Kyzen Corporation (“Kyzen” or the “Company”) is a specialty chemical company focused on chemistries and processes for industrial manufacturing operations including: electronics, electronic packaging, optical, glass, aerospace, metal finishing, semiconductor and other high technology industries where precision cleaning processes are required. The Company also manufactures and markets peripheral equipment such as process control systems, prototype cleaning machines and chemical handling systems that enhance the use by customers of the Company’s chemical solutions. The Company also performs contract cleaning and laboratory services.
The Company was incorporated in Utah in 1990 and re-domesticated under Tennessee law in 1999. The Company’s headquarters are located at 430 Harding Industrial Drive, Nashville, TN 37211, where its telephone number is (615) 831-0888, and its fax number is (615) 831-0889.
History of the Company
The Company was founded in 1990 with its initial focus on developing chemical products to replace chemicals that were to be banned under the Montreal Protocol (the “Protocol”). The Protocol called for a freeze in the production and consumption of ozone depleting products (“ODPs”) by the year 2000 for developed countries and 2010 for developing countries. Over 90 nations, representing over 90% of the world’s consumption of ODPs, were parties to the Protocol. The more than 90 nations agreed to accelerate the phase-out of production of ODPs to December 31, 1995 for developed countries and December 31, 2005 for developing countries. After the 1995 deadline, ODP products can still be bought, recycled and sold until the inventories are depleted.
Because industrial cleaning is one of the largest applications for ODPs, Kyzen was organized to develop chemical solutions and processes to replace ODPs used in the cleaning of electronic assemblies and precision metal components. Historically, materials such as chlorofluorocarbon 113 (“CFC-113”) and 1,1,1, Trichloroethane (“Methyl Chloroform” or “Trich”) were widely used in these applications. Today, no single replacement product has been developed that has the broad applicability of the ODPs produced before 1995. The market for high technology cleaning has fragmented into smaller niche cleaning segments where specific products are developed to meet specialized market needs. This market continues to evolve as newer products and manufacturing technology and increasing miniaturization of products present more difficult cleaning challenges for manufacturers.
KYZEN CORPORATION
PART I (Continued)
The Company’s Technology Roadmap
The technology roadmap, which the Company developed in 2000, has continued to serve as Kyzen’s strategic plan since that date. This roadmap helps to identify and focus the Company’s products and resources to serve the niche markets within four areas (the “Technical Roads”). The Technical Roads are described in the table below:
| Technical Road |
Niche Cleaning Applications |
Kyzen Products Used |
||
Electronics
|
Through Hole and Surface Mount Circuit Boards; Screens, Misprints, Maintenance, Adhesives, Lead-Free Soldering Processes | Aquanox®, Ionox®, SynergyCCS™, Lonox™, Cybersolv® | ||
Semiconductor
|
Wafers, Hybrids, Wafer Level Packaging, Flip Chips, Lead-Free Soldering Processes, Ball Grid Arrays, Solder Bumps, Photoresist, | Ionox®, Micronox®, SynergyCCS™, Optisolv®, Cybersolv® | ||
Metal Finishing
|
Rocket Assemblies, Aerospace Parts, Automotive Parts, General Industrial Metal Parts | Ionox®, Metalnox®, Cybersolv®, Kryptonol™, SynergyCCS™ | ||
Optics
|
Lenses, Moulds, Glass, Lasers, Fiber Optics, | Optisolv®, Micronox®, Cybersolv®, Kryptonol™ |
Electronics. Electronics has been the core of the Company’s business since its inception. The advent of no-clean soldering processes has reduced demand for the cleaning products and processes provided by the Company to assemblers of electronic components. This industry experienced a down cycle that began in 2001 and has continued through 2003. Despite the slow market conditions, the Company’s sales in this segment have been steady due to a combination of new customers and higher sales volume to existing customers. The Company anticipates that demand for its products and processes in this Technical Road will increase in light of the trends towards miniaturization and the use of lead-free soldering techniques as discussed below. The Company feels that lead-free soldering will be adopted by many manufacturers over the next three to five years. The Company is working to position its products and market channels to capitalize on the potential need to clean these new materials.
Semiconductor. In order to produce semiconductor packages with faster clock speeds, manufacturers of semiconductors are increasing their use of wafer level packaging and flip chip technology. These technologies involve a soldering process which matches our core electronic assembly cleaning expertise. As a result, the Company hopes to capitalize on its experience in the Electronics Technical Road to increase its share of the business within the Semiconductor Technical Road, which management continues to believe will be a growing market in the future. The continued slowness in the overall semiconductor industry limited the Company’s growth in this area in 2003. Like the Electronics Technical Road, this segment will also be impacted by the requirement of lead-free soldering materials.
Metal Finishing. During the past few years, the Company has developed a new line of Metalnox ® products designed to bring new, more environmentally friendly products to this industrial cleaning sector as alternatives to the traditional industrial cleaning products. This Technical Road encompasses a broad range of parts requiring cleaning, from space systems to brake pads. Significant resources have been allocated to develop and test these new products, and this preparation has resulted in the successful addition of some significant new customers contributing to our growth in 2003. Substantial efforts are underway to promote our products in this relatively new area as well as define and develop effective channels to market.
Optics. The Company provides cleaning products and processes to the optical industry. Initially, the Company focused on products and processes for cleaning ophthalmic lenses. In 2001, we expanded our focus to include industrial glass and plastic devices, which resulted in increased applications and market opportunity for these products. The Company has had some success in marketing its products and services to manufacturers of various optical product and devices. The optics market continues to represent a modest, but growing, portion of our product mix.
KYZEN CORPORATION
PART I (Continued)
Most of Kyzen’s formulations are non-flammable and non-combustible, low in toxicity and generally require no hazardous material shipping or storage precautions. The Company attempts to meet this standard with all of its products; however, customized products for key high volume customers and new niche applications frequently have unique requirements, which may necessitate departure from this standard.
The Company continues to develop new cleaning chemistries and processes for all of the Technical Roads. Management of the Company believes that future product lines may also be obtained through marketing agreements or licensing agreements. The Company has a licensing agreement with Honeywell International Inc. (“Honeywell”) and Hewlett Packard Company to sell and market a patented cleaning product jointly developed by both companies. In 1999, the Company entered into an exclusive agreement to sell and market Xolvone ® , a patented chemical developed by the DuPont Nylons Division. In 2002, DuPont announced its decision to exit the Xolvone ® business. This decision required the Company to reformulate those products using the Xolvone ® solvent and re-qualify alternative products with the customers using those products. In 2001, the Company entered into an agreement to sell and market Vertrel ® , a patented chemical developed by the DuPont Fluoroproducts Division. These chemicals are primarily used by the Company as ingredients in formulated products sold under the Company’s own trademarks, such as Ionox ® , Aquanox ® , Cybersolv ® and Micronox ® . The primary application for these products is within the Semiconductor Technical Road, with additional applications in both the Metal Finishing and Electronics Technical Roads. Late in 2003, DuPont informed the Company that DuPont would like the relationship to continue in 2004 but under a revised agreement. Both parties are currently considering potential changes to the structure of this relationship. The Company believes that any potential structural changes should not have a material adverse effect on the Company’s financial condition or results of operations in 2004 or beyond.
The Company, through its normal sales channels and communications with customers, is able to monitor the market place in an effort to identify potential acquisition candidates or licensors of cleaning technology and products. The Company has not entered into any new definitive agreements with such candidates or licensors, and there can be no assurance that any particular opportunity will materialize.
Engineering Services Group
The goal of Kyzen’s Engineering Services Group is to enhance our customers’ cleaning processes and eliminate obstacles preventing the implementation of Kyzen’s chemical cleaning solutions. This group is responsible for developing, manufacturing and/or retrofitting process control and cleaning equipment. In addition, the group also builds and maintains equipment in Kyzen’s Cleaning Applications and Evaluation Laboratory, maintains existing customer processes pursuant to service contracts and manufactures peripheral items necessary to assist in the installation and implementation of our cleaning products. The group also utilizes the Company’s extensive array of equipment in our Cleaning Applications and Evaluation Laboratories in Manchester, New Hampshire and Nashville, Tennessee to perform contract-cleaning services.
Products sold by the Engineering Services Group include meters that monitor cleaner concentration, metering pumps, liquid level sensors, transfer pump systems, holding tanks and coalescors, filters and the PCS-Process Control System. The PCS is a fully integrated process tool based on the Company’s proprietary technology that automatically samples and adjusts cleaning agent concentration to a specified level in a cleaning tank or machine. All the products are designed to operate on many of the Company’s existing and developmental cleaning products.
The Company’s strategy is to continue to develop process control technology to meet market needs and to differentiate the Company’s cleaning agents and processes from those of its competitors. The Company plans to pursue the manufacture and sale of all its products within the Technical Roads. Management believes growth of the Engineering Services Group will track the Company’s growth rate for the sale of its chemical products in the Technical Roads; however, revenues from this group are expected to continue to be less than ten percent of the overall sales for the Company.
Competition
The Company currently considers its most significant competitors to be the following companies: Zestron/Dr. O.K. Wack Chemie, Petroferm, Church & Dwight, ITW-Magnaflux, Valtech, Dynalloy, Oakite, Envirosense, EKC Technology, Chesapreake Industrial Cleaning Products and Brulin. Management believes new competitors will emerge as the Company continues to expand its product offerings to solve new technical challenges. Management also believes the Company has a competitive advantage because the Company is one of only a few companies that has as its primary source of revenue the sale of high technology cleaning products. Management believes that the Company may also have a competitive advantage due to the Company’s ability to leverage its core competencies
KYZEN CORPORATION
PART I (Continued)
though its agreements with technology partners and the Company’s provision of cleaning data and information on environmentally sensitive cleaning processes to solder, flux and equipment suppliers.
Dependence on Suppliers and Others
The Company purchases its raw materials, components and finished products from a variety of sources. While the Company is generally not dependent on any one supplier for raw materials, components or finished products, there are instances where supplies of certain materials are sole-sourced with backup inventories available from distributors. For materials that the Company uses in large quantities, the Company attempts to have a minimum of two sources of supply. The Company monitors the viability of its suppliers and markets to avoid a situation in which the available supply becomes unfavorable. The Company’s strategy for all its raw materials is to be capable of sourcing required materials from alternative suppliers or producers on short notice if the need arises. There can be no assurance that any raw material or other components and systems utilized by the Company will continue to be available at reasonable prices in the volume required for the Company to meet its customers’ orders.
Production and Supply
The production of the Company’s products involves the blending of chemicals purchased from third-party suppliers in the open market. Many of the Company’s chemical raw materials are widely available from numerous manufacturers and distributors. In 2004, the Company anticipates that some of its products may be blended by third parties where location, availability of raw materials and/or technical capability make blending by a third party more favorable to the Company than producing and shipping these products from our manufacturing center in Nashville, Tennessee.
Sales and Product Distribution
Marketing. There are a number of precision-cleaning market niches ranging in size from $1 million to $50 million in which management believes the Company should be able to establish and maintain a competitive advantage. The Company is now established in the Electronics Technical Road and has targeted the Optics, Semiconductor and Metal Finishing Technical Roads for expansion. In most aspects of the Electronics and Semiconductor Technical Roads, the Company has historically used a direct sales force combined with selected agents with special expertise. In the Optics, Metal Finishing and non-critical aspects of the Electronics Technical Roads, the Company utilizes multiple channels for sales to selected market segments. In 2004, the Company expects to evaluate new potential channels to market to assist in the sale of our products across the Technical Roads.
Cleaning Applications and Evaluation Laboratories. The Company currently operates comprehensive Cleaning Applications and Evaluation Laboratories in Manchester, New Hampshire and Nashville, Tennessee. A Cleaning Applications and Evaluation Laboratory is a demonstration facility in which customers can view the effectiveness of the Company’s cleaning technology in a risk-free environment. The Company believes it has the most comprehensive demonstration facilities in the industrial cleaning industry. The centers are used to expedite the sales cycle for Kyzen’s chemical solutions, to accelerate the development of new cleaning products, to gather performance data on products and to increase potential customers’ exposure to Kyzen and its products.
Sales Force. Historically, one of the primary challenges facing the Company has been selling its cleaning technologies to customers who have limited experience with cleaning agents and processes. Consequently, these sales often require long relationship-building periods and considerable time for solving problems and testing processes and chemistry. To shorten the sales cycle, the Company has invested in the Cleaning Applications and Evaluation Laboratories described above, which allow new and existing customers to test and collect data on various cleaning products and processes. In addition, for the Electronics Technical Road, the Company has an extensive, ongoing testing protocol, which is used to evaluate the effectiveness of our products and provide detailed, optimized process recommendations to our customers and prospects. The Company estimates that in 2003 the Company hand-built and tested nearly 10,000 test circuit boards utilizing over 100 different soldering materials from various solder manufacturers. The Company anticipates that this data will greatly assist all of the Company’s sales channels in more effectively selling Kyzen products. The sales cycle for conversion to the Company’s products typically ranges from three months to two years, and the Company believes that cycle will become shorter with the use of this test data.
The Company currently sells its products through a direct regional sales force, complemented in certain geographic regions or market segments with manufacturer representatives or agents. The Company is broadening its reach in the market through the use of partners in other channels, such as cleaning equipment manufacturers and flux manufacturers, to reach additional customers in selected Technical Roads. The Company also uses sales engineers, chemists, application lab personnel and inside sales personnel in the Company’s sales efforts, depending on the customer application, sales volume potential and the status of the customer in testing, buying and/or implementing the cleaning
KYZEN CORPORATION
PART I (Continued)
chemical. The Company anticipates that as it diversifies its product offerings, it will expand its channels to market in selected segments. The Company delivers its product via common carrier.
Customers
During the year ended December 31, 2003, no customer accounted for more than 10% of the Company’s revenues. Management believes that the loss of any one customer would not have a material adverse effect on the Company’s financial condition or results of operations.
Patents
The U.S. Patent and Trademark Office has approved the Company’s latest patent application and the Company expects the patent to be issued in early 2004. This will be the Company’s seventh U.S. patent, and it will apply to cleaning products and applications in all four of Kyzen’s Technical Roads. The Company currently holds six patents for its chemical cleaning formulations in the United States. Three U.S. patents cover applications primarily in the electronics and semiconductor industry and three cover applications mainly in the optical and semiconductor industry. The Company has also obtained one patent for electronic and semiconductor applications in each of Mexico, China, Taiwan, Australia, Korea, Brazil, the European Union and Japan. Two U.S. patents for electronic and semiconductor applications, which expire between 2009 and 2014, and pending international patents related to these two U.S. patents are jointly owned by the Company and Delphi Automotive Systems (“Delphi,” formerly Delco Electronics, a division of General Motors). Delphi has retained the right to use the chemistry developed under the patents, and the Company has retained the right to market the patented formulations. Delphi is not entitled to receive royalties or license fees from the Company on the chemical cleaning products manufactured and sold by the Company. If the Company enters into a license or royalty arrangement for the patented formulations, the resulting license fee or royalties would be shared between the Company and Delphi.
The Company has applied for additional patents in the United States and several foreign countries covering discoveries in all four Technical Roads and the use of novel materials and processes. These filings relate to work performed during the past five years on a number of formulations to be used in existing and new market niches. Four U.S. patents were issued to the Company in October 1999 and January, May and October 2000 and will expire in approximately 2018. The Company also has additional applications that are currently being reviewed by the U.S. Patent and Trademark Office.
The Company is also required to pay patent royalties to Bix Manufacturing Company, a shareholder of the Company. Royalties are based on 2% of revenues related to the patented chemistry and were less than $50,000 in both 2002 and 2003. The Company is currently settling its royalty obligation through consulting services performed by the Company. The Company also pays a royalty to Honeywell for the sale of products under a licensing arrangement with Honeywell. The royalty is based on a percentage of sales made by Kyzen under the agreement. In both 2002 and 2003, these royalty payments were less than $50,000.
Future Legislation and Governmental Regulation on Chemicals
The Company believes that the demand for its products is directly related to governmental responses to and public concern with ozone depletion, CFC elimination, use of hazardous or highly toxic cleaning agents, and air and water contamination. Legislation has been passed in the European Union to prohibit the use of lead in solder by 2006. This legislation may encourage other countries, including the U.S., to enact similar legislation resulting in the elimination of lead solders.
Decreased public concern over ozone depletion or air and water contamination or less governmental pressure to remedy such problems could substantially reduce demand for the Company’s products. Although the Company is not aware of any such pending or proposed federal legislation or regulation, any legislation or regulation that has the effect of limiting the demand for the Company’s products, chemicals, services or components or limiting the methods by which the Company’s products or chemicals are manufactured, installed or serviced could have a material adverse effect on the financial condition or results of operations of the Company.
Research and Development
The Company’s research and development expenses in 2003 were $562,016 and in 2002 were $545,680. Research and development activities are expensed as incurred because the majority of the Company’s research and development activities consist of developing technologically feasible products and processes for niche specific applications. Management expects that the Company will maintain its research and development costs at this level, which will allow the Company to continue to develop new and innovative products for all four Technical Roads.
KYZEN CORPORATION
PART I (Continued)
Employees
As of December 31, 2003, the Company had 27 full-time employees and two part-time employees. The Company considers its employee relations to be satisfactory. The management of the Company believes the current staffing level is adequate to accomplish the necessary tasks for 2004, given historical growth levels of the Company. Higher growth rates, acquisitions or licensing of new product lines may require additional employees to properly staff increased sales, development and technical support functions. Management of the Company intends to hire additional personnel as they are required.
Environmental, Health and Safety Considerations
The Company and its operations are subject to certain federal, state and local laws and regulations relating to the discharge of pollutants into the air and water, worker exposure to the chemical formulations manufactured and sold and established standards for the reuse, storage and disposal of hazardous wastes. The Company believes that its operations are in material compliance with current laws and regulations relating to such matters. The management of the Company estimates the current cost of compliance with environmental laws is less than $10,000 per year. The Company derives a large portion of its revenue from the sale of blended products made from finished materials purchased from various chemical producers. These chemicals are periodically evaluated and/or re-evaluated by the third party chemical producers for potential adverse health effects resulting from exposure or overexposure.
