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, 1998
( ) 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: $276,675.
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: $58,512.50 based on the average high and low price as of March 5, 1998 of
$0.3125 per share.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 1,577,584 shares of Common Stock
as of February 4, 1999.
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 sells cyclodextrins ("Cyclodextrins" or "CDs") and related
products to the food, pharmaceutical and other industries. The Company also
provides consulting services.
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.
<PAGE>
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.
CDs are manufactured 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 Company currently sells its products for use in the pharmaceutical,
food and industrial chemical industries.
<PAGE>
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 1997 in Japan was
estimated at $150 million. Within the last five years, more 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.
Oral arguments for regulatory approval by the United States Food and Drug
Administration ("FDA") have been accepted. 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.
<PAGE>
Products
The Company's products include its Trappsol(R ), Aquaplex(R ), and
AP(TM)-Flavor 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( R) 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: Trappsol(R),
Garlessence(R), and Aquaplex (R). 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. Exclusivity expired
December 31, 1998, but the Company still has the non-exclusive right to sell
Garlessence(R).
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.
<PAGE>
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 current year, sales of CDs and CD derivatives
have been sufficient to provide the necessary operational profitability to
sustain the Company. Since these materials were simply purchased and resold,
they had the least value-added attributes. Up until 1995 almost 100% of the
revenue was generated by these products with the least value-added attributes.
Since 1995 sales of complexes increased until they contributed approximately 30%
of the revenue.
Presently, sales of CD complexes represent 31% of the Company's product
sales revenues. Transition to the more value-added complexes continues 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 continues to be 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(R) B (beta cyclodextrin) Garlessence(R) 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(R)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(R)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.
<PAGE>
The Company 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.
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 its licensing efforts, the Company intends to 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 2000. 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".
<PAGE>
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
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. In 1998 average sales per month to this R & D market were $16,000 and
they accounted for 70% of the company's total product sales. These fluctuations
are certainly not trends but examples of the great volatility of CD use in an
emerging industry.
The Company believes the resell market will continue to grow accounting for
25-30% of the total revenues of the Company. The Company expects that any growth
will be stimulated by the effect of word-of-mouth and the availability of
information electronically on the interent as more and more of these difficult
to reach end users log on. 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
1999
The Company has shown by example (Garlessence(R))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 the next five years. 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 would then be
expected to 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 successful 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.
<PAGE>
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 (2001-2002)
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. 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.
<PAGE>
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 1998 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.
<PAGE>
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 less than
$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
1998 First Quarter $ 0.875 $ 0.375
Second Quarter $ 0.625 $ 0.375
Third Quarter $ 0.500 $ 0.281
Fourth Quarter $ 0.260 $ 0.170
</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, 1998 , 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 56 .
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
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company's working capital was $90,093 compared to
$108,781 at December 31, 1997. The decrease is primarily due to the valuation
allowance for inventory.
Total product sales remained stable from 1997 to 1998, decreasing by only 3%.
Consulting fee revenues are much less than last year's, ($350 vs. $86,667) but
management expects these revenues to increase in 1999. Selling, General and
Administrative expenses (SG&A) decreased by 50% during 1998 compared to 1997 due
to a reduction in outside consulting, advertising and personnel costs.
Inventory decreased by 87% in 1998. The reduction in inventory is due to the
write down of the Garlessence product to net realizable value in the third
quarter of 1998. Management continues to maintain appropriate cyclodextrin
inventory levels in response to normal customer sales.
During 1998, Rick Strattan, the Company's President, made short term loans to
the Company totaling $16,800. These loans were repaid prior to December 31,
1998. Management does not expect further funding to be required in 1999 to meet
the Company's cash needs.
In 1997, the Company entered into a financial consulting agreement to raise
equity capital for the purpose of funding new drug applications. As of July 31,
1998 no new capital was raised, the agreement was terminated, and the previously
capitalized deferred offering costs ($71,347) were expensed. Plans for the
anticipated new drug applications have been suspended until alternate funding
becomes available. However, there is no assurance that any additional funding
will be available. While some of the costs were paid out of operations, almost
40% were paid by the issuance of stock. The Company still expects to benefit
from the continued efforts of these financial consultants through ongoing
negotiations and growing interest by other companies.
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 the second quarter of 1997. While most of these offering costs were non-cash,
the net result was a loss in the financial results reported for the year ended
December 31, 1997.
The Company currently has a $25,000 credit line with no outstanding balance as
of December 31, 1998. The Company also has available approximately $90,000 in
combined credit card lines with less than $1,000 outstanding on these lines.
The Company is in the fourth 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 plans to negotiate a new lease on the existing
building or to begin evaluations of alternate properties during 1999.
On May 1, 1995 the Company entered into a joint venture operating as Ocudex,
Inc. The Company and Ocumed, Inc., (Ocumed) 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 losses of $11,094 to date.
Since there was no activity at Ocudex during all of 1997 and the Company's
efforts to acquire the assets of Ocumed, did not materialize, the Company
provided an allowance in the fourth quarter of 1997 for the remaining investment
in the amount of $40,406. The Ocudex corporate shell will remain available for
future use as the Company will continue to work with Ocumed to bring ophthalmic
drugs using cyclodextrins to the market.
During the eight years of its existence the Company has created a
comprehensive database on patents involving cyclodextrins. Currently, management
is in the process of adding this database to the Company's existing web site.
Customers will have access to the patent database through a subscription service
with a monthly fee. The cost of the database is expected to be less than $5,000
and is being paid out of operations. However, the subscriptions fee revenue will
provide continuing income at little or no further cost to the company. The
original $5,000 expense will be recovered within the first two years of
operation. The Company plans to add additional subscription databases on other
cyclodextrin information in the future. These databases can be added with little
cost to the company.
Management has completed its evaluation of Year 2000 (y2k) issues on internal
computer systems. Management has also completed its initial assessment of y2k
issues related to the company's external vendors and suppliers. The Company
relies on a few large customers and suppliers outside of the United States,
which are believed to be at greater y2k risk than domestic companies with which
the Company does business. While there are no assurances that y2k issues will
not affect the company, Management does not believe its internal or external y2k
issues, if any, will have a material effect on the company's business, results
of operations, or financial condition. Although management has sought and
obtained assurances from its major suppliers and customers regarding operational
continuity in light of Y2k problems, supply or demand interruptions in these key
relationships would cause a resulting interruption in the business of the
Company.
RESULTS OF OPERATIONS
Sales of cyclodextrins and related manufactured complexes are historically
highly volatile. While annual sales remain constant, the Company is dependent on
a small number of larger orders throughout the year in order to maintain its
current volume of sales. 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, creating proprietary
databases on its web site that will generate subscription revenues and expanding
its inventory line to include more routinely purchased products. While sales are
still volatile, Management believes that these other revenues will offset the
volatility of cyclodextrin sales and that product and service sales will be
augmented by profitable web-site subscription services.
Sales for the years ended December 31, 1998 and 1997 remained constant ($276,352
in 1998 vs. $283,677 in 1997). Management expects cyclodextrin sales to continue
at historical levels in the near term.
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. For 1998, one customer has been
responsible for 48% of total sales and over the past three years has averaged
40% of total sales.
The Company's gross profit margin on product sales increased from 75% to 80% for
1997 and 1998, respectively. This increase in gross profit margin is in large
part due to sales in the third quarter 1998 of inventory items obtained at no
cost to the Company. Occasionally, the Company is able to obtain quantities of
product free or at a reduced cost from the manufacturer for sampling purposes.
The Company is often able to sell portions of this product to its customers
resulting in unusually high gross margins due to the low acquisition costs.
Future sales of these low cost products, while not assured, will continue to
positively affect the Company's future gross profit and net income when they
occur.
Selling, general and administrative (SG&A) expenses for 1998 decreased 50% from
1997 ($175,427 vs. $347,685). However, SG&A expenses for 1997 included $53,320
of outside consulting services related to the $86,667 in consulting revenues
earned. These expenses are unusual and are not expected to recur. Excluding this
amount, normal SG&A expenses decreased by $118,938 (175,427 vs. $294,365). This
decrease is the result of a reduction in personnel and related costs made in
1997 as well as a decrease in advertising, amortization and professional fees.
Management continues to manage SG&A expenses in efforts to keep expenses in line
with revenues.
Consulting services in 1998 were $350 compared to $86,667 in the same period
1997. Consulting sales in 1997 resulted from a research and development project
contracted to the Company in the third and fourth quarters.
The Company has unused operating loss carryforwards and deductible temporary
differences totaling approximately $1,567,000 at December 31, 1998. If not used,
the carryforwards expire in years beginning in 2011. If all the operating loss
carryforwards and deductible temporary differences were used, the Company would
realize a deferred tax asset of approximately $345,000 based upon expected
income tax rates. Realization depends on generating sufficient taxable income
before the expiration of the loss carryforwards. Although realization is not
assured, Management believes that sixty-two percent of the deferred tax asset
will be realized based upon 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 Company has recorded income tax expense of $35,000 as a
result of an increase in the valuation allowance on the deferred tax asset less
the tax benefit of temporary differences at December 31, 1998. The Company
recorded an income tax benefit of $32,975 for the year ended December 31, 1997,
reflecting the future benefit of the 1997 net operating loss, net of a valuation
allowance.
The Company experienced three large expenses in 1998: an allowance for a
write-down of the remaining Garlessence inventory to net realizable value;
offering expenses from an aborted private placement issue and reduction of
deferred offering expenses; and the reduction of the deferred tax asset derived
from the operating loss carryforwards. Combined, these items total $162,876. The
effect of these items on EPS for 1998 was a reduction of $0.12; from $0.04 to
($0.08). The Company's loss from operations for the year ended December 31, 1998
was ($82,484). However, the Company's net income from operations for the year
ended December 31, 1998 before income taxes, inventory allowance and certain
public offering expenses was $45,392. Management believes the inventory
allowance and certain public offering expenses are unusual and are not expected
to recur in normal operations of the Company.
The Company's net loss from operations before income taxes for the year ended
December 31, 1997 before the public offering expenses was ($48,568). Comparing
the results of operations before the inventory allowance and public offering
costs for the years 1998 and 1997, there is a $93,960 improvement in operating
results from 1997 to 1998. Operationally, the above expenses removed, the
Company was profitable for year ended December 31, 1998. This improvement in
operating results is due primarily to the reduced SG&A expenses.
The Company continues to develop new products, seek additional financing, and
implement its strategy of creating operational affiliates that will use CD's in
herbal medicines, wastewater remediation, and pharmaceuticals.
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.
During fiscal years ended December 31, 1998 and December 31, 1997, there
were no disagreements with James Moore & Co., P.L.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
for the past two years ended December 31, 1998, contained no adverse opinion or
disclaimer of opinion and were 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 53 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, 1998, 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, 1996, 1997 and 1998 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 1998 $15,500 $10,000 -0- -0-
Chief Executive Officer, President 1997 $34,750 -0- -0- -0-
1996 $24,000 -0- -0- -0-
Lisa Stephens 1998 $25,000 $ 500 -0- $ 281.25 (1)
Chief Financial Officer
David L. Southworth(2) 1998 -0- -0- -0- -0-
Treasurer/Chief Financial Officer 1997 $15,686 -0- -0- -0-
1996 $21,550 -0- -0- -0-
</TABLE>
(1) On November 24, 1998, the Company issued 1,500 shares to Lisa Stephens
for compensation for services.
(2) 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
On February 4, 1999, the Company issued 250,000 shares to Mr. Strattan as a
performance bonus.
On February 4, 1999, the Company issued 1,500 shares to Lisa Stephens as a
performance bonus.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table shows the ownership of the Common Stock of the Company
on February 17, 1999, 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.
Names and Address of Individual or .........Amount and Nature of Approximate %
Identity of Group ..........................Beneficial Ownership of Class
C.E. Rick Strattan(1)....................... 781,800 49.56%
4123 N.W. 46th Avenue
Gainesville, FL 32606
Burckhardt & Company, Inc................... 106,474 6.75%
1304 South DeSoto Avenue, Suite 203
Tampa, Florida 33606
All Officers and Directors as a group ...... 888,274 56.31%
(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.
Strattan 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.
On November 24, 1998, the Company issued 106,474 shares to Burckhardt and
Co. for its services performed in 1998.
On August 10, 1998, the Company purchased 10,000 shares of common stock
from Atlanta Syndication Network, Inc. for $5,000. The shares were originally
issued in April 1997. The shares were canceled after the Company bought them.
On February 4, 1999, the Company issued 1,500 shares to Lisa Stephens for
her services.
<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
quarter ended June 30, 1995.** None
(10.6) Extension of Agreement between the Company and Herbe
Wirkstoffe GmbH.*** None
(11) Statement re: Computation of Per Share Earnings Note 1 to
Financial
Statements
(16) Letter on changes in certifying accountant*** None
(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
(28) Additional Exhibits None
(29) Information from reports furnished to state insurance
regulatory authorities None
(b) Reports on Form 8-K:
No Form 8-K was filed for the quarter ended December 31, 1998.
* 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.
*** Incorporated by reference to the Company's Form 10-KSB filed with the
Securities and Exchange Commission on March 28, 1998.
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 31, 1999
[LETTERHEAD OF JAMES MOORE & CO.]
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, 1998, and the related statements of
operations, comprehensive income, stockholders' equity and cash flows for the
years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit 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, 1998, and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997, in conformity
with generally accepted accounting principles.
/s/
January 28, 1999
Gainesville, Florida
F - 1
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 36,883
Investments 9,219
Accounts receivable 11,695
Inventory 32,786
Deferred tax asset 2,500
Other current assets 3,065
-------------
Total current assets 96,148
-------------
PROPERTY AND EQUIPMENT
Furniture and equipment 61,915
Leasehold improvements 24,800
-------------
86,715
Less: Accumulated depreciation 69,916
-------------
Total property and equipment 16,799
-------------
OTHER ASSETS
Deferred tax asset 212,500
-------------
TOTAL ASSETS $ 325,447
=============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-2
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
BALANCE SHEET
DECEMBER 31, 1998
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 6,055
-------------
COMMON STOCK SUBJECT TO REPURCHASE, par value $.0001 per share,
100,000 shares authorized, 8,000 shares issued and outstanding 1,660
-------------
STOCKHOLDERS' EQUITY
Class A common stock, par value $.0001 per share,
9,900,000 shares authorized, 1,316,584 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 130
Additional paid-in capital 1,690,734
Accumulated other comprehensive income (loss) (4,164)
Accumulated deficit (1,368,968)
-------------
Total stockholders' equity 317,732
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 325,447
=============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
PRODUCT SALES $ 276,325 $ 283,677
COST OF PRODUCTS SOLD 55,856 71,227
------------- -------------
GROSS PROFIT 220,469 212,450
CONSULTING SERVICES AND OTHER OPERATING REVENUE 350 86,667
------------- -------------
TOTAL OPERATING REVENUE 220,819 299,117
------------- -------------
OPERATING EXPENSES
Selling, general and administrative 175,427 347,685
Public offering expenses 70,689 127,467
Write down of inventory to net realizable
value 57,187 -
------------- -------------
Total operating expenses 303,303 475,152
------------- -------------
LOSS FROM OPERATIONS (82,484) (176,035)
------------- -------------
OTHER INCOME (EXPENSE)
Investment and other income 10,633 1,654
Gain due to change in redemption price
on common stock subject to repurchase 420 6,408
Equity in loss from unconsolidated joint
venture - (420)
Allowance for loss from unconsolidated
joint venture - (40,406)
Interest expense (3,152) (2,727)
------------- -------------
Total other income (expense) 7,901 (35,491)
------------- -------------
LOSS BEFORE INCOME TAXES (74,583) (211,526)
INCOME TAX BENEFIT (EXPENSE), net (35,000) 20,650
------------- -------------
NET LOSS $ (109,583) $ (190,876)
============= =============
NET LOSS PER COMMON SHARE $ (.08) $ (.15)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,290,434 1,230,973
============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
NET LOSS $ (109,583) $ (190,876)
------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized holding losses arising during
the period (4,164) (3,755)
Less: Reclassification adjustment for
losses included in net loss 3,755 -
------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS) (409) (3,755)
------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (109,992) $ (194,631)
============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK ADDITIONAL COMMON STOCK ACCUM. OTHER TOTAL
___________________________ PAID-IN ISSUED FOR COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL FUTURE SERV. INCOME (LOSS) DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 - - - - - -
Other comprehensive income
(loss) - - - - (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
Shares issued for services 106,474 11 24,989 - - - 25,000
Shares repurchased and
retired (10,000) (1) (4,999) - - - (5,000)
Other comprehensive income
(loss) - - - - (409) - (409)
Net loss - - - - - (109,583) (109,583)
------------ ------------ ------------ ------------ ------------ ------------ -------------
Balance, December 31, 1998 1,316,584 $ 130 $ 1,690,734 $ - $ (4,164) $(1,368,968) $ 317,732
============ ============ ============= =========== ============ ============ =============
</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, 1998 AND 1997
Increase in Cash and Cash Equivalents
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (109,583) $ (190,876)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 14,282 34,200
(Gain) loss on sale of investments 2,019 (702)
Deferred compensation earned - 18,500
Equity in loss of unconsolidated joint venture - 420
Allowance for loss from unconsolidated joint
venture - 40,406
Write down of inventory to net realizable value 57,187 -
Gain based on redemption price of common
stock subject to repurchase (420) (6,408)
Stock issued for services 25,674 310
Decrease in accounts receivable 29,841 64,656
Increase in inventory (2,977) (10,617)
Decrease in other current assets 363 585
Decrease (increase) in deferred income taxes 35,000 (20,650)
Decrease in deferred offering costs 35,000 92,531
Increase (decrease) in accounts payable and
accrued expenses (23,240) 18,752
------------ ------------
Total adjustments 172,729 231,983
------------ ------------
Net cash provided by operating activities 63,146 41,107
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (3,733) (9,255)
Loan to employee - (4,000)
Repayment of employee loan 2,467 11,283
Proceeds from sale of investment 19,331 43,756
Purchases of investments (13,382) (64,405)
------------ ------------
Net cash provided by (used in) investing
activities 4,683 (22,621)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line-of-credit (23,877) (28,322)
Net proceeds (payments) on investment margin account (10,400) 10,400
Proceeds from loan payable to stockholder 16,771 9,090
Payment to stockholder on loan (16,771) (9,090)
Repurchase of stock (5,000) -
------------ ------------
Net cash used for financing activities (39,277) (17,922)
------------ ------------
Net increase in cash and cash equivalents 28,552 564
CASH AND CASH EQUIVALENTS, beginning of year 8,331 7,767
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 36,883 $ 8,331
============ ============
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998 AND 1997
Increase in Cash and Cash Equivalents
(Continued)
1998 1997
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 3,152 $ 2,727
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITY
Common stock issued for services $ 25,674 $ 310
============ ============
The accompanying notes to financial statements are an integral part of these
statements.
F-8
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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.
(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.
(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 $4,164 at December 31,
1998, and are charged to stockholders' equity. Realized losses were $2,019
in 1998 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-9
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
(h) NET INCOME (LOSS) PER COMMON SHARE--Net income (loss) per common share
is computed in accordance with the requirements of Statement of Financial
Accounting Standards No. 128 (SFAS 128) at December 31, 1998 and 1997. 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.
(i) 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, 1998, are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -----------
1999 18,240
-----------
Total $ 18,240
===========
Rent expense under the foregoing lease and all other operating leases was
$23,391 and $22,606 for 1998 and 1997, respectively.
F-10
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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 allowed 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 was $20,000. 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 was
required to order additional inventory of approximately $15,000 by March 31,
1998, under the terms of this agreement extension. The deadline to purchase the
additional inventory was further extended on March 23, 1998 to June 1, 1998. The
Company paid approximately $5,500 in January 1998 toward this obligation. As of
June 1, 1998, the Company had not purchased the additional inventory and the
right of first refusal expired. As of December 31, 1998 the $5,500 prepayment
has been expensed and the Company is under no further obligation to purchase
inventory.
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. This option expired June 1, 1998. On
August 10, 1998 the Company repurchased the 10,000 shares for $5,000 and retired
these shares previously issued to ASNI.
The Company has other commitments as discussed in Notes 3 and 7.
F-11
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(3) COMMON STOCK SUBJECT TO REPURCHASE:During 1994, the Company adopted a
nonqualified employee stock issuance plan to provide incentives to employees.
The Company has reserved 100,000 of its 10,000,000 voting common stock shares
authorized to be used under this Plan. 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.
1994 Shares
The Company valued the shares issued under the plan in 1994 at 50% of the bid
price on award date. 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 be accurately established. The amount recorded was
classified as a reduction to stockholders' equity in the accompanying financial
statements. The Company amortized this amount over the vesting period on the
straight-line basis, the estimated benefit of future services.
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 award date. On June 30,
1997, all of the remaining employees holding stock issued in 1994 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's obligation to repurchase
the remaining 5,000 1994 shares expires in 1999.
F-12
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(3) COMMON STOCK SUBJECT TO REPURCHASE: (Continued)
1998 Shares
The Company valued the shares issued under the plan in 1998 at an average of the
stock price during the 30 days prior and the 30 days after the award date. 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 be
accurately established.
In April 1998, the Company issued 1,500 shares to employees for future services
under this plan. The Company valued the 1,500 shares at $675, which was
approximately 50% less than the bid price on the effective award date.
The Company expensed $675 and $18,500 under the plan for the years ended
December 31, 1998 and 1997. No shares have been repurchased under this plan in
1997 or 1998.
The Company reflects its obligation to repurchase the stock as a liability under
the caption Common Stock Subject to Repurchase in the accompanying financial
statements. Any change in the valuation of this account is recorded as a gain or
loss in the accompanying statement of operations. The Company's repurchase
obligation for current employees is valued at 50% of the bid price of the stock
on the balance sheet date. The Company's repurchase obligation for stock held by
former employees is valued at 50% of the bid price on the date of the employee's
termination.
Common stock subject to repurchase activity comprises the following:
1998 1997
----------- -----------
Balance, beginning of year $ 1,405 $ 7,813
Common stock issued 675 -
Expiration of repurchase obligation - (6,250)
Market changes in redemption price (420) (158)
----------- -----------
Balance, end of year $ 1,660 $ 1,405
=========== ===========
F-13
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(4) 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, 1998, the bank balance was $36,907. 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.
(5) MAJOR CUSTOMERS:
Sales to two customers in 1998 represented approximately 59% of total sales. Of
this, sales to one major customer were approximately $132,000 or 48% of sales,
and sales to another major customer were approximately $30,000 or 11% of sales.
The aggregate accounts receivable balances at December 31, 1998 for the two
major customers were $6,250. Sales to two customers in 1997 represented
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.
(6) NOTES PAYABLE:
The Company has a $25,000 unsecured line-of-credit with a local bank. The
monthly minimum payment is calculated based on the outstanding balance. The
interest rate is variable (11.25% at December 31, 1998). The Company has no
outstanding balance as of December 31, 1998. The credit line can be canceled and
payment of the outstanding amount due can be required on demand by the bank at
any time.
F-14
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(7) JOINT VENTURES:
Effective May 1, 1995, the Company entered into a joint venture agreement under
the name of Ocudex, Inc. (Ocudex). The Company and Ocumed, Inc., an unrelated
company, each own 50% of Ocudex. The Company had 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 the recovery of these amounts.
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. The Company has agreed 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.
Jurox purchased $360 of product from CTD in the fourth quarter of 1998 under
this agreement.
(8) 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,
1998:
CARRYING FAIR
AMOUNT VALUE
---------- ----------
FINANCIAL ASSETS:
Cash and cash equivalents $ 36,883 $ 36,883
Investments 9,219 9,219
Accounts receivable 11,695 11,695
---------- ----------
Total financial assets $ 57,797 $ 57,797
========== ==========
FINANCIAL LIABILITIES:
Accounts payable and accrued expenses $ 6,055 $ 6,055
---------- ----------
Total financial liabilities $ 6,055 $ 6,055
========== ==========
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.
F-15
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(9) INCOME TAXES:
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.
The Company has available at December 31, 1998, unused operating loss
carryforwards totaling approximately $1,485,000 that may be applied against
future taxable income. If not used, the carryforwards will expire as follows:
Year Ending
December 31, Amount
----------------- -----------------
2011 $ 1,084,000
2012 195,000
2014 206,000
-----------------
Total $ 1,485,000
=================
The Company also has deductible temporary difference resulting from the
difference between financial and tax bases of inventory and stock issued for
services totaling approximately $82,000 at December 31, 1998.
If all of the operating loss carryforwards and temporary deductible differences
were used, the Company would realize a deferred tax asset of approximately
$345,000 based upon expected income tax rates. Under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, the deferred tax
asset should be reduced by a valuation allowance if it is likely that all or a
portion of it will not be realized. Realization depends on generating sufficient
taxable income before the expiration of the loss carryforwards. Although
realization is not assured, management believes that sixty-two percent of the
deferred tax asset will be realized based upon anticipated future profitability.
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 Company has recorded income tax expense of
$35,000 as a result of an increase in the valuation allowance on the deferred
tax asset less the tax benefit of temporary differences at December 31, 1998.
1998 1997
----------- ------------
Current income taxes $ - $ -
Tax benefit of temporary differences (21,500) -
Effect of decrease in effective tax rate - 183,325
Effect of increase (decrease) in valuation
allowance 56,500 (166,925)
Tax benefit of current year loss - (37,050)
----------- ------------
Total net expense (benefit) $ 35,000 $ (20,650)
=========== ============
(10) PUBLIC OFFERING EXPENSES:
The Company has incurred certain costs associated with the following offerings
of common stock:
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. No shares were sold.
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, 1998 AND 1997
(10) PUBLIC OFFERING EXPENSES: (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.
F-17
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(10) PUBLIC OFFERING EXPENSES: (Continued)
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 approximately 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. Beginning in March 1998
the agreement was amended to provide payment of the remaining installments
through the future issuance of the Company's common stock. The Company has paid
all amounts due as of December 31, 1998. The number of shares issued was
determined monthly by dividing $5,000 by 50% of the average market price of the
stock during the month the compensation was earned. As of December 31, 1998 the
Company has paid $40,000 in cash and $25,000 in common stock, the value of
106,474 shares.
On April 30, 1998 the Company gave sixty days notice to terminate the financial
services agreement and cancel the option for 600,000 shares of the Company's
common stock in favor of a new agreement. The Company agreed to continue the
$5,000 monthly payments for service in stock through July 31, 1998. The new
agreement specified that if at least $2.5 million in new capital was raised
before July 31, 1998, the consultant would be issued 50,000 shares of common
stock, plus an amount of stock equal to $25,000 divided by the lowest monthly
average stock value during the months of March through July 1998 and a monthly
retainer of $2,500 through December 31, 1998. No new capital was raised by July
31, 1998 and the new agreement terminated.
F-18
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(10) PUBLIC OFFERING EXPENSES (Continued):
As the Company was 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 were classified as deferred charges. These deferred costs were to
be offset against the net proceeds of the offering. Since no new capital was
raised under this agreement and the agreement was terminated effective July 31,
1998, deferred offering costs in the amount of $71,347 were expensed.
(11) WRITE DOWN OF INVENTORY TO NET REALIZABLE VALUE:
During 1998 the Company determined that its quantity of Garlessence inventory
was in excess of current requirements based on lower than expected product
sales. Accordingly, the Garlessence inventory has been written down to its
estimated net realizable value, and $57,187 has been charged to expense in 1998.
F-19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Financial Statements for the year ended December 31, 1998, and is qualified in
its entirety by reference to such Financial Statements filed with form 10KSB and
for the annual period ended December 31, 1998.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-START> JAN-01-1998
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 36,883
<SECURITIES> 9,219
<RECEIVABLES> 11,695
<ALLOWANCES> 0
<INVENTORY> 32,786
<CURRENT-ASSETS> 96,148
<PP&E> 86,715
<DEPRECIATION> (69,916)
<TOTAL-ASSETS> 325,447
<CURRENT-LIABILITIES> 6,055
<BONDS> 0
<COMMON> 130
0
0
<OTHER-SE> 317,732
<TOTAL-LIABILITY-AND-EQUITY> 325,447
<SALES> 276,325
<TOTAL-REVENUES> 276,675
<CGS> 65,856
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,152)
<INCOME-PRETAX> (74,583)
<INCOME-TAX> (35,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109,583)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
</TABLE>
