<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996
ZAXIS INTERNATIONAL INC.
(Name of Small Business Issuer In Its Charter)
Delaware 0-15476 68-0080601
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
1890 Georgetown Road, Hudson, Ohio 44236
(Address of principal executive office)
(216) 650-0444
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value.
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months and (2) has
been subject to such filings 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 no disclosure will 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 its most recent fiscal year: $450,566
The aggregate market value of the voting stock held by non-affiliates was
$13,661,000 based on the average of the bid and asked prices on April 7, 1997
($3.3125). Officers and directors are considered affiliates for purposes of this
calculation. The bid and asked prices are based on a small volume of infrequent
trading in the stock, as 90% of the shares are restricted as to transfer.
As of April 7, 1997, there were 5,444,437 shares of common stock outstanding.
Transitional Small Business Disclosure Format. Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Issuer's definitive proxy statement for its 1997 Annual Meeting of
Stockholders, which the Issuer intends to file no later than April 30, 1997, are
incorporated by reference into Part III.
Page 1 of __ pages. Exhibit index is located on page 8.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
Zaxis International Inc. ("International") is a holding company which operates
its business through its wholly-owned subsidiary, Zaxis Inc. ("Zaxis"). Zaxis
was incorporated in Ohio in 1989. On August 25, 1995, Zaxis merged with a
subsidiary of The InFerGene Company ("InFerGene") and InFerGene changed its name
to Zaxis International Inc. InFerGene and its subsidiary were inactive and had
no assets or liabilities at the time of the merger. InFerGene was incorporated
in Delaware in 1985. For accounting and tax purposes, the merger is treated as a
reverse acquisition in which Zaxis acquired International.
Zaxis was founded by Raymond Gesinski, Ph.D., (deceased), and Gregory Bambeck,
Ph.D., Executive Vice President of Research, to develop products for use in life
sciences research. Each had extensive backgrounds in genetic research,
cardiovascular diagnostic developments, and polymer technology in gene
separation applications. In 1994 and 1995, Zaxis implemented a program to
develop, manufacture and market a complete product line based on the research of
Drs. Gesinski and Bambeck and to continue research and development of related
products. During that period, the Company moved into new manufacturing and
office facilities, installed automated and computer controlled production
equipment, added key management personnel, prepared its lipoprotein testing
system for FDA approval, and began establishing marketing arrangements with
domestic and foreign distributors. A private placement of units consisting of
common stock and warrants to purchase common stock was completed in the third
quarter of 1995, adding capital funds of $1.4 million. In 1996, holders
exercised 465,743 Class A Warrants, providing approximately $1,048,000 in
additional capital funds, and International sold approximately $605,000 in notes
with warrants attached in private sales.
BUSINESS OF ISSUER
Zaxis manufactures and sells products used in an electrochemical process known
as electrophoresis which is widely used in applications for the separation and
identification of genes (e.g., DNA) and gene products (e.g., RNA, proteins). A
variety of techniques, formats, materials, compounds, equipment and devices are
employed in electrophoresis and Zaxis' catalog includes products for virtually
all of these needs.
Electrophoresis has been in use for over fifty years. Laboratory applications
cover a broad spectrum, including medical diagnostics, immunology, agriculture,
criminology, forensics, pharmaceuticals, quality assurance and DNA and RNA
research. A simplified explanation of the process describes it as the
application of specimens, for example bacteria, blood serum, body tissue or
plant tissue, to a gel substance which is then subjected to electric current
while submerged in a liquid filled chamber. The sample material breaks down and
its molecules are deposited on the gel substance in a unique pattern which can
be compared to other samples to determine similarities or differences. The
pattern of molecules is popularly referred to as a "bar code" of living matter.
2
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The usefulness of the information from electrophoresis depends on the clarity
and consistency of the results (or resolution) which is dependent upon a variety
of factors, including consistency of manufacturing materials and methods for the
devices, chemicals and gels. Gels can be compounded and polymerized in the end
user's laboratory by technicians or supplied in precast form in plastic or glass
cassettes. Generally, gels are made from one of two materials: a natural
plant-based substance called agarose or an acrylamide-based substance. Agarose
gels are not available in precast form and are generally limited to use with
proteins of larger molecular size. Polyacrylamide gels are available in precast
cassettes or may be prepared by the technician from compounds or premixed
preparations. The precast cassettes offer the advantages of convenience,
efficiency, and reliability and are being used by a growing percentage of users.
Zaxis' core product is a precast polyacrylamide gel cassette based upon its
proprietary polymer chain length control ("PCL") technology. The gel cassettes
can be used with Zaxis' proprietary electrophoresis devices or with devices of
other manufacturers. Zaxis' product line includes electrophoresis systems and
components, chemicals, compounds, stains, reagents, chambers, power supplies,
computers, scanners, and accessories in addition to gel cassettes. The gel
cassettes, chemical compounds and many of the acrylic components are
manufactured or assembled by Zaxis in its facility, while the microprocessor
components, scanners, power supplies and other system components are
manufactured to Zaxis' specifications by other companies.
The product has had varying degrees of acceptance since its introduction in
1995, but the Company has not been able to gain any significant market share,
despite aggressive product promotion efforts. The Company is pursuing efforts to
attain sales growth in its core product by making improvements in product
performance, packaging and presentation and by concentrating on obtaining new
private label business through new distributors who wish to either replace their
current suppliers or add a new product to their catalogs.
Zaxis developed a lipoprotein assay system, consisting of a poly-gradient
electrophoresis gel, electrophoresis processing equipment, reagents, gel
scanner, computer software and hardware. The system measures the relative
percentages of High Density and Low Density Lipoproteins (HDL and LDL) in human
blood serum in a single test from single samples. Within the general categories
of HDL and LDL are subfractions variously designated as Very Low Density
Lipoprotein, LDL 1, 2 and 3 and HDL 1, 2 and 3. The Zaxis system obtains its
measurement by separating the subfractions and then programmatically computing
the totals of the components, rather than simply measuring the two masses of LDL
and HDL, as competing systems do. The system was granted FDA marketing approval
in September 1996 on the basis that it provided measurements in terms of total
LDL and HDL equivalent to other systems already approved. The lipoprotein
subfractions measurements unique to the Zaxis system were not part of the FDA
clearance for clinical marketing purposes, but are the subject of ongoing
research by the Zaxis research and development staff and by outside researchers
who have purchased the Zaxis system. In December 1996, the Company was granted a
patent for the poly-gradient gel component of the system.
The Company has been marketing the lipoprotein assay system to researchers since
March 1996. In late 1996, the Company began selling lipoprotein gels and reagent
kits separately, to researchers who had not purchased the systems. The Company
has not actively pursued the clinical market yet because it does not currently
possess the staff and resources to do so. Efforts are in process to determine if
marketing or supply arrangements can be made for the lipoprotein system or the
gels separate from the system with established instrument manufacturers or
marketers in the biomedical industry.
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The Company has also produced a precast gel for use in DNA Sequencing and has
placed prototypes of the gel for testing with several companies that manufacture
DNA Sequencing instruments and supplies.
SUPPLIERS
The raw materials and system components that Zaxis uses in its products are
readily available from several reliable sources.
CUSTOMERS AND DISTRIBUTION METHODS
Two customers accounted for 46% of sales in 1996 and four customers accounted
for 62% of sales in 1995. One of these customers sells Zaxis products under a
private label and another is a distributor of Zaxis brand products. The Company
also sells directly to research, educational and medical institutions.
PATENTS, TRADEMARKS, AGREEMENTS
In addition to the patent on the poly-gradient gel, the Company has patents on
its electrophoresis device, a cassette and a cassette component. In addition,
Zaxis relies on trade secrets and proprietary knowledge which it protects by
confidentiality agreements with employees and consultants. There can be no
assurance that patents will not be challenged or breached or that the
confidentiality agreements will not be breached. The Company has U.S. trademarks
covering "Zaxis--A New Dimension In Technology" and the term "Z-Gel."
Zaxis owns the software for its lipoprotein analysis system, LFS, and intends to
grant limited, non-exclusive licenses for the use of the software by its
customers.
GOVERNMENTAL REGULATIONS
The Zaxis manufacturing plant is a registered FDA facility and is subject to FDA
regulation, including audit and review for compliance with agency rules. The
Company believes it is in compliance with the FDA regulations. The facility has
not been audited and the Company has not received notice of any planned or
pending audits.
RESEARCH AND DEVELOPMENT
Research and development costs were approximately $146,000 in 1996 and
$107,000 in 1995. None of the expenses were borne by customers.
ENVIRONMENTAL LAWS
Zaxis has not incurred any costs specifically for compliance with environmental
laws and does not anticipate any material costs solely for this purpose.
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EMPLOYEES
Zaxis has 22 full time employees. In addition, the Company utilizes outside
consultants and, on occasion, temporary help on a contract basis.
The Company believes it has good relations with all of its employees and has
experienced no strikes or work stoppages.
ITEM 2. DESCRIPTION OF PROPERTY.
Zaxis' operations are conducted in a facility consisting of a 19,800-square-foot
building in Hudson, Ohio, which is rented under a lease expiring October 31,
1998. The building is approximately six years old, is in good condition and is
sufficient for currently anticipated needs of the Company.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in a legal proceeding alleging breach of contract
concerning a product to be manufactured to the Company's specifications. The
action claims compensatory and special damages aggregating $23,000 plus attorney
fees and costs. The Company denies any liability in the matter, since a
prototype conforming to the contract was never delivered to the Company as
required under the contract. Management believes that the ultimate outcome in
this matter will not have a material adverse affect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market at present in the United States or
elsewhere for International's common stock. Over-the-counter trading volume is
reported by NASD through its "Bulletin Board" system. Sporadic trading has been
reported in the pink sheets since December 1995. There were approximately 2,500
holders of record of International common stock as of April 7, 1997, including
holders of InFerGene and Zaxis shares who have yet to exchange their shares for
International shares. No cash dividends have been declared on the common stock
and none are currently anticipated. The high and low bid prices quoted for each
quarter during the last two fiscal years since trading commenced over the
counter are presented below. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------------------------ ----------------- --------------
<S> <C> <C>
December 31, 1995 $5.00 $1.00
March 31, 1996 6.00 3.00
June 30, 1996 6.00 4.75
September 30, 1996 3.75 1.75
December 31, 1996 5.50 1.75
</TABLE>
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS
Net sales were $451,000 in 1996, up $238,000 or 112% from 1995. New distributors
added in late 1995 and early 1996, accounted for $180,000 of the sales increase.
Direct sales of laboratory equipment and devices (not through distributors)
accounted for $120,000 of the sales increase. Offsetting decreases were spread
among many smaller customers.
Cost of goods sold exceeded sales in both 1996 and 1995. Production capacity,
built in anticipation of rapid sales growth, is greater than sales volumes
achieved, causing inefficient application of labor and overhead. In addition,
the Company incurred additional costs to establish glass cassette manufacturing
capabilities to alleviate difficulties in securing reliable sources of that
component.
Selling, general and administrative expenses increased $362,000 or 25% to
$1,832,000 in 1996. Fees and expenses in connection with the Company having
publicly traded equity securities starting in August 1995 and in connection with
financing efforts account for $175,000 of the increase, including legal,
accounting, transfer agent and investor relations fees. Selling expenses,
including sales salaries, advertising, promotion and travel expenses, rose
$201,000 in 1996 compared to 1995. The Company also incurred $55,000 in costs
for the write off of purchase option fees paid to another company and had higher
administrative salaries, depreciation expense and research and development
expense in 1996, but these increases were largely offset by the $316,000
reduction in non-cash stock option expense.
FINANCIAL CONDITION AND LIQUIDITY
The Company used $1,902,000 in operations and $153,000 for equipment and patent
expenditures in 1996. Proceeds from sales of common stock, including shares sold
in connection with the exercise of warrants, of $1,275,000 and notes payable
(mainly notes with common stock warrants) of $680,000 provided the cash for
these uses. At December 31, 1996, current liabilities exceeded current assets by
$1,024,000 and total liabilities exceeded assets by $617,000. The Company is
reliant upon investors to provide funds for operations and has entered into a
Financing and Shareholder Agreement and obtained funds from sales of shares of
International common stock in February and March of 1997, as described in Note 2
to the financial statements. The Company has maintained amicable relations with
creditors while striving to improve sales volume and demonstrate that the
Company can be successful.
To achieve this, the Company has embarked on programs to enhance current and
future operations. Zaxis is seeking to establish OEM supplier relationships with
distributors of chemical and biomedical products to researchers and industry for
its core product, the protein gel. Products have been supplied for product
testing to several such distributors, but no such relationship has been
established yet. The Company is also seeking to acquire additional research
customers for its lipoprotein assay system or components thereof and is seeking
a partner for entering the clinical market for these products. The Company's
long-lived, precast DNA sequencing gel is in the prototype stage and is being
tested by several instrument and reagent suppliers to the Human Genome project
and other significant research organizations.
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Management believes that the core product and the DNA sequencing product can
provide sufficient sales revenue to bring the Company to profitability if firm
contracts can be negotiated soon enough, near mid-1997. Management also believes
that the lipoprotein assay system represents a significant technological
improvement over existing cardiac disease diagnostic systems and can be a
profitable future source of revenues. There can be no assurance, however that
the Company will be successful in obtaining the necessary contracts and
commitments from distributors and potential partners to achieve profitable
operations.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements of the Registrant and the reports of independent auditors
thereon are included on the following
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Reports of Independent Auditors.............................. 10
Balance Sheets............................................... 11
Statements of Operations..................................... 12
Statements of Changes in Stockholders' Equity (Deficit)...... 13
Statements of Cash Flows..................................... 14
Notes to Financial Statements................................ 15-22
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1997.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit Page
Number Description Number
------------- --------------------------------------------------------------------- -----------
<S> <C> <C>
3 (i) Certificate of Incorporation (Exhibit 3(i) to the Company's *
Annual Report on Form 10-KSB for the year ended
December 31, 1995, File Number 0-15476, incorporated herein
by reference).
3 (ii) By-laws Certificate of Incorporation (Exhibit 3(ii) to the *
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995, File Number 0-15476, incorporated herein
by reference).
10 Material contracts.
(a) Promissory Notes to Directors and Other Investors *
(Exhibit 10 to the Company's Quarterly Report on
Form 10-QSB for the period ended September 30,
1996, File Number 0-15476, incorporated herein by
reference).
(b) Financing and Shareholder Agreement (Exhibit 10 to *
the Company's Current Report on Form 8-K dated
February 5, 1997, File Number 0-15746, incorporated
herein by reference).
21 List of Subsidiaries 23
27 Financial Data Schedule
* Incorporated by reference.
(b) Reports on Form 8-K
None.
</TABLE>
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 14, 1997 Zaxis International, Inc.
/s/John V. Danis
By:
----------------------------------
John V. Danis, President,
Chief Executive Officer and
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- --------------------------------------------- -------------------------------- --------------
<S> <C> <C>
/s/Conaly Bedell
- ---------------------------------------------
Conaly Bedell Director, Chairman of the Board April 14, 1997
/s/Leonard Duval
- ---------------------------------------------
Leonard Duval Director April 14, 1997
/s/Craig Jones
- ---------------------------------------------
Craig Jones Director April 14, 1997
/s/Alan Scott
- ---------------------------------------------
Alan Scott Director April 14, 1997
/s/Calvin D. Wible
- ---------------------------------------------
Calvin D. Wible Director April 14, 1997
</TABLE>
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Report of Independent Auditors
The Board of Directors and Stockholders
Zaxis International Inc.
We have audited the accompanying consolidated balance sheets of Zaxis
International Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zaxis
International Inc. and Subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has liabilities in excess of total assets and has a working capital deficiency.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ERNST & YOUNG LLP
Cleveland, Ohio
April 10, 1997
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<TABLE>
<CAPTION>
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
------
DECEMBER 31,
----------- -----------
1996 1995
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,090 $ 110,559
Restricted cash 100,000 25,015
Accounts receivable, less allowance for
doubtful accounts of $20,000 in 1996
and $15,000 in 1995 42,468 54,356
Inventory 139,209 135,845
Prepaid expenses and other 43,928 58,794
----------- -----------
Total current assets 326,695 384,569
PROPERTY AND EQUIPMENT:
Leasehold improvements 86,992 50,847
Machinery and equipment 276,250 185,093
Office equipment 190,369 177,674
----------- -----------
553,611 413,614
Less accumulated depreciation 184,852 96,201
----------- -----------
368,759 317,413
OTHER ASSETS:
Organization costs 5,132 7,502
Patent costs 33,125 26,124
----------- -----------
38,257 33,626
----------- -----------
TOTAL ASSETS $ 733,711 $ 735,608
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------
CURRENT LIABILITIES:
Capitalized lease obligations $ 1,516 $ 10,334
Bank loan payable 100,000 25,015
Notes payable to directors 141,340 -
Notes payable to others 464,000 -
Accounts payable 551,623 200,262
Accrued expenses 92,593 198,512
----------- -----------
Total current liabilities 1,351,072 434,123
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock:
$.01 par value, 12,000,000 shares authorized,
5,438,019 and 4,902,746 shares issued and
outstanding 54,380 49,027
Additional paid-in capital 5,404,540 4,152,631
Deferred compensation (30,868) (59,375)
Accumulated deficit (6,045,413) (3,840,798)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (617,361) 301,485
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 733,711 $ 735,608
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
ZAXIS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales $ 450,566 $ 212,323
Cost of goods sold 805,918 461,097
Selling, general and administrative expenses 1,831,751 1,470,084
----------- -----------
Loss from operations (2,187,103) (1,718,858)
Other income (expense):
Interest income 7,572 8,232
Miscellaneous income 1,317 654
Interest expense (26,401) (18,946)
----------- -----------
Total other expense (17,512) (10,060)
----------- -----------
Net loss $(2,204,615) $(1,728,918)
=========== ===========
Net loss per common share $ ( 0.41) $ (0.46)
=========== ===========
Weighted average number of shares outstanding 5,368,898 3,728,457
=========== ===========
</TABLE>
See notes to consolidated financial statements
12
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<TABLE>
<CAPTION>
ZAXIS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
--------------------------- ADDITIONAL
NUMBER OF STATED OR PAID-IN DEFERRED ACCUMULATED
SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 3,402,648 $ 1,945,162 $ - $ - ($1,773,146)
Shares issued for cash prior to merger 25,913 77,739
Shares issued to adjust investors' bases 229,184 338,734 (338,734)
----------- ----------- ----------- ----------- -----------
3,657,745 2,361,635 - - (2,111,880)
Transactions in conjunction with merger:
Conversion of Zaxis Inc. to
to Zaxis International Inc. (527,850) (2,330,336) 2,330,268
Zaxis International Inc. shares outstanding 578,808 5,788 (5,788) -
----------- ----------- ----------- ----------- -----------
3,708,703 37,087 2,324,480 - (2,111,880)
Shares issued in private placement,
net of expenses 1,176,148 11,761 1,412,214
Shares issued upon exercise of
Class A warrants 17,895 179 40,084
Stock option grants 375,853 (59,375)
Net loss - 1995 (1,728,918)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 4,902,746 49,027 4,152,631 (59,375) (3,840,798)
Shares issued upon exercise of
Class A warrants 465,743 4,657 1,043,267
Sales of shares 69,530 696 225,917
Stock option grants, net of recissions (17,275) 28,507
Net loss - 1996 (2,204,615)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 5,438,019 $ 54,380 $ 5,404,540 $ (30,868) $(6,045,413)
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
13
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<TABLE>
<CAPTION>
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,204,615) $(1,728,918)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 97,289 56,617
Compensation due to stock option grants 11,232 316,478
Changes in operating assets and liabilities:
Restricted cash (74,985) (25,015)
Accounts receivable 11,888 (44,781)
Inventory and prepaid expenses 11,502 (98,426)
Accounts payable and accrued expenses 245,442 280,404
----------- -----------
Cash used in operating activities (1,902,247) (1,243,641)
INVESTING ACTIVITIES:
Purchase of property and equipment (142,770) (194,865)
Patent cost expenditures (10,496) (17,060)
----------- -----------
Cash used in investing activities (153,266) (211,925)
FINANCING ACTIVITIES:
Proceeds from sales of common stock and exercise of warrants 1,274,537 1,541,909
Proceeds from notes and bank loan payable 680,325 25,015
Payments on capital lease obligations (8,818) (9,911)
----------- -----------
Cash provided by financing activities 1,946,044 1,557,013
----------- -----------
(Decrease) increase in cash (109,469) 101,447
Cash at beginning of year 110,559 9,112
----------- -----------
Cash at end of year $ 1,090 $ 110,559
=========== ===========
Supplemental information:
Interest paid $ 12,687 $ 6,746
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements present the consolidated financial position and results
of operations of Zaxis International Inc. (International) and Zaxis Inc. (Zaxis
or the Company ), its wholly-owned subsidiary.
On August 25, 1995, Zaxis merged with a subsidiary of The InFerGene Company
(InFerGene). InFerGene was an inactive public company and neither InFerGene nor
its subsidiary had any assets or liabilities. The merger, for accounting
purposes, was a reverse acquisition in which Zaxis acquired InFerGene. The
acquisition was accounted for as a purchase with no value assigned to InFerGene.
InFerGene then changed its name to Zaxis International Inc. The financial
statements include the operations of Zaxis for all periods presented and the
operations of International since the date of acquisition. All intercompany
transactions and balances have been eliminated. As a result of the transaction,
the former InFerGene stockholders initially acquired approximately 12% of the
outstanding stock of International.
2. NATURE OF OPERATIONS AND LIQUIDITY
Zaxis manufactures and sells products for use in electrophoresis, an
electrochemical process used to analyze genetic material and its components,
such as proteins and RNA. The products include testing media, primarily in the
form of precast polyachrylamide gel cassettes, electrophoresis chambers,
chemical compounds and reagents. The Company also sells equipment manufactured
to its specifications for use in performing electrophoresis, such as power
supplies, and in the analysis and quantification of electrophoresis results,
including computer systems and automated scanners. The Company sells its
products directly to institutions operating research laboratories and to
distributors who market the Company's products under the Zaxis name or their
private labels. The Company's blood serum lipoprotein assay system is marketed
directly to research laboratories. The system was granted clearance to be
marketed for clinical use by the Food and Drug Administration in September 1996
and the Company is seeking means to effectively sell the system to clinical
users.
The Company was primarily engaged in research and development activities from
1989 until 1994. In 1994, the Company moved into its present office and
manufacturing facilities and began selling certain products, finalizing product
planning and design, developing its computerized manufacturing process, and
setting marketing and distribution plans. In 1995, a private placement of units
consisting of common stock and two series of common stock warrants was
completed, resulting in net proceeds of $1,424,000. The proceeds were used to
complete the projects started in 1994, continue research activities and provide
funds during the startup of product manufacturing and marketing. During 1996,
the Company obtained financing totaling $1,955,000 from sales of common stock
and exercise of warrants and issuance of notes which was primarily used to fund
operations as the Company sought to establish marketing arrangements for its
products.
15
<PAGE> 16
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
In February 1997, the Company entered into a Financing and Shareholder Agreement
with MML Management Limited, an Australia-based investment firm ("MML"). The
agreement provided initial funds of $65,000 under a one-year note and additional
financing over the next year of up to $1.2 million, contingent upon the
occurrence of certain events. The initial funds were provided under a one year
9.25% note, collateralized by accounts receivable and a patent owned by the
Company. The agreement also granted MML warrants to purchase International
common shares for a one-year period at $1.50 per share. In February 1997, MML
loaned an additional $25,000 on the same terms as the initial financing. In
March 1997, International sold 37,500 units, each consisting of one share of
International common stock and a two-year $3.00 warrant for common stock, for
$2.00 per unit in a private offering. In addition, MML purchased 25,000 units on
the same terms.
The events which MML agreed would initiate additional financing, other than
obtaining investments under the private placement, have not occurred. These
events included the obtaining of new purchase orders from certain prospective
customers by certain dates.
The Company incurred losses of $2,205,000 in 1996 and $1,729,000 in 1995. The
Company does not expect to generate sufficient sales volume with its existing
customer base to support the cost of operations in the next year and is
attempting to strengthen its customer base in several ways. Principal efforts
include aggressive pursuit of additional private label distributors for the
Company's protein electrophoresis products, prototype testing of its precast DNA
Sequencing product with several leading instrument manufacturers with the intent
of obtaining exclusive supply contracts or joint ventures, and pursuit of
partnering arrangements with clinical device manufacturers and pharmaceutical
companies for its lipoprotein assay system or components, thereof.
There can be no assurance that the Company will be successful in obtaining
additional financing, nor can there be any assurance that the Company will be
able to strengthen its customer base and generate sufficient sales volume to
meet or exceed the costs of operation. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. No adjustments to
the amounts or classification of assets and liabilities which could result from
the outcome of this uncertainty are reflected in the financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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.
16
<PAGE> 17
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
INVENTORY
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Classes of property and equipment and related useful lives are as follows
<TABLE>
<CAPTION>
Estimated
Asset Useful Life
- ------------------------------- -------------
<S> <C>
Leasehold improvements 5
Machinery and equipment 5-10
Office equipment 5-7
</TABLE>
Depreciation expense, including depreciation of capitalized leases, charged
to operations was $91,424 and $51,345 for 1996 and 1995, respectively.
ASSET IMPAIRMENT
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This Statement requires companies to
review certain assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable, in
which case the asset generally would be written down to fair value. The adoption
of this standard did not affect the Company's results of operations, financial
position or liquidity.
INTANGIBLES
Patent costs are amortized over the life of the patents. Amortization expense
was $3,495 and $2,903 for 1996 and 1995, respectively, and accumulated
amortization was $6,398 and $2,903 at December 31, 1996 and 1995, respectively.
Organization costs are amortized over five years. Accumulated amortization was
$6,712 and $4,343 at December 31, 1996 and 1995, respectively.
17
<PAGE> 18
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under Statement No. 109, the liability method is used in accounting for
income taxes whereby deferred tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's accounts receivable and short-term debt
approximate their fair value.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs were approximately $146,000 and $107,000 for 1996 and 1995,
respectively.
STOCK COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which defines a
fair value based method of accounting for employee stock options which allows
for an element of compensation cost to be charged to earnings on an annual
basis. Statement No. 123 also permits entities to continue to measure
compensation cost using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" which may result in no compensation cost being recognized.
As permitted by the Statement, the Company has elected to continue to account
for its employee stock compensation plans under the intrinsic value based method
of accounting prescribed by APB Opinion No. 25, while providing pro forma
disclosures of net loss as if the fair value based method had been applied.
Under the intrinsic value based method, compensation cost is the excess, if any,
of the fair market value of a share of common stock at the grant date over the
amount an employee must pay to acquire the stock. The effect of adopting this
Statement results in pro forma net loss that is not materially different from
amounts reported.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising expense amounted to
$131,355 in 1996 and $93,815 in 1995.
RECLASSIFICATIONS
Certain reclassifications have been made to 1995 amounts to conform with 1996
reporting presentations.
18
<PAGE> 19
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
4. BANK LOAN AND NOTES PAYABLE
The bank loan payable represents borrowings under a $100,000 line of credit
which permits borrowings at the lender's base rate (9.30% at December 31, 1996).
The borrowings are collateralized by a money market account.
Notes payable to directors of $141,340 at December 31, 1996 are due on demand
and bear interest at 9.25% per year. Notes payable to others of $464,000 at
December 31, 1996 are due $224,000 on demand and $220,000 at various dates from
October 21,1997 to December 4, 1997, and bear interest at 9.25% per year.
Holders of the notes payable were granted warrants to purchase 201,766 shares of
common stock at $3.00 per share for three years from the date of issuance. The
notes payable include terms which permit the holder to be repaid in shares of
common stock by exercising the warrants. If the holder so elects, the Company
will grant additional three year, $3.00 common stock warrants in an amount
equivalent to 50% of the warrants exercised. No value was assigned to the
warrants.
5. DEFINED CONTRIBUTION PLAN
The Company maintains a 401(k) plan for substantially all employees. Company
contributions are at the discretion of management. There were no Company
contributions under the plan in 1996 or 1995.
6. LEASE OBLIGATIONS
The Company has equipment under capital leases as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------
1996 1995
---------- -----------
<S> <C> <C>
Cost $ 31,650 $ 31,650
Less accumulated amortization 7,535 4,370
---------- -----------
$ 24,115 $ 27,280
========== ===========
</TABLE>
The Company rents a building for its office, research and development and
manufacturing under a sub-lease agreement. The lease expires on October 31,
1998. Rent expense was $67,055 on 1996 and $62,325 in 1995.
Future minimum lease payments under the building sub-lease are $104,500 in 1997
and $87,083 in 1998.
19
<PAGE> 20
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
7. CAPITAL STOCK TRANSACTIONS
During 1996, The Company sold shares of common stock at prices ranging from
$3.00 to $3.75 per share in private offerings and at $2.25 per share upon the
exercise of Class A Warrants. In March 1997, additional shares were issued to
purchasers of shares at $3.75 per share to adjust the basis of those share
holdings to $3.00 per share.
During 1995, Zaxis Inc. sold stock in private transactions for $3.00 per share.
In August 1995, in connection with the merger described in Note 1, Zaxis
International Inc. sold units consisting of common stock and warrants to
purchase common stock as discussed below. The value attributed to the Zaxis
common stock was $1.48 per share at the time of the merger and, accordingly,
229,184 additional shares of Zaxis common stock were issued immediately prior to
the merger to those purchasers who had previously acquired common stock at $3.00
per share.
Immediately prior to the merger, InFerGene shares outstanding were reduced to
approximately 578,808 as a result of a fifty-to-one reverse stock split. In the
merger, each share of Zaxis Inc. common stock was converted into .8557 shares of
Zaxis International Inc. common stock. Accordingly, shares outstanding were
reduced by 527,850 and $2,330,336 was transferred from common stock to
additional paid-in capital to reflect the effect of the exchange.
International sold 933,048 units at $1.90 per unit during the period from August
1995 to October 1995 in a private placement transaction. In addition, 243,100
shares of International were issued to consultants as finders' fees. Each unit
consisted of one share of common stock and one-half of a Class A warrant and
one-half of a Class B warrant. Each Class A warrant entitled the holder to
acquire one share of common stock for $2.25 per share through February 15, 1996.
Class B warrants are exercisable until September 30, 1997 at a price of $3.50
per share.
8. INCOME TAXES
A reconciliation of income taxes computed at the U.S. federal statutory
rate to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Tax benefit at statutory rate $ (749,000) $ (587,800)
Increase in valuation allowance on deferred tax asset 749,000 587,800
-------------- -------------
Provision for income taxes $ - $ -
============== ==============
</TABLE>
20
<PAGE> 21
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Deferred income taxes are provided to reflect the tax effects of temporary
differences in the recognition of revenue and expense for tax and reporting
purposes. Significant components of deferred tax assets at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
Deferred tax assets:
<S> <C> <C>
Stock compensation $ 111,300 $ 107,600
Net operating loss carryforward 1,666,000 920,000
Other, net 1,000 1,700
---------- ----------
1,778,300 1,029,300
Valuation allowance 1,778,300 1,029,300
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
</TABLE>
For Federal income tax purposes, net operating loss carryovers total $4,900,000
that, if not utilized, will expire between 2004 and 2011. Future changes in
ownership, as defined by Section 382 of the Internal Revenue Code, could limit
the amount of net operating loss carryovers used in any one year.
9. STOCK OPTIONS AND WARRANTS
In 1996, the Company issued warrants to purchase 201,766 shares of common stock
in conjunction with notes payable, as described in Note 4.
In 1995, options to purchase 477,850 shares of common stock at $.876 per share
were granted to officers and an employee of the corporation in connection with
employment agreements. The options vest over periods ranging from one to five
years. Compensation expense is recorded for the difference between the exercise
price and the fair market value. Compensation expense charged to operations in
connection with these agreements amounted to $316,478 in 1995. All but 50,000
options either expired or were rescinded in 1996 and 1997. Also in 1995, options
to purchase 10,268 shares of common stock at $.88 per share expiring in 2005
were granted to a consultant.
International has a long-term incentive plan under which options to purchase up
to 405,000 shares of common stock may be granted at the fair market value on the
date of grant in the form of incentive or non-qualified stock options. In
addition, the Company has a Non-Employee Director's Stock Option plan under
which options to purchase up to 100,000 shares may be granted at fair market
value at the date of grant. In 1995, options to purchase 70,000 shares at $2.25
per share, expiring in 1998, were granted to two directors outside of the plan.
21
<PAGE> 22
ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
In addition to the Class A and Class B warrants included in the units sold in
1995 as described in Note 7, warrants to purchase 220,080 shares of common stock
were issued in accordance with interim lending agreements with several investors
and warrants for 130,000 shares were issued to an investor under a consulting
agreement. The additional warrants included the same terms as the Class A
warrants, except for expiration dates. These warrants were exercised or expired
by January 31, 1997.
At December 31, 1996, common shares were reserved for the following:
<TABLE>
<S> <C>
Stock option plan 505,000
Other stock options 472,548
Common stock warrants 755,790
</TABLE>
10. MAJOR CUSTOMERS
Two customers accounted for 46% of the Company's sales in 1996 and four customer
accounted for 62% of the Company's sales in 1995. Since the Company will not be
able to cover its operating costs unless the customer base is increased, the
loss of either of the major 1996 customers could have a material adverse effect
on the Company.
11. NET LOSS PER COMMON SHARE
Net loss per share has been calculated giving retroactive effect to the exchange
ratio of Zaxis Inc. common stock for shares of Zaxis International Inc. in the
August 25, 1995 merger. The effects of outstanding options and warrants has not
been included in the calculation of net loss per share because their inclusion
would not be dilutive.
22
<PAGE> 1
Exhibit 21
Subsidiaries of the Small Business Issuer:
Zaxis Inc., incorporated in the state of Ohio and doing business under
that name, is the sole subsidiary of Zaxis International, Inc.
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,090
<SECURITIES> 0
<RECEIVABLES> 42,468
<ALLOWANCES> 0
<INVENTORY> 139,209
<CURRENT-ASSETS> 326,695
<PP&E> 553,611
<DEPRECIATION> 184,852
<TOTAL-ASSETS> 733,711
<CURRENT-LIABILITIES> 1,351,072
<BONDS> 0
<COMMON> 54,380
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 733,711
<SALES> 450,566
<TOTAL-REVENUES> 450,566
<CGS> 805,918
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,401)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,204,615)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> 0
</TABLE>
