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, 1998
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 office (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, 1998 were
$1,205,105
As of May 15, 1998, 16,746,668 shares of the Issuer's common stock were
issued and outstanding of which 15,474,451 shares were held by non-affiliates.
As of May 15, 1998, the aggregate market value of shares held by non-affiliates
(based upon the closing price reported by NASDAQ) was approximately $32,186,858
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
Forward-Looking and Cautionary Statements
Certain statements contained in this 10-KSB may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to materially differ. These risks are
discussed more fully elsewhere in this 10-KSB and in the Company's filings with
the Securities and Exchange Commission, press releases and other communications.
PART 1
ITEM 1. Description of Business
General
Cyclopss Corporation (the "Company") is primarily engaged in the design,
manufacture, assembly, sales and installation of ozone application technologies
and processes. The Company's principal technology provides an alternative to
address food safety concerns and laundry disinfection and efficiency. Ozone
technology is proven to reduce microbial counts on food products without the
potential for the development of immunity or resistance by the organism. Ozone
laundry systems enable users to reduce costs associated with labor, water,
energy, chemical, textile replacement and wastewater. Cyclopss also markets
sorting and counting systems to the laundry industry and manufactures and sells
specialty chemicals. The Company holds patents for medical sterilization
processes and plans to resume research and development activities in this field
by the fiscal year 2000.
NOTE: Ozone is a gas that is created naturally in the atmosphere by
ultraviolet light or lightning. In the process the oxygen molecule (O2) is split
into two atoms of oxygen (O) that then combine with another oxygen molecule to
form ozone molecule (O3). This is an unstable molecule which reverts to regular
oxygen within a short time period. Ozone is one of the most powerful oxidants
and deodorants known and can be created artificially and applied to beneficial
use through a technological process.
The Company has five wholly-owned subsidiaries:
Eco-Pure Food Safety Systems, Inc.
Cyclopss Textile Systems, Inc.
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Cyclopss Medical Systems, Inc.
Cyclopss Biochemical Corporation
Cyclopss Wastewater Systems, Inc.
Eco-Pure Food Safety Systems, Inc.
This subsidiary, formerly known as Cyclopss Food Processing Systems, Inc.,
develops, markets and installs Eco-Pure Food Safety Systems (the "Eco-Pure
System") for food decontamination. In fiscal 1998, the Company developed
technology to utilize ozone in small to large scale applications in both aqueous
and gaseous forms. These applications can be applied to a broad spectrum of food
products for disinfection purposes.
During fiscal 1998, Americans witnessed the beginning of a food safety
crisis. Two recent US Department of Agriculture estimates place some of the
costs associated with food borne illness in the $5.5 billion to $22 billion per
year range. Food processors, who have relied heavily on chlorination to
decontaminate foods, are being forced to consider alternatives to chlorine and
other toxic chemicals. The Company believes the Eco-Pure System offers a lower
cost and more environmentally-friendly and consumer accepted form of
decontamination than many other chemical treatments and irradiation.
Management believes that sales generated from this division will come first
from the produce industry. Produce is less encumbered with government
regulations than are the poultry and red meat industries. Poultry and meat are
regulated by the United States Department of Agriculture ("USDA") and its Food
Safety Inspection Service ("FSIS") division. Pilot tests which validate the
Eco-Pure system applications on meat and poultry are required by the USDA and
FSIS. The Company is currently in the process of conducting tests on meat and
poultry and will submit a protocol to the USDA/FSIS for approval during fiscal
year 1999.
The number of meat and poultry plants in the U.S. is 5,666; fresh fruit and
vegetable facilities total 33,943, in the U.S. and Mexico. (Sources: FSIS for
meat and poultry; The Packer and The Produce News for fruit and vegetable.)
These 39,609 plant facilities represent the Company's primary target market.
Other subsequent markets include food processors, (a $430 billion per year
business) who process spices, grains, juices, soups, nuts and seafood and
operate grocery chains and restaurants.
The Company's sales plan includes internal and regional sales coverage as
well as distributorships in markets where they prove to be more effective. As of
May 15, 1998, one Eco-Pure sale has been made by the Company directly and no
distributorships have been established. The Company believes that, in the near
future, most sales of the Eco-Pure System will continue to be made directly by
the Company's sales staff.
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Cyclopss Textile Systems, Inc.
The Company develops, markets and installs a number of different laundry
products for commercial and institutional laundries. This subsidiary was born
out of technology developed by the Company and its growth hastened by the
acquisition of Intex Corporation in 1994.
All laundry washing systems are marketed under the name Eco-Wash, formerly
known as the OzO3-Clean laundry systems. These systems consist of 1) a large
industrial ozone generator, 2) a distribution panel constructed to distribute
ozone to individual washing machines within a laundry facility, 3) pumps,
filters, and piping systems used to transport ozone and ozonated water within
the laundry facility, and 4) PLC (Programmable Logic Controller) computer
systems that control the functions of the ozone system. Additionally, the
Company has installed ozone safety monitoring devices. These ozone-based textile
washing systems dissolve soils on contact and require shorter wash cycles. Cost
savings include reducing hot water requirements, eliminating chlorine, the
reduction of other chemical usage, and extending the life of most fabrics.
The Company also markets a non-ozone based sorting and counting technology
known as the VAC Soil Counting System. This system is an automated and
computerized means of sorting and counting incoming soiled textiles. The VAC
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 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. It improves count
accuracy, controls inventory, reduces labor costs and improves production.
The U.S. market for Eco-Wash Systems is provided below:
# of Facilities
Hospitals 7,404
Nursing Homes 39,744
Hotels/Motels 47,000
Commercial Laundries 7,163
Prisons 4,190
Source: American Hospital Assn.,
Statistical Abstract of the US,
American Hotel & Motel Assn.,
Textile Rental Service Assn.. of American,
U.S. Dept. of Justice.
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The U.S. market for the VAC Soil Counting System includes only commercial
laundries.
The average installation of an Eco-Wash system costs $200,000 depending on
the size and layout of the facility; the average cost for a VAC Soil Counting
Station installation is $22,000 per station, depending again on size and layout
of the facility. During fiscal 1998, the Company installed 12 VAC Soil Counting
Stations and one Eco-Wash System.
The Company continues development of the Eco-Save Water Reuse System which is
designed to reuse water in commercial laundries. The Company believes this
system will be launched in late fiscal 1999. Increased emphasis on water
conservation and the cost for disposal of contaminated waste water will present
an opportunity for the Company in this area.
The Company was contracted to develop an eight-pound residential washing
machine specifically for the Japanese market. The Company's Japanese
distributor, NITI-ON, retains an exclusive distributorship with the Company for
Japan and has the first right of refusal to distribute units to other Pacific
Rim countries. The Company holds all proprietary rights to this product and
distribution rights elsewhere in the world.
The Company believes the products developed and marketed by this subsidiary
will enjoy increased market potential in coming years due to:
* Competitive laundry markets will create a need for cost reduction and
increased productivity;
* Further environmental restrictions placed on discharge water quality;
* Increased emphasis on sanitation and disinfection in the laundry industry;
and
* Increased concern regarding environmental issues associated with the
laundry industry.
Currently, the Company is marketing its laundry systems in the U.S. market
through an internal sales force. However, the Company is exploring the
possibility of establishing distributorships on a regional basis. To date, no
distributorships have been established. The Company has installed 15 ozone
washing systems in major commercial laundries and 45 VAC Counting Systems
throughout North America.
Cyclopss Medical Systems, Inc.
The Company has developed technologies and products it believes may be
effective alternatives to current methods of sterilizing medical instruments and
devices. This subsidiary offers two product lines: Ster-O-Zone and Sterox.
Ster-O-Zone is an ozone gas sterilizer and Sterox is a patented liquid
sterilant/disinfectant.
The Company spent six years researching, developing and constructing
pre-production prototypes of the Ster-O-Zone unit. Research and development was
suspended in fiscal 1998 due to budget constraints. The Company, on January 6,
1995, submitted a 510(k) Premarket Notification
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application to the Food & Drug Administration ("FDA"). The FDA has since
accepted the application for review and has begun the customary process of
requesting additional information for evaluation. The Company has complied with
these requests and anticipates that it will be in a position to resume
Ster-O-Zone development in fiscal 2000.
The Company was awarded a patent on Sterox and anticipates further
development and testing on this product in fiscal 2000. The Company is also
considering the possibility of co-venturing the market development of Sterox
with a strategic partner.
The Company believes that certain conditions exist which create an
opportunity for new alternatives to current sterilization methods:
* Increased public and professional concern regarding the transmission of
infectious diseases;
* Increased utilization of endoscopic instruments for minimally invasive
surgical procedures;
* Competitive situation in the healthcare industry will require increased
cost containment and productivity;
* Increased decentralization of the delivery of patient care, including many
procedures being performed in non-hospital facilities that do not have
ready access to central sterilization services; and
* Greater environmental concern regarding the handling and disposal of toxic
waste.
Cyclopss Biochemical Corporation
In 1994, the Company acquired Chem BioChem Research, ("CBC") a specialty
chemical company. This wholly-owned subsidiary has developed approximately 350
products for sale to commercial and research institutions and offers contract
research and development services.
Biochemical ended fiscal year 1998 with record sales for the second
consecutive year. A key contributor to these sales is the continued production
of a chemical for Applied Biosystems, a division of Perkin-Elmer Corporation.
CBC developed a proprietary method for the manufacture of this product, and
remains the sole source of this material.
CBC concluded a year long project with Keystone Biomedical Corporation
resulting in the development of a 28-step synthesis of a potential therapeutic
agent. CBC also recently concluded a research project with TheraTech Inc. which
lead to the development of a system with commercial therapeutic implications.
Pyrogonn, a limited liability corporation, was established during the past
fiscal year to commercialize a new high-performance aerospace polymer system
which was co- developed with Foster-Miller Inc. It is hoped that this resin
system will replace the industry standard, PMR-15, which is difficult to process
and contains a carcinogenic chemical. Potential applications include jet engine
parts, as well as aircraft and spacecraft structural components.
Research and development in this important area is progressing.
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The Biochemical division continues to market specialized chemicals and
research and development services to scientists and chemical companies around
the world. The staff recently met with Mr. Chip Lindgren of AG Scientific and
Dr. John Snow of Calbiochem-Novabiochem International concerning further
expansion of business opportunities. Both companies provide a wide array of
chemical and biochemical products. Catalog sales to retail distributors and
individual researchers continues to be a vital element of our business.
The manufacturing facilities used by this subsidiary do not currently meet
Good Laboratory Practices (GLP) or Good Manufacturing Practices (GMP);
therefore, the chemical compounds produced therein are not sold for use in human
trials or studies. Instead, most are sold through larger chemical distribution
companies for research purposes only.
Research and Development Activities
Cyclopss' marketing efforts and focus on supporting customer applications of
its technology drive the research and development activities. Objectives of the
ozone research are to demonstrate its efficacy and to determine the conditions
for ozone's optimum application. Specialty chemical research is directed at
synthesizing new products for catalog sales and proprietary products and
procedures for specific customers.
Ozone research is conducted on products provided by customers or acquired by
Cyclopss that represent our market focus - food and laundry systems. For many
projects, the Company has signed non-disclosure agreements with customers that
prevent the Company from revealing their name, location, and, in some cases,
their product. Some customers contract with the Company's staff for R&D projects
that are more extensive in the quantity of tests or require special process
simulation not already existing in the laboratories. In determining the efficacy
of ozone, control samples are used to monitor the effect of ozone with respect
to the current technologies, if any. Once the efficacy has been demonstrated,
the ozone delivery process is optimized through the Company's research on
compatible surfactant, water reuse, and process technologies, for example. The
customer is presented with the research results and a proposal for a pilot
project to be implemented in their facility, operated by their employees.
Textile R&D continues to address textile bleaching, ozone system product
design and Underwriter's Laboratory ("UL") approval, and VAC soil system product
improvements. Working with a major textile manufacturer, the Company is
conducting a study of ozone's efficacy to design and bleach cotton and cotton
polyester fabrics in high volumes. Within the laundry industry, the Company is
optimizing and standardizing the design of the ozone system and seeking UL
approval for it. With the VAC systems the Company is developing methods of
counting, and upgrading the control system and interface to the customer's
information systems.
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Biochemical's R&D falls into three categories: establish product improvement;
new product development; and contract R&D. The Company's staff routinely
attempts to develop improvements in synthesis procedures of established
products. New biochemical products appear nearly every day in the scientific
community. The Company's goal is to recognize those with the highest commercial
potential and to develop economically viable syntheses for these materials.
Contract R&D is a major focus of Biochemical Corporation. These efforts include
the design and implementation of synthesis strategies, revision and development
of customer processes, and scale-up of reaction sequences.
Cyclopss' R&D organization consists of a microbiologist, three organic
chemists, and two ozone application engineers under the direction of the Vice
President of Research and Development. Half of the staff earned their Ph.D.'s in
physics or chemistry. During the fiscal year ended February 28, 1998 most of
these employees' salaries were directed to cost of goods sold. The Company
incurred research and development expenses of $244,282 and $816,941 during the
fiscal years ended February 28, 1998 and February 28, 1997, respectively. The
reduction in research and development expenses was due to the redirection of the
Company's efforts from medical systems and initiation of effort in Eco-Pure Food
Safety and Eco-Wash Systems.
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.
Competition
The Company's ozone-based food safety systems and laundry systems compete
directly with chlorine and other chemical and physical treatments. Chlorine is
used extensively throughout food processing and textile washing. However,
scientific research demonstrates that chlorine is becoming less effective in
destroying certain microorganisms, such as crytosporidium. Furthermore,
extensive use of chlorine has caused ground water contamination in certain
areas. Other competitive treatment methods in food are: irradiation, propylene
oxide, ethylene oxide, methyl bromide, pasteurization and steam pasteurization.
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The Company's laundry products are also 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 research and development activities over the past eight years have gained it
a competitive advantage in those markets targeted.
The Company's specialty chemicals are unique products with limited markets
and fragmented competition.
Proprietary Technology, Patents, and Trademarks
The Company has developed technologies which it believes will enable it to
offer effective ozone laundry systems, as well as support product development in
certain other 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 the Company in January 1994.
Utilizing such ozone generation technology as the "core" for the Company's ozone
products, the Company has developed technologies with various components and
modules. 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.
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Patent Applications. To date, the Company has filed twelve patent
applications with the United States Patent and Trademark Office. As of May 15,
1998, ten of these patents have been granted, one of the patents is 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 the Company's
sterilization, laundry products, food processing, and chemical compounds.
The ten 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. . . . 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
10. Cold Water Ozone Disinfection................ 11-30-1997
Foreign patent proceedings, where applicable, have been initiated for
patents that have been granted in the United States.
The currently pending patent application is identified and dated as shown
in the following list:
Title Application Date
1. 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)", "
Eco-Pure(TM)", "VAC(TM)", "Eco- Save(TM)", Eco-Wash(TM)". All of these
applications have been allowed but the trademarks have not yet been issued.
Other trademark applications such as "Retr-O-Zone(TM)", "Sterox(TM)",
"Ozo-clean(TM)" and "Zono-chem(TM)" have been abandoned or rejected. Additional
trademark applications have been submitted for the "Ozone For The EarthTM",
"Eco-Pure(TM)" and ozone symbol for its marketing programs.
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Corporate History
The Company is based in Salt Lake City, Utah, and was incorporated in the
State of Delaware on November 14, 1927, under the name Icthyol Oil & Refining
Company. Between 1930 - 1987, the Company ceased active business operations. In
1987 through the third quarter of 1988, the Company tried to resume operations
by affecting a merger with a privately-held company known as Sterile Process
Corporation and the Company's name changed to Inter-Med International, Inc. By
the end of 1988, the Company had exhausted all of its financial resources and
again terminated operations. In April of 1990, majority investors of the then
defunct company, asked a management group to assist the Company in securing
financing to continue research and development work with ozone. In September of
1990, the Company's name changed to Cyclopss Medical Systems, Inc. and in 1995,
the Company's name again changed to Cyclopss Corporation. The name "Cyclopss"
stands for "Cycling Ozone Pressure Swing Sterilization." The Company's ticker
symbol can be found on NASDAQ under "OZON".
Originally, when the Company resumed operations in 1990, the Company's
primary focus was medical sterilization. In 1995, a form 501(k) Premarket
Notification for its Ster-O-Zone 100 system. This system is ozone-based and
delivers a cool, dry, low pressure means of sterilizing expensive medical
devices. Currently, certain modifications must be made to the Ster-O-Zone system
in order to comply with the FDA's approval process. The Company will continue to
further develop and conduct supporting documentation once it has sufficient
financial resources to support this effort. The Company is now focusing its
effort on its Eco-Pure system and its laundry systems products.
Employees
The Company and its subsidiaries employed twenty-four full-time employees and
three part-time employees as of May 15, 1998. None of the Company's employees
are covered by a collective bargaining agreement.
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, 1998 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.
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In addition to the Salt Lake location, one of the Company's subsidiaries,
Cyclopss 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, 1998 and requires minimum monthly lease payments of $250.
ITEM 3. LEGAL PROCEEDINGS
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. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of the Company's shareholders was held January 13, 1998.
The Meeting was held to consider and vote upon election of directors and
approval of auditors. The Company's shareholders took the following action at
the Annual Meeting of Shareholders:
1. Election of directors:
Votes for Votes Against Abstain
William R. Stoddard 8,936,437 500 20,460
Robert J. Wrigley 8,936,437 500 20,460
Steve Sarich, Jr. 8,935,437 1,500 20,460
John Herzog 8,936,437 500 20,460
J. Bruce Baily 8,936,437 500 20,460
Michael J. Lakis 2,784,532 -0- -0-
2. Approval of auditors:
Votes for Votes Against Abstain
8,894,789 48,757 13,851
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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 1997 February 28, 1998 May 15, 1998
High Low High Low High Low
First Quarter $ 4.38 $ 2.63 $1.44 $.75 $2.56 $1.63
Second Quarter 2.88 0.75 1.03 .72
Third Quarter 1.03 0.63 3.75 .66
Fourth Quarter 1.31 0.69 2.63 1.00
Holders
The number of holders of record of the Company's common stock as of May
15, 1998 was 375. The Company believes the actual number of beneficial
shareholders exceeds 1,500. There are numerous shareholders that hold the
Company's common stock in the "street name" of their various stock brokerage
houses.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future. The
Company has paid dividends in the form of stocks to convertible debt stock
holders. It is the present intention of management to utilize all available
funds for the development of the Company's business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION
General
Cyclopss Corporation is primarily engaged in ozone application
technologies and processes. The Company's main product lines offer alternatives
to food safety, particularly microbial reductions on meat, poultry, fruits and
vegetables. Additional products offered by the Company enable manufacturers to
eliminate microbial build-up in and on plant equipment of various food
processors, while other ozone-related products marketed by the Company to
commercial and institutional laundry markets enable users to reduce costs
associated with labor, water, energy, chemicals, and wastewater disposal. The
Company also markets an automated sorting and counting system.
Other non-ozone based products offered by the Company include more than
350 specialty chemicals and compounds. The Company also has two medical
sterilization products.
Due to the demand for alternative disinfection systems for food safety and
cost saving equipment for the commercial laundry markets, the Company shifted
its focus from medical sterilization, which is encumbered by a lengthy and
costly FDA approval process, to more immediate, less or non-encumbered target
markets -- food, laundry and chemical compounds.
Results of Operations
The Company's net revenues during fiscal 1998, which ended on February 28,
1998, were nearly double that of the prior year: $1,205,105 versus $610,525,
respectively. Two of the Company's wholly owned subsidiaries contributed to the
Company's net revenues, Cyclopss Textile Systems, Inc. (CTS) and Cyclopss
Biochemical Corporation (CBC). CTS's net revenues were $805,057 for the year
ended February 28, 1998, and $292,279 for the year ended February 28, 1997, an
increase of $512,778 (175%). CBC's net revenues were $400,048 for the year ended
February 28, 1998, and $318,246 for the year ended February 28, 1997, an
increase of $81,802 (26%). Cost of sales more than doubled to $1,093,656 for
fiscal 1998 from the previous year of $477,955, due to increase in product costs
from the increase in sales.
Research and development expenses decreased to $244,282 for fiscal 1998
from $816,941 for the previous year. The decrease in research and development
costs resulted from the Company putting more effort into production of products.
The Company believes it is necessary to increase research and development
efforts for fiscal 1999 in order to complete the development of food processing
systems and to comply with USDA protocols to validate the Company's food
processing technology.
Selling and marketing expenses increased to $326,732 for fiscal 1998 from
$156,490 for the previous year. The Company began advertising in a variety of
general business and food-related
14
<PAGE>
trade publications to maximize its exposure during what is continuing to be a
food safety crisis. The Company also placed a number of laundry-related
advertisements in industry trade publications. The Company produced and
distributed a video news release relating to its new and innovative
technologies, shown extensively on the PBS network. Management believes that it
is critical to periodically support and supplement its sales efforts through
advertising, public relations and trade- show participation.
General and administrative expenses increased to $1,978,591 for fiscal
1998 compared with $1,449,319 for the previous year, due to increased investor
relation expenses, promotional activities and legal fees. Management will
continue to review and control these costs, but believes general and
administrative expenses will continue to increase due to management and human
resource requirements for the Company as sales and other commercial activities
increase.
Interest expense declined for fiscal 1998 by more than half: $111,182 for
1998 compared with $241,528 for fiscal 1997, due to the conversion of long-term
debt to common stock. The Company anticipates that interest expense will further
decrease in fiscal 1999 as the Company has minimum debt and intends to fund its
operations through non-interest bearing capital sources.
The Company suffered a net loss for fiscal 1998 of $2,928,197, or $.21 per
share. The loss incurred for the previous year was $2,957,744, or $.25 per
share. The primary reason for the decrease in the net loss per share is the
result of issuance of common shares during the year. The Company anticipates
that it will operate at a loss for the year ending February 28, 1999. However,
it is anticipated that losses will begin to diminish as revenues of CTS and CBC
increase and sales of the food safety systems are generated.
The Company believes that three of its subsidiaries, namely Eco-Pure Food
Safety Systems, Inc., Cyclopss Textile Systems, Inc., and Cyclopss Biochemical,
Inc. will be the major contributors to the Company's future revenue stream. In
order to achieve sales growth acceptable to management, the Company will
primarily focus on these three subsidiaries of the Company.
Liquidity and Capital Resources
As of the date of this filing, the Company has insufficient funds on hand
to continue its operations for the fiscal year ending February 28, 1999 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,
completed a private placement offering of the Company's common stock to
accredited investors through First Financial Investment Securities, Inc. for net
proceeds of $1,387,851 to
15
<PAGE>
date. 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 management's assumptions as presented heretofore and in the
remainder of this section.
Cash used in operating activities was $1,709,955 for the year ended
February 28,1998, compared with $2,025,899 for the year ended February 28,1997,
a reduction of $315,944 (16%). The Company's use of cash in the year ended
February 28, 1997 was more aggressive as the Company experienced significant
general and administrative and marketing expenses in support of CTS in 1997. The
use of the Company's cash reserves were decreased as a result of more
conservative expenditures during the year ended February 28, 1998. Accounts
receivable were comprised of service and parts sales, an ozone washing system
sale to Crowne Plaza Hotel in Atlanta, GA, several VAC Counting Systems sales
from CTS, and contract development and chemical compound sales from CBC.
Cash expenditures for property and equipment and patents were $24,485 for
the year ended February 28, 1998 compared with $17,654 for the year ended
February 28, 1997. This slight increase was the result of legal fees related to
patent filing costs.
Shares issued and outstanding as of February 28, 1998 were 15,145,868,
compared to 12,793,440 for the prior year. Common shares increased due to
conversion of long-term debt and accrued interest into 1,305,852 common shares
in November 1997, and additional financing that occurred in October 1997, for
1,000,000 new common shares. This financing raised $1,250,000 ($1,057,500 in net
proceeds).
Net cash provided by financing activities was $1,031,965 which was
primarily related to the issuance of common stock in an offering done through
First Financial Investment Securities. This amount compares to $3,067,076 for
the year ended February 28, 1997, which included net proceeds from the issuance
of preferred stock.
Total assets decreased to $1,960,141 for the year ended February 28, 1998
from $3,024,846 for the year ended February 28, 1997, a decrease of $1,064,705
(35%), primarily due to the decrease in the Company cash position.
Total current liabilities increased to $806,286 at February 28, 1998 from
$269,929 at February 28, 1997, an increase of $536,357, due to increase in
accounts payable. 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 decreased to $13,278 for
the year ended February 28, 1998 from $1,345,086 for the year ended February 28,
1997, a decrease of $1,331,808. This decrease was due to conversion of all
long-term debt obligations to common stock. The $13,278 remaining is the
long-term portion of capital lease obligations. The Company's two financing
transactions for the year ended February 28, 1998 are further described below.
16
<PAGE>
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 included warrants to purchase shares of the Company's
restricted common stock at $4.00 per share, also bore interest at a rate of 12%
per annum. The principal and accrued interest of $1,406,063 were converted to
shares of the Company's common stock at $1.00 per share, instead of the original
conversion price of $3.50 per share, after an approval from the Board of
Directors on August 23, 1997. Also, the warrants included in the conversions
were repriced to $2.00 per share from $4.00 per share.
During the period of October 13, 1997 to November 5, 1997, the Company
authorized and offered its restricted common shares to accredited investors in
an offering made pursuant to a Board Resolution on October 10, 1997 through
First Financial Investment Securities Inc. Subscribers purchased 1,000,000 of
such shares in this offering for a total of $1,250,000 resulting in net proceeds
to the Company of $1,057,500 after offering costs. These shares were sold for
$1.25 each and each share carries two warrants. One redeemable Class "A" Warrant
entitling the holder to purchase one share of common stock at a price of $2.60
per share and one redeemable Class "B" Warrant entitling the holder to purchase
one share of common stock at a price of $2.75 per share.
Year 2000 Issue
The Year 2000 issue refers to some computer systems' inability to
recognize the date field as the year 2000. As a result of these shortcomings,
some computers may be unable to process year- date data accurately beyond the
year 1999. The Company has preliminarily assessed the potential impact of this
issue on its business and operations as being minor. The Company does not
believe the Year 2000 issue will have a material effect on the Company's
internal accounting and information systems, most of which consist of relatively
inexpensive off-the-shelf software packages.
The Company has not undertaken a comprehensive study as to whether its
clients, suppliers and service providers are Year 2000 compliant. The Company's
primary vendors consist of service professionals who are not expected to be
materially impacted by the Year 2000 issue. The Company does have relationships
with various financial institutions, which could be materially impacted by this
problem.
Plan of Operation
The 1998 fiscal year could be characterized as pivotal. In June, the
Company tabled further research and development of its medical sterilization
units and put resources to work on the development of food safety systems. In
June of 1997, ozone was granted the status as "generally recognized as safe" or
"GRAS", allowing food processors to use ozone in the processing of certain food
items. This, together with a food safety crisis, created a groundswell of demand
for alternative food decontamination technologies. One food safety system is
already in the process of being
17
<PAGE>
installed for a major food company. The Company believes this sale will result
in further opportunities with this and other food related companies.
Fiscal 1998 also experienced new interest from laundry operators in ozone
systems. One laundry installation was completed in a major hotel chain and the
Company believes this installation will result in further sales opportunities in
the chain and other institutional and commercial laundries. In fiscal year 1999
the Company will continue to upgrade existing customers' VAC systems with recent
technological changes.
A major challenge that the Company faces is that of educating government,
industry and the end consumer about the benefits of ozone. Ozone is a
naturally-occurring phenomenon that is usually associated with photochemical
smog or an eroding level of protection in our atmosphere. It is the Company's
intent to provide this education and show the beneficial side of ozone:
decontamination. For industry, ozone is a cost competitive and
environmentally-friendly answer to microbial contaminates. For the consumer,
ozone kills harmful microorganisms quickly and leaves behind no chemical
residue.
The Biochem products will be provided additional marketing and promotional
assistance in order to increase sales and product development. Current sales
activities will be evaluated and alternatives looked for to improve profit
margins. Joint efforts will continue with Foster Miller, Inc., to market
biochem's monomer to the aerospace industry.
The focus for the fiscal year 1999 will be sales in the three target areas
and Cyclopss will apply the resources necessary to accomplish this. The Company
anticipates a spending level of approximately $1,000,000 on research and
development activities required to continue with product validation and food
trials. Sales and marketing activities will be budgeted at $1,500,000 to allow
for sales staff, advertising and trade shows. General and administrative
expenses should be in the $2,000,000 range for the year.
The Company had 22 full time and 2 part-time employees as of February 28,
1998. The Company anticipates additional employees will be required in
engineering and sales during the next twelve months. The impact of the above
will be determined by the market demand for food safety and textile systems and
specialty chemicals.
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.
18
<PAGE>
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes or disagreements between the Company and Ernst
& Young LLP, its Independent Auditors during the year ended February 28, 1998.
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
Gary D. Bratcher 51 Chairman, CEO
William R. Stoddard 46 President, Director
Mondis Nkoy 34 Controller, Corporate Secretary
Michael J. Lakis, Jr. 61 Director
Richard C. Nelson 67 Director
Steve Sarich, Jr. 76 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:
Gary D. Bratcher. Mr. Bratcher joined the Company on March 1, 1998,
replacing former CEO, John Williams. Mr. Bratcher served as a Cabinet Secretary
for Economic Development for the Governor of the State of New Mexico for the
past three years. Prior to this post, he served as President and Chief Executive
Officer for Del Monte Fresh Produce Company, a multi-national fresh produce
company.
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
19
<PAGE>
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 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.
Michael J. Lakis. Mr. Lakis joined the Company on December 1, 1997,
replacing Robert Wrigley and John Herzog on Cyclopss' Board of Directors. Mr.
Lakis is a well-known veteran in the food industry. Most recently, he served as
President and Chief Operating Officer - North America for Del Monte Fresh
Produce Company. Prior to this post, Mr. Lakis was with Chiquita Brands Inc.,
where he built up over 37 years of experience and serving as President from 1979
to 1992.
Richard C. Nelson. Mr. Nelson joined the Company on March 24, 1998,
replacing Bruce Baily Jr. on Cyclopss' Board of Directors. Mr. Nelson is Vice
President Emeritus and Consultant of Hyatt Hotels and Resorts. In June of 1996,
he retired from the day-to-day operations as Vice President and Managing
Director of the Grand Hyatt Washington, a 900 room hotel he opened in 1987.
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.
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, no
disclosure is required in this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning compensation
for services rendered for the past three years to the Company's Chief Executive
Officer and to the Company's most highly compensated executive officers other
than the CEO, whose annual salary and bonus exceeded $100,000:
20
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Options
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name and Principal Position Year Salary Bonus Compensation Stock Awards SAR's(#) LTIP Payouts Compensation
William R. Stoddard 1998 $150,000 -0- -0- 150,000(1) -0- -0- -0-
President 1997 $96,000 -0- -0- 100,000(1) -0- -0- -0-
1996 $96,000 -0- -0- -0- -0- -0- -0-
John M. Williams 1998 $96,000 -0- -0- 24,999(1) -0- -0- -0-
Chairman/CEO 1997 $96,000 -0- -0- 100,000(1) -0- -0- -0-
(Retired December 1997) 1996 $96,000 -0- -0- -0- -0- -0- -0-
(1) Options to acquire shares of common stock
</TABLE>
Stock Options Granted to Executives
During the year ended February 28, 1997, stock options were granted to
each of the two persons listed 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, 1997, options to purchase 774,999 shares owned by Mr.
Williams and Mr. Stoddard, which vested during the four prior employment years
were all exercisable.
On September 1, 1997 an additional grant was made for 150,000 and 100,000
shares to Mr. Stoddard and Mr. Williams respectively. Mr. Stoddard's options
were issued at $.90 per share. Mr. Williams options were issued at $1.07,
consistent with the prior year's grant. These options vest on a monthly basis,
consistent with the previous grants. Since Mr. Williams left the company at the
beginning of December 1997, only 1/4 or 24,999 of the options granted on
September 1, 1997, were vested. The above shares of 150,000 and 24,999 will
become exercisable on August 31, 1998.
On June 1, 1997 a grant was made to Mondis Nkoy, Corporate Secretary, for
15,000 shares at $.94, the closing market price for that day. These shares are
exercisable one year after the grant date at 5,000 shares a year, for three
years. These options were granted under the 1992 Stock Incentive Plan.
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<PAGE>
As of May 28, 1998 none of the options granted in the employment
agreements discussed above 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, 1994. 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
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Number of Securities % of Total options/SAR
Name underlying Options/SARs Granted to employees Exercise or
Expiration Date Granted (#) In fiscal year Base price
John Williams 100,000 35% $1.07
8/31/2003
William Stoddard 150,000 53% $ .90
8/31/2003
</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>
<S> <C> <C> <C> <C>
Nature of Value of Unexercised
Shares Acquired Values Unexercised Options In-the-Money Options
Name on Exercise (#) Realized ($) at 2/28/98 (#) at 2/28/98 ($)(1)
Exercisable Unexercisable Exercisable Unexercisable
John M. Williams -0- -0- 400,000 24,999 $150,000 $ 24,000
William R. Stoddard -0- -0- 400,000 150,000 $150,000 $169,500
</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 28, 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 28, 1998 ($2.03) 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 exercisable
options granted under the extensions; $.90 for Mr. Stoddard's 150,000
unexercisable options and $1.07 for Mr. Williams' 24,999 unexercisable options).
22
<PAGE>
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
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 is the Corporate
Secretary and was granted options in June of 1997. 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, 1998, the following options
have been granted under the 1992 Stock Incentive Plan:
23
<PAGE>
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, 1998 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, 1998, 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 two 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, all 20,000 of such options canceled pursuant to
the terms of the plan when one of the optionee's' employment with the
Company terminated, which leaves none of these options outstanding as of
February 28, 1998.
On July 12, 1994, options to purchase a total of 90,000 shares were
granted to four employees of Cyclopss 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, 1998, 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 Cyclopss BioChemical Corporation, a
wholly-owned subsidiary of the Company, none 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, 1998, 24,000 of these options were still
outstanding.
On January 1, 1995, options to purchase a total of 45,000 shares
were granted to ten employees of the Company, none of whom are officers or
directors of the Company. All of such options are exercisable at $5.44 per
share. Subsequently, 30,000 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, 1998, 15,000 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, 26,000 of these options were canceled
24
<PAGE>
pursuant to the terms of the plan when the employment of the optionee's
with the Company terminated. As of February 28, 1998, 18,500 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, 1998, all 7,000 of these options were still
outstanding.
On March 1, 1997, options to purchase a total of 10,000 shares were
granted to an employee of the Company who was not an officer or director.
These options are exercisable at $1.18 per share. As of February 28, 1998,
all 10,000 of these options were still outstanding.
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. As of February 28, 1998
all 6,000 of these options were still outstanding.
On June 1, 1997, options to purchase a total of 15,000 shares were
granted to an employee of the Company who is an officer. These options are
exercisable at $.94 per share. As of February 28, 1998, all 15,000 of
these options were still outstanding.
As of February 28, 1998, there are 145,500 shares granted and
outstanding, which leaves 124,500 shares available for grant under the
1992 Stock Incentive Plan.
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, 1998, 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
William R. Stoddard(2)(3) 822,586 4.3%
3646 West 2100 South
Salt Lake City, UT 84120
25
<PAGE>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class Ownership
Steve Sarich, Jr.(2)(4) 576,487 3.0%
505 Madison Street
Suite 220
Seattle, WA 98104
Mondis Nkoy(2)(5) 6,000 *
3646 West 2100 South
Salt Lake City, UT 84120
Michael J. Lakis (6)(2) 10,000 *
3646 West 2100 South
Salt Lake City, UT 84120
Gary D. Bratcher (7)(2) -0- *
3646 West 2100 South
Salt Lake City, UT 84120
Richard C. Nelson (8)(2) -0- *
3646 West 2100 South
Salt Lake City, UT 84120
All Officers and Directors
as a Group (6 Persons) 1,415,073 7.4%
* Less than 0.1%
(1) As of May 15, 1998, there were 16,746,668 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
2,200,500 shares of the Company's common stock. Therefore, under the rules of
the Securities and Exchange Commission, there are deemed to be 18,947,168 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, 1998.
(3) Mr. Stoddard is the record owner of 270,741 of these shares and owns an
additional 51,845 of these shares in brokerage accounts. The 822,586 figure
includes 400,000 shares which may be acquired by Mr. Stoddard from the Company
pursuant to an employment stock option and 100,000 shares which may be purchased
from the Company pursuant to a Warrant as of May 15, 1998. All of such options
and warrants are currently exercisable. Mr. Stoddard also owns options to
purchase an additional 150,000 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, 1998. (See
"Executive Compensation.")
26
<PAGE>
(4) The 576,487 shares of total beneficial ownership shown for Mr. Sarich
includes 461,487 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 and 100,000 shares which may be purchased
pursuant to a currently exercisable Warrant as of May 15, 1998. All of such
options and warrants are currently exercisable.
(5) Ms. Nkoy is the Corporate Secretary and Controller and has a currently
exercisable stock option for the 6,000 shares shown as beneficial ownership. She
has also been granted options to purchase 15,000 additional shares which are not
currently exercisable but become exercisable at quantities of 5,000 shares on
June 1, 1998, 1999, and 2000.
(6) Mr. Lakis is a new director who is currently the record owner of 10,000
common shares. He has no exercisable stock options as of May 15, 1998, nor has
he been granted any options as of May 15, 1998.
7) Mr. Bratcher is the new CEO who currently has no exercisable stock options as
of May 15, 1998. He has been granted options for the purchase of 300,000 shares
which will be exercisable on March 1, 1999.
8) Mr. Nelson is a new Director who currently has no exercisable stock options
as of May 15, 1998, nor has he been granted any options as of May 15, 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)
321 Investment Company(2) 35,087 10,025 10,025 (3)
27
<PAGE>
(1) This individual is a Director of the Company as of May 15, 1998. 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.
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 a Form 8-K during the last quarter of
the year ended February 28, 1998
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCLO3PSS CORPORATION
Date: May 29, 1998 By/s/Gary D. Bratcher
Gary D. Bratcher,
CEO & Chairman
Principal Executive Officer
Date: May 29, 1998 By/s/ Mondis Nkoy
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
28
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ Gary D. Bratcher Chief Executive Officer/ May 29, 1998
Gary D. Bratcher Chairman
/s/ William R. Stoddard President May 29, 1998
William R. Stoddard
/s/ Steve Sarich Jr Director May 29, 1998
Steve Sarich, Jr.
/s/ Richard C. Nelson Director May 29, 1998
Richard C. Nelson
/s/ Michael J. Lakis Director May 29, 1998
Michael J. Lakis
29
<PAGE>
Consolidated Financial Statements
CyclO3 PSS Corporation
Years ended February 28, 1998 and 1997
with
Report of Independent Auditors
<PAGE>
CyclO3PSS Corporation
Consolidated Financial Statements
Years ended February 28, 1998 and 1997
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 Flows 7
Notes to Consolidated Financial Statements 8
<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, 1998 and 1997, 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, 1998 and 1997, 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, 1998 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
May 5, 1998
1
<PAGE>
CyclO3PSS Corporation
Consolidated Balance Sheets
February 28
1998 1997
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 573,161 $1,275,636
Accounts receivable, less allowance for
doubtful accounts of $2,000 in 1998
and 1997 113,090 97,605
Inventories 152,026 100,584
Prepaid expenses 75,526 102,815
------------- -------------
Total current assets 913,803 1,576,640
Property and equipment, net 236,780 370,994
Other assets:
Goodwill, net 311,887 540,375
Acquired patents, net 368,941 411,187
Developed patents and other, net 128,730 125,650
------------- -------------
$1,960,141 $3,024,846
============= =============
2
<PAGE>
February 28
1998 1997
------------- -------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 668,834 $ 108,619
Accrued liabilities 112,789 135,190
Current portion of capital lease obligations 24,663 26,120
------------- -------------
Total current liabilities 806,286 269,929
Long-term debt obligations - 1,156,000
Interest payable on long-term debt obligations - 151,730
Long-term portion of capital lease obligations 13,278 37,356
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, issued and outstanding
(liquidation preference of $71,276) 356 356
Series "B" convertible preferred stock;
30,000 shares authorized, 1,932 and
1,935 shares issued and outstanding in
1998 and 1997, respectively
(liquidation preference of $2,850,655) 19 19
Class "A" preferred stock, par value $.01; 500,000
shares authorized; none issued or outstanding - -
Common stock:
Common stock, par value $.001; 55,000,000 shares
authorized; 15,145,868 shares and 12,793,440
shares issued in 1998 and 1997, respectively 15,146 12,793
Additional paid-in capital 16,034,785 13,546,195
Accumulated deficit (14,408,184) (11,479,987)
Deferred compensation - (168,000)
Less treasury stock, 264,000 common shares at (501,545) (501,545)
cost
------------- -------------
Total stockholders' equity 1,140,577 1,409,831
------------- -------------
$ 1,960,141 $ 3,024,846
============= =============
See accompanying notes to consolidated financial statements
3
<PAGE>
CyclO3PSS Corporation
Consolidated Statements of Operations
Year ended
February 28
1998 1997
-------------- --------------
Net revenues $1,205,105 $ 610,525
Costs and expenses:
Cost of sales 1,093,656 477,955
Research and development 244,282 816,941
Selling and marketing 326,732 156,490
General and administrative 1,978,591 1,449,319
Depreciation and amortization 426,353 464,840
-------------- --------------
4,069,614 3,365,545
-------------- --------------
Loss from operations (2,864,509) (2,755,020)
Interest income 47,494 38,804
Interest expense (111,182) (241,528)
-------------- --------------
Net loss (2,928,197) (2,957,744)
Preferred stock dividends (154,560) (1,660,133)
-------------- --------------
Net loss applicable to common stock $ (3,082,757) $ (4,617,877)
Net loss per common share before preferred
stock dividends $ (.21) $ (.25)
Loss per common share for preferred stock
dividends (.01) (.14)
-------------- --------------
Basic and diluted net loss per common share $ (.22) $ (.39)
============== ==============
Weighted average number of common shares-diluted $13,853,892 $11,702,285
============== ==============
See accompanying notes to consolidated financial statements.
4
<PAGE>
CyclO3PSS Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series "A" Series "B"
Convertible Convertible Class "A"
Preferred Stock Preferred Stock Preferred Stock Common Stock
Shares Amounts Shares Amounts Shares Amounts Shares Amounts
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at February 29, 1996 35,638 $356 - $ - - $ - 10,169,932 $10,170
Reissuance of shares pursuant to
court ruling (See Note 8) - - - - - - 355,606 355
Return of shares held in escrow
(See Note 7) - - - - - - (124,378) (124)
Issuance of common stock for
services - - - - - - 311,044 311
Issuances 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
Conversions of Series "B"
dividends to common stock - - - - - - 21,690 22
Issuances of common stock for
cash - - - - - - 100,000 100
Issuances of warrants with
convertible debt - - - - - - - -
Amortization of deferred
compensation - - - - - - - -
Net loss - - - - - - - -
Recognition of paid-in-kind stock
dividends on Series "B" preferred
stock (See Note 7) - - - - - - - -
------------------------------------------------------------------------------------------
Balances at February 28, 1997 35,638 356 1,935 19 - - 12,793,440 12,793
Issuances of common stock for
cash - - - - - - 1,000,000 1,000
Conversions of long-term debt and
accrued interest to common stock- - - - - - - 1,305,852 1,306
Issuances of common stock in
connection with business purchas- - - - - - - 41,676 42
Conversions of Series "B"
preferred stock to common stock - - (3) - - - 4,703 5
Conversions of Series "B"
dividends to common stock - - - - - - 197 -
Amortization of deferred
compensation - - - - - - - -
Interest expense related to warr-nts - - - - - - - -
Net loss - - - - - - - -
Recognition of paid-in-kind stock
dividends on Series "B" preferred
stock (See Note 7) - - - - - - - -
------------------------------------------------------------------------------------------
Balances at February 28, 1998 35,638 $356 1,932 $ 19 - $ - 15,145,868 $15,146
===========================================================================================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Additional Treasury Stock
Paid-in Accumulated Deferred (Common)
Capital Deficit Compensation Shares Amounts Total
- -------------- -------------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
$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
1,056,500 - - - - 1,057,500
1,404,757 - - - - 1,406,063
(42) - - - - -
(5) - - - - -
- - - - - -
- - 168,000 - - 168,000
27,380 - - - - 27,380
- (2,928,197) - - - (2,928,197)
- - - - - -
- -------------------------------------------------------------------------------------
$16,034,785 $(14,408,184) $ - 264,000 $(501,545) $1,140,577
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CyclO3PSS Corporation
Consolidated Statements of Cash Flow
Year ended
February 28
1998 1997
____________________________
Cash flows from operating activities:
Net loss $(2,928,197) $(2,957,744)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 143,660 182,416
Amortization 282,693 282,424
Interest expense on convertible debt 98,333 137,067
Common stock issued for services 168,000 176,624
Loss on write-off of assets - 48,717
Interest expense on warrants with convertible
debt 27,380 90,214
Other - 231
Changes in assets and liabilities:
Increase in accounts receivable (15,485) (20,475)
(Increase) decrease in inventories (51,442) 308,305
Decrease (increase) in prepaid expenses and other
27,289 (92,202)
Increase (decrease) in accounts payable and
accrued liabilities 537,814 (38,727)
Decrease in deferred revenue - (142,749)
---------------------------
Net cash used in operating activities (1,709,955) $(2,025,899)
---------------------------
Cash flows from investing activities:
Purchase of property and equipment (9,446) (17,654)
Increase in developed patents (15,039) -
___________________________
Net cash used in investing activities (24,485) (17,654)
___________________________
Cash flows from financing activities:
Proceeds from issuance of common stock 1,057,500 52,813
Proceeds from issuance of preferred stock - 2,755,000
Proceeds from issuance of convertible debt
obligations - 351,000
Payment on notes payable - (70,000)
Principal payments under capital lease obligation (25,535) (21,737)
_________________________
Net cash provided by financing activities 1,031,965 3,067,076
_________________________
Net (decrease) increase in cash and cash
equivalents (702,475) 1,023,523
Cash and cash equivalents at beginning of year 1,275,636 252,113
-------------------------
Cash and cash equivalents at end of year $ 573,161 $1,275,636
=========================
Supplemental schedule of non-cash financing
activities:
Conversions of long-term debt obligations and
interest payable on long-term debt obligations
to common stock $1,406,063 $ -
Capital lease obligations incurred for
acquisition of property and equipment - 14,236
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, 1998
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., and in 1995, changed its name to
CyclO3PSS Corporation (the Company). The Company is engaged in the manufacture,
sale and installation of ozone food processing products, 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.
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.
8
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Inventories (continued)
Inventories consist of the following:
February 28
1998 1997
-----------------------------
Raw materials $131,114 $100,584
Work-in-process 20,912 -
-----------------------------
$152,026 $100,584
=============================
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
1998 1997
-----------------------------
Equipment $559,241 $558,694
Furniture and fixtures 85,528 87,808
Leasehold improvements 101,390 99,610
-----------------------------
746,159 746,112
Less: accumulated depreciation and
amortization (509,379) (375,118)
-----------------------------
$236,780 $370,994
==============================
Depreciation and amortization expense was $143,660 and $182,416 for the
years ended February 28, 1998 and 1997.
Property and equipment includes $94,905 of equipment under capital leases
at February 28, 1998 and February 29, 1997. Accumulated depreciation for such
equipment was $38,082 and $23,044 at February 28, 1998 and 1997, 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.
9
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 $830,549
and $602,061 at February 28, 1998 and 1997. 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 $148,598 and $106,321 at February 28, 1998
and 1997. The Company periodically reviews the recoverability of these
intangible assets in order to record them at their net realizable value.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of. The
standard requires the Company to review long-lived and intangible assets for
impairment whenever events or circumstances indicate that the carrying value of
an asset may not be recoverable. For the year ended February 28, 1998, the
Company did not identify any impaired assets.
Income Taxes
The Company accounts for income taxes using the liability method pursuant to
Statement of Financial Accounting Standards (SFAS) 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 SFAS No. 123, Accounting for
Stock-based Compensation. 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.
10
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Revenue is recognized upon shipment, or in the case of washing and laundry
systems, upon completion of certain milestones as specified in the related
customer contracts.
Advertising Costs
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $52,118 and $23,542 respectively for the years then
ended February 28, 1998 and 1997.
Concentration of Credit Risk
The Company's financial instruments consist primarily of cash and trade accounts
receivable. The Company sells its products primarily to, and has trade
receivables with, industrial and healthcare laundries, chemical manufacturers
and universities in the United States and abroad. Less than 10% of product sales
are to foreign customers.
As a general policy, collateral is not required for accounts receivable;
however, 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.
Historical losses have not been material.
Net Loss per Common Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings
Per Share, which replaced the calculation of primary and fully-diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previous calculation of fully-diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Because the Company reported a net loss for each of the fiscal years ended
February 28, 1998 and 1997, all common stock equivalents are anti-dilutive and,
accordingly have been excluded from the earnings per share computation. As a
result, the numerator or net loss applicable to common stock and the denominator
or weighted average number of common shares - diluted are the same for both
basic and diluted earnings per share computations.
11
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Impact of Recently Issued Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued SFAS No 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. These Standards will become effective for
the Company's 1999 fiscal year. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 131 changes current practice
under SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, by
establishing a new framework on which to base segment reporting (referred to as
the "management " approach) and also requires interim reporting of segment
information. Management is currently assessing the impact of implementation of
these Standards on the consolidated financial statements of the Company and does
not believe that the implementation will have a material impact on the Company's
financial statements.
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, 1998 of $14,408,184 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, 1998 was $2,928,197. In the past
the Company has been able to receive funding necessary for its operations
through the issuances of common and preferred stock. The Company anticipates a
net loss for the year ended February 28, 1999, and with a cash balance of
$573,161 at February 28, 1998 and expected cash requirements for the coming
year, there is substantial doubt as to the Company's ability to continue
operations.
The Company believes that these conditions have resulted from the inherent
risks associated with small technology companies. Such risks include, but are
not limited to, the ability to (a) generate sales of its product at levels
sufficient to cover its costs and provide a return for investors, (b) attract
additional capital in order to finance growth, (c) 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.
12
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation (continued)
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 over the next
fiscal year.
3. Accrued Liabilities
Accrued liabilities consist of the following:
February 28
1998 1997
----------------------------
Accrued payroll and payroll taxes $67,787 $60,507
Accrued vacation 45,002 49,683
Other - 25,000
-----------------------------
$112,789 $135,190
=============================
4. Long-Term Debt
During the year ended February 28, 1997, the Company's Board of Directors
approved the issuance of $3,000,000 in convertible debt to individual investors.
Principal and interest were payable in full three years from the date of
execution of each note. Interest accrued at 12% per year on the principal
balance. The debt was secured by all the assets of the Company. The lender could
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 issued 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 was exercisable for a period of 5 years from
the date of the closing of each loan. The Board of Directors had 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.
On August 29, 1997 the Company provided the holders of the Company's
Convertible Promissory Notes an option to convert the outstanding principal and
interest into the Company's common stock, which stock is restricted from sale
for a period of 120 days from the date of conversion, at a conversion price
which is the higher of a) $1.00 per share or b) the average closing price for
the ten days prior to the date of conversion. Note
13
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
4. Long-Term Debt (continued)
holders continue to own the warrants which were received as part of the original
purchase; however, the exercise price of the underlying shares has been reduced
to $2.00 per share for the notes converted. As of February 28, 1998, all of the
long-term debt obligations and interest payable on long-term debt obligations
have been converted to 1,035,852 shares of the Company's restricted common
stock.
5. Capital Lease Obligations and Commitments
Future minimum lease payments for capital lease obligations are as follows:
Year ending
February 28
1999 27,722
2000 11,970
2001 3,915
--------------
Future minimum lease payments 43,607
Amount representing interest (5,666)
--------------
Present value of future minimum lease 37,941
obligations
Amounts due within one year (24,663)
--------------
Amounts due after one year $13,278
==============
Interest paid and expensed for capital lease obligations was $7,662 and $10,601
for the years ended February 28, 1998 and 1997, respectively.
The Company leases office facilities and office equipment under noncancelable
operating leases. Rent expense under these leases was $107,695 and $107,945 for
the years ended February 28, 1998 and 1997. The future minimum operating lease
payments are $93,678 and $78,065 for the years ended February 28, 1999 and 2000,
respectively.
6. Income Taxes
As of February 29, 1998, the Company had federal and state net loss
carryforwards of approximately $13,012,000 and $12,050,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $119,000. The net operating loss and credit carryforwards will
expire at various dates beginning in 2003 through 2012, if not utilized.
14
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
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.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of February 28, 1998 and 1997 are as follows:
February 28
1998 1997
----------------------------
Deferred tax assets:
Net operating loss carryforwards $4,822,000 $3,750,000
Research credit carryforwards 119,000 113,000
----------------------------
4,941,000 3,863,000
Valuation allowance (4,941,000) (3,863,000)
============================
$ - $ -
============================
The net valuation allowance increased by $1,078,000 and $886,000 during the
years ended February 28, 1998 and 1997, respectively.
7. Stockholders' Equity
Common Stock
On July 12, 1994, the Company completed the acquisition of Innovative Textile
Technology, Inc. ("INTEX"), a privately held Pennsylvania Corporation. In
connection with the acquisition, the Company placed 124,378 shares of the
Company's common stock in escrow. The shares were 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 during the year ended February 28, 1997.
15
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
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 years ended February 28, 1998 and 1997, the
Company recorded $168,000 of compensation expense related to this issue.
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.
In October 1997, the Company completed a private placement offering for
$1,250,000 (net proceeds of $1,057,500) of its securities, which consist of
1,000,000 units at a price of $1.25 per unit. Each unit consists of one
restricted share of common stock, one Class A Warrant and one Class B Warrant.
The Class A Warrant entitles the holder to purchase one share of common stock at
$2.60 per share and the Class B Warrant entitles the holder to purchase one
share of common stock at $2.75 per share. The shares underlying the warrants
were registered in December 1997. As of February 28, 1998, none of the warrants
have been exercised.
At February 28, 1998, the Company had reserved 3,922,422 shares of common stock
for future issuance, including 2,479,422 shares reserved for exercise of
warrants and 1,443,000 shares for the exercise of stock options.
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 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.
16
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Preferred Stock (continued)
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.
For the year ended February 28, 1997, 3,170 shares of Series "B" convertible
preferred stock had 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 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 $154,560 and $108,673 for the
years ended February 28, 1998 and 1997 in paid-in-kind stock dividends as a
reduction of and simultaneous increase in additional paid in capital.
For the year ended February 28, 1997, 1,235 shares of series "B"
convertible preferred stock and related accrued dividends of $20,587 were
converted into 1,964,446 and 21,690, respectively, shares of common stock. For
the year ended February 28, 1998, 3 shares of series "B" convertible preferred
stock and related accrued dividends of $191 were converted into 4,703 and 197,
respectively, shares of common stock.
At February 28, 1998 and 1997, the Company had aggregate accrued and unpaid
preferred stock dividends of $242,455 and $88,086, respectively.
17
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
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. On October 21, 1994, one of these
employees was terminated and the corresponding options were canceled. At
February 28, 1998, options to purchase 662,500 shares of common stock were
exercisable under these employee agreements.
Effective September 1, 1996, the Board of Directors extended the terms of the
employment agreements for two of the above employees. Under the terms of the
extension, each of the employees was granted an additional 100,000 options at
$1.07 per share for an additional one year of service. As of February 28, 1998,
a total of 200,000 shares were exercisable under these employment agreements.
Effective September 1, 1997, the Board of Directors approved the employment
agreements for the above two employees for one additional year. Under the
renewed terms one employee received 150,000 options at $.90 per share and the
other employee received 100,000 options at $1.07 per share. In December 1997,
one of these employees resigned and the corresponding options were canceled. The
vested options become exercisable one year from the date of grant.
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, 1998 a total of 75,000 options were exercisable.
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.
18
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Stock Options (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 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 1998
and 1997, respectively: risk-free interest rates of 6.00% and 6.38%; dividend
yield of 0%; volatility factors of the expected market price of the Company's
common stock of .811 and 1.049; and a weighted-average remaining contractual
life of the options of 3 years and 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:
1998 1997
----------------------------
Pro forma net loss $(3,111,403) $(2,973,634)
Pro forma net loss per common share (0.22) (0.26)
Pro forma net loss applicable to
common stock $ (0.24) $ (0.40)
Because the effect of SFAS No. 123 is prospective, the initial impact on pro
forma net loss may not be representative of compensation expense in future
years.
19
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Stock Options (continued)
A summary of all stock option activity, and related information for the years
ended February 28, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Shares Outstanding Stock Options Weighted-
Available Number of Price Average
for Grant shares Per Share Exercise Price
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at February 29,1996 20,500 972,500 $1.75-6.03 $2.42
Additional authorizations 200,000 - - -
Options granted (207,000) 207,000 .94-1.07 1.07
Options canceled 107,000 (107,000) 1.85-6.03 4.00
------------------------------------------------------------
Balance at February 28, 1997 120,500 1,072,500 .94-6.03 2.00
Additional authorization 250,000 - - -
Options granted (281,000) 281,000 .90-1.25 .98
Options canceled 95,501 (95,501) 1.07-6.03 1.94
------------------------------------------------------------
Balance at February 28,1998 185,001 1,257,999 $.90-6.03 $1.78
============================================================
</TABLE>
The weighted average fair value of options granted in the year ended February
28, 1998 and 1997, were $.52 and $.66, respectively.
Additionally, SFAS 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 28,1998:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------
Weighted-
Average
Range of Remaining Weighted- Weighted-
Exercise Number Contractual Average Number Average
Prices Outstanding Life Exercise Exercisable Exercise
Price Price
- -------------------------------------------------------------------------------
$.90-1.25 412,999 5 years $1.01 207,000 $1.07
1.75-1.85 766,500 4 years 1.85 766,500 1.85
2.79 18,500 8 years 2.79 11,000 2.79
5.44-6.03 60,000 6 years 5.87 60,000 5.87
- -------------------------------------------------------------------------------
0$.90-6.03 1,257,999 4 years $1.78 1,044,500 $2.08
===============================================================================
20
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
8. 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.
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.
9. Segment Information
During fiscal 1998 and 1997, the Company operated 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"). During the fourth quarter of fiscal 1998 the Company began testing
its ozone technology on food products. As of February 28, 1998, the Company had
not recognized any revenue on its food processing activities, had no
specifically identifiable assets relating to food products, and has incurred
research and development costs of approximately $66,000. The costs incurred with
food products has been combined with the textile products segment.
Operating profit is total revenue less operating expenses, excluding interest
expense and general corporate expenses. Corporate assets consist primarily of
cash and cash equivalents and property and equipment.
For the year ended February 28, 1998, two customers accounted for 47% and
25% of total net revenues for textile products, and one customer accounted for
15% of total net revenues for biochemical products. 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.
21
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
9. Segment Information (continued)
Industry Data
CyclO3PSS Corporation and Subsidiaries Year ended
February 28
1998 1997
------------------------------
Net sales and other income:
Medical products $ - $ -
Textile products 805,057 292,279
Biochemical products 400,048 318,246
------------------------------
1,205,105 610,525
Interest Income 47,494 38,804
------------------------------
Total revenue $1,252,599 $ 649,329
==============================
Operating loss (income)
Medical products $ 294,127 $ 703,186
Textile products 1,218,294 948,895
Biochemical products (63,244) (2,344)
------------------------------
Total operating loss 1,449,177 1,649,737
Corporate expenses 1,367,838 1,066,479
Interest expense 111,182 241,528
------------------------------
Net loss $2,928,197 $2,957,744
==============================
Identifiable assets
Medical products $ 247,410 $ 358,390
Textile products 1,100,191 1,103,712
Biochemical products 373,434 384,451
------------------------------
1,721,035 1,846,553
General corporate assets 239,106 1,178,293
------------------------------
Total assets $1,960,141 $3,024,846
==============================
Depreciation and amortization expense
Medical products $ 51,188 $ 91,878
Textile products 61,453 322,064
Biochemical products 31,019 50,898
Capital expenditures
Medical products $ 2,997 $ 3,789
Textile products 5,149 2,066
Biochemical products 1,300 11,799
22
<PAGE>
CyclO3PSS Corporation
Notes to Consolidated Financial Statements (continued)
10. Subsequent Event
Subsequent to year end, the company entered into a best efforts private
placement offering for $2,001,000 of its securities, which consists of 1,600,800
units at a price of $1.25 per unit. Each unit consists of one share of common
stock and a warrant to purchase one share of common stock at a price of $3.25
per share.
23
Consent of Independent Auditors
We consent to the use of our report dated May 5, 1998 with respect to the
financial statements of CyclO3PSS Corporation for the years ended February 28,
1998 and 1997 included in the Annual Report (Form 10-KSB) of CyclO3PSS
Corporation for the year ended February 28, 1998.
We also 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, the Registration Statement (Form S-8 No. 333-10567)
pertaining to Consulting Agreement of John Sloan, and the Registration Statement
(Form S-3 No. 333-41737) and related Prospectus of CyclO3PSS Corporation of our
report dated May 5, 1998, with respect to the consolidated financial statements
of CyclO3PSS Corporation included in this Annual Report (Form 10-KSB) for the
year ended February 28, 1998.
ERNST & YOUNG LLP
Salt Lake City, Utah
May 28, 1998
<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>
<MULTIPLIER> 1
<CURRENCY> 573,161
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<EXCHANGE-RATE> 1
<CASH> 573,161
<SECURITIES> 0
<RECEIVABLES> 113,090
<ALLOWANCES> (2,000)
<INVENTORY> 152,026
<CURRENT-ASSETS> 913,803
<PP&E> 236,780
<DEPRECIATION> (509,379)
<TOTAL-ASSETS> 1,960,141
<CURRENT-LIABILITIES> 806,286
<BONDS> 0
0
375
<COMMON> 15,146
<OTHER-SE> 1,125,056
<TOTAL-LIABILITY-AND-EQUITY> 1,960,141
<SALES> 1,205,105
<TOTAL-REVENUES> 1,205,105
<CGS> 1,093,656
<TOTAL-COSTS> 4,069,614
<OTHER-EXPENSES> 2,975,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (111,182)
<INCOME-PRETAX> (3,082,757)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,082,757)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
