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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-K
(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, 1996 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.
(Exact name of registrant as specified in its charter)
New York 13-1574215
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1001 Yamato Road, Suite 403, Boca Raton, Florida 33431
(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
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Sections 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 /X/ NO / /
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation SK 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 10K or any other
amendment to this Form 10K. / /
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was $32,646,029 based upon the closing price of $1.625 on March
27, 1997.
Number of shares of Common Stock outstanding as of March 27, 1997: 24,776,816.
Documents Incorporated by Reference: None.
Part I
Item 1. Business
Introduction
Hydron Technologies, Inc. ("HyTech"), 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. On July 30, 1993, its name was changed from Dento-Med Industries,
Inc.
HyTech has the exclusive worldwide license to develop and market
products using Hydron(Registered Mark) polymers, a scientifically-proven
moisture attracting ingredient, in the consumer and oral health care fields, and
holds U.S. and international patents on the only known means to suspend the
Hydron polymer in a stable emulsion that is cosmetically acceptable for use in
personal care/cosmetic products, creating a new moisturizing technology for the
cosmetic and pharmaceutical industries. HyTech has concentrated its development
activities to date, primarily on the application of these biocompatible,
hydrophilic polymers in various personal care/cosmetic products for consumers
and oral care products for dental professionals. Because of their unique
properties, management believes that products which utilize Hydron polymers have
the potential for wide acceptance in consumer and professional health care
markets.
HyTech's products are currently sold in the United States exclusively
through direct response television and catalog sales, and internationally
through conventional retail stores and electronic retailing. During the fiscal
year ended December 31, 1996 ("Fiscal 1996"), substantially all sales of
HyTech were made to QVC, Inc. ("QVC"), the world's largest electronic
retailer.
Marketing
HyTech's expansion in product marketing primarily began with the
distribution of its first catalog in the middle of November 1996. HyTech also
expanded international marketing to include conventional retail store
distributorships in Australia and New Zealand, as well as electronic retailing
in Europe through an affiliate of QVC. In 1997 HyTech intends to continue the
expansion of its marketing plan in the United States, and may seek to add
distribution through prestige retail channels such as department and specialty
stores, boutiques and beauty salons.
One important aspect of management's expanding marketing plan was to
begin by testing new marketing strategies within its home state, Florida.
Management believes that the Florida market is strong and can be closely
monitored, while enabling them to determine the marketing strategy for
expanded global markets. This progressive marketing plan has taken form under
the following strategically managed areas.
-Direct Response Television
Management believes that marketing Hydron products initially through
direct response television has afforded HyTech several advantages over
conventional in-store retailing, including: cash flow that has enabled HyTech
to internally finance 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
has allowed management to make marketing decisions quickly and cost
effectively.
HyTech's personal care products are presently marketed through direct
response television in the Western Hemisphere exclusively by QVC, pursuant to
an amended license agreement with QVC. See "Amended Agreement with QVC."
Certain products are also sold in Europe by a QVC affiliate. In the United
States, QVC programming is transmitted live on cable television to
approximately sixty (60) million homes. In addition, "QVC-The Shopping
Channel," which is owned by QVC and an English partner, reaches several
million households in the United Kingdom, and QVC Deutschland GmbH, a
wholly-owned subsidiary of QVC, Inc., produces a televised shopping program
for the German market.
In Fiscal 1996, HyTech expanded its personal care, hair care and bath
and body product lines marketed on the QVC program, from twenty-one (21) items
(sku's) in Fiscal 1995 to thirty-five (35) items (sku's), five (5) of which
are from the hair care and bath and body product lines. Hair care and bath and
body items sell at a lower cost and somewhat lower margin than HyTech's skin
care products.
During Fiscal 1996, retail sales of Hydron products by QVC to
consumers decreased by twenty-two percent (22%), to approximately $16.4
million from $21 million in the fiscal year ended December 31, 1995 ("Fiscal
1995"). Retail sales of Hydron products by QVC to consumers increased thirty
percent (30%) in Fiscal 1995 from $16 million in fiscal year ended December
31, 1994 ("Fiscal 1994"). Approximately sixty-three (63%) percent of retail
sales in Fiscal 1996 occurred in connection with on-air marketing of Hydron
products by QVC, and the balance occurred as back-end or off-air sales, which
is primarily re-order business.
QVC maintains an inventory of Hydron products, which consumers may
purchase at any time. Back-end (off air) sales of Hydron products by QVC to
consumers decreased approximately six percent (6%) in Fiscal 1996 from Fiscal
1995, but increased 104% in Fiscal 1995 over Fiscal 1994.
Management believes that the lack of quality on-air time for Hydron
products resulted in the decrease in retail sales by QVC, as such lack of
quality on-air time affects both on-air retail sales as well as the reorder
business.
2
"Hydron Care" hours have been part of QVC's regularly scheduled
programming since April 1994. The hour-long, live broadcasts generally feature
most currently available products, which are sold individually or by packaging
in various combinations of products. During the second half of Fiscal 1995,
QVC began airing regularly scheduled programming, including "Hydron Care,"
approximately every eight (8) weeks instead of monthly. As a result, the
aggregate number of on-air hours declined from sixteen (16) in the first six
(6) months of Fiscal 1995, to twelve (12) in the last six (6) months of Fiscal
1995.
Although the aggregate number of on-air QVC hours was substantially
the same for Fiscal 1996 (twenty-seven (27)) as compared with twenty-eight
(28) for Fiscal 1995, HyTech was not allotted substantial prime time hours or
weekends when consumers typically increase purchases. In the first six (6)
months of Fiscal 1996, the aggregate number of on-air QVC hours was nine (9),
as compared to sixteen (16) in the first six (6) months of Fiscal 1995. In the
second six (6) months of Fiscal 1996, the aggregate number of on-air QVC hours
increased to eighteen (18) from twelve (12) for the second six (6) months of
Fiscal 1995. Although management of HyTech is constantly pursuing
opportunities to increase the quantity and quality of on-air programming on
QVC, including new program formats, line extensions that may warrant
additional programming, as well as special promotions, management of HyTech
has no control over the amount and quality of air-time that QVC allots to
Hydron products.
During Fiscal 1996 ninety-seven percent (97%), during Fiscal 1995
ninety-eight percent (98%) and in Fiscal 1994 ninety-eight percent (98%), of
HyTech's sales, were made to QVC and affiliated companies. Management
anticipates that as QVC more fully exploits its amended license, QVC will
continue to represent the greatest percentage of sales in the fiscal year
ending December 31, 1997 ("Fiscal 1997"). The loss of QVC as a customer would
have a material, adverse impact upon the financial condition of HyTech.
However, management believes that if QVC were to cease acting as HyTech's
exclusive electronic retailer in the Western Hemisphere, HyTech would attempt
to reach the existing consumer base utilizing various marketing methods. No
assurance can be given that HyTech could market its products as successfully
utilizing any of such methods.
-Catalog Sales
In November 1996, Hydron Direct Marketing ("HyDirect"), a division of
HyTech, opened a new channel of distribution for Hydron products with the
launch of the Hydron Magalog(TM). This full-color catalog offers HyTech's
personal care products for sale directly to consumers. The Magalog also
provides information on new Hydron products, educates consumers on proper skin
and hair care, responds to customer questions, and facilitates re-ordering.
Net catalog sales for the first four (4) months of operations, commencing in
November 1996 were approximately $16,000 (for one-half of the month), $45,000,
$69,000 and $203,000, respectively.
3
Management expects that increased distribution, value added
promotions, including free product samples, coupled with increased brand
awareness will continue to enhance catalog sales in Fiscal 1997. HyTech
currently markets the catalog to consumers through print advertising in
national women's magazines, as well as several athletic sponsorships and
community events. HyTech also markets the catalog to its shareholders, who
presently receive a twenty-five percent (25%) discount on all purchases
through the Hydron Magalog. Consumers can order a Hydron Magalog by calling
1-800-4-HYDRON.
In connection with its Magalog marketing program, HyTech signed
sponsorship agreements with Florida's Miami Heat professional basketball team,
the Miami Dolphins professional football team and Pro Player Stadium. Hydron
products and the 1-800-4-HYDRON number are promoted during games through
in-stadium advertising and product sampling. Brand awareness is promoted through
television and radio half-time and post game reports and broadcast segments
naming the "the Hydron Defensive Player of the Game" and "Hydron Best Defensive
Play of the Week." In addition, an over-the-counter, pharmaceutical, topical
analgesic, is promoted through 30- and 60-second direct response television and
radio advertisements on local area television and radio commercials. Management
is also seeking a sponsorship arrangement with the Florida Marlins professional
baseball team.
HyTech's sports marketing program also includes one-year sponsorships
of the Ft. Lauderdale Diving Team in Ft. Lauderdale, FL, and the United States
Olympic Training Center Men's Gymnastics Team in Colorado Springs, CO, signed
in June 12, 1996 and April 19, 1996, respectively. Both teams sent athletes to
the 1996 Olympic Games, and endorsed Hydron sunscreen, moisturizing and
topical analgesic products during U.S. and international competitions.
In the near future, the Hydron Magalog and on-line ordering through
an "Internet shopping cart" will be available directly to consumers through
HyTech's web site at http://www.hydron.com.
-Infomercials
In January 1995, HyTech entered into an agreement with two other
companies to form a joint venture known as Hydromercial Partners (the "Joint
Venture") to promote and sell HyTech's Hydron polymer-based skin care products
through a thirty (30) minute commercial ("Infomercial"), which the Joint
Venture has produced. Each company had a one-third interest in the profits and
losses of the Joint Venture, which had an initial term of two (2) years,
subject to renewal on an annual basis thereafter upon unanimous consent of all
of the Joint Venture participants. The Infomercial, which featured an eight
(8) product Hydron skin care collection, aired regularly on regional broadcast
and national cable networks from September 1995, following the completion of
successful test marketing, to April 30, 1996.
4
In July 1996, pursuant to the amended QVC License Agreement (see
"Amended Agreement with QVC), the Joint Venture was dissolved (effective May
31, 1996), and HyTech entered into a new agreement with QVC to form an equal
partnership known as New Hydromercial Partners (the "Infomercial
Partnership"). During the fourth quarter of Fiscal 1996, the Infomercial
Partnership revised the existing Infomercial to test several new product
offers. The Infomercial Partnership plans to produce a second infomercial in
Fiscal 1997, to promote and sell new products in HyTech's skin care line.
The Infomercial Partnership supports infomercial programming with a
variety of marketing and promotional activities to maximize sales. These
include a telemarketing program to convert requests from Infomercial viewers
for product information into sales, and a program that encourages Infomercial
customers to purchase additional Hydron products, and offers them an
opportunity to receive the skin care collection on a regular basis without
having to re-order.
-Retail Stores
As the result of the QVC Amended License Agreement (see "Amended
Agreement with QVC"), HyTech is reviewing various methods of marketing Hydron
brand products through conventional retail distribution. Although management
has made no substantial commitments with respect to domestic retail store
marketing, in November 1996, HyTech signed an agreement with an
Australian-based health and beauty products distributor, Doctors Formula Pty.
Ltd., to market Hydron products for the first time in retail stores in
Australia and New Zealand. The agreement provides that Hydron products be sold
for the first time in retail stores in Australia and New Zealand, and is
subject to certain escalating minimum product purchase requirements.
Management has been advised that Doctors Formula Pty. Ltd. expects Hydron
products to be placed in approximately 100 retail outlets by April 1, 1997,
the anticipated Australian launch date. HyTech has reserved the right to sell
its products through electronic retailing in these markets.
Consumer Products
HyTech has been engaged in the development of various consumer
products using Hydron polymers since 1966. During the past fiscal year, HyTech
devoted its resources primarily to the development of products in the personal
care/cosmetics field using its patented cosmetic delivery system, focusing in
particular on products that appeal to an aging baby boomer generation,
currently one-third of the U.S. population. A survey of more than 1,200
30-to-50-year-olds, conducted by a major pharmaceutical company, found that:
76% are convinced they look younger than their actual age, 58% are influenced
by facial wrinkles or brown spots when judging people's age, and 77% think
women worry more than men about an aging facial appearance. HyTech's products
are designed to address these concerns, and include Hydron skin care, hair
care, bath and body, sun care, and over-the-counter pharmaceutical lines.
5
HyTech launched eleven (11) new products in Fiscal 1996, bringing the
total number of individual products available to twenty-eight (28), all of
which use its patented cosmetic delivery system. All are presently being sold
to and marketed by QVC, and are also sold directly by HyTech to consumers
through the company's Magalog. In addition, some products are marketed through
HyTech's infomercial, direct response television advertisements, and retail
stores internationally.
Management believes that HyTech's product lines are unique, and offer
the following competitive benefits: they become water-insoluble on the skin's
surface, and unlike all other water-based creams and lotions, are not removed
by skin's perspiration or plain water; they are oxygen-permeable, allow skin
to breathe and leave no greasy afterfeel; they do not emulsify skin's natural
moisturizing agents, as do conventional creams 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. All of these
products are based on HyTech's patented cosmetic delivery system, which permit
the product ingredients to deliver their intended benefits over an extended
period of time and in a more efficient manner. (See "Patents.") They are
dermatologist tested and approved for all skin types, and products for use
around the eye area are also ophthalmologist-tested, and safe for contact lens
wearers.
HyTech has also developed a variety of products that complement its
patented moisturizers. These include facial cleansing products that are free
of soaps and detergents; alpha-hydroxy products for the face and body that
clear the skin of its surface buildup of dead cells, to allow other products
to work more effectively; botanical cleansing products for the body; and a
product that visibly reduces the appearance of fine facial lines, that has
both short- and long-term benefits. HyTech has also applied the moisture
holding properties of the Hydron polymer to its line of hair care products,
creating a Hydronizing Complex that remains on the hair after rinsing, and
helps to repair damaged portions of the hair shaft.
During the past fiscal year, HyTech utilized its patented Hydron
polymer emulsion technology as an enhanced drug delivery system in the
development of a non-prescription, topical analgesic for minor arthritis and
sore muscle relief. The "Menthol Ice" product was launched by QVC in June
1996, and is presently sold through QVC, the Hydron Magalog, and direct
response television commercials. In addition to the Menthol Ice and sunscreens
which utilize the drug delivery system, HyTech is developing additional
over-the-counter products using its technology, which management expects to
market during Fiscal 1997 through QVC and other distribution channels.
Management also believes that this technology could also be licensed by HyTech
to other consumer products manufacturers or pharmaceutical companies, to
develop new products or improve the effectiveness of existing products, and
bring them under patent protection.
6
HyTech is also exploring uses for the Hydron polymer and its patented
technology in color cosmetics, fragrances and consumer health care products.
The market for these products is highly competitive, and there are a
substantial number of manufacturers of these products that have greater
financial resources and marketing expertise than HyTech. Whether further
efforts are undertaken to develop these products for the commercial market
will depend upon management's evaluations of market potential, costs,
competitive benefits, regulatory approval and certain manufacturing
considerations, applicable to each product. There can be no assurances that
these products will be commercially marketed.
Professional Products
HyTech markets its hand and body moisturizer on a limited basis
directly to health care professionals. An independent clinical study indicates
that the product's hydrophilic properties create a moisturizing film that
helps protect health care workers' hands against the irritation and minor
allergic reactions that often accompany prolonged use of latex gloves and
frequent hand washing, including dryness, itching and scaling.
HyTech has also developed, and currently manufactures and sells on a
limited basis, a group of Hydron polymer-based products for dental
professionals under the Hydrocryl(Registered Mark) brand name. These include a
heat cured material used in the manufacturing of dentures, as well as cold
cure kits used in connection with relining or repairing existing Hydrocryl or
conventional acrylic dentures, 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.
Topical Drug Delivery System
Management believes that HyTech's patented Hydron emulsion system
enhances the effectiveness of over-the-counter medications applied to the
skin. The system deposits a uniform film on the skin's surface which possesses
all the attributes required of an effective pharmaceutical base material, and
has a number of advantages over other lotions. It is moisture-resistant and
not degraded by perspiration or sebaceous oils, but it is oxygen permeable. It
promotes hydration of the stratum corneum, which improves ready penetrability
into the skin's pores. It has a relatively low affinity for the drug
associated with the application, which promotes controlled release of the
drug. It has good tactility and flexibility, and is free from greasiness,
brittleness, tackiness, gumminess or oiliness, which makes it comfortable on
the skin. It does not rub-off easily, and is resistant to inks, dyes, oils and
other materials with which the treated skin may come into contact.
7
During Fiscal 1996, HyTech applied its drug delivery system to
topical analgesics, and in June 1996 launched an over-the-counter product for
the relief of minor arthritis and sore muscle pain. HyTech also created a
Hydron Pharmaceuticals division to develop and market additional OTC products
based on this technology, several of which management expects to launch in
Fiscal 1997.
Agreement with QVC
In December 1993, HyTech entered into a license agreement with QVC
(the "QVC License Agreement"), whereby QVC was granted exclusive rights to
market and distribute HyTech's proprietary consumer products using Hydron
polymers in North America, South America and Central America, through a
variety of retail channels, including its electronic retail cable television
program, other forms of electronic retailing such as infomercials
(program-length commercials) and direct response television advertising, and
conventional retail distribution. The QVC License Agreement specifically
excludes the marketing of HyTech's professional products, use of HyTech's
patented technology as a drug delivery system and products specifically geared
to the health care field.
The initial term of the QVC License Agreement ran through April 1996,
and the term is automatically renewable for like terms if QVC purchases
certain escalating minimum quantities of product. QVC met the minimum purchase
requirements in order to maintain such exclusive rights for the initial two
(2) year term of the contract, and the term of the QVC License Agreement was
renewed. No obligation exists for QVC to promote or purchase product, and no
assurances can be given that QVC will meet escalating minimum purchase levels
for subsequent years in order to maintain such exclusive rights. If QVC does
not meet such minimum purchase levels, then HyTech has the right to terminate
the agreement and seek other marketing and distribution arrangements for its
products. The loss of QVC as a customer would have a material, adverse impact
upon the financial condition of HyTech. If QVC were to cease acting as
HyTech's exclusive marketing agent in the Western Hemisphere, then HyTech
would attempt to reach the existing base of Hydron customers utilizing various
alternative methods of marketing. No assurance can be given that HyTech could
successfully market its products utilizing any such alternative methods.
In connection with the execution and delivery of the QVC License
Agreement, HyTech also entered into a Warrant Purchase Agreement whereby
HyTech issued two (2) warrants to QVC to purchase an aggregate of 500,000
shares of HyTech's Common Stock at $2.50 per share. QVC was also granted
anti-dilution and registration rights for the shares of Common Stock issuable
upon exercise of the warrants.
Amended Agreement with QVC
8
On July 19, 1996 HyTech entered into an amended license agreement
effective as of May 31, 1996 (the "Amendment") with QVC, which amends the QVC
License Agreement. The Amendment provides HyTech with certain retail marketing
rights to its Hydron brand product lines, (i.e., traditional department
stores, specialty stores, boutiques and beauty salons) and catalog sales, and
significantly higher minimum product purchase requirements for QVC in order
for QVC to maintain its exclusive rights to market Hydron brand consumer
products within North, South and Central America through direct response
television. In return, HyTech pays QVC a royalty on its retail sales of
consumer products in North, South and Central America.
The Amendment permits QVC to maintain its exclusive rights if QVC
purchases certain escalating minimum quantities of product over a two-year
term ending May 31, 1998. In return for such increased minimums, HyTech has
decreased the prices at which it sells Hydron brand consumer products to QVC.
Products sold to QVC or its affiliates for resale through infomercials are
excluded from the calculation of such minimum purchases levels. QVC has no
obligation to purchase Hydron brand consumer products except to maintain
exclusivity under the Amendment, which renews automatically for additional
two-year terms as long as the annual minimum purchase levels are met. No
assurances can be given that QVC will meet such escalating minimum purchase
levels in order to maintain its exclusive rights.
In conjunction with the execution and delivery of the Amendment, QVC
has paid HyTech $1.25 million in payment for the exercise of warrants to
purchase 500,000 shares of Common Stock, $.01 per share, ("Common Stock") of
HyTech at $2.50 per share. Further, HyTech has granted an additional warrant
to QVC to purchase 500,000 shares of Common Stock at $2.75 per share for a
five year period. Further still, with the exception of the aforementioned
warrant, QVC has agreed to a standstill provision not to purchase additional
shares of Common Stock without the consent of HyTech.
Concurrent with the execution and delivery of the Amendment, and as
part of the overall transaction, HyTech has granted to DTR Associates, a
Massachusetts limited partnership ("DTR"), an option to purchase 1.5 million
shares of Common Stock at the purchase price of $.01 per share (the "DTR
Option"). As the result of such grant, HyTech incurred a one-time non-cash
charge against earnings of approximately $3.1 million for the third quarter of
1996, which had no effect upon net shareholder's equity of HyTech. DTR had
previously introduced HyTech to QVC, had certain retail distribution rights
and was receiving a royalty payment from QVC on net sales from direct response
television. DTR terminated its right to receive such royalty payments and
relinquished its retail distribution rights in return for the DTR Option. If
the minimum purchase level for the first renewal period was met under the
License Agreement, DTR would have received approximately $5 million in royalty
payments over the next two years. In January 1997 DTR exercised its option.
9
Finally, HyTech 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 Hydromercial Partners to
promote and sell HyTech's Hydron(Registered Mark) polymer based skin care line
by means of a full length program commercial ("Infomercial"). See
"Marketing-Infomercial."
Agreement with National Patent
Pursuant to the terms of an agreement with National Patent
Development Corporation ("National Patent"), HyTech 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
HyTech has been concentrating its research and development efforts. HyTech
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. Products
which are not developed by HyTech, could be developed by National Patent, and
could benefit HyTech through the payment of royalties.
The agreement requires HyTech to make royalty payments to National
Patent equal to five percent (5%) of net sales, and for National Patent to pay
HyTech a five percent (5%) royalty on net sales, of Hydron polymer products,
except with respect to certain excluded products. In the area of
non-prescription drugs using Hydron polymers as a drug delivery system, both
HyTech and National Patent have agreed to pay the other a royalty equal to
five percent (5%) of net sales and twenty-five percent (25%) of any license
fees, royalties or other similar payments received from third parties with
regard to such products developed. HyTech has not received any royalties from
National Patent, and has paid royalties to National Patent of approximately
$338,000 for net product sales in Fiscal 1995 and approximately $387,000 for
sales in Fiscal 1996 under this agreement.
Foreign Operations
Direct foreign sales by HyTech in Fiscal 1996 were not significant as
a percentage of consolidated net sales. However, in November 1996, HyTech
signed an agreement for conventional retail sales with Doctors Formula Pty.
Ltd., an Australia-based health and beauty products distributor. The agreement
provides that Hydron products be sold for the first time in retail stores in
Australia and New Zealand, and is subject to certain escalating minimum
product purchase requirements. HyTech has reserved the right to sell its
products through electronic retailing in these markets.
In addition, HyTech markets its products in Europe through a QVC
affiliate in the United Kingdom. "Hydron Care" programming aired twenty-seven
(27) hours in
10
Fiscal 1996 and twenty-eight (28) hours in Fiscal 1995 on the QVC affiliate in
the United Kingdom. Management is reviewing other opportunities to exploit its
consumer products through various retail marketing and distribution methods in
regions not covered under the QVC License Agreement as amended.
Manufacturing
Hydron polymer-based products are manufactured exclusively for HyTech
by independent third parties. HyTech has principally used one cosmetic filler
because of its quality manufacturing and reasonable cost. During Fiscal 1996,
however, HyTech utilized additional third party manufacturers to produce
select new products. Also, HyTech and its primary cosmetic filler have
established relationships with other third party cosmetic fillers who could
produce HyTech's cosmetic products should increased capacity be required. To
date, contract manufacturing has permitted HyTech to meet rapidly escalating
inventory requirements in a timely manner. All raw materials and packaging
components for HyTech's consumer and professional product lines are readily
available to HyTech.
HyTech is not dependent on any sole manufacturer except National
Patent, which has agreed to make the Hydron polymer available to HyTech as
needed, and to provide HyTech with all manufacturing procedures (including
know-how) and render necessary and reasonable technical assistance, should
National Patent be unable to meet HyTech's requirements for Hydron polymer.
Inventory
At December 31, 1996, HyTech maintained inventory valued at
approximately $2.8 million, as compared to approximately $4.0 million at
December 31, 1995. The decrease in the amount of inventory resulted from
increased sales volume to QVC, offset by new product introductions.
HyTech has generally delivered its orders to QVC within two (2) weeks
of the date orders are booked. As a result thereof, HyTech had no backlog of
firm booked orders at December 31, 1996 or December 31, 1995. Although the
business of HyTech is not seasonal, orders are placed by QVC after it
determines its programming, and therefore, fluctuations in sales, which to
date have been virtually all to QVC, may occur on a monthly and quarterly
basis. Orders are generally shipped to customers of the Hydron Magalog within
a few days of placement of an order.
The Amended License Agreement provides that QVC purchase products
directly from HyTech for resale to consumers, and HyTech receive payment from
QVC thirty (30) days after QVC's receipt of such goods. In view of the thirty
(30) day payment terms in connection with sales to QVC and to the Infomercial
Partnership,
11
management does not anticipate any difficulty in financing foreseeable inventory
requirements.
Research and Development
HyTech's research and development efforts during Fiscal 1996 aimed to
achieve greater diversification among HyTech's product lines, by broadening
the brand's appeal to an aging baby boomer marketplace, as well as younger and
older consumers. During the fiscal year ended December 31, 1996, HyTech's
contract research and development program completed development of an eye
makeup remover; an oil-free tinted moisturizers; a blemish concealer; a line
smoothing serum; a topical analgesic; a lip moisturizer with sunscreen; a
soap-free, botanical body scrub; a soap-free cleansing bar; and a botanical
hair styling gel, luminating spray and finishing spray.
At year-end, development efforts were continuing for numerous 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. HyTech's research and development program is
headed by Charles Fox, a consultant to HyTech, who 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 1996 during 1997, 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 HyTech's proprietary
technology, and sales potential. Management also anticipates devoting greater
resources in Fiscal 1997 to developing over-the-counter products, and is
exploring a strategic relationship with a fragrance company for the addition
of a fragrance line.
Vitamins, Minerals and Nutritional Supplements
In March 1997, HyTech entered into a manufacturing and supply,
"turn-key" agreement with a leading vitamin supplier for a vitamin, mineral
and nutritional supplement line to complement HyTech's facial, body and hair
care regimes. Management anticipates marketing vitamins, minerals and
nutritional supplements as part of a healthy skin care program through the
company's wholly-owned subsidiary, Hydron Pharmaceuticals, utilizing HyTech's
Magalog, web site, and electronic retailing. As HyTech has had no experience
in marketing vitamins, minerals and nutritional supplements, no assurances can
be given that this new line will be successful to any degree.
12
Patented Technology
HyTech 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. 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 skin's natural oils and humectants;
and allows skin to breathe (air and moisture permeable). The film is insoluble
in water and resistant to rub-off, but can easily be removed with soap and
water.
HyTech's management believes that there are no competitive cosmetic
products with this combination of properties. Applications for the Hydron
polymer and HyTech'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
longer on the skin in a moist environment.
In fiscal 1993, HyTech was granted a European patent covering its
Hydron emulsification process in Austria, Belgium, France, Germany, Great
Britain, Greece, Italy, Luxembourg, Netherlands, Spain, Switzerland,
Liechtenstein and Sweden. HyTech also holds patents on this technology in the
U.S., Australia and South Africa, and has patents pending in Canada, Japan and
Israel.
Management believes that having patents for an emulsification process
adaptable to an array of consumer goods strengthens its ability to bring
Hydron-based products to the marketplace, and that holding international
patents facilitates HyTech's efforts to market its products in other
countries. HyTech is aggressively pursuing new patentable technologies for
both cosmetic and pharmaceutical products.
Government Regulation
All of HyTech'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 HyTech's products, i.e. its topical analgesic and
products that contain a sunscreen, are also classified as over-the-counter
drugs. Additional regulatory requirements for such products include additional
labeling requirements, registration of the manufacturer and semi-annual update
of the drug list.
Employees
13
HyTech currently has eighteen (18) full-time employees, four (4) of
whom are executive officers or directors. HyTech also maintains relationships
with various consultants, who assist HyTech with new product development,
packaging design, and marketing, and hires temporary help in connection with
the increased operations associated with promotions.
In August 1996, HyTech expanded its corporate communications
department to manage all marketing communications activities, as well as
public and investor relations functions, in-house. In addition, during the
fourth quarter of Fiscal 1996 and the first quarter of Fiscal 1997, HyTech
significantly expanded its customer care department to accommodate catalog
orders and to respond promptly to consumer inquires.
Item 2. Properties
HyTech maintains its offices at Yamato Office Center, 1001 Yamato
Road, Suite 403, Boca Raton, Florida 33431, and occupies approximately 4,000
square feet of office space. During the first quarter of Fiscal 1997,
construction began to develop an additional 1,500 square feet of adjacent
office space, to accommodate expanded customer service and marketing
departments. The term of HyTech's lease expires in August 2001 and requires
monthly rent of approximately $6,600, subject to increases in the Consumer
Price Index, plus increases in taxes and specified operating costs over set
amounts.
HyTech maintains it main warehouse space of approximately 31,000
square feet at 95 Mayhill Street, Saddle Brook, New Jersey 07663 pursuant to
leases which expires in August 2000 at a monthly rents of approximately
$14,000.
In addition, HyTech maintains additional warehouse space of 1,200
square feet 6600 West Rogers Circle, Boca Raton, Florida 33487 , which expires
in September 1998 at a monthly rental of approximately $700. HyTech has
recently acquired additional warehouse and shipping space of approximately
3,200 square feet at 1120 Holland Drive, Suites nos. 9 and 19, Boca Raton,
Florida, pursuant to a lease which expires in March 2000, at a monthly rental
of approximately $2,250.
Management believes that such facilities are satisfactory for its
present needs.
Item 3. Legal Proceedings
HyTech is not a party to, and its property is not the subject of, any
material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders None.
14
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
HyTech's Common Stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market ("The Nasdaq National Market") under the symbol HTEC.
The following tables indicate the closing prices for each quarter of HyTech's
last two (2) fiscal years, as reported by The Nasdaq National Market.
Fiscal 1996 High Closing Price Low Closing Price
- ----------- ------------------ -----------------
Fourth Quarter 2-1/4 1-7/8
Third Quarter 2-3/4 2
Second Quarter 3-1/4 2-7/16
First Quarter 3-3/8 1-13/16
Fiscal 1995 High Closing Price Low Closing Price
- ----------- ------------------ -----------------
Fourth Quarter 3-1/16 1-3/4
Third Quarter 5-1/16 2-15/16
Second Quarter 5-1/8 4-1/4
First Quarter 5-3/8 3-7/8
As of March 1, 1997, there were 4,230 record holders of HyTech's
Common Stock. No cash dividends were paid during the fiscal year ended
December 31, 1994 or at any time prior thereto. In January 1995, HyTech
instituted a regular quarterly cash dividend of two and one-half cents ($.025)
per share and paid a dividend in March, June, September and December 1995 and
1996. In March 1997, HyTech's Board of Directors declared a two and one-half
cents ($.025) per share dividend for record holders on March 17, 1997 and
payable on March 31, 1997. The payment of dividends in the future will be
determined by the Board of Directors in light of conditions then existing,
including HyTech's earnings and financial condition.
15
Item 6. Selected Financial Data
Fiscal Years Ended December 31,
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
Net sales $ 8,112,672 $ 7,303,468 $ 8,640,234 $ 698,109 $ 168,833
Distribution $ 3,149,718 - - - -
Agreement
Expense
------------ ----------- ----------- ----------- -----------
Operating income
(loss) $ (2,997,070) $ 1,566,212 $ 3,418,599 $(1,446,944) $(1,453,752)
------------ ----------- ----------- ----------- -----------
Interest and
investment $ 308,998 $ 325,010 $ 219,617 $ 85,909 $ 127,569
income
------------ ----------- ----------- ----------- -----------
Net income $ (2,823,977) $ 1,782,588 $ 3,638,206 $(1,361,085) $(1,338,225)
(loss)
------------ ----------- ----------- ----------- -----------
Net income
(loss)
per common $(.12) $ .08 $ .16 $(.07) $(.07)
share
------------ ----------- ----------- ----------- -----------
Total assets $ 12,741,140 $12,992,111 $13,809,583 $ 7,635,267 $ 6,657,326
------------ ----------- ----------- ----------- -----------
Total
stockholders' $ 11,981,480 $12,561,548 $13,013,459 $ 7,456,653 $ 6,610,889
equity
============ =========== =========== =========== ===========
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
HyTech sells specialty personal care/cosmetic products, primarily for
skin care, and to a lesser extent oral health care products, most of which are
covered by patent, license and royalty agreements. The Amended QVC License
Agreement provides that QVC will purchase licensed products solely from
HyTech, and the License Agreement with National Patent provides that HyTech
will generally pay royalties on its sales to National Patent and receive
royalties from National Patent from sales of certain of that company's
products. HyTech is developing other personal care/cosmetics for consumers and
health care products for professionals using Hydron polymers, and anticipates
using its patented technology as a drug delivery system in proprietary
products, in which Hydron polymers act as a drug release mechanism. HyTech
intends to either seek licensing arrangements for its drug delivery technology
with third
16
parties, or develop and market proprietary products through its own efforts.
HyTech commenced marketing its products on QVC in April 1994.
Results of Operations - Fiscal 1996 versus Fiscal 1995
Net sales for fiscal year ended December 31, 1996 ("Fiscal 1996") of
$8,112,672 reflect a increase of $809,204, or 11% from the $7,303,468 of net
sales for the fiscal year ended December 31, 1995 ("Fiscal 1995"). This
increase is primarily the result of QVC's purchasing patterns, along with
increased sales to the Infomercial Joint Venture and QVC Europe. QVC's
purchasing patterns are primarily affected by the timing of the Hydron Care
programming.
Approximately 97% and 98% of HyTech's sales during Fiscal 1996 and
Fiscal 1995, respectively were to QVC and its related entities, including the
Infomercial Joint Venture and QVC Europe. Management anticipates that sales to
QVC will continue to grow as HyTech further extends its skin care line, adds
other product lines, and broadens its marketing efforts to include other forms
of electronic and conventional retailing. Absent the consummation of marketing
or distribution arrangements with third parties other than QVC, the percentage
of sales to QVC and HyTech's dependence upon QVC as a substantial customer
will remain significant.
HyTech's gross profit margin decreased 6 percentage points to 59% in
Fiscal 1996, compared to 65% in Fiscal 1995. This decrease is due primarily to
fluctuations in the mix of products sold to QVC in those periods, increased to
the Infomercial Partnership (at lower gross margins), and reduced pricing on
products sold to QVC as a result of the Amended License Agreement. Management
anticipates gross profit margins, relating to sales to QVC, to remain at
approximately 60%.
Research and development ("R&D") expenses reflect HyTech'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 increased 181% to
$497,899 in Fiscal 1996, compared to $177,468 in Fiscal 1995. The amount of
R&D expenses per year varies, depending on the steps taken towards development
during such 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 expiring on December 31, 1996.
Selling, general and administrative expenses in Fiscal 1996 increased
45% to $3,324,021 from $2,288,841 in Fiscal 1995. This increase is
attributable to an overall increase in salary requirements, expansion of
full-time staff, including customer service personnel, additional office and
warehouse rent and increased advertising expense, primarily relating to the
production, distribution and advertising for HyTech's new Magalog, a direct
mail catalog launched in November 1996.
17
Distribution Agreement expense of $3,149,718 pertains to costs
incurred in connection with the execution of the Amended License Agreement. In
connection with the execution and delivery of the Amended License Agreement,
HyTech granted DTR an option to purchase 1.5 million shares of the company's
common stock at $.01 per share, resulting in a one-time non-cash charge
against earnings of approximately $3.1 million. This non-cash charge has no
effect on the company's shareholders equity.
Interest and investment income in Fiscal 1996 decreased 5% percent,
to $308,998 from $325,010 in Fiscal 1995, primarily as a result of lower
interest rates. HyTech maintains a conservative investment strategy, deriving
investment income primarily from U.S. Treasury securities.
Net income for Fiscal 1996 decreased to a net loss of $2,823,977 from
net income of $1,782,588 for Fiscal 1995, primarily as a result of the factors
discussed above. Discounting the effect of the expenses associated with the
Amended License Agreement, HyTech would have reported net income of $325,741, or
$.01 per share for Fiscal 1996.
- -------------------------------------------------------------------------------
(Forward Looking Statement)
In its Quarterly Report on Form 10-Q for the period ended September
30, 1996, HyTech made the forward looking statement to the effect that, based
upon proposed increases in air time that QVC would be required to make if it
is to meet the minimum purchase levels necessary to maintain its exclusive
rights, then management believed that HyTech would have record sales and
earnings for Fiscal 1997. Such statement was qualified by the following: "This
assumes, however, that QVC makes its purchases on a pro rata basis over the
annual term of the Amended License Agreement. Further, no obligation exists
for QVC to promote or purchase product, and no assurances can be given that
QVC will meet escalating minimum purchase levels for subsequent years in order
to maintain exclusive rights."
As of March 13, 1997, QVC has made purchases of approximately $5.5
million during the first term of the Amended License Agreement, and based upon
present purchasing patterns, it appears that QVC will be approximately $5.0
million short of making the minimum purchase level necessary to maintain its
exclusive license. Management of QVC has requested that HyTech waive the
minimum purchase requirement of the first year of the Amended License
Agreement, which expires on May 31, 1997.
If an agreement is reached on waiving the minimum purchase levels for
the first term of the Amended License Agreement, then no assurance can be
given that HyTech will have record sales and earnings for Fiscal 1997. If no
agreement is reached with regard to waiving the minimum purchase requirement
for the first term, then either, (1) QVC will not make the minimum purchases
and HyTech will be able to terminate such relationship; or (2) QVC will make
an usually large purchase in order to maintain its exclusive rights prior to
the end of the term or the following thirty (30) day cure period.
18
If QVC does not meet such minimum purchase levels, then HyTech has
the right to terminate the agreement and seek other marketing and distribution
arrangements for its products. The loss of QVC as a customer would have a
material, adverse impact upon the financial condition of HyTech. If QVC were
to cease acting as HyTech's exclusive marketing agent in the Western
Hemisphere, then HyTech would attempt to reach the existing base of Hydron
customers utilizing various alternative methods of marketing, as well as other
access to direct response television. No assurance can be given that HyTech
could reach any substantial portion of such existing customer base in the
foreseeable future utilizing any such alternative methods.
If QVC makes an unusually large purchase of Hydron products in order
to maintain its exclusive rights for the next twelve (12) month term of the
Amended License Agreement, then HyTech may experience unusually disparate
quarters, as it may take a substantial time for QVC to sell the products
purchased in the unusually large purchase order. Further, it will be highly
unlikely that QVC would make the minimum purchase levels for the following
term. Therefore, QVC may not provide HyTech with any substantial quantity or
quality of on-air hours in view of the impending termination of the
relationship.
(End of Forward Looking Statement)
- -------------------------------------------------------------------------------
Results of Operations - Fiscal 1995 versus Fiscal 1994
Net sales for the fiscal year ended December 31, 1995 ("Fiscal 1995")
of $7,303,468 reflect a decrease of $1,336,766, or 15% from $8,640,234 in net
sales for the fiscal year ended December 31, 1994 ("Fiscal 1994"). This
decrease is primarily the result of QVC's purchasing patterns, partially
offset by increased sales to the Infomercial Joint Venture and QVC's European
affiliate ("QVC Europe"). QVC's purchasing patterns, which are primarily
affected by the timing of Hydron Care programming, resulted in QVC holding
approximately $1.8 million more of HyTech's inventory, at QVC's cost, at
December 31, 1994 than it held in inventory at December 31, 1995. Retail sales
of HyTech's products by QVC to consumers increased thirty percent (30%) in
Fiscal 1995 over retail sales in Fiscal 1994.
No obligation exists for QVC to purchase product under the terms of
the QVC License Agreement, except to maintain such exclusive rights, and no
assurances can be given that QVC will meet the escalating minimum purchase
levels for subsequent years in order to maintain such exclusive rights.
Management is actively pursuing opportunities to increase on-air
programming on QVC in Fiscal 1996, focusing primarily on new program formats,
line extensions and special promotions. In Fiscal 1995, special one-day
promotions of Hydron products conducted by QVC in February and July generated
$2.4 million and $2.2 million in
19
retail sales to consumers during two 24-hour periods, respectively. However,
no assurances can be given that QVC will grant HyTech additional on-air
selling time; and the failure to receive such additional on-air selling time
could negatively impact sales. Management anticipates that increased sales to
the Infomerical Joint Venture, albeit at lower gross margins, together with an
increase in back-end sales, may offset any such decrease in sales, if any.
Approximately 98% of HyTech's sales during Fiscal 1995 and Fiscal
1994 were to QVC and its related entities, including the Infomercial Joint
Venture and QVC Europe. Management anticipates that sales to QVC will continue
to grow as HyTech further extends its skin care line, adds other product
lines, and broadens its marketing efforts to include other forms of electronic
and conventional retailing. Absent the consummation of marketing or
distribution arrangements with third parties other than QVC, the percentage of
sales to QVC and HyTech's dependence upon QVC as a substantial customer will
remain significant.
HyTech's gross profit margin decreased 7% to 65% in Fiscal 1995,
compared to 72% in Fiscal 1994. This decrease is due primarily to fluctuations
in the mix of products sold to QVC in those periods. During Fiscal 1995,
HyTech introduced five (5) new products, three (3) of which were hair care or
bath and body products which provide a lower profit margin than HyTech's skin
care products. Further, management, in conjunction with QVC, made the decision
to package several of HyTech's individual skin care products in a collection
and agreed to price such collection at a substantial discount from the
aggregate costs of all of the individual items. This marketing strategy is a
concerted effort by management to further broaden the number of consumers
using HyTech's products, as well as to increase the distribution of the
complete Hydron product line. Management believes that once consumers sample a
wider variety of HyTech's products, they are more likely to reorder more of
such products, either the entire collection, or individual products at higher
prices.
Research and development ("R&D") expenses reflect HyTech'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 decreased 16% to
$177,468 in Fiscal 1995, compared to $211,909 in Fiscal 1994. The amount of
R&D expenses per year varies, depending on the steps taken toward development
during such year, as well as the number and type of products under development
at such time.
Substantially all of the R&D activities have been performed for
HyTech by Charles Fox Associates Inc. ("the Consultant") pursuant to a series
of one-year agreements.
HyTech has entered into an agreement with the Consultant providing
for research and development services for a one-year period commencing March
1, 1996,
20
in return for a monthly fee of $5,000 plus reimbursement of expenses. In
addition, such agreement provides that the principal of the Consultant,
Charles Fox, will make live appearances on QVC, and will appear for taping of
one (1) or more infomercials for HyTech products. In return for such personal
appearances, during calendar year 1996 HyTech will pay a royalty to the
Consultant equal to two and one-half (2.5%) percent of the net sales of Hydron
polymer based products, with a maximum royalty of $218,125. Such royalty will
be paid quarterly, with a minimum quarterly sales royalty to the Consultant
equal to $54,531.25. Finally, the Consultant has agreed that such royalty
payments will be used solely to exercise three (3) outstanding stock options
held by Charles Fox to purchase an aggregate of 100,000 shares of common stock
of HyTech.
Selling, general and administrative expenses in Fiscal 1995 increased
24% to $2,288,841 from $1,842,414 in Fiscal 1994. This increase is
attributable to an overall increase in salary requirements, expansion of
full-time staff, including customer service personnel, and increased
advertising expenses, primarily relating to the production and mailing of
HyTech's quarterly newsletter. This increase in overall selling, general and
administrative expenses was partially offset by a non-recurring, predominantly
non-cash charge in Fiscal 1994 of approximately $120,000 in legal and
miscellaneous costs related to the settlement of a lawsuit.
Interest and investment income in Fiscal 1995 increased 48% percent,
to $325,010 from $219,607 in Fiscal 1994, resulting from the investment of
additional cash from operations. HyTech maintains a conservative investment
strategy, deriving investment income primarily from U.S. Treasury securities.
Net income for Fiscal 1995 decreased 51% to $1,782,588 from
$3,638,206 for Fiscal 1994, primarily a result of the factors discussed above.
Liquidity and Financial Resources
HyTech's overall financial condition remains strong as reflected in
the Consolidated Balance Sheets at December 31, 1996 compared to December 31,
1995. Working capital at December 31, 1996 was approximately $8.8 million and
cash flow from operations in Fiscal 1996 increased to $2,536,643 from
$1,716,931 in Fiscal 1995. HyTech's cash flow from operations is a direct
result of its marketing efforts with QVC. The QVC License Agreement provides
that QVC purchase products directly from HyTech for resale to consumers, and
that HyTech receive payment from QVC thirty days after QVC's receipt of such
goods.
Investing activities used $238,570 in Fiscal 1996, as compared to
$859,509 in Fiscal 1995. The Fiscal 1995 investing activities consisted
primarily of leasehold improvements for HyTech's new administrative office and
HyTech's investment in the Infomercial Joint Venture.
21
Financing activities in Fiscal 1996 and Fiscal 1995 related primarily
to the payment of cash dividends totaling $2,293,952 and $2,263,374,
respectively. Financing activities in Fiscal 1996 also generated $1,253,000 of
proceeds from the issuance of common stock.
Based on HyTech's absence of any short or long term debt, present
cash position, relatively small accounts payable, third-party contractual
approach to manufacturing and R&D, and present business strategy, management
believes that HyTech has adequate resources to meet normal, recurring
obligations as they become due. Further, in view of the thirty (30) day
payment terms in connection with sales to QVC, management does not anticipate
any difficulty in financing foreseeable inventory requirements.
In November 1996 management commenced marketing of its products
through its catalog and has supported such marketing efforts with print
advertisements in national women's magazines, as well as athletic sponsorships
and community events. However, management recognizes that HyTech may not have
the financial resources to sustain a major, national advertising campaign to
successfully market its products. In view of the foregoing, management has
obtained with QVC, and continues to seek internationally, marketing, licensing
and distribution agreements with third parties which have greater financial
resources and that can enhance HyTech's product introductions with appropriate
national marketing support programs. In the event of the termination of the
QVC License Agreement, HyTech may seek other access to direct response
television to market its products.
The effect of inflation has not been significant upon either the
operations or financial condition of HyTech.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of HyTech are contained in this
report following Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
22
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 HyTech as of
March 10, 1997.
Name Position
- ---- --------
Harvey Tauman Director, Chairman of the Board,
Chief Executive Officer, President and
Treasurer
Richard Tauman Director, Chief Operating Officer and
Executive Vice President
Chaudhury M. Prasad Director, Vice President, Operations
and Secretary
Frank Fiur Director
Samuel M. Leb, M.D. Director
Nestor M. Cardero, C.P.A. Director
Joseph A. Caccamo, Esq. Director
Richard Banakus Director
Hugues Lamotte Director
Thomas G. Burns Vice President, Finance and Chief
Financial Officer
Business Experience
Harvey Tauman, age 55, has been Chairman of the Board of Directors,
Chief Executive Officer, President and Treasurer of the Company for more than
the past five (5) years. Mr. Tauman became a director of the Company in 1971.
Harvey Tauman is the father of Richard Tauman, who is a Director, Chief
Operating Officer and Executive Vice President.
Richard Tauman, age 30, became a Director and Vice President,
Production, in March 1994. In April 1995 he was appointed Executive Vice
President, and in May
23
1996 he was appointed Chief Operating Officer. In May 1989 he graduated from
the University of Miami with a BBA degree in Marketing, and since such time
has worked for the Company, predominately in product production. Richard
Tauman is the son of Harvey Tauman, the Chairman of the Board, Chief Executive
Officer, President and Treasurer.
Chaudhury M. Prasad, age 50 and a Director since 1975, has been Vice
President, Operations, and Secretary of the Company for more than the past
five (5) years.
Frank Fiur, age 83 and a Director since 1980, has been a consultant
to the Company on business and financial matters for more than the past five
(5) years. In addition, he is a real estate broker and salesman for The Fiur
Organization, Inc., industrial real estate brokers. During Fiscal 1996 Mr.
Fiur filed one (1) Form 4 approximately one (1) week late disclosing one (1)
purchase of HyTech Common Stock.
Samuel M. Leb, age 73 and a Director since 1988, was a self-employed
practicing surgeon from 1958 through August 1993, when he retired. From 1969
through December 1987, he was a member of the Board of Trustees of Parkway
Regional Medical Center, North Miami Beach, Florida.
Nestor M. Cardero, age 56 and a Director since 1990, is a certified
public accountant in private practice. He was a tax partner at Karpel &
Company, P.A. from March 1989 through November 1990. Prior to that time and
for more than five (5) years, he was a tax partner at KPMG Peat Marwick and
its predecessor KMG Main Hurdman, the Company's former independent auditors.
Joseph A. Caccamo, age 41 and a Director since August 1992, has been
a practicing attorney since 1981 and is general counsel to the Company. From
May 1987 through February 1991, he was an associate of Parker Chapin Flattau &
Klimpl, New York City, and from February 1991 through August 1991, he was of
counsel to Brandeis, Bernstein & Wasserman, New York City. In September 1991
he founded Joseph A. Caccamo Attorney at Law, P.C., his predecessor firm,
which was general counsel to the Company. He is also a director of Jean
Philippe Fragrances, Inc., a company engaged in the production and
distribution of fragrances and cosmetics, which has its common stock listed on
The Nasdaq Stock Market (National Market System).
Richard Banakus, age 50, was elected as a member of the Board of
Directors in June 1995. During the period 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 the
managing partner of Banyan Securities, Larkspur, California, which he founded.
24
Hugues Lamotte, age 54, was elected as a member of the Board of
Directors in June 1995. Mr. Lamotte has been engaged in managerial, marketing
and asset management functions in international finance for the past
twenty-seven (27) years. He has a broad array of investment experience,
working both in the United States and European Community. From 1974 through
1993 he was the Managing Director of Wertheim Schroder & Co., Incorporated, a
full service investment banking firm with offices in New York, London and
Paris. He is credited with starting the firm's European operation and opened
offices in London, Paris and Geneva, and was formerly President of Wertheim
Schroder International. During his association with Wertheim Schroder & Co.,
he advised numerous European and United States institutional clients with
regard to their global asset allocations and investments. In 1993, he started
an investment firm, Atlas Capital Management, and is its Chairman and Chief
Executive Officer. In addition, he is the Manager of Atlas Global Fund. Mr.
Lamotte is an MBA graduate of the University of Paris.
Thomas G. Burns, age 39, was hired as Chief Financial Officer in June
1994, and was appointed as Vice President, Finance in April 1995. Mr. Burns
served most recently as Audit Senior Manager for Ernst & Young, LLP of West
Palm Beach, Florida, where he had worked as a certified public accountant
since 1981.
Item 11. Executive Compensation
The following table sets forth a summary of all compensation awarded
to, earned by, or paid to HyTech's Chief Executive Officer and all other
persons who were executive officers of HyTech for services rendered in all
capacities to HyTech and its subsidiaries during the fiscal years ended
December 31, 1996, December 31, 1995 and December 31, 1994:
25
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Awards
- -------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary ($) Bonus ($) Other Number All Other
Annual of Compensation
Compensation Options
($)
- -------------------------------------------------------------------------------------------------------------------
Harvey Tauman, Chief Executive Officer, 1996 422,604 100,000 50,660(2) -0- -0-
President and Treasurer(1) 1995 402,480 100,000 35,900(3) 100,000 -0-
1994 335,400 150,000 4,940 200,000 -0-
Richard Tauman, Chief Operating Officer and 1996 102,496 15,000 2,860 -0- -0-
Executive Vice President(4) 1995 74,360 12,500 -0- 60,000 -0-
1994 58,525 10,500 523,813(5) -0- -0-
Chaudhury M. Prasad, Vice President, 1996 80,288 10,000 -0- -0- -0-
Operations and Secretary(6) 1995 76,440 7,500 -0- 2,500 -0-
1994 72,800 7,500 679,939(7) -0- -0-
Karen Gray, Vice President, Corporate 1996 57,011 10,000 -0- -0- -0-
Communications(8) 1995 60,060 10,000 -0- 10,000 -0-
1994 54,000 7,500 103,750(9) -0- -0-
Thomas G. Burns, Vice President, Finance 1996 92,872 10,000 4,800 -0- -0-
and Chief Financial Officer(10) 1995 88,452 10,000 4,800 10,000 -0-
1994 48,600 5,000 2,800 50,000 -0-
============================================================================================================
- --------
(1) As of December 31, 1996 Mr. Tauman beneficially held 2,000,000
restricted shares of Common Stock, with an aggregate value of $3,812,500 based
upon the closing price of HyTech's Common Stock as reported by the Nasdaq
Stock Market, National Market system, of $1.90625.
(2) Consists of $48,762 of salary for vacation time not taken and $4,940
for insurance premiums.
(3) Consists of $30,960 of salary for vacation time not taken and $4,940
for insurance premiums.
(4) As of December 31, 1996 Mr. Tauman beneficially held 15,000 restricted
shares of Common Stock, with an aggregate value of $28,594 based upon the
closing price of HyTech's Common Stock as reported by the Nasdaq Stock Market,
National Market system, of $1.90625.
(5) Represents income attributable to the difference between the exercise
price of stock options exercised and the fair market value of the Common Stock
on the date of such exercise.
(6) As of December 31, 1996 Mr. Prasad held 200,200 restricted shares of
Common Stock, with an aggregate value of $381,631 based upon the closing price
of HyTech's Common Stock as reported by the Nasdaq Stock Market, National
Market system, of $1.90625.
(7) Represents income attributable to the difference between the exercise
price of stock options exercised and the fair market value of the Common Stock
on the date of such exercise.
(8) Ms. Gray, who left the Company in November 1996, did not hold any
restricted shares of Common Stock as of December 31, 1996.
(9) Represents income attributable to the difference between the exercise
price of stock options exercised and the fair market value of the Common Stock
on the date of such exercise.
(10) Mr. Burns did not hold any restricted shares of Common Stock as of
December 31, 1996.
26
During Fiscal 1996 no stock option grants were made to HyTech's Chief
Executive Officer or any other persons who were executive officers of HyTech
and its subsidiaries for Fiscal 1996.
The following table sets forth certain information relating to option
exercises effected during Fiscal 1996, and the value of options held as of
such date by HyTech's Chief Executive Officer and all other persons who were
executive officers of HyTech and its subsidiaries for Fiscal 1996:
AGGREGATE OPTION EXERCISES FOR FISCAL 1996
AND YEAR END OPTION VALUES
Number of Unexercised Value(11) of
Options at Unexercised In-the-
December 31, 1996 money Options at
December 31, 1996
- ---------------------------------------------------------
Name Shares Acquired on Value ($) Exercisable/ Exercisable/
Exercise Realized(12) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------
Harvey Tauman -0- -0- 300,000/-0- -0-/-0-
- -----------------------------------------------------------------------------------------------------
Richard Tauman -0- -0- 60,000/-00 -0-/-0-
- -----------------------------------------------------------------------------------------------------
Chaudhury M. -0- -0- 2,500/-0- -0-/-0-
- -----------------------------------------------------------------------------------------------------
Prasad
- -----------------------------------------------------------------------------------------------------
Karen Gray -0- -0- 90,000/-0- 14,688/-0-
- -----------------------------------------------------------------------------------------------------
Thomas G. Burns -0- -0- 40,000/20,000 -0-/-0-
=====================================================================================================
Harvey Tauman has an employment agreement with HyTech whereby he is
to serve as Chief Executive Officer, President and Treasurer of HyTech through
April 30, 2003. His salary will increase annually by an amount equal to the
greater of (i) 5% of his base salary for the immediately preceding employment
term or (ii) increases as reflected in the Consumer Price Index, and which may
also be increased at any time at the discretion of the Board of Directors. In
addition, effective September 1, 1993 contemporaneous with the commencement of
the effective date of the QVC License Agreement, the Board of Directors voted
to increase Mr. Tauman's base salary (as defined in the employment agreement)
by $100,000 in consideration of the services to
- --------
(11) Total value of unexercised options is based upon the closing price
($1.90625) of the Common Stock as reported by the Nasdaq Stock Market on
December 31, 1996.
(12) 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 the
Nasdaq Stock Market on the date of exercise and the exercise price of the
options at the time of the exercise.
27
be performed by Harvey Tauman pursuant to the terms of the QVC License
Agreement. Such increase in base salary is to remain in effect only for the so
long as the QVC License Agreement shall remain in effect.
Richard Tauman has an employment agreement with HyTech whereby he is
to serve as Vice President, Production of HyTech through August 31, 2004. His
salary will increase annually by an amount equal to the greater of (i) five
percent (5%) of his base salary for the immediately preceding employment term
or (ii) increases as reflected in the Consumer Price Index and which may also
be increased at any time at the discretion of the Board of Directors.
Chaudhury M. Prasad has an employment agreement with HyTech whereby
Mr. Prasad is to serve as Secretary of HyTech through April 30, 2003. His
annual salary may be increased at any time at the discretion of the Board of
Directors.
Each of the above employment agreements provide that, if a change in
control of HyTech has occurred and thereafter such employee shall terminate
his employment with HyTech, or if his employment is terminated by HyTech for
any reason other than death or disability, such employee shall be entitled to
receive (i) his regular compensation, including all awards, perquisites and
benefits, through the date on which his employment terminates and (ii) a lump
sum payment in an amount equal to 2.99 times his "base amount" (as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended).
Compensation of Directors
There are no standard arrangements whereby directors who are also
employees of HyTech are compensated.
Nonemployee directors receive an annual fee of $5,000, and during
Fiscal 1996 each of Messrs. Frank Fiur, Samuel M. Leb, Nestor Cardero, Joseph
A. Caccamo, Richard Banakus and Hugues Lamotte were paid $5,000 for their
service as a director.
On December 22, 1993, the Board of Directors of HyTech adopted the
1993 Nonemployee Stock Option Plan (the "1993 Plan"). This Plan was approved
by the stockholders on July 19, 1994. The purpose of the 1993 Plan is to
assist HyTech in attracting and retaining key directors who are responsible
for continuing the growth and success of HyTech.
The 1993 Plan provides nonqualified stock options for nonemployee
directors to purchase an aggregate of 250,000 shares of Common Stock, with
grants of options to purchase 10,000 shares on each September 1st, and grants
of options to purchase 10,000 shares upon election or appointment of any new
nonemployee directors which will not be exercisable for a one (1) year period,
at an exercise price equal to the fair
28
market value of HyTech's Common Stock on the date of grant but in no event less
that $2.50 per share. Each of Messrs. Frank Fiur, Samuel M. Leb, Nestor
Cardero, Joseph A. Caccamo, Richard Banakus and Hugues Lamotte were granted
options to purchase 10,000 shares of Common Stock at the exercise price of $2.50
per share in September 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of the close of
business on March 13, 1997 as to the total number of shares of equity
securities of HyTech, owned by each director, and by all officers and
directors of HyTech as a group (ten (10) persons), and by each person known to
HyTech to be the beneficial owner of more than five percent (5%) of HyTech's
Common Stock:
Name and Address of Amount and Nature Approximate
Beneficial Owner of Beneficial Percent of Class
Ownership
- -----------------------------------------------------------------------------------------------------------
Harvey Tauman 3,925,000(13) 15.7%
Hydron Technologies, Inc.
1001 Yamato Road, Suite 403
Boca Raton, FL 33431
Richard Tauman 75,000(14) Less than 1%
Hydron Technologies, Inc.
1001 Yamato Road, Suite 403
Boca Raton, FL 33431
Chaudhury M. Prasad 202,700(15) Less than 1%
Hydron Technologies, Inc.
1001 Yamato Road, Suite 403
Boca Raton, FL 33431
Frank Fiur 274,000(16) 1.1%
469 W. 83rd Street
Hialeah, FL 33041
- -----------------------------------------------------------------------------------------------------------
- --------
(13) Consists of 1,000,000 shares held directly; options to purchase 300,000
shares; 766,889 shares held as co-trustee and life estate beneficiary of Marital
Trust of deceased spouse; 233,111 held as personal representative and life
estate beneficiary of estate of deceased spouse; 45,000 shares held as trustee
for emancipated children; and 100,000 shares as a co-trustee. Also includes an
irrevocable proxy to vote 1,480,000 shares.
(14) Consists of 15,000 shares held directly; and options to purchase 60,000
shares.
(15) Consists of 200,200 shares held directly and options to purchase 2,500
shares.
(16) Consists of 130,000 shares held directly, 114,000 shares held by his
spouse; and options to purchase 30,000 shares of Common Stock. Mr. Fiur
disclaims beneficial ownership of 114,000 shares held by his spouse.
29
Samuel M. Leb, M.D. 312,252(17) 1.3%
1905 So. Oak Haven Circle
No. Miami Beach, FL 33179
Nester M. Cardero, C.P.A. 40,000(18) Less than 1%
14222 S.W. 97th Terrace
Miami, FL 33183
Joseph A. Caccamo, Esq. Less than 1%
1001 Yamato Road, Suite 65,500(19)
403, Boca Raton, FL 33431
Thomas G. Burns 60,000(20) Less than 1%
Hydron Technologies, Inc.
1001 Yamato Road, Suite 403
Boca Raton, FL 33431
Richard Banakus 1,520,000(21) 6.1%
82 Verissimo Drive
Novato, CA 94947
Hugues Lamotte 420,000(22) 1.7%
Atlas Capital Limited
166 Piccadilly
Foxglove House
London, England W1V9DE
Victor Grillo(23) 1,480,000 5.9%
150 East Palmetto Park Road
Suite 700
Boca Raton, FL 33432
- --------
(17) Consists of 151,152 held as an IRA beneficiary, 6,000 shares held
directly, 80,000 shares held as a co-trustee and 35,100 shares held as a
co-trustee and a beneficiary; and options to purchase 40,000 shares.
(18) Consists of 1,500 shares held indirectly through an IRA, 1,500 shares
held by his spouse in an IRA, 7,000 shares of Common Stock held directly and
options to purchase 30,000 shares. Mr. Cardero disclaims beneficial ownership of
1,500 shares held by his spouse in an IRA.
(19) Consists of options to purchase 65,000 shares and 500 shares held as
trustee for the benefit of his children.
(20) Consists of options to purchase shares.
(21) Consists of 1,500,000 shares held directly and options to purchase
10,000 shares.
(22) Consists of 300,000 shares held directly and options to purchase 110,000
shares.
(23) Information derived from Schedule 13D Amendment No. 1 dated March 17,
1997 of Victor Grillo and DTR Associates, Limited Partnership.
30
All officers and directors as a 6,894,452(24) 27.0%
group (10 persons)
Item 13. Certain Relationships and Related Transactions
Joseph A. Caccamo, a director of HyTech, is general counsel to
HyTech. Mr. Caccamo was paid $78,862 in legal fees and for reimbursement of
disbursements incurred on behalf of HyTech during Fiscal 1996. Commencing as
of August 1996, HyTech provides office space for Mr. Caccamo. Mr. Caccamo was
granted options in Fiscal 1996 to purchase 10,000 shares at $2.50, (a price
above the fair market value at the time of grant), and received a non-employee
director's fee of $5,000.
- --------
(24) Consists of 4,686,952 shares held directly and options to purchase
727,500 shares. Also includes an irrevocable proxy to vote 1,480,000 shares.
31
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
Report of Independent Certified
Public Accountants F-1
Financial Statements:
Consolidated Balance Sheets, December 31, F-2
1996 and 1995
Consolidated Statements of Operations for the F-3
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' F-4
Equity for the Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows for the F-5-6
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements F-7
All financial schedules are omitted since the required information is not
present or is not present 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.
32
(a)(3) Exhibits:
The following Exhibits are filed as a part of this Report:
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985:
Exhibit No. and Description
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 (filed therein as Exhibit 3.1).
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986:
Exhibit No. and Description
4.0 Non-Qualified Stock Option Plan (filed as Exhibit 4.0 therein).
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987:
Exhibit No. and Description
3.2 By-laws of HyTech, as amended March 17, 1988 (filed therein as
Exhibit 3.2).
4.1 Incentive Stock Option Plan, as amended January 2, 1987 (filed as Exhibit
4.1 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988:
Exhibit No. and Description
3.3 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of the State of New York on
November 14, 1988 (filed therein as Exhibit 3.2).
33
10.6 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Harvey Tauman (filed therein as Exhibit 10.8).
10.7 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Ilene Tauman (filed therein as Exhibit 10.9).
10.8 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Frank Fiur (filed therein as Exhibit 10.10).
10.9 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Chaudhury M. Prasad (filed therein as Exhibit 10.11).
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Current Report on Form 8-K (date of
event--November 30, 1989):
Exhibit No. and Description
10.10 Agreement between Dento-Med and National Patent dated November 30, 1989
(filed as Exhibit 10.1 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989:
Exhibit No. and Description
4.2 1989 Stock Option Plan (filed as Exhibit 4.2 therein).
10.11 Indemnification Agreement between Dento-Med and Samuel M. Leb, M.D.
dated May 9, 1989 (filed as Exhibit 10.11 therein).
10.12 Indemnification Agreement between Dento-Med and Richard Tauman dated May
19, 1989 (filed as Exhibit 10.12 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991:
Exhibit No. and Description
34
10.13 Indemnification Agreement dated as of January 14, 1992 between Dento-Med
and Joseph A. Caccamo Attorney at Law, P.C. (filed as Exhibit 10.13 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, and filed therein as the same exhibit
number, unless otherwise noted:
Exhibit No. and Description
4.3 Stock Option Agreement and Consulting Agreement between HyTech and John T.
Boone dated January 30, 1992.
4.4 Stock Option Agreement between HyTech and DTR Associates Limited
Partnership dated March 9, 1992.
4.7 Stock Option Agreement between HyTech and DTR Associates Limited
Partnership dated September 15, 1992.
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Current Report on Form 8-K (date of
report December 6, 1993), as amended by the Form 8 Amendment no. 1 to such
Current Report, and filed therein as the same exhibit number, unless otherwise
noted:
Exhibit No. and Description
4.9 Warrant Purchase Agreement, together with Series A and Series B Warrants,
dated December 6, 1993, between QVC Network, Inc. and Hydron Technologies, Inc.,
filed as exhibit no. 4.3 therein.1
10.23 License Agreement dated December 6, 1993 between QVC Network, Inc. and
Hydron Technologies, Inc.(1)
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, and filed therein as the same exhibit
number, unless otherwise noted:
- --------
(1) Filed in excised form, as confidential treatment has been granted for
certain portions thereof.
35
Exhibit No. and Description
3.4 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of the State of New York on
July 30, 1993.
4.10 1993 Nonemployee Director Stock Option Plan.
10.24 Amended and Restated Employment Agreement between Dento-Med and Harvey
Tauman dated May 13, 1993.
10.25 Amendment to Amended and Restated Employment Agreement between HyTech
and Harvey Tauman dated December 20, 1993.
10.26 Amended and Restated Employment Agreement between Dento-Med and
Chaudhury M. Prasad dated May 13, 1993.
10.27 Indemnification Agreement dated April 22, 1993 between HyTech and Nestor
Cardero.
10.28 Indemnification Agreement dated November 16, 1993 between HyTech and
Karen Gray.
10.30 Agreement among HyTech, Jill International, Inc. and John Charles Revson
dated November 16, 1993.
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Current Report on Form 8-K (date of
report January 21, 1995), and filed therein as the same exhibit number, unless
otherwise noted:
Exhibit No. and Description
10.31 Letter Agreement among QDirect, Inc., Hydron Direct, Inc. and DTR
Associates dated January 17, 1995
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, and filed therein as the same exhibit
number, unless otherwise noted:
36
Exhibit No. and Description
10.33 Consulting Agreement made effective as of the 1st day of April, 1994
between Hydron Technologies, Inc. and The Pink Jungle, Inc.
10.35 Employment Agreement dated the 16th day of September, 1994 between and
Hydron Technologies, Inc. and Richard Tauman
10.36 Letter Agreement dated December 22, 1994 among Hydron Technologies, Inc.,
Roy Reiner and Chemaid Laboratories, Inc.
10.37 Indemnification Agreement dated February 21, 1995 between and Hydron
Technologies, Inc. and Thomas G. Burns
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and filed therein as the same exhibit
number, unless otherwise noted:
Exhibit No. and Description
10.38 Lease for 1001 Yamato Road, Suite 403, Boca Raton, FL between PFRS Yamato
Corp. and Hydron Technologies, Inc. dated May 8, 1995
10.39 First Amendment to Lease for 1001 Yamato Road, Suite 403, Boca Raton, FL
between PFRS Yamato Corp. and Hydron Technologies, Inc. dated September 15, 1995
10.40 Agreement for use and occupancy of portion of 5 East Building, 95 Mayhill
Street, Saddle Brook NJ, between Chemaid Laboratories, Inc. and Hydron
Technologies, Inc. dated February 9, 1996
10.41 Depository Agreement between Chemaid Laboratories, Inc. and Hydron
Technologies, Inc. dated February 9, 1996
10.42 Consulting Agreement between Charles Fox Associates, Inc. and Hydron
Technologies, Inc. dated February 5, 1996
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Current Report on Form 8-K (Date of
Report - July 19, 1996), and filed therein as the same exhibit number, unless
otherwise noted:
37
Exhibit No. and Description
4.11 Warrant Purchase Agreement dated as of May 31, 1996 between QVC and
HyTech, as Exhibit no. 4.1 therein
10.43 First Amendment to Licensing Agreement dated as of May 31, 1996 between
QVC and HyTech as Exhibit no. 10.1 therein
10.44 Letter Agreement between QDirect, Inc. And Hydron Direct, Inc. dated May
31, 1996 as Exhibit no. 10.2 therein
38
The following exhibits are filed herewith:
10.45 Lease Agreement between Industrial Office Associates and Hydron
Technologies, Inc. dated March 10, 1997
10.46 Sponsorship Agreement with Pro Player Stadium dated as of January 1, 1997
10.47 Sponsorship Agreement with Miami Dolphins dated as of January 1, 1997
10.48 Executive Suite License Agreement dated March 4, 1997
10.49 Sponsorship Agreement with Miami Heat Limited Partnership and Sunshine
Network dated December 1996
11 Statement re: Computation of Earnings Per Share
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young, LLP, Independent Certified Public Accountants.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth quarter of Fiscal
1996.
39
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Hydron Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Hydron
Technologies, Inc. and subsidiaries (HyTech) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of HyTech'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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
West Palm Beach, Florida
February 19, 1997.
F-1
Hydron Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
----------------------------------------------
1996 1995
----------------------------------------------
Assets
Current assets:
Cash, including cash equivalents of $5,441,109
and $4,235,295 at December 31, 1996 and 1995 $ 5,603,708 $ 4,346,587
Trade accounts receivable 611,731 1,002,969
Inventories 2,826,684 3,998,304
Prepaid expenses and other current assets 517,583 130,907
----------------------------------------------
Total current assets 9,559,706 9,478,767
Property and equipment, less accumulated depreciation
of $249,479 and $163,830 at December 31, 1996
and 1995 579,692 620,317
Deferred product costs, less accumulated
amortization of $4,005,576 and $3,697,400 at
December 31, 1996 and 1995 1,962,220 2,264,061
Investment in Joint Venture 238,128 221,366
Deposits 401,394 407,600
----------------------------------------------
$ 12,741,140 $ 12,992,111
----------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 453,337 $ 235,645
Accrued liabilities 306,323 194,918
----------------------------------------------
Total current liabilities 759,660 430,563
Commitments
Stockholders' equity:
Common Stock; $.01 par value; 30,000,000 shares authorized, 23,228,511 and
22,639,816 shares issued and outstanding at December 31, 1996
and 1995 232,285 226,398
Additional paid-in capital 20,351,654 18,113,632
Accumulated deficit (8,602,459) (5,778,482)
----------------------------------------------
Total stockholders' equity 11,981,480 12,561,548
----------------------------------------------
$ 12,741,140 $ 12,992,111
===============================================
See accompanying notes.
F-2
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1996 1995 1994
---------------------------------------------------------
Net sales $ 8,112,672 $ 7,303,468 $ 8,640,234
Cost of sales 3,323,056 2,577,606 2,435,557
---------------------------------------------------------
Gross profit 4,789,616 4,725,862 6,204,677
Expenses:
Royalty expense 386,679 337,575 386,643
Research and development 497,899 177,468 211,909
Selling, general and administrative 3,324,021 2,288,841 1,842,414
Distribution agreement expense 3,149,718 - -
Amortization of deferred product costs 308,176 307,733 307,303
Depreciation and amortization 120,193 48,033 37,809
---------------------------------------------------------
7,786,686 3,159,650 2,786,078
---------------------------------------------------------
Operating income (loss) (2,997,070) 1,566,212 3,418,599
Other income (expense):
Interest and investment income 308,998 325,010 219,607
Equity in loss of joint venture (135,905) (78,634) -
---------------------------------------------------------
173,093 246,376 219,607
---------------------------------------------------------
Income (loss) before income taxes (2,823,977) 1,812,588 3,638,206
Income tax expense - 30,000 -
---------------------------------------------------------
Net income (loss) $ (2,823,977) $ 1,782,588 $ 3,638,206
=========================================================
Net income (loss) per common share $ (.12) $ .08 $ .16
=========================================================
Weighted average number of common
shares outstanding 22,905,175 23,138,665 22,666,970
=========================================================
See accompanying notes.
F-3
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------------------------------------------------------------------------------
Balance at December 31, 1993 21,202,316 $212,023 $18,443,906 $(11,199,276) $ 7,456,653
Issuance of common stock
for services 130,000 1,300 208,700 - 210,000
Issuance of common stock upon
exercise of stock options 1,284,500 12,845 1,695,755 - 1,708,600
Net income - - - 3,638,206 3,638,206
------------------------------------------------------------------------------------
Balance at December 31, 1994 22,616,816 226,168 20,348,361 (7,561,070) 13,013,459
Issuance of common stock upon
exercise of stock options 23,000 230 28,645 - 28,875
Net income - - - 1,782,588 1,782,588
Cash dividends ($.10 per share) - - (2,263,374) - (2,263,374)
------------------------------------------------------------------------------------
Balance at December 31, 1995 22,639,816 226,398 18,113,632 (5,778,482) 12,561,548
Issuance of common stock
for services 86,695 867 183,994 - 184,861
Value of common stock options
issued for non-cash consideration - - 3,100,000 - 3,100,000
Issuance of common stock upon
exercise of stock options 502,000 5,020 1,247,980 - 1,253,000
Net loss - - - (2,823,977) (2,823,977)
Cash dividends ($.10 per share) - - (2,293,952) - (2,293,952)
------------------------------------------------------------------------------------
Balance at December 31, 1996 23,228,511 $232,285 $20,351,654 $ (8,602,459) $11,981,480
====================================================================================
See accompanying notes.
F-4
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995 1994
---------------------------------------------------
Operating activities
Cash received from customers $ 8,503,910 $ 8,345,103 $ 6,857,170
Cash paid to suppliers and employees (6,245,766) (6,918,993) (6,663,432)
Proceeds from interest on investments 318,499 334,821 203,807
Cash paid for income taxes (40,000) (44,000) -
---------------------------------------------------
Net cash provided by operating activities 2,536,643 1,716,931 397,545
Investing activities
Purchase of investments (1,949,212) - (3,449,019)
Proceeds from sale of investments 1,949,212 - 3,449,019
Capital expenditures (79,568) (558,964) (56,801)
Payments for registering patents (6,335) (545) (12,504)
Investment in Joint Venture (152,667) (300,000) -
---------------------------------------------------
Net cash used by investing activities (238,570) (859,509) (69,305)
Financing activity
Proceeds from issuance of common stock 1,253,000 28,875 1,708,600
Dividends paid (2,293,952) (2,263,374) -
---------------------------------------------------
Net cash used (provided) by financing activities (1,040,952) (2,234,499) 1,708,600
---------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,257,121 (1,377,077) 2,036,840
Cash and cash equivalents at beginning of year 4,346,587 5,723,664 3,686,824
---------------------------------------------------
Cash and cash equivalents at end of year $ 5,603,708 $ 4,346,587 $ 5,723,664
===================================================
Continued on following page.
F-5
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1996 1995 1994
----------------------------------------------------
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) $ (2,823,977) $ 1,782,588 $ 3,638,206
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 428,369 355,766 345,112
Equity in losses of joint venture 135,905 78,634 -
Issuance of common stock for services 184,861 - 210,000
Issuance of stock options for non-cash consideration 3,100,000 - -
Changes in operating assets and
liabilities:
Trade accounts receivable 391,238 1,041,635 (1,783,064)
Inventories 1,171,620 (738,294) (2,610,680)
Prepaid expenses and other current
assets (386,676) (30,237) (19,539)
Deposits 6,206 (407,600) -
Accounts payable 217,692 (160,217) 267,160
Accrued liabilities 111,405 (205,344) 350,350
----------------------------------------------------
Total adjustments 5,360,620 (65,657) (3,240,661)
----------------------------------------------------
Net cash provided by
operating activities $ 2,536,643 $ 1,716,931 $ 397,545
----------------------------------------------------
See accompanying notes.
F-6
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Description of Business and Summary of Significant Accounting Policies
Organization of Business
Hydron Technologies, Inc. and subsidiaries (HyTech) sells consumer and
professional products, primarily in the personal care/cosmetics field. Most of
these products are covered by patent, license and royalty arrangements which
provide that HyTech will generally pay royalties on its sales and receive
revenues from the sale of its products to nonaffiliated third parties, and
royalties from others. These arrangements include a royalty agreement with
National Patent Development Corporation (National Patent) in connection with
exclusive licenses which HyTech holds on certain oral health and other consumer
products containing Hydron polymers, and an exclusive licensing agreement with
QVC, Inc. (QVC) for the sale of HyTech's Hydron polymer-based consumer products
in the Western Hemisphere. QVC, a significant customer, purchases HyTech's
products and takes physical possession of these products prior to QVC's sale to
the ultimate end user. The products are sold and shipped to the end user by QVC.
The sales of HyTech's products to QVC are not conditioned upon QVC's sale of the
products to the ultimate end user. HyTech also holds the exclusive license with
National Patent to a Hydron polymer-based drug delivery system for topically
applied, nonprescription pharmaceutical products, which it intends to license to
third parties or use to develop proprietary products.
Basis of Presentation
The consolidated financial statements include the accounts of HyTech and all
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. HyTech'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
HyTech 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.
F-7
Hydron Technologies, Inc. and Subsidiaries
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 QVC which, by contract, must be
paid to HyTech within 30 days after QVC's receipt of goods. HyTech 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, work-in-progress and raw materials (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", which was adopted during 1995. 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. HyTech analyses undiscounted cash flows on
an annual basis. No impairment losses have been recognized in the three year
period ended December 31, 1996.
Property and Equipment
Property and equipment, consisting primarily of office leasehold improvements,
furniture and fixtures, is carried at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets.
Deferred Product Costs
Deferred product costs consist primarily of costs incurred for the purchase and
development of patents and product rights (see Note 3). The deferred product
costs are being amortized over their estimated useful lives of eight to 20 years
using the straight-line method.
F-8
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Common Stock, Common Stock Options and Net Income (Loss) Per Share
When HyTech 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.
HyTech 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
HyTech's stock option plans.
Net income (loss) per share is based on the weighted average number of common
shares outstanding during the year. For the years ended December 31, 1995 and
1994, the assumed exercise of stock options did not result in a material
dilution.
Revenue Recognition and Product Warranty
Revenue from product sales is recognized at the time of shipment. Provision is
made currently 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
$665,000, $205,000 and $1,000 for 1996, 1995 and 1994, respectively.
F-9
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Inventories
At December 31, 1996 and 1995, inventories consist of the following:
1996 1995
------------------------------------
Finished goods $1,880,112 $3,044,890
Work-in-process 95,241 162,794
Raw materials and components 851,331 790,620
------------------------------------
$2,826,684 $3,998,304
------------------------------------
3. Deferred Product Costs and Royalty Agreements
From 1976 through 1989, HyTech and National Patent entered into various
agreements, wherein HyTech obtained the exclusive worldwide rights to market
products using Hydron polymers in the consumer and oral health fields, the two
fields in which HyTech 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 HyTech'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, HyTech issued National Patent an aggregate of 1,100,000
shares of common stock, valued at $5,370,000. The valuation for these shares was
based on the market prices of HyTech's common stock at the dates the agreements
were made.
The agreements require HyTech 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 HyTech a 5% royalty on its net sales of Hydron polymer
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 HyTech and National Patent have agreed to pay the other a
royalty equal to 5% of net sales and 25% of any license fees, royalties or
similar payments received from third parties with regard to such products
developed.
F-10
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Investment in Joint Venture
On January 17, 1995, HyTech entered into an agreement with QVC and another
company to form a joint venture know as Hydromercial Partners (the Joint
Venture). Each company had a one-third interest in the profits and losses of the
Joint Venture, which had an initial term of two (2) years, subject to renewal on
an annual basis thereafter upon unanimous consent of all of the Joint Venture
participants.
The purpose of the Joint Venture was to provide and sell HyTech's Hydron
polymer-based skin care line by means of a thirty (30) minute commercial
(Infomercial) which the Joint Venture produced. The initial capital of the
Joint Venture, $600,000, was contributed in equal shares by the Joint Venture
participants, and was used to produce the Infomercial and conduct test
marketing. An additional $458,000 and $300,000, contributed in equal amounts by
the Joint Venture participants, was contributed during 1996 and 1995,
respectively to purchase additional air time. Sales to the Joint Venture
totalled approximately $459,000 and $230,000 in 1996 and 1995, respectively.
On July 19, 1996, in conjunction with the amended QVC license agreement (see
Note 5), the Joint Venture was dissolved and a new partnership (New Hydromercial
Partners) was formed between HyTech and QVC to continue the same activities as
the Joint Venture. Sales to New Hydromercial Partners totalled approximately
$60,000 in 1996.
5. Significant Customer
HyTech presently sells a substantial portion of its products to QVC and
affiliates. During the years ended December 31, 1996, 1995 and 1994,
approximately 97%, 98% and 98%, respectively, of HyTech's sales were made to QVC
and its affiliates. At December 31, 1996 and 1995, amounts due from QVC included
in trade accounts receivable were approximately $592,000 and $847,000,
respectively. HyTech entered into a license agreement with QVC in 1993, whereby
QVC was granted exclusive rights to market and distribute HyTech's proprietary
consumer products using Hydron polymers in the Western Hemisphere. On July 19,
1996, HyTech and QVC modified their license agreement (Amended License
Agreement). The Amended License Agreement provides HyTech with certain retail
marketing rights, and increases the minimum product purchase requirements QVC
must meet on a bi-annual basis to maintain their exclusive rights to market
Hydron consumer products through direct response television.
F-11
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Significant Customer (continued)
No obligation exists for QVC to purchase product except to maintain such
exclusive rights, and no assurances can be given that QVC will meet the
escalating minimum purchase levels for subsequent years in order to maintain
such exclusive rights. If QVC does not meet such minimum purchase levels, then
HyTech has the right to terminate the agreement and seek other marketing and
distribution arrangements for its products, which may include QVC on a
nonexclusive arrangement. Although management believes that there are other
avenues for selling its products, the loss of QVC as a customer would be
financially disruptive to HyTech.
The Amended License Agreement provides that certain retail marketing rights
formerly held by Direct to Retail (QVC granted these rights to DTR under a
separate agreement), revert back to HyTech and that QVC will no longer pay a
royalty on retail sales of Hydron products to Direct to Retail (DTR). The retail
marketing rights include prestige retail channels of distribution such as
traditional department and specialty stores, boutique stores and beauty salons,
as well as catalog sales. QVC will receive a commission from HyTech on these
sales. Also concurrent with the execution of the Amended License Agreement, and
as part of the overall transaction, HyTech granted DTR an option to purchase 1.5
million shares of the Company's common stock at $.01 per share. As a result,
HyTech incurred a one-time non-cash charge against earnings of
approximately $3.15 million (Distribution Agreement Expense), which had no
effect on the Company's shareholders' equity. Also, QVC exercised options to
purchase 500,000 shares of HyTech's common stock, at $2.50 per share, and paid
HyTech $1.25 million. HyTech also granted to QVC warrants to purchase an
additional 500,000 shares at $2.75 per share. Both QVC and DTR have agreed to
standstill provisions not to purchase additional shares of HyTech's stock
without the Company's permission and DTR has given its proxy for its shares to
Harvey Tauman, HyTech's president, for as long as DTR holds them.
F-12
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
For the years ended December 31, 1996 and 1994, there was no income tax
provision due to significant permanent differences between financial and tax
reporting of 1994 transactions, principally a tax deduction for the exercise of
certain nonqualified stock options, and to the utilization of net operating loss
carryforwards of approximately $493,000 and $2,031,000, respectively. The income
tax provision for 1995 of $30,000 reflects alternative minimum tax after the
utilization of net operating loss carryforwards of approximately $1,781,000.
The reconciliation of income tax rates, computed at the U.S. federal statutory
tax rates, to income tax expense is as follows:
1996 1995 1994
-------------------------------
Tax at U.S. statutory rates (34)% 34 % 34 %
State income taxes, net of federal tax benefit (4) 4 4
Valuation allowance adjustments 38 (36) (38)
Net effect of net operating loss not recognized - - -
-------------------------------
-0- % 2 % -0-
===============================
At December 31, 1996, HyTech had the following available net operating loss
carryforwards for tax purposes, which may be used to offset taxable income in
future periods:
Expires December 31,
2001 $ 163,000
2002 876,000
2003 601,000
2004 1,173,000
2005 1,094,000
2006 - 2008 4,173,000
------------------
$ 8,080,000
------------------
The tax benefit relating to $2,719,000 of the above net operating loss
carryforwards will be charged to stockholders equity in the period in which the
benefit is recognized.
F-13
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
HyTech utilizes the liability method of accounting for income taxes required by
Financial Accounting Standards Board Statement No. 109 (FASB 109), "Accounting
for Income Taxes." At December 31, 1996 and 1995, net tax benefits of
approximately $4,505,000 and $3,700,000, respectively, relating primarily to net
operating loss carryforwards which may be realized in the future and the
issuance of the DTR warrants, are recorded as a deferred tax asset, net of a
valuation allowance in an equal amount. The valuation allowance increased by
approximately $805,000 for the year ended December 31, 1996 as a result of the
utilization of net operating loss carryforwards, the issuance of the DTR
Warrants and the expiration of a capital loss carryforward.
7. Stock Options and Warrants
The number of shares of common stock reserved for issuance at December 31, 1996
and 1995 was 3,948,805 and 2,577,500, respectively.
Nonqualified Stock Option Plan
HyTech has a nonqualified stock option plan whereby up to 500,000 shares may be
granted to employees, directors and consultants. The options may be granted at
prices greater than, less than or equal to the fair market value at the date of
grant and are exercisable at the date of grant and expire at various times up to
ten years from the date of grant. Activity with respect to this plan is as
follows:
Number of Option Price
Options Per Share
-------------------------
Outstanding at December 31, 1993 140,000 .875 to 1.00
Stock options exercised (140,000) .875 to 1.00
---------
Outstanding at December 31, 1996, 1995 and 1994 -0-
=========
At December 31, 1996, there were no options available for grant under this plan.
The options that were exercised under the above plan in fiscal 1994 resulted in
proceeds of $123,750.
F-14
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Warrants (continued)
Incentive Stock Option Plan
HyTech has an Employee Incentive Stock Option Plan covering a maximum of
1,000,000 shares of common stock. Options granted under the plan are exercisable
at prices equal to the fair market value of the shares at the date of grant,
except that options granted to persons owning 10% or more of the outstanding
common stock carry an exercise price equal to 110% of the fair market value at
the date of grant. Options are exercisable by each optionee according to the
terms contained in each option and expire five to ten years after the date of
grant. Activity with respect to this plan is as follows:
Number of Option Price
Options Per Share
Outstanding at December 31, 1993 292,500 .75 to 2.56
Stock options exercised (292,500) .75 to 2.56
---------
Outstanding at December 31, 1996, 1995 and 1994 -0-
=========
At December 31, 1996 there were no options available for grant under this plan.
The options under the above plan that were exercised in fiscal 1994 resulted in
proceeds of $377,789.
1989 Stock Option Plan
Under the 1989 Stock Option Plan, HyTech may grant incentive stock options,
nonqualified stock options and/or stock appreciation rights to key employees,
officers, directors and consultants of HyTech, and its present and future
subsidiaries to purchase an aggregate of 1,000,000 shares of HyTech's common
stock. Activity with respect to this plan is as follows:
F-15
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Warrants (continued)
1989 Stock Option Plan (continued)
Weighted
Average
Number of Option Price Exercise
Options Per Share Price
-----------------------------------------
Outstanding at December 31, 1993 250,000 .75 to 2.50
Stock options exercised (175,000) .75 to 1.50
-----------
Outstanding at December 31, 1994 75,000 1.438 to 2.50
Stock options granted 2,000 3.00 to 4.00
Stock options expired (1,000) 4.00
-----------
Outstanding at December 31, 1996 and 1995 76,000 1.438 to 3.00 2.16
===========
These options expire five years from the date of the grant and all outstanding
options are exercisable at December 31, 1996. There were 9,500 options available
for grant under this plan at December 31, 1996. The options that were exercised
under the above plan in fiscal 1994 resulted in proceeds of $164,250.
1993 Stock Option Plan
During 1993, HyTech adopted the 1993 Stock Option Plan. Under the 1993 Stock
Option Plan, HyTech may grant incentive stock options, nonqualified stock
options and/or stock appreciation rights to key employees, officers, directors
and consultants of HyTech to purchase an aggregate of 1,000,000 shares of
HyTech'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, 1993 - -
Stock options granted 250,000 $2.625 to $4.125
---------
Outstanding at December 31, 1994 250,000 2.625 to 4.125
Stock options granted 207,500 2.285 to 5.00
---------
Outstanding at December 31, 1995 457,500 2.285 to 5.00 3.04
Stock options expired (25,000) 5.00 5.00
---------
Outstanding at December 31, 1996 432,500 2.285 to 4.606 2.92
=========
F-16
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Warrants (continued)
1993 Stock Option Plan (continued)
These options expire five years from the date of the grant. At December 31,
1996, a total of 412,500 of these options are exercisable and there were 542,500
options available for grant under this plan.
1993 Nonemployee Director Stock Option Plan
During 1993, HyTech adopted the 1993 Nonemployee Director Stock Option Plan.
Such plan provides grants of stock options to nonemployee directors of HyTech to
purchase an aggregate of 250,000 shares of HyTech's common stock. Each
nonemployee director shall be granted an option to purchase 10,000 shares of
HyTech's common stock on each September 1st throughout the term of this plan at
exercise prices equal to the fair market value of HyTech's common stock on the
date of the grant, but in no event less than $2.50 per share. Activity with
respect to this plan is as follows:
Weighted
Average
Number of Option Price Exercise
Options Per Share Price
----------------------------------------
Outstanding at December 31, 1993 40,000 $ 2.50
Stock options granted 40,000 5.688
Stock options exercised (20,000) 2.50
----------
Outstanding at December 31, 1994 60,000 2.50 to 5.6875
Stock options granted 60,000 3.219 to 4.781
----------
Outstanding at December 31, 1995 120,000 2.50 to 5.688 4.18
Stock options granted 60,000 2.50 2.50
----------
Outstanding at December 31, 1996 180,000 2.50 to 5.688 3.62
==========
These options expire five years from the date of the grant and all outstanding
options are exercisable at December 31, 1996. There were 50,000 options
available for grant under this plan at December 31, 1996. The options that were
exercised under the above plan in fiscal 1994 resulted in proceeds of $50,000.
F-17
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Warrants (continued)
Other Options and Warrants
HyTech has agreements with several consultants who are to provide financial,
business and technical advice to HyTech 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 HyTech'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:
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
-------------------------------------------
Outstanding at December 31, 1993 1,827,000 .813 to 3.00
Stock options and warrants granted 105,000 2.50 to 4.625
Stock options exercised (657,000) .813 to 2.50
------------
Outstanding at December 31, 1994 1,275,000 .938 to 4.625
Stock options granted 10,000 5.00
Stock options exercised (23,000) .938 to 1.50
------------
Outstanding at December 31, 1995 1,262,000 1.375 to 4.625 2.56
Stock options granted 2,000,000 .01 to 2.75 .70
Stock options exercised (588,695) 1.50 to 2.50 2.44
Stock options expired (15,000) 4.625 4.63
------------
Outstanding at December 31, 1996 2,658,305 .01 to 3.00 1.17
=============
The options and warrants outstanding at December 31, 1996 generally expire two
to five years after the date of grant. At December 31, 1996, all outstanding
options and warrants are exercisable.
The options under this plan that were exercised in fiscal 1996, 1995 and 1994
resulted in proceeds of $1,253,000, $28,875 and $992,811, respectively. In
addition, during 1996, options were exercised for services valued at $184,861.
See Note 5 relating to options exercised by QVC and options granted to DTR and
QVC in conjunction with the Amended License Agreement.
F-18
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 has 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 1996
and 1995, respectively: risk free interest rates of 6.5%; a dividend yield of
3.34% and 2.46%; volatility factors of the expected market price of the
Company's Common Stock of .575 and .595; and the weighted average expected
life of the options of 3 years.
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 managements 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 1995 awards in 1995 and the vesting of 1996 and 1995 awards
in 1996, 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 $2,867,177 for the year
ended December 31, 1996 and pro forma net income of $1,435,854 for the year
ended December 31, 1995. In addition, the pro forma net loss per share is $.13
per share for the year ended December 31, 1996 and pro forma net income per
share of $.06 per share for the year ended December 31, 1995.
The weighted average grant-date fair value of options granted during the year
ended December 31, 1996 was $.72 for options whose exercise price was greater
than the market price on the date of the grant and $2.07 for options whose
exercise price was less than the market price on the date of the grant. The
weighted average remaining contractual life of all options outstanding at
December 31, 1996 is 3.31 years.
F-19
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Related Party Transactions
During the years ended December 31, 1996, 1995 and 1994, HyTech paid
approximately $79,000, $64,000 and $77,000, respectively, in legal fees to
attorney who is also a director of the Company.
9. Commitments
HyTech leases office and warehouse space under noncancelable lease agreements
which expire in August 2001 and September 2000, respectively. At December 31,
1996, the future minimum rental payments due under such noncancelable leases are
as follows:
1997 $ 266,000
1998 136,000
1999 85,000
2000 87,000
2001 59,000
--------------------
$ 633,000
====================
The warehouse lease agreement required a deposit of approximately $385,000 that
will be utilized to pay rent and certain expenses during the last half of the
lease term. Total rent expense was approximately $240,000, $98,000 and $39,000
in 1996, 1995 and 1994, respectively.
HyTech has employment agreements with three executive officers, providing for
their continued employment through August 31, 2004. The combined current annual
salaries are approximately $603,000 with annual increases of the greater of 5%
per year or the annual increase in the CPI, and may also be increased at the
discretion of the Board of Directors.
F-20
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/ Harvey Tauman
----------------------------
Harvey Tauman, President
Date: March 18, 1997
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 and in the capacities and on the dates indicated:
By: /s/ Harvey Tauman By: /s/ Thomas G. Burns
-------------------------- --------------------------
Harvey Tauman, Thomas G. Burns
Chairman of the Board (principal financial
(principal executive officer) and accounting officer)
Date: March 18, 1997 Dated: March 18, 1997
By: /s/ Richard Tauman By: /s/ Chaudhury M. Prasad
-------------------------- --------------------------
Richard Tauman, Director Chaudhury M. Prasad, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Frank Fiur By: /s/ Samuel M. Leb
-------------------------- --------------------------
Frank Fiur, Director Samuel M. Leb, M.D., Director
Date: March 19, 1997 Date: March 19, 1997
By: /s/ Nestor M. Cardero By: /s/ Joseph A. Caccamo
-------------------------- --------------------------
Nestor M. Cardero, Director Joseph A. Caccamo, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Richard Banakus By:
-------------------------- --------------------------
Richard Banakus, Director Hugues Lamotte, Director
Date: March 19, 1997 Date: March __, 1997
41
EXHIBIT INDEX
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Exhibits:
The following Exhibits are filed as a part of this Report:
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985:
Exhibit No. and Description
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 (filed therein as Exhibit 3.1).
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986:
Exhibit No. and Description
4.0 Non-Qualified Stock Option Plan (filed as Exhibit 4.0 therein).
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987:
Exhibit No. and Description
3.2 By-laws of HyTech, as amended March 17, 1988 (filed therein as
Exhibit 3.2).
4.1 Incentive Stock Option Plan, as amended January 2, 1987 (filed as Exhibit
4.1 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988:
Exhibit No. and Description
3.3 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of the State of New York on
November 14, 1988 (filed therein as Exhibit 3.2).
10.6 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Harvey Tauman (filed therein as Exhibit 10.8).
10.7 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Ilene Tauman (filed therein as Exhibit 10.9).
10.8 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Frank Fiur (filed therein as Exhibit 10.10).
10.9 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Chaudhury M. Prasad (filed therein as Exhibit 10.11).
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Current Report on Form 8-K (date of
event--November 30, 1989):
Exhibit No. and Description
10.10 Agreement between Dento-Med and National Patent dated November 30, 1989
(filed as Exhibit 10.1 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989:
Exhibit No. and Description
4.2 1989 Stock Option Plan (filed as Exhibit 4.2 therein).
10.11 Indemnification Agreement between Dento-Med and Samuel M. Leb, M.D.
dated May 9, 1989 (filed as Exhibit 10.11 therein).
10.12 Indemnification Agreement between Dento-Med and Richard Tauman dated May
19, 1989 (filed as Exhibit 10.12 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991:
Exhibit No. and Description
10.13 Indemnification Agreement dated as of January 14, 1992 between Dento-Med
and Joseph A. Caccamo Attorney at Law, P.C. (filed as Exhibit 10.13 therein).
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, and filed therein as the same exhibit
number, unless otherwise noted:
Exhibit No. and Description
4.3 Stock Option Agreement and Consulting Agreement between HyTech and John T.
Boone dated January 30, 1992.
4.4 Stock Option Agreement between HyTech and DTR Associates Limited
Partnership dated March 9, 1992.
4.7 Stock Option Agreement between HyTech and DTR Associates Limited
Partnership dated September 15, 1992.
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Current Report on Form 8-K (date of
report December 6, 1993), as amended by the Form 8 Amendment no. 1 to such
Current Report, and filed therein as the same exhibit number, unless otherwise
noted:
Exhibit No. and Description
4.9 Warrant Purchase Agreement, together with Series A and Series B Warrants,
dated December 6, 1993, between QVC Network, Inc. and Hydron Technologies, Inc.,
filed as exhibit no. 4.3 therein.1
10.23 License Agreement dated December 6, 1993 between QVC Network, Inc. and
Hydron Technologies, Inc.(1)
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, and filed therein as the same exhibit
number, unless otherwise noted:
- --------
(1) Filed in excised form, as confidential treatment has been granted for
certain portions thereof.
Exhibit No. and Description
3.4 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of the State of New York on
July 30, 1993.
4.10 1993 Nonemployee Director Stock Option Plan.
10.24 Amended and Restated Employment Agreement between Dento-Med and Harvey
Tauman dated May 13, 1993.
10.25 Amendment to Amended and Restated Employment Agreement between HyTech
and Harvey Tauman dated December 20, 1993.
10.26 Amended and Restated Employment Agreement between Dento-Med and
Chaudhury M. Prasad dated May 13, 1993.
10.27 Indemnification Agreement dated April 22, 1993 between HyTech and Nestor
Cardero.
10.28 Indemnification Agreement dated November 16, 1993 between HyTech and
Karen Gray.
10.30 Agreement among HyTech, Jill International, Inc. and John Charles Revson
dated November 16, 1993.
The following document heretofore filed with the Commission is
incorporated by reference to HyTech's Current Report on Form 8-K (date of
report January 21, 1995), and filed therein as the same exhibit number, unless
otherwise noted:
Exhibit No. and Description
10.31 Letter Agreement among QDirect, Inc., Hydron Direct, Inc. and DTR
Associates dated January 17, 1995
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, and filed therein as the same exhibit
number, unless otherwise noted:
Exhibit No. and Description
10.33 Consulting Agreement made effective as of the 1st day of April, 1994
between Hydron Technologies, Inc. and The Pink Jungle, Inc.
10.35 Employment Agreement dated the 16th day of September, 1994 between and
Hydron Technologies, Inc. and Richard Tauman
10.36 Letter Agreement dated December 22, 1994 among Hydron Technologies, Inc.,
Roy Reiner and Chemaid Laboratories, Inc.
10.37 Indemnification Agreement dated February 21, 1995 between and Hydron
Technologies, Inc. and Thomas G. Burns
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and filed therein as the same exhibit
number, unless otherwise noted:
Exhibit No. and Description
10.38 Lease for 1001 Yamato Road, Suite 403, Boca Raton, FL between PFRS Yamato
Corp. and Hydron Technologies, Inc. dated May 8, 1995
10.39 First Amendment to Lease for 1001 Yamato Road, Suite 403, Boca Raton, FL
between PFRS Yamato Corp. and Hydron Technologies, Inc. dated September 15, 1995
10.40 Agreement for use and occupancy of portion of 5 East Building, 95 Mayhill
Street, Saddle Brook NJ, between Chemaid Laboratories, Inc. and Hydron
Technologies, Inc. dated February 9, 1996
10.41 Depository Agreement between Chemaid Laboratories, Inc. and Hydron
Technologies, Inc. dated February 9, 1996
10.42 Consulting Agreement between Charles Fox Associates, Inc. and Hydron
Technologies, Inc. dated February 5, 1996
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Current Report on Form 8-K (Date of
Report - July 19, 1996), and filed therein as the same exhibit number, unless
otherwise noted:
Exhibit No. and Description
4.11 Warrant Purchase Agreement dated as of May 31, 1996 between QVC and
HyTech, as Exhibit no. 4.1 therein
10.43 First Amendment to Licensing Agreement dated as of May 31, 1996 between
QVC and HyTech as Exhibit no. 10.1 therein
10.44 Letter Agreement between QDirect, Inc. And Hydron Direct, Inc. dated May
31, 1996 as Exhibit no. 10.2 therein
The following exhibits are filed herewith:
10.45 Lease Agreement between Industrial Office Associates and Hydron
Technologies,
Inc. dated March 10, 1997
10.46 Sponsorship Agreement with Pro Player Stadium dated as of January 1, 1997
10.47 Sponsorship Agreement with Miami Dolphins dated as of January 1, 1997
10.48 Executive Suite License Agreement dated March 4, 1997
10.49 Sponsorship Agreement with Miami Heat Limited Partnership and Sunshine
Network dated December 1996
11 Statement re: Computation of Earnings Per Share
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young, LLP, Independent Certified Public Accountants.