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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-KSB (Mark One) [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2003 [  ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from  to Commission file number 000-26434 Kyzen Corporation 
  Tennessee
    
    87-0475115(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 430 Harding Industrial Drive, Nashville, TN
    
    37211(Address of Principal Executive Offices)
    
    (Zip Code)
 615-831-0888 
  Securities registered under Section 12(b) of the Exchange Act: Title Of Each Class
    
    Name Of Each Exchange On Which RegisteredCommon Stock
    
    Boston Stock ExchangeWarrants for Common Stock
    
    Boston Stock Exchange
 Securities registered under Section 12(g) of the Exchange Act: NONE 
  Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [ X ] Yes
[  ] No Check if 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. [X] State issuers revenues for its most recent fiscal year. $6,008,045 State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act) $1,166,767 at $0.43 as of February
27, 2004 Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.




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ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. [  ] Yes [  ] No APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date. 4,690,119 shares of Common Stock outstanding as of February 27, 2004 DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.)
into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (Securities
Act). The listed documents should be clearly described for identification
purposes (e.g., annual report to security holders for fiscal year ended
December 31, 1990). Portions of the Registrants definitive Proxy Statement relating to the 2004
Annual Meeting of Shareholders to be held on April 27, 2004 are incorporated
into Part III of this report. Transitional Small Business Disclosure Format (check one): [  ] Yes [ X ] No




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KYZEN CORPORATIONINDEX Page No.Part IItem 1.
    
    Description of Business.
    
    
    4Item 2.
    
    Description of Property.
    
    
    9Item 3.
    
    Legal Proceedings.
    
    
    9Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    9Part IIItem 5.
    
    Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities.
    
    
    10Item 6.
    
    Managements Discussion and Analysis or Plan of Operation.
    
    
    10Item 7.
    
    Financial Statements.
    
    
    16Independent Auditors Report
    
    
    17Balance Sheets as of December 31, 2003 and 2002
    
    
    18Statements of Income for the years ended December 31, 2003 and 2002
    
    
    19Statements of Shareholders Equity and Comprehensive Income for the years ended December 31, 2003 and 2002
    
    
    20Statements of Cash Flows for the years ended December 31, 2003 and 2002
    
    
    21Notes to Financial Statements
    
    
    22Item 8.
    
    Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
    
    
    31Item 8A.
    
    Controls and Procedures.
    
    
    31Part IIIItem 9.
    
    Directors and Executive Officers of the Registrant.
    
    
    32Item 10.
    
    Executive Compensation.
    
    
    32Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
    
    
    32Item 12.
    
    Certain Relationships and Related Transactions.
    
    
    32Item 13.
    
    Exhibits and Reports on Form 8-K.
    
    
    33Item 14.
    
    Principal Accountant Fees and Service.
    
    
    34EX-23 CONSENT OF KPMG LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  3




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KYZEN CORPORATION 
 PART I
 Forward-Looking Statements Management has included in this report certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. When used,
statements which are not historical in nature, including the words
anticipate, estimate, should, expect, believe, intend and similar
expressions are intended to identify forward-looking statements. Such
statements are, by their nature, subject to certain risks and uncertainties.
Among the factors that could cause actual results to differ materially from
those projected are the following: business conditions and the general economy
as they affect interest rates and manufacturing output; business conditions as
they affect manufacturers of chemical raw materials; trends toward
miniaturization and the use of lead-free soldering and solder bumping
techniques by assemblers of electronic components; whether other jurisdictions
follow the European Union in banning lead-tin solders; whether lead-free
soldering technology results in additional cleaning requirements; the rate of
growth within the Technical Road markets; the Companys ability to successfully
implement its Technical Roads plan; the emergence of new competitors; the
negotiation of a satisfactory arrangement to continue the Companys
relationship with DuPont; the ability of the Company to attract and retain
qualified employees; the Companys ability to control costs including selling,
marketing, general and administrative expenses and research and development
expenses; the availability of raw materials at favorable prices from suppliers;
the federal, state and local regulatory environment; changes in the import and
export rules, regulations and tariffs as they apply to countries where the
Company conducts business; changes in the Companys liquidity or capital
resources; the accuracy of the Companys sales estimates as they relate to the
impairment of patents; changes in accounting policies and practices; the
ability of the Company to obtain financing or equity capital with favorable
terms and conditions; changes in the financial condition, corporate strategy or
technology of the Companys primary customers; the Companys ability to attract
new customers; the ability of the Company to develop new competitive product
lines or add product lines through marketing agreements or licensing
agreements; the Companys ability to capitalize on its existing relationships
to expand into new markets; and acceptance of the Companys new products by the
Companys existing and potential customers. Actual results, events and
performance may differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to release
publicly the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. 
 Item 1. Description of Business. The Company 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. 4




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KYZEN CORPORATIONPART 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 UsedElectronics
    
    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. 5




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KYZEN CORPORATIONPART 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 6




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KYZEN CORPORATIONPART 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 7




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KYZEN CORPORATIONPART 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. 8




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KYZEN CORPORATIONPART 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. 
 Item 2. Description of Property. Facilities The Companys headquarters are located at 430 Harding Industrial Drive,
Nashville, Tennessee. At this facility, the Company occupies approximately
24,000 square feet of leased space, consisting of a research and development
laboratory, a Cleaning Application and Evaluation Laboratory, a chemical
manufacturing facility and sales, engineering, marketing and administrative
offices. This property is located in a well-maintained industrial park. The
Company also leases an approximately 7,675 square foot facility located at 540
Commercial Street, Manchester, New Hampshire. The New Hampshire location
houses a Cleaning Application and Evaluation Laboratory, the Engineering
Services Group, an equipment manufacturing facility and a regional sales
office. Management believes the current facilities and leased space are
adequate to serve the Companys needs for at least the next year. The Company conducts its operations from these facilities under two operating
lease agreements. The lease for the New Hampshire facility was renewed in May
2002 and extended to May 2006. The lease for the Tennessee facility has a
five-year term ending January 2006 with an option to renew for an additional
five years. Total rent expense was $160,771 in 2003 and $153,781 in 2002.
Included in rent expense for 2003 and 2002 is approximately $115,000 and
$109,000, respectively, of rent paid to Charles Hawkins Company, whose pension
plan is a shareholder of the Company. The Company carries general property and casualty insurance in an amount management considers adequate. 
 Item 3. Legal Proceedings. The Company is not aware of any proceedings contemplated by any party or
governmental authority against the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the fourth quarter
of 2003. 9




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KYZEN CORPORATION 
 PART II
 
 Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities. The Companys Common Stock and Warrants to purchase Common Stock are quoted on
the OTC Bulletin Board (symbols KYZN.OB and KYZNW.OB, respectively) and listed
on the Boston Stock Exchange (symbols KYZ and KYZ&W, respectively). The
following table provides the range of the high and low bid quotations
(denominated in dollars) for the Companys Warrants and Common Stock for each
quarter within the last two fiscal years. The quotations reflect inter-dealer
quotations without retail mark-up, mark-down or commission and may not
represent actual transactions. Warrants
    
    Common StockDividends
    
    High
    
    Low
    
    High
    
    LowQuarter ended:
    
    March 31, 2002
    
    *
    
    $
    0.020
    
    
    $
    0.005
    
    
    $
    0.23
    
    
    $
    0.16June 30, 2002
    
    *
    
    
    0.005
    
    
    
    0.005
    
    
    
    0.30
    
    
    
    0.16September 30, 2002
    
    *
    
    
    0.030
    
    
    
    0.005
    
    
    
    0.22
    
    
    
    0.15December 31, 2002
    
    *
    
    
    0.030
    
    
    
    0.001
    
    
    
    0.28
    
    
    
    0.12March 31, 2003
    
    *
    
    
    0.010
    
    
    
    0.010
    
    
    
    0.25
    
    
    
    0.13June 30, 2003
    
    *
    
    
    0.010
    
    
    
    0.001
    
    
    
    0.35
    
    
    
    0.22September 30, 2003
    
    *
    
    
    0.001
    
    
    
    0.001
    
    
    
    0.55
    
    
    
    0.26December 31, 2003
    
    *
    
    
    0.030
    
    
    
    0.001
    
    
    
    0.70
    
    
    
    0.40
 * The Company historically has not paid dividends and does not expect to
pay dividends in the foreseeable future. There were approximately 130 shareholders of record and approximately 750
beneficial shareholders of Common Stock on February 27, 2004. For information regarding securities authorized for issuance under an equity
compensation plan, please see Item 11 of this annual report on Form 10-KSB. 
 Item 6. Managements Discussion and Analysis or Plan of Operation. Executive Overview The Company continues to focus on the Technical Roads as discussed in Item 1 of
this report. As the market for precision cleaning has changed, whether from
no-clean solder paste, outsourcing to Electronic Manufacturing Services
production or the recent introduction of lead-free solders, the Company has
focused on understanding the market and making necessary changes to stay ahead
of the trends. The downward trends in the electronics markets in previous
years were not as pronounced for the Company. Similarly, the possible future
upward trends may also not be as pronounced to the Company. The four Technical
Roads offer the Company the opportunity to avoid significant unfavorable
changes in one market by focusing immediate attention on a different market.
However, the cleaning processes and technology used in each Technical Road are
similar, which enables the Company to offset some of the negative effects from
one Technical Road to another. This was demonstrated in 2003 when sales
increased slightly, but gross margins and net profit increased significantly.
The Company has now had six consecutive profitable quarters, and management
expects that trend to continue as the Company offers new, innovative and
effective products in all its Technical Roads, applying its cleaning knowledge
and abilities to each area. In 2004 and beyond, the Companys ability to leverage its knowledge of cleaning
chemicals and processes in order to access new target markets will be very
important. Developing new channels of distribution to target markets is one of
the Companys goals for the coming year. Whether this is done by working with
cleaning equipment producers, flux manufacturers or distributors of cleaning
supplies, the Company will focus on generating higher sales volume. Partners
such as these may bring market or specific customer expertise in newer markets
and help the Company expand its market penetration in cleaning areas in which
the Company is already established. Using these complementary channels allows
the Company to continue to focus on developing methods and products for
cleaning. Recent Business Developments During 2003, the Companys management continued its focus on increasing sales
by adhering to the Technical Roads plan outlined in Item 1 above. Despite the
weak economy in the past three years, particularly in the Electronics and
Semiconductor Technical Roads, the Company followed its plan to pursue other
high technology cleaning niches. In 10




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) addition, management of the Company plans to evaluate complementary channels
for bringing its products to market, such as developing relationships with
cleaning equipment producers, flux manufacturers or distributors of cleaning
supplies. The Company believes such endeavors help expand sales at a higher
rate than may be accomplished exclusively by our direct sales force. The development that the Company believes will have the biggest impact on the
Companys business is legislation which will ban the use of lead in solder.
Legislation has been passed in the European Union (EU) to eliminate the use
of lead in solder by July 2006. The Company believes this legislation will
encourage many other countries, including possibly the United States, to follow
the EU in banning the existing lead-tin solders commonly used in the
electronics industry. Current information from customers testing the new
lead-free soldering materials indicate that the more aggressive fluxes, which
require higher temperatures to function properly, may require more cleaning
than conventional soldering materials. The Company strongly believes that
lead-free soldering technologies will create more cleaning opportunities than
those currently existing with lead-based soldering, particularly within the
Electronics and Semiconductor Technical Roads. Competitive Environment The precision cleaning industry has undergone rapid change since the 1990s as
companies searched for new technology to replace processes based on ODPs. The
precision cleaning industry moved from a commodity market supplied by major
chemical companies to a series of highly fragmented niche markets supplied by
numerous focused specialty chemical companies. In the last five years, the
Companys greatest competitive challenge has come not from direct competition
but from industry changes. The largest change came from the advent of
soldering technologies that do not require cleaning. These No Clean
technologies dominate electronic assemblies produced worldwide and limit
cleaning to those applications with more stringent reliability requirements.
The second change was the emergence of contract manufacturers of electronic
assemblies known as the Electronic Manufacturing Services (EMS) industry.
With the emergence of EMS, many original equipment manufacturers (OEMs) have
outsourced the production of their products to these contract manufacturers.
The EMS industry, unlike the OEM business, is a commodity market and focuses on
cost rather than reliability of end products. The end result is that many of
the products produced by the EMS manufacturers are not cleaned, thereby
reducing the size of the cleaning market in the Electronics Technical Road.
The third change came in 2001 when the rapid growth experienced by high
technology businesses ended, and these businesses underwent a severe decline
due to worldwide economic conditions. A consequence of this change resulted in
the relocation and consolidation of many of the EMS manufacturers to Asia.
Industry sources indicate that manufacturing production in the electronics and
semiconductor industries declined by as much as 30 to 40 percent below the
levels produced in 2000 and continued to remain near those levels over the last
three years. While the industry changes discussed in the preceding paragraph have reduced
the overall demand for cleaning products, there are also current technology
developments that are creating new opportunities for the Company in the
Electronics and Semiconductor Technical Roads. The continued trend of
miniaturization has made formerly acceptable contaminants unacceptable with the
new service devices. Additionally, the desire to eliminate production steps
and reduce size is leading to the development of a new type of device  the
flip chip  and attachment technology known as wafer level packaging. This
emerging trend will require cleaning in many of the manufacturing steps. Results of Operations Comparison of the Years Ended December 31, 2003 and December 31, 2002 Increase (decrease)2003
    
    2002
    
    Change ($)
    
    Change (%)Net sales
    
    $
    6,008,045
    
    
    $
    5,930,466
    
    
    $
    77,579
    
    
    
    1
    %Gross profit
    
    
    3,346,848
    
    
    
    3,086,573
    
    
    
    260,275
    
    
    
    8Selling, marketing, general and
administrative expenses
    
    
    2,669,213
    
    
    
    2,507,694
    
    
    
    161,519
    
    
    
    6Research and development expenses
    
    
    562,016
    
    
    
    545,680
    
    
    
    16,336
    
    
    
    3Operating income
    
    
    115,619
    
    
    
    33,199
    
    
    
    82,420
    
    
    
    248
 Net Sales The increase in net sales from 2002 to 2003 reflected changes in the Companys
product mix and the recovery of approximately $37,000 in product returns.
Changes in the product mix included increases in the Metal Finishing Road 11




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KYZEN CORPORATIONPART II (Continued) offset by decreases in the Optics and Electronics Roads. Sales of Engineering
Services increased during the year ended December 31, 2003 as compared to 2002;
however, these services constituted less than 10% of net sales in both 2003 and
2002. The Company will continue to focus on chemical sales and use the
Engineering Services Group to enhance future chemical sales. Gross Profit The increase in gross profit from 2002 to 2003 was due to slightly higher sales
volume and a shift in product mix to more profitable product lines. Gross
profit as a percent of sales increased from 52% for the year ended December 31,
2002 to 56% for the year ended December 31, 2003. The changes in the Companys
product mix had a positive effect on gross profit. Selling, Marketing, General and Administrative Expenses The increase in selling, marketing, general and administrative expenses from
2002 to 2003 was the result of continued increases in insurance costs and
increased wages as well as increases in incentive-based expenses in areas, such
as commissions and bonuses, that contributed directly to increasing sales.
Incentive-based spending will continue because the Company is committed to
encouraging sales growth throughout its sales force. Administrative expenses
continued to grow due to increases in medical insurance, general insurance and
financial reporting and accounting costs. The Company believes that the
current level of spending is appropriate to encourage sales growth while
maintaining other costs. Research and Development Expenses The increase in research and development expenses from 2002 to 2003 reflected
the Companys continued focus on developing new products. The increase was
primarily a result of increased use of the Companys cleaning products to test
the effectiveness of these products for various customer-related cleaning
opportunities and the consumption of other supplies required to facilitate
testing of these products. Operating Income Operating income increased from 2002 to 2003 as a result of higher net sales,
the shift to a higher margin product mix, increases in both gross profit and
gross profit as a percent of sales, and control over the rate of increase in
operating expenses. Income Taxes The Company did not record a provision for income taxes in 2003. The Company
applied net operating loss carryforwards to eliminate taxable income. Comparison of the Years Ended December 31, 2002 and December 31, 2001 Increase (decrease)2002
    
    2001
    
    Change ($)
    
    Change (%)Net sales
    
    $
    5,930,466
    
    
    $
    5,605,067
    
    
    $
    325,399
    
    
    
    6
    %Gross profit
    
    
    3,086,573
    
    
    
    2,888,604
    
    
    
    197,969
    
    
    
    7Selling, marketing, general and
administrative expenses
    
    
    2,507,694
    
    
    
    2,620,963
    
    
    
    (113,269
    )
    
    
    (4
    )Research and development expenses
    
    
    545,680
    
    
    
    549,101
    
    
    
    (3,421
    )
    
    
    (1
    )Operating income
    
    
    33,199
    
    
    
    (281,460
    )
    
    
    314,659
    
    
    
    N/AInterest income
    
    
    5,698
    
    
    
    12,816
    
    
    
    (7,118
    )
    
    
    (56
    )
 Net Sales The increase in net sales from all business activities from 2001 to 2002
reflected increased sales in the optics and metal finishing industries as well
as the addition of new customers in the electronics industry. These increases
were partially offset by a generally recessionary economic environment,
including a challenging market for many customers in the electronics industry.
Sales of Engineering Services decreased during the year ended December 31, 2002
as compared to 2001. This reflected the slow industrial markets and associated
lower need for these services in 2002. As a percentage of net sales, the
Engineering Services sales were less than 10% of net sales in both 2002 and
2001. 12




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) Gross Profit The increase in gross profits from 2001 to 2002 was the result of higher sales
volume and changes in product mix. Selling, Marketing, General and Administrative Expenses The decrease in selling, marketing, general and administrative expenses from
2001 to 2002 was the net result of better targeted spending in areas such as
marketing and sales and control of spending in all areas. Considering the
increased expenses for such items as liability insurance, medical insurance and
financial reporting and accounting costs, the Company was successful in
reducing overall expenses from 2001. Research and Development Expenses The slight decrease in research and development expenses from 2001 to 2002
reflected the Companys continued focus on developing new products with the
talent and resources available within the organization. Operating Income The achievement of operating income in 2002 from an operating loss in 2001 was
due to the Companys control over selling, marketing, general and
administrative expenses and research and development expenses and represented
an increased focus on the sale of new and existing products in new and
different markets. Other Income The decrease in total other income from 2001 to 2002 reflected lower interest
rates in conjunction with lower cash balances in the first half of 2002 versus
2001. Income Taxes The Company did not record a provision for income taxes in 2002. The Company
applied net operating loss carryforwards to eliminate taxable income. Liquidity and Capital Resources 2003
    
    2002
    
    Change ($)
    
    Change (%)Working capital
    
    $
    1,471,948
    
    
    $
    1,310,858
    
    
    $
    161,090
    
    
    
    12
    %Cash provided by operations
    
    
    155,320
    
    
    
    104,081
    
    
    
    51,239
    
    
    
    49Cash used in investing activities
    
    
    77,067
    
    
    
    37,924
    
    
    
    39,143
    
    
    
    103Capital expenditures
    
    
    86,552
    
    
    
    56,306
    
    
    
    30,246
    
    
    
    54
 The Companys primary source of funds is cash flow from operations in the
normal course of selling products. The Companys primary uses of funds are
buying raw materials, the funding of research and development of new products,
purchases of capital equipment and sales and marketing activities. Increases in cash and cash equivalents, accounts receivable and inventory along
with a decrease in accounts payable were responsible for the increase in
working capital from the year ended December 31, 2002 to the year ended
December 31, 2003. Cash and cash equivalents increased as a result of
increased sales and better gross margins, while the increase in accounts
receivable was very small. Inventory increased in both raw material and
finished goods as more material was purchased to meet anticipated customer
demand. The accounts payable decrease reflected the timing of normal payments. The increase in cash and cash equivalents provided by operations from the year
ended December 31, 2002 to the year ended December 31, 2003 was attributed to
net income increasing from $39,167 to $118,850. Increases in accounts
receivable and inventory and decreases in accounts payable offset some of the
increase in net income. The increase in cash and cash equivalents used in investing activities from the
year ended December 31, 2002 to the year ended December 31, 2003 reflected
increased purchases of property and equipment as well as increased expenditures
on patent rights offset by the proceeds from the sale of certain property and
equipment and the collection of a note receivable from an officer and director
who is a shareholder of the Company. The increase in capital expenditures from 2002 to 2003 reflected capital
spending on several equipment additions used in product demonstration and
simulation, increased spending for computer related equipment and significant
improvements
to the Companys leased office space. Capital expenditures for patents
increased for the year ended December 31, 2003 to $13,965 from $11,618 for the
year ended December 31, 2002 as the Company successfully completed the pursuit
of one patent. 13




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KYZEN CORPORATIONPART II (Continued) The reduction in cash and cash equivalents as a result of financing activities
for 2003 reflects the repurchase of shares of the Companys Common Stock. A
program for the repurchase of the Companys Common Stock was approved by the
Board of Directors in October 2002 and began in December 2002. During 2003,
the Company repurchased 86,768 shares of its Common Stock as part of this
program. The Company anticipates, based on currently proposed plans and assumptions
relating to its operations and expansion plans, that the current cash and cash
equivalents balances together with projected cash flows from operations will be
sufficient to satisfy its contemplated cash requirements through at least
December 31, 2004. The Companys cash requirements for 2004 and beyond will
depend primarily upon the level of sales of chemical products, inventory
levels, product development, product procurement, sales and marketing
expenditures and capital expenditures. If the Companys plans change or its
assumptions change or prove to be inaccurate (due to unanticipated expenses,
delays, deterioration of customer base, financial condition or otherwise), the
Company may have to seek financing from public or private debt and equity
markets. There can be no assurance, however, that these sources will be
available to the Company on favorable terms, and unfavorable markets could
limit the Companys ability to obtain financing. Contractual Obligations The following table sets forth our contractual obligations at December 31,
2003: Payments Due by PeriodTotal
    
    1 Year
    
    2-3 Years
    
    4-5 Years
    
    ThereafterOperating leases
    
    $
    378,380
    
    
    $
    159,940
    
    
    $
    202,400
    
    
    $
    17,040
    
    
    $
    0Total contractual
cash obligations
    
    $
    379,380
    
    
    $
    159,940
    
    
    $
    202,400
    
    
    $
    17,040
    
    
    $
    0
 The operating leases above include leases for two facilities used by the
Company, one in Nashville, Tennessee and another in Manchester, New Hampshire,
and a lease of a copier/printer located at the Companys Nashville facility. At December 31, 2003, the Company had no outstanding letters of credit or
long-term debt guarantees. International Trade Developments The Company has been using foreign manufacturers since 1997 for certain raw
materials. The Company continued to use these sources through much of 2003.
During the second quarter of 2003 and again in February 2004, the International
Trade Commission (ITC) requested that the Company complete a questionnaire
regarding the Companys purchase of certain raw materials from a Chinese
supplier. In January 2004, the U.S. Department of Commerce (DOC) rendered a
preliminary decision that the Chinese supplier was determined to be
underselling its U.S. competition and requested that a bond, representing a
tariff, be posted by the Company in the amount of 31.3% of the purchase price
of any future purchases of the materials from the Chinese supplier. The bond
will remain in place until further investigation and determinations can be
completed by both the DOC and ITC. The Company believes that the DOC and ITC
will make final decisions in the third quarter of 2004. An imposition of
significant duties on the Chinese supplier, should it be found by the ITC to
have violated federal anti-dumping laws and regulations, could have a
material adverse effect on the Companys financial condition and results of
operations, due to an anticipated increase in the cost of the raw material.
The Company is currently purchasing this product from a domestic producer and
will continue to do so in the future. The Company believes it is in the best
interest of its shareholders to have multiple sources for key raw materials
whenever possible. The Company has identified several organizations, both
domestic and abroad, which are capable of manufacturing these materials. The
Company will be actively pursuing such organizations to produce these materials
should the DOC and ITC decisions preclude Chinese imports of these materials. Critical Accounting Policies The Securities and Exchange Commission defines critical accounting policies
as those that require application of managements most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods. Kyzens significant accounting policies are described in Note 1 in the Notes to
Financial Statements. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgements or estimates. Management considers the recording of patent costs, including the purchase of
patent rights and legal costs incurred related to issued, and pending patents,
to be a critical accounting policy. At December 31, 2003, the Company had
capitalized patent costs, net of amortization, of $195,243. Patent costs are
recorded and amortized using the straight-line method over the shorter of the
statutory or estimated useful lives of the patents, not exceeding 20 years.
Patent costs are 14




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. During
2002, the Company recognized $4,993 as impairment for part of a foreign patent
application that was abandoned. During 2003, the Company recognized $2,540 as
a loss on the abandonment of certain patent rights. This policy is considered
to be critical because management relies on sales estimates of patented
products to evaluate impairment of patents. If such sales estimates are not
attained, there could be future impairment of the patents. If a pending patent
is not approved, the remaining net book value is written off. As of December
31, 2003, the Company had two patents pending with a total value of
approximately $50,000. If a pending patent is not approved, the remaining net
book value is written off. Off-Balance Sheet Arrangements The Company currently does not have any off-balance sheet financing
arrangements. Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, revised December 2003, (FIN 46R), Consolidation of
Variable Interest Entities,which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be required to
apply FIN 46R to variable interests in variable interest entities (VIEs)
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning January 1, 2005.
For any VIEs that must be consolidated under FIN 46R that were created before
January 1, 2004, the assets, liabilities and non-controlling interests of the
VIE initially would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
non-controlling interest in the VIE. The Company is evaluating the impact of applying FIN 46R and has not yet
completed this analysis. At this time, it is anticipated that the adoption of
FIN 46R will not have an impact on the Company. 15




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) 
 Item 7. Financial Statements. INDEX TO FINANCIAL STATEMENTS PageIndependent Auditors Report
    
    
    17Balance Sheets as of December 31, 2003 and 2002
    
    
    18Statements of Income for the years ended December 31, 2003 and 2002
    
    
    19Statements of Shareholders Equity and Comprehensive Income for the
years ended December 31, 2003 and 2002
    
    
    20Statements of Cash Flows for the years ended December 31, 2003 and 2002
    
    
    21Notes to Financial Statements
    
    
    22
 16




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##### Table of Contents



Independent Auditors Report The Board of Directors
and Shareholders of
Kyzen Corporation: We have audited the accompanying balance sheets of Kyzen Corporation as of
December 31, 2003 and 2002, and the related statements of income, shareholders
equity and comprehensive income, and cash flows for the years then ended.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 Kyzen Corporation as of
December 31, 2003 and 2002 and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. /s/ KPMG LLP Nashville, Tennessee
February 6, 2004 17




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) 
 BALANCE SHEETS December 31,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    438,999
    
    
    $
    383,306Accounts receivable, net of allowance for
doubtful accounts of $9,846 in 2003 and $11,683
in 2002
    
    
    940,877
    
    
    
    927,508Inventory
    
    
    487,775
    
    
    
    419,340Other
    
    
    70,930
    
    
    
    72,711Total current assets
    
    
    1,938,581
    
    
    
    1,802,865Property and equipment, net
    
    
    231,376
    
    
    
    272,216Patents, net
    
    
    195,243
    
    
    
    204,203Total assets
    
    $
    2,365,200
    
    
    $
    2,279,284LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    466,633
    
    
    $
    489,438Accounts payable to related parties
    
    
    
    
    
    
    2,569Total current liabilities
    
    
    466,633
    
    
    
    492,007Commitments and contingencies (Note 9)Shareholders equity:Preferred Stock, $0.01 par value;10,000,000
shares authorized, no shares issued or
outstanding in 2003 and 2002; 100,000
Designated Series A Junior Participating
Preferred Stock
    
    
    
    
    
    
    Common Stock, $0.01 par value; 40,000,000
shares authorized, 4,690,119 shares issued and
outstanding in 2003 and 4,776,887 shares issued
and outstanding in 2002
    
    
    46,902
    
    
    
    47,769Additional paid-in capital
    
    
    5,295,531
    
    
    
    5,302,224Accumulated deficit
    
    
    (3,443,866
    )
    
    
    (3,562,716
    )Total shareholders equity
    
    
    1,898,567
    
    
    
    1,787,277Total liabilities and shareholders equity
    
    $
    2,365,200
    
    
    $
    2,279,284
 See accompanying notes to the financial statements. 18




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) 
 STATEMENTS OF INCOME For the years endedDecember 31,2003
    
    2002Net sales
    
    $
    6,008,045
    
    
    $
    5,930,466Cost of sales
    
    
    2,661,197
    
    
    
    2,843,893Gross profit
    
    
    3,346,848
    
    
    
    3,086,573Operating costs and expenses:Selling, marketing, general and administrative expenses
    
    
    2,669,213
    
    
    
    2,507,694Research and development expenses
    
    
    562,016
    
    
    
    545,680Total operating expenses
    
    
    3,231,229
    
    
    
    3,053,374Operating income
    
    
    115,619
    
    
    
    33,199Other income:Interest income
    
    
    2,575
    
    
    
    5,968Gain on sale of property and equipment
    
    
    656
    
    
    
    Total other income
    
    
    3,231
    
    
    
    5,968Net income
    
    $
    118,850
    
    
    $
    39,167Net income per share  basic
    
    $
    0.03
    
    
    $
    0.01Net income per share  diluted
    
    $
    0.02
    
    
    $
    0.01Weighted
average shares outstanding - basic
    
    
    4,721,498
    
    
    
    4,777,718Weighted
average shares outstanding - diluted
    
    
    4,780,139
    
    
    
    4,777,718
 See accompanying notes to the financial statements. 19




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) 
 STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME For the years ended December 31, 2003 and 2002 Common Stock
    
    AdditionalPaid-in
    
    Accumulated
    
    TotalShareholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    EquityBalance at December 31, 2001
    
    
    4,777,787
    
    
    $
    47,778
    
    
    $
    5,302,404
    
    
    $
    (3,601,883
    )
    
    $
    1,748,299Purchase of common stock
    
    
    (900
    )
    
    
    (9
    )
    
    
    (180
    )
    
    
    
    
    
    
    (189
    )Net income and
comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,167
    
    
    
    39,167Balance at December 31, 2002
    
    
    4,776,887
    
    
    $
    47,769
    
    
    $
    5,302,224
    
    
    $
    (3,562,716
    )
    
    $
    1,787,277Purchase of common stock
    
    
    (86,768
    )
    
    
    (867
    )
    
    
    (21,693
    )
    
    
    
    
    
    
    (22,560
    )Payments on stock
subscription receivable
from a shareholder/officer
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    15,000Net income and
comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,850
    
    
    
    118,850Balance at December 31, 2003
    
    
    4,690,119
    
    
    $
    46,902
    
    
    $
    5,295,531
    
    
    $
    (3,443,866
    )
    
    $
    1,898,567
 See accompanying notes to the financial statements. 20




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) 
 STATEMENTS OF CASH FLOWS For the years endedDecember 31,2003
    
    2002Cash Flows from Operating Activities:Net income
    
    $
    118,850
    
    
    $
    39,167Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    139,983
    
    
    
    155,272Loss on abandonment of patent rights
    
    
    2,540
    
    
    
    4,993Gain on sale of property and equipment
    
    
    (656
    )
    
    
    Increase in accounts receivable
    
    
    (13,369
    )
    
    
    (7,858
    )(Increase) decrease in inventory
    
    
    (68,435
    )
    
    
    38,097Decrease (increase) in other current assets
    
    
    1,781
    
    
    
    (12,358
    )Decrease in accounts payable and accrued expenses
    
    
    (25,374
    )
    
    
    (113,232
    )Net cash provided by operating activities
    
    
    155,320
    
    
    
    104,081Cash Flows from Investing Activities:Purchase of property and equipment
    
    
    (86,552
    )
    
    
    (56,306
    )Proceeds from sale of property and equipment
    
    
    8,450
    
    
    
    Expenditures for patent rights
    
    
    (13,965
    )
    
    
    (11,618
    )Payments on notes receivable from shareholder/officer
    
    
    
    
    
    
    30,000Net cash used in investing activities
    
    
    (92,067
    )
    
    
    (37,924
    )Cash Flows from Financing Activities:Purchase of common stock
    
    
    (22,560
    )
    
    
    (189
    )Payments on stock subscription receivable from a
shareholder/officer
    
    
    15,000
    
    
    
    Net cash used in financing activities
    
    
    (7,560
    )
    
    
    (189
    )Net increase in cash and cash equivalents
    
    
    55,693
    
    
    
    65,968Cash and cash equivalents at beginning of year
    
    
    383,306
    
    
    
    317,338Cash and cash equivalents at end of year
    
    $
    438,999
    
    
    $
    383,306Supplemental cash flow information:The Company paid no income taxes or interest cost in 2003 or 2002.
 See accompanying notes to the financial statements. 21




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Background Kyzen Corporation (Kyzen or the Company) was incorporated under the laws of
the State of Utah in 1990. In May 1999, the Company re-domesticated under the
laws of Tennessee. Kyzen was formed to develop environmentally safe chemical
solutions to replace ozone-depleting chlorinated solvents. The Company
manufactures and markets chemical solutions and processes used in
high-technology cleaning applications, including electronic assemblies and
precision metal and plastic components where precision cleaning processes are
required. The Company also manufactures and markets peripheral equipment such
as process control systems and chemical handling systems that enhance the use
by customers of the Companys chemical solutions. Sales of such equipment
totaled less than 10% of net sales in both 2003 and 2002. Typically, these
products are sold as separate items and are integrated into a cleaning process
by the customer, or by the Company as part of a contract service. The
Companys operations are located in Nashville, Tennessee and Manchester, New
Hampshire. The Companys operations are conducted within one reportable business segment.
Sales to customers outside the United States totaled $668,940 in 2003 and
$575,194 in 2002, representing approximately 11% of net sales in 2003 and 10%
of net sales in 2002. No individual customer or foreign market accounted for
more than 10% of the Companys revenue in 2003 or 2002. Summary of Significant Accounting Policies Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents. Cash equivalents at December 31, 2003 and 2002 consist of
certificates of deposit with an original term of less than three months. Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Companys best estimate of
the amount of probable credit losses in the Companys existing accounts
receivable balances. The Company determines the allowance based on historical
write-off experience. The Company reviews its allowance for doubtful accounts
monthly. Balances over 90 days past due and over a specified amount are
reviewed individually for collectibility. All other balances are reviewed on a
pooled basis. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit
exposure related to its customers. Inventories Inventories are valued at the lower of cost or market value with cost
determined using the weighted average and the first in, first out (FIFO)
method. Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives (2 to 12 years) of the respective assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful life of the asset or the lease term. Patent Costs Patent costs, including the purchase of patent rights and legal costs incurred
related to issued and pending patents, are recorded and amortized using the
straight-line method over the shorter of the statutory or estimated useful
lives of the patents, which range from 17 to 20 years. If a pending patent is
not approved, the remaining net book value is written off. Accumulated
amortization was $157,808 and $138,613 at December 31, 2003 and 2002,
respectively. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of
the carrying amount of an asset to future undiscounted net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset. 22




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KYZEN CORPORATIONPART II (Continued) Business Concentrations 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. The Company sells its products to customers involved in a variety of industries
including electronics, metal finishing, optics, semiconductors and industrial
manufacturing. Kyzen performs continuing credit evaluations of its customers
and does not require customers to pledge collateral. Historically, the Company
has not experienced significant losses related to individual customers or
groups of customers in any particular industry or geographic area. Revenue Recognition Revenue from sales of chemical products or services is recognized when the
products are shipped or the services are performed. Revenues and profits for
certain equipment contracts are recorded using the percentage of completion
method based on the product type, contract size and duration of the time to
completion. The percentage of completion is determined by relating the actual
costs of work performed to date to the current estimated total cost of the
respective contracts. If estimated total costs on any of these contracts
indicate a loss, the entire amount of the estimated loss is recognized
immediately. Advertising Costs Costs incurred for producing and communicating advertising are expensed in the
period incurred and totaled $21,797 in 2003 and $34,633 in 2002. Research and Development Costs The Company is involved in research and development activities relating to new
product development and new uses for its chemicals. The Company expenses
research and development costs as incurred. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. Comprehensive Income The Company did not have any components of comprehensive income other than net
income in 2003 or 2002. 23




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) Stock Option Plan The Company applies the intrinsic-value-based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees,and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25,issued in March 2000, to account for its
stock options. Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, Accounting for Stock-Based Compensationand SFAS
No. 148 Accounting for Stock-Based Compensation -Transition and Disclosure, an
amendment to SFAS No. 123,established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As permitted by existing accounting standards, the Company
has elected to continue to apply the intrinsic-value-based method of accounting
described above, and has adopted only the disclosure requirements of SFAS No.
123, as amended. The following table illustrates the effect on net income if
the fair-value-based method had been applied to all outstanding and unvested
awards in each period: 2003
    
    2002Net income, as reported
    
    $
    118,850
    
    
    $
    39,167Add stock-based employee compensation expense
included in reported net income, net of tax
    
    
    
    
    
    
    Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax
    
    
    (6,399
    )
    
    
    (3,140
    )Pro forma net income
    
    $
    112,451
    
    
    $
    36,027Net income, per share as reported:Basic
    
    
    0.03
    
    
    
    0.01Diluted
    
    
    0.02
    
    
    
    0.01Net income, per share pro forma:Basic
    
    
    0.02
    
    
    
    0.01Diluted
    
    
    0.02
    
    
    
    0.01
 The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following assumptions: 2003
    
    2002Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    106.0
    %
    
    
    105.0
    %Risk-free interest rate
    
    
    4.36
    %
    
    
    5.21
    %Expected life of options
    
    1-10 years
    
    1-10 years
 The weighted average fair value at date of grant for options granted during
2003 and 2002 was $0.41 and $0.19 per option, respectively. Income Per Share The Company calculates basic income per share as income available to common
shareholders divided by the weighted average number of shares outstanding
during the year. Diluted income per share is calculated using the treasury
stock method for options and warrants. At December 31, 2003 the Company had
options to purchase 600,000 shares of the
Companys Common Stock and warrants to purchase 1,650,000 shares of the
Companys Common Stock outstanding. For the twelve months ended December 31,
2003, options to purchase 475,700 shares of the Companys Common Stock and all
the warrants had exercise prices higher than the average trading value for the
twelve months ended December 31, 2003 of the Common Stock and accordingly, were
anti-dilutive. There were options to purchase 124,300 shares of the 24




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) Companys Common Stock that had exercise prices below the average trading value
for the twelve months ended December 31, 2003 of the Common Stock and these
shares were dilutive. At December 31, 2002, the Company had options to
purchase 575,183 shares of the Companys Common Stock and warrants to purchase
1,650,000 shares of the Companys Common Stock outstanding. Although the
Company had net income in 2002, the exercise price of these options and
warrants was above the average trading value of the Companys Common Stock for
the twelve months ended December 31, 2002; therefore, the effect of these
options and warrants was anti-dilutive in 2002. Fair Value of Financial Instruments Carrying values of cash, accounts receivable and accounts payable approximate
fair value due to the short-term maturities of these assets and liabilities. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, revised December 2003, (FIN 46R), Consolidation of
Variable Interest Entities,which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be required to
apply FIN 46R to variable interests in variable interest entities (VIEs)
created after December 31, 2003. For variable interest in VIEs created before
January 1, 2004, the Interpretation will be applied beginning January 1, 2005.
For any VIEs that must be consolidated under FIN 46R that were created before
January 1, 2004, the assets, liabilities and non-controlling interests of the
VIE initially would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
non-controlling interest in the VIE. The Company is evaluating the impact of applying FIN 46R and has not yet
completed this analysis. At this time, it is anticipated that the adoption of
FIN 46R will not have an impact on the Company. NOTE 2  NOTES RECEIVABLE During 1999, certain key employees, one of whom is an officer and director of
the Company, exercised options to purchase 93,333 shares of the Companys
Common Stock by executing non-recourse promissory notes payable to the Company.
At December 31, 2002, the principal balance of the notes totaled $17,500 and
was reflected in the balance sheet as a reduction in additional paid-in
capital. The notes bore interest at 5% per year and matured on November 24,
2003. The notes were secured by the Companys Common Stock held by such
employees. The interest payable on the notes was withheld from the applicable
employees paychecks. In November 2003, the note payable from the officer and
director of the Company in the amount of $15,000 was paid. The note in the
amount of $2,500 from an employee who is not an officer or director was
extended to November 2005. During 2001, the Company entered into a short-term loan of $30,000 with Michael
L. Bixenman, Chairman of the Company, to enable him to finance the purchase of
shares of the Companys Common Stock from another shareholder. This loan bore
interest at a rate of 9% per year and had an original maturity date of April
2002. Interest was received via
automatic payroll deductions on a monthly basis. The loan was secured by
200,000 shares of the Companys Common Stock. The note was paid in full during
2002. 25




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) NOTE 3    INVENTORY Inventory consisted of the following: December 31,2003
    
    2002Raw materials
    
    $
    336,230
    
    
    $
    287,910Finished goods
    
    
    151,545
    
    
    
    131,430$
    487,775
    
    
    $
    419,340
 NOTE 4  PROPERTY AND EQUIPMENT Property and equipment consisted of the following: December 31,2003
    
    2002Manufacturing equipment
    
    $
    723,115
    
    
    $
    709,290Office furniture and fixtures
    
    
    472,223
    
    
    
    485,478Demonstration equipment
    
    
    435,130
    
    
    
    413,614Leasehold improvements
    
    
    303,492
    
    
    
    278,2311,933,960
    
    
    
    1,886,613Less-accumulated depreciation
    
    
    (1,702,584
    )
    
    
    (1,614,397
    )$
    231,376
    
    
    $
    272,216
 Depreciation expense totaled $119,598 in 2003 and $136,381 in 2002. NOTE 5  ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following: December 31,2003
    
    2002Accounts payable
    
    $
    298,780
    
    
    $
    330,610Salaries, wages and commissions
    
    
    14,207
    
    
    
    11,357Other accrued expenses
    
    
    153,646
    
    
    
    147,471$
    466,633
    
    
    $
    489,438
 NOTE 6  CAPITAL STOCK Common Stock The Company is authorized to issue up to 40,000,000 shares of common stock,
$0.01 par value per share (the Common Stock). Warrants In conjunction with its initial public offering in 1995, the Company issued
warrants to purchase 1,650,000 shares of Common Stock at an exercise price of
$5.00 per share. The Warrants were exercisable from February 4, 1996 through
August 4, 2002. The Board of Directors authorized the extension of the
expiration date of these warrants, effective June 18, 2002, from August 4, 2002
to August 4, 2004. This extension provided the Companys Warrant holders with
two additional years to exercise their Warrants. The Warrants are subject to
redemption at the Companys option at $0.05 per warrant at any time on
thirty-days, prior written notice, provided that the closing price or the
closing bid quotation for
the Common Stock has equaled or exceeded $7.50 for ten trading days. All
warrants remained outstanding at December 31, 2003. 26




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) Preferred Stock The Company is also authorized to issue up to 10,000,000 shares of preferred
stock with a par value of $0.01 per share (the Preferred Stock). The terms of
any Preferred Stock to be authorized, including dividend rates, conversion
prices, voting rights, redemption prices, and similar matters, will be
determined by the Board of Directors. As of December 31, 2003, there were no
shares of preferred stock issued or outstanding. Stock Purchase Right On January 15, 1999, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a Right) for each outstanding share of
the Companys Common Stock to holders of record at the close of business on
January 15, 1999. Each Right will entitle the registered holder, subject to
the terms of the Rights Agreement, to purchase from the Company one
one-hundredth (0.01) of a share of Series A Junior Participating Preferred
Stock at a purchase price of $5.00 per Right, subject to adjustment (the
Purchase Price). The Rights may cause substantial dilution to a person or
group that attempts to acquire the Company on terms not approved by a majority
of the Board of Directors. Thus, the Rights are intended to encourage persons
who may seek to acquire control of the Company to initiate such an acquisition
through negotiations with the Companys Board of Directors. The Rights attach to all certificates representing outstanding shares of
Company Common Stock, and no separate certificates in respect of the Rights
will be distributed. The Rights will separate from the Common Stock, and will
be distributed, upon the earlier of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding Common Stock, excluding certain specified persons (such person or
group being an Acquiring Person), or (ii) 10 business days (or such later
date as may be determined by the Board of Directors) following the commencement
of, or an announcement of an intention to commence, a tender offer or exchange
offer that would result in a person or group becoming an Acquiring Person (the
earlier of (i) and (ii) being the Distribution Date). Until the Distribution
Date, (i) the Rights will be evidenced by the Common Stock certificates and
will be transferred with and only with such certificates, (ii) new Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates for Common
Stock outstanding will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificates. In the event that any
person becomes an Acquiring Person, each holder of a Right will thereafter have
the right to receive, upon exercise, the number of shares of Common Stock (or,
in certain circumstances, cash, property or other securities of the Company)
having a value equal to two times the Purchase Price. The Rights are not exercisable until distributed and will expire at the close
of business on January 15, 2009 unless earlier redeemed or extended by the
Company. In the event that, after such time as a person becomes an Acquiring Person: (i)
the Company engages in a merger or business combination transaction in which
the Company is not the surviving corporation; (ii) the Company engages in a
merger or business combination transaction in which the Company is the
surviving corporation and the Common Shares of the Company are changed or
exchanged; or (iii) 50% or more of the Companys assets or earning power is
sold or transferred, each holder of a Right (except Rights which have
previously been voided as set forth above) shall thereafter have the right to
receive, upon exercise of the Right, the number of shares of common stock of
the acquiring company having a value equal to two times the Purchase Price. The
Board of Directors may redeem the Rights in whole, but not in part, at a price
of $0.001 per Right, payable, at the election of the Board of Directors, in
cash or shares of Company Common Stock. Until a Right is exercised, the holder
will have no rights as a shareholder. A total of 100,000 shares of Series A Junior Participating Preferred Stock are
initially reserved for issuance upon exercise of the Rights, subject to
adjustment. Stock Options The Company had an incentive stock option plan, which terminated pursuant to
its terms in January 2004. As a result of this termination, the Company will
not grant any new options; however, existing options will continue to vest or
expire according to the terms stated in the stock option grant. Under this
plan, officers, directors and other key employees of
the Company were granted options, each of which allows for the purchase of
shares of the Companys Common Stock. The per share exercise price of the
options granted under the plan is equal to the estimated fair value of the
Common Stock on the date of grant as determined by the Board of Directors,
except for options granted to 10% or greater shareholders for which the per
share exercise price is 110% of the estimated fair value. The Company reserved

600,000 shares of Common Stock for issuance upon exercise of the options
granted. The stock options have terms of five to ten 27




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) years from the date of the grant and vest ratably over a three-year period,
except for options granted to outside directors, which vested immediately upon
grant. During 2002, the Company granted options to its outside directors to purchase
15,000 shares of the Companys Common Stock at an exercise price of $0.21 per
share. The Company also granted options to officers and employees to purchase
67,600 shares of the Companys Common Stock at an exercise price of $0.21 per
share. During 2003, the Company granted options to its outside directors to purchase
15,000 shares of the Companys Common Stock at an exercise price of $0.23 per
share. The Company also granted options to its employees to purchase 19,417
shares of the Companys Common Stock at an exercise price of $0.60 per share. The Company does not currently intend to adopt a new incentive stock option
plan. Stock option transactions were as follows: Weighted AverageNumber of Shares
    
    Exercise PriceOutstanding, December 31, 2001
    
    
    497,583
    
    
    $
    2.34Granted
    
    
    82,600
    
    
    
    0.21Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (5,000
    )
    
    
    1.29Outstanding, December 31, 2002
    
    
    575,183
    
    
    
    2.04Granted
    
    
    34,417
    
    
    
    0.44Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (9,600
    )
    
    
    2.23Outstanding, December 31, 2003
    
    
    600,000
    
    
    $
    1.95
 28




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) The following table summarizes information concerning outstanding and
exercisable options at December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted AverageRange Of
    
    
    
    
    
    Remaining
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Contractual Life
    
    Average
    
    
    
    
    
    AveragePrices
    
    Number Outstanding
    
    (years)
    
    Exercise Price
    
    Number Exercisable
    
    Exercise Price$0.21
    
    
    94,300
    
    
    
    8.46
    
    
    $
    0.21
    
    
    
    63,922
    
    
    $
    0.210.40 - 0.75
    
    
    119,417
    
    
    
    6.59
    
    
    
    0.64
    
    
    
    100,000
    
    
    
    0.651.00 - 1.38
    
    
    44,800
    
    
    
    4.55
    
    
    
    1.31
    
    
    
    44,800
    
    
    
    1.311.69  1.86
    
    
    55,100
    
    
    
    1.82
    
    
    
    1.81
    
    
    
    55,100
    
    
    
    1.812.81  3.99
    
    
    285,883
    
    
    
    0.09
    
    
    
    3.19
    
    
    
    285,883
    
    
    
    3.194.50
    
    
    500
    
    
    
    0.03
    
    
    
    4.50
    
    
    
    500
    
    
    
    4.50600,000
    
    
    
    
    
    
    $
    1.95
    
    
    
    550,205
    
    
    $
    2.29
 The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002: Options Outstanding
    
    Options ExercisableWeighted AverageRange Of
    
    
    
    
    
    Remaining
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Contractual Life
    
    Average
    
    
    
    
    
    AveragePrices
    
    Number Outstanding
    
    (years)
    
    Exercise Price
    
    Number Exercisable
    
    Exercise Price$0.21
    
    
    81,100
    
    
    
    9.3
    
    
    $
    0.21
    
    
    
    15,000
    
    
    $
    0.210.40 - 0.75
    
    
    100,600
    
    
    
    6.9
    
    
    
    0.64
    
    
    
    97,479
    
    
    
    0.661.00 - 1.38
    
    
    45,300
    
    
    
    5.6
    
    
    
    1.31
    
    
    
    45,300
    
    
    
    1.311.69  1.86
    
    
    55,700
    
    
    
    2.8
    
    
    
    1.81
    
    
    
    55,700
    
    
    
    1.812.81  3.99
    
    
    291,983
    
    
    
    1.1
    
    
    
    3.19
    
    
    
    291,983
    
    
    
    3.194.50
    
    
    500
    
    
    
    1.0
    
    
    
    4.50
    
    
    
    500
    
    
    
    4.50575,183
    
    
    
    
    
    
    $
    2.04
    
    
    
    505,962
    
    
    $
    2.29
 NOTE 7  RETIREMENT PLAN The Company implemented the Kyzen Corporation 401(k) Retirement Plan (the
Plan) in 1997. Employees become eligible to participate in the Plan after 90
days of their initial employment. Employees may contribute as little as 1% or
up to 20% of their salary to the Plan. The Company pays all expenses of the
Plan and matches employee contributions on a discretionary basis in such
amounts as are determined by the Companys Board of Directors. Matches of
employee contributions are available to the employee based on a six year
vesting schedule that is prorated at different percentages for each year
vested. The Company did not match or make other contributions to the Plan
during 2003 or 2002. The Plan expense for 2003 and 2002 was $4,112 and $1,689,
respectively. 29




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) NOTE 8  INCOME TAXES The Company did not record a provision for income taxes in 2003 or 2002. A
reconciliation of the total provision for income taxes with amounts determined
by applying the statutory U.S. federal income tax rate of 34% to income before
income taxes is as follows: December 31,2003
    
    2002Income tax expense (benefit) at statutory rate
    
    $
    40,409
    
    
    $
    13,317State income taxes, net of federal tax benefit
    
    
    1,661
    
    
    
    3,002Research and development credit, net of federal tax benefit
    
    
    (24,199
    )
    
    
    (24,524
    )Change in valuation allowance
    
    
    (29,138
    )
    
    
    1,559Other
    
    
    11,267
    
    
    
    6,646Total income tax provision
    
    $
    
    
    
    $
    
 Significant components of the Companys deferred tax assets at December 31,
2003 and 2002 are as follows: December 31,2003
    
    2002Federal and state net operating loss carryforwards
    
    $
    802,761
    
    
    $
    843,322Research and development credits
    
    
    304,621
    
    
    
    280,976Other
    
    
    42,418
    
    
    
    54,640Deferred tax assets
    
    
    1,149,800
    
    
    
    1,178,938Valuation allowance
    
    
    (1,149,800
    )
    
    
    (1,178,938
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. At December 31, 2003, the Company had net operating loss carryforwards
available to reduce future federal taxable income of approximately $2,088,577.
The carryforwards expire between 2007 and 2021. The Company has provided a
valuation allowance for the entire balance of its deferred tax assets,
including its net operating loss carryforwards, due to the uncertainty of
future realization. NOTE 9  COMMITMENTS AND CONTINGENCIES Lease Commitments The Company conducts its operations from facilities under two operating lease
agreements. The lease for the New Hampshire facility was renewed in May 2002
and extended to May 2006. The lease for the Tennessee facility has a five year
term ending January 2006 with an option to renew for an additional five years.
The Company also has a lease for a copier/printer at its Nashville office. As
of December 31, 2003, future annual rental payments for the next five years are
summarized as follows: 2004
    
    $
    159,9402005
    
    $
    165,5402006
    
    $
    36,8602007
    
    $
    8,5202008
    
    $
    8,520
 Total rent expense was $160,771 in 2003 and $153,781 in 2002. Included in rent
expense for 2003 and 2002 is approximately $115,000 and $109,000, respectively,
of rent paid to Charles Hawkins Company, whose pension plan is a shareholder of
the Company. 30




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##### Table of Contents



KYZEN CORPORATIONPART II (Continued) Patents The Companys original patents were for products developed by a founder of the
Company while employed by Bix Manufacturing Company (Bix) and Delphi
Automotive Systems (Delphi, formerly Delco Electronics, a division of General
Motors). The joint effort was undertaken to develop a more effective
non-chlorinated fluorocarbon cleaning solvent which would be environmentally
neutral. A patent was applied for jointly by Bix and Delphi in 1989. The
Company purchased the patent rights from Bix in 1990 and two patents were
subsequently issued jointly to Kyzen and Delphi in the United States. Delphi
retained the right to use chemistry developed under the patent and the Company
retains the right to market the patented technology. However, if the Company
enters into a license or royalty arrangement for the patented technology, the
resulting license fee or royalty revenues will be shared jointly between Delphi
and the Company. Royalty Agreements The Company is also required to pay patent royalties to Bix, a shareholder of
the Company. Royalties are based on 2% of revenues related to the patented
chemistry and amounted to less than $50,000 in both 2003 and 2002. The Company
is currently settling its royalty obligation through consulting services
performed by the Company. In addition, 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 2003 and 2002, these royalty payments were less than
$50,000. Employment Agreements Certain officers and key employees are party to an employment agreement that
provides that if the employee is terminated upon a change of control, the
employee shall immediately be paid, among other things, all accrued
compensation to the date of termination. For the remainder of the existing
employment term and for a period of two years thereafter, the employee shall be
entitled to receive semi-monthly severance payments equal to the salary which
would otherwise have been paid to the employee. NOTE 10  RELATED PARTY TRANSACTIONS The Company paid certain shareholders approximately $4,300 and $1,000 for
freight transportation services in 2003 and 2002, respectively. 
 Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. None. 
 Item 8A. Controls and Procedures. Disclosure Controls and Procedures The Companys Chief Executive Officer and Chief Accounting Officer have
supervised and participated in an evaluation of the Companys disclosure
controls and procedures as of the end of the period covered by this report.
Based upon this evaluation, the Companys Chief Executive Officer and Chief
Accounting Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective in ensuring that
information required to be disclosed in this report is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and regulations. Internal Control over Financial Reporting There has not been any change in the Companys internal controls over financial
reporting identified in connection with the evaluation required by Rules
13a-15(f) under the Securities Exchange Act of 1934 that occurred during the
fourth quarter of 2003 that has materially affected or is reasonably likely to
materially affect these controls. 31




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KYZEN CORPORATION 
 PART III
 
 Item 9. Directors and Executive Officers of the Registrant. Incorporated by reference to the information contained under the captions
Election of Directors, Meeting of the Board of Directors and
Committees-Committees-Audit Committee and Section 16(a) Beneficial Ownership
Reporting Compliance included in Registrants definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held on April 27, 2004. The Company has adopted a Code of Ethics, administered by the Companys Audit
Committee, that applies to the Chief Executive Officer, Chief Accounting
Officer and the Controller, as well as any person performing similar functions
(the Senior Financial Officers). This Code of Ethics requires honest and
ethical conduct by each Senior Financial Officer, including the ethical
handling of conflicts of interest. The Code of Ethics also requires the Senior
Financial Officers to ensure accurate and reliable record-keeping that conforms
to applicable legal requirements and the Companys system of internal controls.
The Senior Financial Officers must also promote full, fair, accurate, timely
and understandable disclosure in all of the Companys required filings and
other public communications. The Senior Financial Officers are expected to
comply with all applicable laws, to report any observed illegal or unethical
behavior to the Audit Committee and to cooperate with the Audit Committee in
its investigation of any misconduct. If the Company makes any substantive
amendment to or grants any waiver of any provision of the Code of Ethics, the
Company will disclose the nature of such amendment or waiver in a report filed
with the SEC on Form 8-K. A copy of this Code of Ethics will be provided to
any person without charge upon request. Requests for copies may be directed
to: Kyzen Corporation
430 Harding Industrial Drive
Nashville, Tennessee 37211
Attention: Investor Relations 
 Item 10. Executive Compensation. Incorporated by reference to the information contained under the captions
Compensation of Directors and Executive Compensation included in
Registrants definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 27, 2004. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. Incorporated by reference to the information contained under the captions
Security Ownership of Certain Beneficial Owners and Management and Executive
Compensation included in Registrants definitive Proxy Statement relating to
the Annual Meeting of Shareholders to be held on April 27, 2004. 
 Item 12. Certain Relationships and Related Transactions. Incorporated by reference to the information contained under the caption
Certain Relationships and Related Transactions included in Registrants
definitive Proxy Statement relating to the Annual Meeting of Shareholders to be
held on April 27, 2004. 32




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KYZEN CORPORATIONPART III (Continued) 
 Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No.
    
    DescriptionExhibit 3.1
    
    Registrants Restated Charter (1)Exhibit 3.2
    
    Amended Bylaws of Registrant (1)Exhibit 4.1
    
    Warrant and Registration Rights Agreement by and among Kyzen
Corporation, Paulson Investment Company, Inc., Nutmeg
Securities, Ltd. and LaJolla Securities, dated August 3, 1995
(2)Exhibit 4.5
    
    Specimen of Common Stock Certificate (3)Exhibit 4.6
    
    Specimen of Warrant Certificate (3)Exhibit 4.7
    
    Rights Agreement, dated January 15, 1999, between Kyzen
Corporation and American Stock Transfer & Trust (4)Exhibit 10.1
    
    Lease Agreement, dated June 11, 1993, between Harding
Business Park, a partnership, and Registrant for Registrants
headquarters and chemical manufacturing facilities (2)Exhibit 10.3
    
    Employee Agreements, dated January 1, 1994 with officers and
key employees of Registrant (2):(a) Kyle J. Doyel*(b) Michael L. Bixenman*(c) Thomas M. Forsythe*Exhibit 10.7
    
    Purchase Agreement, dated May 1, 1990, between Bix Manufacturing Company, Inc. and Registrant (2)Exhibit 10.8
    
    Technology Exchange Agreement, dated December 17, 1993, between Bix Manufacturing Company, Inc. and Registrant (2)Exhibit 10.20
    
    Warrant Agreement between Kyzen Corporation and American Stock Transfer & Trust Company (2)Exhibit 10.21
    
    Reassignment of Patents to Bix Manufacturing Company, Inc. (2)Exhibit 10.24
    
    Lease Agreement, dated April 25, 1995, between Five-Forty North Associates, a partnership, and the Registrant for
Registrants offices, demonstration facility, and equipment manufacturing facilities (5)Exhibit 10.31
    
    Form of Amendment No. 1 to Employment Agreements with certain officers of the Company (6):(a) Kyle J. Doyel*(b) Michael L. Bixenman*(c) Thomas M. Forsythe*Exhibit 10.33
    
    Amended Lease Agreement, dated February 21, 2001, between
Harding Business Park, a partnership, and the Registrant for
the Registrants Nashville, Tennessee headquarters and
chemical manufacturing facilities (7)Exhibit 10.37
    
    Second Amendment to Lease Agreement, dated May 20, 2002,
between Five-Forty North Associates, a partnership, and the
Registrant for Registrants offices, demonstration facility,
and equipment manufacturing facilities (8)Exhibit 23
    
    Consent of KPMG LLPExhibit 31.1
    
    Certification of the Chief Executive Officer of Kyzen
Corporation pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of the Chief Accounting Officer of Kyzen
Corporation pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of the Chief Executive Officer of Kyzen
Corporation pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2
    
    Certification of the Chief Accounting Officer of Kyzen
Corporation pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 * Indicates a management contract or compensation plan or arrangement. 33




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KYZEN CORPORATIONPART III (Continued)  (1)
    
    Filed as an exhibit to the Companys Registration Statement
on Form S-3 (No. 333-82021) dated June 30, 1999, previously filed
pursuant to the Securities Act of 1933 and hereby incorporated by
reference.(2)
    
    Filed as an exhibit to the Companys Registration Statement
on Form SB-2 (No. 33-91854-A) previously filed pursuant to the
Securities Act of 1933 and hereby incorporated by reference.(3)
    
    Filed as an exhibit to the Companys Registration Statement
on Form S-3/A (No. 333-82021) dated August 2, 1999, previously filed
pursuant to the Securities Act of 1933 and hereby incorporated by
reference.(4)
    
    Filed as an exhibit to the Companys filing on Form 8-A dated
January 15,1999, previously filed pursuant to the Securities
Exchange Act of 1934 and hereby incorporated by reference.(5)
    
    Filed as an exhibit to the Companys annual report on Form
10-KSB for the year ended December 31, 1997, previously filed
pursuant to the Securities Exchange Act of 1934 and hereby
incorporated by reference.(6)
    
    Filed as an exhibit to the Companys quarterly report on Form
10-QSB for the quarter ended June 30, 1999, previously filed
pursuant to the Securities Exchange Act of 1934 and hereby
incorporated by reference.(7)
    
    Filed as an exhibit to the Companys annual report on Form
10-KSB for the year ended December 31, 2000, previously filed
pursuant to the Securities Exchange Act of 1934 and hereby
incorporated by reference.(8)
    
    Filed as an exhibit to the Companys quarterly report on Form
10-QSB for the quarter ended June 30, 2002, previously filed
pursuant to the Securities Exchange Act of 1934 and hereby
incorporated by reference. (b) Reports on Form 8-K  On November 14, 2003, the Company filed a report on Form 8-K containing a
press release reporting the Companys earnings for the quarter ended
September 30, 2003. 
 Item 14. Principal Accountant Fees and Services. Incorporated by reference to the information contained under the captions
Independent Public Accountants-Audit Fees, Independent Public
Accountants-Audit Related Fees, Independent Public Accountants-Tax Fees, and
Independent Public Accountants-All Other Fees included in the Registrants
definitive Proxy Statement relating to the Annual Meeting of Shareholders to be
held on April 27, 2004. 34




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KYZEN CORPORATION 
 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. (Registrant)     Kyzen Corporation By
    
    /s/ Kyle J. DoyelKyle J. Doyel, President, CEO (Principal Executive Officer), DirectorDate:
    
    March 30, 2004
 In accordance with 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. By
    
    /s/ Michael L. BixenmanMichael L. Bixenman, Chairman, Vice President, DirectorDate:
    
    March 30, 2004By
    
    /s/ Kyle J. DoyelKyle J. Doyel, President, CEO (Principal Executive Officer), DirectorDate:
    
    March 30, 2004By
    
    /s/ Thomas M. ForsytheThomas M. Forsythe, Vice President, Treasurer (Principal Accounting
Officer and Principal Financial Officer), DirectorDate:
    
    March 30, 2004By
    
    /s/ John A. Davis IIIJohn A. Davis III, DirectorDate:
    
    March 30, 2004By
    
    /s/ James R. GordonJames R. Gordon, DirectorDate:
    
    March 30, 2004By
    
    /s/ Janet Korte BakerJanet Korte Baker, DirectorDate:
    
    March 30, 2004