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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
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
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3646 West 2100 South
Salt Lake City, Utah 84120-1202
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (801) 972-9090
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2)has been subject to such filing requirements for the past 90 days. Yes x/ No.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
The Issuer's revenues for the fiscal year ended February 28, 1999 were
$832,168
As of May 15, 1999, 17,599,482 shares of the Issuer's common stock were
issued and outstanding of which 16,680,209 shares were held by non-affiliates.
As of May 15, 1999, the aggregate market value of shares held by non-affiliates
(based upon the closing price reported by OTC Bulletin Board) was approximately
$3,387,750.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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Forward-Looking and Cautionary Statements
This Annual Report on Form 10-KSB contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. To the extent
statements in this Annual Report involve, without limitation, product
development and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the Company's
various product categories and for the industries in which the Company operates
or any other guidance on future periods, these statements are forward- looking
and involve matters which are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those expressed in or
implied by such forward looking statements. These risks and uncertainties
include product development or production difficulties or delays due to supply
constraints, technical problems or other factors; technological changes; the
effect of global, national and regional economic conditions; the impact of
competitive products and pricing; changes in demand; increases in component
prices or other costs; and a number of other risks including those identified by
the Company through out Item I and elsewhere in this report, and other risks
identified from time to time in the Company's filings with the Securities and
Exchange Commission, press releases and other communications. The Company
assumes no obligation to update forward-looking statements.
Risk Factors
The following risk factors are inherent in and affect the business of the
Company:
1. Ability to Continue as a Going Concern. As a result of the Company's
financial condition, the Company's independent auditor has included an
explanatory paragraph in its report on the Company's financial statements for
the period ended February 28, 1999, with respect to the Company's ability to
continue as a going concern. The Company's ability to continue in the normal
course of business is dependent upon its access to additional capital and the
success of future operations. Uncertainties as to these matters raised
substantial doubt about the Company's ability to continue as a going concern at
the date of such report. The net loss for the year ended February 28, 1999 was
$3,232,857. In the past the Company has been able to receive funding necessary
for its operations through the issuance of common and preferred stock. The
Company anticipates a net loss for the year ended February 29, 2000, and with a
cash balance of $36,018 at February 28, 1999 and expected cash requirements for
the coming year, there is substantial doubt as to the Company's ability to
continue operations.
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 believes 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; however, no assurances can be given that sales will be generated or
that the additional necessary funding will be raised.
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2. History of Operating Losses; Uncertainty of Future Profitability. The
Company has never operated at a profit. The Company has sold a limited number of
products and has generated a limited amount of revenue from its operations.
There can be no assurance that the Company will ever generate revenue from any
of its operations sufficient to achieve profitability.
3. Future Capital Requirements and Negative Cash Flow. The Company's
operations to date have consumed substantial amounts of cash. The negative cash
flow from operations is expected to continue and may increase over the
foreseeable future. Thereafter, the Company will need to raise substantial
additional funds to conduct its operations, develop its products and
subsequently to establish manufacturing and marketing capabilities. The Company
intends to seek additional funding through public or private financing,
including equity financing, and through collaborative arrangements. Adequate
funds, whether obtained through financial markets or from collaborative or other
arrangements with corporate partners or other sources, may not be available when
needed or on terms acceptable to the Company and may result in significant
dilution to existing stockholders. Insufficient funds may require the Company to
delay, scale back or eliminate some or all of its research and product
development programs or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop itself. The
Company's future cash requirements will be affected by results of research and
development, results of relationships with corporate collaborators, changes in
the focus and direction of the Company's research and development programs,
competitive and technological advances, the regulatory process and other
factors.
4. Uncertainty of Entrance Into Medical Sterilization Market. The Company
business plan includes selling medical sterilization products. However, as of
the date hereof, the Company has not obtained FDA clearance for wide-scale
marketing of such products and there can be no assurance it will ever obtain
such FDA clearance. Even if FDA clearance is obtained, there can be no assurance
that the Company will be able to effectively and profitably enter into the
medical sterilization product market. Due to its lack of capital, the Company
has presently ceased efforts to advance the progress of its medical
sterilization products.
5. Lengthy Sales Cycle. Currently, the Company is focusing its efforts and
financial resources on the marketing of its food processing and laundry system
products and technologies as a means of generating revenue. Installing and
integrating new laundry systems requires substantial investments by the
Company's customers. In addition, customers often require a significant number
of product presentations and demonstrations, as well as substantial interaction
with the Company's senior management, before reaching a sufficient level of
confidence in the system's performance characteristics and compatibility with
the customer's target applications. Accordingly, the Company's products
typically have a lengthy sales cycle during which the Company may expend
substantial funds and management time and effort with no assurance that sales
will result
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6. Rapid Technological Change; Dependence on Product Development. The
industries in which the Company is engaged are characterized by rapid
technological change and evolving industry standards. As a result, the Company
must continue to enhance its existing products and develop and manufacture new
products and upgrades with improved capabilities, which has required and will
continue to require substantial investments in research and development by the
Company to advance a number of state-of-the-art technologies. Continuous
investments in research and development also will be required to respond to the
emergence of new technologies. The failure to develop, manufacture and market
new products, or to enhance existing products, would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's competitors can be expected to continue to develop
and introduce new and enhanced products, any of which could cause a decline in
market acceptance of the Company's products or a reduction in the Company's
margins as a result of intensified price competition.
The Company's potential success in developing and selling new and enhanced
products depends upon a variety of factors, including accurate prediction of
future customer requirements, introduction of new products on schedule,
cost-effective manufacturing and product performance in the field. The Company's
new product decisions and development commitments must anticipate the equipment
needed to satisfy the requirements for inspection processes one year or more in
advance of sales. Failure to predict accurately customer requirements and to
develop new generations of products to meet those requirements would have a
sustained material adverse effect on the Company's business, financial condition
and results of operations. New product transitions could adversely affect sales
of existing systems. Product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence, and
orders for existing products or enhancements of existing products fluctuate.
7. Uncertain Market Acceptance of Products. There can be no assurance that
the products created for the Company's customers will gain any significant
market acceptance and market share even if required regulatory approvals are
obtained. Market acceptance may depend on a variety of factors, including
educating consumers and customers regarding the use of a new product or
procedure or overcoming objections to certain effects of the product. Market
acceptance and market share are also affected by the timing of market
introduction of competitive products. Accordingly, the relative speed with which
the Company's customers can develop products, gain regulatory approval and
reimbursement acceptance, and supply commercial quantities of the product to the
market are expected to be important factors in market acceptance and market
share. The failure to gain market acceptance of products could have a material
adverse effect on the Company's business, results of operations, and financial
conditions.
8. Design and Manufacturing Process Risks. While the Company has experience
in designing and manufacturing products, the Company may still experience
technical difficulties and delays with the design and manufacturing of its
products. Such difficulties could cause significant delays in the Company's
production of products and have a material adverse effect on the Company's
revenues. In some instances, payment by a manufacturing customer is dependent on
the Company's ability to
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meet certain design and production milestones in a timely manner. Also, some
major contracts can be canceled if purchase orders thereunder are not completed
when due. Potential difficulties in the design and manufacturing process that
could be experienced by the Company include difficulty in meeting required
specifications, difficulty in achieving necessary manufacturing efficiencies,
and difficulties in obtaining materials on a timely basis. Such design and
manufacturing difficulties could have a material adverse effect on the Company's
business and financial condition.
9. Expansion of Marketing Activities; Limited Distribution. The Company
currently has no domestic direct sales force. The Company anticipates that it
will need to increase its marketing and sales capability significantly to more
fully cover its target markets, particularly as additional proprietary devices
become commercially available. There can be no assurance that the Company will
be able to compete effectively in attracting and retaining qualified sales
personnel or obtaining a marketing partner. There can be no assurance that the
Company or its potential marketing partner will be successful in marketing or
selling the Company's services and products. The Company's ability to sell its
devices in certain areas may depend on alliances with independent manufacturing
representatives. There can be no assurance that the Company will be able to
identify and obtain a marketing partner in desirable markets.
10. Product Recalls. If a device that is designed or manufactured by the
Company is found to be defective, whether due to design or manufacturing
defects, to improper use of the product, or to other reasons, the device may
need to be recalled, possibly at the Company's expense. Furthermore, the adverse
effect of a product recall on the Company might not be limited to the cost of a
recall. For example, a product recall could cause a general investigation of the
Company by applicable regulatory authorities as well as cause other customers to
review and potentially terminate their relationships with the Company. Recalls,
especially if accompanied by unfavorable publicity or termination of customer
contracts, could result in substantial costs, loss of revenues, and a diminution
of the Company's reputation, each of which would have a material adverse effect
on the Company's business, results of operations, and financial condition.
11. Risk of Product Liability. The manufacture and sale of products entails
an inherent risk of product liability. The Company does maintain product
liability insurance with limits of $1,000,000 per occurrence and $1,000,000 in
the aggregate. There can be no assurance that such insurance is adequate to
cover potential claims or that the Company will be able to obtain product
liability insurance on acceptable terms in the future, or that any product
liability insurance subsequently obtained will provide adequate coverage against
all potential claims. A successful claim brought against the Company in excess
of its insurance coverage, or any material claim for which insurance coverage
was denied or limited, could have a material adverse affect on the Company's
business, results of operations and financial condition. Additionally, the
Company generally provides a design defect warranty and in some instances
indemnifies its customers for failure to conform to design specifications and
against defects in materials and workmanship. Any substantial claim against the
Company under such warranties or indemnification could have a material adverse
affect on the Company's business, results of operations and financial condition.
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12. Significant Industry Competition. The markets for the products the
Company currently offers nd will offer in the future, are and will be, highly
competitive. Numerous manufacturers and distributors compete for customers
throughout the United States and internationally in these industries. Many of
the Company's competitors are substantially larger and more experienced than the
Company, have longer operating histories and have materially greater financial
and other resources than the Company. There can be no assurance that the Company
will be able to compete successfully with its more established and better
capitalized competitors.
13. Government Regulation. All of the Company's operations are subject to a
variety of governmental regulation just as all companies are subject to
governmental regulation. The Company's food processing and safety systems are
regulated by the Unites States Department of Agriculture ("USDA") and its Food
Safety Inspection Service ("FSIS") division as well as the Food and Drug
Adminstration ("FDA") and other federal, foreign and state regulatory agencies.
The Company's medical sterilization products which are in development are
regulated in the U.S. by the FDA and other federal, foreign and state regulatory
agencies. Domestic and foreign government regulatory and certification
authorities may delay or prevent product introductions and may require
additional studies or tests prior to product introduction.
14. Patent Protection. The Company's patent and trade secret rights are of
material importance to the Company and its future prospects because the Company
relies on these rights to protect proprietary technology. Patents granted may
not provide meaningful protection from competitors. Even if a competitor's
products were to infringe patents owned by the Company, it would be costly for
the Company to enforce its rights in an infringement action and would divert
funds and other resources from the Company's operations. Furthermore, no
assurance can be given that the Company's products or processes will not
infringe any patents or other intellectual property rights of third parties. If
the Company's products or processes do infringe the rights of third parties, no
assurance can be given that the Company can obtain a license from the
intellectual property owner on commercially reasonable terms or at all.
The Company relies on trade secrets that it seeks to protect, in part,
through confidentiality agreements with employees, consultants and its current
and potential customers. No assurance can be given that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. As the Company intends to enforce its
patents, trademarks and copyrights and protect its trade secrets, it may be
involved from time to time in litigation to determine the enforceability, scope
and validity of these rights. Any such litigation could result in substantial
cost to the Company and diversion of effort by the Company's management and
technical personnel.
15. Dependence Upon Key Personnel. The Company's success is dependent upon
numerous factors including the active and continued participation of its
management team. The loss of services or current management, for any reason,
would have a negative impact on the future success of the Company. The Company
has no key man insurance on its officers and directors. Furthermore, there
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can be no assurance that the Company will be able to continue to attract and
retain the qualified personnel necessary for the development of its business.
The Company's continued expansion into areas and activities requiring additional
expertise, such as regulatory compliance, manufacturing, monitoring and
distribution of ozone wasting systems for the food industry is expected to place
increased demands on the Company's resources. The Company's activities are
expected to require additional personnel with expertise in these areas and the
development of additional expertise by existing personnel. The failure to
acquire or retain such personnel, or develop such expertise could adversely
affect the prospect for the Company's success.
16. Dividends. The Company has never paid a dividend on its Common Stock and
there can be no assurance that it will ever pay a dividend on its Common Stock.
Any future cash dividends will depend on earnings, if any, the Company's
financial requirements and other factors.
17. Authorization of Preferred Stock and Anti-Takeover Effect Risk. The
Company's Certificate of Incorporation authorizes the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the
Company's Convertible Preferred Stock and Common Stock. Also, the voting power
and percentage of stock ownership of the shareholders of the Company's
outstanding capital stock can be substantially diluted by such preferred stock
issuance.
In addition, the issuance of such preferred stock may have the effect of
rendering more difficult or discouraging an acquisition of the Company or
changes in control of the Company. There can be no assurance that the Company
will not issue preferred stock in the future. Other than the authorization of
"blank check" preferred stock, the Company does not have any other provisions in
the Company's Certificate of Incorporation, Stock Option Plans, and/or
Employment Agreements which may have an anti-takeover effect. The issuance of
preferred stock with anti-takeover provisions may discourage bidders from making
offers at a premium to the market price. In addition, the mere existence of an
anti-takeover device may have a depressive effect on the market price of the
Company's stock.
18. General Factors. The Company's business may be affected from time to
time by such matters as changes in general economic, industrial and
international conditions; change in taxes, prices and costs; and other factors
of a general nature which may have an adverse effect on the Company's business.
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PART 1
ITEM 1. Description of Business
General
Cyclopss Corporation (the "Company") is primarily engaged in the design,
manufacturing, 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 within the next few years, when sufficient funds are
available.
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 Laundry Systems, Inc.
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 1999, 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.
Food producers and processors, large and small, are searching for new
technology to address food safety concerns driven by their customers. 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.
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The Company's sales generated from this division in fiscal 1999 came 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 contract R&D tests on meat and
poultry and plans to submit a detailed protocol to the USDA/FSIS for approval
during fiscal year 2000. However, there is no assurance that any protocol
submitted by the Company to USDA and FSIS will be approved and will result in
approval of the Company's technology for commercial marketing.
The number of meat and poultry plants in the U.S. total 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.
For year end February 28, 1999 the Company reported $348,426 in sales for
Eco-Pure Food Safety Systems, Inc. The Company's sales plan includes internal
and regional sales coverage as well as distributorships in markets where they
prove to be more effective. To date, all sales have been made by the Company
directly and no distributorships have been established. The Company believes
that, in the near future, sales of the Eco-Pure System will continue to be made
directly by the Company.
Cyclopss Laundry Systems, Inc.
The Company develops, markets and installs a number of different laundry
products for commercial and institutional laundries. This division emerged from
technology developed by the Company and it was anticipated that market
acceptance would be hastened by the acquisition of Intex Corporation in 1994.
All laundry washing systems are marketed under the name Eco-Wash, formally
known as the OzO3-Clean laundry systems. These systems consist of 1) a large
industrial ozone generator, 2) oxygen concentrators, 3) pumps, filters, and
piping systems used to transport ozone and ozonated water within the laundry
facility, and 4)Programmable Logic Controller (PLC) computer systems that
control the functions of the ozone system. Additionally, the Company has
installed ozone safety monitoring devices and ozone destruct systems to assure
the ambient ozone in the environment is below OSHA safety levels. These
ozone-based textile washing systems dissolve soils on contact and require
shorter wash cycles. Cost savings include reducing hot water requirements and
energy costs, eliminating chlorine, reducing labor costs, reducing 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
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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, infrared 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.
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 1999, the Company installed 5 VAC Soil Counting
Stations and no Eco-Wash Systems. The Company recorded $194,145 in sales for
Cyclopss Laundry Systems, Inc for year end February 28, 1999. .
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' 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
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* 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,
limited distributorships has been established in South America. The Company has
installed 15 ozone washing systems in major commercial laundries and 47 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 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 not had the resources to continue to comply with
these requests and has abandoned the application until such time that it will be
in a position to resume Ster-O-Zone development. It will be necessary to restart
the entire application process.
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.
To date, the Company has not shipped any product or recorded any sales for
Cyclopss Medical Systems, Inc.
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.
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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.
CBC has concluded several development products that have been tied to
ongoing supply of the agents to the initiating parties. Pyrogonn, a limited
liability corporation, was established during the fiscal year 1998 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. Foster Miller
continues to pursue funding from various grant opportunities to finance research
and development in this important area.
The Biochemical division continues to market specialized chemicals and
research and development services to scientists and chemical companies around
the world. Catalog sales to retail distributors and individual researchers
continues to be a vital element of our business. The Company recorded $289,597
in sales for Cyclopss Biochemical Corporation for year end February 28, 1999.
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 its focus on supporting specific customer
applications drive the research and development activities. Objectives of the
research are to demonstrate disinfection efficacy and determine the conditions
for ozone's optimum application. Specialty chemical research is directed at
synthesizing new products for catalog sales and propriety products and
procedures for specific customers. During the year ended February 28, 1999 the
Company spent $289,147 in Reseach and Development costs.
Ozone research is conducted on products provided by customers or acquired by
Cyclopss that represent our market focus - food and laundry systems. For certain
projects, the Company has signed non-disclosure agreements with customers that
prevent the Company from revealing their
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name, location, and, in some cases, their product. Certain customers contract
with the Company 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, 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.
The limited resources directed to textile R&D address textile bleaching,
ozone system product design and UL approval, and VAC soil system product
improvements. Work with a major textile manufacturer that was conducting a study
of ozone's efficacy to design and bleach cotton and cotton polyester fabrics in
high volumes has been postponed do to the financial issues of the customer.
Within the laundry industry, the Company is optimizing and standardizing the
design of the ozone system and plans to seek Underwriter's Laboratory approval
during fiscal 2000. For fiscal 1999, the Company eliminated personnel and closed
it's facilities inTucson, Arizona
Technical accomplishments for the year end February 28, 1999 contributed
directly to $455,780 of the total revenue reported for the Company. Technical
accomplishments this past year in research and development areas include:
Redesign of the Eco-Wash control system: Soon after installation and in
response to an Eco- Wash system failure at the Crowne Plaza Ravinnia, due to the
failure of the mechanical relay control system, the system was redesigned to a
PLC system. The parts were procured and the PLC control system was installed
over a weekend. There has not been a subsequent failure of the control system in
nearly a year of operation.
In an Eco-Pure application at a major food producer, system requirements
were found to be far different from specified at the beginning of the contract.
The short processing season called for immediate redesign and installation of
additional equipment. A three-stage demonstration program was presented to and
accepted by the customer. Over the period of six weeks, each stage
implementation successively demonstrated improved disinfection capability of the
Eco-Pure system over the chlorine dioxide method. The final results demonstrated
nearly a 99.99% reduction in total aerobic and coliform counts.
An Eco-Pure onion storage system was designed and installed in an 870,000
cubic foot storage facility. The system was designed to work with an existing
550,000 cubic feet per minute ventilation system. Anecdotal evidence from the
ozonated facility showed no black mold. Neighboring storage facilities showed
black mold product loss.
An ozone process was developed to bleach raw cotton and cotton/polyester
blend textiles for two potential customers. The ozone textile bleaching design
replaces a harsh chemical process of hydrogen peroxide with caustic, scour, and
chelating agents (pH over 10) while achieving equivalent bleaching results.
Byproducts of the ozone bleaching, oxygen and water, offered the customers
relief
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on severe cost penalties for the waste discharge from their current bleaching
practice. In addition to the fabric bleaching, recovery of product "seconds" by
ozone treatment was demonstrated. Such recovery could potentially save the
customer millions of dollars in operating costs a year.
An Eco-Pure ozone system was designed and installed for the storage of
bananas and other fruits and vegetables. The system was integrated into a
ripening room built by Cool Care affiliate of Dole Corporation. Laboratory tests
were conducted to establish the ozone damage threshold for bananas and the
efficacy of ozone to destroy Listeria monocytogenes on avocados.
A red meat study was performed to determine the efficacy of ozone gas
treatment. Although significant microbial reduction could be achieved the strong
oxidation potential of ozone causes rancidity through lipid breakdown and
formation of free fatty acids and aldehydes. A number of antioxidants were tried
in an attempt to overcome the rancidity to no avail. An alternative wet
treatment approach was designed that will be tested in the near future.
An Eco-Pure gaseous treatment system was developed for treatment of dry
products. Dry ginger dietary supplement was treated with ozone gas and
demonstrated ozone efficacy to reduce the aerobic and coliform contamination to
acceptable levels specified by the US Pharmacopeia. Using the same conceptual
design, dry onion and chili pepper flakes, St. John's Wort and spinach powders,
and broccoli flakes were treated and demonstrated significant reduction of total
aerobic and coliform counts.
In response to a Brazilian customer need, an ozone gas disinfection system
was designed to treat a hospital gas line. The unit was laboratory tested on
simulated hospital gas lines and efficacy was proven.
Biochemical's R&D falls into three categories: established 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. The Company incurred research and development expenses of
$289,147 and $244,282 during the fiscal years ended February 28, 1999 and
February 28, 1998, respectively. The increase in research and development
expenses was due to the redirection of the Company's efforts from medical
systems and towards the Eco-Pure Food Safety and Eco-Wash Systems.
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Manufacturing
The Company's products are assembled from a variety of component parts. The
component parts include, but are not limited to microprocessors, ozone
generators, pumps, motors, oxygen concentrators, ozone monitors and sensors,
sterilization containers, various electronic parts, structural frames, ozone
destruct systems, ozone humidification systems, ozone liquid injectors,
compressors, valves and fittings. The Company assembles and tests each of its
products in-house or at the time of assembly in the field. The Company relies on
outside vendors for various parts and sub-assemblies and does not intend to be a
basic manufacturer. The Company has provided its documentation to a large
contract manufacturer and anticipated having its products manufactured by this
source or others like it should the demand outspace its ability to assemble in
house.
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.
Also, the Company's laundry products are in competition with several small
producers of ozone washing systems. These competitors include International
EcoSciences, 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 nine years has 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 development of
the Company's ozone products, the Company has engineered technology applications
with various
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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.
Patent Applications. To date, the Company has filed twelve patent
applications with the United States Patent and Trademark Office. As of May 15,
1999, 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:
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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 Soil Counting System(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 made for the "Ozone For The EarthTM",
"Eco-Pure(TM)" and ozone symbol for its marketing programs.
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 resurrect itself 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 small cap bulletin board under "OZON".
Originally and when resurrected in 1990, the Company's primary focus was
medical sterilization. In 1995, a form 501(k) Premarket Notification was filed
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 revenues generated from other
divisions support this effort.
Employees
The Company and its subsidiaries employed ten full-time employees as of May
15, 1999. None of the Company's employees are covered by a collective bargaining
agreement.
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ITEM 2. Properties
The Company leases approximately 9,150 square feet of office and research
laboratory space at 3646 West 2100 South, Salt Lake City, Utah 84120. The lease
expires December 31, 1999 and requires monthly lease payments of $5,546. 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.
ITEM 3. LEGAL PROCEEDINGS
Mifal Klita, et al. During the period from May through August 1996, the
Company sold its series B preferred stock in a private placement offering 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 series 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
series B preferred shares into unrestricted common stock of the Company.
Management believes, based on advise of legal counsel, that such litigation and
claims will be resolved without material effect on the Company's consolidated
financial position, results of operations or cash flows.
The Company is involved in other legal actions and claims arising in the
ordinary course of business. Management believes, based on advise of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's consolidated financial position, results of operations
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
Market for Common Stock
The Company's common stock is currently listed on the OTC Bulletin Board
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 Bulletin Board 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:
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Year End Year Ended Through
February 28, 1998 February 28, 1999 May 15, 1999
High Low High Low High Low
- -------------------------------------------------------------------------------
First Quarter $ 1.44 $ .75 $2.56 $1.63 $ 0.34 $ 0.11
Second Quarter 1.03 0.72 1.91 0.41
Third Quarter 3.75 0.66 0.47 0.06
Fourth Quarter 2.63 1.00 0.33 0.08
Holders
The number of record holders of the Company's common stock as of May 15,
1999 was 432. 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 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR 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, 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.
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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 a perceived demand for alternative disinfection systems for food
safety and cost saving equipment for the commercial laundry markets, the Company
shifted its focus and has abandoned medical sterilization, which is encumbered
by a lengthy and costly FDA approval process, and focused on more immediate,
less or non-encumbered target markets -- food, laundry and chemical compounds.
The following discussion and analysis should be read in conjunction with
the financial statements and notes attached hereto. Included in the Company's
consolidated financial statements are the Company's recurring losses from
operations and periodic cash flow difficulties which raise substantial doubt
about it's ability to continue as a going concern.
Results of Operations
The Company's sales during fiscal 1999, which ended on February 28,
1999, were $832,168 versus $1,205,105 for the year ended February 28, 1998, a
reduction of $372,937 (31%). This reduction in revenues was due to several
factors, including the elimination of sales & marketing personnel, and differed
customer purchase decisions because of the financial instability of the Company
eliminating sales that have historically provided revenues from ozone washing
laundry systems. Three of the Company's wholly owned subsidiaries contributed to
the Company's gross revenues, Cyclopss Laundry Systems, Inc. (CLS), Eco-Pure
Food Safety Systems, Inc. (EFS) and Cyclopss Biochemical Corporation (CBC).
CLS's revenues were $194,145 for the year ended February 28, 1999, and $805,057
for the year ended February 28, 1998, a decrease of $610,912 (76%). CBC's
revenues were $289,597 for the year ended February 28, 1999, and $400,048 for
the year ended February 28, 1998, a decrease of $110,451 (28%) due to the
resignation of two principals for part of the year, and the time required to
bring their replacements into revenue producing capabilities. EFS reported
revenue of $348,426 for its first year of operation. Cost of sales reduced in
proportion to sales to $615,549 for fiscal 1999 from the previous year of
$1,093,656, a reduction of $478,107 (44%).
Research and development expenses increased to $289,147 for fiscal 1999
from $244,282 for the previous year. This slight increase in research and
development costs resulted from the Company's efforts in bringing the foos
processing system to market. The Company believes it is necessary to continue to
increase research and development efforts for fiscal 2000, whether on a contract
basis or from its own resources as available, in order to complete the
development of food
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processing systems and to comply with USDA protocols to validate the Company's
food processing technology.
Selling and marketing expenses decreased to $145,162 for fiscal 1999
from $326,732 for the previous year, a decrease of $181,570 (56%). The Company
took steps to reduce marketing staff and eliminated all advertising in order to
help conserve cash. Management believes that it is critical to periodically
support and supplement its sales efforts through advertising, public relations
and trade-show participation when sufficient funds are available.
General and administrative expenses decreased to $1,781,747 for fiscal
1999 compared with $1,978,591 for the previous year, since during the second
half of the year Company took steps to control these costs by reducing
management and employees and promotional and investor relation activities.
Management will continue to review and control these costs, but believes general
and administrative expenses in fiscal 2000 will increase due to management and
human resource requirements for the Company should sales and other commerical
acitivities increase.
During fiscal year end, 1999 after periodically evaluating the
recoverability of intangible assets, the Company recorded expense of $447,424
related to the impairment of certain intangible assets. The circumstances giving
rise to the impairment include, but are not limited to, declines in sales and
volume, de-listing from the NASDAQ Small-Cap Market, reorganization of the
Company personnel, and issues concerning the recoverability of the intangible
assets associated with areas of the Company's business that were being
de-emphasized. Of the impairment amount, approximately, $84,000 related to
patents in Cyclopss Medical, Inc., $107,000 related to patents in the CBC, and
$256,000 related to goodwill and patents in CLS. These assets were written down
to fair value which was based on estimated future cash flows to be generated,
discounted at a market value of interest.
Interest expense declined significantly to $3,863 for fiscal 1999
compared with $111,182 for fiscal 1998, due to the conversion of all long-term
debt to common stock. The Company is not in a financial position to borrow from
traditional sources and anticipates low interest expense in fiscal 2000. The
Company has minimum debt and intends to fund its operations through non-interest
bearing capital sources.
The Company suffered a net loss applicable to common stock for fiscal
1999 of $3,232,857, or $.19 per share. The loss incurred for the previous year
was $3,082,757, or $.22 per share. The increase in the net loss is attributable
to the non-cash preferred dividends recorded in connection with the issuance of
Series "C" preferred stock. The decrease in the net loss per common share
primarily resulted from the increase of 2,453,614 shares of common stock issued
in fiscal 1999. The Company anticipates that it will operate at a loss for the
year ending February 28, 2000. However, if revenues of CLS, EFS and CBC
increase, it is anticipated that losses will begin to diminish.
The Company believes that three of its subsidaries, namely Eco-Pure Food
Safety Systems, Inc., Cyclopss Laundry 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 divisions of the Company.
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Liquidity and Capital Resources
As of the date of this filing, the Company has sustained significant net
losses which have resulted in an accumulated deficit at February 28, 1999 of
$17,185,231 and has experienced 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, 1999 was $3,232,857. 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 29, 2000, and with a cash balance of
$36,018 at February 28, 1999 and expected cash requirements for the coming year,
there is substantial doubt as to the Company's ability to continue operations.
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 believes
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; however, no assurances can be given that sales will be
generated or that funding will be raised. 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 equity financing to pay the
shortfall, the Company will seek direction from the Board of Directors as to
what action must be taken.
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, initiated a private placement of the Company's restricted common stock.
Again, 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 heretofor and in the
remainder of this section.
Shares issued and outstanding for February 28, 1999 were 17,599,482,
compared to 15,145,868 for the prior year. Common shares increased due to
additional financing that occurred in 1999, for a total of 1,395,140 new common
shares. This financing raised $1,743,925 ($1,500,821 in net proceeds).
Cash used in operating activities was $2,105,085 for the year ended
February 28,1999, compared with $1,709,955 for the year ended February 28,1998,
an increase of $395,130 (23%). The Company's use of cash in the year ended
February 29, 1998 was more aggressive than the previous year as the Company
experienced significant general and administrative expenses in the first half of
the year, due to an increase in management and marketing costs. The use of the
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Company's cash reserves were decreased during the second half as a result of
more conservative expenditures during this period and the resignation of the
Company's Chief Executive Officer and elimination of sales personnel.
Cash expenditures for property and equipment and patents were $126,021
for the year ended February 28, 1999 compared with $24,485 for the year ended
February 28, 1998. This significant increase was the result of the Company
increasing purchases of equipment principally for Eco-Pure Food Processing
Systems.
Net cash provided by financing activities was $1,693,963. This amount
compares to $1,031,965 for the year ended February 28, 1998. These amounts for
both years, were mostly comprised of issuance of common or preferred stock in
offerings done through First Financial investment Securities.
Total assets decreased to $593,607 for the year ended February 28, 1999
from $1,968,130 for the year ended February 28, 1998, a decrease of $1,374,523
(70%), primarily due to decrease in the Company's cash position, and the write
off of certain impaired patents and goodwill.
Total current liabilities decreased to $397,678 at February 28, 1999
from $814,275 at February 28, 1998, a decrease of $416,597 (51%), due to a
decrease in accounts payable, from $676,823 last year to $239,140 for February
28, 1999. The decline in accounts payable is attributable to a more concerted
effort by the Company to reduce expenditures and conserve cash in the latter
half of fiscal 1999.
The Company's financing transactions for the year ended February 28,
1999 are further described here. During the period of March 9, 1998 to April 15,
1998, the Company authorized and offered its restricted common shares to
accredited investors in an offering made persuant to a Board Resolution on march
3, 1998 through First Financial Investment Securities, Inc. Subscribers
purchased 1,395,140 of such shares in this offering for a total net proceeds of
$1,500,821. These shares were sold for $1.25 each and each share carries a
redeemable class "AA" Warrant entitling the owner to purchase one share of
common stock at a price of $3.75 per share.
During the period of September 28, 1998 to April 15, 1999 the Company
authorized and offered its Series "C" preferred shares to accredited investors
in an offering made persuant to Regulation S of the Securities Exchange Act, and
a Board Resolution on September 10, 1998. As of year end February 28, 1999, six
subscribers purchased such shares in this offering for a total of $206,000.
Subsequent to year end, an additional 156,825 shares were accepted under the
subscription plan. Series "C" preferred shares at $.10 (ten cents) per share.
On April 19, 1999, the Company's Board of Directors engaged an
investment banking firm to offer its restricted common shares to accredited
investors in an offering for a minimum of $1,000,000 and a maximum of
$2,000,000. These shares are being offered at $.20 (twenty cents) each.
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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. There is substantial concern that if the Year 2000 problem is not
adequately addressed, there may be widespread problems with computer
applications in all areas of use, potentially affecting the global economy.
If the Company's internal systems and products do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on the Company's operations. Additionally, if the Company's
supplier, customers, and other parties experience Y2K difficulties, the Company
could be adversely affected. The Company is continuing the process of assessing
and correcting potential Year 2000 problems with the Company's operations.
The Company has assessed the potential impact of this issue on its
business and operations as being minor. With regard to its information systems
(financial, supply, inventory, order, office support, etc.) the Company has
developed and begun implementing a plan to convert all necessary systems to be
ready for the year 2000. The Company does not believe the Year 2000 issue will
have a material effect on the Compny's internal accounting and information
systems, most of which consist of relatively inexpensive off-the-shelf software
packages. Costs incurred to date to modify systems have been insignificant and
remaining costs to modify IT systems are expected to be less than $5,000.
With regard to its non-information system operations, the Company is in
the process of reviewing and correcting Y2K problems in the following areas:
products currently manufactured by the Company and manufacturing and engineering
systems. This review is approximately 95% complete and the Company has been able
to correct or plans to correct prior to 2000 each material Y2K issue identified
in the review.
With regard to potential Y2K issues for the Company's major material
suppliers, the Company is in the process of communicating with such parties.
Although not all major suppliers have indicated their Y2K compliance, the
Company has not yet identified any major supplier that believes it will be
unable to operate due to Y2K problems in 2000. Generally, the Company has
alternative sources for supplies in the event a supplier experiences such
difficulties and the Company does not presently anticipate material difficulties
in obtaining materials due to suppliers' Y2K problems.
With regard to major customers, the Company has had communications with
such parties and is reviewing responses regarding the Companies Y2K compliance.
To date, the Company has insufficient information from such parties to determine
the potential impact on the Company if such parties experience Y2K difficulties.
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With regard to third-party utilities and services (for example,
telephone electrical, bankcard processing and shipping services), the Company
has no plans to evaluate the Y2K readiness of such providers.
The Company anticipates that the material risks related to its
information and non- information systems will be timely mitigated by current
efforts being made by the Company to identify and correct internal Y2K problems.
However, there is no guarantee that the Company will successfully identify or
correct all Y2K problems in a timely manner. In some cases, problems may be
unforeseen, and occur regardless of the testing and review that is done.
Additionally, a major potential Y2K risk to the Company's operations is
service disruption from third-party providers that supply telephone, electrical,
banking and shipping services. Any disruption of these critical services would
hinder the Company's ability to receive, process and ship orders.
Plan of Operation
The Company's Plan of Operation is solely subject to availability of
additional capital, of which there can no assurance. As stated elsewhere in the
10-KSB, the Company continues to operate at a significant loss and continues to
have insufficient capital for operations; however, Management is currently
working on completing a Private Placementof the Company's restricted common
shares that it believes will provide additional capital.
In late 1997 the Electrical Power Research Institute (EPRI) self
affirmed ozone as being Generally Regarded As Safe (GRAS) allowing food
processors to use ozone in the processing of certain food items. The Companys
expertise in ozone applications combined with the aggressive public relations
activities of early 1998 created substantial interest in the food
decontamination potential of the Company's technologies. However, those
interested parties anticipated proven turnkey solutions, and were not initially
prepared to contribute resources towards the development work and expenses
necessary to ultimately provide the solution. The Company has been aggressively
seeking customers and strategic partners who are sufficiently convinced of the
potential to pro-actively participate in necessary research and development
costs. These customers and strategic partners not only may provide revenues from
possible R&D contracts but also follow-on revenues from the purchase of systems
and processes. These installed systems will be used as demonstration sites, and
will further validate the technologies.
The Company currently has provided a major food producer with prototype
ECO-PURE test systemsthat have been installed in wet produce processing plants,
long-term onion storage facilities, short term banana and tomato ripening rooms,
and is developing systems for another major customer for use in treatment of
herbal remedies and dietary supplements.
The Company continues to pursue strategic partners who are willing to
advance resources and expenses in contract R&D relationships that not only
provide revenues and working capital for the Company but, if successful, create
a captive customer for future products.
25
<PAGE>
Until such time as additional monies are raised and the Company can
execute its broader sales and marketing plan, management anticipates its primary
revenues will be generated through the R&D contracts and the resulting sale of
systems engineered from, and sold to, the parties funding the specific R&D
activities.
The Company is, as of the time of this filing, the subject of two
separate due diligence efforts. The parties engaged in these two separate due
diligence processes are both confined by stringent Confidential Disclosure
Agreements which protect the Company's intellectual properties. These companies
are both significant purveyors to the target markets of the Company. Should
these due diligence efforts provide positive results, the Company may have an
opportunity to engage a strategic partner, and the Company's revenues as well as
the source of those revenues will change significantly. However, there can be no
assurance that these due dilligence agreements will be completed or that such
efforts will gain any significant market accpetance in the intended target
markets, even if a partnership agreement is reached.
Even with sufficient funds available, the ongoing challenge facing the
Company 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 continue to be driven by customer requests and
increased sales will be derived from contract product development. Current sales
activities will be evaluated and alternatives looked for to improve profit
margins. Joint efforts will continue with Foster Miller, Inc., in efforts to
create a market for Biochem's monomer to the aerospace industry.
Given the Company's generally illiquid cash position and limited
capital, there can be no assurances that the Company will be able to effectively
execute its plan of operations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required with respect to this Item 7, see "Consolidated
Financial Statements and Schedules".
26
<PAGE>
Cyclo3pss Corporation
Consolidated Financial Statements
Years ended February 28, 1999 and 1998
Contents
Report of Independent Auditors............................................ 28
Consolidated Financial Statements:
Consolidated Balance Sheets ............................................ 29
Consolidated Statements of Operations .................................. 31
Consolidated Statements of Stockholders' Equity ........................ 32
Consolidated Statements of Cash Flows .................................. 34
Notes to Consolidated Financial Statements ............................. 35
27
<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, 1999 and 1998, 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, 1999 and 1998, 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, 1999 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.
/s/ Ernst & Young LLP
Salt Lake City, Utah
May 11, 1999
28
<PAGE>
Cyclo3pss Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28
1999 1998
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 36,018 573,161
Accounts receivable, less allowance for doubtful
accounts of $17,000 in 1999 and $2,000 in 1998 47,578 113,090
Inventories 65,348 152,026
Prepaid expenses 45,128 75,526
--------------------------------
Total current assets 194,072 913,803
Property and equipment, net 232,935 236,780
Other assets:
Goodwill, net - 311,887
Acquired patents, net 109,210 368,941
Developed patents, net 52,170 117,118
Other 5,220 19,601
--------------------------------
$ 593,607 $1,968,130
================================
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
February 28
1999 1998
--------------------------------
<S> <C> <C>
Liabilities and stockholders' equity Current liabilities:
Accounts payable $239,140 $676,823
Accrued liabilities 149,033 112,789
Current portion of capital lease obligations 9,505 24,663
--------------------------------
Total current liabilities 397,678 814,275
Long-term portion of capital lease obligations 3,778 13,278
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, 1,187 and 1,932 shares issued and
outstanding in 1999 and 1998, respectively
(liquidation preference of $1,848,364) 12 19
Series "C" convertible preferred stock; 550 shares
authorized, 206 shares and none issued and
outstanding in 1999 and 1998, respectively
(liquidation preference of $267,800) 2 -
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; 17,599,482 shares and 15,145,868 shares
issued in 1999 and 1998, respectively 17,599 15,146
Additional paid-in capital 17,860,958 16,034,785
Accumulated deficit (17,185,231) (14,408,184)
Less treasury stock, 264,000 common shares at cost (501,545) (501,545)
--------------------------------
Total stockholders' equity 192,151 1,140,577
$593,607 $1,968,130
================================
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE>
Cyclo3pss Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended
February 28
1999 1998
----------------------------------
<S> <C> <C>
Net revenues $832,168 $1,205,105
Costs and expenses:
Cost of sales 615,549 1,093,656
Research and development 289,147 244,282
Selling and marketing 145,162 326,732
General and administrative 1,781,747 1,978,591
Depreciation and amortization 333,389 426,353
Impairment of intangible assets 447,424 -
----------------------------------
3,612,418 4,069,614
----------------------------------
Loss from operations (2,780,250) (2,864,509)
Interest income and other 7,066 47,494
Interest expense (3,863) (111,182)
Net loss (2,777,047) (2,928,197)
Preferred stock dividends (455,810) (154,560)
----------------------------------
Net loss applicable to common stock $(3,232,857) $(3,082,757)
==================================
Basic and diluted net loss per common share $(.19) $(.22)
==================================
Weighted average number of common shares - basic and
diluted 17,457,109 13,853,892
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Cyclo3pss Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series "A" Series "B" Series "C"
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
Shares Amounts Shares Amounts Shares Amounts
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1997 35,638 $356 1,935 $19 - $ -
Issuances of common stock for cash - - - - - -
Conversions of long-term debt and
accrued interest to common stock - - - - - -
Issuances of common stock in
connection with business purchase - - - - - -
Conversions of Series "B" preferred
stock to common stock - - (3) - - -
Conversions of Series "B" dividends
to common stock - - - - - -
Amortization of deferred
compensation - - - - - -
Interest expense related to warrants - - - - - -
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 - -
Issuances of common stock and
warrants for cash - - - - - -
Exercise of stock options - - - - - -
Revaluation of Class A Warrant - - - - - -
Issuance of Series "C" convertible
preferred stock - - - - 206 2
Conversions of Series "B" preferred
stock to common stock - - (745) (7) - -
Conversions of Series "B" dividends
to common stock - - - - - -
Net loss - - - - - -
Recognition of paid-in-kind stock
dividends on Series "B" preferred
stock (See Note 7) - - - - - -
---------------------------------------------------------------------------------
Balances at February 28, 1999 35,638 $356 1,187 $12 206 $2
=================================================================================
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Additional Treasury Stock
Common Stock Paid-in Accumulated Deferred (Common)
Shares Amounts Capital Deficit Compensation Shares Amounts Total
- ------------ ----------- ------------ ------------- -------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
12,793,440 $12,793 $13,546,195 $(11,479,987) $(168,000) 264,000 $(501,545) $1,409,831
1,000,000 1,000 1,056,500 - - - - 1,057,500
1,305,852 1,306 1,404,757 - - - - 1,406,063
41,676 42 (42) - - - - -
4,703 5 (5) - - - - -
197 - - - - - - -
- - - - 168,000 - - 168,000
- - 27,380 - - - - 27,380
- - - (2,928,197) - - - (2,928,197)
- - - - - - - -
- ------------ ----------- ------------ ------------- -------------- ------------ ----------- ---------------
15,145,868 15,146 16,034,785 (14,408,184) - 264,000 (501,545) 1,140,577
1,395,140 1,395 1,499,426 - - - - 1,500,821
10,000 10 11,790 - - - - 11,800
- - 110,000 - - - - 110,000
- - 205,998 - - - - 206,000
880,046 880 (873) - - - - -
168,428 168 (168) - - - - -
- - - (2,777,047) - - - (2,777,047)
- - - - - - - -
- ------------ ----------- ------------ ------------- -------------- ------------ ----------- ---------------
17,599,482 $17,599 $17,860,958 $(17,185,231) $ - 264,000 $(501,545) $ 192,151
============ =========== ============ ============= ============== ============ =========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
Cyclo3pss Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
February 28
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,777,047) $(2,928,197)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 113,728 143,660
Amortization 219,661 282,693
Impairment on intangible assets 447,424 -
Revaluation of Class A Warrant 110,000 -
Common stock issued for services - 168,000
Interest expense on convertible debt - 98,333
Interest expense on warrants with convertible debt - 27,380
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 65,512 (15,485)
Decrease (increase) in inventories 86,678 (51,442)
Decrease in prepaid expenses and other 30,398 19,300
(Decrease) increase in accounts payable and accrued
liabilities (401,439) 545,803
---------------- ----------------
Net cash used in operating activities (2,105,085) (1,709,955)
Cash flows from investing activities:
Purchase of property and equipment (109,883) (9,446)
Increase in developed patents (16,138) (15,039)
---------------- ----------------
Net cash used in investing activities (126,021) (24,485)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,500,821 1,057,500
Proceeds from exercise of stock options 11,800 -
Proceeds from issuance of preferred stock 206,000 -
Principal payments under capital lease obligations (24,658) (25,535)
---------------- ----------------
Net cash provided by financing activities 1,693,963 1,031,965
---------------- ----------------
Net decrease in cash and cash equivalents (537,143) (702,475)
Cash and cash equivalents at beginning of year 573,161 1,275,636
---------------- ----------------
Cash and cash equivalents at end of year $ 36,018 $ 573,161
================ ================
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
See accompanying notes to consolidated financial statements.
</TABLE>
34
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies
Organization
The Corporation was formed in Delaware in 1927. In 1990, the Corporation was
reorganized as Cyclo3pss Medical Systems, Inc. In 1995, the Company changed its
name to Cyclo3pss Corporation (the Company). The Company is engaged in the
manufacture, sale and installation of ozone 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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
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.
36
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories consist of raw materials and work-in-process and are stated at
the lower of cost or market, cost being determined using the first-in, first-out
(FIFO) method. Inventories consist of the following:
February 28
1999 1998
------------------ -----------------
Raw materials $65,348 $131,114
Work-in-process - 20,912
------------------ -----------------
$65,348 $152,026
================== =================
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
1999 1998
----------------- ------------------
Equipment $638,837 $559,241
Furniture and fixtures 83,971 85,528
Leasehold improvements 114,717 101,390
----------------- ------------------
837,525 746,159
Less: accumulated depreciation and
amortization (604,590) (509,379)
----------------- ------------------
$232,935 $236,780
================= ==================
Property and equipment includes $81,022, and $94,905 of equipment under capital
leases at February 28, 1999 and 1998, respectively. Accumulated depreciation for
such equipment was $47,665 and $38,082 at February 28, 1999 and 1998,
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.
37
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Intangible assets
Intangible assets consist primarily of acquired patents that are recorded at the
lower of cost or their net realizable value. Goodwill is amortized over five
years. Accumulated amortization for goodwill was $1,142,436 and $830,549 at
February 28, 1999 and 1998, respectively. 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 $336,159 and $164,071 at February 28, 1999
and 1998, respectively. 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
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed Of, the
Company reviews long-lived and intangible assets for impairment whenever events
or circumstances indicate the carrying value of an asset may not be recoverable.
For the year ended February 28, 1999, the Company recorded expense of $447,424
related to impairment of certain of its intangible assets. The circumstances
giving rise to the impairment include, but are not limited to, declines in sales
and volume, de-listing from the NASDAQ Small-Cap Market, reorganization of
Company personnel and issues concerning the recoverability of the intangible
assets associated with areas of the Company's business that were being
de-emphasized. Of the impairment amount, approximately, $84,000 related to
patents in the medical products segment, $107,000 related to patents in the
biochemical products segment, and $256,000 related to goodwill and patents in
the textile products segments (See Note 9 for a description of segments). Fair
value was based on estimated future cash flows to be generated, discounted at a
market rate of interest.
Income Taxes
The Company accounts for income taxes using the liability method pursuant to
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. The liability method requires that the expected future consequences of
temporary differences between the tax and reporting basis of assets and
liabilities be recognized as deferred tax assets and liabilities.
38
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options rather than adopting the alternative
fair value accounting provided for under FASB Statement No. 123, Accounting for
Stock-based Compensation (SFAS 123). Under APB 25, because the exercise price of
the Company's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Revenue Recognition
Revenue is recognized upon shipment, or in the case of washing and laundry
systems, upon 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 $77,683 and $52,118, respectively for the years ended
February 28, 1999 and 1998.
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
Basic net loss per common share is calculated by dividing net loss for the
period by the weighted-average number of the Company's common shares
outstanding. Because the Company reported a net loss for each of the fiscal
years ended February 28, 1999 and 1998,
39
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
all common stock equivalents are anti-dilutive and accordingly have been
excluded from the earnings per common share computation.
Options and warrants to purchase 5,519,173 and 3,737,421 shares of common stock
were outstanding at February 28, 1999 and 1998, respectively, but were not
included in the computation of diluted earnings per common share because they
were anti-dilutive.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income, which
is effective for fiscal years beginning after December 15, 1997. SFAS No. 130
requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The items of
other comprehensive income that are typically required to be displayed are
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. There
were no items of other comprehensive income in 1999 or prior.
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, 1999 of $17,185,231, 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, 1999 was $3,232,857. 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 29, 2000, and with a cash balance of
$36,018 at February 28, 1999 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
40
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation (continued)
technology companies having financial, production and marketing resources
significantly greater than those of the Company.
The Company is attempting to improve these conditions by way of financial
assistance through collaborative partnering agreements, issuances of additional
equity, debt arrangements, and product sales. Management believes 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; however, no assurances can be given that sales will be generated or
that the additional necessary funding will be raised.
3. Accrued Liabilities
Accrued liabilities consist of the following:
February 28
1998 1998
------------------ -----------------
Accrued payroll and payroll taxes $121,483 $ 67,787
Accrued vacation 24,865 45,002
Other 2,685 -
------------------ -----------------
$149,033 $112,789
================== =================
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 accrues at 12% per year on the principal
balance. The debt is 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.
41
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
4. Long-Term Debt (continued)
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 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
2000 $ 10,374
2001 3,915
-----------------
Future minimum lease payments 14,289
Amounts representing interest (1,006)
-----------------
Present value of future minimum lease obligations 13,283
Amounts due within one year (9,505)
-----------------
Amounts due after one year $3,778
=================
Interest paid and expensed for capital lease obligations was $3,645 and $7,662
for the years ended February 28, 1999 and February 28, 1998, respectively.
The Company leases office facilities and office equipment under noncancelable
operating leases. Rent expense under these leases was $107,149 and $107,695 for
the years ended February 28, 1999 and, 1998, respectively. The future minimum
operating lease payments are $53,557, $53,976, $46,728, and none for the years
ended February 28, 2000, 2001, 2002, and 2003 and beyond, respectively
42
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
As of February 28, 1999, the Company had federal and state net loss
carryforwards of approximately $15,482,000 and $11,699,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $137,000. The net operating loss and credit carryforwards will
expire at various dates beginning on 2003 through 2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of February 28, 1999 and February 28, 1998 are
as follows:
February 28
1999 1998
----------------- -----------------
Deferred tax assets:
Net operating loss carryforwards $5,650,000 $4,822,000
Research credit carryforwards 137,000 119,000
5,787,000 4,941,000
Valuation allowance (5,787,000) (4,941,000)
----------------- -----------------
$ - $ -
================= =================
The net valuation allowance increased by $846,000 and $1,078,000 during the
years ended February 28, 1999 and 1998, respectively.
7. Stockholders' Equity
Common Stock
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 were 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.
43
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
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 exercise price of the Class A
Warrant was reduced to $.50 by a resolution of the Board of Directors on October
28, 1999. The shares underlying the warrants were registered in December 1997.
On February 27, 1998, the Board of Directors approved a private placement
offering of its restricted common shares to accredited investors. The Company
issued 1,395,140 units for $1,743,925 (net proceeds of $1,500,821). Each unit
consists of one restricted share of common stock and one warrant convertible
into one share of common stock at $3.75 per share.
At February 28, 1999, the Company had reserved 5,519,173 shares of common stock
for future issuance, including 4,086,173 shares reserved for exercise of
warrants and 1,433,000 shares for the exercise of stock options.
Preferred Stock
Series "A"
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.
44
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Series "B"
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, payable 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. The Company also recorded the required 8% dividend in
additional preferred stock, rather than cash and, accordingly, accrued $141,660
and $154,560 for the years ended February 28, 1999 and 1998 in paid-in-kind
stock dividends as an adjustment to additional paid in capital.
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. For the year ended February 28,
1999, 745 shares of series "B" convertible preferred stock and related accrued
dividends of $140,406 were converted into 880,046 and 168,428, respectively,
shares of common stock.
At February 28, 1999 and 1998, the Company had aggregate accrued and unpaid
preferred stock dividends of $245,914 and $242,455, respectively.
Series "C"
On September 10, 1998, the Board of Directors authorized for issuance 550 shares
of Series "C" convertible preferred stock with a $0.01 par value and a stated
value of $1,000 per share. Each Series "C" preferred share is convertible from
the subscription date into 10,000 common shares. These shares do not have voting
rights or preemptive rights to acquire other securities. These subscriptions are
entitled to registration rights. The shares provide for payment of cumulative
dividends at 10% annually, payable in cash or stock at the
45
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Company's option, and include a liquidation preference equal to $1,000 per share
together with all accrued and unpaid dividends.
Because the Series "C" preferred shares have conversion rights at a discount
from the market price on the date of subscription, the Company has reflected a
dividend to shareholders of Series "C" in the earnings per share calculation,
which reflects the assured incremental yield on preferred stock that is embedded
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
$309,000. Additionally, the Company recorded the required 10% dividend in
additional preferred stock, rather than cash and, accordingly, accrued $5,150
for the year ended February 28, 1999, in paid-in-kind stock dividends as an
adjustment to additional paid in capital.
For the year ended February 28, 1999, 206 shares of Series "C" convertible
preferred stock had been issued for net proceeds of $206,000, none of which have
been converted.
Stock Options
On August 31, 1993, the Company entered into employment agreements with three
key employees for a three year period commencing September 1, 1993. Under the
terms of these contracts, each employee was granted options to purchase 100,000
common shares per year at $1.85 per share, which approximated the fair value of
the common shares at the date of grant. On October 21, 1994, one of these
employees was terminated and the corresponding options were canceled. At
February 28, 1999, options to purchase 662,500 shares of common stock were
exercisable under these 1993 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, 1999,
a total of 200,000 shares were exercisable under the 1996 employment agreements.
On August 26, 1993, the Board of Directors granted each of the five non-employee
directors options to purchase 15,000 common shares at an exercise price of $1.85
per share, which was the fair market value at the date of grant. The options
vest at a rate of 5,000 shares annually at the time of each Annual Meeting of
Stockholders, commencing with the 1994 Annual Meeting of Stockholders. At
February 28, 1999, a total of 75,000 options were exercisable, none of which
have been exercised as of February 28, 1998.
46
46
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
On December 21, 1992, the Company adopted a stock incentive plan which provides
for the issuance of options to employees to purchase up to an aggregate of
270,000 common shares. All options are granted at no less than the fair market
value of the common shares on the date of grant, as determined by the Board of
Directors. The options vest beginning one year subsequent to the date of grant
and expire on the earlier of seven years from the date of vesting or termination
of employment.
Pro forma information regarding net income (loss) and earnings (loss) 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 1999 and 1998, respectively: risk-free interest rates of 5.30%
and 6.00%; dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of 3.853 and .811; and a weighted-average expected
life of the options of 3 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:
1999 1998
---------------- ---------------
Pro forma net loss applicable to common stock $(3,188,548) $(3,265,953)
Pro forma net loss per common share (.18) (0.24)
Because the effect of SFAS 123 is prospective, the initial impact on pro forma
net income (loss) may not be representative of compensation expense in future
years.
47
47
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
A summary of stock option activity, and related information for the years ended
February 28, 1998 and 1999 follows:
<TABLE>
<CAPTION>
Outstanding Stock Options
Shares ----------------------------- Weighted-
Available Number of Price Average
for Grant Shares Per Share Exercise Price
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at February 29, 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
Options granted (34,875) 34,875 $.25-1.99 $1.43
Options exercised - (10,000) $1.18 $1.18
Options canceled 248,499 (248,499) $.94-6.03 $2.11
-------------- -------------- -------------- --------------
Balance at February 28, 1999 398,625 1,034,375 $.10-5.44 $1.72
============== ============== ============== ==============
</TABLE>
The weighted average fair value of options granted in the year ended February
28, 1999 and 1998, were $1.43 and $.52, 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.
48
48
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Below are the segregated ranges of exercise prices as of February 28, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------- ------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$.25 11,250 8.2 years $ .25 - $ -
$.94-1.07 215,000 7.3 years $1.06 205,000 $1.07
$1.75-1.99 790,125 3.1 years $1.85 766,500 $1.85
$2.79-5.44 18,000 6.2 years $4.56 18,000 $4.56
- ------------- ------------- ------------- ------------- ----------- -----------
$2.50-5.00 1,034,375 4.6 years $1.72 989,500 $1.73
============= ============= ============= ============= =========== ===========
</TABLE>
Warrants
In connection with the issuance of $3,000,000 in convertible debt approved by
the Board of Directors for the year ended February 28, 1997, 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. Note holders were entitled to exercise their warrants to purchase
264,000 shares of common stock. Each warrant was exercisable for a period of 5
years from the date of the closing of each loan. In August 1997, the exercise
price of the underlying shares was reduced to $2.00 per share for the notes
converted.
In October 1997, the Company issued 1,000,000 Class A Warrants and 1,000,000
Class B Warrants in connection with a $1,250,000 private placement offering, as
discussed above. On October 28, 1998, the Board reduced the exercise price on
the Class A Warrants to $.50 and extended the expiration date to December 11,
1999. In conjunction with the reduction in the exercise price and the extension
of the expiration date, the Company recorded additional expense of $110,000. The
Class B Warrants expire three years from the date of the offering.
49
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
In connection with this private placement offering, the Company issued the
brokers warrants to purchase 100,000 shares of common stock at $1.25 per share.
The underwriters paid a price of $.001 per warrant. These warrants expire 4
years from the date of the offering. The underwriters' warrants are restricted
from exercise for a period of one year commencing from the offering date.
In December 1997, the Company issued warrants, related to financing
services provided by an investment bank, to purchase 215,422 shares of common
stock at $4.00 per share. These warrants expire December 10, 2000.
In connection with a private placement offering approved by the Board of
Directors on February 27, 1998, the Company issued 1,395,140 warrants at an
exercise price of $3.75 per share. The warrants expire one year from the
offering date, assuming the warrant holders do not exercise their demand
registration rights.
In connection with the private placement offering approved by the Board of
Directors on February 27, 1998, the Company issued the brokers warrants to
purchase 111,611 shares of common stock with an exercise price of $1.25 per
share. The underwriters paid a price of $.001 per warrant. These warrants expire
4 years from the date of the offering. The underwriters' warrants are restricted
from exercise for a period of one year commencing from the offering date.
As of February 28, 1999, none of the above warrants have been exercised.
8. Contingencies
During the period from May through August 1996, the Company sold its Series "B"
preferred stock in a private placement offering to certain investors pursuant to
the provisions of Securities and Exchange Commission Regulation S. One of the
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 Series "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
50
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
8. Contingencies (continued)
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 Series "B" preferred shares into unrestricted common stock
of the Company. The
Company and Mifal Klita are currently in negotiations seeking to resolve the
dispute without further litigation. 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.
The Company is involved in 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 1999 and 1998, the Company operated in three principal industries;
the manufacture, sale and installation of ozone food processing products ("food
processing 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"). For the year ended February 28, 1998, the
Company incurred certain research and development costs in developing
technologies for the sterilization and/or disinfection of surgical and medical
instruments ("medical products"). Operations related to medical products were
suspended in early fiscal 1998 in order to conserve available cash.
Operating profit is total revenue less operating expenses, excluding interest
expense and general corporate expenses. Corporate assets consist primarily of
cash and cash equivalents, other receivables, prepaid expenses, property and
equipment and corporate payables.
For the year ended February 28, 1999, two customers accounted for approximately
36% and 23% of total net revenues for textile products, one customer accounted
for approximately
51
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
9. Segment Information (continued)
Industry Data
100% of total net revenues for food processing products, and three customers
accounted for approximately 20%, 19% and 17% of total net revenues for
biochemical products. For the year ended February 28, 1998, two customers
accounted for approximately 47% and 25% of total net revenues for textile
products, and one customer accounted for approximately 15% of total net revenues
for biochemical products.
Cyclo3pss Corporation and Subsidiaries
Year ended
February 28
1999 1998
-----------------------------------
Net sales and other income:
Medical products $- $-
Food processing products 348,426 -
Textile products 194,145 805,057
Biochemical products 289,597 400,048
-----------------------------------
832,168 1,205,105
Interest income and other 7,066 47,494
-----------------------------------
Total revenue $839,234 $1,252,599
===================================
Operating loss (income)
Medical products $- $294,127
Food processing products 113,089 66,000
Textile products 1,031,381 1,152,294
Biochemical products 79,234 (63,244)
-----------------------------------
Total operating loss 1,223,704 1,449,177
Corporate expenses 1,549,480 1,367,838
Interest expense 3,863 111,182
-----------------------------------
Net loss $2,777,047 $2,928,197
===================================
52
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
Identifiable assets
Medical products $- $88,858
Food processing products 14,316 -
Textile products 364,462 1,100,191
Biochemical products 123,377 373,434
-----------------------------------
487,839 1,562,483
General corporate assets 105,768 405,647
-----------------------------------
Total assets $593,607 $1,968,130
===================================
Depreciation and amortization expense
Medical products $- $16,907
Food processing products 82 -
Textile products 236,489 312,740
Biochemical products 39,866 50,465
Corporate 56,952 46,241
Capital expenditures
Medical products $- $-
Food processing products 614 -
Textile products 97,712 5,149
Biochemical products 492 1,300
Corporate 11,065 2,997
53
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
10. Subsequent Events
In March 1999, in connection with the private placement offering of Series "C"
preferred stock, as mentioned above, the Company sold an additional 157 shares
for net proceeds of $156,875.
On April 19, 1999, the Board of Directors approved stock option grants to two
key members of the management team totaling 800,000 options. These options vest
upon issuance and are exercisable at $.10.
54
<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, 1999.
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
William R. Stoddard 46 President, CEO
Mondis Nkoy 35 Controller, Corporate Secretary
Michael J. Lakis, Jr. 62 Director
Richard C. Nelson 68 Director
Steve Sarich, Jr. 77 Director
Durand M. Smith 51 Director, Vice President of
Reseach and Development
There are no family relationships among the Company's officers and
directors. Background information concerning the Company's officers and
directors is as follows:
William R. Stoddard. Mr. Stoddard has been an officer and director of the
Company since 1990. From 1986 to 1989, Mr. Stoddard was the Chief Financial
Officer of Medivest, Inc. and its subsidiaries. From 1988 to 1990, he was Chief
Financial Officer of Medivest Aviation Group, Inc.
Mondis Nkoy. Ms. Nkoy has been employed as Controller by the Company since
September, 1996. She was also elected as corporate Secretary in October of 1996.
For the three years prior to her appointment as controller she worked as an
assistant to the controller of the Company. Previous to this time she was
working 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 board of directors on December 1,
1997. 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.
55
<PAGE>
Richard C. Nelson. Mr. Nelson joined the Company on March 24, 1999,
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.
Durand M. Smith, PhD Dr. Smith has been the Vice President of Research and
Developmet for the Company since March of 1998 and has been a director of the
Company since April of 1999. Dr. Smith is the former Manager of Advanced Space
Programs for General Electric's Aerospace and Defense Group (1973- 1988) and
Vice President of Engineering for Ithaco Inc, a spacecraft-hardware-engineering
firm (1988-1993). Dr Smith also served as COO of Orion International
Technologies (1993-1996), an engineering services company. Prior to joining
Cyclopss, Dr. Smith served as the Governor's Science Advisor for the State of
New Mexico.
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 exceede 000:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------ --------------------------
Awards Payouts
Options
Name and Principal Position Year Salary Bonus Compensation Stock Awards SAR's(#) LTIP Payouts Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William R. Stoddard 1999 $150,000(2) -0- -0- 450,000(1) -0- -0- -0-
Chairman, CEO 1998 $150,000 -0- -0- -0- -0- -0- -0-
1997 $96,000 -0- -0- 100,000(1) -0- -0- -0-
John M. Williams 1999 -0- -0- -0- -0- -0- -0- -0-
Chairman/CEO 1998 $96,000 -0- -0- -0- -0- -0- -0-
(Retired December 1997 $96,000 -0- -0- 100,000(1) -0- -0- -0-
1997)
Durand M. Smith 1999 $120,000 -0- -0- 350,000(1) -0- -0- -0-
Vice President, Research and Development
Gary Bratcher 1999 $235,000 -0- -0- -0- -0- -0- -0-
Chairman, CEO (March of 1999 to resignation August of 1999)
</TABLE>
(1) Options to acquire shares of common stock
(2) William R. Stoddard has deferred $59,375 of his annual salary as of
year end, due to cash constraints of the Company
56
<PAGE>
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 was 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 Price that was 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 Opeions
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 the 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 800,000 shares owned by Mr.
Williams and Mr. Stoddard, which vested during the four prior employmane years
were all
On April 19, 1999 an additional grant was made for 450,000 shares to Mr.
Stoddard at $.10 per share. At the same time, additional options were granted
for Dr. Durand Smith for 350,000 shares at $.10 per share. These options vested
on the date of grant and were excercisable on that date. A Form S-8 was filed on
May 13, 1999 to register common shares underlying these options.
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 were
exercisable one year after the grant date at 5,000 shares a year, for three
years. On April 19, 1999 these 15,000 shares were repriced to $.10 per share and
the options became immediately vested. The underlying shares were registered on
the Form S-8 mentioned above, on May 13, 1999.
As of May 28, 1999 none of the options granted in the Employment Agreements
have been exercised. The Options granted in the original three-year Employment
Agreements were approved by the Company's stockholders at the Annual Meeting of
Stockholders held
57
57
<PAGE>
December 10, 1993. The shares of common stock underlying the originally granted
Options were registered by the Company with the filing of Form S-8 dated August
31, 1995, and May 13, 1999, which is incorporated herein by reference.
<TABLE>
<CAPTION>
Option/SAR Grants in last fiscal year
Individual Grants
---------------------------------------
Number of Securities % of Total options/SAR
underlying Options/SARs Granted to employees Exercise or
Name Granted (#) In fiscal year Base price Expiration Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William R. Stoddard 450,000 54% $ .10 4/19/2004
Durand Smith 350,000 42% $ .10 4/19/2004
</TABLE>
Aggregate Option Exercises and Number/Value of Unexercised Options
The following table provides information concerning the exercise of options
during the last fiscal year by persons named in the Summary Compensation Table,
the number of unexercised options held by such persons at the end of the last
fiscal year, and the value of such unexercised options as of such date:
<TABLE>
<CAPTION>
Nature of Value of Unexercised
Shares Acquired Values Unexercised Options In-the-Money Options
Name on Exercise (#) Realized ($ ) at 2/28/99 (#) at 2/28/99 ($)(1)
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William R. Stoddard -0- -0- 850,000 -0- -0- -0-
John M. Williams -0- -0- 400,000 -0- -0- -0-
Durand Smith -0- -0- 350,000 -0- -0- -0-
</TABLE>
1 An "In-the-Money" stock option is an option for which the market price of the
Company's Common Stock underlying the option on February 28, 1999 exceeded the
option exercise price. The value shown is calculated by multiplying the number
of unexercised options by the difference between (I) the closing price for the
Common Stock on Small Cap Bulletin Board Market on February 28, 1999 ($. 09) and
(ii) the exercise price of the stock options ($1.85 for the 300,000 Exercisable
options granted under the original Grant and $1.07 for the 100,000 exercisable
options granted under the extensions; and $.10 for Mr. Stoddard's 450,000 and
Mr. Smith's 350,000 exercisable options).
58
58
<PAGE>
Compensation of Directors
The Company's non-employee directors are paid $500 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 were
granted, they are 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. 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.
59
<PAGE>
Options Granted under the Plan. As of May 15, 1999, the following options
have been granted under the 1992 Stock Incentive Plan:
On March 1, 1993, options to purchase an aggregate of 18,000 shares were
granted to three non-management employees. Such options are exercisable at $1.75
per share for a period of 7 years commencing one year from the date such options
were granted and subject to certain provisions of the Incentive Plan. As of
February 28, 1999 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, 31,000 of these Options canceled pursuant to the terms
of the plan when the optionee's' employment with the Company terminated. As of
February 28, 1999, 13,000 of these Options have been exercised and 5,000 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, 33,000 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, 1999, 12,000 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,
38,500 of these options were canceled pursuant to the terms of the plan when the
employment of the optionee's with the Company terminated. As of February 28,
1999, 6,000 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, 1999 all of these options
have been exercised and none is outstanding.
60
60
<PAGE>
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, 1999, all 15,000 of these options were
still outstanding. The exercise price of these options were changed to $ .10 per
share on April 19, 1999.
On May 1, 1998, options to purchase a total of 23,625 shares were granted to
two employees of the Company, none of whom are officers or directors of the
Company. All of such options are exercisable at $1.99 per share. As of February
28, 1999, all of these options were still outstanding.
On October 1, 1998, options to purchase a total of 11,250 shares were
granted to an employee of the Company, who is not an officer or director of the
Company. All of such options are exercisable at $.25 per share. As of February
28, 1999, all of these options were still outstanding.
As of February 28, 1999, there are 96,875 shares granted and outstanding,
which leaves 136,125 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, 1999, 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:
61
<PAGE>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class Ownership
- -------------------------------------------------------------------------------
William R. Stoddard(2)(3) 968,214 4.4%
3646 West 2100 South
Salt Lake City, UT 84120
Steve Sarich, Jr.(2)(4) 505,059 2.3%
505 Madison Street
Suite 220
Seattle, WA 98104
Mondis Nkoy(2)(5) 21,000 *
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
Durand Smith (7)(2) 351,000 1.6%
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) 1,855,273 8.4%
* Less than 0.1%
(1) As of May 15, 1999, there were 17,599,482 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 5,519,173 shares of the Company's common stock.
Therefore, under the rules of the Securities and Exchange Commission,
there are deemed to be 23,118,655 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, 1999.
(3) Mr. Stoddard is the record owner of 89,642 of these shares. The
968,214 figure includes 850,000 shares which may be acquired by Mr.
Stoddard from the Company pursuant to an employment stock option and
28,572 shares which may be purchased from the Company pursuant to a
Warrant as of May 15, 1999. All of such options and warrants are
currently exercisable.
62
<PAGE>
(4) The 505,059 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
28,572 shares which may be purchased pursuant to a currently
exercisable Warrant as of May 15, 1999. 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 all currently exercisable.
(6) Mr. Lakis is a new director who is currently the record owner of 10
Series "C" preferred shares, which are convertible to 100,000 common
shares. He has no exercisable stock options as of May 15, 1999, nor
has he been granted any options as of May 15, 1999 .
8) Mr. Nelson is a Director who currently has no exercisable stock
options as of May 15, 1999, nor has he been granted any options as of
May 15, 1999.
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:
63
<PAGE>
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)
(1) This individual is a Director of the Company as of May 15, 1999.
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 filed a Form 8-K on May 13, 1999 to register stock options and
shares issued to management on April 19, 1999.
64
<PAGE>
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 28, 1999 By/s/William R. Stoddard
------------------------------
William R. Stoddard
CEO & Chairman
Principal Executive Officer
Date: May 28, 1999 By/s/ Mondis Nkoy
------------------------------
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
65
<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/ William R. Stoddard President May 28, 1999
- -----------------------
William R. Stoddard
/s/ Steve Sarich Jr. Director May 28, 1999
- -----------------------
Steve Sarich, Jr.
/s/ Richard C. Nelson Director May 28, 1999
- -----------------------
Richard C. Nelson
/s/ Michael J. Lakis Director May 28, 1999
- --------------------
Michael J. Lakis
/s/ Durand M. Smith Director May 28, 1999
- -------------------
Durand M. Smith
66
<PAGE>
INDEX TO EXHIBITS
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 and are referred to and incorporated herein by reference.
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- --------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation Form 10-SB, 1993 (1)
3.2 Bylaws Form 10-SB, 1993 (1)
3.2 Amended Certificate of Incorporation Form 8-K, Feb. 1995 (4)
10.1 Agreement with Clean Tech International, Inc. Form 10-SB, 1993 (1)
10.2 Agreement with Chem Biochem Research, Inc. Form 10-SB, 1993 (1)
10.3 1992 Stock Incentive Plan Form 10-SB, 1993 (1)
10.4 Stock Option - Dale Winger Form 10-SB, 1993 (1)
10.5 Lease Agreement Form 10-SB, 1993 (1)
10.6 Employment Agreement - John M. Williams Form 10-SB, 1993 (1)
10.7 Employment Agreement - William R. Stoddard Form 10-SB, 1993 (1)
10.8 Form Indemnification Agreement
(Identical agreement for all officers and directors Form 10-SB, 1993 (1)
10.9 Clean Tech Merger Agreement Form 10-SB, 1993 (1)
10.10 Intex Acquisition Agreement Form 8-K, July 1994 (2)
10.11 Non-Employee Director 1993 Stock Option Plan Form S-8, August 1994 (3)
11.1 Earnings Per Share Calculation Not Applicable
16.1 Change of Independent Auditors Form 8-K, January 1996 (5)
16.2 Consulting Agreement of John Sloan Form 8-K, August 1996 (6)
21.1 Subsidiaries of Registrant Attached (7)
21.2 Consent of Ernst & Young, LLP Attached
</TABLE>
67
<PAGE>
(1) Filed as an Exhibit to the Registrant's Registered Statement on Form
10-SB and incorporated herein by reference
(2) Filed as an Exhibit to the Registrant's Form 8-K dated July 11, 1994
incorporated herein by reference
(3) Filed as an Exhibit to the Registrant's Form S-8 dated August 31, 1994
incorporated herein by reference
(4) Filed as an Exhibit to the Registrant's Form 8-K dated February 2,
1995 incorporated herein by reference
(5) Filed as an Exhibit to the Registrant's Form 8-K dated January 8, 1996
incorporated herein by reference
(6) Filed as an Exhibit to the Registrant's Form 8-K dated August 20, 1996
incorporated herein by reference
(7) Filed as an Exhibit to the Registrant's Form 10-KSB dated for the year
ended February 29, 1996 incorporated herein by reference
68
EXHIBIT 21.1
Subsidiaries of Registrant
Eco-Pure Food Safety Systems, Inc.
Cyclopss Laundry Systems, Inc.
Cyclopss Medical Systems, Inc.
Cyclopss Biochemical Corporation
Cyclopss Wastewater Systems, Inc.
69
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-83586) pertaining to the Cyclo3pss Medical Systems, Inc.
Amended 1992 Stock Option Plan, Cyclo3pss Medical Systems, Inc. 1993
Non-Employee Director Stock Option Plan, and Written Agreements between
Cyclo3pss Medical Systems, Inc. and Certain Officers, Directors, and Employees
of Cyclo3pss Corporation, the Registration Statement (Form S-8 No. 333-10567)
pertaining to the Consulting Agreement of John Sloan; the Registration Statement
(Form S-3 No. 333-41737) and related Prospectus of Cyclo3pss Corporation; and
the Registration Statement (Form S-8 No. 333-78411) pertaining to the Employee
Stock Option Agreement - William R. Stoddard, Employee Stock Option Agreement -
John M. Williams, Employment Agreement - William R. Stoddard, Employment
Agreement - Durrand Smith, Employee Stock Option Agreement - Mondis Nkoy, and
Agreement (Regarding Shares in Lieu of Cash Salary) - William R. Stoddard of
Cyclo3pss Corporation of our report dated May 11, 1999, with respect to the
consolidated financial statements of Cyclo3pss Corporation included in its
Annual Report (Form 10-KSB) for the year ended February 28, 1999.
Salt Lake City, Utah
May 26, 1999
70
<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> 36,018
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> 1
<CASH> 36,018
<SECURITIES> 0
<RECEIVABLES> 47,578
<ALLOWANCES> 17,000
<INVENTORY> 65,348
<CURRENT-ASSETS> 194,072
<PP&E> 232,935
<DEPRECIATION> 113,728
<TOTAL-ASSETS> 593,607
<CURRENT-LIABILITIES> 397,678
<BONDS> 0
0
370
<COMMON> 17,599
<OTHER-SE> 174,182
<TOTAL-LIABILITY-AND-EQUITY> 593,607
<SALES> 832,168
<TOTAL-REVENUES> 832,168
<CGS> 615,549
<TOTAL-COSTS> 3,612,418
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (2,780,250)
<INTEREST-EXPENSE> (3,863)
<INCOME-PRETAX> (2,777,047)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (455,810)
<CHANGES> 0
<NET-INCOME> (3,232,857)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
</TABLE>
