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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 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22720
CYCLO3PSS 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 28, 1997 were
$610,525
As of May 1, 1997, 12,793,440 shares of the Issuer's common stock were
issued and outstanding of which 10,333,288 shares were held by non-affiliates.
As of May 1, 1997, the aggregate market value of shares held by non-affiliates
(based upon the closing price reported by NASDAQ) was approximately $9,364,542.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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FORWARD- LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. To the extent
statements in this Annual Report involve, without limitation, product
development and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the Company's
various product categories and for the industries in which the Company operates
or any other guidance on future periods, these statements are forward-looking
and involve matters which are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those expressed in or
implied by such forward looking statements. These risks and uncertainties
include product development or production difficulties or delays due to supply
constraints, technical problems or other factors; technological changes; the
effect of global, national and regional economic conditions; the impact of
competitive products and pricing; changes in demand; increases in component
prices or other costs; and a number of other risks including those identified by
the Company throughout Item I and elsewhere in this report, and other risks
identified from time to time in the Company's filings with the Securities and
Exchange Commission, press releases and other communications. The Company
assumes no obligation to update forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
CyclO3PSS Corporation (the "Company") designs, manufactures, sells and
installs laundry sorting and counting systems and ozone washing systems to
commercial and institutional laundry's and healthcare facilities, manufactures
and sells specialty chemicals, and performs research and development of
technologies for the sterilization and/or disinfection of surgical and medical
instruments. These activities are performed through three active and operating
subsidiaries of the Company's five wholly-owned subsidiaries. The Company's five
wholly- owned subsidiaries are CyclO3PSS Textile Systems, Inc., CyclO3PSS
BioChemical Corporation, CyclO3PSS Medical Systems, Inc, CyclO3PSS Food
Processing Systems, Inc. and CyclO3PSS Wast Water Systems, Inc.
CyclO3PSS Textile Systems, Inc. The Company, through internal technology
development and the 1994 acquisition of another corporation, has developed
products for sale to the healthcare, commercial and institutional laundry
markets. These products include:
Ozone washing systems for healthcare laundry facilities that enable
them to save time, money, energy and chemical costs while producing
laundry cleaning and disinfection which has demonstrated to be
superior to current methods.
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Ozone washing systems for commercial and industrial laundries that
enable them to reduce the amount of time, water, energy and chemicals
needed to launder textiles.
Laundry sorting and counting systems designed to improve the speed
and accuracy of preparing, counting and transporting soiled linens
for washing operations.
Proprietary wash chemicals designed to be compatible with the ozone
washing technology.
The Company has commenced sales of its ozone washing systems and its VACTM
laundry sorting and counting systems to commercial and industrial laundries. The
Company is scheduling tests of its healthcare ozone laundry washing and
disinfection systems with leading companies in the healthcare field and expects
to commence sales of these systems during the next fiscal year. The Company is
also engaging in marketing efforts to the institutional laundry market and
expects to commence sales of systems to the institutional market during the next
fiscal year.
CyclO3PSS BioChemical Corporation. The Company, through the 1994
acquisition of another corporation, Chem BioChem Research, has developed a line
of specialty chemicals for sale to biomedical and research institutions and
performs limited contract research and development of organic compounds and
synthesis methods for some of its customers. Subsequent to the acquisition, the
name of this subsidiary was changed to CyclO3PSS BioChemical Corporation (CBC).
While the revenues produced by CBC have constituted a significant portion of
total revenues during the year ended February 28, 1997, it is not currently
expected to contribute a significant portion of sales if and when the Company's
laundry and/or medical sterilization/disinfection products gain market
acceptance.
CyclO3PSS Medical Systems, Inc. The Company has developed technologies and
products which it believes may be an effective alternative to current
sterilization technologies for the sterilization of medical instruments and
devices. 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 conducted five years
of research, development and testing of its gas sterilization technology and
products and has developed and constructed pre-production prototypes of its
STER-O3-ZONE(TM) 100 model. The Company submitted a 510(k) Premarket
Notification application to the Food and Drug Administration (FDA) on January 6,
1995 for the STER-O3-ZONE(TM) 100 ozone gas sterilizer and 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 for evaluation, which the Company is
gathering. 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 or whether the submission will ultimately be accepted. Given
the Company's limited resources, during the fiscal year ended February 28, 1997
the Company continued to scale back significantly its efforts relative to the
redesign and testing of the STER-O3-ZONETM 100, choosing instead to concentrate
its resources on the completion and marketing of its textile systems. The
Company is prohibited from undertaking general marketing of the STER-O3-ZONE(TM)
100 device until final marketing clearance from the FDA has been received, which
is not anticipated by the Company during the next fiscal year. 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
determined that it is prudent to postpone placement of these units indefinitley
or until issues of
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reproducibility have been satisfied and labeling claims made pursuant to the
application can be fully substantiated by internal testing and independent
validation.
As discussed above, 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 has been awarded an issued patent on this chemical and is
continuing product testing in preparation for the submission of a 510(k)
Premarket Notification Application with the FDA. The Company is currently
considering whether it will complete this product itself or to complete an
agreement for its completion, manufacture and marketing with a strategic
partner.
.
The Company is also pursuing 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 CyclO3PSS Medical
Systems, Inc.
Subsequent to April 1990, the Company has:
(1) obtained equity funding of approximately $12,159,858 and debt
funding (net) of approximately $1,156,000.
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(2) abandoned its previous technology.
(3) acquired a license to use an alternate ozone-generating technology.
(4) conducted development of all aspects of applicable technology,
testing and improvement.
(5) engaged in the research and development of product lines which the
Company believes may ultimately be competitive in the market place.
(6) acquired the company that owned the ozone-generating technology
previously licensed to the 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 that were active in diversified markets,
increase their product development and completion activities and
embarked on marketing activities aimed at gaining and accelerating
sales of these products.
On February 3, 1995, the Company's name was changed from CyclO3PSS Medical
Systems, Inc. to its current name of CyclO3PSS 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 CyclO3PSS 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 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 approximately 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.
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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
industry consolidation. Economic constraints provide continual pressure for
laundries to cut costs and increase utilization of capital equipment and
labor.
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 Systems
provide superior performance, reliability and repeatability 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 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.
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Additionally, the Company has installed ozone safety monitoring devices and
recirculation loops that are used to reuse wash water in some plants.
The Company has developed and is now beginning to market a second
generation Ozone Washing System that includes all of the previous features and
also 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 Patent and Trademark office. On May 6,
1997, the patent was granted by the US Patent and Trademark Office.
Commercial and Institutional Laundry Products
The Company's Ozone Washing System products include the following:
THE OZO3- CLEANTM SYSTEM 2002HC is the trade name of the ozone washing
system specifically designed and tested to combine the cost-effective cleaning
enhancements of the OZO3-CLEANTM SYSTEM 2000 Commercial Laundry system with the
superior disinfection capabilities required by healthcare facilities. Retail
costs of these systems range from $20,000 to $300,000, depending on the size of
the laundry facility and the options selected by the customer.
THE OZO3-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 thelaundry facility
and the number of options selected by the customer.
THE OZO3-CLEANTM SYSTEM 2002i is the trade name for the Company's smaller
ozone washing system which is designed for installation in institutional
on-premise laundries in hotels, prisons, etc. Retail cost of these systems range
from $20,000 to $100,000, depending on the size of the laundry facility and the
optional equipment selected by the customer.
THE ZONO3-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. CyclO3PSS Textiles will offer these chemicals to its Ozone
Washing System customers through licensed providers. By using CyclO3PSS
formulated and supplied wash chemicals, the customers will be better assured of
consistent performance by the Ozone Washing System.
SKID-MOUNTED OZO3-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, whitypically features smaller customer facilities.
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Other Laundry Products
The Company also markets a Material Handling System that was acquired as
part of the assets of Innovative Textile Technology, Inc. The VAC Soil Counting
System sorts, counts and conveys soiled textiles through the use of vacuums, a
series of tubes, a computer terminal, infra-red sensors 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 into 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 manual 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 fifty 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 between $94,000 and $340,000 depending on the size and layout of
individual customer laundry facilities.
Specialty Chemicals Market
Through the Company's CyclO3PSS BioChemical Corporation subsidiary, the
Company supplies specialty organic chemicals and custom synthesis services to
pharmaceutical, chemical, and biochemical researchers worldwide. CyclO3PSS
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.
CyclO3PSS 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 do 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. The following is a list of CBC customers with purchases
of more than 10% of CBC products: Applied BioSystems, with purchases of $39,712
(14.52%), Alexis Corporation, with purchases of $70,012 (19.65%) and Marchem
Corporation, with purchases of $112,814 (36.02%). While the revenues produced by
CBC have constituted a significant portion of total revenues during the year
ended February 29, 1997, 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. Subsequent to the
year ended February 28, 1997, CBC agreed to form a 50/50 joint venture with a
mechanical and materials engineering firm to commercialize a material which may
be used in aerospace products and which is manufactured using proprietary
technologies owned separately by the two companies. If and when this product
reaches successful commercialization, the contribution to the Company's revenues
by CBC could
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become material. However, there can be no assurance that the product will reach
successful commercialization or that quantities will result in material revenue
for the Company.
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 could be a viable alternative to current technologies.
As of 1996, 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.
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.
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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-O3-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.
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 (O3) 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.
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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 (O3), 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-O3-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 two gas sterilization products, both of
which will utilize the Company's ozone gas sterilization system. The FDA 510(k)
Premarket Notification for the Company's previously identified first product,
the STER-O3-ZONE(TM) 100, was filed on January 6, 1995. Additional information
about the Company's initial proposed product line of ozone gas sterilizers is as
follows:
THE STER-O3-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 containers and chambers, is expected to be
approximately $70,000. The Company believes that this product if and when
completed and cleared for marketing, could address the need for fast, low
temperature, dry and environmentally responsible sterilization of expensive
and delicate instruments between surgical procedures.
THE STER-03-ZONE(TM) 400 will be a larger version of the STER-O3-ZONE
(TM) 100 and has a 4.0 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.
In addition to its ozone gas sterilizers the Company has developed a LIQUID
CHEMICAL STERILANT (STEROX(TM)) The Company is engaged in the research and
development of this proprietary 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 these products. There can be no
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assurance that the product line currently proposed will not be significantly
changed in the future or 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 through
its CyclO3PSS Medical Systems , Inc. subsidiary 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-O3-
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-O3-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 that it is prudent to postpone the
placement of these units indefinitley or 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, of which there can be
no assurance, the Company will receive a determination from the FDA that the
STER-O3-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.
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-O3-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 STER-O3-ZONE(TM) 100
in anticipation of rigorous FDA review. Recent actions by the FDA have caused
the general 510(k) Premarket Notification process to require more detailed
information than in the past and the Company makes no claims as to the current
design or data submitted as being acceptable to the FDA. Additionally,
increasing acceptance in the United States of ISO (International Organization
for Standardization) product design standards also caused the Company to
entertain making certain revisions to the product and to redirect the design
effort.
Proprietary Technology, Patents, and Trademarks
The Company has developed technologies which it believes will enable it to
offer effective ozone laundry systems and medical and surgical product
sterilization systems, as well as support product development in certain other
non-medical applications. 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
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<PAGE>
the Company in January 1994. Utilizing such ozone generation technology as the
"core" for the Company's ozone gas medical sterilization 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 May 15,
1997, nine of these patents have been granted, two 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 CyclO3PSS
sterilization, laundry products and chemical compounds.
The nine 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 & Mixing System.. 08-02-1994
7. Ozone Sterilization Vapor Humidification Component............... 09-06-1994
8. Fluid Chemical Biocide........................................... 04-04-1995
9. Laundry Ozone Injection System................................... 05-06-1997
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Foreign patent proceedings, where applicable, have been initiated for
patents that have been granted in the United States.
The two 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
Trademarks. The Company has filed trademark applications with the United
States Patent and Trademark Office for the trademarks "STER-03-ZONE(TM)",
"RETR-O3-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 continues to engage in research and product development of its
ozone laundry systems for healthcare, institutional and commercial laundries, as
well as for upgrades and enhancements for its VAC soiled laundry counting and
sorting systems. It also intends to continue limited additional research into
ozone gas sterilization 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-O3-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.
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 $816,941 during the fiscal year ended February 28,
1997 and $816,517 for the fiscal year ended February 29, 1996. The Company,
given its current plans and budgetary
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<PAGE>
constraints, does not expect these costs to increase significantly during the
next year, but believes that it will be necessary and therefore intends to
continue to invest similar amounts in research and development during the next
fiscal year as certain products complete the development process and are
commercialized
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, pumps, motors, oxygen concentrators, ozone monitors and sensors,
sterilization containers, various electronic parts, structural frames, ozone
destruct systems, ozone humidification systems, ozone liquid injectors,
compressors, valves and fittings. The Company assembles and tests each of its
products in-house or at the time of assembly in the field. The Company relies on
outside vendors for various parts and sub-assemblies and 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 gas 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 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.
Marketing
The Company markets its laundry industry products through in-house sales
efforts of its CyclO3PSS Textiles Systems, Inc. subsidiary and regional laundry
equipment dealers.
The Company markets specialty chemicals through in-house sales efforts of
its CyclO3PSS BioChemical Corporation (CBC) subsidiary as well as through
independent chemical distributors. Many of CBC's products are also included and
available on the Company's "Home Page" location on the World Wide Web
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.
Competition
The Company's laundry products are in competition with several small
producers of ozone washing systems. These competitors include Tri-O-Clean
Systems, Guestcare, and Envirozone. The Company believes that each of these
competitors are also small, early stage enterprises. The Company believes that
its proprietary technologies and know-how will provide an advantage over the
systems offered by its competition.
The Company is developing 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 (recently acquired by Getinge,
15
<PAGE>
International), J&J Medical, Inc. (a subsidiary of Johnson & Johnson), Abtox
Corporation and the MedicalSurgical 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 and if 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.
The Company's specialty chemicals products are unique products with limited
markets and fragmented competition.
Many of the Company's existing or potential competitors in the medical,
textiles and chemical supply industries 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.
Government Regulation
The STER-O3-ZONE 100(TM) and the Company's other proposed medical
sterilization products are classified as medical devices, 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-O3-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
16
<PAGE>
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
The Company carries product liability insurance for its medical and other
products in amounts which it believes to be adequate for the exposures attendant
to its business. However, there can be no assurance that such insurance will be
adequate to protect the Company from loss in the event of significant claims or
catastrophic events or that such insurance will fully cover future product
liability claims if they arise. The Company also carries general liability and
casualty loss insurance and Directors and Officers liability insurance.
Employees
The Company and its subsidiaries employed twenty-two full-time employees
and three part-time employees as of May 15, 1997. None of the Company's
employees are covered by a collective bargaining agreement.
17
<PAGE>
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,
CyclO3PSS 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 minimum monthly lease payments of $250.
ITEM 3. LEGAL PROCEEDINGS
Baggett, et al. On October 27, 1995, a Motion for Summary Judgement in
Utah's Third District Court was granted by Judge David S. Young 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 the 355,606 canceled shares. The Company and
legal counsel believed the summary judgement was incorrect and vigorously
appealed this decision. On March 27, 1997 the Utah Court of Appeals affirmed the
decision of the Third District Court . At the time the stock was originally
canceled in 1990, these certain former stockholders and officers had abandoned
the company for over a year, the Company was financially insolvent, the stock
was not listed or traded on any exchange, and the Company's stock had an
indeterminate and negligible value. In compliance with the order of the court of
appeals, the Company reissued the 355,606 shares of common stock previously
canceled. On April 28, 1997 the Company filed a Petition for Writ of Certiorari
with the Supreme Court of Utah for a further hearing on the case. There is no
assurance, however, that the petition will be granted.
Bughi. An action was filed on December 23, 1996 by Larry P. Bughi and
Kathleen Lison-Bughi in the United States District Court for the Western
District of Washington seeking recision of a $140,000 investment the Bughi's
made in February, 1996 in a convertible secured promissory note which was
offered and sold to accredited investors by the Company. In addition to seeking
recision of their investment, the Bughi's suit contained a motion for a
temporary restraining order and a motion for a preliminary injunction and pre-
judgement attachment. These "Bughi motions" were denied by the court and the
Company has filed a Motion to Dismiss for Improper Venue which has not yet been
ruled upon by the court. The relief sought by the Bughi's consists primarily of
the early repayment of a promissory note which was issued by the Company and
which is already recorded as a liability in the financial statements of the
Company, therefore, no additional contingency or liability has been recorded by
the Company relative to this matter.
Mifal Klita, et al. During the period from May through August 1996, the
Company sold its Class B preferred stock in a private placement to certain
investors pursuant to the provisions of Regulation S. One of these investors,
Mifal Klita, a purported Canadian company, filed suit against the Company
demanding the removal of the restrictive investment legend which the Company
caused to be placed on common shares issued pursuant to the conversion of Class
B preferred shares. The suit was filed in the Court of Chancery in the State of
Delaware, which ruled in favor of the Company on April 8, 1997 and dismissed
Mifal Klita's suit.
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<PAGE>
Subsequently, Mifal Klita refiled an amended suit in the Superior Court of the
State of Delaware. The primary relief sought by Mifal Klita is the return of
their invested funds and/or the conversion of their Class B preferred shares
into unrestricted common stock of the Company. The Company has not recorded any
contingencies or reserves related to this matter.
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.
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". There is limited trading activity in the
Company's common stock and the quotations set forth below reflect such limited
activity. There can 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:
Year End Year Ended Through
February 28, 1996 February 28, 1997 May 15, 1997
High Low High Low High Low
First Quarter $ 5.75 $ 2.75 $ 4.38 $ 2.63 $ 1.28 $ 0.75
Second Quarter 4.75 3.25 2.88 0.75
Third Quarter 4.31 2.50 1.03 0.63
Fourth Quarter 3.25 2.50 1.31 0.69
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<PAGE>
Holders
The number of record holders of the Company's common stock as of May 15,
1997 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.
Recent Sales of Unregistered Securities
The Company issued the following shares in an unregistered offering during
the year ended February 28, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Date Title of Number Principal Consideration Name of Commission
Sold Securities Of Shares Underwriter Paid Purchaser Paid
- ----- ---------- --------- ----------- -------------- --------- ------------
02/27/97 Unregistered 100,000 None $52,813 Joseph Matarazzo None
</TABLE>
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company commenced operations in 1987 after being an inactive
corporation from the 1930's until 1987. From 1987 until July of 1994, the
Company was in the development stage, engaged primarily in the research and
development of its technologies and products. From the period since reactivation
(March 2, 1987) to February 28, 1997, the Company incurred a cumulative net loss
of approximately $11,480,000. 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. The Company had planned to place a minimal
number of its ozone gas medical instrument sterilization systems in test
locations, and it has determined that it is prudent to postpone, perhaps
indefinitely, the sale of these STER-O3-ZONE(TM) 100 model systems. The Company
will not commence marketing these systems in the clinical marketplace until and
unless it obtains FDA marketing clearance for its ozone gas sterilizers. 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 or if it will continue to pursue this
application in its current form.
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On May 31st, 1995 the Company moved CyclO3PSS Textile Systems, Inc., (CTS)
a wholly owned subsidiary of the Company, from its previous location in West
Chester, Pennsylvania into facilities at the Company's headquarters in Salt Lake
City, Utah. 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 Company's line of
textiles ozone washing 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 losses
in the years ended February 28, 1997 and February 29, 1996. The Company believes
these processes are nearly completed and intends to aggressively market these
textiles systems in future periods, during which it expects significantly
increasing revenues from sales of its textiles systems to the commercial and
industrial laundry market, the institutional laundry market and the healthcare
laundry market.
CyclO3PSS BioChemical Corporation, (CBC) is also a wholly-owned subsidiary
of the Company, which was purchased in October of 1994 and contributed only
modest revenues for the year ended February 28, 1995. The subsidiary was moved
into new laboratories in January of 1995, contributing its first full year of
revenues to the Company during the year ended February 29, 1996, as reflected on
the accompanying financial statements. CBC provides contract custom synthesis
and contract biochemical research and development. This subsidiary also produces
an ongoing product line of over 250 scientific compounds in addition to
providing invaluable scientific expertise in all areas of the Company's product
development activities.
The Company's future operating results will depend on many factors,
including acceptance of the Company's laundry technologies, systems, equipment
and attendant products in the various markets and industries where the Company
intends to and currently is selling them and the timing of FDA marketing
clearance, if received, for the Company's medical sterilization and disinfection
products which require such clearance and the demand for them at that time.
Additional factors include the Company's ability to manufacture and market its
products on a cost-effective basis, the level of competition which it encounters
in its various marketplaces, the ability of the Company to develop product
enhancements and new products in order to achieve and maintain market share, and
its ability to obtain adequate financing.
Results of Operations
The Company's gross revenues were $610,525 for the year ended February 28,
1997, and $442,632 for the year ended February 29, 1996, an increase of $167,893
(38%). Two of the Company's wholly owned subsidiaries currently contribute to
the Company gross revenues, CyclO3PSS Textile Systems, Inc (CTS) and CyclO3PSS
BioChemical Corporation (CBC). CTS's revenues were $292,279 for the year ended
February 28, 1997, and $202,525 for the year ended February 29, 1996, an
increase of $89,754 (44%). CBC's revenues were $318,246 for the year ended
February 28,1997, and $240,107 for the year ended February 29,1996, an increase
of $78,139 (33%). CTS's revenues for the year ended February 28, 1997 consisted
of the sale of upgrades and the performance of service and support for present
customers who had purchased Ozone Washing Systems and VAC Soil Counting Systems
in prior years. The Company attributes the increase in the revenues of CTS to
increasing acceptance of its technologies by its customers. CBC's revenues are
the result of contract custom synthesis and the sale of chemical compounds it
produces in its laboratories. The increase in the revenues of CBC are
attributable to increasing interest in and use of its products and services by
medical researchers and chemical suppliers and CBC's reputation for quality. Due
to the selective expertise of its personnel, CBC also provides extensive
in-house research assistance to other operations within the Company and has
become an
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<PAGE>
invaluable resource engaged in the scientific support of all activities of the
Company. The internal support activities are, however, non-revenue-producing.
Although the Company is producing increasing revenues, the research and
development expenditures of the Company remained the same for the last two
fiscal years. These R&D expenses were $816,941 for the year ended February 28,
1997, and $816,517 for the year ended February 29, 1996 and were still
significantly greater than revenues in each of these two past years. The
Company, given its current plans, does not expect these costs to significantly
increase during the next year, but believes it is necessary and intends to
continue to invest similar amounts in R&D as certain products complete the
development process and are commercialized.
.
The Company incurred general and administrative expenses of $1,449,319 for
the year ended February 28, 1997, compared to $1,841,331 for the year ended
February 29, 1996, a decrease in these expenses of $392,012 (21%). This decrease
was due to a reduction of personnel and operational expenses as the Company
focused the bulk of its efforts on the products which it believes have the
highest probability for producing significantly increased near-term revenues
while reducing expenses related to products and projects which may not produce
marketable products or revenues until further in the future. At February 28,
1997, the Company had 24 full-time and 4 part-time employees, a significantly
reduced number compared to the 33 full time employees which were employed by the
Company as of February 29, 1996. With the IDE STER-O3-ZONETM 100 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 prepares for commercialization, the human
resource requirements of the Company will change.
The Company incurred selling and marketing expenses of $156,490 for the
year ended February 28, 1997, compared to $402,307 for the year ended February
29, 1996, a decrease in these expenses of $245,817 (61%). This decreased expense
is attributable to a reduction in sales staff, significant re-use of previously
prepared sales and marketing materials and fewer trade show expenses. During the
previous year the Company advertised heavily in industry publications, hosted
events at several industry trade shows, and engaged in several promotional
demonstrations of the systems' capabilities using small portable systems
designed and manufactured specifically for that purpose. The Company anticipates
that marketing expenses will increase significantly in the fiscal year ending
February 28, 1998 due to the hiring and training of additional marketing and
sales personnel for the textiles operations (CTS) and the attendant costs
related to their endeavors as CTS's products are marketed and accepted by the
various markets where they have applications and advantages over current method
and competitors. The Company also anticipates increasing its direct marketing
efforts to potential customers of CBC.
For the year ended February 28, 1997, the Company had interest income of
$38,804 as compared to interest income for the year ended February 29, 1996, of
$25,363. This increase was due to an increase in the amount of cash and cash
equivalents. The Company incurred $241,528 in interest expense for the year
ended February 28, 1997. $10,601 of this amount is attributable to equipment
leasing arrangements for certain laboratory and telephone equipment required for
the operations of the Company and $137,067 of this amount is the interest
accrued in conjunction with the Company's convertible debt offering (see
discussion below under Liquidity and Capital Resources in regards to this debt
offering). Unless the Company pays down this debt or sells additional interest
bearing securities it is anticipated that this expense will remain approximately
level during the fiscal year ending February 28, 1998.
The Company's net loss for the year ended February 28, 1997 was $2,957,744
compared to the net loss for the year ended February 29, 1996 of $3,449,994, a
decrease of $492,250 (14%). The Company anticipates
22
<PAGE>
that it will operate at a loss for the year ended February 28, 1998. However, it
is anticipated that the losses will continue to diminish significantly as the
revenues of CTS and CBC continue to increase.
Liquidity and Capital Resources
As of the date of this filing, the Company has insufficient funds on hand
to continue its operations for the entire upcoming fiscal year ending February
28, 1998 unless significantly increased revenues and gross profits are achieved
or additional financing is obtained. Should the Company be unsuccessful in
achieving the increased level of revenues and gross profits required to pay its
operating expenses or in acquiring additional financing to pay the shortfall,
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 and has, as of the date of filing of this Form
10-KSB, entered into an investment banking agreement with Southwest Securities
Group. There are no assurances that the efforts to locate and secure additional
financing will be successful, and the failure to secure this financing would
substantially alter the management's assumptions as presented heretofore and in
the remainder of this section.
Cash used in operating activities was $2,025,899 for the year ended
February 28,1997, compared to $3,165,217 for the year ended February 29,1996, a
reduction of $1,139,318 (36%). The Company's use of cash in the year ended
February 29, 1996 was more aggressive than in any previous year as the Company
experienced significant general and administrative and marketing expenses in
support of CTS. The use of the Company's cash reserves were significantly
decreased as a result of more conservative expenditures during the year ended
February 28, 1997. Accounts receivable were comprised of service and parts sales
from CTS, and contract development and chemical compound sales from CBC.
No cash was provided from investing activities for the year ended February
28, 1997, compared to cash provided from investing activities of $959,276,
including net proceeds of $1,192,849 from the sale of short term investments for
the preceding year ended February 29, 1996. Cash expenditures for property and
equipment were $17,654 for the year ended February 29, 1997 compared to $222,810
for the year ended February 28, 1996, a reduction of $205,156 (92%). This
decrease was the result of the Company decreasing purchases of equipment and
utilizing equipment leasing arrangements for acquisition of certain required
equipment in its efforts to conserve cash.
Net cash provided by the sale of the Company's securities was $3,067,076
for the year ended February 28, 1997, which includes $2,755,000 in net proceeds
from issuance of preferred stock. This amount compares to $1,469,660, with an
additional $875,000 from the issuance of convertible debt for the year ended
February 29, 1996.
Total assets increased to $3,024,846 for the year ended February 28, 1997
from $2,678,618 for the year ended February 29, 1996, an increase of $346,228
(13%), primarily due to the increase in the Company cash position. .
Total current liabilities decreased to $269,929 at February 28, 1997 from
$441,636 at February 29,1996, a decrease of $171,707 (39%). All of the Company's
current liabilities at year end were attributed to accounts payable, accrued
liabilities and the current portion of certain capital equipment leases. Long
term liabilities
23
<PAGE>
increased to $1,345,086 for the year ended February 28, 1997 from $944,289 for
the year ended February 29, 1996, an increase of $400,797 (42%) over the prior
year. Of the total, $1,307,730 represents principal and interest on debt
generated pursuant to the Company 's offering of convertible debt instruments.
The Company's two financing transactions for the year ended February 28, 1997
are further described below.
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.
The principal and accrued interest 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 and it was closed. On January 7, 1997 one subscription to this
offering in the amount of $70,000 was rescinded pursuant to a determination that
the State of residence of the subscriber did not recognize the exemption from
registration which was relied upon by the Company.
During the period of June 1, 1996 through August 16, 1996 the Company
authorized and offered its "Series B" preferred shares to accredited investors
in an offering made pursuant to Regulation S of the Securities Exchange Act.
Eleven subscribers purchased such shares in this offering for a total of
$3,170,000. "Series B" preferred shares were sold for $1,000 each and were
convertible into the Company's common shares at a conversion price which carried
a discount from and fluctuated with the average market price for the Company's
common shares. The preferred shares carry and accrue a preferred dividend rate
of 8%. Please also see Part 1, Item 3, LEGAL PROCEEDINGS regarding this
offering.
Even though the Company has taken aggressive steps to reduce current
monthly expenses, unless additional financing is acquired by the Company, it has
insufficient funds to finance its operations for the next twelve months. It is
possible that significantly increased revenues from the sale of CTS's and CBC's
products could reduce the overall cash requirement. However, unless additional
financing is located there is no assurance that the Company will be able to
continue operations for the next twelve months.
Plan of Operation
The plan of operation during the next twelve (12) months includes the
following:
1. Aggressively market the Company's Ozone Laundry Systems initially, to the
Healthcare markets and then the commercial and Industrial Laundry
marketplaces.
2. Continue testing and validation and initiate sales and installation of the
Company's Healthcare Ozone Laundry Systems with healthcare providers in the
US and Internationally.
3. Complete design and development of the Company's Ozone Laundry Systems for
institutional users such as hotels, resorts, prisons, etc and initiate
sales and installation of these systems to such institutions.
4. Continue to increase marketing, sales and installation of the Company's VAC
laundry counting and sorting systems to commercial, industrial,
institutional and healthcare customers.
24
<PAGE>
5. Complete validation testing of the Company's liquid chemical sterilant,
SterOxTM, preparatory to completion of a licensing agreement with an
established medical product manufacturing/marketing company and/or
preparation and submission of a 510(k) Premarket Notification to the FDA.
6. 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-O3-ZONE 100TM.
7. Continued development of products and enhancements for the Company's
textile operations.
8. Increased marketing and continued growth of contract research and
development within the BioChemical group and the ongoing manufacture and
sales of their current and future products.
9. With adequate financing in place, there may be additional diversification
of the Company's business activities through future acquisitions or product
development.
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 and 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 and
available.
The Company had 24 full time and 4 part-time employees as of the year ended
February 28, 1997. The Company anticipates that no more than twelve additional
employees will be hired during the next twelve months, and then, only as the
market acceptance of the Company's textile systems accelerates. 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
availability of new technologies, the completion or lack of completion of
certain strategic alliances, and the timing and successful completion of the
Company's stated requirement to acquire additional operating and growth 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.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
25
<PAGE>
There have been no changes or disagreements between the Company and Ernst &
Young LLP , its Independent Auditors during the year ended February 28, 1997.
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 46 Chairman, CEO
William R. Stoddard 45 President, Director
Mondis Nkoy 33 Controller, Corporate Secretary
Robert J. Wrigley 48 Director
Steve Sarich, Jr. 76 Director
J. Bruce Baily 62 Director
John R. Herzog 51 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.
Mondis Nkoy. Ms. Nkoy has been employed as Controller by the Company since
September, 1996. She was also elected as corporate Secretary in October of 1996.
For the three years prior to her appointment as controller she worked as an
assistant to the controller of the Company. Previous to this time she was
working
26
<PAGE>
to complete her education and received a Bachelor of Science Degree from the
University of Utah with a major in Mathematics and a minor in Computer Science.
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.
John R. Herzog. Mr. Herzog was a director of the Company from 1991 until
May, 1996 when he resigned. He was re-appointed as a director at the annual
meeting of directors in October, 1996. From 1980 to the present he has been the
president and owner of Herzog Surgical, Inc., a surgical products distribution
company headquartered in Sacramento, California. From 1984 to 1991 he was
chairman and CEO of Genesis Medical Corporation.
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:
The only transaction during the fiscal year of which the company is
aware wherein securities of the Company were purchased or sold by persons
subject to Section 16(a) was a single transaction on October 4, 1996 wherein
John M. Williams (Chairman, Director and CEO) exercised an option to purchase
shares from Robert Wrigley (Director) pursuant to an option entered into on
October 4, 1991. Forms 4 were filed by these individuals. However, this
transaction was not subject to Rule 16 because the option was granted more than
two years prior to the Company becoming a "reporting company".
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
27
<PAGE>
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:
<TABLE>
<CAPTION>
Annual. Compensation Long-Term Compensation
Name and Principal Position Year Salary Bonus Compensation Stock Awards SAR's(#) LTIP Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Williams 1997 $96,000 -0- -0- 100,000(1) -0- -0- -0-
Chairman/CEO 1996 $96,000 -0- -0- -0- -0- -0- -0-
1995 $96,000 -0- -0- -0- -0- -0- -0-
William R. Stoddard 1997 $96,000 -0- -0- 100,000(1) -0- -0- -0-
President 1996 $96,000 -0- -0- -0- -0- -0- -0-
1995 $96,000 -0- -0- -0- -0- -0- -0-
(1) Options to acquire shares of common stock.
</TABLE>
Stock Options Granted in Last Fiscal Year
During the year ended February 28, 1997, stock options for 100,000 shares
were granted to each of the two persons named in the Summary Compensation Table
above. Effective on September 1, 1996, the Company extended the three-year
Employment Agreements of John M. Williams and William R. Stoddard ("Employees")
which expired on August 31, 1996 and had been in force for the immediately
preceding three years since their inception on August 31, 1993. Each extension
is for a term of one year commencing September 1, 1996. The expiring Agreements,
and therefore the one year extensions effective on September 1, 1996, granted
each of these two employees an Option to purchase 100,000 shares of the
Company's common stock at a Grant Price which is equal to its fair market value
on the date of grant, for each subsequent year of continued employment. The fair
market value of the additional 100,000 options granted under the extensions as
of September 1, 1996 (the Grant Date) was $1.07 per share (the average closing
price for the Company's common stock for the 30 days prior to September 1,
1996). 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.
Therefore, at August 31, 1996, Options to purchase 300,000 shares owned by each
Mr. Williams and Mr. Stoddard, which vested during the three prior employment
years were all exercisable. Options to purchase the additional 100,000 shares
each granted to Mr. Williams and Mr. Stoddard pursuant to the extension of the
Employment Agreements will become exercisable on August 31, 1997. As of May 31,
1997 none of the options granted in the Employment Agreements have been
exercised. The Options granted in the original three-year 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
originally granted Options were registered by the Company with the filing of
Form S-8 dated August 31, 1995, which is incorporated herein by reference. The
Company intends to file a registration on Form S-8 to register the Options
granted under the extensions of the Employment Agreements.
Option/SAR Grants in last fiscal year
Individual Grants
28
<PAGE>
<TABLE>
<CAPTION>
Number of Securities % of Total options/SAR
underlying Options/SARs Granted to employees Excercise or
Name Granted (#) In fiscal year Base price Expiration Date
- --------- -------------------------- ----------------------- ------------ ---------------
<S> <C> <C> <C> <C>
John Williams 100,000 43.1% $1.07 8/31/2002
William Stoddard 100,000 43.1% $1.07 8/31/2002
</TABLE>
Aggregate Option Exercises and Number/Value of Unexercised Options
The following table provides information concerning the exercise of options
during the last fiscal year by persons named in the Summary Compensation Table,
the number of unexercised options held by such persons at the end of the last
fiscal year, and the value of such unexercised options as of such date:
<TABLE>
<CAPTION>
Nature of Value of Unexercised
Shares Acquired Values Unexercised Options In-the-Money Options
Name on Exercise (#) Realized ($) at 2/29/97 (#) at 2/29/97 ($)(1)
- ------- --------------- ------------ --------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C>
John M. Williams -0- -0- 300,000 100,000 $ -0- $2,000
William R. Stoddard -0- -0- 300,000 100,000 $ -0- $2,000
</TABLE>
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, 1997 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, 1997 ($1.09) and (ii)
the exercise price of the stock options ($1.85 for the 300,000 Exercisable
options granted under the original Grant and $1.07 for the 100,000 Unexercisable
options granted under the extensions).
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 granted under this plan are
exercisable at $1.85 per share. This 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. Effective September
1, 1996 the Company's Board of Directors approved an additional 25,000 options
to be granted 5,000 shares each to Non-Employee Directors on the date of the
Company's Annual Meeting of Stockholders in 1997. After these options are
granted, they will be exercisable for a period of five years. The Options
granted under this additional plan are exercisable at $1.07 per share, which is
deemed to have been the fair market value of the Company's common stock on
September 1, 1996, the date the plan was approved and enacted.
Stock Incentive Plan
29
<PAGE>
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.
Options Granted under the Plan. As of May 15, 1997, 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. As of February 28, 1997 14,000 of these Options have been exercised
and 4,000 were still outstanding.
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. These Options are
exercisable at $1.85 per share. Subsequently, 11,000 of these Options
canceled pursuant to the terms of the plan when the optionee's' employment
with the Company terminated. As of February 28, 1997, 13,000 of these
Options have been exercised and 25,000 were still outstanding.
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. Subsequently, 10,000 of such Options canceled pursuant to the terms
of the plan when one of the optionee's' employment with the Company
terminated. As of February 28, 1997, 10,000 of these options were still
outstanding.
On July 12, 1994, options to purchase a total of 90,000 shares were
granted to four employees of CyclO3PSS Textile Systems, Inc., a wholly-owned
subsidiary of the Company. None of these optionee's are officers or
directors of the Company. All of such options are exercisable at $6.03 per
share. Subsequently, 69,000 Options were canceled pursuant to the terms of
the plan when three of the optionee's' employment with the Company
terminated. As of February 28, 1997, 21,000 of these options were still
outstanding.
On September 15, 1994, options to purchase a total of 45,000 shares
were granted to three employees of CyclO3PSS BioChemical Corporation, a
wholly-owned subsidiary of the Company, none
30
<PAGE>
of whom are officers or directors of the Company. These options are
exercisable at $6.03 per share. Subsequently, 21,000 of these options were
canceled pursuant to the terms of the plan when one of the optionee's
employment with the Company terminated. As of February 28, 1997 24,000 of
these options were still outstanding.
On January 1, 1995, options to purchase a total of 45,000 shares were
granted tof en employees the Company, none of whom are officers or directors
of the Company. All of such options are exercisable at $5.44 per share.
Subsequently, 24,000 of these options were canceled pursuant to the terms of
the plan when the optionee's' employment with the Company terminated. As of
February 28, 1997, 21,000 of these options were still outstanding.
On February 29, 1996, Options to purchase a total of 44,500 shares were
granted to twelve employees of the Company, none of whom are officers or
directors. All such Options are exercisable at $5.44 per share.
Subsequently, 24,500 of these options were canceled pursuant to the terms of
the plan when the employment of the optionee's with the Company terminated.
As of February 28, 1997 20,000 of these options were still outstanding.
On September 15, 1996, Options to purchase a total of 7,000 shares were
granted to two employees of the Company, neither of whom were officers or
directors. These options are exercisable at $0.9375 per share. As of
February 28, 1997 all 7,000 of these options were still outstanding.
Subsequent to the fiscal year ended February 28, 1997, on March 25, 1997
Options to purchase a total of 6,000 shares were granted to an employee of
the Company who was not an officer or director. These options are
exercisable at $1.25 per share and are still outstanding as of May 15, 1997.
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 15, 1997, 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:
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class Ownership
John M. Williams(2)(3) 1,084,434 7.9%
3646 West 2100 South
Salt Lake City, UT 84120
William R. Stoddard(2)(4) 616,319 4.5%
3646 West 2100 South
Salt Lake City, UT 84120
31
<PAGE>
John R. Herzog(5) 1,129,654 8.2%
5901 Rosebud Lane
Sacramento, CA 95841
Robert J. Wrigley(2)(6) 76,840 0.6%
4260 S. 500 West
Salt Lake City, UT 84123
J. Bruce Baily(2)(7) 58,243 0.4%
40 Ina Court
Alamo, CA 94507
Steve Sarich, Jr.(2)(8) 486,181 3.5%
505 Madison Street
Suite 220
Seattle, WA 98104
Mondis A. Nkoy(2)(9) 4,000 *
3646 West 2100 South
Salt Lake City, UT 84120
All Officers and Directors
as a Group (7 Persons) 3,455,671 25.1%
* Less than 0.1%
(1) As of May 15, 1997, there were 12,793,442 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
816,860 shares of the Company's common stock as well as promissory notes which
are currently convertible into 178,657 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
13,788,959 shares of the Company's common stock issued and outstanding for
purposes of the table above. 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. The shares
issuable upon the conversion of promissory notes can only be voted at a
shareholders meeting if the notes are converted and the shares issued prior to
the record date of the meeting.
(2) These individuals are the directors and/or officers of the Company as of May
15, 1997.
(3) Mr. Williams is the record owner of 465,707 of these shares and owns an
additional 256,745 of these shares in brokerage accounts. The 1,084,434 figure
also includes 300,000 shares which Mr. Williams may purchase from the Company
pursuant to an employment stock option, 28,572 shares which may be purchased
from the Company pursuant to a Warrant and 33,410 shares which may be acquired
from the Company by Mr. Williams upon conversion of a $100,000 Promissory Note
and the accrued interest thereon as of May 15, 1997. All of such options and
warrants are currently exercisable and the promissory note and accrued interest
is currently convertible. As of May 15, 1997, Mr. Williams also owns options to
purchase an additional 75,000 shares of common stock from the Company pursuant
to a continuing employment agreement, which additional options are not currently
exercisable and are not therefore included in the total for beneficial
ownership. These additional options become exercisable on August 31, 1997. (See
"Executive Compensation.")
(4) Mr. Stoddard is the record owner of 202,454 of these shares and owns an
additional 51,845 of these shares in brokerage accounts. The 616,319 figure
includes 300,000 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 33,448 shares which may be acquired
from the Company by Mr. Stoddard upon conversion of a $100,000 Promissory Note
and the accrued interest thereon as of May 15, 1997. 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 75,000 shares of common stock from the Company pursuant to a
continuing employment agreement, which additional options are not currently
exercisable and are not therefore included in the total for beneficial
ownership. These additional options become exercisable on August 31, 1997. (See
"Executive Compensation.")
32
<PAGE>
(5) The total of 1,129,654 shares shown for Mr. Herzog includes 1,052,414 shares
owned of record, 15,000 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 33,668 shares which may be acquired from
the Company by Mr. Herzog upon conversion of a $100,000 Promissory Note and the
accrued interest thereon as of May 15, 1997. All of such options and warrants
are currently exercisable and the promissory note and accrued interest is
currently convertible.
(6) Mr. Wrigley does not own any shares of record. The 76,840 shares
beneficially owned includes 15,000 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 33,268 shares which may be
acquired from the Company by Mr. Wrigley upon conversion of a $100,000
Promissory Note and the accrued interest thereon as of May 15, 1997. All of such
options and warrants are currently exercisable and the promissory note and
accrued interest is currently convertible.
(7) The total of 58,243 shares shown for Mr. Baily includes 20,000 shares owned
of record, 1,600 shares held in brokerage accounts, 15,000 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 11,643 shares
which may be acquired from the Company by Mr. Baily upon conversion of a $35,000
Promissory Note and the accrued interest thereon as of May 15, 1997. All of such
options and warrants are currently exercisable and the promissory note and
accrued interest is currently convertible.
(8) The 486,181 shares of total beneficial ownership shown for Mr. Sarich
includes 409,389 shares owned of record by Mr. Sarich and an affiliated Company
(321 Investments), 15,000 shares which may be acquired upon exercise of a
currently exercisable stock option, 28,572 shares which may be purchased
pursuant to a currently exercisable Warrant, and 33,220 shares which may be
acquired from the Company by Mr. Sarich upon conversion of a $100,000 Promissory
Note and the accrued interest thereon as of May 15, 1997. All of such options
and warrants are currently exercisable and the promissory note and accrued
interest thereon is currently convertible.
(9) Ms. Nkoy is the Corporate Secretary and Controller and has a currently
exercisable stock option for the 4,000 shares shown as beneficial ownership. She
has also been granted options to purchase 2,000 additional shares which are not
currently exercisable but become exercisable on January 1, 1998.
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 share holdings 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 $2,000,000. 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 warrants expired one year after the closing of
the private placement. Of the 415,674 units that were issued for a total
consideration of $1,454,858, the following was the only officer, director or
affiliate that participated in this private placement offering:
Amount Shares Warrants
Name of Owner Invested Purchased Purchased (expired July 1996)
- ------------- --------- ---------- -----------------------------
Steve Sarich, Jr.(1) $178,773 51,078 51,078 (3)
33
<PAGE>
321 Investment Company(2) 35,087 10,025 10,025 (3)
(1) This individual is a Director of the Company as of May 15, 1997. Please
see Part 3, Item 9 for further identification. (2) This is a company that is
affiliated with Mr. Sarich, a director of the Company. (3) These warrants were
not exercised prior to their expiration in July, 1996.
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
Note offering included warrants to purchase shares of the Company's restricted
common stock at $4.00 per share and paid 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. The following officers and directors participated in
this debt offering:
Amount Conversion Shares/ Shares available for
Name of Owner Invested Interest & Principal(2) Purchase from warrants
John M. Williams(1) $100,000 33,410 28,572
William R. Stoddard(1) 100,000 33,448 28,572
Steve Sarich, Jr.(1) 100,000 33,220 28,572
Robert J. Wrigley(1) 100,000 33,268 28,572
J. Bruce Baily(1) 35,000 11,643 10,000
John Herzog(1) 100,000 33,668 28,572
(1) These individuals are the directors and /or officers of the Company as
of May 15, 1997. (Please see Part III, Item 9 for further identification)
(2) Represents number of shares that could be received from conversion of
principal and interest as of May 15, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Exhibits
The exhibits which are filed with this Form 10-KSB or incorporated herein by
reference are set forth in the Exhibits Index which appears on page 37.
(b) Reports on Form 8-K
The Company did not file any Forms 8-K during the last quarter of the year
ended February 28, 1997.
SIGNATURES
34
<PAGE>
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.
CYCLO3PSS CORPORATION
Date: May 29, 1997 By/s/ John M. Williams
--------------------------------
John M. Williams, CEO & Chairman
Principal Executive Officer
Date: May 29, 1997 By/s/ Mondis Nkoy
-------------------------------
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
SIGNATURES
35
<PAGE>
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/ May 29, 1997
- ------------------------ Chairman
John M. Williams
/s/ William R. Stoddard President May 29, 1997
- ---------------------------
William R. Stoddard
/s/ Robert J. Wrigley Director May 29, 1997
- -----------------------
Robert J. Wrigley
/s/ Steve Sarich, Jr. Director May 29, 1997
- -------------------------
Steve Sarich, Jr.
/s/ J. Bruce Baily Director May 29, 1997
- ----------------------------
J. Bruce Baily
/s/ John R. Herzog Director May 29, 1997
- ----------------------
John R. Herzog
36
<PAGE>
Consolidated Financial Statements
CyclO3 PSS Corporation
Years ended February 28, 1997 and February 29, 1996
with
Report of Independent Auditors
<PAGE>
CyclO3PSS Corporation
Consolidated Financial Statements
Years ended February 28, 1997 and February 29, 1996
Contents
Report of Independent Auditors.......................................1
Consolidated Financial Statements:
Consolidated Balance Sheets........................................2
Consolidated Statements of Operations..............................4
Consolidated Statements of Stockholders' Equity....................5
Consolidated Statements of Cash Flow...............................7
Notes to Consolidated Financial Statements ........................8
0
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
CyclO3PSS Corporation
We have audited the accompanying consolidated balance sheets of CyclO3PSS
Corporation and subsidiaries as of February 28, 1997 and February 29, 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CyclO3PSS Corporation and subsidiaries at February 28, 1997 and February 29,
1996, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the Company's recurring
losses from operations and periodic cash flow difficulties raise substantial
doubt about its ability to continue as a going concern. Management's plans as to
these matters are described in Note 2. The consolidated financial statements for
the year ended February 28, 1997 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
Salt Lake City, Utah
April 25, 1997
1
<PAGE>
CyclO3PSS Corporation
Consolidated Balance Sheets
February 28 February 29
1997 1996
--------------------------
Assets
Current assets:
Cash $1,275,636 $252,113
Accounts receivable, less allowance for doubtful
accounts of $2,000 and $40,138 at February 28,
1997and February 29, 1996, respectively 97,605 77,130
Inventories 100,584 408,889
Prepaid expenses 102,815 37,474
--------------------------
Total current assets 1,576,640 775,606
Property and equipment, net 370,994 570,237
Other assets:
Goodwill, net 540,375 768,862
Acquired patents, net 411,187 453,456
Developed patents and other, net 125,650 110,457
----------------------------
$3,024,846 $2,678,618
============================
2
<PAGE>
<TABLE>
<CAPTION>
February 28 February 29
1997 1996
-------------------------------------
<S> <C>
Liabilities and stockholders' equity Current liabilities:
Accounts payable $108,619 $162,414
Accrued liabilities 135,190 120,122
Deferred revenue - 142,749
Current portion of capital lease obligations 26,120 16,351
-------------------------------------
Total current liabilities 269,929 441,636
Long-term debt obligations 1,156,000 875,000
Interest payable on long-term debt obligation 151,730 14,663
Long-term portion of capital lease obligations 37,356 54,626
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Preferred stock issuable in series: par value $.01,
4,500,000 authorized:
Series "A" convertible preferred stock; 35,638
shares authorized; 35,638 shares issued and
outstanding (liquidation preference of $71,276) 356 356
Series "B" convertible preferred stock; 30,000
shares authorized; 1,935 shares issued and
outstanding (liquidation preference of
$2,612,250) 19 -
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; 12,793,440 and 10,169,932 shares issued
at February 28, 1997 and February 29, 1996,
respectively 12,793 10,170
Additional paid-in capital 13,546,195 10,305,955
Accumulated deficit (11,479,987) (8,522,243)
Deferred compensation (168,000) -
Less treasury stock, 264,000 common shares at cost (501,545) (501,545)
-------------------------------------
Total stockholders' equity 1,409,831 1,292,693
-------------------------------------
$3,024,846 2,678,618
=====================================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
CyclO3PSS Corporation
Consolidated Statements of Operations
Year ended
February 28 February 29
1997 1996
-------------- --------------
Net revenues $ 610,525 $ 442,632
Costs and expenses:
Cost of sales 477,955 411,565
Research and development 816,941 816,517
Selling and marketing 156,490 402,307
General and administrative 1,449,319 1,841,331
Depreciation and amortization 464,840 412,667
-----------------------------
3,365,545 3,884,387
Loss from operations (2,755,020) (3,441,755)
Interest income 38,804 25,363
Interest expense (241,528) (33,602)
-----------------------------
Net loss (2,957,744) (3,449,994)
Preferred stock dividends (1,660,133) -
-----------------------------
Net loss applicable to common stock $(4,617,877) $(3,449,994)
=============================
Net loss per common share before preferred stock
dividends $ (.26) $ (.35)
Loss per common share for preferred stock dividends (.14) -
-----------------------------
Net loss per common share $ (.40) $ (.35)
=============================
Weighted average number of common shares
issued and outstanding 11,415,069 9,995,060
=============================
See accompanying notes to consolidated financial statements.
4
<PAGE>
CyclO3PSS Corporation
Consolidated Statements of
Stockholders' Equity
Series "A" Series "B"
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
Shares Amounts Shares Amounts Shares Amounts
-------------------------------------------------
Balance at February 28, 1995 35,638 $356 - $ - 9,702,508 $9,702
Common stock issued for cash 415,674 416
Employee stock options exercised 8,000 8
Purchase of ThermoChem 43,750 44
Issuance of warrants with
convertible debt
Net loss
-------------------------------------------------
Balance at February 29, 1996 35,638 356 - - 10,169,932 10,170
Reissuance of shares pursuant
to court ruling (See Note 9) 355,606 355
Return of shares held in excrow
(See Note 3) (124,378) (124)
Issuance of common stock for
services 311,044 311
Issuance of Series "B" convertible
preferred stock 3,170 32
Conversions of Series "B"
preferred stock to common stock ( 1,235) (13) 1,959,546 1,959
Conversion of Series "B"
dividends to common stock 21,690 22
Issuance of common stock for cash 100,000 100
Issuance of warrants with
convertible debt
Amortization of deferred
compensation
Net loss
Reflection of paid-in-kind stock
dividends on Series "B" preferred
stock (See Note 8)
--------------------------------------------------
Balance at February 28, 1997 35,638 $356 1,935 $19 12,793,440 $12,793
==================================================
5
<PAGE>
<TABLE>
<CAPTION>
Additional Treasury Stock
Paid-in Accumulated Deferred (Common)
Capital Deficit Compensation Shares Amounts Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8,651,163 $(5,072,249) $ - 264,000 $(501,545) $3,087,427
1,454,444 1,454,860
14,792 14,800
174,956 175,000
10,600 10,600
(3,449,994) (3,449,994)
- -------------------------------------------------------------------------------------
10,305,955 (8,522,243) - 264,000 (501,545) 1,292,693
355
(124)
344,313 (336,000) 8,624
2,754,968 2,755,000
(1,946) -
(22) -
52,713 52,813
90,214 90,214
168,000 168,000
(2,957,744) (2,957,744)
- -
- -------------------------------------------------------------------------------------
$13,546,195 $(11,479,987) $ (168,000) 264,000 $(501,545) $1,409,831
=====================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
CyclO3PSS Corporation
Consolidated Statements of Cash Flow
Year ended
February 28 February 29
1997 1996
Cash flows from operating activities:
Net loss $(2,957,744) $(3,449,994)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 182,416 163,662
Amortization 282,424 249,005
Accrued interest on convertible debt issuance 137,067 14,663
Common stock issued for services 176,624 -
Loss on write-off of assets 48,717 -
Issuance of warrant with convertible debt 90,214 10,600
Other 231 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (20,475) 52,397
Decrease (increase) in inventories 308,305 (152,890)
Increase in prepaid expenses, developed patents,
and other (92,202) (11,004)
Decrease in accounts payable & accrued liabilities (38,727) (94,584)
(Decrease) increase in deferred revenue (142,749) 52,928
-----------------------
Net cash used in operating activities (2,025,899) (3,165,217)
-----------------------
Cash flows from investing activities:
Purchase of property and equipmen (17,654) (222,810)
Proceeds from sale of short-term investments - 1,541,537
Purchase of short-term investments - (348,688)
Increase in other assets - (10,763)
------------------------
Net cash (used in) provided by investing activities (17,654) 959,276
------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 52,813 1,469,660
Proceeds from issuance of preferred stock 2,755,000 -
Proceeds from issuance of convertible debt
obligations 351,000 875,000
Payments on notes payable (70,000) -
Principal payments under capital lease obligations (21,737) (9,692)
------------------------
Net cash provided by financing activities 3,067,076 2,334,968
------------------------
Net increase in cash 1,023,523 129,027
Cash at beginning of period 252,113 123,086
------------------------
Cash at end of period $1,275,636 $ 252,113
========================
Supplemental schedule of non-cash financing activities:
Capital lease obligations incurred for acquisition
of property and equipment $14,236 $80,669
========================
Acquisitions:
Fair value of assets acquired $ - $175,000
Issuance of common stock - (175,000)
-----------------------
Liabilities assumed $ - $ -
========================
See accompanying notes to consolidated financial statements
7
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
CyclO3PSS Corporation
Notes to Consolidated Financial Statements
February 28, 1997
1. Summary of Significant Accounting Policies
Organization
The Corporation was formed in Delaware in 1927. In 1990, the Corporation was
reorganized as CyclO3PSS Medical Systems, Inc. In 1995, the Company changed its
name to CyclO3PSS Corporation (the Company). The Company is engaged in the
manufacture, sale and installation of ozone washing and laundry sorting and
counting systems for commercial and institutional laundries, the manufacture and
sale of specialty compounds and chemicals, and research and development of
technologies for the sterilization and/or disinfection of surgical and medical
instruments.
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.
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.
Cash and Cash Equivalents
Cash equivalents consist primarily of short-term investments with insignificant
interest rate risk and original maturities of three months or less at the date
of acquisition. The carrying amount of cash and cash equivalents reported on the
balance sheets approximates their fair value.
8
8
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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
(FIFO) method.
Inventories consist of the following:
February 28 February 29
1997 1996
-------------- --------------
Raw materials $100,584 $288,450
Work-in-process - 120,439
-------------- --------------
$100,584 $408,889
============== ==============
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 28 February 29
1997 1996
------------------------
Equipment $558,694 $ 621,470
Furniture and fixtures 87,808 89,218
Leasehold improvements 99,610 99,610
------------------------
746,112 810,298
Less: accumulated depreciation
and amortization (375,118) (240,061)
------------------------
$370,994 $ 570,237
========================
Depreciation and amortization expense was $182,416 for the year ended February
28, 1997 and $163,662 for the year ended February 29, 1996.
9
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
Property and equipment includes $94,905 and $80,669 of equipment under capital
leases at February 28, 1997 and February 29, 1996. Accumulated depreciation for
such equipment was $23,044 and $8,808 at February 28, 1997 and February 29,
1996, respectively. Upon completion of certain capital lease terms, the Company
is required to purchase leased equipment at fair value. Other leases provide for
a bargain purchase price.
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 $602,061
and $373,574 at February 28, 1997 and February 29, 1996. Acquired and developed
patents are amortized on a straight-line basis over the shorter of their
estimated useful lives or the remaining stated life of the patent. Accumulated
amortization for acquired and developed patents was $106,321 and $64,052 at
February 28, 1997 and February 29, 1996. The Company periodically reviews the
recoverability of these intangible assets in order to record them at their net
realizable value.
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.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than adopting the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-based
10
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Stock Options (continued)
Compensation" (SFAS 123). Under APB 25, because the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
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 years ended February 28, 1997 and February 29,
1996 consisted of approximately 53% from specialty chemical sales and 47% from
commercial and healthcare laundry equipment sales. All sales were to companies
located in the United States, Canada and Japan. 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.
The Company generally does not require collateral with respect to sales
activities.
Net Loss per Common Share
Net loss per common share is calculated after deduction of preferred stock
dividends divided by 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.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on February 28, 1998.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is not expected to be material since
common stock equivalents are dilutive based on the Company's anticipated losses.
11
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. 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 sustained significant net losses which have resulted in an
accumulated deficit at February 28, 1997 of $11,479,987, 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 28, 1997 was $2,957,744. To date, the
Company has funded its operations through the issuances of common and preferred
stock. The Company's ability to accomplish its business strategy and to
ultimately achieve profitable operations is dependent upon its ability to raise
additional financing.
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) 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 attempting to improve these conditions by way of financial
assistance through collaborative partnering agreements, issuances of additional
equity, 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 through the
next fiscal year.
12
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
3. 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. The acquisition was accounted for using the purchase
method of accounting. Under the terms of the purchase agreement, 124,378 shares
of the Company's common stock were held in escrow to 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. The employment continuity
and net profit goals were not met and all stock held in escrow was returned to
the Company.
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.
4. Accrued Liabilities
Accrued liabilities consist of the following:
February 28 February 29
1997 1996
------------------------------
Accrued payroll and payroll taxes $60,507 $ 72,139
Accrued vacation 49,683 39,291
Other 25,000 8,692
------------------------------
$135,190 $120,122
==============================
<PAGE>
5. Long-Term Debt
During the year ended February 29, 1996, 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 28, 1997, the Company had issued $1,226,000 in convertible debt
(described above), with maturities between December 1998 and April 1999 and had
repaid $70,000. Approximately $535,000 of the convertible debt is held by the
Company's directors. Interest expense of $137,067 and $14,663 was recorded for
the years ended February 28, 1997 and February 29, 1996, respectively.
Maturities for the years succeeding fiscal years February 28, 1997 are $0 in
1998, $875,000 in 1999 and $281,000 in 2000.
In connection with the convertible debt offering, 333 warrants are outstanding
at February 28, 1997. For the years ended February 28, 1997 and February 29,
1996, the Company recorded interest expense of $90,214 and $10,600 related to
the warrants.
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.
13
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
6. Capital Lease Obligations and Commitments
Future minimum lease payments for capital lease obligations are as follows:
Year ending February 28
1998 $33,280
1999 27,722
2000 11,970
2001 3,915
--------------
Future minimum lease payments 76,887
Less amount representing interest (13,411)
--------------
Present value of future minimum lease obligations 63,476
Less amounts due within one year (26,120)
--------------
Amounts due after one year $37,356
==============
Interest paid and expensed for capital lease obligations was $10,601 and $8,339
for the years ended February 28, 1997 and February 29, 1996, respectively.
The Company leases office facilities and office equipment under noncancelable
operating leases. Rent expense under these leases was $107,945 for the year
ended February 28, 1997 and $108,290 for the year ended February 29, 1996. The
future minimum operating lease payments are $86,972 for the year ended February
28
, 1998.
7. Income Taxes
As of February 29, 1997, the Company had federal and state net operating loss
carryforwards of approximately $10,113,000 and $9,441,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $123,000. The net operating loss and credit carryforwards will
expire at various dates beginning on 2003 through 2012, 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.
14
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of February 28, 1997 and February 29, 1996 are
as follows:
February 28 February 29
1997 1996
----------------------------
Deferred tax assets:
Net operating loss carry forwards $3,750,000 $2,855,000
Research credit carryforwards 123,000 122,000
----------------------------
3,873,000 2,977,000
Valuation allowance (3,873,000) (2,977,000)
----------------------------
$ - $ -
============================
The net valuation allowance increased by $896,000 and $1,048,000 during the
years ended February 28, 1997 and February 29, 1996, respectively.
8. Stockholders' Equity
Common Stock
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 for $4.00. The warrant expires one year after the closing of
the private placement. The Company issued 415,674 units for a total
consideration of $1,454,860. This offering was closed as of October 17, 1995 by
the Board of Directors. As of February 28, 1997, all warrants have expired, of
which none were exercised.
In August 1996, the Board of Directors approved the issuance of 300,000 shares
of common stock to a consultant for shareholder promotion services. The Company
issued these shares at fair market value and recorded $336,000 in deferred
compensation at the date of issuance. The services are to be provided over a
twelve month period. For the year ended February 28, 1997, the Company recorded
$168,000 of compensation expense related to this issuance.
15
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Common Stock (continued)
On February 27, 1997, the Board of Directors approved the sale of 100,000 shares
of restricted and unregistered common stock and the Company issued this stock
for total consideration of $52,813.
Preferred Stock
Series "A" convertible preferred stock is non-voting stock and is convertible
into common stock at the rate of one share of common for each four shares of
Series "A" preferred stock during a period expiring two years from the date of
issuance of the shares. The Board of Directors authorized 35,638 shares of
Series "A" preferred stock for issuance at $2.00 per share. In the event of a
liquidation, dissolution or winding up of the affairs of the Company, the
holders of Series "A" preferred stock shall be entitled to the receive the
principal amount paid to the Company before any distribution shall be made to
the holders of common stock. Additionally, holders of Series "A" preferred stock
shall be entitled to receive, as declared by the Board of Directors,
non-cumulative cash dividends prior to the declaration and payment of dividends
on the Company's common stock. The conversion period has expired for all shares
of Series "A" preferred stock.
On May 30, 1996 the Board of Directors authorized for issuance 30,000 shares of
Series "B" convertible preferred stock with a $0.01 par value and a stated value
of $1,000 per share. These shares are convertible after 45 days from the
subscription date into common shares at 65% to 70% of the "Average Stock Price"
as designated by the Board of Directors. The "Average Stock Price" is further
defined as the lesser of the average daily closing bid prices of common shares
for the period of five consecutive trading days immediately preceding the date
of subscription or the five consecutive trading days immediately preceding the
date of conversion of the Series "B" convertible shares. However, these shares
do not have voting rights or preemptive rights to acquire other securities. The
shares provide for payment of cumulative dividends at 8% annually, paid in cash
or stock at the Company's option, and include a liquidation preference equal to
$1,350 per share together with all accrued and unpaid dividends.
As of February 28, 1997, 3,170 shares of Series "B" convertible preferred stock
have been issued for net proceeds of $2,755,000 after issuance costs of
$415,000. Because the Series "B" preferred shares have conversion rights at a
discount from the initial issuance price, as discussed above, in accordance with
Securities and Exchange Commission
16
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Preferred Stock (continued)
requirements, the Company has reflected a dividend to shareholders of Series "B"
in the earnings per share calculation, which reflects the assured incremental
yield on preferred stock that is imbedded in the conversion terms at a discount
from the initial fair value at the date of issuance. The amount of the dividend
recorded to reflect this discount was $1,551,460.
The Company also recorded the required 8% dividend in additional preferred
stock, rather than cash and, accordingly, accrued $108,673 in paid-in-kind stock
dividends as a reduction of and simultaneous increase in additional paid in
capital.
As of February 28, 1997, 1,235 shares of series "B" convertible preferred stock
and related accrued dividends of $20,587 were converted into 1,959,546 and
21,690, respectively, of shares of common stock.
Stock Options
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 approximated the fair value of
the common shares at the date of grant. On October 21, 1994, one of these
employees was terminated and the corresponding options were canceled. Effective
September 1, 1996, the employment agreements for two of these employees were
extended for a period of one year. Under the terms of the extension, each
employee was granted an additional 100,000 options at $1.07 per share. These
options vest over a one year period. At February 28, 1997, options to purchase
603,334 of common stock were exercisable under these employee agreements.
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, which was the fair market value at the date of grant. 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 28, 1997 and February 29, 1996, a total of 75,000 and 50,000 options
were exercisable, none of which have been exercised as of February 28, 1997.
17
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Stock Options (continued)
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 beginning 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.
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value of
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1997 and 1996,
respectively: risk-free interest rates of 6.38% and 5.63%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
1.049 and 0.947; and a weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. The Company's pro forma results
follows:
1997 1996
-------------- --------------
Pro forma net loss $(2,973,634) $(3,449,994)
Pro forma net loss per share (0.26) (0.35)
Pro forma net loss applicable to
common stock (0.40) (0.35)
18
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Stock Options (continued)
Because the effect of SFAS 123 is prospective, the initial impact on pro forma
net loss may not be representative of compensation expense in future years.
A summary of stock option activity, and related information for the years ended
February 28, 1997, and February 29, 1996 follows:
1997 1996
----------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
----------------------------------------------------
Stock options outstanding at
beginning of year 972,500 $2.42 1,074,500 N/A
Granted 207,000 1.07 101,500 $3.47
Exercised - - (8,000) 1.85
Forfeited (107,000) 4.00 (22,000) 5.71
Canceled - - (173,500) 3.88
---------- ----------
Outstanding at end of year 1,072,500 $2.00 972,500 $2.42
========== ==========
Exercisable at end of period 833,334 $2.12 575,000 $2.15
Weighted-average fair value
of options granted during the
year $0.94 $3.47
Exercise prices for options outstanding as of February 28, 1997 ranged from
$0.94 to $6.03. The weighted average remaining contractual life of the options
is 5 years.
19
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Stock Options (continued)
Additionally, Statement No. 123 requires that companies with wide ranges between
the high and low exercise prices of its stock options segregate the exercise
prices into ranges that are meaningful for assessing the timing and number of
additional shares that may be issued and the cash that may be received as a
result of the option exercises. Below are the segregated ranges of exercise
prices as of February 28,1997:
Range of exercise prices
--------------------------------------------
$0.94-1.07 $1.75-1.85 $2.79 $5.44-6.03
--------------------------------------------
Options outstanding $207,000 $766,500 $23,000 $76,000
Weighted-average exercise price of
options outstanding $1.07 $1.84 $2.79 $5.86
Weighted-average remaining
contractual life of options
outstanding 5 years 5 years 9 years 7 years
Options exercisable 83,334 689,000 7,000 54,000
Weighted-average exercise price of
options exercisable $1.07 $1.84 $2.79 $5.87
9. Contingencies
On October 27, 1995, a Motion for Summary Judgment in the Third Judicial
District Court of Utah 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
355,606 canceled shares. On March 27, 1997, the Utah Court of Appeals upheld the
decision in favor of certain former stockholders. The decision by the Utah Court
of Appeals has been appealed by the Company to the Utah Supreme Court. The
Company and legal counsel believe both the summary judgment and the appeal were
incorrect and intend to vigorously appeal these decisions.
In 1990, the Company recorded compensation expense in connection with the
original issuance of the shares; therefore, no additional expenses, other than
the reissuance costs of these shares, has been recorded.
20
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
9. Contingencies (continued)
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.
10. 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 and general corporate expenses. Corporate assets consist primarily of
cash and cash equivalents.
For the year ended February 28, 1997, two customers accounted for 20% and 17% of
total net revenues for textile products, and two customers accounted for 18% and
10% of total net revenues for biochemical products. For the year ended February
29, 1996, one customer accounted for 23% of total net revenues for textile
products, and one customer accounted for 15% of total net revenues for
biochemical products.
21
<PAGE>
10. Segment Information (continued)
Industry Data Year ended
CyclO3PSS Corporation and Subsidiaries February 28 February 29
1997 1996
Net sales and other income:
Medical products $ - $ -
Textile products 292,279 202,525
Biochemical products 318,246 240,107
-----------------------------
610,525 442,632
Interest Income 38,804 25,363
-----------------------------
Total revenue $649,329 $467,995
=============================
Operating income (loss)
Medical products $ (703,186) $(1,122,297)
Textile products (948,895) (1,462,153)
Biochemical products 2,344 (102,314)
--------------------------------
Total operating loss (1,649,737) (2,686,764)
Corporate expenses (1,066,479) (729,628)
Interest expense (241,528) (33,602)
--------------------------------
Net loss $ (2,957,744) $(3,449,994)
================================
Identifiable assets
Medical products $ 358,390 $ 590,177
Textile products 1,103,712 1,531,080
Biochemical products 384,451 335,887
--------------------------------
1,846,553 2,457,144
General corporate assets 1,178,293 221,474
---------------------------------
Total assets $3,024,846 $2,678,618
=================================
Depreciation and amortization expense
Medical products $ 91,878 $ 93,342
Textile products 322,064 305,693
Biochemical products 50,898 13,632
Capital expenditures
Medical products $ 3,789 $ 83,215
Textile products 2,066 68,837
Biochemical products 11,799 70,758
22
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
- ----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
to
FORM 10-KSB
For the fiscal year ended February 28, 1997
__________________________________
CYCLO3PSS CORPORATION
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
---------------------------------------------------------------
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.
Exhibit Page Number or
Number Description Method of Filing
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, Feb. 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)
16.2 Consulting Agreement of John Sloan Form 8-K, August 1996(6)
36
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
21.1 Subsidiaries of Registrant Attached(7)
23.1 Consent of Ernst & Young LLP Attached(7)
(1) Filed as an Exhibit to the Registrant's Registered Statement on Form 10-SB
and incorporated herein by reference
(2) Filed as an Exhibit to the Registrant's Form 8-K dated July 11, 1994
incorporated herein by reference
(3) Filed as an Exhibit to the Registrant's Form S- 8 dated August 31, 1994
incorporated herein by reference
(4) Filed as an Exhibit to the Registrant's Form 8-K dated February 2, 1995
incorporated herein by reference
(5) Filed as an Exhibit to the Registrant's Form 8-K dated January 8, 1996
incorporated herein by reference
(6) Filed as an Exhibit to the Registrant's Form 8-K dated August 20, 1996
incorporated herein by reference
(7) Filed as an Exhibit to the Registrant's Form 10-KSB dated for the year
ended February 29, 1996 incorporated herein by reference
37
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
EXHIBIT 21.1
Subsidiaries of Registrant
CyclO3PSS Medical Systems, Inc.
CyclO3PSS BioChemical Corporation
CyclO3PSS Textile Systems, Inc.
CyclO3PSS Waste Water Systems, Inc.
CyclO3PSS Food Processing Systems, Inc.
38
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
39
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-83586) pertaining to the CyclO3PSS Medical Systems, Inc.
Amended 1992 Stock Option Plan; CyclO3PSS Medical Systems, Inc. 1993
Non-Employee Director Stock Option Plan; and, Written Agreements between
CyclO3PSS Medical Systems, Inc. and Certain Officers, Directors, and Employees
of CyclO3PSS Corporation and Registration Statement (Form S-8 No. 333-10567)
pertaining to Consulting Agreement of John Sloan of our report dated April 25,
1997, with respect to the consolidated financial statements of CyclO3PSS
Corporation included in the Annual Report (Form 10-KSB) for the year ended
February 28, 1997.
ERNST & YOUNG LLP
Salt Lake City, Utah
May 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTS FROM
CYCLO3PSS CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIRIFED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> 1,275,636
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<PERIOD-TYPE> 12-MOS
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<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<CASH> 1,275,636
<SECURITIES> 0
<RECEIVABLES> 97,605
<ALLOWANCES> 3,000
<INVENTORY> 100,584
<CURRENT-ASSETS> 1,576,640
<PP&E> 370,994
<DEPRECIATION> (375,118)
<TOTAL-ASSETS> 3,024,846
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375
<COMMON> 12,793
<OTHER-SE> 669,545
<TOTAL-LIABILITY-AND-EQUITY> 3,024,846
<SALES> 60,625
<TOTAL-REVENUES> 649,329
<CGS> 477,955
<TOTAL-COSTS> 3,365,545
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