<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
------------------------------------------------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from______________________ to ________________________
Commission file number__________________________________________________________
Kyzen Corporation
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Utah 87-0475115
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
430 Harding Industrial Drive, Nashville, TN 37211
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 615-831-0888
------------------------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Class A Common Stock Boston Stock Exchange, NASDAQ Small Cap
- --------------------------------- ---------------------------------------
Warrants for Class A Common Stock Boston Stock Exchange, NASDAQ Small Cap
- --------------------------------- ---------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
CLASS A COMMON STOCK
- -----------------------------------------------------------------------------
(Title of class)
WARRANTS FOR CLASS A COMMON STOCK
- -----------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Items 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant'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]
State issuer's revenues for its most recent fiscal year. $4,959,002
------------------------
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act)
$4,331,250 at $2 5/8 per share on January 16, 1997
- --------------------------------------------------
Note: If determining whether a person is an affiliate would involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
<PAGE>
ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) or the Exchange Act after the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date.
4,999,848 shares of Class A Common Stock outstanding as of February 28, 1997
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 31, 1990)
NONE
- --------------------------------------------------------------------------------
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
(Registrant) Kyzen Corporation
------------------------------------------------------------------
By
----------------------------------------------------------------------------
Date Michael L. Bixenman, Chairman, Director
----------------------
By
----------------------------------------------------------------------------
Date Kyle J. Doyel, President, CEO (Principal Executive
---------------------- Officer), Director
By
----------------------------------------------------------------------------
Date Benjamin D. Wolfley, Treasurer (Principal
---------------------- Accounting Officer)
By
----------------------------------------------------------------------------
Date Thomas M. Forsythe, Vice President, Director
----------------------
By
----------------------------------------------------------------------------
Date Thomas J. Herrmann, Vice President
----------------------
By
----------------------------------------------------------------------------
Date John A. Davis, III, Director
----------------------
By
----------------------------------------------------------------------------
Date Peter J. Murphy, Director
----------------------
By
----------------------------------------------------------------------------
Date Larry A. Lofgreen, Director
----------------------
By
----------------------------------------------------------------------------
Date James A. Gordon, Director
----------------------
<PAGE>
KYZEN CORPORATION
- --------------------------------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I
Item 1. Description of Business 4
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis or Plan of Operation 10
Item 7. Financial Statements 13
Report of Independent Accountants 14
Balance Sheet as of December 31, 1995, and 1996 15
Statement of Operations for the years ended
December 31, 1995, and 1996 16
Statement of Changes in Shareholders' Equity for the years
ended December 31, 1995, and 1996 17
Statement of Cash Flows for the years ended
December 31, 1995, and 1996 18
Notes to Financial Statements 19
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 27
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and Management 30
Item 12. Certain Relationships and Related Transactions 30
Item 13. Exhibits and Reports on Form 8-K 31
</TABLE>
Page 3 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART I
Item 1. Description of Business
- ---------------------------------
The Company
Kyzen(R) Corporation, Inc. ("Kyzen" or the "Company") manufactures or markets
(1) environmentally acceptable chemical solutions and processes used in high-
technology cleaning applications, including electronic assemblies and precision
metal and plastic components, (2) process water reuse machines used in these
chemical cleaning applications, (3) specialty cleaning machines, and (4)
integrated process support services. These products and services can be sold as
a package, as a cleaning process or as separate items that can be integrated
into the customer's cleaning process. The Company was incorporated in Utah in
1990. Its headquarters are located at 430 Harding Industrial Dr., Nashville, TN
37211. Telephone (615) 831-0888/ FAX (615) 831-0889.
History of the Company
In September 1987, the United States and 22 other countries signed the Montreal
Protocol ("the Protocol") on Substances that Deplete the Ozone Layer. The
Protocol called for a freeze in the production and consumption of ozone
depleting products ("ODPs") by the year 2000 for developed countries and 2010
for developing countries. As of February 1993, over 90 nations, representing
over 90% of the world's consumption of ODPs, were parties to the Protocol. In
1990, the United States enacted the Clean Air Act mandating that the use of ODPs
be phased out by the year 2000. In September 1991, the US Environmental
Protection Agency announced that ozone layer depletion over North America was
greater than expected. In response to this announcement, President Bush issued
an executive order accelerating the phase-out of ozone depleting materials to
December 31, 1995. The more than 90 nations which are signatories to the
Protocol agreed to accelerate the phase-out of production of ODP's to December
31, 1995 for developed countries and December 31, 2005 for developing countries.
Because industrial cleaning is one of the largest applications for ODPs, Kyzen
was organized to develop chemical solutions and processes to replace ODPs used
in the cleaning of electronic assemblies and precision metal components.
Historically, materials such as chlorofluorocarbon 113 ("CFC-113") and 1,1,1,
Trichloroethane ("Methyl Chloroform" or "Trich") were widely used in these
applications.
In early 1991, the Company recognized that the majority of chemical cleaning
products designed to replace ODPs required the use of water in the cleaning
process, either as a part of the washing process or as a rinsing agent. In
addition, the Company determined that most potential customers desired to
recycle the rinse water in the cleaning process. The Company has developed
technologies for its process water reuse machines using reverse osmosis ("RO")
membranes in conjunction with distillation, activated carbon and ion exchange
resins.
Kyzen has formulated four general lines of cleaning chemistries that serve
different market niches. These chemistries are:
1. semi-aqueous (Ionox);
2. aqueous cleaner concentrates (Aquanox);
3. metal/plastic precision cleaners which can be aqueous or semi-aqueous
(Metalnox); and
4. volatile organic chemical ("VOC") compliant cleaning agents (Lonox).
In addition, Kyzen has currently identified new product niches and is currently
selling on a limited basis other specialty cleaning substances to address needs
in other industries.
Most formulations used in the electronics applications are based on the
Company's proprietary formulations and have patent protection. The basic
ingredient of these patented formulations is a nonlinear alcohol that is derived
from vegetable wastes.
Most Kyzen formulations are non-flammable and non-combustible, low in toxicity,
and generally require no hazardous material shipping or storage precautions.
The Company attempts to meet this standard with all its products. However,
custom developed products for key high volume customers frequently have unique
requirements which necessitate a departure from the above standards.
Page 4 of 31
<PAGE>
KYZEN CORPORATION
- --------------------------------------------------------------------------------
PART I
The Kyzen electronic cleaning chemistries have proven in laboratory and
production testing to clean a wide range of electronic, metal and plastic
precision components. The products developed for precision metal and plastic
applications are proprietary and are usually developed to operate in a specific
application. The materials used in Metalnox may or may not contain the
nonlinear alcohol. However, when different raw materials are selected, they are
selected based on the same attributes of low toxicity, low combustibility and
treatability as found in the Company's patented products.
The Company intends to develop new cleaning chemistries and processes for the
semiconductor, optics, medical, industrial and other niche cleaning markets.
Kyzen believes its non-flammable, low toxicity chemistry will be an attractive
alternative in such industries. The Company also believes that future product
lines may be obtained through acquisitions, although the Company has not entered
into definitive acquisition agreements and there can be no assurance that any
acquisition opportunities will materialize.
Process Water Reuse Machines
The term "process water" is significant, because Kyzen currently does not plan
to be a waste water reuse vendor, but rather a supplier of innovative "process
water" generation and reuse technologies that can be used in closed-loop process
water applications or applications that require technology to minimize or
concentrate contaminants prior to pretreatment (pretreatment is the term used to
describe the process used to treat discharge water prior to going to drain).
The price range of the process water reuse machines is $15,000 to $250,000 per
unit, based on required capacity. The Company believes that installation of its
water reuse machines facilitates the sale of Kyzen chemistries to its machine
customers.
Process Rinse Water Reuse Technology. The Company's rinse water reuse machines
are based on proprietary RO technology. In the process of RO, contaminated
water is pressurized into membranes which concentrate contaminates on one side
of the membrane allowing clean water to pass through to the other side. A large
scale, high volume RO system will typically concentrate the fluid contaminants
into 10% to 20% of the original water volume, and this technology is often
applied to the purification of tap water. Kyzen applies this RO process
technology to the reuse of process rinse water from cleaning systems. In rinse
water reuse, the Company's RO processes enable 80% to 90% of the rinse water to
be returned to the rinsing process.
Concentrate Fluid Reuse and Distillation Units. The concentrated water from the
Company's RO process may be discharged, subject to governing regulations, or can
be further concentrated by distillation. In distillation, the waste is
concentrated further by heat, and additional water is recycled to the process,
resulting in a reduction in the volume of waste from the process.
Equipment Products and Peripherals
Kyzen's Equipment Products and Peripherals EP&P group has a clear mission:
..enhancing processes and eliminating obstacles in the implementation of Kyzen
Chemistry and Products.
Enhancing processes is a central aspect of Kyzen's process validation concept,
drawing maximum benefit from our Cleaning Applications and Evaluation Center in
Manchester, NH. This includes in house testing, and field support to optimize
our customers equipment in the field. Eliminating obstacles is critical to
every sale. In our case, the EP&P group will fabricate chemical handling
stations or devices which are frequently required in a new cleaning system.
Implementation is where the rubber hits the road, and business begins. This
runs the gamut from IBC-188s, water reuse systems, or field integration and
implementation of any or all such systems.
Competition
The industry of cleaning electronic and metal products is undergoing rapid
change as companies search for new technology to replace processes based on
ozone depleting chemicals. The market is rapidly moving from a commodity market
supplied by major chemical companies to a series of highly fragmented niche
markets supplied by focused specialty chemical companies. There are numerous
competitors in this fragmented industry management believes its most significant
competitors are Petroferm(R) (Bioact(R) and former DuPont Axarel(R) line),
Church & Dwight (Armakleen(R), Alpha Metals, Multicore, Kester, and Dr. O.K.
Wack Chemie.
Page 5 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART I
Dependence on Suppliers and Others
The Company purchases its raw materials, components, and finished machines from
a variety of sources. While the Company believes that it is generally not
significantly dependent on any sole supplier for raw materials, components and
finished machines, it has, in the past, relied on one chemical producer for its
supply of the alcohol used in many of the Company's cleaning formulations. There
can be no assurance that any raw material or other components and systems
utilized by the Company will continue to be available at reasonable prices in
the volume required for the Company to meet its customers' orders.
Production and Supply
The production of the Company's chemistries involves the blending of specific
chemicals purchased from third party chemical manufacturers in the open market.
The costs of the Company's basic chemical raw materials, other than the
nonlinear alcohol, are widely available from numerous sources. The nonlinear
alcohol is currently available from only two producers, both of which are
operating at levels below capacity.
Sales and Distribution
Marketing. The Company believes that there are a number of precision cleaning
market niches ranging in size from $5 million to $50 million in which the
Company attempts to maintain a competitive advantage. The Company is now
established in the electronic assembly market niche. The Company is currently
developing other niches such as electronic hybrids, precision metal parts,
batteries, optics, medical devices and semiconductor wafers.
Establishment of a Process Center. A process center is a demonstration facility
in which customers can view the effectiveness of the Company's cleaning and
water reuse technologies. It is also a nurturing ground for the development of
Kyzen technologies. The Company currently operates one comprehensive process
center at its Manchester, New Hampshire facility.
Further Development of a Regional Sales Force. One of the primary marketing
challenges facing the Company is the selling of its innovative technologies to
customers who have limited experience with water based cleaning and reuse
processes. The information challenges of these sales require long relationship
building periods, supplemented by considerable problem solving of process,
chemistry, operating cost, and regulatory concerns.
The Company is complementing its manufacturer representative network with a
direct regional sales force. Direct sales engineers and implementation personnel
have been hired in key geographic regions in the United States.
Customers
During the past 12 months, no customer accounted for more than 10% of the
Company's revenues. The Company's management believes that the loss of any one
customer would not have a material adverse effect on the Company's business.
Patents
The Company jointly holds two patents for its chemical cleaning formulations in
the United States. The Company also has obtained one patent in each of Mexico,
Taiwan and Australia and has patents pending in Europe and Japan. These existing
patents, which expire between 2009 and 2014, and pending patents are jointly
owned by the Company and Delco, a division of General Motors. Delco retains the
right to use chemistry developed under the patents, and the Company retains the
right to market the patented formulations. Delco is not entitled to receive
royalties or license fees from the Company on the chemical cleaning products
manufactured and sold by the Company. However, if the Company enters into a
license or royalty arrangement for the patented formulations, the resulting
license fee or royalties would be shared between the Company and Delco. The
Company currently has numerous patents on file relating to current and future
market segments.
Future Legislation and Governmental Regulation
The Company believes that the demand for its products is directly related to
governmental responses to and public concern with ozone depletion, CFC
elimination and air and water contamination. If there were to be less public
concern over ozone depletion or water contamination or less governmental
pressure to remedy such problems, there could be substantially reduced demand
for the products offered by the Company. Although the Company is not aware of
any pending or proposed federal legislation or regulation that could adversely
affect its products, chemicals or
Page 6 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART I
services, any such legislation or regulation in the future that limits the sale
of the Company's products or components or limits the methods by which those
products are manufactured, installed or serviced, could have a material adverse
impact on the Company.
Research and Development
The Company's research and development expenses in 1995 and 1996 were $224,508
and $576,308, respectively. Of these amounts, $170,840 and $402,646 was spent
for chemical research and development in 1995 and 1996, respectively. Research
and development activities are expensed as incurred because the majority of the
Company's research and development activities consist of developing technically
feasible products and processes. The Company will continue to maintain a high
level of development activity in order to create new and better products and
processes as required by niche markets.
Employees
As of December 31, 1996, the Company had 37 full time employees and 2 part time
employees. The Company considers its employee relations to be satisfactory. The
Company believes that additional staff will be required to properly support
increased marketing, sales, development, and support functions. The Company
intends to hire support staff and other personnel as they are needed.
Environmental, Health and Safety Considerations
The Company and its operations are subject to certain Federal, state and local
laws and regulations relating to the discharge of pollutants into the air and
water, worker exposure to the chemical formulations manufactured and sold and
established standards for the reuse, storage and disposal of hazardous wastes.
The Company believes that its operations are in compliance with current laws and
regulations relating to such matters. The Company derives a large portion of its
revenue from the sale of blended products made from finished materials purchased
from various chemical manufacturers. These chemical materials are periodically
evaluated and/or re-evaluated by these third party chemical suppliers for
potential adverse health effects due to exposure or overexposure to the chemical
materials.
Item 2. Description of Property
- --------------------------------
Facilities
The Company's headquarters, research and development laboratory, chemical
marketing and chemical manufacturing facilities occupy approximately 18,000
square feet located at 430 Harding Industrial Dr., Nashville, Tennessee 37211.
The Company directs its sales, engineering, process water reuse machine
production and specialty machine manufacturing from a facility consisting of
approximately 11,300 square feet located at 540 Commercial Street, Manchester,
New Hampshire.
The Company conducts its operations from leased facilities under an operating
lease agreement. As of December 31, 1996, including lease agreements entered
into subsequent to year end, future minimum annual rental payments are
summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $148,530
1998 117,275
1999 7,788
</TABLE>
Total rent expense was $80,208 in 1995 and $127,126 in 1996. Included in the
amount for 1996 is approximately $65,146 of rents paid to a shareholder. The
Company has options to renew its leases on all its facilities for up to three
additional years.
The Company carries general property and casualty insurance in an amount
management considers to be adequate.
Item 3. Legal Proceedings
- --------------------------
As of December 31, 1996, the Company was not party to any legal proceedings.
Page 7 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART I
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the annual meeting of stockholders dated July 19, 1995, the stockholders
approved an amendment to the Company's Corporate Bylaws to modify the terms of
service for the members of the Board of Directors, whereby the permitted terms
of service were modified to allow for three year terms, to be staggered such
that approximately one third of the Board of Directors are up for election each
year.
Page 8 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The Company's securities, Class A Common Stock (KYZN) and Warrants to purchase
Class A Common Stock (KYZNW), are quoted on the NASDAQ Small Cap Market and
listed on the Boston Stock Exchange (KYZ and KYZW). The Stock and Warrant prices
for the previous six quarters is presented in the table below.
<TABLE>
<CAPTION>
Class A
Warrants Common Stock
High Low High Low
------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Quarter ended: September 30, 1995 1 5/32 11/16 3 1/8 2 3/8
December 31, 1995 25/32 1/2 2 3/4 2 3/8
March 31, 1996 31/32 1/2 3 5/16 2 1/2
June 30, 1996 1 9/16 1/2 5 2
September 30, 1996 1 1/8 9/16 4 1/16 2 7/8
December 31, 1996 5/8 3/16 3 1/8 1 5/8
</TABLE>
There were approximately 1,400 shareholders of record of Class A Common Stock on
December 31, 1996.
Page 9 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART II
Item 6.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1995 and December 31, 1996
Net sales for the year 1996 from all business activities increased approximately
25% or $1,002,653 to $4,959,002, while net chemical sales increased 18% from
1995. These increases are due to increased sales volume of the Company's
chemical cleaning agents to existing customers as well as sales to new customers
who are converting from ozone depleting processes and chemicals. Sales of
equipment, processes and peripheral systems have increased due to increased
sales and marketing efforts.
Gross profit for 1996 increased 19% or $369,733 to $2,350,781 as compared to
$1,981,048 in 1995. This $369,733 increase is attributable to increased domestic
sales volume of the Company's cleaning agents, as well as increased sales of
equipment, processes, and peripheral systems. Gross profit margins on chemical
sales remained constant at 58% for 1995 and 1996, while gross profit margins
from all business activities decreased from 50% in 1995 to 47% in 1996,
reflecting lower margins on equipment, process and peripheral manufacturing.
Selling, general, and administrative expenses for the year ended December 31,
1996 increased 43% or $789,022 to $2,640,983 in 1996 as compared to $1,851,961
for 1995. This increase reflects augmented spending on advertising, selling
expenses, and expenses associated with being a public company, and expenses
associated with hiring and relocating sales personnel during 1996.
Research and development expenses for 1996 increased 157% or $351,800 to
$576,308 from $224,508 for 1995. This increase reflects the Company's continued
efforts in development projects for new products and processes with current and
potential customers and expenses associated with development of a new machine
product line. One of the new product lines consists of specialty cleaning
machines that will be built to specific customer order.
Operating Income for 1996 decreased 808% or $771,089 to a loss of $866,510 from
a loss of $95,421 for the year ended December 31, 1995. This decrease is due
primarily to the increased research and development expenses in developing a new
line of specialty cleaning machines and increased sales and marketing expenses
in anticipation of greater sales growth in the future.
Interest income for 1996 increased 16% to $126,481 from $108,743 for 1995. This
$17,738 increase is due to higher cash balances during 1996 as a result of the
excess cash available from the public offering being invested in investment
grade commercial paper and similar financial instruments.
Interest expense for 1996 decreased 88% to $16,591 from $143,079 in 1995. The
decrease of $126,488 in interest expense reflects the results of the
extinguishment of debt with the proceeds of the Company's initial public
offering.
Comparison of Years Ended December 31, 1994 and December 31, 1995
Net sales in 1995 increased 25% or $780,415 to $3,956,349 from $3,175,934 in
1994. This increase was due to higher sales volume of the Company's chemical
cleaning agents to existing customers, sales to new customers who are converting
from ozone depleting processes and chemicals, increased sales and marketing
efforts, increased sales of water reuse systems, and sales of specialty cleaning
machines.
Gross profit for 1995 increased 18% or $304,365 to $1,981,048 from $1,676,683
for 1994. This increase reflects higher sales volume, shifting product mix, and
expenditures associated with developing a line of specialty cleaning machines.
Gross profit margins decreased from 53% in 1994 to 50% in 1995, primarily
reflecting a shift in product mix and the lower margins associated with
manufacturing equipment, process and peripheral systems.
Selling, general and administrative expenses for 1995 increased 27% or $398,122
to $1,851,961 as compared to $1,453,839 in the prior year. The increase reflects
an increased marketing effort, increased personnel, and one-time charges of
approximately $200,000 related to the public offering.
Research and development expenses during 1995 increased by 31% or $52,598 to
$224,508 from $171,910 during 1994. This increase reflects the Company's
continued efforts in development projects for new products and processes
Page 10 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART II
with current and potential customers and expenses associated with development of
a new specialty cleaning machine product line.
Operating income for 1995 decreased from income of $50,934 in 1994 to a loss of
$95,421 in 1995. This decrease is due primarily to the increased research and
development expenses in developing a new specialty cleaning machine product
line.
Interest income for 1995 increased 122% or $59,749 to $108,743 from $48,994 for
1994. This increase is due to the greater cash resources available to the
Company during 1995, than in 1994 as a result of the initial public offering
completed in August 1995.
Interest expense for 1995 increased 19% or $23,246 to $143,079 in 1995, as
compared to $119,833 for 1994. This increase reflects the increased borrowings
related to the bridge loan offering in 1995. This increased debt provided
funding for expenditures related to the initial public offering and working
capital expenditures made in 1995.
Net loss increased from $19,905 in 1994 to $244,599 in 1995. The loss in 1995
was due in part to an extraordinary loss booked during the third quarter of 1995
in the amount of $114,843 from the early extinguishment of debt relating to
previous financing arrangements. The Company accreted $97,657 of Class B
Common Stock to redemption amounts in 1994 and $248,326 in 1995. This resulted
in net losses allocable to Class A common shareholders of $117,562 in 1994
compared with $492,925 in 1995.
Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that in the event certain facts and circumstances indicate an asset may
be impaired, an evaluation of recoverability must be performed to determine
whether or not the carrying amount of the asset is required to be written down.
The Company adopted the provisions of this statement effective January 1, 1996,
and adoption did not materially impact the Company's financial condition or
results of operations.
In October 1995, SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" was issued. The Company will continue to measure compensation
costs for its employee stock compensation plans as prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees," as allowed under SFAS No. 123.
SFAS No. 123 does, however, require disclosure of the pro forma effect of
stock-based compensation. This information is disclosed in the footnotes to the
financial statements.
Forward-Looking Statements
Management has included below certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature, including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend," and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties. Among the factors that
could cause actual results to differ materially from those projected are the
following: business conditions and the general economy as they affect interest
rates; business conditions as they affect manufacturers and distributors of
chemical raw materials; the federal, state and local regulatory environment;
availability of debt and equity capital with favorable terms and conditions;
availability of new expansion and acquisition opportunities; changes in the
financial condition or corporate strategy of the Company's primary customers;
and the ability of the Company to develop new, competitive product lines.
Liquidity and Capital Resources
The Company's primary sources of funds are cash generated from operating
activities and a secured line of credit, and its initial public offering in
1995. The Company's primary uses of funds are research and development of new
product lines, purchase of capital equipment, and sales and marketing
activities.
Page 11 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART II
On August 4, 1995, the Company completed an initial public offering of its Class
A Common Stock. The Company received net proceeds of approximately $5,025,000
after underwriters' discounts, commissions and costs of the offering. Prior to
the offering, the Company financed its working capital requirements through the
private placement of equity and debt.
As of December 31, 1996, the Company had working capital of $1,994,994, compared
to $2,794,891 as of December 31, 1995. This represents a decrease of $799,897,
or 29% from 1995. This decrease resulted primarily from the funding of
operating costs and expenses related to the development of a new specialty
cleaning machine line.
In March 1996, the Company obtained a line of credit from a commercial bank in
the amount of $500,000 secured by the Company's accounts receivable and a cash
balance. As of December 31, 1996, there was no balance outstanding on this line
of credit.
Cash used by operations of $625,072 in 1996 represented a $43,266 decrease over
cash used by operations of $668,338 during 1995. This decrease resulted from
losses from operations, increases in accounts receivable, and changes in
accounts payable balances.
Cash used by investing activities of $183,363 in 1996 represented a $820,934
decrease over cash used by investing activities during 1995 of $1,004,297. This
decrease was due mainly to the increase in short-term investments during 1995.
Cash used by financing activities of $58,635 in 1996 represented a decrease of
$3,141,301 from cash provided by financing activities of $3,199,936 during 1995.
This difference was due to the cash provided by the issuance of stock pursuant
to the initial public offering, repurchase of Class B Common Stock, and
repayment of debt during 1995 and the reduction in debt and repurchase of Class
A Common Stock during 1996.
In 1995, the Company reclassified $257,236 from stockholders' equity to current
liabilities to accrue for a potential obligation associated with a put option
related to the bridge loan offering, a combination debt and equity offering sold
in anticipation of the initial public offering. This put option expired on
August 4, 1996 without any bridge loan holder having exercised it, and the
amount was reclassified from current liabilities to additional paid-in-capital.
Additionally, the Company accrued $59,796 of interest expense to current
liabilities for an obligation associated with a put option granted to a
shareholder. This option was exercised in August 1996 and the Company acquired
100 shares of its Class A Common Stock as a result of this transaction. The
Company recorded the acquisition of treasury stock of $313 and the reduction of
the current liability.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations and expansion plans, that the current cash balances,
together with projected cash flow from operations, will be sufficient to satisfy
its contemplated cash requirements for at least twelve months from the end of
the fiscal year. In the event that the Company's plans change, its assumptions
change or prove to be inaccurate (due to unanticipated expenses, delays, or
otherwise) the Company could be required to seek additional financing from
public or private debt and equity markets prior to such time. There can be no
assurance, however, that these sources will be available to the Company on
favorable terms, and unfavorable markets could limit the Company's ability to
obtain additional financing. Additionally, the Company plans to continue to
investigate potential acquisition candidates that are consistent with the
Company's growth strategies.
The Company's cash requirements for 1997 and beyond will depend primarily upon
the level of sales, product development, sales and marketing expenditures,
timing of expansion plans and capital expenditures.
Page 12 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART II
Item 7. Financial Statements
- ----------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 14
Balance Sheet as of December 31, 1995 and 1996 15
Statement of Operations for the years ended December 31, 1995 and 1996 16
Statement of Changes in Shareholders' Equity (Deficit) for the years
ended December 31, 1995 and 1996 17
Statement of Cash Flows for the years ended December 31, 1995 and 1996 18
Notes to Financial Statements 19
</TABLE>
Page 13 of 31
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Kyzen Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Kyzen
Corporation at December 31, 1995 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Nashville, Tennessee
January 23, 1997
Page 14 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,608,890 $ 741,820
Short-term investments 704,608 528,416
Accounts receivable, net of allowance
for doubtful accounts of $9,516 in 1995,
and $16,338 in 1996 630,264 860,785
Costs and estimated losses in excess of billings
on uncompleted contracts 140,056 80,321
Inventory 172,581 205,126
Other 21,239 37,137
----------- -----------
Total current assets 3,277,638 2,453,605
Property and equipment, net 519,982 786,797
Patents, net 91,445 99,243
Interest receivable from related parties 87,105 124,839
----------- -----------
Total assets $ 3,976,170 $ 3,464,484
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable and capital lease obligations, current $ 5,610
Accounts payable and accrued expenses $ 169,241 432,088
Accounts payable to related parties 8,735 20,913
Put repurchase obligation 304,771
----------- -----------
Total current liabilities 482,747 458,611
Notes payable and capital lease obligations 6,697
----------- -----------
Total liabilities 482,747 465,308
----------- -----------
Commitments and contingencies (Note 10)
Mandatorily redeemable Class B Common
Stock, 1,200,000 shares authorized,
no shares issued or outstanding in 1995 or 1996
Shareholders' equity (deficit):
Preferred stock, $0.001 par value, 10,000,000
shares authorized, no shares issued or outstanding in 1995 or 1996
Class A Common Stock, $0.01 par value, 30,000,000
shares authorized, 4,917,322 shares issued and outstanding
in 1995, 4,999,948 and 4,999,848 shares issued and outstanding,
respectively, in 1996 49,174 50,000
Additional paid-in capital 5,031,560 5,293,420
Treasury stock, at cost (313)
Accumulated deficit (1,587,311) (2,343,931)
----------- -----------
Total shareholders' equity 3,493,423 2,999,176
----------- -----------
Total liabilities and shareholders' equity $ 3,976,170 $ 3,464,484
=========== ===========
</TABLE>
Page 15 of 31
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended
December 31,
1995 1996
----------- -----------
<S> <C> <C>
Net sales $ 3,956,349 $ 4,959,002
Cost of sales 1,975,301 2,608,221
----------- -----------
Gross profit 1,981,048 2,350,781
Operating costs and expenses:
Selling, marketing, general and administrative 1,851,961 2,640,983
Research and development expenses 224,508 576,308
----------- -----------
Total operating expenses 2,076,469 3,217,291
----------- -----------
Operating loss (95,421) (866,510)
Other income (expense):
Interest income 108,743 126,481
Interest expense (143,079) (16,591)
----------- -----------
Total other income (expense) (34,336) 109,890
----------- -----------
Loss before extraordinary item (129,757) (756,620)
Extraordinary loss from early extinguishment of debt (114,842)
----------- -----------
Net loss (244,599) (756,620)
Accretion of Class B Common Stock
to redemption amounts (248,326)
----------- -----------
Net loss allocable to Class A common shareholders $ (492,925) $ (756,620)
=========== ===========
Earnings per share:
Loss before extraordinary item allocable
to Class A Common Shareholders $(0.09) $(0.15)
Extraordinary item $(0.03)
Net loss allocable to Class A Common Shareholders $(0.12) $(0.15)
Weighted average shares outstanding 4,052,110 4,964,549
</TABLE>
Page 16 of 31
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Class A Additional
Common Stock Paid-in Treasury Accumulated
Shares Amount Capital Stock Deficit Total
---------- --------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,1994 3,285,822 $ 32,859 $ 461,442 $(1,342,712) $ (848,411)
Issuance of stock 1,706,126 17,061 5,074,934 5,091,995
Redemption of Class A
Common Stock (74,626) (746) (256,490) (257,236)
Accretion of redeemable
Class B Common Stock (248,326) (248,326)
Net loss (244,599) (244,599)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 4,917,322 $ 49,174 $5,031,560 - $(1,587,311) $3,493,423
Issuance of stock 8,000 80 5,370 5,450
Expiration of put obligation 74,626 746 256,490 257,236
Repurchase of Common Stock (100) (313) (313)
Net loss (756,620) (756,620)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 4,999,848 $ 50,000 $5,293,420 $(313) $(2,343,931) $2,999,176
========= ======== ========== ======== =========== ==========
</TABLE>
17 of 31
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended
December 31,
1995 1996
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (244,599) $ (756,621)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Non-cash extraordinary item 114,842
Depreciation and amortization 84,496 154,642
Non-cash interest charge 49,361 11,948
Increase in accounts receivable (38,927) (230,521)
(Increase) decrease in costs and estimated losses
in excess of billings on uncompleted contracts (140,056) 59,735
Increase in inventory (100,957) (85,649)
(Increase) decrease in other current assets 69,783 (15,898)
Increase in interest receivable from related parties (41,868) (37,734)
Increase (decrease) in accounts payable
and accrued expenses (420,413) 275,026
----------- ----------
Net cash used by operating activities (668,338) (625,072)
----------- ----------
Cash Flows from Investing Activities:
(Increase) decrease in short-term investments (704,608) 176,192
Purchase of fixed assets (289,072) (343,936)
Purchase of patent rights and related expenditures (10,617) (15,619)
----------- ----------
Net cash used by investing activities (1,004,297) (183,363)
----------- ----------
Cash Flows from Financing Activities:
Payments on related party notes payable (177,000)
Issuance of stock 5,025,256 5,450
Repurchase of Class A Common Stock (59,796)
Repurchase of Class B Common Stock (875,000)
Proceeds from issuance of note payable 53,252
Payment on note payable (826,572) (4,289)
----------- ----------
Net cash provided (used) by financing activities 3,199,936 (58,635)
--------- ----------
Net increase (decrease) in cash and cash equivalents 1,527,301 (867,070)
Cash and cash equivalents at beginning of year 81,589 1,608,890
----------- ----------
Cash and cash equivalents at end of year $ 1,608,890 $ 741,820
</TABLE>
Supplemental cash flow information:
Cash used for interest payments was $100,552 in 1995 and $59,320 in 1996. The
Company paid no income taxes in 1995 and 1996.
Supplemental disclosure of non-cash investing and financing activities:
The Company reclassified inventory of $65,607 to fixed assets in 1995, and
$53,104 in 1996.
The Company offset $74,053 of deferred charges against the proceeds of the
initial public offering in 1995.
The Company converted short and long term notes payable of $486,260 into bridge
loan units during 1995.
18 of 31
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
Kyzen Corporation ("Kyzen" or the "Company") was incorporated under the laws of
the State of Utah on March 9, 1990. Kyzen was formed to develop environmentally
safe chemical solutions to replace ozone-depleting chlorinated solvents. The
Company manufactures or markets (1) environmentally acceptable chemical
solutions and processes used in high-technology cleaning applications, including
electronic assemblies and precision metal and plastic components, (2) process
water reuse machines used in these chemical cleaning applications, (3) specialty
cleaning machines, and (4) integrated process support services. These products
and services can be sold as a package, as a cleaning process or as separate
items that can be integrated into the customer's cleaning process. The Company's
operations are located in Nashville, Tennessee and Manchester, New Hampshire.
The Company's operations are conducted within one business segment. Sales to
customers outside the United States totaled $533,578 in 1995, and $463,464 in
1996 representing approximately 14% and 9% of 1995 and 1996 net sales,
respectively. No individual customer or foreign country accounts for more than
10% of the Company's revenues in 1995 or 1996.
Summary of Significant Accounting Policies
Cash, Cash Equivalents and Short Term Investments
The Company considers securities with an original maturity of three months or
less to be cash equivalents. By Company policy, short-term investments consist
primarily of investment grade commercial paper, direct obligations of the U.S.
government and its agencies, and other short-term investment funds.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," as of
January 1, 1995. The Company determined all of its investments currently held in
debt and equity securities are trading securities as defined by SFAS 115 and as
such are reported at fair value. Prior to adoption of SFAS 115, cash, cash
equivalents and short-term investments were stated at cost. Unrealized holding
gains and losses recognized in earnings during 1995 and 1996 were not
significant. Accordingly, the adoption of SFAS 115 did not have a significant
impact on the Company's financial condition or results of operations.
Fair value is determined by the most recently traded price of the security at
the balance sheet date. Net realized gains or losses are determined on the
specific identification cost method.
Concentration of Credit Risk
The Company sells its products to customers involved in a variety of industries
including electronics and computers. Kyzen performs continuing credit
evaluations of its customers and does not require collateral. Historically, the
Company has not experienced significant losses related to individual customers
or groups of customers in any particular industry or geographic area.
Revenue Recognition
Revenue from chemical products or services is recognized based upon shipment of
products or performance of services. Revenues and profits are recorded using the
percentage of completion method for certain contracts based on the product type,
contract size and duration of the time to completion. The percentage of
completion is determined by relating the actual costs of work performed to date
to the current estimated total cost of the respective contracts. Revenues and
profits on all other contracts are recorded as shipment is made. If estimated
total costs on any of these contracts indicate a loss, the entire amount of the
estimated loss is recognized immediately. Costs reduced by estimated losses in
excess of billings on uncompleted contracts, as reflected on the accompanying
balance sheet, represent revenues recognized in excess of amounts billed.
Page 19 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Fair Value of Financial Instruments
Carrying values of cash, short-term investments, accounts receivable, accounts
payable, and put repurchase obligations approximate fair value due to the short-
term maturities of these assets and liabilities.
Inventories
Inventories are valued at the lower of cost or market with cost determined using
the weighted average, first in, first out (FIFO) method.
Income Taxes
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the income tax basis of the Company's assets and
liabilities.
Property and Equipment
Property and equipment is recorded at cost and depreciated on a straight-line
basis over the estimated useful lives (2 to 12 years) of the respective assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful life of the asset or the lease term.
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," as of January 1, 1996.
Based upon a review of its assets, the Company determined no impairment exists
at December 31, 1996. Accordingly, the adoption of SFAS 121 did not have a
significant impact on the Company's financial condition or results of
operations.
Deferred Charges
Deferred financing costs of $29,922 related to the issuance of debt in prior
years were charged to extraordinary loss in 1995 due to the extinguishment of
debt (Note 7).
Patent Costs
Patent costs, including the purchase of patent rights (Note 10) and legal costs
incurred related to issued and pending patents, are amortized using the
straight-line method over the useful lives of the patents, not exceeding 17
years. Accumulated amortization amounted to $34,856 and $42,677 in 1995 and
1996, respectively. Impairment of the accounting value of the patent costs is
measured on the basis of anticipated undiscounted cash flows from operations. At
December 31, 1995 and 1996, no impairment was indicated.
Research and Development Costs
The Company is involved in research and development activities relating to new
product development and new uses for its chemicals. The Company expenses
research and development costs as incurred.
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 assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Per Share Data
Net loss per Class A Common Share is calculated based on weighted average shares
of Class A Common Stock outstanding. The weighted average number of shares has
been adjusted to reflect as outstanding, for each period presented using the
treasury stock method at the closing price on the NASDAQ Small Cap Market on the
last day of the year, all shares issued and issuable upon the exercise of stock
options granted subsequent to March 31, 1994 unless the result is anti-dilutive.
Page 20 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Accretion of the mandatorily redeemable Class B Common Stock increases the loss
or reduces the income available to Class A common shareholders.
Supplementary per share data (unaudited) giving effect to the redemption of the
Class B Common Stock, and repayment of the bridge and short term notes payable,
as of January 1, 1995, is also presented. Net loss allocable to Class A Common
shareholders is adjusted by $342,046 at December 31, 1995 to eliminate the
accretion of Class B Common Stock and reflect the reduction in interest expense
related to bridge and short term notes payable. The weighted average shares
outstanding (unaudited) used to calculate supplementary pro forma earnings per
share are based on weighted average shares outstanding at December 31, 1995, as
adjusted for: (i) 160,692 shares at December 31, 1995, being sold in the initial
public offering to redeem the Class B Common Stock; and (ii) 145,567 shares at
December 31, 1995, being sold in this offering to repay the bridge notes
payable.
1995
-------
Supplementary pro forma net loss per share (unaudited) $ (0.03)
Supplementary pro forma weighted average
shares outstanding (unaudited) 4,358,369
NOTE 2 - NOTES RECEIVABLE
Prior to 1995, the Company advanced funds to certain officers and employees for
promissory notes. The notes bore interest at 5% and were unsecured. Both
interest and principal of approximately $78,000 were repaid through a bonus to
these officers and employees in 1995.
Certain officers and key employees of the Company exercised stock options during
1994 in exchange for non-recourse promissory notes. The notes bear interest at
5% per year and are secured by the Company's stock. Both principal and interest
are due January 2000. The non-recourse notes receivable principal balance of
$906,263 at December 31, 1996 has been reflected as a reduction of shareholders'
equity. Interest receivable of $87,103 and $124,839 at December 31, 1995 and
1996, respectively, is included in non-current assets.
NOTE 3 - COSTS AND ESTIMATED LOSSES ON UNCOMPLETED CONTRACTS
Costs and estimated losses incurred on uncompleted contracts incorporate the
following:
<TABLE>
<CAPTION>
December 31,
1995 1996
--------- ----------
<S> <C> <C>
Costs incurred on uncompleted contracts $270,779 $ 681,071
Estimated losses (48,133) (254,159)
-------- ---------
222,646 426,912
Less: Billings to date 82,590 346,591
-------- ---------
Costs and estimated losses in excess of billings on uncompleted contracts $140,056 $ 80,321
======== =========
</TABLE>
Page 21 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - INVENTORY
Inventory consists of the following:
December 31,
1995 1996
-------- --------
Raw materials $109,856 100,523
Work in process 50,818
Finished goods 62,725 53,785
-------- --------
$172,581 $205,126
======== ========
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
1995 1996
--------- ----------
Manufacturing equipment $ 303,317 $ 501,129
Office furniture and fixtures 203,124 307,164
Demonstration equipment 87,544 186,906
Leasehold improvements 75,423 84,053
--------- ----------
669,408 1,079,252
Less--accumulated depreciation (149,426) (292,455)
--------- ----------
$ 519,982 $ 786,797
========= ==========
There were no assets under capital lease at December 31, 1995 and $17,008 at
December 31, 1996. Depreciation expense totaled $70,666 in 1995 and $143,029 in
1996. Included in depreciation expense in 1995 and 1996 was $13,830 and $2,025,
respectively, related to the amortization of assets under a capital lease.
There was no accumulated amortization at December 31, 1995 as the applicable
lease was bought out. Included in accumulated depreciation at December 31, 1996
was $2,025 related to the accumulated amortization of assets on capital lease.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
1995 1996
-------- --------
Accounts payable $169,241 $380,336
Deferred revenue 30,365
Taxes payable 8,883
Customer deposits 6,000
Vacation time accrual 6,504
-------- --------
$169,241 $432,088
======== ========
NOTE 7 - NOTES PAYABLE
Related Party Short Term Notes Payable
During 1994, the Company entered into an informal short term borrowing
arrangement with a group of investors, evidenced by a series of notes. The
Company was required to pay interest monthly with principal due upon the earlier
of two months after demand or nine months after the date of the borrowing.
$190,000 of these notes were converted to bridge loan units during 1995 which
were subsequently repaid. The remaining balance of these notes was repaid with
the proceeds of the initial public offering. Interest expense in 1995 on these
obligations was $23,140.
The Company borrowed and repaid $25,000 from a shareholder and officer of the
Company during 1995. Interest paid on this note amounted to $2,124.
Page 22 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Capital Lease and Put Option Obligations
The Company has capital lease obligations totaling $12,307 at December 31, 1996.
Of this amount, $5,610 is classified as current. Minimum payments on capital
leases over the next three years are as follows:
1997 $ 6,514
1998 6,514
1999 1,086
-------
14,114
Imputed interest (1,807)
-------
Net capital lease obligation $12,307
=======
During 1995, all outstanding notes payable and capital lease obligations were
repaid with proceeds from the initial public offering, as such there were no
notes payable and capital leases at December 31, 1995. As a result of these
repayments, the Company recorded an extraordinary loss of $114,842 due to the
early retirement of its outstanding bridge loan units of approximately $646,000.
The loss was comprised of the write-off of $29,922 of debt issuance costs and
$84,920 of unaccreted discounts.
The Company refinanced a note payable in the amount of $296,259 in January 1994.
The Company granted a put option to the note holder in relation to the
refinancing. This put option was exercised in August 1996 and as a result the
Company acquired 100 shares of its Class A Common Stock for value plus an
interest factor totaling $59,483.
In March 1996, the Company obtained a line of credit expiring April 1997 in the
amount of $500,000 secured by certain assets of the Company including cash and
accounts receivable. Due to the substantial net operating loss, the Company did
not comply with certain financial covenants at December 31, 1996 and accordingly
has received waivers with respect to such covenants. No amounts were borrowed
on this line of credit during 1996 and thus there was no balance outstanding at
December 31, 1996. The Company paid commitment fees of $6,280 on this line of
credit during 1996.
NOTE 8 - CAPITAL STOCK
Common Stock
The Company's common stock comprises two classes, A and B. The latter class
provided redemption and/or other rights not available to Class A common
shareholders. The Company has 30,000,000 shares of $0.01 par value Class A
Common Stock authorized and 1,200,000 shares of $0.001 par value Class B Common
Stock authorized.
The Company's Class B redeemable common stock shares and amounts are as follows:
Shares Amount
--------- ----------
Balance at December 31, 1994 415,935 $ 697,277
Class B Redemption (415,935) (945,603)
Accretion 248,326
-------- ---------
Balance at December 31, 1995 0 $ 0
======== =========
There were no transactions involving Class B redeemable Common Stock during
1996.
Initial Public Offering
On August 4, 1995, the Company consummated an initial public offering of 550,000
units at an offering price of $11.50 per unit. Each unit consisted of three
shares of Class A Common Stock and warrants to purchase three additional shares
of Class A Common Stock at an exercise price of $5.00 per share. The warrants
are exercisable any time after February 4, 1996 until August 4, 2000. The
warrants are subject to redemption by the Company at $0.05 per warrant at any
time on thirty days prior written notice, provided that the closing price or the
closing bid quotation for the Class A Common Stock has equaled or exceeded $7.50
for ten consecutive trading days. The
Page 23 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
offering yielded the Company proceeds of approximately $5,545,000 net of the
underwriters' discounts. Offering costs totaled approximately $520,000.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock
with a par value of $0.001 per share. The Board of Directors is authorized to
establish the terms and rights of the preferred stock.
As of December 31, 1995 and 1996 there were no preferred shares issued or
outstanding.
Bridge Loan Unit Offering
The Company sold approximately 3 units each comprising 2,500 shares of
detachable Class A Common Stock ($1.00 per share) together with $22,500 of 12%
bridge notes payable during 1995 for aggregate proceeds of $75,000. The
proceeds from the bridge loan unit offering were allocated between the Class A
Common Stock and bridge notes based on their relative fair market value.
Approximately 19.5 additional units were issued in exchange for various short
and long term related party notes payable, totaling $486,260 during 1995. The
bridge notes payable were repaid with the proceeds of the initial public
offering in 1995.
The unit sales were made under a plan approved by the Board of Directors to sell
as many as 50 combined stock/bridge loan units. The Company also granted a put
option to the unit holders whereby the Company was required to repurchase 2,500
Class A Common shares per unit at a price equal to 90% of the initial public
offering share price, or $3.45 per share. The put option commenced on February
4, 1996 and expired on August 4, 1996. None of the put options were exercised.
Stock Options
The Company has an incentive stock option plan. Under the Company's stock
option plan, officers, directors and other key employees may be granted options,
each of which allows for the purchase of shares of the Company's Class A Common
Stock. The per share price of the options granted under the plan is equal to
the estimated fair value of the Class A Common Stock on such date as determined
by the Board of Directors, except for options granted to 10% or greater
shareholders, the per share price of which is 110% of the estimated fair value.
The Company has reserved 600,000 shares of Class A Common Stock for issuance
upon exercise of the options. The stock options have terms of 5 to 10 years
from the date of the grant and vest ratably over a three-year period, except for
options granted to directors, which vest immediately. The Company also granted
106,666 options to three employees under a prior non-qualified plan; 100,166 of
these options remain unexercised at December 31, 1996.
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation," as
of January 1, 1996. In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion 25 and related interpretations in accounting for its
stock option plans and accordingly, does not recognize compensation costs. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS 123, net income and
earnings per share would have been reduced to the pro forma amounts indicated in
the table below:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net loss allocable to Class A Common
Shareholders as reported $(492,925) $(756,620)
Net loss allocable to Class A Common
Shareholders pro forma (545,749) (906,270)
Net loss per share allocable to Class A
Common Shareholders as reported (0.12) (0.15)
Net loss per share allocable to Class A
Common Shareholders pro forma (0.13) (0.18)
</TABLE>
Page 24 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ------------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 41.8% 65.3%
Risk-free interest rate 6.10% 6.78%
Expected life of options 10 years 5 - 10 years
</TABLE>
The weighted average fair value at date of grant for options granted during 1995
and 1996 was $1.79 and $2.64 per option, respectively.
<TABLE>
<CAPTION>
Stock option transactions were as follows:
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
<S> <C> <C>
Outstanding, December 31, 1994 391,833 $2.17
Granted in 1995 65,000 2.88
------- -----
Outstanding, December 31, 1995 456,833 $2.27
Granted in 1996 164,000 3.54
Exercised in 1996 (8,000) 0.68
Forfeited in 1996 (33,333) 3.09
------- -----
Outstanding, December 31, 1996 559,500 $2.61
======= =====
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Range Of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices Contractual Life Exercise Price Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.19 100,166 5.0 $ 0.19 100,166 $0.19
$2.81 - $3.99 479,334 6.9 $ 3.11 300,503 $2.94
------- -------
579,500 400,669
======= =======
</TABLE>
Voting Trust Agreement
Certain of the Company's key employees and the majority shareholder entered into
a voting trust agreement on February 28, 1992 which provided for the majority
shareholder to vote, in addition to its shares directly owned, 50% of 1,000,000
Class A Common shares held by the key employees until certain events occurred,
including repayment of the note payable to shareholder and redemption of the
Class B Common Stock. This trust terminated with the completion of the initial
public offering during 1995.
These key employees also granted the majority shareholder an option to purchase
up to 40% of their Class A Common Stock holdings at par value in 1992,
exercisable between January 1, 1996 and February 1, 1996. This option
terminated when the Company completed the initial public offering in 1995.
NOTE 9 - INCOME TAXES
The Company has no provision for income taxes in 1996 as there was no taxable
income for financial reporting or income tax purposes.
At December 31, 1996, the Company had available tax basis net operating loss
carryforwards to reduce future taxable income of approximately $1,419,057 which
expire through 2011.
Page 25 of 31
<PAGE>
KYZEN CORPORATION
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
The difference between available tax basis and financial statement carryforwards
is due to recognition of expenses in different periods for financial reporting
and federal income tax purposes. The tax effect of these temporary differences
gives rise to deferred tax assets and consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1996
--------- ---------
<S> <C> <C>
Capitalized start-up costs $ 38,481 $ 17,272
Net operating losses 336,035 538,674
Estimated losses on construction contracts 96,479
Other 23,974 37,633
--------- ---------
Deferred tax assets 398,490 690,058
Deferred tax asset valuation allowance (398,490) (690,058)
--------- ---------
Total deferred taxes, net $ - $ -
========= =========
</TABLE>
The Company has fully reserved for its deferred tax assets due to uncertainty of
future realization.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company conducts its operations from leased facilities under an operating
lease agreement. As of December 31, 1996, including transactions subsequent to
year end, future minimum annual rental payments are summarized as follows:
<TABLE>
<S> <C>
1997 $148,530
1998 117,275
1999 7,788
</TABLE>
Total rent expense was $80,208 in 1995 and $127,126 in 1996. Included in the
amount for 1996 is approximately $65,146 of rents paid to a shareholder. The
Company has options to renew its leases on all its facilities for up to three
additional years.
Patents
The Company's original patents were for products developed by a founder of the
Company while employed by Bix Manufacturing Company ("Bix") and Delco, a
division of General Motors. The joint effort was undertaken to develop a more
effective non-chlorinated fluorocarbon cleaning solvent which would be
environmentally neutral. A patent was applied for jointly by Bix and Delco in
1989. The Company purchased the patent rights from Bix in 1990 and two patents
were subsequently issued jointly to Kyzen and Delco in the United States. Delco
retained the right to use chemistry developed under the patent and the Company
retains the right to market the patented technology. However, if the Company
enters into a license or royalty arrangement for the patented technology, the
resulting license fee or royalty revenues will be shared jointly between Delco
and the Company.
The Company has subsequently applied for and received one patent each in Mexico,
Australia, and Taiwan.
The Company is also required to pay royalties to Bix (a shareholder). Royalties
are based on 2% of revenues related to the patented chemistry. The Company is
currently settling its royalty obligation through consulting services performed
by a founder of the Company. In 1995 and 1996, $58,503 and $56,342 is recorded
as royalty expense to reflect these transactions.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company purchased approximately $84,000 and $162,000 of advertising, health
insurance, and transportation services from related parties during 1995 and
1996, respectively.
Page 26 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
- --------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission (the "Commission") and the National Association of
Securities Dealers, Inc. initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent shareholders are required by the
Commission's regulations to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required during the year ended December 31, 1996, all Section 16(a) filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial owners were complied with.
The following table sets forth certain information regarding the Company's
directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------- --- --------------------------------------------------
<S> <C> <C>
Michael L. Bixenman 43 Chairman of the Board, Vice President and Director
Kyle J. Doyel 40 President, CEO and Director
Thomas M. Forsythe 39 Vice President and Director
Benjamin D. Wolfley 36 Vice President--Finance, Treasurer/Secretary
Thomas J. Herrmann 39 Vice President (effective January 1, 1997)
John A. Davis, III 63 Director
Peter J. Murphy 48 Director
Larry A. Lofgreen 35 Director
James R. Gordon 51 Director
</TABLE>
Michael L. Bixenman has served as Chairman of the Board since June 1995, Vice
President since the Company's inception in 1990 and Director since December
1994. His term expires at the Annual Meeting in 1999. Mr. Bixenman received a
Bachelor of Arts - Accounting from David Lipscomb University.
Kyle J. Doyel has served as President and Director since the Company's inception
in 1990, and served as Chairman of the Board from the Company's inception until
February 1995. His term as Director expires at the Annual Meeting in 1998. Mr.
Doyel has Bachelor of Science degrees in both Chemical Engineering and Business
Administration from Oregon State University.
Thomas M. Forsythe has served as Vice President since September 1995 and a
Director of the Company since June 1995. His term expires at the annual meeting
1997. He joined the Company in 1992 and served as General Manager from July
1992 to September 1995. From 1989 to 1992, Mr. Forsythe directed, as Business
Manager, a WR Grace & Company business unit charged with entering the CFC free
cleaning chemical market focused on the aerospace industry. Mr. Forsythe is a
graduate of the United States Naval Academy with a Bachelors of Science -
Operations Research/General Engineering and is a graduate of Boston University
Graduate School of Management with a Master of Business Administration in
Finance.
Benjamin D. Wolfley has served as the Corporate Secretary since April 1996, Vice
President of Finance since September 1995, the Treasurer and financial
controller since October 1993, and as a Director from February 1993 until
December 1994. From 1990 to 1993, Mr. Wolfley was Chief Financial Officer for
Cannon Industries, Inc., an industrial development/venture capital firm. Mr.
Wolfley is a Certified Public Accountant, has a Bachelors of Arts degree in
Accounting and a Bachelor of Science degree in Business Administration from the
University of Utah.
Page 27 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART III
Thomas J. Herrmann has served as Vice President since January 1, 1997. He joined
the Company in 1996 and served as Marketing Manager. Mr. Herrmann is currently
responsible for corporate marketing programs, new Business Development, and
Product Management. From 1991 to 1996, Mr. Herrmann was the Regional Manager-
Asia Pacific for Sikorsky Aircraft, a division of United Technologies
Corporation. In this position, he was responsible for sales and market
development of aerospace programs in Southeast Asia. Mr. Herrmann is a graduate
of the United States Naval Academy with a Bachelors of Science-
Oceanography/General Engineering and is a graduate of the Harvard Business
School with a Masters of Business Administration-General Management.
John A. Davis III has served as a Director of the Company since August 1995. His
term expires at the annual meeting in 1999. Mr. Davis is currently Of Counsel
with the Rose Law Firm located in Little Rock, Arkansas and has held that
position since 1993. From 1991 to 1993, Mr. Davis served as Senior Vice
President and Secretary for United Dominion Industries (NYSE-UDI), a
multinational construction and industrial machinery producer. Mr. Davis has
served as a director for the Dickerson Group, Inc., a highway construction and
real estate development company, since 1993 and Tomes Landing, Inc., a developer
of waterfront real estate, since 1991. Mr. Davis received his Juris Doctorate
and Bachelor of Arts from the University of Arkansas. Mr. Davis is the uncle of
the wife of Mr. Doyel, President and Director of the Company.
Peter J. Murphy has served as a Director of the Company since August 1995. His
term expires at the annual meeting in 1999. Mr. Murphy is currently President
and Chief Operating Officer of Parlex Corporation ("Parlex") (NASDAQ/National
Market-PRLX), a manufacturer of flexible interconnect systems for computer,
aerospace, telecommunication and automotive applications. Mr. Murphy became
President of Parlex in 1995. In 1994, he served Parlex as Executive Vice
President and Chief Operating Officer. Mr. Murphy joined Parlex in 1992 as the
Assistant to the President. Mr. Murphy has served as a member of the board of
directors of Parlex since 1994. From 1989 to 1992, he served as President of
Teledyne Electro-Mechanisms, a flexible interconnect manufacturer. Mr. Murphy
has earned a Bachelor of Science from Mount Saint Mary's College and Management
Systems from the University of North Carolina.
Larry A. Lofgreen has served as a director of the Company since June 1995. His
term expires at the annual meeting in 1998. Mr. Lofgreen is President of CI
Technologies, Inc. a systems consulting firm. Mr. Lofgreen has served as
Executive Vice President of Cannon Industries, an industrial development/venture
capital firm, and has held various other positions with Cannon Industries, Inc.
since 1992. Mr. Lofgreen received a Juris Doctorate, a Master of Business
Administration, and a Bachelor of Science in Computational Mathematics from
Brigham Young University.
James R. Gordon has served as a director of the Company since July 1996. His
term expires at the annual meeting in 1997. Mr. Gordon is the President and
Founder of TCS Management Group, Inc., a multi-national software development
company, formed in 1975. Mr. Gordon served seven years on active duty with the
U.S. Army and achieved the rank of Captain. Mr. Gordon received a Masters of
Business Administration from the Owens Graduate School of Management at
Vanderbilt University, and a Bachelor of Science from Murray State University.
Mr. Gordon currently serves on the Board of Directors and Executive Committee of
the Society of International Business Fellows and is a member of the Board of
Trustees of Harding Academy in Nashville, Tennessee.
Page 28 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART III
ITEM 10. Executive Compensation
- --------------------------------
The following table shows all compensation earned or paid to the Company's Chief
Executive Officer and each of the Company's most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 in each year for
all services render in all capacities to the Company.
<TABLE>
<CAPTION>
Securities Underlying
Name and Stock Options All Other
Principal Position Year (1) Salary ($) Bonus($) (Number of Shares) Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kyle J. Doyel, (2)
President and Chief 1995 $89,958 $29,961
Executive Officer 1996 95,000 0 15,000
</TABLE>
(1) Kyzen Corporation became a reporting company for the first time during
1995, therefore no information is reported before that time.
(2) During 1995, Mr. Doyel received a "one-time" cancellation of debt owed to
the Company related to the initial public offering, as a bonus.
The following table shows all Options/SARs granted to the Company's Chief
Executive Officer and each of the Company's most highly compensated executive
officers whose total annual salary and bonus exceed $100,000.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted(#) Current Year ($/share) Date
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kyle J. Doyel, President 15,000 9% $3.99 July 19, 2001
and Chief Executive
Officer
</TABLE>
The following table shows the aggregated number of options/SARs Exercised and
the values of options and SARs that remain outstanding at the end of the year.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money/Options
Acquired on Value Options/SARs at Year End (#) SARs at Year End ($)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kyle J. Doyel, President 0 $0 33,334 15,000 $0 $0
and Chief Executive Officer
</TABLE>
Employment Agreements
Kyle J. Doyel serves as President, Michael L. Bixenman, Thomas M. Forsythe,
Benjamin D. Wolfley, and Thomas J. Herrmann serve as Vice Presidents pursuant to
Employment Agreements dated January 1, 1997. The agreements provide for an
initial term of one year, beginning on January 1, 1997. Thereafter, the
agreements will continue for successive one-year periods until termination by 60
days notice prior to the end of an existing one year period.
In the event that more than 20% of the voting Class A Common Stock of the
Company is acquired by a person or entity (other than an underwriter) which did
not own or control shares of the Class A Common Stock of the Company as of
January 1, 1997, and such acquisitions result in a change in control of the
Company, and the Company terminates the Employment Agreements as a result of
such change in control, then for a period of two years after such termination,
Doyel, Bixenman, Forsythe, Wolfley, and Herrmann are entitled to receive semi-
monthly severance payments equal to salary payments which otherwise would have
been paid pursuant to the employment agreements.
Page 29 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART III
The Employment Agreements contain covenants not to compete and agreements not to
disclose confidential or proprietary information during the period of the
Agreements and for a period of two years after termination. Doyel, Bixenman,
Forsythe, Wolfley and Herrmann have agreed to salary deferral in the event the
Company determines it does not have the necessary funds to pay the full amount
of their salaries. If their salaries are deferred, they are entitled to
interest on the deferred amount at a rate of 12% per annum, compounded monthly.
Compensation of Directors
All outside Directors of the Company are paid one thousand dollars ($1,000) per
meeting physically attended. Each outside Director, Messrs. Davis, Murphy,
Lofgreen, and Gordon was also granted 5,000 options to purchase Class A Common
Stock at an exercise price of $3.63 per share.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership as of December 31, 1996 of the Company's Class A Common Stock by (a)
each person known by the Company to be a beneficial owner of more than 5% of the
outstanding shares of Class A Common Stock and each selling shareholder, (b)
each director of the Company, and (c) the individual listed in the executive
compensation table. Each beneficial owner named below has advised the Company
that he has sole investment and voting power with respect to the shares of Class
A Common Stock shown below. The address for each of the directors is shown
below. The number of shares includes options exercisable within 60 days.
<TABLE>
<S> <C> <C>
Name and Address of Number of Percent
Beneficial Owner Shares Owned Owned
------------------- ------------ -------
Christopher B. Cannon, 60 East South Temple, 1,322,697 25.2%
Salt Lake City, UT
Kyle J. Doyel, 430 Harding Industrial Drive,
Nashville, TN 632,202 12.0%
Michael L. Bixenman, 430 Harding Industrial Drive,
Nashville, TN 566,800 10.8%
James J. Andrus, 12 Heidi Lane,
Bow, NH 03304 446,676 8.5%
Thomas M. Forsythe, 430 Harding Industrial Drive,
Nashville, TN 139,704 2.7%
Benjamin D. Wolfley, 430 Harding Industrial Drive,
Nashville, TN 118,168 2.2%
Thomas J. Herrmann, 430 Harding Industrial Drive,
Nashville, TN 16,393 *
John A. Davis III, 120 East Fourth Street,
Little Rock, Arkansas 12,500 *
Peter J. Murphy, 430 Harding Industrial Drive,
Nashville, TN 10,000 *
Larry A. Lofgreen, 60 East South Temple,
Salt Lake City, UT 10,000 *
James R. Gordon, 430 Harding Industrial Drive,
Nashville, TN 10,000 *
* less than 1%
</TABLE>
Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
Christopher B. Cannon from the period 1990 through 1991 advanced approximately
$1,095,000 to the Company in exchange for a 12% demand note in the amount of
$1,080,000 and 666,667 shares of Class A Common Stock. In February 1992, Mr.
Cannon converted $67,500 and $812,500 of the principal amount of the note into
666,667 shares of Class A Common Stock and 500,000 shares of Class B Common
Stock, respectively. The approximate principal balance of $200,000 plus unpaid
interest from the date of issue in the amount of $124,000 was refinanced with
another shareholder. An affiliate of Mr. Cannon guaranteed this note. On March
31, 1995 this shareholder converted the balance of principal of his note
($296,260) into 29,626 shares of Class A Common Stock and a new 12% promissory
note in the amount of $266,634, payable on December 31, 1996, or from the
proceeds of the initial public offering, whichever occurred first. The note was
paid in full during 1995.
In connection with the October 1993 refinancing, Mr. Cannon sold to this
shareholder 79,120 shares of Class A Common Stock and the Company granted a put
option to the shareholder. The put option was exercised in August of 1996.
During 1994 the Company entered into an informal short term borrowing
arrangement with a group of investors, evidenced by a series of notes. During
the course of the arrangement, the Company borrowed funds in the principal
amount of approximately $392,000. The Company paid interest monthly with
principal due upon the earlier of two months after demand or nine months after
the date of the borrowing. Interest rates on outstanding borrowings at
Page 30 of 31
<PAGE>
KYZEN CORPORATION
- -------------------------------------------------------------------------------
PART III
December 31, 1994 ranged from 12% to 15%. The majority shareholder also
guaranteed repayment of these funds; this guarantee was secured by the Company's
accounts receivable, inventories and equipment. This indebtedness was repaid
from the proceeds of the initial public offering.
In January 1994 six executive officers and employees exercised options to
purchase 322,227 shares of Class A Common Stock in exchange for non-recourse
promissory notes in the principal amount of $906,263 bearing interest at 5%,
maturing in six years, and secured by these shares.
The Company is required to pay royalties in connection with the Company's
acquisition of certain patent rights to Bix Manufacturing Company (a
shareholder). Royalties are based on 2% of revenues related to the patented
chemistry. The Company is currently satisfying its royalty obligation through
consulting services performed by the Company. In 1995 and 1996, $58,503 and
$56,342 respectively is recorded as royalty expense to reflect these
transactions. Michael L. Bixenman, a director and officer is a 10% shareholder
of Bix.
In December 1994, Mr. Michael L. Bixenman, a director and officer, received
shares equivalent to approximately 10% of the outstanding common stock in Bix
Manufacturing Company, a supplier and shareholder of the Company. This
transaction was a part of a series of transactions by the major shareholder of
Bix Manufacturing Company for estate planning purposes. In addition, in
December 1994, Mr. Bixenman also advanced $25,000 to the Company in exchange for
a note bearing 15% interest. The note to Mr. Bixenman was repaid from proceeds
of the initial public offering.
Item 13. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company did not file form 8-K in the fourth quarter of 1996.
23.1 Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-13095) of Kyzen Corporation of our report dated
January 23, 1997 appearing on page 14 of the Form 10-KSB of Kyzen Corporation.
Price Waterhouse
Nashville, TN
March 28, 1997
Page 31 of 31
