SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
Commission file number: 0-19866
CELOX LABORATORIES, INC.
(Name of small business issuer in its charter)
Minnesota 36-3384240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
856 South Fifth Street, Hopkins, Minnesota 55343
(Address of principal executive offices)
Issuer's telephone number: (612) 933-2616
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. __X__ Yes __No__
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. [ ]
The registrant's sales for its most recent fiscal year were $367,546.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
October 31, 1996 as reported on the Over-the-Counter Market, was approximately
$995,385. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
from this number, as such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of October 31, 1996, the registrant had outstanding 2,742,169 shares
of Common Stock.
Transitional Small Business Disclosure Format. ___ Yes __X__ No
PART I
ITEM 1 - BUSINESS
In fiscal 1995, Celox Corporation changed its name to Celox
Laboratories, Inc. The Company is a biotechnology company formed in 1985 that
researches, develops, manufactures, and markets cell biology products that are
used in the propagation of cells derived from mammals, including humans, and
other species. (In fiscal 1993, the Company changed its reporting status from a
development stage enterprise to a regular operating corporation.) These
specialized cell growth products are used primarily in academic, pharmaceutical
and other commercial laboratories to improve the growth, productivity and
quality of cell-derived medical and other biological products such as vaccines,
monoclonal antibodies, interferons, and human growth factor. Since its
inception, the Company has pursued a strategy of developing non-serum based
products for the growth of human and other mammalian cells which management
believes will have significant commercial potential.
BACKGROUND
To date, the Company has focused its efforts on commercial applications
of cell biology -- the science of life processes at the cellular level. Cell
biology involves the study of the molecular, physical, nutritional, and hormonal
needs of cells. The cell is the basic sub-unit of every living system and thus
exerts a significant influence on the functioning of the entire organism. Cells
are complex, having their own power supplies, digestive systems, communication
networks, and centers for producing biological products. The cell holds the key
to solving major health problems such as cancer, Acquired Immune Deficiency
Syndrome ("AIDS"), atherosclerosis, genetic disorders, diabetes, and mental
illness. Having accumulated information concerning cells and cellular functions,
scientists are able to manipulate cells outside the body in their efforts to
address these major health problems.
The development of genetic engineering and the use of mammalian cells
for the production of biological products has advanced cell culturing to new
levels. The manipulation or culturing of cells for production of diagnostic and
therapeutic products is an area of significant commercial growth for
biotechnology companies and pharmaceutical firms. Products currently subject to
research efforts include products to treat and detect AIDS, cancer, growth
disorders, and cardiovascular disease. The medical community now has access to
once unavailable cellular products, such as monoclonal antibodies, interferons,
and human growth factors. As a result, more emphasis is being placed on the
development of cell culturing technology.
Culturing of mammalian cells, tissues, and bacteria is now a widely
used technique in the biological sciences, from the basic sciences of cell and
molecular biology to the rapidly evolving area of biotechnology. The advent of
growing cells IN VITRO (i.e., in cultures or outside the organism) has permitted
extensive studies of specific human and other mammalian cellular functions.
Isolated cells are being used increasingly in the study of biological phenomena
such as chemical toxicity of therapeutic drugs, cancer cell growth and
regulation, and for the production of cell-derived biological products. The
types of cells that can be grown IN VITRO include muscle, cartilage, liver,
lung, breast, skin, bladder, kidney, pancreatic islet cells, and genetically
altered cells producing biological products.
Recreating IN VIVO (i.e., in the organism) interactions in an IN VITRO
environment requires special nutrients conducive to cell growth. Once the cells
are separated from the complex tissue organization in which they normally
thrive, cell biologists, using a cell growth medium as a base, can optimize the
IN VITRO nutritional, hormonal, and physical factors that promote propagation.
Culturing of human and other mammalian cells requires the use of a
nutrient source of cell growth medium. Typically this growth medium includes a
mixture of 80% to 90% basal medium that consists of amino acids, sugar, salts,
vitamins, and 10% to 20% serum. Serum is derived from the whole blood of humans
and other species and provides growth factors necessary for cells to continue to
divide in culture. Although serum provides various proteins, enzymes, hormones,
trace elements, and undefined regulators for cell growth, accumulated evidence
suggests that many of these components are extraneous and may complicate the
purification of cell-derived medical and biological products. Serum availability
and pricing are volatile and serum can exhibit significant biological
variability, including contaminants, thereby affecting researchers' experimental
results and commercial manufacturers' budgeting and product consistency.
Accordingly, if users are unable to purchase a project's entire serum
requirement from the same lot, they may be required to test the quality of the
serum throughout the duration of the project.
Based on research conducted by the Company and its experience with the
disadvantages of cell growth media containing human serum, fetal calf serum,
horse or other animal serum, the Company developed serum-free supplements that
optimize the growth of a variety of cell types. These supplements contain known
concentrations of identified components that remain constant from production lot
to lot and can eliminate potential contaminants such as viruses and bacteria.
PRODUCTS AND SERVICES
The Company markets over 30 different products. The Company's proprietary
products consist of four different serum-free supplements: TCM, TM-235(TM),
TCH(TM), and VaxMax(TM) and a cell freezing medium, Cellvation(TM). VaxMax(TM),
introduced in September of 1993, was developed specifically for use in the
production of veterinary vaccines. An additional proposed product, ViaStem(TM),
continues to undergo further analysis in pre-clinical testing. This product was
developed to improve the preservation of critical cells (e.g., stem cells),
which are required for bone marrow transplantation. The Company also
manufactures eleven basal media formulations, a series of buffered saline
solutions, other cell biology reagents, and a variety of custom formulations.
SERUM-FREE SUPPLEMENTS
The Company has developed four technically advanced serum-free
supplements to address the inadequacies of serum-based media. The Company's
defined basal media supplements, TCM, TM-235(TM), TCH(TM), and VaxMax(TM) are
fortified, low-protein, multipurpose serum-free supplements formulated for the
long-term culturing of a wide variety of cell types. These supplements contain
chemically-defined, growth-promoting factors that enhance the growth,
productivity, and purity of highly specialized cells that secrete biological
products such as monoclonal antibodies, interferons, human growth factor,
insulin, tissue, plasminogen, enzymes, and vaccines. These supplements also
improve the biochemical analysis of nutrient and hormonal effects on the
differentiation and function of cells.
TCM was formulated as a general serum replacement for a variety of cell
types from species including rodent, dog, cat, rabbit, pig, monkey, and human.
This product was designed for cost-effective use. TCM is not highly specific to
a single cell type and is therefore effective in many research and manufacturing
situations. TCM has a Drug Master File classification from the Food and Drug
Administration (FDA), which makes it suitable for the manufacturing of
biologicals (e.g., vaccines, monoclonal antibodies, etc.).
TM-235(TM) is similar to TCM, but contains additional proprietary
components. This product was developed for cell lines that require more than 10%
fetal calf serum and is slightly more expensive than TCM. A Drug Master File
(DMF) is being prepared for TM-235(TM).
TCH(TM) was developed specifically for human hybridomas (cell secreting
monoclonal antibodies) and other human cells of lymphoid origin (originating in
the lymphatic or immune system). TCH(TM) contains no animal proteins and is
compatible for use in the production of human biological products. A Drug Master
File (DMF) is being prepared for TCH(TM).
VaxMax(TM) is a cost effective serum reducer specifically designed for
use by manufacturers of veterinary vaccines. It was formulated to provide
optimal cell growth and virus production. VaxMax(TM) has been used by veterinary
vaccine manufacturers to enhance production while lowering overall costs.
The Company sells TCM, TM-235(TM), TCH(TM), and VaxMax(TM) at prices
competitive with serum and other serum-free supplements. (See "Business --
Competition.") The reliability and rigorous quality control involved in
manufacturing TCH, TM-235(TM), TCH(TM), and VaxMax(TM) allow researchers to
purchase as little as a one-week supply of supplements rather than enough for an
entire project as is often necessary with serum-based media. The consistency of
TCM, TM-235(TM), TCH(TM), and VaxMax(TM) reduces the need to qualify the
supplements prior to each use. TCM, TM-235(TM), and TCH(TM) are concentrated to
a level of fifty times in small-volume packages for easier shipment and storage
than comparable amounts of serum, which are typically sold in non-concentrated
form. VaxMax(TM) is concentrated to a level of one hundred times.
CELLVATION(TM)
Cellvation(TM) is a cryopreservative, or cell freezing medium, used in
the storage of cells at ultra-low temperatures. Cellvation(TM) does not contain
any type of serum or dimethyl sulfoxide, both of which have traditionally been
used in cell freezing. Although the Company believes Cellvation(TM) is ideal for
cells grown without serum, it may also be used for cells cultivated in serum.
VIASTEM(TM)
ViaStem(TM) is a cell solution that was developed as a new technology
for ultra-low temperature preservation of critical cells like those required for
bone marrow transplantations. The Company believes that ViaStem(TM) has the
potential of preventing certain complications associated with current
procedures, such as toxicity and nausea. Preliminary data indicates that
ViaStem(TM) increases the viability and preservation of critical cells. Other
potential applications for ViaStem(TM) include preservation of umbilical cord
cells, platelets, and red blood cells. ViaStem(TM) is currently undergoing
pre-clinical testing and the Company anticipates beginning human trials after
the pre-clinical testing is completed.
BASAL MEDIA FORMULATIONS
The Company manufactures eleven products based on standard published
formulations. Liquid basal media contains ultra-filtered water, essential and
non-essential amino acids, vitamins, and inorganic and organic components.
Generally, the basal medium plus a serum-free supplement provides the complete
growth medium.
BUFFERED SALINE SOLUTIONS
The Company manufactures nine standard formulations, of which five
products are available at standard concentration levels of one and ten times.
Applications include cell rinsing, short-term storage, and washing solution for
diagnostic tests.
OTHER CELL BIOLOGY REAGENTS
The Company also manufactures and sells several reagents, including
enzyme, antibiotic, buffer, and amino acid solutions, and custom formulations.
MARKETS AND MARKETING
The Company sells its products primarily to academic, pharmaceutical,
and other commercial laboratories. In addition, the Company markets its products
through distributors, direct mail, telemarketing, new product releases, and
advertisements in trade publications and scientific journals. The Company has
distribution agreements for the sale of its products worldwide including the
USA, Europe, Canada, Japan, Latin America, and the Pacific Rim.
In April of 1994, the Company entered into an agreement with American
Type Culture Collection (ATCC), Rockville, MD, the world's largest public
archive of living biological cultures and genetic materials. ATCC serves the
international scientific community by acquiring, preserving, and distributing
strains of the most diverse collection of organisms and derivative biological
materials in the world. Under the agreement, ATCC will distribute cell lines
adapted to the Company's non-serum products as well as other associated products
worldwide. Orders for cell lines and growth media under this agreement continued
during fiscal 1996.
During July of 1995, the Company entered into a non-exclusive worldwide
distribution agreement with ICN Pharmaceuticals, Inc., Costa Mesa, CA. Under the
agreement, ICN will market Celox's proprietary serum-free cell biology products
and Cellvation(TM). Initial orders under this agreement began in the final
quarter of fiscal year 1995 and continued during fiscal 1996. ICN has requested
to market the Company's entire product line. The Company is currently
negotiating the terms of this potential agreement, excluding ViaStem(TM).
ICN manufactures and markets a broad range of prescription and
over-the-counter pharmaceuticals, medical diagnostic products, and biotechnology
research products in over 60 countries in North and Latin America, Eastern and
Western Europe, and the Pacific Rim countries.
Beginning in fiscal 1997, the Company will provide its proprietary
products to Sigma Chemical Company under a private label distribution agreement.
CUSTOMERS
The Company markets its products to academic, pharmaceutical, and
diagnostic companies. The Company's three largest customers accounted for 55% of
the Company's revenues during fiscal 1996. These customers each accounted for
more than 10% of the Company's revenue for the past fiscal year. The loss of any
one would have a material adverse, short-term effect on the Company. However,
one of the customers is comprised of many labs and a loss of the total account
is unlikely. (See Note 5 of Notes to Financial Statements.)
In December 1991, the Company was awarded a General Services
Administration, Federal Supply Service Agreement ("GSA Agreement"), commencing
in January 1992 and terminating in December 1996. By receiving the GSA
Agreement, the Company's products have been qualified for use by numerous
institutions, including the National Institutes of Health, National Cancer
Institute, Veterans Administration, and United States Department of Agriculture.
The Company is currently evaluating whether it is in the Company's best interest
to renew this agreement.
RESEARCH AND DEVELOPMENT
Although the Company has completed the research and development of its
current products, the Company intends to refine these products, as necessary, to
meet customer requirements and to take advantage of technological changes.
Additionally, the Company intends to continue to identify factors that affect
the growth, differentiation, and replication of cells, particularly human cells.
For the years ended August 31, 1995 and 1996, the Company spent approximately
$146,193 and $132,534, respectively, on research and development. During fiscal
year 1996, the Company's primary research and development efforts continued to
focus on the development of pre-clinical data on ViaStem(TM). This pre-clinical
data is being developed through collaborative agreements with the Hoxworth Blood
Center at the University of Cincinnati and the Memorial Blood Centers of
Minnesota.
During February of 1996, the Company entered into an agreement with the
Department of the Army, Walter Reed Army Institute of Research (WRAIR) that
provides for a Cooperative Research and Development Agreement for Material
Transfer that encompasses the Company's ViaStem(TM) product.
MANUFACTURING AND DISTRIBUTION
The manufacture of the Company's products requires sterilization of
glassware and packaging, assembly of the chemical components, mixing, sterile
filtration, aseptic packaging of the final product, and quality control testing.
The assembly, mixing, filtration, and packaging take approximately two to three
days, after which the supplements are quarantined for a minimum of three weeks
until quality control testing has been completed. The Company tests its
supplements for cell growth potential, purity, sterility, uniformity, and
integrity.
The materials used in the Company's products are available from many
sources, although the Company utilizes a select group of vendors to ensure
consistency. The manufacturing process requires biological, chemical, and
packaging supplies and equipment that are generally available from several
suppliers.
The Company packages and ships its products from its facility in
Hopkins, Minnesota. The Company generally ships within 24 hours after receiving
a purchase order. (See "Item 2 - Properties" for further discussion of Company
facilities.)
COMPETITION
Competition in the biotechnology industry is intense and comes form
independent cell biology companies, major pharmaceutical firms, and
university-affiliated entities both in the United States and in foreign
countries. Certain of these companies have extensive experience in the
biotechnology industry and most have substantially greater financial, technical,
marketing, and management resources than the Company. A significant amount of
cell biology activity is carried out at universities and other non-profit
research organizations. These entities are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
protection for their technology and products. These institutions also compete
with the Company in recruiting highly trained personnel.
The Company's defined serum-free supplements compete with serum and
serum-free growth media products from a number of companies, including
Gibco/Life Technologies, Inc.; Irvine Scientific, Inc.; and Boehringer Mannheim
Corporation. The principal competitive factors for these products are
performance, price, reliability, and packaging. The Company's products compete
on the basis of all four factors, although management believes its principal
competitive advantages are performance and price. The Company's defined basal
media supplements also compete with serum products, which have traditionally
dominated the market for cell growth media. Manufactures of these products
include Gibco/Life Technologies, Inc.; J.R.H. Biosciences, Inc.; Hyclone
Laboratories, Inc.; and Sigma Chemical Company. The Company believes that its
products have a competitive advantage over serum-based products on the basis of
performance, packaging, and price stability. Many of the same manufacturers also
produce products that compete with the Company's basal media formulations,
buffered saline solutions, and other cell biology reagents.
TRADE SECRETS AND PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively with other producers may
be materially dependent on the proprietary nature of its technologies. The
Company pursues a policy of protecting its technological position through the
use of trade secrets. Because patenting requires disclosure of technology to the
public, and because the nature of certain technology renders policing of
infringement difficult, the Company believes its proprietary technology is
better protected by maintaining strict security and secrecy than by obtaining
patents. There can be no assurance, however, that competitors will not
independently develop substantially the equivalent information or techniques, or
otherwise gain access to the Company's know-how, such as through the employment
of scientific personnel who previously worked for the Company.
To protect its trade secrets, the Company marks all of its proprietary
documents confidential, distributes confidential information on a "need-to-know"
basis only and uses employee confidentiality agreements. All of the Company's
employees have signed, and future employees and consultants will sign,
confidentiality agreements under which they agree not to use or disclose the
Company's proprietary information. The Company intends to vigorously enforce
those agreements. There can be no assurance, however, that these confidentiality
agreements will be honored or that others will not independently develop similar
technology. To the extent that such consultants apply technical information
independently developed by them to projects undertaken by the Company, disputes
may arise as to the proprietary rights to such information. The Company will
also require the vendors, licensees, and joint ventures sign confidentiality
agreements whenever appropriate.
The Company believes that it owns or has the right to use all
proprietary technology necessary to license, manufacture, and market its current
cell biology products. It is possible that with respect to other applications of
the Company's technology still being evaluated, licenses under patents held by
others may be required and there can be no assurance that, if required, such
licenses will be available to the Company on acceptable terms.
VIASTEM(TM) PATENTS
In March 1995, the Company filed a patent application for ViaStem(TM)
in the U.S. Patent and Trademark Office. During August 1996, the Company
received a Notice of Allowance from the United States Patent and Trademark
Office for a patent covering ViaStem(TM). The Company has been informed that the
patent will be issued in early December 1996. The Company has also filed the
documents needed for an International Patent Application as required by the
Patent Cooperation Treaty. Due to the unique nature of ViaStem(TM), the Company
pursued the patent process for this product.
GOVERNMENT REGULATIONS
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. The Company is required to conform its
operations to the FDA's "Good Manufacturing Practice" regulations. The FDA
requires pre-manufacturing approval for certain new medical devices, drugs, or
vaccines. This approval generally requires an unequivocal demonstration of the
safety and efficacy of a new device, drug, or vaccine. The FDA approval process
is generally costly and time-consuming. Because the Company does not currently
produce or sell medical devices, drugs, or vaccines, it is not directly affected
by these regulations. However, if the Company's customers incorporate the
Company's products into products that are medical devices, drugs, or vaccines,
such customers will generally be required to obtain such approvals. During the
second quarter of 1994, the Company received its first Drug Master File
Classification from the FDA for the Company's TCM product. This classification
will expedite the FDA approval process for customers who want to use the
Company's TCM product in the manufacture of drugs or drug substances for human
use. The Company is in the process of gaining this status for its other
proprietary products.
Although the Company's present products are not subject to regulations
by the FDA or other governmental agencies, it is possible that future products
such as ViaStem(TM) may be subject to such regulations. To the extent that the
Company is dependent upon new product development, delays in obtaining any
required FDA or other governmental approval may adversely affect the Company.
The Company applied to the FDA for reclassification as a medical device
company so that the Company's products may be used in wider commercial
applications, particularly for the human health care market. In March 1993, the
Company received this registration.
Compliance with federal, state, and local laws, including environmental
laws, does not require any material expenditures by the Company, and the Company
does not believe that such laws have any material impact on the Company's
operations of financial conditions.
EMPLOYEES
As of October 31, 1996, the Company employed a total of four (4)
persons on a full-time basis, of whom two were involved in technical capacities
and two in administrative functions, as well as temporary employees. During the
next 12 months, the Company anticipates hiring additional business development
representatives, technical personnel, and other employees, as needed, based on
growth. The Company also intends to continue to utilize temporary employees, as
needed, in administrative and general laboratory positions.
ITEM 2 - PROPERTIES
The Company's executive offices and laboratories had been located in
approximately 9,000 square feet of leased office space in Hopkins Minnesota, a
suburb of Minneapolis. The lease for offices and laboratories expired in October
1996.
A new facility is currently being constructed in Oakdale, Minnesota, a
suburb of St. Paul. The Company will lease approximately 9,500 square feet of
office, laboratory, and warehouse space in this facility. The Company
anticipates moving into the Oakdale facility during February 1997. In the
interim, the Company has leased office and warehouse space on a month-to-month
basis.
ITEM 3 - LEGAL PROCEEDINGS
The Company is a member of the class in the KPMG Peat Marwick action as
it relates to their audit of the Piper Jaffray Institutional Government Income
Portfolio Fund, on whose behalf litigation has been commenced in federal
district court in Minneapolis, MN. The Company has not directly participated in
the litigation and the Company does not believe any material developments in the
status of the litigation occurred as of the date of this Form 10-KSB.
The Company is a defendant in a wrongful termination lawsuit brought by
a former employee who was in the probationary period at the time of termination.
The Company believes that the lawsuit is without merit. However, it has
participated in an arbitration hearing in order to bring closure to this
lawsuit. As of October 31, 1996, a final arbitration settlement document has not
been executed.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an annual meeting on June 4, 1996. The election of
directors and ratification of the Board of Directors' selection of independent
auditors were submitted to the Company's shareholders.
It was reported at the annual meeting that the required number of
shareholder votes needed to have a quorum for the purpose of transacting
business were not received. As a result, the meeting was adjourned with no
business transacted.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The Company's Common Stock has been traded on the National Association
of Securities Dealers Automated Quotation System since March 9, 1992. Prior to
this, there was no public market for the Company's Common Stock. Beginning
August 15, 1996, the Company's Common Stock began trading on the
Over-the-Counter (OTC) Market. Due to a failure to meet a NASDAQ requirement of
at least $2,000,000 in net tangible assets, the Company was delisted from the
NASDAQ Small Cap Market. The following table sets forth the range of high and
low bid quotations of the Company's Common Stock as reported by the NASDAQ
System for Fiscal 1995, and 1996. Beginning with September 1996, the quotes
represent inter-dealer prices on the OTC market. The OTC market quotations
reflect inter-dealer prices, without retail mark-up or commission and may not
necessarily represent actual transactions.
STOCK PRICES
HIGH LOW
FISCAL YEAR 1995
November 30, 1994 (1st Quarter)............. 0.75 0.75
February 28, 1995 (2nd Quarter)............. 0.81 0.50
May 31, 1995 (3rd Quarter).................. 0.88 0.38
August 31, 1995 (4th Quarter)............... 1.19 0.63
FISCAL YEAR 1996
November 30, 1995 (1st Quarter)............. 1.00 0.75
February 28, 1996 (2nd Quarter)............. 0.88 0.63
May 31, 1996 (3rd Quarter).................. 2.00 0.63
August 31, 1996 (4th Quarter)............... 1.88 0.63
FISCAL YEAR 1997
September 1, 1996 through
October 31, 1996............................ 0.63 0.30
B. HOLDERS
As of October 31, 1996, there were approximately 1100 holders of the
Company's Common Stock.
C. DIVIDENDS
The Company has not paid any dividends on its Common Stock to date and
anticipates that, for the foreseeable future, it will follow a policy of
retaining earnings in order to finance the expansion and development of its
business.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following pertains to the results of operations and financial
position of the Company for the two fiscal years ended August 31, 1995, and
August 31, 1996, and should be read in conjunction with the financial statements
included elsewhere herein.
RESULTS OF OPERATIONS
In fiscal 1993, the Company's primary focus changed from research and
development to increasing revenues from existing products and expanding
manufacturing capabilities. Accordingly, in fiscal 1993 the Company changed its
reporting status from a development-stage company to a regular operating
corporation.
The Company had a net loss of $384,024 in fiscal 1996 compared to net
loss of $346,614 in fiscal 1995. Realized and unrealized investment losses
contributed $317,683 to the total 1995 loss. Offsetting the fiscal 1995
investment loss was a cumulative effect of an accounting change totaling
$253,621. (See Note 2 to Financial Statements.)
Net sales increased 13.8% or $44,677 to $367,546 in 1996 from $322,869
in 1995, primarily because of increased interest in the Company's technology.
Three customers accounted for sales of more than 10% of the Company's annual
sales in 1996 compared to two customers in 1995. (See Note 5 of Notes to
Financial Statements.)
The Company also received interest income of $111,523 in 1996 compared
to $152,573 in 1995. This is primarily due to the Company's cash position as a
result of its March 1992 initial public offering. The decrease between years is
due to a shifting of investment funds out of the Piper Jaffray Institutional
Government Income Fund (the Fund) into bank certificates of deposit which have
lower yields but less volatility, as well as the use of cash in operations.
Due to an unexpected decline in value of the Fund, which was attributed
to the purchase of derivatives, class action litigation by investors began in
1994. In February 1995, Piper Jaffray Companies Inc. announced a $70 million
(less attorney fees) settlement to settle such litigation, subject to court
approval and acceptance of the settlement by a large percentage of the Funds'
shareholders. In August 1995, a federal judge gave preliminary approval to this
settlement, which would be a combination of $20 million in cash and $50 million
in 8% notes payable. Litigation by investors against auditors of the Fund
related to Fund losses has not yet been resolved.
Based upon information available at the time, a receivable for $317,683
was recorded in the second quarter of fiscal 1995 in order to reflect the
estimated proceeds of the Piper Jaffray litigation settlement. This receivable
was adjusted to $133,000 in the fourth quarter when the attorney for the
plaintiffs notified the Company that the actual receivable would approximate
this amount under the final loss calculation approved by the court. During
fiscal 1996, the Company received payments totaling $53,226 plus interest on
this receivable. At August 31, 1996, the remaining balance in the receivable was
$79,774. Subsequent to the fiscal year end, an additional $57,328 plus interest
was received.
Marketing and general and administrative expenses increased by 5% or
$27,226 from $539,383 in fiscal 1995 to $566,609 in fiscal 1996. The increase
between the respective periods was primarily due to increased legal and
professional fees in fiscal 1996. Marketing expenses were comparable between
periods and reflect an ongoing strategy of bringing the Company's products to
market via distribution agreements.
Cost of goods sold decreased by $13,916 over fiscal 1995, and
represented 52% of sales in 1996 compared to 64% of sales in 1995. The Company
expects the cost of products sold as a percentage of sales to continue to
decrease as sales and production levels increase and fixed production costs are
allocated over a larger revenue base. The mix of products also affected the cost
of goods sold comparison between period.
Research and development expenses decreased by 9% or $13,659 to
$132,534 in 1996 as the Company continued to invest time and money in
ViaStem(TM). The slight decrease between years results from the timing and
amount of professional fees associated with the patent filing for ViaStem(TM).
The Company will add additional products in fiscal 1997, though the main focus
will be on increasing sales volume. The Company presently has 36 products.
The loss per common share before the cumulative effect of an accounting
change was ($0.14) in fiscal 1996 compared to a loss of ($0.22) in fiscal 1995.
The cumulative effect of an accounting change equaled $0.09 per share in fiscal
1995. After giving effect to this cumulative effect of an accounting change, the
net loss per share is ($0.14) and ($0.13) in fiscal 1996 and 1995, respectively.
In 1997, the Company will continue its efforts to increase sales volume
through an increase in sales and marketing activities. The sales and marketing
activities will consist of establishing further relationships with independent
sales organizations and distributors, expanding its distribution activities with
ATCC, ICN Pharmaceuticals, and the Sigma Chemical Company, and increased
promotion. The Company expects operating costs to be slightly lower in 1997.
However, there can be no assurance that sales will increase or that the Company
will be profitable in the future. Management does not expect to realize an
operating profit in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company's capital expenditures totaled $15,400. The
Company anticipates that capital expenditures for 1997 will be approximately
$175,000 to fund additional sales, research and development, manufacturing
growth, and tenant improvements.
At August 31, 1996, the Company had cash and short-term investments
totaling $1,388,885. This cash and short-term investment position is from the
proceeds of the Company's March 1992 initial public offering. Management
believes that these funds will be sufficient to fund operating losses and
capital expenditures for 1997. It is anticipated that tenant improvements noted
above will be financed through a local financial institution.
The Board of Directors has authorized the repurchase of up to 300,000
shares of the Company's Common Stock in the open market at prices not to exceed
$1.75 per share. Through August 31, 1996, 136,700 shares were repurchased for
$142,173.
At this time, management is not aware of any factors that would have a
materially adverse impact on cash flow beyond 1997, other than the potential for
continuing losses. Management expects operating losses to continue in 1997.
EFFECTS OF INFLATION
The Company believes inflation is not expected to have a significant
impact on the Company's operations.
SEASONALITY
The Company's operations are not subject to seasonal fluctuations.
ITEM 7 - FINANCIAL STATEMENTS
The information required by this item is incorporated by reference to
the financial statements, reports, and notes beginning on page F-1.
CELOX LABORATORIES, INC.
Minneapolis, Minnesota
Financial Statements
Years Ended August 31, 1996 and 1995
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Celox Laboratories, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheet of Celox Laboratories, Inc. as of
August 31, 1996 and 1995, and the related statements of operations, changes in
stockholders' equity, 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 financial position of Celox Laboratories, Inc. as of
August 31, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As described in Note 2 to the financial statements, in fiscal 1995 the Company
changed its method of accounting for investments to conform with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities".
Certified Public Accountants
Minneapolis, Minnesota
September 26, 1996
<TABLE>
<CAPTION>
CELOX LABORATORIES, INC.
Balance Sheet
- ---------------------------------------------------------------------------------
August 31
ASSETS 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 420,222 $ 919,404
Certificates of deposit 968,663 99,000
Short-term investments, net 730,840
Trade accounts receivable 91,802 57,540
Investor settlement receivable - current 57,328
Accrued interest receivable 19,002 15,358
Note and interest receivable, officer/stockholder
(at Applicable Federal Rate) 14,804
Inventories
Raw materials 52,742 49,776
Finished goods 21,630 16,901
Prepaid expenses 814 2,668
---------- ----------
Total current assets 1,632,203 1,906,291
INVESTOR SETTLEMENT RECEIVABLE 22,446 133,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Laboratory and production equipment 204,882 191,709
Office furniture and equipment 78,764 76,538
Leasehold improvements 64,390 64,390
---------- ----------
348,036 332,637
Less accumulated depreciation 254,432 206,499
---------- ----------
Net equipment and leasehold improvements 93,604 126,138
TOTAL ASSETS $1,748,253 $2,165,429
========== ==========
Notes to Financial Statements are an integral part of this Statement.
</TABLE>
<TABLE>
<CAPTION>
CELOX LABORATORIES, INC.
Balance Sheet
- -------------------------------------------------------------------------------------
August 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 29,748 $ 18,394
Accrued liabilities
Compensation 21,179 23,638
Taxes, other than income taxes 9,273 10,896
Other 3,000
----------- -----------
Total current liabilities 63,200 52,928
DEFERRED RENT 773 5,399
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized, 4,000,000 shares
Issued and outstanding, 2,742,169 shares in
1996 and 1995 27,422 27,422
Additional paid-in capital 5,251,756 5,251,756
Accumulated deficit (3,594,898) (3,210,874)
Unrealized gains on investments available for sale -- 38,798
----------- -----------
Total stockholders' equity 1,684,280 2,107,102
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,748,253 $ 2,165,429
=========== ===========
Notes to Financial Statements are an integral part of this Statement.
</TABLE>
<TABLE>
<CAPTION>
CELOX LABORATORIES, INC.
Statement of Operations
- -------------------------------------------------------------------------------
Years Ended August 31
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 367,546 $ 322,869
COST OF GOODS SOLD 192,523 206,439
--------- ---------
GROSS PROFIT 175,023 116,430
OPERATING EXPENSES
Research and development 132,534 146,193
Marketing 241,926 254,901
General and administrative 324,683 284,482
--------- ---------
Total operating expenses 699,143 685,576
--------- ---------
OPERATING LOSS (524,120) (569,146)
OTHER INCOME (EXPENSE)
Interest and dividend income 111,523 152,573
Gain (loss) on investment 27,750 (317,683)
Investor settlement income 133,000
Other 823 1,021
--------- ---------
Total other income (expense), net 140,096 (31,089)
--------- ---------
LOSS BEFORE INCOME TAX BENEFIT AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (384,024) (600,235)
INCOME TAX BENEFIT -- --
--------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (384,024) (600,235)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- 253,621
--------- ---------
NET LOSS ($384,024) ($346,614)
========= =========
LOSS PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE ($ .14) ($ .22)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- .09
--------- ---------
NET LOSS PER COMMON SHARE ($ .14) ($ .13)
========= =========
Notes to Financial Statements are an integral part of this Statement.
</TABLE>
<TABLE>
<CAPTION>
CELOX LABORATORIES, INC.
Statement of Changes in Stockholders' Equity
Years Ended August 31, 1996 and 1995
- ----------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In
Shares Amount Capital
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE - August 31, 1994 2,764,669 $ 27,647 $ 5,268,681
Common stock repurchased (22,500) (225) (16,925)
Net change in unrealized gains for the year
Net loss --------- ----------- -----------
BALANCE - August 31, 1995 2,742,169 27,422 5,251,756
Net change in unrealized gains for the year
Net loss --------- ----------- -----------
BALANCE - August 31, 1996 2,742,169 $ 27,422 $ 5,251,756
Notes to Financial Statements are an integral part of this Statement.
</TABLE>
CELOX LABORATORIES, INC.
Statement of Changes in Stockholders' Equity
Years Ended August 31, 1996 and 1995
------------------------------------------------------
Unrealized
Accumulated Gains on
Deficit Investments Total
------------------------------------------------------
(17,150)
$38,798 38,798
(346,614) (346,614)
----------- ----------- -----------
(3,210,874) 38,798 2,107,102
(38,798) (38,798)
(384,024) (384,024)
----------- ----------- -----------
($3,594,898) $ - ($1,684,280)
=========== =========== ===========
Notes to Financial Statements are an integral part of this Statement.
<TABLE>
<CAPTION>
CELOX LABORATORIES, INC.
Statement of Cash Flows
- -----------------------------------------------------------------------------------------------------
Years Ended August 31
1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 384,024) ($ 346,614)
Adjustments to reconcile net loss to net
cash used for operating activities
Cumulative effect of accounting change (253,621)
Depreciation 47,933 48,789
Deferred rent expense (4,626) (4,626)
Realized and unrealized (gains) losses on investments (27,750) 317,683
Investor settlement income (133,000)
Changes in assets and liabilities
(Increase) in trade accounts receivables (34,262) (7,848)
(Increase) decrease in accrued interest receivable 7,160 (6,415)
(Increase) decrease in inventories (7,695) 16,706
(Increase) decrease in prepaid expenses 1,854 (2,668)
(Decrease) increase in trade accounts payable 11,354 (39,154)
(Decrease) in accrued liabilities (1,082) (9,208)
----------- -----------
Net cash used for operating activities (391,138) (419,976)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments and
certificates of deposit (1,551,715) (193,696)
Proceeds from sale of short-term investments and
certificates of deposit 1,401,844 1,056,871
Proceeds from investor settlement receivable 53,226
Principal payments received on note receivable -
officer/stockholder 4,000 19,000
Capital expenditures (15,399) (1,002)
----------- -----------
Net cash from (used for) investing activities (108,044) 881,173
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock -- (17,150)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (499,182) 444,047
CASH AND CASH EQUIVALENTS - Beginning of Year 919,404 475,357
----------- -----------
CASH AND CASH EQUIVALENTS - End of Year $ 420,222 $ 919,404
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for income taxes $ -- $ --
=========== ===========
Cash payments for interest $ -- $ --
=========== ===========
Notes to Financial Statements are an integral part of this Statement
</TABLE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1996 and 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Celox Laboratories, Inc. is a biotechnology company that researches, develops,
manufactures and markets cell biology products used in the propagation of cells
derived from mammals, including humans and other species. These specialized cell
growth products are used primarily in academic, pharmaceutical and other
commercial laboratories to improve growth conditions, productivity and quality
of cell-derived medical and other biological products.
The Company grants credit to its customers on an individual basis and generally
requires no collateral. The Company's customers are located throughout the
United States and the Pacific Rim.
REVENUE RECOGNITION
The Company recognizes revenues on the accrual basis, generally when products
are shipped to the customer. "Bill and hold" sales, in which delivery is delayed
at the customer's explicit request, are recognized when conditions for such
revenue recognition are met; principally, the completed product is ready for
delivery and transfer of the risks and rewards of ownership to the buyer has
occurred.
ACCOUNTING ESTIMATES
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates. Significant
estimates include legal matters (described in Note 3), and the income tax
valuation account (Note 6). It is at least reasonably possible that a change in
these estimates will occur in the near term.
CASH AND CASH EQUIVALENTS
For purposes of reporting the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Cash equivalents consist primarily of money market
funds.
At times throughout the year, the Company's cash, cash equivalents and
certificates of deposit in financial institutions may exceed FDIC insurance
limits. The Company has not experienced any losses in such accounts.
INVESTMENTS
Effective September 1, 1994, the Company accounts for investments under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115 (see
Note 2). Under SFAS No. 115, the Company classifies its marketable debt and
equity securities as "available for sale". Securities classified as "available
for sale" are carried in the financial statements at fair value. Realized gains
and losses, determined using average cost method, are included in earnings;
unrealized holding gains and losses are reported as a separate component of
stockholders' equity.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company uses the allowance method to account for uncollectible accounts,
however, no allowance was deemed necessary at August 31, 1996 and 1995.
INVENTORIES
Inventories are stated at the lower of FIFO (first-in, first-out method) cost or
market.
ADVERTISING
The Company expenses advertising when incurred. Total advertising costs were
approximately $29,500 and $14,500, respectively, for the years ended August 31,
1996 and 1995.
DEPRECIATION
Depreciation is computed by the straight-line method using the estimated useful
lives of the individual assets.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of property and equipment for
financial and income tax reporting. Deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be deductible or taxable, when the assets and liabilities are recovered
or settled. Deferred taxes also are recognized for operating and capital losses
that are available to offset future taxable income and tax credits that are
available to offset future income taxes payable. These deferred taxes relating
to the operating and capital losses are fully reserved.
LOSS PER COMMON SHARE
Loss per common share is computed based upon the weighted-average number of
common shares outstanding during the year. The weighted average number of shares
outstanding was 2,742,169 and 2,748,984, respectively, for the years ended
August 31, 1996 and 1995. None of the common stock equivalents have been
included in the computation for the years presented because they are
antidilutive. Fully diluted and primary loss per share are materially the same
for each of the years presented.
NEWLY ISSUED ACCOUNTING STANDARDS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The Company will adopt
this Statement in fiscal 1997. The effect of this Statement has not been
determined, however, the impact on the Company's financial position and results
of operations is not expected to be material.
2. SHORT-TERM INVESTMENTS
The Company invested substantially all of the proceeds from its initial public
offering in investments which the Company understood to be focused on capital
preservation, including the Piper Jaffray Institutional Government Income
Portfolio Fund (the "Fund").
Due to the unexpected decline in value of the Fund, which was attributed to the
purchase of derivatives, class action litigation by investors began in 1994. In
February 1995, Piper Jaffray Companies Inc. announced a $70 million (less
attorney fees) settlement to settle such litigation, subject to court approval
and acceptance of the settlement by a large percentage of the Funds'
shareholders. In August 1995, a Federal judge gave preliminary approval to this
settlement, which would be a combination of $20 million in cash and $50 million
in 8% notes payable. Litigation by investors against the auditors of the Fund
related to Fund losses has not yet been resolved.
In fiscal 1995, the Company adopted Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The
Company has determined that its investment in the Fund qualifies as an
"available for sale" investment. Accordingly, at the date of adoption,
previously recognized unrealized losses of $253,621 were recorded as the
cumulative effect of an accounting change in the statement of operations and as
a valuation account within stockholders' equity. Subsequently, the investment
was reduced by $317,683 (to a new cost basis) reflecting a decline in market
value of the investment judged to be other than temporary. In conjunction with
this adjustment, a receivable of $133,000 was recorded to reflect the estimated
proceeds of the Piper litigation settlement discussed above.
At August 31, 1995 the Fund investment was recorded at its market value of
$730,840 and unrealized gains of $38,798 (based on the new cost basis) were
reflected as an element of stockholders' equity.
In fiscal 1996, the Company sold its remaining shares in the Fund, transferring
such amounts to certificates of deposit at several banks; and collections of the
settlement receivable were made as scheduled.
3. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company conducted its operations from a facility under an operating lease
which expired October 31, 1996. The Company subsequently entered into a
month-to-month lease until the building they intend to move to is constructed.
The anticipated date of this move is February 1997. Although there is no signed
letter of intent or lease, both parties are proceeding under a mutual
understanding of lease payments of approximately $6,400 per month for a seven
year period, with renewal options and leasehold improvement allowance. Rent
expense for the former operating lease was $101,404 and $96,519 for the years
ended August 31, 1996 and 1995, respectively.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The Company anticipates capital expenditures for fiscal 1997 will be
approximately $175,000 to fund additional sales, research and development,
manufacturing growth and tenant improvements. It is anticipated that the
majority of these expenditures will be financed through a local financial
institution.
EXECUTIVE EMPLOYMENT AGREEMENT
The Company has an employment contract with Milo R. Polovina, effective January
25, 1995. The agreement provides that Mr. Polovina will serve as Chairman of the
Board, Chief Executive Officer and President of the Company for a period of ten
years with an annual base salary of not less than $126,000. Mr. Polovina is also
eligible for an annual bonus and performance stock options, determined at the
discretion of the Board of Directors. The bonus shall in no event exceed
one-half of his annual salary. In 1996 and 1995, the Board of Directors
authorized the payment of a $30,000 bonus in each year to Mr. Polovina. No
performance stock options were issued at August 31, 1996 and 1995.
This agreement also contains a provision relating to compensation in the event
of a change in control of the Company followed by a termination of Mr.
Polovina's employment. Upon a change of control, if Mr. Polovina's employment is
terminated by the Company for other than disability or cause (as defined), or is
terminated by Mr. Polovina for good reason (as defined), he will be entitled to
receive his entire annual base salary, in twelve equal monthly payments, for the
five calendar years following the date of termination.
LEGAL MATTERS
The Company is a defendant in a wrongful termination lawsuit brought by a former
employee. The Company believes that the lawsuit is without merit, and intends to
defend its position accordingly. While the ultimate results of this litigation
cannot be estimated, management does not expect that it will have a material
adverse effect on the Company's financial position or results of operations.
4. STOCKHOLDERS' EQUITY
REPURCHASE OF COMMON STOCK
Effective July 30, 1993, the Board of Directors authorized the repurchase of up
to 300,000 shares of the Company's common stock in open market purchases at
prices not to exceed $1.75 per share. As of August 31, 1996 and 1995, the
Company had repurchased 136,700 shares at prices of $.85 to $1.58 per share.
STOCK OPTIONS AND WARRANTS
The Company has issued certain common stock warrants and has stock option plans
which permit the granting of incentive stock options or nonqualified options to
key employees and outside directors. Options are granted at 100 percent of the
market value at the date of grant and are exercisable over periods up to ten
years from grant date in various stages. One stock option plan, initiated prior
to the Company's initial public offering (IPO), includes 200,000 shares of
common stock available for future issuance at August 31, 1996 and 1995. Another
stock option plan, put into effect after the IPO, reserved 549,300 shares for
issuance upon exercise of warrants and options at August 31, 1996 and 1995. No
options or warrants have been exercised at August 31, 1996 and 1995.
At August 31, 1996 and 1995, options and warrants for 376,500 and 342,500
shares, respectively, were exercisable.
A summary of outstanding options and warrants follows:
Number Price
of Shares Per Share
--------- ---------
Outstanding at August 31, 1994 416,300 $1.00-$4.20
Granted 15,000 $.81-$ .88
Cancelled or expired (53,800)
Outstanding at August 31, 1995 377,500 $.81-$4.20
Granted 35,000 $.88-$1.00
Cancelled or expired (11,000)
Outstanding at August 31, 1996 401,500 $.81-$4.20
5. MAJOR CUSTOMERS
During fiscal 1996, sales to two customers were approximately 45% of net sales
and sales to another institution, which is comprised of many laboratories, were
approximately 10% of net sales. During fiscal 1995, sales to one of the same
customers were 25% of net sales and sales to the same institution were
approximately 14% of net sales.
At August 31, 1996 one customer comprised 81% of the total accounts receivable
balance and one customer comprised 43% of the total accounts receivable at
August 31, 1995.
6. INCOME TAXES
Differences between the income tax benefit at the Federal statutory rates and
the recorded benefit are as follows:
1996 1995
---- ----
Amount computed using the Federal statutory rate ($131,000) ($ 118,000)
Increase (reduction) in taxes resulting from:
State taxes, net of Federal tax benefit (12,000) (11,000)
Change in valuation allowance 143,000 129,000
-------- ---------
Total benefit $ - $ -
======== =========
The deferred income tax asset consists of the following at August 31, 1996 and
1995:
1996 1995
---- ----
Capital loss carryforwards $ 316,000 $ 285,000
Net operating loss carryforwards 1,055,000 871,000
Tax credit carryforwards 41,000 31,000
Unrealized capital losses on investments - 82,000
----------- -----------
Subtotal 1,412,000 1,269,000
Valuation allowance (1,412,000) (1,269,000)
----------- -----------
$ - $ -
============ ============
At August 31, 1996, the Company had net operating loss carryforwards and tax
credit carryforwards available to reduce future taxable income, which expire as
follows:
Net Operating Loss Tax Credits
2002 $ 75,000
2003 196,000
2004 223,000 $ 9,000
2005 93,000
2006 98,000 2,000
2007 488,000 3,000
2008 407,000 2,000
2009 431,000 3,000
2010 390,000 10,500
2011 376,000 11,500
---------- -------
Totals $2,777,000 $41,000
========== =======
At August 31, 1996, the Company had capital loss carryforwards of approximately
$928,000, which must be offset by capital gains in order to be used. These
capital loss carryforwards expire as follows:
Capital Loss
1999 $771,000
2000 -
2001 157,000
--------
Totals $928,000
========
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, none of which
are held for trading purposes, are as follows at August 31, 1996:
Carrying Fair
Amount Value
------ -----
Cash and cash equivalents $420,222 $420,222
Certificates of deposit 968,663 968,663
Investor settlement receivable 79,774 See below
The carrying values of cash and cash equivalents and certificates of deposit
approximate fair values. It is not currently practicable to estimate the fair
value of the investor settlement receivable. Because this receivable contains
unique terms which were negotiated with the institution as part of class action
litigation, there is no readily determinable similar instrument on which to base
an estimate of fair value.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information regarding the
directors and executive officers of the Company as of August 31, 1996. Directors
hold office until the next Annual Shareholder's meeting.
NAME AGE POSITION
---- --- --------
Milo R. Polovina 40 Chairman of the Board, President
Chief Executive Officer,
Treasurer, and Secretary
Gerald L. Olson 62 Director
Johnny W. Thompson 44 Director
Gerald W. Orr 60 Director
MILO R. POLOVINA has been President, Chief Executive Officer,
Treasurer, and Secretary of the Company and has served as a director since 1985.
GERALD L. OLSON was elected as a director by the Board of Directors in
March 1996 to fill a vacancy on the Company's Board of Directors. Mr. Olson is
President of the Rowland Company, a marketing and public relations firm located
in St. Paul, Minnesota, and has served in that capacity since January 1996.
Prior to 1996, Mr. Olson was an Executive Vice President at the Rowland Company
from 1994 to 1995. From 1992 through 1994, Mr. Olson served as President of
Olson and Associates, a public affairs practice located in Victoria, Minnesota.
Prior to that, Mr. Olson was President of the Minnesota Chamber of Commerce
located in St. Paul Minnesota from 1990 through 1992. From 1989 to 1990, Mr.
Olson served as Assistant Secretary for Legislation in the U.S. Department of
Health and Human Services in Washington, D.C., during the Bush Administration.
Mr. Olson also serves on the Board of Directors of Allina Foundation and the
Mankato State University Foundation.
JOHNNY W. THOMPSON was elected as a director by the Board of Directors
in April 1994 to fill a vacancy on the Company's Board of Directors. Mr.
Thompson is Executive Vice President of the Rowland Company, a marketing and
public relations firm located in St. Paul, Minnesota, and has served in that
capacity since July 1994. From April 1991 to July 1994, Mr. Thompson was
Executive Vice President of Himle Horned Incorporated, a public relations and
marketing firm located in Bloomington, Minnesota. From 1989 to 1991, Mr.
Thompson operated his own strategic communications consultancy business in
Minneapolis, Minnesota.
GERALD W. ORR was elected a director by the Company's Board of
Directors in July 1994 to fill a vacancy on the Company's Board. Since 1965, Mr.
Orr has served as the Executive Director of the American Lung Association of
Hennepin County.
There are no family relationships among any of the executive officers
or directors of the Company.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board was established to advise the
Company on specific product opportunities and on certain advances in
biotechnology.
Steven T. Rosen, M.D., F.A.C.P., is the Director of the Cancer Center
and the Cancer Program, Northwestern Memorial Hospitals, Chicago, Illinois. He
is also the Genevieve Teuton Professor of Medicine at Northwestern University
Medical School, Chicago, Illinois. Dr. Rosen is the Editor-in-Chief of
CONTEMPORARY ONCOLOGY. Dr. Rosen has authored or co-authored over 160 technical
papers.
Robert G. McKinnel, Ph.D., is a professor of genetics and cell biology
at the University of Minnesota. Dr. McKinnell is a Fellow of the American
Association for the Advancement of Science and the Linnean Society of London. He
was a Visiting Fellow of the Royal Society of London at Oxford University. He is
a member of the Editorial Board of DIFFERENTIATION and is the Secretary and
Treasurer of the International Society of Differentiation, Inc. He is the author
or co-author of more than 100 technical papers.
The Company intends to add additional members to the Scientific
Advisory Board as appropriate.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in Ownership on Forms 4 or 5 with the Securities
and Exchange Commission (SEC) and the NASDAQ Small-Cap Market. Such officers,
directors, and ten percent shareholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for such persons, the Company believes that, during the fiscal year
ended August 31, 1996, all Section 16(a) filing requirements applicable to its
officers, directors, and ten percent stockholders were compiled with.
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for
each of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company, the only officer whose annual compensation exceeded
$100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Fiscal Salary Bonus Compensation Options
Principal Position Year $ $ $(1) #
------------------ ---- ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Milo R. Polovina 1996 135,600 30,000 -- 120,000
President, Chief 1995 132,300 30,000 -- 103,000
Executive Officer, 1994 121,200 30,000 -- 145,000
Treasurer, and Secretary
(1) The total amount of personal benefits paid to Mr. Polovina for
fiscal 1996 was less than the lesser of (i) $50,000 or (ii) 10% of
his total reported salary and bonus.
</TABLE>
Milo R. Polovina was granted options to purchase 20,000 shares during
fiscal 1996. No executive officer exercised options during fiscal 1996. The
following table sets forth, for the Chief Executive Officer, the number and
year-end value of unexercised options. (All such options were granted at the
fair market value of the underlying shares as of the respective grant dates.)
<TABLE>
<CAPTION>
OPTION EXERCISES AND VALUE OF OPTIONS AT END OF FISCAL 1996
Number of Unexercised Value of Unexercised
Options at End of In-the-Money Options
Fiscal 1996 at End of Fiscal 1996(1)
--------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Milo R. Polovina 120,000 ---- 0 ----
(1) Calculated on the basis of the fair market value of the
underlying securities at August 31, 1996, ($0.63) minus the
exercise price per share (ranging from $1.00 to $1.50).
</TABLE>
STOCK OPTIONS AND WARRANTS
The Company has issued certain Common Stock warrants and has stock
option plans which permit the granting of incentive stock options or
non-qualified options to key employees and outside directors. Options are
granted at 100 percent of the market value at the date of grant and are
exercisable over periods up to ten years from grant date in various stages. One
stock option plan, initiated prior to the Company's initial public offering
(IPO), includes 200,000 shares of Common Stock available for future issuance at
August 31, 1996 and 1995. Another stock option plan, put into effect after the
IPO, reserved 549,300 shares for issuance upon exercise of warrants and options
at August 31, 1996 and 1995. No options or warrants have been exercised at
August 31, 1996 and 1995.
At August 31, 1996 and 1995, options and warrants for 376,500 and 342,500
shares, respectively, were exercisable. The total options and warrants
outstanding as August 31, 1996 are 401,500, with exercise prices of $0.81 to
$4.20.
EXECUTIVE EMPLOYMENT AGREEMENT
In January 1995, the Company entered into a revised employment
agreement with Mr. Milo R. Polovina. The agreement provides that Mr. Polovina
will serve as Chairman of the Board, Chief Executive Officer, and President of
the Company for a period of ten years and will receive a minimum annual base
salary of $126,000. The Agreement automatically extends for an additional period
of one year on each anniversary of the agreement; provided, however, that if the
agreement is terminated for any reason other than (i) a change in control, (ii)
voluntary resignation, (iii) death, (iv) disability, (v) retirement, or (vi)
cause, Mr. Polovina will be entitled to receive his annual base salary and
related benefits for a period of five calendar years following the termination.
Mr. Polovina is also eligible for an annual bonus, determined in the
discretion of the Board of Directors, which shall in no event exceed one-half of
his annual salary. This agreement also contains a provision relating to
compensation in the event of a change in control of the Company followed by a
termination of Mr. Polovina's employment. A "Change in Control" will occur if
any person, other than Mr. Polovina, becomes the beneficial owner of securities
representing 30% or more of the combined voting power of the outstanding
securities of the Company, the stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another corporation,
or if the persons who were directors of the Company immediately prior to the
change in control cease to constitute a majority of the Board of the Directors
of the Company or of its successor. Upon a change in control, if Mr. Polovina's
employment is terminated by the Company for other than disability or cause (as
defined), he will receive his annual composition pursuant to the agreement for
the ten year term then remaining. In addition, in such a situation, Mr. Polovina
will be entitled to require the Company to purchase his shares in the Company at
their then fair market value.
DIRECTOR COMPENSATION
Effective September 1992, non-employee directors receive $250 for each
Board of Directors meeting attended, and for each committee meeting held at a
date other than a date on which a Board meeting is held.
Under the Company's Director Stock Option Program (the "Program"), the
Company has granted stock options to non-employee directors and intends to
continue to grant stock options to attract additional directors. Under the
Program, each non-employee is granted an initial option for 15,000 shares of
Common Stock for serving on the Board of Directors. These options vest at 5,000
shares per year for three years commencing one year from the date of grant. The
exercise price of any options granted will be not less than the fair market
value of the underlying Common Stock on the date of grant. Directors are also
eligible to receive supplemental options on an annual basis.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of October 31, 1996 by:
(i) each director of the Company, (ii) all directors and executive officers as a
group, (iii) the Chief Executive Officer, and (iv) each shareholder who own more
than 5% of the outstanding shares of Common Stock. Except as otherwise
indicated, the Company believes each person listed below possesses sole voting
and investment power with respect to the shares indicated. Beneficial ownership
means the shareholder has voting or investment power with respect to the shares.
Shares of Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days are deemed outstanding for computing the percentage
of the person holding such options or warrants, but are not deemed outstanding
for computing the percentage of any other person.
NAME AND ADDRESS SHARES BENEFICIALLY OWNED
OF BENEFICIAL OWNER NUMBER PERCENT
------------------- ------ -------
DIRECTORS AND EXECUTIVE OFFICERS
Milo R. Polovina 717,600(1) 24.8
856 South Fifth Street
Hopkins, MN 55343
Gerald L. Olson 0 *
420 Summit Avenue
St. Paul, MN 55102
Johnny W. Thompson 14,000(2) *
420 Summit Avenue
St. Paul, MN 55102
Gerald W. Orr 12,200(3) *
1829 Portland Avenue
Minneapolis, MN 55404
All directors and executive officers 743,800(4) 25.5
as a group (4 persons)
PRINCIPAL HOLDERS
Arnold Espeseth 159,800 5.8
Winger, MN 56592
------------------------------
* Represents less than 1% of the outstanding shares.
(1) Includes (a) 560,100 shares of stock owned by Mr. Polovina;
(b) 2,500 shares owned by Mr. Polovina's wife, an employee of
the Company; (c) 3,000 shares owned by Mr. Polovina's
children; (d) options granted to Mr. Polovina for exercise
within 60 days to purchase 120,000 shares; and (e) options
granted to Mr. Polovina's wife for exercise within 60 days to
purchase 32,000 shares. (Mr. Polovina's spouse was granted the
options while an employee of the Company but prior to her
marriage to Mr. Polovina.)
(2) Includes (a) 4,000 shares of stock owned by Mr. Thompson and
(b) options granted to Mr. Thompson under the program,
available for exercise within 60 days to purchase 10,000
shares.
(3) Includes (a) 2,200 shares of stock owned by Mr. Orr and (b)
options granted Mr. Orr under the program plan, available for
exercise within 60 days to purchase 10,000 shares.
(4) Includes Outstanding shares and options described in the
preceding footnotes.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1989, the Company adopted a performance stock option program
that authorizes the Board of Directors to grant Mr. Polovina an annual stock
option to purchase 1% of the Company's outstanding stock at an exercise price
equal to the fair market value of the Common Stock determined as of the date of
grant for each of the fiscal years ending in 1990 through 1994. These stock
options are exercisable for five years from the end of each fiscal year. No
options were granted for the year ended August 31, 1994.
In March 1992, Milo R. Polovina, the Company's President, borrowed
$60,000 from the Company and issued a promissory note to the Company for that
amount. In 1993 through 1995, $56,000 was repaid to the Company by Mr. Polovina.
The balance of the note and accrued interest was repaid in fiscal 1996.
In October 1993, the Company granted each non-employee director then
serving on the Company's Board of Directors a non-statutory five-year option to
purchase 5,000 shares of Common Stock at $1.50 per share. In October 1993, the
Board of Directors reset the exercise price to $1.50 per share on all options
previously granted to the Board that had exercise prices equal to or in excess
of $1.75 per share. The Board adopted that adjustment because of the belief
that, due to then-current market conditions, such options had lost value to the
option holders and did not provide adequate incentives for the option holders'
efforts on behalf of the Company.
The Company believes that the exercise price for the options and
warrants granted in the transactions described above were at their then fair
market value of the Common Stock.
Mr. Polovina has an employment agreement with the Company. (See
"Executive Compensation -- Executive Employment Agreement".)
PART IV
ITEM 13 - EXHIBITS, AND REPORTS ON FORM 8-K
A. Documents filed:
1. FINANCIAL STATEMENTS. The following documents are filed as
part of this report on Form 10-KSB:
PAGE
Report of Independent Auditors.......................... F-1
Balance Sheet -- August 31, 1996 and 1995............... F-2
Statement of Operations -- Years ended
August 31, 1996 and 1995............................ F-4
Statement of Changes in Shareholders' Equity --
Years ended August 31, 1996 and 1995................ F-5
Statement of Cash Flows -- Years ended
August 31, 1996 and 1995............................ F-7
Notes to Financial Statements........................... F-8
2. EXHIBITS.
3.1 Articles of Incorporation*
3.2 By-Laws*
10.1 Lease Agreement with R.L. Johnson for premises
located at 856 South Fifth Street, Hopkins,
Minnesota, dated May 9, 1991*
10.2 Employment Agreement with Milo R. Polovina dated
September 25, 1991*
10.3 Stock Plan*
10.4 Director Stock Option Program*
10.5 Employee Stock Purchase Plan+
25 Power of Attorney (included on signature page)
------------------------
* Incorporated by reference to the Company's
Registration Statement on Form S-18 (No. 33-42573C),
which became effective on March 9, 1992.
+ Incorporated by reference to Company's Form 10-KSB
dated 8/31/95.
B. Reports on Form 8-K:
On September 26, 1996, the Company filed a Form 8-K that reported that
the NASDAQ Stock Market delisted Celox Laboratories, Inc., for failing
to meet an exchange requirement of maintaining net tangible assets of
at least $2,000,000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CELOX LABORATORIES, INC.
By: /s/ Milo R. Polovina
---------------------------------
Milo R. Polovina
Chairman of the Board
and President and CEO
Date: November 22, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Milo R. Polovina as attorney-in-fact for him in
any and all capacities, to sign any amendments to this Report on Form 10-KSB and
to file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, may do or cause to be done by virtue
of hereof.
Pursuant to the requirements of 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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Milo R. Polovina Chairman of the Board, November 22, 1996
- --------------------------------- President, CEO and Director
Milo R. Polovina (principal executive officer
and principal financial officer)
/s/ Johnny W. Thompson Director November 22, 1996
- ---------------------------------
Johnny W. Thompson
/s/ Gerald W. Orr Director November 22, 1996
- ---------------------------------
Gerald W. Orr
/s/ Gerald L. Olson Director November 22, 1996
- ---------------------------------
Gerald L. Olson
</TABLE>
