U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22720
CYCLO(3)PSS CORPORATION
(Name of Small Business Issuer as specified in its charter)
Delaware 87-0455642
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3646 West 2100 South
Salt Lake City, Utah 84120-1202
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (801) 972-9090
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
$.001 Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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.
Yes [x] No [ ] .
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [x]
The Issuer's revenues for the fiscal year ended February 29, 1996 were $442,632
As of May 31, 1996, 10,524,338 shares of the Issuer's common stock were
issued and outstanding of which 7,312,026 shares were held by non-affiliates.
As of May 31, 1996, the aggregate market value of shares held by non-affiliates
(based upon the closing price reported by NASDAQ) was approximately $20,108,072.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
CyclO(3)PSS Corporation (the "Company") is in the business of research and
development of technologies for the sterilization and/or disinfection of
surgical and medical instruments; the manufacture, sale and installation of
ozone washing and laundry sorting and counting systems for commercial and
institutional laundries; and the manufacture and sale of specialty chemicals.
The Company is currently developing two medical sterilization
technologies, one which utilizes ozone gas as a sterilant and a second which is
a liquid chemical sterilant/disinfectant. The Company has developed a
prototype ozone gas sterilization device using its proprietary ozone
technology. The Company submitted a 510(k) Premarket Notification
application to the Food and Drug Administration (FDA) on January 6, 1995
for the STER-O(3)-ZONE(TM) 100. The Company and the FDA have since
been in communication regarding the application. The FDA has accepted the
application for review and has begun the customary process of requesting
additional information which the Company is gathering for evaluation. Based
upon the volume of additional data requested by the FDA and the potential for
additional design and engineering that will be required in order to produce the
required data and substantiate the desired labeling, the Company is unable to
predict the amount of time that will be required for the FDA to complete its
review. The Company is prohibited from undertaking general marketing of the
STER-O(3)-ZONE(TM) 100 device until final marketing clearance from the
FDA has been received. The Company had previously planned on placing a
limited number of initial products prior to receiving marketing clearance from
the FDA pursuant to an Investigational Device Exemption (IDE) in accordance
with the FDA rules and regulations. The Company has determined it prudent
to postpone the placement of these units until such time as the labeling claims
made pursuant to the application can be fully substantiated by ongoing internal
testing and independent validation.
The Company has developed technologies and products which it believes
may be an effective alternative to current sterilization technologies. The
Company has conducted five years of research, development and testing of its
technology and products and has developed and constructed pre-production
prototypes of its STER-O(3)-ZONE(TM) 100 model. The Company is also
engaged in the development of a liquid chemical sterilant/disinfectant,
SterOx(TM), which may compete with liquid chemical sterilants/disinfectants
currently available in the market place.
The Company, through internal technology development and the acquisition
of another corporation, has developed products for sale to the commercial and
institutional laundry markets. These products include:
Ozone washing systems that enable laundries to reduce the amount of
time and chemicals needed to launder textiles.
Proprietary wash chemicals designed to be compatible with the ozone
washing technology.
Sorting and counting systems designed to improve the speed and
accuracy of preparing soiled linens for washing operations.
<PAGE> 3
The Company has commenced sales of the ozone washing systems and the
laundry sorting and counting systems. The Company expects to commence
sales of its wash chemicals through licensees during the next fiscal year.
The Company, through the acquisition of another corporation, has
developed a line of specialty chemicals for sale to biomedical and research
institutions. While the minimal revenues produced by CyclO(3)PSS
BioChemical Corporation have constituted a significant portion of total
revenues during the year ended February 29, 1996, it is not expected to be a
significant portion of sales if and when the Company's laundry and/or medical
sterilization/disinfection products gain market acceptance.
The Company is also pursuing the applications of the Company's
technologies and expertise in the food processing and waste water treatment
industries.
History and Business Development
The Company was incorporated under the laws of the State of Delaware on
November 14, 1927 under the name of Icthyol Oil and Refining Company.
The Company was originally formed for the purpose of engaging in the oil
business. Subsequent to its incorporation, the Company ceased active business
operations and was essentially inactive from the 1930's to 1987. In 1987, the
Company acquired a license to manufacture and market surgical and medical
sterilization products. Such license was subsequently terminated by the
Company and the Company's current technology is not based upon the
technology involved with such license.
In February 1988, the Company effected a 15-for-1 forward stock-split
increasing the number of shares issued and outstanding from 174,300 to
2,614,500.
In February 1988, the Company effected a merger with a privately-held
company known as Sterile Process Corporation and the Company's name was
changed to Inter-Med International, Inc. This merger was accounted for as a
reverse merger.
Between 1987 and the third quarter of 1988, the Company exhausted
essentially all of its financial resources in research and development
activities and in the third quarter of 1988 terminated its operations.
Those persons serving as officers and directors of the Company at such time left
the Company and the Company was again inactive. Such previous management is
no longer affiliated with the Company.
In April 1990, John M. Williams, William R. Stoddard and Craig R. Rousch
agreed, at the request of the holders of a majority of the shares of the
Company's common stock, to become officers and directors of the Company
and to use their best efforts to assist the Company in obtaining financing
sufficient to continue research and development efforts, to finalize product
development, to obtain FDA clearance and to commence product marketing
activities.
In September 1990, the Company's name was changed to CyclO(3)PSS
Medical Systems, Inc.
Subsequent to April 1990, the Company has: (1) obtained equity funding of
approximately $8,959,858 and debt funding of approximately $1,226,000; (2)
abandoned its previous technology; (3)acquired a license to use a different
ozone-generating technology; (4) conducted technology development, testing
and improvement; (5) engaged in the research and development of a product
line which management believes may ultimately be competitive in the market
place; (6) acquired the company which owned the technology licensed to the
<PAGE> 4
Company; (7) engaged in development activities aimed at diversifying the
application of the Company's ozone expertise into non-medical industries; and
(8) acquired two companies which were active in diversified markets.
On February 3, 1995, the Company's name was changed from CyclO(3)PSS
Medical Systems, Inc. to its current name of CyclO(3)PSS Corporation to
reflect the Company's expansion into non-medical markets.
On June 1, 1995 the Company finalized the acquisition of Thermo-Chem
Inc. (TCI), a Utah-based company. TCI was merged with CyclO(3)PSS
BioChemical Corporation. TCI is in the business of developing technology
relating to synthetic methods, new product formulations and molecular design
for the purpose of manufacturing and marketing pharmaceutical chemicals to
commercial and research libraries. The purchase of TCI was recorded at
$175,000 reflecting the fair value of 43,750 shares of the Company's common
stock in exchange for all of the outstanding stock of TCI. The acquisition was
accounted for using the purchase method of accounting. The results of
operations of TCI were not material prior to the acquisition.
The Sterilization Market
A significant element in the operation of all health care facilities is the
sterilization or disinfection of reusable surgical and diagnostic instruments.
Sterilization is the absolute destruction of any virus, bacteria, fungus or
vegetative state microorganisms, whether active or in a dormant spore state.
Disinfection is a lower standard of microbial destruction which traditionally
destroys all microorganisms with the exception of spore state viruses such as
tuberculosis and hepatitis B, which may become reactivated when exposed to
conditions present within the body. Conventional sterile processing procedures
for medical instruments involve high temperatures (such as steam and dry heat
units) or toxic chemicals (such as ethylene oxide gas) and are typically
performed at central processing sites in health care facilities or near the area
of use. Central site sterile processing requires multiple handling of
instruments and time-consuming transportation to and from the site of patient
care. Disinfection procedures commonly use liquid solutions which create
hazardous chemical waste and may require special disposal procedures.
The safety and environmental risks and economic disadvantages associated with
these processes, together with a number of trends in the health care industry,
have created a market opportunity for new sterile processing technologies and
products. The Company has developed a technology and product line which it
believes to be a viable alternative to current technologies.
As of 1991, a significant number of sterilization procedures utilized
ethylene oxide (EtO) gas sterilization processes. EtO is highly flammable.
Medical facilities typically use a 88% / 12% mixture of EtO and
chlorofluorocarbon-12 (CFC-12) for gas sterilization. EtO is highly explosive
and burns in excess of 3,000 degrees without requiring oxygen, making it
extremely difficult to extinguish. CFC-12 has been added to EtO to counteract
its combustibility. However, the use of CFC-12 has caused concerns relating
to the possible adverse effect on the earth's atmospheric ozone layer. Concern
for personnel working in sterilization areas has increased due to verification
of the carcinogenic and mutagenic properties of EtO. Residual EtO escapes into
the work place and many sterilization chambers have been vented into the
atmosphere, posing potential health hazards for area residents.
Due to government restrictions, health concerns and costs associated with
the disposal of ozone depleting chemicals (ODCs), industry analysts have
projected that the use of EtO in sterilization procedures will be reduced
significantly in the next decade, and that the overall cost of using EtO will
increase rapidly.
<PAGE> 5
Sterilization Market Trends
Several trends and concerns have developed which have created a market
opportunity for alternative sterilization processes which avoid the health,
environmental and financial problems associated with conventional EtO gas
sterilization and other disinfection procedures. Such concerns and trends
include the following:
Heightened public and professional concern regarding the transmission
of infectious diseases. This concern has increased the desirability of
adopting sterilization (as opposed to disinfection) as the appropriate
standard of practice for instrument preparation in minimally invasive
surgical and diagnostic procedures and has augmented the demand for low
temperature sterile processing systems that are compatible with
sophisticated endoscopic instruments.
Increased use of endoscopic instruments for minimally invasive
surgical procedures that enter body cavities where infection could be
catastrophic. New minimally-invasive surgical procedures create further
demand for the use of expensive surgical instruments that often cannot be
sterilized using high temperature processes and which must be rapidly
sterilized between patient procedures to achieve maximum economic
benefit. These procedures, although minimally invasive, still involve
surgical invasion of body cavities where introduction of infectious
microorganisms could have disastrous results.
Increasing pressure facing the health care industry to contain costs
and increase productivity. Economic constraints continue to force health
care providers to increase utilization of expensive surgical and
diagnostic instruments and increase staff productivity.
Increased decentralization of the delivery of patient care. Many
surgical and diagnostic procedures are now being performed in non-hospital
facilities such as ambulatory surgical centers without ready access to
central sterilization services.
Public concern regarding the handling and disposal of toxic waste. The
increasing burdens placed on institutions and industries using hazardous
chemicals give a competitive advantage to low temperature instrument
processing systems which do not generate toxic waste.
The Company believes that the current trend towards minimally invasive
procedures delivered outside the traditional hospital environment will
continue. Many of these procedures utilize sophisticated and costly endoscopic
equipment. The Company further believes that this trend, when combined with
increasing concern about infectious diseases and hazardous wastes, will
increase the demand for safe, rapid, low temperature, sterile processing and
infection control systems such as the Company's STER-O(3)-ZONE(TM) 100
and other product models. However, there can be no assurance that there will
be an increased demand for the Company's products or for products similar to
the Company's products.
Ozone Sterilization Technology
Most common low-heat sterilants kill microorganisms by oxidation. Ozone
is a powerful oxidizing agent. Ozone has an oxidation potential of 2.07
millivolts, nearly three times that of EtO's 0.699 millivolts. Ozone will
oxidize fats, fatty acids, alcohol, albumin, blood, polychlorinated biphenyl
(PCBs) and other substances.
<PAGE> 6
Ozone has not been widely used as a medical sterilant because of the lack of
an ozone generating technique efficient enough to be practical. Ozone (O(3))
is an unstable compound which has a short half-life under many conditions,
after which it reverts to oxygen (O2). It must, therefore, be generated on
site, as it cannot be effectively stored or containerized.
The Company owns a patent for an ozone generating technology which, in
a small package with low power consumption, produces the highly
concentrated ozone that is needed for efficient medical sterilization.
Previously available ozone generators adequate to produce the quantities and
concentrations of ozone necessary for sterilization purposes were large,
expensive and power hungry and required massive cooling systems. The cost,
size, weight and limited output of these generators made them impractical for
integration into medical sterilization devices. This new generating technology
has enabled the Company to build a compact system which easily fits into a
limited space and has power requirements which are easily met in the modern
medical arena.
The Company's proposed medical sterilization products have been designed
to use highly concentrated and humidified ozone gas. These systems sterilize
through a process which converts oxygen (O2) into ozone (O(3)), uses the
ozone to achieve sterilization, and then reconverts the ozone into oxygen. The
sterilization chambers provide for equal and effective distribution of the gas
to the instrument surfaces and components.
The Company's first sterilization product scheduled for completion and
marketing, the STER-O(3)-ZONE(TM) 100, utilizes a unique chamber
configuration wherein a slightly modified sterilization transport container is
used as the primary sterilization chamber. This container is placed in the
secondary safety chamber and connected via internally developed patented
"quick-connect" fittings which close and seal during the disconnect procedure
and are easily accessible for cleaning and sterilization. This configuration
will provide practitioners with sterilized instruments contained in a
"portable sterile field" for transport to the area of use or to storage for
later use.
Proposed Sterilization Products
As a result of its research and development efforts and market research, the
Company has initially identified three sterilization products, each of which
will utilize the Company's ozone gas sterilization system. The FDA 510(k)
Premarket Notification for the Company's first product, the STER-O(3)-ZONE(TM)
100, was filed on January 6, 1995. Additional information about
the Company's initial proposed product line is as follows:
THE STER-O(3)-ZONE(TM) 100 has a 1.5 cu. ft. master chamber that
utilizes a modular sterilization container/chamber system jointly developed
by the Company and Genesis, Inc., which was subsequently acquired by the
V. Mueller Sterile Container Division of Baxter Healthcare Corp (Baxter).
Baxter's only ongoing interest in the container/chamber system is to provide
the pre-modification containers to the Company pursuant to an OEM
agreement. This modular approach offers maximum utilization of the
system and will be used between cases in the operating room and as needed in
the Emergency and Intensive Care Units. The list price for this model,
complete with the necessary accessory container/chambers, is expected to
be approximately $70,000. The Company believes that this product
addresses the need for fast, low temperature, dry and environmentally
responsible sterilization of expensive and delicate instruments between
surgical procedures.
THE STER-0(3)-ZONE(TM) 800 will be a larger version of the STER-O(3)-
ZONE(TM) 100 and has an 8.3 cu. ft. sterilization chamber. It will be
used in central processing areas of hospitals and clinics as well as other
specialty areas. The list price for this unit is projected to be approximately
$100,000.
<PAGE> 7
THE RETR-O(3)-ZONE(TM) SYSTEMS are intended to be custom designed
and engineered ozone based sterilization systems to retrofit existing larger
EtO and/or steam sterilizers enabling the replacement of EtO or steam with
ozone gas as the sterilant. The price range of these systems will be
dependent upon the size and configuration of the system being replaced,
but is currently projected to be in the $115,000 to $150,000 range. Market
entry of this device is dependent upon materials compatibility and may be
initially utilized in manufacturing and laboratory settings. The Company
currently intends to introduce and market these systems within 30 months
after market entry of the STER-O(3)-ZONE(TM) 100.
LIQUID CHEMICAL STERILANT (STEROX(TM)) The Company is
engaged in the research and development of a liquid chemical
sterilant/disinfectant which may compete with liquid chemical disinfectants
currently available in the marketplace. In some situations, the use of a
liquid chemical sterilant may be more practical than ozone-based
sterilization procedures due to costs, size and other factors.
The Company's activities in the medical sterilization market have been
limited to research and development of its technologies and proposed initial
product line. The Company has not yet marketed any medical products and
there can be no assurance that it will ever market products. There can be no
assurance that the product line currently proposed will not be significantly
changed in the future. There can be no assurance that any of the products
currently planned for distribution will ever be introduced in the marketplace.
Anticipated Procedure For FDA Review
Some of the products which are intended to be sold by the Company will be
medical devices and will therefore be subject to the rules and regulations of
the FDA. The first product for which the Company is seeking FDA marketing
clearance is the STER-O(3)-ZONE(TM) 100.
A 510(k) Premarket Notification was filed with the FDA on January 6,
1995. The Company may commence product distribution efforts in an attempt
to place a limited number of the STER-O(3)-ZONE(TM) 100 units in medical
facilities and clinics for clinical evaluation. Such initial product
distribution would be pursuant to an Investigational Device Exemption (IDE)
under FDA rules and regulations. The Company has determined it prudent to
postpone the placement of these units until such time as the labeling claims
made pursuant to the application can be fully substantiated by ongoing internal
testing and independent validation.
If the FDA review process is successfully completed, the Company will
receive a determination from the FDA that the STER-O(3)-ZONE(TM) 100 is
"Substantially Equivalent" to products currently marketed. If the FDA
determines that the product is Substantially Equivalent, the Company will be
able to commence active marketing efforts to hospitals, clinics and other
facilities.
The Company originally anticipated that the FDA review process would
take approximately 6 to 18 months. However, the accumulation of the
additional data requested to support the desired "wide-use" label claim is
taking longer than anticipated and the Company has revised the anticipated
time frame to range from 24 to 30 months from application. However, there
can be no assurance that the review process will be completed within a 24 to
30 month period or that the review process will result in FDA marketing
clearance.
<PAGE> 8
The Company initially intended to file the 510(k) Premarket Notification
during the last quarter of 1993 or the first quarter of 1994. In early 1994,
the Company determined that it would delay the filing of the FDA 510(k)
Premarket Notification for the STER-0(3) -ZONE(TM) 100 by approximately
six to nine months and the application was ultimately filed on January 6, 1995.
The Company elected to use this time to make certain engineering revisions to
the STER-0(3) -ZONE(TM) 100. Recent actions by the FDA have caused the
general 510(k) Premarket Notification process to require more detailed
information than in the past. Increasing acceptance in the United States of ISO
(International Organization for Standardization) product design standards also
caused the Company to make certain revisions to the product. The Company
believes that the potential benefits of the engineering revisions may outweigh
any disadvantages in delaying the product introduction.
The Commercial and Institutional Laundry Market
The commercial and institutional laundry market is broken down into four
main sectors: hospitality (hotel and restaurant linen), health care (hospitals
and nursing homes), industrial (uniform rental and industrial towels) and dust
control (rubber-backed mats and dust mops). Commercial laundries may
process the entire spectrum of products while institutional laundries are often
owned by hospitals, nursing homes or hotels and solely process their own
textile goods.
According to the 1987 Census of Service Industries, there are 1,338 linen
supply laundries and 1,379 industrial supply laundries in the United States.
The company estimates there are additionally some 27,500 institutional
laundries in the United States.
Most commercial laundries supply both linen and industrial textiles and
may be reflected in either category mentioned above. This commercial market
segment was the initial target for the company's Ozone Washing System
products.
All commercial and institutional laundries use large quantities of water and
wash chemicals to process textile products. The company's Ozone Washing
Systems are installed at laundry facilities. Ozone is generated and dissolved
into laundry wash water at key times during the wash process. The ozone
oxidizes soil molecules, causing large soil molecules to fragment into smaller
molecules. This helps soils to break free from fabrics faster and to dissolve
more completely in the wash water.
Benefits to Ozone Washing System users include the ability to reduce the
wash cycle times required to process the laundry and the ability to wash with
lower temperature water. This allows Ozone Washing System customers to
reduce their usage of electricity, water, water-heating energy, and manpower,
as well as to increase the capacity of existing laundry plants and to lower
their capital equipment expenditures.
Commercial and Institutional Laundry Market Trends
Several existing market trends and concerns have created an opportunity
for alternative washing processes such as ozone washing. These trends and
concerns include the following:
Heightened need for cost containment and increased productivity. The
commercial laundry market is very competitive and is currently undergoing
some industry consolidation. Economic constraints provide continual
pressure for laundries to cut costs and increase utilization of capital
equipment and labor.
<PAGE> 9
Stricter environmental restrictions on discharging water effluent.
Existing and proposed federal and local waste water regulations are
becoming more restrictive, placing many laundries in the position of
facing fines or closure because of high waste water output.
Need for greater sanitization. Increased public concern about the
transmission of infectious diseases has increased the burden on textile
processors, especially those in the health care sector, to provide
improved sanitization in laundry operations.
Increased public concern regarding conservation of natural resources and
energy. As large consumers of water and energy, many laundries are
seeking technologies that will allow them to conserve resources.
The Company believes that its Ozone Washing Systems provide numerous
operational benefits that are attractive to laundries that are motivated to
cut costs and increase capacity. The Company is also developing proprietary
marketing programs designed to help the Company's customers communicate
information regarding ozone's superior sanitization and resource conservation
capabilities. The Company further believes that its Ozone Washing System
provides superior performance compared to other ozone technologies that
have been introduced to the laundry markets. However, there can be no
assurance that there will be an increased demand for the Company's products
or for products similar to the Company's products.
Commercial and Institutional Laundry Ozone Technology
The Company has successfully installed 14 first-generation Ozone Washing
Systems in major commercial laundries in the United States and Canada.
These systems consist of a large industrial ozone generator; a distribution
panel constructed to distribute ozone to individual washing machines within a
laundry facility; pumps, filters, and piping systems used to transport ozone
and ozonated water within the laundry facility; and PLC (Programmable Logic
Controller) computer systems that control the function of the ozone system.
Additionally, the company has installed ozone safety monitoring devices and
recirculation loops that are used to reuse wash water in some plants.
The Company is now beginning to market a second generation Ozone
Washing System that includes all of the previous features, but adds enhanced
Management Information Systems, chemical delivery systems, and waste water
treatment options.
The Company's Ozone Washing System is the subject of a patent
application that has been filed in the United States. The outcome of the
patent proceeding cannot be predicted.
Commercial and Institutional Laundry Products
The Company's Ozone Washing System products include the following:
THE OZO(3)-CLEAN(TM) SYSTEM 2000 is the trade name of the second
generation Ozone Washing System. The product consists of equipment
suited for permanent installation in large commercial laundry facilities.
Retail cost of the system ranges from $150,000 to $300,000, depending on
the size of the laundry facility and the number of options selected by the
customer.
<PAGE> 10
THE ZONO(3)-CHEM LINE OF WASH CHEMICALS is the formulation
of approximately 8 detergents and chemicals used in the wash process. The
company has entered into a license agreement with a laundry chemical
supplier for the distribution of these chemicals. CyclO(3)PSS Textiles
will offer these chemicals to its Ozone Washing System customers through
licensed providers. By using CyclO(3)PSS formulated and supplied wash
chemicals, the customers will be better assured of consistent performance
by the Ozone Washing System.
SKID-MOUNTED OZO(3)-CLEAN(TM) SYSTEMS are being constructed
for use in two settings. They are designed as a smaller, self-contained
Ozone Washing System mounted to a single platform. These systems can
be used to demonstrate the ozone washing process in large facilities.
These compact systems are also expected to become the model for the
company's entry into the institutional segment of the market, which
typically features smaller customer facilities.
Other Laundry Products
The Company also markets a Material Handling System that was acquired
with Innovative Textile Technology, Inc. The VAC Soil Counting System
sorts, counts and conveys soil textiles through the use of vacuums, a series
of tubes, a computer terminal, infra-red eyes and holding bins. The system is
designed to count the number of pieces of each type of laundry, by customer,
and provide the appropriate billing codes to the Accounting Department in
order to maintain inventory control, work scheduling records, and billing
requirements. The system operates by counting the number of each type of
laundry that is fed through a vacuum tube through a temporary holding bin,
prior to transportation to the washing area of the laundry facility. The
speed and accuracy of the vacuum system as opposed to manually counting and
sorting, improves overall work flow in the commercial laundry and provides a
cleaner environment for processing soiled linen. The Company's VAC Soil
Counting System allows for a variety of types of laundry being sent through
the system at any one time and sorts various types of laundry for washing
purposes.
The Company, and its predecessors, have sold and installed over forty VAC
Soil Counting Systems in the United States and Canada and provides periodic
service to many of those facilities. VAC Soil Counting Systems sell for a
retail price of between $94,000 and $340,000 depending on the size and layout
of individual customer laundry facilities.
Specialty Chemicals Market
Through the Company's CyclO(3)PSS BioChemical Corporation
subsidiary, the Company supplies specialty fine organic chemicals and custom
synthesis services to pharmaceutical, chemical, and biochemical researchers
worldwide. CyclO(3)PSS BioChemical Corporation's primary services include:
Offering rare or difficult to synthesize organic and biochemical products
for individual researchers and large chemical, biochemical, and
pharmaceutical firms.
Providing products and services for special projects.
Producing isolates of plant and animal tissue extracts for research or
product purposes.
<PAGE> 11
CyclO(3)PSS BioChemical Corporation (CBC) sells over 250 specialty
chemicals and pharmaceuticals to researchers and scientists both in the United
States and abroad in very small quantities. The manufacturing facilities of
CBC does not currently meet Good Laboratory Practices(GLP) or Good
Manufacturing Practices (GMP) and therefore, the products are not sold for
use in human trials or studies. Many of CBC's current products are sold
through larger chemical distribution companies. While the minimal revenues
produced by CBC have constituted a significant portion of total revenues
during the year ended February 29, 1996, it is not expected to be a
significant portion of total sales if and when the Company's laundry and/or
medical sterilization/disinfection products gain market acceptance.
Proprietary Technology, Patents, and Trademarks
The Company has developed technologies which it believes will enable it
to offer effective medical and surgical product sterilization systems, as
well as support product development in certain non-medical application. The
Company's gas sterilization technology has been developed around an ozone
generation technology patented and owned by CleanTech International, Inc.,
which was acquired by the Company in January 1994. Utilizing such ozone
generation technology as the "core" for the Company's products, the Company
has developed technologies with various components and modules which are
integrated into a sterilization product and system. The Company has, and will
continue to, seek patent protection for various components, technologies and
systems it develops when appropriate, and will attempt to protect other
components, technologies and systems through trade secret protection.
License from CleanTech International, Inc. and Subsequent Acquisition of
CleanTech International, Inc. On June 4, 1991, the Company entered into a
license agreement with CleanTech International, Inc. ("CTI") whereby CTI
granted the Company the exclusive worldwide license to manufacture, license
and sell the ozone generator developed by CTI, and any improvements
thereon, for worldwide uses related to sterilization or disinfecting devices
intended for sale to and use by medical, hospital and dental facilities for
human and animal health care, including medical product manufacturers and
suppliers.
Effective January 1994, the Company acquired CleanTech International,
Inc. The former shareholders of CleanTech International, Inc. were issued
shares of the Company's common stock and cash in connection with the
acquisition.
CleanTech International, Inc.'s assets consisted primarily of patents
relating to the ozone generation technology and its license agreement with the
Company. CleanTech had no other licenses and had not generated income
from any other source other than the Company.
The acquisition of CleanTech International, Inc. provided the Company
with ownership of the technology for an amount equal to or less than the
minimum royalties called for in the licensing agreement. Additional benefits
are provided to the Company through absolute ownership of the technology,
giving it the opportunity to expand, should it be determined appropriate to do
so in the future, into other markets requiring ozone generation which were
previously prohibited under the licensing agreement.
Patent Applications. To date, the Company has filed twelve patent
applications with the United States Patent and Trademark Office. As of the
date hereof, eight of these patents have been granted, three of the patents
are still pending and one of the submissions has been denied by the Patent
Office and the Company has determined not to resubmit such application. The
patent submissions relate to various component parts or technologies used in
CyclO(3)PSS sterilization, laundry products and chemical compounds.
<PAGE> 12
The eight patents granted and grant dates are identified as shown in the
following list:
Title Grant Date
1. Method for Producing Ethynylated Aromatic Compounds 05-12-1987
2. Laundry Transfer and Counting Apparatus 07-18-1989
3. Ozone Generator 09-08-1992
4. Ozone Sterilization System Secondary Safety Chamber 11-30-1993
5. Limited Restriction Quick Disconnect Valve 01-25-1994
6. Ozone Sterilization System Spent Agent Destruct and
Mixing System 08-02-1994
7. Ozone Sterilization Vapor Humidification Component 09-06-1994
8. Fluid Chemical Biocide 04-04-1995
Foreign patent proceedings, where applicable, have been initiated for
patents that have been granted in the United States.
The three currently pending patent applications are identified and dated
as shown in the following list:
Title Application Date
1. Cold Water Ozone Disinfection 11-30-1995
2. Cold Water Wash Formula 01-03-1996
3. Laundry Ozone Injection System 09-30-1994(1)
1 Reapplied for on 06-06-1995
Trademarks. The Company has filed trademark applications with the
United States Patent and Trademark Office for the trademarks
"STER-0(3)-ZONE(TM)", "RETR-O(3)-ZONE(TM)" and "STEROX(TM)." All three
applications have been allowed but the trademarks have not yet been issued.
The Company also has filed a trademark application for its "OzO-Clean
2000TM" ozone laundry system, seven trademark applications for its
"ZonO-ChemTM" line of laundry chemicals and an additional trademark
application for the "Ozone For The EarthTM" symbols for its marketing
programs.
Research and Development Activities
The Company intends to engage in continuing research and development on
systems for use by manufacturers of products requiring sterilization prior to
customer shipment. In many cases, the products requiring sterilization
contain heat and radiation sensitive materials. Because of this, EtO gas
sterilization has been the only viable option available for some manufacturers
and is currently used by many such makers of medical devices and disposable
products. Packaged goods sterilized in large commercial EtO systems typically
require lengthy EtO exposures, followed by a "quarantined" aeration period
prior to release for shipment.
Preliminary tests have indicated that the Company's technology may enable
the conditioned ozone gas to penetrate numerous layers of various wrapping
materials, providing sterilization of the wrapped goods. Due to the
relatively rapid natural decay of ozone gas into ordinary oxygen, aeration
will probably be unnecessary. In contrast, packaged goods often require 7-10
days of aeration after sterilization in EtO. With the minimal recurring
costs of the ozone gas technology and the elimination of environmental hazards
and lengthy degassing periods, the Company believes it may be able to provide
an effective sterilization alternative for many product manufacturers. The
Company also intends to continue testing of the STER-O(3)-ZONE(TM) 100 to
validate the system's performance with a wide range of medical instruments
and devices and to continue research and development activities pertaining to
products and potential products in the laundry, food processing and waste
water treatment markets.
<PAGE> 13
The Company's research and development work is currently done on an
in-house basis, utilizing services of independent testing laboratories and
contract engineering firms on an as-needed basis.
The Company incurred research and development expenses of $816,517
and $947,101 for the years ended February 29, 1996 and February 28, 1995.
The decrease of $130,584 was due to cost curtailment measures implemented
by the Company as capital resources diminish. These measures, however, have
slowed the completion of some projects. The Company intends to further
develop its technologies for additional commercial uses and marketplaces as
resources become available and/or suitable strategic alliances are
negotiated.
Manufacturing
The Company's products are assembled from a variety of component parts.
The component parts include, but are not limited to microprocessors, ozone
generators, sterilization containers, various electronic parts, structural
frames, ozone destruct systems, ozone humidification systems, ozone liquid
injectors, compressors, valves and fittings, and various sensors and
monitoring devices. The Company assembles and tests each of its products on
an in-house basis. The Company relies on outside vendors for various parts and
sub-assemblies.
The Company does not intend to be a basic manufacturer.
The ozone generator is the device that creates the ozone gas used in the
Company's sterilization process. The ozone generator is the "engine" of the
Company's sterilization process and a key component in each sterilization
unit. The ozone generator, which will be contained in the Company's
sterilization products, is manufactured by the Company from component parts
and packaged in a modular "slide-in" chassis.
The Company also purchases large industrial ozone generators from outside
vendors for use in laundry and other applications.
The Company's products are currently designed to utilize standard
80386SX microprocessor "mother boards," along with PLC controllers and
several custom circuit boards built by independent manufacturers pursuant to
the Company's specifications.
Surgical and medical instruments requiring sterilization are inserted
into a modular sterilization container/chamber system jointly developed by the
Company and Genesis, Inc., the sterile container division of the V. Mueller
division of Baxter Healthcare Corp. The sterilization chamber is manufactured
by Genesis, Inc. and supplied to the Company for modification on an as-needed
basis for inclusion in the Company's products.
The Company believes that, with the exception of the ozone generator used
in the medical sterilizer, which is manufactured by the Company, most of the
components and sub-assemblies are available from multiple sources.
<PAGE> 14
Marketing
The Company does not anticipate undertaking wide-scale marketing efforts
of clinical sterilization systems for at least the next year, during which
time it will be engaged in the FDA review process. Currently, the Company
anticipates marketing its medical products through in-house sales efforts and
through independent surgical product dealers.
The Company markets laundry industry products through in-house sales
efforts.
The Company markets specialty chemicals through in-house sales efforts
and through independent chemical distributors.
Competition
The Company has developed and intends to market a surgical and medical
product sterilization device which uses ozone gas as the sterilant. There
currently exists a number of methodologies and commercial products for
general sterilization purposes. AMSCO International and Steris Corporation
(recently combined via acquisition of AMSCO by Steris), the Castle Division
of MDT Corporation, J&J Medical, Inc. (a subsidiary of Johnson & Johnson),
Abtox Corporation and the Medical-Surgical Products Division of 3M
Corporation are well-known U.S. companies offering products for general
sterilization and disinfection. Competition in the market served by the
Company is based upon product design and quality, product innovation, and
product serviceability that results in the greatest overall value to the
customer. In addition, there is significant price competition among various
instrument preparation processes.
J&J Medical is currently marketing a product for low temperature sterile
processing based on hydrogen peroxide technologies. Abtox is currently
marketing a product for low temperature sterile processing based on hydrogen
peroxide and peracetic acid technologies. Other smaller, early stage
companies are believed to be working with a variety of other technologies and
sterilizing agents, including plasma, chlorine dioxide and formaldehyde.
In addition, a number of companies are developing disposable medical
instruments and other devices designed to address the risk of contamination.
The Steris Corporation technology is a liquid chemical process which
sterilizes instruments and devices at or near the site of the patient
procedure.
The Company has not yet commenced marketing of its medical products.
When it does, however, it will undoubtedly face substantial competition from
companies currently selling sterilization products and procedures and from
other companies as new processes enter the market. Many of the Company's
existing or potential medical competitors have substantially greater
financial, technical and human resources than the Company. Accordingly, the
Company's competitors may succeed in developing and commercializing
products more rapidly than the Company.
The Company's laundry products are in competition with several small
producers of ozone washing systems. These competitors include Tri-O-Clean
Systems, Oxygen Technologies, and Envirozone. The Company believes that
each of these competitors is a small, early stage enterprise.
The Company's specialty chemicals products are unique products with
limited markets and fragmented competition.
<PAGE> 14
Government Regulation
The STER-O(3)-ZONE(TM) 100 is a medical device subject to the
provisions of the Food, Drug and Cosmetic Act (the FDC Act) and
implementing regulations. The 1976 Medical Device Amendments and the
Safe Medical Device Amendments of 1990 provides comprehensive regulation
of all stages of development, manufacture, distribution and promotion of
medical devices. The two primary regulatory routes by which to bring a
product to market are: the Premarket Approval Application (PMA) and the
Premarket Notification (510(k) Notification). The PMA requires a
comprehensive review of specified pre-clinical and clinical data, which
results in a finding that a device is safe and effective for its designated
indicated use. The 510(k) Notification permits marketing upon a demonstration
to the FDA's satisfaction that a device is "Substantially Equivalent" to a
device already in commercial distribution. In general, the clearance process
can require extended periods of testing. Review of submissions can take
prolonged, indefinite periods of time and involve significant resource
expenditures. There is no certainty that the FDA will clear any given device
for marketing.
The Company has filed a 510(k) Notification in connection with the STER-O
(3)-ZONE 100(TM). (See "Description of Business - Anticipated FDA Review
Process.")
Even if the Company obtains FDA clearance to market products under the
510(k) Notification, the manufacture, distribution and promotion of any
medical device by the Company cleared for distribution is also extensively
regulated by the FDA. All devices must be manufactured in accordance with
Good Manufacturing Practices specified in implementing regulations under the
FDC Act. These practices control every phase of production from the
incoming receipt of raw materials, components and subassemblies to the
labeling, tracing of consignees after distribution and follow-up and reporting
of complaint information. The FDA has the authority to conduct unannounced
inspections of all facilities where devices are manufactured or assembled,
and if the investigator observes conditions which might be violations, those
conditions must be corrected or satisfactorily explained, or the Company could
face regulatory action that might include physical removal of the product from
the marketplace. The FDA also regulates and supervises labeling for devices.
Recently, the FDA has pursued a more rigorous enforcement program to
ensure that regulated firms comply with the provisions of the FDC Act. A firm
not in compliance may face a variety of regulatory actions, ranging from
warning letters, product detention, device alerts and mandatory recalls or
field corrections to seizures, injunction actions, civil penalties and
criminal prosecutions of the Company and/or responsible individual employees,
officers or directors. The commencement of any action against it of the type
described above could seriously impact the Company's ability to conduct
business.
The Company also plans to commercially distribute its medical products in
foreign countries in the future. Its products will be subject to a wide
variety of laws and regulations in these markets, ranging from simple product
registration in certain countries to complex clearance and production controls
in others. The extent and complexity of regulation of medical devices is
increasing worldwide. The Company anticipates that this trend will continue,
and that the cost and time required to obtain approval to market in any given
country will greatly increase, with no assurance that such approval will be
obtained.
Other Business Opportunities
The Company intends to continue diversifying its current business
activities by entering into other lines of business which are related or
unrelated to its current activities. The Company may attempt to enter into
new lines of business through acquisitions or by initiating operations
internally. There can be no assurance that the Company will be able to
effectively diversify its business activities.
Insurance
Currently, the Company does not have product liability insurance for it's
medical sterilization systems. Prior to the time the Company commences
medical product distribution, it will attempt to obtain product liability
insurance, however, there can be no assurance that the Company will obtain
product liability insurance protection or if obtained, that such insurance
will fully cover future product liability claims if they arise.
Employees
The Company and its subsidiaries employ thirty three full-time employees
as of February 29, 1996. None of the Company's employees are covered by a
collective bargaining agreement.
<PAGE> 16
ITEM 2. PROPERTIES
The Company leases approximately 14,850 square feet of office and
research laboratory space at 3646 West 2100 South, Salt Lake City, Utah
84120. The lease expires December 31, 1997 and requires monthly lease
payments of $6,173. The Company has two, one-year options to renew the
lease with a five percent (5%) rent increase. The Company's facilities are
adequate for its current needs. In the event that the Company's business
operations expand in the future, it anticipates that it will be able to find
suitable additional facilities at competitive rates.
In addition to the Salt Lake location, one of the Company's subsidiaries,
CyclO(3)PSS Textile Systems, Inc. currently leases approximately 750 square
feet of office space for a service and support office in Tucson, Arizona.
The lease expires September 30, 1997 and requires monthly lease payments of
$250.
ITEM 3. LEGAL PROCEEDINGS
On October 27, 1995, a Motion for Summary Judgement in Utah Supreme
Court was granted to certain former stockholders with respect to an allegation
that shares owned by the former stockholders had been wrongfully canceled in
April 1990. The ruling provides for the reissuance of 354,406 canceled
shares. The Company and legal counsel believe the summary judgement was
incorrect and intend to vigorously appeal this decision. At the time the
stock was originally canceled in 1990, the Company was financially insolvent,
the stock was not listed on any exchange, and the Company's stock had an
indeterminate value. Management believes the outcome of this litigation will
not have a material impact on the Company's financial position or results of
operations. Accordingly, the Company has not made an accrual for a potential
loss as both the resolution of this litigation and the value, if any, that
would be ascribed to the stock is not determinable.
At year end, the 354,406 shares were reserved for future issuance.
Subsequent to February 29, 1996 the shares were issued and placed in escrow
awaiting the results of the appeal.
The Company is involved in other legal actions and claims arising in the
ordinary course of business. Management believes, based on advise of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's consolidated financial position, results of operations
or cash flows.
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
Market for Common Stock
The Company's common stock is currently listed on the NASDAQ Small-Cap
Market under the symbol "OZON". Currently, there is only limited trading
activity in the Company's common stock and the quotations set forth below
reflect such limited activity. There can therefore be no assurance that
quotations will not fluctuate greatly in the future in the event trading
activity increases or decreases. The information contained in the following
table was obtained from the NASDAQ Stock Market and from various
broker-dealers and shows the range of representative trading prices for the
Company's common stock for the periods indicated. The prices represent
quotations between dealers and do not include retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions:
<TABLE>
Year Ended Year Ended Through
February 28, 1995 February 28, 1996 May 31, 1996
<CAPTION>
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 9.50 $ 5.50 $ 5.75 $ 2.75 $ 5.13 $ 2.50
Second Quarter 7.88 4.50 4.75 3.25
Third Quarter 6.88 5.75 4.31 2.50
Fourth Quarter 6.13 3.63 3.25 2.50
</TABLE>
Holders
The number of record holders of the Company's common stock as of May
31, 1996 was 372. The Company believes the actual number of beneficial
shareholders exceeds 1,000. There are numerous shareholders that hold the
Company's common stock in the "street name" of their various stock brokerage
houses.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying dividends in the foreseeable future.
It is the present intention of management to utilize all available funds
for the development of the Company's business.
<PAGE> 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company was an inactive corporation from the 1930's to 1987. From
the commencement of operations in 1987 until July of 1994, the Company was
in the development stage engaged primarily in the research and development of
its products. From the period since reactivation (March 2, 1987) to February
29, 1996, the Company had incurred a cumulative net loss of approximately
$8,522,243. The Company expects to continue to incur losses into next year.
Prior to July 1994, the majority of the Company's efforts were directed
to research and development of its ozone-based medical equipment sterilization
technology and related products. Although the Company may place a minimal
number of its sterilizers, it has determined it prudent to postpone the
placement of these units until such time as the labeling claims made pursuant
to the application can be fully substantiated by ongoing internal testing and
independent validation. The Company will not commence wide-scale marketing
efforts in the clinical marketplace until and unless it obtains FDA marketing
clearance of its products. The Company filed a 510(k) Premarket Notification
with the FDA on January 6, 1995. Based upon the volume of additional data
requested by the FDA in their first response, and the potential for additional
design and engineering that will be required in order to produce the required
data and substantiate the desired labeling, the Company cannot predict how
long the FDA review and approval process of this submission will take.
On May 31st, 1995, CyclO(3)PSS Textile Systems, Inc., (CTS) a wholly
owned subsidiary of the Company closed its offices in West Chester,
Pennsylvania, and the operations were moved to the corporate headquarters in
Salt Lake City, Utah. All employees and management of the Philadelphia
operations were terminated. The move enabled the utilization of the design
and engineering expertise of the Salt Lake organization to correct the
production issues experienced by the subsidiary in designing and installing
the line of systems and products. The direct expenses of the move along with
resources expended on the redesign, coupled with the indirect costs of an
extended period of dormant sales activity and revenues during redesign and
reintroduction of the products contributed significantly to the Company's
loss.
CyclO(3)PSS BioChemical Corporation, (CBC) also a wholly owned
subsidiary of the Company, was purchased in October of 1994 contributing
only modestly to the prior year revenues. The subsidiary was moved into new
laboratories in January of 1995, contributing its first full year of revenues
to the Company, as reflected on the accompanying financial statements. CBC
provides contract custom synthesis and contract biochemical research and
development. They also produce an ongoing product line of over 250 scientific
compounds in addition to providing invaluable scientific expertise in all
areas of the Company product development activities.
The Company's future operating results will depend on many factors,
including the timing of the FDA marketing clearance, the demand for the
Company's medical sterilization products at that time, and industry acceptance
of the Company laundry technologies, system equipment and attendant
products. Additional factors include the Company's ability to manufacture and
market its products on a cost-effective basis, the level of competition and
the ability of the Company to develop product enhancements and new products
and to obtain the required financing.
<PAGE> 19
Results of Operations
The Company's gross revenues were $442,632 for the year ended February
29, 1996, and $945,567 for the year ended February 28, 1995. Only two of
the Company's wholly owned subsidiaries are currently contributing to the
Company gross revenues, CTS and CBC. CTS's revenues were $202,525 for
the year ended February 29, 1996, and $886,853 for the year ended February
28, 1995. CBC's revenues were $240,107 for the year ended February
29,1996, and $58,714 for the year ended February 28, 1995. The reduction in
the revenues of CTS is primarily the result of the Company's decision to
interrupt the direct sale of systems until such time as the redesign effort
was completed and dependable systems could be reintroduced to the market.
Direct sales efforts were suspended May of 1995, and reintroduced in
September of 1995. Revenues were further hampered by the time
considerations of hiring and training replacement personnel and bringing
operations back on line after moving to Salt Lake City. CTS's revenues for the
year ended February 29, 1996 consisted of service and support of present
customers who had purchased Ozone Washing Systems and VAC Soil
Counting Systems in the year ended February 28, 1995 and in prior years. The
increase in the revenues of CBC are attributable to the fact that this was
the first full twelve months of financial reporting for the subsidiary. CBC's
revenues are the result of contract custom synthesis, and the sale of chemical
compounds it produces in its laboratories. Due to the selective expertise of
its personnel the subsidiary also provides extensive in-house research
assistance, and has become an invaluable resource engaged in the scientific
support of all activities of the Company. The internal support activities are
non revenue producing.
Although the Company is beginning to produce revenues, the research and
development expenditures of $816,517 for the year ended February 29, 1996,
and $947,101 for year ended February 28, 1995 are significant. The Company
experienced a slight reduction in research and development expenses last year
over the prior year, but management sees no immediate overall reduction of
research and development expenses. These costs will continue to be expended
as certain products complete the development process and are commercialized.
The Company incurred general and administrative expenses of $1,841,331
for the year ended February 29, 1996, compared to $1,197,244 for the year
ended February 28, 1995. This increase was due in part to the added salaries
and operational expenses incurred at the textile facilities in West Chester
prior to its closing. At year end February 28, 1995, the Company had 38 full
time employees. At year end February 29, 1996, the Company had 33 full time
employees. In anticipation of the Company's ability to manufacture and sell a
limited number of IDE STER-O(3)-ZONETM 100 devices, and in preparation
for what was expected to be an active reintroduction of CTS's products, the
number of employees reached 46 full time and 4 part time employees. With the
IDE sales postponed, and the textile product reintroduction sluggish, a number
of production and assembly personnel were terminated. As the Company
completes development on certain products and prepare for commercialization,
the human resource requirements of the Company will change.
The Company incurred selling and marketing expenses of $402,307 for the
year ended February 29, 1996, compared to $225,917 for the year ended
February 28, 1995. This increased expense is attributable to the market entry
and subsequent re-entry of CTS's products. The Company advertised heavily
in industry publications, hosted events at several industry trade shows, and
engaged several promotional demonstrations of the systems' capabilities using
small portable systems designed and manufactured specifically for that
purpose. The Company anticipates marketing expenses to increase slightly in
the fiscal year 1997 due to the hiring and training of additional marketing
personnel and the attendant costs related to their endeavors. The Company
also anticipates increasing its direct marketing efforts to potential
customers of CBC. The Company will also increase marketing activity and incur
additional expenses should it receive positive indications from the FDA as to
marketing clearance for its medical sterilization systems during the year
1997.
<PAGE> 20
For the year ended February 29, 1996, the Company had interest income of
$25,363 as compared to interest income for the year ended February 28, 1995,
of $161,672. This reduction was due to a decrease in the amount of cash on
hand and short term investments. The cash position of the Company has been
depleted as funds for operations have been required. The Company incurred
$33,602 in interest expense for the year ended February 29, 1996. $8,339 is
attributable to the result of entering into equipment leasing arrangements for
certain laboratory equipment required for the operations of the newly built
CBC facilities. $25,263 is the interest amount accrued in conjunction with
the convertible debt offering (see discussion below under Liquidity and
Capital Resources in regards to this debt offering). While this is the first
year the Company has incurred interest expense, it is anticipated that this
amount will continue to increase due to the convertible debt offering
currently being accrued.
The Company's net loss for the year ended February 29, 1996 was
$3,449,994, as compared to year ended February 28, 1995 of $2,233,364. The
Company anticipates that it will operate at a loss for the year ended February
28, 1997. However, it is anticipated that the losses should begin to
diminish if and when the revenues of CTS begin to be generated.
Liquidity and Capital Resources
As of the date of this filing, the Company has insufficient funds to
continue its operations. Should the Company be unsuccessful in acquiring the
needed financing immediately, the Company will seek direction from the Board
of Directors as to what action must be taken to create a safe harbor for the
Company's limited operations and assets. Management is aggressively
exploring additional financing for the ongoing operations of the Company.
There are no assurances that the efforts to locate and secure additional
financing will be successful. The failure to secure this financing would
substantially alter the management's assumptions as presented in the remainder
of this section.
Cash used in operating activities was $3,165,217 for the year ended
February 29,1996, compared to $1,892,408 for the year ended February 28,
1995. The Company's use of cash in the year ended February 29, 1996 was
more aggressive than any previous year as the Company experienced
extraordinary general and administrative and marketing expenses in support of
CTS. The use of the Company cash reserves were increased as a result of the
unexpected delay in sales revenues in that subsidiary. Accounts receivable
were comprised of service and parts sales from CTS, and contract development
and chemical compound sales from CBC.
Cash provided from investing activities, which have been used to fund
operations for the year ended February 29, 1996, included net proceeds of
$1,192,849 from the sale of short term investments, compared with $3,131,232
for the year ended February 28, 1995. Cash expenditures for property and
equipment were $222,810 for the year ended February 29, 1996 compared to
$351,349 for the year ended February 28, 1995. This decrease was the result
of the Company entering into equipment leasing arrangements for certain
equipment instead of a cash purchase in an effort to conserve cash.
Cash provided from issuance of common stock was $1,469,660, with an
additional $875,000 from the issuance of convertible debt for the year ended
February 29, 1996 compared to cash used of $907,000 for the year ended
February 28, 1995 for the re-purchase of 254,000 shares of restricted common
stock from a former employee in connection with a termination for $1.97 per
share, and the payment of certain notes payable when the Company acquired
CTS.
Total assets decreased to $2,678,618 for the year ended February 29, 1996
from $3,554,368 at the year ended February 28, 1995, primarily due to the
decrease in the Company cash , as described above.
Total current liabilities decreased to $441,636 at February 29,1996 from
$466,941 at February 28, 1995. All of the Company current liabilities at year
end were attributed to accounts payable, accruals and deferred revenues, and
the current portion of certain capital equipment leases. Long term
liabilities increased to $944,289 from zero from the prior year. Of the
total, $889,663 represented principal and interest debt generated on one of
the Company 's financing which was an offering of convertible debt
instruments. All of the Company financing for the year ended February 29,
1996 are described below.
On June 29,1995 the Board of Directors approved a private placement of
investment stock to accredited investors. The offering consisted of 571,432
units at $3.50 each for a total of $2,000,000. Each unit consists of one
share of restricted common stock plus one warrant to purchase an additional
share of restricted stock at $4.00. The warrant expires one year after the
closing of the private placement. As of November 30, 1995 415,674 units had
been issued for a total consideration of $1,454,858. This offering was closed
as of October 17, 1995 by the Board.
On October 17, 1995 the Board of Directors approved the issuance of a up
to $3,000,000 of Convertible Secured Promissory Notes to investors. The
Convertible Notes which include warrants to purchase shares of the Company's
restricted common stock at $4.00 per share, also bear interest at a rate of
12% per annum. Both the interest and principal are convertible to shares
of the Company's restricted common stock at $3.50 per share. The conversion
shares and warrants carry certain registration rights and requirements.
These notes are secured by all assets of the Company. As of May 31, 1996,
$1,226,000 had been received from this offering.
While management has taken aggressive steps to reduce current monthly
expenses, unless this, or another debt or equity offering is completed the
Company has insufficient funds to finance its operations for the next twelve
months. It is possible that sales revenue from the sale of CTS's products
could reduce the overall cash requirement. However, unless additional
financing is located the Company cannot continue operations for the next
twelve months.
In addition to the efforts of management to secure financing, the
Company has engaged the Kreigsman Group, an investment banking organization,
to assist the Company in locating additional financing. There are no
assurances that the efforts of either the Kreigsman Group or management will
be able to locate and secure the financing necessary for the ongoing
operations of the Company prior to cessation of most of its business
activities.
Plan of Operation
Should the Company secure the financing required, the plan of operation
during the next twelve (12) months is to complete the following:
1. Completion of design modifications, labeling changes and advanced stage
product efficacy testing of the Company's medical sterilization
product, the STER-O(3)-ZONETM 100 in preparation for its final
submittal.
2. Produce data and design elements in support of desired labeling claims
for FDA officials reviewing the Company's 510(k) Premarket
Notification for the STER-O(3)-ZONETM 100.
<PAGE> 21
3. Should the data support the labeled claims, the Company will begin the
sale of a limited number of STER-O(3)-ZONE(TM) 100 units to medical
facilities under an Investigational Device Exemption (IDE).
4. Completion of validation testing of the Company's liquid chemical
sterilant, SterOx(TM), preparatory to submission of the 510(k)
Premarket Notification to the FDA, and potential test marketing in
international markets where possible.
5. Continued development of products and enhancements for the Company's
textile operations.
6. Reintroduction and sales of the Company's revised and modified textile
systems and products.
7. Continuation of contract research and development within the
Biochemical group and the ongoing manufacture and sales of their
current and future products.
8. With appropriate financing in place, there may be additional
diversification of the Company's business activities through future
acquisitions.
Although the Company will be primarily engaged in the aggressive sales
and support of its completed products, it anticipates that research and
development expenses will be ongoing, and could range from $800,000 to
$1,000,000 during the next twelve months in support of the completion of key
future products.
The Company currently anticipates that its expenditures on equipment will
range from $200,000 - $400,000 during the next twelve months based upon
current manufacturing assumptions, assuming that the required financing is
obtained.
The Company had 33 full time employees as of the year ended February 29,
1996. As of May 31, 1996 the Company had reduced its number of employees
to an operational minimum of 25 full-time employees as part of its' plan to
reduce overall expenses. The Company anticipates that no more than six
additional employees will be hired during the next twelve months, unless: (1).
the market acceptance of the textile systems is accelerated; (2). the
sterilizer products are approved by the FDA in a more timely manner than
management predicts. It is anticipated that general and administrative
expenses would not increase by more than $200,000 on an annualized basis as a
result of any such increase in employees.
The information set forth herein as to anticipated research and
development costs, equipment purchases and increase in employees are
management's best estimate based upon current plans. Actual expenditures may
be greater or less than such estimates depending on many factors including,
but not limited to: the FDA review process, the availability of new
technologies, marketing efforts and the successful acquisition of needed
capital.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required with respect to this Item 7, see "Consolidated
Financial Statements and Schedules" on pages F-1 through F-21 of this report.
<PAGE> 23
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In January 1996, the Company replaced Price Waterhouse LLP with Ernst
& Young, LLP as the Company's Independent Certified Public Auditors, as
more fully described in the 8-K filing dated January 8, 1996, which is
incorporated herein by reference. There were no disagreements with Price
Waterhouse LLP on any matter of accounting principals or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT.
A. Identification of Directors and Executive Officers. The current
directors and officers of the Company who will serve until the next annual
meeting of shareholders or until their successors are elected or appointed and
qualified, are set forth below:
Name Age Position
John M. Williams 45 Chairman, CEO
William R. Stoddard 44 President, Director
Alice L. Hart 39 Controller, Corporate
Secretary
Robert J. Wrigley 47 Director
Steve Sarich, Jr. 75 Director
J. Bruce Baily 61 Director
There are no family relationships among the Company's officers and
directors. Background information concerning the Company's officers and
directors is as follows:
John M. Williams. Mr. Williams has been an officer and director of the
Company since 1990. From 1987 to 1989, he was vice president and director
of Medivest, Inc. and its subsidiaries. Mr. Williams graduated from the
University of Utah in 1973 with a degree in accounting.
William R. Stoddard. Mr. Stoddard has been an officer and director of
the Company since 1990. From 1986 to 1989, Mr. Stoddard was the Chief
Financial Officer of Medivest, Inc. and its subsidiaries. From 1988 to
1990, he was Chief Financial Officer of Medivest Aviation Group, Inc.
<PAGE> 24
Alice L. Hart. Ms. Hart has been employed as Controller by the Company
since July 1993. She was elected an officer in March of 1995. Prior to 1993,
she was employed by First Security Investor Services as Senior Operations
Officer. Ms. Hart earned a Bachelor's Degree in Business Administration from
Black Hills State College and an Associate Degree in Accounting from Salt
Lake Community College.
Robert J. Wrigley. Mr. Wrigley has been a director of the Company since
1991. Mr. Wrigley has been president of Mountain States Medical, Inc. since
1981. Prior to 1983, he was employed by Auto Suture Co., a division of U.S.
Surgical Corp. Mr. Wrigley earned his Bachelor's Degree in Behavioral
Science from the University of Utah.
Steve Sarich. Mr. Sarich has been a director of the Company since July
1993. Mr. Sarich is, and has been for the last 15 years, president of 321
Investment Co. Mr. Sarich is a director of Omega Environmental, Wall Data,
Back Technologies, Inc., Ark Systems, Inc., Flo Scan Instrument, Multiple
Zones International and Talus Imaging Co. Mr. Sarich has been president of
Arctic Ventures, Inc. and C.S.S. Management Co. since 1988.
J. Bruce Baily. Mr. Baily has been a director of the Company since
January 1993. Mr. Baily has been employed as a product specialist for
surgical processing systems in the V. Mueller Division of Baxter Healthcare
Corporation since 1991. From 1987 to 1991, he was the international
marketing director of Genesis Medical Corporation, a manufacturer and
distributor of sterilization tray and container systems.
B. Compliance With Section 16(a). Section 16 of the Securities
Exchange Act of 1934 requires the filing of reports for sales of the Company's
common stock made by officers, directors, and 10% or greater shareholders.
A Form 4 must be filed within 10 days after the end of the calendar month in
which a sale or purchase occurred. Based upon review of Forms 4 filed with
the Company, the following disclosure is required in this Form 10-KSB:
John M. Williams. During fiscal year ended February 29, 1996, Mr.
Williams sold shares of the Company's common stock on one occasion
which was not reported in a timely manner. The transaction was
reported within eleven days instead of the ten day period.
Robert J. Wrigley. During fiscal year ended February 29, 1996, Mr.
Wrigley sold shares of the Company's common stock on one occasion
which was not reported in a timely manner. The transaction was
reported, but not within the ten day period.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning
compensation for services rendered for the past three years to the Company's
Chief Executive Officer and to the Company's most highly compensated executive
officers other than the CEO, whose annual salary and bonus exceeded $100,000:
<PAGE> 25
<TABLE>
Annual Compensation Long-Term Compensation
---------------------- ------------------------------------
Awards Payouts
------------------
Year Options/ Other
Name and Principal Position End 2-28/29 Salary Bonus Compensation Stock Awards SAR's (#) LTIP Payouts Compensation
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Williams 1996 $96,000 -0- -0- -0- -0- -0- -0-
Chairman/CEO 1995 $96,000 -0- -0- -0- -0- -0- -0-
1994 $84,000 -0- -0- -0- 300,000(1) -0- -0-
William R. Stoddard 1995 $96,000 -0- -0- -0- -0- -0- -0-
President 1995 $96,000 -0- -0- -0- -0- -0- -0-
1994 $84,000 -0- -0- -0- 300,000(1) -0- -0-
<F1>
(1) Options to acquire shares of common stock.
</TABLE>
Mr. Williams and Mr. Stoddard were issued restricted common stock as
compensation for services rendered during the years ended February 28, 1993,
1992 and 1991. The shares earned in each of such years were as follows: (1)
1992 - 132,000 shares at $.005 per share and 84,000 shares at $.15 per share;
and (ii) 1993 - 60,000 shares at $.15 per share and 36,000 shares at $1.00 per
share.
Stock Options Granted in Last Fiscal Year
During the year ended February 29, 1996, no stock options were granted to
those persons named in the Summary Compensation Table above. However,
on August 31, 1993, the Company entered into Employment Agreements with
John M. Williams and William R. Stoddard ("Employees"). Each Agreement is
for a term of three years commencing September 1, 1993 and ending August
31, 1996. Each Agreement grants each Employee an Option to purchase
300,000 shares of the Company's common stock at $1.85 per share. The
Options vest on a monthly basis, permitting the Employee to exercise an option
to purchase 8,333 shares of the Company's common stock for each month of
service under the Agreement, provided, however, that options vesting during
an employment year are not exercisable until the end of such employment year.
The Options are exercisable for a period of five years from the date of
vesting. At August 31, 1994, Options to purchase 100,000 shares owned by
each Mr. Williams and Mr. Stoddard, which vested during the employment year
ended August 31, 1994, became exercisable. Options to purchase an additional
100,000 shares owned by each Mr. Williams and Mr. Stoddard become
exercisable on August 31, 1994 and Options to purchase the remaining
100,000 shares granted in the Employment Agreements become exercisable on
August 31, 1996. No options granted in the Employment Agreements have
been exercised. The Options granted in the Employment Agreements were
approved by the Company's stockholders at the Annual Meeting of
Stockholders held December 10, 1993. The shares of common stock
underlying the Options were registered by the Company with the filing of Form
S-8 dated August 31, 1995, which is incorporated herein by reference.
Aggregate Option Exercises and Number/Value of Unexercised Options
The following table provides information concerning the exercise of
options during the last fiscal year by persons named in the Summary
Compensation Table, the number of unexercised options held by such persons at
the end of the last fiscal year, and the value of such unexercised options as
of such date:
<PAGE> 26
<TABLE>
Nature of Value of Unexericised
Shares Acquired Values Unexercised Options In-the-Money-Options
Name on Exercise(#) Realized ($) at 2/29/96 (#) at 2/29/96 ($)(1)
- -------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
John M. Williams -0- -0- 200,000 100,000 $230,000 $115,000
William R. Stoddard -0- -0- 200,000 100,000 $230,000 $115,000
<F1>
1. An "In-the-Money" stock option is an option for which the market price of the Company's
Common Stock underlying the option on February 29, 1996 exceeded the option exercise
price. The value shown is calculated by multiplying the number of unexercised options by
the difference between (i) the closing price for the Common Stock on NASDAQ Small Cap
Market on February 29, 1996 ($3.00) and (ii) the exercise price of the stock options ($1.85).
</TABLE>
Compensation of Directors
The Company's non-employee directors are paid $250 for each Board of
Directors Meeting attended. On August 26, 1993, the Company's Board of
Directors approved a Non-Employee Director's Stock Option Plan which
provides for the issuance of a maximum of 75,000 shares of the Company's
common stock pursuant to the exercise of options granted under the Plan. The
Plan provides that each non-employee director will be issued an option to
purchase 5,000 shares of the Company's common stock on the date of the
Company's Annual Meeting of Stockholders, commencing in 1994. After an
option is granted, it will be exercisable for a period of five years. The
Options are exercisable at $1.85 per share. The Non-Employee Director's Stock
Option Plan was approved by the Company's stockholders at the Annual Meeting
of Stockholders held December 10, 1993. The shares of the Company's common
stock underlying these options were registered by the Company with the filing
of Form S-8 dated August 31, 1994, which is incorporated herein by reference.
1992 Stock Incentive Plan
On December 21, 1992, the Company's Board of Directors approved a
Stock Incentive Plan (the "Plan") which provides for the issuance of a
maximum of 270,000 shares of the Company's Common Stock pursuant to the
exercise of options granted under the Plan. Options granted under the Plan
are intended to comply with Section 422 of the Internal Revenue Code of 1986.
On May 9, 1994, the Plan was amended by the Board of Directors. Such
amendments did not increase the number of options which may be issued,
change the persons who may be granted options or in any way materially effect
the Plan. The Plan is administered by the Board of Directors or a committee of
the Board which selects the persons to whom options are granted and the
terms of the options. The Plan provides that the option price may not be less
than 100% of the fair market price on the date the option is granted and that
no option may be exercisable for longer than 10 years. The 1992 Stock
Incentive Plan was approved by the Company's stockholders at the Annual
Meeting of Stockholders held December 10, 1993. Options under the Plan
may be granted to directors and key employees of the Company. To date, one
officer has been granted options under the Plan. This employee was not an
officer in November, 1993 at the time that the options were granted. The
shares of common stock underlying the Options granted under the Plan were
registered by the Company with the filing of Form S-8 dated August 31, 1994,
which is incorporated herein by reference.
<PAGE> 27
Options Granted under the Plan. As of the date of this Proxy Statement,
the following options have been granted under the 1992 Stock Incentive Plan:
On March 1, 1993, options to purchase an aggregate of 18,000 shares
were granted to three non-management employees. Such options are
exercisable at $1.75 per share for a period of 7 years commencing one year
from the date such options were granted and subject to certain provisions
of the Incentive Plan. 14, 000 Options have been exercised.
On November 11, 1993, options to purchase a total of 49,000 shares
were granted to 11 employees of the Company, none of whom were
officers or directors of the Company at the time of the grant.
Subsequently, 3,500 of these Options were canceled when two of the
optionees' employment with the Company was terminated. All of such
options are exercisable at $1.85 per share. 13,000 Options have been
exercised.
On June 8, 1994, options to purchase a total of 20,000 shares were
granted to 2 employees of the Company, neither of whom are officers or
directors of the Company. Both of such options are exercisable at $6.03
per share. 10,000 of such Options were forfeited when a certain optionee
terminated their employment with the Company.
On July 12, 1994, options to purchase a total of 90,000 shares were
granted to four employees of CyclO(3)PSS Textile Systems, Inc., a wholly-
owned subsidiary of the Company. None of these optionees are officers or
directors of the Company. All of such options are exercisable at $6.03
per share. 69,000 Options were cancelled when three of the optionees'
employment was terminated with the Company.
On August 22, 1994, an option to purchase a total of 5,000 shares were
granted to an employee of the Company. Such employee is not an officer
or director of the Company. Such option is exercisable at $6.03 per
share. All of these Options were canceled when this optionee's employment
was terminated with the Company.
On October 24, 1994, options to purchase a total of 45,000 shares were
granted to three employees of CyclO(3)PSS BioChemical Corporation, a
wholly-owned subsidiary of the Company. None of these optionees are
officers or directors of the Company. All of such options are exercisable
at $6.03 per share.
On January 1, 1995, options to purchase a total of 45,000 shares were
granted to ten employees of the Company, neither of whom are officers or
directors of the Company. All of such options are exercisable at $5.44 per
share. 12,000 Options were forfeited when certain optionees
terminated their employment with the Company. Another 12,000 Options
were cancelled when certain optionees' employment was terminated with
the Company.
On July 1, 1995, options to purchase a total of 27,000 shares were
granted to two employees of the Company, one of which is an officer, the
other employee is not an officer or director. All such options are
exercisable at $4.00 per share.
On October 2, 1995, Options to purchase a total of 30,000 shares
were granted to an employee of the Company. Such employee is not an officer
or director of the Company. Such Options are exercisable at $4.00 per
share.
<PAGE> 28
On February 29, 1996, Options to purchase a total of 44,500 shares
were granted to twelve employees of the Company, none of these optionees
are officers or directors of the Company. All such Options are exercisable
at $5.44 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of the
Company's common stock owned beneficially as of May 31, 1996, by (i) each
director of the Company, (ii) all officers and directors as a group and (iii)
each person known by the Company to beneficially own 5% or more of the
outstanding shares of the Company's Common Stock:
<TABLE>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class Ownership
---------------------- ------------------------ ------------------
<CAPTION>
<S> <C> <C>
John M. Williams(2)(3) 1,048,779 9.1%
3646 West 2100 South
Salt Lake City, UT 84120
William R. Stoddard(2)(4) 512,890 4.4%
3646 West 2100 South
Salt Lake City, UT 84120
John R. Herzog(5) 1,121,224 9.7%
5901 Rosebud Lane
Sacramento, CA 95841
Robert J. Wrigley(2)(6) 485,117 4.2%
4260 S. 500 West
Salt Lake City, UT 84123
J. Bruce Baily(2)(7) 52,043 .5%
40 Ina Court
Alamo, CA 94507
Steve Sarich, Jr.(2)(8) 538,854 4.7%
505 Madison Street
Suite 220
Seattle, WA 98104
Jack Benaroya(9) 787,210 6.8%
1001 Fourth Avenue, #4700
Seattle, WA 98154
<PAGE> 28
Alice L. Hart(2)(10) 7,500 .1%
3646 West 2100 South
Salt Lake City, UT 84120
All Officers and Directors
as a Group (6 Persons) 2,195,183 19.04%
<F1>
(1) As of May 31, 1996, there were 10,524,338 shares of the Company's common stock issued and
outstanding and entitled to vote at the annual meeting. Additionally, there are currently exercisable options
and warrants to purchase 815,035 shares of the Company's common stock as well as promissory notes
which are currently convertible into 190,147 shares of the Company's common stock owned by the above
listed individuals or their affiliates. Therefore, under the rules of the Securities and Exchange Commission,
there are deemed to be 11,529,520 shares of the Company's common stock issued and outstanding for
purposes of the above-set forth table. The shares issuable upon the exercise of the options can only be voted
at a shareholders meeting if the options are exercised and the shares issued prior to the record date for the
meeting.
<F2>
(2) These individuals are the directors and/or officers of the Company as of May 31, 1996.
<F3>
(3) Mr. Williams is the record owner of 263,549 of these shares and owns an additional 76,677 of these
shares in brokerage accounts. The 1,048,779 figure also includes 450,000 shares which may be acquired
by Mr. Williams from Robert J. Wrigley, a director of the Company (this amount is included in Williams
number of 1,048,779, but not included in the number shares 3,316,407 for the total units of all officers and
directors). Pursuant to an option, 200,000 shares which may be purchased from the Company pursuant to
an employment stock option, 28,572 shares which may be purchased from the Company pursuant to a
Warrant and 29,981 shares which may be acquired by Mr. Williams upon conversion of a $100,000
Promissory Note and interest as of May 31, 1996 from the Company. All of such options and warrants are
currently exercisable and the promissory note and accrued interest is currently convertible. Mr. Williams
also owns options to purchase an additional 100,000 shares of common stock from the Company pursuant
to an employment agreement. Such additional options are not currently exercisable but become exercisable
on August 31, 1996. (See "Executive Compensation.")
<F4>
(4) Mr. Stoddard is the record owner of 182,453 of these shares and owns an additional 71,846 of these
shares in brokerage accounts. The 512,890 figure includes 200,000 shares which may be acquired by Mr.
Stoddard from the Company pursuant to an employment stock option, 28,572 shares which may be
purchased from the Company pursuant to a Warrant, and 31,019 shares which may be acquired by Mr.
Stoddard upon conversion of a $100,000 Promissory Note and interest as of May 31, 1996 from the
Company. All of such options and warrants are currently exercisable and the promissory note and accrued
interest is currently convertible. Mr. Stoddard also owns options to purchase an additional 100,000 shares
of common stock from the Company pursuant to an employment agreement. Such additional options are
not currently exercisable but become exercisable on August 31, 1996. (See "Executive Compensation.")
<F5>
(5) The 1,121,224 figure includes 1,052,414 shares owned of record, 10,000 shares which may be
acquired upon the exercise of a currently exercisable stock option, 28,572 shares which may be purchased
from the Company pursuant to a Warrant, and 30,238 shares which may be acquired by Mr. Herzog upon
conversion of a $100,000 Promissory Note and interest as of May 31, 1996 from the Company. All of such
options and warrants are currently exercisable and the promissory note and accrued interest is currently
convertible.
<F6>
(6) The 485,117 figure includes 416,707 shares owned of record, 10,000 shares which may be acquired
upon the exercise of a currently exercisable stock option, 28,572 shares which are currently exercisable
pursuant to a Warrant, and 29,838 shares which may be acquired by Mr. Wrigley upon conversion of a
$100,000 Promissory Note and interest as of May 31, 1996 from the Company. All of such options and
warrants are currently exercisable and the promissory note and accrued interest is currently convertible. Mr.
Wrigley has also granted John M. Williams an option to purchase 450,000 shares of the Company's
common stock (for reporting purposes in this section, the 450,000 number is included in Wrigley's total
number of 485,117 and included in the number shares 3,316,407 for the total units).
<F7>
(7) The 52,043 figure includes 20,000 shares owned of record, 1,600 shares held in brokerage accounts,
10,000 shares which may be purchased pursuant to a currently exercisable stock option, 10,000 shares
which may be purchased pursuant to a currently exercisable Warrant, and 10,443 shares which may be
acquired by Mr. Baily upon conversion of a $35,000 Promissory Note and interest as of May 31, 1996 from
the Company. All of such options and warrants are currently exercisable and the promissory note and
accrued interest is currently convertible.
<F8>
(8) The 538,8534 figure includes 409,389 shares owned of record by Mr. Sarich and an affiliated
Company (321 Investments), 10,000 shares which may be acquired upon exercise of a currently exercisable
stock option, 89,675 shares which may be purchased pursuant to a currently exercisable Warrant, and
29,790 shares which may be acquired by Mr. Sarich upon conversion of a $100,000 Promissory Note and
interest as of May 31, 1996 from the Company. All of such options and warrants are currently exercisable
and the promissory note and accrued interest is currently convertible.
<PAGE> 9
<F9>
(9) The 787,210 figure includes 603,800 shares which are owned of record, 153,572 shares which may
be purchased by Mr. Jack Benaroya pursuant to currently exercisable Warrants, and 29,838 shares which
may be acquired by him upon conversion of a $100,000 Promissory Note and interest as of May 31, 1996
from the Company. All of such options and warrants are currently exercisable and the promissory note and
accrued interest is currently convertible.
<F10>
(10) 7,500 shares which may be issued upon the exercise of a currently
exercisable stock option. 6,000 additional shares have been granted,
but are not currently exercisable.
Security Ownership of Management
See Item 4(a) above.
Changes in Control
No changes in control of the Company are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Parents of Company
The only parents of the Company, as defined in Rule 12b-2 of the Exchange
Act, are the officers and directors of the Company. For information regarding
the shareholdings of the Company's officers and directors, see Item 4.
On June 29,1995 the Board of Directors approved a private placement of
investment stock to accredited investors. The offering consisted of 571,432
units at $3.50 each for a total of $2,000,00. Each unit consists of one
share of restricted common stock plus one warrant to purchase an additional
share of restricted stock at $4.00. The warrant expires one year after the
closing of the private placement. Of the 415,674 units that have been issued
for a total consideration of $1,454,858, the following officers and directors
participated in this private placement offering:
</TABLE>
<TABLE>
Amount Shares Warrants
Name of Owner Invested Purchased Available
- ---------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Steve Sarich, Jr.(1) $178,773 51,078 51,078
321 Investment Company(2) 35,087 10,025 10,025
</TABLE>
On October 17, 1995 the Board of Directors approved the issuance of up
to $3,000,000 of Convertible Secured Promissory Notes to investors. The
Convertible Notes which include warrants to purchase shares of the Company's
restricted common stock at $4.00 per share, also bear interest at a rate of
12% per annum. Both the interest and principal are convertible to shares of
the Company's restricted common stock at $3.50 per share. The conversion
shares and option carry certain registration rights and requirements. These
notes are secured by all assets of the Company. As of May 31, 1996,
$1,226,000 had been collected from this offering. The following officers and
directors participated in this debt offering:
<TABLE>
Amount Conversion Units/ Warrants
Name of Owner Invested Interest & Principal(3) Available
- --------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
John M. Williams(1) $100,000 30,019 28,572
William R. Stoddard(1) 100,000 29,981 28,572
Steve Sarich, Jr.(1) 100,000 29,790 28,572
Robert J. Wrigley(1) 100,000 29,838 28,572
J. Bruce Baily(1) 35,000 10,443 10,000
<F1>
(1) These individuals are the directors and /or officers of the Company as of
May 31, 1996. (Please see Part III, Item 9 for further identification)
<F2>
(2) Represents an affiliated company of an officer of the Company
<F3>
(3) Represents number of units that could be converted from principle and
interest as of May 31, 1996
</TABLE>
<PAGE> 31
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries and the Report of Ernst & Young LLP, Independent Auditors, and
Report of Price Waterhouse LLP, Independent Accountants, included herein
on pages F-1 through F-21 are incorporated herein by reference:
Report of Independent Auditors - Ernst & Young LLP
Report of Independent Accountants - Price Waterhouse LLP
Consolidated Balance Sheets - February 29, 1996 and February 28, 1995
Consolidated Statements of Operations - fiscal years ended
February 29, 1996 and February 28, 1995
Consolidated Statements of Stockholders' Equity - fiscal years ended
February 29, 1996 and February 28, 1995
Consolidated Statements of Cash Flows - fiscal years ended
February 29, 1996 and February 28, 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.
3. Exhibits
The exhibits which are filed with this Form 10-K or incorporated herein
by reference are set forth in the Exhibits Index which appears on page 36.
(b) Reports on Form 8-K
On January 8,1996, the Company filed a Form 8-K to report that the firm
of Ernst & Young LLP had been appointed as the Company's Independent
Auditors in place of Price Waterhouse LLP. There were no disagreements
with Price Waterhouse, LLP.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CYCLO(3)PSS CORPORATION
Date: June 10, 1996 By/s/ John M. Williams
John M. Williams
Chief Executive Officer
Chairman
Principal Executive Officer
Date: June 10, 1996 By/s/ Alice L. Hart
Alice L. Hart
Controller, Corporate Secretary
Principal Financial Officer
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ John M. Williams Chief Executive Officer/ June 10, 1996
John M. Williams Chairman
/s/ William R. Stoddard President June 10, 1996
William R. Stoddard
/s/ Robert J Wrigley Director June 10, 1996
Robert J. Wrigley
/s/ Steve Sarich, Jr. Director June 10, 1996
Steve Sarich, Jr.
/s/ J. Bruce Baily Director June 10, 1996
J. Bruce Baily
<PAGE> F-1
CyclO(3)PSS Corporation
Consolidated Financial Statements
Years ended February 29, 1996 and February 28, 1995
Contents
Report of Independent Auditors - Ernst & Young LLP F-2
Report of Independent Accountants - Price Waterhouse LLP F-3
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flow F-8
Notes to Consolidated Financial Statements F-9
<PAGE> F-2
Report of Independent Auditors
The Board of Directors and Stockholders
CyclO(3)PSS Corporation
We have audited the accompanying consolidated balance sheet of CyclO(3)PSS
Corporation and subsidiaries as of February 29, 1996 and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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 audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CyclO(3)PSS
Corporation and subsidiaries at February 29, 1996, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company's recurring
losses from operations and liabilities in excess of total tangible assets
raise substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are also described in Note 3. The
consolidated financial statements for the year ended February 29, 1996 do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
April 15, 1996
<PAGE> F-3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of CyclO(3)PSS Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders equity and of cash
flows present fairly, in all material respects, the financial position of
CyclO(3)PSS Corporation and its subsidiaries at February 28, 1995 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of CyclO(3)PSS Corporation and its
subsidiaries for any period subsequent to February 28, 1995.
PRICE WATERHOUSE LLP
Salt Lake City, Utah
April 21, 1995
<PAGE> F-4
<TABLE>
CyclO(3)PSS Corporation
Consolidated Balance Sheets
February 29 February 28
1996 1995
<CAPTION>
<S> <C> <C>
Assets
Current Assets:
Cash $ 252,113 $ 123,086
Short-term investments - 1,192,849
Accounts receivable, less
allowance for doubtful accounts
of $40,138 at February 29, 1996
and $5,000 at February 28, 1995 77,130 129,527
Inventories 408,889 255,999
Prepaid expenses 37,474 26,470
--------------- ---------------
Total current assets 775,606 1,727,931
Property and equipment, net 570,237 430,420
Other assets:
Goodwill, net 768,862 966,626
Acquired patents, net 453,456 315,861
Developed patents and other, net 110,457 113,530
--------------- ---------------
$2,678,618 $3,554,368
=============== ===============
<PAGE> F-5
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 162,414 $ 229,665
Accrued liabilities 120,122 147,455
Deferred revenue 142,749 89,821
Current portion of capital
lease obligations 16,351 -
--------------- --------------
Total current liabilities 441,636 466,941
Long-term debt obligations 889,663 -
Long-term portion of capital
lease obligations 54,626 -
Commitments and contingencies
Stockholders' equity:
Series "A" preferred stock, par
value $.01; 4,500,000 shares
authorized; 35,638 shares issued
and outstanding 356 356
Class "A" preferred stock, par value
$.01; 500,000 shares authorized;
none issued or outstanding - -
Common stock, par value $.001;
55,000,000 shares authorized;
10,169,932 shares issued at
February 29, 1996, 9,702,508
shares issued at February 28, 1995 10,170 9,702
Additional paid-in capital 10,305,955 8,651,163
Accumulated deficit (8,522,243) (5,072,249)
Less treasury stock, 264,000 common
shares at cost (501,545) (501,545)
--------------- --------------
Total stockholders' equity 1,292,693 3,087,427
--------------- --------------
$2,678,618 $3,554,368
=============== ==============
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE> F-6
<TABLE>
CyclO(3)PSS Corporation
Consolidated Statements of Operations
Year ended
February 29 February 28
1996 1995
-------------- ---------------
<CAPTION>
<S> <C> <C>
Net revenues $ 442,632 $ 945,567
Costs and expenses:
Cost of sales 411,565 550,067
Research and development 816,517 947,101
Selling and marketing 402,307 225,917
General and administrative 1,841,331 1,197,244
Depreciation and amortization 412,667 226,890
-------------- --------------
3,884,387 3,147,219
Loss from operations (3,441,755) (2,201,652)
Interest income 25,363 161,672
Interest expense (33,602) -
Loss on short-term investments - (193,384)
-------------- ---------------
============== ===============
Net loss $ (3,449,994) $ (2,233,364)
============== ===============
Net loss per common share $ (.35) $ (.24)
============== ===============
Weighted average number of common
shares issued and outstanding 9,995,060 9,428,635
============== ===============
<FN>
See accompanying notes to consolidated financial statements.
<PAGE> F-7
</TABLE>
<TABLE>
CyclO(3)PSS Corporation
Consolidated Statements of Cash Flow
Year ended
February 29 February 28
1996 1995
------------------------------
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,449,994) $(2,233,364)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 412,667 226,890
Loss on short-term investments - 193,384
Accrued interest on convertible
debt issuance 14,663 -
Issuance of warrant with convertible debt 10,600 -
Changes in assets and liabilities:
Decrease in accounts receivable 52,397 90,953
(Increase) decrease in inventories (152,890) 111,570
Increase in prepaid expenses,
developed patents, and other (11,004) (78,013)
Decrease in accounts payable and
accrued liabilities (94,584) (34,175)
Increase (decrease) in deferred revenue 52,928 (169,653)
------------ -------------
Net cash used in operating activities (3,165,217) (1,892,408)
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (222,810) (351,347)
Proceeds from sale of short-term
investments 1,541,537 4,692,907
Purchase short-term investments (348,688) (1,561,675)
Increase in other assets (10,763) -
------------- -------------
Net cash provided by (used in)
financing activities 959,276 2,779,885
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,469,660 33,731
Proceeds from issuance of convertible
debt obligations 875,000 -
Purchase of treasury stock - (500,000)
Payment of notes payable - (407,000)
Principal payments under capital lease
obligations (9,692) -
------------ ------------
Net cash provided by (used in) financing
activities 2,334,968 (873,269)
------------- -------------
Net increase in cash 129,027 14,208
Cash at beginning of period 123,086 108,878
------------- ------------
Cash at end of period $ 252,113 $ 123,086
=============== ==============
Supplemental schedule of non-cash
financing activities:
Capital lease obligations incurred for
acquisition of property and equipment $ 80,669 $ -
=============== ===============
Acquisitions:
Fair value of assets acquired $ 175,000 $ 1,620,694
Issuance of common stock (175,000) (574,996)
---------------- --------------
Liabilities assumed $ - $ 1,045,698
================ ==============
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE> F-8
<TABLE>
CyclO(3)PSS Corporation
Consolidated Statements of
Stockholders' Equity
Series "A" Class "A" Accumu- Treasury Stock
Preferred Stock Preferred Stock Common Stock Additional lated (Common)
Shares Amounts Shares Amounts Shares Amounts Paid-in Capital Deficit Shares Amounts Total
-----------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February
28, 1994 35,638 $ 356 - $ - 9,463,711 $ 9,464 $8,042,652 $(2,838,885) 10,000 $(1,545)$ 5,212,042
Common stock
purchased for
treasury 254,000 (500,000)(500,000)
Employee stock
options exercised 19,000 19 33,731 33,750
Purchase of Textile 82,919 83 499,793 499,876
Purchase of Textile
(escrow portion) 124,378 124 124
Purchase of
BioChem 12,500 12 74,987 74,999
Net loss (2,233,364) (2,233,364)
------------------------------------------------------------------------------------------
Balance at February
28, 1995 35,638 356 - - 9,702,508 9,702 8,651,163 (5,072,249) 264,000 (501,545) 3,087,427
-------------------------------------------------------------------------------------------
Common stock
issued for cash 415,674 416 1,454,444 1,454,860
Employee stock
options exercised 8,000 8 14,792 14,800
Purchase of
ThermoChem 43,750 44 174,956 175,000
Issuance of warrants
with convertible
debt 10,600 10,600
Net loss (3,449,994) (3,449,994)
----------------------------------------------------------------------------------------------
Balance at February
29, 1996 35,638 $ 356 - $ - 10,169,932 $10,170 $10,305,955$(8,522,243) 264,000 $(501,545)$1,292,693
=========================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-9
1. Summary of Significant Accounting Policies
Organization
The Corporation was formed in Delaware in 1927. In 1990, the Corporation was
reorganized as CyclO(3)PSS Medical Systems, Inc. In 1995, the Company
changed its name to CyclO(3)PSS Corporation (the Company). The Company is
engaged in the research and development of technologies for the
sterilization and/or disinfection of surgical and medical instruments,
the manufacture, sale and installation of ozone washing and laundry sorting
and counting systems for commercial and institutional laundries, and the
manufacture and sale of specialty chemicals.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated.
Revenue Recognition
Revenue is recognized upon shipment, or in the case of washing and laundry
systems, upon installation and customer acceptance. Payments received from
customers prior to installation and customer acceptance are
recorded as deferred revenue.
Concentration of Credit Risk
The Company's net revenue for the year ended February 29, 1996 represented
54% specialty chemical sales and 46% sales to commercial laundry companies.
For the year ended February 28, 1995, most all sales were to commercial
laundry companies. All sales were to companies located in the United States
and Canada. The Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectation.
<PAGE> F-10
1. Summary of Significant Accounting Policies (continued)
Short-term Investments
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115)
which requires investment securities to be classified as either held to
maturity, trading or available for sale. The Company classifies its
short-term investments as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net
of tax, reported in a separate component of stockholders' equity. Realized
ains or losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in the statement of operations.
The cost of securities sold is based on the specific identification method.
Interest on securities classified as available-for-sale are included in
interest income.
Inventories
Inventories consist of raw materials and work-in-process and are stated at the
lower of cost or market, cost being determined using the first-in, first-out
method. Inventories consist of the following:
February 29 February 28
1996 1995
---------------- ----------------
Raw materials $ 288,450 $ 146,552
Work-in-process 120,439 109,447
---------------- ----------------
$ 408,889 $ 255,999
================ ================
Other Assets
Other assets consist primarily of goodwill and acquired patents which are
recorded at the lower of cost or their net realizable value. Goodwill is
amortized over five years. Accumulated amortization for goodwill was
$342,851 and $145,087 at February 29, 1996 and February 28, 1995. Acquired
and developed patents are amortized on a straight-line basis over the shorter
of their estimated useful lives or the remaining life of the patent.
Accumulated amortization for acquired and developed patents was $64,052 and
$26,639 at February 29, 1996 and February 28, 1995. The Company periodically
reviews the recoverability of these intangible assets in order to record
them at their net realizable value.
<PAGE> F-11
1. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization is determined using the straight-line method
over the estimated useful lives of the assets ranging from three to
seven years. Assets acquired pursuant to capital lease obligations are
amortized over the assets' estimated useful lives. Maintenance and repairs
are expensed as incurred. Property and equipment consists of the
following:
February 29 February 28
1996 1995
---------------- ---------------
Equipment $ 621,470 $ 379,316
Furniture and fixtures 89,218 57,949
Leasehold improvements 99,610 84,743
---------------- ---------------
810,298 522,008
Less: accumulated
depreciation and
amortization (240,061) (91,588)
--------------- ---------------
$ 570,237 $ 430,420
Depreciation and amortization expense was $163,662 for the year ended February
29, 1996 and $77,135 for the year ended February 28, 1995.
Income Taxes
The Company accounts for income taxes using the liability method pursuant to
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." The liability method requires that the expected future consequences
of temporary differences between the tax and reporting basis of assets and
liabilities be recognized as deferred tax assets and liabilities.
Net Loss per Common Share
Net loss per common share is calculated based on the weighted average number
of shares of common stock issued and outstanding during the period. Common
stock equivalents are not included in the computation as their effect would
be anti-dilutive.
<PAGE> F-12
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
2. Acquisitions
Innovative Textile Technology, Inc.
On July 12, 1994, the Company completed the acquisition of Innovative Textile
Technology, Inc. ("INTEX"), a privately held Pennsylvania Corporation.
INTEX is primarily engaged in the business of selling equipment to
commercial and institutional laundries. INTEX's products include automated
textile counting systems and ozone washing systems. The purchase of INTEX was
recorded at $500,000 reflecting the fair value of 82,919 shares of the
Company's restricted common stock in exchange for all of the outstanding
common stock of INTEX. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the results of operations of
INTEX have been included in the accompanying consolidated financial statements
since the date of acquisition. The cost of the acquisition has been allocated
on the basis of the estimated fair market value of the assets acquired and
liabilities assumed. The allocation resulted in the recording of goodwill
of $1,142,436, which is being amortized on a straight-line basis over
five years. In addition, 124,378 shares of the Company's common stock are
held in escrow and will be released to four INTEX stockholders upon
achievement of continuity of employment through February 28, 1996 or net
profit goals to be met by June 16, 1996. Compensation expense was not
recorded during the year relating to these contingent payments due to the
significant uncertainties of achieving the employment and/or profitability
goals. At year end February 29, 1996, these achievements had not been met
and the shares were returned to the Company subsequent to February 29, 1996.
Chem Biochem Research, Inc.
On October 24, 1994, the Company completed the acquisition of Chem Biochem
Research, Inc. ("CBR"), a small Utah-based company which provides research
services and which has a limited line of scientific products. The
acquisition will expand the Company's in-house research staff. The purchase
of CBR was recorded at $75,000 reflecting the fair value of 12,500 shares
of the Company's restricted common stock in exchange for all of the
outstanding common stock of CBR. The acquisition has been
<PAGE> F-13
2. Acquisitions (continued)
accounted for using the purchase method of accounting; the results of CBR
have been included in the accompanying consolidated financial statements
since the date of acquisition.
Thermo-Chem, Inc.
On June 1, 1995 the Company finalized the acquisition of Thermo-Chem, Inc.
("TCI"), a Utah-based Company. TCI is in the business of developing
technology relating to synthetic methods, new product formulations and
molecular design for the purpose of manufacturing and marketing pharmaceutical
chemicals to commercial and research libraries. The purchase of TCI was
recorded at $175,000 reflecting the fair value of 43,750 shares of the
Company's common stock in exchange for all of the outstanding stock of TCI.
The acquisition was accounted for using the purchase method of accounting;
the results of TCI have been included in the accompanying consolidated
financial statements since the date of acquisition. The results of
operations of TCI were not material.
3. Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business.
The Company has liabilities in excess of total tangible assets, which excess
at February 29, 1996 was $40,082. The Company has sustained significant
net losses which have resulted in an accumulated deficit at February 29, 1996
of $8,552,243, and periodic cash flow difficulties, all of which raise
substantial doubt of the Company's ability to continue as a going concern.
The net loss for the year ended February 29, 1996 was $3,449,994. In the
past the Company has been able to receive funding necessary for its
operations through the issuance of common stock. The Company anticipates a
net loss for the year ended February 28, 1997, and with a cash balance of
$252,113 at February 29, 1996 and no firm orders for future product sales,
there is substantial doubt as to the Company's ability to continue operations.
The Company believes that these conditions have resulted from the inherent
risks associated with small technology companies. Such risks include, but are
not limited to, the ability to (a) generate sales of its product at levels
sufficient to cover its costs and provide a return for investors, (b)
attract additional capital in order to finance growth, (c)
<PAGE> F-14
3. Basis of Presentation (continued)
further develop and successfully market commercial products and (d)
successfully compete with other technology companies having financial,
production and marketing resources significantly greater than those
of the Company.
The Company is trying to improve these conditions by way of financial
assistance through collaborative partnering agreements, closely held
common stock issuances, debt arrangements, and product sales.
Management is confident that appropriate funding will be generated and
future product sales will result from these opportunities and that the
Company will continue operations over the next fiscal year.
Subsequent to February 29, 1996, the Company issued approximately
$351,000 of additional debt under the approved $3 million convertible debt
offering (See Note 6).
4. Investments
During the year ended February 29, 1996, the Company sold all of its
investments. The gross realized gains and losses on sales of available-
for-sale securities for the year ended February 29, 1996 were immaterial.
At February 28, 1995, investments consisted of short-term fixed income
securities and were recorded at market value, which approximated cost.
During the year ended February 28, 1995, the Company had proceeds from the
sale of available-for-sale securities of $4,692,907 and realized a loss of
$193,384 on securities sold.
5. Accrued Liabilities
Accrued liabilities consist of the following:
February 29 February 28
1996 1995
Accrued payroll and payroll taxes $ 72,139 $ 100,736
Accrued vacation 39,291 38,027
Other 8,692 8,692
-------------- ----------------
$ 120,122 $ 147,455
<PAGE> F-16
6. Long-Term Debt
During the year, the Company's Board of Directors approved the issuance of
$3,000,000 in convertible debt to individual investors. Principal and
interest are payable in full three years from the date of execution of
each note. Interest accrues at 12% per year on the principal balance.
The debt is secured by all the assets of the Company. The lender can
convert all or a portion of its outstanding principal and interest into
shares of common stock at $3.50 per share. Under the terms of the loan
agreements, the Company will issue each lender a warrant to purchase 1,000
shares of the Company's common stock at a price of $4.00 per share for
each $3,500 principal amount loaned to the Company. Each warrant is
exercisable for a period of 5 years from the date of the closing of each
loan. The Board of Directors has reserved 2,022,714 shares of the Company's
common stock for the conversion of debt and exercise of warrants offered with
the convertible debt.
At February 29, 1996, the Company had issued $875,000 in convertible debt
(described above) to the Company's directors or major stockholders, with
maturities between December 1998 and February 1999. Interest expense of
$14,662, which is included in long-term debt, was recorded for the year
ended February 29, 1996.
The carrying amount of long-term debt approximates fair value. The fair value
of the Company's long-term debt was estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rates for
similar types of debt arrangements.
7. Capital Lease Obligations and Commitments
During the year ended February 29, 1996, the Company acquired equipment under
capital leases. The cost basis of the equipment was $80,669 (zero at
February 28, 1995). Amortization expense was $8,808 for the year ended
February 29, 1996 and is included with depreciation of property and equipment.
Upon completion of certain capital lease
<PAGE> F-16
7. Capital Lease Obligations and Commitments (continued)
terms, the Company is required to purchase leased equipment at fair value.
Other leases provide for a bargain purchase price. Future minimum lease
payments for capital lease obligations are as follows:
<TABLE>
Year ending
February 28
<CAPTION>
<S> <C>
1997 $ 25,870
1998 25,870
1999 25,870
2000 10,374
2001 3,913
-------------
Future minimum lease payments 91,897
Less amount representing interest (20,920)
-------------
Present value of future minimum
lease obligations 70,977
Less amounts due within one year (16,351)
-------------
Amounts due after one year $ 54,626
=============
</TABLE>
Interest paid and expensed for capital lease obligations was $8,339 for the
year ended February 29, 1996.
The Company leases office facilities and office equipment under noncancelable
operating leases. Rent expense under these leases was $108,290 for year ended
February 29, 1996 and $82,476 for the year ended February 28, 1995. The future
minimum operating lease payments are $102,471 and $83,501 for the years
ended February 28, 1997 and 1998 respectively.
8. Income Taxes
As of February 29, 1996, the Company had federal and state net loss
carryforwards of approximately $7,681,000 and $7,367,000, respectively.
The Company also had federal research and development tax credit
carryforwards of approximately $122,000. The net operating loss and credit
carryforwards will expire at various dates beginning on 2003 through 2011,
if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions
of the Internal Revenue Code of 1986 and similar state provisions. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.<PAGE>
7. Capital Lease Obligations and Commitments
(continued)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of February 29, 1996 and February 28,
1995 are as follows:
February 29 February 28
1996 1995
Deferred tax assets:
Net operating loss carryforwards $2,855,000 $1,896,000
Research credit carryforwards 122,000 100,000
Other, net - (67,000)
-------------------------------
2,977,000 1,929,000
Valuation allowance (2,977,000) (1,929,000)
--------------------------------
$ - $ -
================================
The net valuation allowance increased by $1,048,000 during the year ended
February 29, 1996.
9. Stockholders' Equity
Series "A" preferred stock is non-voting stock and is convertible into
common stock at the rate of one share of common for each 20 shares of
Series "A" preferred stock during a period expiring two years from the
date of issuance of the shares. The conversion period has expired for
all shares of Series "A" preferred stock.
Class "A" preferred stock is non-convertible and carries a voting
preference of ten votes for each share held. At May 31, 1994, all issued
shares of Class "A" preferred stock had been repurchased and retired by
the Company.
On August 31, 1993, the Company entered into employment agreements with
three key employees for a three year period commencing September 1, 1993.
Under the terms of these contracts, each employee was granted options to
purchase 100,000 common shares per year at $1.85 per share, which approxi-
mated the fair value of the common shares at the date of grant. As of
October 21, 1994, one of these employees was terminated and the corresponding
options were canceled.
On March 31, 1994, the Company entered into an employment agreement with
another employee for a three year period commencing April 1, 1994. Under
the terms of this contract, the employee was granted options to purchase
25,000 common shares per year
9. Stockholders' Equity (continued)
at $6.00 per share. On October 1, 1994, the employment agreement was amended.
Under the terms of the amendment, the employee was granted options to purchase
an additional 25,000 common shares per year for three years at $6.00 per
share. The options are considered earned monthly and are exercisable at the
end of each employment year. The options expire five years from the date
they become exercisable. On December 27, 1995, the employee resigned and
all unearned options were subsequently canceled.
On August 26, 1993, the Board of Directors granted each of the five
non-employee directors options to purchase 15,000 common shares at an
exercise price of $1.85 per share. The options vest at a rate of 5,000
shares annually at the time of each Annual Meeting of Stockholders,
commencing with the 1994 Annual Meeting of Stockholders. At February 29,
1996 and February 28, 1995, a total of 50,000 and 25,000 options were
exercisable, none of which have been exercised as of February 29, 1996.
On June 29, 1995, the Board of Directors approved a private placement of
investment stock to accredited investors. The offering consists of
571,432 units at $3.50 each for a total of $2,000,000. Each unit consists
of one share of restricted common stock plus one warrant to purchase an
additional share of restricted stock for $4.00. The warrant expires one
year after the closing of the private placement. As of November 30,
1995, 415,674 units had been issued for a total consideration of $1,454,860.
This offering was closed as of October 17, 1995 by the Board of Directors.
Stock Incentive Plan
On December 21, 1992, the Company adopted a stock incentive plan which
provides for the issuance of options to employees to purchase up to an
aggregate of 270,000 common shares. All options are granted at
no less than the fair market value of the common shares on the date of
grant, as determined by the Board of Directors. The options vest one year
subsequent to the date of grant and expire on the earlier of seven years
from the date of vesting or termination of employment.
9. Stockholders' Equity (continued)
Stock option activity was as follows:
Number of Option Price
Options Per Share
Outstanding at February 28, 1994 1,042,000 $1.75-1.85
Granted 355,000 5.44-6.03
Exercised (19,000) 1.75-1.85
Canceled (303,500) 1.85
-------------
Options outstanding at February 28, 1995 1,074,500 1.75-6.03
Granted 101,500 2.79-4.00
Exercised (8,000) 1.85
Forfeited (22,000) 1.85-6.03
Canceled (173,500) 1.85-6.03
--------------
Options outstanding at February 29, 1996 972,500 $1.75-6.03
==============
At February 29, 1996, 525,500 options were exercisable.
Treasury Stock
During the year ended February 28, 1995, the Company purchased 254,000 shares
of its common stock from a former employee in connection with the termination
of his employment for $1.97 per share totaling $500,000.
10. Contingencies
On October 27, 1995, a Motion for Summary Judgment in Utah Supreme Court was
granted to certain former stockholders with respect to an allegation that
shares owned by the former stockholders had been wrongfully canceled in
April 1990. The ruling provides for the reissuance of 354,406 canceled
shares. The Company and legal counsel believe the summary judgment was
incorrect and intend to vigorously appeal this decision. At the time the
stock was originally canceled in 1990, the Company was financially insolvent,
the stock was not listed on any exchange, and the Company's stock had an
indeterminate value. Management believes the outcome of this litigation
will not have a material impact on the Company's financial position or
results of operations. Accordingly, the Company has not made an accrual for
a potential loss as both the resolution of this litigation and the value, if
any, that would be ascribed to the stock is not determinable.
10. Contingencies (continued)
At year end, the 354,406 shares were reserved for future issuance. Subsequent
to February 29, 1996 the shares were issued and placed in escrow awaiting the
results of the appeal.
The Company is involved in other legal actions and claims arising in the
ordinary course of business. Management believes, based on advice of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's consolidated financial position, results of
operations or cash flows.
11. Segment Information
The Company operates in three principal industries; research and development
of technologies for the sterilization and/or disinfection of surgical and
medical instruments ("medical products"), the manufacture, sale and
installation of ozone washing and laundry sorting and counting systems for
commercial and institutional laundries ("textile products"), and the
manufacture and sale of specialty chemicals ("biochemical products").
Operating profit is total revenue less operating expenses, excluding interest
expense, loss on short-term investments and general corporate expenses.
Corporate assets consist primarily of cash and short-term investments.
Sales to the Company's major customers for textile products represented 23% of
total net revenues for the year ended February 29, 1996 and 20%, 19%, 18%
and 11% for the year ended February 28, 1995. Sales to the Company's
major customers for biochemical products represented 15% of total net revenues
for the year ended February 29, 1996 (zero for the year ended February 28,
1995).
11. Segment Information (continued)
<TABLE>
Industry Data
CyclO(3)PSS Corporation and Subsidiaries
Year ended
February 29 February 28
1996 1995
<CAPTION>
<S> <C> <C>
Net sales and other income:
Medical products $ - $ -
Textile products 202,525 886,853
Biochemical products 240,107 58,714
-------------------------------------
442,632 945,567
Interest income 25,363 161,672
-------------------------------------
Total revenue $ 467,995 $ 1,107,239
=====================================
Operating loss
Medical products $ 1,122,297 $ 984,631
Textile products 1,462,153 392,607
Biochemical products 102,314 44,338
--------------------------------------
Total operating loss 2,686,764 1,421,576
Corporate expenses 729,628 618,404
Loss on short-term investments - 193,384
Interest expense 33,602 -
--------------------------------------
Net loss $ 3,449,994 2,233,364
======================================
Identifiable assets
Medical products $ 590,177 $ 621,007
Textile products 1,531,080 1,693,615
Biochemical products 335,887 86,897
--------------------------------------
2,457,144 2,401,519
General corporate assets 221,474 1,192,849
Total assets $ 2,678,618 $ 3,554,368
======================================
Depreciation and amortization expense
Medical products $ 93,342 $ 52,575
Textile products 305,693 171,548
Biochemical products 13,632 2,767
Capital expenditures
Medical products 83,215 225,100
Textile products 68,837 25,001
Biochemical products 70,758 101,246
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
to
FORM 10-KSB
For the fiscal year ended February 29, 1996
CYCLO(3)PSS CORPORATION
<PAGE> 36
INDEX TO EXHIBITS
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 and are referred to and incorporated herein by reference.
<TABLE>
Exhibit Page Number or
Number Description Method of Filing
<CAPTION>
<S> <S> <C>
3.1 Amended and Restated Certificate of Incorporation Form 10-SB, 1993(1)
3.2 Bylaws Form 10-SB, 1993(1)
3.3 Amended Certificate of Incorporation Form 8-K, February 1995(4)
10.1 Agreement with Clean Tech International, Inc. Form 10-SB, 1993(1)
10.2 Agreement with Chem Biochem Research, Inc. Form 10-SB, 1993(1)
10.3 1992 Stock Incentive Plan Form 10-SB, 1993(1)
10.4 Stock Option - Dale Winger Form 10-SB, 1993(1)
10.5 Lease Agreement Form 10-SB, 1993(1)
10.6 Employment Agreement - John M. Williams Form 10-SB, 1993(1)
10.7 Employment Agreement - William R. Stoddard Form 10-SB, 1993(1)
10.8 Form Indemnification Agreement
(Identical agreement for all officers and
directors) Form 10-SB, 1993(1)
10.9 CleanTech Merger Agreement Form 10-SB, 1993(1)
10.10 Intex Acquisition Agreement Form 8-K, July 1994(2)
10.11 Non-Employee Director 1993 Stock Option Plan Form S-8, August 1994(3)
11.1 Earnings Per Share Calculation Not Applicable
16.1 Change of Independent Auditors Form 8-K, January 1996(5)
21.1 Subsidiaries of Registrant Attached(6)
23.1 Consent of Ernst & Young LLP Attached(6)
23.2 Consent of Price Waterhouse LLP Attached(6)
<F1>
(1) Filed as an Exhibit to the Registrant's Registered Statement on Form 10-SB and incorporated herein by reference
<F2>
(2) Filed as an Exhibit to the Registrant's Form 8-K dated July 11, 1994 incorporated herein by reference
<F3>
(3) Filed as an Exhibit to the Registrant's Form S- 8 dated August 31, 1994 incorporated herein by reference
<F4>
(4) Filed as an Exhibit to the Registrant's Form 8-K dated February 2, 1995 incorporated herein by reference
<F5>
(5) Filed as an Exhibit to the Registrant's Form 8-K dated January 8, 1996 incorporated herein by reference
<F6>
(6) Filed as an Exhibit to the Registrant's Form 10-KSB dated for the year ended February 29, 1996 incorporated herein by reference
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of Registrant
CyclO(3)PSS Medical Systems, Inc.
CyclO(3)PSS BioChemical Corporation
CyclO(3)PSS Textile Systems, Inc.
CyclO(3)PSS Waste Water Systems, Inc.
CyclO(3)PSS Food Processing Systems, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-83586) pertaining to the CyclO(3)PSS Medical Systems,
Inc. Amended 1992 Stock Option Plan; CyclO(3)PSS Medical Systems, Inc.
1993 Non-Employee Director Stock Option Plan; and, Written Agreements
between CyclO(3)PSS Medical Systems, Inc. and Certain Officers, Directors,
and Employees of CyclO(3)PSS Corporation of our report dated April 15, 1996,
with respect to the consolidated financial statements of CyclO(3)PSS
Corporation included in the Annual Report (Form 10-KSB) for the year
ended February 29, 1996.
ERNST & YOUNG LLP
Salt Lake City, Utah
June 10, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF PRICE WATERHOUSE LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectus
constituting part of the Registration Statement on Form S-8 (No. 33-83586)
of CyclO(3)PSS Corporation for our report dated April 21, 1995 appearing on
page 16 of the Annual Report for the year ended February 28, 1995.
PRICE WATERHOUSE LLP
Salt Lake City, Utah
April 21, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<CASH> 252,113
<SECURITIES> 0
<RECEIVABLES> 117,268
<ALLOWANCES> 40,138
<INVENTORY> 408,889
<CURRENT-ASSETS> 775,606
<PP&E> 810,298
<DEPRECIATION> 240,061
<TOTAL-ASSETS> 2,678,618
<CURRENT-LIABILITIES> 441,636
<BONDS> 0
0
356
<COMMON> 10,170
<OTHER-SE> 9,840,410
<TOTAL-LIABILITY-AND-EQUITY> 1,292,693
<SALES> 442,632
<TOTAL-REVENUES> 467,995
<CGS> 411,565
<TOTAL-COSTS> 411,565
<OTHER-EXPENSES> 3,472,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,602
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,522,243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,499,994)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> 0
</TABLE>
