-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CiV+r6rBL58xJP0ipnpsAyYb2KWyfw08/v6nEz6bYbY5WLMiq30jJ8ANyhe84gxu cIRz/syRZNlqNBX4yWx9Ow== 0000950133-00-001470.txt : 20000411 0000950133-00-001470.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950133-00-001470 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991226 FILED AS OF DATE: 20000410 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRYOMEDICAL SCIENCES INC CENTRAL INDEX KEY: 0000834365 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 943076866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-18170 FILM NUMBER: 597948 BUSINESS ADDRESS: STREET 1: 1300 PICARD DR STE 102 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3014177070 MAIL ADDRESS: STREET 1: 1300 PICCARD DRIVE SUITE 102 CITY: ROCKVILLE STATE: MD ZIP: 20850 10KSB40 1 FORM 10-KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 26, 1999 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-18170 -------------- CRYOMEDICAL SCIENCES, INC. ( Name of Small Business Issuer in its Charter) DELAWARE 94-3076866 -------- ---------- (State of Incorporation) (IRS Employer Identification Number) 1300 PICCARD DRIVE, ROCKVILLE, MARYLAND 20850 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) -------------- Issuer telephone number, including area code: (301) 417-7070 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share --------------------------------------- Title of Class Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X] . Issuer's revenues for the fiscal year ended December 26, 1999 were $1,776,553. As of February 29, 2000, the aggregate market value of voting stock held by nonaffiliates of the registrant was $16,927,151. As of February 29, 2000, there were 33,854,302 shares of Common Stock (par value $.001 per share) outstanding. Documents Incorporated by Reference ----------------------------------- None ================================================================================ 1 2 PART I ITEM 1. DESCRIPTION OF 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"), the CMS Blizzard(TM) Series (the "Blizzard"), and the Cryo-Lite(R) Series (the "Cryo-Lite"). The AccuProbe, the Blizzard and the Cryo-Lite are sophisticated cryosurgical devices designed to freeze and destroy diseased tissue. They are particularly applicable where diseased tissue cannot be removed surgically or where surgery is likely to have extensive adverse side effects. The Company plans to utilize its AccuProbe, Blizzard and Cryo-Lite in the various fields for which the devices have received clearance from the United States Food and Drug Administration (the "FDA"). 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 Cryo-Lite received FDA clearance in July 1997 and the Blizzard received FDA clearance in February 1998, no Blizzard or Cryo-Lite devices have been shipped for commercial sale. Sales and other revenues totaled $1,776,553 and $2,369,748 for the twelve-month period ended December 26, 1999 and the twelve-month period ended December 27, 1998, 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 pursued for those markets not subject to FDA regulations through the Company's wholly-owned subsidiary, BioLife Solutions, Inc. ("BioLife"), formed in 1998. At present, development of the Solutions for human organ transplantation is in the laboratory and preclinical stage. The Company is seeking funds from various government and non-government granting agencies as well as third party investors to continue the development of the Solutions. The total research and development expenses of the Company for the twelve-month period ended December 26, 1999 were $687,450. For the twelve-month period ending December 27, 1998 total research and development expenses were $674,160. The Company was incorporated in Delaware in November 1987. BioLife was incorporated in March of 1998. Unless the context requires otherwise, references to the Company include BioLife. The Company's principal executive offices are located at 1300 Piccard Drive, Rockville, Maryland 20850, and its telephone number is (301) 417-7070. 2 3 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. The Company believes that cryosurgery has a number of advantages over other options for managing such diseased tissue. First, unlike surgical resection, cryosurgery does not require removal of large volumes of healthy surrounding tissue. Second, 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 of their belief that cryosurgery has not yet proved to be effective over an extended period of time. THE CMS ACCUPROBE SYSTEM, BLIZZARD SERIES AND CRYO-LITE SERIES The Company has developed certain proprietary designs intended to make its cryosurgical instrumentation more efficient and more precise than previous cryosurgical instrumentation. The CMS AccuProbe System, the Blizzard Series, and the Cryo-Lite Series are the Company's three cryosurgical instrument product lines. 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 Cryo-Lite series of cryosurgical instrumentation. The Cryo-Lite Series differs from the AccuProbe Systems in that Cryo-Lite is a hand held device capable of utilizing cryogens (refrigerants) other than liquid nitrogen. The AccuProbe was designed to use only liquid nitrogen as a cryogen. In February 1998 the Company received FDA clearance for its Blizzard series of cryosurgical instrumentation. The Blizzard Series also differs from the AccuProbe Systems in that Blizzard devices are capable of utilizing cryogens (refrigerants) other than liquid nitrogen. The AccuProbe was designed to use only liquid nitrogen as a cryogen. The backlog of orders at December 26, 1999 totaled $24,860, as compared to $14,560 at December 27, 1998. The Company expects all of December 26, 1999 back orders to generate revenues in the fiscal year ending December 2000. 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. 3 4 CMS 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 of BioLife, for which there can be no assurance, 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. The products which may result from the development of the Solutions include, but are not limited to media for preservation of organs used in human transplantation procedures, cardioplegia (stopping of the heart) applications, and media utilized in cell and tissue culture preservation. Additional applications may include cryogenic preservation (-196 degrees Celsius) of certain tissues and organs. 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 Company contemplates that a variety of applications of hypothermic preservative solutions, or other products for use in hypothermic or cryogenic medical procedures, could ultimately be developed from the Solutions. The Company expects that any significant funding activities with respect to the Solutions would entail the sale of equity securities in BioLife, which there can be no assurance of achieving. 4 5 RESEARCH PROJECT AGREEMENTS 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. In January 1998 the Agreement with Dr. Robert van Buskirk was extended through September 1, 1999. In March 1999, BioLife signed an Incubator Licensing Agreement with SUNY whereby BioLife will conduct research and development in the field of cryogenic science and in particular solution technology. The Company will pay the University $1,005 per month during the five year term of the License and all inventions conceived as a result of these research and development efforts will belong to BioLife. MARKETS AND MARKETING The Company currently markets its AccuProbe system to hospitals, surgeons, and radiologists through its own sales department. The Company has signed contracts with independent contractors for purposes of selling and distributing the Company's product lines of cryosurgical instrumentation. In November 1998, the Company signed a distribution agreement with Sino America Commerce Corporation for marketing, sales and distribution of its products in mainland China and other far east countries. 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. However, in February 1999 HCFA announced that it was going to provide coverage for cryosurgery of the prostate for localized prostate cancer effective July 1999. Reimbursement codes and guidelines for cryosurgery of the prostate have subsequently been issued by HCFA, however, the reimbursement levels for the procedure have been left up to the individual regional agencies. At his time HCFA has not established a national reimbursement level for the procedures associated with cryosurgery of the prostate. 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 and may continue to do so until the completion of formal national reimbursement levels are established by HCFA. There can be no assurance as to when such national reimbursement levels will be established or, when established, that reimbursement will be sufficient to encourage use of the AccuProbe System by hospitals and physicians. 5 6 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, the Blizzard, and the Cryo-Lite, single-use probes and other accessory products. The Company presently uses third party vendors to manufacture certain parts and subassemblies of the AccuProbe, the Blizzard, the Cryo-Lite, single-use probes and other accessory products. While the typical lead time required for suppliers varies depending upon the components, the quantity required, and other factors, the lead times in some cases can be as long as three months. However, because the Company typically purchases components in advance in anticipation of future orders, the Company is generally able to deliver AccuProbe systems within 30 days of its receipt of an order, and single-use probes and other accessory products immediately upon receipt of an order. Although the Company generally uses standard parts and components for its products, certain components, such as liquid nitrogen dewars and probe tips, are currently available only from a limited number of sources. The Company does not have long-term agreements with all of these suppliers. To date, the Company has been able to obtain adequate supplies of such components in a timely manner from its existing sources. Although the Company believes it could develop alternative sources of supply for most of these components within a reasonable period of time, the inability to develop alternative sources, or a reduction or interruption in supply or a significant increase in the price of materials, parts or components, could materially and adversely affect the Company's results of operations. The Company also maintains an inventory of finished goods consisting primarily of single-use probes and other accessory products in anticipation of future orders. The Company believes it has sufficient capital to manufacture and market future AccuProbe products in the quantities anticipated over the next year. However, it is possible that additional capital may be necessary to effectively carry out these objectives in the future, 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, the Blizzard, the Cryo-Lite, the Solutions, and related instrumentation are regulated by the FDA pursuant to the federal Food, Drug and Cosmetic Act and in some instances, the Public Health Service 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. 6 7 There can be no assurance that regulatory approvals or clearances will be obtained for any of the intended applications of the Company's proposed technologies once developed or that the FDA will not impose additional post-marketing requirements. Accessory devices developed by the Company for use with the CMS AccuProbe system may also require review and clearance or approval by the FDA. In August, 1995, the Company submitted to the FDA 510(k) premarket notification of two new models of the AccuProbe system (500 series). In December 1995, the Company received 510(k) marketing approval from the FDA for two new models of the AccuProbe system (Model 530 and Model 550). In October, 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. In February, 1998 the Company submitted to the FDA 510(k) premarket notification of a new series of cryosurgical instrumentation called the Blizzard Series. The new device represents a series of devices that utilize cryogens (refrigerants) other than liquid nitrogen. In June, 1998 the Company received 510(k) marketing approval from the FDA for the Blizzard Series and will market it in accordance therewith in the fields currently cleared by FDA. In June, 1998 the Company submitted to the FDA 510(k) premarket notification of a new model of the AccuProbe System (the 800 series). The new device represents evolutionary advances of the currently marketed AccuProbe, incorporating numerous technical refinements. In September, 1998 the Company received 510(k) marketing approval from the FDA for the 800 series model of the AccuProbe System and will market it in accordance therewith in the fields currently cleared by FDA. 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. The use of Solutions for human organ transplantation would, most likely, require 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 developed with this technology. 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 7 8 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. In September 1997 the Company was advised by FDA that it could no longer promote its products for gynecological applications which referenced endometrial ablation. It is FDA's opinion that there is not enough clinical data to support the use of cryosurgical techniques in the uterus, specifically endometrial ablation. The Company is complying with this new FDA directive, even though it does have intended use clearance in the field of gynecology. 8 9 In November 1999 the Company was inspected by FDA in regard to compliance with Good Manufacturing Practices and other regulations relevant to the manufacturing of medical devices. The Company was cited for six instances of irregularities, all of which were subsequently corrected. Included in these irregularities the FDA requested that the Company file a Medical Device Report (MDR) in regard to an incident that occurred in February 1998 in which a hospital alleged that a patient my have been burned by a product of the Company called a Urethrael Warmer. Although the Company did not feel that the submission of such a report was warranted based upon the facts associated with the incident, it did file an MDR as requested by the FDA. Also included in the list of irregularities was an instance of the Company changing wires from an 18 gauge wire to a 14 gauge wire in the Company's Accuprobe 530 series that was considered by the FDA to fall within the definition of a product recall. Although all of the wires had been changed in the field and no instruments had to be returned, the Company provided the FDA with all relevant information regarding this change in wiring. Upon receiving this information the Company received notification from the FDA that the recall file had been closed in regard to this incident. 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. 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. 9 10 With respect to the Company's cryosurgical instrumentation, the Company faces competition from other firms engaged in the business of developing or marketing cryosurgical devices as well as other firms engaged in developing or marketing medical devices that destroy diseased tissues by means other than freezing. The Company is aware that cryogenic devices used to freeze tissue have been available for 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, Inc. and Frigitronics Incorporated, American companies; a German company, Erbe Incorporated; a Israeli company, Galile; 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 companies that employ techniques for destroying diseased tissue by, but not limited to, radiofrequency and thermal (hot) devices. 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 13 full-time employees at December 26, 1999. The Company is not a party to any collective bargaining agreements. ITEM 2. DESCRIPTION OF PROPERTY The Company's administrative, manufacturing and research and development facilities consisted of approximately 21,000 square feet located in Rockville, Maryland. In February 1999 the Company reduced its facilities space to approximately 10,000 square feet. The Company rents these facilities under a five-year lease that commenced in May 1995. Rental expense for facilities for the 12-month period ended December 26, 1999 totaled $160,516. At December 26, 1999, the monthly rental was $12,071 net of subleases for space previously occupied by the Company. 10 11 The Company is presently in the process of moving its corporate headquarters to New Jersey. Development work on cryosurgical instrumentation will relocate to the State University of New York in Binghamton under an incubator agreement presently being negotiated. It is anticipated that the future manufacturing of the company's products will be done on a contract basis with third parties. Such contracts are presently being negotiated. ITEM 3. LEGAL PROCEEDINGS In February, 1999, Alan A. Rich, formerly Vice President of Sales and Marketing for the Company, filed a suit against the Company in the Superior Court of the Commonwealth of Massachusetts, Middlesex County, for breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel and violation of the Maryland Wage Payment and Collection Law based upon the allegation that the Company constructively discharged the plaintiff from his employment with the Company. The complaint seeks appropriate damages. The suit has been removed to the Federal District Court. Although the Company believes it has meritorious defenses, no prediction concerning the ultimate outcome or amount of damages, if any, can be made at this time. On July 12, 1999, the complaint was amended to include two additional causes of action, one relating to a breach of Rich's stock option agreement and another relating to a failure to issue a COBRA notice. The complaint seeks appropriate damages and statutory penalties, respectively, on these causes of action. The Company believes there is no merit to the first claim and that it has meritorious defenses to the second claim. In March, 1999, Endocare Inc. filed a suit against the Company, Dr. Richard J. Reinhart, the Company's President and Chief Executive Officer, and Dr. John G. Baust, the Company's Senior Vice President of Research and Development, in the Superior Court of California, County of Orange (Case No. 806794), for libel, slander, trade libel, false advertising, and unfair business practices based upon the alleged dissemination of information in press releases, and otherwise, to the effect that Endocare's cryosurgical devices are unsafe and have a history of putting patients, upon which the devices were used, in danger. The Company has confirmed to Endocare that the device in question was not an Endocare device, and the suit has been dismissed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 12 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock, par value $.001 per share, of the Company ("Common Stock") is traded on the OTC Bulletin Board. The following table sets forth the high and low closing prices for the Common Stock for the periods indicated.
Price Range ----------- High Low ---- --- Quarter Ended: -------------- March 28, 1999 1.0312 .0625 June 27, 1999 .7031 .2500 September 26, 1999 .4844 .2500 December 26, 1999 .5625 .1406 March 29, 1998 .4062 .1562 June 28, 1998 .4688 .1250 September 27, 1998 .3750 .0938 December 27, 1998 .1562 .0469
HOLDERS As of February 29, 2000, there were more than 1,000 holders of record of the Common Stock. DIVIDEND HISTORY AND POLICY The Company has never paid cash dividends on its Common Stock and does not anticipate that any cash dividends will be paid for the foreseeable future. 12 13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The Company is engaged in the research, development, marketing and manufacturing of products for use in the field of hypothermic (low-temperature) medicine. In March 1998 the Company created a wholly owned subsidiary, BioLife Solutions, 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 year. 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 Through June 1999 the Company continued to have its revenues negatively influenced by the lack of reimbursement by HCFA in regard to cryoablation of the prostate. Effective July 1, 1999 HCFA formally authorized reimbursement and published national guidelines regarding reimbursement for cryoablation of the prostate. Although HCFA established reimbursement for cryoablation of the prostate, the approximate three-year hiatus in non-reimbursement left many hospitals and physicians unprepared to resume the procedure. In a large part this unpreparedness was due to a lack of personnel available or trained to operate the Accuprobe system and physicians who had not performed the procedure in several years. Therefore, although formal reimbursement had been established there was, and continues to be, a very slow start up in reestablishing cryosurgical programs. This situation was compounded by the fact that the Company did not have the financial resources to assist in the reestablishment of the many cryosurgical programs it had originally started many years ago. The revenues of the Company were also negatively impacted in 1999 by the continuing FDA prohibition on the promotion of cryosurgical techniques that may be used in the uterus, specifically endometrial ablation. Throughout the past several years 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 26, 1999 and the year ended December 27, 1998 are $1,776,553 and $2,369,748, 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 liquid resources (see "Liquidity and Capital Resources" below) the Company undertook certain actions in 1999 to reduce expense levels. Such actions included staff reductions, a reduction in 13 14 the amount of leased office space, reductions in the levels of research grants so outside facilities and reductions in other overhead expenses. The goal of these cost reduction measures was to reduce operating expenses to a level whereby the Company could achieve a positive cash flow from operations. Gross profits for the year ended December 26, 1999 and the year ended December 27, 1998 are $812,101 and $1,093,607, respectively. Gross profits as a percentage of revenues in 1999 and 1998 were 46% and 46%, respectively. The company can give no assurance that there will be stabilization in gross profits as a percent of sales during the year ending December 31, 2000. Research and development expenses for the year ended December 26, 1999 and fiscal year 1998 were $687,450 and $674,160, respectively. The research and development expenses for 1999 were incurred primarily in the continuing development of the Accuprobe 800 Series, the Blizzard Series, and other non-liquid nitrogen based products. Sales and marketing expenses for the year ended December 26, 1999 and fiscal year 1998 were $355,864 and $548,480, respectively. The trend in reducing sales and marketing expenses is primarily due to reduced number of sales and marketing personnel, reduced participation in marketing and trade shows, and general travel expenses. General and administrative expenses for year ended December 26, 1999 and fiscal year 1998 were $913,689 and $1,114,490, respectively. This trend in reducing general and administrative expenses is primarily due to staff reductions and reduced professional and consultants fees. The Company sustained net losses for the year ended December 26, 1999 and fiscal year 1998 in the amount of $1,175,722 and $1,268,341, respectively. Although the Company continued to decrease its operating costs, the decrease in gross profits, due to significantly lower revenues, has resulted in continued annual net losses. LIQUIDITY AND CAPITAL RESOURCES On October 13, 1998 the Company entered into a Stock Purchase Agreement with ValorInvest, Ltd. ("ValorInvest") a Geneva, Switzerland based corporation, pursuant to which, among other things, ValorInvest (a) purchased from the Company, 128 Series E Units at price of $1,562.50 per Unit (an aggregate of $200,000), and (b) agreed to purchase an additional 256 Series E Units at a price of $1,562.50 per Unit (an aggregate of $400,000), each Unit to consist of one share of Series E Convertible Preferred Stock, convertible into 10,000 shares of Common Stock, and a warrant to purchase 5,000 shares of Common Stock at $.25 per share, the exercise of which is subject to the consummation of a public offering of the Company's securities on certain minimum terms and conditions. ValorInvest completed the purchase of the additional 256 Series E Units in February 1999. At December 26, 1999 the Company had cash and cash equivalents totaling $7,952 and working capital of $(33,207). The working capital of the Company was $722,620 at December 27, 1998. The Company's working capital position decreased in the year ended December 26, 1999 as a result of a 12 month net loss of $1,175,722, net of the proceeds of $400,000 obtained from the ValorInvest equity placement. 14 15 Capital expenditures for leasehold improvements, furniture and equipment totaled $0 in the year ended December 26, 1999 compared to $249,619 in fiscal year 1998. The Company has budgeted $250,000 for additional capital expenditures in the year ending December 31, 2000. On February 25, 2000, the Company received $500,000 from the sale of promissory notes to two individuals, each note being in the amount of $250,000 and bearing interest at the rate of 10% per annum. The notes are due and payable three years from the date of issuance and, in the event they are outstanding at the time of an equity financing which equals or exceeds $2,500,000 ( $500,000 under certain circumstances), together with accrued and unpaid interest, automatically convert into equity securities of the Company on the same terms and conditions provided for in such equity offering. The Company expects to incur expenditures over the next 12 months related to research and development, manufacturing and testing of its products, sales and marketing efforts, and other operating expenses. The Company's management is working under the assumption that fiscal 2000 sales may be less than the level experienced in comparable periods in 1999, and believes that its current cash and working capital position will be sufficient to fund the operations of the Company for 12 months. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CRYOMEDICAL SCIENCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number -------------------------------------------------------------------------- Independent Auditor's Report 16 Balance Sheet 17 Consolidated Statements of Operations 18 Consolidated Statements of Cash Flows 19 Consolidated Statements of Changes in Stockholders' Equity 20 Notes to Consolidated Financial Statements 21 - 34
15 16 Independent Auditor's Report To the Board of Directors and Stockholders of CRYOMEDICAL SCIENCES, INC. Rockville, MD We have audited the accompanying Consolidated Balance Sheet of Cryomedical Sciences, Inc. and Subsidiary as of December 26, 1999, and the related Consolidated Statements of Operations, Cash Flows and Stockholders' Equity for the years ended December 26, 1999 and December 27, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Cryomedical Sciences, Inc. and Subsidiary as of December 26, 1999, and the results of their operations and their cash flows for the years ended December 26, 1999 and December 27, 1998, in conformity with generally accepted accounting principles. ARONSON, FETRIDGE & WEIGLE Rockville, Maryland February 23, 2000 16 17 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
December 26, 1999 ---- ASSETS Current assets Cash and cash equivalents $ 7,952 Receivables, net allowance for doubtful accounts of $11,927 246,436 Inventories 952,298 Prepaid expenses and other current assets 79,372 ---------------------------- Total current assets 1,286,058 Fixed assets, net accumulated depreciation and amortization of $2,592,074 494,452 Intangible assets, net amortization of $12,421 370,277 Other assets 8,328 ---------------------------- Total assets $ 2,159,115 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 648,578 Accrued expenses 484,473 Short-term credit facility 120,000 Unearned revenues 19,608 Extended warranties - current portion 9,949 Long-term debt - current portion 36,657 ---------------------------- Total current liabilities 1,319,265 ---------------------------- Long term liabilities Extended warranties, net of current portion 4,146 Long-term debt, net of current portion 9,908 Deferred rent 7,399 ---------------------------- Total liabilities 1,340,718 ---------------------------- Stockholders' equity Preferred stock, $.001 par value per share, 9,378,800 authorized; 384 shares issued and outstanding - Common stock, par value $.001 per share, 50,000,000 shares authorized; 33,854,302 issued and outstanding 33,854 Additional paid-in capital 31,313,343 Accumulated deficit (30,528,800) ---------------------------- Total stockholders' equity 818,397 ---------------------------- Total liabilities and stockholders' equity $ 2,159,115 ============================
The accompanying notes are an integral part of these financial statements. 18 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 26, December 27, --------------------------- ----------------------- 1999 1998 ---- ---- Revenues Product sales $ 1,045,869 $ 1,461,942 Services and other 730,684 907,806 --------------------------- ----------------------- Total Revenue 1,776,553 2,369,748 Cost of sales Product sales 585,047 821,247 Services and other 379,405 454,894 --------------------------- ----------------------- Total cost of sales 964,452 1,276,141 Gross profit 812,101 1,093,607 Expenses Research and development 687,450 674,160 Sales and marketing 355,864 548,480 General and administrative 913,689 1,114,490 --------------------------- ----------------------- Total expenses 1,957,003 2,337,130 --------------------------- ----------------------- Operating loss (1,144,902) (1,243,523) Interest income, net of interest expense (30,820) (24,818) --------------------------- ----------------------- Net loss $ (1,175,722) $ (1,268,341) =========================== ======================= Basic net loss per common share $ (0.03) $ (0.04) =========================== ======================= Weighted average number of common shares outstanding 33,643,891 33,454,302 =========================== =======================
The accompanying notes are an integral part of these financial statements. 19 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 26, December 27, ------------------------- ------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net loss $ (1,175,722) $ (1,268,341) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 283,728 342,288 Provision for bad debt 84,148 154,427 Write-off of accounts receivable (749,855) (45,793) Sale of rental equipment 14,548 54,000 Loss on disposal of fixed assets, net - 22,394 Changes in operating assets and liabilities: Decrease in receivables 906,044 394,501 Decrease in inventories 273,684 428,124 Decrease in prepaid and other current assets 1,138 17,520 Decrease in other assets 10,399 - Increase in accounts payable 55,557 59,347 Increase (decrease) in accrued expenses 117,369 (61,220) Decrease in unearned revenue (41,231) (74,423) Decrease in warranty reserves (11,400) (39,198) Decrease in extended warranties (16,180) (67,062) Decrease in deferred rent (18,485) (7,446) ------------------------- ------------------------- Net cash (used in) operating activities (266,258) (90,882) ------------------------- ------------------------- Cash flows from investing activities: Increase in intangibles (382,698) - Proceeds from sale of fixed assets - 44,926 Purchase of fixed assets - (249,619) ------------------------- ------------------------- Net cash used in investing activities (382,698) (204,693) ------------------------- ------------------------- Cash flows from financing activities: Issuance of preferred stock 400,000 200,000 Issuance of common stock 162,480 - Decrease in unearned compensation - 39,525 Increase in short-term credit facility - 120,000 Proceeds from notes payable - 32,407 Principal payments on capital leases and notes payable (40,755) (85,174) ------------------------- ------------------------- Net cash provided by financing activities 521,725 306,758 ------------------------- ------------------------- Net (decrease) increase in cash and cash equivalents (127,231) 11,183 Cash and cash equivalents at beginning of period 135,183 124,000 ------------------------- ------------------------- Cash and cash equivalents at end of period $ 7,952 $ 135,183 ========================= ========================= Supplemental Cash Flow Information: Cash paid for interest $ 33,322 $ 28,278 ========================= =========================
The accompanying notes are an integral part of these financial statements. 19 20 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Convertible Preferred Stock ------------------------------------ ----------------------------------- Shares Amount Shares Amount - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 28, 1997 33,454,302 $ 33,454 - - Issuance of Series E Convertible Preferred Stock 128 - Amortization of unearned compensation - - - - Net loss - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 27, 1998 33,454,302 33,454 128 - Issuance of Series E Convertible Preferred Stock 256 - Issuance of common stock 400,000 400 - - Net loss - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance December 26, 1999 33,854,302 $ 33,854 384 - =================================================================================================================================
Additional Total paid-in Accumulated Unearned stockholders' capital deficit Compensation equity - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 28, 1997 $ 30,551,263 $ (28,084,737) $ (39,525) $ 2,460,455 Issuance of Series E Convertible Preferred Stock 200,000 - - 200,000 Amortization of unearned compensation - - 39,525 39,525 Net loss - (1,268,341) - (1,268,341) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 27, 1998 30,751,263 (29,353,078) - 1,431,639 Issuance of Series E Convertible Preferred Stock 400,000 - - 400,000 Issuance of common stock 162,080 - - 162,480 Net loss - (1,175,722) - (1,175,722) - ----------------------------------------------------------------------------------------------------------------------------- Balance December 26, 1999 $ 31,313,343 $ (30,528,800) $ - $ 818,397 =============================================================================================================================
The accompanying notes are an integral part of these financial statements. 21 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (A) Organization and condition of the Company The Company was organized November 5, 1987, as a Delaware corporation. On March 5, 1998, BioLife Technologies, Inc. (BioLife) was incorporated under the laws of the State of Delaware and is wholly owned by the Company. 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, being developed by the Company's subsidiary, 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 has experienced recurring operating losses and continuing negative cash flows from its business activities. Additionally, past and expected future revenue is based upon 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. The Company is currently developing a market for its hypothermic blood substitute solutions and has been awarded grants from two agencies of the United States government. One grant for $113,566 was substantially funded and recognized in 1999; the second grant was funded, in part, through February 23, 2000. The Company anticipates additional grants to be awarded. Except for the proceeds from the sale of its products, the Company has no other major sources of liquidity. On February 10, 1999, an investor purchased 256 units of the Company's Series E Convertible Preferred Stock for an aggregate amount of $400,000. Additionally, Management intends to fund its operations, including future research and development, through the profitable sales of the Company's products and services, and continues to search for additional financing, either in the form of debt or the sale of equity securities. Subsequent to December 31, 1999, the Company entered into two Note Purchase Agreements with Subscribers wherein the Company issued to the Subscribers promissory notes aggregating $500,000, bearing interest at 10% per annum, due and payable three years from the date of issuance, February 25, 2000. The promissory notes automatically convert into equity securities of the Company in the event that the Company receives any additional financing equal to or exceeding $2,500,000 ($500,000 under certain circumstances). On April 10, 2000, the Company sold the equivalent of 2,000,000 units ("Units"), each Unit consisting of two shares of Common Stock and one warrant to purchase a share of Common Stock at the equivalent of $.25 per share, to an investor at the equivalent of $.51 per Unit, for an aggregate of $1,020,000. In connection with the sale of these Units, outstanding promissory notes, dated February 25, 2000, in the principal amount of $500,000, plus accrued interest theron, automatically were converted into Units on the same terms and conditions as the Units sold to the investor. 21 22 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (A) Organization and condition of the Company (continued) The Company has assessed its current position and 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. 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) Principles of consolidation The financial statements include the accounts of Cryomedical Sciences, Inc., and its wholly owned subsidiary BioLife Technologies, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. (C) Fiscal year The Company and its subsidiary have adopted a 52-53 week year ending on the Sunday nearest to December 31st for financial reporting purposes. (D) Basic net loss per share The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Because the Company has incurred losses, fully diluted per share amounts are not presented. (E) Cash equivalents Cash equivalents consist primarily of interest-bearing money market accounts. The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains cash balances which may exceed Federally insured limits. The Company does not believe that this results in any significant credit risk. 22 23 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (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 over estimated useful lives of three to ten years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the lesser of the life of the asset or the remaining term of the lease. Equipment also includes Accuprobe Consoles on rent or on loan which are depreciated using the straight-line method over an estimated useful life of five years. (H) Revenue recognition The Company receives revenue from sales of products, services and from the rental of Accuprobe Consoles. The Company generally recognizes revenue related to the sales of its products, primarily its Accuprobe Consoles and disposable probes, at the time of shipment. Revenue from extended warranties and service contracts is deferred and recognized on a straight-line basis over the contract periods. Revenue from the lease of Accuprobe Consoles is recognized over the course of the non-cancelable lease term. (I) Warranties The Company generally warrants its Accuprobe Consoles for one year. The estimated cost to repair or replace systems under warranty is provided by charges to cost of sales in the period in which the system is shipped. (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 effects of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of differences between tax bases of assets and liabilities, and financial reporting amounts, based upon enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized (Note 5). 23 24 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (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 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. (M) 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. NOTE 2 - INVENTORIES Inventories consist of the following at December 26, 1999: Raw materials and purchased parts $ 653,529 Work in process 22,604 Finished goods 276,165 -------------------- $ 952,298 ====================
24 25 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 26, 1999:
Leasehold improvements $ 201,521 Furniture and office equipment 766,150 Manufacturing and other equipment 2,118,855 --------------- 3,086,526 Less accumulated depreciation and amortization (2,592,074) $ 494,452 ===============
NOTE 4 - INTANGIBLE ASSETS The Company perfected its rights to a patent on a cryoprobe during 1999. Legal and other costs associated with this action were capitalized and are being amortized over the remaining life of the patent of 168 months (Note 11). Intangible assets at December 26, 1999 are as follows:
Patents $ 382,698 Less: Amortization (12,421) --------------- $ 370,277 ===============
25 26 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 5 - INCOME TAXES The Company has not realized any taxable income since its inception and as of December 26, 1999, 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:
Net R&D Year of Operating Tax Expiration Losses Credits 2003 $ 76,000 $ - 2004 472,000 20,000 2005 1,747,000 42,000 2006 2,523,000 88,000 2007 4,505,000 125,000 2008 5,893,000 150,000 2009 1,431,000 114,000 2010 1,562,000 145,000 2011 5,137,000 33,000 2012 1,570,000 - 2013 1,260,000 - 2014 1,175,000 - --------------- --------------- Total $ 27,351,000 $ 717,000 =============== ===============
At December 26, 1999, the Company has a deferred tax asset related primarily to the net operating loss carryforward and the R&D tax credit carryforward of approximately $11,315,000, against which the Company has provided an allowance for the full amount as management has determined that there is doubt that the deferred tax asset will be realized. In the event of a significant change in the ownership of the Company, the utilization of such loss carryforward could be substantially limited. NOTE 6 - STOCKHOLDERS' EQUITY On October 20, 1998, the Company entered into an agreement for the private placement of 384 Series E Units. Each Unit consists of one share of Series E Convertible Preferred Stock (the "Series E Preferred Stock"), convertible into 10,000 shares of Common Stock and a warrant to purchase 5,000 shares of common stock at $.25 per share, pursuant to Regulation S of the Securities Act of 1933, as amended. The net proceeds of the offering is to total $600,000, of which $200,000 was received in 1998 and the remaining $400,000 was received on February 10, 1999 (Note 10). 26 27 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) The Company has 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 8 regarding warrants granted to a director). In August 1998, the Company granted warrants to two consultants to the Company to purchase 6,480,000 shares of the Company's common stock at a price of $.25. The fair value of the Company's common stock at the date of the grant was $.1562. The warrants are exercisable immediately after issuance and until the termination date of August 30, 2008. In 1999, the Company granted warrants to purchase 1,920,000 shares of the Company's common stock at a price of $.25. The warrants are contingent and are exercisable only upon the grantee providing access to funding through a new common stock offering. No funding was provided and the Company intends to cancel the warrants. The Company also granted additional warrants to purchase 10,000 shares of the Company's common stock at a price of $.40 for prior work performed. The market price of the Company's common stock at the date of the grant was $.40. The warrants are exercisable 2,500 immediately, 5,000 in one year and 2,500 in two years from the date of the grant. The following table summarizes warrant activity for the years ended December 26, 1999 and December 27, 1998, with respect to warrants granted.
Year Ended Year Ended December 26, 1999 December 27, 1998 ------------------------- ------------------------ Wgtd. Avg. Wgtd. Avg. Exer. Exer. Shares Price Shares Price ------ ----- ------ ----- Outstanding at beginning of year 6,785,000 $ .26 367,000 $ 3.66 Granted 1,930,000 .25 6,480,000 .25 Exercised - - - - Expired and Extended - - 90,000 6.19 Terminated - - 152,000 5.66 Outstanding at end of year 8,715,000 .26 6,785,000 .26 Warrants exercisable at year end 6,787,500 .26 6,722,900 .26
27 28 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) Stock Compensation Plans The Company's 1988 Stock Option Plan was approved and adopted by the Board of Directors in July 1988 and had a term of ten years. The plan expired in 1998. The options are exercisable for up to ten years from the grant date. During 1998, the Board of Directors adopted the 1998 Stock Option Plan, and obtained approval of the shareholders at a special meeting held on December 16, 1998. Under the 1998 Stock Option Plan, an aggregate of 20,000,000 shares of common stock are reserved for issuance upon the exercise of options granted under the plan. The purchase price of the common stock underlying each option may not be less than the fair market value at the date the option is granted (110% of fair market value for optionees that own more than 10% of the voting power of the Company). The options are exercisable for up to ten years from the grant date. The plan expires August 30, 2008. The stock option agreements are issued with immediate vesting or vesting provisions. The following table provides information pertaining to stock options under both plans:
Year Ended Year Ended December 26, 1999 December 27, 1998 ------------------------ ------------------------- Wgtd. Avg. Wgtd. Avg. Exer. Exer. Shares Price Shares Price ---------- ---------- ---------- ---------- Outstanding at beginning of year 13,074,600 $ .45 1,843,600 $ 2.12 Granted 200,000 .25 11,525,000 .25 Exercised - - - - Terminated (330,400) 1.70 (294,000) 3.00 Outstanding at end of year 12,944,200 .39 13,074,600 .45 Stock options exercisable at year end 12,084,200 .35 11,655,225 .40
28 29 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes information about stock options outstanding at December 26, 1999:
Range of Number Weighted Average Exercise Outstanding Remaining Weighted Average Prices at December 26, 1999 Contractual Life Exercise Price - ----------------------- -------------------- ------------------ --------------- $ .25 11,560,000 8.0 $ .25 .26 -3.00 1,380,500 6.4 1.71 3.01 -6.00 700 6.0 3.38 6.01 -9.25 3,000 4.0 7.38 ------------ --- ----- 12,944,200 7.84 .39 ============ ==== =====
Number Exercisable at Weighted Average December 26, 1999 Exercise Price --------------------- ---------------- 12,084,200 .35
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 26, 1999 and the year ended December 27, 1998 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 26, 1999 and the year ended December 27, 1998 would have been the pro forma amounts indicated below:
1999 1998 --------------- ---------------- Net loss to common shareholders As reported $ (1,175,722) $ (1,268,341) Pro forma (1,194,178) (2,704,067) Net loss per basic common share As reported (.03) (.04) Pro forma (.03) (.08)
29 30 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) Stockholder Rights Plan - On August 21, 1995, the Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock for stockholders of record on September 11, 1995. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series B Junior Preferred Stock, par value $.001 per share (the "Preferred Shares"), of the Company at a price of $10 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. 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. At a special meeting of the stockholder on December 16, 1998, approval was given to amend the Company's charter to reduce the number of authorized shares of common stock of the Company from 50 million shares to 25 million shares; reduce the number of authorized shares of preferred stock of the Company, par value $.001 per share, from 9,378,800 shares to 1 million shares; and authorized the Board of Directors to effect, at its option, a reverse stock split of the Company's common stock of anywhere from one-for-five to one-for-sixteen. The Company has not acted to amend its charter for the reductions in the common and preferred stock as of February 23, 2000, and the Board of Directors has taken no action to effect a reverse split as approved by the stockholders. 30 31 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) As of December 26, 1999, the Company does not have sufficient authorized but unissued common stock to fulfill the requirements for issuance of common stock under all of its outstanding options, warrants and conversion provisions. The Company expects that after the Board of Directors selects and effects the reverse stock split authorized that the Company will have sufficient authorized and unissued shares to reserve for issuance under its outstanding option, warrant and conversion obligations on a post reverse split basis. NOTE 7 - EMPLOYEE BENEFIT PLAN The Company established a 401(k) savings plan effective July 1,1992 covering all eligible employees. The plan was terminated June 30, 1998. NOTE 8 - RELATED PARTY TRANSACTIONS The Company incurred $49,985 and $58,793 in legal fees during the years ended December 26, 1999 and December 27, 1998, respectively, to a law firm in which a director and stockholder of the Company is a partner. The Company incurred $34,750 of human resources consulting fees during fiscal year 1999 for services provided by the wife of an officer, director, and shareholder of the Company. In August 1998, the Company granted warrants to entities in which a director and stockholder of the Company owned an interest. The warrants allow for the purchase of 6,480,000 shares of the Company's common stock at a price of $.25. The fair value of the Company's common stock at the date of the grant was $.1562. The warrants vest immediately and lapse after 10 years. 31 32 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 9 - 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. The Company is obligated for $71,015 in future payments to the landlord. Rental expenses for facilities and equipment for the year ended December 26, 1999 and December 27, 1998, totaled $160,516 and $257,349, respectively. Effective February 1, 1999, the Company released 7,300 square feet of space back to the Landlord and the Company was released from any obligation to the landlord. NOTE 10 - LONG-TERM DEBT Long-term debt consisted of the following at December 26, 1999: (A) Capital lease obligations Two leases for equipment entered into in 1997 require aggregate monthly payments of $2,955. The leased equipment is included in property and equipment at a cost of $91,727 less accumulated amortization of $48,454 at December 26, 1999 and $19,691 at December 27, 1998. A summary of future payments required under the leases and the present value of the lease obligations based upon interest rates ranging from 12 to 25% that are implicit in the leases are as follows:
Year Amount ---- ------ 2000 $ 26,595 Less: Imputed interest 876 --------------- Net obligations $ 25,719 ===============
(B) Note payable The Company entered into a note agreement with a bank for $32,407. The note is secured by an automobile and requires monthly payment of $1,033. The note bears interest at 9.153% and matures November 2001. 32 33 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 10 - LONG-TERM DEBT (CONTINUED) (C) Future maturities Future maturities of long-term debt is as follows:
Year Amount ---- ------ 2000 $ 10,937 2001 9,909 --------------- Total $ 20,846 ===============
Interest expense for the years ending December 26, 1999 was $33,322 and December 27, 1998 was $28,278, respectively. NOTE 11 - SHORT-TERM CREDIT FACILITY The Company entered into a short term credit facility agreement on May 18, 1998 for one year whereby the Company assigns and factors its accounts receivable. Advances are made under the agreement at 65% of the invoice amount and the credit facility bears interest at prime plus 11.5%. The facility automatically renewed for an additional one year term on May 18, 1999. NOTE 12 - LITIGATION On July 12, 1999, the Company entered into a Settlement Agreement with Concept Group, Inc. (Concept) in connection with a lawsuit filed in June 1997 by Concept against the Company in the United States District Court for the Eastern District of Pennsylvania. Pursuant to the Settlement Agreement, in addition to granting to Concept a world-wide, non-transferable, royalty-free license to make, have made, sell, use, import, manufacture, produce and/or market cryogenic surgical instruments based upon the techniques and specifications as described and detailed in U.S. Patent Number 5,573,532, the Company (a) issued to Concept and its attorney an aggregate of 400,000 shares of the Company's common stock (the Initial Shares), and (b) if the aggregate average cash value (as defined in the Settlement Agreement) of the Initial Shares is less than $550,000 one year from the execution of the Settlement Agreement, agreed to issue such additional shares of Common Stock (up to a maximum of 600,000 shares) (Contingent Shares) such that the total shares issued (Initial Shares plus Contingent Shares) shall be worth not less than $550,000. The issuance of the shares of Common Stock was exempt from the registration requirement of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof and Rule 506 promulgated thereunder. The legal costs incurred to perfect the patent rights have been capitalized as an intangible asset on the Balance Sheet (Note 3). 33 34 CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998 NOTE 12 - LITIGATION (CONTINUED) In February 1999, Alan A. Rich, formerly Vice President of Sales and Marketing for the Company, filed a suit against the Company in the Superior Court of the Commonwealth of Massachusetts, Middlesex County, for breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel and violation of the Maryland Wage Payment and Collection Law based upon an allegation that the Company constructively discharged the plaintiff from his employment with the Company. The complaint seeks appropriate damages. The suit has been removed to the Federal District Court. Although the Company believes it has meritorious defenses to the allegations, no prediction concerning the ultimate outcome or amount of damages, if any, can be made at this time. On July 12, 1999, the complaint was amended to include two additional causes of action, one relating to a breach of Rich's stock option agreement and another relating to a failure to issue a COBRA notice. The complaint seeks appropriate damages and statutory penalties, respectively, on these causes of action. The Company believes there is no merit to the first claim and that it has meritorious defenses to the second claim. In March 1999, EndoCare, Inc. ("EndoCare") filed a suit against the Company, Dr. Richard J. Reinhart, the Company's President and Chief Executive Officer and John G. Baust, the Company's Senior Vice President of Research and Development in the Superior Court of California, County of Orange based upon the alleged dissemination of information to the effect that EndoCare's cryosurgical devices are unsafe and have a history of putting patients, upon which the devices were used, in danger. The Company has confirmed to EndoCare that the device in question was not an EndoCare device and the suit has been dismissed. 34 35 ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows:
Position and Offices Name Age With the Company - ---- --- -------------------- Richard J. Reinhart, Ph.D. 58 President and Chief Executive Officer and Director John G. Baust, Ph.D. 57 Senior Vice President and Chief Scientific Officer Howard S. Breslow 60 Director, Secretary
Set forth below is a biographical description of each of the directors and executive officers identified above 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. 35 36 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. All directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors are elected and qualified. Executive officers hold office until their successors are elected and qualified, subject to earlier removal by the Board of Directors. No family relationship exists between any director or executive officer and any other director or executive officer of the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company's executive officers, directors, and beneficial owners of more than 10% of any class of its equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (collectively, the "Reporting Persons") are required to file reports of ownership and changes in beneficial ownership of the Company's equity securities with the Securities Exchange Commission. Copies of those reports also must be furnished to the Company. Based solely on a review of copies of the reports furnished to the Company, the Company believes that during the fiscal year ended December 27, 1998 all of these filing requirements have been satisfied. 36 37 ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company to its Chief Executive Officer and to each of its executive officers (other than the Chief Executive Officer) who received salary and bonus payments in excess of $100,000 during the fiscal year ended December 26, 1999 (collectively the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
Long Term Compensation --------------------------------------------------- Annual Compensation Awards Payouts --------------------------------------------- ------------------------ ----------------------- Restricted Other Annual Stock Options/ LTIP All Other Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs Payouts Compensation Positions Year ($)(2) ($) ($) ($) (#)(1) ($) ($) - ------------------ ---- ------ --- --- --- ------ --- --- Richard J. Reinhart, Ph.D. 1999 100,000 - 8,183 - - - - President, Chief 1998 113,461 - 8,384 - 7,200,000 - - Executive Officer and Director John G. Baust, Ph.D. 1999 100,000 - 6,377 - - - - Senior Vice 1998 98,790 - 15,316 - 2,160,000 - - President, Research and Development
(1) Options to acquire shares of Common Stock. (2) Salaries for fiscal year 1999 reflect voluntary salary reductions by Reinhart and Baust. 37 38 OPTION/SAR GRANTS IN YEAR-ENDED DECEMBER 26, 1999 In 1999, the Company did not issue any options/SAR grants to purchase Common Stock to any Executive Officers. AGGREGATED OPTION/SAR EXERCISES DURING THE 1999 FISCAL YEAR AND THE 1999 FISCAL YEAR OPTION/SAR VALUES The following table provides information related to options exercised by each of the Named Executive Officers during the 1999 fiscal year and the number and value of options held at December 26, 1999. The Company does not have any outstanding stock appreciation rights. None of the options were in the money at year ended December 26, 1999.
Number of Securities Value of Unexercised Underlying Unexercised in the money Options/SAR Options/SAR At Fiscal Year End (#) At Fiscal Year End ($) (1) --------------------------- --------------------------- Shares Acquired Value Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---------- --------------- ------------ ----------- ------------- ----------- ------------- Richard J. Reinhart, Ph.D. - - 7,650,000 450,000 - -- John G. Baust, Ph.D. - - 2,330,000 30,000 - --
(1) The closing price for the Common Stock as reported on the OTC Bulletin Board on December 26, 1999 was $0.155. Value is calculated on the basis of the difference between the option exercise price and $0.155 multiplied by the number of shares of Common Stock underlying the option. EMPLOYMENT AGREEMENTS The Company does not have any employment agreements between the Company and any of its executive officers. Each officer has executed a Proprietary Information and Inventions Agreement pursuant to which each agreed, among other things, to keep the Company's information confidential and assigned all inventions to the Company, except for certain personal inventions not related to the Company's work, whether existing or later developed. CONSULTANTS At December 26, 1999, the various consultants to the Company held exercisable warrants to purchase an aggregate of 6,787,500 shares of Common Stock. 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 automatic one year renewals (absent notice to the contrary by either party), and has either received warrants to purchase Common Stock or is 38 39 entitled to cash compensation. 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: 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. Furthermore, inventions or processes discovered by the advisors and consultants will not, unless otherwise agreed, become the property of the Company but will remain the property of such persons or of such persons' full-time employers. In addition, the institutions with which the advisors and consultants are affiliated may make available the research services of their scientific and other skilled personnel, including the advisors and consultants, to entities other than the Company. In rendering such services, such institutions may be obligated to assign or license to a competitor of the Company patents and other proprietary information which may result from such services, including research performed by an advisor or consultant for a competitor of the Company. COMPENSATION OF DIRECTORS There are no standard arrangements pursuant to which the directors are compensated. In August 1998, each of the two outside directors was granted options to purchase 720,000 shares of Common Stock at .25 per share. These options vest immediately and expire in ten years. 39 40 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 26, 1999, certain information regarding beneficial ownership of Common Stock and Preferred Stock by (i) all persons known by the Company to own beneficially more than 5% of the outstanding shares of the Common Stock, (ii) each director, (iii) each Named Executive Officer, and (iv) all executive officers and directors of the Company as a group.
Amount and Nature of Percent Name (and Address of 5% Holder) Beneficial Ownership (1) of Class ------------------------------- ---------------------------------------------- Richard J. Reinhart.................... 8,260,000 (2) 19.6% Howard S. Breslow...................... 7,493,000 (3) 18.1% J. Donald Hill......................... 770,000 (4) 2.1% John G. Baust.......................... 2,380,000 (5) 6.6% ValorInvest, Ltd....................... 356 (7) 100% All officers and directors as a group (4 persons)................ 18,903,000 (6) 35.5%
(1) Unless otherwise indicated below, all shares are owned beneficially and of record. (2) Includes an aggregate of 8,200,000 shares underlying stock options. (3) Includes an aggregate of 795,000 shares underlying stock options and 6,480,000 shares underlying warrants owned indirectly through Breslow & Walker, LLP and B&W Investments. (4) Includes an aggregate of 770,000 shares underlying stock options. Mr. Hill resigned as a director 12-31-99. (5) Includes an aggregate of 2,360,000 shares underlying stock options. (6) Includes an aggregate 18,605,000 shares underlying options and warrants. (7) ValorInvest, Ltd., 29 Quai des Bergues, 1201 Geneva, Switzerland, is the only holder of Preferred Stock. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Howard S. Breslow, a director of the Company, is a member of Breslow & Walker, LLP, general counsel to the Company. Mr. Breslow currently owns 218,000 shares of Common Stock of the Company and holds options to purchase an aggregate of 7,275,000 additional shares pursuant to stock options and warrants issued to him and/or affiliates. During the period ended December 1999, Breslow & Walker, LLP billed the Company $40,985 for legal fees. 40 41 PART IV ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements The financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements on page 18. (2) Schedules No Schedules are furnished as the information is presented elsewhere in this document or is inapplicable. (3) Exhibits
Exhibit Number Document 3 (a) Certificate of Incorporation, as amended. (1) (b) By-Laws(1), and amendment, dated March 19, 1990, thereto. (2) 4 (a) Specimen of Common Stock Certificate. (1) 10 (a) Stock Option Plan, dated July 7, 1988, and amendment, dated July 19, 1989. (1) (b) 1998 Stock Option Plan (5) (c) Form of Scientific Advisory Board Member Agreement (1) (d) 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. (3) (e) Stock Purchase Agreement dated September 30, 1998 between the Company and ValorInvest, LTD. (4) 21 BioLife Technologies, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 33-31420) which became effective with the Securities and Exchange Commission on November 22, 1989. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. (5) Incorporated by reference to the Company's Definitive Proxy Statement for the special meeting of Stockholders held on December 16, 1998. 41 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRYOMEDICAL SCIENCES, INC. Date: April , 2000 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 , 2000 /s/Richard J. Reinhart -------------------------------------- Richard J. Reinhart, Ph.D. Director Date: April , 2000 /s/Howard S. Breslow -------------------------------------- Howard S. Breslow Director EX-27 2 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-26-1999 DEC-28-1998 DEC-26-1999 7,952 0 258,363 11,927 952,298 1,286,058 3,086,526 2,592,074 2,159,115 1,319,265 9,908 0 0 33,854 784,543 2,159,115 1,045,869 1,776,553 585,047 964,452 1,957,003 0 30,820 (1,175,722) 0 0 0 0 0 (1,175,722) (.03) (.03)
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