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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 29, 2000
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 office) (Zip Code)
Issuer's telephone number, including area code: (801) 972-9090
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x/ No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x/
The Issuer's revenues for the fiscal year ended February 29, 2000 were $751,542
As of May 15, 2000, 27,235,758 shares of the Issuer's common stock were
issued and outstanding of which 25,795,632 shares were held by non-affiliates.
As of May 15, 2000, the aggregate market value of shares held by non-affiliates
(based upon the closing price reported by OTC Bulletin Board) was approximately
$10,883,177.
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
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 throughout Item I and elsewhere in this report, and other risks
identified from time to time in the Company's filings with the Securities and
Exchange Commission, press releases and other communications. The Company
assumes no obligation to update forward-looking statements.
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 auditors have included an
explanatory paragraph in their report on the Company's financial statements for
the period ended February 29, 2000, 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 29, 2000 was
$2,194,760. 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 28, 2001, and with a
cash balance of $107,565 at February 29, 2000 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 royalty
revenues generated from licensing agreements, financial assistance through
collaborative partnering agreements, issuances of additional equity, debt
arrangements, and limited direct product sales. Management
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believes that appropriate revenues will be generated and future product sales
and royalties will result from these opportunities and that the Company will
continue operations over the next fiscal year; however, no assurances can be
given that revenues will be generated or additional funding will be available.
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.
Although the Company has instituted aggressive cash management practices and
severely reduced operating costs, even with the prospects of royalty revenue and
limited direct sale of products, there can be no assurance that the Company will
generate revenue from its operations sufficient to achieve profitability within
its coming fiscal year.
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 during the immediate future. The
Company anticipates a need to raise additional funds in order to conduct its
operations, develop its products and subsequently to establish manufacturing and
marketing licenses and contracts for its products. The Company may seek 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, impacting the
ability to license these products to third parties for commercialization. The
Company's future cash requirements will be affected by the 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. Lengthy Revenue Cycle. Currently, the Company is focusing the majority of
its efforts and financial resources on the ongoing consumer product development
and licensing 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 potential
licensees and 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 licensee's or customer's target applications.
Accordingly, the Company's products and any licensing arrangements typically
require lengthy sales cycles during which the Company may expend substantial
funds and management time and effort with no assurance that revenues will result
5. 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
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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
and market new products, to enhance existing products and arrange appropriate
licences for the 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 royalty streams 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 are made in part by the
product licensee and must anticipate performance to satisfy the requirements of
the market. 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.
6. 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.
7. 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 production of
products by third party licensees or the Company 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 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
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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.
8. Expansion of Marketing Activities; Limited Distribution. The Company
currently has no domestic direct sales force. The Company has already and
anticipates that it will continue to negotiate marketing and or manufacturing
licences in which the Company will rely on the existing sales and marketing
capabilities of its partners in order to 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 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.
9. Product Recalls. If a device that is designed by the Company is found to
be defective, whether due to design or manufacturing defects, to improper use of
the product, even though the Company may not be the manufacturer, 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.
10. Risk of Product Liability. The manufacture and sale of products entails
an inherent risk of product liability although it is the Companys intent to pass
that liability on to its manufacturing and marketing licensees when appropriate.
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 effect
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 effect on the Company's business, results of operations and
financial condition.
11. Significant Industry Competition. The markets for the products the
Company currently offers and will offer in the future, are and will be, highly
competitive. Numerous manufacturers and
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distributors, and retailers 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.
12. 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
Administration ("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.
13. 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.
14. 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 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 washing systems for the food industry is expected to place
increased demands on the Company's resources. The Company's activities are
expected to require
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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.
15. 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.
16. 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.
17. 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. The Company
currently does not have a disaster recovery plan in effect, and is vulnerable to
damage from fire, floods, earthquakes, power loss, telecommunication failures
and other events. A disaster could severely harm the business if the business is
interrupted for an indeterminate length of time.
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PART 1
ITEM 1. Description of Business
General
Cyclopss Corporation (the "Company") has historically been engaged in a
fully integrated business model providing 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. The Company has recently changed its
business model to include the licensing of proprietary technologies to partners
who have resources and infrastructures better suited to successfully
commercialize certain of the Company's technologies or products. The Company has
entered into a Technology Licensing Agreement with Consolidated Stills and
Sterilizers of Boston, MA. The agreement licenses the ozone medical instrument
sterilization technology developed and patented by the Company for an initial
licensing fee and future royalties. The Company anticipates negotiating like
arrangements on other of its proprietary technologies when the circumstances are
beneficial. Cyclopss will continue to engage in all integrated functions
required in the synthesis, manufacturing and marketing of its specialty
chemicals.
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 four wholly-owned subsidiaries:
Eco-Pure Food Safety Systems, Inc.
Cyclopss Laundry Systems, Inc.
Cyclopss Medical Systems, Inc.
Cyclopss Biochemical Corporation
The overwhelming historic overhead associated with the Company's efforts to
operate the above listed subsidiaries as fully integrated businesses, bearing
the costs of research and development, sales and manufacturing, and installation
and service. To date, revenues have not provided cash to support these costs.
Management believes that its new business model provides for more rapid market
entry and acceptance through the utilization of the strengths and existing
infrastructures of
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industry providers wherein the Cyclopss component becomes an incremental cost of
the product's sale and support. This model is designed to allow the Company
access to revenues generated through licensing and royalty streams, while
keeping the overhead low and the valuable human resources focused.
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. This subsidiary has also developed,
validated and licensed consumer products such as a tooth brush sanitizer and a
kitchen sponge sanitizer. In fiscal 2000, the Company continued development of
the technology to utilize ozone in small consumer and large industrial scale
applications in both aqueous and gaseous forms. These applications can be
applied to a broad spectrum of food, health and cleaning products for
disinfection purposes.
Consumers, food producers and processors large and small, are searching for
new technology to address food safety concerns. Both consumers and food
processors, who have relied heavily on chlorination and other chemicals to
decontaminate foods, are being forced to consider alternatives to chlorine and
those 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.
The Company's sales generated from this division in fiscal 2000 came mostly
from research and development fees the Company charged to Otres and Procter &
Gamble (P&G) in connection with development and validation of two consumer
products, the tooth brush sanitizer and kitchen sponge sanitizer. The Company,
under contract to Otres, spent eight months in the development and testing of
the technology, and introduced the product to P&G. The introduction resulted in
co-marketing agreements being negotiated by Otres with the Crest Division of P&G
on the toothbrush sanitizer and the Dawn Division on the sponge sanitizer.
The Company will receive royalties from the sale of these consumer devices
worldwide, managing the ongoing relationship between Otres and Procter & Gamble
under contract. In addition the Company has a first right of refusal for future
product development contracts on new consumer product categories being
considered by Otres. The Toothbrush and Kitchen Sponge Sanitizers were developed
by Otres in corroboration with the Company and are the subject of a co-marketing
agreement with the Crest and Dawn divisions of Procter & Gamble. The products
are designed to kill 99.9% of germs found on toothbrushes and kitchen sponges
using ozone technology, and they address a growing consumer concern, that of
reducing the spread of germs and microorganisms, such as streptococci and
staphylococci, in the home. Otres is in the final phase of production process
development.
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For year end February 29, 2000, the Company reported $133,034 in sales
for Eco-Pure Food Safety Systems, Inc. The Company's sales plan includes limited
internal sales, and will concentrate its efforts in locating appropriate
marketing partners with infrastructures and access to the various markets into
which the Company's technologies will be sold. It anticipates that the
manufacturing license will these agreements as long as they prove to be more
effective. To date, all sales have been made by the Company directly. The
Company believes that, in the near future, sales of the Eco-Pure System will
continue to be made directly by the Company. The OTRES products, when released
will be available for purchase on the Company's website (www.cyclopss.com), as
well as grocery, appliance and hardware stores, mass merchandisers and drug
stores.
Cyclopss Laundry Systems, Inc.
The Company has historically operated this subsidiary as a fully integrated
business for developing, marketing, manufacturing and installing ozone washing
systems 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.
The Company has elected to adopt the new business model as executed in its
Eco-Pure subsidiary, and while current sales are being generated internally, the
Company is seeking qualified potential licensees for the manufacturing and sales
of its products worldwide.
All laundry washing systems are marketed under the name Eco-Wash, formally
known as the OzO3-Clean laundry systems. These systems consist of 1) an 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 has also marketed a non-ozone based sorting and counting
technology known as the VAC Soil Counting System. This system is an automated
and computerized means of sorting and counting incoming soiled textiles. The VAC
system sorts, counts and conveys soiled textiles through the use of vacuums, a
series of tubes, a computer terminal, 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. This
product is also the subject of ongoing licensing negotiations.
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The price of installing an Eco-Wash system can vary from $30,000 to $300,000
depending on laundry volume required by the operator; 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. During fiscal 2000, the Company
installed 2 VAC Soil Counting Stations and one Eco-Wash Systems for the Navy.
The Company recorded $201,147 in sales for Cyclopss Laundry Systems, Inc. for
year end February 29, 2000.
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; * Increased concern regarding environmental issues associated with the
laundry industry; and * Formation of strategic licensing and marketing
arrangements with known industry vendors.
Currently, the Company is marketing its laundry systems in the U.S. market
through the internal efforts of Management. However, the Company is exploring
the possibility of establishing distributorship relationships with a large
manufacturer on a regional basis beginning with those contracts awarded to the
Company by the Navy. To date, limited distributorship has been established in
South America. The Company has installed 16 ozone washing systems in major
commercial laundries and 49 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. On November 1999, the Company entered into a technology licensing
agreement with Consolidated Stills and Sterilizers of Boston, MA. The agreement
licenses the ozone medical instrument sterilization technology developed and
patented by the Company for use in Ster-O-Zone 100. The terms included an
initial licensing fee of $100,000 and ongoing royalties of 3% of gross revenues,
once Consolidated Stills and Sterilizers has completed development and are
generating revenue. Consolidated Stills and Sterilizer is a well-known and
respected developer, manufacturer
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and distributor of medical sterilizers for over 50 years, with a sales and
distribution organization that encompass North America and over 60 countries
worldwide. Consolidated Stills and Sterilizers also contracted with the Company
for $38,500 to produce an eight cubic foot prototype ozone sterilizer using
Consolidated Stills and Sterilizers' standard model sterilization vessel. This
prototype serves as an initial test bench for development and validation of
Consolidated Stills and Sterilizers' new product application to FDA.
The Company recorded $100,000 in deferred revenue and $38,500 in sales for
Cyclopss Medical Systems, Inc. for year end February 29, 2000, for the licensing
and contract prototype sale to Consolidated Stills and Sterilizers. Revenues
from the license fee are to be recognized in conjunction with this first
$100,000 of royalty revenues based upon royalty reports.
The Company was awarded a patent on Sterox and anticipates further
development and testing on this product in fiscal 2001. The Company is also
considering the possibility of co-venturing the market development of Sterox
with a strategic partner. .
The Company believes that certain conditions exist which create an
opportunity for new alternatives to current sterilization methods:
* Increased public and professional concern regarding the transmission of
infectious diseases; * Increased utilization of endoscopic instruments for
minimally invasive surgical procedures; * Competitive situation in the health
care industry will require increased cost containment and
productivity;
* Increased decentralization of the delivery of patient care, including many
procedures being performed in non-hospital facilities that do not have
ready access to central sterilization services; and
* Greater environmental concern regarding the handling and disposal of toxic
waste.
Cyclopss Biochemical Corporation
In 1994, the Company acquired Chem BioChem Research, ("CBC") a specialty
chemical company. This wholly-owned subsidiary has developed approximately 350
products for sale to commercial and research institutions and offers contract
research and development services.
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 fiscal 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.
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The Biochemical division continues to market specialized chemicals and
research and development services to scientists and chemical companies around
the world. Catalog sales to retail distributors and individual researchers
continues to be a vital element of our business. The Company recorded $378,861
in sales for Cyclopss Biochemical Corporation for year end February 29, 2000.
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 proprietary products and
procedures for specific customers.
Ozone research is conducted on products provided by customers or acquired by
Cyclopss that represent our market focus - consumer products and commercial food
and laundry systems. For certain projects, the Company has signed non-disclosure
agreements with customers that prevent the Company from revealing their name,
location, and, in some cases, their product. Certain customers contract with the
Company for research and development 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 and 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, and operated by their employees.
Technical accomplishments for year end February 29, 2000 contributed directly
to $276,909 of the total revenue reported for the Company. Technical
accomplishments this past year in research and development areas include:
Design and development of a consumer Toothbrush and Sponge Sanitizers for
Otres, Inc.: These two products are nearing production. Cyclopss redesigned and
optimized the ozone generator and conducted the microbiological research to
verify that these appliances can destroy the appropriate bacteria that would
likely be found on toothbrushes or sponges. The testing was performed with the
presence of Crest(R) toothpaste or Dawn(R) dishwashing detergent. In addition,
materials testing was performed on the Sanitizer's materials of construction and
Crest toothbrushes and 3M Scotch-Brite(R) sponges.
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Design and development of an ozone disinfection system for a medical
instrument for an international manufacturer: Cyclopss designed a UV ozone
system that provided >99% destruction of a broad spectrum of bloodborne
pathogens. A prototype system was delivered to the customer for integration into
a new product that will be available in late 2000. As part of the development
contract, Cyclopss will be solicited to build production units of the ozone
subsystem.
Design and development of a prototype 8 cubic foot medical sterilizer for
Consolidated Stills and Sterilizers: As a part of a licensing agreement with
Consolidated Stills and Sterilizers, Cyclopss designed and built a prototype
ozone sterilizer on the customer's 8 cubic foot steam sterilizer. The design is
based on earlier Ster-O3-Zone(TM) technology and patents. Microbiological
testing showed the system was effective in complete destruction of the medical
biological indicator, Bacillus subtilis, in 3-hour sterilization cycles.
Consolidated Stills and Sterilizers will use the prototype to develop a
commercial product for which Cyclopss will receive royalties.
Design and development of a prototype HVAC duct disinfection system for
Zynko, Technology & Marketing, Inc.: In response to a Brazilian customer need,
Cyclopss developed an ozone system to destroy airborne and surface bacteria and
fungi inside Heating, Ventilation, and Air Conditioning (HVAC) ducts.
Microbiological studies indicated that airborne bacteria were reduced by >99%
and airborne fungi by 20% in air flow at 8 m/sec. The same microorganisms on the
duct wall were reduced by >99.99% in a one hour period. We expect to install a
system in an apartment building in Brazil sometime in 2000.
Design and development of an Eco Wash Industrial Wipe Rag laundry system for
the US Navy: Cyclopss developed an ozone laundry system to retrofit two existing
washer/extractors at the Navy Public Works Center in San Diego. The system was
based on our successful Eco Wash design and experience in commercial
applications. Acceptance tests were conducted by the Naval Facilities
Engineering Service Center and proved that rags cleaned using the ozone process
were significantly cleaner as measured by absorbency. The petroleum smell was
nearly eliminated and the rags had a softer feel. The ozone process also
produced 71% less water pollution (COD) and 27% lower operating costs. These
savings result from the elimination of the need for hot water, reductions in
water use, shorter cycle times, and less laundry chemicals. Following the
successful demonstration, Cyclopss designed a US Navy Industrial Wipe Rag/Eco
Wash Laundry that includes a 125-lb washer/extractor, a 175-lb dryer and an
Eco-Wash 60 ozone system. The US Navy has approximately 40 sites that are
potential customers for the Eco Wash System.
Biochemical's research and development falls into three categories:
established product improvement; new product development; and contract research
and development. 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 research and development is a major
focus of the Biochemical Corporation. These efforts include the design and
implementation of synthesis strategies, revision and development of customer
processes, and scale-up of reaction sequences.
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Cyclopss' research and development organization consists of a microbiologist,
two organic chemists, and one electrical engineer under the direction of the
Vice President of Research and Development. Two of the staff earned their Ph.D.
in physics, and one in Chemistry. The Company incurred $131,050 in research and
development expenses during the fiscal year ended February 29, 2000 compared to
$289,147 during the fiscal year ended February 28, 1999. The reduction of
research and development expenses was due to the redirection of the Company's
efforts to find strategic partners willing to fund the majority of the Company's
research and development efforts and license the developed application under
royalty arrangements.
Manufacturing
The Company's technologies become products through the proprietary system
integration and assembly of a variety of component parts. The Company currently
assembles and tests each of its
products in-house or at the time of assembly in the field. In certain instances,
the Company relies on outside vendors for various parts and subassemblies and
does not intend to be a basic manufacturer. The Company provided its
documentation to a large contract manufacturer for manufacturing purposes should
the demand out pace the Company's ability to assemble in house. In addition, the
Company is looking at technology partnerships as the one with Proctor & Gamble
and Otres, to handle all the manufacturing that would allow the Company to
receive royalties from the sale of consumer products that are manufactured
elsewhere.
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.
The Company's specialty consumer products for sterilization of tooth brushes
and kitchen sponges, are unique products with limited markets and fragmented
competition.
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 as well as its
newly adopted business model will gain it a competitive advantage in those
markets targeted.
The Company's specialty chemicals are unique products with limited markets
and fragmented competition, as well.
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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 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 fifteen patent
applications with the United States Patent and Trademark Office. As of May 15,
2000, eleven of these patents have been granted, three of the patents are still
pending and one of the submissions has been denied by the Patent Office and the
Company has determined not to resubmit such application. The patent submissions
relate to various component parts or technologies used in the Company's
sterilization, laundry products, food processing, consumer products, and
chemical compounds.
The eleven 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
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Title Grant Date
--------- ------------
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
11. Cold Water Wash Formula..............................12-28-1999
Foreign patent proceedings, where applicable, have been initiated for
patents that have been granted in the United States.
The currently pending patent applications are identified and dated as
shown in the following list:
Title Application Date
------------ ------------------------
1. Porous Material Disinfection Method.................01-14-2000
2. Method for optimizing ozone production in a corona
discharge ozone generator .........................01-14-2000
3. Cold water disinfection of foods....................10-18-1999
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.
All of the Company's intellectual properties as outlined above, were used as
collateral in the issuance of the Secured Convertible Loan financing the Company
received from Procter & Gamble in February, 2000. There is additional
information regarding the terms of this transaction under Liquidity and Capital
Resources.
Employees
The Company and its subsidiaries employed eight full-time employees as of May
15, 2000. None of the Company's employees are covered by a collective bargaining
agreement.
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ITEM 2. Properties
The Company is currently attempting to sublease the bulk of 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, 2000 and
requires monthly lease payments of $5,546. The Company has two, one year options
to renew the lease with a five percent (5%) rent increase, which it does not
intend to renew. Under the new business model, the Company's facilities exceed
current needs of the Salt Lake City administrative office. In the event that the
Company's business operations expand in the future, it anticipates that it will
be able to find suitable additional facilities at competitive rates.
In addition to the Salt Lake location, the research and development section
of the Company, under the direction of Durand Smith, currently leases
approximately 2,000 square feet of space in Albuquerque, New Mexico. The lease
expires February 2001 and has two, one year options to renew the lease with a
five percent (5%) rent increase. It requires monthly lease payment of $1,270.
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 Securities and Exchange
Commission 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 final settlement agreement reached by the parties
involved, in September 1999, entitled Mifal Klita to the conversion of his
Series "B" preferred shares into unrestricted common stock of the Company plus
shares for legal fees and other provisions stated in the original agreement.
These additional costs of $853,000 were recorded as legal settlement expense in
the fiscal 2000 consolidated statement of operation. Another investor, Leitinger
Corporation, a Series "B" preferred stockholder, negotiated a final cash
settlement of $250,000 in January 2000. The Company paid this obligation
subsequent to fiscal year end on April 17, 2000.
The Company is not aware of any other legal actions. Management believes,
based on advice of legal counsel, if any claims arise in the normal course of
business, 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
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
Market for Common Stock
The Company's common stock is currently listed on the 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:
Year Ended Year Ended Through
February 28, 1999 February 29, 2000 May 15, 2000
High Low High Low High Low
--------------------------------------------------------------
First Quarter $ 2.56 $ 1.63 $0.38 $0.09 $ 1.45 $ 0.42
Second Quarter 1.91 0.41 0.34 0.16
Third Quarter 0.47 0.06 0.22 0.06
Fourth Quarter 0.33 0.08 0.73 0.06
Holders
The number of record holders of the Company's common stock as of May 15,
2000 was 397. The Company believes the actual number of beneficial shareholders
exceeds 1,500. There are numerous shareholders that hold the Company's common
stock in the "street name" of their various stock brokerage houses.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future. The
Company has paid dividends in the form of stocks to convertible debt and
preferred stock holders. It is the present intention of management to utilize
all available funds for the development of the Company's business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
Cyclopss Corporation is primarily engaged in ozone application
technologies and processes. One of the Company's product lines offers
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 non-ozone based products offered by the Company include more than 350
specialty chemicals and compounds.
The Company operated under a non binding investigational Letter of Intent
with The Procter & Gamble Company of Cincinnati, Ohio, ("P&G") executed on June
3, 1999. The content and context of that document considered and was the result
of a technical due diligence initiated by P&G in late December 1998. The
relationship was not disclosed prior to January 2000, due to stringent
confidentiality requirements.
Under the confidentiality of this relationship and while investigating the
technologies and products of the Company, P&G was subsequently introduced to the
proprietary products being developed under contract development by the Company
for its client Otres. Initial interest was expressed by P&G prompting Otres and
the Company to enter into an additional contract that called for Cyclopss'
Management to administer the relationship between the parties. The result
effected co- marketing agreements for Otres with both the Crest and Dawn
divisions of P&G. The contract also provides for an on-going royalty payment to
Cyclopss on gross sales of developed appliances, and a First Right of Refusal
for Cyclopss to contract all future product development under the same royalty
arrangement. This working model prompted the business model as adopted and
discussed in the Plan of Operations below.
The severe financial condition of the Company was disclosed to P&G during
the last week of November 1999. P&G responded immediately and after conferring
with the Company's Management negotiated and subsequently entered into a new
Letter of Intent on December 10, 1999. The agreement allows for two separate
financings by P&G to the Company. The first, an Unsecured Promissory Note for
$250,000, was executed and funded in concert with the signing of the new Letter
of Intent in order to relieve the immediate and critical cash requirements of
the Company. The second contemplated financing is a Convertible Secured Loan for
$750,000 which will provide long-term working capital for the Company. Should
the Company successfully meet the pre-loan conditions of this transaction, and
P&G elects to move forward in its execution, it is currently scheduled to be
concluded in the second quarter of fiscal 2001. The loan accrues interest at 8%
and is secured by a first security interest in all of the Company's Intellectual
Properties and
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will be due and payable in full on the one year anniversary date of its
execution. The loan agreement grants a conversion right to P&G allowing for the
conversion of all or any part of the outstanding loan, including all or any part
of interest due into shares in the Company's common shares of stock at anytime
during the term of the loan, and at the sole discretion of P&G. The Company
contemplates engaging in several diverse development and testing contracts
within various departments of P&G. .
In addition, under the terms of the agreement, P&G will be granted an
Exclusive First Right of Refusal for the Licensing of all the current and future
technologies of the Company.
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 its ability to continue as a going concern.
Results of Operations
The Company's sales during fiscal 2000, which ended on February 29, 2000,
were $751,542 compared to $832,168 for the year ended February 28, 1999, a
decrease of $80,626, (10%). Four 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), Cyclopss Medical Systems, Inc.
(CMS) and Cyclopss Biochemical Corporation (CBC). CLS's revenues were $201,147
for the year ended February 29, 2000, and $194,145 for the year ended February
28, 1999, an increase of $7,002 (4%). CBC's revenues were $378,861 for the year
ended February 29, 2000, and $289,597 for the year ended February 28, 1999, an
increase of $89,264 (31%) due to the efforts of its new managing director, who
took over the operations in late fiscal 1999. EFS reported revenue of $133,034
for the year ended February 29, 2000, and $348,426 for the year ended February
28, 1999, a decrease of $215,392 (62%), mainly due to a lack of sales and
marketing efforts in this area. CMS reported revenue of $38,500 for the year
ended February 29, 2000, for research and development of a prototype that was
built for Consolidated Stills and Sterilizer, as described previously in the
general business description. Cost of sales declined to $433,598 for fiscal 2000
from the previous year of $615,549, a reduction of $181,951 (30%), mainly due to
a reduction of service personnel and an overall effort to reduce costs.
Research and development expenses decreased to $131,050 for fiscal 2000
from $289,147 for the previous year, a reduction of $158,097 (55%). This
decrease is due to the Company's efforts to reduce research expenses and obtain
strategic partners that are willing to fund research related costs. The Company
believes it is necessary to increase research and development efforts for fiscal
2001, whether on a contract basis or from its own resources as available, in
order to complete the development of food processing and consumer products.
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Selling and marketing expenses decreased to $107,458 for fiscal 2000 from
$145,162 for the previous year, a reduction of $37,704 (26%). The Company took
steps to eliminate 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 $871,148 for fiscal 2000
compared with $1,781,747 for the previous year, a reduction of over 50%. During
the year, the Company instituted measures to control these costs by reducing
employees, legal, promotional and investor relation activities. Management will
continue to review and control these costs, but believes general and
administrative expenses in fiscal 2001 will increase due to management and human
resource requirements for the Company, assuming sales and other commercial
activities increase.
During fiscal 2000, the Company recorded $1,156,000 in litigation
settlement expense. 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 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 final settlement agreement reached by the parties involved, on September of
1999, entitled Mifal Klita to the conversion of his Series "B" preferred shares
into unrestricted common stock of the Company plus shares for legal fees and
other provisions stated in the original agreement and 627,520 options
exercisable into common stock at $.085 per share one year from the settlement
date. The additional costs of $906,000 were recorded as legal settlement expense
in the fiscal 2000 statement of operations. The unrestricted common shares will
be disbursed monthly over a two year period. Another investor, Leitinger
Corporation of Series "B" preferred stock negotiated a final cash settlement of
$250,000 in January 2000. The Company paid this obligation subsequent to year
end, on April 17, 2000.
During fiscal year end 1999, after periodically evaluating the
recoverability of tangible and intangible assets, the Company recorded expense
of $447,424 related to impairment 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 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.
Interest expense increased to $5,875 for fiscal 2000 compared with $3,863
for fiscal 1999. The Company anticipates a higher interest expense in fiscal
2001, due to the interest-bearing loan from P&G.
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The Company suffered a net loss applicable to common stockholders for
fiscal 2000 of $2,194,760, or $.11 cents per share. The loss incurred for the
previous fiscal year was $3,232,857, or $.19 per share. The decrease in the net
loss is attributable to a significant decrease of costs and expenses offset by
legal settlement expense. The decrease in the net loss per common share
primarily resulted from the increase of 7,626,584 shares of common stock issued
in fiscal 2000. The Company anticipates that it will operate at a loss for the
year ending February 28, 2001. However, if revenues of CLS, EFS and CBC
increase, it is anticipated that losses will begin to diminish.
The Company believes that all four of its subsidiaries, namely Eco-Pure
Food Safety Systems, Inc., Cyclopss Laundry Systems, Inc., Cyclopss Medical
Systems, Inc. and Cyclopss Biochemical, Inc. will be contributors to the
Company's future revenue stream.
Impact of Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue recognition in Financial Statements. SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in the financial statements. All registrants are expected to apply the
accounting and disclosure described in SAB 101. Because the Company has complied
with generally accepted accounting principles for its historical revenue
recognition, a change, if any, in its revenue recognition policy resulting from
SAB 101 will be reported as a change in accounting principle in the quarter
ended August 31, 2000. The impact of SAB 101 is not expected to have a material
impact on the Company's revenue recognition policy.
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 29, 2000, of
$19,092,645 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 29, 2000 was $2,194,760. In the
past the Company has been able to receive funding necessary for its operations
through the issuances of common and preferred stock. The Company anticipates a
net loss for the year ended February 28, 2001, and with a cash balance of
$107,565 at February 29, 2000 and expected cash requirements for the coming
year, even considering the loan agreement of $1,000,000 with P&G, 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 additional
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necessary funding will be raised. The Company will receive royalties from the
sale of the toothbrush and kitchen sponge Sanitizers, which were developed by
Otres in collaboration with the Company and are the subject of a co-marketing
agreement with the Crest and Dawn divisions of P&G. Otres is in the final phase
of manufacturing process development.
The severe financial condition of the Company was disclosed to P&G during
the last week of November 1999. P&G responded immediately and after conferring
with the Company's Management negotiated and subsequently entered into a new
Letter of Intent on December 10, 1999. The agreement allows for two separate
financings by P&G to the Company. The first, an Unsecured Promissory Note for
$250,000, was executed and funded in concert with the signing of the new Letter
of Intent in order to relieve the immediate and critical cash requirements of
the Company. The second contemplated financing is a Convertible Secured Loan for
$750,000 which will provide long-term working capital for the Company. Should
the Company successfully meet the pre-loan conditions of this transaction, and
P&G elects to move forward in its execution, it is currently scheduled to be
concluded in the second quarter of fiscal 2001. The loan is secured by a first
security interest in all of the Company's Intellectual Properties and will be
due and payable in full on the one year anniversary date of its execution. The
Company contemplates engaging in several diverse development and testing
contracts within various departments of P&G. The agreement grants a conversion
right to P&G allowing for the conversion of all or any part of the outstanding
loan, including all or any part of interest due into shares in the Company's
common shares of stock at anytime during the term of the loan, and at the sole
discretion of P&G. 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.
Shares issued and outstanding for February 29, 2000 were 25,226,066,
compared to 17,599,482 for the prior year. Common shares increased partly due to
additional financing that occurred in fiscal 2000, for a total of 4,026,857 new
common shares. Approximately $443,000 was raised from the issuance of common
stock in fiscal years 1999 and 2000. An additional 3,201,197 common shares were
issued in connection with the conversion of Series "B" preferred stock, as
described above.
Cash used in operating activities was $371,917 for the year ended February
29, 2000 compared with $2,105,085 for the year ended February 28, 1999, a
decrease of $1,733,168 (82%). The Company experienced significant general and
administrative expenses in the first half of fiscal 1999, due to an increase in
management and marketing costs. The use of the Company's cash reserves were
decreased during the fiscal 2000 as a result of more conservative expenditures
during this period.
Cash expenditures for property and equipment and patents were $34,356 for
the year ended February 29, 2000 compared with $126,021 for the year ended
February 28, 1999. This significant decrease was the result of more conservative
expenditures during this period also.
24
<PAGE>
Total assets decreased to $466,984 for the year ended February 29, 2000
from $593,607 for the year ended February 28, 1999, a decrease of $126,623
(21%), primarily due to decreases in inventory and the depreciation and
amortization of patents.
Total current liabilities increased to $1,060,173 at February 29, 2000
from $397,678 at February 28, 1999, an increase of $662,495 (167%), due to an
increase in accrued liabilities, from $149,033 in prior year to $449,440 for
February 29, 2000. The accrued liabilities include $250,000 in litigation
settlement fees the Company incurred in connection with Series "B" stockholders,
as described previously.
Net cash provided by financing activities was $477,820 for fiscal 2000.
This amount compares to $1,693,963 for fiscal 1999. The Company's financing
transactions for the year ended February 29, 2000 are further described here.
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 pursuant to Regulation S of the Securities Exchange Act, and
a Board Resolution on September 10, 1998. Series "C" preferred shares are
convertible to common shares at $.10 (ten cents) per share. By the end of the
offering, seven subscribers purchased such shares in this offering for a total
of $362,825 that were accepted under the subscription plan. $206,000 of this
total was recorded in fiscal 1999, and the balance of $156,825 of the total was
recorded in fiscal 2000.
The Company operated in a state of insolvency for the bulk of the year.
During an emergency board meeting on November 16, 1999, it was determined that
the company would need to locate capital immediately. The financing would fund
minimal operations and allow time to investigate what actions needed to be taken
and what, if any, alternatives where available to cure the risks associated with
its precarious financial condition. Two independent members of the board agreed
to fund a small private offering for that purpose. Relying on that commitment
the Company moved forward with its plans to review its survival options. At the
subsequent emergency board meeting on December 6, 1999 the board approved the
issuance of 1,142,857 shares of restricted common stock to Steve Sarich and
Michael Lakis for a total of $80,000. Subsequent to that board meeting, the
severe financial condition of the Company was disclosed to P&G. P&G entered into
the Letter of Intent on December 10, 1999, as described priviouly in this
section. Concurrent with the execution of the Letter of Intent by both parties
$85,000 was advanced by P&G to the Company. The combination of these two
financing events allowed the Company and P&G the time to enter into
negotiations, without taking defensive legal actions, that culminated in the
$1,000,000 financing as described priviously.
Year 2000 or Y2K Issue
In prior years, the Company disclosed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a
25
<PAGE>
result of those planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the year 2000 date change. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Plan of Operation
The Company historically has acted as both the developer of its
technologies and then as the manufacturer and marketer of those technologies. It
has become apparent that the customers within the markets pursued by the Company
are intrigued by the performance and potential of the products. However, the
size and operating capabilities of the Company doesn't support the confidence
required for the Company's targeted customers to become purchasers. The
Company's targeted industrial customer base is accustomed to doing business with
vendors and suppliers of a size and stability that reasonably assures business
continuity and internal product support. The single exception to this
discrimination as to our limited size has been the U S Navy who is mandated to
provide business opportunity for small business enterprises such as Cyclopss.
Under the Company's new plan of operations it will no longer attempt to
act as a manufacturer or marketer of its technologies but will instead act as a
technology provider. Its efforts will be directed toward the creation of
technology bridges for companies providing products and services. The Company
will utilize its technology products to produce new complete processes. These
ventures will include suppliers of equipment and appliances and suppliers of
disposable or consumable products modified to utilize the Company's proprietary
technologies under licensing and royalty agreements. The end result will create
interlocking process systems that will be both effective and economic.
Additionally the process systems will be sold and serviced by vendors and
suppliers already accepted by the target markets. This model provides the
manufacturers with technology and new product offerings and provides the Company
with royalty revenue and commercialization of its technologies through already
existing manufacturing, sales and service infrastructures.
The Company will continue to provide low volume production of ozone
systems to customers like the US Navy, and the Company also anticipates it will
be compensated by one or more of the industry participants for design and
development work required in modifying their existing products to accommodate
the incorporation of the Company's proprietary technologies. This model allows
the Company to keep the number of employees limited to specific requirements of
the technology application, and converts the Company into a technology purveyor.
26
<PAGE>
This business model is illustrated by the current business relationship
between the Company, P&G and Otres, Inc. Cyclopss had established a working
relationship with P&G early in 1999. In May of 1999, the Company was approached
by the principals of Otres to assist in the development and validation of a
toothbrush sanitizer and a kitchen sponge sanitizer utilizing ozone. The
management of the Company determined the products could be of great interest to
P&G and, after having appropriate confidentiality documents executed, Otres
agreed to allow the Company to introduce the product concepts to P&G. P&G
determined they had products that would lend themselves to a co-marketing
relationship with the Otres appliances as long as the product development was
responsibly executed and the technology application proved safe and effective.
Both Otres and P&G engaged the Company for these activities. This resulted in
the Company receiving revenues of approximately $98,000 from both venture
partners for the development and testing of the appliances. The Company manages
the relationship with P&G for Otres under contract, and contributed to the
execution of co-marketing agreements between Otres and CREST(R) for the
toothbrush sanitizer, and Otres and DAWN(R) for dish washing soap that were
announced at the International Home Appliance Show in Chicago on January 16,
2000. The Company negotiated to receive an ongoing royalty of 3% from the sale
of these appliances, which provides the potential for significant future
revenues with minimal related costs.
The Company also executed a License and Royalty Agreement with
Consolidated Sills and Sterilizers of Boston, Mass. in support of the new
business model. The agreement not only called for an up-front license fee and
ongoing royalty, but also included revenues from the production of a prototype
for Consolidated Stills and Sterilizers and consulting fees for work done going
forward on the project.
To better provide the human resources required under this business model
the Company moved its Research and Development activities to New Mexico in
February 2000. The Company arranged the assistance available to them from the
New Mexico Department of Economic Development for the relocation. This enhances
and supports the Company's emergence as a respected technology purveyor. The
Company maintains a limited administrative staff in its current offices in Salt
Lake City, Utah, as well as the Biochem division.
This plan, if successfully executed, provides ongoing operating revenues
derived from contract development, with the potential of significant license and
royalty revenues generated by the success of its partners in commercializing the
processes.
The Company anticipates its revenues as well as the source of those
revenues to change significantly through establishment of these types of
relationships. However, there can be no assurance that the financing as
completed with Procter & Gamble will be sufficient to offset cash demands, nor
can there be any assurance that any of the Company's products will be accepted
in such numbers as to make the royalty revenues significant enough to cover the
cost of operation.
The Company has demonstrated the Eco Wash system for the US Navy in San
Diego at the Public Works Center ("PWC"). The system was able to launder
industrial wipe rags, achieving higher absorbency than produced with convention
laundry formulas. This result was achieved while reducing hot water costs by
100%, water consumption by 51%, sewer costs by 100%, chemical costs
27
<PAGE>
by 77%, labor by 29%, and electricity cost by 11%. These savings resulted in an
estimated payback period to the US Navy of 10.7 months. From the successful
demonstration, the Naval Facilities Engineering Service Center is recommending
that the other PWC sites convert their operations to the Eco Wash system
(potentially a total of 50 systems). Since this demonstration, several new sites
have been visited. Each site will average two Eco Wash 60 Laundry Systems,
including a washer and dryer, at approximately $75,000 each. At this time there
are no additional Eco Wash systems under contract and there are no assurances
that additional contracts are forthcoming.
In late 1997, the electrical Power Research Institute (EPRI) declared
ozone as Generally Regarded as Safe (GRAS) allowing food processors to use ozone
in the processing of certain food items. Quoting from a September 2, 1999 ozone
industry solicitation on behalf of EPRI: "Recently, FDA discovered a troublesome
ruling in their 1982 bottled water regulation that accorded GRAS status to ozone
use in bottled water. The 1982 bottled water ruling was issued inappropriately
under 184.1(b) (2), which indicated that all other food uses require regulation.
Therefore, although FDA has elected not to challenge the EPRI Expert Panel
declaration, the FDA cannot officially sanction GRAS status for the use of ozone
in food processing because of the prior 184.1(b) (2) ruling. To help resolve
this dilemma, EPRI is preparing to petition the FDA for approval of ozone under
the food additive regulations. In view of the significant food safety protection
provided by the use of ozone, FDA has agreed to receive this petition under the
new Expedited Review rules, which appears to be the best way to resolve the
regulatory problem. This discovery and its resolution can adversely affect
future sales and contracts for Eco Pure and others in the ozone industry.
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 research and development contracts
but also follow-on royalty revenues from the purchase of systems and processes.
The Company has provided major agricultural producers with prototype
ECO-PURE test systems that have been installed in wet produce processing plants,
long-term produce storage facilities, short term banana and tomato ripening
rooms, and 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 research and development
relationships that not only provide revenues and working capital for the Company
but, if successful, create on going royalty revenues.
Even with sufficient funds available, the ongoing challenge facing the
Company is that of educating potential partners, 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
28
<PAGE>
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 order to
create a market for Biochem's monomer to the aerospace industry.
The information set forth herein as to anticipated research and
development costs, equipment purchases and increase in employees are
management's best estimates based upon current plans. Actual expenditures may be
greater or less than such estimates depending on many factors including, but not
limited to the availability of new technologies, the completion or lack of
completion of certain strategic alliances, and the timing and successful
completion of the Company's stated requirement to acquire additional operating
and growth capital, industry initiatives, success of the Company's research and
development efforts, and other factors.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The private Securities litigation Reform Act of
1995 provides a safe harbor for forward looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, the following:
1. Market acceptance of the Company's products;
2. Obtaining sufficient additional operating capital in the form of debt or
equity; 3. The existence of an orderly market in the Company's securities; 4.
Increased sales of the various products of the Company; 5. Continued success in
the Company's research and development activities; and 6. Successful completion
of strategic alliances.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required with respect to this Item 7, see "Consolidated
Financial Statements and Schedules" on pages F-1 through F-21 of this report.
29
<PAGE>
Cyclo3pss Corporation
Consolidated Financial Statements
Years ended February 29, 2000 and February 28, 1999
Contents
Report of Independent Auditors....................................... 31
Consolidated Financial Statements:
Consolidated Balance Sheets ....................................... 32
Consolidated Statements of Operations ............................. 34
Consolidated Statements of Stockholders' Equity (Deficit) ......... 35
Consolidated Statements of Cash Flows ............................. 37
Notes to Consolidated Financial Statements .......................... 38
30
<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 29, 2000 and February 28, 1999, and
the related consolidated statements of operations, stockholders' equity
(deficit) 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 auditing standards generally accepted
in the United States. 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 29, 2000 and February 28,
1999, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
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 29, 2000 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 4, 2000
31
<PAGE>
Cyclo3pss Corporation
Consolidated Balance Sheets
February 29 February 28
2000 1999
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 107,565 $ 36,018
Accounts receivable, less allowance for doubtful 70,723 47,578
accounts of $23,420 in 2000 and $17,000 in 1999,
respectively
Inventories 17,930 65,348
Prepaid expenses 5,815 45,128
------------- -------------
Total current assets 202,033 194,072
Property and equipment, net 135,521 232,935
Other assets:
Acquired patents, net 72,807 109,210
Developed patents, net 56,623 52,170
Other - 5,220
------------- -------------
$ 466,984 $ 593,607
============= =============
32
<PAGE>
<TABLE>
<CAPTION>
February 29 February 28
2000 1999
------------- -------------
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 256,955 $ 239,140
Accrued liabilities 449,440 149,033
Note payable 250,000 -
Current portion of capital lease obligations 3,778 9,505
Deferred revenue 100,000 -
------------- -------------
Total current liabilities 1,060,173 397,678
Long-term portion of capital lease obligations - 3,778
Commitments and contingencies Stockholders' equity
(deficit):
Preferred stock:
Preferred stock issuable in series: par value $.01,
4,500,000 authorized:
Series "A" 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, 900 and 1,187 shares issued and
outstanding in 2000 and 1999, respectively
(liquidation preference of $1,478,914) 9 12
Series "C" convertible preferred stock; 550 shares
authorized, 75 and 206 shares issued and outstanding
in 2000 and 1999, respectively (liquidation
preference of $75,000) 1 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; 25,226,066 shares and 17,599,482 shares
issued in 2000 and 1999, respectively 25,225 17,599
Additional paid-in capital 19,028,410 17,860,958
Accumulated deficit (19,145,645) (17,185,231)
Less treasury stock, 264,000 common shares at cost (501,545) (501,545)
------------------------------
Total stockholders' equity (equity) (593,189) 192,151
------------------------------
$ 466,984 $ 593,607
==============================
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE>
Cyclo3pss Corporation
Consolidated Statements of Operations
Year ended
February 29 February 28
2000 1999
-------------- --------------
Revenues:
Products sales $ 614,196 832,168
Services 137,346 -
Total revenues 751,542 832,168
Costs and expenses:
Cost of products sold 367,828 615,549
Cost of services 65,770 -
Research and development 131,050 289,147
Selling and marketing 107,458 145,162
General and administrative 871,148 1,781,747
Depreciation and amortization 151,000 333,389
Impairment of intangible assets - 447,424
1,694,254 3,612,418
-------------- --------------
Loss from operations (942,712) (2,780,250)
Interest income and other 298 7,066
Interest expense (875) (3,863)
Litigation settlement expense (1,156,000) -
Other income 138,875 -
Net loss (1,960,414) (2,777,047)
Preferred stock dividends (234,346) (455,810)
--------------- --------------
Net loss applicable to common stock $(2,194,760) $(3,232,857)
Basic and diluted net loss per common share $ (.11) $ (.19)
Weighted average number of common shares - basic and
diluted 19,572,862 17,457,109
============== ==============
See accompanying notes to consolidated financial statements.
34
<PAGE>
Cyclo3pss Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series "B" Series "C"
Series "A" 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, 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
Issuance of common stock for cash - - - - - -
Issuance of common stock for services
- - - - - -
Exercise of stock options - - - - - -
Issuance of Series "C" convertible preferred
stock - - - - 157 2
Conversions of Series "B" preferred stock to
common stock - - (287) (3) - -
Conversions of Series "C" preferred stock to
common stock - - - - (288) (3)
Legal settlement with Series "B" preferred
stockholders - - - - - -
Net loss - - - - - -
Recognition of paid-in-kind stock dividends
on Series "B" preferred stock (See Note 7)
- - - - - -
----------------------------------------------------------------
Balances at February 29, 2000 35,638 $356 900 $ 9 75 $ 1
================================================================
</TABLE>
35
<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>
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
1,142,857 1,143 78,857 - - - - 80,000
391,530 391 31,358 - - - - 31,749
4,000 4 496 - - - - 500
- - 156,823 - - - - 156,825
3,204,197 3,204 (3,201) - - - - -
2,884,000 2,884 (2,881) - - - - -
- - 906,000 - - - - 906,000
- - - (1,960,414) - - - (1,960,414)
- - - - - - - -
--------------------------------------------------------------------------------------------------------------------
25,226,066 $ 25,225 $19,028,410 $(19,145,645) $ - 264,000 $(501,545) $ (593,189)
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
Cyclo3pss Corporation
Consolidated Statements of Cash Flows
Year ended
February 29 February 28
2000 1999
-----------------------------
Cash flows from operating activities:
Net loss $(1,960,414) $(2,777,047)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 89,648 113,728
Amortization 61,352 219,661
Common stock issued for services 31,749 -
Legal settlement expense with Series "B"
shareholder 906,000 -
Loss on disposition of property and equipment 12,722 -
Impairment on intangible assets - 447,424
Revaluation of Class A Warrant - 110,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (23,145) 65,512
Decrease in inventories 47,418 86,678
Decrease in prepaid expenses and other 44,533 30,398
Increase (decrease) in accounts payable and
accrued liabilities 318,220 (401,439)
Increase in deferred revenue 100,000 -
Net cash used in operating activities (371,917) (2,105,085)
Cash flows from investing activities:
Purchase of property and equipment (4,954) (109,883)
Increase in developed patents (29,402) (16,138)
Net cash used in investing activities (34,356) (126,021)
Cash flows from financing activities:
Proceeds from issuance of common stock 80,000 1,500,821
Proceeds from exercise of stock options 500 11,800
Proceeds from issuance of preferred stock 156,825 206,000
Proceeds from note payable 250,000 -
Principal payments under capital lease obligations (9,505) (24,658)
Net cash provided by financing activities 477,820 1,693,963
----------------------------
Net increase (decrease) in cash and cash equivalents 71,547 (537,143)
Cash and cash equivalents at beginning of year 36,018 573,161
----------------------------
Cash and cash equivalents at end of year $ 107,565 $ 36,018
============================
See accompanying notes to consolidated financial statements.
37
<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.
38
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories consist of raw materials and are stated at the lower of cost or
market, cost being determined using the first-in, first-out (FIFO) method
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. Leasehold improvements are amortized over the
lessor of the estimated useful lives or the remaining lease term. Maintenance
and repairs are expensed as incurred. Property and equipment consists of the
following:
February 29 February 28
2000 1999
--------------------------------
Equipment $ 618,821 $ 638,837
Furniture and fixtures 58,981 83,971
Leasehold improvements 111,005 114,717
--------------------------------
788,807 837,525
Less: accumulated depreciation
and amortization (653,286) (604,590)
--------------------------------
$ 135,521 $ 232,935
================================
Property and equipment includes $25,902, and $81,022 of equipment under capital
leases at February 29, 2000 and February 28, 1999, respectively. Accumulated
depreciation for such equipment was $16,836 and $47,665 at February 29, 2000 and
February 28, 1999, 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.
39
<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. 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 $297,139 and $336,159 at February 29, 2000
and February 28, 1999, 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 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.
40
<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, under the percentage of completion method. The Company also provides
services on a time and materials basis.
Deferred revenue is comprised of prepaid license fees received from the license
of certain of the Company's technologies. Revenues from license fees are to be
recognized in connection with royalty revenues to be credited.
Advertising Costs
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $318 and $77,683, respectively for the years ended
February 29, 2000 and February 28, 1999.
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.
41
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 29, 2000 and February 28, 1999, all common stock
equivalents are anti-dilutive and accordingly have been excluded from the
earnings per common share computation.
Options and warrants to purchase 9,717,900 and 5,519,173 shares of common stock
were outstanding at February 29, 2000 and February 28, 1999, respectively, but
were not included in the computation of diluted earnings per common share
because they were anti-dilutive.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, 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
2000 or prior.
Impact of Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue recognition in Financial Statements. SAB 101 provides
guidance on the recognition, presentation, and disclosure of revenue in the
financial statements. All registrants are expected to apply the accounting and
disclosure described in SAB 101. Because the Company has complied with generally
accepted accounting principles for its historical revenue recognition, a change,
if any, in its revenue recognition policy resulting from SAB 101 will be
reported as a change in accounting principle in the quarter ended August 31,
2000. The impact of SAB 101 is not expected to have a material impact on the
Company's revenue recognition policy.
42
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
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 that have resulted in an
accumulated deficit at February 29, 2000 of $19,145,645, 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 applicable to common shareholders for the year ended February 29,
2000 was $2,194,760. In the past the Company has been able to receive funding
necessary for its operations through the issuances of common and preferred
stock. The Company anticipates a net loss for the year ended February 28, 2001,
and with a cash balance of $107,565 at February 29, 2000 and expected cash
requirements for the coming year, there is substantial doubt as to the Company's
ability to continue operations.
The Company believes that these conditions have resulted from the inherent risks
associated with small technology companies. Such risks include, but are not
limited to, the ability to (a) generate sales of its product at levels
sufficient to cover its costs and provide a return for investors, (b) attract
additional capital in order to finance growth, (c) further develop and
successfully market commercial products and (d) successfully compete with other
technology companies having financial, production and marketing resources
significantly greater than those of the Company.
The Company is attempting to improve these conditions by way of financial
assistance through collaborative partnering agreements, issuances of additional
equity, debt arrangements, and product sales. Management believes that
appropriate funding will be generated and future product sales will result from
these opportunities and that the Company will continue operations over the next
fiscal year; however, no assurances can be given that sales will be generated or
that the additional funding will be raised.
3. Accrued Liabilities
Accrued liabilities consist of the following:
43
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
February 29 February 28
2000 1999
------------------------------
Accrued payroll and payroll taxes$ 150,877 121,483
Accrued vacation 17,598 24,865
Accrued legal expense 250,000 -
Other 30,965 2,685
------------------------------
$ 449,440 149,033
==============================
4. Long-Term Debt
In December 1999, the Company negotiated a letter of intent with a strategic
partner that provided for two separate financings. The first, an unsecured
promissory note for $250,000, was executed and funded in concert with the
signing of the letter of intent. The second contemplated financing is a
convertible secured loan for $750,000 currently scheduled to be funded in the
second quarter of fiscal 2001. The second financing is contingent upon
successful completion of certain conditions and at the strategic partner's
election. The loan agreement is secured by a first security interest in all of
the Company's intellectual property and will be due and payable in full one year
from its execution. The loan and accrued interest are convertible, in whole or
in part, into the Company's common stock at anytime during the loan term. As of
February 29, 2000, the first financing of $250,000 is outstanding and is
reflected in the accompanying balance sheet as a note payable.
5. Capital Lease Obligations and Commitments
Future minimum lease payments for capital lease obligations are as follows:
Year ending
February 28
2001 $ 3,916
--------------
Future minimum lease payments 3,916
Amounts representing interest (138)
--------------
Present value of future minimum lease obligations 3,778
Amounts due within one year (3,778)
--------------
Amounts due after one year $ -
==============
Interest expensed for capital lease obligations was $868 and $3,645 for the
years ended February 29, 2000 and February 28, 1999, respectively.
44
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
5. Capital Lease Obligations and Commitments (continued)
The Company leases office facilities and office equipment under noncancelable
operating leases. Rent expense under these leases was $97,531 and $107,149 for
the years ended February 29, 2000 and, February 28, 1999, respectively. The
future minimum operating lease payments are $84,864, $85,224, and $89,152 for
the years ended February 28, 2001, 2002, and 2003 and beyond, respectively.
6. Income Taxes
As of February 28, 2000, the Company had federal and state net loss
carryforwards of approximately $17,047,000 and $8,736,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $149,000. The net operating loss and credit carryforwards will
expire at various dates beginning on 2003 through 2020, 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 29, 2000 and February 28, 1999 are
as follows:
February 29 February 28
2000 1999
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards $ 6,084,000 $ 5,650,000
Research credit carryforwards 149,000 137,000
Other 45,000 12,000
-------------- --------------
6,278,000 5,799,000
Deferred tax liabilities:
Tax depreciation (36,000) (120,000)
-------------- --------------
Net deferred tax assets 6,242,000 5,679,000
Valuation allowance (6,242,000) (5,679,000)
$ - $ -
============== ==============
45
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The net valuation allowance increased by $563,000 and $738,000 during the years
ended February 29, 2000 and February 28, 1999, respectively.
7. Stockholders' Equity
Preferred Stock
Series "A"
Series "A" 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
and no dividends have been declared.
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.
46
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
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 $18,000
and $141,660 for the years ended February 29, 2000 and February 28, 1999,
respectively, in paid-in-kind stock dividends as an adjustment to additional
paid in capital.
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 a
total of 1,048,474 shares of common stock. For the year ended February 29, 2000,
287 shares of Series "B" convertible preferred stock were converted into a total
of 3,204,197 shares of common stock.
At February 29, 2000 and February 28, 1999, the Company had aggregate accrued
and unpaid preferred stock dividends of $263,914 and $245,914, 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 shares are
entitled to registration rights and provide for a liquidation preference equal
to $1,000 per share.
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 dividends recorded to reflect this discount was
$216,346 and $309,000, respectively, for the years ended February 29, 2000 and
February 28, 1999.
For the years ended February 29, 2000 and February 28, 1999, 157 shares and 206
shares, respectively, of Series "C" convertible preferred stock were issued for
net proceeds of $362,825. During the year ended February 29, 2000, 288 shares of
Series "C" convertible preferred stock were converted into 2,884,000 shares of
common stock.
47
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Common Stock
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.
On April 15, 1999, the Board of Directors issued 180,000 shares of common stock
for services provided to the Company by the CEO. The shares were given in place
of $18,000 for wages. In addition, on November 4, 1999, the Company granted
211,530 shares to the Board of Directors for services rendered. The Company has
received compensation expense to reflect the transactions.
On December 1, 1999, the Company issued 1,142,857 common shares to two directors
in exchange for cash of $80,000.
At February 29, 2000, the Company had reserved 9,717,900 shares of common stock
for future issuance, including 4,086,173 shares reserved for exercise of
warrants and 5,631,727 shares for the exercise of stock options.
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 29, 2000, 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 29, 2000,
a total of 200,000 shares were exercisable under the 1996 employment agreements.
48
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
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 29, 2000, a total of 75,000 options were exercisable, none of which
have been exercised.
On December 21, 1992, the Company adopted a stock incentive plan that 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.
On November 24, 1999 the Board of Directors approved granting 4,152,727 options
to three officers with an exercise price of $.065 per share. These options were
immediately exercisable.
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 2000 and 1999, respectively: risk-free interest rates of 5.89%
and 5.30%; dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of 2.133 and 3.853; and a weighted-average
expected life of the options of 5 and 3 years.
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:
2000 1999
----------------------------
Pro forma net loss applicable to common $(2,219,130) $(3,188,548)
Pro forma net loss per common share $ (.10) $ (.18)
A summary of stock option activity, and related information for the years
ended February 28, 1999 and 2000 follows:
49
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Outstanding Stock Options
------------------------
Shares Weighted
Available Number of Price Average
for Grant Shares Per Share Exercise Price
------------ ----------- ------------ -----------
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
Additional authorization 4,202,727 - - -
Options granted (4,349,955) 4,349,955 $ .07-.16 $.07
Options exercised - (4,000) $.13 $.13
Options canceled 59,375 (59,375) $.25-5.44 $1.93
------------ ----------- ------------ -----------
Balance at February 29, 2000 310,772 5,320,955 $.07-5.44 $.37
============ =========== ============ ===========
The weighted average fair value of options granted in the year ended February
29, 2000 and February 28, 1999, were $.07 and $1.43, respectively.
Additionally, SFAS No. 123 requires that companies with wide ranges between the
high and low exercise prices of its stock options segregate the exercise prices
into ranges that are meaningful for assessing the timing and number of
additional shares that may be issued and the cash that may be received as a
result of the option exercises.
Below are the segregated ranges of exercise prices as of February 29, 2000:
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
----------- ----------- ----------- ----------- --------- ---------
$.07-.16 4,973,475 4.8 years $.07 4,345,955 $.07
$.94-1.07 215,000 6.4 years $1.06 205,000 $1.07
$1.85-1.99 748,000 2.1 years $1.85 726,000 $1.85
$2.79-5.44 12,000 5.4 years $4.12 12,000 $4.70
----------- ----------- ----------- ----------- --------- ---------
$.07-5.44 5,948,475 4.5 years $.37 5,288,955 $.36
=========== =========== =========== =========== ========= =========
50
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Warrants
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. 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, 2000. 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.
In connection with the private placement offering for 1,250,000 discussed above,
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 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.
In addition to the warrants discussed above there are warrants outstanding to
purchase 264,000 shares of common stock from a 1997 debt issuance. The warrants
expire on various dates 5 years from the date of issuance in 1997.
As of February 29, 2000, 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
51
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
8. Contingencies (continued)
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 final settlement agreement reached by the parties involved, in September
1999, entitled Mifal Klita to the conversion of his Series "B" preferred shares
into unrestricted common stock of the Company plus shares for legal fees and
other provisions stated in the original agreement and 627,520 options
exercisable into common stock at $.085 per share one year from the settlement
date. The stock options were valued using a black-scholes model. These
additional costs of $906,000 were recorded as legal settlement expense in the
accompanying fiscal 2000 consolidated statement of operations. The unrestricted
common stock will be disbursed monthly over a two year period. Another investor,
Leitinger Corporation, of Series "B" preferred stock negotiated a final cash
settlement of $250,000 in January 2000. The Company paid this obligation
subsequent to fiscal year end on April 17, 2000.
The Company is not aware of any other legal actions. Management believes, based
on advice of legal counsel, if any claims arise in the normal course of
business, 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 2000 and 1999, 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"). 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.
52
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
For the year ended February 29, 2000, three customers accounted for
approximately 33%, 28% and 26% of total net revenues for textile products, one
customer accounted for approximately 80% of total net revenues for food
processing products, one customer accounted for 100% of total net revenues for
the medical products, and one customer accounted for approximately 41% of total
net revenues for biochemical products. 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
53
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
9. Segment Information (continued)
for approximately 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.
Industry Data
Cyclo3pss Corporation and Subsidiaries Year ended
February 29 February 28
2000 1999
-----------------------------------
Net sales and other income:
Medical products $38,500 $-
Food processing products 133,034 348,426
Textile products 201,147 194,145
Biochemical products 378,861 289,597
-----------------------------------
751,542 832,168
Interest income and other 139,173 7,066
===================================
Total revenue $890,715 $839,234
===================================
Operating loss (income)
Medical products $(10,377) $-
Food processing products 10,673 113,089
Textile products (122,817) 1,031,381
Biochemical products 281,174 79,234
-----------------------------------
Total operating loss 158,653 1,223,704
Corporate expenses 1,800,886 1,549,480
Interest expense 875 3,863
-----------------------------------
Net loss $1,960,414 $2,777,047
===================================
Identifiable assets
Medical products $- $-
Food processing products 27,581 14,316
Textile products 206,818 364,462
Biochemical products 111,811 123,377
-----------------------------------
346,210 487,839
General corporate assets 120,774 105,768
-----------------------------------
Total assets $466,984 $593,607
===================================
54
<PAGE>
Cyclo3pss Corporation
Notes to Consolidated Financial Statements (continued)
Depreciation and amortization expense
Medical products $- $-
Food processing products 327 82
Textile products 100,171 236,489
Biochemical products 20,534 39,866
Corporate 29,969 56,952
Capital expenditures
Medical products $- $-
Food processing products - 614
Textile products - 97,712
Biochemical products 4,274 492
Corporate 680 11,065
10. Subsequent Events
On March 7, 2000, the Board of Directors approved the issuances of 150,000
shares of common stock for $100,000 in legal services rendered to the Company
and 200,000 shares of common stock for consulting services provided to the
Company.
Subsequent to year-end, 382,000 Class A warrants were exercised for 382,000
shares of common stock for total proceeds of $191,000.
In addition, subsequent to year-end, the 75 remaining shares of Series "C"
preferred stock were converted into 744,250 shares of common stock.
55
<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 29, 2000.
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 47 President, CEO
Durand M. Smith 52 Director, Vice President of Research
and Development
Mondis Nkoy 36 Controller, Corporate Secretary
Michael J. Lakis, Jr. 63 Director
Richard C. Nelson 69 Director
Steve Sarich, Jr. 78 Director
There are no family relationships among the Company's officers and directors.
Background information concerning the Company's officers and directors is as
follows:
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.
Durand M. Smith, Ph.D. Dr. Smith has been the Vice President of Research
and Development for the Company since March 1998 and has been a director of the
Company since April 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.
Mondis Nkoy. Ms. Nkoy has been employed as Controller by the Company since
September 1996. She was also elected as corporate Secretary in October 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.
Richard C. Nelson. Mr. Nelson joined the Company on March 24, 1999. Mr.
Nelson is Vice President Emeritus and Consultant of Hyatt Hotels and Resorts. In
June 1996, he retired from the day-to-day operations as Vice President and
Managing Director of the Grand Hyatt Washington, a 900 room hotel he opened in
1987.
Steve Sarich. Mr. Sarich has been a director of the Company since July
1993. Mr. Sarich is, and has been for the last 15 years, president of 321
Investment Co. Mr. Sarich is a director of Omega Environmental, Wall Data, Back
Technologies, Inc., Ark Systems, Inc., Flo Scan Instrument, Multiple Zones
International and Talus Imaging Co. Mr. Sarich has been president of Arctic
Ventures, Inc. and C.S.S. Management Co. since 1988.
B. Compliance With Section 16(a). Section 16 of the Securities Exchange Act
of 1934 requires the filing of reports for sales of the Company's common stock
made by officers, directors, and 10% or greater shareholders. A Form 4 must be
filed within 10 days after the end of the calendar month in which a sale or
purchase occurred. Based upon review of Forms 4 filed with the Company, no
disclosure is required in this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning compensation
for services rendered for the past three years to the Company's Chief Executive
Officer and to the Company's most highly compensated executive officers other
than the CEO, whose annual salary and bonus exceeded $100,000:
56
<PAGE>
<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 2000 $150,000(2) -0- -0- 2,654,354 -0- -0- -0-
Chairman, CEO 1999 $150,000(2) -0- -0- 450,000(1) -0- -0- -0-
1998 $150,000 -0- -0- -0- -0- -0- -0-
John M. Williams 2000 -0- -0- -0- -0- -0- -0- -0-
Chairman/CEO 1999 -0- -0- -0- -0- -0- -0- -0-
(Retired December 1998 $96,000 -0- -0- -0- -0- -0- -0-
1997)
Durand M. Smith 2000 $120,000 -0- -0- 1,105,981(1) -0- -0- -0-
Vice President, 1999 $120,000 -0- -0- 350,000(1) -0- -0- -0-
Research and Development
Gary Bratcher 2000 -0- -0- -0- -0- -0- -0- -0-
Chairman, CEO 1999 $235,000 -0- -0- -0- -0- -0- -0-
(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 for
fiscal 1999 and $31,875 for fiscal 2000, for a total of $91,250, due to cash
constraints of the Company
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 Options vest on a monthly
basis, permitting the Employee to exercise an option to purchase 8,333 shares of
the Company's common stock for each month of service under the Agreement,
provided, however, that the options vesting during an employment year are not
exercisable until the end of such employment years. The Options are exercisable
for a period of five years from the date of vesting. Therefore, at February 20,
1999 options to purchase 800,000 shares owned by Mr. Williams and Mr. Stoddard,
which vested during the four prior employment years were all exercisable.
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 to
Dr. Durand Smith for 350,000 shares at $.10 per share. These options vested on
the date of grant and were exercisable on that date. A Form S-8 was filed on May
13, 1999 to register common shares underlying these options.
57
<PAGE>
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.
On December 6, 1999, an additional grant was made for 2,654,354 shares to Mr.
Stoddard at $.065 per share. At the same time, additional options were granted
for Dr. Durand Smith for 1,105,981 shares at $.065 per share and for Mondis Nkoy
for 442,392 shares at $.065. These options vested on the date of grant and were
exercisable on that date. A Form S-8 was filed on March 7, 2000 to register
common shares underlying these options.
As of February 29, 2000, none of the options granted in the Employment
Agreements have been exercised. The Options granted in the original three-year
Employment Agreements were approved by the Company's stockholders at the Annual
Meeting of Stockholders held December 10, 1993. The shares of common stock
underlying the originally granted Options were registered by the Company with
the filing of Forms S-8 dated August 31, 1995, May 13, 1999, and March 7, 2000
which are incorporated herein by reference.
Option/SAR Grants in last fiscal year
Individual Grants
<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 2,654,354 62% $.065 12/6/2004
Durand Smith 1,105,981 25% $.065 12/6/2004
Mondis Nkoy 442,392 10% $.065 12/6/2004
Michael Weglarz 120,000 3% $ .08 12/9/2008
</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:
58
<PAGE>
<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 2/29/99 ($)(1)
Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William R. Stoddard -0- -0- 3,504,354 -0- $2,013,877 -0-
John M. Williams -0- -0- 400,000 -0- -0- -0-
Mondis Nkoy -0- -0- 467,692 -0- $301,071 -0-
Durand Smith -0- -0- 1,455,981 -0- $939,670 -0-
</TABLE>
1 An "In-the-Money" stock option is an option for which the market price of the
Company's Common Stock underlying the option on February 29, 2000 exceeded the
option exercise price. The value shown is calculated by multiplying the number
of unexercised options by the difference between (I) the closing price for the
Common Stock on Small Cap Bulletin Board Market on February 29, 2000 ($.7188)
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; $5.44 for 6,000 and $.125 for
4,300 exercisable options for Mondis Nkoy; $.10 for Mr. Stoddard's 450,000, Mr.
Smith's 350,000 and Ms. Nkoy's 15,000 exercisable options; and $.065 for Mr.
Stoddard's 2,654,354, Mr. Smith's 1,105,981 and Ms. Nkoy's 442,392 exercisable
options).
Compensation of Directors
The Company's non-employee directors are paid $500 for each Board of
Directors Meeting attended and $250 for each telephonic meeting. 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.
Due to the cash restraints of the Company, the board compensation was accrued
for about a year and a half, or sixteen telephonic meetings, and was paid
pursuant a board resolution on November 24, 1999, in Company's stock at $.065
per share. These shares were registered by the Company with the filing of Form
S-8 dated March 7, 2000, which is incorporated herein by reference.
59
<PAGE>
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 affect 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.
Options Granted under the Plan. As of May 15, 2000, 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 29, 2000, 14,000 of these Options have been exercised and 4,000 of
these options were canceled pursuant to the terms of the plan when the
optionee's employment with the Company terminated.
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, 36,000 of these Options canceled pursuant to the terms
of the plan when the optionee's employment with the Company terminated. As of
February 29, 2000, 13,000 of these Options have been exercised and none 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,
39,000 of these options were canceled pursuant to the terms of the plan when the
optionee's employment with the Company terminated. As of February 29, 2000,
6,000 of these options were still outstanding.
60
<PAGE>
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 $2.79 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 29,
2000, 6,000 of these options were still outstanding.
On June 1, 1997, options to purchase a total of 15,000 shares were granted to
an employee of the Company who is an officer. These options are exercisable at
$.94 per share. As of February 28, 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. Subsequently,
13,125 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 29,
2000, 10,500 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. Subsequently, all 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 29,
2000, none of these options were still outstanding.
On March 1, 1999, options to purchase a total of 23,328 shares were granted
to six employees of the Company, none of whom are officers or directors of the
Company. All of such options are exercisable at $.125 per share. Subsequently,
9,100 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 29,
2000, 14,228 of these options were still outstanding.
On September 1, 1999, options to purchase a total of 8,500 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 $.1562 per share. As of
February 29, 2000, all of these options were still outstanding.
On October 1, 1998, options to purchase a total of 120,000 shares were
granted to an employee of the Company, who is not an officer or director of the
Company. This option is exercisable at $.08 per share. As of February 29, 2000,
all of these options were still outstanding.
As of February 29, 2000, there are 165,228 shares granted and outstanding,
which leaves 104,772 shares available for grant under the 1992 Stock Incentive
Plan.
61
<PAGE>
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, 2000, by (I) each
director of the Company, (ii) all officers and directors as a group and (iii)
each person known by the Company to beneficially own 5% or more of the
outstanding shares of the Company's Common Stock:
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class Ownership
-------------------------------------------------------------------------------
William R. Stoddard(2)(3) 4,150,957 10.7%
-
3646 West 2100 South
Salt Lake City, UT 84120
Procter & Gamble(9) 2,972,973 7.7%
One Procter & Gamble Plaze
Cincinnati, OH 45202
Steve Sarich, Jr.(2)(4) 1,280,881 3.3%
505 Madison Street
Suite 220
Seattle, WA 98104
Mondis Nkoy(2)(5) 453,392 1.2%
3646 West 2100 South
Salt Lake City, UT 84120
Michael J. Lakis (6)(2) 590,107 1.5%
3646 West 2100 South
Salt Lake City, UT 84120
Durand Smith (7)(2) 1,456,981 3.8%
3646 West 2100 South
Salt Lake City, UT 84120
Richard C. Nelson (8)(2) 61,536 0.2%
3646 West 2100 South
Salt Lake City, UT 84120
All Officers and Directors
as a Group (6 Persons) 10,966,827 28.31%
62
<PAGE>
(1)As of May 15, 2000, there were 27,235,758 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
11,496,581 shares of the Company's common stock. Therefore, under the rules of
the Securities and Exchange Commission, there are deemed to be 38,732,339 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, 2000.
(3) Mr. Stoddard is the record owner of 618,031 of these shares. The
4,150,957 figure includes 3,504,354 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 pursuant to a currently exercisable Warrant as of May 15, 2000.
All of such options are currently exercisable.
(4)The 1,280,881 shares of total beneficial ownership shown for Mr. Sarich
includes 1,237,309 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, 2000. All of such
options and warrants are currently exercisable.
(5)The 453,392 shares of total beneficial ownership shown for Ms. Nkoy
includes 5,000 shares owned of record by Ms. Nkoy, the controller and the
Corporate Secretary of the Company and 448,392 shares which may be acquired by
Ms. Nkoy from the Company pursuant to employment stock option agreements. All of
these options are currently exercisable.
(6)Mr. Lakis is a director who is currently the record owner of 590,107
shares. He has no exercisable stock options as of May 15, 2000, nor has he been
granted any options as of May 15, 2000.
(7)The 1,456,981 shares of total beneficial ownership shown for Dr. Smith
includes 71,000 shares owned of record by Dr. Smith, a director and employee
(vice president of research and development) of the Company and 1,385,981 shares
which may be acquired by Dr. Smith from the Company pursuant to employment stock
option agreements. All of these options are currently exercisable.
8) Mr. Nelson is a Director who is currently the record owner of 61,536
shares. He has no exercisable stock options as of May 15, 2000, nor has he been
granted any options as of May 15, 2000.
63
<PAGE>
9) Procter & Gamble, under the terms of the $1,000,000 loan agreement, may
convert the loan amount, plus interest to common shares, at $.37 cents per
share. More information about this agreement is under Cash & Liquidity section
of this financial statement.
Security Ownership of Management
See Item 4(a) above.
Changes in Control
No changes in control of the Company are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Parents of Company
The only parents of the Company, as defined in Rule 12b-2 of the Exchange
Act, are the officers and directors of the Company. For information regarding
the share holdings of the Company's officers and directors, see Item 4.
On June 29,1995 the Board of Directors approved a private placement of
investment stock to accredited investors. The offering consisted of 571,432
units at $3.50 each for a total of $2,000,000. Each unit consists of one share
of restricted common stock plus one warrant to purchase an additional share of
restricted stock at $4.00. The warrants expired one year after the closing of
the private placement. Of the 415,674 units that were issued for a total
consideration of $1,454,858, the following was the only officer, director or
affiliate that participated in this private placement offering:
Amount Shares Warrants
Name of Owner Invested Purchased Purchased (expired July 1996)
------------- --------- ---------- -----------------------------
Steve Sarich, Jr.(1) $178,773 51,078 51,078 (3)
321 Investment Company(2) 35,087 10,025 10,025 (3)
(1) This individual is a Director of the Company as of May 15, 2000. 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.
64
<PAGE>
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 67.
(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.
65
<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 29, 2000 By/s/William R. Stoddard
---------------------------------------
William R. Stoddard
CEO & Chairman
Principal Executive Officer
Date: May 29, 2000 By/s/ Mondis Nkoy
---------------------------------------
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ William R. Stoddard President May 29, 2000
-----------------------
William R. Stoddard
/s/ Steve Sarich Jr. Director May 29, 2000
Steve Sarich, Jr.
/s/ Richard C. Nelson Director May 29, 2000
---------------------
Richard C. Nelson
/s/ Michael J. Lakis Director May 29, 2000
--------------------
Michael J. Lakis
/s/ Durand M. Smith Director May 29, 2000
-------------------
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.
Exhibit Page Number or
Number Description Method of Filing
------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation Form 10-SB, 1993 (1)
3.2 Bylaws Form 10-SB, 1993 (1)
3.2 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)
67
<PAGE>
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
27.1 Financial data schedule Attached
(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
