Exhibit 99.2
Report of Ernst & Young, LLP, Independent Auditors
The Board of Directors and Shareholders
CryoGen, Inc.
We have audited the accompanying consolidated balance sheet of CryoGen, Inc. as
of December 31, 2001, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CryoGen, Inc. at
December 31, 2001 and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
May 3, 2002, except for Note 7,
as to which the date is
December 30, 2002
F-1
CryoGen, Inc.
Consolidated Balance Sheet
December 31, 2001
<Table>
<Caption>
ASSETS
Current assets:
Cash and cash equivalents $ 7,857,656
Accounts receivable, net of allowance for doubtful accounts of $60,000 496,154
Inventories, net 1,152,240
Other current assets 152,725
--------------
Total current assets 9,658,775
Property and equipment, net 1,657,191
Intangible assets 458,635
Other non-current assets 26,300
--------------
Total assets $ 11,800,901
==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 661,899
Accrued liabilities 1,689,385
Capital lease obligations, current portion 120,194
--------------
Total current liabilities 2,471,478
Capital lease obligations, less current portion 14,470
Redeemable convertible preferred stock, no par value; 38,200,000 shares
authorized; 35,437,749 shares issued and outstanding at December 31, 2001
Series D, E and F 45,045,364
Shareholders' equity (deficit):
Convertible preferred stock, no par value; 7,614,286 shares authorized;
7,094,845 shares issued and outstanding at December 31, 2001
Series A, B and C 13,500,797
Common stock, no par value; 63,000,000 shares authorized; 2,153,207 shares
issued and outstanding at December 31, 2001 433,352
Accumulated comprehensive loss --
Accumulated deficit (49,664,560)
--------------
Total shareholders' equity (deficit) (35,730,411)
--------------
Total liabilities and shareholders' equity (deficit) $ 11,800,901
==============
</Table>
See accompanying notes.
F-2
CryoGen, Inc.
Consolidated Statement of Operations
Year Ended December 31, 2001
<Table>
<Caption>
Net sales $ 1,949,885
Costs and expenses:
Cost of sales 3,879,580
Research and development 1,813,867
General and administrative 2,618,125
Sales and marketing, including depreciation of demonstration
and field capital equipment of $699,300 7,208,089
--------------
Total costs and expenses 15,519,661
--------------
Operating loss (13,569,776)
Interest and other expense, net (60,497)
--------------
Net loss (13,630,273)
Accrued preferred stock dividends (2,476,592)
--------------
Net loss applicable to common stockholders $ (16,106,865)
==============
Basic and diluted net loss per share (7.91)
==============
Shares used to compute basic and dilute net loss per share $ 2,037,214
==============
</Table>
See accompanying notes.
F-3
CryoGen, Inc.
Consolidated Statement of Shareholders' Equity (Deficit)
Year Ended December 31, 2001
<Table>
<Caption>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------ ------------
Balance at December 31, 2000 7,094,845 $ 13,500,797 1,996,176 $ 370,251
Accrued redeemable convertible preferred stock dividend -- -- -- --
Proceeds from the exercise of stock options -- -- 158,031 63,129
Repurchase of restricted common shares -- -- (1,000) (28)
Net loss and comprehensive loss -- -- -- --
------------- ------------- ------------ ------------
Balance at December 31, 2001 7,094,845 $ 13,500,797 2,153,207 $ 433,352
============= ============= ============ ============
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY (DEFICIT)
---------------- ---------------
Balance at December 31, 2000
Accrued redeemable convertible preferred stock dividend $ (33,557,695) $ (19,686,647)
Proceeds from the exercise of stock options (2,476,592) (2,476,592)
Repurchase of restricted common shares -- 63,129
Net loss and comprehensive loss -- (28)
(13,630,273) (13,630,273)
---------------- ---------------
Balance at December 31, 2001 (49,664,560) $ (35,730,411)
---------------- ---------------
</Table>
See accompanying notes.
F-4
CryoGen, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31, 2001
<Table>
<Caption>
OPERATING ACTIVITIES
Net loss $ (13,630,273)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,032,895
Amortization of debt discount 26,551
Deferred rent (16,107)
Changes in operating assets and liabilities:
Accounts receivable, net (420,349)
Inventories, net (650,872)
Other current assets 41,211
Accounts payable 388,995
Accrued liabilities 1,142,196
---------------
Net cash used in operating activities (12,085,753)
INVESTING ACTIVITIES
Purchases of property and equipment (1,825,618)
Other non-current assets (67,666)
---------------
Net cash used in investing activities (1,893,284)
FINANCING ACTIVITIES
Repayment of notes payable (1,017,924)
Repayment of capital lease obligations (85,899)
Net proceeds from an issuance of redeemable convertible preferred stock 21,374,175
Proceeds from exercise of stock options 63,129
Repurchase of common stock (28)
---------------
Net cash provided by financing activities 20,333,453
---------------
Net increase in cash and cash equivalents 6,354,416
Cash and cash equivalents at beginning of the year 1,503,240
---------------
Cash and cash equivalents at end of the year $ 7,857,656
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 116,457
===============
Accrued dividend $ 2,476,592
===============
</Table>
See accompanying notes.
F-5
CryoGen, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CryoGen, Inc. ("CryoGen" or the "Company") was incorporated in California on
December 29, 1993. The Company is a medical device company engaged in the
development, manufacture and sale of cryotherapy tools for gynecologic and other
indications. In April 2001, the Federal Drug Administration ("FDA") approved the
Company's Pre-Marketing Applications for the Company's "Her Option(TM)" device
and the Company commenced sales and marketing of the device at that time. The
Company's primary customers are hospitals and physician offices in the United
States.
BASIS OF PRESENTATION
These consolidated financial statements include the accounts of CryoGen and its
wholly-owned European subsidiary located in France. All intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less when purchased. Cash equivalents primarily
represent funds invested in money market funds and their cost approximates
market value.
F-6
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist of raw materials, work in process and finished goods and are
stated at the lower of cost (first-in first-out) or market.
The Company generally uses standard parts and components for its products;
however, many key components are purchased from sole or single source vendors
for which alternative sources are not currently available. The inability to
obtain sufficient quantities of these components in the future may result in
delays or reductions in product shipments, which could have a material adverse
affect on the Company's business, financial condition and results of operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
calculated using the straight-line method over an estimated useful life ranging
from two to five years, or the lease term, as appropriate. Leasehold
improvements are amortized over the estimated useful life or the lease term,
whichever is shorter.
PATENT AND TRADEMARK COSTS
Legal costs incurred in filing patent and trademark applications have been
capitalized and, upon patent or trademark issuance, are amortized over ten
years, the estimated economic useful lives of such patents and trademarks. Costs
related to abandoned patent applications are expensed at the time of
abandonment.
ACCOUNTING STANDARD ON IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, the Company regularly evaluates its long-lived assets, including
identifiable intangibles and goodwill related to those assets, for indicators of
possible impairment. To date, no such indicators have been identified.
F-7
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists; (ii) delivery of the
products and/or services had occurred; (iii) the selling price is fixed or
determinable; and (iv) collectibility is reasonably assured. In addition, the
Company complies with the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin ("SAB") No. 101, which sets forth guidelines on the timing
of revenue recognition based upon factors such as passage of title,
installation, payment and customer acceptance.
The Company markets and sells cryotherapy products, which include both
disposables and related equipment. Initially, the Company sells disposables and
provides the related equipment to customers at no charge during an evaluation
period. Customers either acquire the equipment or return it to the Company.
Depreciation on the equipment during the evaluation period is charged to sales
and marketing. Revenue is recognized upon transfer of title, which generally
coincides with the shipment of products to the customer. Revenue during 2001
primarily relates to the sale of disposables.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $854,450 for the year
ended December 31, 2001.
F-8
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 requires that all components
of comprehensive income (loss), including net income (loss), be reported in the
financial statements in the period in which they are recognized. Comprehensive
income (loss) is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Net
income (loss) and other comprehensive income (loss), including unrealized gains
and losses on investments, shall be reported, net of their related tax effect,
to arrive at comprehensive income (loss). The Company's comprehensive loss is
the same as the reported net loss for the year ended December 31, 2001.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for its employee stock options. Under APB No. 25, when the purchase
price of restricted stock or the exercise price of the Company's employee stock
options equals or exceeds the fair value of the underlying stock on the date of
issuance or grant, no compensation expense is recognized.
Deferred compensation for stock options or warrants issued to non-employees are
recorded at their fair value as determined in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, and Emerging Issues Task Force No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring or in Conjunction with Selling Goods or Services. The fair value
of the unvested options and warrants is periodically remeasured and the related
amortization is adjusted as necessary.
F-9
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
The Company calculated net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SAB No. 98. Basic earnings per share ("EPS") is
calculated by dividing the net income or loss available to common stockholders
by the weighted average number of common shares outstanding for the period,
without consideration for common stock equivalent. Diluted EPS is computed by
dividing the net income available to common stockholders by the weighted average
number of common shares outstanding for the period and the weighted average
number of dilutive common stock equivalents outstanding for the period
determined using the treasury-stock method. For purposes of this calculation,
common stock subject to repurchase by the Company, convertible preferred stock,
options, and warrants are considered to be common stock equivalents and are only
included in the calculation of diluted earnings per share when their effect is
dilutive. Under the provisions of SAB No. 98, common shares issued for nominal
consideration (as defined), if any, would be included in the per share
calculations as if they were outstanding for all periods presented. No common
shares have been issued for nominal consideration.
Potentially dilutive securities totaling 50,751,835 shares for the year ended
December 31, 2001 were excluded from basic and diluted earnings per share
because of their anti-dilutive effect.
F-10
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
The computation for basic and diluted net loss per share for the year ended
December 31, 2001 is as follows:
<Table>
<Caption>
Numerator:
Net loss $ (13,630,273)
Accrued preferred stock dividends (2,476,592)
------------------
Net loss applicable to common stockholders (16,106,865)
==================
Denominator
Weighted average common shares 2,099,641
Weighted average restricted common shares subject to repurchased (62,427)
------------------
Denominator for basic and diluted earnings per share 2,037,214
==================
Basic and diluted net loss per share $ (7.91)
==================
</Table>
2. BALANCE SHEET INFORMATION
INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
DECEMBER 31,
2001
------------------
Raw materials $ 1,145,885
Work-in-process 594,881
Finished goods 491,591
Inventory reserve (1,080,117)
------------------
$ 1,152,240
==================
</Table>
Inventory reserve is for lower-of-cost and excess & obsolescence provisions.
F-11
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
2. BALANCE SHEET INFORMATION (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<Table>
<Caption>
DECEMBER 31,
2001
-----------------
Demonstration and field capital $ 1,701,010
Office furniture and equipment 749,456
Laboratory equipment 943,818
Leasehold improvements 394,280
-----------------
3,788,564
Accumulated depreciation and amortization (2,131,373)
-----------------
$ 1,657,191
=================
</Table>
Demonstration and field capital represent cryotherapy equipment, some of which
are physically located at the customer's site during the evaluation period.
The cost of equipment acquired under capital leases totaled $396,849 at December
31, 2001 with accumulated amortization of $262,185 at December 31, 2001.
INTANGIBLE ASSETS
Intangible assets consist of the following:
<Table>
<Caption>
DECEMBER 31,
2001
-----------------
Patents and trademarks $ 458,927
License fees 42,000
-----------------
500,927
Accumulated amortization (42,292)
-----------------
$ 458,635
=================
</Table>
F-12
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
2. BALANCE SHEET INFORMATION (CONTINUED)
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<Table>
<Caption>
DECEMBER 31,
2001
---------------
Accrued warranty $ 280,375
Executive severance 475,690
Accrued payroll and vacation 311,503
Accrued professional fees 208,253
Other 413,564
---------------
$ 1,689,385
===============
</Table>
3. COMMITMENTS
LEASES
Future minimum annual lease payments at December 31, 2001 are as follows:
<Table>
<Caption>
OPERATING CAPITAL
LEASES LEASES
------------ ------------
2002 $ 398,775 $ 133,192
2003 38,107 8,080
------------ ------------
$ 436,882 141,272
============
Less amount representing interest 6,608
------------
Present value of net minimum lease payments 134,664
Less current portion 120,194
------------
Long-term portion of capital lease obligation $ 14,470
============
</Table>
The Company has a operating lease for its office and manufacturing facilities.
Rent expense was $275,920 for the year ended December 31, 2001.
F-13
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
3. COMMITMENTS (CONTINUED)
LICENSE AGREEMENTS
In January 1997, the Company entered into an exclusive license agreement with
the National Institute of Standards and Technology ("NIST") whereby NIST has
agreed to license certain patents to the Company in exchange for 2% royalties on
the net sales of the licensed products (as defined) during the term of the
agreement. The Company shall also pay to NIST a royalty on sales by any
sublicensees of licensed products equal to the greater of 2% of sublicensees'
net sales of licensed products or 50% of all consideration received by the
Company under a sublicense agreement. NIST shall receive an annual minimum
royalty within 60 days of each year-end of $45,000 through the term of the
agreement. Up to 70% of fees paid for patent filing, prosecution and maintenance
costs in any country qualify as an offset against the royalties due. Both
parties may modify or terminate the agreement with advance notice. Expense
related to this licensing agreement for the year ended December 31, 2001 was
$30,000.
In April 1997, the Company entered into an exclusive license and option
agreement with Sunpower, Inc. ("Sunpower") whereby Sunpower agreed to give the
Company the option to license certain patents to the Company in exchange for an
initial non-refundable license fee payment of $20,000. A license fee of $50,000
was paid within thirty days after the date the Company notified Sunpower of its
intention to obtain the license. The Company is also obligated to pay a
guaranteed annual minimum royalty as follows:
<Table>
June 2000 to June 2001 $ 16,200
June 2001 to June 2003 32,400
June 2003 until terminated 108,000
</Table>
The minimum royalty payments are to be paid equally on a quarterly basis. In
addition, an actual royalty payment is required for each unit sold in excess of
the guaranteed minimum royalty (as defined) until either party terminates the
agreement with advanced notice or until all patent rights expire or are
invalidated. Expense related to this licensing agreement for the year ended
December 31, 2001 was $25,701.
F-14
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
<Table>
<Caption>
DECEMBER 31, 2001
---------------------------------------
NUMBER ISSUANCE NUMBER REDEMPTION
OF SHARES PRICE OF SHARES AND
AUTHORIZED PER SHARE OUTSTANDING LIQUIDATION VALUE
-------------- -------------- -------------- -------------------
Series D 4,100,000 $ 3.00 3,990,114 $ 11,456,694
Series E 12,100,000 $ 2.02 10,531,452 22,870,673
Series F 22,000,000 $ 0.50 20,916,183 10,465,064
-------------- -------------- -------------------
38,200,000 35,437,749 $ 44,792,431
============== ============== ===================
</Table>
Holders of Series D, E and F preferred stock are entitled to cumulative cash
dividends at a rate of 8% of the original issue price per annum, compounded
quarterly and payable at the beginning of each calendar quarter beginning June
30, 1999, October 20, 2000 and December 28, 2001, respectively. Such dividends
shall accrue beginning March 31, 1999, October 20, 2000 and December 28, 2001
for Series D, E and F preferred stock, respectively, whether or not earned or
declared. In the event that the Company fails to redeem any shares of the Series
D, E and F preferred stock in accordance with the agreement or fails to comply
with any of the protective provisions of preferred stock (as defined), then
dividends shall accrue at a rate of 10%. The holders of Series D, E and F
preferred stock may redeem the shares at any time beginning October 12, 2005,
October 12, 2005 and December 28, 2006, respectively, as amended.
Accrued dividends on Series D, E and F preferred stock, at December 31, 2001
total $2,558,673 and $1,597,140 and $6,972, respectively. Accrued dividends are
included in the redemption and liquidation value of the redeemable convertible
preferred stock.
F-15
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
CONVERTIBLE PREFERRED STOCK
<Table>
<Caption>
DECEMBER 31, 2001
--------------------------------------
NUMBER ISSUANCE NUMBER
OF SHARES PRICE OF SHARES LIQUIDATION
AUTHORIZED PER SHARE OUTSTANDING VALUE
------------- -------------- -------------- ----------------
Series A 1,214,286 $ 0.84 1,214,286 $ 85,000
Series B 3,800,000 $ 1.80 3,658,336 3,768,086
Series C 2,600,000 $ 2.70 2,222,223 4,288,890
------------- -------------- ----------------
7,614,286 7,094,845 $ 8,141,976
============= ============== ================
</Table>
Liquidation value per share for Series A, B and C preferred stock at December
31, 2001 was $0.07, $1.03 and $1.93, respectively.
Holders of Series A, B and C preferred stock are entitled to noncumulative cash
dividends at a rate to be determined by the Board of Directors, if and when such
dividends are declared by the Board of Directors. No dividends have been
declared to date.
In the event of liquidation, dissolution or winding up of the Company where the
assets and the funds to be distributed to the holders of Series D, E and F
preferred stock would be less than two times the original issuance price of
Series D, E or F preferred stock, the holders of Series D, E and F preferred
stock shall also be entitled to receive, prior and in preference to any
distribution the holders of Series A, B and C preferred stock and common
stockholders a liquidation preference for Series D, E and F preferred stock that
equals the amount per share equal to the sum of the originally issued price plus
any accrued but unpaid dividends.
The preferred shareholders have voting rights equal to the common shares they
would own upon conversion.
Each share of Series A, B, C, D, E and F preferred stock is convertible into
common stock at the option of the holder on a one-for-one basis, subject to
adjustment for changes in capitalization. Each share of Series A, B, C, D, E and
F preferred stock will automatically convert into shares of common stock at the
conversion price in effect at
F-16
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
such time, upon the closing of the sale of common stock at a per share offering
price of at least two times the then applicable conversion price for such series
in a firm commitment underwritten public offering with net proceeds to the
Company of at least $50,000,000.
WARRANTS
Pursuant to an operating lease signed in 1997, in February 1998, the Company
issued to a leasing company a warrant to purchase 13,100 shares of Series B
preferred stock for $2.29 per share. The warrant is immediately exercisable for
a period of seven years or three years from the effective date of the Company's
initial public offering, whichever is earlier. The value of these warrants on
the date of issuance was not considered significant.
In connection with the issuance of the $3 million subordinated promissory notes
in 1998, the Company granted the note holders a warrant to purchase 111,111
shares of Series C preferred stock at $2.70 per share. The warrant is
immediately exercisable for a period of seven years or three years from the
effective date of the Company's initial public offering, whichever is earlier.
The fair value of this warrant has been recorded to equity and offset against
the debt as a debt discount. The discount is being amortized to interest expense
over the term of the debt (three years). The remaining $26,551 of the discount
was amortized during 2001, and there is no further debt discount to be
amortized.
Pursuant to the master loan and security agreement signed in September 1998, the
Company granted the lender a warrant to purchase 2,658 shares of Series C
preferred stock at $2.70 per share. The warrant is immediately exercisable for a
period of seven years, or three years from the effective date of the Company's
initial public offering, whichever is earlier. The value of these warrants on
the date of issuance was not considered significant.
In connection with the issuance of the 2000 Bridge Notes, the Company granted
the note holders warrants to purchase shares of preferred stock whereby the
holders are entitled to purchase 459,598 shares of Series E preferred stock at
$2.02 per share. The fair value of the warrants was $588,285 and was recorded as
additional interest expense and an increase to the value of the preferred stock.
The warrants were valued using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%; expected volatility of 70%; risk
free interest rate of 6.5%; and a term of five years. The warrants expire
on March 31, 2005.
F-17
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
In connection with the issuance of the 2001 Bridge Notes, the Company granted
the note holders warrants to purchase shares of preferred stock whereby the
holders are entitled to purchase 493,549 shares of Series F preferred stock at
$0.50 per share. The value of these warrants on the date of issuance was not
considered significant. The warrants expire on November 7, 2005.
STOCK OPTIONS
In 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan under
which employees, directors, and consultants may be granted options to purchase
common shares. In 1998, the Company adopted its 1998 Stock Option/Stock Issuance
Plan, collectively the "Plans". As amended, the Plans provide for the grant of
up to 7,350,000 shares of the Company's common stock, which are reserved for
issuance upon exercise of options granted by the Company.
The exercise price of incentive stock options and restricted stock must equal at
least the deemed fair value on the date of grant and the exercise price of
non-statutory stock options and the issuance price of common stock under the
stock issuance program may be no less than 85% of the deemed fair value on the
date of grant or issuance. The options are immediately exercisable for a period
of up to ten years after the date of grant and generally vest over four years,
or earlier if performance incentives are achieved. Unvested common shares
obtained through early exercise of options, or the grant of restricted stock,
are subject to repurchase by the Company at the original issue price. Through
December 31, 2001, 49,598 shares were repurchased by the Company and at December
31, 2001, 61,927 shares were subject to repurchase. As of December 31, 2001, no
shares have been issued under the stock issuance program.
The weighted-averaged fair value of options granted during 2001 was $0.15.
Exercise prices for options outstanding as of December 31, 2001 were $0.10 to
$0.60. The weighted-average exercise price was $0.48. The weighted-average
remaining contractual life of those options is 7.87 years.
F-18
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
At December 31, 2001, 4,900,604 shares were available for future grant or
issuance under the Plans.
The following table summarizes stock option activity under the Plans and related
information through December 31, 2001:
<Table>
<Caption>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------------- ----------------
Balance at December 31, 2000 1,758,073 $0.47
Granted 1,313,563 $0.53
Exercised (157,629) $0.40
Forfeited (675,416) $0.55
-------------
Balance at December 31, 2001 2,238,591 $0.48
=============
</Table>
Pro forma information regarding net loss is required by SFAS No. 123 and has
been determined as if the Company had accounted for its employee stock options
and stock purchase plan under the fair value method of SFAS No. 123. The fair
value for these options was estimated at the date of grant using the minimum
value option pricing model with the following weighted-average assumptions for
2001: risk-free interest rates of 6.50%; dividend yield of 0%; and a
weighted-average expected life of the options of six years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period. The Company's pro forma net
loss and net loss per basic and diluted share were $13,786,039 and $7.98,
respectively, for the year ended December 31, 2001.
The pro forma effect on net loss may not be representative of the pro forma
effect on net loss in future years because it reflects less than four years of
vesting and changes in the subjective input assumptions may effect the fair
values of future option grants.
F-19
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Common stock reserved for future issuance at December 31, 2001 is as followed:
<Table>
Conversion of redeemable convertible preferred stock 35,437,779
Conversion of convertible preferred stock 7,094,845
Warrants 1,080,016
Stock options:
Issued and outstanding 2,238,591
Available for future grant 4,900,604
------------
50,751,835
============
</Table>
5. INCOME TAXES
At December 31, 2001, the Company had federal and California tax net operating
loss carryforwards of approximately $46,400,000 and $28,000,000, respectively.
The federal and California tax loss carryforwards will begin expiring in 2011
and 2003, respectively, unless previously utilized. The Company also has federal
and state research and development tax credit carryforwards of approximately
$1,700,000 and $1,000,000, respectively. The federal research and development
tax credit carryforward will expire beginning in 2012, unless previously
utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period.
Significant components of the Company's deferred tax assets as of December 31,
2001 are shown below. A valuation allowance of $21,136,000 has been established
as realization of such assets is uncertain.
F-20
================================================================================
CryoGen, Inc.
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
<Table>
<Caption>
DECEMBER 31,
2001
------------------
Deferred tax assets:
Net operating loss carryforwards $ 17,852,000
Research and development credits 2,353,000
Capitalized research and development 687,000
Other, net 431,000
------------------
Total deferred tax assets 21,323,000
Deferred tax liabilities:
Patents (187,000)
------------------
Net deferred tax assets 21,136,000
Valuation allowance (21,136,000)
------------------
Net deferred taxes $ --
==================
</Table>
6. 401(k) DEFINED CONTRIBUTION AND PROFIT SHARING PLAN
Effective January 1, 1998, the Company adopted a 401(k) defined contribution and
profit sharing plan that covers substantially all full time employees, as
defined, who meet certain length-of-service requirements. Employees may
contribute up to a maximum of 25% of their annual compensation (subject to a
maximum limit imposed by federal tax law).
7. SUBSEQUENT EVENT
The Company has entered into a merger agreement with America Medical Systems on
December 13, 2002 for an initial consideration of $40,000,000 subject to certain
purchase price adjustments. In addition, the Company's shareholders are entitled
to future earnout payment on a formula based on Net Product Revenues, as defined
in the Merger Agreement, less $40,000,000. The merger was consummated on
December 30, 2002.
F-21