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, 1997
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.)
1311 Helmo Avenue, St. Paul, Minnesota 55128
(Address of principal executive offices)
Issuer's telephone number: (612) 730-1500
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 $221,407.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on October
31, 1997 as reported on the Over-the-Counter Market, was approximately
$1,963,990. 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, 1997, the registrant had outstanding 2,742,169 shares
of Common Stock.
Transitional Small Business Disclosure Format. ____ Yes __X__ No
Exhibit Index is located on page 16.
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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.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology.
There are certain important factors that could cause results to differ
materially from those anticipated by some of these forward-looking statements.
Investors are cautioned that all forward- looking statements involve risks and
uncertainty. The factors, among others, that could cause actual results to
differ materially include the Company's ability to execute its business plan.
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.
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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).
<PAGE>
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.
<PAGE>
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 1997.
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 have continued through fiscal 1997. During the
third quarter of fiscal 1997, the Company also began to supply ICN with the rest
of its product line, except for 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.
During fiscal 1997, the Company began providing 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 two largest customers accounted for 34% of
the Company's revenues during fiscal 1997. 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.
Management determined that it was in the Company's best interest to allow this
agreement to terminate without renewal. Customers who had been ordering under
the GSA agreement have continued to order from the Company subsequent to the
termination of the 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, 1996 and 1997, the Company spent approximately
$132,534 and $47,686, respectively, on research and development. During fiscal
year 1997, 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. Research and developmental expenses will fluctuate based on the
status of pre-clinical and clinical trials for ViaStem(TM).
<PAGE>
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
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 St.
Paul, 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
generally 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.
<PAGE>
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. The Company received the U.S. Patent in
early December 1996. This patent provides protection of the Company's
ViaStem(TM) technology through March of 2015. The Company has also filed the
documents needed for an International Patent Application as required by the
Patent Cooperation Treaty. Initial reports from the various countries that have
reviewed the international patent application have been positive. 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.
<PAGE>
EMPLOYEES
As of October 31, 1997, 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 are located in a new
facility in St. Paul, Minnesota. The Company leases approximately 9,500 square
feet of office, laboratory, and warehouse space in this facility. The Company
moved into the St. Paul facility during March 1997.
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. The Company expects that attorneys for the plaintiff in this
action will appeal the decision of the federal court in Minneapolis to grant
partial summary judgement to KPMG Peat Marwick.
The Company was 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 was totally without merit.
During fiscal 1997 however, the Company agreed to a settlement reached as a
result of court ordered mediation.
On November 21, 1996, the Company filed a lawsuit in Hennepin County
Court, in the State on Minnesota, against its former landlord claiming, among
other things, that the landlord repeatedly violated the terms of the lease
agreement in the area of the tenant's right to quiet enjoyment of the leased
space. Currently, both parties have been ordered by the Court to participate in
a mediation process.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
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 1996, and 1997. 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 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
November 30, 1996 (1st Quarter)..................... 0.63 0.30
February 28, 1997 (2nd Quarter)..................... 0.65 0.30
May 31, 1997 (3rd Quarter).......................... 0.50 0.34
August 31, 1997 (4th Quarter)....................... 0.63 0.34
FISCAL YEAR 1998
September 1, 1997 through
October 31, 1997.................................... $1.13 $0.34
B. HOLDERS
As of October 31, 1997, there were approximately 900 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.
<PAGE>
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, 1996, and
August 31, 1997, 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 $388,473 in fiscal 1997 compared to net
loss of $384,024 in fiscal 1996. Reduced operating expenses offset a decline in
sales.
Net sales decreased 40% or $146,139 to $221,407 in 1997 from $367,546
in 1996, primarily due to the timing of orders received from a manufacturing
customer. Additionally, the Company moved into its new facility in April, 1997
and had to re-validate all of the production equipment. The re-validation
limited the production of products during the third quarter of the fiscal year.
Two customers each accounted for sales of more than 10% of the Company's annual
sales in 1997 compared to three customers in 1996. (See Note 5 of Notes to
Financial Statements.)
The Company also received interest income of $67,820 in 1997 compared
to $111,523 in 1996. 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 the final loss calculation approved by the court a
receivable for litigation settlement in the amount of $133,000 was set up at
August 31, 1995. During fiscal 1996, the Company received payments totaling
$53,226 plus interest on this receivable. During fiscal 1997, the Company
received payments totalling $57,328 plus interest under the settlement
agreement. As of August 31, 1997, the balance remaining in the settlement
receivable was $22,446. Subsequent to the fiscal year end, an additional $15,807
plus interest was received.
Marketing and general and administrative expenses decreased by 17% or
$97,081 from $566,609 in fiscal 1996 to $469,528 in fiscal 1997. The decrease
between the respective periods was the amount and timing of advertising,
promotional materials and trade show expenses. General and administrative
expenses were comparable between periods as moving costs were offset by lower
rent and operating expenses in the current fiscal year.
Cost of goods sold decreased by $61,105 over fiscal 1996, and
represented 59% of sales in 1997 compared to 52% of sales in 1996. The increase
in the cost of goods sold as a percentage of sales results from fewer sales to
cover fixed manufacturing costs. The Company expects the cost of products sold
as a percentage of sales 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.
<PAGE>
Research and development expenses decreased by 64% or $84,848 to
$47,686 in 1997. The decrease between years results from the timing and amount
of professional fees and other costs associated with the patent filing for
ViaStem(TM). Professional fees for research and development in fiscal 1998 will
include international filing fees for the international patent on ViaStem(TM).
The Company will add additional products in fiscal 1998, though the main focus
will be on increasing sales volume. The Company presently has over 30 products.
The loss per common share was ($0.14) in fiscal 1997 as well as ($0.14)
in fiscal 1996.
In 1998, the Company will continue its efforts to increase sales volume
through an increase in 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. In addition, the Company
has instituted a focused advertising/marketing strategy which will increase
certain sales and marketing expenses for fiscal 1998. The Company expects
operating costs to remain flat in 1998. 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 1998.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company's capital expenditures totaled $115,558. The
Company anticipates that capital expenditures for 1998 will be approximately
$50,000 to fund additional sales, research and development, and manufacturing
growth.
At August 31, 1997, the Company had cash and short-term investments
totaling $1,145,393. 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 1998.
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, 1997, 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 1998, other than the potential for
continuing losses. Management expects operating losses to continue in 1998.
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.
<PAGE>
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, 1997 and 1996, 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, 1997 and 1996 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Certified Public Accountants
Minneapolis, Minnesota
September 25, 1997
F-1
<PAGE>
CELOX LABORATORIES, INC.
Balance Sheet
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
August 31
ASSETS 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 408,274 $ 420,222
Certificates of deposit 737,119 968,663
Trade accounts receivable 26,562 91,802
Investor settlement receivable - current 22,446 57,328
Accrued interest receivable 16,956 19,002
Inventories
Raw materials 30,142 52,742
Finished goods 16,713 21,630
Prepaid expenses 1,058 814
---------- ----------
Total current assets 1,259,270 1,632,203
INVESTOR SETTLEMENT RECEIVABLE 22,446
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Laboratory and production equipment 204,882 204,882
Office furniture and equipment 78,764 78,764
Leasehold improvements 115,558 64,390
---------- ----------
399,204 348,036
Less accumulated depreciation 229,010 254,432
---------- ----------
Net equipment and leasehold improvements 170,194 93,604
OTHER ASSETS
Patents, net 18,789
---------- ----------
TOTAL ASSETS $1,448,253 $1,748,253
========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-2
<PAGE>
CELOX LABORATORIES, INC.
Balance Sheet
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
August 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable $ 94,879
Trade accounts payable 26,321 $ 29,748
Accrued liabilities
Compensation 21,438 21,179
Taxes, other than income taxes 6,808 9,273
Other 3,000 3,773
----------- -----------
Total current liabilities 152,446 63,973
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
1997 and 1996 27,422 27,422
Additional paid-in capital 5,251,756 5,251,756
Accumulated deficit (3,983,371) (3,594,898)
----------- -----------
Total stockholders' equity 1,295,807 1,684,280
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,448,253 $ 1,748,253
=========== ===========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-3
<PAGE>
CELOX LABORATORIES, INC.
Statement of Operations
- ---------------------------------------------------------------
Years Ended August 31
1997 1996
- ---------------------------------------------------------------
NET SALES $ 221,407 $ 367,546
COST OF GOODS SOLD 131,418 192,523
--------- ---------
GROSS PROFIT 89,989 175,023
OPERATING EXPENSES
Research and development 47,686 132,534
Marketing 153,738 241,926
General and administrative 315,790 324,683
--------- ---------
Total operating expenses 517,214 699,143
--------- ---------
OPERATING LOSS (427,225) (524,120)
OTHER INCOME (EXPENSE)
Interest and dividend income 67,820 111,523
Investment gain 27,750
Interest expense (2,609)
Other (26,459) 823
--------- ---------
Total other income, net 38,752 140,096
--------- ---------
LOSS BEFORE INCOME TAX BENEFIT (388,473) (384,024)
INCOME TAX BENEFIT -- --
--------- ---------
NET LOSS ($388,473) ($384,024)
========= =========
NET LOSS PER COMMON SHARE ($ .14) ($ .14)
========= =========
Notes to Financial Statements are an integral part of this Statement.
F-4
<PAGE>
CELOX LABORATORIES, INC.
Statement of Changes in Stockholders' Equity
Years Ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Common Stock Additional
-------------------- Paid-In
Shares Amount Capital
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCES - August 31, 1995 2,742,169 $27,422 $5,251,756
Net change in unrealized gains for the year
Net loss
--------- ------- ----------
BALANCES - August 31, 1996 2,742,169 27,422 5,251,756
Net loss
--------- ------- ----------
BALANCES - August 31, 1997 2,742,169 $27,422 $5,251,756
========= ======= ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-5
<PAGE>
CELOX LABORATORIES, INC.
Statement of Changes in Stockholders' Equity
Years Ended August 31, 1997 and 1996
- --------------------------------------------------------------------------------
Unrealized
Accumulated Gains on
Deficit Investments Total
- --------------------------------------------------------------------------------
($3,210,874) $38,798 $2,107,102
(38,798) (38,798)
(384,024) (384,024)
---------- ---------- ----------
(3,594,898) 1,684,280
(388,473) (388,473)
---------- ---------- ----------
($3,983,371) $ -- $1,295,807
========== ========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-6
<PAGE>
CELOX LABORATORIES, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Years Ended August 31
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 388,473) ($ 384,024)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation 38,968 47,933
Deferred rent expense (773) (4,626)
Realized and unrealized gains on investments (27,750)
Changes in assets and liabilities
(Increase) decrease in trade accounts receivable 65,240 (34,262)
Decrease in accrued interest receivable 2,046 7,160
(Increase) decrease in inventories 27,517 (7,695)
(Increase) decrease in prepaid expenses (244) 1,854
(Decrease) increase in trade accounts payable (3,427) 11,354
(Decrease) in accrued liabilities (2,206) (1,082)
----------- -----------
Net cash used for operating activities (261,352) (391,138)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments and
certificates of deposit (933,549) (1,551,715)
Proceeds from sale of short-term investments and
certificates of deposit 1,165,093 1,401,844
Proceeds from investor settlement receivable 57,328 53,226
Principal payments received on note receivable -
officer/stockholder 4,000
Investment in ViaStem patent (18,789)
Capital expenditures (115,558) (15,399)
----------- -----------
Net cash from (used for) investing activities 154,525 (108,044)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable, net 94,879
----------- -----------
Net cash from financing activities 94,879 --
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,948) (499,182)
CASH AND CASH EQUIVALENTS - Beginning of Year 420,222 919,404
----------- -----------
CASH AND CASH EQUIVALENTS - End of Year $ 408,274 $ 420,222
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for income taxes $ -- $ --
=========== ===========
Cash payments for interest $ 2,609 $ --
=========== ===========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-7
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
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 the income tax valuation account (Note 6). It is at least
reasonably possible that this estimate could change.
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.
F-8
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
INVESTMENTS
The Company accounts for investments under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115. 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.
In fiscal 1996, the Company sold all of its remaining shares in the Piper
Jaffray Institutional Government Income Portfolio Fund, transferring such
amounts to certificates of deposit at several banks, where the Company currently
is investing their surplus cash.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company uses the allowance method to account for uncollectible accounts,
however, no allowance was deemed necessary at August 31, 1997 and 1996.
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 $20,800 and $29,500, respectively, for the years ended August 31,
1997 and 1996.
DEPRECIATION
Depreciation is computed by the straight-line method using the estimated useful
lives of the individual assets.
F-9
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
AMORTIZATION OF INTANGIBLE ASSETS
During fiscal 1997, Celox received a patent for ViaStem. The costs associated
with this patent were capitalized and are being amortized by the straight-line
method over 17 years. This patent provides protection of the ViaStem product
until March 2015.
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.
NET LOSS PER COMMON SHARE
Net 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 for the years ended August 31, 1997 and 1996. 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 fiscal 1997, the Company adopted Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Management considers the
options to be immaterial to the financial statements taken as a whole primarily
because all of the stock option prices are above market prices.
In fiscal 1998, the Company will adopt Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE and Statement of Financial Accounting
Standards No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. The new
calculations and disclosures of these new Standards are not expected to
materially affect the financial statements of the Company.
F-10
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
NEWLY ISSUED ACCOUNTING STANDARDS - Continued
In fiscal 1999, the Company will adopt Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME and Statement of Financial
Accounting Standards No. 131, SEGMENTS OF AN ENTERPRISE. Again, the new
reporting requirements of these Standards are not expected to materially affect
the financial statements of the Company.
2. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
During fiscal 1996, the Company conducted its operations from a facility under
an operating lease which expired on October 31, 1996. In fiscal 1997, the
Company conducted operations from a temporary facility in a month-to-month lease
until the new building they are currently leasing was constructed. They moved
into this new location in April 1997 under an operating lease which has an
initial term expiring January 31, 2004 with an option for two - five year
renewal terms. The lease requires payment for certain operating costs. Rent
expense under the former operating lease was $101,404 during fiscal 1996 and
$64,789 for the new leases during fiscal 1997.
Future minimum base lease payments, by fiscal year, are as follows:
1998 $ 73,726
1999 73,726
2000 73,726
2001 73,726
2002 73,726
Thereafter 104,445
--------
$473,075
========
F-11
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
2. COMMITMENTS AND CONTINGENCIES - Continued
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. The Board of Directors authorized the payment of
$15,000 and $30,000 in 1997 and 1996, respectively, as a bonus to Mr. Polovina.
No performance stock options were issued at August 31, 1997 and 1996.
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 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. The Company has not directly participated in the
litigation. The Company expects that attorneys for the plaintiff in this action
will appeal the decision of the federal court in Minneapolis to grant partial
summary judgement to KPMG Peat Marwick.
The Company was a defendant in a wrongful termination lawsuit brought by a
former employee who was in the probationary period at the time of the
termination. The Company believes that the lawsuit was totally without merit.
However, during fiscal 1997, the Company agreed to a settlement for an amount
which was not material to the financial statements.
The Company has filed a lawsuit against its former landlord and adjacent tenant,
claiming, among other things, that the landlord repeatedly violated the terms of
the lease agreement in the area of the tenant's right to quiet enjoyment of the
leased space. Currently, both parties are in the discovery process.
F-12
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
3. NOTE PAYABLE
The Company has a note payable with its bank, secured by a deposit account held
at the same bank. The balance due at August 31, 1997 is $94,879 with interest
charged on borrowings at an initial rate of 7.65%. The note is payable in
monthly installments of $1,933 to February 1998 with a balloon payment of the
balance due at that time. The terms of the note agreement with the bank require
the Company to maintain certain financial covenants and ratios and restricts the
Company from incurring additional debt or engaging in other than their current
business. Management of the Company plans to renegotiate this note in February
1998.
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, 1997 and 1996, 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, 1997 and 1996. 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, 1997 and 1996. No
options or warrants have been exercised at August 31, 1997 and 1996.
At August 31, 1997 and 1996, options and warrants for 254,000 and 376,500
shares, respectively, were exercisable.
F-13
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
4. STOCKHOLDERS' EQUITY - Continued
A summary of outstanding options and warrants follows:
Number Price
of Shares Per Share
--------- ---------
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
Cancelled or expired (137,500)
-------
Outstanding at August 31, 1997 264,000 $.81-$1.50
=======
5. MAJOR CUSTOMERS
During fiscal 1997, sales to two customers were approximately 34% of net sales.
During fiscal 1996, sales to one of the same customers were 10% of net sales and
sales to two other customers were approximately 45% of net sales.
At August 31, 1997 one customer comprised 50% of the total accounts receivable
balance and a different customer comprised 81% of the total accounts receivable
at August 31, 1996.
F-14
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
6. INCOME TAXES
Differences between the income tax benefit at the Federal statutory rates and
the recorded benefit are as follows:
1997 1996
---- ----
Amount computed using the Federal statutory rate ($132,000) ($131,000)
Increase (reduction) in taxes resulting from:
State taxes, net of Federal tax benefit (14,000) (12,000)
Change in estimate 40,000
Change in valuation allowance 106,000 143,000
-------- --------
Total benefit $ -- $ --
======== ========
The deferred income tax asset consists of the following at August 31, 1997 and
1996:
1997 1996
---- ----
Capital loss carryforwards $ 316,000 $ 316,000
Net operating loss carryforwards 1,167,000 1,055,000
Tax credit carryforwards 35,000 41,000
---------- ----------
Subtotal 1,518,000 1,412,000
Valuation allowance (1,518,000) (1,412,000)
---------- ----------
$ -- $ --
========== ==========
F-15
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
6. INCOME TAXES - Continued
At August 31, 1997, 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 3,500
2010 390,000 10,500
2011 385,000 2,000
2012 426,000 3,000
---------- -------
Totals $3,212,000 $35,000
========== =======
At August 31, 1997, 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
--------
Total $928,000
========
F-16
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1997 and 1996
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:
<TABLE>
<CAPTION>
August 31
-----------------------------------------------------------
1997 1996
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash and cash equivalents $408,274 $408,274 $420,222 $420,222
Certificates of deposit 737,119 737,119 968,663 968,663
Investor settlement receivable 22,446 SEE BELOW 79,774 See below
Note payable 94,879 94,879 -- --
</TABLE>
The carrying values of cash and cash equivalents, certificates of deposit and
the short-term note payable 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.
8. RELATED PARTY TRANSACTIONS
During fiscal 1997, Celox entered into a verbal agreement with The Rowland
Company, which currently employs two of the Company's Board Members. The Rowland
Company was assisting Celox in the promotion and receipt of FDA approval for the
Company's new product, ViaStem. The total amount expensed was approximately
$5,400 during fiscal 1997.
F-17
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
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
director and executive officer of the Company as of October 31, 1997. Directors
hold office until the next Annual Shareholder's meeting.
NAME AGE POSITION
---- --- --------
Milo R. Polovina 41 Chairman of the Board, President
Chief Executive Officer,
Treasurer, and Secretary
MILO R. POLOVINA has been President, Chief Executive Officer,
Treasurer, and Secretary of the Company and has served as a director since 1985.
During the last week of October, 1997, the Chairman of the Board of
Directors requested and received resignations from the Company's three outside
directors. These resignations had been requested by the Chairman based upon the
strategic focus of the Company and the need for expertise in the bio medical
field. As a result, the Company does not have any outside directors. The Company
intends to identify and interview qualified candidates for the open director
positions as soon as practical.
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). 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, 1997, all Section 16(a) filing requirements applicable to its
officers, directors, and ten percent stockholders were complied with.
<PAGE>
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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 1997 135,600 15,000 -- 120,000
President, Chief 1996 135,600 30,000 -- 120,000
Executive Officer, 1995 132,300 30,000 -- 103,000
Treasurer, and Secretary
</TABLE>
(1) The total amount of personal benefits paid to Mr. Polovina for
fiscal 1997 was less than the lesser of (i) $50,000 or (ii) 10% of
his total reported salary and bonus.
No options were granted to Milo R. Polovina during fiscal 1997. No
executive officer exercised options during fiscal 1997. 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.)
OPTION EXERCISES AND VALUE OF OPTIONS AT END OF FISCAL 1997
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at End of In-the-Money Options
Fiscal 1997 at End of Fiscal 1997 (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, 1997, ($0.50) 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, 1997 and 1996. 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, 1997 and 1996. No options or warrants have been exercised under
either of these plans at August 31, 1997 and 1996.
At August 31, 1997 and 1996, options and warrants for 254,000 and 376,500
shares, respectively, were exercisable. The total options outstanding at August
31, 1997 are 264,000, with exercise prices of $0.81 to $1.50 per share.
<PAGE>
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 reasons 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
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 director 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.
<PAGE>
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, 1997 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.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED
OF BENEFICIAL OWNER NUMBER PERCENT
------------------- ------ -------
DIRECTORS AND EXECUTIVE OFFICERS
<S> <C> <C>
Milo R. Polovina 704,100(1) 24.3
1311 Helmo Avenue
St. Paul, MN 55128
All directors and executive officers 704,100 24.3
as a group (1 person)
PRINCIPAL HOLDERS
Heartland Advisors, Inc. 250,500 9.1
790 North Milwaukee Street
Milwaukee, WI 53202
Arnold Espeseth 159,800 5.8
Winger, MN 56592
</TABLE>
----------------------
* Represents less than 1% of the outstanding shares.
(1) Includes (a) 546,600 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.)
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
Mr. Polovina has an employment agreement with the Company. (See
"Executive Compensation -- Executive Employment Agreement".)
<PAGE>
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, 1997 and 1996............. F-2
Statement of Operations -- Years ended
August 31, 1997 and 1996.......................... F-4
Statement of Changes in Shareholders' Equity --
Years ended August 31, 1997 and 1996.............. F-5
Statement of Cash Flows -- Years ended
August 31, 1997 and 1996.......................... 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+
10.6 Lease agreement with Oakdale Properties LLC located
at 1311 Helmo Avenue, St. Paul, Minnesota, dated
December 6, 1996**
10.7 Revised employment agreement with Milo R. Polovina
dated January, 1995+
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.
** Incorporated by reference to Company's Form 10-QSB dated
2/28/97.
B. Reports on Form 8-K:
On November 4, 1997, the Company filed a Form 8-K that reported
that the Chairman of the Board of Directors requested and received
resignations from the Company's three outside directors. These
resignations had been requested by the Chairman based upon the
strategic focus of the Company and the need for expertise in the bio
medical field. As a result, the Company does not have any outside
directors. The Company intends to identify and interview qualified
candidates for the open director positions as soon as practical.
<PAGE>
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 24, 1997
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.
Signature Title Date
- --------- ----- ----
/s/ Milo R. Polovina Chairman of the Board, November 24, 1997
- -------------------------- President, CEO and Director
Milo R. Polovina (principal executive officer
and principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000883720
<NAME> CELOX LABORATORIES INC
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 408,274
<SECURITIES> 737,119
<RECEIVABLES> 26,562
<ALLOWANCES> 0
<INVENTORY> 46,855
<CURRENT-ASSETS> 1,259,270
<PP&E> 399,204
<DEPRECIATION> 229,010
<TOTAL-ASSETS> 1,448,253
<CURRENT-LIABILITIES> 152,446
<BONDS> 0
<COMMON> 27,422
0
0
<OTHER-SE> 1,268,385
<TOTAL-LIABILITY-AND-EQUITY> 1,448,253
<SALES> 221,407
<TOTAL-REVENUES> 221,407
<CGS> 89,989
<TOTAL-COSTS> 285,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (388,473)
<INCOME-TAX> 0
<INCOME-CONTINUING> (388,473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (388,473)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
