UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Fiscal year ended December 31, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ________.
Commission file Number 0-6333
HYDRON TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
New York 13-1574215
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Yamato Road, Suite 403, Boca Raton, Florida 33431
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 994-6191
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $1,001,470 based upon the closing price of $0.22 on August
15, 2000.
Number of shares of Common Stock outstanding as of August 15, 2000: 4,975,136
Documents Incorporated by Reference: None
Part I
Item 1. Business
Introduction
Hydron Technologies, Inc. ("the Company"), a New York corporation
organized on January 30, 1948, maintains its principal office at 1001 Yamato
Road, Suite 403, Boca Raton, Florida 33431 and its telephone number is (561)
994-6191.
The Company markets a broad range of consumer and oral health care
products using a moisture-attracting ingredient (the "Hydron(R) polymers"), and
owns a non-prescription drug delivery system for topically applied
pharmaceuticals, which uses such polymer. The Company holds U.S. and
international patents on, what Management believes is, the only known
cosmetically acceptable method to suspend the Hydron polymer in a stable
emulsion for use in personal care/cosmetic products. The Company has
concentrated its sales and development activities primarily on the application
of these biocompatible, hydrophilic polymers in various personal care/cosmetic
products for consumers and, to a lesser extent, oral care products for dental
professionals. The Company is developing other personal care/cosmetic products
for consumers using Hydron polymers and can use its patented technology as a
topical drug delivery system. The Company intends to continue to explore the
efficacy of using its technology as a topical drug delivery system and would,
when appropriate, either seek licensing arrangements with third parties, or
develop and market proprietary products through its own efforts. Management
believes that, because of their unique properties, products that utilize Hydron
polymers have the potential for wide acceptance in consumer and professional
health care markets.
Consumer Products
The Company has been engaged in the development of various consumer
products using Hydron polymers since 1966. The Company's products are designed
to address concerns about aging, and include Hydron skin care, hair care, bath
and body and sun care.
The Company launched two new consumer products in Fiscal 1999, bringing
the total number of individual products available to thirty-nine in the
following product lines: skin care (22 products), hair care (7 products), bath
and body (8 products) and sun care (2 products). These products are also
packaged into collections and sold at a discounted price. A number of the
products are presently being sold to and marketed by Home Shopping Club LP
("HSN") and all of the products are sold directly by the Company to consumers
through the Company's Hydron Catalog ("Catalog').
Management believes that the Company's product lines are unique and
offer the following competitive benefits: the moisturizers self-adjust to match
the skin's natural pH balance soon after they are applied to the skin; they
become water-insoluble on the skin's
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surface, and unlike all other water-based cremes and lotions, are not removed by
the skin's perspiration or plain water; they are oxygen-permeable, allow the
skin to breathe and leave no greasy afterfeel; they do not emulsify the skin's
natural moisturizing agents, as do conventional cremes and lotions; and they
attract and hold water, creating a cushion of moisture on the skin's surface
that promotes penetration of other beneficial product ingredients. The Company's
products are dermatologist tested and approved for all skin types. Products for
use around the eye area are also ophthalmologist tested and safe for contact
lens wearers. Most of the Company's moisturizing products are based on the
Company's patented emulsion system, which permits the product ingredients to
deliver their intended benefits over an extended period of time and in a more
efficient manner. See "Patented Technology."
Professional Products
The Company has also developed and markets a group of Hydron
polymer-based products for dental professionals under the Hydrocryl(R) brand
name. These include a heat cured material used in the manufacture of dentures,
as well as cold cure kits used in connection with the relining or repairing of
existing Hydrocryl or conventional acrylic dentures that is necessitated by the
continual changes that occur in the tissue structure of the mouth. Management
believes that the hydrophilic, or moisture attracting properties, of these
Hydron polymer-based products give them competitive advantages over conventional
acrylic dentures and denture repair kits, which are not hydrophilic. Sales of
Hydrocryl brand name products were minimal in Fiscal 1999, Fiscal 1998 and
Fiscal 1997.
Topical Drug Delivery System
Management believes that the Company's patented Hydron emulsion system
can enhance the effectiveness of over-the-counter medications applied to the
skin. The system is designed to deposit a uniform film on the skin's surface and
to have a relatively low affinity for the drug associated with the application.
The emulsion system is moisture-resistant so that it is not degraded by
perspiration or sebaceous oils, but is oxygen permeable. Management believes
that the Hydron system has a number of advantages over traditional lotions as it
promotes hydration of the stratum corneum, which improves penetration into the
skin's pores, and has good tactility and flexibility. The system has also been
developed to be free from greasiness, brittleness, tackiness, gumminess or
oiliness, to make it comfortable on the skin and to be resistant to inks, dyes,
oils and other materials with which the treated skin may come in contact. The
Company intends to continue to explore the efficacy of using its technology as a
topical drug delivery system and would, when appropriate, either seek licensing
arrangements with third parties, or develop and market proprietary products
through its own efforts.
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Marketing and Distribution Agreements
- QVC, Inc.
The Company entered into a license agreement with QVC, Inc. (QVC) in
1993 ("QVC License Agreement"), whereby QVC was granted exclusive rights to
market and distribute the Company's proprietary consumer products using Hydron
polymers in the Western Hemisphere. In 1996, the Company and QVC modified the
QVC License Agreement ("Amended License Agreement"), whereby the Company
reacquired certain retail marketing rights to the Hydron product line. Such
retail marketing rights included prestige retail channels of distribution such
as traditional department and specialty stores, boutique stores and beauty
salons, as well as catalog sales. QVC was entitled to receive a commission from
the Company on any such sales. In addition, the Amended License Agreement
increased the minimum product purchase requirements QVC was required to meet, on
an annual basis over a two-year term ended May 31, 1998, to maintain its
exclusive rights to market Hydron consumer products in the Western Hemisphere,
through all channels of distribution except as noted above. QVC did not meet the
annual minimum product purchase requirements to maintain exclusivity for the
year ended May 31, 1997.
On June 11, 1997, the Company and QVC renegotiated the Amended License
Agreement ("Renegotiated License Agreement") pursuant to which the term of the
Amended License Agreement was extended to May 31, 1999. Under the terms of the
Renegotiated License Agreement, QVC was required to meet certain minimum product
purchase requirements during each two-year period during the term of the
agreement, as well as annual minimum product purchase requirements, to maintain
its exclusive rights. No obligation existed for QVC to purchase the Company's
product, except to maintain such exclusive rights. If QVC had met the stipulated
minimum product purchase requirements, then the Renegotiated License Agreement
would have renewed automatically. If QVC did not meet the annual minimum product
purchase requirements, the Company could elect to continue or terminate the
Renegotiated License Agreement as of the end of each contract year during the
term.
Although QVC did not satisfy the minimum product purchase requirements for the
period ended May 31, 1998, the Company elected to continue the Renegotiated
License Agreement at that time. Effective May 31, 1999, the Company terminated
the Renegotiated License Agreement as a result of QVC's failure to satisfy the
annual minimum product purchase requirements for the period ended May 31, 1999.
Under the terms of the Renegotiated License Agreement, QVC had a period of 30
days, commencing with the Company's notice to QVC of its decision to terminate,
to satisfy the minimum product purchase requirements. As the deficiency was not
cured during that time, the Renegotiated License Agreement terminated May 31,
1999. Under the terms of the Renegotiated License Agreement, following
termination thereof, the Company could not market or sell certain Hydron
products through direct response television in the Western Hemisphere, for a
period of three months ending September 1, 1999.
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The Company continues to sell certain products to QVC, on a
non-exclusive basis, so that QVC can resell these products to their customers
who had previously purchased the products and wish to re-order Hydron products.
- Home Shopping Club LP (HSN)
Effective September 1, 1999, the Company entered into a marketing and
distribution agreement (the "Home Shopping Agreement") with HSN that grants HSN
an exclusive worldwide license to market and distribute certain of the Company's
proprietary consumer products through various forms of electronic retailing. The
Home Shopping Agreement also grants HSN a non-exclusive license to market Hydron
products through all other methods of distribution in certain countries outside
the United States.
Under the terms of the Home Shopping Agreement, HSN will make minimum
product purchases i) during the period ending 12 months following the date on
which the products first aired on HSN's television programs, and ii) during the
second 12 months following the date of the first airing (the "Initial Term"),
should HSN exceed a certain threshold amount in retail sales of Hydron products
to consumers during the Initial Term. The term of the Home Shopping Agreement
may be automatically renewed after the Initial Term for an indefinite number of
successive one-year periods, subject to HSN's achieving certain escalating
threshold levels in product purchases. However, beginning in the third contract
year, HSN will no longer be required to make minimum product purchases, except
to maintain exclusivity.
The Company launched its products on HSN's television network on
September 16, 1999. Hydron products have since been featured regularly on HSN's
television network and are expected to continue to air regularly. In addition to
selling Hydron products on-air, HSN provides brand development, and marketing
promotion and support for the products, including direct mail, sampling,
outbound telemarketing, package inserts, advertising and publicity programs, the
costs and expenses of which are shared equally by HSN and the Company.
Although Management believes that there are other avenues for selling
the Company's products, including the Hydron Catalog, the loss of HSN as a
customer would have a material adverse effect on the Company's business.
Marketing and Sales
The majority of the Company's products are currently sold in the United
States exclusively through direct response television and catalog sales, and on
a minor level, internationally through conventional retail stores. During the
Fiscal year ended December 31, 1999 ("Fiscal 1999"), the majority of the
Company's sales were made to QVC and HSN, the world's largest electronic
retailers, pursuant to the respective license agreements. See "Marketing and
Distribution Agreements."
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- Direct Response Television
Management believes that marketing Hydron products through direct
response television affords the Company several advantages over conventional
in-store retailing, including: cash flow that enables the Company to finance,
internally, product development and new marketing activities, the ability to
take advantage of time-sensitive opportunities by moving products to market
quickly, and the ability to conduct real time market research, which can allow
Management to make marketing decisions quickly and cost effectively.
The Company's personal care products are presently marketed through
direct response television in the United States exclusively by HSN, whose
programming is transmitted live on cable television to approximately seventy
million homes. Sales of the Company's products to HSN & QVC accounted for
approximately 68%, 79%, 82%, 97% and 98% of the Company's total sales for Fiscal
1999, 1998, 1997, 1996 and 1995, respectively. Although Management believes that
there are other avenues for selling its products, including attempting to expand
its Catalog base by utilizing various marketing methods, the inability to sell
through direct response television would have a material adverse effect on the
Company's business.
Hydron products had been marketed on QVC through regularly scheduled
hour-long programs from April 1994 through May 1999. Hydron products have been
marketed on HSN through regularly scheduled hour-long programs since September
1999. The hour-long live broadcasts generally feature most currently available
products, which are sold individually or in collections (packaging of products
in various combinations). The majority of Hydron products are sold in connection
with on-air marketing, although customers may purchase the products outside of
these hour-long programs. Such off-air or back-end sales are considered
primarily re-order business.
Retail sales of Hydron products by HSN are affected primarily by the
amount of hours provided, the quality of such hours (e.g., time of day or day of
the week), new product introductions, competitive products offered and the
effectiveness of the host and spokesperson.
In Fiscal 1999, the Company added two (2) new items to its product
lines. At December 31, 1999, the products marketed by Hydron consisted of skin
care (22 sku's), hair care (7 sku's), bath and body (8 sku's) and sun care (2
sku's). Most of these products can be purchased on HSN individually or in kits
or collections. The Company constantly reviews its product lines and is now
emphasizing the skin care line of products to a greater extent.
- Catalog Sales
In November 1996, the Company opened a new channel of distribution for
Hydron products with the launch of its proprietary Catalog. This full color
Catalog offers
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the Company's personal care products for sale directly to consumers. The Catalog
also provides information on new Hydron products, educates consumers on proper
skin and hair care and facilitates re-ordering. The Company is currently
exploring new ways to enhance Catalog sales and operations.
The typical Hydron Catalog customer is a repeat purchaser who spent, on
average, $138 in Fiscal 1999 on Hydron products. The average order size is $72
with the consumer purchasing an average of 3.3 items per order. Management is
testing various cost-effective direct marketing methods that can be used to
acquire new customers, and enhance the purchasing frequency of the Company's
current customers.
-Infomercial
In 1997, the Company, through its wholly-owned subsidiary, Hydron
Direct, Inc., entered into an agreement with QDirect Ventures, Inc., an
affiliate of QVC, Inc., to form a new joint venture, known as New Hydromercial
Partners ("Infomercial Partnership"), to promote and sell the Company's Hydron
polymer-based skin care products through a thirty-minute commercial
("Infomercial"), which the Infomercial Partnership produced. Although the
Infomercial is not currently being aired, it had been shown on regional and
national cable networks, at various times, since September 1995.
- Alternative Channels of Distribution
In addition to the Company's Catalog operations, the Company intends to
seek alternative channels of distribution for its products, such as private
labeling, international and limited retail.
The Company has an agreement with an Australian-based health and beauty
products distributor, Doctors Formula Pty. Ltd., to market Hydron products in
retail stores in Australia and New Zealand. Sales to Doctors Formula Pty. Ltd.
have been minimal.
Agreement with National Patent
Pursuant to the terms of an agreement ("Patent Agreement") with
National Patent Development Corporation ("National Patent"), the Company has the
exclusive worldwide rights to market products using Hydron polymers in the oral
health, personal care/cosmetic and other consumer product fields, the areas in
which the Company has been concentrating its research and development efforts.
The Company also has exclusive worldwide rights to utilize Hydron polymers in
its topical delivery system for non-prescription drugs only. National Patent has
the exclusive worldwide rights to market prescription drugs and medical devices
using Hydron polymers. Furthermore, each Company has the right to exploit
products with Hydron polymers not in the other's exclusive fields.
The Patent Agreement requires the Company to pay a 5% royalty to
National Patent based on the net sales of products containing the Hydron
polymer. Additionally,
7
National Patent is required to pay the Company a 5% royalty on its net sales of
Hydron polymer-based products, except with respect to certain excluded products.
In the area of prescription and nonprescription drugs using Hydron polymers as a
drug release mechanism, both the Company and National Patent have agreed to pay
the other a royalty equal to 5% of net sales received from third parties with
regard to such products developed. In addition, each will pay the other 25% of
any up-front license fees, royalties or similar payments received from third
parties with regard to such products developed in the area of nonprescription
drugs. For the years ended December 31, 1999, 1998, 1997, 1996 and 1995, the
Company paid or accrued royalties to National Patent of approximately $130,000,
$190,000, $330,000, $387,000 and $338,000, respectively. The Company has not
received any royalties from National Patent during these periods.
Foreign Operations
Direct foreign sales by the Company have never been significant as a
percentage of consolidated net sales. From 1995 to 1997, the Company marketed
its products in Europe through a QVC affiliate in the United Kingdom. In 1996,
the Company signed an agreement for conventional retail sales with Doctors
Formula Pty. Ltd., an Australia-based health and beauty products distributor.
The Company is currently working with HSN's international network to
include its Spanish language show in Mexico, Latin America and South America.
Management is also reviewing other opportunities to exploit its consumer
products through various retail marketing and distribution methods in regions
not covered under agreements with HSN.
Manufacturing and Raw Materials
Hydron polymer-based products are manufactured exclusively for the
Company by independent third parties. Although the Company has used principally
one manufacturer of cosmetic products because of the quality of its products and
reasonable cost, the Company has established relationships with other third
party cosmetic manufacturers who could produce the Company's cosmetic products
should alternate capacity be required. To date, contract manufacturing has
allowed the Company to meet inventory requirements in a timely manner. All raw
material and packaging components for the Company's consumer and professional
product lines are readily available to the Company from a variety of sources.
The Company is not dependent on any sole manufacturer except National
Patent, which has agreed to make the Hydron polymer available to the Company as
needed, and to provide the Company with all manufacturing procedures, including
know-how, and render necessary and reasonable technical assistance should
National Patent be unable to meet the Company's requirements for the Hydron
polymer. The loss of National Patent as a supplier or a reduction in the
availability of the Hydron polymer would have a material adverse effect on the
Company's business.
8
Inventory
The Company did not have any backorder of firm booked orders as of
December 31, 1999, and generally delivers its orders within two weeks of the
date orders are booked. Although the Company's business in not seasonal, orders
are placed by HSN after it determines its programming, and therefore,
fluctuations in the Company's sales may occur on a monthly and quarterly basis.
Orders placed by the Company's Catalog customers are generally shipped within a
few days of the placement of the order.
Research and Development
The Company's research and development efforts during Fiscal 1999
continued to achieve greater diversification among the Company's product lines
by broadening the brand's appeal primarily to the aging baby boomer marketplace.
During Fiscal 1999, the Company's contract research and development program
completed development of two new products: Hydronamins Anti-Wrinkle Firming
Therapy (Retinol and Pure Vitamin C) and an improved Tri-Activating Skin
Clarifier.
At year-end, development efforts were continuing for several other
personal care/cosmetic products. These efforts include product formulation,
packaging design and prototypes, extensive product safety and stability testing
conducted by dermatologists, along with non-comedogenicity tests where
appropriate, certain efficacy studies to support product claims, and consumer
focus groups and panel tests. Charles Fox, a consultant and a former member of
the Company's Board of Directors from September 1997 to October 1998, leads the
Company's research and development. Mr. Fox was formerly director of product
development for Warner Lambert Company's personal products division and
president of the Society of Cosmetic Chemists.
Management anticipates completing development of products initiated in
1999 during 2000, and expects to focus research and development resources on
additional Hydron polymer-based products as determined by Management's
assessment of consumer demand, compatibility with the Company's proprietary
technology, and sales potential.
Patented Technology
In addition to owning certain non-material patents relating to personal
care products, the Company was granted U.S. Patent No. 4,883,659, dated November
28, 1989, and U.S. Patent No. 5,039,516, dated August 13, 1991, which cover a
stable moisturizing emulsion containing an unusual emulsifying agent, as well as
the Hydron polymer and a unique combination of ingredients. These patents have
expiration dates of November 28, 2006 and August 13, 2008, respectively. The
Company also holds a European patent, as well as patents in numerous other
countries, for this emulsification process. According to the patents, Hydron,
utilized in cosmetic emulsions, creates a thin moisture-attracting film that is
non-greasy; is not dissolved by sebaceous oils or perspiration; does not
emulsify the skin's natural oils and humectants; and allows the skin to breathe
(i.e., it is air and moisture permeable). The film is insoluble in water and
resistant to rub-off, but can easily be removed with cleanser and water.
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The Company's Management believes that there are no competitive
cosmetic products with this combination of properties. Applications for the
Hydron polymer and the Company's patented technology in the cosmetics and
pharmaceutical industries include more effective and prolonged delivery of
moisturizing agents to the skin; enhanced flavor and scent releasing components;
and a delivery system for topically applied over-the-counter medications which
may enhance the penetration of active ingredients to the skin by holding them on
the skin longer, in a moist environment.
During 1999 the Company was granted U.S. Patent No. 5,879,684 for its
Line Smoothing Complex formula. This product has been clinically shown to reduce
fine lines and wrinkles. The patent has an expiration date of April 11, 2017.
Government Regulation
All of the Company's skin care, hair care, and bath and body products
are "cosmetics" as that term is defined under the Federal Food, Drug and
Cosmetics Act ("FDC Act"), and must comply with the labeling requirements of the
FDC Act, the Fair Packaging and Labeling Act ("FPL Act"), and the regulations
thereunder. Certain of the Company's products (i.e. its topical analgesic and
products that contain a sunscreen or triclosan) are also classified as
over-the-counter drugs. Additional regulatory requirements for such products
include additional labeling requirements, registration of the manufacturer and
semiannual update of the drug list. Management believes that it is in compliance
with these requirements and that there are no material costs associated with
such compliance.
Competition
The skin care business is characterized by vigorous competition
throughout the world. Product recognition, quality, performance and price have
significant influence on customers' choices among competing products and brands.
Advertising, promotion, merchandising, the pace and timing of new product
introductions and line extensions also have a significant impact on the consumer
buying decisions. The Company competes against a number of marketers of skin
care products, some of which have substantially greater resources than the
Company. Although the Company is in competition with all skin care brands,
direct competition in electronic retailing and catalog sales includes Victoria
Principal's Principal Secret, ProActiv, Physician's Advice, Susan Lucci,
Signature Club A, Connie Sellecca's The Sellecca Solution, Tova Borgnine,
Jennifer Flaven-Stallone's Serious Skin, Adrienne Arpel Cosmetics, Avon, Mary
Kay Cosmetics and NuSkin.
Seasonality
The Company's results of operations are not subject to seasonal
fluctuations.
10
Employees
The Company satisfies its human resource needs utilizing an outsourcing
firm that provides all administrative services relating to payroll, personnel
and employee benefits. Management continues to hire, fire, set pay rates and
supervise its staff. This arrangement enables the Company to reduce its
administrative and benefits costs relating to employees. The Company currently
has ten full time positions.
Item 2. Properties
The Company maintains its offices at Yamato Office Center, 1001 Yamato
Road, Suite 403, Boca Raton, Florida 33431. The lease on this office space
(5,500 square feet) expires in September 2001 and requires monthly rent of
approximately $8,300, including taxes and common area expenses, subject to
increases in the Consumer Price Index and other increases in taxes and common
area expenses over set amounts. The Company subleases approximately 1,500 square
feet of this office to an independent third party for $2,600 per month, under
terms similar to the Company's lease.
The Company maintains its main warehouse of approximately 31,000 square
feet at 95 Mayhill Street, Saddle Brook, New Jersey 07663, pursuant to a lease
that expires in August 2000, at a monthly rent of approximately $14,000. That
lease will be terminated in August and the Company has made arrangements for
less expensive storage of component and finished goods in conjunction with its
contract manufacturers.
In addition, the Company maintained warehouse space, of approximately
3,200 square feet, at 1120 Holland Drive, Suites 9 and 19, Boca Raton, Florida
33487, pursuant to a lease that expired in April 2000, at a monthly rent of
approximately $2,900. This warehouse was subleased in April 1999 to an
independent third party under terms similar to the original lease including the
required rent and other payments. The Company no longer has any obligation under
this lease.
Management believes that such facilities are satisfactory for its
present needs.
Item 3. Legal Proceedings
The Company is not a party to, and its property is not the subject of,
any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1999.
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Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock trades on the NASDAQ Bulletin Board Market
tier of the NASDAQ Stock Market (the "NASDAQ BB Market") under the symbol HTEC.
The following tables indicate the high and low closing prices for the Company's
Common Stock (restated for the one-for-five reverse stock split effective
October 19, 1998), as reported by the NASDAQ Stock Market.
Fiscal 1999 High Closing Price Low Closing Price
Fourth Quarter $ .844 $ .437
Third Quarter .906 .562
Second Quarter 1.250 .500
First Quarter 1.062 .500
Fiscal 1998 High Closing Price Low Closing Price
Fourth Quarter $ 1.719 $ .375
Third Quarter 2.500 .940
Second Quarter 3.750 2.190
First Quarter 3.750 .406
As of July 12, 2000, there were approximately 4,003 record holders of
the Company's Common Stock. The Board of Directors will determine the payment of
dividends in the future in light of conditions then existing, including the
Company's earnings and financial condition.
Item 6. Selected Financial Data
Fiscal Years Ended December 31,
1999 1998 1997 1996 1995
Net Sales $ 2,593,448 $ 3,983,303 $ 7,305,154 $ 8,112,672 $ 7,303,468
Distribution Agreement Expense -- -- -- 3,149,718 --
Operating Income (Loss) (3,064,189) (2,067,349) (2,849,790) (2,997,070) 1,566,212
Interest and Investment Income 80,860 144,203 211,371 308,998 325,010
Net Income (Loss) (2,974,142) (1,882,667) (2,588,492) (2,823,977) 1,782,588
Basic & Diluted Earnings
(Loss) per Common Share (.60) (.38) (.54) (.62) .39
Total Assets 3,835,303 6,641,433 8,751,343 12,741,140 12,992,111
Total Shareholders' Equity 3,065,272 5,974,571 7,857,238 11,981,480 12,561,548
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company sells specialty personal care/cosmetics products, primarily
for skin care, and to a lesser extent oral health care products, most of which
are covered by patent, license and/or royalty agreements. The Home Shopping
Agreement provides HSN with certain exclusive rights to purchase certain
products solely from the Company for sale in direct response television and
other distribution channels. In addition, the Patent Agreement with National
Patent provides for reciprocal royalty payments based on the sale of certain of
each party's products. The Company is developing other personal care/cosmetics
for consumers using Hydron polymers. The Company also has a patented technology
in which the Hydron polymers act as a drug release mechanism and the Company
intends to continue to explore the efficacy of using this technology to either
seek licensing arrangements with third parties, or develop and market
proprietary products through its own efforts.
Results of Operations - Fiscal 1999 versus Fiscal 1998
Net sales for Fiscal 1999 were $2,593,448, a decrease of $1,389,855, or
35%, from net sales of $3,983,303 for the Fiscal year ended December 31, 1998
("Fiscal 1998"). During Fiscal 1999, catalog sales increased by approximately
$58,000, or 8%, from $769,000 in Fiscal 1998 to $827,000 in Fiscal 1999. The
increase in Catalog sales resulted primarily from an increase in the number of
new customers and a major "25% off" sale in the summer. Non-catalog sales,
including all sales to QVC and HSN, decreased by approximately $1,448,000, or
45%, from $3,214,000 in Fiscal 1998 to $1,766,000 in Fiscal 1999. QVC sales
slowed as the May 31, 1999 contract anniversary date approached and the contract
required the Company to refrain from selling its products on any form of direct
response television prior to September 1, 1999.
Approximately 63% of the Company's non-catalog sales during Fiscal 1999
were to QVC and approximately 37% of non-catalog sales were to HSN. Management
anticipates that sales to HSN will grow to be a larger percentage of the
Company's sales and, absent the consummation of marketing or distribution
arrangements with third parties other than HSN, the Company's dependence upon
direct response television as a distribution channel will remain significant.
Any disruption in the Company's relationship with HSN would have a material
adverse effect on the business, financial condition and results of operations of
the Company.
As a result of an inventory write down, the Company's overall gross
profit margin decreased to 22% of net sales for Fiscal 1999 from 49% for Fiscal
1998. The Company took an inventory write down of $794,362 and $442,254 in
Fiscal 1999 and Fiscal 1998, respectively. The write downs to net realizable
value represent components and finished goods of product that the Company deems
are in excess based on current sales levels or does not plan to continue
marketing in the future. The gross margin on catalog sales, excluding the write
down of inventory, increased to 84% of net sales in Fiscal 1999 from 79% in
Fiscal 1998. The gross margin on non-catalog sales,
13
excluding the write down of inventory, grew to 59% for Fiscal 1999, up from 56%
of net sales for Fiscal 1998. The increases in gross margins are attributable to
a shift in the mix of product sold to more profitable items.
Substantially all of the inventory components and finished goods
written down resulted from the conversion to HSN from QVC as the primary channel
of distribution, or were purchased and/or manufactured prior to September 1997.
The write down applies primarily to components and finished goods outside of the
traditional skin care product line, such as hair care, sun care, and bath and
body products. The Company will make every effort to recoup as much value as
possible as it examines various means of liquidating the current excess.
Royalty expenses in Fiscal 1999 were $141,974, representing a decrease
of $72,440, or 34%, from royalty expenses of $214,414 in Fiscal 1998. This
decrease is commensurate with the decrease in gross sales for the Company in
Fiscal 1999. These expenses are related primarily to the Patent Agreement with
National Patent and pertain to the use of the Hydron polymers as a formula
ingredient for many of the Company's products.
Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, develop and package the products for
commercial sale, perform appropriate efficacy and safety tests, and conduct
consumer panel studies and focus groups. R&D expenses in Fiscal 1999 were
$211,956, a decrease of $138,873, or 40%, from R&D expenses of $350,829 in
Fiscal 1998. The amount of R&D expenses per year varies, depending on the nature
of the development work during each year, as well as the number and type of
products under development at such time.
Selling, general and administrative ("SG&A") expenses in Fiscal 1999
were $2,160,227, representing a decrease of $151,052, or 7%, from SG&A expenses
of $2,311,279 in Fiscal 1998. This decrease is primarily the result of lower
executive salary expense. Expenses attributed to the Catalog include
advertising, additional marketing, customer service and warehouse personnel, and
related telephone, postage and supply expenses. Advertising was the most
significant Catalog expense, totaling approximately $109,000 in Fiscal 1999 and
approximately $119,000 in Fiscal 1998.
Employment contract settlement costs in Fiscal 1999 were $620,099, a
decrease of $7,614, or 1%, from employment contract settlement costs of $627,713
for Fiscal 1998. These costs related to the settlement terms and associated
legal fees regarding several employment contracts. These contracts, which
originated during Fiscal 1993 and Fiscal 1994, overburdened the Company's
operations during a period when the Company's revenues could not support the
contracts. The Company does not currently have any employment contracts.
Interest and investment income in Fiscal 1999 was $80,860, a decrease
of $63,343, or 44%, from interest income of $144,203 in Fiscal 1998, due
primarily to lower
14
cash balances resulting from the factors discussed above. The Company maintains
a conservative investment strategy, deriving investment income primarily from
U.S. Treasury securities.
The Company had a net loss for Fiscal 1999 of $2,974,142, an increase
of $1,091,475, or 58% from the net loss of $1,882,667 for Fiscal 1998, primarily
as a result of the factors discussed above. Excluding the write down of
inventory and the employment contract settlement costs, the net loss for Fiscal
1999 and Fiscal 1998 would have been $1,559,681 and $812,700, respectively.
Results of Operations - Fiscal 1998 versus Fiscal 1997
Net sales for Fiscal 1998 were $3,983,303, a decrease of $3,321,851, or
45%, from net sales of $7,305,154 for the Fiscal year ended December 31, 1997
("Fiscal 1997"). During Fiscal 1998, catalog sales decreased by approximately
$532,000, or 41%, from $1,301,000 in Fiscal 1997 to $769,000 in Fiscal 1998. The
decrease in Catalog sales resulted primarily from decreased promotion of the
catalog. Although catalog sales decreased, the catalog was profitable in Fiscal
1998 as compared to a loss of approximately $1.9 million in Fiscal 1997.
Non-catalog sales, including sales to QVC and its affiliates, decreased by
approximately $2,790,000, or 46%, from $6,004,000 in Fiscal 1997 to $3,214,000
in Fiscal 1998. The decrease in non-catalog sales resulted primarily from
decreased sales to QVC, which in turn, resulted primarily from a reduction in
QVC's retail sales due to the amount and quality of hours provided by QVC, as
well as the number of new product introductions, the amount of competitive
products offered by QVC and the effectiveness of the host and spokesperson.
Approximately 79% and 82% of the Company's non-catalog sales during
Fiscal 1998 and Fiscal 1997, respectively, were to QVC and its related entities,
including the Infomercial partnership and QVC Europe. Sales to QVC will continue
to be a large percentage of the Company's sales and, absent the consummation of
marketing or distribution arrangements with third parties other than QVC, the
Company's dependence upon QVC as a substantial customer will remain significant.
Any disruption in the Company's relationship with QVC would have a material
adverse effect on the business, financial condition and results of operations of
the Company.
The Company's overall gross profit margin decreased to 49% of net sales
for Fiscal 1998 from 51% for Fiscal 1997. The gross margin on non-catalog sales,
excluding the write down of inventory, including sales to QVC and affiliates,
remained at 56% of net sales for both Fiscal 1998 and Fiscal 1997. The decrease
in overall gross profit margin relates primarily to the write down, to net
realizable value, of components and finished goods of products that the Company
did not plan to continue marketing in the future. Substantially all of these
components and finished goods were purchased and/or manufactured prior to
September 1997. Management decided that there was no viable market for these
products, which consisted mainly of products outside of the traditional skin
care product line, such as hair care, sun care and bath and body products.
Disposal of inventory of $651,270 in Fiscal 1997 related primarily to the write
down, to net realizable
15
value, of the Company's vitamin and nutritional supplement line of products. The
Company has discontinued this line of products. The gross margin on catalog
sales, excluding the write down of inventory, decreased to 79% of net sales in
Fiscal 1998 from 80% in Fiscal 1997.
Royalty expenses in Fiscal 1998 were $214,414, representing a decrease
of $172,293, or 45%, from royalty expenses of $386,707 in Fiscal 1997. This
decrease is commensurate with the decrease in gross sales for the Company in
Fiscal 1998. These expenses are related primarily to the Patent Agreement with
National Patent and pertain to the use of the Hydron polymers as a formula
ingredient for many of the Company's products.
R&D expenses reflect the Company's efforts to identify new product
opportunities, develop and package the products for commercial sale, perform
appropriate efficacy and safety tests, and conduct consumer panel studies and
focus groups. R&D expenses in Fiscal 1998 were $350,829, an increase of $45,919,
or 15%, from R&D expenses of $304,910 in Fiscal 1997. The amount of R&D expenses
per year varies, depending on the nature of the development work during each
year, as well as the number and type of products under development at such time.
SG&A expenses in Fiscal 1998 were $2,311,279, representing a decrease
of $3,031,350, or 57%, from SG&A expenses of $5,342,629 in Fiscal 1997. This
decrease is the result primarily of lower expenses associated with the Hydron
Catalog. Total Catalog SG&A expenses in Fiscal 1998 were approximately $426,000,
a decrease of approximately $1,874,000, or 81%, from Catalog SG&A expenses of
approximately $2,300,000 in Fiscal 1997. Expenses attributed to the Catalog
include advertising, additional marketing, customer service and warehouse
personnel, and related telephone, postage and supply expenses. Advertising was
the most significant Catalog expense, totaling approximately $119,000 in Fiscal
1998 and approximately $1.6 million in Fiscal 1997. Included in advertising in
Fiscal 1997 were sports sponsorship expenses of approximately $771,000. Such
sports sponsorships were discontinued during Fiscal 1997.
SG&A expenses, other than Catalog related expenses, in Fiscal 1998 were
approximately $1,885,000, a decrease of approximately $1,158,000, or 38%, from
such expenses of approximately $3,131,000 in Fiscal 1997. This decrease was due
primarily to a reduction in legal expenses. In 1997 legal expenses included
approximately $470,000 incurred in connection with the dispute between the
Company and certain shareholders of the Company (including certain current
directors of the Company) who were members of a group ("13D Group") through
September 19, 1997, including the legal fees and expenses of the 13D Group
reimbursed by the Company.
Employment contract settlement costs in Fiscal 1998 were $627,713, an
increase of $552,984, or 640%, from employment contract settlement costs of
$74,729 for Fiscal 1997. This increase pertained primarily to legal fees and
related expenses in connection with the litigation with Harvey Tauman, and
approximately $391,000 in payroll and
16
related expenses relating to the voluntary early termination of another
executive officer's employment contract that would have otherwise provided for
continued employment through August 31, 2004. The contract is now settled.
Interest and investment income in Fiscal 1998 was $144,203, a decrease
of $67,168, or 32%, from interest income of $211,371 in Fiscal 1997, due
primarily to lower cash balances as a result of the factors discussed above. The
Company maintains a conservative investment strategy, deriving investment income
primarily from U.S. Treasury securities.
The Company had a net loss for Fiscal 1998 of $1,882,667, a decrease of
$705,825, or 27%, from the net loss of $2,588,492 for Fiscal 1997, primarily as
a result of the factors discussed above. Excluding the write down of inventory
and the employment contract settlement costs, the net loss for Fiscal 1998 and
Fiscal 1997 would have been $812,700 and $1,862,493, respectively.
Results of Operations - Fiscal 1997 versus Fiscal 1996
Net sales for Fiscal 1997 were $7,305,154, a decrease of $807,518, or
10%, from net sales of $8,112,672 for the Fiscal year ended December 31, 1996
("Fiscal 1996"). During Fiscal 1997, Catalog sales increased by approximately
$1.1 million and sales to QVC and its affiliates decreased by approximately $1.9
million from sales in Fiscal 1996. The increase in Catalog sales resulted from a
full year of Catalog sales, which was initiated in November 1996. The decrease
in non-catalog sales resulted from decreased sales to QVC ($1.2 million), the
Infomercial Partnership ($500,000) and QVC Europe ($200,000). QVC's purchasing
patterns are affected primarily by the amount and timing of the Hydron Care
programming.
Approximately 82% and 97% of the Company's sales during Fiscal 1997 and
Fiscal 1996, respectively, were to QVC and its related entities, including the
Infomercial Partnership and QVC Europe.
The Company's overall gross profit margin decreased to 51% in Fiscal
1997, compared to 59% in Fiscal 1996, primarily as a result of the write down,
to net realizable value, of the Company's vitamin and nutritional supplement
line of products and by a decrease in gross margins on products sold to QVC,
partially offset by an increase in Catalog sales (gross margin of 79%). The
Company has discontinued the vitamin and nutritional supplement line of
products. The reduction in gross margins on products sold to QVC relates
primarily to fluctuations in the mix of products sold to QVC in those periods.
R&D expenses reflect the Company's efforts to identify new product
opportunities, develop and package the products for commercial sale, perform
appropriate efficacy and safety tests, and conduct consumer panel studies and
focus groups. R&D expenses in Fiscal 1997 were $304,910, a decrease of $192,989,
or 39%, from R&D expenses of $497,899 in Fiscal 1996. The amount of R&D expenses
per year varies,
17
depending on the nature of the development work during each year, as well as the
number and type of products under development at such time. Included in R&D
expense in Fiscal 1996 is approximately $200,000 of royalty fees paid to a
consultant relating to product development under a contract that expired on
December 31, 1996.
SG&A expenses in Fiscal 1997 were $5,342,629, an increase of
$2,018,608, or 61%, from SG&A expenses of $3,324,021 in Fiscal 1996. This
increase is the result primarily of expenses associated with the Hydron Catalog,
which was initiated in November 1996. Total Catalog SG&A expenses were
approximately $2.3 million in Fiscal 1997, as compared to approximately $449,000
in Fiscal 1996. Expenses attributed to the Catalog include advertising,
additional marketing, customer service and warehouse personnel, and related
telephone, postage and supply expenses. Advertising was the most significant
Catalog expense, totaling approximately $1.5 million in Fiscal 1997 and
approximately $394,000 in Fiscal 1996. Included in advertising in Fiscal 1997
and Fiscal 1996 were sports sponsorship related expenses of approximately
$771,000 and $158,000, respectively. Such sports sponsorships were discontinued
during Fiscal 1997.
SG&A expenses, other than Catalog related expenses, in Fiscal 1997 were
approximately $3,043,000, an increase of approximately $168,000, or 6%, from
such expenses of $2,875,000 in Fiscal 1996. This increase was due primarily to
legal expenses of approximately $470,000 incurred in connection with the dispute
between the Company and the 13D Group through September 19, 1997, including the
legal fees and expenses of the 13D Group reimbursed by the Company. This
increase in legal fees was partially offset by a reduction of approximately
$102,000 in promotional expenses associated with the Hydron newsletter sent to
QVC customers in Fiscal 1996.
The Distribution Agreement expense of $3,149,718 in Fiscal 1996
pertains to costs incurred in connection with the execution and delivery of the
Amended License Agreement, whereby the Company granted an unrelated third party
an option to purchase 300,000 shares of the Company's Common Stock at $.05 per
share, resulting in a one-time non-cash charge against earnings of approximately
$3.1 million. Such option was exercised on January 6, 1997.
Interest and investment income in Fiscal 1997 was $211,371, a decrease
of $97,627, or 32%, from interest income of $308,998 in Fiscal 1996, due
primarily to lower cash balances as a result of the factors discussed above, the
payment of dividends and the repurchase of the Company's Common Stock (both of
which programs were discontinued). The Company maintains a conservative
investment strategy, deriving investment income primarily from U.S. Treasury
securities.
The Company had a net loss for Fiscal 1997 of $2,588,492, a decrease of
$235,485, or 8%, from the net loss of $2,823,977 for Fiscal 1996, primarily as a
result of the factors discussed above.
18
Liquidity and Capital Resources
The Company's working capital was approximately $1,479,000 at December
31, 1999, including cash and cash equivalents of approximately $653,916.
Investing activities of $8,351 during Fiscal 1999 related to the sale
of property and equipment.
The financing activity in Fiscal 1999 related primarily to the purchase
of 10,000 shares of the Company's common stock at a purchase price of $.7813.
The Company has incurred significant losses over the past four years.
The ability of the Company to continue as a going concern is dependent on
increasing sales and reducing operating expenses.
Management's plan to increase sales and reduce operating expenses
includes several specific actions. Catalog sales will be emphasized since they
have higher profit margins and represent markets that are growing more rapidly
than the Company's traditional television market. Direct marketing techniques
will be used to reach new and current consumers such as promotions mailed to
targeted consumers, Web site specials, promotions to other Web site customers,
and direct e-mail promotions to current customers.
Inventory write downs and contract settlements of $1,414,461 and
$1,069,967 were incurred in the years ended December 31, 1999 and 1998,
respectively. Steps have been taken to prevent these types of charges in the
future. In addition, annual operating expenses have been reduced an estimated
$700,000 by reducing payroll cost, warehouse cost, consulting fees, legal fees,
and insurance premiums.
Based on the above plan and the Company's present cash position, the
absence of any short or long term debt, arrangements with third parties for
contractual manufacturing and R&D, and the Company's present business strategy,
management believes that the Company has adequate resources to meet normal,
recurring obligations, for at least the next twelve months, as they become due.
Further, in view of the payment terms in connection with sales to HSN,
management does not anticipate any difficulty in financing foreseeable inventory
requirements.
The Company does not have the financial resources to sustain a national
advertising campaign to market its products in a conventional retail mode. In
view of the foregoing, Management's strategy has been to enter into marketing,
licensing and distribution agreements with third parties (such as HSN, QVC and
the Infomercial Partnership) which have greater financial resources than those
of the Company and that can enhance the Company's product introductions with
appropriate national marketing support programs.
The effect of inflation has not been significant upon either the
operations or financial condition of the Company.
19
Cautionary Statement Regarding Forward Looking Statements
The statements contained in this Report on Form 10-K that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future. Forward looking
statements include the Company's liquidity, anticipated cash needs and
availability, and the anticipated expense levels under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward looking statements included in this document are based on information
available to the Company on the date of this Report, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those expressed
or implied in such forward looking statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information required by this item is set forth in the Consolidated
Financial Statements contained in this report and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company are contained in
this report following Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
Part III
Item 10. Directors and Executive Officers of the Registrant
Identification of Directors and Executive Officers
Listed below are the directors and executive officers of the Company as
of December 31, 1999:
Name Position
Richard Banakus Director, Chairman of the Board and Interim President
Mark Egide Director
Karen Gray Director
Charles Johnston Director
Business Experience
Richard Banakus, age 54, has served as a director of the Company since
June 1995 and as Interim President of the Company since September 19, 1997. From
April 1991 to the present, Mr. Banakus has been a private investor with
interests in a number of privately and publicly held companies. From July 1988
through March 1991, he was managing partner of Banyan Securities, Larkspur,
California, a securities brokerage firm that he founded.
Mark Egide, age 43, has served as a director of the Company since
September 1997. Since September 1989, Mr. Egide has served as President of
Avalon Natural Products, Inc., a cosmetics manufacturing and importing company
which he founded
Karen Gray, age 41, has served as a director of the Company since
December 1997 and has been a consultant to the Company on marketing and
communications matters since November 1996. Ms. Gray has over 16 years of
management experience in marketing communications in various capacities with
various companies. From 1993 to November 1996, Ms. Gray served as Vice
President, Corporate Communications, of the Company. From June 1992 to November
1993, Ms. Gray served as President of MarCom Associates, Inc., a marketing
communications company that she founded.
Charles Johnston, age 64, has served as a director of the Company since
December 1997. During the past 10 years he has served on various boards. Mr.
Johnston is currently Chairman of Ventex Technology, Inc. an electronic
transformer company in Riviera Beach, Florida and AFD Technologies, LLC a
chemical company in Jupiter, Florida. He was previously founder, Chairman and
CEO of ISI Systems, a computer software company listed on the American Stock
Exchange prior to its sale in November 1989 to Teleglobe Corporation in
Montreal, Canada. Mr. Johnston also serves as a Trustee of Worcester Polytechnic
Institute in Worcester and of the Psychiatric Research Center at the University
of Pennsylvania. In addition, he serves as a director of the
21
following companies: Infosafe Systems, an internet company in New York City;
Kideo Productions, an educational software company in New York City; Spectrum
Signal Processing, a digital signal processing computer hardware and software
company in Vancouver, Canada; and Waste Systems International, a landfill
remodeling company in Cambridge, Massachusetts.
Compliance with Section 16(A) of the Securities Exchange Act of 1934
The Company's officers, directors and beneficial owners of more than
10% of any class of its equity securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 ("Reporting Persons") are required under the
Act to file reports of ownership and changes in beneficial ownership of the
Company's equity securities with the Securities and Exchange Commission. Copies
of those reports must also be furnished to the Company. Based solely on a review
of the copies of reports furnished to the Company pursuant to the Act, the
Company believes that during the fiscal year ended December 31, 1999, all filing
requirements applicable to Reporting Persons were complied with, except with
respect to (1) Mr. Richard Banakus, Interim President and Chairman of the Board
of the Company, for whom there were two late filings on Form 4 for the month of
May and June (the grant of options) and (2) Mr. Mark Egide, Ms. Karen Gray, and
Mr. Charles Johnston, Directors of the Company, for whom there was one late
filing each on Form 4 for the month of May (the grant of options).
Item 11. Executive Compensation
The following table sets forth information for the years ended December
31, 1999, 1998, and 1997 with respect to all compensation awarded to, earned by,
or paid to the Company's Chief Executive Officer. None of the Company's other
executive officers received salary and bonus payments in excess of $100,000
during the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
- ------------------------------------------------- --------- ------------- ---------- ---------------------
OTHER ANNUAL
NAME AND PRINCIPLE POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------- --------- ------------- ---------- ---------------------
Richard Banakus, Interim President 1999 $ 55,771
- ------------------------------------------------- --------- ------------- ---------- ---------------------
1998 $ 120,016
- ------------------------------------------------- --------- ------------- ---------- ---------------------
1997 $ 32,312
- ------------------------------------------------- --------- ------------- ---------- ---------------------
During Fiscal 1999, the Company's Interim President was granted options
to purchase 2,000 shares of the Company's common stock for his participation on
the Company's Board of Directors while serving as the Interim President.
22
The following table sets forth certain information relating to option
exercises effected during the year ended December 31, 1999, and the value of
options held as of such date by the Company's Chief Executive Officer and all
other persons who were executive officers of the Company and its subsidiaries
for the year ended December 31, 1999. The Company does not have any outstanding
stock appreciation rights.
Aggregate Option Exercises for the Year Ended December 31, 1999
and Year End Option Values
Number of
securities underlying Value(1) of unexercised
unexercised options in-the-money options
at December 31, 1999 at December 31, 1999
Shares Acquired Value ($) Exercisable/ Exercisable/
Name on Exercise Realized(2) Unexercisable Unexercisable
Richard Banakus -0- -0- 108,000/2,000 -0-/-0-
Employment Agreement
On September 19, 1997, the Board of Directors appointed Richard Banakus
to serve as President of the Company on an interim basis. The Board agreed to
pay Mr. Banakus a monthly salary of $10,000 and to reimburse his lodging
expenses in Boca Raton, Florida and travel expenses to and from California,
where Mr. Banakus resides. During April 1999, Mr. Banakus' salary was reduced to
$5,000 per month. During May 1999, the Company granted Mr. Banakus options to
purchase 100,000 shares of the Company's common stock at an exercise price of
$0.8125 per share in exchange for a further salary reduction to $1,666 per month
through the remainder of 1999.
Compensation of Directors
Employees of the Company who also serve as directors are not entitled
to any additional compensation for such service, except for Mr. Richard Banakus,
Chairman of the Board, because of his status as Interim President. The Company
does not have a written employment agreement with Mr. Banakus.
Nonemployee directors receive an annual fee of $5,000, paid quarterly.
During Fiscal 1999, each of Messrs. Richard Banakus, Mark Egide, Karen Gray and
Charles Johnston were paid $5,000 for their service as a director; and Harvey
Tauman was paid $3,750 for his service as a director.
- ----------
(1) Total value of unexercised options is based upon the closing price ($.4375)
of the Common Stock as reported by NASDAQ on December 31, 1999.
(2) Value realized in dollars is the amount that the shareholder is deemed to
have received as the result of the exercise of options, based upon the
difference between the fair market value of the Common Stock as reported by
NASDAQ on the date of exercise and the exercise price of the options.
23
The 1993 Nonemployee Director Stock Option Plan ("1993 Plan") was
adopted by the Board of Directors on December 22, 1993, approved by the
shareholders on July 19, 1994 and approved, as amended, by the shareholders on
December 17, 1997. The purpose of the 1993 Plan is to assist the Company in
attracting and retaining key directors who are responsible for continuing the
growth and success of the Company. No options were granted under the 1993 Plan
during the year ended December 31, 1999.
On November 10, 1997, the Board of Directors of the Company adopted the
1997 Nonemployee Stock Option Plan ("1997 Plan"). This plan was approved by the
shareholders on December 17, 1997. The purpose of the 1997 Plan is to assist the
Company in attracting and retaining experienced and knowledgeable nonemployee
directors who will continue to work for the best interests of the Company.
The 1997 Plan provides nonqualified stock options for nonemployee
directors to purchase an aggregate of 100,000 shares of Common Stock, with
grants of options to purchase 2,000 shares to each nonemployee director on
October 1, 1997, grants of options to purchase 2,000 shares on each May 1st
thereafter (starting in 1999), and grants of options to purchase 2,000 shares
upon election or appointment of any new nonemployee directors. The options are
not exercisable for a one-year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option. Under the provisions
of the 1997 Plan, Mark Egide, Karen Gray and Charles Johnson were granted
options to purchase 2,000 shares of the Company's common stock at an exercise
price of $.91875 on May 1, 1999. As a new Board member, Harvey Tauman was
granted an option to purchase 2,000 shares of the Company's common stock at an
exercise price of $.72185 on May 21, 1999.
The 1997 Plan also provides nonqualified stock options for nonemployee
directors who serve on committees of the Board of Directors. The options are not
exercisable for a one year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option. No options were
granted under this provision of the 1997 Plan during the year ended December 31,
1999.
During August 1999, the Company agreed to grant an option to purchase
18,000 shares of the Company`s common stock to each of the five individuals
comprising the Board of Directors, subject to shareholders' approval at the next
annual meeting at an exercise price of $.64065 per share. Since the options have
not been granted pending shareholders' approval, the options are not reflected
as outstanding as of December 31, 1999.
24
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of July 31, 2000
regarding (i) the share ownership of the Company by each person who is known to
the Company to be the record or beneficial owner of more than five percent (5%)
of the Common Stock, (ii) the share ownership of each director of the Company,
(iii) the Chief Executive Officer of the Company and each other most highly paid
executive officer of the Company who earned in excess of $100,000 during the
year ended December 31, 1999, and (iv) the share ownership of the Company of all
directors and executive officers of the Company, as a group (six persons).
Name and Address of Amount and Nature of Approximate
Beneficial Owner Beneficial Ownership Percent of Class
Richard Banakus 448,000(3) 7.0%
82 Verssimo Drive
Novato, CA 94947
Karen Gray 9,000(4) Less than 1%
P.O. Box 478
Cutchogue, NY 11935
Charles Johnston 84,500(5) 1.7%
706 Ocean Drive
Juno Beach, FL 33408
Joshua Rochlin -(6) Less than 1%
1365 Milford Terrace
Teaneck, NJ 07666
All directors and executive officers as 543,500(7) 11.3%
a group (6 persons)
Item 13. Certain Relationships and Related Transactions
During Fiscal 1999, Karen Gray, a director of the Company since
December 1997, was paid a total of $43,199 in consulting fees and reimbursement
of disbursements incurred on behalf of the Company. Ms. Gray advises the Company
on matters relating to marketing and communications.
- ----------
(3) Consists of 340,000 shares held directly and 108,000 shares issuable upon
exercise of options. Does not include 19,500 shares of Common Stock underlying
options not currently exercisable.
(4) Consists of 3,000 shares held directly and 6,000 shares issuable upon
exercise of options. Does not include 20,000 shares of Common Stock underlying
options not currently exercisable.
(5) Consists of 80,000 shares held directly and 4,500 shares issuable upon
exercise of options. Does not include 20,000 shares of Common Stock underlying
options not currently exercisable.
(6) Does not include 2,000 shares of Common Stock underlying options not
currently exercisable.
(7) Consists of 423,000 shares held directly and 120,500 shares issuable upon
exercise of options. Does not include 61,500 shares of Common Stock underlying
options not currently exercisable.
25
The Company has also paid a consultant, who was a director from September 1997
to October 1998, advisory fees and expense reimbursements of approximately
$130,000 during the year ended December 31, 1999.
26
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following financial statements required by Item 8 follow Item 14 of this
Report:
Page
Reports of Independent Certified Public Accountants 32-33
Financial Statements:
Consolidated Balance Sheets, December 31,
1999 and 1998 34
Consolidated Statements of Operations for the
Years ended December 31, 1999, 1998 and 1997 35
Consolidated Statements of Shareholders'
Equity for the Years ended December 31,
1999, 1998 and 1997 36
Consolidated Statements of Cash Flows for the
Years ended December 31, 1999, 1998 and 1997 37
Notes to Consolidated Financial Statements 38-55
All financial schedules are omitted since the required information is not
present, is not in significant amounts sufficient to require submission of the
schedules or because the information required is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) Exhibits
3.1 Restated Certificate of Incorporation of Dento-Med Industries, Inc.
("Dento-Med"), as filed with the Secretary of State of New York on March 4,
1981.(8)
3.2 By-laws of the Company, as amended March 17, 1988.(9)
- ----------
(8) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1985.
(9) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987.
27
3.3 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of New York on November 14, 1988
(filed as Exhibit 3.2 therein).(10)
3.4 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of New York on July 30,
1993.(11)
4.0 Non-Qualified Stock Option Plan.(12)
4.1 Incentive Stock Option Plan, as amended January 2, 1987.(9)
4.2 1989 Stock Option Plan(13)
4.10 1993 Nonemployee Director Stock Option Plan.(11)
4.11 Warrant Purchase Agreement dated as of May 31, 1996 between QVC and the
Company, filed as Exhibit 4.1 therein.(14)
10.6 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Harvey Tauman (filed therein as Exhibit 10.8).(10)
10.8 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Frank Fiur (filed therein as Exhibit 10.10).(10)
10.9 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Chaudhury M. Prasad (filed therein as Exhibit 10.11).(10)
10.10 Agreement between Dento-Med and National Patent dated November 30,
1989.(15)
10.11 Indemnification Agreement dated May 9, 1989 between Dento-Med and Samuel
M. Leb, M.D.(13)
10.12 Indemnification Agreement dated May 9, 1989 between Dento-Med and Richard
Tauman.(13)
10.13 Indemnification Agreement dated January 14, 1992 between Dento-Med and
Joseph A. Caccamo, Attorney at Law, P.C.(16)
- ----------
(10) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1988.
(11) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1993.
(12) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1986.
(13) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1989.
(14) Incorporated by reference to the Company's report on Form 8-K (date of
event - July 19, 1996).
(15) Incorporated by reference to the Company's report on Form 8-K (date of
event - November 30, 1989).
(16) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1991.
28
10.23 License Agreement dated December 6, 1993 between QVC Network, Inc. and the
Company (filed in excised form, as confidential treatment has been granted for
certain portions thereof).(17)
10.24 Amended and Restated Employment Agreement between Dento-Med and Harvey
Tauman dated May 13, 1993.(11)
10.25 Amendment to Amended and Restated Employment Agreement between Dento-Med
and Harvey Tauman dated December 20, 1993.(11)
10.26 Amended and Restated Employment Agreement between Dento-Med and Chaudhury
M. Prasad dated May 13, 1993.(11)
10.27 Indemnification Agreement dated April 22, 1993 between the Company and
Nestor Cardero.(11)
10.28 Indemnification Agreement dated April 22, 1993 between the Company and
Karen Gray.(11)
10.31 Letter Agreement among QDirect, Inc., Hydron Direct, Inc. and DTR
Associates dated January 17, 1995.(18)
10.35 Employment Agreement dated September 16, 1994 between the Company and
Richard Tauman.(19)
10.36 Letter Agreement dated December 22, 1994 among the Company, Roy Reiner and
Chemaid Laboratories, Inc.(19)
10.37 Indemnification Agreement dated February 21, 1995 between the Company and
Thomas G. Burns.(19)
10.38 Lease for 1001 Yamato Road, Suite 403, Boca Raton, Florida between PFRS
Yamato Corp. and the Company dated May 8, 1995.(20)
10.39 First Amendment to Lease for 1001 Yamato Road, Suite 403, Boca Raton,
Florida between PFRS Yamato Corp. and the Company dated September 15, 1995.(20)
10.40 Agreement for use and occupancy of a portion of 5 East Building, 95
Mayhill Street, Saddle Brook, New Jersey, between Chemaid Laboratories, Inc. and
the Company dated February 9, 1996.(20)
- ----------
(17) Incorporated by reference to the Company's report on Form 8-K (date of
event - December 6, 1993), as amended by the Form 8, Amendment No. 1 to such
Report.
(18) Incorporated by reference to the Company's report on Form 8-K (date of
event - January 21, 1995).
(19) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1994
(20) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1995.
29
10.41 Depository Agreement between Chemaid Laboratories, Inc. and the Company
dated February 9, 1996.(20)
10.42 Consulting Agreement between Charles Fox Associates, Inc. and the Company
dated February 5, 1996.(20)
10.43 First Amendment to Licensing Agreement dated May 31, 1996 between QVC and
the Company, files as Exhibit 10.1 therein.(14)
10.44 Letter Agreement between QDirect, Inc. and Hydron Direct, Inc. dated May
31, 1996, filed as Exhibit 10.2 therein.(14)
10.45 Lease Agreement between Industrial Office Associates and the Company dated
March 10, 1997.(21)
10.46 Sponsorship Agreement with Pro Player Stadium dated January 1, 1997.(21)
10.48 Executive Suite License Agreement dated March 4, 1997.(21)
10.49 Sponsorship Agreement with Miami Heat Limited Partnership and Sunshine
Network dated December 1996.(21)
10.50 Consulting Agreement between Charles Fox Associates, Inc. and the Company
dated May 20, 1997.(22)
10.51 Personal Appearance Agreement between Mr. Charles Fox and the Company
dated May 20, 1997.(22)
10.52 Second Amendment to Licensing Agreement dated June 11, 1997 between QVC
and the Company.(22)
10.53 Letter Agreement between QVC and the Company dated October 17, 1997.(22)
10.54 Consulting Agreement between Gloria Barton and the Company dated November
1, 1997.(22)
10.55 Service Agreement between Lauren Anderson and the Company dated January 1,
1998.(22)
10.56 Amendment to Employment Agreement between Richard Tauman and the Company
dated August 13, 1998.(23)
10.57 Consulting Agreement between Richard Tauman and the Company dated December
1, 1998.(23)
- ----------
(21) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1996.
(22) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1997.
30
10.58 Marketing and Distribution Agreement between Home Shopping Club LP and the
Company dated September 1, 1999(23)
Amendment to 1993 Nonemployee Director Stock Option Plan.(24)
1997 Nonemployee Director Stock Option Plan.(24)
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Certified Public Accountants.
23.2 Consent of Daszkal Bolton Manela Devlin & Co., Independent Certified Public
Accountants.
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K (date of report December 29, 1999), dated December
23, 1999, reporting items 4 and 7.
- ----------
(23) Incorporated by reference to the Company's report on Form 8-K (date of
report September 14, 1999), dated September 1, 1999.
(24) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A for the year ended December 31, 1996.
31
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Hydron Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Hydron
Technologies, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hydron
Technologies, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
West Palm Beach, Florida
March 5, 1999
32
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Hydron Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Hydron
Technologies, Inc. and subsidiaries (the Company) as of December 31, 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hydron
Technologies, Inc. and subsidiaries at December 31, 1999, and the consolidated
results of their operations and their cash flows for the year ended December 31,
1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company experienced losses from operations
in 1999, 1998, and 1997. These matters raise doubt about the Company's ability
to continue as a going concern. Direct marketing techniques have been
implemented to increase the more profitable Catalog sales, add new customers and
take advantage of new channels of distribution (see note 12 to Consolidated
Financial Statements). The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Daszkal Bolton Manela Devlin & Co.
Boca Raton, Florida
July 27, 2000
33
Hydron Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1999 1998
------------ ------------
Assets
Current assets:
Cash, including cash equivalents of $0 and $1,896,521
at December 31, 1999 and 1998, respectively $ 653,916 $ 2,127,781
Trade accounts receivable 38,490 428,817
Inventories 1,438,292 1,751,353
Prepaid expenses and other current assets 118,453 72,610
------------ ------------
Total current assets 2,249,151 4,380,561
Property and equipment, less accumulated depreciation
of $758,081 and $635,816 at December 31, 1999
and 1998, respectively 286,743 550,773
Deferred product costs, less accumulated
amortization of $4,914,191 and $4,623,451 at
December 31, 1999 and 1998, respectively 1,060,238 1,350,978
Investment in joint venture 62,721 53,534
Deposits 176,450 305,587
------------ ------------
$ 3,835,303 $ 6,641,433
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 127,543 $ 261,581
Accrued liabilities 642,488 405,281
------------ ------------
Total current liabilities 770,031 666,862
Commitments and contingencies
Shareholders' equity:
Common Stock; $.01 par value; 30,000,000 shares
authorized; 5,035,336 and 4,960,336 shares issued,
4,975,136 and 4,910,136 shares outstanding at
December 31, 1999 and 1998, respectively 50,353 49,603
Additional paid-in capital 19,501,837 19,429,931
Accumulated deficit (16,047,760) (13,073,618)
Treasury Stock, at cost, 60,200 shares and 50,200
shares at December 31, 1999 and 1998, respectively (439,158) (431,345)
------------ ------------
Total shareholders' equity 3,065,272 5,974,571
------------ ------------
$ 3,835,303 $ 6,641,433
============ ============
See accompanying notes.
34
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Net sales $ 2,593,448 $ 3,983,303 $ 7,305,154
Cost of sales 1,237,816 1,590,148 2,904,042
Write down of inventory 794,362 442,254 651,270
----------- ----------- -----------
Gross profit 561,270 1,950,901 3,749,842
Expenses:
Royalty expense 141,974 214,414 386,707
Research and development 211,956 350,829 304,910
Selling, general and administrative 2,160,227 2,311,279 5,342,629
Employment contact settlement costs 620,099 627,713 74,729
Amortization of deferred product costs 290,740 309,501 308,374
Depreciation and amortization 200,463 204,514 182,283
----------- ----------- -----------
3,625,459 4,018,250 6,599,632
----------- ----------- -----------
Operating loss (3,064,189) (2,067,349) (2,849,790)
Other income:
Interest and investment income 80,860 144,203 211,371
Equity in earnings of joint venture 9,187 40,479 49,927
----------- ----------- -----------
90,047 184,682 261,298
----------- ----------- -----------
Loss before income taxes (2,974,142) (1,882,667) (2,588,492)
Income tax expense -- -- --
----------- ----------- -----------
Net loss $(2,974,142) $(1,882,667) $(2,588,492)
=========== =========== ===========
Basic and diluted earnings per share
Net loss per common share $ (.60) $ (.38) $ (.54)
=========== =========== ===========
See accompanying notes.
35
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Additional Treasury
Common Stock Paid-in Accumulated Stock Total
Shares Amount Capital Deficit (at cost) Equity
--------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1996 4,646,675 $46,466 $20,537,473 $ (8,602,459) $ -- $11,981,480
Issuance of common stock
for services 2,661 27 33,236 -- -- 33,263
Issuance of common stock upon
exercise of stock options 311,000 3,110 93,140 -- -- 96,250
Purchase of treasury shares,
at cost (50,200 shares) -- -- -- -- (431,345) (431,345)
Net loss -- -- -- (2,588,492) -- (2,588,492)
Cash dividends ($.25 per share) -- -- (1,233,918) -- -- (1,233,918)
--------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1997 4,960,336 49,603 19,429,931 (11,190,951) (431,345) 7,857,238
Net loss -- -- -- (1,882,667) - (1,882,667)
--------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1998 4,960,336 49,603 19,429,931 (13,073,618) (431,345) 5,974,571
Issuance of common stock
for services 75,000 750 71,906 -- -- 72,656
Purchase of treasury shares,
at cost (10,000 shares) -- -- -- -- (7,813) (7,813)
Net Loss -- -- -- (2,974,142) -- (2,974,142)
--------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1999 5,035,336 $50,353 $19,501,837 $(16,047,760) $(439,158) $ 3,065,272
========= ======= =========== ============ ========= ===========
See accompanying notes.
36
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Operating activities
Net loss $(2,974,142) $(1,882,667) $(2,588,492)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 491,203 514,015 490,657
Loss on disposal of property & equipment 55,216 -- --
Equity in earnings of joint venture (9,187) (40,479) (49,927)
Issuance of common stock for services 72,656 -- 33,263
Write down of inventory 794,362 442,254 651,270
Changes in operating assets and liabilities:
Trade accounts receivable 390,327 125,659 57,255
Inventories (481,301) 604,788 (622,981)
Prepaid expenses and other current
assets (45,843) 58,952 386,021
Deposits 129,137 144,397 (48,590)
Accounts payable (134,038) (319,016) 127,260
Accrued liabilities 237,207 91,773 7,185
----------- ----------- -----------
Net cash used by operating activities (1,474,403) (260,324) (1,557,079)
Investing activities
Capital expenditures -- (20,617) (337,261)
Payments for registering patents -- -- (6,633)
Proceeds from joint venture -- 275,000 --
Proceeds from sale of fixed assets 8,351 -- --
----------- ----------- -----------
Net cash provided (used) by investing activities 8,351 254,383 (343,894)
Financing activities
Proceeds from issuance of common stock -- -- 96,250
Dividends paid -- -- (1,233,918)
Purchase of treasury stock (7,813) -- (431,345)
----------- ----------- -----------
Net cash used by financing activities (7,813) -- (1,569,013)
----------- ----------- -----------
Decrease in cash and cash equivalents (1,473,865) (5,941) (3,469,986)
Cash and cash equivalents at beginning of year 2,127,781 2,133,722 5,603,708
----------- ----------- -----------
Cash and cash equivalents at end of year $ 653,916 $ 2,127,781 $ 2,133,722
=========== =========== ===========
See accompanying notes.
37
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. Description of Business and Summary of Significant Accounting Policies
Organization of Business
Hydron Technologies, Inc. and subsidiaries (the "Company") sell consumer and
professional products, primarily in the personal care/cosmetics field. The
Company has a licensing agreement with Home Shopping Club LP ("HSN"), whereby
HSN purchases the Company's products and takes physical possession of these
products prior to HSN's sale of the products to the ultimate end user. The
products are sold and shipped to the end user by HSN. The sales of the Company's
products to HSN are sold under terms typical to HSN through its Master Terms and
Conditions contract.
The Company also holds the exclusive license with National Patent Development
Corporation ("National Patent") to a Hydron polymer-based drug delivery system
for topically applied, nonprescription pharmaceutical products, which the
Company intends to use to develop proprietary products or license to third
parties.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
all subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. The Company's investment in a joint venture is
accounted for using the equity method of accounting.
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes amounts not covered by the Federal Deposit
Insurance Commission. The risk associated with these amounts is considered low
due to the credit quality of the institutions.
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents. The credit
risk associated with cash equivalents is considered low due to the credit
quality of the issuers of the financial instruments.
38
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Concentration of Credit Risk
Trade accounts receivable are due primarily from HSN and QVC, Inc. (QVC) which
are usually paid to the Company within 30 days after HSN's and QVC's receipt of
goods. The Company performs ongoing evaluations of its significant customers and
does not require collateral.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market, and
include finished goods, packaging and raw materials. The 1998 amount classified
as work-in-process, which represents individual components of future products,
has been restated and combined in the Raw Materials and Components
classification. The Company believes that this classification better describes
the items involved (see Note 2).
Long-Lived Assets
Long-lived assets, consisting primarily of deferred product costs, are accounted
for in accordance with Financial Accounting Standards Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." FASB Statement No. 121 requires impairment losses be
recognized for long-lived assets when indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the assets' carrying
amount. The Company analyzes undiscounted cash flows on an annual basis. No
impairment losses have been recognized in the three year period ended December
31, 1999.
Property and Equipment
Property and equipment, consisting primarily of office leasehold improvements,
furniture and equipment, is carried at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets, ranging from four to six years (see Note 3).
Deferred Product Costs
Deferred product costs consist primarily of costs incurred for the purchase and
development of patents and product rights (see Note 4). The deferred product
costs are being amortized over their estimated useful lives of eight to 20 years
using the straight-line method.
39
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Common Stock, Common Stock Options and Net Loss Per Share
On October 1, 1998, the Company's shareholders approved a one-for-five reverse
stock split of the Company's Common Stock, which became effective on October 19,
1998. All share data and per share amounts have been adjusted to reflect the
reverse stock split on a retroactive basis.
When the Company issues shares of common stock in exchange for services, an
expense is recognized over the period in which the services are rendered based
upon the fair value of such shares at the date such arrangements are consummated
or authorized by the Board of Directors, with a corresponding credit to capital.
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock options and has adopted the disclosure-only provisions
of FASB Statement No. 123, "Accounting and Disclosure of Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's stock option plans.
Revenue Recognition and Product Warranty
Revenue from product sales is recognized at the time of shipment. Provision is
made in the period of the sale for estimated product returns from the ultimate
end user.
Research and Development
Research and development costs are charged to operations when incurred and are
included in operating expenses.
Advertising
Advertising costs are expensed as incurred and are included in "selling, general
and administrative expenses." Advertising expenses amounted to approximately
$263,000, $112,000 and $1,516,000 for 1999, 1998 and 1997, respectively.
40
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Employment Contract Settlement
For the years' ended December 31, 1999, 1998 and 1997, the Company recorded
charges of $620,099, $627,713 and $74,729, respectively, for the settlement and
associated legal fees regarding three employment contracts. These contracts,
which originated during 1993 and 1994, overburdened the Company's operations
during a transition period when Company's revenues could not support the
contracts. The Company does not currently have any employment contracts.
2. Inventories
At December 31, 1999 and 1998, inventories consist of the following:
1999 1998
---------- ----------
Finished goods $ 753,692 $ 909,928
Raw materials and components 684,600 841,425
---------- ----------
$1,438,292 $1,751,353
========== ==========
The results of operations include a charge of $794,362, $442,254 and $651,270
for the years ended December 31, 1999, 1998 and 1997, respectively. These
charges relate primarily to the write down, to net realizable value, of
components and finished goods of products that the Company does not plan to
promote in the future, which consist mainly of products outside of the
traditional skin care product line, such as hair care, sun care, bath and body
products and other products.
The 1998 raw materials and components balance of $841,425 includes $199,374 that
was previously classified as work-in-process. In addition, the write down of
inventory shown in the Consolidated Statement of Operations has been
reclassified to reflect it as a cost of sales. Although these write downs have
been abnormally high due to the changes in distribution channels and packaging,
management believes that some inventory obsolesces and revitalized packaging is
an annual cost of producing revenue growth in this industry.
41
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
At December 31, 1999 and 1998, property and equipment consist of the following:
1999 1998
----------- -----------
Furniture and equipment $ 576,572 $ 695,239
Leasehold improvements 468,252 491,350
----------- -----------
1,044,824 1,186,589
Less accumulated depreciation (758,081) (635,816)
----------- -----------
$ 286,743 $ 550,773
=========== ===========
4. Deferred Product Costs and Royalty Agreements
From 1976 through 1989, the Company and National Patent entered into various
agreements, wherein the Company obtained the exclusive worldwide rights to
market products using Hydron polymers in the consumer and oral health fields,
the two fields in which the Company has concentrated its research and
development efforts, and to utilize the Hydron polymer as a drug release
mechanism in topically applied, nonprescription pharmaceutical products. The
Hydron polymer is the underlying technology in substantially all of the
Company's products. National Patent has the exclusive worldwide rights to market
prescription drugs and medical devices using Hydron polymers. Further, each has
the right to exploit products with Hydron polymers not in the other's exclusive
fields. As consideration for product rights obtained, the Company issued
National Patent an aggregate of 220,000 shares of common stock through 1989,
valued at $5,370,000. The valuation for these shares was based on the market
prices of the Company's common stock at the dates the agreements were made.
The agreements require the Company to pay a 5% royalty to National Patent based
on the net sales of products containing the Hydron polymer. Additionally,
National Patent is required to pay the Company a 5% royalty on its net sales of
Hydron polymer-based products, except with respect to certain excluded products.
In the area of prescription and nonprescription drugs using Hydron polymers as a
drug release mechanism, both the Company and National Patent have agreed to pay
the other a royalty equal to 5% of net sales received from third parties with
regard to such products developed. In addition, each will pay the other 25% of
any up-front license fees, royalties or similar payments received from third
parties with regard to such products developed in the area of nonprescription
drugs.
42
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
4. Deferred Product Costs and Royalty Agreements (continued)
For the years ended December 31, 1999, 1998 and 1997, the Company incurred
royalties payable to National Patent of approximately $130,000, $190,000 and
$330,000, respectively. The Company has not received any royalties from National
Patent during these periods.
5. Investment in Joint Venture
During 1995, the Company entered into an agreement with QVC and another company
to form a joint venture known as Hydromercial Partners (the "Joint Venture").
The purpose of the Joint Venture was to provide and sell the Company's Hydron
polymer-based skin care line by means of a thirty (30) minute commercial
("Infomercial") which the Joint Venture produced. As of March 31, 2000, the
Joint Venture has discontinued operations and is expected to be dissolved during
the year ended December 31, 2000. The Company will receive any inventory and 50%
of the proceeds from liquidation. The amount to be realized is expected to
exceed the carrying value in the balance sheet.
6. Significant Customer
The Company presently sells a substantial portion of its products to HSN and
QVC. The percent of Company's sales for the years ended December 31, 1999, 1998
and 1997 and trade receivable balances as of December 31, 1999, 1998 and 1997
are as follows:
1999 1998 1997
Percent of Sales
HSN 25% - --
QVC 43% 79% 82%
Trade Receivables
HSN $ 34,743 -- --
QVC $ 3,747 $427,000 $538,000
The Company entered into a license agreement with QVC, Inc. ("QVC License
Agreement") in 1993, whereby QVC was granted exclusive rights to market and
distribute the Company's proprietary consumer products using Hydron polymers in
the Western Hemisphere. In 1996, the Company and QVC modified the QVC License
Agreement ("Amended License Agreement"), whereby the Company reacquired certain
retail marketing rights to the Hydron product line. Such retail marketing rights
included prestige retail channels of distribution such as traditional department
and specialty stores, boutique stores and beauty salons, as well as catalog
sales. QVC was entitled to receive a commission from the Company on any such
sales.
43
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
6. Significant Customer (continued)
In addition, the Amended License Agreement increased the minimum product
purchase requirements QVC was required to meet, on an annual basis over a
two-year term ended May 31, 1998, to maintain its exclusive rights to market
Hydron consumer products in the Western Hemisphere, through all channels of
distribution except as noted above. QVC did not meet the annual minimum product
purchase requirements to maintain exclusivity for the year ended May 31, 1997.
On June 11, 1997, the Company and QVC renegotiated the Amended License Agreement
("Renegotiated License Agreement") pursuant to which the term of the Amended
License Agreement was extended to May 31, 1999. Under the terms of the
Renegotiated License Agreement, QVC was required to meet certain minimum product
purchase requirements during each two-year period during the term of the
agreement, as well as annual minimum product purchase requirements, to maintain
its exclusive rights. No obligation existed for QVC to purchase the Company's
product, except to maintain such exclusive rights, and no assurances could be
given that QVC would meet the escalating minimum purchase levels for subsequent
years in order to maintain such exclusive rights. If QVC had met the stipulated
minimum product purchase requirements, then the Renegotiated License Agreement
would have renewed automatically. If QVC did not meet the annual minimum product
purchase requirements, the Company could elect to continue or terminate the
Renegotiated License Agreement as of the end of each contract year during the
term.
Although QVC did not satisfy the minimum product purchase requirements for the
period ended May 31, 1998, the Company elected to continue the Renegotiated
License Agreement at that time. Effective May 31, 1999, the Company terminated
the Renegotiated License Agreement as a result of QVC's failure to satisfy the
annual minimum product purchase requirements for the period ended May 31, 1999.
Under the terms of the Renegotiated License Agreement, QVC had a period of 30
days, commencing with the Company's notice to QVC of its decision to terminate,
to satisfy the minimum product purchase requirements. As the deficiency was not
cured during that time, the Renegotiated License Agreement terminated May 31,
1999. Under the terms of the Renegotiated License Agreement, following
termination thereof, the Company could not market or sell certain Hydron
products through direct response television in the Western Hemisphere, for a
period of three months ending September 1, 1999.
The Company continues to sell certain product to QVC, on a non-exclusive basis,
so that QVC can resell these products to their customers who had previously
purchased and wish to re-order Hydron products.
44
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
6. Significant Customer (continued)
Effective September 1, 1999, the Company entered into a marketing and
distribution agreement (the "Home Shopping Agreement") with HSN, that grants HSN
an exclusive worldwide license to market and distribute certain of the Company's
proprietary consumer products through various forms of electronic retailing. The
Home Shopping Agreement also grants HSN a non-exclusive license to market Hydron
products through all other methods of distribution in certain countries outside
the United States.
Under the terms of the Home Shopping Agreement, HSN will make minimum product
purchases i) during the period ending 12 months following the date on which the
products first aired on HSN's television programs, and ii) during the second 12
months following the date of the first airing (the "Initial Term"), should HSN
exceed a certain threshold amount in retail sales of Hydron products to
consumers during the Initial Term. The term of the Home Shopping Agreement may
be automatically renewed after the Initial Term for an indefinite number of
successive one-year periods, subject to HSN's achieving certain escalating
threshold levels in product purchases. However, beginning in the third contract
year, HSN will no longer be required to make minimum product purchases, except
to maintain exclusivity.
The Company launched its products on HSN's television network on September 16,
1999. Hydron products have since been featured in "Hydron Skin Care Solutions"
hours during 7 of the first 11 months of the Home Shopping Agreement and are
expected to air regularly on HSN's television programs. In addition to selling
Hydron products on-air, HSN provides brand development, and marketing promotion
and support for the products, including direct mail, sampling, outbound
telemarketing, package inserts, advertising and publicity programs, the costs
and expenses of which are shared equally by HSN and the Company.
7. Income Taxes
The Company accounts for income taxes under FASB Statement No. 109, "Accounting
for Income Taxes" (FASB 109). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
There has been no income tax expense during the three years ended December 31,
1999.
45
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
1999 1998 1997
----------- ----------- -----------
Net operating loss carryforwards $ 6,478,000 $ 5,414,000 $ 4,956,000
Tax credit carryforwards 180,000 215,000 191,000
Other 951,000 819,000 392,000
----------- ----------- -----------
Deferred tax assets 7,609,000 6,448,000 5,539,000
Less valuation allowance (7,609,000) (6,448,000) (5,539,000)
----------- ----------- -----------
Total net deferred taxes $ -- $ -- $ --
=========== =========== ===========
FASB 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, Management has
determined that a $7,609,000 valuation allowance at December 31, 1999 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The valuation allowance increased (decreased) by
$1,161,000, $909,000 and $1,034,000 in 1999, 1998 and 1997, respectively. At
December 31, 1999, the Company has available net operating loss carryforwards of
$17,048,000, which will expire beginning in the year 2002 and through the year
2014. The tax benefit relating to $2,745,000 of the above net operating loss
carryforwards will be charged to shareholders' equity in the period in which the
benefit is recognized.
The reconciliation of income tax rates, computed at the U.S. federal statutory
tax rates, to income tax expense is as follows:
Year ended December 31
1999 1998 1997
------ ------ ------
Tax at U.S. statutory rates (34) % (34) % (34) %
State income taxes, net of federal tax benefit (4) (4) (4)
Valuation allowance adjustments 38 38 38
------ ------ ------
-0- % -0- % -0- %
====== ====== ======
46
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Options and Warrants
The number of shares of common stock reserved for issuance at December 31, 1999
and 1998 was 411,100 and 363,100, respectively.
1989 Stock Option Plan
Under the 1989 Stock Option Plan, the Company may grant incentive stock options,
nonqualified stock options and/or stock appreciation rights to key employees,
officers, directors and consultants of the Company, and its present and future
subsidiaries to purchase an aggregate of 200,000 shares of the Company's common
stock. Activity with respect to this plan is as follows:
Weighted
Average
Number of Option Price Exercise
Options Per Share Price
Outstanding at December 31, 1996 15,200 7.19 to 15.00 10.80
Stock options expired (5,000) 7.19 7.19
-------
Outstanding at December 31, 1997 10,200 12.50 to 15.00 12.55
Stock options expired (10,000) 12.50 12.50
-------
Outstanding at December 31, 1998 200 15.00 15.00
Stock options expired (200) 15.00 15.00
-------
Outstanding at December 31, 1999 --
=======
These options expire five years from the date of the grant. There are no
outstanding options at December 31, 1999. There are 12,100 options available for
grant under this plan at December 31, 1999.
47
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Options and Warrants (continued)
1993 Stock Option Plan
Under the 1993 Stock Option Plan, the Company may grant incentive stock options,
nonqualified stock options and/or stock appreciation rights to key employees,
officers, directors and consultants of the Company to purchase an aggregate of
200,000 shares of the Company's common stock. Activity with respect to this plan
is as follows:
Weighted
Average
Number of Option Price Exercise
Options Per Share Price
Outstanding at December 31, 1996 86,500 11.43 to 23.03 15.20
Stock options granted 13,000 9.38 to 10.00 9.81
Stock options expired (68,000) 9.38 to 13.13 12.22
-------
Outstanding at December 31, 1997 31,500 10.00 to 23.03 17.81
Stock options granted 15,500 .53 to 2.42 .78
Stock options expired (2,000) 10.00 10.00
-------
Outstanding at December 31, 1998 45,000 .53 to 23.03 12.29
Stock options granted 119,500 .64 to .92 .79
Stock options expired (37,500) .53 to 23.03 13.83
-------
Outstanding at December 31, 1999 127,000 .53 to 11.43 .98
=======
These options expire five years from the date of the grant and all but 119,500
of the outstanding options are exercisable at December 31, 1999. There are no
options available for grant under this plan at December 31, 1999.
48
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Options and Warrants (continued)
1993 Nonemployee Director Stock Option Plan
The 1993 Nonemployee Director Stock Option Plan provides grants of stock options
to nonemployee directors of the Company to purchase an aggregate of 50,000
shares of the Company's common stock. Activity with respect to this plan is as
follows:
Weighted
Average
Number of Option Price Exercise
Options Per Share Price
Outstanding at December 31, 1996 36,000 12.50 to 28.44 18.10
Stock options granted 10,000 12.50 12.50
Stock options expired (24,000) 12.50 to 28.44 15.755
Outstanding at December 31, 1997 22,000 12.50 to 28.44 18.125
Stock options expired (2,000) 12.50 12.50
Outstanding at December 31, 1998 20,000 12.50 to 28.44 18.69
Stock options expired (4,000) 28.44 28.44
Outstanding at December 31, 1999 16,000 12.5 to 23.91 16.25
These options expire five years from the date of the grant and all outstanding
options are exercisable at December 31, 1999. There are 6,000 options available
for grant under this plan at December 31, 1999.
1997 Nonemployee Director Stock Option Plan
During 1997, the Company adopted the 1997 Nonemployee Director Stock Option
Plan. Such plan provides grants of stock options to nonemployee directors of the
Company to purchase an aggregate of 100,000 shares of the Company's common
stock. Each nonemployee director shall be granted an option to purchase 2,000
shares of the Company's common stock on each May 1st throughout the term of this
plan at exercise prices equal to the average of the fair market value of the
Company's common stock during the ten business days preceding the date of the
grant. In addition, each nonemployee director who sits on a committee of the
Board of Directors shall be granted an option to purchase 500 shares of the
Company's common stock under the same pricing arrangements as above. Subject to
certain exceptions, no options granted under this plan shall be exercisable
until one year after the date of grant.
49
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Options and Warrants (continued)
1997 Nonemployee Director Stock Option Plan (continued)
During August 1999, the Company agreed to grant an option to purchase 18,000
shares of the Company`s common stock to each of the five individuals comprising
the Board of Directors, subject to shareholders' approval at the next annual
meeting, at an exercise price of $.64065 per share. Since the options have been
granted pending shareholders' approval, the options are reflected as outstanding
as of December 31, 1999.
Activity with respect to this plan is as follows:
Weighted
Average
Number of Option Price Exercise
Options Per Share Price
Outstanding at December 31, 1996 -- -- --
Stock options granted 17,000 3.02 to 3.53 3.32
------
Outstanding at December 31, 1997 and 1998 17,000 3.02 to 3.53 3.32
Stock options granted 80,000 .64 to .92 .66
------
Outstanding at December 31, 1999 97,000 .64 to 3.53 1.13
======
These options expire five years from the date of grant and all but 80,000 of the
outstanding options are exercisable at December 31, 1999. There are 3,000
options available for grant under this plan at December 31, 1999.
Other Options and Warrants
The Company has agreements with several consultants who are to provide
financial, business and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. In exchange, these consultants were granted warrants and nonqualified
stock options to purchase shares of the Company's common stock at prices
representing the fair market value of the shares at the date of grant. Activity
with respect to options and warrants granted to these consultants is summarized
below:
50
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Options and Warrants (continued)
Other Options and Warrants (continued)
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
Outstanding at December 31, 1996 531,661 .05 to 15.00 5.85
Stock options and warrants exercised (313,661) .05 to 12.50 .42
Stock options expired (106,000) 6.88 to 15.00 13.52
--------
Outstanding at December 31, 1997 112,000 12.50 to 25.00 13.84
Stock options expired (10,000) 12.50 12.50
--------
Outstanding at December 31, 1998 102,000 13.75 to 25.00 13.97
Stock options granted 50,000 2.50 2.50
Stock options expired (2,000) 25.00 25.00
--------
Outstanding at December 31, 1999 150,000 2.50 to 25.00 10.17
========
The options and warrants outstanding at December 31, 1999 expire two to five
years after the date of grant. At December 31, 1999, all but 50,000 of the
outstanding options and warrants are exercisable.
The options under this plan that were exercised in Fiscal 1997 resulted in
proceeds of $96,250. In addition, during 1997, options were exercised for
services valued at $33,263.
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, which also requires that the information be determined
as if the Company had accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for the
years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
Risk-free interest rate 6.5 % 6.5 % 6.5 %
Expected life 3 years 3 years 3 years
Expected volatility .825 .757 .572
Expected dividend yield 0 % 0 % 5 %
51
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. Stock Options and Warrants (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different than
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in Management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
compensation expense from stock option awards on proforma net income reflects
only the vesting of 1997, 1996 and 1995 awards in 1997; the vesting of 1998,
1997, 1996 and 1995 awards in 1998, and the vesting of 1999, 1998, 1997, 1996
and 1995 awards in 1999 in accordance with Statement No. 123. Because
compensation expense associated with the stock option award is recognized over
the vesting period, the initial impact of applying Statement No. 123 may not be
indicative of compensation expense in future years, when the effect of the
amortization of multiple awards will be reflected in pro forma net income. The
effect of Statement No. 123 resulted in a pro forma net loss of $3,015,082,
$1,911,068, and $2,606,181 for the years ended December 31, 1999, 1998, and
1997, respectively. In addition, the pro forma net loss per share was $.61,
$.39, and $.55 per share for the years ended December 31, 1999, 1998 and 1997,
respectively.
The weighted average grant-date fair value of options granted during the year
ended December 31, 1999 was $.82 for options whose exercise price was equal to
the market price on the date of the grant. The weighted average grant-date fair
value of options granted during the year ended December 31, 1999 was $2.50 for
options whose exercise price greater than the market price on the date of the
grant. The weighted average remaining contractual life of all options
outstanding at December 31, 1999 was 2.3 years.
52
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Earnings per Share
The following table sets forth the computation of basic and diluted loss per
share:
Years ended December 31,
1999 1998 1997
Numerator:
Net loss is both the numerator for basic
loss per share (income available to
common shareholders) and the numerator
for diluted loss per share (income
available to common shareholders after
assumed conversions) $(2,974,142) $(1,882,667) $(2,588,492)
=========== =========== ===========
Denominator:
Denominator for basic loss per share
(weighted-average shares) 4,953,054 4,910,136 4,805,562
Effect of dilutive securities:
Stock options and warrants -- -- --
----------- ----------- -----------
Denominator for dilutive loss per
share (adjusted weighted-average) 4,953,054 4,910,136 4,805,562
=========== =========== ===========
Basic loss per share $ (.60) $ (.38) $ (.54)
=========== =========== ===========
Diluted loss per share $ (.60) $ (.38) $ (.54)
=========== =========== ===========
See Note 8 for additional disclosures regarding the stock options and warrants.
Options and warrants to purchase 302,500, 184,200 and 192,700 shares of common
stock were outstanding during 1999, 1998 and 1997, respectively, but were not
included in the computation of diluted loss per share because the effect would
be anti-dilutive to the net loss per share for the respective periods.
53
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions
During 1997, the Company hired a director as a marketing consultant, who was
paid approximately $43,000, $48,000 and $21,000 for the years ended December 31,
1999, 1998 and 1997, respectively. This consulting relationship ended in
December 1999.
The Company has also paid a consultant, who was a director from September 1997
to October 1998, advisory fees, quality control and product testing expense
reimbursements of approximately $130,000, $101,000 and $92,000 during the years
ended December 31, 1999, 1998 and 1997, respectively. Although the contract has
expired, Management has continued this agreement on a month to month basis.
During the year ended December 31, 1997, the Company paid approximately $68,000
in legal fees to an attorney who was also a director of the Company until
September 1997.
The Company sells products to any of the Company's shareholders at a 25%
discount. This discount is designed to acknowledge the appreciation of the
shareholders support and to promote the use of the products.
11. Commitments
The Company leases office and warehouse space under noncancelable lease
agreements. There is one office lease, which expires in September 2001, and two
warehouse leases, which expire in April 2000 and August 2000. During April 1999,
the Company subleased a portion of its office space and one of its warehouses to
unrelated third parties under noncancelable sublease agreements under terms
similar to the original leases. These subleases resulted in a reduction of rent
expense of approximately $65,000 in 1999. At December 31, 1999, the future
minimum rental payments due under such noncancelable leases are as follows:
2000 $ 215,000
2001 67,000
---------
$ 282,000
=========
The warehouse agreement required a deposit of approximately $385,000 that is
being utilized to pay rent and certain expenses during the last half of the
agreement term. The amount is held in a joint account with the leaseholder.
Commencing in March 1998, approximately $11,400 of the deposit was being used to
pay for approximately 50% of
54
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
the monthly warehouse rent and expenses. This agreement will expire in August
2000 and the Company's inventory will be moved to the Company's fulfillment
service contractor.
Net rent expense was approximately $226,000, $269,000, and $258,000 in 1999,
1998, and 1997, respectively.
12. Management's Plan
As shown in the accompanying consolidated financial statements, the Company
incurred net losses of $2,974,142 during the year ended December 31, 1999 and
$1882,667 for the year ended December 31, 1998. The ability of the Company to
continue as a going concern is dependent on increasing sales and reducing
operating expenses. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Management's plan to increase sales and reduce operating expenses includes
several specific actions. Catalog sales will be emphasized since they have
higher profit margins and represent a market which is growing more rapidly than
the Company's traditional television market. Direct marketing techniques will be
used to reach new and current consumers, such as promotions mailed to targeted
consumers, Web sight specials, promotions to other Web site customers, and
direct e-mail promotions.
Inventory write-downs and contract settlements of $1,414,461 and $1,069,967 were
incurred in the years ended December 31, 1999 and 1998, respectively. Steps have
been taken to prevent these types of charges in the future. In addition, annual
operating expenses have been reduced an estimated $700,000 by reducing payroll
cost, warehouse cost, consulting fees, legal fees, and insurance premiums.
No estimate has been made should Management's plan be unsuccessful.
55
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.
Hydron Technologies, Inc.
(Registrant)
By: /s/ Richard Banakus
------------------------------------
Richard Banakus, Interim President
Date: August 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
By: /s/ Richard Banakus By: /s/ William A Fagot
------------------- -------------------
Richard Banakus, William A. Fagot
Chairman of the Board (principal financial and
(principal executive officer) accounting officer)
Date: August 22, 2000 Date: August 22, 2000
By: /s/ Joshua Rochlin By: /s/ Karen Gray
------------------ --------------
Joshua Rochlin, Director Karen Gray, Director
Date: August 22, 2000 Date: August 22, 2000
By: /s/ Charles Johnston
--------------------
Charles Johnston, Director
Date: August 22, 2000
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of Dento-Med Industries, Inc.
("Dento-Med"), as filed with the Secretary of State of New York on March 4,
1981.(8)
3.2 By-laws of the Company, as amended March 17, 1988.(9)
- ----------
(8) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1985.
(9) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987.
3.3 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of New York on November 14, 1988
(filed as Exhibit 3.2 therein).(10)
3.4 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of New York on July 30,
1993.(11)
4.0 Non-Qualified Stock Option Plan.(12)
4.1 Incentive Stock Option Plan, as amended January 2, 1987.(9)
4.2 1989 Stock Option Plan(13)
4.10 1993 Nonemployee Director Stock Option Plan.(11)
4.11 Warrant Purchase Agreement dated as of May 31, 1996 between QVC and the
Company, filed as Exhibit 4.1 therein.(14)
10.6 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Harvey Tauman (filed therein as Exhibit 10.8).(10)
10.8 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Frank Fiur (filed therein as Exhibit 10.10).(10)
10.9 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Chaudhury M. Prasad (filed therein as Exhibit 10.11).(10)
10.10 Agreement between Dento-Med and National Patent dated November 30,
1989.(15)
10.11 Indemnification Agreement dated May 9, 1989 between Dento-Med and Samuel
M. Leb, M.D.(13)
10.12 Indemnification Agreement dated May 9, 1989 between Dento-Med and Richard
Tauman.(13)
10.13 Indemnification Agreement dated January 14, 1992 between Dento-Med and
Joseph A. Caccamo, Attorney at Law, P.C.(16)
- ----------
(10) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1988.
(11) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1993.
(12) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1986.
(13) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1989.
(14) Incorporated by reference to the Company's report on Form 8-K (date of
event - July 19, 1996).
(15) Incorporated by reference to the Company's report on Form 8-K (date of
event - November 30, 1989).
(16) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1991.
10.23 License Agreement dated December 6, 1993 between QVC Network, Inc. and the
Company (filed in excised form, as confidential treatment has been granted for
certain portions thereof).(17)
10.24 Amended and Restated Employment Agreement between Dento-Med and Harvey
Tauman dated May 13, 1993.(11)
10.25 Amendment to Amended and Restated Employment Agreement between Dento-Med
and Harvey Tauman dated December 20, 1993.(11)
10.26 Amended and Restated Employment Agreement between Dento-Med and Chaudhury
M. Prasad dated May 13, 1993.(11)
10.27 Indemnification Agreement dated April 22, 1993 between the Company and
Nestor Cardero.(11)
10.28 Indemnification Agreement dated April 22, 1993 between the Company and
Karen Gray.(11)
10.31 Letter Agreement among QDirect, Inc., Hydron Direct, Inc. and DTR
Associates dated January 17, 1995.(18)
10.35 Employment Agreement dated September 16, 1994 between the Company and
Richard Tauman.(19)
10.36 Letter Agreement dated December 22, 1994 among the Company, Roy Reiner and
Chemaid Laboratories, Inc.(19)
10.37 Indemnification Agreement dated February 21, 1995 between the Company and
Thomas G. Burns.(19)
10.38 Lease for 1001 Yamato Road, Suite 403, Boca Raton, Florida between PFRS
Yamato Corp. and the Company dated May 8, 1995.(20)
10.39 First Amendment to Lease for 1001 Yamato Road, Suite 403, Boca Raton,
Florida between PFRS Yamato Corp. and the Company dated September 15, 1995.(20)
10.40 Agreement for use and occupancy of a portion of 5 East Building, 95
Mayhill Street, Saddle Brook, New Jersey, between Chemaid Laboratories, Inc. and
the Company dated February 9, 1996.(20)
- ----------
(17) Incorporated by reference to the Company's report on Form 8-K (date of
event - December 6, 1993), as amended by the Form 8, Amendment No. 1 to such
Report.
(18) Incorporated by reference to the Company's report on Form 8-K (date of
event - January 21, 1995).
(19) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1994
(20) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1995.
10.41 Depository Agreement between Chemaid Laboratories, Inc. and the Company
dated February 9, 1996.(20)
10.42 Consulting Agreement between Charles Fox Associates, Inc. and the Company
dated February 5, 1996.(20)
10.43 First Amendment to Licensing Agreement dated May 31, 1996 between QVC and
the Company, files as Exhibit 10.1 therein.(14)
10.44 Letter Agreement between QDirect, Inc. and Hydron Direct, Inc. dated May
31, 1996, filed as Exhibit 10.2 therein.(14)
10.45 Lease Agreement between Industrial Office Associates and the Company dated
March 10, 1997.(21)
10.46 Sponsorship Agreement with Pro Player Stadium dated January 1, 1997.(21)
10.48 Executive Suite License Agreement dated March 4, 1997.(21)
10.49 Sponsorship Agreement with Miami Heat Limited Partnership and Sunshine
Network dated December 1996.(21)
10.50 Consulting Agreement between Charles Fox Associates, Inc. and the Company
dated May 20, 1997.(22)
10.51 Personal Appearance Agreement between Mr. Charles Fox and the Company
dated May 20, 1997.(22)
10.52 Second Amendment to Licensing Agreement dated June 11, 1997 between QVC
and the Company.(22)
10.53 Letter Agreement between QVC and the Company dated October 17, 1997.(22)
10.54 Consulting Agreement between Gloria Barton and the Company dated November
1, 1997.(22)
10.55 Service Agreement between Lauren Anderson and the Company dated January 1,
1998.(22)
10.56 Amendment to Employment Agreement between Richard Tauman and the Company
dated August 13, 1998.(23)
10.57 Consulting Agreement between Richard Tauman and the Company dated December
1, 1998.(23)
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(21) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1996.
(22) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1997.
10.58 Marketing and Distribution Agreement between Home Shopping Club LP and the
Company dated September 1, 1999(23)
Amendment to 1993 Nonemployee Director Stock Option Plan.(24)
1997 Nonemployee Director Stock Option Plan.(24)
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Certified Public Accountants.
23.2 Consent of Daszkal Bolton Manela Devlin & Co., Independent Certified Public
Accountants.
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K (date of report December 29, 1999), dated December
23, 1999, reporting items 4 and 7.
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(23) Incorporated by reference to the Company's report on Form 8-K (date of
report September 14, 1999), dated September 1, 1999.
(24) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A for the year ended December 31, 1996.