UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
SCOTTSDALE SCIENTIFIC, INC.
Florida 13-3940486
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30806 Santana Street, Hayward, California 94544
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (800) 545-9960
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None. None.
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
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TABLE OF CONTENTS
PART I.....................................................................1
ITEM 1. DESCRIPTION OF BUSINESS....................................1
Background...............................................1
The Company..............................................1
Business Plan............................................1
Products and Services....................................3
Industry Overview........................................9
Competition.............................................10
Market Strategies.......................................12
Regulation..............................................13
Employees...............................................14
Intellectual Property...................................14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.................................................15
General.................................................15
Results of Operations ..................................15
Liquidity and Capital Resources.........................17
Plan of Operation.......................................18
Recent Accounting Pronouncements........................19
Recent Developments.....................................19
ITEM 3. DESCRIPTION OF PROPERTY...................................19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................20
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS...........................................20
Key Employees...........................................21
Medical Advisory Board..................................22
ITEM 6. EXECUTIVE COMPENSATION....................................24
Remuneration Paid to Executives.........................24
Remuneration Paid to Directors..........................25
Employment Agreements...................................26
Employee Benefits.......................................26
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............27
ITEM 8. DESCRIPTION OF SECURITIES.................................28
Common Stock............................................28
Preferred Stock.........................................28
Annual Shareholders' Meeting............................28
PART II...................................................................29
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............29
Market Information......................................29
Holders.................................................29
Dividends...............................................29
ITEM 2. LEGAL PROCEEDINGS.........................................29
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.............30
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES...................31
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.................32
ITEM 6. FINANCIAL STATEMENTS......................................32
PART III..................................................................33
ITEM 1. INDEX TO EXHIBITS.........................................33
ITEM 2. DESCRIPTION OF EXHIBITS...................................33
SIGNATURES................................................................34
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Scottsdale Scientific, Inc. (SYMBOL: STDS) (the "Company" or
"Scottsdale Scientific"), through its wholly owned subsidiary, NutriCology, Inc.
is an innovative leader in nutraceutical research and product formulation. Since
1980, the Company has been noted for quality, hypoallergenic nutritional
supplements and supplies products to approximately 4,000 physicians and health
care practitioners world-wide. NutriCology, Inc. was the first in the U.S. to
introduce numerous specialty products including melatonin, a neurohormone,
germanium sesquioxide (a trace mineral), AntiOx(TM), a broad-spectrum
antioxidant and Buffered Vitamin C. Buffered Vitamin C was tested at the Haight
Ashbury Clinic in San Francisco as a nutritional supplement for its value
(associated with medical treatment) for opiate and stimulate abusers.
THE COMPANY
Scottsdale Scientific was incorporated under the laws of the state of
Florida on April 8, 1997 for the purpose of wholesale distribution of health
and nutritional supplements. On February 3, 1998, the Company entered into an
agreement to acquire NutriCology, Inc., a California corporation formed on March
11, 1980 ("NutriCology"). NutriCology was engaged in the distribution of
hypoallergenic nutritional supplements under the guidance of Dr. Stephen Levine.
Allergy Research Group/NutriCology, Inc. was established in 1980, and
now operates as a wholly owned subsidiary of Scottsdale Scientific. As used
herein, the "Company" means Scottsdale Scientific, Inc. and its subsidiaries,
except where indicated otherwise. The Company is recognized worldwide for the
quality, purity and efficacy of its targeted nutritional supplement line.
Currently, physicians and health care practitioners worldwide purchase our
products and recommend these supplements to their patients. We develop, contract
manufacture, market and sell branded and private label products, including
vitamins and nutritional supplements, throughout the world under the NutriCology
and Allergy Research Group labels. We distribute our products through
distributors to medical and professional accounts and to retailers. See "Market
Strategies" below. We offer a line of approximately 200 products, including
vitamins in both multivitamin and single-entity formulas, minerals, and herbals.
Our products are manufactured in various forms, including capsules, tablets,
softgels, powders (drink mixes) and liquids.
The Company's principal executive offices are located at 30806 Santana
Street, Hayward, California 94544 and its telephone number is (800) 545-9960.
BUSINESS PLAN
COMPANY GROWTH STRATEGY
We intend to expand the Company's position in the vitamin and
nutritional supplements markets. Specifically, our strategy is to: (i) develop
new brands and product line extensions, as well as new products, through our
commitment to research and development; (ii) continue the growth of our balanced
distribution network; (iii) build our execution skills through new operations
processes and decision support systems; (iv) achieve cost superiority through
formal productivity benchmarking and continuous improvement programs; and (v)
implementing a comprehensive e-commerce plan. The Company believes that its
history and reputation in the field, multiple distribution channels, broad
portfolio of products and packaging and distribution capabilities position it to
be a long-term competitor in the vitamin and nutritional supplements industries.
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In addition, the Company is expanding into the field of research on
pharmaceuticals and nutraceuticals under the leadership and guidance of Dr.
Stephen Levine and Dr. Ba Hoang, MD, PhD. This process will be limited to
literature work, including patent submissions for potential products. The
research can be marketed to pharmaceutical companies either through direct sell
of the research to the pharmaceutical company, or through a joint venture
arrangement between the pharmaceutical company and Scottsdale Scientific whereby
the parties will jointly own the patent and continue development of the
products. It is our hope that, during the process of research into possible
pharmaceutical and nutraceutical products, we will test new herbal products, or
additional uses for existing herbal products, that can be added to our current
line of products as health food or dietary supplements.
In October 2000, the Company and Dr. Hoang jointly entered into an
agreement with Phytopharm PLC and Phytotech Limited, of England (collectively,
"Phytopharm"), whereby the Company and Dr. Hoang granted Phytopharm an
irrevocable option for an exclusive, world-wide license to manufacture and sell
products derived from certain materials and chemicals for the treatment of
asthma, chronic idiopathic thrombocytopenic purpura ("ITP"), chronic
Glomerulonephritis ("GC") and gout pursuant to certain U.S. patent applications
filed by the Company and Dr. Hoang. The patents are based on the joint research
of Drs. Levine and Hoang. The option was granted for a price of 5,000 British
pounds and, should the option be exercised and the license agreement executed,
the Company and Dr. Hoang will receive royalties based upon the amount of sales
of products produced under the patent applications. The license agreement would
prevent us from using the materials and chemicals to which the option applies to
manufacture products which would be in direct competition with products being
manufactured and sold by Phytopharm without Phytopharm's consent. However, we
believe that we will be able to use the research to either enhance existing
herbal products or produce new herbal products that can be added to our current
product line.
PRODUCT RESEARCH AND DEVELOPMENT
We strive to make the Company a leader in vitamin and nutritional
supplement product development and intend to continue our commitment to research
and development to create new products and existing product line extensions. The
nutritional supplement industry is influenced by products that become popular
due to changing consumer interests in health, appearance and longevity, new
research coming out on existing compounds or new compounds being discovered
along with public and media attention to these same interests. We believe it is
important to develop new products in these industries in order to capitalize on
new market opportunities, to strengthen relationships with customers by meeting
demand and to increase market share. In addition, we believe that continually
introducing new products is important to preserving and enhancing gross margins
due to the relatively short life cycle of some products. Our involvement in the
research and development of pharmaceuticals and nutraceuticals should enable us
to expand our nutritional supplement product line and open a new potential
revenue stream through joint ownership of patents.
As a result of the Company's product development history, we believe
that it has built a reputation in the nutritional supplement industry for
innovation in both branded and private label products. Allergy Research
Group/NutriCology, Inc. is recognized worldwide for the quality, purity and
efficacy of its targeted nutritional supplement line, and was the first
U.S.-based company to introduce numerous specialty products, including melatonin
and Buffered Vitamin C. The Company is in various stages of development with
respect to new product concepts that we anticipate will augment both our
existing domestic and international product lines. Recently, through Dr. Levine,
the Company has become more focused on researching and developing broad spectrum
immune products. (A broad spectrum immune product is one that is varied in its
ability to enhance a broad range of protective mechanisms of immune function
against pathogens, bacteria, virus, fungus, protozoan and cancer.)
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MANUFACTURING AND PRODUCT QUALITY
Our purpose is to improve the quality of life for our customers through
scientifically-based innovation, purity of ingredients, education and
outstanding service. Our products are the purest and highest quality obtainable
and are generally made without yeast, corn, wheat, soy, dairy products,
flavorings, colors, salt, sugar, starch, common preservatives, binders and
excipents. The only ingredients are those listed on the label. To ensure optimal
stability, our products are stored in a humidity and temperature controlled
environment. We rely on scientific research and collaboration with other experts
in the biomedical field to insure state of the art, hypoallergenic, when
possible, formulations containing the purest, highest quality ingredients.
The Company currently does not have facilities for the manufacture of
our products, and we are using outside vendors for this purpose. As of September
30, 2000, changes in operations have resulted in a concentration of
approximately 50% of our manufacturing among three separate vendors, with
Horizon Laboratories acting as our largest manufacturer and supplier of raw
materials at 26%. We are committed to providing the highest quality products,
and require our manufacturers to provide evidence that they have met our
standards. Our outside vendors are required to manufacture our products in
accordance with the applicable Current Good Manufacturing Practices ("CGMPs") of
the United States Food and Drug Administration ("FDA") applicable to food and
other applicable regulatory and compendial manufacturing standards, such as
United States Pharmacopoeia ("USP"). Raw materials and finished products undergo
random sample quality testing procedures, including weight, purity, heavy metals
and microbiological testing. In order to assure that our products meet the high
standards we require, we randomly take raw materials and samples from our
manufacturers to independent laboratories for testing.
Approximately 70% of our products, consisting of capsules and tablets,
are packaged at and distributed from the Company's 19,940 square foot
warehousing and packaging facility located in Hayward, California (the "Hayward
Facility"). The Hayward Facility was leased by the Company at a rate of $16,282
per month for five years commencing June 1, 1998, and consists of approximately
5,500 square feet of office space. Current rent on the facility is $17,682 per
month (the lease allows for an increase of 5% per year). We recently upgraded
our facilities and enhanced our packaging capabilities through new equipment and
technological improvements in order to meet the demands of our customers. Our
liquid and powder products are packaged by our outside manufacturers.
PRODUCTS AND SERVICES
Our vitamin and nutritional supplement line consists of more than 200
products. The Company's product catalog includes the following categories:
Vitamin C Products, Multiple Vitamins/Minerals, Mineral Products, Selenium
Products, Antioxidant Formulas, Vitamin E Products, Bioflavonoids, B Vitamins,
Essential Fatty Acids, Amino Acids, Pancreas Glandulars, Organic Glandulars,
Probiotics, Microbial Balancers, Bioenergetic Nutrients, Musculoskeletal
Products, Brain Support Products, Complete Nutrient Formulas and a variety of
specialty products, such as supplements for immunological disorders. A brief
description of each of these categories appears below, including descriptions of
some of our most popular products.
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Approximately 75% of the products discussed below were formulated by
Allergy Research Group/NutriCology and are manufactured and distributed by the
Company. Another 25% of the products are produced by other companies in the
industry and distributed by the Company through licensing agreements. Most
notably, we license the distribution rights for ProGreens(R), a fresh,
nutrient-rich whole food concentrate, which is gluten-free and contains no egg,
dairy or animal products, no yeast, malto-dextrin, barley malt or simple sugar,
no preservatives, and no artificial flavoring or coloring; OralMat, a product
based on an extract of the rye plant; and Eurocel(R), a product made from Korean
and Chinese herbs that have been used historically in Oriental medicine.
The trademark to ProGreens(R) is owned by Jim Cassidy and is licensed
to NutriCology under an exclusive, worldwide license pursuant to which Mr.
Cassidy receives royalties based on the amount of ProGreens(R) products sold by
the Company. Mr Cassidy acts as a consultant to the Company in relation to the
ProGreens(R) products and receives a fee for attending tradeshows on the
Company's behalf as well as commissions based on sales of the Company's products
made by him.
VITAMIN C PRODUCTS
Vitamin C is the body's most important water-soluble antioxidant
nutrient and is involved in a wide variety of biochemical reactions throughout
the body. Included in its functions is the synthesis of collagen, the basis of
connective tissues, found in virtually every cell of the body. Vitamin C
possesses antioxidant properties and, because of its molecular structure, is
able to donate hydrogen atoms from two hydroxyl positions to neutralize free
radicals. In addition, it is thought that the body uses Vitamin C during
detoxification and inflammation processes, as well as immune system functions,
including: the production of white blood cells, histamine release and
degradation, the reduction of glutathione (a thiol antioxidant nutrient) and the
metabolism and protection of several other nutrients.
MULTI-VITAMIN/MINERAL PRODUCTS
The Company produces a multi-Vitamin complex, Multi-Vi-Min(R),
formulated by Stephen A. Levine, Ph.D., the Company's Chief Executive Officer
and Director of Research. Multi-Vi-Min(R) was designed to be a hypoallergenic,
and many people who cannot tolerate a complex nutrient formula do well with the
formula. The formula comes in two varieties, one containing copper and iron and
one without those ingredients. In addition, the Company produces and markets a
number of other multi-Vitamin and mineral products on the premise that a potent
multiple vitamin/mineral supplement is a must for everyone. These products
include calcium, magnesium, zinc and potassium based products, as well as two
forms of OcuDyne(TM), a formula created exclusively for NutriCology by Jonathan
Wright, M.D. and Alan R. Gaby, M.D. OcuDyne(TM) is a formula designed to support
the structure and various functions of the eye.
SELENIUM PRODUCTS
The Company produces Selenium-based products. Selenium is an essential
trace element that is "redoxactive," i.e., highly active in electron exchange
reactions. Antioxidant enzymes specialize in electron exchange reactions that
help protect the cells and tissues from free radicals and other oxidative
"electron stealers." Selenium is an essential component of glutathione
peroxidase, being located at the "active site" of this major antioxidant enzyme.
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ANTIOXIDANT FORMULAS
Under the leadership of Dr. Levine, the Company, through NutriCology,
has pioneered hypoallergenic, broad spectrum, mixed antioxidant formulations.
Though essential, oxygen has the potential to create metabolic toxicity.
Antioxidant nutrients are utilized in conjunction with antioxidant enzymes to
help quench oxygen free radical generation. Acting to impede free radical damage
to cells and tissues, the body's antioxidant defense system amounts to a
metabolic cooling and lubrication system. The antioxidant nutrients are the
body's natural antioxins and are crucial to homeostasis, having regulatory roles
in a diversity of tissue functions. A variety of stressful environmental,
genetic and behavioral factors have been linked to increased free radical
production in the tissues. Good dietary habits help conserve the body's
antioxidant stores, but under the conditions of modern living it can be good
"nutritional insurance" to supplement the diet with natural antioxidants.
BIOFLAVONOIDS
The bioflavonoids are the biologically active flavonoids. (A flavonoid
is any of a large group of plant substances that includes the anthocypanins, a
class of flower pigments.) Bioflavonoids are important nutritional factors, and
are part and parcel of just about every plant on Earth. They are important
protective factors and regulatory factors in plant metabolism, and from their
widespread distribution are likely to have been an integral part of the human
diet ever since humans appeared. We believe that this co-relationship with
humans over the course of evolution is consistent with the many benefits to
homeostasis that they seem to offer, although scientific research on this
relationship is still in development stages. Certainly, they are complex
chemically, and can play a variety of roles in human metabolism. They are potent
antioxidants, and many also display metal binding activity, a property which may
contribute to their antioxidant effects. Bioflavonoids are required for the
proper absorption of Vitamin C, and increase Vitamin C's effectiveness. They are
also thought to improve immunity, fight cancer, reduce inflammation and
strengthen capillaries.
B VITAMINS
B vitamins are water-soluble and not stored in the body very
effectively, therefore they need to be replenished daily. Insufficiencies may
occur easily during dieting for weight loss, fasting or consuming the Standard
American Diet (SAD), which usually includes too many processed foods and excess
sugar. Alcohol and drugs, including antibiotics, also deplete levels of B
vitamins.
The B vitamins function as co-enzymes: they assist the enzymes, our
biological catalysts, in implementing the tens of thousands of biochemical
reactions and metabolic pathways that make life possible. Some of those enzyme
functions include energy production, conversion of carbohydrates to glucose and
assisting other nutrients in the metabolism of fat and protein. In addition, B
vitamins are essential to optimal functioning of the central nervous system, as
the body uses B vitamins during physiological response to stress and fatigue.
Adequate levels of B vitamins are also especially important for the formation of
healthy hair and skin, and optimal functioning of the eyes and liver. The
general muscle tone of gastrointestinal tract is supported by the B vitamins,
potentially promoting efficient bowel functions.
Included in the B vitamin group are the following: B1 (thiamin), B2
(riboflavin), B3 (niacin), B5 (pantothenic acid), B6 (pyridoxine), B12
(cyanocobalamin), chlorine, inositol, PABA, orotic acid, pangameic acid, and B17
(laetrile). Biotin and folic acid are intimately involved in many of the same
pathways, and are commonly regarded as quasi-B vitamins.
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AMINO ACIDS
Amino acids exist in all living cells and chains of amino acids make up
protein. They make up a great portion of our skin, hair, nails, muscle tissue
and internal organs. Our brain and heart are especially high in protein. The
body uses amino acids in the production of neurotransmitters in the brain,
several hormones, a variety of enzyme and metabolic processes, the formation of
antibodies, as well as for the production of non-essential amino acids.
Essential amino acids are the amino acids the body does not produce and it is
necessary to get them from the diet or a supplement. Non-essential and
semi-essential amino acids are produced by the body; however, higher amounts may
be necessary during times of increased physical or emotional stress, illness or
imbalance. The amino acid products produced by NutriCology are easily absorbed
into the system.
PANCREAS GLANDULARS
The pancreas produce digestive enzymes that serve to break down complex
carbohydrates, proteins and fats into nutrient forms required for proper
absorption. The Pancreas Organic Glandulars produced by NutriCology are
lyophilized (freeze dried) pancreatic glandular tissue taken from organically
raised beef, lamb or pork. We obtain our pancreas glandulars exclusively from
New Zealand and Australia, where they are harvested from range-grazed animals
that have not been exposed to pesticides or additives throughout their lives.
Customized freeze-drying yields products that are extremely potent in enzyme
activities.
ORGANIC GLANDULARS
Glandular tissues can be rich sources of nutrients, enzymes and other
factors that support specific gland related metabolism and physiological
function. When prepared with sufficient technical sophistication and sensitivity
to their delicate nature, some of these glandulars can retain a significant
portion of their biological activity. The glandular products produced through
NutriCology are produced from government inspected, range-grazed animals from
Australia and New Zealand. Our glandulars are freeze-dried, which means the
material is frozen, then subjected to a high vacuum that vaporizes moisture
directly from the solid state, thereby maintaining its biological activity.
PROBIOTICS
The gastrointestinal tract (GI tract) is actually a complex
micro-ecosystem in which the mucosal lining of the host coexists with billions
of micro-organisms that live on or are attached to the lining. These "probiotic"
bacteria are provided with shelter and support, and copious amounts of food
substrates. The body benefits from the vitamins and other useful metabolic
products these bacteria produce. Other, less beneficial micro-organisms are also
present and compete with the probiotics. Dietary supplementation with potent
probiotic cultures assists the host in maintaining a healthy probiotic balance.
The probiotic products produced by the Company are non-dairy and are generally
well tolerated.
MICROBIAL BALANCERS
The Company produces a family of microbial balancers. These
formulations take advantage of the powers of certain plant extracts to affect
the intestinal balance of micro-organisms. Since both friendly and unfriendly
micro-organisms are affected, we suggest the use of a probiotic supplement to
anyone using these botanicals.
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BIOENERGETIC NUTRIENTS
The production of energy begins in a particular organ inside of our
cells. That organ is known as the mitochondria. Inside the mitochondria, with
assistance of enzymes from the Krebs cycle, carbohydrates and fatty acids are
metabolized into Adenosine Triphosphate (ATP). ATP is considered a cofactor and
a modulator of activity of some enzymes and can be thought of as cellular
currency. Included in this category is the product ProGreens(R), which is
formulated with the highest quality green foods, premium adaptogenic herbs and
antioxidant bioflavonoids, to provide a broad-spectrum nutritional support from
natural food factors not found in isolated vitamins or mineral concentrates.
ProGreens(R) is marketed in a variety of forums, including distribution through
Internet sites such as Blossomhill.com and VitaminUSA.com, under the Company's
NutriCology label.
MUSCULOSKELETAL PRODUCTS
The Company produces a variety of musculoskeletal products designed to
support connective/joint tissue. Connective tissue is present in varying degrees
in all organs of the body. The term "connective tissue" refers to the various
types of tissue that make up the joints, tendons, ligaments, even the web that
holds all cells together. As a part of this group of products, the Company also
produces a calcium product designed to support the production of healthy bone
tissue.
BRAIN SUPPORT PRODUCTS
The "brain support" formulas produced by the Company are designed to
enhance brain function, improving memory, supporting the central nervous system
and aiding in the production of neurotransmitters in the brain. Included in this
group of products is Melatonin, which was first introduced into the U.S. health
food and professional market by NutriCology. Melatonin has many nutritional
benefits. However, its main function in the body is to support the aspects of
brain chemistry involved in sleep.
"COMPLETE" NUTRIENT FORMULAS
The Company produces a family of products which it refers to as
"complete" nutrient formulas. These products include: Complete Immune(TM) ,
Complete Heart(TM), Complete Heart II(TM), and Complete Nerve(TM). (These
products are sold as Wholly Immune(TM), Take Heart(TM), and Steady On(TM) under
the Allergy Research Group label, which is marketed to professionals). Complete
Immune(TM) is a blend of herbs and nutrients designed to work synergistically to
enhance the body's natural immunity system, decrease oxidative damage, promote
liver detoxification and to regulate cell division. Complete Heart(TM) and
Complete Heart II(TM) are comprehensive cardiovascular support formulas and are
prepared with or without hormones DHEA and Pregnenolone (Complete Heart II(TM)
does not contain these hormones). Both formulas support general nutrition, ATP
(adenosine triphosphate) production, catabolism and homocysteine metabolism,
anti-oxidant function and maintenance of serum viscosity and cardiovascular
health. Complete Nerve(TM) is a comprehensive neurovasular support formula that
provides nutrients that have been shown to improve blood and oxygen supply to
the brain, potentially improving brain function. This formula provides general
nutrition, precursors for the formation of L-dopa and dopamine, support for the
generation of neurotransmitters, support of healthy emotional response,
increased neuromuscular control and support against oxidative degeneration of
central neurons.
SPECIALTY PRODUCTS
The Company produces and/or distributes a number of "specialty items"
which do not fall into its general product categories. These products include
HomoCysteine Metabolism Formula, which provides a good source of folic acid and
B vitamins to facilitate the breakdown of homocysteine (a toxic amino acid that
can cause vascular disease, playing a role in stroke, myocardial infarction
(heart attack), and carotid artery damage among others) back into methionine and
other metabolites. Methionine is one of the sulfur-containing amino acids
(cysteine and cystine are others) and is important for many bodily functions.
Through its supply of sulfur, it helps prevent problems of the skin and nails.
It acts as a lipotropic agent to prevent excess fat buildup in the liver and the
body, is helpful in relieving or preventing fatigue, and may be useful in some
cases of allergy because it reduces histamine release. It also may help lower an
elevated serum copper level. Methionine is of concern mainly because it is the
limiting, or the least abundant, amino acid in most foods.
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The Company produces and distributes Mastica, an encapsulated product
which contains Mastic gum, a resinous exudate obtained from the stem and the
main leaves of the Pistacia Lentiscus tree indigenous to the Mediterranean (most
notably the Greek Island of Chios). The gum has been reported in the New England
Journal of Medicine to be effective against several strains of Helicobacter
pylori. Mastica has become one of our most popular products and we are aware of
only one other distributor in the United States.
Another of our specialty products is Earth Dragon, an herbal
combination product developed by Dr. Ba Hoang and his family of three
generations of Vietnamese doctors. The product includes dried earthworms (Earth
Dragons), which are used traditionally in the Vietnamese diet to aid human
digestive system. Recent studies by Professor Joel Weinstock, University of
Iowa, support the theory that certain microorganisms may play a key role in
modulating intestinal immunity. Weinstock believes that ingesting a very
specific species of parasitic worm may be highly effective in the treatment of
inflammatory bowel diseases such as ulcerative colitis and Crohn's disease,
which are believed to be caused by an overactive immune response to normal
intestinal bacteria. Earth Dragon is a proprietary product of Dr. Hoang and is
unique to the Company.
The Company produces a hypoallergenic product using germanium, which is
a semimetallic element in the same family as carbon, silicon, tin and lead.
Germanium sesquioxide may be used in the treatment of anemia, a blood condition
involving an abnormal oxygen carrying potential. NutriCology was the first
company in the United States to introduce germanium sesquioxide. We currently
produce germanium in both powder and capsule form.
One of our specialty products is Laktoferrin(TM), which consists of a
bovine colostrum derived immuno enhancer called lactoferrin, which is used as a
food supplement. Colostrum is the first milk, obtained during the first two days
of milk after birth of the calves. Lactoferrin is one of the body's own
immunodefensive proteins and is found in small quantities in most body fluids
such as saliva, tears, nasal secretions, intestinal fluids and, in much greater
quantities, in human colostrum. Besides food supplements, other potential
applications of Laktoferrin(TM) include use as an antibacterial agent in
personal hygiene products and use as an iron supplement. The Company obtains
lactoferrin from New Zealand grain fed cattle. We produce two forms of
Laktoferrin(TM), one with 250 mg of Colostrum.
The Company recently obtained exclusive U.S. distribution rights for
Eurocel, a product made from Korean and Chinese herbs that have been used
historically in Oriental medicine. Testing done on Eurocel indicates positive
results in patients with Hepatitis C, indicating a significant decrease in viral
titers. Since Eurocel is only a recent addition to our product line, we cannot
yet predict what percentage of sales it will represent.
Other "specialty products" include three hypoallergenic products known
as NAC (N-Acetyl-L-Cysteine), an antioxidant closely related to L-cysteine but
more stable, Saw Palmetto Complex, which provides the highest quality
standardized Saw Palmetto extract available, together with other active
nutrients that complement its action, and Super Immuno Complex(TM), a daily
high-potency nutritional supplement package designed to boost the body's
immunity system. NAC, when taken orally, will raise blood and tissue cysteine
levels. Cysteine is important for homeostasis, being a key antioxidant, a
glutathione pre-curser and a natural source of sulfur for metabolism. Saw
Palmetto extract is a lipophilic extract of saw palmetto berries, which act as
an anti-inflammatory in the treatment of benign prostate enlargement. Super
Immuno Complex(TM) consists of a combination of capsules of the Company's other
immunodefensive-related products, including Buffered Vitamin C.
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INDUSTRY OVERVIEW
According to Packaged Facts, an independent research firm, the retail
market for vitamins, minerals and other supplements (excluding sports nutrition,
food bars and diet products; the "VMS Products") grew, through 1998, at a
compound annual rate of 15.4% from $5.0 billion in 1994 to $8.9 billion in 1998.
A large portion of this growth is attributable to an increase in sales of
supplements (primarily herbal products), which grew from $1.3 billion in 1994 to
$3.9 billion in 1998. Growth in this category was fueled by the widespread
publicity surrounding such herbs as echinacea, garlic, ginseng, gingko, Saw
Palmetto and St. John's Wort.
Despite growth through 1998, industry sources indicate that the growth
rate in the nutritional supplement industry slowed significantly in 1999. We
believe this slowdown is partially due to a decline in sales at the retail level
of St. John's Wort and other herbal products that were in greater demand in the
first half of 1998, largely as a result of media attention, and to a more
generalized industry-wide slowing of growth across most product categories. We
believe that, as a result, orders to manufacturers and suppliers were reduced in
1999.
We believe the historical industry growth through 1998 was caused by
several factors, including; (i) favorable demographic trends towards older
Americans, who are more likely to consume nutritional supplements; (ii) product
introductions in response to new scientific research findings supporting the
positive health effects of certain nutrients; (iii) the nationwide trend toward
preventive medicine in response to rising health care costs; (iv) increased
consumer interest in alternative health and herb-related supplements; and (v)
the heightened understanding and awareness of healthier lifestyles and the
connection between diet and health. Moreover, although the industry has grown
dramatically in recent years, there is still a large untapped domestic market as
only an estimated 56% of Americans currently consume vitamins, herbs and
nutritional supplements on a regular basis.
Vitamins and nutritional supplements are sold through several channels
of distribution: health and natural food stores, mass market retailers (drug
store chains, supermarkets and other mass merchandisers), direct sales channels
(including network marketing and catalog distribution), and e-commerce via the
Internet. According to Packaged Facts, in 1998 the mass market channel accounted
for approximately 49% of the sales of vitamin, mineral and supplement products,
health and natural food stores accounted for approximately 39% of sales and
direct selling, mail order and the Internet accounted for approximately 12% of
sales.
Over the past several years, public awareness of the positive effects
of vitamins and nutritional supplements on health has been heightened by widely
publicized reports of scientific findings supporting such claims. Many studies
have indicated a correlation between the regular consumption of selected
vitamins and nutritional supplements and reduced incidences of a wide range of
conditions, including cancer, heart disease, stroke, arthritis, osteoporosis,
mental fatigue, depression, declining immune function, macular degeneration,
memory loss and neural tube birth defects. Reports have indicated that the
United States government and universities have generally increased sponsorship
of research relating to vitamins and nutritional supplements. In addition,
Congress has established the Office of Alternative Medicine in the National
Institutes of Health to foster research into alternative medical treatments
which may include natural remedies and has also directed the Office of Dietary
Supplements in the National Institutes of Health to conduct and coordinate
research into the role of dietary supplements in maintaining health and
preventing disease.
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We expect that the aging of the United States population, together with
a corresponding increased focus on preventative health measures, should result
in increased demand for vitamins and nutritional supplement products. According
to the United States Census Bureau, through 2010, the 35-and-older age group of
consumers, which represents a substantial majority of regular users of vitamin
and nutritional supplements, is expected to grow significantly faster than the
general United States population. Based on information supplied by Packaged
Facts indicating that approximately 56% of Americans consumed vitamins and
nutritional supplements on a regular basis in 1998, we believe that there is a
large untapped domestic market for vitamins and nutritional supplements.
While the retail channel of distribution for vitamins and nutritional
supplements has been consolidating, there has not yet been any significant
consolidation among the companies that manufacture and sell these products. The
vitamin and nutritional supplement industry remains fragmented, and we believe
that no company controls a significant share of the market.
Our work with Dr. Ba Hoang, one of our Medical Advisors, has lead to
research into a number of herbal products that we plan to sell as supplements
and which may also be developed into strict pharmaceutical products with patent
protection. We have already submitted two patent applications, one for the
treatment of asthma and another for the treatment of ITP, idiopathic
thrombocytopenia, which is a common bleeding disease. We have recently completed
an option agreement to license these products to Phytopharm plc, a UK based
pharmaceutical company. This company is a public pharmaceutical company that
specializes in developing botanicals for drug use. They work with inventors, and
move research ideas into full scale research.
COMPETITION
Strong interest in nutritional supplements has resulted in a large
number of competitors in the marketplace. The market has many growth companies
with strong marketing and sales abilities, quality products and sound
management. According to the trade magazine Whole Foods, health food store sales
throughout the nation grew in revenues from $9 billion to $17 billion in 1998.
Nutritional supplements represent approximately 25% of those revenues according
to Whole Foods. Vitamins and nutritional supplements are sold primarily through
the following channels of distribution: health and natural food stores, mass
market retailers (drug store chains, supermarkets and other mass merchandisers),
and direct sales channels (including network marketing, catalog and Internet
distribution).
A few of our competitors are listed below:
THORNE RESEARCH. Thorne manufactures products similar to those of the
Company, in approximately the same price range, and markets its products only to
health care professionals. In fact, in marketing to professionals, Thorne is
probably our biggest competitor. However, Thorne tends to cater to Naturopathic
Doctors, while the Company markets to a broader range of professionals in the
medical field. In addition, our products are more generally available than those
of Thorne since they can be purchased directly or in stores.
METAGENICS, INC. We have a broad spectrum of medical professionals who
buy our products, including, but not limited to, Chiropractors, whereas
Metagenics primarily targets Chiropractors. The two companies have different
market focuses, as Scottsdale Scientific does not concentrate on courting
chiropractors.
DOUGLAS LABS. This company manufactures some products which are similar
to ours and does a lot of private labeling for members of the health care
profession. Although we feel that our products are as good or better than those
of Douglas, we are not yet equipt to compete with their products in the private
labeling market.
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JARROW FORMULAS. Jarrow manufactures high quality products which are
marketed in the retail market. We believe their products are of a higher quality
than those of either TwinLab or KAL, and their products are generally priced a
little lower than ours. The retail market for Jarrow products seems to be
growing; while most of our sales are from the professional market.
TWINLAB. This is a mass market-focused company, whereas Scottsdale
Scientific concentrates on sales to medical professionals. The Company has plans
to enter the mass market in the next few years, but believes that
scientifically-based products such as the Company's will be sought after. There
will be some overlap with the TwinLab customer base at this time, but it is not
expected to adversely impact our current revenue stream.
NATURE'S WAY. This company focuses on the private label business
segment, not on sales to medical professionals. We plan to increase our focus on
the private label segment. We received a favorable response to our products in
the EU marketplace at the European Private Label Exhibit. As the private label
customer looks to add products into its line, we believe scientifically-based
products will be sought-after. There will be some overlap with Nature's Way
customer-base, but this is not expected to adversely impact our current revenue
stream.
KAL. This company produces herbal products. Currently we do not carry
many herbal products and do not view KAL as a direct competitor. Should we begin
producing and marketing herbal products as a result of our research and on
nutraceuticals, there is a chance that we will be in direct competition with
products produced by KAL.
SOLGAR VITAMIN AND HERB COMPANY. Solgar (acquired by American Home
Products, Inc. during 1998) has made in-roads into the international
marketplace, which is an arena management feels will be a viable growth avenue
for the Company. While competition with Solgar may cause some overlap, it will
not adversely impact our current revenue stream.
REXALL SUNDOWN, Inc. develops, manufactures, markets and sells
vitamins, nutritional supplements and consumer health products through sales to
retailers, direct sales through independent distributors and mail order. It
offers a line of approximately 800 products, including vitamins in both
multivitamin and single-entity formulas, minerals, herbals, weight management
products, homeopathic remedies, sports nutrition products and personal care
products, and is in direct competition with some of the our vitamin and
nutritional supplement products.
WEIDER NUTRITION INTERNATIONAL, INC. develops, manufactures, markets,
distributes and sells branded and private label vitamins, nutritional
supplements and sports nutrition products in the United States and throughout
the world. It offers a broad range of capsules and tablets, powdered drink
mixes, bottled beverages and nutrition bars. Its portfolio of recognized brands,
including Schiff, Weider Sports Nutrition, MetaForm and American Body Building,
are primarily marketed in four principal categories, sports nutrition, vitamins,
minerals and herbs, weight management and healthy snacks. Weider carries a
broader range of products than the Company, a few of which are in direct
competition with some of our products. However, although we use mass marketing,
Weider appears to focus its marketing efforts on the sports sector.
PURE ENCAPSULATIONS, manufactures a line of hypo-allergenic nutritional
supplements (vitamins, minerals, standardized herbal extracts, amino acids,
protein powders, and other nutrients), which are marked directly to individuals
in the health care industry. Some of these products are similar to ours, and we
will experience competition from Pure Encapsulations to varying degrees.
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Some of the companies listed above, and many other corporations in the
health and nutritional supplement business, are better funded and possess
superior managerial and marketing resources. We plan to compete primarily on the
basis of superior service and differentiate the Company by marketing its high
quality products directly to professionals, allowing a greater percentage of
products to be distributed under private labeling and producing products which
address needs that have not been met by our competitors' products.
The Company is also expanding into the field of research on
pharmaceuticals and nutraceuticals. While we hope that this research will lead
to discovery of new uses for herbs which may be incorporated into our existing
products or used to develop new products, we will also market our research
results to pharmaceutical companies for further research and clinical trials. It
is our intention to obtain patents for our research, and to sell these patents
to interested pharmaceutical companies. Due to the limited nature of our
activities in the field of pharmaceutical and nutraceutical research - the
Company will not perform clinical trials - the identity and nature of our
competitors is uncertain. However, we anticipate competition from pharmaceutical
companies conducting internal research on new products as well as outside
research groups, such as ClinTrials, that are hired by pharmaceutical companies
to conduct research on their behalf. In addition, products produced under
patents to which the Phytopharm option applies will experience competition from
alternative or similar products produced by Phytopharm's competitors.
MARKET STRATEGIES
Scottsdale Scientific has divided sales into multiple market channels:
o Allergy Research Group (Professional product label) - Physicians,
nutritionists, chiropractors and health care professionals.
o NutriCology, Inc. (Wholesale/Retail product label) - Wholesale
accounts including health food stores and direct catalog sales to
consumers.
o Private labeling to other health and wellness companies.
The Company markets its products under both broadline brands for
NutriCology, Inc. and Allergy Research Group, and private labeling. Broadline
brands offer a complete range of products under one brand name, including
multivitamins, single-entity vitamins, minerals and nutritional supplements,
including herbal products. Private label products which are usually marketed
under the retailer's store brand name also offer a wide product assortment,
albeit typically somewhat narrower in scope than broadline brands, including
national brand equivalent formulas positioned as lower-priced "compare and save"
products. We currently provide private labeling to a number of our physician
accounts.
Currently, the Company markets its products through the use of trade
shows, direct marketing to physicians, nutritionists, chiropractors and health
care professionals, contractual arrangements with distributors (who market the
products themselves), advertising in trade magazines, radio shows in which Dr.
Levine participates, direct sales to health food stores and pharmacies, and
direct catalog sales to consumers. The Company's direct sales marketing team is
currently limited, consisting of two primary sales representatives. The Company
is in the process of expanding its in-house marketing team and is adding two
additional sales representatives in January 2001.
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REGULATION
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the United States Department
of Agriculture and the Environmental Protection Agency ("EPA"). These activities
are also regulated by various agencies of the states, localities and foreign
countries in which the Company's products are manufactured, distributed and
sold. The FDA, in particular, regulates the formulation, manufacture and
labeling of vitamin and other nutritional supplements in the United States.
On October 25, 1994, the President signed into law the DSHEA. This new
law revises the provisions of the FFDC Act concerning the composition and
labeling of dietary supplements and, in our judgment, is favorable to the
dietary supplement industry. The legislation creates a new statutory class of
"dietary supplements." This new class includes vitamins, minerals, herbs, amino
acids and other dietary substances for human use to supplement the diet, and the
legislation grandfathers, with certain limitations, dietary ingredients on the
market before October 15, 1994. A dietary supplement which contains a new
dietary ingredient, one not on the market before October 15,1994, will require
evidence of a history of use or other evidence of safety establishing that it
will reasonably be expected to be safe, such evidence to be provided by the
manufacturer or distributor to the FDA before it may be marketed. The DSHEA also
invalidates the FDA's prior enforcement theory that dietary supplements are food
additives requiring pre-market approval.
Products marketed by the Company are classified as dietary supplements
under the FFDC Act. Advertising and label claims for dietary supplements have
been regulated by state and federal authorities under a number of disparate
regulatory schemes. There can be no assurance that a state will not interpret
claims presumptively valid under federal law as illegal under that state's
regulations, or that future FDA or FTC regulations or decisions will not
restrict the permissible scope of such claims.
Both foods and dietary supplements are subject to the Nutrition
Labeling and Education Act of 1990 (the "NLEA"), which prohibits the use of any
health claim for foods, including dietary supplements, unless the health claim
is supported by significant scientific agreement and is either pre-approved by
the FDA or the subject of substantial government scientific publications and a
notification to the FDA. To date, the FDA has approved the use of only a limited
number of health claims for dietary supplements. However, among other things,
the DSHEA amends, for dietary supplements, the NLEA by providing that
"statements of nutritional support" may be used in labeling for dietary
supplements without FDA preapproval if certain requirements, including prominent
disclosure on the label of the lack of FDA review of the relevant statement,
possession by the marketer of substantiating evidence for the statement and
post- use notification to the FDA, are met. Such statements, commonly referred
to as "structure function" claims, may describe how particular nutritional
supplements affect the structure, function or general well-being of the body
(e.g. "promotes your cardiovascular health").
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On November 18, 1998, the FTC published "Dietary Supplements: An
Advertising Guide for Industry," a guide describing FTC policy governing dietary
supplement advertising. The guide provides additional explanation but does not
substantively change the FTC's policy requiring that product claims be truthful
and supported by adequate substantiation as to the truthfulness of the claim.
Governmental regulations in foreign countries where the Company plans
to commence or expand sales may prevent or delay entry into the market or
prevent or delay the introduction, or require the reformulation, of certain of
the Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.
These distributors are independent contractors over whom the Company has limited
control.
We cannot predict the nature of any future laws, regulations,
interpretations or applications, nor can we determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on the Company's business in the future. They could, however, require
the reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not capable of reformulation, additional
record keeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition. Compliance with the provisions of
national, state and local environmental laws and regulations has not had a
material adverse effect upon the capital expenditures, earnings, financial
position, liquidity or competitive position of the Company.
Because the Company does not intend to manufacture pharmaceuticals and
nutraceutical products itself, but will only conduct literature work and patent
applications for potential products, we do not anticipate application of
regulations governing the manufacturer of pharmaceuticals.
EMPLOYEES
As of the date of this registration statement, the Company, together
with NutriCology, employs approximately 46 full-time and 4 part-time employees.
We expect to hire other personnel, including sales representatives and corporate
officers, as necessary for sales and marketing and administration. The Company
does not have any collective bargaining agreements with its employees and we
believe its employee relations are good.
INTELLECTUAL PROPERTY
The Company's trademarks are valuable assets which are very important
to the marketing of our products. Our policy is to pursue registrations for all
of the trademarks associated with our key products. The Company has
approximately seven (7) trademark registrations with the United States Patent
and Trademark Office with others in the application process, including one for
OcuDyne. We rely on common law trademark rights to protect our unregistered
trademarks. Common law trademark rights do not provide the Company with the same
level of protection as would U.S. federal registered trademarks. In addition,
common law trademark rights extend only to the geographic area in which the
trademark is actually used, while U.S. federal registration prohibits the use of
the trademark by any third party anywhere in the United States.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The following discussion should be read in conjunction with the
Company's financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. In addition to historical
information, the following discussion and other parts of this document contain
certain forward-looking information. When used in this discussion, the words
"believes," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those projected due to a number of factors beyond the Company's control.
The Company does not undertake to publicly update or revise any of its
forward-looking statements even if experience or future changes show that the
indicated results or events will not be realized. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. Readers are also urged to carefully review and consider the
Company's discussions regarding the various factors which affect its business
included in this section and elsewhere in this Registration Statement.
RESULTS OF OPERATIONS
Please refer to the financial statements, which are a part of this
Registration Statement for further information regarding the results of
operations of the Company.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
During the fiscal year ended December 31, 1999, the Company had net
sales of $13,205,493, representing a decrease of approximately $245,000 or 2%
from net sales of $13,450,758 during fiscal year ended December 31, 1998. Cost
of sales decreased approximately $376,000 or 4% to $8,344,852 for the year ended
December 31, 1999, compared to $8,721,194 for the year ended December 31, 1998.
Gross profit margins increased approximately 2%, resulting from the Company's
successful implementation of planned cost reduction programs, which included the
Company's efforts to continue to actively pursue and replace existing vendors
(with more favorable terms), resulting in reduced raw material costs and storage
costs. Additionally, during 1999, the Company reduced its physical inventory
levels by approximately one-third, which further contributed to substantial
savings to the Company in terms of raw material costs and storage costs.
Operating expenses increased by approximately $439,000 or 7% to
$6,517,635 for the year ended December 31, 1999 from $6,079,061 for the year
ended December 31, 1998, primarily attributable to increased payroll and related
costs resulting from the placement of several key personnel, increased leasing
expenses for the new facility, and increased consulting expenses related to
implementing the Company's new 25,000 square-foot facility.
Interest expense increased approximately $43,000 for the year ended
December 31, 1999 as compared to 1998 as a result of the Company's outstanding
line of credit balance during most of 1999, which was used to finance its
accounts receivable and inventory.
As of December 31, 1999, the Company recorded a deferred tax asset of
$24,454 to be realized as a result of future taxable income offset by net
operating loss carryforwards. As of fiscal year ended December 31, 1999, the
Company had approximately $2,600,000 available in federal and state net
operating loss carryforwards to offset future taxable income, which expire
principally in the year 2019.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
During the nine months ended September 30, 2000, the Company
experienced a decrease in net sales of approximately $875,000, or 9%, to
$8,743,084 compared to $9,618,648 for the nine months ended September 30, 1999.
The decrease is primarily attributable to a decrease in sales to professionals.
Cost of sales decreased approximately $1,005,000, or 16%, to $5,243,477 for the
nine months ended September 30, 2000, compared to $6,248,006 for the nine months
ended September 30, 1999. Although sales and costs of sales decreased from the
prior operating period, gross profit margins increased approximately 5% as a
result of the Company's successful implementation of planned cost reduction
programs, which include the Company's efforts to continue to actively pursue and
replace existing vendors (with more favorable terms), resulting in reduced raw
material costs and storage costs. In addition, during 1999, the Company reduced
its physical inventory levels by approximately one-third, which further
contributed to substantial savings to the Company in terms of raw material costs
and storage costs.
Operating expenses decreased by approximately $1,300,000, or 29%, to
$3,176,794 for the nine months ended September 30, 2000, from $4,477,067 for the
nine months ended September 30, 1999. The decrease is primarily attributable to
an approximate decrease of $800,000 in payroll and costs resulting from the
departure of several members of management and other employees. The Company is
currently re-building its management team from within to support its continued
growth and, is in the process of recruiting an additional sales person for the
Northern California region and new personnel to operate its management
information system following departure of a current employee. In the interim,
the Company may obtain the services of outside management consultants. As
personnel are added or transitioned, the Company may experience an increase in
payroll and related costs, and/or, if the services of outside consultants are
utilized, an increase in costs due to consulting fees. As a result of changes in
management, the Company has been successful in reducing its selling expenses,
including advertising, printing and promotion costs, by approximately $288,000.
The Company continues to seek out business and industry savvy individuals
willing to serve on the Company's Board of Directors, who can advise management
on its growth strategy. Although directors are not currently compensated, the
Company may be required to offer some form of compensation to attract new
directors. It is not anticipated that compensation of directors will have a
material impact on the Company's cost of operations however, since director
compensation would most likely take the form of equity compensation and/or
attendance fees.
Total expenses paid for outside consultants for the nine months ended
September 30, 2000 decreased approximately $176,000, offset by approximately
$200,000 in legal fees incurred primarily as a result of the Company's efforts
to file a registration statement and become a fully reporting company.
Additionally, the Company has centralized its operations to its corporate
headquarters by closing down offsite locations, thereby reducing total occupancy
costs by approximately $175,000.
As of September 30, 2000, the Company recorded a deferred tax asset of
$116,370 to be realized as a result of taxable income offset by net operating
loss carryforwards. The Company has approximately $2,300,000 available in
federal and state net operating loss carryforwards to offset future taxable
income, which expire principally in 2019.
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LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
At December 31, 1999, the Company had a negative working capital of
$86,217, with an outstanding line of credit balance of $608,005. The line of
credit was used to finance the Company's accounts receivables and inventory
during fiscal year 1999.
Net cash flows used in operating activities was $33,745 for the year
ended December 31, 1999, resulting primarily from a decrease in inventory of
$2,473,183, a decrease in income tax deposits of $220,195, and a decrease in
accounts payable of $1,413,401. Net cash flows used in operating activities for
the year ended December 31, 1998 was $566,179, primarily resulting from an
increase in income tax deposits of $220,195, a decrease in inventory of
$376,789, and an increase in accounts payable of $580,833. During 1999, the
Company decreased its inventory levels by approximately one-third to curtail its
warehousing and inventory costs, which contributed to the significant decrease
in accounts payable of $1,413,401 from 1998 to 1999.
Net cash flows used in investing activities was $194,480 and $467,125
for the years ended December 31, 1999 and 1998, respectively, which was
primarily used to purchase the equipment necessary to increase its manufacturing
and distribution capacity.
Net cash flows provided by financing activities was $58,575 and
$1,241,810 for the years ended December 31, 1999 and 1998, respectively, and was
primarily attributable to proceeds from the sales of its common stock of $37,500
and $790,499, respectively, advances under its line of credit of $75,000 and
$533,005, respectively, and repayments under capital lease obligations of
$71,425 and $84,367, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
The Company regained a positive working capital position during the
nine months ended September 30, 2000. As of that date, the Company had positive
working capital of $249,463. The Company's outstanding line of credit balance
used to finance its accounts receivable and inventory was $956,898.
At September 30, 2000, net cash flows from operating activities was
$204,274, resulting from an increase in inventory of $213,246 and a decrease in
accounts payable of $273,142. Net cash flows used in operating activities for
the nine months ended September 30, 1999 was $951, primarily resulting from a
decrease in inventory of $1,736,979 and a decrease in accounts payable of
$1,021,494. As of September 30, 2000, the Company had no backlog of business.
Net cash flows used in investing activities was $86,561 and $193,140
for the nine months ended September 30, 2000 and 1999, respectively. The Company
continues to purchase the equipment necessary to increase its manufacturing and
distribution capacity to support its sales volume.
Net cash flows provided by financing activities was $290,711 and
$129,164 for the nine months ended September 30, 2000 and 1999, respectively,
and was primarily attributable to advances under its line of credit of $348,893
and $150,000, respectively, reduced by repayments under capital lease
obligations of $58,182 and $49,435, respectively.
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PLAN OF OPERATION
During the next twelve months, the Company will continue to work with
Dr. Hoang on his proprietary herbal formulas and patent applications with a view
to developing additional research which can be marketed to the pharmaceutical
and nutraceutical industries under agreements similar to that with Phytopharm.
In addition, should Phytopharm exercise its option, the Company and Dr. Hoang
will continue to work with Phytopharm to develop new products based on the
existing patent applications.
In addition to our work in the pharmaceutical and nutraceutical fields
of research, we hope to add new products to our existing product line. The
Company will devote resources to the development of ImmKine, a bacterial
cell-wall immunostimulant used for immune depressive diseases such as CFS. It is
anticipated that ImmKine will be added to the Company's current line of products
in January 2001. As a result of these activities, the Company may experience an
increase in research and development costs over the next year. The Company is
also in discussions with the developer of an anti-angiogenic compound
("C-Statin"), a product designed to block abnormal angiogenisis (development of
blood and lymph vessels), with a goal towards establishing the Company as the
master distributor of the product. Management hopes to enter into a license
agreement with the patent-holder for distribution of the product during January
2001.
Management believes that the Company has good relations with all of its
current manufacturers and suppliers. Subsequent to year end, we have experienced
a concentration of approximately 50% of our manufacturing with three separate
vendors, with Horizon Laboratories manufacturing 26% of our products. However,
we believe that, due to the large number of businesses performing this type of
service in the industry, the Company would have little difficulty in finding
viable alternatives in the event Horizon Laboratories became unable or
determined not to continue manufacturing the Company's products.
The Company's future funding requirements will depend on numerous
factors, some of which are beyond the Company's control. These factors include
the Company's ability to operate profitably, its ability to recruit and train
management and personnel, and its ability to compete with other, better
capitalized and more established competitors who offer alternative or similar
products to those of the Company. Management believes that, given its positive
working capital position, the Company can satisfy its cash requirements over the
next twelve months from operations if it continues to operate at a profit. The
Company's capital resources and liquidity are expected to be provided by the
Company's cash flow from operations, and borrowings under its $1,200,000 line of
credit with Aerofund Financial, Inc. ("Aerofund"). In addition, the Company has
available net operating loss carryforwards of approximately $2,300,000 to offset
future taxable income, and continued repayment of notes are expected to act as
contributing factors to the Company's profitability.
The Aerofund line of credit provides for maximum financing of
$1,200,000, bearing interest at prime plus three percent (3%), computed on a
monthly basis. As of September 30, 2000 the balance outstanding under the line
of credit was $956,898. The Company has been making monthly interest payments on
the balance. Because the line of credit is secured by substantially all of the
assets of the Company, if the Company were to fall into default under the terms
of its agreement with Aerofund it could have material adverse impact on the
Company's business and financial position. Management is currently seeking
financing on better terms from other financial institutions.
One of the Company's business strategies is to pursue acquisition
opportunities that complement or extend its existing products or product lines,
or are compatible with its business philosophy and strategic goals. Future
acquisitions could be financed by internally generated funds, bank borrowings,
public offerings or private placements of equity or debt securities, or a
combination of the foregoing. There can be no assurance that the Company will be
able to make acquisitions on terms favorable to the Company and that funds to
finance an acquisition will be available or permitted under the Company's
financing instruments.
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RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board,
which are not required to be adopted at this date include SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the effective Date of SFAS No. 133" and SFAS
No. 138, "Accounting For Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133". SFAS No. 133, as amended
by SFAS No. 137 and SFAS No. 138, is not expected to have a material impact on
the Company's financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition In Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company is required to adopt
SAB 101 no later than the fourth quarter of fiscal 2000. SAB 101 is not expected
to have a material impact on the Company's financial statements.
RECENT DEVELOPMENTS
On April 20, 2000, the Company's common stock became ineligible for
listing on the Nasdaq Over-The-Counter Bulletin Board under NASD Eligibility
Rule 6530. The Company is currently traded on the pink sheets under the symbol
"STDS", and hopes to re-establish its stock on the OTCBB upon clearance of this
registration statement by the U.S. Securities and Exchange Commission. Once the
registration statement has cleared comments, the Company's stock will be
eligible for re-listing on the OTCBB upon acceptance by Nasdaq of the
application of one of the Company's market makers for such a listing.
On December 18, 2000, the Company will hold its annual meeting of
shareholders, at which shareholders will be asked to approve an amendment to the
Company's Articles of Incorporation, changing the name of the Company to
"Allergy Research Group, Inc."
ITEM 3. DESCRIPTION OF PROPERTY
The Company's main administrative and warehouse, located in Hayward,
California, is leased at a rate of $17,682 under a five year lease which
commenced June 1, 1998. The lease contains a provision allowing for an increase
in rent of 5% per annum. The property consists of approximately 25,440 square
feet of office and warehouse space, of which approximately 5,500 square feet is
office space and 19,940 square feet consists of warehouse space. The Company
previously maintained a second warehouse for warehousing and packaging purposes,
which was sublet during the nine months ended September 30, 2000 at a loss to
the Company. During fiscal years ended 1999 and 1998, the Company paid rent on
its facilities of $312,036 and $145,692, respectively, including $48,000 in rent
paid on its previous facilities in 1998. For the period ended December 1, 2000,
the Company has paid total rent of $331,152 on both facilities, with a loss of
$25,192 on the facilities currently being sublet.
19
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of December 31, 1999
concerning the beneficial ownership of the Company's common stock by (i) each
director, (ii) each named executive officer, (iii) each shareholder known by the
Company to be the beneficial owner of more than 10% of its outstanding Common
Stock, and (iv) the directors and officers as a group. Except as otherwise
indicated, the persons named in the table have sole voting and investing power
with respect to all shares of Common Stock owned by them.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Name and Address of Beneficial Amount and Nature of Percent of Class
Title of Class Owner Beneficial Ownership
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$.001 par value common stock Stephen Levine, Ph.D.
30806 Santana Street 9,800,000 (3) 66%(1)
Hayward, California 94544
$.001 par value common stock Officers and Directors as a group 9,800,000 65%(2)
</TABLE>
--------------
(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or warrants
or the conversion of convertible securities within 60 days from December 31,
1999, these additional shares are deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by such persons, but are not
deemed outstanding for the purpose of computing the percentage owned by any
other person.
(2) Percentages are based on 15,055,355 shares outstanding on December 1, 2000.
(3) Represents shares held jointly with the Company's Secretary, Susan Levine,
as community property. Percentage calculation includes currently vested options
held by Susan Levine.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The management and directors of the Company's business activities are
under the control of its Board of Directors. Its Chief Executive Officer, Dr.
Steven Levine, manages the Company's daily operations. The Company currently has
three directors. Below are the executive officers and directors of the Company.
NAME POSITION HELD(1)
---- -------------
Stephen Levine, Ph.D. Chief Executive Officer, President,
30806 Santana Street and Chairman of the Board
Hayward, California 94544
Susan Levine Chief Promotions Officer, Secretary,
30806 Santana Street Director
Hayward, California 94544
Ed Kane (1) Director
45 Reese Road
Millville, NJ 08332
----------------
(1) Mr. Kane is an independent director of the Company.
20
<PAGE>
The following is a summary of the business experience of the officers
and directors of the Company, as well as other key employees.
STEPHEN LEVINE, PH.D. (50) has served as the Company's Chief Executive
Officer from December 1997 to January 1999 and recommenced service to the
Company in that capacity in January 2000, upon resignation of Marianne Sum. Dr.
Levine has been Chairman of the Board and a Director of the Company since
December 1997. Dr. Levine graduated cum laude from the State University College
in Buffalo, New York and received his Ph.D. from the University of California,
Berkeley. In 1979, Dr. Levine founded NutriCology/Allergy Research Group and was
employed as its owner and operator from that time until 1998, when NutriCology
was acquired by the Company. He now serves as Chairman of the Board of
Directors, as well as being employed as Director of Research. Dr. Levine is the
author of AntiOxidant Adaption, Its Role in Free Radical Pathology. Dr. Levine
is the husband of Susan Levine, who acts as Vice President of Convention Sales
of the Company.
SUSAN LEVINE (46) has served as the Secretary and Chief Promotions
Officer and Director to the Company since December 1997. Mrs. Levine resigned
her board membership temporarily between January 1999 and January 2000. In
addition, Susan Levine acts as the Company's Public Relations and Conventions
and Travel Specialist. Since 1980, Mrs. Levine has worked with her husband, Dr.
Stephen Levine, in the creation and development of NutriCology. Prior to working
for the Company, Mrs. Levine was the Director of Senior Housing ECHO, a
non-profit organization located in Hayward, California, where her duties
included grant writing and coordination of workers for social programs.
ED KANE (74) was appointed to the Company's Board of Directors on
November 8, 2000. From 1955 to present, Mr. Kane has acted as the sole owner and
chief executive officer of Kane Steel, a company that has current gross sales of
$25 million and over 120 employees. Mr. Kane also started K-TRON International
("KTII") in 1964. KTII was the first to digitize weigh feeding, which is a
system used to continuously weigh and feed material for the process industries.
KTII is listed on the over-the-counter market and is a $120 million company
today, with plants in Switzerland and the United States. In addition, Mr. Kane
started K-FLOW International ("KFI") in 1980 to manufacture a patented mass flow
meter. KFI was merged into the instrument division of the Swiss firm Asea Braun
Bavari in 1991. Expanding into the health field ten years ago, Mr. Kane and his
wife Patricia, a Ph.D., founded BodyBio Corporation, a specialized laboratory
analysis service utilized by physicians worldwide in interpreting blood test
results. Mr. Kane is currently the chief executive officer of BodyBio
Corporation. Mr. Kane has been a student of science and medicine for most of his
adult life, and holds a degree from the Temple University. Mr. Kane's particular
focus has been on fatty acid metabolism. He has been a visiting professor at the
Wharton School of Business in Philadelphia and instructs physicians in a
biomedical course on lipid metabolism five times yearly. Mr. Kane holds several
U.S. patents on steel structures, instrumentation and biochemistry. The city of
Millville, New Jersey recently recognized Mr. Kane as one of the three leading
industrialists of the last half century.
KEY EMPLOYEES
CLINTON ABBOTT has served as Purchasing Manager of the Company since
October 1999. Mr. Abbott has filled various roles for the Company: From July
1999 to September 1999, he acted as Pharmacy Market Development Manager; from
September 1998 to July 1999 he acted as Purchasing and Facilities Manager; from
April 1997 to September 1998 he acted as Purchasing/Warehouse Manager; and from
December 1996 to April 1997, he acted as Purchasing Manager. Mr. Abbott brings
20 years of experience with two of the largest pharmaceutical wholesalers in the
U.S., Cardinal Health ($240 million per year in sales) and Bergen Brunswig ($140
million per year), where he held titles of Purchasing, Operation and
Distribution Manager. Mr. Abbott holds a B.S. degree in Business Administration
from California State University, Sacramento, where he graduated in 1980.
21
<PAGE>
LUBA VOLOSHKO, PH.D. has served as Director of Quality Control to the
Company since 1998. Dr. Voloshko came to Scottsdale Scientific with a Ph.D. in
chemistry from the Moscow University of Chemical Technology. Dr. Voloshko was
the Chemical Department Chief at the Laboratory of Foresensic Science in Riga
Latvia for twelve years from 1984 through 1997 before coming to the U.S. Dr.
Voloshko keeps abreast of all FDA regulations related to the nutritional
supplement industry, conducts random and specific product and material testing,
oversees the receipt and release of all raw materials and finished goods, and
well as reviewing product labeling for accuracy.
HORTENSE AMARANTE serves as Customer Service Manager and Accounting
Supervisor to the Company. One of the most senior employees at Scottsdale
Scientific, Ms. Amarante has been with the Company since 1990 filling many
roles, primarily in the accounting department which she now supervises. Ms.
Amarante was recently also promoted to Manager of Customer Service. Prior to
joining the Company Ms. Amarante worked in the Accounting Department for First
Select Visa for five years. Ms. Amarante was educated in Portugal and holds a
Bachelors of Arts degree in Education.
BEVERLY WEAVER, acts as national Sales Manager for the Company since
2000. Ms. Weaver came to work for the Company as its Texas sales representative
in 1997, an area that covers Arizona as well. Prior to coming to the Company,
Ms. Weaver was the business manager for Rhythm of Life Wellness Center in Mesa
Arizona from 1995 to 1997. Ms. Weaver attended the University of Houston for two
years and the Pan American College in Edinburgh, Texas for one year. In her
current position, she attends trade shows, visits doctors and coordinates
efforts of other members of the Company's sales staff.
DIANE RAILE, CNC, acts as Technical Support Coordinator to the Company.
A Certified Nutrition Consultant, Ms. Raile was educated at the Institute for
Educational Therapies in Cotati, California. Ms. Raile acts as intermediary
between customers and the Scottsdale Scientific research and development
department, as well as coordinator of the Company's product library. Prior to
joining the Company in 1998, Ms. Raile held teaching positions at IET campuses
and Trinity College in San Francisco and maintained a private nutritional
practice. Ms. Raile is an accomplished public speaker on the subject of
nutrition. She taught at IET from September 1997 to July 1998 and with Trinity
from October 1997 to March 1998.
MEDICAL ADVISORY BOARD
The Company has a Medical Advisory Board, currently consisting of the
following members:
DR. JEFFRY ANDERSON. Dr. Anderson is Medical Advisory Board co-chairman
with Dr. Stephen Levine. Dr. Anderson is a Marin County based medical doctor
whose work in the area is well known. Dr. Anderson consults with Dr. Levine to
develop state of the art designer supplements the Company is known for
originating. Prior to his consulting work with the Company, Dr. Anderson was in
private practice in Marin County for approximately 25 years. He has been working
with Dr. Levine during for approximately the past ten years, at the same time
acting as a consulting physician for other companies. He is best known for his
ground-breaking work in the fields of Chronic Fatigue Syndrome and Fibro
Mialgia. Dr. Anderson was one of the first Bay Area Physicians to focus on the
causes of Chronic Fatigue. His extensive work in immune system dysfunctions make
him the perfect choice to help head up Scottsdale Scientific's Medical Advisory
Board. Dr. Anderson received his M.D. from the Indiana University School of
Medicine in 1969.
22
<PAGE>
DR. FOUAD I. GHALY, M.D. Dr. Ghaly has been consulting with the Company
for approximately two years. He specializes in cardiovascular health, using a
preventive medical approach in both his cardiovascular and anti-aging protocols.
Dr. Ghaly has appeared on several local television programs focusing on
cardiovascular health, as well as lecturing at conferences worldwide, most
notably in the Soviet Union in 1992 at the Cardiovascular Institute. Dr. Ghaly
has acted as a diplomat for the American Board of Anti-Aging Medicine (June
1999) and for the American Board of Anethesiology (March 1975). For the past
five years, he has been engaged in private practice in Beverly Hills, CA, and
acts as President of the Rejuvenation & Longevity Medical Clinic. Dr. Ghaly
received his M.D. from the University of Alexandria Medical School in
Alexandria, Egypt in 1965, with internships and residencies in Egypt, Canada and
Johns Hopkins Hospital in Baltimore, MD.
DR. BA HOANG. Dr. Hoang has been consulting with the Company since
August 1999. He is also a scientific advisor with Get Well International, Inc.,
and research consultant for the Institute of Transplant Research at the
University of California Davis. From 1996 to 1998, Dr. Hoang acted as founder
and director of the Research of the Natural Immune Supplements Corp., where he
focused on research and development of natural supplements for chronic
infectious diseases, chronic viral infections, allergy, asthma, auto-immune
diseases and immune suppressed conditions. From 1995 to present, Dr. Hoang has
acted as research collaborator of the Biochemistry Department of the Royal
Holloway University of London, where he works on the investigation of anti-HIV1
activities and the mode of action of herbal species. He is the co-receiver of
the Wellcome Trust Grant. From 1993 to 1996, Dr. Hoang was senior research
associate St. Petersburg Pediatric medical Academy, Russia, where he conducted
research for the development of a new approach to the diagnosis and treatment of
Auto-Immune Thrombocytopenic Purpura Asthma. Dr. Hoang has received the Visa O1
for persons with extraordinary ability in science, and has published several
articles in medical journals.
DR. MICHAEL ROSENBAUM MD. Dr. Rosenbaum has been consulting with Dr.
Levine since inception of NutriCology. He is an original member in the
Orthomolecular medical Society under Linus Pauling. Dr. Rosenbaum previously
held the position of President of the Orthomolecular Medical Society and is well
recognized as an author and lecturer by his lectures. Dr. Rosenbaum has also
been the President of the Huxley Society and a medical director of the Primal
Therapy Center. He has had a private practice in environmental medicine, allergy
and immunology in both Marin County and Santa Monica since 1977. Dr. Rosenbaum
received his M.D. from the Albert Einstein College of Medicine in New York City
in 1968. He has authored several books, including "the Natural Way to Energize &
Revitalize Your Life" in 1999, and has published a number of articles in medical
journals. Currently, Dr. Rosenbaum acts as a member of the review panel for The
Healthy Foundation and Vitamins for the Homeless, and as a director for the
Orthomolecular Health Medicine Organization.
DR. DANIEL RUBIN, N.C. Dr. Rubin has been a medical and technical
consultant to the Company since 1997, and acted as our national spokesperson
during 1999. He is the Director of Clinical Research and Attending Physician at
Aidan, Incorporated, an Immunology or Oncology company in Tempe, Arizona, which
designs and manufactures state-of-the art immunological products and protocols.
He is also the Medical Director for the Being Alive Wellness Center, the medical
program of AIDS Project Arizona. He received his N.D. from Southwest College of
Naturopathic Medicine, where he also did his residency, in 1997. Dr. Rubin has
extensive teaching experience, and has delivered lectures in Asia as well as the
United States on Cancer Immunology and HIV Disease.
The Company's success is substantially dependent upon the efforts of
Dr. Stephen Levine. The loss of Dr. Levine, whom we regard as the Company's
visionary, could have a material adverse effect on the Company if a suitable
replacement were not found. Our future success is likely to depend substantially
on its continued ability to attract and retain highly qualified personnel, and
the competition for such personnel is intense.
23
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
REMUNERATION PAID TO EXECUTIVES
The following table sets forth the remuneration to the Company's
executive officers for the past three fiscal years:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
------------------------------------------
| Long Term Compensation |
------------------------------------- ------------------------------------------
| Annual Compensation | Awards | Payouts |
------------------------------------- --------------------------- -------------- ---------------
| Other | | | |
| Annual | Restricted Securities| | |
Name and | Compen- | Stock Underlying| LTIP | All Other |
Principal | sation | Award(s) Options/ | Payouts | Compensation |
Position Year | Salary ($) Bonus ($) ($) | ($) SARs (#)| ($) | ($)(3) |
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen 1997 | 90,000 - - | - - | - | 4,750 |
Levine, 1998 | 167,336 - - | - - | - | 11,900 |
CEO(6) 1999 | 165,846 - - | - - | - | 13,543 |
| | | | |
Susan 1997 | 66,000 | | | 4,750 |
Levine, 1998 | 113,392 - - | - - | - | 5,000 |
Secretary(6) 1999 | 99,846 - - | - 150,000 | - | 6,643 |
| | | | |
Joseph M. 1997 | - - - | - - | - | - |
Feller 1998 | - - - | - - | - | - |
COO(3) 1999 | 76,938 - - | - - | - | 10,913 |
| | | | |
Marianne 1997 | - - - | - - | - | - |
Sum, CEO(1) 1998 | 136,350 - - | - - | - | 8,174 |
1999 | 174,276 - - | - - | - | 9,824 |
| | | | |
Edward Lau, 1997 | 97,712 - - | - - | - | 7,559 |
COO(4) 1998 | 126,811 - - | - - | - | 4,037 |
1999 | 150,735 - - | - - | - | 4,522 |
| | | | |
Samantha 1997 | - - - | - - | - | - |
Jewett, 1998 | - - - | - - | - | - |
VP of 1999 | 100,600 - - | - - | - | 3,018 |
Operation (5) | | | | |
</TABLE>
-----------------
(1) Marianne Sum resigned her position as Chief Executive Officer and
Director of the Company on January 26, 1999, at which time Stephen
Levine was reappointed to that position.
(2) Includes matching funds contributed under the Company's 401(K) Plan,
auto allowances and premiums paid on Officer Life Insurance policies.
(3) Joseph M. Feller left the Company in June 2000. The Company currently
has no Chief Operating Officer.
(4) Edward Lau resigned his position as Chief Operating Officer/General
Manager on February 4, 2000.
(5) Samantha Jewett resigned her position with the Company in June 2000.
(6) In fiscal year 2000, each of Stephen Levine and Susan Levine have
agreed to a reduction in salary of approximately 20%.
24
<PAGE>
During the last fiscal year and as of December 31, 1999, the Company
granted stock options to executive officers as set forth in the following table:
OPTION/SAR GRANTS ENDED DECEMBER 31, 1999
Individual Grants
------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise of Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
------------ ------------- ------------- ----------------- ----------
Susan Levine 150,000
The following table is intended to provide information as to the number
of stock options exercised by each of the executive officers listed above, the
value realized upon exercise of such options, and the number and value of any
unexercised options still held by such individuals.
23
<PAGE>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at FY-
at FY-End (#) End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
------------ --------------- ------------ --------------- ----------------
Susan Levine 150,000
REMUNERATION PAID TO DIRECTORS
The following table sets forth the remuneration paid to the Company's
directors during its fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
| Cash Compensation | Security Grants |
----------------- ----------------------------------------------- ----------------------------
| | | | | Number of |
| | | | | Securities |
| Annual Retainer| | Consulting | Number of | Underlying |
Name | Fees | Meeting Fees | Fees/Other Fees | Shares | Options/SARs|
--------------- | ---------------| ------------ | --------------- | ---------- | ------------|
<S> <C> <C> <C> <C> <C>
Stephen Levine | | | | | |
--------------- | ---------------| ------------ | --------------- | ---------- | ------------|
Susan Levine | | | | | |
--------------- --------------- ------------ --------------- ---------- ------------
</TABLE>
25
<PAGE>
EMPLOYMENT AGREEMENTS
The Company does not have a current employment agreement with its Chief
Executive Officer.
EMPLOYEE BENEFITS
1998 INCENTIVE STOCK OPTION PLAN. The Company's Board of Directors and
shareholders adopted the 1998 Incentive Stock Option Plan on July 10, 1998 and
reserved an aggregate of 1,000,000 shares of Common Stock for grants of stock
options under the plan. The purposes of the 1998 Incentive Stock Option Plan are
(a) to attract and retain the best available people for positions of substantial
responsibility and (b) to provide additional incentive to the employees of the
Company and to promote the success of the Company's business.
On March 25, 1999, the Board of Directors approved the issuance of
options to purchase 100,000 shares of common stock to each of its directors as
compensation for services. On January 26, 1999, Mr. Arnold Takemoto and Susan
Levine resigned their director positions with the Company, and relinquished
their rights to the options issued to them. These options were immediately
exercisable at an exercise price of $2.00 per share and expire on December 31,
2003. However, in 1999, the Company issued options to purchase 150,000 shares of
common stock to Susan Levine as compensation for her services as an officer of
the Company. These options also are immediately exercisable for an exercise
price of $2.00 per share. On January 26, 1999, the Company issued options to
purchase 100,000 shares of common stock at a per share exercise price of $4.00
to Dr. Pollycove for her services as a director of the Company. These options
were canceled pursuant to Dr. Pollycove resignation from the board.
The 1998 Incentive Stock Option Plan is administered by the Board of
Directors, which has the authority to select individuals who are to receive
options under the Plan and to specify the terms and conditions of each option so
granted (incentive or nonqualified), the vesting provisions, the option term and
the exercise price. The 1998 Incentive Stock Option Plan includes two separate
plans: Plan A provides for the granting of options that are intended to qualify
as incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and Plan B provides for the
granting of non-qualified stock options. Each Plan will terminate on July 31,
2003, unless sooner terminated by the Board.
An option granted under the 1998 Incentive Stock Option Plan expires
five (5) years from the date of grant or, if earlier, on the date of the
optionee's termination of employment or service, no more than six (6) months of
the optionee's death or disability. Options granted under the 1998 Incentive
Stock Option Plan are not generally transferable by the optionee except by will
or the laws of descent and distribution and generally are exercisable during the
lifetime of the optionee only by such optionee. The Board of Directors has
authority to grant options under the 1998 Incentive Stock Option Plan to
non-officer employees (including outside directors) of the Company and
consultants to the Company at an exercise price not greater than the fair market
value of the Common Stock on the date of grant.
In the event of (i) the merger or consolidation of the Company in which
it is not the surviving corporation, or pursuant to which shares of Common Stock
are converted into cash, securities or other property (other than a merger in
which holders of Common Stock immediately before the merger have the same
proportionate ownership of the capital stock of the surviving corporation
immediately after the merger), (ii) the sale, lease, exchange or other transfer
of all or substantially all of the Company's assets (other than a transfer to a
majority-owned subsidiary), or (iii) the approval by the holders of Common Stock
of any plan or proposal for the Company's liquidation or dissolution (each,
a"Corporate Transaction"), the Board of Directors will determine whether
26
<PAGE>
provision will be made in connection with the Corporate Transactions for
assumption of the options under the 1998 Incentive Stock Option Plan or
substitution of appropriate new options covering the stock of the successor
corporation, or an affiliate of the successor corporation. If the Board of
Directors determines that no such assumption or substitution will be made, each
outstanding option under the 1998 Incentive Stock Option Plan shall
automatically accelerate so that it will become 100% vested and exercisable
immediately before the Corporate Transaction, except that acceleration will not
occur if, in the opinion of the Company's accountants, it would render
unavailable "pooling of interest" accounting for the Corporate Transaction.
RULE 401(K) RETIREMENT PLAN. In January 1997, the Company adopted the
NutriCology, Inc. 401(k) Retirement Plan (the "401(k) Plan"). Eligible employees
may contribute up to 15 percent of their annual compensation, subject to certain
limitations, and the Company will match 50 percent of an employee's
contribution. The Company will not match before tax contribution amounts in
excess of 6% of the employee's compensation. Total provisions with respect to
these plans approximated $46,372, $35,026 and $35,000 for the years ended
December 31, 1997,1998 and 1999, respectively. During the nine months ended
September 30, 2000, the Company contributed $21,495 in matching funds to the
401(k) Plan.
CAFETERIA PLAN. In May 1999, the Company adopted the NutriCology, Inc.,
ARG Cafeteria Plan pursuant to section 125 of the Internal Revenue Code
("Cafeteria Plan"), retroactive to January 1999. Eligible employees may
contribute a portion of their upcoming pay to special funds or accounts to pay
for certain benefits under the Cafeteria Plan, including health care
reimbursement, day-care assistance and insurance premiums on health care
insurance programs. Ordinarily, these expenses would be paid with out-of-pocket,
taxable dollars. Under the Cafeteria Plan, the amounts contributed are not
subject to Federal income or Social Security taxes. Employees may submit
requests for reimbursement of these expenses to the administrator of the
Cafeteria Plan, benefitStreet.com, at any time during a plan year. At the end of
each plan year, any unspent monies will be forfeited by the employees unless
requests for reimbursement are made no later than 60 days after the end of the
year. The Company will automatically contribute enough of the employee's
compensation to pay for insurance coverage provided under its health plan;
however, it is up to the employee to determine the amount of any additional
contributions.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stephen Levine, the Company's Chief Executive Officer and Chairman of
the Board of Directors, and Susan Levine, the Company's Secretary, are husband
and wife.
In September 19, 1997, NutriCology invested $20,000 in BodyBio
Corporation, a company started by the Company's independent director, Ed Kane.
As of the date of this registration statement, none of these funds have been
repaid. The investment has been booked as "Other Assets" on the Company's
consolidated financial statements.
Stephen and Susan Levine loaned NutriCology approximately $286,000
prior to its reverse acquisition by the Company in 1998. Current records
indicate that the loan has been offset and exceeded by advances made to the
Levines, seventy-three percent (73%) of which were made prior to the reverse
acquisition. Each advance has been made as a non-interest bearing, due on demand
loan on the books of the Company. The Company's audited financial statements
indicate that as of December 31, 1999 and 1998, the amounts due from Mr. Levine
were $166,002 and $123,602, respectively. At the request of the Levines, the
amount of the advances is currently being reviewed for accuracy.
27
<PAGE>
In 1999 Dr. Levine stepped down from his CEO position to focus on the
development of new products. He and his wife, Susan Levine, formed Inventive
Biomedical, LLC, a California limited liabililty company ("IBM"), as a research
and development firm. The company was initially funded by Scottsdale, with the
intention that it would eventually carry itself with its own product line. In
return for the initial funding, Scottsdale was given the first right of refusal
on any products developed through IBM.
Dr. Levine and the Company also utilized the IBM staff for marketing
purposes related to Scottsdale products, including informative letters from Dr.
Levine to the professional accounts on new research and products, almost
exclusively Allergy Research Group products.
IBM currently sells one herbal product, Liver Calm. As of December
2000, the operations of IBM have been scaled down considerably to limit
overhead, while sales of the Liver Calm grow steadily.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 100,000,000 shares of its
$.001 par value common stock, of which 15,055,355 shares are issued and
outstanding as of December 1, 2000, exclusive of options to purchase 250,000
shares and warrants to purchase 133,500 shares currently outstanding. The Board
of Directors may issue additional shares of Common Stock without the consent of
the holders of Common Stock.
VOTING RIGHTS
Each outstanding share of Common Stock is entitled to one vote. The
holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than 50% of such outstanding shares voting for the election
of directors can elect all of the directors of the Company to be elected, if
they so choose.
NO PREEMPTIVE RIGHTS
Holders of Common Stock are not entitled to any preemptive rights.
DIVIDENDS AND DISTRIBUTIONS
Holders of Common Stock are entitled to receive such dividends as may
be declared by the directors out of funds legally available therefore and to
share pro rata in any distributions to holders of Common Stock upon liquidation
or otherwise. However, the Company has not paid cash dividends on its Common
Stock, and does not expect to pay such dividends in the foreseeable future.
PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors to
issue, by resolution, up to 10,000,000 shares of preferred stock, in classes or
series having such designations, powers, preferences, rights, and limitations as
the Board of Directors may from time to time determine.
ANNUAL SHAREHOLDERS' MEETING
The Company has given notice of its annual shareholders' meeting to be
held December 18, 2000. At that meeting, shareholders will vote to elect
directors, to change the name of the Company to Allergy Research Group, Inc.,
and to ratify the Company's choice of accountants for fiscal year end December
31, 2000.
28
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock traded on the Over-the-Counter Bulletin
Board from December 1997 to April 19, 2000 under the symbol "STDS." The
following table sets forth the trading history of the Common Stock on the Over
the Counter Bulletin Board and on the pink sheets (as reflected after April 20,
2000) for each quarter, as reported by Tradeline. The quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
END DATE HIGH LOW CLOSE
-------- ---- --- -----
December 31, 1997 2 1/4 $2.25 7/64 $0.11 2 1/4 $2.25
March 31, 1998 2 35/64 2.55 1 49/64 1.77 2 23/64 2.36
June 30, 1998 5 27/64 5.42 2 19/64 2.30 3 43/64 3.67
September 30, 1998 3 3/4 3.75 2 2.00 2 3/8 2.38
December 31, 1998 2 9/16 2.56 1 5/16 1.31 1 9/16 1.56
March 31, 1999 2 3/4 2.75 1 7/16 1.44 2 2.00
June 30, 1998 2 1/2 2.50 29/32 0.91 1 5/16 1.31
September 30, 1999 1 11/32 1.34 13/32 0.41 31/64 0.48
December 31, 1999 35/64 0.55 3/16 0.19 23/64 0.36
March 31, 2000 15/32 0.47 13/64 0.20 13/64 0.20
September 29, 2000 19/64 0.30 7/64 0.11 5/32 0.17
*November 30, 2000 9/64 0.14 3/32 0.09 1/8 0.13
* Partial period data.
HOLDERS
As of December 1, 2000, there were approximately 102 holders of record
of the Company's common stock.
DIVIDENDS
The Company has never paid a cash dividend on its Common Stock. Payment
of dividends is at the discretion of the Board of Directors. The Board of
Directors plans to retain earnings, if any, for operations and does not intend
to pay dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
In 1993, a lawsuit was filed in the Circuit Court of the 15th Judicial
Circuit in and for Palm Beach County, Florida by NutriSupplies, Inc., successor
in the interest to rights of Robert H. Harris and the Earth Harvest, Inc.
against NutriCology, Inc. (which has since become a wholly-owned subsidiary of
the Company), Stephen A. Levine (officer, director and beneficial shareholder of
the Company) and Nicholas Gonzales, M.D. This matter is a contract dispute
between Dr. Gonzales and NutriSupplies, Inc., which alleges that Dr. Gonzales
29
<PAGE>
violated their contract agreement and then returned to NutriCology to supply his
patients' needs. NutriCology and Dr. Levine were named in the suit only because
NutriCology had been Dr. Gonzales' supplier. Dr. Gonzales has fully indemnified
NutriCology and Dr. Levine from any wrong-doing. NutriCology did not specify an
amount of relief sought in its suit. Dr. Gonzales has liability coverage of
$1,000,000 for this dispute. A motion for summary judgment granted in favor of
NutriCology is currently being appealed by the plaintiffs in this action. We
anticipate that the Company's potential exposure, if any, will consist primarily
of legal costs and will not exceed $200,000.
On March 25, 1999, a complaint was filed against NutriCology by East
Park Research, a Nevada corporation, in the District Court of Clark County,
Nevada, alleging breach of contract for failure to pay amounts due. The
NutriCology had been granted an exclusive license to distribute one of East
Park's products, Eden Extract(TM), in January 1996. However, NutriCology revoked
the license agreement in May 1996, when the product delivered to NutriCology was
found to be of a lower grade than that promised under the license agreement. The
product was rejected as nonconforming. However, Eastpark did not cure the defect
or replace the nonconforming product. The complaint filed by East Park alleges
that NutriCology has an outstanding balance of $37,000 due to East Park for the
product. The matter was sent to non-binding arbitration under Nevada law, and
the arbitrator ruled in favor of NutriCology. However, East Park has since filed
a motion for trial de novo and that matter has been reopened in the Nevada
court. The parties are currently in the discovery process of the litigation.
Management believes that, as with the arbitration, it will ultimately prevail;
however, there can be no assurance that the matter will be determined in the
Company's favor and the Company may, in addition to its legal costs in defending
the action, be required to make payment to East Park.
On June 29, 2000, a complaint was filed against Scottsdale Scientific
and its former director, Arnold Takemoto, in Superior Court of the State of
Arizona, County of Maricopa, by Joseph Breslin, one of the Company's
shareholders. The Complaint arises out of the sale of Common Stock to Mr.
Breslin in 1998, and alleges causes of action for securities fraud, breach of
fiduciary duty, misrepresentation and unjust enrichment. We feel that these
claims are unfounded and have filed a general denial of the allegations
contained in the Complaint.
In September 2000, a complaint was filed against the Company in the
Superior Court of California, Marin County, by two of the Company's former
officers - Joseph M. Feller, former Chief Operating Officer, whose employment
was terminated in June 2000, and Samantha M. Jewett, who voluntarily resigned
her position as Vice President of Operations in June 2000. The complaint alleges
that both employees were wrongfully terminated by the Company and were
terminated in violation of respective employment contracts. The Company did not
have a formal written employment agreement with either of these former
employees. Administrative claims filed by these individuals with the State of
California have been denied, and the Company is confident that it can
successfully defend the claims.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During its last fiscal year and as of the date of this Registration
Statement, the Company has had no changes in or disagreements with its principal
independent accountant regarding any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, nor
has the Company's principal accounting firm resigned or declined to stand for
re-election.
30
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On February 3, 1998, the Company issued 6,800,000 shares of restricted
common stock to Dr. Stephen Levine in exchange for all of the outstanding common
shares of NutriCology under Section 4(2) of the Securities Act. As a part of
that transaction, Dr. Levine also acquired 3,000,000 restricted shares of the
Company's common stock from Hermal Rayat, a former officer and director of the
Company. Dr. Levine still holds all of the 9,800,000 shares so issued under Rule
144 restrictions.
On April 1, 1998, the Company approved a Regulation D, Rule 504 Private
Placement Offering of 96,000 shares at $1.625 per share with a warrant
exercisable at $1.75 per share until April 15, 2000. The proceeds from this
offering were to be used for advertising and marketing. The placement was
completed on April 30, 1998 with all shares sold. The offering price was
determined based upon the Company's price range for the previous quarter on the
OTC Bulletin Board of $1.875 to$2.56 per share, with a slight discount given to
attract investors.
A Regulation D, Rule 504 offering was approved July 1, 1998,
authorizing the sale of 46,855 shares of common stock of the Company at $3.18
per share. The offering was completed in July 1998, with all shares sold and the
proceeds were used as additional capital to develop the business of the
Company's subsidiary, NutriCology, Inc. The offering price was determined based
upon the Company's price range for the previous quarter on the OTC Bulletin
Board of $2.3125 to $4.06 per share, with a slight discount given to attract
investors.
On July 24, 1998, the Board agreed to offer 20,000 shares of the
Company's common stock via a Regulation D, Rule 504 Private Placement Memorandum
at $2.50 per share with a warrant exercisable at $2.00 per share until July 31,
2000. The proceeds from this offering, which was completed on July 31, 1998 with
all shares sold, were used to market the Company. In addition, 61,500 shares
were authorized for issuance to Lorraine Peller in order to resolve an
outstanding finder's fee in connection with the acquisition of NutriCology, Inc.
These shares were issued pursuant to Section 4(2) of the Act.
On July 31, 1998, the Company issued options to purchase 100,000 shares
of its common stock to Wendy Appleyard, a then employee of the Company in
recognition of services rendered to the Company. The options were issued with an
exercise price of $2.00 and were issued pursuant to Section 4(2) of the Act
pursuant to the Company's 1998 Stock Option Plan. None of these options have
been exercised as of the date of this Registration Statement, and will expire on
the fifth-year anniversary of the date of grant.
On September 11, 1998, the Company's Board of Directors approved a
Regulation D, Rule 504 offering of 50,000 shares of common stock at $2.00 per
share. This offering was completed on September 30, 1998 with all shares sold
and the proceeds were used to market the company. The Board also approved the
cancellation of the acquisition of the rights to "ProGreens" and the
cancellation of 50,000 shares paid to Jim Cassidy for these rights.
The Board of Directors met on October 9, 1998 and approved a Regulation
D, Rule 504 offering of 15,000 shares of the Company's common stock at $1.00 per
share and an additional 75,000 shares of common stock at $1.00 per share with a
warrant exercisable at $1.00 per share until October 13, 2000. These funds were
used to meet the expenses of the company. The offering was completed on October
30, 1998, with all shares sold.
31
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation contain a provision which, in
accordance with Florida law, eliminates or limits the personal liability of
directors and officers of the Company for monetary damages for certain breaches
of their duty of care or other duty if he or she acted in good faith and in a
manner they believed to be in, or not opposed to, the best interests of the
Company, except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the
Company unless otherwise determined by the court before which such action was
brought. The Company believes this provision is essential to maintain and
improve its ability to attract and retain competent directors. These
indemnification provisions do not reduce the exposure of directors and officers
to liability under federal and state securities laws, nor do they limit the
shareholders' ability to obtain injunctive relief or other equitable remedies
for a violation of a director's or officer's duty to the Company or its
shareholders, although such equitable remedies may not be an effective remedy in
certain circumstances.
Insofar as indemnification for liabilities arising under the U.S.
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company is
informed that it is the opinion of the U.S. Securities and Exchange Commission
that such indemnification is against public policy and therefore unenforceable.
ITEM 6. FINANCIAL STATEMENTS
Please see the Company financial statements attached hereto.
32
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
ITEM EXH. NO.
---- --------
Registrant's Articles of Incorporation 2.1
Registrant's Articles of Amendment to
Articles of Incorporation dated January 15, 1998 2.2
Registrant's Bylaws 2.3
Form of Common Stock Certificate 3.1
Form of Non-Qualified Stock Option 3.2
Form of Incentive Stock Option 3.3
Form of Common Stock Purchase Warrant 3.4
1998 Stock Option Plan 6.1
License Agreement between Registrant and
Jim Cassidy dated March 21, 2000 6.2
Option Agreement between Registrant,
Dr. Ba Hoang and PhytoPharm PLC 6.3
Loan and Security Agreement between
Registrant and Aerofund Financial, Inc. 6.4
Consent of Auditors 10.1
ITEM 2. DESCRIPTION OF EXHIBITS
As appropriate, the Registrant has attached those documents required to
be filed as Exhibit Numbers 2, 3, 5, 6 and 7 of Part III of Form 1-A.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, hereunto duly authorized.
SCOTTSDALE SCIENTIFIC, INC.
Date: December 14, 2000 By: /s/ Stephen Levine
------------------------------------
Stephen Levine, Chairman and CEO
Date: December 14, 2000 By: /s/ Susan Levine
------------------------------------
Susan Levine, Secretary and Director
Date: December 14, 2000 By: /s/ Ed Kane
------------------------------------
Ed Kane, Director
34
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
FOR FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1998
Independent Auditors' Report...................................................................F-3
Consolidated Balance Sheets....................................................................F-4
Consolidated Statements of Operation...........................................................F.6
Consolidated Statements of Stockholder's Equity................................................F-7
Consolidated Statements of Cash Flows..........................................................F-9
Notes to the Consolidated Financial Statements................................................F-11
AS OF SEPTEMBER 30, 2000 AND 1999 AND THE PERIODS THEN ENDED
Consolidated Balance Sheet....................................................................F-19
Consolidated Statement of Cash Flow...........................................................F-20
Consolidated Statements of Income.............................................................F-21
Notes to the Interim Financial Statements.....................................................F-23
SCOTTSDALE SCIENTIFIC, INC. FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED DECEMBER 31, 1997
Independent Auditors' Report..................................................................F-27
Balance Sheet at December 31, 1997............................................................F-28
Statement of Operations from Inception (April 8, 1997)........................................F-29
Statement of Stockholders' Equity from Inception (April 8, 1997)..............................F-30
Statement of Cash Flows from Inception (April 8, 1997)........................................F-31
Notes to the Financial Statements.............................................................F-33
NUTRICOLOGY, INC. FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED DECEMBER 31, 1997
COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1996
Independent Auditors' Report..................................................................F-37
Balance Sheet.................................................................................F-38
Statement of Income...........................................................................F-40
Statement of Stockholders' Equity.............................................................F-41
Statement of Cash Flows.......................................................................F-42
Notes to the Financial Statements.............................................................F-44
</TABLE>
<PAGE>
SCOTTSDALE SCIENTIFIC, INC.
HAYWARD, CALIFORNIA
AUDIT REPORT
DECEMBER 31, 1999 AND 1998
F-1
<PAGE>
CONTENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheet at December 31, 1999 and 1998 . . . . . . . F-4
Consolidated Statements of Operations For the Years Ended
December 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Stockholders' Equity For the Years
Ended December 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to the Consolidated Financial Statements . . . . . . . . . . . . F-11
All schedules are omitted because they are not applicable or the required
Information is shown in the financial statements or notes thereto.
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Scottsdale Scientific, Inc.
Scottsdale, Arizona 94544
We have audited the consolidated balance sheets of Scottsdale Scientific, Inc.,
(the Company), as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1999 and 1998, and the consolidated results of their operations and
their consolidated cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
July 5, 2000
F-3
<PAGE>
SCOTTSDALE SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
------ ------------- -------------
Current Assets
Cash and Cash Equivalents $ 55,356 $ 225,006
Accounts Receivable, Net of Allowances for
Doubtful Accounts and Returns, $232,921 and
$256,000 969,943 1,049,079
Inventories (Note 3) 1,065,428 3,538,611
Refundable Income Tax Deposits 0 220,995
Prepaid Income Taxes (Note 10) 800 0
Prepaid Expenses and Other Current Assets 119,414 132,769
Deferred Tax Assets (Note 10) 24,454 135,000
------------- -------------
Total Current Assets 2,235,395 5,301,460
Property and Equipment, Net (Note 4) 872,304 942,558
Other Assets
Deposits 28,410 38,630
Due From Officers (Note 5) 166,002 123,602
Cash Surrender Value of Life Insurance (Note 6) 40,405 33,953
Intangible Assets, Net of Amortization of $2,436 21,925 0
Organization Costs, Net of Amortization of $635 0 2,540
------------- -------------
Total Other Assets 256,742 198,725
------------- -------------
Total Assets $ 3,364,441 $ 6,442,743
============= =============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ------------- -------------
<S> <C> <C>
Current Liabilities
Accounts Payable and Accrued Liabilities $ 1,639,671 $ 3,053,072
Line of Credit (Note 7) 608,005 533,005
Notes Payable, Current Portion (Note 8) 0 6,225
Capital Lease Obligation, Current Obligation (Note 9) 73,886 76,314
Income Taxes Payable (Note 10) 50 850
------------- -------------
Total Current Liabilities 2,321,612 3,669,466
Long-Term Liabilities
Capital Lease Obligation, Current Obligation (Note 9) 172,099 208,822
------------- -------------
Total Liabilities 2,493,711 3,878,288
Commitments and Contingencies (Note 11)
Stockholders' Equity
Preferred Stock, $0.25 Par Value, Authorized 1,000,000
Shares, Issued and Outstanding, None 0 0
Common Stock, $0.001 Par Value, Authorized 100,000,000
Shares, Issued and Outstanding, 15,055,355 and
15,017,855, at December 31, 1999 and 1998, respectively 15,055 15,018
Additional Paid In Capital 1,133,927 1,032,464
Retained Earnings (A Deficit) (278,252) 1,516,973
------------- -------------
Total Stockholders' Equity 870,730 2,564,455
------------- -------------
Total Liabilities and Stockholders' Equity $ 3,364,441 $ 6,442,743
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
Year Ended December 31: 1999 1998
------------- -------------
<S> <C> <C>
Revenues $ 13,205,493 $ 13,450,758
Cost of Sales 8,344,852 8,721,194
------------- -------------
Gross Profit 4,860,641 4,729,564
Operating Expenses
Selling, General and Administrative 5,539,055 5,148,469
Research and Development 978,580 930,592
------------- -------------
Total Operating Expenses 6,517,635 6,079,061
------------- -------------
Operating Loss (1,656,994) (1,349,497)
Other Income (Expense)
Interest Income 13,841 2,119
Interest Expense (90,691) (47,901)
Loss on Disposal of Fixed Assets (8,498) (9,432)
------------- -------------
Total Other Income (Expense) (85,348) (55,214)
------------- -------------
Net Loss Before (Provision) Benefit For Income Taxes (1,742,342) (1,404,711)
Provision (Benefit) For Income Taxes (Note 10) (50,343) 101,351
------------- -------------
Net Loss Before Cumulative Effect of Accounting Change (1,792,685) (1,303,360)
Cumulative Effect of Accounting Change (2,540) -
------------- -------------
Net Loss Available to Common Stockholders $ (1,795,225) $ (1,303,360)
============= =============
Basic Loss Per Common Share
Loss Before Cumulative Effect of Accounting Change $ (0.12) $ (0.09)
Cumulative Effect of Accounting Change - -
Net Loss $ (0.12) $ (0.09)
============= =============
Basic Weighted Average Common Shares Outstanding 15,042,855 13,617,386
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid In Earnings
Shares Amount Shares Amount Capital (A Deficit) Total
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 7,700,000 7,700 525,300 (417,057) $ 115,943
Net Equity of Nutricology, Inc. 2,000 2,000 0 2,815,673 2,817,673
Reverse Acquisition: February
1998, Retire Old Shares of
Nutricology, Inc. (2,000) (2,000) 2,000 0
Retire Net Equity of Scottsdale
Scientific, Inc. (533,000) 421,717 (111,283)
Common Stock in Exchange For
Net Book Value of Scottsdale
Scientific, Inc. 6,800,000 6,800 104,483 111,283
Issuance of Common Stock Under
Private Placement Memorandum
Dated April 15, 1998, For Cash
at $1.625 Per Share 96,000 96 155,904 156,000
Exercise of Warrants Under
Private Placement Memorandum
Dated April 15, 1998 For Cash
at $1.75 Per Share 96,000 96 167,904 168,000
Issuance of Common Stock Under
Private Placement Memorandum
Dated July 1, 1998, For Cash at
$3.18 Per Share 46,855 46 148,953 148,999
Issuance of Common Stock Under
Private Placement Memorandum
Dated July 24, 1998, For Cash
at $2.50 Per Share 20,000 20 49,980 50,000
Exercise of Warrants Under
Private Placement Memorandum
Dated July 24, 1998 For Cash at
$2.00 Per Share 20,000 20 39,980 40,000
Issuance of Common Stock For
Services Rendered at $2.00 Per
Share, July 31, 1998 61,500 62 122,938 123,000
Less Issuance Costs (123,000) (123,000)
Issuance of Common Stock Under
Private Placement Memorandum
Dated September 15, 1998, For
Cash at $2.00 Per Share 50,000 50 99,950 100,000
Issuance of Common Stock Under
Private Placement Memorandum
Dated October 13, 1998, For
Cash at $1.00 Per Share 15,000 15 14,985 15,000
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid In Earnings
Shares Amount Shares Amount Capital (A Deficit) Total
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock Under
Private Placement Memorandum
Dated October 13, 1998, For
Cash at $1.00 Per Share 75,000 75 74,925 75,000
Exercise of Warrants Under
Private Placement Memorandum
Dated October 13, 1998, For
Cash at $1.00 Per Share 37,500 38 37,462 37,500
Compensation Costs - Options
Granted 143,700 143,700
Loss, Year Ended December 31, 1998 (1,303,360) (1,303,360)
----------- -----------
Balance, December 31, 1998 0 $ 0 15,017,855 15,018 1,032,464 1,516,973 2,564,455
Compensation Costs - Options Granted 46,500 46,500
Exercise of Warrants
Under Private Placement Memorandum
Dated October 13, 1998 For
Cash at $1.00 Per Share,
Warrants Exercised, April
1999, at $1.00 Per Share 37,500 37 37,463 37,500
Capital Contributions 17,500 17,500
Loss, Year Ended December 31, 1999 (1,795,225) (1,795,225)
----------- -----------
Balance, December 31, 1999 0 $ 0 15,055,355 $ 15,055 $1,133,927 $ (278,252) $ 870,730
=========== =========== ============ =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-8
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<CAPTION>
Year Ended December 31: 1999 1998
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $(1,795,225) $(1,303,360)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities
Compensation Costs 46,500 143,700
Depreciation and Amortization 217,960 131,997
Loss on Disposal of Fixed Assets 8,498 9,433
Charge-off of Organizational Costs 2,540 0
Cash Surrender Value Life Insurance (6,452) (3,584)
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable 79,136 (147,572)
(Increase) Decrease in Inventories 2,473,183 376,789
(Increase) Decrease in Notes Receivable 5,121
(Increase) Decrease in Income Tax Deposits 220,195 (220,995)
(Increase) Decrease in Prepaid Expenses and Other Current Assets 13,355 25,651
(Increase) Decrease in Deferred Tax Assets 110,546 (135,000)
(Increase) Decrease in Deposits 10,220 (31,280)
(Increase) Decrease in Other Receivables 0 12,180
Increase (Decrease) in Accounts Payable and Accrued Liabilities (1,413,401) 580,833
Increase (Decrease) in Income Taxes Payable (800) (10,092)
------------ ------------
Total Adjustments 1,761,480 737,181
------------ ------------
Net Cash Used In Operating Activities (33,745) (566,179)
Cash Flows From Investing Activities
Acquisition of Property and Equipment (127,719) (460,247)
Expenditures for Intangible Assets, Trademarks (24,361) 0
Advances To Officers (42,400) (6,878)
------------ ------------
Net Cash Flows Used In Investing Activities (194,480) (467,125)
Cash Flows From Financing Activities
Proceeds From the Sale of Common Stock 37,500 790,499
Capital Contributions 17,500 0
Net Proceeds From Line of Credit 75,000 533,005
Cash Received for Common Shares in Connection with the
Nutricology Acquisition 0 2,673
Repayments on Notes Payable (6,225) (71,752)
Repayments on Capital Lease Obligations (65,200) (12,615)
------------ ------------
Net Cash Provided By Financing Activities 58,575 1,241,810
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (169,650) 208,506
Cash and Cash Equivalents, Beginning of Period 225,006 16,500
------------ ------------
Cash and Cash Equivalents, End of Period $ 55,356 $ 225,006
============ ============
F-9
<PAGE>
Year Ended December 31: 1999 1998
------------ ------------
Supplemental Information
------------------------
Cash Paid For:
Interest $ 90,691 $ 47,901
============ ============
Income taxes $ 0 $ 115,000
============ ============
Noncash Investing Activities:
Reverse Acquisition-Issuance of 6,800,000 Shares of Common Stock
In Exchange for Net Equity of Scottsdale Scientific, Inc.
Details of Acquisition:
Fair Value of Assets of Scottsdale Scientific, Inc. $ 111,283
Liabilities Assumed 0
------------
Net Book Value of Company 111,283
Less Cash Acquired (2,673)
------------
Total Acquisition, Net of Cash Received $ 108,610
============
Property and Equipment Acquired Under Capital Lease $ 29,305 $ 297,493
============ ============
Compensation Costs $ 46,500 $ 143,700
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-10
<PAGE>
SCOTTSDALE SCIENTIFIC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - ORGANIZATION
------------
Scottsdale Scientific, Inc. (the Company) was incorporated under the
laws of the State of Florida on April 8, 1997, with an authorized
capital of 100,000,000 shares of common stock with a par value of one
mil ($0.001) per share. On January 15, 1998, the Company amended its
Articles of Incorporation to increase authorized capital by 1,000,000
shares of $0.25 par value preferred stock. The Company is engaged in
the wholesale distribution of health and nutritional supplements.
On February 3, 1998, the Company entered into an agreement to acquire
Nutricology, Inc., in exchange for 9,800,000 shares of Scottsdale
Scientific, Inc.'s common stock, consisting of 6,800,000 newly issued
shares and 3,000,000 existing shares transferred in connection with the
acquisition. The acquisition is treated as a reverse acquisition as
prescribed by Accounting Principles Board No. 16, "Business
Combinations," because the shareholders of the company being acquired
retained actual control of the resulting combined company. Nutricology,
Inc. is the continuing reporting entity for accounting purposes and
Scottsdale Scientific, Inc. was the acquirer for legal purposes. The
equity section reflects the recapitalization of the merger: retirement
of old shares and issuance of new shares for the net equity of
Scottsdale Scientific, Inc., with no goodwill being recorded.
Nutricology, Inc., a California corporation, was incorporated on March
11, 1980, and is in the business of developing and marketing natural
nutritional supplements primarily to distributors and health care
professionals throughout the United States.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Method of Accounting
--------------------
The Company's financial statements are prepared using the accrual
method of accounting.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with a
maturity of three months or less when acquired to be cash and cash
equivalents.
Concentration of Credit Risk
----------------------------
The Company maintains cash balances in excess of $100,000. The accounts
are insured by the Federal Deposit Insurance Corporation up to
$100,000.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant intercompany transactions
and balances have been eliminated.
Purchase Method
---------------
Acquisition of the Company's subsidiary is accounted for by the
purchase method following the historical cost principle on the basis of
the fair value of the acquired assets less liabilities assumed in
exchange for the issuance of 9,800,000 shares of the Company's common
stock.
F-11
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
Inventories
-----------
Inventories consist of raw materials, work in process, and finished
goods. Raw materials consist of bulk product that has not been mixed or
encapsulated. Work in Process consists of products in the
mixing/encapsulating stage. Finished goods consist of product that has
been encapsulated or made into tablet form and that has been packaged
for sale. Inventories are stated at the lower of cost or net realizable
value, using the first-in, first-out method.
Property and Equipment
----------------------
Property and equipment, stated at cost, is depreciated under the
straight-line method over their estimated useful lives ranging from
three to ten years.
Revenue Recognition
-------------------
Revenues are recognized and title passes upon shipment to the customer.
Sales are presented net of returns and allowances for 1999 and 1998 of
$1,155,126 and $980,323, respectively.
Allowance for Doubtful Accounts and Return Allowances
-----------------------------------------------------
Accounts Receivable are shown net of allowances for doubtful accounts
and returns which are estimated as a percentage of accounts receivable
based on prior years experience.
Cost Recognition
----------------
Cost of sales includes all direct material and labor costs and those
indirect costs of bringing raw materials to sale condition. Selling,
general and administrative costs are charged to operating expenses as
incurred. Research and Development costs are charged to operations when
incurred and are included in operating expenses. Research and
development costs were $978,580 and $930,592 for 1999 and 1998,
respectively.
Use of Estimates
----------------
Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may vary from these
estimates.
Income Taxes
------------
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax liabilities and assets
are determined based on the difference between the financial statement
and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for stock
options, if any, is measured as the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method
of accounting for stock-based employee compensation plans. The Company
has elected to remain on its current method of accounting as described
above, and has adopted the disclosure requirements of SFAS No. 123,
effective April 1997.
F-12
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
Earnings/Loss Per Share of Common Stock
---------------------------------------
Basic earnings or loss per share has been computed based on the
weighted average number of common shares. All earnings or loss per
share amounts in these financial statements are basic earnings or loss
per share as defined by SFAS No. 128, "Earnings Per Share." Diluted
weighted average shares outstanding exclude the potential common shares
from warrants and stock options because to do so would have been
antidilutive.
Capital Structure
-----------------
The Company has implemented SFAS No. 129, "Disclosure of Information
about Capital Structure," effective January 1, 1998, which established
standards for disclosing information about an entity's capital
structure. The implementation of SFAS No. 129 had no effect on the
Company's financial statements
Comprehensive Income
--------------------
The Company has implemented SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998, which requires companies to
classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid in capital in the equity section of a statement of financial
position. The implementation of SFAS No. 130 had no effect on the
Company's financial statements.
Business Segment Information
----------------------------
The Company implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," on January 1, 1998. The Company
operates in one industry segment, that being developing and marketing
natural nutritional supplements. The Company's sales are primarily to
distributors and health care professionals throughout the United
States. The Company does not have any significant customers or
concentration of credit risk.
Start-up Costs
--------------
Effective January 1, 1999, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities."
SOP 98-5 provides guidance on the financial reporting of start-up and
organization costs and requires such costs to be expensed as incurred.
The total amount of deferred start-up costs reported as a cumulative
effect of a change in accounting principle is $3,175. For income tax
purposes, the Company has elected to treat its organizational
expenditures as deferred expenses and amortize them over a period of
sixty months, beginning in the first month the Company is actively in
business.
Development Stage Company
-------------------------
Prior to the reverse acquisition of Nutricology, Inc., February 3,
1998, the Company was in the development stage in prior years.
Presentation
------------
Certain accounts from prior years have been reclassified to conform
with the current year's presentation.
Pending Accounting Pronouncements
---------------------------------
It is anticipated that current pending accounting pronouncements will
not have an adverse impact on the financial statements of the Company.
F-13
<PAGE>
NOTE 3 - INVENTORIES
-----------
Inventories consist of the following at December 31:
1999 1998
------------ ------------
Raw Materials $ 692,002 $ 708,548
Work In Process 0 197,194
Finished Goods 474,270 2,751,504
Reserve for Obsolescence (100,844) (118,635)
------------ ------------
Total $ 1,065,428 $ 3,538,611
============ ============
NOTE 4 - PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following at December 31:
1999 1998
------------ ------------
Machinery and Equipment $ 679,834 $ 586,054
Office Equipment 230,084 221,084
Vehicles 43,161 43,161
Furniture and Fixtures 184,723 181,119
Computer Equipment 169,640 142,589
Computer Software 34,050 34,050
Leasehold Improvements 92,607 97,904
------------ ------------
Total 1,434,099 1,305,961
Less Accumulated Depreciation (561,795) (363,403)
------------ ------------
Net Book Value $ 872,304 $ 942,558
============ ============
Depreciation expense charged to operations for 1999 and 1998 was
$215,524 and $131,730, respectively.
NOTE 5 - DUE FROM OFFICERS
-----------------
From time to time, the Company makes personal loans or receives
advances from/to its principle stockholder. Total advances prior to the
merger were $116,724. Due From Officers at December 31, 1999 and 1998
was $166,002 and $123,602, respectively, and are noninterest bearing
and due on demand.
NOTE 6 - CASH SURRENDER VALUE LIFE INSURANCE
-----------------------------------
The Company has purchased insurance in the face amount of $750,000 on
the lives of certain key employees, who are the beneficiaries. The
policies have been assigned to THE MONEY STORE. The cash surrender
value at December 31, 1999 and 1998 was $40,406 and $33,953,
respectively, with no policy loans outstanding.
NOTE 7 - LINE OF CREDIT
--------------
In March 1998, the Company entered into a credit agreement which
provides a line of credit of up to $1,000,000, to be used to finance
the Company's accounts receivable and inventory, and has a perfected
first lien security interest in the Company's accounts receivable,
inventory, and equipment. The Company's majority stockholder has also
personally guaranteed the loan. The credit agreement requires
F-14
<PAGE>
NOTE 7 - LINE OF CREDIT (CONTINUED)
--------------------------
interest to be due and payable monthly at the bank's floating Prime
rate plus one quarter of one percent, principal due and payable at
maturity, which is May 31, 1999. The credit agreement also requires the
Company to maintain a zero principal balance for at least thirty
consecutive days prior to May 31, 1999. The balance at December 31,
1998 is $533,005.
The credit agreement contains customary covenants and events of
default. Under the terms of the agreement, the bank may call the loan
if the Company is in violation of any restrictive covenants. At
December 31, 1998, the Company was in breach of certain restrictive
covenants for which the Company has received waivers and amendments per
an agreement dated June 14, 1999. These amendments contain among other
things, provisions for the payment of accrued interest of $5,394.04
through June 5, 1999, an increase in the interest rate to Prime plus 2%
(effective June 5, 1999), and five monthly payments of principal in the
amount of $25,000 plus interest beginning June 25, 1999 and continuing
on the twenty-fifth day of each month thereafter until maturity, when
the remaining balance is due in full. The Bank waives the Company's
existing defaults of the financial covenants until November 5, 1999,
the extended maturity date. Per an agreement dated December 28, 1999,
the bank extended the maturity date until April 5, 2000, with payments
due in three monthly payments of $25,000 plus interest beginning
January 25, 2000, and continuing on the twenty-fifth day of each month
thereafter until maturity, when the remaining balance is due in full.
The Bank waives the Company's existing defaults of the financial
covenants until April 5, 2000, the extended maturity date. The balance
was paid in full prior to maturity and the Company no longer has any
line of credit agreements with Bank of the West.
NOTE 8 - NOTES PAYABLE
-------------
Notes Payable of $6,225 at December 31, 1998, represents a note payable
to bank, principal and interest payments of $6,273 payable monthly at
9.25%. All unpaid principal and interest due February 1999,
collateralized by all significant assets.
NOTE 9 - CAPITAL LEASE OBLIGATIONS
-------------------------
The Company leases certain machinery and equipment under capital leases
which contain purchase options at the end of the leases. Assets under
capital leases are summarized as follows:
1999 1998
--------- ---------
Office Equipment $118,005 $118,005
Machinery and Equipment 83,232 53,927
Furniture and Fixtures 10,393 10,393
Computer Software 34,050 34,050
Computer Equipment 33,194 33,194
Leasehold Improvements 47,924 47,924
--------- ---------
326,798 297,493
Accumulated Depreciation 78,463 22,372
--------- ---------
Net Assets $248,335 $275,121
========= =========
F-15
<PAGE>
NOTE 9 - CAPITAL LEASE OBLIGATIONS (CONTINUED)
-------------------------------------
Future minimum payments under noncancelable leases at December 31, 1999
are as follows:
2000 $ 85,016
2001 69,789
2002 66,534
2003 50,016
-----------
Total minimum lease payments 271,355
Less amount representing interest 25,370
-----------
Present Value of the minimum lease payments $ 245,985
===========
NOTE 10 - INCOME TAXES
------------
The deferred tax consequences of temporary differences in reporting
items for financial statement and income tax purposes are recognized,
as appropriate. Realization of the future tax benefits related to the
deferred tax assets is dependent on many factors, including the
Company's ability to generate taxable income within the net operating
loss carryforward period. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial
reporting purposes. The income tax effect of temporary differences
comprising the deferred tax assets and deferred tax liabilities on the
accompanying consolidated balance sheet is a result of the following:
Deferred Tax Assets: 1999 1998
-------------------- ------------ ------------
Net Operating Loss Carryforwards $ 1,071,368 $ 387,650
Expenses Not Currently Deductible
For Tax Purposes 160,559 298,476
------------ ------------
Total 1,231,927 686,126
Valuation Allowance (1,078,953) (419,236)
------------ ------------
Net Deferred Tax Asset 152,974 266,890
Deferred Tax Liabilities:
-------------------------
Depreciation 128,520 131,890
------------ ------------
Net Deferred Tax Asset $ 24,454 $ 135,000
============ ============
The net change in the valuation allowance for 1999 and 1998 principally
resulted from net operating loss carryforwards.
The reconciliation of income tax attributable to continuing operations
compared at the U.S. federal statutory rates to income tax expense
(benefit) is as follows:
1999 1998
---------- ----------
State Taxes $ 50 $ 850
(Increase) Decrease in Deferred Tax Asset 50,293 (135,000)
Settlement of Prior Years Income Taxes 0 32,799
---------- ----------
Income Tax Provision (Benefit) $ 50,343 $(101,351)
========== ==========
At December 31, 1999, the Company has available net operating loss
carryforwards for federal and state income tax purposes of
approximately $2,600,000 and $2,143,445 to offset future taxable
F-16
<PAGE>
NOTE 10 - INCOME TAXES (CONTINUED)
------------------------
income, which expire principally in the year 2019. At December 31,
1998, the Company had available net operating loss carryforwards for
federal and state income tax purposes of approximately $957,000 and
$1,039,000 for tax purposes to offset future taxable income, which
expire principally in the year 2018.
Pursuant to the Tax Reform Act of 1986, annual utilization of the
Company's net operating loss carryforwards may be limited if a
cumulative change in ownership of more than 50% is deemed to occur
within any three-year period.
During 1998, state income taxes of $32,799 were paid as settlement of
prior years income taxes for the years 1992, 1993, and 1994.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases office space and equipment under various
noncancelable operating leases which are generally for one to five year
periods. Rent expense charged to operations for 1999 and 1998 was
approximately $385,000 and $282,000.
Future minimum rental commitments under noncancelable leases are as
follows:
2000 $ 294,163
2001 $ 302,148
2002 $ 313,920
2003 $ 162,408
2004 $ 1,162
Rent Expense charged to operations during 1999 and 1998 was
approximately $385,000 and $282,000, respectively.
NOTE 12 - PROFIT SHARING PLAN
-------------------
The Company has a defined contribution plan which covers substantially
all employees. The Company's contributions to the plan are made at the
sole discretion of the Company's Board of Directors. Contributions to
the plan were approximately $35,000 during 1999 and 1998.
NOTE 13 - STOCK OPTIONS
-------------
The Company has authorized 1,000,000 shares of common stock for
issuance to directors and key employees under the 1998 Stock Option
Plan (the plan). The objectives of the plan include attracting and
retaining the best personnel, providing for additional performance
incentives, and promoting the success of the Company by providing
directors and key employees the opportunity to acquire common stock.
The Company granted 100,000 options during July 1998 and 150,000
options during January 1999, exercisable at $2.00 per share, and
expiring five years from the date of grant. As of December 31, 1999 and
1998, total options outstanding were 250,000 and 100,000. The Company
accounts for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," under which
F-17
<PAGE>
NOTE 13 - STOCK OPTIONS (CONTINUED)
-------------------------
no compensation cost for stock options is recognized for stock options
awards granted at or above fair market value. Had compensation expense
for the Company's stock-based compensation plans been determined under
SFAS No. 123, based on the fair market value at the grant dates, the
Company's pro forma net loss and pro forma net loss per share would
have been reflected as follows at December 31:
Net Loss 1999 1998
------------ ------------
As reported $ 1,795,225 $ 1,303,360
Pro forma $ 1,845,355 $ 1,337,130
Net Loss Per Share
As reported $ (0.12) $ (0.09)
Pro forma $ (0.12) $ (0.09)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for those options granted in 1999 and
1998, respectively: dividend yield of 0%, expected volatility of 95%
and 131%, risk-free interest rate of 5%, and expected lives of five
years.
NOTE 14 - SUBSEQUENT EVENTS
-----------------
On March 1, 2000, the Company entered into an agreement with Aerofund
Financial, Inc. to provide additional funding in the form of a line of
credit to the Company up to $1,200,000, bearing interest at prime plus
three percent (3%) computed on a monthly basis. Secured by
substantially all of the assets of the Company. As of the date of
issuance of these financial statements, approximately $967,000 had been
advanced on the line, bearing interest at 12.5%. Interest is due
monthly.
F-18
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
Unaudited
<CAPTION>
9/30/00 9/30/00
Consolidated Consolidated
------------ ------------
<S> <C> <C> <C>
ASSETS LIABILITIES AND STOCKHOLDERS EQUITY
Current Assets Current Liabilities
Cash & Cash Equivalents 55,232 Accounts Payable and Accrued Liabilities 1,423,136
Accounts Receivable, Net of Allowance Line of Credit 956,898
for Doubtful Accounts of $232,921) 1,000,504
Capital Lease Obligation, Current Portion 48,891
Inventories 1,278,674
Income Taxes Payable 50
Prepaid Expenses and Other Current Assets 227,658 ----------
Deferred Tax Asset 116,370
---------- Total Current Liabilities 2,428,975
Total Current Assets 2,678,438
Long-Term Liabilities
Property and Equipment, Net 789,891 Capital Lease Obligation, Noncurrent Portion 112,863
----------
Other Assets
Deposits 70,078 Total Liabilities 2,541,838
Due From Stockholder 168,110
Preferred Stock, $.25 Par Value,
Authorized 1,000,000 0
Cash Surrender Value of Life Insurance 40,405 Shares, Issued and Outstanding, None
Common Stock, $.001 Par Value,
Authorized 100,000,000 15,055
Intangible Assets, Net of Amortization Shares, Issued and Outstanding, 15,055,355
of $6,443 20,181 Additional Paid In Capital 1,133,927
----------
Total Other Assets 298,774 Retained Earnings (Deficit) 76,283
Total Assets $3,767,103 Total Liabilities and Stockholders' Equity $3,767,103
========== ==========
</TABLE>
F-19
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF CASH FLOW
SEPTEMBER 30, 2000
Unaudited
<CAPTION>
9/30/00 9/30/99
------------ ------------
<S> <C> <C>
Cash Flows for Period Ended September 30, 2000 and September 30, 1999
Cash Flows from Operating Activities
Net Income / Loss $ 354,533 $(1,154,395)
Adjustments to Reconcile Net Income/Loss to
Net Cash Used in Operating Activities
Depreciation and Amortization 144,669 164,853
Loss on Disposal of Fixed Assets
Cash Surrender Value of Life Insurance
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable (46,004) 127,803
(Increase) Decrease in Inventory (213,246) 1,736,979
(Increase) Decrease in Prepaid Expenses and Other Assets (87,191) 173,285
(Increase) Decrease in Deferred Tax Assets (41,624)
(Increase) Decrease in Deposits (73,678) 37,800
(Increase) Decrease in Other Receivables 31,409 (65,782)
Increase (Decrease) in Accounts Payable and Accrued Liabilities (273,142) (1,021,494)
Increase (Decrease) in Income Taxes Payable 0 0
------------ ------------
Total Adjustments (558,807) 1,153,444
Net Cash Used in Operating Activities (204,274) (951)
Cash Flows From Investing Activities
Acquisition of Property and Equipment (86,561) (150,740)
Advances to Officers 0 (42,400)
------------ ------------
Net Cash Flows Used In Investing Activities (86,561) (193,140)
Cash Flows From Financing Activities
Proceeds from Sale of Common Stock 0 0
Capital Contributions 0 28,599
Net Proceeds from Line of Credit 348,893 150,000
Repayment of Notes Payable (58,182) (49,435)
------------ ------------
Net Cash Provided by Financing Activities 290,711 129,164
Increase (Decrease) in Cash and Cash Equivalents (124) (64,927)
Cash and Cash Equivalents, Beginning of Period 55,356 202,348
------------ ------------
Cash and Cash Equivalents, End of Period $ 55,232 $ 137,421
============ ============
</TABLE>
F-20
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED 9/30/00 AND 9/30/99
Unaudited
<CAPTION>
3 MONTHS 3 MONTHS
ENDED 9/30/00 ENDED 9/30/99
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues 2,957,837 100.0% 3,170,993 100.0%
Cost of Sales 1,773,615 60.0% 2,049,350 64.6%
------------ ------------
Gross Profit 1,184,222 40.0% 1,121,643 35.4%
Operating Expenses 974,837 33.0% 1,355,676 42.8%
------------ ------------
Net Operating Income (Loss) 209,385 7.1% (234,033) -7.4%
Other Expense, net (25,685) -0.9% (22,773) -0.7%
------------ ------------
Net Income (Loss) Before Income Taxes 183,700 6.2% (256,806) -8.1%
Provision for Income Taxes (91,916) 0
Net Income (Loss) Available to Common
Stockholders $ 275,616 9.3% $ (256,806) -8.1%
============ ============
Shares Outstanding 15,055,355 15,055,355
Net Income Per Common Share $ 0.02 $ (0.02)
============ ============
</TABLE>
F-21
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED 9/30/00 AND 9/30/99
Unaudited
<CAPTION>
9 MONTHS 9 MONTHS
ENDED 9/30/00 ENDED 9/30/99
--------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues 8,743,084 100.0% 9,618,648 100.0%
Cost of Sales 5,243,477 60.0% 6,248,006 65.0%
------------ ------------
Gross Profit 3,499,607 40.0% 3,370,642 35.0%
Operating Expenses 3,176,794 36.3% 4,477,067 46.5%
------------ ------------
Net Operating Income (Loss) 322,813 3.7% (1,106,425) -11.5%
Other Expense, net (60,196) -0.7% (47,970) -0.5%
------------ ------------
Net Income (Loss) Before Income Taxes 262,617 3.0% (1,154,395) -12.0%
Provision (Benefit) for Income Taxes (91,916) 0
Net Income (Loss) Available to Common $ 354,533 $(1,154,395)
Stockholders ============ ============
Basic Weighted Average Shares Outstanding 15,055,355 15,042,855
Net Income (Loss) Per Common Share $ 0.02 $ (0.08)
============ ============
</TABLE>
F-22
<PAGE>
NOTES TO THE INTERIM FINANCIAL STATEMENTS
-----------------------------------------
Note 1. Statement of Information Furnished
------------------------------------------
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with Form 10QSB instructions and in the opinion of
management contains all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 2000, the results of operations for the three and nine months ended
September 30, 2000, and the statement of cash flows for the nine months ended
September 30, 2000. These results have been determined on the basis of generally
accepted accounting principles and practices and applied consistently with those
used in the preparation of the Company's 1999 Annual Report included in its
Registration Statement on Form 10-SB.
Certain information and footnote disclosure normally included in the financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying financial
statements be read in conjunction with the accompanying financial statements and
notes thereto incorporated by reference in the Company's 1999 Annual Report
included in its Registration Statement on Form 10-SB.
Note 2. Inventories
-------------------
Inventories consist of the following at September 30, 2000:
Raw Materials $ 621,363
Finished Goods 771,996
Reserve for Obsolescence (114,685)
-------------
Total $ 1,278,674
=============
Note 3. Fixed Assets
--------------------
Fixed assets consist of the following at September 30, 2000:
Machinery and Equipment $ 733,335
Office Equipment 230,085
Vehicles 43,161
Furniture and Fixtures 184,723
Computer Equipment 182,504
Computer Software 46,981
Leasehold Improvements 92,607
------------
Total 1,513,396
Accumulated Depreciation (723,505)
------------
Net Book Value $ 789,891
============
Depreciation expense charged to operations during the nine months ended
September 30, 2000, was $140,663.
F-23
<PAGE>
Note 4. Line of Credit
----------------------
The Company has a line of credit agreement with Aerofund Financial, Inc. for a
maximum amount of funding of $1,200,000, bearing interest at prime plus three
percent (3%) computed on a monthly basis. Secured by substantially all of the
assets of the Company. As of September 30, 2000, the balance outstanding was
$956,898. Interest is due monthly.
Note 5. Income Taxes
--------------------
As of September 30, 2000, the Company's deferred tax asset was $116,370, which
was primarily attributed to taxable income offset by net operating loss
carryforwards. The Company uses an average tax rate of approximately 35%.
Included in the statement of operations is a benefit for income taxes of
$91,916.
Note 6. Contingencies
---------------------
The Company is a defendant in a lawsuit filed by one of its shareholders for
alleged securities fraud and misrepresentations of material facts. The suit asks
for rescission of the purchase of the common stock, including a return of the
plaintiff's $149,000 investment plus interest, all costs incurred by the
plaintiff, and punitive damages. The Company believes the suit is of
questionable merit and intends to vigorously defend its position. At this
time, however, no estimate can be made as to the time or the amount, if any, of
ultimate recovery.
F-24
<PAGE>
SCOTTSDALE SCIENTIFIC, INC.
SCOTTSDALE, ARIZONA
AUDIT REPORT
DECEMBER 31, 1997
F-25
<PAGE>
C O N T E N T S
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-27
Balance Sheet at December 31, 1997 . . . . . . . . . . . . . . . . . .F-28
Statement of Operations from Inception (April 8, 1997)
Through December 31, 1997 . . . . . . . . . . . . . . . . . . . . . F-29
Statement of Stockholders' Equity from Inception (April 8, 1997)
Through December 31, 1997 . . . . . . . . . . . . . . . . . . . . . F-30
Statement of Cash Flows from Inception (April 8, 1997)
Through December 31, 1997 . . . . . . . . . . . . . . . . . . . . . F-31
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . .F-33
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Scottsdale Scientific, Inc.
Scottsdale, Arizona 85258
We have audited the accompanying balance sheet of Scottsdale Scientific, Inc. (A
Development Stage Company), (the Company), as of December 31, 1997, and the
related statements of operations, stockholders' equity and cash flows for the
period from inception (April 8, 1997) through December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997, and the
results of its operations and its cash flows for the period then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is a development stage Company as defined in Financial
Accounting Standards Board Statement No. 7. The Company is devoting
substantially all of its present efforts in establishing a new business and
planned principal operations have not commenced. Management's plans regarding
the matters which raise doubts about the Company's ability to continue as a
going concern are disclosed in Note 1. These factors raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
May 13, 1998
F-27
<PAGE>
SCOTTSDALE SCIENTIFIC, INC.
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31, 1997
Cash $ 112,518
----------
Other
Assets
Organization Costs 3,175
Security Deposit 250
----------
Total Other Assets 3,425
Total Assets $ 115,943
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ None
Stockholders' Equity
Common Stock: $0.001 Par Value,
100,000,000 Authorized; Issued and
Outstanding, 7,700,000 7,700
Additional Paid In Capital 525,300
Loss Accumulated During The Development Stage (417,057)
----------
Total Stockholders' Equity 115,943
----------
Total Liabilities and Stockholders' Equity $ 115,943
==========
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
SCOTTSDALE SCIENTIFIC, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 8, 1997)
THROUGH DECEMBER 31, 1997
For the
Period From
Inception Loss
(April 8, Accumulated
1997) Through During The
December 31, Development
1997 Stage
------------ ------------
Revenues $ 0 $ 0
Expenses
General and Administrative (418,001) (418,001)
Other Income
Interest Income 944 944
------------ ------------
Net Loss $ (417,057) $ (417,057)
============ ============
Net Loss Per Weighted Share of Common Stock $ (.15) $ (.15)
============ ============
Weighted Shares Outstanding 2,875,000 2,875,000
============ ============
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (APRIL 8, 1997)
THROUGH DECEMBER 31, 1997
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock For
Services Rendered at $.001 per
Share as of April 8, 1997 3,000,000 $ 3,000 $ - $ - $ 3,000
Issuance of Common Stock Under
504D Offering Dated May 1, 1997
For Cash at $.25 per Share 400,000 400 99,600 - 100,000
Issuance of Common Stock Under
Private Placement Memorandum
Dated October 28, 1997 for Cash
at $.10 per Share 1,097,588 1,098 108,661 - 109,759
Issuance of Common Stock Under
Private Placement Memorandum
Dated October 28, 1997 for
Services Rendered at $.10 per
Share 3,202,412 3,202 317,039 - 320,241
Loss From Inception (April 8, 1997)
Through December 31, 1997 - - - (417,057) (417,057)
---------- ----------
Balance, December 31, 1997 7,700,000 $ 7,700 $ 525,300 $(417,057) $ 115,943
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-30
<PAGE>
<TABLE>
SCOTTSDALE SCIENTIFIC, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (APRIL 8, 1997)
THROUGH DECEMBER 31, 1997
<CAPTION>
For The
Period From From
Inception Inception
(April 8, 1997) (April 8, 1997)
Through Through
December 31, December 31,
1997 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss $(417,057) $(417,057)
Adjustments to Reconcile Net Loss to Net Cash Used by
Operating Activities
Common Stock Issued for Services 323,241 323,241
Changes in assets and liabilities
(Increase) Decrease in Organization Costs (3,175) (3,175)
(Increase) Decrease in Security Deposits (250) (250)
---------- ----------
Total Adjustments 319,816 319,816
---------- ----------
Net Cash Used by Operating Activities (97,241) (97,241)
Cash Flows From Investing Activities 0 0
---------- ----------
Net Cash Flows From Investing Activities 0 0
Cash Flows from Financing activities
Proceeds from Sale of Common Stock 209,759 209,759
---------- ----------
Net Cash Flows from Financing Activities 209,759 209,759
---------- ----------
Increase in Cash and Cash Equivalents 112,518 112,518
Cash and Cash Equivalents, Beginning of Year 0 0
---------- ----------
Cash and Cash Equivalents, End of Year $ 112,518 $ 112,518
========== ==========
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
For The
Period From From
Inception Inception
(April 8, 1997) (April 8, 1997)
Through Through
December 31, December 31,
1997 1997
---------- ----------
Supplemental Information
------------------------
Cash paid for:
Interest $ 0 $ 0
========== ==========
Income taxes $ 0 $ 0
========== ==========
Supplemental Schedule of Noncash Financing Activities
-----------------------------------------------------
On April 8, 1997, the Company Issued 3,000,000
Shares of Common Stock for Services $ 3,000 $ 3,000
========== ==========
Issuance of Common Stock Under Private Placement
Memorandum Dated October 28, 1997 for Services
Rendered at $.10 per Share $ 320,241 $ 320,241
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-32
<PAGE>
SCOTTSDALE SCIENTIFIC, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - ORGANIZATION
------------
Scottsdale Scientific, Inc. (the Company) was incorporated under the
laws of the State of Florida on April 8, 1997, with an authorized
capital of 100,000,000 shares of common stock with a par value of one
mil ($0.001) per share. The Company is engaged in the wholesale
distribution of health and nutritional supplements.
On April 8, 1997, the Company issued 3,000,000 shares of common stock
for services rendered at $0.001, or $3,000.
During May and June 1997, the Company completed a 504D Offering
Memorandum for 400,000 shares of common stock for cash at $0.25 per
share, or $100,000.
During December 1997, the Company completed a Private Placement
Memorandum for 4,300,000 shares of Common Stock at $.10 per share. The
Company issued 1,097,588 shares for cash, or $109,759 and 3,202,412
shares for services rendered, or $320,241.
The Company is a development stage company, as defined in the Financial
Accounting Standards Board No. 7. The Company is devoting substantially
all of its present efforts in securing and establishing a new business,
and planned principal operations have not commenced. These factors
raise substantial doubt about its ability to continue as a going
concern.
The financial statements have been prepared on the basis of accounting
principles applicable to a going concern. Accordingly, they do not
purport to give effect to adjustments, if any, that may be necessary
should the Company be unable to continue as a going concern. The
continuation of the Company as a going concern, is dependent upon the
Company's ability to establish itself as a profitable business. It is
the Company's belief that it will continue to incur losses during the
coming year and possibly require additional funds. The additional
funding will be accomplished by seeking additional funds from private
or public equity investments, and possible future collaborative
agreements to meet such needs, in order that the Company will be a
viable entity. The Company's ability to achieve these objectives cannot
be determined at this time.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
A. Accounting Method
-----------------
The Company's financial statements are prepared using the accrual
method of accounting.
B. Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with a
maturity of three months or less to be cash and cash equivalents.
F-33
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
C. Earnings (Loss) Per Share
-------------------------
The computations of earnings or loss per share of common stock are
based on the weighted average number of common shares and common share
equivalents outstanding at the date of the financial statements.
D. Use of Estimates
----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could vary from
the estimates that were assumed in preparing the financial statements.
E. Pending Accounting Pronouncements
---------------------------------
It is anticipated that current pending accounting pronouncements will
not have an adverse impact on the financial statements of the Company.
NOTE 3 - SUBSEQUENT EVENTS
-----------------
On February 3, 1998, the Company entered into an agreement to acquire
Nutricology, Inc., a company engaged in the distribution of
hypoallergenic nutritional supplements, in exchange for 9,800,000
shares of Scottsdale Scientific, Inc.'s, common stock to Stephen
Levine.
After completion of the above transactions, Stephen Levine's ownership
of 9,800,000 common shares represents 67.6 % of the total issued and
outstanding common shares of the Company.
F-34
<PAGE>
NUTRICOLOGY, INC.
Hayward, California
AUDIT REPORT
DECEMBER 31, 1997 AND 1996
F-35
<PAGE>
C O N T E N T S
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-37
Balance Sheet at December 31, 1997 and 1996 . . . . . . . . . . . . . F-38
Statement of Income For The Years Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . F-40
Statement of Stockholders' Equity For The Years Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . F-41
Statement of Cash Flows For The Years Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . F-42
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . F-44
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Nutricology, Inc.
Hayward, California 94544
We have audited the accompanying balance sheet of Nutricology, Inc., (the
Company), as of December 31, 1997, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Nutricology, Inc. for the year ended
December 31, 1996, were audited by other auditors whose report thereon, dated
January 21, 1998, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
September 5, 1998
F-37
<PAGE>
<TABLE>
NUTRICOLOGY, INC.
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<CAPTION>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 16,500 $ 237,873
Accounts Receivable, Net of Allowances for Doubtful
Accounts and Returns, $256,000 and $256,000 901,507 1,004,579
Inventories (Note 3) 3,915,400 2,059,474
Notes Receivable 5,121 8,721
Income Taxes Receivable 0 113,312
Prepaid Expenses and Other Current Assets 48,572 45,118
Deferred Taxes (Note 9) 0 195,625
----------- -----------
Total Current Assets 4,887,100 3,664,702
Property and Equipment, Net (Note 4) 325,355 279,049
Other Assets
Deposits 7,100 0
Due From Stockholder (Note 5,10) 116,724 0
Cash Surrender Value of Life Insurance (Note 6) 30,369 0
Other Receivables 12,183 0
----------- -----------
Total Other Assets 166,376 0
----------- -----------
Total Assets $5,378,831 $3,943,751
=========== ===========
F-38
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
Current Liabilities
Accounts Payable and Accrued Liabilities $2,472,239 $1,384,198
Notes Payable, Current Portion (Note 7) 71,704 439,492
Due to Stockholder (Note 5,10) 0 143,810
Income Taxes Payable (Note 9) 10,942 0
----------- -----------
Total Current Liabilities 2,554,885 1,967,500
Notes Payable, Noncurrent Portion (Note 7) 6,273 77,909
----------- -----------
Total
Liabilities 2,561,158 2,045,409
Commitments and Contingencies (Note 8,12)
Stockholders' Equity
Common Stock, No Par Value, Authorized 25,000 Shares,
Issued and Outstanding, 100 Shares 2,000 2,000
Retained Earnings 2,815,673 1,896,342
----------- -----------
Total Stockholders' Equity 2,817,673 1,898,342
----------- -----------
Total Liabilities and Stockholders' Equity $5,378,831 $3,943,751
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-39
<PAGE>
NUTRICOLOGY, INC.
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------- -------------
Revenues $ 12,367,629 $ 10,951,701
Cost of Sales 7,480,484 6,536,711
------------- -------------
Gross Profit 4,887,145 4,414,990
Operating Expenses
Selling, General and Administrative 3,888,614 4,304,298
------------- -------------
Operating Income 998,531 110,692
Other Income (Expense)
Interest Income 920 3,600
Interest Expense (40,249) (48,412)
Loss on Disposal of Assets 0 (77,232)
Gain on the Sale of Securities 0 319,237
Other, Net 5,101 0
------------- -------------
Total Other Income (Expense) (34,228) 197,193
------------- -------------
Income Before Provision For Income Taxes 964,303 307,885
Provision For Income Taxes (Note 9) 44,972 149,105
------------- -------------
Net Income $ 919,331 $ 158,780
============= =============
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
<TABLE>
NUTRICOLOGY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
Common Common Unrealized Retained
Shares Par Value Gains Earnings Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 (Restated) 100 $ 2,000 $ 87,336 $ 1,737,562 $ 1,826,898
Net Income - - - 158,780 158,780
Unrealized Gains on Securities, Net
of Tax of $72,278 - - (87,336) - (87,336)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 100 2,000 0 1,896,342 1,898,342
Net Income 919,331 919,331
------------ ------------
Balance, December 31, 1997 100 $ 2,000 $ 0 $ 2,815,673 $ 2,817,673
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-41
<PAGE>
<TABLE>
NUTRICOLOGY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 919,331 $ 158,780
Adjustments to Reconcile Net Income to Net Cash Provided
by (Used in) Operating Activities
Depreciation and Amortization 44,195 71,700
Gain on Sale of Securities 0 (319,237)
Loss on Disposal of Fixed Assets 0 77,232
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable 103,072 1,908
(Increase) Decrease in Provision for Allowances of
Doubtful Accounts and Returns 0 110,000
(Increase) Decrease in Inventories (1,855,926) (385,348)
(Increase) Decrease in Income Taxes Receivable 113,312 34,288
(Increase) Decrease in Prepaid Expenses and Other Current
Assets 146 (18,988)
(Increase) Decrease in Deferred Taxes 195,625 (156,889)
(Increase) Decrease in Deposits (7,100) 0
(Increase) Decrease in Cash Surrender Value Life Insurance (30,369) 0
(Increase) Decrease in Other Receivables (12,183) 0
Increase (Decrease) in Accounts Payable and Accrued
Liabilities 1,088,041 (63,819)
Increase (Decrease) in Income Taxes Payable 10,942 (448,450)
------------ ------------
Total Adjustments (350,245) (1,097,603)
------------ ------------
Net Cash Provided by (Used in) Operating Activities 494,086 (938,823)
Cash Flows From Investing Activities
Purchase of Property and Equipment (90,501) (101,901)
Sale of Marketable Securities 0 460,212
------------ ------------
Net Cash Flows Provided by Investing Activities (90,501) 358,311
Cash Flows From Financing Activities
Proceeds (Repayments) From Stockholder Loans (143,810) 143,810
Increase (Decrease) in Stockholders Loans (116,724) 32,115
Proceeds from Issuance of Long-term Debt 0 698,060
Payments on Long-term Debt (439,424) (180,659)
------------ ------------
Net Cash Provided By (Used In) Financing Activities (699,958) 693,326
------------ ------------
F-42
<PAGE>
1997 1996
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents $ (221,373) $ 112,814
Cash and Cash Equivalents, Beginning of Year 237,873 125,059
------------ ------------
Cash and Cash Equivalents, End of Year $ 16,500 $ 237,873
============ ============
Supplemental Information:
-------------------------
Cash paid for:
Interest $ 40,249 $ 48,412
============ ============
Income taxes $ 177,652 $ 682,166
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-43
<PAGE>
NUTRICOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION
------------
Nutricology, Inc., (the Company), was incorporated in California on
March 11, 1980, primarily for the purpose of developing and marketing
natural nutritional supplements. The Company's sales are primarily to
distributors and health care professionals throughout the United
States.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
A. Method of Accounting
--------------------
The Company's financial statements are prepared using the accrual
method of accounting.
B. Cash and Cash Equivalents
-------------------------
For the purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments with a maturity of three months or
less to be cash and cash equivalents.
C. Allowance for Doubtful Accounts and Return Allowances
-----------------------------------------------------
Accounts Receivable are shown net of allowances for doubtful accounts
and returns which are estimated as a percent of accounts receivable and
sales, respectively, based on prior years experience.
D. Inventories
-----------
Inventories consist entirely of raw materials, finished goods and
supplies. Raw materials consist of bulk product that has not been mixed
or encapsulated. Finished goods consist of product that has been
encapsulated or made into tablet form and that has been packaged for
sale. Inventories are stated at the lower of cost or net realizable
value, using the first-in, first-out method.
E. Property, Equipment and Depreciation
------------------------------------
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives as follows:
Machinery and Equipment 2 to 10 years
Transportation Equipment 3 to 5 years
Office Furniture and Equipment 3 to 5 years
Leasehold Improvements Lesser of useful lives of
assets (3 to 10 years or
the related lease term)
F-44
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
F. Revenue Recognition
-------------------
Revenue is recognized upon shipment to the customer. Sales are
presented net of returns and allowances of $972,621 and $673,310 for
the years ended December 31, 1997 and 1996, respectively.
G. Cost Recognition
----------------
Cost of sales includes all direct material and labor costs and those
indirect costs of bringing raw materials to sale condition. Selling,
general and administrative costs are charged to operating expenses as
incurred.
H. Income Taxes
------------
The Company accounts for income taxes under Statement of Financial
Standards No. 109 ("SFAS" 109), Accounting for Income Taxes, which
utilizes an asset and liability approach to accounting for income
taxes.
I. Use of Estimates
----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could vary from
the estimates that were assumed in preparing the financial statements.
J. Financial Statement Presentation
--------------------------------
Certain accounts from prior years have been reclassified to conform
with the current year's presentation.
K. New Accounting Standards
------------------------
The Company implemented SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, on
January 1, 1996. The implementation of SFAS No. 121 had no effect on
the Company's financial statement.
The Company implemented SFAS No. 129, Disclosure of Information about
Capital Structure, on January 1, 1997. The implementation had no effect
on the Company's financial statement.
F-45
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
The Company implemented SFAS No. 130, Reporting Comprehensive Income.
The implementation had no effect on the Company's financial statement.
L. Pending Accounting Pronouncements
---------------------------------
It is anticipated that current pending accounting pronouncements will
not have an adverse impact on the financial statements of the Company.
NOTE 3 - INVENTORIES
-----------
Inventories consist of the following at December 31:
1997 1996
------------ ------------
Raw Materials $ 968,053 $ 345,128
Finished Goods 3,015,982 1,955,724
Reserve for Obsolescence (68,635) (241,378)
------------ ------------
Total $ 3,915,400 $ 2,059,474
============ ============
NOTE 4 - PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following at December 31:
1997 1996
------------ ------------
Machinery and Equipment $ 643,844 $ 527,317
Transportation Equipment 81,356 81,356
Office Furnitures and Fixtures 79,186 58,542
Leasehold Improvements 101,708 98,310
------------ ------------
Total 906,094 765,525
Less Accumulated Depreciation (580,739) (486,476)
------------ ------------
Net Book Value $ 325,355 $ 279,049
============ ============
Depreciation expense charged to operation for the years ended December
31, 1997 and 1996 was $44,195 and $71,700, respectively.
NOTE 5 - DUE FROM/TO STOCKHOLDERS
------------------------
From time to time, the Company makes personal loans or receives
advances from/to its two principal stockholders. The balance due from
stockholder of $116,724 at December 31, 1997 and the balance due to
stockholder at December 31, 1996 of $143,810, bear no interest and are
receivable/payable on demand.
F-46
<PAGE>
NOTE 6 - CASH SURRENDER VALUE LIFE INSURANCE
-----------------------------------
The Company has purchased insurance in the face amount of $757,600 on
the lives of certain key employees, who are the beneficiaries. Two of
the policies, face amount $750,000, have been assigned to THE MONEY
STORE. The cash surrender value at December 31, 1997 was $30,369, with
no policy loans outstanding.
NOTE 7 - NOTES PAYABLE
-------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Notes Payable, Line of Credit. Secured
revolving credit line with bank up to $500,000,
interest payable monthly at prime plus one
(9.25% at December 31, 1996). All unpaid
principal and interest due April 1, 1997. $ 0 $ 362,000
Note Payable to bank, principal and interest
payments of $6,273 payable monthly at 9.25%.
All unpaid principal and interest due February
1999, collateralized by all significant assets. 77,977 143,239
Other notes payable 0 12,162
------------ ------------
Total 77,977 517,401
Less Current Portion 71,704 439,492
------------ ------------
Noncurrent Portion $ 6,273 $ 77,909
============ ============
</TABLE>
Principal maturities of long-term debt are as follows at December 31:
1998 $ 6,273
===========
The revolving loan with bank, which supports working capital and
capital expenditures, is secured by all significant assets of the
Company. The loan had available borrowings of $138,000 at December 31,
1996, subject to borrowing base limitations as defined in the
agreement. The agreement contains certain restrictive covenants which
relate to net worth, capital expenditures and indebtedness, with which
the Company was in compliance at December 31, 1996.
NOTE 8 - LEASE OBLIGATIONS
-----------------
OPERATING LEASES - The Company leases two warehouse office spaces, its
main administrative/warehouse location, and various equipment under
operating leases which are generally for one year periods.
Rent expense amounted to $207,727 and $117,969 for the years ended
December 31, 1997 and 1996, respectively, including $96,000 paid to two
Company's shareholders.
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<PAGE>
NOTE 8 - LEASE OBLIGATIONS (CONTINUED)
-----------------------------
Future minimum rental commitments under noncancelable leases are as
follows:
1998 $ 114,240
1999 $ 117,600
NOTE 9 - INCOME TAXES
------------
Effective January 1, 1997, the Company converted from a C corporation
to an S corporation, thereby changing its tax status from taxable to
nontaxable. The Company is required to file Internal Revenue Service
Form 1120S, U.S. Income Tax Return for an S Corporation, and to supply
its shareholders with Schedule K-1, Shareholder's Share of Income,
Credits, Deductions, etc. The income (loss) is taxed at the individual
level. The Company is also required to file a California S Corporation
Franchise or Income Tax Return, in which the Company will be liable for
franchise taxes.
The provision for income taxes reflected in the financial statements is
as follows:
1997 1996
---------- ----------
Current payable
Federal $ 0 $ 232,344
State 10,942 73,560
---------- ----------
Subtotal 10,942 305,994
Deferred Taxes 34,030 (156,889)
---------- ----------
Total Provision for Income Taxes $ 44,972 $ 149,105
========== ==========
The provision for income taxes differs from amounts computed by
applying the federal income tax rate of 34% in 1996, to income before
provision for income taxes primarily due to California state taxes, and
certain nondeductible permanent items.
The following reconciles the differences between 1997 and 1996 current
and statutory provisions for income taxes:
1997 1996
--------- ---------
Statutory Federal rate - % 35.0 %
State and local income taxes, net of
Federal income tax benefit 1.5 % 6.0 %
Change in Valuation Allowances - (12.0)%
Gains on Investments - 19.0 %
Permanent Items - 0.1 %
--------- ---------
Provision for Income Taxes 1.5 % 48.1 %
========= =========
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<PAGE>
NOTE 9 - INCOME TAXES (CONTINUED)
------------------------
Due to the change in tax status from a taxable entity to a nontaxable
entity, the existing deferred tax assets and liabilities have been
eliminated through a charge to income tax expense for the period ended
December 31, 1997. The components of net deferred tax assets at
December 31, 1996, are primarily associated with timing differences
from accounts receivable, sales returns, inventory reserves, and state
taxes. Deferred liabilities result primarily from timing differences
associated with basis differences in fixed assets for book and tax
purposes.
Deferred Tax Assets $ 224,252
Deferred Tax Liabilities (28,627)
------------
Total Net Assets $ 195,625
============
NOTE 10 - RELATED PARTIES
---------------
The Company leases warehouse and office space from two of the Company's
stockholders as described in Note 6.
Due From/To Stockholders-From time to time, the Company makes personal
loans or receives advances from/to its two principal stockholders. The
balance due from stockholder at December 31, 1997 of $116,724 and the
balance due to stockholder at December 31, 1996 of $143,810, bear no
interest and are receivable/payable on demand.
NOTE 11 - PROFIT SHARING PLAN
-------------------
The Company has noncontributory profit sharing plan which covers
substantially all employees. The Company's contributions to the plan
are made at the sole discretion of the Company's board of directors.
Contributions to the plan were $46,372 and $153,160 for the years ended
December 31, 1997 and 1996, respectively.
NOTE 12 - SUBSEQUENT EVENTS
-----------------
Merger
------
On February 3, 1998, the Company entered into an agreement to be
acquired by Scottsdale Scientific, Inc., a company engaged in the
wholesale distribution of nutritional supplements, in exchange for
9,800,000 shares of Scottsdale Scientific, Inc., common stock to
Stephen Levine, the Company's former President.
After completion of the above transaction, Stephen Levine's ownership
of 9,800,000 common shares represents 67.6% of the total issued and
outstanding common shares of Scottsdale Scientific, Inc.
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<PAGE>
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
-----------------------------
Bank Financing
--------------
During March 1998, the Company increased its secured revolving credit
line with bank up to $1,000,000, with interest payable monthly at prime
plus one quarter of one percent (.25%). The bank has a perfected first
lien security interest in the Company's accounts receivable, inventory,
and equipment. All unpaid principal due May 31, 1999.
Lease Commitments
-----------------
On March 26, 1998, the Company entered into an agreement to lease
approximately 25,440 square feet of office and warehouse space located
in Building "G", 30806 Santana Street, Hayward, California. The lease
term commences June 1, 1998 and expires on May 31, 2003. Base rent is
$13,738 per month and a deposit of $18,019 was paid to effect the
lease. The Company moved its present headquartered operations at 400
Preda Street, San Leandro, California, of which rent was paid to
stockholders totaling $8,000 per month, in July 1998.
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