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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, 1997 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 of (I.R.S. Employer
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 Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was $12,105,767 based upon the closing price of $.5625 on March
25, 1998.
Number of shares of Common Stock outstanding as of March 25, 1998: 24,796,816
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 markets a broad range of consumer and oral health care products
using Hydron(R) polymers, a scientifically-proven moisture attracting
ingredient, and owns a non-prescription drug delivery system for topically
applied pharmaceuticals, which uses such polymer. HyTech 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, thereby creating a new moisturizing technology for the
personal care/cosmetic and pharmaceutical industries. HyTech has concentrated
its sales and development activities primarily on the application of these
biocompatible, hydrophilic polymers in various personal care/cosmetic products
for consumers and, to a lesser extent, oral care products for dental
professionals. HyTech is developing other personal care/cosmetic products for
consumers using Hydron polymers and is using its patented technology as a drug
delivery system in one of its proprietary products, in which Hydron polymers act
as a drug release mechanism. HyTech intends to continue to explore the efficacy
of using its technology for such purposes and would, when appropriate, either
seek licensing arrangements with third parties, or develop and market
proprietary products through its own efforts. Management believes that, because
of their unique properties, products which utilize Hydron polymers have the
potential for wide acceptance in consumer and professional health care markets.
Marketing and Sales
HyTech's products are currently sold in the United States exclusively
through direct response television and catalog sales, and to a lesser degree,
internationally through conventional retail stores and electronic retailing.
During the fiscal year ended December 31, 1997 ("Fiscal 1997"), substantially
all of HyTech's sales were made to QVC, Inc. ("QVC"), the world's largest
electronic retailer, pursuant to a license agreement with QVC. See "Renegotiated
License Agreement."
- 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
finance, internally, product development and new marketing activities, the
ability to take advantage of time-sensitive opportunities by moving products to
market quickly, and the ability to conduct real time market research, which can
allow management to make marketing decisions quickly and cost effectively.
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HyTech's personal care products are presently marketed through direct
response television in the United States exclusively by QVC. Certain of HyTech's
products are sold in Europe by a QVC affiliate. In the United States, QVC
programming is transmitted live on cable television to approximately sixty
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. The sales of HyTech's products to QVC are not conditioned upon QVC's
sale and shipment of the products to the ultimate consumer. Sales of HyTech's
products to QVC, and its affiliates, accounted for approximately 82%, 97%, 98%
and 98% of HyTech's total sales for Fiscal 1997, the fiscal years ended December
31, 1996 ("Fiscal 1996"), December 31, 1995 ("Fiscal 1995"), and December 31,
1994 ("Fiscal 1994"), respectively. Although management believes that there are
other avenues for selling its products, including attempting to reach the
existing Hydron customer base utilizing various marketing methods, the loss of
QVC as a customer would have a material adverse effect on HyTech's business.
Hydron products have been marketed on QVC through regularly scheduled
"Hydron Care" hours since April 1994. The hour-long, live broadcasts generally
feature most currently available products, which are sold individually or in
collections (packaging of products in various combinations). The majority of
QVC's sales of Hydron products occur in connection with this on-air marketing,
although QVC customers may purchase the products outside these "Hydron Care"
hours. These off-air sales, or back-end business, are considered primarily
re-order business. The following information pertains to retail sales of Hydron
products sold by QVC to consumers in Fiscal 1997, 1996, 1995, and 1994,
respectively:
1997 1996 1995 1994
QVC Retail Sales, in millions $ 17.0 $ 16.6 $ 21.2 $ 16.3
Percentage increase (decrease) 4% (22%) 33% --
Percent of on-air retail sales 68% 63% 69% 80%
Percent of back-end retail sales 32% 37% 31% 20%
Retail sales of Hydron products are affected primarily by the amount of
hours provided by QVC, the quality of such hours (e.g., time of day or day of
the week) and new product introductions. During the first quarter of 1998,
HyTech revised the show format to freshen the on-air presentations.
In Fiscal 1997, HyTech expanded its product lines from thirty-five items
(sku's) in Fiscal 1996 to forty-six items (sku's) in Fiscal 1997. At December
31, 1997, the product lines marketed on QVC consisted of skin care (24 sku's),
hair care (10 sku's), bath and body (9 sku's) and sun care (3 sku's). Such
products can be purchased on QVC individually (33 sku's) or in kits or
collections (13 sku's). HyTech is currently reviewing its product line
distribution and is now emphasizing the skin care line of products to a greater
extent.
- Catalog Sales
In November 1996, HyTech opened a new channel of distribution for Hydron
products with
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the launch of the Hydron Catalog ("Catalog"). This full color Catalog offers
HyTech's personal care products for sale directly to consumers. The Catalog also
provides information on new Hydron products, educates consumers on proper skin
and hair care and facilitates re-ordering. Prior to September 19, 1997, the
Catalog was marketed through sports marketing, print advertising and community
events. Since the fourth quarter of Fiscal 1997, management has significantly
reduced the direct expenses associated with the Catalog and is currently
exploring new ways to enhance Catalog operations.
HyTech also markets the Catalog to its shareholders, who presently receive
a twenty-five percent discount on all purchases. Consumers can order Hydron
products or a Hydron Catalog by calling 1-800-4-HYDRON (1-800-449-3766) or by
visiting HyTech's web site at http://www.hydron.com.
- Infomercial
New Hydromercial Partners ("Infomercial Partnership") is an equal
partnership between HyTech and QVC, which promotes and sells HyTech's Hydron
polymer-based skin care products through a thirty minute commercial
("Infomercial"), which the Infomercial Partnership produced. Although the
Infomercial is not currently being aired, it has been shown on regional and
national cable networks, at various times, since September 1995. The Infomercial
Partnership continues to market to the existing Infomercial customers through a
continuity program. Management is currently reviewing the options available in
reviving the Infomercial concept.
- Retail Stores
Under the terms of HyTech's amended agreement with QVC (see "Agreement
with QVC"), HyTech is permitted to market Hydron brand products through most
conventional retail outlets. Although management is reviewing the available
retail distribution options, at the present time, HyTech does not intend to
enter into retail outlet distribution in the United States in Fiscal 1998.
HyTech has an agreement with an Australian-based health and beauty
products distributor, Doctors Formula Pty. Ltd., to market Hydron products in
retail stores in Australia and New Zealand. Sales to Doctors Formula Pty. Ltd.
in Fiscal 1997 and Fiscal 1996 were minimal.
Consumer Products
HyTech has been engaged in the development of various consumer products
using Hydron polymers since 1966. Currently, HyTech is focusing on products that
appeal to an aging baby boomer generation, currently one-third of the U.S.
population. A 1995 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,
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bath and body, sun care and over-the-counter pharmaceutical lines.
HyTech launched six new consumer products in Fiscal 1997, bringing the
total number of individual products available to thirty-three in the following
product lines: skin care (17 products), hair care (7 products), bath and body (6
products), sun care (2 products) and over-the-counter pharmaceutical (1
product). These products are also packaged into collections and sold at a
discounted price. All of the products are presently being sold to and marketed
by QVC, and are also sold directly by HyTech to consumers through HyTech's
Catalog.
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 cremes and lotions, are not removed by
the skin's perspiration or plain water; they are oxygen-permeable, allow the
skin to breathe and leave no greasy afterfeel; they do not emulsify the skin's
natural moisturizing agents, as do conventional cremes and lotions; and they
attract and hold water, creating a cushion of moisture on the skin's surface
that promotes penetration of other beneficial product ingredients. HyTech's
products 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. Most of HyTech's moisturizing products are based on HyTech's
patented emulsion system, which permits the product ingredients to deliver their
intended benefits over an extended period of time and in a more efficient
manner. See "Patented Technology."
Professional Products
HyTech markets its hand and body moisturizer, on a limited basis, directly
to health care professionals. An independent clinical study has indicated 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 markets a group of Hydron polymer-based
products for dental professionals under the Hydrocryl brand name. These include
a heat cured material used in the manufacture of dentures, as well as cold cure
kits used in connection with the relining or repairing of existing Hydrocryl or
conventional acrylic dentures that is necessitated by the continual changes that
occur in the tissue structure of the mouth. Management believes that the
hydrophilic, or moisture attracting properties, of these Hydron polymer-based
products gives them competitive advantages over conventional acrylic dentures
and denture repair kits, which are not hydrophilic. Sales of Hydrocryl brand
name products were minimal in Fiscal 1997, Fiscal 1996 and Fiscal 1995.
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
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base material, and has a number of advantages over other lotions. It is
moisture-resistant and not degraded by perspiration or sebaceous oils, but is
oxygen permeable. It promotes hydration of the stratum corneum, which improves
penetration 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 in contact. HyTech currently markets, since
mid-1996, an over-the-counter topical analgesic for the relief of minor
arthritis and sore muscle pain. Management 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, although no such
license agreements are currently in effect and there can be no assurance that
any will be entered into in the future.
Agreement with QVC
In December 1993, HyTech entered into a license agreement with QVC ("QVC
License Agreement"), whereby QVC was granted exclusive rights to market and
distribute HyTech's proprietary consumer products using Hydron polymers in
North, Central and South America ("Western Hemisphere"), 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 two-year term of the QVC License Agreement ran through April
1996, and the term was automatically renewable for like terms if QVC purchased
certain escalating minimum quantities of product. QVC met the minimum product
purchase requirements in order to maintain such exclusive rights for the initial
two year term of the contract, and the term of the QVC License Agreement was
renewed.
In connection with the execution and delivery of the QVC License
Agreement, HyTech also entered into a Warrant Purchase Agreement whereby HyTech
issued two warrants ("Initial QVC 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. The Initial QVC Warrants were exercised on July
19, 1996 in connection with an amendment of the QVC License Agreement ("Amended
License Agreement"). Under the terms of the Amended License Agreement, effective
as of May 31, 1996, HyTech reacquired certain retail marketing rights to the
Hydron product line. Such retail marketing rights include prestige retail
channels of distribution such as traditional department and speciality stores,
boutique stores and beauty salons, as well as catalog sales. In addition, the
Amended License Agreement increased the minimum product purchase requirements
QVC must meet, on an annual
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basis over a two-year term ending May 31, 1998, to maintain its exclusive rights
to market Hydron consumer products through direct response television in the
Western Hemisphere. Products sold to QVC or its affiliates for resale through
infomercials are excluded from the calculation of such minimum purchase levels.
The Amended License Agreement requires HyTech to pay QVC a royalty on HyTech's
retail sales of consumer products in the Western Hemisphere and decreased the
prices at which HyTech is required to sell Hydron brand consumer products to
QVC.
In conjunction with the execution and delivery of the Amended License
Agreement, QVC paid HyTech $1.25 million upon the exercise of the Initial QVC
Warrants. Further, HyTech granted a warrant to QVC to purchase an additional
500,000 shares of HyTech's Common Stock at $2.75 per share, exercisable for a
period of five years ("Additional QVC Warrant"). QVC has agreed to a standstill
provision not to purchase additional shares of HyTech's Common Stock, except
upon exercise of the Additional QVC Warrant, without the consent of HyTech.
Pursuant to the Amended License Agreement, and as part of the overall
transaction with QVC, HyTech granted DTR Associates ("DTR"), a Massachusetts
limited partnership, an option to purchase 1.5 million shares of HyTech's Common
Stock at the purchase price of $.01 per share ("DTR Option"). DTR had previously
introduced HyTech to QVC, held certain retail distribution rights for Hydron
products and was receiving a royalty payment from QVC on net sales of Hydron
products sold via direct response television. In return for the DTR Option,
DTR's right to receive such royalty payments was terminated and DTR relinquished
its retail distribution rights. As a result of HyTech's granting of the DTR
Option, HyTech incurred a one-time non-cash charge against earnings of
approximately $3.1 million ("Distribution Agreement Expense"). DTR exercised its
option in January 1997.
Also in connection with the Amended License Agreement, 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 New Hydromercial Partners, to promote and sell Hydron products by means
of a full length program commercial . See "Marketing-Infomercial."
On June 11, 1997, HyTech and QVC renegotiated the Amended License
Agreement ("Renegotiated License Agreement") pursuant to which the term of the
Amended License Agreement was extended for one year, commencing on June 1, 1997.
Also, in October 1997, HyTech agreed, primarily as the result of a
five-month decline in HyTech's on-air sales, to further amend the Renegotiated
License Agreement with QVC to temporarily reduce its scheduled airtime to two
hours per month. HyTech has since revised its show format and hired a permanent
on-air spokesperson. As a result, HyTech exercised its right to reinstate the
previous airtime provisions, which returned to four hours per month, commencing
in February 1998.
In January 1998, HyTech retained Lauren Anderson to be the new HyTech
spokesperson for
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the Hydron Care shows on QVC. Ms. Anderson spent 23 years with Estee Lauder
rising to the position of Vice President of Training. For the past seven years,
Ms. Anderson has owned her own consulting firm, designing training and sales
programs for leading companies such as Givenchy, Chanel, Yves St. Laurent, la
prairie and Donna Karan.
Under the terms of the Renegotiated License Agreement, QVC must meet
certain minimum product purchase requirements during each two year term of the
agreement, including annual minimum product purchase requirements, to maintain
its exclusive rights. No obligation exists for QVC to purchase HyTech's 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 meets the stipulated minimum
product purchase requirements, then the Renegotiated License Agreement renews
automatically. If QVC does not meet the annual minimum product purchase
requirements, then HyTech alone can elect to continue or terminate the
Renegotiated License Agreement. If QVC does not meet the biannual minimum
product purchase requirements, then both HyTech and QVC have the ability to
renew or terminate the Renegotiated License Agreement. If the Renegotiated
License Agreement terminates, HyTech may seek other marketing and distribution
arrangements for its products, which may include distribution arrangements with
QVC on a nonexclusive basis. Although management believes that there are other
avenues for selling its products, including the Hydron Catalog, the loss of QVC
as a customer would have a material adverse effect on HyTech's business.
Agreement with National Patent
Pursuant to the terms of an agreement ("Patent 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 as required under the
Patent Agreement.
The Patent Agreement requires 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, each of HyTech and National Patent has
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. For the years ended December 31, 1997, 1996,
1995, 1994 and 1993, HyTech paid royalties to National Patent of approximately
$330,000, $387,000, $338,000, $387,000 and $35,000, respectively. HyTech has not
received any royalties
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from National Patent during these periods.
Foreign Operations
Direct foreign sales by HyTech have never been significant as a percentage
of consolidated net sales. Since 1995, HyTech has marketed its products in
Europe through a QVC affiliate in the United Kingdom. In 1996, HyTech signed an
agreement for conventional retail sales with Doctors Formula Pty. Ltd., an
Australia-based health and beauty products distributor. Management is reviewing
other opportunities to exploit its consumer products through various retail
marketing and distribution methods in regions not covered under agreements with
QVC, although no other marketing and distribution methods are currently being
used and there can be no assurance that any will be used in the future.
Manufacturing
Hydron polymer-based products are manufactured exclusively for HyTech by
independent third parties. Although HyTech has used principally one cosmetic
filler because of its quality manufacturing and reasonable cost, 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 allowed HyTech to meet
rapidly escalating inventory requirements in a timely manner. All raw material
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 the Hydron polymer. The loss of
National Patent as a supplier or a reduction in the availability of the Hydron
polymer would have a material adverse effect on HyTech's business.
Inventory
HyTech had no backorder of firm booked orders as of December 31, 1997, and
generally delivers its orders within two weeks of the date orders are booked.
Although HyTech's business in not seasonal, orders are placed by QVC after it
determines its programming, and therefore, fluctuations in HyTech's sales may
occur on a monthly and quarterly basis. Orders placed by HyTech's Catalog
customers are generally shipped within a few days of the placement of the order.
The Renegotiated 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. In view of QVC's thirty
day payment terms, management does not anticipate any difficulty in financing
foreseeable inventory requirements.
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Research and Development
HyTech's research and development efforts during Fiscal 1997 continued to
achieve greater diversification among HyTech's product lines by broadening the
brand's appeal primarily to the aging baby boomer marketplace. During Fiscal
1997, HyTech's contract research and development program completed development
of six new products: an anti-bacterial facial cleansing gel, an oil reducing
serum, a controlling hair spray, a balancing shampoo, a botanical body mist and
an antibacterial and moisturizing hand wash.
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 is led by
Charles Fox, a consultant and a member of HyTech's Board of Directors since
September 1997, 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
1997 during 1998, 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.
Vitamins and Nutritional Supplements
HyTech's vitamin and nutritional supplement line of products, initiated in
June 1997, was discontinued by HyTech in December 1997. The results of
operations for Fiscal 1997 include an expense of approximately $501,000 relating
to the write down, to net realizable value, of this line of products.
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. HyTech also holds a
European patent, as well as patents in numerous other countries, for this
emulsification process. According to the patents, Hydron, utilized in cosmetic
emulsions, creates a thin moisture-attracting film that is non-greasy; is not
dissolved by sebaceous oils or perspiration; does not emulsify the skin's
natural oils and humectants; and allows the skin to breathe (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
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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 on the skin longer, in a moist
environment.
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 semiannual update of the drug
list.
Employees
HyTech currently has thirteen full-time employees, four of whom are
executive officers or directors, and one part-time employee. HyTech also
maintains relationships with various consultants, who assist HyTech with new
product development, packaging design and marketing.
Item 2. Properties
HyTech maintains its offices at Yamato Office Center, 1001 Yamato Road,
Suite 403, Boca Raton, Florida 33431, where it occupies approximately 5,500
square feet of office space. The lease on this office space expires in August
2001 and requires monthly rent of approximately $6,500, including taxes and
common area expenses, subject to increases in the Consumer Price Index and other
increases in taxes and common area expenses over set amounts.
HyTech maintains its main warehouse of approximately 31,000 square feet at
95 Mayhill Street, Saddle Brook, New Jersey 07663, pursuant to a lease that
expires in August 2000, at a monthly rent of approximately $14,000. In addition,
HyTech maintains warehouse space, of approximately 3,200 square feet, at 1120
Holland Drive, Suites 9 and 19, Boca Raton, Florida 33487, pursuant to a lease
that expires in March 2000, at a monthly rent of approximately $2,400. In
January 1998, HyTech obtained a release from a lease involving approximately
1,200 square feet of warehouse space, pursuant to a lease that was to expire in
September 1998.
Management believes that such facilities are satisfactory for its present
needs.
Item 3. Legal Proceedings
On September 30, 1997, Harvey Tauman, formerly Chairman, Chief Executive
Officer,
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President and Treasurer of HyTech, whose employment was terminated by HyTech on
September 19, 1997, commenced an action (the "Action") against HyTech in the
Circuit Court of the Fifteenth Judicial District in and for Palm Beach County,
Florida. In his complaint in the Action, Mr. Tauman alleges that HyTech breached
his employment contract upon the termination of his employment and seeks damages
of not less than $4,000,000, plus interest and costs. Mr. Tauman also seeks a
declaration that his employment was terminated without cause and that he may
continue to exercise his stock options for the duration of their term
notwithstanding the termination of his employment.
On November 4, 1997, HyTech served and filed its answer to the complaint
in the Action and asserted counterclaims against Mr. Tauman seeking various
relief against him including an award of compensatory and punitive damages of
not less than $6,000,000, together with appropriate interest, costs and
expenses. In its counterclaims, HyTech seeks a declaration, among other things,
that Mr. Tauman breached his employment agreement as a result of wrongful and
fraudulent performance of his duties under the contract. Among other
allegations, HyTech contends in its counterclaims that Mr. Tauman improperly
caused HyTech to make payments of personal expenses upon the submission by Mr.
Tauman of false expense reports and receipts, caused HyTech to improperly enter
into consulting agreements with members of his family and with friends without
Board approval, misrepresented to the Board the financial condition of HyTech
and its prospects in order to obtain a grant to himself of bonuses and stock
options to which he would otherwise not have been entitled, caused the
submission to the Board of false projections of HyTech's revenues in order to
cause the Board to declare dividends, of which he was a substantial recipient,
and to approve a share repurchase plan, caused HyTech to pay for accounting
services rendered to him and to other members of his family, and intentionally
breached his fiduciary duties to HyTech.
Management is unable, at this time, to estimate the likelihood or scope of
liability, if any, it may incur as a result of Mr. Tauman's claims or the
likelihood of success of its counterclaims.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders ("Meeting") of Hydron Technologies,
Inc. was held on December 17, 1997.
(b) The following individuals were nominated for election as members of
the Board of Directors to hold office for a term of one year until the next
annual meeting of shareholders or until their successors are elected and
qualify: Richard Banakus, Mark Egide, Charles Fox, Frank Fiur, Karen Gray,
Charles Johnston, Hugues Lamotte, Dr. Samuel Leb, and Richard Tauman. A vote was
taken and the results thereof were as follows:
(i) 19,215,751 votes for Richard Banakus and 1,920,017 votes
withheld;
(ii) 19,229,246 votes for Mark Egide and 1,906,522 votes withheld;
(iii) 19,207,914 votes for Charles Fox and 1,927,854 votes withheld;
(iv) 19,239,777 votes for Frank Fiur and 1,895,991 votes withheld;
(v) 19,218,228 votes for Karen Gray and 1,917,540 votes withheld;
12
(vi) 19,189,307 votes for Charles Johnston and 1,946,461 votes
withheld;
(vii) 19,220,071 votes for Hugues Lamotte and 1,915,697 votes
withheld;
(viii) 19,195,698 votes for Dr. Samuel Leb and 1,940,070 votes
withheld; and
(ix) 18,785,509 votes for Richard Tauman and 2,350,259 votes
withheld.
A plurality of the votes having been cast in favor of each of the
above-named Directors, they were duly elected to serve a one year term.
(c) The second item of business was the approval of an amendment to
HyTech's 1993 Nonemployee Director Stock Option Plan ("1993 Plan") permitting
the committee charged with administering the 1993 Plan, at its discretion, to
extend the period of time a terminated nonemployee director has to exercise his
or her outstanding options. The results of the voting were as follows:
17,926,581 votes for the resolution, 2,676,172 votes against and 87,835 votes
abstained. A majority of the shares cast at the Meeting having been cast in
favor of the resolution, the resolution was duly passed.
(d) The third item of business was the approval of the adoption of
HyTech's 1997 Nonemployee Director Stock Option Plan. The results of the voting
were as follows: 18,096,797 votes for the resolution, 2,363,918 votes against
and 229,872 votes abstained. A majority of the shares cast at the Meeting having
been cast in favor of the resolution, the resolution was duly passed.
(e) The final item of business was the proposal to ratify the appointment
of Ernst & Young LLP, the independent certified public accountants for HyTech,
for the current fiscal year. The results of the voting were as follows:
19,206,540 votes for the resolution, 1,840,427 votes against and 88,801 votes
abstained. A majority of the shares cast at the Meeting having been cast in
favor of the resolution, the resolution was duly passed.
13
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder 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. There
can be no assurance that HyTech will be able to maintain the listing
requirements of The Nasdaq National Market. The following tables indicate the
closing prices for each quarter of HyTech's last two fiscal years, as reported
by The Nasdaq National Market.
================================================================================
Fiscal 1997 High Closing Price Low Closing Price
- --------------------------------------------------------------------------------
Fourth Quarter 1-1/16 13/32
- --------------------------------------------------------------------------------
Third Quarter 1-5/8 1
- --------------------------------------------------------------------------------
Second Quarter 1-27/32 1-1/4
- --------------------------------------------------------------------------------
First Quarter 2-5/16 1-9/16
================================================================================
================================================================================
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
================================================================================
As of March 25, 1998, there were approximately 4,167 record holders of
HyTech's Common Stock. In January 1995, HyTech instituted a regular quarterly
cash dividend of two and one-half cents ($.025) per share and paid a quarterly
dividend from March 1995 through June 1997. In September 1997, the Board of
Directors voted to suspend the dividend. 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.
14
Item 6. Selected Financial Data
Fiscal Years Ended December 31,
================================================================================================
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
Net sales $ 7,305,154 $ 8,112,672 $ 7,303,468 $ 8,640,234 $ 698,109
- ------------------------------------------------------------------------------------------------
Distribution -- $ 3,149,718 -- -- --
Agreement
Expense
- ------------------------------------------------------------------------------------------------
Operating income
(loss) $ (2,849,790) $ (2,997,070) $ 1,566,212 $ 3,418,599 $ (1,446,944)
- ------------------------------------------------------------------------------------------------
Interest and
investment income $ 261,298 $ 308,998 $ 325,010 $ 219,617 $ 85,909
- ------------------------------------------------------------------------------------------------
Net income (loss) $ (2,588,492) $ (2,823,977) $ 1,782,588 $ 3,638,206 $ (1,361,085)
- ------------------------------------------------------------------------------------------------
Basic & Diluted
Earnings (Loss)
Per Share $(.11) $(.12) $ .08 $ .16 $(.07)
- ------------------------------------------------------------------------------------------------
Total assets $ 8,751,343 $ 12,741,140 $ 12,992,111 $ 13,809,583 $ 7,635,267
- ------------------------------------------------------------------------------------------------
Total shareholders'
equity $ 7,857,238 $ 11,981,480 $ 12,561,548 $ 13,013,459 $ 7,456,653
================================================================================================
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
HyTech sells specialty personal care/cosmetics products, primarily for
skin care, and to a lesser extent oral health care products, most of which are
covered by patent, license and royalty agreements. The Renegotiated License
Agreement provides QVC with certain exclusive rights to purchase certain
products solely from HyTech for sale in the Western Hemisphere. In addition, the
Patent Agreement with National Patent provides for reciprocal royalty payments
based on the sale of certain of each party's products. HyTech is developing
other personal care/cosmetics for consumers using Hydron polymers. HyTech also
uses its patented technology as a drug delivery system in proprietary products,
in which Hydron polymers act as a drug release mechanism. HyTech intends to
continue to explore the efficacy of using its technology for such purposes and
would, when appropriate, either seek licensing arrangements with third parties,
or develop and market proprietary products through its own efforts. HyTech
commenced marketing its skin care product line on QVC in April 1994.
15
Substantially all of HyTech's net sales are derived from sales to QVC under the
Renegotiated License Agreement. Pursuant to the Renegotiated License Agreement,
if QVC fails to meet the stipulated minimum product purchase requirements at the
May 31, 1998 measurement date, HyTech alone can elect to continue or terminate
the agreement. HyTech has not decided what actions, if any, it plans to take
under such circumstances.
Results of Operations - Fiscal 1997 versus Fiscal 1996
Net sales for the fiscal year ended December 31, 1997 ("Fiscal 1997") were
$7,305,154, a decrease of $807,518, or 10%, from net sales of $8,112,672 for the
fiscal year ended December 31, 1996 ("Fiscal 1996"). During Fiscal 1997, Catalog
sales increased by approximately $1.1 million and sales to QVC and its
affiliates decreased by approximately $1.9 million from sales in Fiscal 1996.
The increase in Catalog sales resulted from a full year of Catalog sales, which
was initiated in November 1996. The decrease in non-catalog sales resulted from
decreased sales to QVC ($1.2 million), the Infomercial Partnership ($500,000)
and QVC Europe ($200,000). QVC's purchasing patterns are affected primarily by
the amount and timing of the Hydron Care programming.
Approximately 82% and 97% of HyTech's sales during Fiscal 1997 and Fiscal
1996, 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 be a large percentage of HyTech's sales and, absent the
consummation of marketing or distribution arrangements with third parties other
than QVC, HyTech's dependence upon QVC as a substantial customer will remain
significant. Any disruption in HyTech's relationship with QVC would have a
material adverse effect on the business, financial condition and results of
operations of HyTech.
HyTech's overall gross profit margin increased to 60% in Fiscal 1997,
compared to 59% in Fiscal 1996, primarily as a result of an increase in Catalog
sales (gross margin of 79%) offset in part by a decrease in gross margins on
products sold to QVC. The reduction in gross margins on products sold to QVC
relates primarily to fluctuations in the mix of products sold to QVC in those
periods. Management anticipates gross profit margins in Fiscal 1998 of
approximately 58% relating to sales to QVC and approximately 80% relating to
catalog operations.
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 in Fiscal 1997 were
$304,910, a decrease of $192,989, or 39%, from R&D expenses of $497,899 in
Fiscal 1996. The amount of R&D expenses per year varies, depending on the nature
of the development work during each year, as well as the number and type of
products under development at such time. Included in R&D expense in Fiscal 1996
is approximately $200,000 of royalty fees paid to a consultant relating to
product development under a contract that expired on December 31, 1996.
Selling, general and administrative ("SG&A") expenses in Fiscal 1997 were
$5,417,358, an
16
increase of $2,093,337, or 63%, from SG&A expenses of $3,324,021 in Fiscal 1996.
This increase is primarily the result of expenses associated with the Hydron
Catalog, which was initiated in November 1996. Total Catalog SG&A expenses were
approximately $2.3 million in Fiscal 1997, as compared to approximately $449,000
in Fiscal 1996. Expenses attributed to the Catalog include advertising,
additional marketing, customer service and warehouse personnel and related
telephone, postage and supply expenses. Advertising was the most significant
Catalog expense, totaling approximately $1.5 million in Fiscal 1997 and
approximately $394,000 in Fiscal 1996. Included in advertising in Fiscal 1997
and Fiscal 1996 were sports sponsorship related expenses of approximately
$771,000 and $158,000, respectively. Such sports sponsorships were discontinued
during Fiscal 1997.
SG&A expenses, other than Catalog related expenses, in Fiscal 1997 were
approximately $3,131,000, an increase of approximately $256,000, or 9%, from
such expenses of $2,875,000 in Fiscal 1996. This increase was due primarily to
legal expenses of approximately $470,000 incurred in connection with the dispute
between HyTech and certain shareholders of HyTech (including certain current
directors of HyTech) who were members of a group ("13D Group") through September
19, 1997, including the legal fees and expenses of the 13D Group reimbursed by
HyTech. This increase in legal fees was partially offset by a reduction of
approximately $102,000 in promotional expenses associated with the Hydron
newsletter sent to QVC customers in Fiscal 1996.
HyTech's short term focus is to reduce SG&A expenses, primarily relating
to the promotion of its Catalog operations. HyTech expects SG&A expenses to
decrease significantly in the first quarter of 1998 as the result of, among
other things, the cancellation of sport and event sponsorships. In addition,
certain expenses, such as legal fees relating to the matters between HyTech and
the 13D Group, will not be recurring in Fiscal 1998. However, HyTech will incur
legal fees and related expenses in connection with the pending litigation with
Harvey Tauman. See "Legal Proceedings."
Disposal of inventory of $651,270 in Fiscal 1997 relates primarily to the
write down, to net realizable value, of HyTech's vitamin and nutritional
supplement line of products. This line of products has been discontinued by
HyTech.
Distribution Agreement expense of $3,149,718 in Fiscal 1996 pertains to
costs incurred in connection with the execution and delivery of the Amended
License Agreement, whereby HyTech granted DTR an option to purchase 1.5 million
shares of HyTech's Common Stock at $.01 per share, resulting in a one-time
non-cash charge against earnings of approximately $3.1 million. Such option was
exercised on January 6, 1997.
Interest and investment income in Fiscal 1997 was $211,371, a decrease of
$97,627, or 32%, from interest income of $308,998 in Fiscal 1996, due primarily
to lower cash balances as a result of the factors discussed above, the payment
of dividends and the repurchase of HyTech's Common Stock (both of which programs
were discontinued). HyTech maintains a conservative investment strategy,
deriving investment income primarily from U.S. Treasury securities.
HyTech had a net loss for Fiscal 1997 of $2,588,492, a decrease of
$235,485, or 8%, from
17
the net loss of $2,823,977 for Fiscal 1996, primarily as a result of the factors
discussed above.
Results of Operations - Fiscal 1996 versus Fiscal 1995
Net sales for Fiscal 1996 were $8,112,672, an increase of $809,204, or
11%, from net sales of $7,303,468 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 Partnership 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 Partnership and QVC Europe. 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 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 sales to the Infomercial
Partnership (at lower gross margins), and reduced pricing on products sold to
QVC as a result of the Amended License Agreement.
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 expense 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 that
expired 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 direct mail Catalog launched in
November 1996.
Distribution Agreement expense of $3,149,718 pertains to costs incurred in
connection with the execution and delivery of the Amended License Agreement,
whereby HyTech granted DTR an option to purchase 1.5 million shares of HyTech's
Common Stock at $.01 per share, resulting in a one-time non-cash charge against
earnings of approximately $3.1 million.
Interest and investment income in Fiscal 1996 decreased 5% percent to
$308,998 from
18
$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.
Results of Operations - Fiscal 1995 versus Fiscal 1994
Net sales for Fiscal 1995 were $7,303,468, a decrease of $1,336,766, or
15%, from net sales of $8,640,234 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 Partnership and
QVC Europe. QVC's purchasing patterns, which are primarily affected by the
timing of the Hydron Care programming, resulted in QVC holding approximately
$1.8 million more of HyTech's inventory, at cost, at December 31, 1994 than it
held in inventory at December 31, 1995. Retail sales of HyTech's products on QVC
to consumers increased thirty-three percent (33%) in Fiscal 1995 over retail
sales in Fiscal 1994.
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. 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 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 1994, HyTech introduced
five (5) new skin care products, three (3) of which were hair care or bath and
body products that 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 into a kit and agreed
to price such kit 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 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 kit, 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 expense 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 towards development during such
year, as well as the number and type of products under development at such time.
19
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 expense,
primarily relating to the production and mailing of HyTech's quarterly
newsletter to QVC's Hydron customers. 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 as 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, 1997. Working capital at December
31, 1997 was approximately $4.7 million, including cash and cash equivalents of
approximately $2.1 million.
Investing activities used $343,894 in Fiscal 1997, as compared to $238,570
in Fiscal 1996. The Fiscal 1997 investing activities consisted primarily of
leasehold improvements for the expansion HyTech's new administrative office.
Financing activities in Fiscal 1997 and Fiscal 1996 related primarily to
the payment of cash dividends totaling $1,233,918 and $2,293,952, respectively.
Fiscal 1997 financing activities also included the expenditure of $431,345 for
the purchase of 251,000 shares of HyTech's Common Stock at an average price per
share of $1.72. In September 1997, HyTech's Board of Directors suspended the
quarterly dividends and canceled the stock repurchase program. Fiscal 1996
financing activities also generated $1,253,000 of proceeds from the issuance of
Common Stock.
Based on HyTech's present cash position, absence of any short or long term
debt, arrangements with third parties for contractual manufacturing and R&D, and
HyTech's 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 day payment terms in connection with sales to QVC, management
does not anticipate any difficulty in financing foreseeable inventory
requirements. However, since sales to QVC represent approximately 82% of
HyTech's net sales for Fiscal 1997, termination of the Renegotiated License
Agreement or any significant reduction in the volume of sales to QVC would have
a material adverse effect on HyTech's business, financial condition and results
of operations.
20
HyTech does not have the financial resources to sustain a national
advertising campaign to market its products in a conventional retail mode. In
view of the foregoing, management's strategy has been to enter into marketing,
licensing and distribution agreements with third parties (such as QVC and the
Infomercial Partnership) which have greater financial resources than those of
HyTech and that can enhance HyTech's product introductions with appropriate
national marketing support programs.
HyTech has determined that it will need to modify or replace certain
portions of its software so that its computer systems will function properly
with respect to dates in the Year 2000 and beyond. Management does not expect
that this project will have a significant effect on operations. While HyTech
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which HyTech's
systems and operations rely will be converted on a timely basis and will not
have a material effect on HyTech. The cost of the Year 2000 initiatives is not
expected to be material to HyTech's results of operations or financial position.
The effect of inflation has not been significant upon either the
operations or financial condition of HyTech.
Cautionary Statement Regarding Forward Looking Statements
The statements contained in this Report on Form 10-K that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding HyTech's expectations, hopes, intentions,
beliefs or strategies regarding the future. Forward looking statements include
HyTech's liquidity, anticipated cash needs and availability, and the anticipated
expense levels under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." All forward looking statements
included in this document are based on information available to HyTech on the
date of this Report, and HyTech assumes no obligation to update any such forward
looking statement. It is important to note the HyTech's actual results could
differ materially from those expressed or implied in such forward looking
statements.
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
None.
Part III
21
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 25, 1998:
Name Position
Richard Banakus Director, Chairman of the Board, Interim
President
Thomas G. Burns Vice President, Finance, Chief
Financial Officer and Treasurer
Mark Egide Director
Frank Fiur Director
Charles Fox Director
Karen Gray Director
Charles Johnston Director
Hugues Lamotte Director
Samuel M. Leb, M.D. Director
Chaudhury M. Prasad Vice President, Operations
Richard Tauman Director, Executive Vice President, and
Chief Operating Officer
Business Experience
Richard Banakus, age 51, has served as a director of HyTech since June
1995 and as interim President of HyTech since September 19, 1997. From April
1991 to the present, Mr. Banakus has been a private investor with interests in a
number of privately and publicly held companies. From July 1988 through March
1991, he was managing partner of Banyan Securities, Larkspur, California, a
securities brokerage firm which he founded.
Thomas G. Burns, age 40, has served as Chief Financial Officer of HyTech
since June 1994, as Vice President, Finance since April 1995 and as Treasurer
since September 1997. Mr. Burns served most recently as Audit Senior Manager for
Ernst & Young LLP of West Palm Beach, Florida, where he worked as a certified
public accountant since 1981.
Mark Egide, age 41, has served as a director of HyTech since September
1997. Since September 1989, Mr. Egide has served as President of Avalon Natural
Products, Inc., a cosmetics manufacturing and importing company which he
founded.
Charles Fox, age 77, has served as a director of HyTech since September
1997 and has been a consultant to HyTech on research and development matters for
more than the past five years. Since June 1985, Mr. Fox has served as President
of Charles Fox Associates, Inc., a consulting firm in the area of product
development and safety testing.
22
Frank Fiur, age 84, has served as a director of HyTech since 1980 and is
Chairman of The Fiur Organization, Inc., industrial real estate brokers.
Karen Gray, age 39, has been a director of HyTech since December 1997 and
has been a consultant to HyTech on marketing and communications matters since
November 1996. From 1993 to November 1996, Ms. Gray served as Vice President,
Corporate Communications, of HyTech. From June 1992 to November 1993, Ms. Gray
served as President of MarCom Associates, Inc., a marketing communications
company which she founded.
Charles Johnston, age 62, has been a director of HyTech since December
1997. Mr. Johnston has served as Chairman of Ventex Technology, an electronic
transformer company in Riviera Beach, Florida, AFD Technologies, a chemical
company in Jupiter, Florida, and ISI Systems, a computer software company in
Montreal, Quebec. In 1969, Mr. Johnston founded ISI Systems, which pioneered the
development of software for the insurance industry. Mr. Johnston also serves as
a Trustee of Worcester Polytechnic Institute in Worcester and of the Psychiatric
Research Center at the University of Pennsylvania and as a director of Bit Wise,
a computer software company in Schenectady, Infosafe Systems, an internet
company in New York City, Kideo Productions, an educational software company in
New York City, Spectrum Signal Processing, a digital signal processing computer
hardware and software company in Vancouver, British Columbia, and Waste Systems
Management, a landfill remodeling company in Cambridge, Massachusetts.
Hugues Lamotte, age 56, has served as a director of HyTech since June
1995. Mr. Lamotte has been engaged in managerial, marketing and asset management
functions in international finance for the past twenty-nine years. He has a
broad array of investment experience, working both in the United States and
European Community. From 1974 through 1993, he was a Managing Director of
Wertheim Schroder & Co., Incorporated, a full service investment banking firm
with offices in New York, London and Paris, and was formally President of
Wertheim Schroder International. In 1993, he started an investment firm, Atlas
Capital Management, and is its Co-Chairman and Co-Chief Executive Officer.
Dr. Samuel Leb, age 73, has served as a director of HyTech since 1988. Dr.
Leb maintained a private surgical practice from 1958 through August 1993. From
1969 through December 1987, Dr. Leb was a member of the Board of Trustees of
Parkway Regional Medical Center, a full service hospital in North Miami Beach,
Florida.
Chaudhury M. Prasad, age 50, was a director of HyTech from 1975 through
December 1997 and has served as Vice President, Operations, of HyTech since
1976.
Richard Tauman, age 30, has served as a director of HyTech since March
1994, Executive Vice President since April 1995, and Chief Operating Officer
since May 1996. Mr. Tauman served as Vice President, Production, of HyTech from
March 1994 to April 1995 and in various capacities since 1989.
23
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 Fiscal 1997, Fiscal 1996 and Fiscal 1995:
Summary Compensation Table
Annual Compensation Long Term Awards
Other Securities All
Annual Underlying Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
Richard Banakus, Interim President 1997 $ 32,312 -- -- -- --
Thomas G. Burns, Vice President, 1997 $ 97,552 -- $ 4,800 -- --
Finance, Chief Financial Officer, 1996 $ 92,872 $ 10,000 $ 4,800 -- --
and Treasurer 1995 $ 88,452 $ 10,000 $ 4,800 10,000 --
Chaudhury M. Prasad, Vice 1997 $ 84,344 -- -- -- --
President, Operations 1996 $ 80,288 $ 10,000 -- -- --
1995 $ 76,440 $ 7,500 -- 2,500 --
Richard Tauman, Executive Vice 1997 $105,040 -- $ 3,232 -- --
President and Chief Operating 1996 $102,496 $ 15,000 $ 2,860 -- --
Officer 1995 $ 74,360 $ 12,500 -- 60,000 --
Harvey Tauman, former Chief 1997 $332,826 -- $ 51,204 -- --
Executive Officer, President, 1996 $422,604 $100,000 $ 50,660 -- --
Treasurer 1995 $402,480 $100,000 $ 35,900 100,000 --
Karen Gray, former Vice 1997 -- -- -- -- --
President, Corporate 1996 $ 57,011 $ 10,000 -- -- --
Communications 1995 $ 60,060 $ 10,000 -- 10,000 --
During Fiscal 1997, 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.
The following table sets forth certain information relating to option
exercises effected during Fiscal 1997, 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 1997:
24
Aggregate Option Exercises for Fiscal 1997
and Fiscal Year End Option Values
Number of
securities underlying Value(1) of unexercised
unexercised options in-the-money options
at December 31, 1997 at December 31, 1997
Shares Acquired Value ($) Exercisable/ Exercisable/
Name on Exercise Realized(2) Unexercisable Unexercisable
Richard Banakus -0- -0- 20,000/-0- -0-/-0-
Thomas G. Burns -0- -0- 50,000/10,000 -0-/-0-
Chaudhury M. Prasad -0- -0- 2,500/-0- -0-/-0-
Richard Tauman -0- -0- 60,000/-0- -0-/-0-
Harvey Tauman -0- -0- -0-/-0- -0-/-0-
Employment Agreements
Chaudhury M. Prasad has an employment agreement with HyTech for a term
extending through April 30, 2003 at a current annual salary of $84,344. His
annual salary may be increased at any time at the discretion of the Board.
Richard Tauman has an employment agreement with HyTech for a term
extending through August 31, 2004 at a current annual salary of $110,292. His
salary will increase annually by an amount equal to the greater of (i) five
percent of his base salary for the immediately preceding employment year or (ii)
an amount calculated on the basis of the increase, if any, in the Consumer Price
Index for such immediately preceding year over the prior year and may also be
increased at any time at the discretion of the Board.
Each of the above employment agreements provides that if (i) a change in
control of HyTech has occurred and thereafter such employee shall terminate his
employment with HyTech, or (ii) the employment of such employee is terminated by
HyTech for any reason other than death, disability or cause, then such employee
shall be entitled to receive (A) his regular compensation, including all awards,
perquisites and benefits, through the date on which his employment terminated
and (B) either (1) a lump sum payment in an amount equal to 2.99 times his "base
salary" (as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended) or (2) his base salary in such periodic installments throughout the
balance of the term of such employment agreement as would have been payable if
the employee had not been terminated.
Prior to his termination on September 19, 1997, Harvey Tauman had an
employment agreement with HyTech. On September 19, 1997, his employment
agreement was canceled.
On September 19, 1997, the Board of Directors appointed Richard Banakus to
serve as
- ----------
(1) Total value of unexercised options is based upon the closing price
($.4375) of the Common Stock as reported by NASDAQ on December 31, 1997.
(2) Value realized in dollars is the amount that the shareholder is deemed
to have received as the result of the exercise of options, based upon the
difference between the fair market value of the Common Stock as reported by
NASDAQ on the date of exercise and the exercise price of the options.
25
President of HyTech on an interim basis. The Board has agreed to pay Mr. Banakus
a monthly salary of $10,000 and to reimburse his lodging expenses in Boca Raton,
Florida and travel expenses to and from California, where Mr. Banakus resides.
Compensation of Directors
Employees of HyTech who also serve as directors are not entitled to any
additional compensation for such service.
Nonemployee directors receive an annual fee of $5,000, paid quarterly, and
during the fiscal year ended December 31, 1997, (1) each of Messrs. Richard
Banakus, Frank Fiur, Hugues Lamotte and Samuel Leb were paid $5,000 for their
service as a director; (2) Mr. Joseph A. Caccamo was paid $3,750 for his service
as a director; (3) Mr. Nestor Cardero was paid $2,500 for his service as a
director and (4) each of Messrs. Mark Egide and Charles Fox were paid $1,250 for
their service as a director.
The 1993 Nonemployee Director Stock Option Plan ("1993 Plan") was adopted
by the Board of Directors on December 22, 1993, approved by the shareholders on
July 19, 1994 and approved, as amended, by the shareholders on December 17,
1997. The purpose of the 1993 Plan was to assist HyTech in attracting and
retaining key directors who are responsible for continuing the growth and
success of HyTech. In accordance with the 1993 Plan, on September 1, 1997,
grants of options to purchase 8,333 shares of Common Stock were granted to each
of Messrs. Richard Banakus, Joseph A. Caccamo, Nestor Cardero, Frank Fiur,
Hugues Lamotte and Samuel Leb at an exercise price of $2.50 per share (a price
above the fair market value at the time of grant). The options granted to
Messrs. Joseph A. Caccamo and Nestor Cardero were canceled in December 1997, as
they were not exercised within a period of three months from the date these
individuals resigned from the Board of Directors. The options granted to Messrs.
Richard Banakus, Frank Fiur, Hugues Lamotte and Samuel Leb were canceled upon
the approval of the 1997 Nonemployee Director Stock Option Plan, as discussed
below.
On November 10, 1997, the Board of Directors of HyTech adopted the 1997
Nonemployee Stock Option Plan ("1997 Plan"). This plan was approved by the
shareholders on December 17, 1997. The purpose of the 1997 Plan is to assist
HyTech in attracting and retaining experienced and knowledgeable nonemployee
directors who will continue to work for the best interests of HyTech.
The 1997 Plan provides nonqualified stock options for nonemployee
directors to purchase an aggregate of 500,000 shares of Common Stock, with
grants of options to purchase 10,000 shares to each nonemployee director on
October 1, 1997, grants of options to purchase 10,000 shares on each May 1st
thereafter, and grants of options to purchase 10,000 shares upon election or
appointment of any new nonemployee directors. The options are not exercisable
for a one year period and are to be granted at an exercise price equal to the
average fair market value of the Common Stock during the ten business days
preceding the day of the grant of the option. Each of Messrs. Mark Egide, Frank
Fiur, Charles Fox, Hugues Lamotte and Samuel Leb were granted options to
26
purchase 10,000 shares of Common Stock at the exercise price of $.70625 per
share on November 10, 1997. Ms. Karen Gray and Mr. Charles Johnston were each
granted options to purchase 10,000 shares of Common Stock at the exercise price
of $.6047 per share on December 17, 1997.
The 1997 Plan also provides nonqualified stock options for nonemployee
directors who serve on committees of the Board of Directors. During December
1997, grants of options to purchase 2,500 shares of Common Stock at an exercise
price of $.6047 per share were granted to each of Messrs. Mark Egide, Charles
Johnston and Samuel Leb for their participation on the Compensation Committee of
the Board of Directors. Also, in December 1997, grants of options to purchase
2,500 shares of Common Stock at an exercise price of $.6047 per share were
granted to each of Messrs. Mark Egide, Frank Fiur and Hugues Lamotte for their
participation on the Audit Committee of the Board of Directors. The options are
not exercisable for a one year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of the close of business on
March 25, 1998 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
(11 persons), and by each person known to HyTech to be the beneficial owner of
more than five percent of HyTech's Common Stock:
Name and Address of Amount and Nature of Approximate
Beneficial Owner Beneficial Ownership Percent of Class
Richard Banakus 1,720,000(1) 6.9%
82 Verissimo Drive
Novato, CA 94947
Thomas G. Burns 60,000(2) Less than 1%
Hydron Technologies, Inc.
1001 Yamato Road, Suite 403
Boca Raton, FL 33431
Mark Egide 25,000(3) Less than 1%
2505 Vineyard Road
Novato, CA 94952
- --------
(1) Consists of 1,700,000 shares held directly and options to purchase
20,000 shares.
(2) Consists of 10,000 shares held directly and options to purchase 50,000
shares. Does not include 10,000 shares of Common Stock underlying options not
currently exercisable.
(3) Consists of 25,000 shares held directly. Does not include 15,000
shares of Common Stock underlying options not currently exercisable.
27
Frank Fiur 284,000(1) 1.1%
469 W. 83rd Street
Hialeah, FL 33041
Charles Fox 60,000(2) Less than 1%
39-08 Tierney Place
Fair Lawn, NJ 07410
Karen Gray 75,000(3) Less than 1%
1107 Key Plaza, #244
Key West, FL 33040
Charles Johnston 400,000(4) 1.6%
706 Ocean Drive
Juno Beach, FL 33408
Hugues Lamotte 320,000(5) 1.3%
Atlas Capital Limited
166 Piccadilly
Foxglove House
London, England W1V9DE
Samuel Leb, M.D. 316,252(6) 1.3%
1905 So. Oak Haven Circle
North Miami Beach, FL 33179
Chaudhury M. Prasad 212,700(7) Less than 1%
Hydron Technologies, Inc.
1001 Yamato Road, Suite 403
Boca Raton, FL 33431
- --------
(1) Consists of 140,000 shares held directly; 114,000 shares held by his
spouse; and options to purchase 30,000 shares of Common Stock. Does not include
12,500 shares of Common Stock underlying options not currently exercisable. Mr.
Fiur disclaims beneficial ownership of 114,000 shares held by his spouse.
(2) Consists of 60,000 shares held directly. Does not include 10,000
shares of Common Stock underlying options not currently exercisable.
(3) Consists of 15,000 shares held directly and options to purchase 60,000
shares. Does not include 10,000 shares of Common Stock underlying options not
currently exercisable.
(4) Consists of 400,000 shares held directly. Does not include 12,500
shares of Common Stock underlying options not currently exercisable.
(5) Consists of 300,000 shares held directly and options to purchase
20,000 shares. Does not include 12,500 shares of Common Stock underlying options
not currently exercisable.
(6) Consists of 151,152 held as an IRA beneficiary; 80,000 shares held as
a co-trustee; 45,100 shares held as a co-trustee and beneficiary; and options to
purchase 40,000 shares. Does not include 12,500 shares of Common Stock
underlying options not currently exercisable.
(7) Consists of 210,200 shares held directly and options to purchase 2,500
shares.
28
Richard Tauman 85,000(1) Less than 1%
Hydron Technologies, Inc.
1001 Yamato Road, Suite 403
Boca Raton, FL 33431
All officers and directors as 3,557,952(2) 14.2%
a group (11 persons)
Item 13. Certain Relationships and Related Transactions
During Fiscal 1997, Joseph A. Caccamo was, until September 1997, a
director of and general counsel to HyTech and was paid $68,155 in legal fees and
reimbursement of disbursements incurred on behalf of HyTech. From August 1996
through September 1997, HyTech provided office space for Mr. Caccamo. During
Fiscal 1997, Mr. Caccamo was granted options to purchase 8,333 shares of Common
Stock at $2.50 (a price above the fair market value at the time of grant), and
received a nonemployee director's fee of $3,750 for his services.
During Fiscal 1997, Charles Fox, a director of HyTech since September
1997, was paid a total of $91,766 in advisory fees and reimbursement of
disbursements incurred on behalf of HyTech. Mr. Fox advises HyTech on matters
relating to research and development. During Fiscal 1997, Mr. Fox was granted
options to purchase 10,000 shares of Common Stock at $.70625 and received a
nonemployee director's fee of $1,250 for his services.
During Fiscal 1997, Karen Gray, a director of HyTech since December 1997,
was paid a total of $21,146 in consulting fees and reimbursement of
disbursements incurred on behalf of HyTech. Ms. Gray advises HyTech on matters
relating to marketing and communications. During Fiscal 1997, Ms. Gray was
granted options to purchase 10,000 shares of Common Stock at $.6047 per share.
- --------
(1) Consists of 25,000 shares held directly and options to purchase 60,000
shares.
(2) Consists of 3,275,452 shares held directly and options to purchase
282,500 shares. Does not include 95,000 shares of Common Stock underlying
options not currently exercisable.
29
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,
1997 and 1996 F-2
Consolidated Statements of Operations for the
Years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Shareholders'
Equity for the Years ended December 31,
1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the
Years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
All financial schedules are omitted since the required information is not
present, is not in significant amounts sufficient to require submission of the
schedules or because the information required is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) Exhibits
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, and filed therein as the same exhibit number,
unless otherwise noted:
Exhibit No. and Description
30
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.
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, 1986, and filed therein as the same exhibit number,
unless otherwise noted:
Exhibit No. and Description
4.0 Non-Qualified Stock Option Plan.
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, 1987, and filed therein as the same exhibit number,
unless otherwise noted:
Exhibit No. and Description
3.2 By-laws of HyTech, as amended March 17, 1988.
4.1 Incentive Stock Option Plan, as amended January 2, 1987.
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, and filed therein as the same exhibit number,
unless otherwise noted:
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 New York on November 14, 1988
(filed as Exhibit 3.2 therein).
10.6 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Harvey Tauman (filed therein as Exhibit 10.8).
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
31
to HyTech's Current Report on Form 8-K (date of event - November 30, 1989), and
filed therein as the same exhibit number, unless otherwise noted:
Exhibit No. and Description
10.10 Agreement between Dento-Med and National Patent dated November 30, 1989.
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, and filed therein as the same exhibit number,
unless otherwise noted:
Exhibit No. and Description
4.2 1989 Stock Option Plan
10.11 Indemnification Agreement dated May 9, 1989 between Dento-Med and Samuel
M. Leb, M.D.
10.12 Indemnification Agreement dated May 9, 1989 between Dento-Med and Richard
Tauman.
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, 1991, and filed therein as the same exhibit number,
unless otherwise noted:
Exhibit No. and Description
10.13 Indemnification Agreement dated January 14, 1992 between Dento-Med and
Joseph A. Caccamo, Attorney at Law, P.C.
32
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Current Report on Form 8-K (date of event
- - 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
10.23 License Agreement dated December 6, 1993 between QVC Network, Inc. and
HyTech (filed in excised form, as confidential treatment has been granted for
certain portions thereof).
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:
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 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 April 22, 1993 between HyTech and Karen
Gray.
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
33
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
10.35 Employment Agreement dated September 16, 1994 between HyTech and Richard
Tauman.
10.36 Letter Agreement dated December 22, 1994 among HyTech, Roy Reiner and
Chemaid Laboratories, Inc.
10.37 Indemnification Agreement dated February 21, 1995 between HyTech 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, Florida between PFRS
Yamato Corp. And HyTech dated May 8, 1995.
10.39 First Amendment to Lease for 1001 Yamato Road, Suite 403, Boca Raton,
Florida between PFRS Yamato Corp. and HyTech dated September 15, 1995.
10.40 Agreement for use and occupancy of a portion of 5 East Building, 95
Mayhill Street, Saddle Brook, New Jersey, between Chemaid Laboratories, Inc. And
HyTech dated February 9, 1996.
10.41 Depository Agreement between Chemaid Laboratories, Inc. and HyTech dated
February 9, 1996.
10.42 Consulting Agreement between Charles Fox Associates, Inc. and HyTech dated
February 5, 1996.
34
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,
filed as Exhibit 4.1 therein.
10.43 First Amendment to Licensing Agreement dated May 31, 1996 between QVC and
HyTech, files as Exhibit 10.1 therein.
10.44 Letter Agreement between QDirect, Inc. and Hydron Direct, Inc. dated May
31, 1996, filed as Exhibit 10.2 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, 1996, and filed therein as the same exhibit number,
unless otherwise noted:
Exhibit No. and Description
10.45 Lease Agreement between Industrial Office Associates and HyTech dated
March 10, 1997.
10.46 Sponsorship Agreement with Pro Player Stadium dated 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.
The following documents heretofore filed with the Commission are
incorporated by reference to HyTech's Definitive Proxy Statement on Schedule 14A
for the fiscal year ended December 31, 1996, and filed therein as the same
exhibit number, unless otherwise noted:
Exhibit and Description
Amendment to 1993 Nonemployee Director Stock Option Plan.
1997 Nonemployee Director Stock Option Plan.
The following exhibits are filed herewith:
10.50 Consulting Agreement between Charles Fox Associates, Inc. and HyTech dated
May 20, 1997
35
10.51 Personal Appearance Agreement between Mr. Charles Fox and HyTech dated May
20, 1997.
10.52 Second Amendment to Licensing Agreement dated June 11, 1997 between QVC
and HyTech.
10.53 Letter Agreement between QVC and HyTech dated October 17, 1997.
10.54 Consulting Agreement between Gloria Barton and HyTech dated November 1,
1997.
10.55 Services Agreement between Lauren Anderson and HyTech dated January 1,
1998.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young, LLP, Independent Certified Public Accountants.
27 Financial Data Schedule
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth quarter of Fiscal
1997.
36
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Hydron Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Hydron
Technologies, Inc. and subsidiaries (HyTech) as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
West Palm Beach, Florida
February 13, 1998
F-1
Hydron Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1997 1996
-----------------------------
Assets
Current assets:
Cash, including cash equivalents of $1,494,695
and $5,441,109 at December 31, 1997 and 1996 $ 2,133,722 $ 5,603,708
Trade accounts receivable 554,476 611,731
Inventories 2,798,395 2,826,684
Prepaid expenses and other current assets 131,562 517,583
-----------------------------
Total current assets 5,618,155 9,559,706
Property and equipment, less accumulated depreciation
of $431,762 and $249,479 at December 31, 1997
and 1996, respectively 734,670 579,692
Deferred product costs, less accumulated
amortization of $4,313,950 and $4,005,576 at
December 31, 1997 and 1996, respectively 1,660,479 1,962,220
Investment in joint venture 288,055 238,128
Deposits 449,984 401,394
-----------------------------
$ 8,751,343 $ 12,741,140
=============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 580,597 $ 453,337
Accrued liabilities 313,508 306,323
-----------------------------
Total current liabilities 894,105 759,660
Commitments and contingencies
Shareholders' equity:
Common Stock; $.01 par value; 30,000,000 shares authorized, 24,796,816 and
23,228,511 shares issued and outstanding at December 31, 1997
and 1996, respectively 247,968 232,285
Additional paid-in capital 19,231,566 20,351,654
Accumulated deficit (11,190,951) (8,602,459)
Treasury Stock, at cost, 251,000 shares (431,345) --
-----------------------------
Total shareholders' equity 7,857,238 11,981,480
-----------------------------
$ 8,751,343 $ 12,741,140
=============================
See accompanying notes.
F-2
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1997 1996 1995
-----------------------------------------
Net sales $ 7,305,154 $ 8,112,672 $ 7,303,468
Cost of sales 2,904,042 3,323,056 2,577,606
-----------------------------------------
Gross profit 4,401,112 4,789,616 4,725,862
Expenses:
Royalty expense 386,707 386,679 337,575
Research and development 304,910 497,899 177,468
Selling, general and administrative 5,417,358 3,324,021 2,288,841
Disposal of inventory 651,270 -- --
Distribution agreement expense -- 3,149,718 --
Amortization of deferred product costs 308,374 308,176 307,733
Depreciation and amortization 182,283 120,193 48,033
-----------------------------------------
7,250,902 7,786,686 3,159,650
-----------------------------------------
Operating income (loss) (2,849,790) (2,997,070) 1,566,212
Other income (expense):
Interest and investment income 211,371 308,998 325,010
Equity in earnings (loss) of joint venture 49,927 (135,905) (78,634)
-----------------------------------------
261,298 173,093 246,376
-----------------------------------------
Income (loss) before income taxes (2,588,492) (2,823,977) 1,812,588
Income tax expense -- -- 30,000
-----------------------------------------
Net income (loss) $(2,588,492) $(2,823,977) $ 1,782,588
=========================================
Basic and diluted earnings per share
Net income (loss) per common share $ (.11) $ (.12) $ .08
=========================================
See accompanying notes.
F-3
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Additional Treasury
Common Stock Paid-in Accumulated Stock Total
Shares Amount Capital Deficit (at cost) Equity
---------------------------------------------------------------------------------------
Balance at December 31, 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
Issuance of common stock
for services 13,305 133 33,130 -- 33,263
Issuance of common stock upon
exercise of stock options 1,555,000 15,550 80,700 -- 96,250
Purchase of treasury shares, at
cost (251,000 shares) -- -- -- -- (431,345) (431,345)
Net loss -- -- -- (2,588,492) -- (2,588,492)
Cash dividends ($.05 per share) -- -- (1,233,918) -- -- (1,233,918)
---------------------------------------------------------------------------------------
Balance at December 31, 1997 24,796,816 $ 247,968 $ 19,231,566 $(11,190,951) $ (431,345) $ 7,857,238
=======================================================================================
See accompanying notes.
F-4
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1997 1996 1995
-----------------------------------------
Operating activities
Cash received from customers $ 7,362,409 $ 8,503,910 $ 8,345,103
Cash paid to suppliers and employees (9,116,272) (6,245,766) (6,918,993)
Proceeds from interest on investments 210,784 318,499 334,821
Cash paid for income taxes (14,000) (40,000) (44,000)
-----------------------------------------
Net cash provided (used) by operating activities (1,557,079) 2,536,643 1,716,931
Investing activities
Purchase of investments -- (1,949,212) --
Proceeds from sale of investments -- 1,949,212 --
Capital expenditures (337,261) (79,568) (558,964)
Payments for registering patents (6,633) (6,335) (545)
Investment in joint venture -- (152,667) (300,000)
-----------------------------------------
Net cash used by investing activities (343,894) (238,570) (859,509)
Financing activities
Proceeds from issuance of common stock 96,250 1,253,000 28,875
Dividends paid (1,233,918) (2,293,952) (2,263,374)
Purchase of treasury stock (431,345) -- --
-----------------------------------------
Net cash used by financing activities (1,569,013) (1,040,952) (2,234,499)
-----------------------------------------
Increase (decrease) in cash and cash equivalents (3,469,986) 1,257,121 (1,377,077)
Cash and cash equivalents at beginning of year 5,603,708 4,346,587 5,723,664
-----------------------------------------
Cash and cash equivalents at end of year $ 2,133,722 $ 5,603,708 $ 4,346,587
=========================================
Continued on following page.
F-5
Hydron Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1997 1996 1995
-----------------------------------------
Reconciliation of net income (loss) to net cash
provided (used) by operating activities
Net income (loss) $(2,588,492) $(2,823,977) $ 1,782,588
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization 490,657 428,369 355,766
Equity in (earnings) loss of joint venture (49,927) 135,905 78,634
Issuance of common stock for services 33,263 184,861 --
Disposal of inventory 651,270 -- --
Issuance of stock options for
non-cash consideration -- 3,100,000 --
Changes in operating assets and
liabilities:
Trade accounts receivable 57,255 391,238 1,041,635
Inventories (622,981) 1,171,620 (738,294)
Prepaid expenses and other current
assets 386,021 (386,676) (30,237)
Deposits (48,590) 6,206 (407,600)
Accounts payable 127,260 217,692 (160,217)
Accrued liabilities 7,185 111,405 (205,344)
-----------------------------------------
Total adjustments 1,031,413 5,360,620 (65,657)
-----------------------------------------
Net cash provided (used) by
operating activities $(1,557,079) $ 2,536,643 $ 1,716,931
=========================================
See accompanying notes.
F-6
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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. HyTech
has 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
Development Corporation (National Patent) to a Hydron polymer-based drug
delivery system for topically applied, nonprescription pharmaceutical products,
which HyTech intends to use to develop proprietary products or license to third
parties.
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.
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.
F-7
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
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 analyzes undiscounted cash flows on
an annual basis. No impairment losses have been recognized in the three year
period ended December 31, 1997.
Property and Equipment
Property and equipment, consisting primarily of office leasehold improvements,
furniture and equipment, is carried at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets, ranging from four to six years.
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.
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.
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 (continued)
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.
In 1997, the FASB issued Statement No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.
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
$1,516,000, $665,000 and $205,000 for 1997, 1996 and 1995, respectively.
F-9
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Inventories
At December 31, 1997 and 1996, inventories consist of the following:
1997 1996
-----------------------
Finished goods $1,731,767 $1,880,112
Work-in-process 270,480 95,241
Raw materials and components 796,148 851,331
-----------------------
$2,798,395 $2,826,684
=======================
The results of operations for the year ended December 31, 1997 include a charge
of $651,270, primarily relating to the write down, to net realizable value, of
HyTech's vitamin and nutritional supplement line of products. This product line
has been discontinued by HyTech.
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 through 1989, 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-based products, except with respect to certain excluded products. In the
area of prescription and nonprescription drugs using Hydron polymers as a drug
release mechanism, both 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. For the years ended December 31, 1997, 1996 and 1995, HyTech paid
royalties to National Patent of approximately $330,000, $387,000 and $338,000,
respectively. HyTech has not received any royalties from National Patent during
these periods.
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. 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
$42,000 and $60,000 in 1997 and 1996, respectively.
5. Significant Customer
HyTech presently sells a substantial portion of its products to QVC. During the
years ended December 31, 1997, 1996 and 1995, approximately 82%, 97% and 98%,
respectively, of HyTech's sales were made to QVC and its affiliates. At December
31, 1997 and 1996, amounts due from QVC included in trade accounts receivable
were approximately $538,000 and $592,000, 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.
Pursuant to the Amended License Agreement, certain retail marketing rights
formerly held by Direct to Retail (DTR), which rights were granted by QVC to DTR
under a separate agreement, reverted to HyTech. Such 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 is entitled to receive a commission from HyTech on any such sales.
F-11
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Significant Customer (continued)
Concurrent with the execution of the Amended License Agreement, and as part of
the overall transaction, HyTech granted DTR a warrant to purchase 1.5 million
shares of the Company's common stock at $.01 per share. As a result, HyTech
incurred, during 1996, a one-time non-cash charge against earnings of
approximately $3.15 million (Distribution Agreement Expense). Also during 1996,
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, in
1996, 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.
On June 11, 1997, HyTech and QVC renegotiated the Amended License Agreement
(Renegotiated License Agreement) pursuant to which the term of the Amended
License Agreement was extended for one year, commencing on June 1, 1997.
In October 1997, HyTech agreed, primarily as a result of a five month decline in
HyTech's on-air sales, to further amend the Renegotiated License Agreement with
QVC to temporarily reduce its scheduled airtime to two hours per month. HyTech
has since revised its show format and hired a permanent on-air spokesperson. As
a result, HyTech exercised its right to reinstate the previous airtime
provisions, which returned to four hours per month, commencing in February 1998.
Under the terms of the Renegotiated License Agreement, QVC must meet certain
minimum product purchase requirements for a two year period, including annual
minimum product purchase requirements, to maintain its exclusive rights. No
obligation exists for QVC to purchase HyTech's 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 meets the stipulated minimum product purchase
requirements, then the Renegotiated License Agreement renews automatically. If
QVC does not meet the annual minimum product purchase requirements, then HyTech
alone can elect to continue or terminate the Renegotiated License Agreement. If
QVC does not meet the biannual minimum product purchase requirements, then both
HyTech and QVC have the ability to renew or terminate the Renegotiated License
Agreement. If the Renegotiated License Agreement terminates, HyTech may seek
other marketing and distribution arrangements for its products, which may
include distribution agreements with QVC on a nonexclusive arrangement. Although
management believes that there are other avenues for selling its products,
including the Hydron catalog, which was initiated in November 1996, the loss of
QVC as a customer would have a material adverse effect on HyTech's business.
F-12
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
HyTech accounts for income taxes under FASB Statement No. 109, "Accounting for
Income Taxes" (FASB 109). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Income tax expense consists of the following:
Year ended December 31
1997 1996 1995
-------------------------------------------
Current Federal -0- -0- $30,000
===========================================
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
HyTech's net deferred income taxes are as follows:
1997 1996
----------------------------
Net operating loss carryforwards $ 4,956,000 $ 3,070,000
Tax credit carryforwards 191,000 190,000
Deferred compensation -- 1,178,000
Other 392,000 67,000
----------------------------
Deferred tax assets 5,539,000 4,505,000
Less valuation allowance (5,539,000) (4,505,000)
----------------------------
Total net deferred taxes $ -- $ --
============================
F-13
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
FASB 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $5,539,000 valuation allowance at December 31, 1997 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The valuation allowance increased (decreased) by
$1,034,000, $805,000 and ($600,000) in 1997, 1996 and 1995, respectively. At
December 31, 1995 and 1994, the valuation allowance was $3,700,000 and
$4,300,000, respectively. At December 31, 1997, HyTech has available net
operating loss carryforwards of $13,041,000, which will expire beginning in the
year 2001 and through the year 2009. The tax benefit relating to $2,745,000 of
the above net operating loss carryforwards will be charged to shareholders'
equity in the period in which the benefit is recognized.
The reconciliation of income tax rates, computed at the U.S. federal statutory
tax rates, to income tax expense is as follows:
Year ended December 31
1997 1996 1995
-------------------------
Tax at U.S. statutory rates (34)% (34)% 34%
State income taxes, net of federal tax benefit (4) (4) 4
Valuation allowance adjustments 38 38 (36)
-------------------------
-0-% -0-% 2%
=========================
7. Stock Options and Warrants
The number of shares of common stock reserved for issuance at December 31, 1997
and 1996 was 1,865,502 and 3,948,805, respectively.
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-14
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, 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, 1995 and 1996 76,000 1.438 to 3.00 2.16
Stock options expired (25,000) 1.438 1.438
----------------
Outstanding at December 31, 1997 51,000 2.50 to 3.00 2.51
================
These options expire five years from the date of the grant and all outstanding
options are exercisable at December 31, 1997. There are 9,500 options available
for grant under this plan at December 31, 1997.
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, 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
Stock options expired (25,000) 5.00
-------------
Outstanding at December 31, 1996 432,500 2.285 to 4.606 3.04
Stock options granted 65,000 1.875 to 2.00 1.962
Stock options expired (340,000) 1.875 to 2.625 2.444
-------------
Outstanding at December 31, 1997 157,500 2.00 to 4.606 3.561
=============
F-15
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,
1997, a total of 122,500 of these options are exercisable at an average exercise
price of $3.833 per share. There are 467,500 options available for grant under
this plan at December 31, 1997.
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, 1994 60,000 $ 2.50 to $5.688
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
Stock options granted 50,000 2.50 2.50
Stock options expired (120,000) 2.50 to 5.688 3.151
-------------
Outstanding at December 31, 1997 110,000 2.50 to 5.688 3.625
=============
These options expire five years from the date of the grant and all outstanding
options are exercisable at December 31, 1997. There are no options available for
grant under this plan at December 31, 1997.
F-16
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Warrants (continued)
1997 Nonemployee Director Stock Option Plan
During 1997, HyTech adopted the 1997 Nonemployee Director Stock Option Plan.
Such plan provides grants of stock options to nonemployee directors of HyTech to
purchase an aggregate of 500,000 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 October 1st throughout the term of this plan at
exercise prices equal to the average of the fair market value of HyTech's common
stock during the ten business days preceding the date of the grant. In addition,
each nonemployee director who sits on a committee of the Board of Directors
shall be granted an option to purchase 2,500 shares of HyTech's common stock
under the same pricing arrangements as above. Subject to certain exceptions, no
options granted under this plan shall be exercisable until one year after the
date of grant. During 1997, there were 85,000 options granted under this plan at
exercise prices ranging from $.6047 to $.7063 (weighted average exercise price
of $.664). These options expire five years from the date of grant and none of
the outstanding options are exercisable at December 31, 1997. There are 415,000
options available for grant under this plan at December 31, 1997.
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:
F-17
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Warrants (continued)
Other Options and Warrants (continued)
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
----------------------------------------------
Outstanding at December 31, 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 warrants 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
Stock options and warrants exercised (1,568,305) .01 to 2.50 .083
Stock options expired (530,000) 1.375 to 3.00 2.703
-------------
Outstanding at December 31, 1997 560,000 2.50 to 5.00 2.768
=============
The options and warrants outstanding at December 31, 1997 generally expire two
to five years after the date of grant. At December 31, 1997, all outstanding
options and warrants are exercisable.
The options under this plan that were exercised in fiscal 1997, 1996 and 1995
resulted in proceeds of $96,250, $1,253,000 and $28,875, respectively. In
addition, during 1997 and 1996, options were exercised for services valued at
$33,263 and $184,861, respectively.
See Note 5 relating to options exercised by QVC and warrants granted to DTR and
QVC in conjunction with the Amended License Agreement.
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 the
years ended December 31, 1997, 1996 and 1995:
F-18
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Warrants (continued)
1997 1996 1995
----------------------------------------------
Risk-free interest rate 6.5% 6.5% 6.5%
Expected life 3 years 3 years 3 years
Expected volatility .572 .575 .595
Expected dividend yield 5% 3.34% 2.46%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different than
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
compensation expense from stock option awards on proforma net income reflects
only the vesting of 1995 awards in 1995 and the vesting of 1996 and 1995 awards
in 1996, and the vesting of 1997, 1996 and 1995 awards in 1997, 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 $2,606,181 and $2,867,177 for the years ended December 31,
1997 and 1996, respectively, 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 was $.11
and $.13 per share for the years ended December 31, 1997 and 1996, respectively,
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, 1997 was $.41 for options whose exercise price was greater
than the market price on the date of the grant. The weighted average remaining
contractual life of all options outstanding at December 31, 1997 was 3.02 years.
F-19
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Years ended December 31,
1997 1996 1995
------------------------------------------
Numerator:
Net income (loss) is both the numerator for
basic earnings per share (income available
to common shareholders) and the numerator
for diluted earnings per share (income
available to common shareholders after
assumed conversions) $(2,487,701) $(2,823,977) $ 1,782,588
==========================================
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 24,027,809 22,905,175 22,632,180
Effect of dilutive securities:
Stock options and warrants -- -- 504,282
------------------------------------------
Denominator for dilutive earnings per
share (adjusted weighted-average) 24,027,809 22,905,175 23,136,462
==========================================
Basic earnings per share $ (.11) $ (.12) $ .08
==========================================
Diluted earnings per share $ (.11) $ (.12) $ .08
==========================================
See Note 7 for additional disclosures regarding the stock options and warrants.
Options and warrants to purchase 963,500 and 3,346,805 shares of common stock
were outstanding during 1997 and 1996, respectively, but were not included in
the computation of diluted earnings per share because the effect would be
antidilutive to the net loss per share for the respective periods. Options and
warrants to purchase 1,551,000 shares of common stock were outstanding during
1995, but were not included in the computation of diluted earnings per share
because the exercise prices of the options and warrants were greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
F-20
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Related Party Transactions
During the years ended December 31, 1997, 1996 and 1995, HyTech paid
approximately $68,000, $79,000 and $64,000, respectively, in legal fees to an
attorney who was also a director of HyTech until September 1997.
HyTech has also paid a consultant, who was elected as a director in September
1997, advisory fees and expense reimbursements of approximately $92,000,
$289,000 and $21,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
10. Commitments
HyTech leases office and warehouse space under noncancelable lease agreements
which expire in August 2001 and September 2000, respectively. At December 31,
1997, the future minimum rental payments due under such noncancelable leases are
as follows:
1998 $ 155,000
1999 134,000
2000 125,000
2001 71,000
-----------
$ 485,000
===========
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 $258,000, $240,000 and $98,000
in 1997, 1996 and 1995, respectively.
HyTech has employment agreements with two executive officers, providing for
their continued employment through April 30, 2003 and August 31, 2004. The
combined current annual salaries are approximately $189,000. One agreement
provides for annual salary increases of the greater of 5% per year or the annual
increase in the CPI. In addition, both agreements provide that salaries may also
be increased at the discretion of the Board of Directors.
F-21
Hydron Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Contingencies
On September 30, 1997, Harvey Tauman, formerly Chairman, Chief Executive
Officer, President and Treasurer of HyTech, whose employment was terminated by
HyTech on September 19, 1997, commenced an action (the "Action") against HyTech
in the Circuit Court of the Fifteenth Judicial District in and for Palm Beach
County, Florida. In his complaint in the Action, Mr. Tauman alleges that HyTech
breached his employment contract upon the termination of his employment and
seeks damages of not less than $4,000,000, plus interest and costs. Mr. Tauman
also seeks a declaration that his employment was terminated without cause and
that he may continue to exercise his stock options for the duration of their
term notwithstanding the termination of his employment.
On November 4, 1997, HyTech served and filed its answer to the complaint in the
Action and asserted counterclaims against Mr. Tauman seeking various relief
against him including an award of compensatory and punitive damages of not less
than $6,000,000, together with appropriate interest, costs and expenses. In its
counterclaims, HyTech seeks a declaration, among other things, that Mr. Tauman
breached his employment agreement as a result of wrongful and fraudulent
performance of his duties under the contract. Among other allegations, HyTech
contends in its counterclaims that Mr. Tauman improperly caused HyTech to make
payments of personal expenses upon the submission by Mr. Tauman of false expense
reports and receipts, caused HyTech improperly to enter into consulting
agreements with members of his family and with friends without Board approval,
misrepresented to the Board the financial condition of HyTech and its prospects
in order to obtain a grant to himself of bonuses and stock options to which he
would otherwise not have been entitled, caused the submission to the Board of
false projections of HyTech's revenues in order to cause the Board to declare
dividends of which he was a substantial recipient and to approve a share
repurchase plan, caused HyTech to pay for accounting services rendered to him
and to other members of his family, and intentionally breached his fiduciary
duties to HyTech.
Management is unable, at this time, to estimate the likelihood or scope of
liability, if any, it may incur as a result of Mr. Tauman's claims or the
likelihood of success of its counterclaims.
F-22
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hydron Technologies, Inc.
(Registrant)
By: /s/ Richard Banakus
--------------------
Richard Banakus, Interim President
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
By: /s/ Richard Banakus By: /s/ Thomas G. Burns
---------------------- ------------------------
Richard Banakus, Thomas G. Burns
Chairman of the Board (principal financial and
(principal executive officer) accounting officer)
Date: March 25, 1998 Date: March 25, 1998
By: /s/ Mark Egide By: /s/ Frank Fiur
---------------------- ------------------------
Mark Egide, Director Frank Fiur, Director
Date: March 25, 1998 Date: March 25, 1998
By: /s/ Charles Fox By: /s/ Karen Gray
---------------------- ------------------------
Charles Fox, Director Karen Gray, Director
Date: March 25, 1998 Date: March 25, 1998
By: /s/ Charles Johnston By: /s/ Hugues Lamotte
---------------------- ------------------------
Charles Johnston, Director Hugues Lamotte, Director
Date: March 25, 1998 Date: March 25, 1998
By: /s/ Samuel M. Leb By: /s/ Richard Tauman
---------------------- ------------------------
Samuel M. Leb, M.D., Director Richard Tauman, Director
Date: March 25, 1998 Date: March 25, 1998