29, 1996, Dr. Baust's annual salary was $115,140.
Alan F. Rich joined the Company in May 1992 as a regional sales manager.
On March 1, 1994, the Company and Mr. Rich entered into a one year employment
agreement, automatically renewable for additional one year periods (absent
notice to the contrary by either party), pursuant to which Mr. Rich is employed
as Vice President, Sales and Marketing, of the Company. At December 29, 1996,
Mr. Rich's annual salary was $100,450, which salary is to increase each year to
the extent of any cost of living increases based upon the Consumer Price Index
increase for the immediate preceding year. In addition, Mr. Rich is entitled
to commissions of up to 1% of the sales revenue of the Company. In accordance
with the employment agreement, in March 1994, Mr. Rich was
4
<PAGE> 44
granted options to purchase 100,000 shares of Common Stock at $3.125 per share
pursuant to the Company's 1988 Stock Option Plan. The options vest with
respect to 20,000 shares after one year, an additional 25,000 shares after two
years, an additional 25,000 shares after three years, and an additional 30,000
shares after four years.
In connection with the execution of the employment agreements between the
Company and each of its executive officers, each officer executed a Proprietary
Information and Inventions Agreement, pursuant to which each agreed, among
other things, to keep the Company's information confidential and assigned all
inventions to the Company, except for certain personal inventions not related
to the Company's work, whether existing or later developed.
CONSULTANTS
Dr. Jeffrey Cohen was granted warrants to purchase 50,000 shares for his
service during the fiscal year ended December 28, 1997, as a consultant. In
November 1996, Dr. David Olive and Dr. Thomas Rutherford were granted 60,000
and 25,000 shares, respectively, for research to be conducted during 1997. At
December 28, 1997, warrants to purchase XXXXXX shares of Common Stock held by
various consultants had been exercised, warrants to purchase XXXXXX shares of
Common Stock had expired and warrants to purchase XXXXX shares were
outstanding.
The Company has obtained the services of consultants to render advice with
respect to various areas of the Company's research. Each of the consultants
has entered into a one year consulting agreement with the Company (with the
exception of Mr. Nicoletta, who has not had his contract renewed in January
1997), with automatic one year renewals (absent notice to the contrary by
either party), and has either received warrants to purchase Common Stock or is
entitled to cash compensation effective January 1997. No consultant has agreed
to devote any specified amount of time to Company activities. The consultants
of the Company (and the commencement dates of their consulting agreements) are
as follows:
Jeffrey K. Cohen, M.D., (January 1997), is Director, Division of Urology,
Allegheny General Hospital in Pittsburgh, Pennsylvania, and Associate Professor
of Surgery, Allegheny University.
Robert Van Buskirk, Ph.D. (January 1997), Associate Professor of Biology,
Binghamton University, advises the Company with respect to the use of the
Solutions.
David Olive, M.D. (November 1996), Director, Reproductive Endocrinology
and Infertility, Yale University School of Medicine in New Haven, Connecticut.
Thomas Rutherford, M.D. (November 1996), Assistant Professor, Gynecologic
Oncology, Yale University School of Medicine in New Haven, Connecticut.
Jay Pashrica, M.D. (July 1997), Chairman and Professor of
Gastroenterology, University of Texas, Austin, Texas.
Anthony Kallo, M.D. (July 1997), Johns Hopkins School of Medicine,
Baltimore, Maryland.
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.
5
<PAGE> 45
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 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 28, 1997, certain
information concerning stock ownership of all persons known by the Company to
own beneficially 5% or more of the outstanding shares of the Company's Common
Stock, each director, each named executive officer and all officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name (and Address of 5% Holder) Beneficial Ownership (1) of Class
------------------------------- ------------------------ --------
<S> <C> <C>
Richard J. Reinhart . . . . . . . . . . . . 1,000,000 (2) 3%
Howard S. Breslow . . . . . . . . . . . . . 318,000 (3) *
J. Donald Hill . . . . . . . . . . . . . . . 75,000 (4) *
John G. Baust . . . . . . . . . . . . . . . 400,000 (5) 1.2%
Alan F. Rich . . . . . . . . . . . . . . . . 185,500 (6) *
All officers and directors
as a group (5 persons) . . . . . . . . . . 1,978,500 (7) 5.9%
</TABLE>
- ---------------------------------------
* Less than 1%
(1) Unless otherwise indicated below, all shares are owned beneficially and
of record.
(2) Includes an aggregate of 1,000,000 shares underlying stock options.
(3) Includes an aggregate of 100,000 shares underlying stock options.
(4) Includes an aggregate of 75,000 shares underlying stock options and
warrants.
(5) Includes an aggregate of 380,000 shares underlying stock options and
warrants.
(6) Includes an aggregate of 180,000 shares underlying stock options.
(7) Includes an aggregate 1,560,000 shares underlying options which the
Company has granted to the three executive officers of the Company and an
aggregate of 175,000 shares underlying options and warrants granted to
two directors of the Company.
6
<PAGE> 46
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Howard S. Breslow, a director of the Company, is a member of Breslow &
Walker, LLP, general counsel to the Company. Mr. Breslow currently owns
218,000 shares of Common Stock of the Company and holds options to purchase an
aggregate of 100,000 additional shares pursuant to stock options issued to him.
During the period ended December 1997, Breslow & Walker, LLP billed legal fees
of $27,647.
In September 1992, in connection with a three-year consulting
agreement, the Company granted to J. Donald Hill, a director of the Company,
warrants to purchase 25,000 shares of Common Stock of the Company. The
warrants lapse after five years, and in the event that Mr. Hill continues to
provide consulting services to the Company, one-third may be exercised after
one year, an additional one-third may be exercised at the end of the second
year, and an additional one-third may be exercised at the end of the third
year. In November 1995, Mr. Hill became a director of the Company, at which
time he was granted 25,000 options to purchase shares of Common Stock of the
Company. In June 1997, Mr. Hill was granted an additional 25,000 options to
purchase shares of Common Stock of the Company.
7
<PAGE> 47
PART IV
ITEM 13. 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 18.
(2) Schedules
No Schedules are furnished as the information is
presented elsewhere in this document or is inapplicable.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
-------
Number Document
------ ---------
<S> <C>
3 (a) Certificate of Incorporation, as amended. (1)
(b) By-Laws(1), and amendment, dated March 19, 1990, thereto.(2)
4 (a) Specimen of Common Stock Certificate.(1)
10 (a) Stock Option Plan, dated July 7, 1988, and amendment, dated July 19, 1989.(1)
(b) Stockholders' Agreement and amendments.(1)
(c) 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)
(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)
</TABLE>
8
<PAGE> 48
<TABLE>
<S> <C>
(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.(9)
(p) Employment Agreement, dated as of May 24, 1996, between the Company and Richard J. Reinhart, Ph.D.(9)
21 Cryo Instruments, Inc., a California corporation.
23 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
- --------------------------------------
(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.
(9) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996.
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.
9
<PAGE> 49
CRYOMEDICAL SCIENCES, INC.
Date: April 13, 1998 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: April 13, 1998 /s/Richard J. Reinhart
--------------------------------------
Richard J. Reinhart, Ph.D.
Director
Date: April 13, 1998 /s/Howard S. Breslow
--------------------------------------
Howard S. Breslow
Director
Date: April 13, 1998 /s/J. Donald Hill
--------------------------------------
J. Donald Hill
Director
10
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