-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MmEAEmy5jicGjhT9rSHjY9dw8P7EL8Y644ybMt76OEp2IeT1nIhX3tvpxzMjvQkH E33YPYIDJHQNBHSmvuHzDg== 0000897101-97-001237.txt : 19971201 0000897101-97-001237.hdr.sgml : 19971201 ACCESSION NUMBER: 0000897101-97-001237 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971128 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELOX LABORATORIES INC CENTRAL INDEX KEY: 0000883720 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 333384240 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19866 FILM NUMBER: 97730186 BUSINESS ADDRESS: STREET 1: 856 SOUTH FIFTH ST CITY: HOPKINS STATE: MN ZIP: 55343 BUSINESS PHONE: 6129332616 MAIL ADDRESS: STREET 1: 856 S FIFTH STREET CITY: HOPKINS STATE: MN ZIP: 55343 FORMER COMPANY: FORMER CONFORMED NAME: CELOX CORPORATION DATE OF NAME CHANGE: 19930328 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1997 Commission file number: 0-19866 CELOX LABORATORIES, INC. (Name of small business issuer in its charter) Minnesota 36-3384240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1311 Helmo Avenue, St. Paul, Minnesota 55128 (Address of principal executive offices) Issuer's telephone number: (612) 730-1500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. __X__ Yes ____ No Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB. [ ] The registrant's sales for its most recent fiscal year were $221,407. The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on October 31, 1997 as reported on the Over-the-Counter Market, was approximately $1,963,990. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this number, as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of October 31, 1997, the registrant had outstanding 2,742,169 shares of Common Stock. Transitional Small Business Disclosure Format. ____ Yes __X__ No Exhibit Index is located on page 16. PART I ITEM 1 - BUSINESS In fiscal 1995, Celox Corporation changed its name to Celox Laboratories, Inc. The Company is a biotechnology company formed in 1985 that researches, develops, manufactures, and markets cell biology products that are used in the propagation of cells derived from mammals, including humans, and other species. (In fiscal 1993, the Company changed its reporting status from a development stage enterprise to a regular operating corporation.) These specialized cell growth products are used primarily in academic, pharmaceutical and other commercial laboratories to improve the growth, productivity and quality of cell-derived medical and other biological products such as vaccines, monoclonal antibodies, interferons, and human growth factor. Since its inception, the Company has pursued a strategy of developing non-serum based products for the growth of human and other mammalian cells which management believes will have significant commercial potential. FORWARD LOOKING INFORMATION Information contained in this Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. There are certain important factors that could cause results to differ materially from those anticipated by some of these forward-looking statements. Investors are cautioned that all forward- looking statements involve risks and uncertainty. The factors, among others, that could cause actual results to differ materially include the Company's ability to execute its business plan. BACKGROUND To date, the Company has focused its efforts on commercial applications of cell biology -- the science of life processes at the cellular level. Cell biology involves the study of the molecular, physical, nutritional, and hormonal needs of cells. The cell is the basic sub-unit of every living system and thus exerts a significant influence on the functioning of the entire organism. Cells are complex, having their own power supplies, digestive systems, communication networks, and centers for producing biological products. The cell holds the key to solving major health problems such as cancer, Acquired Immune Deficiency Syndrome ("AIDS"), atherosclerosis, genetic disorders, diabetes, and mental illness. Having accumulated information concerning cells and cellular functions, scientists are able to manipulate cells outside the body in their efforts to address these major health problems. The development of genetic engineering and the use of mammalian cells for the production of biological products has advanced cell culturing to new levels. The manipulation or culturing of cells for production of diagnostic and therapeutic products is an area of significant commercial growth for biotechnology companies and pharmaceutical firms. Products currently subject to research efforts include products to treat and detect AIDS, cancer, growth disorders, and cardiovascular disease. The medical community now has access to once unavailable cellular products, such as monoclonal antibodies, interferons, and human growth factors. As a result, more emphasis is being placed on the development of cell culturing technology. Culturing of mammalian cells, tissues, and bacteria is now a widely used technique in the biological sciences, from the basic sciences of cell and molecular biology to the rapidly evolving area of biotechnology. The advent of growing cells IN VITRO (i.e., in cultures or outside the organism) has permitted extensive studies of specific human and other mammalian cellular functions. Isolated cells are being used increasingly in the study of biological phenomena such as chemical toxicity of therapeutic drugs, cancer cell growth and regulation, and for the production of cell-derived biological products. The types of cells that can be grown IN VITRO include muscle, cartilage, liver, lung, breast, skin, bladder, kidney, pancreatic islet cells, and genetically altered cells producing biological products. Recreating IN VIVO (i.e., in the organism) interactions in an IN VITRO environment requires special nutrients conducive to cell growth. Once the cells are separated from the complex tissue organization in which they normally thrive, cell biologists, using a cell growth medium as a base, can optimize the IN VITRO nutritional, hormonal, and physical factors that promote propagation. Culturing of human and other mammalian cells requires the use of a nutrient source of cell growth medium. Typically this growth medium includes a mixture of 80% to 90% basal medium that consists of amino acids, sugar, salts, vitamins, and 10% to 20% serum. Serum is derived from the whole blood of humans and other species and provides growth factors necessary for cells to continue to divide in culture. Although serum provides various proteins, enzymes, hormones, trace elements, and undefined regulators for cell growth, accumulated evidence suggests that many of these components are extraneous and may complicate the purification of cell-derived medical and biological products. Serum availability and pricing are volatile and serum can exhibit significant biological variability, including contaminants, thereby affecting researchers' experimental results and commercial manufacturers' budgeting and product consistency. Accordingly, if users are unable to purchase a project's entire serum requirement from the same lot, they may be required to test the quality of the serum throughout the duration of the project. Based on research conducted by the Company and its experience with the disadvantages of cell growth media containing human serum, fetal calf serum, horse or other animal serum, the Company developed serum-free supplements that optimize the growth of a variety of cell types. These supplements contain known concentrations of identified components that remain constant from production lot to lot and can eliminate potential contaminants such as viruses and bacteria. PRODUCTS AND SERVICES The Company markets over 30 different products. The Company's proprietary products consist of four different serum-free supplements: TCM, TM-235(TM), TCH(TM), and VaxMax(TM) and a cell freezing medium, Cellvation(TM). VaxMax(TM), introduced in September of 1993, was developed specifically for use in the production of veterinary vaccines. An additional proposed product, ViaStem(TM), continues to undergo further analysis in pre-clinical testing. This product was developed to improve the preservation of critical cells (e.g., stem cells), which are required for bone marrow transplantation. The Company also manufactures eleven basal media formulations, a series of buffered saline solutions, other cell biology reagents, and a variety of custom formulations. SERUM-FREE SUPPLEMENTS The Company has developed four technically advanced serum-free supplements to address the inadequacies of serum-based media. The Company's defined basal media supplements, TCM, TM-235(TM), TCH(TM), and VaxMax(TM) are fortified, low-protein, multipurpose serum-free supplements formulated for the long-term culturing of a wide variety of cell types. These supplements contain chemically-defined, growth-promoting factors that enhance the growth, productivity, and purity of highly specialized cells that secrete biological products such as monoclonal antibodies, interferons, human growth factor, insulin, tissue, plasminogen, enzymes, and vaccines. These supplements also improve the biochemical analysis of nutrient and hormonal effects on the differentiation and function of cells. TCM was formulated as a general serum replacement for a variety of cell types from species including rodent, dog, cat, rabbit, pig, monkey, and human. This product was designed for cost-effective use. TCM is not highly specific to a single cell type and is therefore effective in many research and manufacturing situations. TCM has a Drug Master File classification from the Food and Drug Administration (FDA), which makes it suitable for the manufacturing of biologicals (e.g., vaccines, monoclonal antibodies, etc.). TM-235(TM) is similar to TCM, but contains additional proprietary components. This product was developed for cell lines that require more than 10% fetal calf serum and is slightly more expensive than TCM. A Drug Master File (DMF) is being prepared for TM-235(TM). TCH(TM) was developed specifically for human hybridomas (cell secreting monoclonal antibodies) and other human cells of lymphoid origin (originating in the lymphatic or immune system). TCH(TM) contains no animal proteins and is compatible for use in the production of human biological products. A Drug Master File (DMF) is being prepared for TCH(TM). VaxMax(TM) is a cost effective serum reducer specifically designed for use by manufacturers of veterinary vaccines. It was formulated to provide optimal cell growth and virus production. VaxMax(TM) has been used by veterinary vaccine manufacturers to enhance production while lowering overall costs. The Company sells TCM, TM-235(TM), TCH(TM), and VaxMax(TM) at prices competitive with serum and other serum-free supplements. (See "Business -- Competition.") The reliability and rigorous quality control involved in manufacturing TCH, TM-235(TM), TCH(TM), and VaxMax(TM) allow researchers to purchase as little as a one-week supply of supplements rather than enough for an entire project as is often necessary with serum-based media. The consistency of TCM, TM-235(TM), TCH(TM), and VaxMax(TM) reduces the need to qualify the supplements prior to each use. TCM, TM-235(TM), and TCH(TM) are concentrated to a level of fifty times in small-volume packages for easier shipment and storage than comparable amounts of serum, which are typically sold in non-concentrated form. VaxMax(TM) is concentrated to a level of one hundred times. CELLVATION(TM) Cellvation(TM) is a cryopreservative, or cell freezing medium, used in the storage of cells at ultra-low temperatures. Cellvation(TM) does not contain any type of serum or dimethyl sulfoxide, both of which have traditionally been used in cell freezing. Although the Company believes Cellvation(TM) is ideal for cells grown without serum, it may also be used for cells cultivated in serum. VIASTEM(TM) ViaStem(TM) is a cell solution that was developed as a new technology for ultra-low temperature preservation of critical cells like those required for bone marrow transplantations. The Company believes that ViaStem(TM) has the potential of preventing certain complications associated with current procedures, such as toxicity and nausea. Preliminary data indicates that ViaStem(TM) increases the viability and preservation of critical cells. Other potential applications for ViaStem(TM) include preservation of umbilical cord cells, platelets, and red blood cells. ViaStem(TM) is currently undergoing pre-clinical testing and the Company anticipates beginning human trials after the pre-clinical testing is completed. BASAL MEDIA FORMULATIONS The Company manufactures eleven products based on standard published formulations. Liquid basal media contains ultra-filtered water, essential and non-essential amino acids, vitamins, and inorganic and organic components. Generally, the basal medium plus a serum-free supplement provides the complete growth medium. BUFFERED SALINE SOLUTIONS The Company manufactures nine standard formulations, of which five products are available at standard concentration levels of one and ten times. Applications include cell rinsing, short-term storage, and washing solution for diagnostic tests. OTHER CELL BIOLOGY REAGENTS The Company also manufactures and sells several reagents, including enzyme, antibiotic, buffer, and amino acid solutions, and custom formulations. MARKETS AND MARKETING The Company sells its products primarily to academic, pharmaceutical, and other commercial laboratories. In addition, the Company markets its products through distributors, direct mail, telemarketing, new product releases, and advertisements in trade publications and scientific journals. The Company has distribution agreements for the sale of its products worldwide including the USA, Europe, Canada, Japan, Latin America, and the Pacific Rim. In April of 1994, the Company entered into an agreement with American Type Culture Collection (ATCC), Rockville, MD, the world's largest public archive of living biological cultures and genetic materials. ATCC serves the international scientific community by acquiring, preserving, and distributing strains of the most diverse collection of organisms and derivative biological materials in the world. Under the agreement, ATCC will distribute cell lines adapted to the Company's non-serum products as well as other associated products worldwide. Orders for cell lines and growth media under this agreement continued during fiscal 1997. During July of 1995, the Company entered into a non-exclusive worldwide distribution agreement with ICN Pharmaceuticals, Inc., Costa Mesa, CA. Under the agreement, ICN will market Celox's proprietary serum-free cell biology products and Cellvation(TM). Initial orders under this agreement began in the final quarter of fiscal year 1995 and have continued through fiscal 1997. During the third quarter of fiscal 1997, the Company also began to supply ICN with the rest of its product line, except for ViaStem(TM). ICN manufactures and markets a broad range of prescription and over-the-counter pharmaceuticals, medical diagnostic products, and biotechnology research products in over 60 countries in North and Latin America, Eastern and Western Europe, and the Pacific Rim countries. During fiscal 1997, the Company began providing its proprietary products to Sigma Chemical Company under a private label distribution agreement. CUSTOMERS The Company markets its products to academic, pharmaceutical, and diagnostic companies. The Company's two largest customers accounted for 34% of the Company's revenues during fiscal 1997. These customers each accounted for more than 10% of the Company's revenue for the past fiscal year. The loss of any one would have a material adverse, short-term effect on the Company. However, one of the customers is comprised of many labs and a loss of the total account is unlikely. (See Note 5 of Notes to Financial Statements.) In December 1991, the Company was awarded a General Services Administration, Federal Supply Service Agreement ("GSA Agreement"), commencing in January 1992 and terminating in December 1996. By receiving the GSA Agreement, the Company's products have been qualified for use by numerous institutions, including the National Institutes of Health, National Cancer Institute, Veterans Administration, and United States Department of Agriculture. Management determined that it was in the Company's best interest to allow this agreement to terminate without renewal. Customers who had been ordering under the GSA agreement have continued to order from the Company subsequent to the termination of the agreement. RESEARCH AND DEVELOPMENT Although the Company has completed the research and development of its current products, the Company intends to refine these products, as necessary, to meet customer requirements and to take advantage of technological changes. Additionally, the Company intends to continue to identify factors that affect the growth, differentiation, and replication of cells, particularly human cells. For the years ended August 31, 1996 and 1997, the Company spent approximately $132,534 and $47,686, respectively, on research and development. During fiscal year 1997, the Company's primary research and development efforts continued to focus on the development of pre- clinical data on ViaStem(TM). This pre-clinical data is being developed through collaborative agreements with the Hoxworth Blood Center at the University of Cincinnati and the Memorial Blood Centers of Minnesota. Research and developmental expenses will fluctuate based on the status of pre-clinical and clinical trials for ViaStem(TM). During February of 1996, the Company entered into an agreement with the Department of the Army, Walter Reed Army Institute of Research (WRAIR) that provides for a Cooperative Research and Development Agreement for Material Transfer that encompasses the Company's ViaStem(TM) product. MANUFACTURING The manufacture of the Company's products requires sterilization of glassware and packaging, assembly of the chemical components, mixing, sterile filtration, aseptic packaging of the final product, and quality control testing. The assembly, mixing, filtration, and packaging take approximately two to three days, after which the supplements are quarantined for a minimum of three weeks until quality control testing has been completed. The Company tests its supplements for cell growth potential, purity, sterility, uniformity, and integrity. The materials used in the Company's products are available from many sources, although the Company utilizes a select group of vendors to ensure consistency. The manufacturing process requires biological, chemical, and packaging supplies and equipment that are generally available from several suppliers. The Company packages and ships its products from its facility in St. Paul, Minnesota. The Company generally ships within 24 hours after receiving a purchase order. (See "Item 2 - Properties" for further discussion of Company facilities.) COMPETITION Competition in the biotechnology industry is intense and comes form independent cell biology companies, major pharmaceutical firms, and university-affiliated entities both in the United States and in foreign countries. Certain of these companies have extensive experience in the biotechnology industry and most have substantially greater financial, technical, marketing, and management resources than the Company. A significant amount of cell biology activity is carried out at universities and other non-profit research organizations. These entities are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking protection for their technology and products. These institutions also compete with the Company in recruiting highly trained personnel. The Company's defined serum-free supplements compete with serum and serum-free growth media products from a number of companies, including Gibco/Life Technologies, Inc.; Irvine Scientific, Inc.; and Boehringer Mannheim Corporation. The principal competitive factors for these products are performance, price, reliability, and packaging. The Company's products compete on the basis of all four factors, although management believes its principal competitive advantages are performance and price. The Company's defined basal media supplements also compete with serum products, which have traditionally dominated the market for cell growth media. Manufactures of these products include Gibco/Life Technologies, Inc.; J.R.H. Biosciences, Inc.; Hyclone Laboratories, Inc.; and Sigma Chemical Company. The Company believes that its products have a competitive advantage over serum-based products on the basis of performance, packaging, and price stability. Many of the same manufacturers also produce products that compete with the Company's basal media formulations, buffered saline solutions, and other cell biology reagents. TRADE SECRETS AND PROPRIETARY TECHNOLOGY The Company's ability to compete effectively with other producers may be materially dependent on the proprietary nature of its technologies. The Company pursues a policy of protecting its technological position through the use of trade secrets. Because patenting requires disclosure of technology to the public, and because the nature of certain technology renders policing of infringement difficult, the Company believes its proprietary technology is generally better protected by maintaining strict security and secrecy than by obtaining patents. There can be no assurance, however, that competitors will not independently develop substantially the equivalent information or techniques, or otherwise gain access to the Company's know-how, such as through the employment of scientific personnel who previously worked for the Company. To protect its trade secrets, the Company marks all of its proprietary documents confidential, distributes confidential information on a "need-to-know" basis only and uses employee confidentiality agreements. All of the Company's employees have signed, and future employees and consultants will sign, confidentiality agreements under which they agree not to use or disclose the Company's proprietary information. The Company intends to vigorously enforce those agreements. There can be no assurance, however, that these confidentiality agreements will be honored or that others will not independently develop similar technology. To the extent that such consultants apply technical information independently developed by them to projects undertaken by the Company, disputes may arise as to the proprietary rights to such information. The Company will also require the vendors, licensees, and joint ventures sign confidentiality agreements whenever appropriate. The Company believes that it owns or has the right to use all proprietary technology necessary to license, manufacture, and market its current cell biology products. It is possible that with respect to other applications of the Company's technology still being evaluated, licenses under patents held by others may be required and there can be no assurance that, if required, such licenses will be available to the Company on acceptable terms. VIASTEM(TM) PATENTS In March 1995, the Company filed a patent application for ViaStem(TM) in the U.S. Patent and Trademark Office. The Company received the U.S. Patent in early December 1996. This patent provides protection of the Company's ViaStem(TM) technology through March of 2015. The Company has also filed the documents needed for an International Patent Application as required by the Patent Cooperation Treaty. Initial reports from the various countries that have reviewed the international patent application have been positive. Due to the unique nature of ViaStem(TM), the Company pursued the patent process for this product. GOVERNMENT REGULATIONS Regulation by governmental authorities in the United States and other countries is a significant factor affecting the success of products resulting from biotechnological research. The Company is required to conform its operations to the FDA's "Good Manufacturing Practice" regulations. The FDA requires pre-manufacturing approval for certain new medical devices, drugs, or vaccines. This approval generally requires an unequivocal demonstration of the safety and efficacy of a new device, drug, or vaccine. The FDA approval process is generally costly and time-consuming. Because the Company does not currently produce or sell medical devices, drugs, or vaccines, it is not directly affected by these regulations. However, if the Company's customers incorporate the Company's products into products that are medical devices, drugs, or vaccines, such customers will generally be required to obtain such approvals. During the second quarter of 1994, the Company received its first Drug Master File Classification from the FDA for the Company's TCM product. This classification will expedite the FDA approval process for customers who want to use the Company's TCM product in the manufacture of drugs or drug substances for human use. The Company is in the process of gaining this status for its other proprietary products. Although the Company's present products are not subject to regulations by the FDA or other governmental agencies, it is possible that future products such as ViaStem(TM) may be subject to such regulations. To the extent that the Company is dependent upon new product development, delays in obtaining any required FDA or other governmental approval may adversely affect the Company. The Company applied to the FDA for reclassification as a medical device company so that the Company's products may be used in wider commercial applications, particularly for the human health care market. In March 1993, the Company received this registration. Compliance with federal, state, and local laws, including environmental laws, does not require any material expenditures by the Company, and the Company does not believe that such laws have any material impact on the Company's operations of financial conditions. EMPLOYEES As of October 31, 1997, the Company employed a total of four (4) persons on a full-time basis, of whom two were involved in technical capacities and two in administrative functions, as well as temporary employees. During the next 12 months, the Company anticipates hiring additional business development representatives, technical personnel, and other employees, as needed, based on growth. The Company also intends to continue to utilize temporary employees, as needed, in administrative and general laboratory positions. ITEM 2 - PROPERTIES The Company's executive offices and laboratories are located in a new facility in St. Paul, Minnesota. The Company leases approximately 9,500 square feet of office, laboratory, and warehouse space in this facility. The Company moved into the St. Paul facility during March 1997. ITEM 3 - LEGAL PROCEEDINGS The Company is a member of the class in the KPMG Peat Marwick action as it relates to their audit of the Piper Jaffray Institutional Government Income Portfolio Fund, on whose behalf litigation has been commenced in federal district court in Minneapolis, MN. The Company has not directly participated in the litigation. The Company expects that attorneys for the plaintiff in this action will appeal the decision of the federal court in Minneapolis to grant partial summary judgement to KPMG Peat Marwick. The Company was a defendant in a wrongful termination lawsuit brought by a former employee who was in the probationary period at the time of termination. The Company believes that the lawsuit was totally without merit. During fiscal 1997 however, the Company agreed to a settlement reached as a result of court ordered mediation. On November 21, 1996, the Company filed a lawsuit in Hennepin County Court, in the State on Minnesota, against its former landlord claiming, among other things, that the landlord repeatedly violated the terms of the lease agreement in the area of the tenant's right to quiet enjoyment of the leased space. Currently, both parties have been ordered by the Court to participate in a mediation process. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. MARKET INFORMATION The Company's Common Stock has been traded on the National Association of Securities Dealers Automated Quotation System since March 9, 1992. Prior to this, there was no public market for the Company's Common Stock. Beginning August 15, 1996, the Company's Common Stock began trading on the Over-the-Counter (OTC) Market. Due to a failure to meet a NASDAQ requirement of at least $2,000,000 in net tangible assets, the Company was delisted from the NASDAQ Small Cap Market. The following table sets forth the range of high and low bid quotations of the Company's Common Stock as reported by the NASDAQ System for Fiscal 1996, and 1997. Beginning with September 1996, the quotes represent inter-dealer prices on the OTC Market. The OTC Market quotations reflect inter-dealer prices, without retail mark-up or commission and may not necessarily represent actual transactions. STOCK PRICES HIGH LOW FISCAL YEAR 1996 November 30, 1995 (1st Quarter)..................... $1.00 $0.75 February 28, 1996 (2nd Quarter)..................... 0.88 0.63 May 31, 1996 (3rd Quarter).......................... 2.00 0.63 August 31, 1996 (4th Quarter)....................... 1.88 0.63 FISCAL YEAR 1997 November 30, 1996 (1st Quarter)..................... 0.63 0.30 February 28, 1997 (2nd Quarter)..................... 0.65 0.30 May 31, 1997 (3rd Quarter).......................... 0.50 0.34 August 31, 1997 (4th Quarter)....................... 0.63 0.34 FISCAL YEAR 1998 September 1, 1997 through October 31, 1997.................................... $1.13 $0.34 B. HOLDERS As of October 31, 1997, there were approximately 900 holders of the Company's Common Stock. C. DIVIDENDS The Company has not paid any dividends on its Common Stock to date and anticipates that, for the foreseeable future, it will follow a policy of retaining earnings in order to finance the expansion and development of its business. ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following pertains to the results of operations and financial position of the Company for the two fiscal years ended August 31, 1996, and August 31, 1997, and should be read in conjunction with the financial statements included elsewhere herein. RESULTS OF OPERATIONS In fiscal 1993, the Company's primary focus changed from research and development to increasing revenues from existing products and expanding manufacturing capabilities. Accordingly, in fiscal 1993 the Company changed its reporting status from a development-stage company to a regular operating corporation. The Company had a net loss of $388,473 in fiscal 1997 compared to net loss of $384,024 in fiscal 1996. Reduced operating expenses offset a decline in sales. Net sales decreased 40% or $146,139 to $221,407 in 1997 from $367,546 in 1996, primarily due to the timing of orders received from a manufacturing customer. Additionally, the Company moved into its new facility in April, 1997 and had to re-validate all of the production equipment. The re-validation limited the production of products during the third quarter of the fiscal year. Two customers each accounted for sales of more than 10% of the Company's annual sales in 1997 compared to three customers in 1996. (See Note 5 of Notes to Financial Statements.) The Company also received interest income of $67,820 in 1997 compared to $111,523 in 1996. This is primarily due to the Company's cash position as a result of its March 1992 initial public offering. The decrease between years is due to a shifting of investment funds out of the Piper Jaffray Institutional Government Income Fund (the Fund) into bank certificates of deposit which have lower yields but less volatility, as well as the use of cash in operations. Due to an unexpected decline in value of the Fund, which was attributed to the purchase of derivatives, class action litigation by investors began in 1994. In February 1995, Piper Jaffray Companies Inc. announced a $70 million (less attorney fees) settlement to settle such litigation, subject to court approval and acceptance of the settlement by a large percentage of the Funds' shareholders. In August 1995, a federal judge gave preliminary approval to this settlement, which would be a combination of $20 million in cash and $50 million in 8% notes payable. Litigation by investors against auditors of the Fund related to Fund losses has not yet been resolved. Based upon the final loss calculation approved by the court a receivable for litigation settlement in the amount of $133,000 was set up at August 31, 1995. During fiscal 1996, the Company received payments totaling $53,226 plus interest on this receivable. During fiscal 1997, the Company received payments totalling $57,328 plus interest under the settlement agreement. As of August 31, 1997, the balance remaining in the settlement receivable was $22,446. Subsequent to the fiscal year end, an additional $15,807 plus interest was received. Marketing and general and administrative expenses decreased by 17% or $97,081 from $566,609 in fiscal 1996 to $469,528 in fiscal 1997. The decrease between the respective periods was the amount and timing of advertising, promotional materials and trade show expenses. General and administrative expenses were comparable between periods as moving costs were offset by lower rent and operating expenses in the current fiscal year. Cost of goods sold decreased by $61,105 over fiscal 1996, and represented 59% of sales in 1997 compared to 52% of sales in 1996. The increase in the cost of goods sold as a percentage of sales results from fewer sales to cover fixed manufacturing costs. The Company expects the cost of products sold as a percentage of sales to decrease as sales and production levels increase and fixed production costs are allocated over a larger revenue base. The mix of products also affected the cost of goods sold comparison between period. Research and development expenses decreased by 64% or $84,848 to $47,686 in 1997. The decrease between years results from the timing and amount of professional fees and other costs associated with the patent filing for ViaStem(TM). Professional fees for research and development in fiscal 1998 will include international filing fees for the international patent on ViaStem(TM). The Company will add additional products in fiscal 1998, though the main focus will be on increasing sales volume. The Company presently has over 30 products. The loss per common share was ($0.14) in fiscal 1997 as well as ($0.14) in fiscal 1996. In 1998, the Company will continue its efforts to increase sales volume through an increase in marketing activities. The sales and marketing activities will consist of establishing further relationships with independent sales organizations and distributors, expanding its distribution activities with ATCC, ICN Pharmaceuticals, and the Sigma Chemical Company. In addition, the Company has instituted a focused advertising/marketing strategy which will increase certain sales and marketing expenses for fiscal 1998. The Company expects operating costs to remain flat in 1998. However, there can be no assurance that sales will increase or that the Company will be profitable in the future. Management does not expect to realize an operating profit in fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES During 1997, the Company's capital expenditures totaled $115,558. The Company anticipates that capital expenditures for 1998 will be approximately $50,000 to fund additional sales, research and development, and manufacturing growth. At August 31, 1997, the Company had cash and short-term investments totaling $1,145,393. This cash and short-term investment position is from the proceeds of the Company's March 1992 initial public offering. Management believes that these funds will be sufficient to fund operating losses and capital expenditures for 1998. The Board of Directors has authorized the repurchase of up to 300,000 shares of the Company's Common Stock in the open market at prices not to exceed $1.75 per share. Through August 31, 1997, 136,700 shares were repurchased for $142,173. At this time, management is not aware of any factors that would have a materially adverse impact on cash flow beyond 1998, other than the potential for continuing losses. Management expects operating losses to continue in 1998. EFFECTS OF INFLATION The Company believes inflation is not expected to have a significant impact on the Company's operations. SEASONALITY The Company's operations are not subject to seasonal fluctuations. ITEM 7 - FINANCIAL STATEMENTS The information required by this item is incorporated by reference to the financial statements, reports, and notes beginning on page F-1. REPORT OF INDEPENDENT AUDITORS Board of Directors Celox Laboratories, Inc. Minneapolis, Minnesota We have audited the accompanying balance sheet of Celox Laboratories, Inc. as of August 31, 1997 and 1996, and the related statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Celox Laboratories, Inc. as of August 31, 1997 and 1996 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Certified Public Accountants Minneapolis, Minnesota September 25, 1997 F-1 CELOX LABORATORIES, INC. Balance Sheet
- -------------------------------------------------------------------------------- August 31 ASSETS 1997 1996 - -------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 408,274 $ 420,222 Certificates of deposit 737,119 968,663 Trade accounts receivable 26,562 91,802 Investor settlement receivable - current 22,446 57,328 Accrued interest receivable 16,956 19,002 Inventories Raw materials 30,142 52,742 Finished goods 16,713 21,630 Prepaid expenses 1,058 814 ---------- ---------- Total current assets 1,259,270 1,632,203 INVESTOR SETTLEMENT RECEIVABLE 22,446 EQUIPMENT AND LEASEHOLD IMPROVEMENTS Laboratory and production equipment 204,882 204,882 Office furniture and equipment 78,764 78,764 Leasehold improvements 115,558 64,390 ---------- ---------- 399,204 348,036 Less accumulated depreciation 229,010 254,432 ---------- ---------- Net equipment and leasehold improvements 170,194 93,604 OTHER ASSETS Patents, net 18,789 ---------- ---------- TOTAL ASSETS $1,448,253 $1,748,253 ========== ==========
Notes to Financial Statements are an integral part of this Statement. F-2 CELOX LABORATORIES, INC. Balance Sheet
- ------------------------------------------------------------------------------------- August 31 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 - ------------------------------------------------------------------------------------- CURRENT LIABILITIES Note payable $ 94,879 Trade accounts payable 26,321 $ 29,748 Accrued liabilities Compensation 21,438 21,179 Taxes, other than income taxes 6,808 9,273 Other 3,000 3,773 ----------- ----------- Total current liabilities 152,446 63,973 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $.01 per share Authorized, 4,000,000 shares Issued and outstanding, 2,742,169 shares in 1997 and 1996 27,422 27,422 Additional paid-in capital 5,251,756 5,251,756 Accumulated deficit (3,983,371) (3,594,898) ----------- ----------- Total stockholders' equity 1,295,807 1,684,280 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,448,253 $ 1,748,253 =========== ===========
Notes to Financial Statements are an integral part of this Statement. F-3 CELOX LABORATORIES, INC. Statement of Operations - --------------------------------------------------------------- Years Ended August 31 1997 1996 - --------------------------------------------------------------- NET SALES $ 221,407 $ 367,546 COST OF GOODS SOLD 131,418 192,523 --------- --------- GROSS PROFIT 89,989 175,023 OPERATING EXPENSES Research and development 47,686 132,534 Marketing 153,738 241,926 General and administrative 315,790 324,683 --------- --------- Total operating expenses 517,214 699,143 --------- --------- OPERATING LOSS (427,225) (524,120) OTHER INCOME (EXPENSE) Interest and dividend income 67,820 111,523 Investment gain 27,750 Interest expense (2,609) Other (26,459) 823 --------- --------- Total other income, net 38,752 140,096 --------- --------- LOSS BEFORE INCOME TAX BENEFIT (388,473) (384,024) INCOME TAX BENEFIT -- -- --------- --------- NET LOSS ($388,473) ($384,024) ========= ========= NET LOSS PER COMMON SHARE ($ .14) ($ .14) ========= ========= Notes to Financial Statements are an integral part of this Statement. F-4 CELOX LABORATORIES, INC. Statement of Changes in Stockholders' Equity Years Ended August 31, 1997 and 1996
- ------------------------------------------------------------------------------------- Common Stock Additional -------------------- Paid-In Shares Amount Capital - ------------------------------------------------------------------------------------- BALANCES - August 31, 1995 2,742,169 $27,422 $5,251,756 Net change in unrealized gains for the year Net loss --------- ------- ---------- BALANCES - August 31, 1996 2,742,169 27,422 5,251,756 Net loss --------- ------- ---------- BALANCES - August 31, 1997 2,742,169 $27,422 $5,251,756 ========= ======= ==========
Notes to Financial Statements are an integral part of this Statement. F-5 CELOX LABORATORIES, INC. Statement of Changes in Stockholders' Equity Years Ended August 31, 1997 and 1996 - -------------------------------------------------------------------------------- Unrealized Accumulated Gains on Deficit Investments Total - -------------------------------------------------------------------------------- ($3,210,874) $38,798 $2,107,102 (38,798) (38,798) (384,024) (384,024) ---------- ---------- ---------- (3,594,898) 1,684,280 (388,473) (388,473) ---------- ---------- ---------- ($3,983,371) $ -- $1,295,807 ========== ========== ========== Notes to Financial Statements are an integral part of this Statement. F-6 CELOX LABORATORIES, INC. Statement of Cash Flows
- -------------------------------------------------------------------------------------------- Years Ended August 31 1997 1996 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($ 388,473) ($ 384,024) Adjustments to reconcile net loss to net cash used for operating activities Depreciation 38,968 47,933 Deferred rent expense (773) (4,626) Realized and unrealized gains on investments (27,750) Changes in assets and liabilities (Increase) decrease in trade accounts receivable 65,240 (34,262) Decrease in accrued interest receivable 2,046 7,160 (Increase) decrease in inventories 27,517 (7,695) (Increase) decrease in prepaid expenses (244) 1,854 (Decrease) increase in trade accounts payable (3,427) 11,354 (Decrease) in accrued liabilities (2,206) (1,082) ----------- ----------- Net cash used for operating activities (261,352) (391,138) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of short-term investments and certificates of deposit (933,549) (1,551,715) Proceeds from sale of short-term investments and certificates of deposit 1,165,093 1,401,844 Proceeds from investor settlement receivable 57,328 53,226 Principal payments received on note receivable - officer/stockholder 4,000 Investment in ViaStem patent (18,789) Capital expenditures (115,558) (15,399) ----------- ----------- Net cash from (used for) investing activities 154,525 (108,044) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from note payable, net 94,879 ----------- ----------- Net cash from financing activities 94,879 -- ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (11,948) (499,182) CASH AND CASH EQUIVALENTS - Beginning of Year 420,222 919,404 ----------- ----------- CASH AND CASH EQUIVALENTS - End of Year $ 408,274 $ 420,222 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for income taxes $ -- $ -- =========== =========== Cash payments for interest $ 2,609 $ -- =========== ===========
Notes to Financial Statements are an integral part of this Statement. F-7 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Celox Laboratories, Inc. is a biotechnology company that researches, develops, manufactures and markets cell biology products used in the propagation of cells derived from mammals, including humans and other species. These specialized cell growth products are used primarily in academic, pharmaceutical and other commercial laboratories to improve growth conditions, productivity and quality of cell-derived medical and other biological products. The Company grants credit to its customers on an individual basis and generally requires no collateral. The Company's customers are located throughout the United States and the Pacific Rim. REVENUE RECOGNITION The Company recognizes revenues on the accrual basis, generally when products are shipped to the customer. "Bill and hold" sales, in which delivery is delayed at the customer's explicit request, are recognized when conditions for such revenue recognition are met; principally, the completed product is ready for delivery and transfer of the risks and rewards of ownership to the buyer has occurred. ACCOUNTING ESTIMATES Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant estimates include the income tax valuation account (Note 6). It is at least reasonably possible that this estimate could change. CASH AND CASH EQUIVALENTS For purposes of reporting the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market funds. At times throughout the year, the Company's cash, cash equivalents and certificates of deposit in financial institutions may exceed FDIC insurance limits. The Company has not experienced any losses in such accounts. F-8 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued INVESTMENTS The Company accounts for investments under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115. Under SFAS No. 115, the Company classifies its marketable debt and equity securities as "available for sale". Securities classified as "available for sale" are carried in the financial statements at fair value. Realized gains and losses, determined using average cost method, are included in earnings; unrealized holding gains and losses are reported as a separate component of stockholders' equity. In fiscal 1996, the Company sold all of its remaining shares in the Piper Jaffray Institutional Government Income Portfolio Fund, transferring such amounts to certificates of deposit at several banks, where the Company currently is investing their surplus cash. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company uses the allowance method to account for uncollectible accounts, however, no allowance was deemed necessary at August 31, 1997 and 1996. INVENTORIES Inventories are stated at the lower of FIFO (first-in, first-out method) cost or market. ADVERTISING The Company expenses advertising when incurred. Total advertising costs were approximately $20,800 and $29,500, respectively, for the years ended August 31, 1997 and 1996. DEPRECIATION Depreciation is computed by the straight-line method using the estimated useful lives of the individual assets. F-9 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued AMORTIZATION OF INTANGIBLE ASSETS During fiscal 1997, Celox received a patent for ViaStem. The costs associated with this patent were capitalized and are being amortized by the straight-line method over 17 years. This patent provides protection of the ViaStem product until March 2015. INCOME TAXES Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of property and equipment for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be deductible or taxable, when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating and capital losses that are available to offset future taxable income and tax credits that are available to offset future income taxes payable. These deferred taxes relating to the operating and capital losses are fully reserved. NET LOSS PER COMMON SHARE Net loss per common share is computed based upon the weighted-average number of common shares outstanding during the year. The weighted average number of shares outstanding was 2,742,169 for the years ended August 31, 1997 and 1996. None of the common stock equivalents have been included in the computation for the years presented because they are antidilutive. Fully diluted and primary loss per share are materially the same for each of the years presented. NEWLY ISSUED ACCOUNTING STANDARDS In fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Management considers the options to be immaterial to the financial statements taken as a whole primarily because all of the stock option prices are above market prices. In fiscal 1998, the Company will adopt Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE and Statement of Financial Accounting Standards No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. The new calculations and disclosures of these new Standards are not expected to materially affect the financial statements of the Company. F-10 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued NEWLY ISSUED ACCOUNTING STANDARDS - Continued In fiscal 1999, the Company will adopt Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME and Statement of Financial Accounting Standards No. 131, SEGMENTS OF AN ENTERPRISE. Again, the new reporting requirements of these Standards are not expected to materially affect the financial statements of the Company. 2. COMMITMENTS AND CONTINGENCIES OPERATING LEASE During fiscal 1996, the Company conducted its operations from a facility under an operating lease which expired on October 31, 1996. In fiscal 1997, the Company conducted operations from a temporary facility in a month-to-month lease until the new building they are currently leasing was constructed. They moved into this new location in April 1997 under an operating lease which has an initial term expiring January 31, 2004 with an option for two - five year renewal terms. The lease requires payment for certain operating costs. Rent expense under the former operating lease was $101,404 during fiscal 1996 and $64,789 for the new leases during fiscal 1997. Future minimum base lease payments, by fiscal year, are as follows: 1998 $ 73,726 1999 73,726 2000 73,726 2001 73,726 2002 73,726 Thereafter 104,445 -------- $473,075 ======== F-11 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 2. COMMITMENTS AND CONTINGENCIES - Continued EXECUTIVE EMPLOYMENT AGREEMENT The Company has an employment contract with Milo R. Polovina, effective January 25, 1995. The agreement provides that Mr. Polovina will serve as Chairman of the Board, Chief Executive Officer and President of the Company for a period of ten years with an annual base salary of not less than $126,000. Mr. Polovina is also eligible for an annual bonus and performance stock options, determined at the discretion of the Board of Directors. The bonus shall in no event exceed one-half of his annual salary. The Board of Directors authorized the payment of $15,000 and $30,000 in 1997 and 1996, respectively, as a bonus to Mr. Polovina. No performance stock options were issued at August 31, 1997 and 1996. This agreement also contains a provision relating to compensation in the event of a change in control of the Company followed by a termination of Mr. Polovina's employment. Upon a change of control, if Mr. Polovina's employment is terminated by the Company for other than disability or cause (as defined), or is terminated by Mr. Polovina for good reason (as defined), he will be entitled to receive his entire annual base salary, in twelve equal monthly payments, for the five calendar years following the date of termination. LEGAL PROCEEDINGS The Company is a member of the class in the KPMG Peat Marwick action as it relates to their audit of the Piper Jaffray Institutional Government Income Portfolio Fund, on whose behalf litigation has been commenced in federal district court in Minneapolis. The Company has not directly participated in the litigation. The Company expects that attorneys for the plaintiff in this action will appeal the decision of the federal court in Minneapolis to grant partial summary judgement to KPMG Peat Marwick. The Company was a defendant in a wrongful termination lawsuit brought by a former employee who was in the probationary period at the time of the termination. The Company believes that the lawsuit was totally without merit. However, during fiscal 1997, the Company agreed to a settlement for an amount which was not material to the financial statements. The Company has filed a lawsuit against its former landlord and adjacent tenant, claiming, among other things, that the landlord repeatedly violated the terms of the lease agreement in the area of the tenant's right to quiet enjoyment of the leased space. Currently, both parties are in the discovery process. F-12 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 3. NOTE PAYABLE The Company has a note payable with its bank, secured by a deposit account held at the same bank. The balance due at August 31, 1997 is $94,879 with interest charged on borrowings at an initial rate of 7.65%. The note is payable in monthly installments of $1,933 to February 1998 with a balloon payment of the balance due at that time. The terms of the note agreement with the bank require the Company to maintain certain financial covenants and ratios and restricts the Company from incurring additional debt or engaging in other than their current business. Management of the Company plans to renegotiate this note in February 1998. 4. STOCKHOLDERS' EQUITY REPURCHASE OF COMMON STOCK Effective July 30, 1993, the Board of Directors authorized the repurchase of up to 300,000 shares of the Company's common stock in open market purchases at prices not to exceed $1.75 per share. As of August 31, 1997 and 1996, the Company had repurchased 136,700 shares at prices of $.85 to $1.58 per share. STOCK OPTIONS AND WARRANTS The Company has issued certain common stock warrants and has stock option plans which permit the granting of incentive stock options or nonqualified options to key employees and outside directors. Options are granted at 100 percent of the market value at the date of grant and are exercisable over periods up to ten years from grant date in various stages. One stock option plan, initiated prior to the Company's initial public offering (IPO), includes 200,000 shares of common stock available for future issuance at August 31, 1997 and 1996. Another stock option plan, put into effect after the IPO, reserved 549,300 shares for issuance upon exercise of warrants and options at August 31, 1997 and 1996. No options or warrants have been exercised at August 31, 1997 and 1996. At August 31, 1997 and 1996, options and warrants for 254,000 and 376,500 shares, respectively, were exercisable. F-13 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 4. STOCKHOLDERS' EQUITY - Continued A summary of outstanding options and warrants follows: Number Price of Shares Per Share --------- --------- Outstanding at August 31, 1995 377,500 $.81-$4.20 Granted 35,000 $.88-$1.00 Cancelled or expired (11,000) ------- Outstanding at August 31, 1996 401,500 $.81-$4.20 Cancelled or expired (137,500) ------- Outstanding at August 31, 1997 264,000 $.81-$1.50 ======= 5. MAJOR CUSTOMERS During fiscal 1997, sales to two customers were approximately 34% of net sales. During fiscal 1996, sales to one of the same customers were 10% of net sales and sales to two other customers were approximately 45% of net sales. At August 31, 1997 one customer comprised 50% of the total accounts receivable balance and a different customer comprised 81% of the total accounts receivable at August 31, 1996. F-14 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 6. INCOME TAXES Differences between the income tax benefit at the Federal statutory rates and the recorded benefit are as follows: 1997 1996 ---- ---- Amount computed using the Federal statutory rate ($132,000) ($131,000) Increase (reduction) in taxes resulting from: State taxes, net of Federal tax benefit (14,000) (12,000) Change in estimate 40,000 Change in valuation allowance 106,000 143,000 -------- -------- Total benefit $ -- $ -- ======== ======== The deferred income tax asset consists of the following at August 31, 1997 and 1996: 1997 1996 ---- ---- Capital loss carryforwards $ 316,000 $ 316,000 Net operating loss carryforwards 1,167,000 1,055,000 Tax credit carryforwards 35,000 41,000 ---------- ---------- Subtotal 1,518,000 1,412,000 Valuation allowance (1,518,000) (1,412,000) ---------- ---------- $ -- $ -- ========== ========== F-15 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 6. INCOME TAXES - Continued At August 31, 1997, the Company had net operating loss carryforwards and tax credit carryforwards available to reduce future taxable income, which expire as follows: Net Operating Loss Tax Credits ------------------ ----------- 2002 $ 75,000 2003 196,000 2004 223,000 $ 9,000 2005 93,000 2006 98,000 2,000 2007 488,000 3,000 2008 407,000 2,000 2009 431,000 3,500 2010 390,000 10,500 2011 385,000 2,000 2012 426,000 3,000 ---------- ------- Totals $3,212,000 $35,000 ========== ======= At August 31, 1997, the Company had capital loss carryforwards of approximately $928,000, which must be offset by capital gains in order to be used. These capital loss carryforwards expire as follows: Capital Loss ------------ 1999 $771,000 2000 - 2001 157,000 -------- Total $928,000 ======== F-16 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1997 and 1996 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments, none of which are held for trading purposes, are as follows:
August 31 ----------------------------------------------------------- 1997 1996 -------------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and cash equivalents $408,274 $408,274 $420,222 $420,222 Certificates of deposit 737,119 737,119 968,663 968,663 Investor settlement receivable 22,446 SEE BELOW 79,774 See below Note payable 94,879 94,879 -- --
The carrying values of cash and cash equivalents, certificates of deposit and the short-term note payable approximate fair values. It is not currently practicable to estimate the fair value of the investor settlement receivable. Because this receivable contains unique terms which were negotiated with the institution as part of class action litigation, there is no readily determinable similar instrument on which to base an estimate of fair value. 8. RELATED PARTY TRANSACTIONS During fiscal 1997, Celox entered into a verbal agreement with The Rowland Company, which currently employs two of the Company's Board Members. The Rowland Company was assisting Celox in the promotion and receipt of FDA approval for the Company's new product, ViaStem. The total amount expensed was approximately $5,400 during fiscal 1997. F-17 ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth certain information regarding the director and executive officer of the Company as of October 31, 1997. Directors hold office until the next Annual Shareholder's meeting. NAME AGE POSITION ---- --- -------- Milo R. Polovina 41 Chairman of the Board, President Chief Executive Officer, Treasurer, and Secretary MILO R. POLOVINA has been President, Chief Executive Officer, Treasurer, and Secretary of the Company and has served as a director since 1985. During the last week of October, 1997, the Chairman of the Board of Directors requested and received resignations from the Company's three outside directors. These resignations had been requested by the Chairman based upon the strategic focus of the Company and the need for expertise in the bio medical field. As a result, the Company does not have any outside directors. The Company intends to identify and interview qualified candidates for the open director positions as soon as practical. SCIENTIFIC ADVISORY BOARD The Company's Scientific Advisory Board was established to advise the Company on specific product opportunities and on certain advances in biotechnology. Steven T. Rosen, M.D., F.A.C.P., is the Director of the Cancer Center and the Cancer Program, Northwestern Memorial Hospitals, Chicago, Illinois. He is also the Genevieve Teuton Professor of Medicine at Northwestern University Medical School, Chicago, Illinois. Dr. Rosen is the Editor-in-Chief of CONTEMPORARY ONCOLOGY. Dr. Rosen has authored or co-authored over 160 technical papers. Robert G. McKinnel, Ph.D., is a professor of genetics and cell biology at the University of Minnesota. Dr. McKinnell is a Fellow of the American Association for the Advancement of Science and the Linnean Society of London. He was a Visiting Fellow of the Royal Society of London at Oxford University. He is a member of the Editorial Board of DIFFERENTIATION and is the Secretary and Treasurer of the International Society of Differentiation, Inc. He is the author or co-author of more than 100 technical papers. The Company intends to add additional members to the Scientific Advisory Board as appropriate. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership on Form 3 and changes in Ownership on Forms 4 or 5 with the Securities and Exchange Commission (SEC). Such officers, directors, and ten percent shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that, during the fiscal year ended August 31, 1997, all Section 16(a) filing requirements applicable to its officers, directors, and ten percent stockholders were complied with. ITEM 10 - EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer of the Company, the only officer whose annual compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ------------------- ------------ Name and Fiscal Salary Bonus Compensation Options Principal Position Year $ $ $(1) # -------- ------ ------ ----- ------------ ------- Milo R. Polovina 1997 135,600 15,000 -- 120,000 President, Chief 1996 135,600 30,000 -- 120,000 Executive Officer, 1995 132,300 30,000 -- 103,000 Treasurer, and Secretary
(1) The total amount of personal benefits paid to Mr. Polovina for fiscal 1997 was less than the lesser of (i) $50,000 or (ii) 10% of his total reported salary and bonus. No options were granted to Milo R. Polovina during fiscal 1997. No executive officer exercised options during fiscal 1997. The following table sets forth, for the Chief Executive Officer, the number and year-end value of unexercised options. (All such options were granted at the fair market value of the underlying shares as of the respective grant dates.) OPTION EXERCISES AND VALUE OF OPTIONS AT END OF FISCAL 1997
Number of Unexercised Value of Unexercised Options at End of In-the-Money Options Fiscal 1997 at End of Fiscal 1997 (1) --------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Milo R. Polovina 120,000 --- 0 --- (1) Calculated on the basis of the fair market value of the underlying securities at August 31, 1997, ($0.50) minus the exercise price per share (ranging from $1.00 to $1.50).
STOCK OPTIONS AND WARRANTS The Company has issued certain Common Stock warrants and has stock option plans which permit the granting of incentive stock options or non-qualified options to key employees and outside directors. Options are granted at 100 percent of the market value at the date of grant and are exercisable over periods up to ten years from grant date in various stages. One stock option plan, initiated prior to the Company's initial public offering (IPO), includes 200,000 shares of Common Stock available for future issuance at August 31, 1997 and 1996. Another stock option plan, put into effect after the IPO, reserved 549,300 shares for issuance upon exercise of warrants and options at August 31, 1997 and 1996. No options or warrants have been exercised under either of these plans at August 31, 1997 and 1996. At August 31, 1997 and 1996, options and warrants for 254,000 and 376,500 shares, respectively, were exercisable. The total options outstanding at August 31, 1997 are 264,000, with exercise prices of $0.81 to $1.50 per share. EXECUTIVE EMPLOYMENT AGREEMENT In January 1995, the Company entered into a revised employment agreement with Mr. Milo R. Polovina. The agreement provides that Mr. Polovina will serve as Chairman of the Board, Chief Executive Officer, and President of the Company for a period of ten years and will receive a minimum annual base salary of $126,000. The agreement automatically extends for an additional period of one year on each anniversary of the agreement; provided, however, that if the agreement is terminated for any reason other than (i) a change in control, (ii) voluntary resignation, (iii) death, (iv) disability, (v) retirement, or (vi) cause, Mr. Polovina will be entitled to receive his annual base salary and related benefits for a period of five calendar years following the termination. Mr. Polovina is also eligible for an annual bonus, determined in the discretion of the Board of Directors, which shall in no event exceed one-half of his annual salary. This agreement also contains a provision relating to compensation in the event of a change in control of the Company followed by a termination of Mr. Polovina's employment. A "Change in Control" will occur if any person, other than Mr. Polovina, becomes the beneficial owner of securities representing 30% or more of the combined voting power of the outstanding securities of the Company, the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation, or if the persons who were directors of the Company immediately prior to the change in control cease to constitute a majority of the Board of the Directors of the Company or of its successor. Upon a change in control, if Mr. Polovina's employment is terminated by the Company for reasons other than disability or cause (as defined), he will receive his annual composition pursuant to the agreement for the ten year term then remaining. In addition, in such a situation, Mr. Polovina will be entitled to require the Company to purchase his shares in the Company at their then fair market value. DIRECTOR COMPENSATION Non-employee directors receive $250 for each Board of Directors meeting attended, and for each committee meeting held at a date other than a date on which a Board meeting is held. Under the Company's Director Stock Option Program (the "Program"), the Company has granted stock options to non-employee directors and intends to continue to grant stock options to attract additional directors. Under the Program, each non-employee director is granted an initial option for 15,000 shares of Common Stock for serving on the Board of Directors. These options vest at 5,000 shares per year for three years commencing one year from the date of grant. The exercise price of any options granted will be not less than the fair market value of the underlying Common Stock on the date of grant. Directors are also eligible to receive supplemental options on an annual basis. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of October 31, 1997 by: (i) each director of the Company, (ii) all directors and executive officers as a group, (iii) the Chief Executive Officer, and (iv) each shareholder who own more than 5% of the outstanding shares of Common Stock. Except as otherwise indicated, the Company believes each person listed below possesses sole voting and investment power with respect to the shares indicated. Beneficial ownership means the shareholder has voting or investment power with respect to the shares. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person.
NAME AND ADDRESS SHARES BENEFICIALLY OWNED OF BENEFICIAL OWNER NUMBER PERCENT ------------------- ------ ------- DIRECTORS AND EXECUTIVE OFFICERS Milo R. Polovina 704,100(1) 24.3 1311 Helmo Avenue St. Paul, MN 55128 All directors and executive officers 704,100 24.3 as a group (1 person) PRINCIPAL HOLDERS Heartland Advisors, Inc. 250,500 9.1 790 North Milwaukee Street Milwaukee, WI 53202 Arnold Espeseth 159,800 5.8 Winger, MN 56592
---------------------- * Represents less than 1% of the outstanding shares. (1) Includes (a) 546,600 shares of stock owned by Mr. Polovina; (b) 2,500 shares owned by Mr. Polovina's wife, an employee of the Company; (c) 3,000 shares owned by Mr. Polovina's children; (d) options granted to Mr. Polovina for exercise within 60 days to purchase 120,000 shares; and (e) options granted to Mr. Polovina's wife for exercise within 60 days to purchase 32,000 shares. (Mr. Polovina's spouse was granted the options while an employee of the Company but prior to her marriage to Mr. Polovina.) ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In March 1992, Milo R. Polovina, the Company's President, borrowed $60,000 from the Company and issued a promissory note to the Company for that amount. In 1993 through 1995, $56,000 was repaid to the Company by Mr. Polovina. The balance of the note and accrued interest was repaid in fiscal 1996. Mr. Polovina has an employment agreement with the Company. (See "Executive Compensation -- Executive Employment Agreement".) PART IV ITEM 13 - EXHIBITS, AND REPORTS ON FORM 8-K A. Documents filed: 1. FINANCIAL STATEMENTS. The following documents are filed as part of this report on Form 10-KSB: PAGE ---- Report of Independent Auditors........................ F-1 Balance Sheet -- August 31, 1997 and 1996............. F-2 Statement of Operations -- Years ended August 31, 1997 and 1996.......................... F-4 Statement of Changes in Shareholders' Equity -- Years ended August 31, 1997 and 1996.............. F-5 Statement of Cash Flows -- Years ended August 31, 1997 and 1996.......................... F-7 Notes to Financial Statements......................... F-8 2. EXHIBITS. 3.1 Articles of Incorporation* 3.2 By-Laws* 10.1 Lease Agreement with R.L. Johnson for premises located at 856 South Fifth Street, Hopkins, Minnesota, dated May 9, 1991* 10.2 Employment Agreement with Milo R. Polovina dated September 25, 1991* 10.3 Stock Plan* 10.4 Director Stock Option Program* 10.5 Employee Stock Purchase Plan+ 10.6 Lease agreement with Oakdale Properties LLC located at 1311 Helmo Avenue, St. Paul, Minnesota, dated December 6, 1996** 10.7 Revised employment agreement with Milo R. Polovina dated January, 1995+ 25 Power of Attorney (included on signature page) ------------------- * Incorporated by reference to the Company's Registration Statement on Form S-18 (No. 33-42573C), which became effective on March 9, 1992. + Incorporated by reference to Company's Form 10-KSB dated 8/31/95. ** Incorporated by reference to Company's Form 10-QSB dated 2/28/97. B. Reports on Form 8-K: On November 4, 1997, the Company filed a Form 8-K that reported that the Chairman of the Board of Directors requested and received resignations from the Company's three outside directors. These resignations had been requested by the Chairman based upon the strategic focus of the Company and the need for expertise in the bio medical field. As a result, the Company does not have any outside directors. The Company intends to identify and interview qualified candidates for the open director positions as soon as practical. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CELOX LABORATORIES, INC. By: /s/ Milo R. Polovina ------------------------------------- Milo R. Polovina Chairman of the Board and President and CEO Date: November 24, 1997 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Milo R. Polovina as attorney-in-fact for him in any and all capacities, to sign any amendments to this Report on Form 10-KSB and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, may do or cause to be done by virtue of hereof. Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Milo R. Polovina Chairman of the Board, November 24, 1997 - -------------------------- President, CEO and Director Milo R. Polovina (principal executive officer and principal financial officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 0000883720 CELOX LABORATORIES INC Year AUG-31-1997 AUG-31-1997 408,274 737,119 26,562 0 46,855 1,259,270 399,204 229,010 1,448,253 152,446 0 27,422 0 0 1,268,385 1,448,253 221,407 221,407 89,989 285,156 0 0 0 (388,473) 0 (388,473) 0 0 0 (388,473) (0.14) (0.14)
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