U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (Fee Required)
For the fiscal year ended December 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
For the transition period from _________ to _________
Commission file number 0-24930
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
(Name of small business issuer in its charter)
FLORIDA 59-3029743
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3713 S. W. 42nd Avenue, Suite 3, Gainesville, FL 32608-6581
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 352-375-6822
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
- ----.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB ( )
State issuer's revenues for its most recent fiscal year: $370,344.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference at the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $348,275 based on the average high and low price as of March 5, 1998 of
$0.593 per share.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 1,235,110 shares of Common Stock
as of March 5, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check One): Yes No X
<PAGE>
PART I
Item 1. Description of Business
Cyclodextrin Technologies Development, Inc. ("the Company") was organized
as a Florida corporation on August 9, 1990, with operations beginning in July
1992. The Company is engaged in the marketing and sale of cyclodextrins
("Cyclodextrins" or "CDs") and related products to the food, pharmaceutical and
other industries. The Company also provides consulting services related to
cyclodextrin technology.
Cyclodextrins are molecules that bring together oil and water and have
potential applications anywhere oil and water must be used together. Successful
applications have been made in the areas of agriculture, analytical chemistry,
biotechnology, cosmetics, diagnostics, electronics, foodstuffs, pharmaceuticals
and toxic waste treatment. Stabilization of food flavors and fragrances is the
largest current worldwide market for CD applications. The Company and others are
already developing CD-based applications in stabilization of flavors for food
products; elimination of undesirable tastes and odors; preparation of antifungal
complexes for foods and toiletries; stabilization of fragrances and dyes;
reduction of foaming in foods; cosmetics and toiletries; and the improvement of
quality, stability and storability of foods.
CDs can improve the solubility and stability of a wide range of drugs. Many
promising drug compounds are unusable or have serious side effects because they
are either too unstable or too insoluble in water. Strategies for administering
currently approved compounds involve injection of formulations requiring pH
adjustment and/or the use of organic solvents. The result is frequently painful,
irritating, or damaging. These side effects can be ameliorated by CDs. CDs also
have many potential uses in drug delivery for topical applications to the eyes
and skin.
The Company believes that the application of CDs in both OTC and ethical
ophthalmic products provides the greatest opportunity for the successful and
timely introduction of CD containing preparations for topical drug use. To
pursue this opportunity the Company has entered into a joint venture with a
small ophthalmic manufacturing company.
The Company provides consulting services for the commercial development of
new products containing CDs. The Company's revenues are derived from consulting,
the distribution of CDs, the manufacturing of selected CD complexes, and sales
of its own manufactured and licensed products containing CDs.
Product Background
CDs are donut shaped circles of glucose (sugar) molecules. CDs are formed
naturally by the action of bacterial enzymes on starch. They were first noticed
and isolated in 1891 by a French scientist, Villiers, as he studied rotting
potatoes. The bacterial enzyme naturally creates a mixture of at least three
different CDs depending on how many glucose units are included in the molecular
circle; six glucose units yield Alpha CD ("ACD"); seven units, beta CD ("BCD");
eight units, gamma CD ("GCD"). The more glucose units in the circle, the bigger
the circle, or donut. The inside of this "donut" provides an excellent resting
place for "oily" molecules while the outside of the donut is significantly
compatible with water enabling clear stable solutions of CDs to exist in aqueous
environments even when an "oily" molecule is carried within the donut hole. The
net result is a molecular carrier that comes in small, medium, and large sizes
with the ability to transport and deliver "oily" materials using water as the
primary vehicle.
Research has established how to produce these natural CDs in large
quantities by mixing appropriate enzymes with starch solutions, thereby
reproducing the natural process. ACD, BCD and GCD can be manufactured by an
entirely natural process and therefore are considered to be natural products.
Additional processing is required to isolate and separate the CDs. The purified
ACD, BCD, and GCD are referred to collectively as natural CDs (NCD's).
The chemical groups on each glucose unit in a CD molecule provide chemists
with ways to modify the properties of the CDs, i.e. to make them more water
soluble or less water soluble, thereby making them better carriers for a
specific chemical. The CDs that result from chemical modifications are no longer
considered "natural" and are referred to as chemically modified CDs ("CMCD's").
Since the property modifications achieved are often so advantageous to a
specific application, the Company does not believe the loss of the "natural"
product categorization will prevent its ultimate commercial use. It does,
however, create a greater regulatory burden.
The Company's strategy is to introduce products with little or no
regulatory burden in order to minimize product expenses and create profitable
revenue. The attached Table 1 illustrates the Company's approach to the
introduction of regulated products.
The Company currently sells its products for use in the pharmaceutical,
food and industrial chemical industries.
Industry
The food additive industry has been experimenting with CDs for many years.
Now that commercial supply of these materials can be assured, the Company
believes that the food additive industry will significantly increase its use of
CDs.
CDs have been used in a variety of food products in Japan for over 10
years. The market for the use of CDs in food products in 1990 in Japan was
estimated at $100 million. Within the last five years, many European countries
have approved the use of CDs in food products. In the United States, major
starch companies are renewing their earlier interest in CDs as food additives
and oral arguments for regulatory approval by the United States Food and Drug
Administration ("FDA") were resumed in December 1990. In December of 1990,
American-Maize Products, Inc. of Hammond, Indiana and Roquette Freres of Le
Strem, France jointly presented oral arguments to the FDA for the addition of
the natural CD's to the GRAS (Generally Recognized As Safe) list of excipients.
American-Maize has proceeded alone with a request for a GRAS confirmation letter
from the FDA and/or a request for level 3 approval for the use of BCD in foods.
As of November 3, 1997, BCD use as a food additive in 10 categories of food
products was confirmed to be GRAS.
Applications of CDs in personal products and for industrial uses have
appeared in many patents and patent applications. Proctor & Gamble uses CDs in
Bounce(R), a popular fabric softener. Avon uses CDs in its dermal preparations
using its Age Protective System APS(R). These uses will grow as the price of the
manufactured CDs decrease or are perceived as acceptable in view of the value
added to the products.
In Japan at least nine pharmaceutical preparations are now marketed which
contain CDs. The CDs permit the use of all routes of administration. Ease of
delivery and improved bioavailability of such well-known drugs as nitroglycerin,
dexamethasone, PGE(1&2), and cephalosporin permit these "old" drugs to command
new market share and sometimes new patent lives. Because of the value added, the
dollar value of the worldwide market for products containing CDs and for
complexes of CDs should be 2 to 3 1/2 times that of the CD itself.
There is little published data relating to the production or dollar sales
of CDs worldwide. The following estimates are based on the investigation and
estimates made by Mr. Strattan, which have included discussions with Dr. Hitoshi
Hashimoto of Ensuiko Sugar Refining Co., Ltd. Mr. Strattan's estimates have been
used by others including "April 1993 Food Processing," CDs and Foods by Dean
Ducksbury, and in "Food in Canada" edited by Ron Waske in an article entitled
"CDs for the Food Industry." The Company believes the annual worldwide market
for CDs is $150 million, which is expected to increase to $800 million by the
year 2000. Because of the value added, the dollar value of the worldwide market
for products containing CDs and for complexes of CDs should be 2 to 3 1/4 times
that of the CD itself.
Products
The Company's products include its Trappsol(TM) and Aquaplex(TM) product
lines. The Trappsol product line consists of approximately 15 different
varieties of CDs and the Aquaplex product line includes more than three dozen
different complexes of active ingredients with various CDs. In addition to these
product lines, the Company introduced Garlessence(TM) in the fourth quarter of
1995. Garlessence is the first ingestible product containing CDs to be marketed
in the U.S. The Company believes that by marketing Garlessence it has
demonstrated industry leadership. The Company also provides consulting services,
research coordination, and the use of CD Infobase(TM), a comprehensive database
of CD related information. The Company has protected its service and trade marks
by registering them with the U.S. Patent and Trademark office. The following
trademarks have been approved: TrappsolTM, GarlessenceTM, and AquaplexTM. The
following U.S. trademarks and service marks are pending since May, 1995.: CTDSM
,CD InfobaseSM, CTD ring design(TM), and Appromote(TM). There is no assurance
that any of the pending marks will be approved. These properties add to the
intangible asset value of the Company.
CTD purchases CD's from commercial manufacturers around the world
including: Wacker Chemie - Munich, Germany; Ensuiko Sugar Refining Co., Ltd. -
Yokohama, Japan; Nihon Shokuhin Kako - Tokyo, Japan; Roquette Freres - Le Strem,
France; American-Maize Products - Hammond IN, USA. CTD purchases specialty CD's
on occasion from Cyclolab R&D Company in Budapest, Hungary. The Company does not
manufacture cyclodextrins.
The Company's first product, Garlessence, is manufactured for the Company
by Herbe Wirkstoffe (GmbH) of Berlin-Zehlendorf, Germany. Under the terms of its
agreements with Herbe-Wirkstoffe, CTD has rights to sell the CD/garlic oil
complex within the U.S., its territories and possessions until December 31,
1998.
The Company has also introduced new products into its basic line of CDs and
CD complexes--liquid preparations of CDs; relatively unprocessed, less expensive
mixtures of the natural CDs; naturally modified CDs (glucosyl and maltosyl); and
finally, excess production of custom complexes when those items are not
proprietary or restricted by the customer.
Business Strategy
The Company's strategy has been and will continue to be to generate
profitable revenue through sales of CD related goods and services. The long term
success of this strategy depends on the smooth and continuous transition into
CD-related products with increasing value-added attributes.
From inception through the end of 1992, sales of CDs and CD derivatives
were enough to provide the necessary profitability to sustain the Company. Since
these materials were simply purchased and resold, they had the least value-added
attributes. Up until 1990 almost 100% of the revenue was generated by these
products with the least value-added attributes. During the early 90's sales of
complexes increased until they contributed approximately 30% of the revenue.
Presently, sales of CD complexes represent 44% of the Company's product
sales revenues. This transition to the more value-added complexes has been
planned and is desirable for increased profitability since higher margins can be
maintained for these products. However, it appears that the base business of CD
sales has eroded. Combined with price reductions dictated by the market, the
revenues from the sales of these products have decreased as much as the revenue
from CD complexes has increased. The Company is also becoming dependent on just
a few customers for the majority of its revenue. In response to this situation
the Company has expanded its original business strategy of parlaying its
leadership position in the presently quite small CD industry as a supplier of
CDs, CD derivatives, CD complexes to include:
(1) Marketing and launching a dozen OTC and naturaceutical products (e.g.,
dietary supplements) utilizing CD delivery benefits. For example, by
extracting specific ingredients from the garlic clove and complexing these
ingredients with Trappsol(TM) B (beta cyclodextrin) Garlessence(TM) was
created. Similar products can be created with any of the other herbal
ingredients such as ginseng, echinacea, ginkgo, cat's claw, and melatonin.
(2) Licensing the use of the Trappsol(TM)symbol for use by others wishing to
use CD delivery technology. This strategy is reflected in the Garlessence
package which, in addition to the Garlessence trademark, carries a
Trapposol trademark. This symbol will be promoted as an indication that a
Trappsol(TM)cyclodextrin is used with the product within and thereby
assures the user of the quality of the aqueous delivery system. This symbol
will be licensed in the same way as the MLB (Major League Baseball) symbol
is for baseball related products and the Nutrasweet(R)symbol is for
artificially sweetened products containing Nutrasweet(R).
(3) Creating independent pharmaceutical organizations by merging basic
manufacturing capability with the Company's technical product development
and marketing expertise; these stand alone organizations will be captive
purchasers of CD complexes.
(4) In-licensing and out-licensing basic CD applications technology. CTD is
currently preparing a patent of its own for a veterinary euthanasia product
based on benzocaine. The euthanasia product is an example of technology
resulting from the Company's research and development which the Company
will seek to out-license.
The Company continues to market its comprehensive selection of CDs, CD
derivatives, and CD complexes to scientists and researchers around the world
through print media advertising, trade show participation, and direct mail. The
Company projects an 8-10% growth in revenue from product sales in 1998.
The Company also intends to increase its business development efforts in
the food additive and personal products industries while continuing to build on
its successes in the pharmaceutical industry.
Business development on behalf of the Company's clients will include the
following: (i) negotiation of rights and/or licenses to CD-related inventions;
(ii) consultation with manufacturers to establish customized manufacturing
specifications; (iii) patentability assessments and strategic planning of patent
activities; (iv) trade secret strategies; (v) regulatory interface; and (vi)
strategic marketing planning.
Prior to the creation of CTD, Mr. Strattan had negotiated several
sub-licenses to current CD technology (US Patent 4,727,064), owned by the U.S.
Government. Most recently, in July of 1992, Mr. Strattan completed a major CD
licensing arrangement on behalf of Pharmatec, Inc. with Wyeth-Ayerst
Laboratories -- a division of American Home Products. The Company believes these
are the first sub-licenses granting use of the inventions in the above cited
U.S. government patent. While U.S. government ownership of US Patent 4,727,064
is available for licensing to all applicants on a non-exclusive basis, the
Company does not believe that this access to the basic CD technology presents a
competitive risk to the Company because the Company believes its competitive
advantage lies in its experience and know how in the use and application of CDs,
areas in which it believes it has a significant lead.
In addition to in-licensing and out-licensing efforts, the Company will
coordinate research studies in which it will retain a portion of the rights
created as a result of the research work supported.
Assuming the availability of funds, the Company will negotiate licensing
rights to its own selected inventions. Because of its comprehensive technical
and patent database for CD-related inventions, the Company believes it is
uniquely positioned to take advantage of various licensing situations.
<PAGE>
Marketing Plan
While at Pharmatec, Inc. in the late 1980's, Mr. Strattan pioneered the
marketing of derivatized CDs and their drug complexes. Mr. Strattan contended
that commercial use and development of CDs could only begin in earnest as
individuals and organizations became familiar with the truly unique solubilizing
and stabilizing properties of these starch molecules. Mr. Strattan set about
publicizing the benefits of CDs while other companies continued to hoard new
information in hopes of protecting imagined exclusivity. The Company has
continued this effort to market CDs. The Company believes that the failure of
businesses to exchange information about these exciting molecules has hindered a
more rapid commercialization of CDs as safe excipients. The Company believes
that its philosophy of partnering and sharing will act as a catalyst to create
momentum overcoming the inertia created by the previous conservatism and
secrecy.
The Company's sales have always been direct, highly cyclical and driven by
advertising and participation in trade shows. Arrangements with large laboratory
supply companies and several diagnostic companies have provided a more stable
sales base, but at the price of dependency on a few customers. The objective in
this unregulated target market of life science research is to increase annual
sales to $1,000,000 in 1998. This growth is forecasted to occur as a result of
the Company's expansion of its product line to include value-added complexes of
chemicals and CDs, increasing promotional efforts and widespread acceptance of
CDs by laboratories through word-of-mouth, white paper circulation, and hiring
of a dedicated product manager and acquisition or merger with a qualified
technical laboratory.
The Company has taken advantage of the propensity of researchers to use the
Internet to gather information about new products by establishing a WEB Page and
"site" on the world-wide web and obtaining a unique and descriptive domain name:
"cyclodex.com".
Historical Analysis
Research Markets
Historically the Company's revenues have been derived from sales to
individuals and companies which use the products in connection with research. In
1995 those sales averaged approximately $20,000 per month; in 1994 those sales
averaged just $13,000 per month. In 1995 the Company looked more closely at the
"research" business and found that only 28.6% ($72,867) of total sales could be
attributed to the market the Company had originally called its primary market.
Sales to this market are driven by trade shows, advertisements in trade
journals, and the Company's web site. Customers typically purchase small amounts
of CDs and complexes at premium prices. The remainder of 1995 sales were divided
between diagnostics (30.0%) and complexes for resale (41.4%). In 1996 sales to
the "research" market averaged almost $14,500 per month and accounted for 50% of
total revenues. In 1997 the research market averaged $23,547. "Research" and
"industrial" sales revenues are increasing, the industrial portion is growing
twice as fast as the research portion.
The Company believes the research market will continue to grow accounting
for 25-30% of the total revenues of the Company. The Company expects that such
growth will be stimulated by the effect of word-of-mouth within and the
availability of information electronically as national advertising reaches more
and more of these difficult to reach end users. The Company believes current
promotional efforts have reached less than 5% of the potential end users.
Pharmaceutical Companies
The objective in this target market has been to promote the adoption of
CMCDs for those human health care compounds that are either too insoluble or
unstable in aqueous solutions for use in ethical, over-the-counter and generic
pharmaceutical preparations. There are a number of generic and proprietary
"problem" drugs where solubility has been improved in the lab by CMCD
complexing. All pharmaceutical companies have many problem drugs but cannot
generate enough solid pharmacological data (due to poor solubility and
stability) to justify extensive in-house formulation work. Many companies are
quite willing to contract out such work on their most promising prospects.
Issues of regulatory requirements, clinical testing, and patent
restrictions have made this area of revenue generation very difficult for the
Company to break into.
Current and Near-Term Activity
1998
The Company intends to show by example that products containing CDs may be
introduced into the U.S. market. Rather than trying to push companies to
introduce CD products, the Company intends to pull them into the market by
launching approximately seven new CD containing products of its own into the
U.S. market over this time period. These products will address needs in the
relatively unregulated areas of natural medicine, topical OTC preparations,
veterinary products, and home gardening.
The Company intends to work with clients in countries whose current
regulatory views do not exclude CDs as natural products acting as excipients to
introduce beneficial pharmaceuticals improved by CDs. The terms for the joint
development of CD containing drugs with several medium-sized pharmaceutical
companies in South America, Australia and South Africa are currently being
negotiated.
Along with the new products themselves, the Company has created a
legitimate, licensable mark that may be used by other manufacturers wishing to
take advantage of the improved aqueous delivery afforded by Trappsol CDs. This
protected mark has the capability of generating revenues in a manner similar to
the Nutrasweet(R) (artificial sweetener) and MLB(R) (major league baseball)
logos.
The Company intends to generate additional revenue through obtaining rights
to certain patents that it will sublicense to appropriate organizations or that
it will use to develop its own proprietary products. Revenue will result from
sub-licensing royalties, sales of CD complexes to be used in the newly developed
pharmaceuticals, and finally from the sales of the products to end users.
Assuming an ongoing process of development, approval and adoption of CDs
and CMCDs for pharmaceutical applications, the Company's objective is to
initiate dialogue and be well prepared for partnerships with major food
companies. Price is a primary concern in this market, but unlike pharmaceuticals
where FDA permission for clinical testing may be obtained before actual FDA
product approval, food companies cannot feed experimental formulations to test
panels of consumers until the ingredients, i.e., the CDs, receive approval for
human consumption. Therefore, the Company will work with the food companies and
key university food research groups to initially evaluate non-taste
applications; e.g., "will CD complexes allow microwave baked casseroles to
brown? Will it provide crispness to certain microwave foods?" These questions
will initially be explored using NCDs since commercial adoption will depend
heavily upon the price of the CD selected and NCDs will always be the least
expensive. However, the benefits derived from the use of other CDs with
expensive ingredients (e.g., flavors, fragrances) may justify the use of CMCDs
and/or NMCDs.
There exist opportunities for CD applications in industrial applications
not associated with pharmaceuticals or foods. The Company believes that
developers of these other industrial applications will approach CTD because of
its leadership and partnering philosophy to help them commercialize their
products. Applications for which the Company has already received such inquiries
are:
(1) Cleaning agent ingredients
(2) Adhesive ingredients
(3) Paint surface finishing product ingredients
(4) Extrusion additives
(5) LED dye ingredients
Long Term View (1999-2001)
The Company believes that the sales of CDs, CD derivatives, and CD
complexes will always provide sufficient revenue to support a business of the
Company's present size. The Company intends to test its strategy of augmenting
these R&D derived revenues through the introduction of its own products, e.g.
Garlessence. Further, by allying itself with appropriate manufacturing
capabilities, the Company intends to introduce products which it manufactures.
Thus, the long-term goals of the Company are to:
(1) Sell CDs and related products and services to the R&D industry (2) Produce a
line of its own products utilizing CDs for unregulated uses;
e.g. naturaceuticals, geriatric nutriceuticals, naturacides. These products
will carry a licensable trade mark that will provide revenue when used on
other products.
(3) Own a portion of companies for which it guarantees a significant portion of
that JV's business; e.g., a marketing/package design company, a CD
applications R&D/pilot plant manufacturing company.
(4) Form and operate joint ventures with companies to jointly develop specific
pharmaceutical applications of CDs.
The Company anticipates that revenues from direct sales of its products and
services along with its portion of the profits of jointly owned businesses will
create sufficient net worth to permit the Company to move from the NASDAQ
Bulletin Board up to the NASDAQ Small Cap Market. With such a structure CD
technology will be introduced from the inside. It is anticipated that the
Company will provide the CDs, CD complexes, and CD technology to its joint
venture companies at a profit.
Competition
The Company is currently a leading consultant in determining what the
manufacturing standards and costs for CDs and CMCDs are, and believes, at the
current time, no organization is manufacturing commercial quantities of any CD
complex for resale. However, there will always exist the potential for
competition in this area since no patent protection can be comprehensive and
forever exclusive. Nevertheless, there is a perceived barrier to entry into the
CD industry because of the lack of general experience with CD complexation
procedures. The Company has established a strong business relationship with one
of the experts in this field -- Cyclolab in Hungary -- and has utilized the
services and expertise of this laboratory. The Company believes this
relationship provides a significant marketing lead time, and combined with a
strong marketing presence, will give the Company a two to three year lead time
advantage over its competitors.
The Company intends to form a more formal business relationship with
Cyclolab in Hungary by creating a Cyclolab-USA laboratory facility and thereby
strengthen its competitive advantage. Discussions between the principals of
Cyclolab and CTD have been ongoing for more than 5 years. Potential
relationships which have been discussed include joint venture arrangements, the
Company's outright acquisition of Cyclolab and the employment of Cyclolab
personnel to create Cyclolab-USA. There is no assurance that the Company will be
able to reach a formal business relationship with Cyclolab.
By copyrighting and registering its own name brands, CD logos, etc. the
Company intends to create licensable icons much like Nutrasweet and Major League
Baseball have. Such a strategy allows the Company to benefit financially through
licensing royalties from the efforts of its competition.
Government Regulation
Under the Federal Food, Drug and Cosmetic Act ("Food and Drug Act"), the
Food and Drug Administration ("FDA") is given comprehensive authority to
regulate the development, production, distribution, labeling and promotion of
food and drugs. The FDA's authority includes the regulation of the labeling and
purity of the Company's food and drug products. In the event the FDA believes
that the Company is not in compliance with the law, the FDA can institute
proceedings to detain or seize products, enjoin future violations or assess
civil and/or criminal penalties against the Company.
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of therapeutic drug products through lengthy
and detailed laboratory and clinical testing procedures, sampling activities and
other costly and time consuming procedures. The extent of potentially adverse
government regulations which might arise from future legislation or
administrative action cannot be predicted.
Under present FDA regulations, FDA defines drugs as "articles intended for
use in the diagnosis, cure, mitigation, treatment or prevention of disease in
man." The Company's product development strategy is at first to introduce
products that will not be regulated by the FDA as drugs because all of its
ingredients are natural products or are generally regarded as safe (GRAS) by the
FDA. The Company is continually updated by counsel as to changes in FDA
regulations that might affect the use of and claims for these products. There is
no assurance that the FDA will not take the position that the Company's food and
nutritional supplement products are subject to requirements relating to drug
development and sale. The effect of such determination could be to limit or
prohibit distribution of such products.
Employees
In 1997 the Company employed 3 persons on a full time basis. None of the
Company's employees belong to a union. The Company believes relations with its
employees are good.
Item 2. Description of Properties.
The Company occupies a 3,000 sq. ft. building at 3713 S.W. 42nd Ave., Suite
3, Gainesville, Florida 32608, pursuant to a 5-year lease beginning November 1,
1994. The lease provides for annual increases in rent ($18,000 for the first
year, $18,900 for the second year, $19,848 for the third year, $20,844 for the
fourth year and $21,888 for the fifth year). The Company also has an option to
lease an additional 3,000 sq. ft. of space. The Company houses its
administrative offices in approximately 1,100 sq. ft. of this space; an
additional 550 sq. ft. is dedicated to laboratory/manufacturing functions. The
remaining 1,350 sq. ft. has been prepared for additional laboratory and pilot
plant manufacturing use. This prepared space is suitable for housing
Cyclolab-USA and the optioned 3,000 sq. ft. of space can be used to house
graphic design functions and provide space for future expansion of Cyclolab USA.
The current marketing and sales activities are implemented from that site.
The entire 6,000 sq. ft. could support a total of 12 - 15 people and therefore
is expected to be adequate for the foreseeable future. Current total office and
laboratory operating expenses excluding salaries have stabilized at about
$10,000 per month.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
In October 1994, the Company's securities began trading on the OTC Bulletin
Board and in the over-the-counter market "pink sheets" under the symbol CTDI.
Since the commencement of trading of the Company's securities, there has been an
extremely limited market for its securities. During the fourth quarter of 1995,
one of the Company's market makers ceased business. The following table sets
forth high and low bid quotations for the quarters indicated as reported by the
OTC Bulletin Board.
<TABLE>
<S> <C> <C> <C>
High Low
1995 First Quarter $ 7.50 $ 3.00
Second Quarter $ 8.50 $ 4.25
Third Quarter $ 9.00 $ 4.00
Fourth Quarter $ 8.00 $ .50
1996 First Quarter $ 2.25 $ .50
Second Quarter $ 1.0625 $ .75
Third Quarter $ 2.25 $ .25
Fourth Quarter $ 1.00 $ .625
1997 First Quarter $ 3.00 $ .75
Second Quarter $ 1.50 $ .562
Third Quarter $ .562 $ .437
Fourth Quarter $ 1.062 $ .531
</TABLE>
Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
Holders
As of December 31, 1997, the number of holders of record of shares of
common stock, excluding the number of beneficial owners whose securities are
held in street name was approximately 60.
Dividend Policy
The Company does not anticipate paying any cash dividends on its common
stock in the foreseeable future because it intends to retain its earnings to
finance the expansion of its business. Thereafter, declaration of dividends will
be determined by the Board of Directors in light of conditions then existing,
including without limitation the Company's financial condition, capital
requirements and business condition.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
As of December 31, 1997, the Company's working capital was $108,781
compared to $293,518 at year end 1996. The total reduction in working capital
was $184,737. However, at the end of 1997 the Company re-evaluated its projected
use of the deferred tax asset which resulted in a reclassification of $141,350
to long term assets. Therefore, the reduction in real working capital was only
$43,387. This reduction is due primarily to the loss from operations and the
purchase of $10,000 of laboratory and office equipment.
Total product sales decreased by $60,391, however, excluding an unusually
large sale in 1996, the Company's normal customer sales experienced 13% growth
and for the first time, the Company recognized consulting revenues of $86,667.
Total product and service revenues increased by 8%. Selling, General and
Administrative expenses (SG&A) increased by 16%, however, after removing $83,425
of unusual expenses incurred in 1997, recurring SG&A expenses actually decreased
by 12%.
Inventory continues to be dominated (68%) by the Garlessence(R) retail
product and therefore masks the steady movement of the other components of that
inventory. While total product sales have decreased since 1996 ($283,677 in 1997
vs. $344,068 in 1996), Management has continued to maintain inventory levels in
response to the normal customer sales trend recognized above.
The three year period of time (starting January 1, 1995) in which the
Company could recover its original licensing fee for Garlessence of $60,000
through discounted purchases of raw materials expired at the end of 1997 and the
license fee has been fully amortized. The Company has recovered $9,137 of its
license fee through purchase discounts. The Company continues to negotiate with
the German company to maintain its exclusivity in the U.S. As of February of
1998, the Company has been assured that it still has right-of-first-refusal
status and may continue to recover its original licensing fee through purchase
discounts until December 31, 1998.
The Company will continue to seek out distribution arrangements that will
allow it to recover all of its Garlessence(R) licensing prepayment fee and
inventory costs and to meet its commitments to the licensor. In 1997, the
Company sold less than $1,000 of Garlessence. Management is currently working
with a small health products telemarketing company in Arizona, Life Enrichment,
to include Garlessence(R) in its catalog promotions. Management believes that as
a last resort it can recover at least the inventory value of the Garlessence(R)
by selling it to companies that purchase such inventory. Since the
Garlessence(R) inventory has a greater than five year shelf life, the Company
fully expects to recover all of its investment in this product.
To meet the financial needs of expected future growth, the Company filed a
registration statement with the SEC to make a public offering in 1996 and 1997
of 250,000 shares of common stock and 125,000 warrants of the Company. No shares
of stock were sold in this offering. The offering closed April 30, 1997 and the
Company expensed the previously capitalized deferred offering costs ($127,467)
in 1997. While most of these offering costs were non-cash, the net result was a
large negative impact on the financial results reported for 1997.
On January 1, 1996 the Company resolved to issue 48,000 shares of its
common stock to various unrelated parties for services performed in connection
with the Company's anticipated self-underwritten stock offering as noted above.
The shares issued bear a restrictive legend. The Company valued the 48,000
shares at $12,000 which is approximately 50% less than the bid price at the date
of issuance. The quoted market price was not used to value the stock since the
stock does not qualify as a designated issue.
Of these shares, 47,000 were issued on August 15, 1996. The other 1,000
will not be issued. Furthermore, two of these parties acknowledged that in the
event the gross proceeds of the offering were less than $500,000, then one-half
of their shares (20,000) would be returned to the Company. As no proceeds were
recognized from the self-underwritten offering, the first party returned their
10,000 shares to the Company to be canceled. The second party and the Company
agreed on the provision of services at no cost to the Company in return for
their 10,000 shares. No further contingent shares are outstanding.
On February 1, 1997, the Company paid its outstanding balance of $52,200 on
its $75,000 Line of Credit down to $1 and accepted a new credit line of $25,000.
As of December 31, 1997, $14,000 has been drawn on this line of credit compared
to $52,200 for the same period in 1996. The Company also obtained a second Line
of Credit from a local bank in the amount of $25,000. As of December 31, 1997,
approximately $9,800 is outstanding on this line. Management feels that the
decrease in the amount of advances drawn on the lines of credit during the year
and the addition of a second bank line of credit available reflect the continued
confidence in the financial position of the Company.
The Company is in the third year of a five-year lease for 3,000 square feet
of space for an office, laboratory, and manufacturing plant. The Company moved
into the building during October 1994. Rent payments are $18,000 in year one,
$18,900 in year two, $19,484 in year three, $20,844 in year four, and $21,888 in
year five. The Company also has a purchase option on this space in which ten
percent of the lease payments may be applied to the purchase price. The Company
may exercise an option to lease an additional 3,000 square feet of adjoining
space. The Company houses its administrative offices, laboratory, and
manufacturing facility in this complex, utilizing an aggregate of approximately
1,650 square feet. This facility has been built, and can be expanded, according
to "GMP" (good manufacturing practices) specifications in anticipation of the
commercial needs of the markets the Company serves. The remaining 1,350 square
feet of space is for pilot plant manufacturing and an analytical laboratory.
However, this expansion will require additional funding and there is no
assurance that any additional funding will be available. Management has no
immediate plans for this expansion.
The Company's right-of-first-refusal with Cyclops h.f. (CyC) to certain
inventions embodied in patents owned by Cyclops expired in September of 1997.
Licenses to specific ophthalmic drugs benefiting from CyC's inventions will now
have to be negotiated with the German company that holds these rights. The
Company feels confident that rights to these inventions can be obtained at least
for sales in the United States. Contingent upon a successful private placement
of the Company's stock in the second or third quarter of 1998 the Company
expects to file New Drug Applications with the Food and Drug Administration
(FDA) for the licensed ophthalmic products. There is no assurance that the
Company will be able to obtain licenses to the CyC inventions or that the
private placement proposed will raise sufficient capital to undertake the New
Drug Applications.
On May 1, 1995 the Company entered into a joint venture operating as
Ocudex, Inc. The Company and Ocumed, Inc., an unrelated company, each own 50% of
Ocudex. The Company had agreed to provide funds on a best efforts basis of not
more than $10,000 per month for up to 12 months. As of December 31, 1997 the
Company had advanced a total of $51,000 and realized a loss of $11,094 to date.
Since there was no activity at Ocudex during all of 1997 and the Company was
unable to acquire the assets of its joint venture partner, Ocumed, the Company
has provided an allowance in 1997 for the remaining investment in the amount of
$40,406. The corporate shell will remain available for future use as the Company
will continue to work with its joint venture partner to bring ophthalmic drugs
using cyclodextrins to the market.
In May of 1996 the Company entered into a contractual agreement with
Diversified Corporate Consulting Group, LLC (DCCG), whereby the Company
transferred 110,010 shares of CTD's voting common stock to DCCG in return for
future financial services related to business and financial public relations
improvement as defined in its agreement. Management anticipates benefits will be
realized in 1998 from the retaining of DCCG (now called Genesis Consulting
(GCLLC)).
Through GCLLC the Company retained the services of Burckhardt & Company,
Inc (B&C). to coordinate the private placement that will make possible the
Company's planned ophthalmic Investigational New Drug (IND) applications to the
FDA. Planning for this private placement began in late 1997 which required the
Company to spend $30,000 and $2,500 in the form of consulting fees to B&C and
Executive Concepts, respectively. The Company also recorded $2,500 in stock to
be issued to Executive Concepts. Since these costs are directly attributable to
the proposed private placement, they have been classified as deferred charges.
The total amount deferred for the year ended December 31, 1997 is $35,000. The
Company believes the private placement will be completed in the second quarter
of 1998.
The private placement is expected to raise $2,000,000; to be used as
follows:
<TABLE>
<S> <C>
Initial costs to secure Licenses and Intellectual Property $ 250,000
File IND 50,000
Complete IND studies 300,000
Working Capital for completing Phase I & II studies 850,000
Working Capital for Administering IND through Phase II applications 400,000
Private Placement Costs 150,000
Total $ 2,000,000
</TABLE>
The Company expects the IND application process to be completed within 12
months of an initial IND application; such application could occur as early as
the end of June 1998. Management expects to be able to move several related
ophthalmic drug products through the above process at much reduced incremental
costs. Using this strategy, the Company anticipates licensing one or more of the
drugs that have completed phase II studies to interested ophthalmic
manufacturing companies, thereby creating revenue from these licenses early in
1999. These licensing arrangements provide a proof of concept and thereby are
expected to provide credibility for a possible future public offering. Using the
licensing revenues and/or the proceeds of such a public offering, the Company
expects to take drugs not out-licensed, completely through marketing approval by
the FDA (Phase III).
The Company's drug applications have been structured so that even if only
50% ($1,000,000) of the private placement proceeds become available to the
Company, the Company will be able to complete phase II studies on at least one
of the ophthalmic drugs to be submitted; however the planned economies of
multiple, related drug applications will be lost. Once the phase I and II
studies are complete, Management believes it can approach investors for
additional funding based on the phase I and II data. Additional capital will be
required if the Company is to complete the phase III approvals itself. Without
additional capital, the Company could license the phase I and II data and
through royalties over time generate revenue.
There are no assurances that the above private placement or other future
financing activities will generate enough resources to accomplish the Company's
financial or regulatory goals. Factors which can adversely affect the
realization of the Company's goals as stated in this report include dependence
on continued growth of the CD market, the success of future financing
activities, the ability of the Company to continue the development of its
products and services, and the uncertainties regarding regulatory approval of
the Company's products.
In the case that less than the $1,000,000 is raised, the Company will
allocate funds between doing an IND for the best pharmaceutical candidate and
creating retail over-the-counter products that require minimal regulatory
intervention such as contact lens soak solutions, benzocaine patches,
plaque-softening chewing gum, etc to be marketed or sub-licensed by the Company.
In the event that no further funding is available, Management believes that it
can sub-license its secured licensing rights along with the completed IND to a
large ophthalmic company to recover its costs and generate revenues.
In the second quarter of 1996, the Company amended its Articles of
Incorporation increasing the number of voting shares authorized from 5,000,000
to 10,000,000. In addition, non-voting common shares were created. The total
amount of non-voting common shares authorized is 10,000,000.
In continuing to implement its strategic plan of acquiring and developing
new products through licensing and joint ventures, the Company, on March 10,
1997, entered into a royalty-bearing agreement with Jurox Pty, Ltd., an
Australian company manufacturing and selling veterinary pharmaceuticals, to
jointly develop a cyclodextrin/alfaxalone veterinary anesthetic product. As of
December 31, 1997 no sales of these products have occurred.
During 1997 CTD was awarded a judgement in the amount of $50,000 against
WTDT, a production company and television station in South Florida, for breach
of contract to provide services related to the marketing and sales of
Garlessence(R). The Company paid WTDT $22,000 in 1995 to secure their services
and was awarded additional compensatory costs and damages. WTDT has filed for
protection under Chapter 11 bankruptcy rules. No amount is expected to be
recovered from this judgement and the Company has not recorded any amount
related to this judgement in its financial statements.
In a continuing effort to let the public know about the benefits of
cyclodextrins, the Company accepted the opportunity to appear on the premier of
a proposed new television show called The Stock Show. The purpose of this weekly
series was to bring to the attention of its viewers OTC bulletin board companies
that presented significant growth opportunities. In April of 1997, Company
management entered into an agreement with Atlantic Syndication Network, Inc.
(ASNI), a Las Vegas based production company, to contribute to the production
fees necessary to produce the first show as follows:
(a) $2,500.00 cash
(b) 10,000 shares of common stock of CTD
(c ) options to purchase 25,000 shares of non-voting common stock
of CTD for $1.00/share.
In return, CTD would be guaranteed at least two airings of the 1/2 hour
show on television and satellite networks as ASNI could secure the air-time. At
least two airings of the show occurred on KDOC, a Los Angeles TV station; and
LVTN (Las Vegas TV Network), a satellite TV network. The Company also received
tapes of the show for its own promotional uses. As of December 31, 1997 the
agreement with ASNI has been completed and no further events are expected.
In response to the need for consulting services by major companies
commercializing CD applications, the Company entered into an agreement with
NuPharm, Inc., a Canadian company manufacturing metered dose inhalants (MDI's).
The Company agreed to provide research and development services for NuPharm on
cyclodextrin/respiratory drug complexes for potential use in MDI's. CTD expects
to recognize increasing revenues from these services and other similar services
provided by the Company.
Management has evaluated the Company's computer systems to determine the
impact of the Year 2000 (Y2K) on the Company's operations. Management has
completed its evaluation and determined that both the hardware and software used
by the Company are Y2K capable and no additional cost or impact on operations is
expected.
Results of Operations
Prior to 1995 sales of cyclodextrins and related manufactured complexes
were highly volatile. In efforts to offset this volatility, the Company
continues to expand its revenue producing activities to include providing
research and development services for unrelated companies and its inventory line
to include more routinely purchased products. Total product and service revenues
were $370,344 and $344,068 for the years December 31, 1997 and 1996,
respectively. With the above expansions and the normal customer sales, the
volatility of the Company's revenues appears to have stabilized into steady
growth and the revenues are expected to continue to grow through the year 2000
and beyond.
Total product sales for 1997 were $283,677 compared to $344,068 for 1996.
However, 1996 sales are supplemented by $92,500 due to an unusual sale that
occurred in December of 1996. By removing that amount, the Company's normal
customer sales ($283,677 vs. 251,568) resulted in 13% growth. The Company also
experienced the emergence of consulting revenue as a new revenue category.
During 1997 the Company realized consulting revenues for the first time in the
amount of $86,667.
Product sales are primarily to large pharmaceutical and food companies for
research and development purposes. Sales of both products and services have been
concentrated among a few large customers.
The Company's gross profit margin on product sales decreased from 87% for
1996 to 75% for 1997, due primarily to increasing inventory replacement costs.
Future retail sales of Garlessence at a gross profit of approximately 25% will
contribute to overall profitability, but at a substantial reduction in gross
profit percentage. Therefore, the Company expects this trend of decreasing gross
profit margins to continue as the replacement cost of cyclodextrins continues to
rise and the retail sales of Garlessence and other lower margin products occur.
In efforts to minimize expenses, Management constantly reviews efficiency
and productivity. Total personnel was reduced from 5 employees to 3 in 1997.
This reduction in personnel costs (from $121,575 in 1996 to $112,062 in 1997)
will provide the Company with a significant improvement in the product sales to
salary ratio in 1998 and reduce personnel expenses to 1994 levels. While
Management continues to monitor company operations, it is anticipated that no
further personnel changes will be required for the immediate future.
Selling, General and Administrative (SG&A) expenses ($347,685 vs. $300,599)
increased 16%. The increase stems in large part from certain non-recurring
activities. While the Company reduced personnel costs, it experienced an unusual
expense in the amount of $15,625 due to the write off of the remaining deferred
employee stock compensation. The Company also incurred $52,800 in additional
outside consulting services related to the revenues created by providing those
consulting services. Future consulting services are not expected to incur such
expenses. Lastly, in efforts to promote Garlessence, the Company increased
spending on advertising by more than $15,000. Taking into account the above
items, recurring operating SG&A expenses actually decreased by $36,339.
The Company recorded in 1997 a net income tax benefit of $20,650 as
compared to $229,350 in 1996. However, the amount recorded in 1996 was the
cumulative benefit of all prior years' net operating losses, as 1996 was the
first year such a benefit was recognized. The current year's benefit resulted
from changes in the effective tax rate and the valuation allowance, and the tax
benefit from the current year loss.
The total loss from operations in 1997 was $(176,035) compared to $(1,885)
in 1996. However, over 70% of that loss stems primarily from the public offering
costs expensed in 1997. By removing those expenses ($127,467) the loss from
operations was only $(48,568). Taking into account the unusual sale in 1996 and
the unusual expenses in 1997 for deferred compensation, advertising and
consulting; Management feels that the results in 1997 are comparable to 1996 and
that the operating health of the Company is sound. Management has held the line
on recurring operating expenses, increased normal customer sales and expanded
the Company's revenues base even while developing new products, and implementing
its strategy of creating operational affiliates that will use CD's in herbal
medicines, wastewater remediation, and pharmaceuticals.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
When used in this report, the words "believes," expects," "anticipates" and
similar expressions are intended to identify forward-looking statements.
Statements herein regarding sales and research performance, expected financing,
and expected regulatory approval of the Company's products further constitute
forward-looking statements under federal securities laws. Such statements are
subject to certain risks and uncertainties that could cause the actual
realization to be delayed or to not occur. Management has made certain
assumptions regarding each of the statements which may or may not be accurate.
Actual research and development results may vary significantly from the current
plans. Actual Company financing activities may vary significantly from the
current plans and may result in the Company changing its plan of the use of such
proceeds.
Item 7. Financial Statements
Financial statements are submitted as an exhibit under Items 13(a)(1) and
(2) on this Form 10-KSB.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On December 23, 1997, the Company engaged James Moore & Co., P.L. as its
independent accountants for 1997. The work of Davis, Monk & Co. was terminated
on December 23, 1997. The dismissal of Davis, Monk & Co. and the engagement of
James Moore & Co., P.L. was approved by the Company's Board of Directors.
On December 5, 1996, the Company engaged the accounting firm of Davis, Monk
& Co. as independent accountants for the Registrant for 1996. The work of James
Moore & Co.., P.L. was terminated on December 5, 1996. The dismissal of James
Moore & Co., P.L. and the engagement of Davis, Monk & Co. was approved by the
Company's Board of Directors.
During fiscal years ended December 31, 1995 and December 31, 1996, there
have been no disagreements with James Moore & Co., P.L. or Davis, Monk & Co. on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure or any reportable events.
The reports on the financial statements performed by James Moore & Co., P.L
and Davis, Monk & Co. for the past two years ended December 31, 1996, contained
no adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles.
<PAGE>
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
<TABLE>
<S> <C> <C> <C>
Name Age Position Since
C.E. Rick Strattan 52 President/CEO, Director August, 1990
</TABLE>
C.E. Rick Strattan, has been President and a Director of the Company since
its formation. He served as treasurer of the Company from August, 1990 to May,
1995. From November 1987 through July 1992, Mr. Strattan was with Pharmatec,
Inc. where he became its Director of Marketing and Business Development for CDs.
He was responsible for CD sales and related business development efforts. From
November, 1985 through May, 1987 he served as Chief Technical Officer for
Boots-Celltech Diagnostics, Inc. He also served as Product Sales Manager for
American Bio-Science Laboratories, a Division of American Hospital Supply
Corporation. He is a graduate of the University of Florida with a BS degree in
chemistry and mathematics and has also received an MS degree in Pharmacology and
an MBA degree in Marketing/Computer Information Sciences from the same
institution. Mr. Strattan has written and published numerous articles and a book
chapter on the subject of Cyclodextrins. Mr. Strattan's professional and
technical experience are deemed highly important to the Company. See "Business -
General."
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representation from certain reporting persons, the Company believes
that during the fiscal year ended December 31, 1997, all filing requirements
applicable to the Company's executive officers, directors and more than 10%
shareholders were complied with.
<PAGE>
Item 10. Executive Compensation
Executive compensation is determined by the Board of Directors. All
compensation paid by the Company for services rendered during the three fiscal
years ended December 31, 1995, 1996 and 1997 for each executive officer is set
forth in the following table: <TABLE> <CAPTION>
SUMMARY COMPENSATION TABLE (three
fiscal years ended December 31, 1995, 1996 and 1997)
Annual Long Term
Compensation Compensation
---------------------------------------------------------
Other All
Annual Other
Name and Principal Position Year Salary Bonus Compensation Compensation
<S> <C> <C> <C> <C> <C>
C.E. Rick Strattan 1997 $34,750 -0- -0- -0-
Chief Executive Officer, President 1996 $24,000 -0- -0- -0-
1995 $36,000 -0- -0- -0-
Steve Herschleb 1997 -0- -0- -0- -0-
Vice President 1996 -0- -0- -0- -0-
19951 $12,500 -0- -0- $25,000(1)
David L. Southworth(3) 1997 $15,686 -0- -0- -0-
Treasurer/Chief Financial Officer 1996 $21,550 -0- -0- -0-
1995 $27,550 -0- -0- $ 2,501(2)
</TABLE>
1 On May 1, 1995, Mr. Herschleb left CTD due to ill health and the Company
repurchased his shares for $2.50 per share.
2 On November 11, 1995 Mr. Southworth received 4,000 shares of CTD common
stock having a value of $2,501 based on the market price of the shares at that
time.
3 On June 30, 1997, Mr. Southworth resigned from the Company as
Treasurer/Chief Financial Officer.
On November 15, 1995, the Company adopted a non-qualified employee stock
purchase plan pursuant to which employees may purchase restricted shares of the
Company's common stock at a price of 50% of the current bid price of the shares
in amounts not to exceed the employee's gross pay. Pursuant to the plan,
employees have elected to purchase 33,400 shares, of which 15,800 shares have
been purchased by Mr. Strattan.
Performance-Based Stock Compensation
The Company has adopted a resolution whereby up to 100,000 shares may be
transferred to Mr. Strattan based on his performance in the discretion of the
Board of Directors which is solely comprised of Mr. Strattan.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table shows the ownership of the Common Stock of the Company
on March 17, 1998, by each person who, to the knowledge of the Company, owned
beneficially more than five (5%) of such stock, the ownership of each director,
and the ownership of all directors and officers as a group. Unless otherwise
noted, shares are subject to the sole voting and investment power of the
indicated person.
<TABLE> <CAPTION>
Names and Address of Individual or .........Amount and Nature of Approximate %
Identity of Group ..........................Beneficial Ownership of Class
<S> <C> <C>
C.E. Rick Strattan(1)....................... 531,800 43.06%
4123 N.W. 46th Avenue
Gainesville, FL 32606
Diversified Corporate Consulting Group ..... 116,000 9.39%
11355 S.E. 54th Avenue
Belleview, FL 34420
All Officers and Directors as a group ...... 531,800 43.06%
</TABLE>
1 Held by Strattan Associates, Ltd., of which Mr. Strattan is the general
partner. Strattan Associates, Ltd. is a limited partnership established by Mr.
Strattan for estate tax purposes and is not otherwise engaged in business.
Strattan Associates, Ltd. is the owner of the 500,000 shares of CTD stock. Mr.
Stratton is the President/CEO and Director of the Company.
Item 12. Certain Relationships and Related Transactions.
.........In November 1993, the Company entered into a Business Consulting
Agreement with Garrison Enterprises, Inc. ("Garrison") to provide consulting
services to the Company in the areas of the evaluation of managerial, marketing
and sales requirements; reviewing and analyzing proposed business opportunities;
consulting with the Company on strategic corporate planning and long-term
investment policies; and rendering advice with respect to future fund raising
and other financial arrangements. As compensation for its services Garrison was
issued 300,000 shares of the Company's Common Stock and after completion of the
Company's private placement offering in May, 1994, Garrison began receiving
$7,000 per month for a period of 3 years and $10,000 per month for the two-year
period thereafter.
.........In November 1993, C.E. Rick Strattan, the President of the
Company, and Garrison entered into a Shareholder's Agreement. Pursuant to which
Mr. Strattan and Garrison (the "Shareholders") agreed to vote their shares so as
to provide that the Directors of the Company shall be C.E. Rick Strattan and
Michael A. Schub ("Schub"). In addition, the Shareholders agreed to an annual
salary to the President of the Company of $7,000 per month for the three years
after the closing of the stock offering, increasing to $10,000 per month in
years four and five.
.........Subsequently, on June 16, 1994, Mr. Schub resigned as Vice
President, Secretary and Director of the Company. On June 23, 1994, Barry R.
Klein became Secretary and a Director of the Company. In addition, Mr. Schub was
president and a director of Garrison from inception to June 23, 1994, when Mr.
Schub resigned.
.........Upon Mr. Schub's resignation as an officer and director of the
Company and Garrison, the Company entered into a retainer agreement with Schub
thereby retaining Schub as special counsel, at a monthly retainer of $1,750
commencing July 1, 1994 and continuing until March 31, 1997. From April 1, 1997
to March 31, 1999, said retainer was to be increased to $2,500 per month.
Garrison thereafter agreed to reduce its compensation from the Company in an
amount equal to the monthly retainer paid to Schub.
.........On August 1, 1994, the Company entered into a five-year consulting
agreement (renewable annually by mutual agreement) with Yellen Associates
("Yellen"). Yellen agreed to provide ideas for new products in the nutritional,
geriatric, and related health fields; to find companies and/or products suitable
for acquisition; to find products suitable for manufacture and/or distribution;
and to secure customers for Company products. All products offered by Yellen and
accepted by the Company will belong exclusively to the Company with all related
rights. In return, the Company agreed to pay Yellen $2,000 per month for nine
months. If sales of Yellen products had been at least $200,000 per year, this
monthly payment would have automatically continued for one year. Any other
continuance of the payment would be negotiated. Additionally, the Company would
pay Yellen royalties of up to 5% of sales for three to five years for products
acquired through Yellen or cyclodextrin sales made by Yellen. The Company also
agreed to sell to Yellen over a period of three years from August 1, 1994, up to
30,000 shares of Company stock at a discount of 50% of the market price quoted
at the time of purchase. Having satisfied the guaranteed minimum payments part
of the agreement in April, 1995, the Company chose to discontinue the monthly
payments.
.........In September 1994, the Company prepaid its consulting agreements
with Garrison and Schub for an amount equal to $180,000. Garrison and Schub are
no longer providing services to the Company. The Company terminated these
agreements because it believed that the marketing and financial services of
Schub and Garrison would not be needed for the remaining term of five years.
Thus, the Company bought out of these agreements at a discount of $270,000.
Under the terms of the contracts, the Company was obligated to expend
approximately $450,000 over the next year term of the agreement.
.........On December 12, 1994, the Company adopted a stock issuance plan
pursuant to which employees named by the board of directors receive shares in
amounts determined by the board. Shares received pursuant to the 1994 plan are
vested after five years. During the third, fourth and fifth years the stock is
held by an employee, the employee may cause the Company to repurchase the stock
at 50% of the then current market value. Since its inception 35,000 shares have
been issued pursuant to the plan, of which 10,000 have been repurchased.
.........On May l, 1995, the Company agreed to purchase all of Mr.
Herschleb's common shares of the Company (10,000 shares) at a price of $2.50 per
share payable in 12 monthly installments without interest.
.........On May 1, 1995, the Company entered into a Joint Venture Agreement
with Ocumed, Inc. Under the terms of the Agreement, the parties have created a
separate entity called Ocudex, Inc. for the purpose of developing and selling
ophthalmic products manufactured by Ocumed and developed by the Company for
which the Company will provide funding of up to $120,000 over a 12-month period.
The Company and Ocumed each own 50% of Ocudex, Inc.
On June 30, 1997, Mr. Southworth resigned from the Company as
Treasurer/Chief Financial Officer.
On March 10, 1998, the Company adopted a resolution whereby 10,000 shares
of the Company's common stock, issued in the name of Gregory V. DeLong, be
returned to the Company's treasury stock as authorized but unissued shares,
pursuant to a Stock Power retained by the Company.
The Company has adopted a resolution whereby up to 100,000 shares may be
transferred to Mr. Strattan based on his performance in the discretion of the
Board of Directors which is solely comprised of Mr. Strattan.
<PAGE>
PART IV.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits Page
(1) Reports of Independent Certified Accountants F-1
(2) Financial Statements F-2
Exhibits required by Item 601, Regulation S-B:
(3) Articles of incorporation and by-laws
(a) Articles of Incorporation filed August 9, 1990 * None
(b) By-Laws. * None
(c) Certificates of Amendment to the Articles of Incorporation
filed November 18, 1993 and September 24, 1993. * None
(4) Instruments defining the rights of security holders,
including indentures
(a) Specimen Share Certificate for Common Stock. * None
(9) Voting Trust Agreement None
(10) Material Contracts
(10.1) Agreement of Shareholders dated November 11, 1993
by and among C.E. Rick Strattan, Garrison Enterprises,
Inc. and the Company. * None
(10.2) Lease Agreement dated July 7, 1994**. None
(10.3) Consulting Agreement dated July 29, 1994 between
the Company and Yellen Associates. * None
(10.4) License Agreement dated December 20, 1994 between
the Company and Herbe Wirkstoffe GmbH. * None
(10.5) Joint Venture Agreement between the Company and
Ocumed, Inc. dated May 1, 1995, incorporated by
reference to the Company's Form 10-QSB for the q
uarter ended June 30, 1995.** None
(10.6) Extension of Agreement between the Company and Herbe
Wirkstoffe GmbH 40
(11) Statement re: Computation of Per Share Earnings Note 1 to
Financial
Statements
(16) Letter on changes in certifying accountant 41
(18) Letter on change in accounting principles None
(22) Subsidiaries of Registrant None
(23) Published Report re: Matters Submitted to Vote of
Security Holders None
(24) Consents of Experts and Counsel None
(25) Power of Attorney None
(27) Financial Data Schedule 43
(28) Additional Exhibits None
(29) Information from reports furnished to state insurance
regulatory authorities None
(b) Reports on Form 8-K:
Form 8-K, filed December 23, 1997 regarding item 4.
* Incorporated by reference to the Company's Form 10-SB filed with the
Securities and Exchange Commission on February 1, 1994.
** Incorporated by reference to the Company's Form 10-KSB filed with the
Securities and Exchange Commission on March 29, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
/S/
By (Signature and Title)_______________________________________
C.E. RICK STRATTAN, President,
Chief Executive Officer, Chief
Operating Officer and
Director
Date: March 28, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cyclodextrin Technologies Development, Inc.:
We have audited the accompanying balance sheet of Cyclodextrin Technologies
Development, Inc. as of December 31, 1997, and the related statements of
operations, 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 Cyclodextrin Technologies Development,
Inc. for the year ended December 31, 1996, were audited by other auditors whose
report dated February 21, 1997, expressed an unqualified opinion on those
statements.
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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cyclodextrin Technologies
Development, Inc. as of 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.
/s/
February 3, 1998
Gainesville, Florida
F - 1
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,331
Investments 17,596
Accounts receivable 41,536
Inventory 86,996
Deferred tax asset 12,000
Other current assets 5,894
Total current assets 72,353
PROPERTY AND EQUIPMENT
Furniture and equipment 58,182
Leasehold improvements 24,800
82,982
Less: Accumulated depreciation 55,634
Total property and equipment 27,348
OTHER ASSETS
Deferred offering costs 35,000
Deferred tax asset 238,000
Total other assets 273,000
TOTAL ASSETS $ 472,701
</TABLE>
Theaccompanying notes to financial statements are an integral
part of these statements.
F-2
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
BALANCE SHEET
DECEMBER 31, 1997
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 39,693
Notes payable 23,879
Total current liabilities 63,572
COMMON STOCK SUBJECT TO REPURCHASE, par value $.0001 per share,
100,000 shares authorized, 5,000 shares issued and outstanding 1,405
STOCKHOLDERS' EQUITY
Class A common stock, par value $.0001 per share, 9,900,000
shares authorized, 1,220,110 shares issued and outstanding;
Class B non-voting common stock, par value $.0001 per share,
10,000,000 shares authorized, 0 shares issued and outstanding 120
Additional paid-in capital 1,670,744
Unrealized loss on investments (3,755)
Accumulated deficit (1,259,385)
Total stockholders' equity 407,724
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 472,701
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-3
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF OPERATIONS
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
PRODUCT SALES .......................................$ 283,677 $ 344,068
COST OF PRODUCTS SOLD ............................... 71,227 45,354
GROSS PROFIT ........................................ 212,450 298,714
CONSULTING SERVICES AND OTHER OPERATING REVENUE ..... 86,667 --
TOTAL OPERATING REVENUE ............................. 299,117 298,714
OPERATING EXPENSES
Selling, general and administrative ................ 347,685 300,599
Public offering expenses ........................... 127,467 --
Total operating expenses ....................... 475,152 300,599
LOSS FROM OPERATIONS ................................ (176,035) (1,885)
OTHER INCOME (EXPENSE)
Investment and other income ........................ 1,654 2,632
Gain (loss) due to change in redemption price
on common stock subject to repurchase ............. 6,408 (1,563)
Equity in loss from unconsolidated joint venture ... (420) (9,169)
Allowance for loss from unconsolidated joint venture (40,406) --
Interest expense ................................... (2,727) (3,914)
Total other income (expense) ................... (35,491) (12,014)
LOSS BEFORE INCOME TAXES ............................ (211,526) (13,899)
INCOME TAX BENEFIT, net ............................. 20,650 229,350
NET INCOME (LOSS) ...................................$ (190,876) $ 215,451
NET INCOME (LOSS) PER COMMON SHARE ..................$ (.15) $ .19
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ................................. 1,230,973 1,151,794
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-4
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
ADDITIONAL ISSUED FOR UNREALIZED RETAINED STOCK-
COMMON STOCK PAID-IN FUTURE LOSS ON EARNINGS HOLDERS'
SHARES AMOUNT CAPITAL SERVICES INVESTMENTS (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December
31, 1995 1,023,300 $ 102 $ 1,571,921 $ (24,250) $ - $ (1,283,960) $ 263,813
Shares issued
under employee
temporary
purchase
plan 3,800 - 3,025 - - - 3,025
Shares issued
for services 157,010 16 86,490 - - - 86,506
Shares issued
as bonus 16,000 2 8,998 - - - 9,000
Compensation
earned - - - 5,750 - - 5,750
Net income - - - - - 215,451 215,451
BALANCE,
December
31, 1996 1,200,110 120 1,670,434 (18,500) - (1,068,509) 583,545
Shares issued
for services 10,000 1 2,809 - - - 2,810
Shares returned,
originally
issued in 1996
for services (10,000) (1) (2,499) - - - (2,500)
Compensation
earned - - - 18,500 - - 18,500
Expiration of
repurchase
obligation on
common stock 20,000 - - - - - -
Change in
unrealized
loss on
investments - - - - (3,755) - (3,755)
Net loss - - - - - (190,876) (190,876)
BALANCE,
December
31, 1997 1,220,110 $ 120 $ 1,670,744 $ - $ (3,755) $ (1,259,385) $ 407,724
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-5
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................... $(190,876) $ 215,451
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization ...................... 34,200 49,507
Loss on currency conversion ........................ -- 175
Gain on sale of investments ........................ (702) --
Deferred compensation earned ....................... 18,500 5,750
Equity in loss of unconsolidated joint venture ..... 420 9,169
Allowance for loss from unconsolidated joint venture 40,406 --
(Gain) loss based on redemption price of common
stock subject to repurchase ...................... (6,408) 1,563
Stock issued for services .......................... 310 9,000
(Increase) decrease in accounts receivable ......... 64,656 (69,540)
(Increase) decrease in inventory ................... (10,617) 1,902
Decrease in other current assets ................... 585 17,445
Increase in deferred income taxes .................. (20,650) (229,350)
(Increase) decrease in deferred offering costs ..... 92,531 (41,025)
Increase (decrease) in accounts payable and
accrued expenses .................................. 18,752 (35,578)
Total adjustments ............................. 231,983 (280,982)
Net cash provided by (used for) operating
activities ....................................... 41,107 (65,531)
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to joint venture ............................ -- (17,000)
Purchase of equipment and leasehold improvements ..... (9,255) (530)
Loan to employee ..................................... (4,000) (4,000)
Repayment of employee loan ........................... 11,283 4,251
Proceeds from sale of investment ..................... 43,756 --
Purchases of investments ............................. (64,405) --
Net cash used in investing activities ............. (22,621) (17,279)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of offering costs ............................... -- 3,025
Cash paid for treasury stock obligation .............. -- (6,421)
Net proceeds (payments) on line-of-credit ............ (28,322) 47,200
Proceeds from investment margin account .............. 10,400 --
Proceeds from loan payable to stockholder ............ 9,090 1,751
Payment to stockholder on loan ....................... (9,090) (1,751)
Net cash provided by (used for) financing
activities ....................................... (17,922) 43,804
Net increase (decrease) in cash and cash equivalents .. 564 (39,006)
CASH AND CASH EQUIVALENTS, beginning of period ........ 7,767 46,773
CASH AND CASH EQUIVALENTS, end of period .............. $ 8,331 $ 7,767
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-6
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997 AND 1996
(Continued)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest .................. $2,727 $ 3,914
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITY
Common stock issued for services ........................ $ 310 $95,506
Contribution by stockholder ............................. -- 6,000
Acquisition of stock of unconsolidated joint venture .... -- 500
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-7
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of the more significant accounting policies of
Cyclodextrin Technologies Development, Inc. (the Company) which affect the
accompanying financial statements:
(a) ORGANIZATION AND OPERATIONS--The Company was incorporated in August
1990, as a Florida corporation with operations beginning in July 1992. The
Company is engaged in the marketing and sale of cyclodextrins and related
products to food, pharmaceutical and other industries. The Company also
provides consulting services related to cyclodextrin technology. The
Company's current market is primarily within the United States.
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. During the last several years the Company has
sustained substantial net losses. These net losses have reduced the
Company's working capital available for operations as of December 31, 1997,
below the level of its 1997 operating expenses. The Company plans a private
placement of additional common stock expected to raise approximately $1.85
million in the second quarter of 1998. Additionally, management's plans
include continuing cost reduction measures to mitigate future losses.
Management also believes it has the ability to reduce expenses, if
necessary, to achieve profitable operations.
(b) CASH AND CASH EQUIVALENTS--For the purposes of reporting cash flows,
the Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation on equipment is computed using primarily accelerated methods
over the estimated useful lives of the assets, which are either five or
seven years. Depreciation on leasehold improvements is computed on the
straight-line method over the lesser of the term of the related lease or
the estimated useful lives of the assets.
(d) INVENTORY--Inventory consists of products purchased for resale and
chemical complexes manufactured in-house, and is recorded at the lower of
cost (first-in, first-out) or market.
At December 31, 1997, some portion of approximately $60,000 in inventory of
one of the Company's products is in excess of current requirements based on
the recent level of sales. Management has developed a program to reduce
inventory to desired levels over the near term and believes no loss will be
incurred on its disposition. No estimate can be made of a range of amounts
of loss that are reasonably possible should the program not be successful.
(e) INVESTMENTS--The Company's investments are marketable equity securities
held for an indefinite period and are classified as available for sale. Net
unrealized holding losses on such securities were $3,755 at December 31,
1997, and are charged to stockholders' equity. Realized gains were $702 in
1997 using the specific identification method.
(f) REVENUE RECOGNITION--Revenues are recorded when products are shipped.
(g) ADVERTISING--The Company expenses the production costs of advertising
the first time the advertising takes place.
F-8
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
(h) LICENSE FEE--The license fee for a dietary supplement product is recorded
at cost. Amortization expense is computed using the straight-line method
over the term of the license, which was three years. Periodically,
management evaluates the estimated useful life of the license to determine
whether intervening economic events an circumstances have affected the
remaining useful life.
(i) DEFERRED OFFERING COSTS--Expenses directly attributable to a proposed
stock offering are recorded at cost as deferred offering costs as discussed
in Note 12.
(j) RECLASSIFICATIONS--Certain amounts from 1996 have been reclassified to
conform to the 1997 presentation.
(k) NET INCOME (LOSS) PER COMMON SHARE--Net income (loss) per common share
is computed in accordance with the new requirements of Statement of
Financial Accounting Standards No. 128 (SFAS 128) at December 31, 1997 and
1996. SFAS 128 requires net income per share information to be computed
using a simple weighted average of common shares outstanding during the
periods presented. SFAS 128 eliminated the previous requirement that
earnings per share include the effect of any dilutive common stock
equivalents in the calculation. Common shares outstanding includes common
stock subject to repurchase. There was no effect on the 1997 or previously
reported 1996 net income per common share amounts as a result of this
change in accounting method.
The stated net income (loss) per share amounts do not include any potential
dilutive effect if certain options issued in 1997 to purchase an 625,000
additional shares of the Company's common stock were exercised.
(l) USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
(2) COMMITMENTS:
On July 7, 1994, the Company entered into a five year noncancelable
operating lease for office space, commencing November 1994. The Company has an
option to rent additional space and a purchase option in which ten percent of
the lease payments may be applied to the purchase price. The future minimum
lease payments under operating leases as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
<S> <C>
1998 $ 21,018
1999 18,240
Total $ 39,258
</TABLE>
Rent expense under the foregoing lease and all other operating leases was
$20,014 and $19,058 for 1997 and 1996, respectively.
F-9
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(2) COMMITMENTS: (Continued)
Effective January 1, 1995, the Company obtained an exclusive right to
market a dietary supplement in the United States for three years. The Company
agreed to pay approximately $60,000 for this right. The agreement allows the
Company to recover this fee through discounts on inventory purchased through
December 31, 1997. The license fee was amortized on a straight-line basis over
the three year period of the contract and was fully amortized at December 31,
1997. Amortization expense in 1997 and 1996, was $20,000 and $32,700,
respectively. In January 1998, this agreement was extended until December 31,
1998, including the right of first refusal to reobtain its exclusive marketing
rights during this period. The Company is required to order additional inventory
of approximately $15,000 by March 31, 1998, under the terms of this agreement
extension. The Company paid approximately $5,500 in January 1998 toward this
obligation.
In May 1996, the Company entered into an agreement with Diversified
Corporate Consulting Group, L.C., an unrelated company, to provide consulting
services to be completed within 12 months. In return, the Company issued
Diversified 110,110 shares of the Company's common stock, a quantity equal to
10% of all then outstanding common stock, in lieu of document licensing fees and
of required cash payments for up to an aggregate of 130 hours of hourly
consulting and licensing fees.
The Company entered into an agreement with Cyclops h. f. (Cyclops), a
company located in Reykjavik, Iceland, in May 1996 to secure limited exclusivity
to certain inventions embodied in patents owned by Cyclops for the purpose of
creating an organization that would commercialize products using those
inventions. In consideration, the Company agreed to share equally with Cyclops
the net profits derived from products commercialized by the Company or
affiliates of the Company that use the inventions. This agreement expired in May
1997.
In April 1997, the Company entered into an agreement with Atlantic
Syndication Network, Inc. (ASNI) for the production of a half hour premier cable
program. The Company paid $2,500 in 1997 to reserve production time and also
issued to ASNI 10,000 shares of the Company's voting common stock. The Company
also granted ASNI an option to purchase up to 25,000 shares of its non-voting
common stock at a purchase price of $1 per share, within one year of May 31,
1997. As of December 31, 1997, no stock options had been exercised.
The Company has other commitments related to various stock offerings as
discussed in Note 12.
(3) EMPLOYEE STOCK PLANS:
During 1994, the Company adopted a nonqualified employee stock issuance
plan to provide incentives to employees. Stock issued under this plan is at the
discretion of the Board of Directors of the Company and bears a restrictive
legend. All shares issued pursuant to this Plan must be held for a minimum of
two years and become fully vested after five years. During the three year period
beginning on the first day of the third year after issuance and ending five
years after issuance, the Company shall purchase all or any part of the shares
from the employee upon the employee's written request; the purchase price of the
shares shall be 50% of the then current market value of the shares.
F-10
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(3) EMPLOYEE STOCK PLANS: (Continued)
In December 1994, the Company issued 25,000 shares to employees for future
services under this plan. The Company valued the 25,000 shares at $37,500, which
was approximately 50% less than the bid price at the date of issuance. The
quoted market price was not used to value the stock since the stock does not
trade freely in an established market and, thus, a market price could not
accurately be established. The Company recorded the $37,500 as stock issued for
future services, which was classified as a reduction to stockholders' equity in
the accompanying financial statements. The Company amortized this amount over
five years on the straight-line basis, the estimated benefit period of the
future services.
On June 30, 1997, all of the remaining employees holding stock issued under
the employee stock issuance plan noted above, terminated employment with the
Company. At that time, the remaining unamortized amount of the stock issued for
future services was charged to expense.
The Company expensed $18,500 and $5,750 under the stock issuance plan for
the years ended December 31, 1997 and 1996, respectively.
Effective November 15, 1995, the Company adopted an employee stock purchase
plan. Under this plan, employees may purchase shares of Company stock up to the
amount of their gross pay for the period. These shares will be restricted from
sale for two years; therefore, they will be sold to employees at 50% of the most
recent trading price at the date of purchase. Under the plan, the Company sold
3,800 shares to employees in 1996. These shares were all issued on September 6,
1996 and the plan was terminated.
Had compensation cost for the Company's employee stock purchase plan and
stock- based compensation plan been determined based on a fair value at the
grant dates for awards under this plan consistent with the method outlined in
FASB Statement No. 123, the Company's 1996 net income and net income per share
would have been the proforma amounts indicated below:
<TABLE>
<CAPTION>
1996
<S> <C> <C>
Net income As reported $ 215,451
Proforma $ 206,176
Net income
Per share As reported $ .19
Proforma $ .18
</TABLE>
F-11
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(4) OTHER COMMON STOCK TRANSACTIONS:
On April 26, 1996, the Company resolved to authorize the issuance of 16,000
shares of voting common stock to Rick Strattan, President, as a bonus for
services rendered to the Company. These shares were issued on August 15, 1996,
and valued at $9,000, which was 50% less than the market price at the date of
issuance. The quoted market price was not used to value the stock since the
stock does not trade freely in an established market and, thus, a market price
could not accurately be established.
On April 21, 1996, the Company amended its Articles of Incorporation
whereby the number of voting shares authorized was increased from 5,000,000 to
10,000,000. In addition, non-voting common shares were created. The total amount
of non- voting common shares authorized is 10,000,000.
(5) COMMON STOCK SUBJECT TO REPURCHASE:
As described in Note 3 above, the Company established a nonqualified
employee stock issuance plan in 1994, and issued shares under this plan in
December, 1994. Also, as noted above, the stock issued under this Plan is
redeemable by the Company at the option of the employee, at 50% of the then
current market value or the employees termination date. The employee can demand
redemption at any time during a three year period beginning on the first day of
the third year after issuance and ending five years after issuance.
The Company has reserved 100,000 of its 10,000,000 voting common stock
shares authorized to be used under this Plan.
The common stock subject to repurchase is reflected on the balance sheet at
50% of the market value as of the balance sheet date or the employees
termination date. Changes in the redemption amount are recognized in the
accompanying Statement of Operations as "Gain (loss) due to change in redemption
price on common stock subject to repurchase."
Common stock subject to repurchase activity comprises the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance, beginning of year $ 7,813 $ 6,250
Common stock issued - -
Common stock redeemed - -
Expiration of repurchase obligation (6,250) -
Market changes in redemption price (158) 1,563
Balance, end of year $ 1,405 $ 7,813
</TABLE>
No shares have been repurchased by the Company through December 31, 1997.
The Company's obligation to repurchase the remaining 5,000 shares of common
stock expires in 1999.
F-12
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(6) CONCENTRATIONS OF CREDIT RISK:
Significant concentrations of credit risk for all financial instruments
owned by the Company, are as follows:
(a) DEMAND DEPOSITS--The Company has demand deposits in two local branch banks
which are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 1997, the bank balance was $14,219. The Company
has no policy of requiring collateral or other security to support its
deposits.
(b) ACCOUNTS RECEIVABLE--The Company's accounts receivable consist of amounts
due primarily from food and pharmaceutical companies located primarily in
the United States. The Company has no policy requiring collateral or other
security to support its accounts receivable.
(7) MAJOR CUSTOMERS AND SUPPLIERS:
Sales to two customers in 1997 consisted of approximately 58% of total
sales. Of this, sales to one major customer were approximately $130,000 or 35%
of sales, and sales to another major customer were approximately $87,000 or 23%
of sales. The aggregate accounts receivable balances at December 31, 1997 for
the two major customers were $16,400. Sales to four customers in 1996 consisted
of approximately 71% of total sales. Of this, sales to one major customer were
approximately $80,000 or 23% of sales, and sales to another major customer were
approximately $120,000 or 35% of sales.
The Company currently purchases all its inventory of Garlessence, a dietary
supplement, from one supplier.
(8) NOTES PAYABLE:
The Company currently has a $25,000 line-of-credit with a bank, which was
reduced from $52,500, the limit at December 31, 1996. Interest is due monthly at
prime plus 2% (currently 10.5%). The Company owes approximately $14,000 at
December 31, 1997, which is due in full on March 1, 1998. The line is
collateralized by accounts receivable and inventory.
The Company also entered into a $25,000 line-of-credit with another bank
during 1997. The monthly minimum payment is calculated based on the outstanding
balance. The interest rate varies monthly at prime plus 3% (currently 11.5%).
The Company owes approximately $10,000 at December 31, 1997. The credit line can
be canceled and payment of the outstanding amount due can be required on demand
by the bank at anytime.
F-13
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(9) JOINT VENTURES:
In March 1997, the Company entered into a joint venture agreement with
Jurox PTY Limited (Jurox), an unrelated company, in order to develop a new
product. According to the agreement, each party shall be separately responsible
for their own costs for the development of the product, then the Company agrees
to provide the developed product to Jurox at the cost to manufacture plus 10%.
Jurox agrees to pay the Company royalties on net sales of the product as
follows:
5% of net sales for the first year of sales, 4% of net sales for the
second year of sales, and 3% of net sales for a further 8 years.
No transactions have taken place as of December 31, 1997.
Effective May 1, 1995, the Company entered into a joint venture agreement
with Ocumed, Inc. (Ocumed), an unrelated company. The joint venture is organized
as Ocudex, Inc. (Ocudex) with the Company and Ocumed each owning 50% of Ocudex.
The Company has advanced Ocudex $51,000 as of December 31, 1997. The Company
accounts for its investment in the Ocudex joint venture using the equity method
of accounting whereby its investment is carried at cost, including advances,
adjusted for the Company's share of earnings and losses. The Company reduced its
investment in the joint venture to zero at December 31, 1997, due to uncertainty
as to recovery of these amounts.
Following is a summary of the financial position and results of operations
of Ocudex:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash $ 160 $ 719
Equipment 28,000 28,000
Other assets 1,652 1,932
Total assets $ 29,812 $ 30,651
Advances from stockholder $ 51,000 $ 51,000
Common stock 1,000 1,000
Stockholders' deficit (22,188) (21,349)
Total liabilities and stockholders' deficit $ 29,812 $ 30,651
Sales $ - $ -
Net loss $ (840) $ (18,338)
Company's proportionate share of loss $ (420) $ (9,169)
</TABLE>
F-14
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires disclosure of
fair value to the extent practicable for financial instruments which are
recognized or unrecognized in the balance sheet. The fair value of the financial
instruments disclosed herein is not necessarily representative of the amount
that could be realized or settled, nor does the fair value amount consider the
tax consequences of realization or settlement. The following table summarizes
financial instruments by individual balance sheet account as of December 31,
1997:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 8,331 $ 8,331
Investments 17,596 17,596
Accounts receivable 41,536 41,536
Total financial assets $ 67,463 $ 67,463
FINANCIAL LIABILITIES:
Lines of credit $ 23,879 $ 23,879
Accounts payable and accrued expenses 39,693 39,693
Total financial liabilities $ 63,572 $ 63,572
</TABLE>
The fair value of investments are determined from quoted market prices at
year end. The fair value of all other financial instruments classified as
current assets or liabilities approximates carrying value due to the short-term
maturity of the instruments.
(11) INCOME TAXES:
At December 31, 1995, the Company had a net operating loss carryforward
totaling approximately $1,322,000 to be offset against future taxable income
through 2010. However, no tax benefit was recognized in the 1995 financial
statements because management believed there was greater than a 50% chance the
carryforward would expire unused. Accordingly, the expected tax benefit of the
loss carryforward was offset by a 100% valuation allowance.
In 1996, the Company had taxable income that utilized approximately $4,000
of the carryforward from prior years. Because of the Company's performance in
1996 and anticipated profitability in the future, management determined a
valuation allowance equal to 50% of the future tax benefit was appropriate.
Accordingly, an income tax benefit in the net amount of $229,350 was recognized
to reflect this change in the allowance.
During 1997, management reevaluated the effective tax rate used to
calculate the Company's deferred tax asset and determined that 15%, rather than
34%, was a more appropriate effective tax rate. Management also reevaluated its
valuation allowance and determined a valuation allowance of 10% of the future
tax benefit was appropriate. The net result of these reevaluations was a
reduction of the income tax benefit in the amount of $12,325.
F-15
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(11) INCOME TAXES: (Continued)
The Company recorded an income tax benefit of $32,975 for the year ended
December 31, 1997, reflecting the future benefit of the current year net
operating loss, net of the 10% valuation allowance. The valuation account
decreased $166,925 during 1997 as a result of the above changes.
At December 31, 1997, the Company has recorded $250,000 in total net
deferred tax assets reflecting the benefit of approximately $1,475,000 in net
operating loss carryforwards that may be offset against future taxable income
through 2012. Realization depends on generating sufficient taxable income before
the expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that ninety percent of the
deferred tax asset will be realized based on prior results and anticipated
profitability in the future. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The income tax benefit consists of the following components:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current income taxes $ - $ 650
Effect of decrease in effective tax rate 183,325 -
Effect of decrease in valuation allowance (171,000) -
Tax benefit of current year loss (37,050) -
Increase in valuation allowance 4,075 -
Tax benefit from change in deferred tax
asset valuation allowance related to
prior years net operating loss carryforward - (230,000)
Total net benefit $ (20,650) $ (229,350)
</TABLE>
(12) DEFERRED OFFERING COSTS:
The Company has deferred certain costs associated with the following
offerings of common stock:
PROPOSED 1996 STOCK OFFERING
Effective February 5, 1996 the Company filed Form SB-2 Registration
Statements with the Securities and Exchange Commission for a proposed securities
offering of 250,000 shares of common stock and 125,000 common stock purchase
warrants with a combined proposed maximum aggregate offering price of
$1,250,500. This offering expired in April 1997.
In January 1996, the Company entered into an agreement with Geller
International Associates (Geller), an unrelated company, to provide various
public relation services. In return, the Company agreed to pay Geller $2,000 per
month plus out-of-pocket expenses with the first three months being guaranteed.
In addition, the Company agreed to pay Geller 1% of net moneys received as a
result of Geller's efforts to secure funding for the current public offering.
The
F-16
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(12) DEFERRED OFFERING COSTS: (Continued)
total amount paid to Geller under this agreement was $10,461. In addition,
Rick Strattan, president of the Company, gave Geller $6,000 worth of the Company
stock on behalf of the Company to provide the above mentioned services. The
value of the stock given was recorded as a contribution to the Company. Since
all of the services performed by Geller represented activities for the purpose
of promoting the 1996 public offering, the total consulting fees paid and stock
issued to Geller in 1996 were deferred at December 31, 1996. These amounts were
expensed in 1997. The agreement with Geller was canceled at the end of the
initial three months.
On January 1, 1996, the Company resolved to issue 48,000 shares of its
common stock to various unrelated parties for services performed in connection
with the Company's anticipated selfunderwritten stock offering. Furthermore, two
of these parties acknowledged that in the event the gross proceeds of the
offering were less than $500,000, then one-half of their shares (20,000) would
be returned to the Company. The shares were issued with a restrictive legend.
The Company valued the 48,000 shares at $12,000 which is approximately 50% less
than the bid price at the date of issuance. The quoted market price was not used
to value the stock since the stock does not trade freely in an established
market. Of these shares, 47,000 were issued on August 19, 1996. The other 1,000
shares, valued at $250, were not issued.
Since all the costs associated with these shares were directly attributable
to the proposed offering, they were classified as deferred charges at December
31, 1996. In addition, all other specific incremental professional fees incurred
in 1996 which were clearly and directly attributable to the Company's effort to
obtain equity financing were deferred. The total amount deferred during 1996 was
$127,531. These deferred professional costs were to be offset against the net
proceeds of the offering. Since no proceeds were received from the offering,
these deferred offering costs and any additional 1997 offering costs related to
this offering were expensed during the year ended December 31, 1997. The amount
expensed was reduced by $2,500 for the value of 10,000 shares of common stock
returned by an advisor as described above.
PROPOSED 1998 STOCK OFFERING
On October 14, 1997, the Company entered into a financial services
agreement with an unrelated company for financial consulting services related to
raising additional capital. Under this agreement, the Company issued an option
for 600,000 shares of the Company's common stock with an exercise price of $.25
per share, which is less than 50% of the market price on the date the parties
agreed to the terms of the agreement. The quoted market price was not used to
value the stock since the stock does not trade freely in an established market
and, thus, a market price could not accurately be established. The Company also
agreed to pay the consultant $85,000 in installments of $20,000 in October 1997,
and $5,000 each month thereafter until November 1998. The Company had paid
$30,000 as of December 31, 1997. The agreement is cancelable by either party by
giving sixty days notice.
As the Company is currently preparing for a private placement to raise
additional capital in 1998, the costs under this agreement and the direct costs
of preparing a business plan have been classified as deferred charges. The total
amount deferred at December 31, 1997, is $35,000. These and any additional
deferred costs will be offset against the net proceeds of the offering or will
be expensed upon the expiration of the offering.
F-17
Amendment to 12/30/94 Agreement between Herbe Wirkstoffe &
Cyclodextrin Technologies Development, Inc.
The above referenced agreement is hereby amended in substance and intent so
that -
1. CTD may continue to recover its original licensing fee of 90,000 DM
through a 20% purchase discount of the garlic preparation described
in the above agreement through December 31, 1998.
2. While the exclusive rights guaranteed by Herbe in the above
referenced document did expire on December 31, 1997, Herbe agrees to
grant to CTD the right of first refusal to these exclusive rights as
described in the original agreement through December 31, 1998.
3. All other terms of the original agreement are unchanged.
4. Herbe Wirkstoffe & CTD, Inc. agree to honor the original agreement
as amended by this document.
The effective date of this agreement is December 31, 1997.
In witness whereof, the parties hereto have caused this amendment to be
executed and incorporated by reference into the original document by their duly
authorized representatives.
Witness: Herbe Wirkstoffe GmbH
/S/ /S/
Signature Dr. Erich Horvath, President
Elvira Maisch-Vogtz 9.1.98
Printed name and title Date
9.1.98
Date
Witness: CTD, Inc.
/s/ /s/
Signature C.E. Rick Stratton, President/CEO
Lisa M. Stephens, CFO 1/9/98
Printed name and title Date
1/9/98
Date
[DAVIS MONK & COMPANY LETTERHEAD]
March 31, 1998
Mr. C.E. "Rick" Strattan
Cyclodextrin Technologies Development, Inc.
3713 S.W. 42 Avenue, Suite 3
Gainesville, Florida 32608-6518
Dear Mr. Stattan:
We have reviewed the Form 10KSB provided to us on March 27, 1998
and agree with the information contained therein.
/S/
DAVIS, MONK & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
& BUSINESS CONSULTANTS
HLM:wfb
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Financial Statements for the year ended December 31, 1997, and is qualified in
its entirety by reference to such Financial Statements filed with form 10KSB and
for the annual period ended December 31, 1997.
<MULTIPLIER> 1
<S> <C>
<PERIOD-START> JAN-01-1997
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,331
<SECURITIES> 17,596
<RECEIVABLES> 41,536
<ALLOWANCES> 0
<INVENTORY> 86,996
<CURRENT-ASSETS> 172,353
<PP&E> 82,982
<DEPRECIATION> (55,634)
<TOTAL-ASSETS> 472,701
<CURRENT-LIABILITIES> 63,572
<BONDS> 0
<COMMON> 120
0
0
<OTHER-SE> 407,604
<TOTAL-LIABILITY-AND-EQUITY> 472,701
<SALES> 283,677
<TOTAL-REVENUES> 370,344
<CGS> 71,227
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (35,491)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (211,526)
<INCOME-TAX> 20,650
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (190,876)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
