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, 1998
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: (651) 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 $265,693.
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, 1998 as reported on the Over-the-Counter Market, was approximately $436,942.
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, 1998, the registrant had outstanding 2,744,169 shares
of Common Stock.
Transitional Small Business Disclosure Format. ____ Yes __X__ No
Exhibit Index is located on page 19.
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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 cell technology 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-KSB 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,
uncertainties relating to clinical trials, dependence on third parties and
future capital needs.
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 six different serum-free supplements: TCM(TM), TM-235(TM),
TCH(TM), Nephrigen(TM), HemaPro(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. Nephrigen(TM) was
introduced in fiscal 1998 and is a serum-free growth medium developed
specifically for the culturing of Human Embryonic Kidney (293) cells. As part of
the Nephrigen(TM) system, the Company also introduced a non-enzymatic
dissociation solution that is used instead of trypsin. HemaPro(TM) was also
introduced in fiscal 1998 and is a low protein, serum-free medium for clonogenic
assays or EX VIVO expansion of human progenitor cells. An additional proposed
product, ViaStem(TM), continues to undergo further analysis in preclinical
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 six technically advanced serum-free
supplements to address the inadequacies of serum-based media. The Company's
defined basal media supplements, TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM),
HemaPro(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.
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TCM(TM) 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(TM) is not highly
specific to a single cell type and is therefore effective in many research and
manufacturing situations. TCM(TM) 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(TM), 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).
Nephrigren(TM) was developed specifically for the culturing of Human
Embryonic Kidney (293) cells. It is a cost-effective, low protein medium which
provides the optimum growth conditions for high density, long-term culturing.
Human embryonic kidney cells are frequently used for human adenovirus
production, drug screening, toxicity testing and the production of recombinant
proteins. Nephrigren(TM) is sold in a kit format with 2 x 500ml bottles of basal
media along with a 20ml supplement. As part of the Nephrigren(TM) system, a
non-enzymatic dissociation solution was introduced to be used instead of
trypsin.
HemaPro(TM) was developed as a serum-free medium for use in clonogenic
assays or EX VIVO expansion of human progenitor cells. HemaPro(TM) does not
contain erythropoietin, recombinant growth factors, human serum or fetal bovine
serum, thereby making it effective in studying stimulatory factors under
controlled conditions.
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), TM-235(TM), TCH(TM), Nephrigren(TM) ,
HemaPro(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),
Nephrigren(TM), HemaPro(TM) and VaxMax(TM) allows 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), TM-235(TM), TCH(TM), Nephrigren(TM) HemaPro(TM) and VaxMax(TM) reduces
the need to qualify the supplements prior to each use. TCM(TM), TM-235(TM),
TCH(TM) Nephrigren(TM) and HemaPro(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.
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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
preclinical testing at the University of Minnesota. Based on the preclinical
results, the next testing would involve human trials.
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, 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 1998.
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 1998. 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.
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Beginning in fiscal 1997, the Company is providing its proprietary
products to Sigma Chemical Company under a private label distribution agreement.
The first shipment under this agreement occurred during the quarter ended
November 30, 1996.
During November 1997 the Company entered into a non-exclusive
distribution agreement with TaKaRa Shuzo Co., Ltd., Biomedical Group,
Kyoto,Japan. Under the agreement, TaKaRa will initially market Celox's
proprietary product Cellvation(TM). TaKaRa's Biomedical Group leads the industry
in several areas owing to the international scope of its research operations
which span from the People's Republic of China to North America and Europe.
TaKaRa will market Cellvation(TM) in Japan, Taiwan, Korea, and People's Republic
of China.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
Management is currently evaluating its reliance on both internal and
external systems with respect to the Year 2000 issues. The Company does not
anticipate any disruption to its internal manufacturing processes. However,
there can be no assurance that all Company vendors will be Year 2000 compliant.
The Company intends to utilize a select number of vendors in order to minimize
this potential problem.
The Company has determined that some of the older financial reporting
systems software recognizes the use of "00" to represent the year 1900 rather
than 2000. In order to correct these problems, it will be necessary for the
Company to purchase commercially available upgrades of the current systems. The
Company also anticipates that certain of its computer hardware will not be year
2000 compliant. As a result, in fiscal 1999, capital expenditures may include
replacement computers.
At this time, Year 2000 issues are not expected to materially affect
the Company's products, services or competitive condition, based on the current
evaluations. The anticipated cost to the Company to become Year 2000 compliant
is $15,000 or less.
CUSTOMERS
The Company markets its products to academic, pharmaceutical,
biotechnology and diagnostic companies. The Company's three largest customers
accounted for 39% of the Company's net sales during fiscal 1998. These customers
each accounted for more than 10% of the Company's net sales during fiscal 1998.
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.)
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 continues to identify factors that affect the growth,
differentiation, and replication of cells, particularly human cells.
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In fiscal 1998 the Company introduced three new products--Nephrigen(TM)
is a serum-free growth medium which was developed specifically for the culturing
of Human Embryonic Kidney (293) cells. These cells are used for human adenovirus
production, drug screening, toxicity testing and production of recombinant
proteins. A second new product that is used with Nephrigen(TM) is a
non-enzymatic dissociation solution which is used instead of trypsin. The third
new product is HemaPro(TM), a low protein, serum-free medium for clonogenic
assays or EX VIVO expansion of human progenitor cells. Because HemaPro(TM) does
not contain erythropoietin, recombinant growth factors, human serum or fetal
bovine serum, it is effective in studying stimulatory factors under controlled
conditions.
For the years ended August 31, 1997 and 1998, the Company spent
approximately $47,686 and $104,309, respectively, on research and development.
The increase is a direct result of the work performed on the new products
mentioned above. During fiscal year 1998, the Company also continued to focus on
the development of preclinical data on ViaStem(TM). In October 1998 the Company
announced that it had entered into a collaborative agreement with the University
of Minnesota, Minneapolis, related to ViaStem(TM). Under the agreement, Celox
and the University will collaborate to complete the Company's preclinical
studies on ViaStem(TM). Research and developmental expenses will fluctuate based
on the status of preclinical and clinical trials for ViaStem(TM).
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 several
sources, although the Company utilizes a select group of vendors to ensure
consistency. However, due to industry consolidation, there can be no assurance
that the Company will continue to receive the material necessary for production
of its proprietary products that meets the specifications of the Company, USDA
and the FDA, in the quantities needed or at a competitive prices. 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.
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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.
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. A second U.S. Patent was received
in August, 1998. This second patent broadened the patented uses of ViaStem(TM)
in bone marrow transplantation and related therapies. The Company has also filed
the documents needed for an International Patent Application as required by the
Patent Cooperation Treaty. In October, 1998 the Company received notice from the
New Zealand and Australia Patent Office that a patent on ViaStem(TM) had been
granted by each of the respective countries. Initial reports from other
countries that have reviewed the international patent application have been
positive. Due to the unique nature of ViaStem(TM)and its applications, the
Company pursued the patent process for this product.
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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 or financial condition.
EMPLOYEES
As of October 31, 1998, 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.
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ITEM 3 - LEGAL PROCEEDINGS
The Company is is not presently involved in any material legal
proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The Company's Common Stock had 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 1997, and 1998. 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 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
November 30, 1997 (1st Quarter).............. 1.13 0.34
February 28, 1998(2nd Quarter)............... 0.63 0.34
May 31, 1998 (3rd Quarter)................... 0.41 0.25
August 31, 1998(4th Quarter)................. 0.38 0.15
FISCAL YEAR 1999
September 1, 1998 through
October 31, 1998............................. $0.25 $0.13
B. HOLDERS
As of October 31, 1998, 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.
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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, 1997, and
August 31, 1998, and should be read in conjunction with the financial statements
included elsewhere herein.
RESULTS OF OPERATIONS
The Company had a net loss of $302,604 in fiscal 1998 compared to net
loss of $388,473 in fiscal 1997. Reduced operating expenses and increased sales
accounted for the decreased loss in fiscal 1998 compared to the prior year.
Net sales increased 20% or $44,286 to $265,693 in 1998 from $221,407 in
1997, 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 fiscal 1997.
Three customers each accounted for sales of more than 10% of the Company's
annual sales in 1998, compared to two customers exceeding 10% of sales in 1997.
(See Note 5 of Notes to Financial Statements.)
The Company also received interest income of $48,666 in 1998 compared
to $67,820 in 1997. 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 the use of cash in operations.
A portion of the proceeds from the March 1992 initial public offering
had been invested in the Piper Jaffray Institutional Government Income Fund. 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 totaling $57,328 plus interest under the settlement agreement.
As of August 31, 1997, the balance remaining in the settlement receivable was
$22,446. In fiscal 1998 the Company received payment for the balance of $22,446
plus interest. The total payments received exceeded the estimated recovery of
$133,000 and the excess was credited to other income in fiscal 1998. In
September, 1998, a final check in the amount of $5,682 was received. This
payment represented a residual distribution of unclaimed funds and money
previously reserved for potential income tax liability on behalf of the
settlement fund.
Marketing and general and administrative expenses decreased by 15% or
$71,063 from $469,528 in fiscal 1997 to $398,465 in fiscal 1998. The decrease
between the respective periods was a result of higher marketing and sales
expenses resulting from a focused marketing plan offset by lower general and
administrative expenses. General and administrative expenses decreased between
periods due to moving expenses incurred in fiscal 1997 as part of the Company's
move to a new facility, reduced operating expenditures in the new facility and a
reduction in salary expense and related payroll taxes.
Cost of goods sold decreased by $2,291 from fiscal 1997, and
represented 49% of sales in 1998 compared to 59% of sales in 1997. The decrease
in the cost of goods sold as a percentage of sales results from increased sales
to cover fixed manufacturing costs. The mix of products also affected the cost
of goods sold comparison between periods.
12
<PAGE>
Research and development expenses increased by 119% or $56,623 to
$104,309 in 1998. The increase 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
included international filing fees for the international patent on ViaStem(TM).
The Company also added three new products in fiscal 1998. The Company presently
has over 30 products.
The loss per common share was ($0.11) in fiscal 1998 compared to
($0.14) in fiscal 1997.
In fiscal 1999, the Company will continue its efforts to increase sales
volume through focused marketing activities and sales of newly introduced
products. The sales and marketing activities will consist of establishing
further relationships with independent sales organizations and distributor and
by expanding its distribution activities with ICN Pharmaceuticals, and the Sigma
Chemical Company. The newly introduced products will be marketed by the Company
and potentially will be made available to one or more distributors. In addition,
the Company has continued to refine a focused advertising/marketing strategy in
fiscal 1999. The Company expects operating costs to remain flat in fiscal 1999.
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 1999.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company's capital expenditures totaled $47,077.
The Company anticipates that capital expenditures for fiscal 1999 will be
approximately $40,000 to fund additional sales, research and development, and
manufacturing growth, as well as computer and software upgrades.
At August 31, 1998, the Company had cash and short-term investments
totaling $809,556. 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 fiscal 1999. The Company intends to raise additional
capital in the second quarter of fiscal 1999 through a private placement,
subject to the prevailing market conditions. The additional funds raised will be
primarily used for advancing ViaStem(TM) through the necessary testing before
FDA approval can be obtained. There is no guarantee however, that the Company
will be able to successfully raise these additional funds. In addition, there
can be no assurance that the Company will be able to obtain the necessary FDA
approvals.
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, 1998, 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 fiscal 1999, other than the
potential for continuing losses. Management expects operating losses to continue
in fiscal 1999.
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.
13
<PAGE>
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.
St. Paul, Minnesota
Financial Statements
Years Ended August 31, 1998 and 1997
<PAGE>
[BHZ LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Celox Laboratories, Inc.
St. Paul, Minnesota
We have audited the accompanying balance sheet of Celox Laboratories, Inc. as of
August 31, 1998 and 1997, 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, 1998 and 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
September 28, 1998
1
<PAGE>
CELOX LABORATORIES, INC.
Balance Sheet
August 31
ASSETS 1998 1997
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 350,120 $ 408,274
Certificates of deposit 459,436 737,119
Trade accounts receivable 18,849 26,562
Investor settlement receivable 22,446
Accrued interest receivable 10,560 16,956
Inventories
Raw materials 32,350 30,142
Finished goods 12,725 16,713
Prepaid expenses 1,830 1,058
---------- ----------
Total current assets 885,870 1,259,270
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Laboratory and production equipment 219,724 204,882
Office furniture and equipment 88,131 78,764
Leasehold improvements 138,426 115,558
---------- ----------
446,281 399,204
Less accumulated depreciation 274,597 229,010
---------- ----------
Net equipment and leasehold improvements 171,684 170,194
OTHER ASSETS
Patents, net 58,860 18,789
---------- ----------
TOTAL ASSETS $1,116,414 $1,448,253
========== ==========
Notes to Financial Statements are an integral part of this Statement.
2
<PAGE>
CELOX LABORATORIES, INC.
Balance Sheet
<TABLE>
<CAPTION>
August 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Note payable $ 82,139 $ 94,879
Trade accounts payable 10,326 26,321
Accrued liabilities
Compensation 20,930 21,438
Taxes, other than income taxes 6,816 6,808
Other 3,000
----------- -----------
Total current liabilities 120,211 152,446
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized, 4,000,000 shares
Issued and outstanding, 2,744,169 and 2,742,169 shares
in 1998 and 1997, respectively 27,442 27,422
Additional paid-in capital 5,254,736 5,251,756
Accumulated deficit (4,285,975) (3,983,371)
----------- -----------
Total stockholders' equity 996,203 1,295,807
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,116,414 $ 1,448,253
=========== ===========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
3
<PAGE>
CELOX LABORATORIES, INC.
Statement of Operations
Years
Ended August 31
1998 1997
--------- ---------
NET SALES $ 265,693 $ 221,407
COST OF GOODS SOLD 129,127 131,418
--------- ---------
GROSS PROFIT 136,566 89,989
OPERATING EXPENSES
Research and development 104,309 47,686
Marketing 168,218 153,738
General and administrative 230,247 315,790
--------- ---------
Total operating expenses 502,774 517,214
--------- ---------
OPERATING LOSS (366,208) (427,225)
OTHER INCOME (EXPENSE)
Interest and dividend income 48,666 67,820
Interest expense (6,267) (2,609)
Other 21,205 (26,459)
--------- ---------
Total other income, net 63,604 38,752
--------- ---------
LOSS BEFORE INCOME TAX BENEFIT (302,604) (388,473)
INCOME TAX BENEFIT -- --
========= =========
NET LOSS ($302,604) ($388,473)
========= =========
BASIC AND DILUTED NET LOSS PER COMMON SHARE ($ .11) ($ .14)
Notes to Financial Statements are an integral part of this Statement.
4
<PAGE>
CELOX LABORATORIES, INC.
Statement of Changes in Stockholders' Equity
Years Ended August 31, 1998 and 1997
Common Stock Additional
------------ Paid-In
Shares Amount Capital
--------- ---------- ----------
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
Options exercised 2,000 20 2,980
Net loss
--------- ---------- ----------
BALANCES - August 31, 1998 2,744,169 $ 27,442 $5,254,736
========= ========== ==========
Notes to Financial Statements are an integral part of this Statement.
5
<PAGE>
CELOX LABORATORIES, INC.
Statement of Changes in Stockholders' Equity
Years Ended August 31, 1998 and 1997
Accumulated Deficit Total
------------------- -----
($3,594,898) $1,684,280
(388,473) (388,473)
----------- ----------
(3,983,371) 1,295,807
3,000
(302,604) (302,604)
----------- ----------
($4,285,975) $ 996,203
=========== ===========
Notes to Financial Statements are an integral part of this Statement.
6
<PAGE>
CELOX LABORATORIES, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended August 31
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 302,604) ($ 388,473)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation and amortization 48,167 38,968
Deferred rent expense (773)
Changes in assets and liabilities
Trade accounts receivable 7,713 65,240
Accrued interest receivable 6,396 2,046
Inventories 1,780 27,517
Prepaid expenses (772) (244)
Trade accounts payable (15,995) (3,427)
Accrued liabilities (3,500) (2,206)
----------- -----------
Net cash used for operating activities (258,815) (261,352)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit (109,436) (933,549)
Proceeds from maturities of certificates of deposit 387,119 1,165,093
Proceeds from investor settlement receivable 22,446 57,328
Investment in ViaStem patent (42,651) (18,789)
Capital expenditures (47,077) (115,558)
----------- -----------
Net cash from investing activities 210,401 154,525
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of) note payable, net (12,740) 94,879
Proceeds from stock options exercised 3,000
----------- -----------
Net cash from (used for) financing activities (9,740) 94,879
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (58,154) (11,948)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 408,274 420,222
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 350,120 $ 408,274
=========== ===========
</TABLE>
- Continued -
Notes to Financial Statements are an integral part of this Statement.
7
<PAGE>
CELOX LABORATORIES, INC.
Statement of Cash Flows - Continued
<TABLE>
<CAPTION>
Years Ended August 31
1998 1997
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for income taxes $ - $ -
=========== ===========
Cash payments for interest $ 6,267 $ 2,609
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Note payable refinanced with line of credit $ 86,817
===========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
8
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
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.
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company uses the allowance method to account for uncollectible accounts,
however, no allowance was deemed necessary at August 31, 1998 and 1997.
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 $42,000 and $20,800, respectively, for the years ended August 31,
1998 and 1997.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at the lower of cost or
estimated fair value. Depreciation is computed by the straight-line method using
the estimated useful lives of the individual assets.
AMORTIZATION OF INTANGIBLE ASSETS
During fiscal 1998 and 1997, Celox received two patents for ViaStem(TM). The
costs associated with these patents were capitalized and are being amortized by
the straight-line method over 17 years, 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.
10
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic 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 2,743,002 and 2,742,169 for the years ended August 31,
1998 and 1997, respectively. None of the common stock equivalents have been
included in the computation of diluted loss per common share for the years
presented because they are antidilutive.
NEWLY ISSUED ACCOUNTING STANDARDS
In fiscal 1998, the Company adopted Statements of Financial Accounting Standards
No. 128, EARNINGS PER SHARE AND NO. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE. The new Standards do not materially affect the financial statements.
In fiscal 1999, the Company will adopt Statements of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME AND NO. 131, SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. 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
In fiscal 1997, the Company conducted operations from a temporary facility under
a month-to-month lease until the new building they are currently leasing was
constructed. It 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 was $80,120 and $70,448 during fiscal 1998 and 1997, respectively.
11
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
2. COMMITMENTS AND CONTINGENCIES - Continued
Future minimum base lease payments, by fiscal year, are as follows at August 31,
1998:
1999 $ 73,726
2000 73,726
2001 73,726
2002 73,726
2003 73,726
Thereafter 30,719
------
$399,349
========
EXECUTIVE EMPLOYMENT AGREEMENT
The Company has an employment contract with Milo R. Polovina which 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. No
bonus was authorized by the Board of Directors in fiscal 1998. The Board of
Directors did authorize the payment of a $15,000 bonus in fiscal 1997. During
fiscal 1998, 40,000 performance stock options were issued at an option price of
$.125. No performance stock options were issued during fiscal 1997.
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
remaining term of the agreement. Termination other than related to a change in
control, results in similar payment for the five calendar years following the
date of termination.
12
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
2. COMMITMENTS AND CONTINGENCIES - Continued
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 continue to pursue this litigation in the federal court in Minneapolis. The
ultimate amount of proceeds, if any, that the Company may receive as a result of
this matter is uncertain.
3. NOTE PAYABLE
In 1998, the Company established a $125,000 line of credit with its bank,
secured by a deposit account held at the same bank. Interest is payable monthly
at a rate of 5.7%. The terms of the 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.
The balance on this line of credit at August 31, 1998 was $82,139. The line of
credit expires in February 1999.
The Company had a note payable with its bank, secured by a deposit account held
at the same bank. The balance due at August 31, 1997 was $94,879 with interest
charged on borrowings at an initial rate of 7.65%. The note was 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 required
the Company to maintain certain financial covenants and ratios and restricted
the Company from incurring additional debt or engaging in other than their
current business. Management of the Company renegotiated this note in February
1998 in which the Company was issued a new note. In March 1998, this note was
paid off using the line of credit discussed above.
13
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
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, 1998 and 1997, the
Company had repurchased 136,700 shares at prices of $.85 to $1.58 per share.
STOCK OPTIONS AND WARRANTS
The Company has an Incentive Stock Option Plan and a non-qualified stock option
and warrant plan under which options and warrants granted may be exercised in
various stages no later than ten years from the date of grant. The terms of the
plans originally reserved 200,000 and 549,300 shares, respectively, for issuance
under the plans. Option and warrant exercise prices are generally 100% of the
stock's fair market value as of the date of grant. Options and warrants vest in
various stages no later than three years from date of grant. Options and
warrants not exercised are forfeited, with such forfeitures accounted for at the
time of forfeiture.
Options and warrants granted, exercised, and forfeited under the plans are as
follows:
Weighted Average
Granted Exercise Price
------- --------------
Balance September 1, 1996 401,500 $0.81 to $4.20
Cancelled or expired (137,500) $1.00 to $4.20
-------
Balance August 31, 1997 264,000 $0.81 to $1.50
Granted 40,000 $0.125
Exercised (2,000) $1.50
Cancelled or expired (18,000) $0.875 to $1.00
-------
Balance August 31, 1998 284,000 $0.125 to $1.50
=======
At August 31, 1998 and 1997, options for 284,000 and 254,000 shares,
respectively, were exercisable. All warrants expired during fiscal 1997.
14
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
4. STOCKHOLDERS' EQUITY - Continued
The fair value of each option granted is estimated on the grant date using the
Black Scholes method. The fair value of options granted in fiscal 1998 and the
assumptions made in estimating fair value are as follows:
Fair value of options granted $0.11
=====
Dividend yield 0%
Risk-free interest rate 5.4%
Expected volatility 100%
Expected life 10 years
The Company applies APB Opinion No. 25 in accounting for its options and
warrants. Accordingly, no compensation cost has been recognized in 1998 or 1997.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, there would be no significant effect on net loss or on
the basic and diluted loss per common share.
Following is a summary of the status of options outstanding at August 31, 1998,
all of which are exercisable:
Weighted Average
Exercise Remaining Contractual
Price Number Life (Years)
----- ------ ------------
$.125 40,000 9.96
$.813 10,000 2.37
$.875 10,000 3.12
$.938 30,000 2.86
$1.00 155,000 3.53
$1.50 39,000 1.36
------ ----
284,000 4.01
======= ====
15
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
5. CONCENTRATION OF CREDIT RISK
During fiscal 1998, sales to three customers were approximately 39% of net
sales. During fiscal 1997, sales to two of the same customers were approximately
34% of net sales.
At August 31, 1998, three customers comprised 40% of the total accounts
receivable balance and one customer comprised 50% of the total accounts
receivable balance at August 31, 1997. Accounts receivable from foreign sales
were 11% and 5% at August 31, 1998 and 1997, respectively.
6. INCOME TAXES
Differences between the income tax benefit at the Federal statutory rates and
the recorded benefit are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Amount computed using the Federal statutory rate ($103,000) ($132,000)
Increase (reduction) in taxes resulting from:
State taxes, net of Federal tax benefit (11,000) (14,000)
Other 2,000 40,000
Change in valuation allowance 112,000 106,000
------------ -------------
Total benefit $ - $ -
============ =============
The deferred income tax asset consists of the following at August 31, 1998 and
1997:
1998 1997
------------ -------------
Capital loss carryforwards $ 316,000 $ 316,000
Net operating loss carryforwards 1,274,000 1,167,000
Tax credit carryforwards 40,000 35,000
------------ -------------
Subtotal 1,630,000 1,518,000
Valuation allowance (1,630,000) (1,518,000)
------------ -------------
$ - $ -
============ =============
</TABLE>
16
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
6. INCOME TAXES - Continued
At August 31, 1998, 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
2013 282,000 5,000
---------- -------
Totals $3,494,000 $40,000
========== =======
At August 31, 1998, 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
========
17
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1998 and 1997
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
-----------------------------------------------
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $350,120 $350,120 $408,274 $408,274
Certificates of deposit 459,436 459,436 737,119 737,119
Investor settlement receivable - - 22,446 See below
Note payable 82,139 82,139 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. SUBSEQUENT EVENTS
During fiscal 1999, the Company entered into an initial $17,000 agreement with
the University of Minnesota related to the Company's ViaStem(TM) product. Under
the agreement, Celox and the University will collaborate to complete the
Company's preclinical studies on ViaStem(TM).
The Company intends to raise additional capital during fiscal 1999 through a
private placement, subject to the prevailing market conditions. The additional
funds raised will be primarily used for advancing the Company's proprietary
product, ViaStem(TM), through the necessary testing required before FDA approval
can be obtained. There is no guarantee however, that the Company will be able to
successfully raise these additional funds. In addition, there can be no
assurance that the Company will be able to obtain the necessary FDA approvals.
18
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<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, 1998. Directors
hold office until the next Annual Shareholder's meeting.
NAME AGE POSITION
---- --- --------
Milo R. Polovina 42 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
Although the Company has a Scientific Advisory Board established to
advise the Company on product opportunities and certain advances in
biotechnology, the Company intends to establish a Scientific Advisory Board
specifically dedicated to ViaStem(TM). The Company is currently seeking
qualified applicants with backgrounds in transplantation to serve on the
ViaStem(TM) Advisory Board.
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, 1998, all Section 16(a) filing requirements applicable to its
officers, directors, and ten percent stockholders were complied with.
15
<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.
<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>
Milo R. Polovina 1998 138,998 0 -- 160,000
President, Chief 1997 135,600 15,000 -- 120,000
Executive Officer, 1996 135,600 30,000 -- 120,000
Treasurer, and Secretary
</TABLE>
(1) The total amount of personal benefits paid to Mr. Polovina for
fiscal 1998 was less than the lesser of (i) $50,000 or (ii) 10% of
his total reported salary and bonus.
Options totaling 40,000 were granted to Milo R. Polovina during fiscal
1998. No executive officer exercised options during fiscal 1998. 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 1998
Number of Unexercised Value of Unexercised
Options at End of In-the-Money Options
Fiscal 1998 at End of Fiscal 1998 (1)
--------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C>
Milo R. Polovina 160,000 ---- 0 ----
</TABLE>
(1) Calculated on the basis of the fair market value of the
underlying securities at August 31, 1998, ($0.50) minus the
exercise price per share (ranging from $0.125 to $1.50).
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, 1998 and 1997. 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, 1998 and 1997. No options or warrants have been exercised under
either of these plans at August 31, 1997. During 1998 options totaling 2,000
were exercised.
At August 31, 1998 and 1997, options and warrants for 284,000 and 254,000
shares, respectively, were exercisable. The total options outstanding at August
31, 1998 are 284,000, with exercise prices of $0.125 to $1.50 per share.
16
<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 compensation 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 $75 for expenses related to 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.
17
<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, 1998 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 744,100(1) 25.3
1311 Helmo Avenue
St. Paul, MN 55128
All directors and executive officers 744,100 25.3
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>
- -------
(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 160,000 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
Mr. Polovina has an employment agreement with the Company. (See
"Executive Compensation -- Executive Employment Agreement".)
18
<PAGE>
PART IV
ITEM 13 - EXHIBITS, AND REPORTS ON FORM 8-K
A. Documents filed:
z 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, 1998 and 1997.............F-2
Statement of Operations -- Years ended
August 31, 1998 and 1997..........................F-4
Statement of Changes in Shareholders' Equity --
Years ended August 31, 1998 and 1997..............F-5
Statement of Cash Flows -- Years ended
August 31, 1998 and 1997..........................F-7
Notes to Financial Statements.........................F-9
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)
27 Financial Data Schedule
- -----------
* 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.
19
<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 20, 1998
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 20, 1998
- --------------------- President, CEO and Director
Milo R. Polovina (principal executive officer
and principal financial officer)
20
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 350120
<SECURITIES> 459436
<RECEIVABLES> 18849
<ALLOWANCES> 0
<INVENTORY> 45075
<CURRENT-ASSETS> 885870
<PP&E> 446281
<DEPRECIATION> 274597
<TOTAL-ASSETS> 1116414
<CURRENT-LIABILITIES> 120211
<BONDS> 0
27442
0
<COMMON> 0
<OTHER-SE> 968761
<TOTAL-LIABILITY-AND-EQUITY> 1116414
<SALES> 265693
<TOTAL-REVENUES> 265693
<CGS> 129127
<TOTAL-COSTS> 297345
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (302604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (302604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (302604)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
