U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-22720
CYCLO3PSS CORPORATION
(Name of Small Business Issuer as specified in its charter)
Delaware 87-0455642
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
7105 South Highland Drive #102
Salt Lake City, Utah 84121
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (801) 972-9090
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $0.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. X
The Issuer's revenues for the fiscal year ended February 28, 2002 were
$366,012
As of May 31, 2002, 40,047,088 shares of the Issuer's common stock were
issued and outstanding of which 34,279,360 shares were held by non-affiliates.
As of May 31, 2002, the aggregate market value of shares held by
non-affiliates (based upon the closing price reported by OTC Bulletin Board)
was approximately $4,125,000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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Forward-Looking and Cautionary Statements
This Annual Report on Form 10-KSB contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, which provides a "safe harbor" for these types of statements. To the
extent statements in this Annual Report involve, without limitation, product
development and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the
Company's various product categories and for the industries in which the
Company operates or any other guidance on future periods, these statements are
forward-looking and involve matters which are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by such forward looking statements. These risks and
uncertainties include product development or production difficulties or delays
due to supply constraints, technical problems or other factors; technological
changes; the effect of global, national and regional economic conditions; the
impact of competitive products and pricing; changes in demand; increases in
component prices or other costs; and a number of other risks including those
identified by the Company throughout Item I and elsewhere in this report, and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications.
The Company assumes no obligation to update forward-looking statements.
Risk Factors
The following risk factors are inherent in and affect the business of
the Company:
1. Ability to Continue as a Going Concern. As a result of the
Company's financial condition, the Company's independent auditors have
included an explanatory paragraph in their report on the Company's financial
statements for the year ended February 28, 2002, with respect to the Company's
ability to continue as a going concern. The Company's ability to continue in
the normal course of business is dependent upon its access to additional
capital and the success of future operations. Uncertainties as to these
matters raised substantial doubt about the Company's ability to continue as a
going concern at the date of such report. The net loss for the year ended
February 28, 2002 was $850,225. In the past the Company has been able to
receive funding necessary for its operations through the issuance of
convertible debt and common and preferred stock. The Company anticipates a net
loss for the year ended February 28, 2003, and with a cash balance of $73,102
at February 28, 2002 and expected cash requirements for the coming year, there
is substantial doubt as to the Company's ability to continue operations.
The Company is attempting to improve these conditions by way of royalty
revenues generated from licensing agreements, financial assistance through
collaborative partnering agreements, issuances of additional equity, debt
arrangements, and limited direct product sales. Management believes that
either appropriate revenues will be generated and future product sales and
royalties will result from these opportunities, or the Company will be able to
raise sufficient funds through debt or equity financings to allow the Company
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to continue operations over the next fiscal year; however, no assurances can
be given that sufficient revenues will be generated or additional funding will
become available.
2. History of Operating Losses; Uncertainty of Future Profitability.
The Company has never operated at a profit. The Company has sold a limited
number of products and has generated a limited amount of revenue from its
operations. Although the Company has instituted aggressive cash management
practices and severely reduced operating costs, even with the prospects of
royalty revenue and limited direct sale of products, there can be no assurance
that the Company will generate revenue from its operations sufficient to
achieve profitability within its coming fiscal year.
3. Future Capital Requirements and Negative Cash Flow. The Company's
operations to date have consumed substantial amounts of cash. The negative
cash flow from operations is expected to continue during the immediate future.
The Company anticipates a need to raise additional funds in order to conduct
its operations, develop its products and subsequently to establish
manufacturing and marketing licenses and contracts for its products. The
Company may seek funding through public or private financing, including equity
financing, and through collaborative partnering arrangements. Adequate funds,
whether obtained through financial markets or from collaborative or other
arrangements with corporate partners or other sources, may not be available
when needed or on terms acceptable to the Company and may result in
significant dilution to existing stockholders. Insufficient funds may require
the Company to delay, scale back or eliminate some or all of its research and
product development programs, impacting the ability to license these products
to third parties for commercialization. The Company's future cash requirements
will be affected by the results of research and development, results of
relationships with corporate collaborators, changes in the focus and direction
of the Company's research and development programs, competitive and
technological advances, the regulatory process and other factors.
4. Lengthy Revenue Cycle. Currently, the Company is focusing the
majority of its efforts and financial resources on consumer product
development, and licensing of its food processing and laundry system products
and technologies as a means of generating revenue. Installing and integrating
new laundry systems requires substantial investments by the Company's
potential licensees and customers. In addition, customers often require a
significant number of product presentations and demonstrations, as well as
substantial interaction with the Company's senior management, before reaching
a sufficient level of confidence in the system's performance characteristics
and compatibility with the licensee's or customer's target applications.
Accordingly, the Company's products and any licensing arrangements typically
require lengthy sales cycles during which the Company may expend substantial
funds and management time and effort with no assurance that revenues will
result.
5. Rapid Technological Changes; Dependence on Product Development. The
industries in which the Company is engaged are characterized by rapid
technological change and evolving industry standards. As a result, the
Company must continue to enhance its existing products and develop and
manufacture new products and upgrades with improved capabilities, which has
required and will continue to require substantial investments in research and
development by the Company to advance a number of state-of-the-art
3
technologies. Continuous investments in research and development also will be
required to respond to the emergence of new technologies. The failure to
develop and market new products, to enhance existing products and arrange
appropriate licenses for the products, would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the Company's competitors can be expected to continue to develop and
introduce new and enhanced products, any of which could cause a decline in
market acceptance of the Company's products or a reduction in the Company's
royalty streams as a result of intensified price competition.
The Company's potential success in developing and selling new and
enhanced products depends upon a variety of factors, including accurate
prediction of future customer requirements, introduction of new products on
schedule, cost-effective manufacturing and product performance in the field.
The Company's new product decisions and development commitments are made in
part by the product licensee and must anticipate performance to satisfy the
requirements of the market. Failure to predict accurately customer
requirements and to develop new generations of products to meet those
requirements would have a sustained material adverse effect on the Company's
business, financial condition and results of operations. New product
transitions could adversely affect sales of existing systems. Product
introductions could contribute to quarterly fluctuations in operating results
as orders for new products commence, and orders for existing products or
enhancements of existing products fluctuate.
6. Uncertain Market Acceptance of Products. There can be no assurance
that the products created for the Company's customers will gain any
significant market acceptance and market share . Market acceptance may depend
on a variety of factors, including educating consumers and customers regarding
the use of a new product or procedure, or overcoming objections to certain
effects of the product. Market acceptance and market share also are affected
by the timing of market introduction of competitive products. Accordingly, the
relative speed with which the Company's competitors can develop products, gain
regulatory approval and reimbursement acceptance, and supply commercial
quantities of the product to the market are expected to be important factors
in market acceptance and market share. The failure to gain market acceptance
of products could have a material adverse effect on the Company's business,
results of operations, and financial condition.
7. Expansion of Marketing Activities; Limited Distribution. The
Company currently has no domestic direct sales force. The Company has already
and anticipates that it will continue to negotiate marketing and or
manufacturing licenses in which the Company will rely on the existing sales
and marketing capabilities of its partners in order to fully cover its target
markets, particularly as additional proprietary devices become commercially
available. There can be no assurance that the Company will be able to compete
effectively in attracting or obtaining a marketing partner. There can be no
assurance that the Company or its potential marketing partner will be
successful in marketing or selling the Company's services and products. The
Company's ability to sell its devices in certain areas may depend on alliances
with independent manufacturing representatives.
8. Product Recalls. If a device that is designed by the Company is
found to be defective, whether due to design or manufacturing defects or
improper use of the product, the device may need to be recalled, possibly at
the Company's
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expense even though the Company may not be the manufacturer. Furthermore, the
adverse effect of a product recall on the Company might not be limited to the
cost of a recall. For example, a product recall could cause a general
investigation of the Company by applicable regulatory authorities as well as
cause other customers to review and potentially terminate their relationships
with the Company. Recalls, especially if accompanied by unfavorable publicity
or termination of customer contracts, could result in substantial costs, loss
of revenues, and a diminution of the Company's reputation, each of which would
have a material adverse effect on the Company's business, results of
operations, and financial condition.
9. Risk of Product Liability. The manufacture and sale of products
entails an inherent risk of product liability although it is the Company's
intent to pass that liability on to its manufacturing and marketing licensees
when appropriate. The Company does maintain product liability insurance with
limits of $1,000,000 per occurrence and $2,000,000 in the aggregate. There
can be no assurance that such insurance is adequate to cover potential claims
or that the Company will be able to obtain product liability insurance on
acceptable terms in the future, or that any product liability insurance
subsequently obtained will provide adequate coverage against all potential
claims. A successful claim brought against the Company in excess of its
insurance coverage, or any material claim for which insurance coverage was
denied or limited, could have a material adverse effect on the Company's
business, results of operations and financial condition. Additionally, the
Company generally provides a design defect warranty and in some instances
indemnifies its customers for failure to conform to design specifications and
against defects in materials and workmanship. While there have been no
warranty claims to date, any substantial claim against the Company under such
warranties or indemnification could have a material adverse effect on the
Company's business, results of operations and financial condition.
10. Significant Industry Competition. The markets for the products the
Company currently offers and will offer in the future, are and will be, highly
competitive. Numerous manufacturers and distributors, and retailers compete
for customers throughout the United States and internationally in these
industries. Many of the Company's competitors are substantially larger and
more experienced than the Company, have longer operating histories and have
materially greater financial and other resources than the Company. There can
be no assurance that the Company will be able to compete successfully with its
more established and better capitalized competitors.
11. Government Regulation. All of the Company's operations are subject
to a variety of governmental regulation just as all companies are subject to
governmental regulation. The Company's food processing and safety systems are
regulated by the United States Department of Agriculture ("USDA") and its Food
Safety Inspection Service ("FSIS") division as well as the Food and Drug
Administration ("FDA") and other federal, foreign and state regulatory
agencies. Domestic and foreign government regulatory and certification
authorities may delay or prevent product introductions and may require
additional studies or tests prior to product introduction.
12. Patent Protection. The Company's patent and trade secret rights
are of material importance to the Company and its future prospects because the
Company relies on these rights to protect proprietary technology. Patents
granted may not provide meaningful protection from competitors. Even if a
5
competitor's products were to infringe patents owned by the Company, it would
be costly for the Company to enforce its rights in an infringement action and
would divert funds and other resources from the Company's operations.
Furthermore, no assurance can be given that the Company's products or
processes will not infringe any patents or other intellectual property rights
of third parties. If the Company's products or processes do infringe the
rights of third parties, no assurance can be given that the Company can obtain
a license from the intellectual property owner on commercially reasonable
terms or at all.
The Company also relies on trade secrets that it seeks to protect, in
part, through confidentiality agreements with employees, consultants and its
current and potential customers. No assurance can be given that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. As the Company intends to
enforce its patents, trademarks and copyrights and protect its trade secrets,
it may be involved from time to time in litigation to determine the
enforceability, scope and validity of these rights. Any such litigation could
result in substantial cost to the Company and diversion of effort by the
Company's management and technical personnel.
13. Dependence Upon Key Personnel. The Company's success is dependent
upon numerous factors including the active and continued participation of its
management team. The loss of services of current management, for any reason,
would have a negative impact on the future success of the Company. The
Company has no key man insurance on its officers and directors. Furthermore,
there can be no assurance that the Company will be able to continue to attract
and retain the qualified personnel necessary for the development of its
business. The Company's continued expansion into areas and activities
requiring additional expertise, such as regulatory compliance, manufacturing,
monitoring and distribution of ozone systems is expected to place increased
demands on the Company's resources. The Company's activities are expected to
require additional personnel with expertise in these areas and the development
of additional expertise by existing personnel. The failure to acquire or
retain such personnel, or develop such expertise, could adversely affect the
prospect for the Company's success.
14. Research and Product Development Test Results. The Company has
achieved a significant reduction in the incidence of certain bacteria (E.coli
and Salmonella) and other pathogens in its laboratory and product development
tests of its sterilizers and produce wash systems. In addition, the Company
has achieved significant operations efficiencies, including reductions in
chemical usage, hot water usage, power usage, and enhanced cleaning results in
installed systems and on-site tests of its ozone laundry systems. Some of
these results were obtained in controlled research and development
environments and/or on-site tests conducted under somewhat controlled
circumstances. While the Company believes that the test results are accurate,
comparable results may or may not necessarily be obtained when the technology
and products are used in a consumer or industrial environment.
15. Dependence on Developing and Maintaining Collaborative
Relationships. The Company's strategy for the development and
commercialization of certain of its products and services includes entering
into various collaborations with corporate partners, licensors, licensees and
others. There can be no assurance that the Company will be able to negotiate
collaborative arrangements in the future on acceptable terms, if at all, or
that such arrangements will be successful.
6
16. Authorization of Preferred Stock and Anti-Takeover Effect Risk:
The Company's Certificate of Incorporation authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may
be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
the Company's Convertible Preferred Stock and Common Stock. Also, the voting
power and percentage of stock ownership of the shareholders of the Company's
outstanding capital stock can be substantially diluted by such preferred stock
issuance.
In addition, the issuance of such preferred stock may have the effect of
rendering more difficult or discouraging an acquisition of the Company or
changes in control of the Company. There can be no assurance that the Company
will not issue preferred stock in the future. Other than the authorization of
"blank check" preferred stock, the Company does not have any other provisions
in the Company's Certificate of Incorporation, Stock Option Plans, and/or
Employment Agreements that may have an anti-takeover effect. The issuance of
preferred stock with anti-takeover provisions may discourage bidders from
making offers at a premium to the market price.
17. General Factors. The Company's business may be affected from time
to time by such matters as changes in general economic, industrial and
international conditions; change in tax laws and tax rates; changes in prices
and costs; and other factors of a general nature which may have an adverse
effect on the Company's business. The Company currently does not have a
disaster recovery plan in effect, and is vulnerable to damage from fire,
floods, earthquakes, power loss, telecommunication failures and other events.
A disaster could severely harm the business if the business is interrupted for
an indeterminate length of time.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Cyclopss Corporation (the "Company") historically has been engaged in a
fully integrated business model providing the design, manufacturing, assembly,
sales and installation of ozone application technologies and processes. The
Company's principal technology provides an alternative to address food safety
and sanitation concerns, healthcare sanitizing, and laundry disinfection and
efficiency. Ozone technology is proven to reduce microbial counts on most
products without the potential for the organisms to develop immunity or
resistance and without leaving residual chemical contaminants. Laundry systems
using ozone technology enable users to reduce costs associated with labor,
water, energy, chemical, textile replacement and wastewater.
Since September 11, 2001, the Company has responded to a number of
requests for proposals from agencies of the Federal government, submitting
proposals for its ozone systems to inactivate anthrax and other biological
pathogens in general. The Company has written four proposals to the
Department of Defense and has begun the process of seeking registration of an
ozone biological decontamination chamber, an Eco Wash laundry, and an aqueous
ozone wash down system with the EPA Office of Solid Waste and Emergency
Response for use against anthrax.
In 2001, the Company changed its business model to include the licensing
of proprietary technologies to partners who have resources and infrastructures
better suited to successfully commercialize certain of its technologies or
products. The Company intends to reduce the historical emphasis on the fully
integrated model of design, manufacturing, assembly and sales of applications
of its ozone technology to a model that emphasizes licensing, partnering or
creating strategic alliances with other entities, and managing manufacturers
of its products for sale through distribution or private label.
As an example of the revised strategy, the Company entered into a
Technology Licensing Agreement with Consolidated Stills and Sterilizers of
Boston, MA. The agreement licenses the ozone medical instrument sterilization
technology developed and patented by the Company for an initial licensing fee
and future royalties. The Company anticipates negotiating like arrangements
on other of its proprietary technologies when the circumstances are
beneficial.
Historically, revenues and cash flow from operations have not been
sufficient to support the significant direct and allocated overhead costs.
These costs include substantial research and development, design,
manufacturing, installation, services, sales, personnel, organizational and
other costs associated with a fully integrated business model. The Company
believes that its new business model provides for more efficient operations
that will conserve cash and management time. The Company also believe this
action will promote more rapid market entry and acceptance of its technology
through the utilization of the strengths and existing infrastructures of other
industry product providers wherein the Company's component becomes an
incremental cost of the product's sale and support. This model is designed to
allow the Company access to revenues generated through licensing and royalty
8
streams, while keeping the overhead low and the valuable human resources
focused.
Ster-O3-ZoneTM Products
The Company has developed technologies and products it believes may be
effective alternatives to current methods of sterilizing and sanitizing
medical instruments and devices. Ster-O3-Zone is a trademarked name that
includes a series of products developed for the medical and pharmaceutical
industries.
The Company spent approximately six years researching, developing and
constructing pre-production prototypes of the Ster-O3-Zone medical sterilizer.
The Company, on January 6, 1995, submitted a 510(k) Pre-market Notification
application to the Food & Drug Administration ("FDA"). The FDA accepted the
application for review and began the customary process of requesting
additional information for evaluation. In late fiscal 2000, the Company
entered into a technology licensing agreement with Consolidated Stills and
Sterilizers of Boston, MA. The agreement licenses the ozone medical
instrument sterilization technology developed and patented by the Company for
use in Ster-O3-Zone 100, which is its ozone based gas sterilization
technology.
The terms of the license agreement include an initial licensing fee of
$100,000 and ongoing royalties of 3% of gross revenues, once Consolidated
Stills and Sterilizers (CSS) has completed development and is generating
revenue from its technology. Under the terms of the license agreement, the
license fee paid by CSS can be offset against royalties due to us, thus the
initial license fee has been deferred and will be recognized as revenue as
royalties become due. In addition, CSS contracted with the Company to produce
an eight cubic foot prototype ozone sterilizer using CSS's standard model
sterilization vessel. This prototype serves as an initial test bench for
development and validation of CSS's new product application to the FDA. CSS
is finalizing the application of this technology to their commercial products.
In 2001 the Company developed two new Ster-O3-Zone systems. An ozone
laboratory cart sanitizer developed for an FDA-registered laboratory provides
an effective and economical alternative to current technologies. A high
purity, high level disinfection system developed for Pharmacia Corporation
will disinfect drug fill lines where the drug efficacy was affected by
residuals of conventional high level disinfectants. Both systems have met
their biocidal objectives against Bacillus spores and have been delivered to
the customers. They will undergo testing trials at the customer's facilities
and the data will be shared with the Company for its marketing efforts.
Eco WashTM Products
In 2001, the Company entered into a contract with a major laundry
chemical partner to develop a commercial ozone laundry system based on a 65-lb
washer/extractor manufactured by Alliance Laundry Systems. This size of
laundry equipment represents the major sales category of machines with
customers in the hotel, nursing home and institutional markets. This Eco Wash
system has been installed in a Marriott hotel in Cincinnati and is being
evaluated by the partner as a potential new commercial market initiative.
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Under contracts with the US Navy, the Company installed Eco Wash ozone
laundry equipment for two washer/extractors in San Diego in the year ended
February 29, 2000 and one system in Pearl Harbor during the year ended
February 28, 2001. As a result of the performance of these Eco Wash systems,
this past year the Eco Wash system was included in the Joint Service Pollution
Prevention Opportunity Handbook. This Handbook was designed to identify
available "off-the-shelf" pollution prevention technologies and process
changes that will reduce the amount of hazardous waste and solid waste being
generated at joint service industrial facilities. The Company expects that
there will be opportunities for additional Eco Wash installations in 2003 as
well as possible opportunities to evaluate the technology for shipboard
laundry applications.
In February 2002, the Company teamed with the Eco Wash Navy customer to
submit a proposal to the Strategic Environmental Research and Development
Program (SERDP) for an ozone based process for cleaning metal parts. The
ozone process will be a replacement for chlorinated solvent based cleaning
methods that are environmental hazards. Should the bid be successful, an
award will be made in January 2003.
Eco PureTM Products
During the current fiscal year, the Company worked on projects applying
ozone to the sanitizing of turkey, beef, and pork carcasses, as well as brine
used in cured meat products. A pilot scale test was conducted at a turkey
plant and a comparison was run against a conventional chlorine treatment.
Initial results showed that low levels (5 ppm) of ozone performed better
overall than the higher levels (30 ppm) of chlorine. A full scale, high level
(10 ppm) ozone level system was designed and proposed to be installed in 2003
for longer term tests.
The Company believes that certain conditions exist which create an
opportunity for ozone as a new alternative to current sterilization methods,
as follows:
* The Food and Drug Administration (FDA), in coordination with the USDA,
issued a final rule effective June 26, 2001. The FDA is amending the
food additive regulations to provide for the safe use of ozone in
gaseous and aqueous phases as an antimicrobial agent on food,
including meat and poultry. [21 CFR Part 173]
* The USDA's Food Safety and Inspection Service issued a final rule on
Jan. 9, 2001, to limit the amount of water retained by raw,
single-ingredient meat and poultry products. Under the new
regulations, raw, single-ingredient meat or poultry products will not
be permitted to retain water unless the establishment producing the
product can show that the amount of water retained is an unavoidable
consequence of a process used in meeting applicable food safety
requirements, such as the Salmonella performance standards. This rule
will allow beef, pork, and lamb processors to use water based
sanitation methods only available to poultry producers in the past.
Although the effective date has recently been postponed from January
9, 2002 to January 9, 2003, the trend is favorable for the application
of aqueous ozone.
In addition to the specific rulings, the Company believes a number of
related actions will create an opportunity for new alternatives to current
sanitation methods, such as:
10
* New regulatory pathogen reduction standards for Salmonella set forth
in the PR/HACCP regulations [9 CFR 381.94]
* The food activist groups Center for Science in the Public Interest and
S.T.O.P. (Safe Tables Our Priority), exemplify public organizations
pushing for tougher standards on food borne pathogens.
* Agricultural Secretary Ann Veneman's announcement (Dec. 18, 2001) that
USDA inspectors will test for Salmonella and close plants that do not
meet food safety requirements.
Consumers and food producers and processors both large and small are
searching for new technologies to address food safety and sterilization
concerns. Both consumers and food processors, which have relied heavily on
chlorination and other chemicals to decontaminate foods and household items,
are being forced to consider alternatives to chlorine and other toxic
chemicals. Ozone products offer a lower cost and more environmentally
friendly and consumer accepted form of decontamination and sterilization than
many other chemical treatments and irradiation.
During the year ended February 28, 2001, the Company owned two active
wholly-owned subsidiaries, Cyclopss Medical Systems, Inc. and Cyclopss
Biochemical Corporation, which was sold as described below. Although they
remain legal entities, the three inactive wholly owned subsidiaries, EcoPure,
Inc., Cyclopss Laundry Systems, Inc. and Cyclopss Wastewater Systems, Inc., in
an effort to conserve cash and minimize management involvement, all
operations, product development, sales, management and other activities of
these three subsidiaries have been combined under the only active wholly owned
subsidiary, Cyclopss Medical Systems, Inc.
On June 15, 2001, the Company entered into an asset purchase and sale
agreement with Paragon, LLC (Paragon). The Principals of Paragon were the
employees of Cyclopss Biochemical Corporation. The purchase price was
$285,000, which was established as the fair value for the Company, and
approved by the Board of Directors. The Company received $30,000 as a down
payment and financed the balance of $255,000 over five years, at 8% interest,
secured by Paragon's assets.
The terms of the sale agreement allowed for a discount in the purchase
price of $50,000 or $40,000 if all amounts due under the note receivable, less
the purchase price discount, were paid prior to September 1, 2001 or December
31, 2001, respectively. During the year ended February 28, 2002 the Company
received a total of $235,000 from Paragon in connection with this sale, and
recorded $213,539 as a gain on the sale of the biochemical products business.
The biochemical products business has been accounted for as discontinued
operations and accordingly, the results of operations are segregated from
continuing operations in the accompanying 2002 and 2001 statements of
operations. Revenues, operating costs and expenses, other income and expenses
of this business have been reclassified to discontinued operations.
Research and Development Activities
A strategic plan and corporate partners drive Cyclopss' research and
development program. Objectives of the research with respect to applications
of ozone technology are to develop new product concepts, demonstrate ozone's
11
disinfection efficacy and determine the conditions for ozone's safe and
optimum application.
Ozone research is conducted on new product developments identified by
customers or by the Company, and that represent the Company's market focus -
consumer products and commercial medical, food and laundry systems. For many
customer research and development projects, the Company has signed
non-disclosure agreements that prevent it from revealing the customer's name,
location, and, in some cases, their product. In determining the efficacy of
ozone, indicator microorganisms are used to monitor the effect of ozone
compared to current practices. Once biocidal efficacy has been demonstrated
and the ozone delivery process optimized, an engineering model prototype for
an ozone product is delivered to the customer for them to manufacture and a
royalty arrangement is negotiated. Alternatively, the customer is presented
with the research results along with a proposal for a pilot project to be
implemented in their facility.
Since implementation of the new business model to perform contract
research and development and license ozone technology, the Company has
developed several products for customers including the Otres Toothbrush and
Sponge Sanitizers and a disinfection system for a medical device.
The Toothbrush and Sponge Sanitizers were originally developed in
collaboration with Otres, LLC (Otres), and with Procter & Gamble as a
marketing and product development partner. However, Otres has not performed
as originally envisioned in the Company's license agreement. Otres has
experienced problems manufacturing the products and has failed to reach
expected production levels. The Company continues to seek alternatives to
realize the full revenue potential offered by the Otres products.
The Company is currently negotiating with Otres to purchase inventories
of unassembled parts for the Toothbrush and Sponge Sanitizers, and intends to
assemble and market the products after completion of the purchase.
Contract research and development projects contributed directly $172,508
and $87,847 of total revenues for the years ended February 28, 2002 and
February 28, 2001, respectively. Technical accomplishments this past year in
Research and Development include:
* Development of Kitchen and Bath Ozone Products: Cyclopss was engaged
by a leading supplier of kitchen and bath appliances to develop two
products. Prototypes have been built and tested against the
customer's criteria and all original specifications met. The customer
is evaluating additional requirements and further changes may be
required to meet the new requirements.
* Development of Self-Sanitizing Humidifier Product: Cyclopss was
engaged by one of the largest suppliers of home humidifiers to develop
an ozone system to sanitize the humidifier reservoir. Prototypes have
shown that ozone will destroy the common bacteria known to cause
"humidifier cough" and has potential to destroy fungus linked to
sinusitis.
* Applications for Kobelco D-Ozone System: Cyclopss was selected by
Schreck, Inc. and Kobelco to be the exclusive ozone partner for the
D-Ozone system for North America. Cyclopss will work with potential
12
D-Ozone customers to conduct feasibility tests and design
applications. Unlike conventional methods, the D-Ozone system creates
dissolved ozone directly in water through an electrolysis process.
Aqueous ozone levels achieved with this method are three times or more
greater than those obtained from dissolved ozone gas. In addition, no
high-concentration ozone gas is produced that subsequently has to be
dissolved in the water, thereby eliminating a potential hazard.
Precious metal catalysts are used in the D-Ozone electrolysis cell,
unlike some competing equipment that uses lead and raises concern for
lead contamination of the ozonated water and food. Cyclopss developed
a design for a turkey carcass washer using the D-Ozone system and
demonstrated 99% reduction of E. coli and Salmonella bacteria. This
system application addresses a major problem with Salmonella
contamination in ground turkey and was successfully tested in 2002 by
a major turkey producer.
The Company's research and development organization consists of a
microbiologist and an electrical engineer under the direction of the Company's
President, Dr. Durand Smith. Two of the staff have also earned their Ph.D.s
in physics. The Company incurred $27,231 in research and development expenses
during the fiscal year ended February 28, 2002 compared to $67,055 during the
fiscal year ended February 28, 2001. The reduction of research and
development expenses was due to cash constraints together with the redirection
of the Company's efforts to find strategic partners willing to fund the
majority of the Company's research and development efforts and license the
developed application under royalty arrangements.
Manufacturing
The Company's strategy is that its proprietary technologies become an
integral part of products produced, manufactured, and commercialized by its
strategic partners or manufactured by contractors directly for the Company.
The Company currently assembles and tests each of its proto-type products
in-house or at the time of assembly in the field. In certain instances, the
Company relies on outside vendors for various parts and subassemblies and does
not intend to be a basic manufacturer. The Company derives income from
royalties on products it develops and from products manufactured by third
parties. In selected cases, Cyclopss will derive income from products
manufactured under contract and providing these products with a private label
or the Company's own brand to strategic partners or directly to distributors.
Competition
The Company's ozone-based food safety systems and laundry systems
compete directly with chlorine and other chemical and physical treatments.
The Company's ozone systems have shown the ability to reduce operating costs,
including water, power and chemical usage as well as residual chemical
contamination that many other food washing and laundry systems generate.
Chlorine based systems are used extensively throughout food processing and
textile washing. However, scientific research demonstrates that chlorine is
becoming less effective in destroying certain microorganisms, such as
Cryptosporidium, and that chlorine can potentially leave a carcinogenic
residual of trihalomethanes. Furthermore, extensive use of chlorine has
caused ground water contamination in certain areas. Other competitive
treatment methods in food are irradiation, high pressure lactic and citric
acid, hydrogen peroxide, propylene oxide, ethylene oxide, methyl bromide,
pasteurization and steam pasteurization.
13
The Company's specialty consumer products for sanitizing toothbrushes
and kitchen sponges are unique products with limited markets and fragmented
competition. The Company believes that there may be other competitors
developing similar products and processes. Emjoi, manufactured by Soft Lines,
Ltd., is a toothbrush sanitizer that uses ultraviolet light. The Emjoi
retails at a higher price and has the potential to expose users with harmful
UV rays. The Sila toothbrush sanitizer uses ozone but operates on batteries,
thus suggesting a significantly lower output ozone generator, and hence, less
efficacy at pathogen reduction. A Sila sponge sanitizer appears to use a
higher power ozone generator. Neither Sila product makes microbial reduction
claims, nor does the toothbrush sanitizer have FDA approval, which the Otres
model does.
The Company's laundry product systems are in competition with several
small producers of ozone washing systems. These competitors have changed
rapidly over the years and presently include Agrimond, EnviroClense, and
Industrozone, among others. The Company believes that these competitors are
also small, early stage enterprises. The Company believes that its research
and development activities over the past nine years, its intellectual
properties, as well as its newly adopted business model will give the Company
a competitive advantage in those markets targeted.
The Company's commercial food processor systems are in competition with
several large European companies that made recent entries in the US market.
These include Air Liquide and British Oxygen Company. The Company
successfully competed with these companies on a recent ozone application and
believes the Company's research and development and the D-Ozone technology to
be superior to its competitors.
Proprietary Technology, Patents, and Trademarks
The Company has developed technologies that it believes will enable it
to offer effective ozone laundry and food washing systems, as well as support
product development in certain other disinfection and sterilization
applications. The Company's gas sterilization technology has been developed
around an ozone generation technology acquired by the Company in January 1994.
Utilizing such ozone generation technology as the "core" for the development
of the Company's ozone products, the Company has engineered technology
applications with various components and modules. The Company has and will
continue to seek patent protection for various components, technologies, and
systems it develops when appropriate, and will attempt to protect other
components, technologies and systems through trade secret protection.
Patent Applications. To date, the Company has filed sixteen patent
applications with the United States Patent and Trademark Office. As of
February 28, 2002, twelve of these patents have been granted, three of the
patents are still pending, and one of the submissions has been denied by the
Patent Office and the Company has decided not to resubmit that application.
The patent submissions relate to various component parts or technologies used
in the Company's sterilization, laundry products, food processing, and
consumer products.
14
The twelve patents granted and grant dates are identified as shown in
the following list:
Title Grant Date
1. Method for Producing Ethynylated Aromatic Compounds 05-12-1987
2. Laundry Transfer and Counting Apparatus 07-18-1989
3. Ozone Generator 09-08-1992
4. Ozone Sterilization System Secondary Safety Chamber 11-30-1993
5. Limited Restriction Quick Disconnect Valve 01-25-1994
6. Ozone Sterilization System Spent Agent Destruct. 08-02-1994
7. Ozone Sterilization Vapor Humidification Component 09-06-1994
8. Fluid Chemical Biocide 04-04-1995
9. Laundry Ozone Injection System 05-06-1997
10. Cold Water Ozone Disinfection 11-30-1997
11. Cold Water Wash Formula 12-28-1999
12. Cold Water Disinfection of Foods 03-13-2001
Foreign patent proceedings, where applicable, have been initiated for
patents that have been granted in the United States.
The currently pending patent applications are identified and dated as
shown in the following list:
Title Application Date
1. Porous Material Disinfection Method 01-14-2000
2. Method for optimizing ozone production in a corona
discharge ozone generator 01-12-2001
3. High Purity, High Level Disinfectant for Clean Rooms 02-08-2002
Trademarks. The Company has filed trademark applications with the United
States Patent and Trademark Office for the trademarks "STER-O3-ZONETM",
"Eco-PureTM", "VAC Soil Counting SystemTM", and "Eco-WashTM". All of these
applications have been allowed but the trademarks have not yet been issued.
Other trademark applications such as "Retr-O-ZoneTM", "SteroxTM",
"Ozo-CleanTM" and "Zono-ChemTM" have been abandoned or rejected. Ecolab, Inc.
has initiated a legal proceeding against the Company's use of the trademarks
that use "Eco" as part of the mark. At this point, the proceeding is in the
discovery phase and in the opinion of the Company's counsel there is little
merit to their case. Furthermore, Ecolab, Inc. is investigating the purchase
of the Company's "Eco-WashTM" trademark.
All of the Company's intellectual properties as outlined above were used
as collateral in the issuance of the Secured Convertible Loan Financing the
Company received from Procter & Gamble in February 2000. There is additional
information regarding the terms of this transaction under Liquidity and
Capital Resources.
15
Employees
The Company employed four full-time employees as of May 30, 2002. None
of the employees are covered by a collective bargaining agreement. The
Company has no retirement or post-employment benefit plans for its employees.
All of the Company's employees are located in the United States.
ITEM 2. FACILITIES
The Company leases 500 square feet of office space at 7105 South
Highland Drive, Suite #102, Salt Lake City, Utah 84121. The lease expires
March 1, 2003 and requires monthly lease payments of $560. In addition to the
Salt Lake location, the Company's research and development division, under the
direction of Dr. Durand Smith, the Company's President, currently leases
approximately 2,000 square feet of space at 2709 Vassar PL NE, Suite C,
Albuquerque, New Mexico 87107. The lease expires in February 2003. It
requires monthly lease payment of $1,320 through February 2002, and $1,370
thereafter.
ITEM 3. LEGAL PROCEEDINGS
Mifal Klita, et al. During the period from May through August 1996, the
Company sold its Series "B" preferred stock in a private placement offering to
certain investors pursuant to the provisions of Securities and Exchange
Commission Regulation S. One of these investors, Mifal Klita, a purported
Canadian company, filed suit against the Company demanding the removal of the
restrictive investment legend which the Company caused to be placed on common
shares issued pursuant to the conversion of Series "B" preferred shares. The
suit was filed in the Court of Chancery in the State of Delaware, which ruled
in favor of the Company on April 8, 1997 and dismissed Mifal Klita's suit.
Subsequently, Mifal Klita refiled an amended suit in the Superior Court of the
State of Delaware. The final settlement agreement reached by the parties
involved, in September 1999, entitled Mifal Klita to the conversion of the
Series "B" preferred shares into unrestricted common stock of the Company plus
shares for legal fees and other provisions stated in the original agreement,
which was fully paid by December of 2001.
Other than the item mentioned above, the Company is not aware of any
other legal actions or outstanding or asserted or unasserted claims against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Market for Common Stock
The Company's common stock is currently listed on the OTC Bulletin Board
under the symbol "OZON". There is limited trading activity in the Company's
common stock and the quotations set forth below reflect such limited activity.
There can be no assurance that stock quotations will not fluctuate greatly in
the future in the event trading activity increases or decreases. The
information contained in the following table was obtained from the Bulletin
Board Stock Market and from various broker-dealers and shows the range of
representative trading prices for the Company's common stock for the periods
indicated. The prices represent quotations between dealers and do not include
retail mark up, mark down or commission, and do not necessarily represent
actual transactions:
Year Ended Year Ended February 28, 2002
February 28, 2001 February 28, 2002 Through May 31, 2002
High Low High Low High Low
First Quarter $1.50 $ 0.27 $ 0.19 $ 0.09 $ 0.20 $ 0.12
Second Quarter 0.80 0.25 0.41 0.12
Third Quarter 0.48 0.11 0.49 0.13
Fourth Quarter 0.25 0.11 0.27 0.16
Holders
The number of holders of record of the Company's common stock as of May
31, 2002 was 456. The Company believes the actual number of beneficial
shareholders exceeds 2,000. There are numerous shareholders that hold the
Company's common stock in the "street name" of their various stock brokerage
houses.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future.
The Company has paid interest and dividends in the form of additional shares
of common stock to Procter & Gamble and other convertible debt and preferred
stock holders as required by the preferred stock and debt agreements. It is
the present intention of management to utilize all available funds for the
development of the Company's business and to not pay any cash dividends.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company is engaged in the licensing, manufacture, sale and
installation of ozone food processing products, ozone washing and laundry
sorting and counting systems for commercial and institutional laundries, and
research and development of technologies for the sterilization and/or
disinfecting of certain consumer products.
The Company believes that its technologies and product lines offer cost
effective, energy efficient, environmentally benign alternatives for cleaning
and disinfecting products and systems. The Company believes that its
technologies are easily scalable from consumer appliances up through
industrial systems. The products provide systems to address food safety,
particularly microbial reductions on meat and poultry, and fruits and
vegetables. Additional products that the Company offers enable manufacturers
to eliminate microbial build up in and on plant equipment. Other ozone-related
products the Company markets to commercial and institutional laundry operators
enable users to reduce costs associated with labor, water, energy, chemicals,
and wastewater disposal. The Company has developed consumer product prototypes
ranging from the sanitization of kitchen sponges and toothbrushes, to counter
top drinking water processors and food sanitizers.
On June 15, 2001, the Company entered into an asset purchase and sale
agreement with Paragon, LLC to sell primarily all of the assets of Cyclopss
Biochemical Corporation, a wholly owned subsidiary. The principals of Paragon,
LLC were the employees of Cyclopss Biochemical Corporation. During the year
ended February 28, 2002, the Company received a total of $235,000 from
Paragon, LLC in connection with this sale, and recorded a gain of $213,539 on
the sale of the biochemical products business.
The Company entered into a Convertible Secured Loan for $ 1,000,000 with
Procter & Gamble in the year ended February 28, 2001, that is further
described in the following Liquidity and Capital Resources section. Under the
terms of the loan agreements, the Company is subject to various covenants,
including maintaining minimum liquid assets in the form of cash or marketable
securities of $100,000. At February 28, 2002 and subsequent to that date, the
Company is in default with the minimum liquid assets covenant and, therefore,
the loan may be called at any time. Proctor & Gamble has and is fully apprised
of the Company's inability to comply with the loan agreement and, while their
can be no assurances that they will continue to do so, as of the date of this
filing has made no attempt to hamper the operations of the Company or call the
loan in default.
The Company has engaged in several diverse development and testing
contracts with departments of Proctor & Gamble and anticipates moving towards
the commercialization of certain of the Company's industrial products. Under
the terms of the Company's loan agreements, Proctor & Gamble has been granted
an exclusive right of first refusal for the licensing of all current and
future technologies of the Company. Under that right of first refusal, the
Company submitted four separate technology ideas or product concepts to
Proctor & Gamble during the reporting period. Of the four, the Company's
commercial Eco Wash(tm) cold-water laundry system was presented to the
Commercial Products Group at Proctor & Gamble and the Company is negotiating
with Proctor & Gamble for their participation in the commercialization effort.
The other three products have been declined by Procter & Gamble as of the date
of this filing.
The Company is not able to disclose all of the development partners
and/or the products currently being developed due to the restrictions of its
confidentiality agreements. The Company's partners are of the opinion that
18
they would be harmed should their competitors and the public prematurely know
their interest in the technologies and the product concepts in general.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations ("Statement 141"). Statement 141 requires that
all business combinations be accounted for under the purchase method of
accounting. Additionally, certain intangible assets acquired as part of a
business combination must be recognized as separate assets, apart from
goodwill. Statement 141 is effective for all business combinations initiated
subsequent to June 30, 2001. The Company does not expect the adoption of
Statement 141 will have a significant impact on its financial statements.
Also in July 2001, the Financial Accounting Standards Board issued
Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142").
Statement 142 requires that ratable amortization of goodwill be replaced with
periodic review and analysis of goodwill for possible impairment. Intangible
assets other than goodwill must be amortized over their estimated useful
lives. The provisions of Statement 142 are effective for fiscal years
beginning after December 15, 2001. The Company reviews its intangible assets
and goodwill for impairment pursuant to this Statement. The Company does not
expect the adoption of Statement 142 will have a significant impact on its
financial statements.
In September 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement 144"). Statement 144
addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company reviews its long-lived assets in accordance with this statement.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenue for product sales is recognized upon shipment, or in the case of
washing and laundry systems, under the percentage of completion method if it
involves a long-term contract, otherwise revenue is recognized at the time of
shipment. The Company also provides certain services on a time and materials
basis.
19
Deferred revenue is comprised of prepaid license fees received from the
license of certain of the Company's technologies. Revenues from license and
royalty fees are to be recognized and credited as the licensed technology
systems are sold.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation and amortization are determined using the
straight-line method over the estimated useful lives of the assets ranging
from three to seven years. Assets acquired pursuant to capital lease
obligations are amortized over the assets' estimated useful lives. Leasehold
improvements are amortized over the lesser of the estimated useful lives or
the remaining lease term. Maintenance and repairs are expensed as incurred.
Intangible assets
Intangible assets consist primarily of patents that are recorded at the
lower of cost or their net realizable value. Acquired and developed patents
are amortized on a straight-line basis over the shorter of their estimated
useful lives or the remaining stated life of the patent. Accumulated
amortization for acquired and developed patents was $56,204 and $370,715 at
February 28, 2002 and 2001, respectively.
Impairment of Long-Lived Assets
The Company reviews long-lived and intangible assets for impairment
whenever events or circumstances indicate the carrying value of an asset may
not be recoverable. Based on the Company's review there has been no impairment
of long-lived or intangible assets during the years ended February 28, 2002
and 2001.
Results of Operations
The following discussion and analysis should be read in conjunction with
the financial statements and notes attached hereto. Included in the Company's
consolidated financial statements are the Company's recurring losses from
operations and periodic cash flow difficulties, which raise substantial doubt
about its ability to continue as a going concern.
The Company's sales during the year ended February 28, 2002, were
$366,012 compared to $188,714 for the year ended February 28, 2001, an
increase of $177,298 or 94%. This increase is due to the Company's efforts to
generate more income, as well as successful consulting and product development
agreements with various strategic partners.
Cost of sales increased to $232,160 for fiscal 2002 from the previous
year's cost of sales of $199,097, an increase of $33,063 or 17%, despite the
94% increase in sales. This disparity is due mainly to the elimination of
service personnel in an overall effort to reduce costs, and execution of the
Company's new business model.
Research and development expenses decreased to $27,231 for fiscal 2002
from $67,055 for the previous year, a reduction of $39,824 or 59%. This
20
decrease is due to the Company's efforts to reduce research expenses and
obtain strategic partners willing to fund research related costs. The Company
believes it is necessary to increase research and development efforts for
fiscal 2003, whether on a contract basis or from its own resources as
available, in order to complete the development and commercialization of its
food processing and consumer products.
Selling and marketing expenses increased to $132,533 for fiscal 2002
from $114,702 for the previous year, an increase of $17,831 or 16%. The
increase in marketing efforts was essential in order to present opportunities
to various strategic partners. Management believes that it is critical to
periodically support and supplement its sales efforts through advertising,
public relations and trade-show participation when sufficient funds are
available.
General and administrative expenses increased to $849,085 for fiscal
2002 compared with $749,011 for the previous year, an increase of $100,074 or
13%. The increase in general and administrative expenses for the year ended
February 28, 2002 is primarily due to the write off of the note receivable and
other advances to OxiDyn totaling $200,386. Management is more closely
monitoring and controlling expenses due to significant cash flow constraints.
However, new accounting requirements and SEC regulations are being adopted
with increasing regularity. These expenses, while burdensome, are crucial to
providing and maintaining a market for the Company's securities. These
expenses are expected to increase in fiscal 2003, with other potential
increases due to management and human resource requirements for the Company
should commercial activities increase, and more funds become available for
this use.
Net income from discontinued operations related to the biochemical
products business as discussed earlier was $16,076 and $40,090 for the years
ended February 28, 2002 and 2001, respectively. The decrease in net income is
due to continuous declining sales of biochemical products, which could be
recorded by the Company before the sale of this subsidiary. The Company
recorded a gain on the sale of the biochemical products business of $213,539
for the year ended February 28, 2002.
The Company suffered a net loss attributable to common stockholders for
fiscal 2002 of $850,225, or $0.02 per share as compared to $1,132,855, or
$0.04 per share for fiscal 2001. The decrease in the net loss and net loss per
share is attributable to a significant decrease of costs and expenses,
primarily legal settlement expense, as all outstanding litigation against the
Company was settled. The Company anticipates that it will operate at a loss
for the year ending February 28, 2003.
Liquidity and Capital Resources
As of the date of this filing, the Company has sustained significant net
losses which have resulted in an accumulated deficit at February 28, 2002 of
$21,110,725, and has experienced periodic cash flow difficulties, all of which
raise substantial doubt about the Company's ability to continue as a going
concern.
Cash used in operating activities was $618,035 for the year ended
February 28, 2002 compared with $1,097,574 for the year ended February 28,
2001. This decrease is primarily due to the Company's efforts to control
costs, the cash received from the sale of Cyclopss Biochemical Corporation
resulting in a gain on sale of $213,539, and the $200,386 write-off of
21
receivables from OxiDyn. In addition, the Company extended payables in fiscal
2002, while in fiscal 2001 significant efforts were made to pay down
outstanding payables.
Total assets decreased to $192,071 for the year ended February 28, 2002
from $315,234 for the year ended February 28, 2001, primarily due to the write
off of the OxiDyn receivable and decreases in fixed assets and patents.
Total current liabilities decreased to $1,129,429 at February 28, 2002
from $1,354,288 at February 28, 2001 due primarily to the Proctor & Gamble
note payable, which decreased from $1,000,000 in the prior year to $500,000
for February 28, 2002, as explained further in the following paragraph.
During the year ended February 28, 2001, the Company entered into a
Convertible Secured Loan for $ 1,000,000 with Procter & Gamble that provided
funds of $250,000 in the fourth quarter of fiscal 2000 and $750,000 in the
second quarter of fiscal 2001. The loan accrued interest at 8% and is
collateralized by a first security interest in all of the Company's
intellectual properties and was due on or before February 28, 2001. The loan
agreement granted a conversion right to Proctor & Gamble allowing for the
conversion of all or any part of the outstanding loan, including all or any
part of interest due, into shares in the Company's common stock at anytime
during the term of the loan, and at the sole discretion of Proctor & Gamble.
The Company recognized its inability to repay the loan by the end of its third
quarter, notified Proctor & Gamble, and negotiated a revised loan agreement.
On February 4, 2001, the Company entered into a Conversion and Amendment
Agreement with Proctor & Gamble that extended the due date for a portion of
the loan amount equal to $500,000 to February 28, 2002, and a conversion of
the remaining $500,000 loan principal into 500,000 shares of Series "E"
convertible preferred stock, which occurred in March 2001. In February 2002,
Procter & Gamble extended the due date of the $500,000 loan note for 18 months
to August 28, 2003. All interest due and payable as of February 28, 2002, has
been included in the new principal balance of $575,000. The re-negotiation was
aided in part by Procter & Gamble's increasing interest in commercializing one
of the Companies more mature technologies and the anticipation of a resulting
licensing and royalty agreement being entered into between the parties. There
can be no assurances however that the parties will successfully enter into an
acceptable licensing and royalty agreement, nor can there be any assurances
that the Company will be able to service the loan or pay the interest when
due.
Under the terms of the loan agreements, the Company is subject to
various covenants, including maintaining minimum liquid assets in the form of
cash or marketable securities of $100,000. At February 28, 2002, and
subsequent to that date, the Company is in default with the minimum liquid
assets covenant and, therefore, the loan may be called at any time.
Common shares issued and outstanding for February 28, 2002 were
38,616,400, compared to 30,352,826 for the prior year. Common shares increased
from the prior year by 638,770 shares and 673,292 shares due to the exercising
of warrants and stock options, respectively, and 378,205 common shares were
issued for services. Additionally, 646,153 common shares were issued in
fiscal 2002 for cash, and 974,359 common shares were issued on the conversion
of a stock subscription. Further, 4,035,855 common shares were issued upon
the conversion of Series "B" to common shares.
22
Net cash provided by financing activities was $575,744 for fiscal 2002.
This amount compares to $1,150,699 for fiscal 2001. The decrease in funds
received were primarily related to $750,000 in proceeds received related to
the note payable to Proctor and Gamble in fiscal 2001. In fiscal 2002, an
additional $100,000 was received on a private placement offering related to
the proposed acquisition of OxiDyn. The Company also received $300,500 as of
February 28, 2002 in connection with a private placement offering of
convertible promissory notes at an annual interest rate of 10%. The note
holders have the right to convert the principal amount into restricted common
shares at the fair market value of the stock on the date of conversion. As of
February 28, 2002, all but $166,500 of the convertible promissory notes had
been converted to common stock. An additional $55,139 and $50,105 were
received from the exercise of warrants and stock options, respectively.
The net loss for the year ended February 28, 2002 was $850,225. In the
past the Company has been able to obtain funding necessary for its operations
through the issuances of common and preferred stock or through debt related
securities. The Company anticipates a net loss for the year ended February 28,
2003, and with a cash balance of $73,102 at February 28, 2002 and expected
cash requirements for the coming year, there is substantial doubt as to the
Company's ability to continue operations.
The Company is attempting to improve these conditions by way of
financial assistance through collaborative partnering agreements, issuances of
additional equity, debt arrangements, and product sales. Management believes
that appropriate funding will be received and future product sales will result
from these opportunities and that the Company will continue operations over
the next fiscal year; however, no assurances can be given that sales will be
generated or that additional necessary funding will be raised. The Company
anticipates it will receive limited royalties from some of its licensed
products within fiscal year 2003 and expects the majority of its revenues to
stem from development contracts and product sales.
Should the Company be unsuccessful in the issuance of its equity
securities, debt arrangements or other methods of securing funding, or should
the Company fail to achieve the increased level of revenues and gross profits
required to pay its operating expenses, direction from the Board of Directors
as to what action should be taken will be sought.
Subsequent Events
The Company is currently negotiating to acquire inventories of parts of
unassembled consumer products and a trademark associated with those consumer
products in order to assemble and market the related products.
Plan of Operation
The Company has been engaged in the licensing, manufacture, sale and
installation of ozone food processing products, ozone washing and laundry
sorting and counting systems for commercial and institutional laundries, and
research and development of technologies for the sterilization and/or
disinfecting of certain consumer products. The Company's principal technology
provides an alternative to address food safety and sanitation concerns,
healthcare sanitizing, and laundry disinfection and efficiency. Ozone
23
technology is proven to reduce microbial counts on most products without the
potential for the organisms to develop immunity or resistance and without
leaving residual chemical contaminants. Laundry systems using ozone technology
enable users to reduce costs associated with labor, water, energy, chemical,
textile replacement and wastewater.
Since September 11, 2001, the Company has responded to a number of
requests for proposals from agencies of the Federal government, submitting
proposals for the Company's ozone systems to inactivate anthrax and biological
pathogens in general. The Company has written four proposals to the
Department of Defense and has begun the process of seeking registration of an
ozone biological decontamination chamber, an Eco Wash laundry, and an aqueous
ozone wash-down system with the EPA's Office of Solid Waste and Emergency
Response for use against anthrax.
In 2001, the Company changed its business model to include the licensing
of proprietary technologies to partners who have resources and infrastructures
better suited to successfully commercialize certain of its technologies or
products. The Company intends to reduce the historical emphasis on the fully
integrated model of design, manufacturing, assembly and sales of applications
of its ozone technology to a model that emphasizes licensing, partnering or
creating strategic alliances with other entities, and managing manufacturers
of its products for sale through distribution or under private label.
As an example of the revised strategy, the Company entered into a
Technology Licensing Agreement with Consolidated Stills and Sterilizers of
Boston, MA. The agreement licenses the ozone medical instrument sterilization
technology developed and patented by us for an initial licensing fee and
future royalties. The Company anticipates negotiating like arrangements on
other of its proprietary technologies when the circumstances are beneficial.
Historically, revenues and cash flow from operations have not been
sufficient to support the significant direct and allocated overhead costs.
These costs include substantial research and development, design,
manufacturing, installation, services, sales, personnel, organizational and
other costs associated with a fully integrated business model. The Company
believes that its new business model provides for more efficient operations
that will conserve cash and management time. The Company also believes this
action will promote more rapid market entry and acceptance of its technology
through the utilization of the strengths and existing infrastructures of other
industry providers wherein the Company's component becomes an incremental cost
of the product's sale and support. This model is designed to allow the
Company access to revenues generated through licensing and royalty streams,
while keeping the overhead low and the valuable human resources focused.
In February 2002, the Company teamed with its Eco Wash Navy customer to
submit a proposal to the Strategic Environmental Research and Development
Program (SERDP) for an ozone-based process for cleaning metal parts. The
ozone process will be a replacement for a chlorinated solvent based cleaning
method that presents environmental hazard issues. Should the bid be
successful, an award will be made in January 2003.
During fiscal 2002, the Company worked on projects applying ozone to the
sanitizing of turkey, beef, and pork carcasses, as well as brine used in cured
meat products. A pilot scale test was conducted at a turkey plant and a
24
comparison was run against a conventional chlorine treatment process. Initial
results showed that low levels (5 ppm) of ozone performed better overall than
the higher levels (30 ppm) of chlorine. A full scale, high level (10 ppm)
ozone system was designed and proposed to be installed in 2003 for longer term
tests.
The Company believes that certain conditions exist which creates an
opportunity for ozone as a new alternative to current sterilization methods,
as follows:
* The Food and Drug Administration (FDA), in coordination with the USDA,
issued a final rule effective June 26, 2001. The FDA is amending the
food additive regulations to provide for the safe use of ozone in
gaseous and aqueous phases as an antimicrobial agent on food,
including meat and poultry. [21 CFR Part 173]
* The USDA's Food Safety and Inspection Service issued a final rule on
January 9, 2001, to limit the amount of water retained by raw,
single-ingredient meat and poultry products. Under the new
regulations, raw, single-ingredient meat or poultry products will not
be permitted to retain water unless the establishment producing the
product can show that the amount of water retained is an unavoidable
consequence of a process used in meeting applicable food safety
requirements, such as the Salmonella performance standards. This rule
will allow beef, pork, and lamb to use water based sanitation methods
only available to poultry producers in the past. Although the
effective date has recently been postponed from January 9, 2002 to
January 9, 2003, the trend is favorable for the application of aqueous
ozone.
In addition to the specific rulings, the Company believes a number of
related actions will create an opportunity for new alternatives to current
sanitation methods, such as:
* New regulatory pathogen reduction standards for Salmonella set forth
in the PR/HACCP regulations. [9 CFR 381.94]
* The food activist groups Center for Science in the Public Interest and
S.T.O.P. (Safe Tables Our Priority) exemplify public organizations
pushing for tougher standards on food borne pathogens.
* Agricultural Secretary Ann Veneman's announcement on Dec. 18, 2001
that USDA inspectors will test for Salmonella, and close plants that
do not meet food safety requirements.
Consumers and food producers and processors both large and small are
searching for new technologies to address food safety and sterilization
concerns. Both consumers and food processors, which have relied heavily on
chlorination and other chemicals to decontaminate foods and household items,
are being forced to consider alternatives to chlorine and other toxic
chemicals. Ozone products offer a lower cost, more environmentally friendly
and consumer accepted form of decontamination and sterilization than many
other chemical treatments and irradiation.
The information set forth herein as to anticipated research and
development costs, equipment purchases and increases in employees are
management's best estimates based upon current plans. Actual expenditures may
be greater or less than such estimates depending on many factors including,
but not limited to, the availability of new technologies, the completion or
25
lack of completion of certain strategic alliances, the timing and successful
completion of the Company's stated requirement to acquire additional operating
and growth capital, industry initiatives, success of the Company's research
and development efforts, and other factors.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include, but are not limited to, the following:
* Market acceptance of the Company's products;
* Obtaining sufficient additional operating capital in the form of debt
or equity;
* The existence of an orderly market in the Company's securities;
* Increased sales of the various products of the Company;
* A regulatory climate that permits the Company's technologies and
products to obtain commercial acceptance;
* Continued success in the Company's research and development
activities; and
* Successful completion of strategic alliances.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required with respect to this Item 7, see "Consolidated
Financial Statements and Schedules" on pages F-1 through F-25 of this report.
CONSOLIDATED FINANCIAL STATEMENTS
Cyclo3pss Corporation and Subsidiaries
Years Ended February 28, 2002 and 2001
with Report of Independent Auditors
Cyclo3pss Corporation and Subsidiaries
Consolidated Financial Statements
Years Ended February 28, 2002 and 2001
Contents
Report of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Deficit F-7
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-10
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
Cyclo3pss Corporation
We have audited the accompanying consolidated balance sheets of Cyclo3pss
Corporation and subsidiaries as of February 28, 2002 and 2001, and the related
consolidated statements of operations, stockholders' deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cyclo3pss Corporation and subsidiaries as of February 28, 2002, and
the consolidated results of their operations and their cash flows for the
year then ended in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2 to the consolidated financial statements, the Company's
recurring losses from operations and periodic cash flow difficulties raise
substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are described in Note 2. The
consolidated financial statements for the year ended February 28, 2002 do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
/s/Squire & Company
Orem, Utah
June 11, 2002
F-2
Report of Independent Auditors
The Board of Directors
Cyclo3pss Corporation
We have audited the accompanying consolidated balance sheet of Cyclo3pss
Corporation and subsidiaries as of February 28, 2001, and the related
consolidated statements of operations, stockholders' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cyclo3pss Corporation and subsidiaries at February 28, 2001, and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 2 to the consolidated financial statements, the Company's
recurring losses from operations and periodic cash flow difficulties raise
substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are described in Note 2. The
consolidated financial statements for the year ended February 28, 2001 do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
/s/Ernst & Young LLP
Salt Lake City, Utah
June 1, 2001
F-3
Cyclo3pss Corporation and Subsidiaries
Consolidated Balance Sheets
February 28
2002 2001
Assets
Current assets:
Cash $ 73,102 $ 62,022
Accounts receivable, less allowance for doubtful
accounts of $17,000 in 2002 and $18,975 in 2001 70,754 28,850
Note receivable from OxiDyn -- 80,000
Prepaid expenses 9,319 3,462
--------- ---------
Total current assets 153,175 174,334
Property and equipment, net 14,641 46,077
Other assets:
Acquired patents, net -- 36,407
Developed patents, net 24,255 36,693
Net assets of discontinued operations:
Property and Equipment, net -- 21,723
--------- ---------
$ 192,071 $ 315,234
========= =========
See accompanying notes to consolidated financial statements.
F-4
Cyclo3pss Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
February 28
2002 2001
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 129,147 $ 124,937
Accrued liabilities 158,782 119,351
Notes payable 741,500 1,000,000
Note payable to officer -- 10,000
Deferred revenue 100,000 100,000
------------- -----------
Total current liabilities 1,129,429 1,354,288
Commitments and contingencies
Stockholders' deficit:
Preferred stock:
Preferred stock issuable in series: par value
$0.01, 4,500,000 authorized:
Series "A" preferred stock; 35,638 shares
authorized, issued and outstanding
(liquidation preference of $71,276) 356 356
Series "B" convertible preferred stock;
30,000 shares authorized, no shares and
614 shares issued and outstanding in 2002
and 2001, respectively -- 6
Series "E" convertible redeemable preferred
stock; 1,000,000 shares authorized, 500,000
and no shares issued and outstanding in 2002
and 2001, respectively (liquidation
preference of $550,000) 5,000 --
Class "A" preferred stock, par value $0.01;
500,000 shares authorized; none issued or
outstanding - -
Common stock, par value $0.001; 55,000,000 shares
authorized; 38,616,400 shares and 30,352,826
shares issued in 2002 and 2001, respectively 38,616 30,353
Additional paid-in capital 20,630,940 19,504,245
Deferred stock-based compensation -- (1,969)
Stock subscription received -- 190,000
Accumulated deficit (21,110,725)(20,260,500)
Less treasury stock, 264,000 common shares at
cost (501,545) (501,545)
----------- -----------
Total stockholders' deficit (937,358) (1,039,054)
----------- -----------
$ 192,071 $ 315,234
=========== ===========
See accompanying notes to consolidated financial statements
F-5
Cyclo3pss Corporation and Subsidiaries
Consolidated Statements of Operations
Year Ended
February 28
2002 2001
Revenues:
Products sales $ 190,504 $ 99,304
Services 175,508 89,410
------------ -----------
Total revenues 366,012 188,714
Costs and expenses:
Cost of products sold 164,132 132,648
Cost of services 68,028 66,449
Research and development 27,231 67,055
Selling and marketing 132,533 114,702
General and administrative 849,085 749,011
Depreciation and amortization 81,785 125,141
------------ -----------
Total expenses 1,322,794 1,255,006
------------ -----------
Loss from continuing operations (956,782) (1,066,292)
Interest income 5,140 4,845
Interest expense (128,198) (97,528)
Other income -- 4,030
------------ -----------
Net loss from continuing operations (1,079,840) (1,154,945)
Discontinued operations:
Gain on sale of discontinued operations 213,539 --
Income from discontinued operations 16,076 40,090
------------ -----------
Net gain from discontinued operations 229,615 40,090
Net loss (850,225) (1,114,855)
Preferred stock dividends -- (18,000)
------------ -----------
Net loss attributable to common stockholders $ (850,225) $(1,132,855)
============ ===========
Basic and diluted net income (loss) per common share:
Continuing operations $ (0.03) $ (0.04)
Discontinued operations $ 0.01 $ 0.00
Net loss per common share- basic and diluted $ (0.02) $ (0.04)
============ ===========
Weighted-average number of common shares -
basic and diluted 35,588,014 28,375,628
============ ===========
See accompanying notes to consolidated financial statements.
F-6
Cyclo3pss Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Series "B" Series "C" Series "E"
Series "A" Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Shares Amounts Shares Amounts Shares Amounts Shares Amount
Balances at
February 29,
2000 35,638 356 900 9 75 1 - -
Issuance of
common stock
for services - - - - - - - -
Issuance of
common stock
upon conversion
of accrued
interest - - - - - - - -
Issuance of
common stock upon
exercise of
warrants - - - - - - - -
Issuance of
common stock upon
exercise of
stock options - - - - - - - -
Conversions of
Series "B"
preferred stock to
common stock - - (286) (3) - - - -
Conversions of
Series "C"
preferred stock to
common stock - - - - (75) (1) - -
Deferred stock-
based compensation - - - - - - - -
Amortization of
deferred stock
based compensation - - - - - - - -
Stock subscription
received in cash - - - - - - - -
Recognition of
paid-in-kind
stock dividends on
Series "B" preferred
stock (See Note 8) - - - - - - - -
Net loss - - - - - - - -
------------------------------------------------------------
Balances at
February 28,
2001 35,638 356 614 6 - - - -
Issuance of
common stock
for cash - - - - - - - -
Issuance of common
stock on conversion
of stock
subscription - - - - - - - -
Issuance of
common stock
for services - - - - - - - -
Issuance of
common stock
upon conversion
of accrued
interest - - - - - - - -
Issuance of
common stock upon
exercise of
options - - - - - - - -
Issuance of
common stock upon
exercise of
warrants - - - - - - - -
Conversions of
Series "B"
preferred stock to
common stock - - (614) (6) - - - -
Issuance of
Series "E"
preferred stock - - - - - - 500,000 5,000
Interest expense
related to warrants - - - - - - - -
Issuance of common
common stock on
conversion of debt - - - - - - - -
Amortization of
deferred stock-
based compensation - - - - - - - -
Net loss - - - - - - - -
Balances at
February 28,
2002 35,638 $ 356 - $ - - $ - 500,000 $5,000
============================================================
See accompanying notes to consolidated financial statements.
F-7
Cyclo3pss Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Treasury
Add'l Deferred Stock Stock
Common Stock Paid-In Stock-Based Subscription Accumulated (Common)
Shares Amounts Capital Compensation Received Deficit Shares AmountsTotal
25,226,066 25,226 19,028,409 $ - $ - $(19,145,645)264,000$(501,545)
(593,189)
350,000 350 176,710 - - - - -
177,060
593,777 594 96,803 - - - - -
97,397
382,000 382 190,618 - - - - -
191,000
177,800 178 13,299 - - - - -
13,477
2,878,933 2,879 (2,876) - - - - -
-
744,250 744 (743) - - - - -
-
- - 2,025(2,025) - - - -
-
- - - 56 - - - -
56
- - - -190,000 - - -
190,000
- - - - - - - -
-
- - - - - (1,114,855) -
-(1,114,855)
------------------------------------------------------------------------------
--
30,352,826 30,353
19,504,245(1,969)190,000(20,260,500)264,000(501,545)(1,039,054)
646,153 646 119,354 - - - - -
120,000
974,359 974 189,026 -(190,000) - - -
-
378,205 378 49,622 - - - - -
50,000
41,877 42 6,658 - - - - -
6,700
673,292 673 49,432 - - - - -
50,105
638,770 639 54,500 - - - - -
55,139
4,035,855 4,036 (4,030) - - - - -
-
- - 495,000 - - - - -
500,000
- - 28,000 - - - - -
28,000
875,063 875 139,133 - - - - -
140,008
- - - 1,969 - - - -
1,969
- - - - - (850,225) - -
(850,225)
38,616,400$38,616$20,630,940 -$ -(21,110,725)264,000(501,545)$
(937,358)
==============================================================================
==
See accompanying notes to consolidated financial statements.
F-8
Cyclo3pss Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended
February 28
2002 2001
Cash flows from operating activities:
Net loss $ (850,225) $(1,114,855)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 30,664 66,275
Amortization 51,121 73,576
Common stock issued for services 50,000 177,060
Amortization of Stock-based compensation 1,969 56
Gain on sale of discontinued operation (213,539) --
Bad debt expense 209,580 --
Loss on disposition of property and equipment -- 4,843
Write off of inventory -- 17,930
Interest on convertible debt 115,710 --
Changes in assets and liabilities:
Accounts receivable (51,098) 39,898
Prepaid expenses and other (5,857) 2,353
Accounts payable and accrued liabilities 43,640 (364,710)
----------- -----------
Net cash used in operating activities (618,035) (1,097,574)
Cash flows from investing activities:
Purchase of property and equipment -- (5,550)
Proceeds from sale of property and equipment 135 4,128
Proceeds from sale of discontinued operations 235,000 --
Increase to Notes Receivable from OxiDyn (120,386) (80,000)
Addition to developed patents and other (1,378) (17,246)
----------- -----------
Net cash provided (used) in investing activities 113,371 (98,668)
Cash flows from financing activities:
Proceeds from issuance of Common Stock 120,000 --
Proceeds from exercise of warrants 55,139 191,000
Proceeds from exercise of stock options 50,105 13,477
Proceeds from issuance of convertible promissory
notes 300,500 --
Proceeds from issuance of stock subscriptions -- 190,000
Proceeds from note payable -- 750,000
Proceeds from (Payment of) note payable to officer (10,000) 10,000
Principal payments under capital lease obligations -- (3,778)
----------- -----------
Net cash provided by financing activities 515,744 1,150,699
----------- -----------
Net increase (decrease) in cash 11,080 (45,543)
Cash at beginning of year 62,022 107,565
----------- -----------
Cash at end of year $ 73,102 $ 62,022
=========== ===========
Supplemental disclosures:
Interest paid in cash $ 5,560 $ 131
Non-cash investing and financing activities:
Receipt of furniture and fixtures as settlement
of accounts receivable $ -- $ 1,975
Conversion of Note Payable into preferred stock $ 500,000 --
Conversion of preferred stock into common stock $ -- 4
Conversion of accrued interest into common stock $ 75,000 $ 97,397
Interest on convertible debt $ 40,710 -
Deferred stock-based compensation -- 2,025
See accompanying notes to consolidated financial statements.
F-9
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization
Organization
The Corporation was formed in Delaware in 1927. In 1990, the Corporation was
reorganized as Cyclo3pss Medical Systems, Inc. In 1995, the Company changed
its name to Cyclo3pss Corporation (the Company). The Company is engaged in
the licensing, manufacture, sale and installation of ozone food processing
products, ozone washing and laundry sorting and counting systems for
commercial and institutional laundries, and research and development of
technologies for the sterilization and/or disinfection of certain consumer
products.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Cyclopss Medical Systems, Inc., EcoPure, Inc.,
Cyclopss Laundry Systems, Inc., and Cyclopss Wastewater Systems, Inc. All
intercompany balances and transactions have been eliminated.
During fiscal 2001, the Company had an additional wholly owned subsidiary,
Cyclopss Biochemical Corporation, which was sold during the year ended
February 28, 2002, as described below.
Asset Purchase and sale Agreement with Paragon, LLC
On June 15, 2001, the Company entered into an asset purchase and sale
agreement with Paragon, LLC (Paragon). The Principals of Paragon were the
employees of Cyclopss Biochemical Corporation. The purchase price was
$285,000, which was established as the fair value for the Company, and
approved by the board of directors. The Company received $30,000 as a down
payment and financed the balance of $255,000 over five years, at 8% interest,
secured by Paragon's assets.
The terms of the sale agreement allow for a discount in the purchase price of
$50,000 or $40,000 if all amounts due under the note receivable, less the
purchase price discount, are paid prior to September 1, 2001 or December 31,
2001, respectively. During the year ended February 28, 2002, the Company
received a total of $235,000 from Paragon in connection with this sale, and
recorded $213,539 as a gain on the sale of the biochemical products business.
The biochemical products business has been accounted for as discontinued
operations and accordingly, the results of operations are segregated from
continuing operations in the accompanying 2002 and 2001 statements of
operations. Revenues, operating costs and expenses, other income, and
expenses and net assets of this business have been reclassified to
discontinued operations.
F-10
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Acquisition of OxiDyn Incorporated
In October 2000, the Company entered into a letter of intent for the
acquisition/merger of OxiDyn Incorporated (OxiDyn), a North Carolina based
manufacturer of ozone based clean-in-place and sanitizing rinsing systems for
the beverage and bottling industry. A preliminary acquisition agreement was
executed in February 2001, subject to final negotiation, which calls for the
Company to issue shares of common stock, the number to be determined by
dividing OxiDyn's net book value by the average closing price of the Company's
common stock during the five-day trading period immediately prior to the
closing date of the acquisition.
In November 2000, the Company loaned $80,000 to OxiDyn to meet its current
operating requirements, which was to be repaid upon the closing of the
acquisition. In order to provide the above funding, the acquisition agreement
called for the Company to complete a private placement offering of at least
$300,000 at a price of $0.19 per share, which was to be purchased by OxiDyn's
investors and shareholders. The Company received cash of $190,000 related to
the offering prior to February 28, 2001, which was reported as a stock
subscription received in the financial statements. Subsequent to February 28,
2001, the Company completed the private placement offering receiving gross
proceeds of $290,000, including the subscription received, and issued
1,487,179 shares of common stock.
During August 2001 management of the Company decided that the completion of
the acquisition was not in the best interest of the Company, and all
activities relative to the acquisition ceased. All advances made to OxiDyn
have been written off as of February 28, 2002..
Cash
Cash consists primarily of cash in banks and money-market accounts with
insignificant interest rate risk. The carrying amount of cash reported on the
balance sheets approximates the fair value.
Concentration of Credit Risk
The Company's financial instruments consist primarily of cash and trade
accounts receivable. Risks associated with cash are mitigated by banking with
federally insured credit worthy institutions. The Company sells its products
primarily to, and has trade receivables with, industrial and healthcare
laundries, chemical manufacturers and universities in the United States and
abroad. Less than 10% of product sales are to foreign customers.
F-11
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk (continued)
As a general policy, collateral is not required for accounts receivable;
however, the Company performs ongoing credit evaluations of its customers and
maintains allowances for possible losses which, when realized, have been
within the range of management's expectation. Historical losses have not been
material.
Inventory
During the year ended February 28, 2001, the Company wrote off its remaining
inventory resulting in a loss of $17,930, and the Company did not maintain any
inventory during the year ended February 28, 2002.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization are determined using the straight-line method
over the estimated useful lives of the assets ranging from three to seven
years. Assets acquired pursuant to capital lease obligations are amortized
over the assets' estimated useful lives. Leasehold improvements are amortized
over the lesser of the estimated useful lives or the remaining lease term.
Maintenance and repairs are expensed as incurred.
Intangible assets
Intangible assets consist primarily of patents that are recorded at the lower
of cost or their net realizable value. Acquired and developed patents are
amortized on a straight-line basis over the shorter of their estimated useful
lives or the remaining stated life of the patent. Accumulated amortization for
acquired and developed patents was $56,204 and $370,715 at February 28, 2002
and 2001, respectively.
Impairment of Long-Lived Assets
The Company reviews long-lived and intangible assets for impairment whenever
events or circumstances indicate the carrying value of an asset may not be
recoverable. Based on the Company's review there has been no impairment of
long-lived or intangible assets during the years ended February 28, 2002 and
2001.
F-12
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company provides for income taxes based on the liability method required
by SFAS No. 109, Accounting for Income Taxes. Under the liability method,
deferred tax assets and deferred tax liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
deferred tax liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
deferred tax liabilities of a change in tax rates is recognized in operations
in the period that includes the enactment date.
Revenue Recognition
Revenue for product sales is recognized upon shipment, or in the case of
washing and laundry systems, under the percentage of completion method if it
involves a long-term contract, otherwise revenue is recognized at the time of
shipment. The Company also provides certain services on a time and materials
basis.
Deferred revenue is comprised of prepaid license fees received from the
license of certain of the Company's technologies. Revenues from license and
royalty fees are to be recognized and credited as the licensed technology
systems are sold.
Advertising Costs
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $271 and $6,082, for the years ended February 28,
2002 and 2001, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, and related Interpretations
in accounting for its employee stock options rather than adopting the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation.
Under APB No. 25, when the exercise price of the Company's stock options
equals the estimated fair market value of the underlying stock on the date of
grant, no compensation expense is recognized. The Company has adopted SFAS No.
123 for disclosure-only purposes.
F-13
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
Stock compensation expense for options granted to non-employees has been
determined in accordance with SFAS No. 123 and EITF 96-18 as the fair value of
the consideration received or the fair value of the equity investments issued,
whichever is more reliably measured. The measurement of stock-based
compensation to non-employees is subject to periodic adjustment as the
underlying securities vest.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Net Loss Per Common Share
Basic net loss per common share is calculated by dividing net loss for the
period by the weighted-average number of the Company's common shares
outstanding. Because the Company reported a net loss for each of the fiscal
years ended February 28, 2002 and 2001, all common stock equivalents are
anti-dilutive and accordingly have been excluded from the earnings per common
share computation.
Options and warrants to purchase 3,713,470 and 5,985,558 shares of common
stock were outstanding at February 28, 2002 and 2001, respectively, but were
not included in the computation of diluted earnings per common share because
they were anti-dilutive. Additionally, the Company has convertible debt and
convertible preferred stock that was not included in the computation of
diluted earnings per common share because their respective converted shares
would be anti-dilutive. The convertible debt would convert into 4,546,723
shares of common stock at February 28, 2002. The convertible preferred stock
has a conversion price that is determined based on an average trading price,
which is established at the date of conversion. Based on the average trading
price as determined at February 28, 2002, the preferred stock would convert
into 2,941,176 shares of common stock.
F-14
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires that all items that are
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. The items of other comprehensive income that
are typically required to be displayed are foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. There were no items of other
comprehensive income in 2002 or prior.
Impact of Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, Business Combinations ("Statement 141"). Statement 141 requires that all
business combinations be accounted for under the purchase method of
accounting. Additionally, certain intangible assets acquired as part of a
business combination must be recognized as separate assets, apart from
goodwill. Statement 141 is effective for all business combinations initiated
subsequent to June 30, 2001. The Company does not expect the adoption of
Statement 141 will have a significant impact on its financial statements.
Also in July 2001, the Financial Accounting Standards Board issued Statement
No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Statement
142 requires that ratable amortization of goodwill be replaced with periodic
review and analysis of goodwill for possible impairment. Intangible assets
other than goodwill must be amortized over their estimated useful lives. The
provisions of Statement 142 are effective for fiscal years beginning after
December 15, 2001. The Company reviews its intangible assets and goodwill for
impairment pursuant to this Statement. The Company does not expect the
adoption of Statement 142 will have a significant impact on its financial
statements.
In September 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("Statement 144"). Statement 144 addresses
the financial accounting and reporting for the impairment or disposal of
long-lived assets. Statement 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company reviews its
long-lived assets in accordance with this statement.
F-15
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business.
The Company has sustained significant net losses that have resulted in an
accumulated deficit at February 28, 2002, of $21,110,725 and periodic cash
flow difficulties, all of which raise substantial doubt about the Company's
ability to continue as a going concern.
The net loss applicable to common shareholders for the year ended February 28,
2002 was $850,225. In the past the Company has been able to obtain funding
necessary for its operations through the issuances of common and preferred
stock. With a cash balance of $73,102 at February 28, 2002, and expected cash
requirements for the coming year, there is substantial doubt as to the
Company's ability to continue operations.
The Company believes that these conditions have resulted from the inherent
risks associated with small technology companies. Such risks include, but are
not limited to, the ability to (a) generate sales of its product at levels
sufficient to cover its costs and provide a return for investors, (b) attract
additional capital in order to finance growth, (c) further develop and
successfully market commercial products, and (d) successfully compete with
other technology companies having financial, production and marketing
resources significantly greater than those of the Company.
The Company is attempting to improve these conditions by way of royalty
revenues generated from licensing agreements, financial assistance through
collaborative partnering agreements, issuances of additional equity, debt
arrangements, and limited direct product sales. Management believes that
either appropriate revenues will be generated and future product sales and
royalties will result from these opportunities, or the Company will be able to
raise sufficient funds through debt or equity financings to allow the Company
to continue operations over the next fiscal year; however, no assurances can
be given that sufficient revenues will be generated or additional funding will
become available.
F-16
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
Property and equipment consists of the following:
February 28 February 28
2002 2001
Equipment $ 47,336 $ 534,510
Furniture and fixtures -- 18,878
Leasehold improvements -- 108,275
--------- ------------
$ 47,336 661,663
Less: accumulated depreciation and
amortization (32,695) (593,863)
--------- ------------
$ 14,641 $ 67,800
========= ============
The final payments due under the Company's capital leases were made during
fiscal 2001, and the Company had no capital leases during the year ended
February 28, 2002.
During fiscal 2001, the Company received furniture and fixtures in full
settlement of an accounts receivable balance of $6,420. The Company
immediately sold the furniture and fixtures items that were received for cash
of $1,975. The remaining accounts receivable balance of $4,445 was written off
as uncollectable.
During fiscal 2002, in order to preserve cash, the Company moved to a smaller
leased space and disposed of the majority of assets that were no longer in
use. All of these assets were fully depreciated.
4. Accrued Liabilities
Accrued liabilities consist of the following:
February 28 February 28
2002 2001
Accrued payroll and payroll taxes $ 37,735 $ 46,239
Accrued vacation 11,795 39,160
Other 109,252 33,952
--------- ---------
$ 158,782 $ 119,351
========= =========
F-17
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Notes Payable
Proctor & Gamble: In December 1999, the Company negotiated a letter of intent
with Procter & Gamble, a strategic partner, that provided for two separate
financings. The first, an unsecured promissory note for $250,000, was
executed and funded in concert with the signing of the letter of intent. The
second financing was a convertible secured loan for $750,000 that was funded
in the second quarter of fiscal 2001. The loan agreement was collateralized
by a first security interest in all of the Company's intellectual property and
was due and payable one year from its execution. The loan and accrued
interest was convertible, in whole or in part, into the Company's common stock
at a price per share of approximately $0.34 at anytime during the loan term.
In February 2001, the Company renegotiated the loan whereby the unpaid accrued
interest on the notes of $97,397 was converted into 593,777 shares of common
stock. In March 2001, $500,000 of the principal balance was converted into
500,000 shares of Series "E" convertible preferred stock. Under the terms of
the renegotiated loan agreement, the remaining $500,000 principal balance was
due February 28, 2002. In February of 2002, Procter & Gamble extended the due
date of the $500,000 note for 18 months to August 28, 2003. All interest due
and payable as of February 28, 2002 has been converted into the new principal
balance of $575,000.
Under the terms of the loan agreements, the Company is subject to various
covenants, including maintaining minimum liquid assets in the form of cash or
marketable securities of $100,000. At February 28, 2002 and continuing
subsequent to that date, the Company was in default with the minimum liquid
assets covenant and, therefore, the loan may be called at any time.
Convertible Unsecured Promissory Notes: During May 2001, the Company issued
$300,500 of 10% convertible unsecured promissory notes due in October 2001.
The due date was later amended to May 2002. Each $10,000 of the notes is
convertible into 62,500 shares of restricted common stock. Prior to October
2001, $134,000 of the notes were converted to 837,500 shares of common stock.
The remaining notes of $166,500 are outstanding at February 28, 2002. The
notes were issued with certain detachable common stock coupons and warrants,
which resulted in the issuance of an additional 37,563 shares of common stock.
The fair value of the warrants is recorded as interest expense in the February
28, 2002, Statement of Operations. Subsequent to February 28, 2002, the
remaining $166,500 of notes payable were converted to 1,040,625 shares of
common stock.
F-18
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Commitments
The Company leases two office facilities under non-cancelable operating
leases. The future minimum operating lease payments under these lease
obligations are as follows at February 28, 2002:
Minimum
Lease
Payments
2003 $ 20,112
2004 --
2005 --
--------
Total $ 20,112
========
Rent expense under the non-cancelable operating leases was $67,742 and $91,665
for the years ended February 28, 2002 and 2001, respectively.
The Company had certain capital leases for equipment, which were paid off
during the year ended February 28, 2001. Interest expensed for capital lease
obligations was $-0- and $131 for the years ended February 28, 2002 and 2001,
respectively.
7. Income Taxes
As of February 28, 2002, the Company had federal and state net loss
carryforwards of approximately $18,783,000 and $8,908,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $153,000. The net operating loss and credit carryforwards will
expire at various dates beginning in 2003 through 2022, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
F-19
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of February 28, 2002 and 2001 are as
follows:
February 28 February 28
2002 2001
Deferred tax assets:
Net operating loss carryforwards $ 6,680,000 $ 6,352,000
Research credit carryforwards 153,000 152,000
Other 11,000 11,000
----------- -----------
Net deferred tax assets 6,844,000 6,515,000
Valuation allowance (6,844,000) (6,515,000)
----------- -----------
$ - $ -
=========== ===========
The net valuation allowance increased by $329,000 and $273,000 during the
years ended February 28, 2002 and 2001, respectively.
8. Stockholders' Equity
Preferred Stock
Series "A"
Series "A" preferred stock is non-voting stock and was convertible into common
stock for a period expiring two years from the date of issuance of the shares.
The conversion period has expired for all shares of Series "A" preferred
stock. The Board of Directors authorized 35,638 shares of Series "A" preferred
stock for issuance at $2.00 per share. In the event of a liquidation,
dissolution or winding up of the affairs of the Company, the holders of Series
"A" preferred stock shall be entitled to receive the principal amount paid to
the Company before any distribution shall be made to the holders of common
stock. Additionally, holders of Series "A" preferred stock shall be entitled
to receive, as declared by the Board of Directors, non-cumulative cash
dividends prior to the declaration and payment of dividends on the Company's
common stock. No dividends have been declared.
F-20
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Preferred Stock (continued)
Series "B"
On May 30, 1996, the Board of Directors authorized for issuance 30,000 shares
of Series "B" convertible preferred stock with a $0.01 par value and a stated
value of $1,000 per share. The Company originally issued 3,170 total shares
of Series "B" convertible preferred stock. These shares are convertible after
45 days from the subscription date into common shares at 65% to 70% of the
"Average Stock Price" as designated by the Board of Directors. The "Average
Stock Price" is further defined as the lesser of the average daily closing bid
prices of common shares for the period of five consecutive trading days
immediately preceding the date of subscription or the five consecutive trading
days immediately preceding the date of conversion of the Series "B"
convertible shares. However, these shares do not have voting rights or
preemptive rights to acquire other securities. The shares provide for payment
of cumulative dividends at 8% annually, payable in cash or stock at the
Company's option, and include a liquidation preference equal to $1,350 per
share together with all accrued and unpaid dividends.
For the year ended February 28, 2001, 286 shares of Series "B" convertible
preferred stock were converted into 2,878,933 shares of common stock. For the
year ended February 28, 2002, 614 shares of Series "B" convertible preferred
stock were converted into a total of 4,035,855 shares of common stock.
At February 28, 2002 and 2001, the Company had aggregate unpaid preferred
stock dividends of $ -0- and $281,914, respectively. During the year ended
February 28, 2002 the Company paid these dividends in shares of common stock,
which were included in the 4,035,855 shares of common stock mentioned above.
At February 28, 2002, no Series "B" convertible preferred stock was issued or
outstanding.
Series "C"
On September 10, 1998, the Board of Directors authorized for issuance 550
shares of Series "C" convertible preferred stock with a $0.01 par value and a
stated value of $1,000 per share. Each Series "C" preferred share is
convertible from the subscription date into 10,000 common shares. These shares
do not have voting rights or preemptive rights to acquire other securities.
These shares are entitled to registration rights and provide for a liquidation
preference equal to $1,000 per share.
F-21
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Preferred Stock (continued)
The Company issued 206 and 157 shares of Series "C" convertible preferred
stock during the years ended February 28, 1999 and February 29, 2000,
respectively. During the year ended February 29, 2000, 288 shares of Series
"C" convertible preferred stock were converted into 2,884,000 shares of common
stock. During the year ended February 28, 2001, the remaining 75 shares of
Series "C" convertible preferred stock were converted into 744,250 shares of
common stock.
Series "E"
In January 2001, the Board of Directors authorized for issuance 1,000,000
shares of Series "E" convertible redeemable preferred stock with a $0.01 par
value and a stated value of $1.00 per share. These shares are convertible
immediately after issuance into common shares at a price determined by
dividing the aggregate value of the Series "E" convertible preferred Shares to
be converted by the "Average Stock Price" as designated by the Board of
Directors. The "Average Stock Price" is further defined as the average daily
closing bid prices of common shares for the period of five consecutive trading
days immediately preceding the date of subscription of the Series "B"
convertible shares. These shares do not have voting rights or preemptive
rights to acquire other securities. The shares provide for payment of
cumulative dividends at 10% annually, payable in cash or stock at the
Company's option, and include a liquidation preference equal to $1.00 per
share together with all accrued and unpaid dividends. The Company may redeem
the Series "E" convertible shares at its option, on or after 145 days from the
date of issuance at a price of $1.00 per share, plus any accrued and unpaid
dividends.
In March 2001, the Company issued 500,000 shares of Series "E" convertible
preferred stock for the conversion of $500,000 of notes payable. At February
28, 2002 the company had aggregate unpaid preferred stock dividends on its
Series "E" preferred stock of $50,000.
Common Stock
During the year ended February 28, 2001, the Company received cash of $190,000
related to a subscription for a private placement offering at $0.195 per
common share in conjunction with its proposed acquisition of OxiDyn. This
transaction resulted in the issuance of 974,359 common shares during the year
ended February 28, 2002. Also during the year ended February 28, 2002, the
Company completed the private placement offering receiving gross proceeds of
$100,000 and issuing 512,820 more common shares at $0.195 per share.
F-22
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Common Stock (continued)
As of February 28, 2002, the Company had reserved shares of common stock for
future issuance as follows:
Stock options 3,536,907
Conversion of note payable 4,827,349
Conversion of preferred stock 2,941,176
----------
Total 11,305,432
==========
Stock Options
On December 21, 1992, the Company adopted a stock incentive plan (the Plan)
that provides for the issuance of options to employees to purchase up to an
aggregate of 270,000 common shares. All options are generally granted at no
less than the fair market value of the common shares on the date of grant, as
determined by the Board of Directors. The options vest beginning one year
after the date of grant and expire on the earlier of seven years from the date
of vesting, or on termination of employment.
In fiscal 2000, the Board of Directors and shareholders approved an increase
in the number of shares available under the Plan by an additional 4,202,727
shares.
On November 24, 1999 the Board of Directors approved granting 4,152,727
options to three officers with an exercise price of $0.065 per share. These
options were immediately exercisable.
F-23
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Stock Options (continued)
A summary of stock option activity, and related information for the years
ended February 28, 2001 and 2002 follows:
Outstanding Stock Options Weighted-
Number of Price Average
Shares Per Share Exercise Price
Balance at February
29, 2000 5,320,955 $0.07-$5.44 $0.37
Additional authorization
Options granted 40,000 $0.37-$0.85 $0.49
Options exercised (127,800) $0.07-$0.13 $0.07
Options canceled (452,070) $0.13-$5.44 $1.66
--------- ----------- -----
Balance at February
28, 2001 4,781,085 $0.07-$1.85 $0.25
Additional authorization
Options granted 6,614 $0.09 $0.09
Options exercised (673,292) $0.07-$0.08 $0.07
Options canceled (577,500) $0.08-$1.85 $1.59
--------- ----------- -----
Balance at February
28, 2002 3,536,907 $0.07-$0.37 $0.07
========= =========== =====
The weighted-average fair value of options granted in the year ended February
28, 2002 and February 28, 2001 was $0.13 and $0.54, respectively.
Additionally, SFAS No. 123 requires that companies with wide ranges between
the high and low exercise prices of its stock options segregate the exercise
prices into ranges that are meaningful for assessing the timing and number of
additional shares that may be issued and the cash that may be received as a
result of the option exercises.
F-24
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Stock Options (continued)
The options outstanding and currently exercisable by exercise price at
February 28, 2002 are as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
(Years)
$0.07 3,506,907 2.8 $0.07 3,506,907 $0.07
$0.37 30,000 6.0 $0.37 30,000 $0.37
----- --------- --- ----- --------- -----
3,536,907 2.8 $0.07 3,536,907 $0.07
========= =========
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2002 and 2001, respectively: risk-free
interest rates of 4.16% and 6.64%; dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of 2.030 and 1.339;
and a weighted-average expected life of the options of one month and 7.75
years.
The Company's pro forma results are as follows:
2002 2001
Net loss attributable to common stockholders:
As reported $ (850,225) $(1,132,855)
Pro forma (851,052) (1,141,432)
Net loss per common share
As reported $ (0.02) $ (0.04)
Pro forma $ (0.02) $ (0.04)
F-25
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Warrants
At February 28, 2002 all of the Company's previously issued and unexercised
warrants had expired. At February 28, 2002, the Company had outstanding
warrants to purchase common stock as follows:
Number of Exercise
Warrants Issued Shares to be Price Per Date Date
In conjunction with Purchased share Issued Expires
Debt issuance 176,563 $0.16 May 2001 May 2004
During the year ended February 28, 2002, warrants to purchase 11,250 shares of
common stock were exercised at a price of $0.16 per share, for gross proceeds
of $1,800. These warrants were originally issued in conjunction with the
issuance of convertible promissory notes on May 15, 2001. During the year
ended February 28, 2002, warrants to purchase 627,520 shares of common stock
were exercised at a price of $0.085 per share for gross proceeds of $53,339
(see Note 9). During the year ended February 28, 2001, warrants to purchase
382,000 shares of common stock were exercised at a price of $0.50 per share
for gross proceeds of $191,000. These warrants were originally issued in
connection with a private placement offering in October 1997.
9. Contingencies
Mifal Klita, et al. During the period from May through August 1996, the
Company sold its Series "B" preferred stock in a private placement offering to
certain investors pursuant to the provisions of Securities and Exchange
Commission Regulation S. One of the investors, Mifal Klita, a purported
Canadian company, filed suit against the Company demanding the removal of the
restrictive investment legend which the Company caused to be placed on common
shares issued pursuant to the conversion of Series "B" preferred shares. The
suit was filed in the Court of Chancery in the State of Delaware, which ruled
in favor of the Company on April 8, 1997 and dismissed Mifal Klita's suit.
Subsequently, Mifal Klita refiled an amended suit in the Superior Court of the
State of Delaware. The final settlement agreement reached by the parties
involved, in September 1999, entitled Mifal Klita to the conversion of the
Series "B" preferred shares into unrestricted common stock of the Company plus
shares for legal fees and other provisions stated in the original agreement
and an option to purchase 627,520 shares of common stock at $0.085 per share,
exercisable over two years from the settlement date. The stock options were
valued using a Black-Scholes option-pricing model. The unrestricted common
stock was disbursed monthly over a two-year period.
F-26
Cyclo3pss Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Contingencies (continued)
The Company issued 250,000 shares of common stock during the second quarter of
fiscal 2002 as final adjustment of a previous legal settlement, for which the
Company recorded a non-cash charge of $25,000.
Management believes, based on advice of legal counsel, if any claims arise in
the normal course of business, that such litigation and claims will be
resolved without material effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company is not a party to nor is it presently aware of any pending claims
or existing litigation other than that described above
10. Segment Information
On March 7, 2000 the Company internally realigned its ozone businesses,
collapsing these separate business units into a single entity. The Company
operated in two principal industries; the manufacture, sale and installation
of ozone products ("ozone products"); and the manufacture and sale of
specialty chemicals ("biochemical products").
On June 15, 2001 the Company sold the assets and business of its biochemical
products subsidiary, Cyclopss Biochemical Corporation, to Paragon, LLC. The
Company now operates in only one segment.
For the year ended February 8, 2002, four customers accounted for
approximately 68% of total net revenues.
For the year ended February 28, 2001, two customers accounted for
approximately 71% of total net revenues for ozone products, and one of these
customers accounted for approximately 41% of total net revenues for ozone
products. Three customers accounted for 86% of total net revenues for the
biochemical products, and one of these customers accounted for approximately
58% of total net revenues for biochemical products.
11. Subsequent Event
The Company is currently negotiating to acquire inventories of parts of
unassembled consumer products and a trademark associated with those consumer
products in order to assemble and market the related products.
F-27
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Audit Committee of the Board of Directors of Cyclo3pss Corporation
(the "Company") annually considers and recommends to the Board the selection
of the Company's independent public accountants. As recommended by the
Company's Audit Committee, the Company's Board of Directors on May 20, 2002,
dismissed Ernst & Young LLP ("Ernst & Young") as the Company's independent
public accountants, and Squire & Company, PC was asked to serve as the
Company's independent public accountants effective immediately.
During the two fiscal years ended February 29, 2000 and February 28,
2001, and through the date of this Form 10-KSB, there were no disagreements
with Ernst & Young, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to Ernst and Young's satisfaction would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the Company's consolidated financial
statements for such years; and there were no reportable
26
events as defined in item 304 (a) (1) (v) of Regulation S-K. Ernst & Young
has not rendered an opinion on the Company's financial statements for the year
ended February 28, 2002. Squire & Co. PC has been engaged to render an
opinion on the Company's financial statements for the year then ended.
Except for an explanatory paragraph concerning the Company's ability to
continue as a going concern, the audit reports of Ernst & Young, LLP on the
financial statements of Cyclo3pss for the years ended February 29, 2000 and
February 28, 2001, did not contain any adverse opinion or disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles.
The Company provided Ernst & Young with a copy of the foregoing
disclosures. A letter from Ernst & Young, LLP dated May 30, 2002 was provided
to the Securities and Exchange Commission stating its agreement with such
statements.
During the years ended February 29, 2000 and February 28, 2001 and
through the date hereof, the Company did not consult with Squire & Company, PC
regarding the application of generally accepted accounting principles to a
specific transaction, either proposed or completed, or the type of audit
opinion that might be rendered on the Company's financial statements or any
other matters or reportable events as set forth in items 304 (a) (2) (i) and
(ii) of Regulation S-B.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
A. Identification of Directors and Executive Officers. The current
directors and officers of the Company who will serve until the next annual
meeting of shareholders or until their successors are elected or appointed and
qualified, are set forth below:
Name Age Position
Durand M. Smith 54 President, Director
William R. Stoddard 50 CEO, Director
Mondis Nkoy 38 Controller, Corporate Secretary
Michael J. Lakis, Jr. 65 Director
Richard C. Nelson 71 Director
Steve Sarich, Jr. 80 Director
William A. Anawaty 53 Director
27
John V. Winings 60 Director
J. Tobin Geatz 43 Director
There are no family relationships among the Company's officers and
directors. Background information concerning the Company's officers and
directors is as follows:
Durand M. Smith, Ph.D. Dr. Smith has been the President of the Company
since November 2001. Prior to that he was the Vice President of Research and
Development since March 1998, and has been a director of the Company since
April 1999. Dr. Smith is the former Manager of Advanced Space Programs for
General Electric's Aerospace and Defense Group (1973-1988) and Vice President
of Engineering for Ithaco Inc, a spacecraft-hardware-engineering firm
(1988-1993). Dr. Smith also served as COO of Orion International Technologies
(1993-1996), an engineering services company. Prior to joining Cyclopss, Dr.
Smith served as the Governor's Science Advisor for the State of New Mexico.
William R. Stoddard. Mr. Stoddard has been an officer and director of
the Company since 1990. From 1986 to 1989, Mr. Stoddard was the Chief
Financial Officer of Medivest, Inc. and its subsidiaries. From 1988 to 1990,
he was Chief Financial Officer of Medivest Aviation Group, Inc.
Mondis Nkoy. The Company has employed Ms. Nkoy as Controller since
September 1996. She was elected Corporate Secretary in October 1996. For the
three years prior to her appointment as Controller she worked as an assistant
to the former Controller of the Company. Previous to this time she was
completing her education and received a Bachelor of Science Degree from the
University of Utah, with a major in Mathematics and a minor in Computer
Science.
Michael J. Lakis. Mr. Lakis joined the Board of Directors on December 1,
1997. Most recently, he served as President and Chief Operating Officer -
North America, for Del Monte Fresh Produce Company. Prior to that position,
Mr. Lakis was with Chiquita Brands Inc., where he gained over 37 years of
experience, including serving as President from 1979 to 1992.
Richard C. Nelson. Mr. Nelson joined the Company as a director on March
24, 1999. Mr. Nelson is Vice President Emeritus and Consultant of Hyatt
Hotels and Resorts. In June 1996, he retired from the day-to-day operations
as Vice President and Managing Director of the Grand Hyatt Washington, a 900
room hotel he opened in 1987.
Steve Sarich. Mr. Sarich has been a director of the Company since July
1993. Mr. Sarich is, and has been for the last 15 years, president of 321
Investment Co. Mr. Sarich is a director of Omega Environmental, Wall Data,
Back Technologies, Inc., Ark Systems, Inc., Flo Scan Instrument, Multiple
Zones International and Talus Imaging Co. Mr. Sarich has been president of
Arctic Ventures, Inc. and C.S.S. Management Co. since 1988.
William A. Anawaty. Mr. Anawaty joined the company as a director on
August 28, 2000. Mr. Anawaty is the founder and President of Anari, Inc.
Prior to his founding Anari, Inc., Mr. Anawaty served in a variety of
positions with the US Treasury Department, including International Legal
Counsel, Director of Special Programs, and finally, Executive Assistant to the
Deputy Secretary.
28
John V. Winings. Mr. Winings joined the board in March of 2000. He is a
business change executive in manufacturing/engineering firms, with 25 years of
experience in large manufacturing companies such as Action Implementors, Inc.
and RCS Technologies, Inc. He has been the President/CEO of OxiDyn since
August of 1997.
J. Tobin Geatz. Mr. Geatz was a founding partner of Supercritical Systems
in 1999. Supercritical Systems developed a method of cleaning semiconductor
chips requiring neither water nor toxic chemicals. The company was sold to
Tokyo Electron in the fall of 2000. Mr. Geatz received a Bachelors Degree in
Chemistry from West Virginia University.
B. Compliance With Section 16(a). Section 16 of the Securities
Exchange Act of 1934 requires the filing of reports for sales of the Company's
common stock made by officers, directors, and 10% or greater shareholders. A
Form 4 must be filed within 10 days after the end of the calendar month in
which a sale or purchase occurred. Based on the review of Forms 4 filed with
the Company all such transactions were filed and no disclosure is required in
this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning
compensation for services rendered for the past three years to the Company's
Chief Executive Officer and to the Company's most highly compensated executive
officers other than the CEO, whose annual salary and bonus exceeded $100,000:
Long Term Compensation
Annual Compensation Awards Payouts
Name and Other All
principal Annual Option/ LTIP Other
position Year Salary Bonue Compen- Stock SAR's Payouts Compen-
sation Awards # sation
------------------------------------------------------------------------------
William R.
Stoddard 2002 $150,000 -0- -0- -0- -0- -0- -0-
President 2001 $150,000 -0- -0- 2,654,354 (1) -0- -0- -0-
2000 $150,000(2)-0- -0- 450,000 (1) -0- -0- -0-
Durand M.
Smith 2002 $120,000 -0- -0- -0- -0- -0- -0-
Chairman 2001 $120,000 -0- -0- 1,105,981 (1) -0- -0- -0-
Vice 2000 $120,000 -0- -0- 350,000 (1) -0- -0- -0-
President,
Research and
Development
(1) Options to acquire shares of common stock.
(2) William R. Stoddard deferred $31,875 of his annual salary in fiscal
2000, due to cash constraints of the Company. All deferred salaries were paid
during 2001.
Stock Options Granted to Executives
On April 19, 1999, a stock option grant was made for 450,000 common
shares to
29
Mr. Stoddard at $0.10 per share. At the same time, additional options were
granted to Dr. Durand Smith for 350,000 common shares at $0.10 per share.
These options vested on the date of grant and were exercisable on that date. A
Form S-8 was filed on May 13, 1999 to register the common shares underlying
these options. All of the above stock options were cancelled in May 1999.
On June 1, 1997, a grant was made to Mondis Nkoy, Corporate Secretary,
for 15,000 common shares at $0.94, the closing market price for that day.
These shares were exercisable one year after the grant date at 5,000 shares a
year, for three years. On April 19, 1999, these 15,000 shares were repriced to
$0.10 per share and the options became immediately vested. The underlying
shares were registered on the Form S-8 mentioned above, on May 13, 1999. All
of the above stock options expired unexercised during fiscal 2001.
On December 6, 1999, a stock option grant was made for 2,654,354 common
shares to Mr. Stoddard at $0.065 per share. At the same time, additional
options were granted to Dr. Durand Smith for 1,105,981 common shares at $0.065
per share and to Mondis Nkoy for 442,392 common shares at $0.065. These
options vested on the date of grant and were exercisable on that date. A Form
S-8 was filed on March 7, 2000 to register the common shares underlying these
options.
No stock options were granted to officers of the Company during fiscal
2002.
As of February 28, 2002, Durand Smith had exercised 70,000 of the options
granted to him at $0.065 per share, Mondis Nkoy had exercised 190,000 of the
options granted to her at $0.065 per share and William Stoddard had exercised
305,000 of the options granted to him at $0.065 per share. The shares of
common stock underlying the granted options were registered by the Company
with the filing of Forms S-8 dated May 13, 1999, and March 7, 2000, which are
incorporated herein by reference.
Aggregate Option Exercises and Number/Value of Unexercised Options
The following table provides information concerning the exercise of
options during the last fiscal year, the number of unexercised options held by
such persons at the end of the last fiscal year, and the value of such
unexercised options as of such date:
Nature of Value of Unexercised
Shares Acquired Values Unexercised In-the-money Options
on exercise Realized Options at at 2/28/2002 ($)(1)
Name (#) ($) 2/28/02 (#)
Exer Unexer Exercisable Unexer
cisable cisable cisable
William R.
Stoddard 380,820 $74,869.50 2,273,534 -0- $261,457 -0-
Mondis Nkoy 190,000 $38,873.07 197,392 -0- $ 22,700 -0-
Durand Smith 0 $ 0 1,035,981 -0- $119,138 -0-
1 An "In-the-Money" stock option is an option for which the market price of
the Company's Common Stock underlying the option on February 28, 2002 exceeded
the option exercise price. The value shown is calculated by multiplying the
number of unexercised options by the difference between (i) the closing price
for the Common Stock on Small Cap Bulletin Board Market on February 28, 2002
($0.18) and (ii) the exercise price of the stock options ($0.065 for Mr.
Stoddard's 2,273,534, Mr. Smith's 1,035,981 and Ms. Nkoy's 197,392 exercisable
options).
30
Compensation of Directors
The Company's non-employee directors are paid a $10,000 annual fee, plus
$500 for each Board of Directors Meeting attended and $250 for each telephonic
meeting. On August 26, 1993, the Company's Board of Directors approved a
Non-Employee Director's Stock Option Plan that provides for the issuance of a
maximum of 75,000 shares of the Company's common stock pursuant to the
exercise of options granted under the Plan. The Plan provides that each
non-employee director will be issued an option to purchase 5,000 shares of the
Company's common stock on the date of the Company's Annual Meeting of
Stockholders, commencing in 1994. After an option is granted, it will be
exercisable for a period of five years. The Options granted under this plan
are exercisable at $1.85 per share. The Company's stockholders at the Annual
Meeting of Stockholders held December 10, 1993 approved this Non-Employee
Director's Stock Option Plan. The shares of the Company's common stock
underlying these options were registered by the Company with the filing of
Form S-8 dated August 31, 1994, which is incorporated herein by reference.
Effective September 1, 1996 the Company's Board of Directors approved an
additional 25,000 options to be granted, 5,000 shares each to Non-Employee
Directors on the date of the Company's Annual Meeting of Stockholders in 1997.
After these options were granted, they are exercisable for a period of five
years. The Options granted under this additional plan are exercisable at $1.07
per share, which is deemed to have been the fair market value of the Company's
common stock on September 1, 1996, the date the plan was approved and enacted.
As of February 28, 2002, due to the cash constraints of the Company, the board
compensation was accrued for approximately one year, or thirteen telephonic
meetings plus annual fees, for a total of $63,500. This amount was registered
on a form S-3 subsequent to year end, at nineteen cents per common share for
334,211 common shares.
Stock Incentive Plan
On December 21, 1992, the Company's Board of Directors approved the 1992
Stock Incentive Plan (the "Plan") that provides for the issuance of a maximum
of 270,000 shares of the Company's Common Stock pursuant to the exercise of
options granted under the Plan. Options granted under the Plan are intended
to comply with Section 422 of the Internal Revenue Code of 1986. On May 9,
1994, the Board of Directors amended the Plan. Such amendment did not
increase the number of options that may be issued, change the persons who may
be granted options, or in any way materially affect the Plan. The Board of
Directors or a committee of the Board that selects the persons to whom options
are granted and the terms of the options, administers the Plan. The Plan
provides that the option price may not be less than 100% of the fair market
price of the common shares on the date the option is granted and that no
option may be exercisable for longer than 10 years. The Company's
stockholders at the Annual Meeting of Stockholders held December 10, 1993
approved the 1992 Stock Incentive Plan. Options under the Plan may be granted
to directors and key employees of the Company. The shares of common stock
underlying the Options granted under the Plan were registered by the Company
with the filing of Form S-8 dated August 31, 1994, which is incorporated
herein by reference.
Options Granted under the Plan.
As of February 28, 2002, there are 30,000 stock options granted and
outstanding, and 22,472 stock options that have been granted and exercised,
which leaves 217,528 options available for grant under the Plan.
31
Securities Authorized for Issuance
A summary of stock option activity, and related information for the years
ended February 28, 2001 and 2002 follows:
Outstanding Stock Options Weighted-
Number of Price Average
Shares Per Share Exercise Price
Balance at February 29, 2000 5,320,955 $0.07 - $5.44 $0.37
Additional authorization
Options granted 40,000 $0.37 - $0.85 $0.49
Options exercised (127,800) $0.07 - $0.13 $0.07
Options canceled (452,070) $0.13 - $5.44 $1.66
--------- ------------- -----
Balance at February 28, 2001 4,781,085 $0.07 - $1.85 $0.25
Additional authorization
Options granted 6,614 $0.09 $0.09
Options exercised (673,292) $0.07 - $0.08 $0.07
Options canceled (577,500) $0.08 - $1.85 $1.59
--------- ------------- -----
Balance at February 28, 2002 3,536,907 $0.07 - $0.37 $0.07
========= ============= =====
The options outstanding and currently exercisable by exercise price at
February 28, 2002 are as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
(Years)
$0.07 3,506,907 2.8 $0.07 3,506,907 $0.07
$0.37 30,000 6.0 $0.37 30,000 $0.37
----- --------- --- ----- --------- -----
3,536,907 2.8 $0.07 3,536,907 $0.07
========= =========
As of February 28, 2002, the Company had reserved shares of common stock for
future issuance as follows:
Stock options 3,536,907
Conversion of note payable 4,827,349
Conversion of preferred stock 2,941,176
----------
Total 11,305,432
==========
32
At February 28, 2002, the Company had outstanding warrants to purchase common
stock
as follows:
Number of Exercise
Warrants Issued Shares to be Price Per Date Date
In conjunction with/to Purchased share Issued Expires
Debt issuance 176,563 $0.16 May 2001 May 2004
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of the
Company's common stock owned beneficially as of May 31, 2002, by (i) each
director of the Company, (ii) all officers and directors as a group and (iii)
each person known by the Company to beneficially own 5% or more of the
outstanding shares of the Company's common stock:
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class Ownership
Procter & Gamble (9) 6,554,878 15.0%
One Procter & Gamble Plaza
Cincinnati, OH 45202
William R. Stoddard (2) (3) 2,971,248 6.8%
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
Durand Smith (2) (7) 1,171,419 7%
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
Steve Sarich, Jr. (2) (4) 1,237,209 2.8%
505 Madison Street, Suite #320
Seattle, WA 98104
Mondis Nkoy (2) (5) 252,392 0.6%
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
Michael J. Lakis (2) (6) 181,457 0.4%
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
33
Tobin Geatz (2) (11) 169,439 0.4%
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
Richard C. Nelson (2) (8) 61,536 0.1%
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
William Anawaty (2) (10) 66,875 0.2%
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
John V. Winings (2) (12) 7,000 --
7105 Highland Drive, Suite #102
Salt Lake City, UT 84121
Amount and Nature of Percent of
Beneficial Ownership(1) Class Ownership
All Officers and Directors
as a Group (10 Persons) 12,673,453 29.0%
(1) As of May 31, 2002, there were 40,047,088 shares of the Company's common
stock issued and outstanding and entitled to vote at the annual meeting.
Additionally, there are currently exercisable options and warrants to purchase
3,713,470 shares of the Company's common stock. Therefore, under the rules of
the Securities and Exchange Commission, there are deemed to be 43,760,558
shares of the Company's common stock issued and outstanding for purposes of
the table above. The shares issuable upon the exercise of the options can
only be voted at a shareholders meeting if the options are exercised and the
shares issued prior to the record date for the meeting. The shares issuable
upon the conversion of promissory notes can only be voted at a shareholders
meeting if the notes are converted and the shares issued prior to the record
date of the meeting.
(2) These individuals are the directors and/or officers of the Company as of
May 31, 2002.
(3) Mr. Stoddard is the record owner of 860,492 of these shares. The balance
of 2,111,256 shares are the shares that may be acquired by Mr. Stoddard from
the Company pursuant to an employment stock option. All of such options are
currently exercisable.
(4) Mr. Sarich is a director who is currently the record owner of 1,237,309
shares. He has no exercisable stock options as of February 28, 2002, nor has
he been granted any options as of May 31, 2002.
(5) The 252,392 shares of total beneficial ownership shown for Ms. Nkoy are
the shares that may be acquired by Ms. Nkoy from the Company pursuant to an
employment stock option. All of such options are currently exercisable.
(6) Mr. Lakis is a director who is currently the record owner of 181,457
shares. He has no exercisable stock options as of February 28, 2002, nor has
he been granted any options as of May 31, 2002.
(7) The 1,171,419 shares of total beneficial ownership shown for Dr. Smith
includes 135,438 shares owned of record by Dr. Smith, and 1,035,981 shares
which may be acquired by Dr. Smith from the Company pursuant to employment
stock option agreements. All of these options are currently exercisable.
(8) Mr. Nelson is a Director who is currently the record owner of 61,536
shares. He has no exercisable stock options as of February 28, 2002, nor has
he been granted any options as of May 31, 2002.
34
CYCLO3PSS CORPORATION
Date: June 8, 2002 By/s/William R. Stoddard
William R. Stoddard
CEO & Chairman
Principal Executive Officer
Date: June 8, 2002 By/s/ Mondis Nkoy
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ Durand M. Smith President June 8, 2002
Durand M. Smith
/s/ William R. Stoddard CEO June 8, 2002
William R. Stoddard
/s/ Steve Sarich Jr. Director June 8, 2002
Steve Sarich, Jr.
/s/ Richard C. Nelson Director June 8, 2002
Richard C. Nelson
/s/ Michael J. Lakis Director June 8, 2002
Michael J. Lakis
/s/William A. Anawaty Director June 8, 2002
William A. Anawaty
/s/John V. Winings Director June 8, 2002
John V. Winings
/s/J. Tobin Geatz Director June 8, 2002
J. Tobin Geatz
36
INDEX TO EXHIBITS
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 and are referred to and incorporated herein by reference.
Exhibit Page Number or
Number Description Method of Filing
3.1 Amended and Restated Certificate of Incorporation Form 10-SB, 1993 (1)
3.2 Bylaws Form 10-SB, 1993 (1)
3.2 Amended Certificate of Incorporation Form 8-K, Feb. 1995 (4)
10.1 Agreement with Clean Tech International, Inc. Form 10-SB, 1993 (1)
10.2 Agreement with Chem Biochem Research, Inc. Form 10-SB, 1993 (1)
10.3 1992 Stock Incentive Plan Form 10-SB, 1993 (1)
10.4 Stock Option - Dale Winger Form 10-SB, 1993 (1)
10.5 Lease Agreement Form 10-SB, 1993 (1)
10.6 Employment Agreement - John M. Williams Form 10-SB, 1993 (1)
10.7 Employment Agreement - William R. Stoddard Form 10-SB, 1993 (1)
10.8 Form Indemnification Agreement
(Identical agreement for all officers and directors)Form 10-SB, 1993 (1)
10.9 Clean Tech Merger Agreement Form 10-SB, 1993 (1)
10.10 Intex Acquisition Agreement Form 8-K, July 1994 (2)
10.11 Non-Employee Director 1993 Stock Option Plan Form S-8, Aug. 1994 (3)
11.1 Earnings per Share Calculation Not Applicable
16.1 Change of Independent Auditors Form 8-K, Jan. 1996 (5)
16.2 Consulting Agreement of John Sloan Form 8-K, Aug. 1996 (6)
37
16.3 Change of Independent Auditors Form 8-K, May 2002 (7)
21.1 Subsidiaries of Registrant Attached
23.1 Consent of Ernst & Young, LLP Attached
23.2 Consent of Squire & Company, PC Attached
(1) Filed as an Exhibit to the Registrant's Registered Statement on Form
10-SB and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Form 8-K dated July 11, 1994,
incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant's Form S-8 dated August 31, 1994,
incorporated herein by reference.
(4) Filed as an Exhibit to the Registrant's Form 8-K dated February 2, 1995,
incorporated herein by reference.
(5) Filed as an Exhibit to the Registrant's Form 8-K dated January 8, 1996,
incorporated herein by reference.
(6) Filed as an Exhibit to the Registrant's Form 8-K dated August 20, 1996,
incorporated herein by reference.
(7) Filed as an Exhibit to the Registrant's Form 8-K dated May 30, 2002,
incorporated herein by reference.
38