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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 2001 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission file Number 0-6333
HYDRON TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
New York 13-1574215
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2201 West Sample Road, Building 9, Suite 7B, Pompano Beach, FL 33073
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 861-6400
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [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 non-affiliates
of the Registrant was $1,638,769 based upon the closing price of $0.36 on March
15, 2002.
Number of shares of Common Stock outstanding as of March 15, 2002: 4,975,136
Documents Incorporated by Reference: None
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Part I
Item 1. Business
Introduction
Hydron Technologies, Inc. ("the Company"), a New York corporation
organized on January 30, 1948, maintains its principal office at 2201 West
Sample Road, Building 9, Suite 7B, Pompano Beach, Florida 33073 and its
telephone number is (954) 861-6400.
The Company markets a broad range of consumer and oral health care
products using a moisture-attracting ingredient (the "Hydron(R) polymer"), and
owns a non-prescription drug delivery system for topically applied
pharmaceuticals, which uses such polymer. The Company holds U.S. and
international patents on, what Management believes is, the only known
cosmetically acceptable method to suspend the Hydron polymer in a stable
emulsion for use in personal care/cosmetic products. The Company has
concentrated its sales and development activities primarily on the application
of these biocompatible, hydrophilic polymers in various personal care/cosmetic
products for consumers and, to a lesser extent, oral care products for dental
professionals. The Company is developing other personal care/cosmetic products
for consumers using its patented technology. The Company intends to continue to
explore the efficacy of using its technology as a topical drug delivery system
and would, when appropriate, either seek licensing arrangements with third
parties, or develop and market proprietary products through its own efforts.
Management believes that because of their unique properties, products that
utilize the Hydron polymer have the potential for wide acceptance in consumer
and professional health care markets.
Consumer Products
The Company has been engaged in the development of various consumer
products using Hydron polymers since 1986. The Company's products are designed
to address concerns about aging, and include Hydron skin care, hair care, bath
and body and sun care.
The Company currently has thirty-nine individual products available in
the following product lines: skin care (22 products), hair care (7 products),
bath and body (8 products) and sun care (2 products). These products are also
packaged into collections and sold at a more favorable value than the individual
products sold separately. All of the products are sold directly by the Company
to consumers through the Hydron Catalog and Web site www.hydron.com ("Catalog").
Management believes that the Company's product lines are unique and
offer the following competitive benefits: the moisturizers self-adjust to match
the skin's optimal pH balance soon after they are applied to the skin; 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, allowing the skin to breathe; they do not emulsify
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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, all
while leaving no greasy after-feel. The Company's products are dermatologist
tested and approved for all skin types. Products for use around the eye area are
also ophthalmologist tested and safe for contact lens wearers. Most of the
Company's moisturizing products are based on the Company's patented emulsion
system, which permits the product ingredients to deliver their intended benefits
over an extended period of time and in a more efficient manner. See "Patented
Technology."
Professional Products
The Company has also developed and currently markets a group of Hydron
polymer-based products for dental professionals under the Hydrocryl(R) brand
name. These include a heat cured material used in the manufacture of dentures,
as well as cold cure kits used in connection with the relining or repairing of
existing Hydrocryl or conventional acrylic dentures that is necessitated by the
continual changes that occur in the tissue structure of the mouth. Management
believes that the hydrophilic, or moisture attracting properties, of these
Hydron polymer-based products give them competitive advantages over conventional
acrylic dentures and denture repair kits, which are not hydrophilic. Sales of
Hydrocryl brand name products were minimal in 2001, 2000 and 1999.
Topical Drug Delivery System
Management believes that the Company's patented Hydron emulsion system
can enhance the effectiveness of over-the-counter medications applied to the
skin. The system is designed to deposit a uniform film on the skin's surface and
to have a relatively low affinity for the drug associated with the application.
The emulsion system is moisture-resistant so that it is not degraded by
perspiration or sebaceous oils, but is oxygen permeable. Management believes
that the Hydron system has a number of advantages over traditional lotions as it
promotes hydration of the stratum corneum (the outer layer of skin) which
improves penetration into the skin's pores, and has good tactility and
flexibility. The system has also been developed to be free from greasiness,
tackiness, gumminess or oiliness, to make it comfortable on the skin and to be
resistant to inks, dyes, oils and other materials with which the treated skin
may come in contact. The Company intends to continue to explore the efficacy of
using its technology as a topical drug delivery system and would, when
appropriate, either seek licensing arrangements with third parties, or develop
and market proprietary products through its own efforts.
Marketing and Distribution
The majority of the Company's products are currently sold in the United
States through Hydron direct marketing channels (proprietary Catalog and the
World Wide Web site). The Company also sells its products to private label
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customers, television retailers and, to a lesser extent, internationally through
salons and doctors offices.
While in prior years television retail was the primary focus for the
marketing and distribution of the Company's products, Management believes that
the Company's exclusive agreements with television retailers had limited the
marketing opportunities to build its business through additional sales channels.
Under exclusive contracts with television retailers the Company neither
controlled its airtime nor the selling priorities of those television retailers;
effectively handicapping the Company's ability to influence sales trends.
The Company began diversifying away from television retailers in 2001
with continued focus on developing the Catalog business and the addition of a
private label customer to provide additional cash flow. Further, the Company has
been pursuing new international distribution and new products that would
significantly augment Hydron's direct marketing efforts. This development
includes filing a patent in February 2002 on new acne formulas that provide
marked performance improvements versus other over-the-counter products currently
on the market.
Management believes a broader base of sales outlets, customers and products will
provide a more solid foundation for future growth by expanding and diversifying
the Company's sources of revenue.
- Hydron Direct Marketing
In November 1996, the Company opened a new channel of distribution for
Hydron products with the launch of its proprietary Catalog. This full color
Catalog offers the Company's personal care products for sale directly to
consumers. The Catalog also provides information on new products, educates
consumers on proper skin care and facilitates consumer re-ordering. The Company
is continuing to explore new ways to enhance Catalog sales and operations.
To become more competitive in its stand-alone direct marketing efforts,
the Company has developed a new look and a new marketing strategy that has
evolved during the last year. Using an industry leading writer/positioning
expert and a local boutique advertising agency, the Brand's communication
strategy has been shifted from "the Hydron Difference Means Moisture" to a more
active performance strategy "Nothing's More Aggressive Against Age, Nothing's
More Gentle To Skin". This positioning is fully supported by the Company's
patented formula system. The marketing materials are much more focused on boldly
presenting the skincare treatment products where anti-aging performance is the
consumer's top priority.
The Company's sales on the World Wide Web continue to increase as the
result of a more unified marketing program where Hydron's web site mirrors the
Catalog marketing efforts. The Company transmits regular E-mail broadcasts to
its customer base, which provides links to the Company's web site. This strategy
has boosted internet sales with sales generated by the Company's web site now
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representing over 15% of Hydron's direct marketing Catalog business. The Company
has also been testing E-mail offers through third party databases as a means for
prospecting for new customers. An internet-based marketing strategy has become
more feasible as declining advertising revenues for web companies have caused
rates for joint marketing efforts to become more reasonable.
In 1997, the Company, through its wholly-owned subsidiary, Hydron
Direct, Inc., entered into an agreement with QDirect Ventures, Inc., an
affiliate of QVC, Inc., to form a new joint venture, known as New Hydromercial
Partners ("Infomercial Partnership"), to promote and sell the Company's Hydron
polymer-based skin care products through a thirty-minute commercial
("Infomercial"). Although the Infomercial is not currently being aired, it had
been shown on regional and national cable networks, at various times, since
September 1995. The partnership has been terminated and Hydron is marketing
directly to the partnership's 25,000 customers.
Management continues to believe that marketing Hydron products through
direct response mail, Catalog, print and television affords the Company several
advantages over conventional in-store retailing. These advantages include: cash
flow that enables the Company to internally finance product development and new
marketing activities the ability to take advantage of time-sensitive
opportunities by moving products to market quickly, and the ability to conduct
real time market research, which can allow Management to make prompt and cost
effective marketing decisions.
- Private Label Customers
Effective March 1, 2001, the Company entered into an agreement with
Reliv International, Inc ("Reliv") to develop and manufacture a line of private
label skin care products under their brand name, ReversAge(R). Five products
were introduced in August 2001 at a national sales meeting to Reliv's multi-tier
marketing distribution network. The agreement requires minimum product purchases
and advance payments to cover packaging and design costs. Reliv is a public
company traded on NASDAQ (symbol RELV).
- Television Retailers
Sales of the Company's products to television retailers once were
central to the Company's marketing and distribution strategy. However, such
sales have declined dramatically in recent years. With the termination of the
Company's agreement with HSN in September 2001, sales to television retailers
have been reduced to limited sales made to QVC on a non-exclusive basis. Sales
to television retailers accounted for approximately 18%, 50%, 68%, 79%, and 82%
of the Company's total sales for 2001, 2000, 1999, 1998, and 1997, respectively.
5
HSN - In September 1999, the Company entered into a marketing and
distribution agreement (the "Home Shopping Agreement") with HSN that granted HSN
an exclusive worldwide license to market and distribute certain of the Company's
proprietary consumer products through various forms of electronic retailing. The
Home Shopping Agreement also granted HSN a non-exclusive license to market
Hydron products through all other methods of distribution in certain countries
outside the United States.
The Company launched its products on HSN's television network in
September 1999. In November 2000, during the second year of the Home Shopping
Agreement, the Company also began marketing on HSE, the Spanish language
subsidiary of HSN. Since HSN did not meet the minimum purchase requirements
during the first year of the two-year agreement, the contract did not
automatically renew after the Initial Term of two years. Management and HSN
chose not to renew the agreement for the third year. Management is actively
exploring other distribution and marketing alternatives in addition to expanding
its current Catalog and direct marketing programs.
QVC - The Company entered into a license agreement with QVC in 1993,
whereby QVC was granted exclusive rights to market and distribute the Company's
proprietary consumer products using Hydron polymers in the Western Hemisphere.
The license and subsequent amendments required that QVC meet certain minimum
product purchases. Effective May 31, 1999, the Company terminated the
Renegotiated License Agreement as a result of QVC's failure to satisfy the
annual minimum product purchase requirements for the period ended May 31, 1999.
The Company continues to sell certain product to QVC, on a
non-exclusive basis, primarily for resale by QVC to their customers who had
previously purchased and wish to re-order Hydron products.
International
In 1996, the Company signed an agreement for conventional retail sales
with Doctors Formula Pty. Ltd., an Australia-based health and beauty products
distributor, to market Hydron products in retail salon stores and medical
offices in Australia and New Zealand.
The Company entered into a distribution agreement with a distributor in
Taiwan in April 2001. The first shipment to Taiwan was in May 2001. The Company
also distributes dental products into Spain and, to a lesser extent, other
countries. Although this category is not significant at this time, Management is
commited to the expansion of international sales and believes that international
sales represent one of the foundations for the future growth of the Company.
Research and Development
The Company expects to continue to focus research and development
resources on additional Hydron polymer-based products, as well as other
proprietary technology-based products as determined by Management's assessment
6
of consumer demand. The Company's research and development efforts during 2001
continued to achieve greater diversification among the Company's product lines
by development of new products targeted at the aging baby boomer marketplace.
Management has completed development of a new acne ingredient delivery
system initiated in 2000. Hydron filed for patent protection in February 2002
for this revolutionary delivery system for over-the-counter (OTC) acne drug
ingredients. The new system significantly reduces the harshness and irritation
caused by most acne products currently in the marketplace. The Brand will be
developed under the registered Aclime(R) trademark. The Company is currently
finalizing packaging and evaluating alternative distribution channels for the
line, including: direct marketing, limited retail and infomercials.
The market for acne treatment is growing, particularly among adults who
are one of the primary targets for the Aclime(R) brand. According to current
market research studies, the core acne consumer market is about 25 million
consumers. Up to 47% of adult women experience at least occasional breakouts.
Retail sales of OTC acne treatments account for $380 million in sales and an
industry analyst estimates an additional $300 million is accounted for by direct
marketing, primarily through infomercials. An additional $650 million is spent
in the prescription market in the United States.
The Company is also researching and developing new technology-based and
possibly patentable skin treatment systems that would augment its product line.
During 2001, the Company's research and development efforts advanced
groundbreaking research into a skin treatment that may provide anti-aging
treatments, wound treatments and healing enhancement. When appropriate, the
Company may license additional existing technology to fully secure its marketing
rights. Research and development efforts include product formulation, clinical
testing, packaging design and prototypes, extensive product safety and stability
testing conducted by medical professionals, efficacy studies to support product
claims, and consumer research. Charles Fox, a consultant and a former member of
the Company's Board of Directors from September 1997 to October 1998, leads the
Company's research and development efforts. Mr. Fox was formerly director of
product development for Warner Lambert Company's personal products division and
president of the Society of Cosmetic Chemists.
Patented Technology
The Company strongly believes that technology and patent protection are
essential to providing a sound foundation for a new product. The Company was
granted U.S. Patent No. 4,883,659, dated November 28, 1989, and U.S. Patent No.
5,039,516, dated August 13, 1991, which cover a stable moisturizing emulsion
containing an unusual emulsifying agent, as well as the Hydron polymer and a
unique combination of ingredients. These patents have expiration dates of
November 28, 2006 and August 13, 2008, respectively. During 1999 the Company was
granted U.S. Patent No. 5,879,684 for its "Line Smoothing Complex" formula. This
7
product has been clinically shown to reduce fine lines and wrinkles. The patent
has an expiration date of April 11, 2017. In addition, the Company has
registered several trademarks relating to it's cosmetic products.
The Company has also received patent protection for its emulsification
process in several countries to facilitate distribution and sale of these
products outside of the United States. The Hydron polymer, 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. The film is
insoluble in water and resistant to rub-off, but can easily be removed with
cleanser and water.
In 2000, the Company discovered that the Hydron emulsion system also
adjusts pH on the skin to match the pH of the stratum corneum, the skin's
surface layer. It is evident in recent skin research that the pH range of the
emulsion system is essential for contributing to the skin's natural healing
process and enzyme production responsible for rebuilding the skin's lipid
barrier.
Management believes that there are no competitive cosmetic products
with this combination of properties. Applications for the Hydron polymer and the
Company's patented technology in the cosmetics and pharmaceutical industries
include more effective and prolonged delivery of moisturizing agents to the
skin, enhanced 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.
Manufacturing and Raw Materials
Hydron polymer-based products are manufactured exclusively for the
Company by independent third parties. The Company has used principally two
manufacturers of cosmetic products because of the quality of their production
and reasonable costs. To date, contract manufacturing has allowed the Company to
meet inventory requirements in a timely manner. All raw material and packaging
components for the Company's consumer and professional product lines are readily
available to the Company from a variety of sources.
The Company is not dependent on any sole manufacturer except National
Patent, which has agreed to make the Hydron polymer available to the Company as
needed, and to provide the Company with all manufacturing procedures, including
know-how, and render necessary and reasonable technical assistance should
National Patent be unable to meet the Company's requirements for the Hydron
polymer. The loss of National Patent as a supplier or a reduction in the
availability of the Hydron polymer would have a material adverse effect on the
Company's business.
8
Agreement with National Patent
Pursuant to the terms of an agreement ("Patent Agreement") with
National Patent Development Corporation ("National Patent"), the Company has the
exclusive worldwide rights to market products using Hydron polymers in the oral
health, personal care/cosmetic and other consumer product fields, the areas in
which the Company has been concentrating its research and development efforts.
The Company also has exclusive worldwide rights to utilize Hydron polymers in
its topical delivery system for non-prescription drugs only. National Patent has
the exclusive worldwide rights to market prescription drugs and medical devices
using Hydron polymers. Furthermore, each Company has the right to exploit
products with Hydron polymers not in the other's exclusive fields.
The Patent Agreement requires the Company to pay a 5% royalty to
National Patent based on the net sales of products containing the Hydron
polymer. Additionally, National Patent is required to pay the Company a 5%
royalty on its net sales of Hydron polymer-based products, except with respect
to certain excluded products. In the area of prescription and nonprescription
drugs using Hydron polymers as a drug release mechanism, both the Company and
National Patent have agreed to pay the other a royalty equal to 5% of net sales
of any products developed and sold by them. In addition, the Company and
National Patent will pay the other 25% of any up-front license fees, royalties
or similar payments received from third parties with regard to such products
developed in the area of nonprescription drugs. For the years ended December 31,
2001, 2000, 1999, 1998, and 1997, the Company paid or accrued royalties to
National Patent of approximately $87,000, $104,000, $130,000, $190,000, and
$330,000, respectively. The Company has not received any royalties from National
Patent during these periods.
Inventory
The Company did not have any backorder of firm booked orders as of
December 31, 2001, and generally delivers its orders within two weeks of the
date orders are booked. Although the Company's business in not seasonal, orders
placed by Hydron's private label customers and television retailers fluctuate on
a monthly and quarterly basis. Orders placed by the Company's Catalog customers
are generally shipped within two days of the placement of the order.
Government Regulation
Most of the Company's skin care, hair care, and bath and body products
are "cosmetics" as that term is defined under the Federal Food, Drug and
Cosmetics Act ("FDC Act"), and must comply with the labeling requirements of the
FDC Act, the Fair Packaging and Labeling Act ("FPL Act"), and the regulations
thereunder. Some of the Company's products (i.e. its topical analgesic and
products that contain a sunscreen or triclosan) are also classified as
over-the-counter drugs. Additional regulatory requirements for such products
include additional labeling requirements, registration of the manufacturer and
9
semi-annual update of the drug list. Management believes that it is in
compliance with these requirements and that it faces no material costs
associated with such compliance.
Competition
The skin care business is characterized by vigorous competition
throughout the world. Product recognition, quality, performance and price have
significant influence on customers' choices among competing products and brands.
Advertising, promotion, merchandising, the pace and timing of new product
introductions and line extensions also have a significant impact on the consumer
buying decisions. The Company competes against a number of marketers of skin
care products, some of which have substantially greater resources than the
Company. Although the Company is in competition with all skin care brands,
direct competition in electronic retailing and catalog sales includes Principal
Secret, ProActiv, Physician's Advice, Susan Lucci, Signature Club A, Marilyn
Miglin, Dr. Graff, and Serious Skin Care.
Seasonality
The Company's results of operations are not subject to seasonal
fluctuations.
Employees
The Company satisfies its human resource needs utilizing an outsourcing
firm that provides all administrative services relating to payroll, personnel
and employee benefits. Management continues to hire, fire, set pay rates and
supervise its staff. This arrangement enables the Company to reduce its
administrative and benefits costs relating to employees. The Company currently
has ten full time positions.
Item 2. Properties
The Company maintains its offices at 2201 West Sample Road, Building 9,
Suite 7B, Pompano Beach, Florida 33073. The lease on this office space (3,750
square feet) expires August 31, 2003 and requires monthly rent of approximately
$4,965, including taxes and common area expenses, through August 31, 2002 and
approximately $5,300 for the last twelve months of the lease term.
In August 2000, the Company's lease for its main warehouse at 95
Mayhill Street, Saddle Brook, New Jersey 07663 expired. The monthly rent was
approximately $14,000. The Company moved the majority of its finished goods and
components to a public warehouse at 14-01 Maple Avenue, Fair Lawn, New Jersey
07410 with a monthly rent typically below $4,000 per month.
In addition, the Company moved out of its local warehouse space, of
approximately 3,200 square feet, at 1120 Holland Drive, Suites 9 and 19, Boca
Raton, Florida 33487, pursuant to a lease that expired in April 2000, at a
monthly rent of approximately $2,900. This warehouse was subleased in April 1999
10
to an independent third party under terms similar to the original lease
including the required rent and other payments. The Company no longer has any
obligation under either lease. Management believes that it's current office and
warehouse facilities are satisfactory for its present needs.
Item 3. Legal Proceedings
The Company is not a party to, and its property is not the subject of,
any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2001.
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Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock is quoted on the OTC Bulletin Board, a
regulated quotation service for over-the-counter securities not listed or traded
on Nasdaq or a national securities exchange, under the symbol HTEC.OB. The
following tables indicate the high and low closing prices for the Company's
Common Stock as reported by the OTC Bulletin Board.
2001 High Closing Price Low Closing Price
Fourth Quarter $ .44 $ .30
Third Quarter .50 .35
Second Quarter .53 .19
First Quarter .24 .13
2000 High Closing Price Low Closing Price
Fourth Quarter $ .28 $ .13
Third Quarter .41 .13
Second Quarter .47 .19
First Quarter .63 .38
As of March 19, 2002, there were approximately 3,966 shareholders of
record of the Company's Common Stock. The Board of Directors will determine the
payment of dividends in the future in light of conditions then existing,
including the Company's earnings and financial condition.
Item 6. Selected Financial Data
Years Ended December 31,
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2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Net Sales $ 1,985,313 $ 2,081,468 $ 2,593,448 $ 3,983,303 $ 7,305,154
Operating (Loss) (748,243) (946,771) (3,064,189) (2,067,349) (2,849,790)
Interest and Investment Income 9,198 20,945 80,860 144,203 211,371
Net (Loss) (758,696) (923,632) (2,974,142) (1,882,667) (2,588,492)
Basic & Diluted Earnings
(Loss) per Common Share (.15) (.19) (.60) (.38) (.54)
Total Assets 2,036,182 2,800,515 3,835,303 6,641,433 8,751,343
Total Shareholders' Equity 1,382,944 2,141,640 3,065,272 5,974,571 7,857,238
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
In 2001 the Company further reduced its reliance on sales made through
television retailers as the result of terminating the exclusive relationship
with HSN and as revenues derived from resales by QVC to prior customers
declined. Management expects that in 2002 and beyond, an increasing portion of
its sales will be generated from direct marketing by the Company through use of
direct response mail, Catalog print and sales made on its web site. Management
also expects that the Company will generate an increasing portion of its
revenues from sales made through private label customers and will look for other
opportunities to sell the Company's products through similar arrangements.
Accordingly, Management anticipates that sales made through television retailers
will continue to decline and will likely become an insignificant portion of
total revenues.
Management believes that the Company's survival and success is
dependent upon its ability to enhance distribution of its products through its
proprietary Catalog and web site, the expansion of consumer access, particularly
through third-party licensing arrangements and the use of alternative channels
of distribution such as private labeling, retail distribution and expansion into
international markets.
Results of Operations - 2001 versus 2000
Net sales for 2001 were $1,985,313, a decrease of $96,155, or 4.6%,
from net sales of $2,081,468 for the year ended December 31, 2000 ("2000").
During 2001, direct marketing catalog sales increased by approximately $160,843,
or 16%, from $1,036,595 in 2000 to $1,197,438 in 2001. The increase in direct
marketing catalog sales resulted primarily from an increase in new customer
trial and the continuation of promotional offers to existing customers.
Non-catalog sales, including private label, television retailer and
international sales, decreased by approximately $256,998, or 25%, from
$1,044,873 in 2000 to $787,875 in 2001. Sales to television retailers HSN and
QVC decreased $693,528 or 67% from $1,041,159 in 2000 to $347,631 in 2001
primarily reflecting the limited airtime provided by HSN during the first nine
months of the year and the termination of the exclusive sales agreement with
HSN, as well as declining revenues received from resales by QVC to prior
purchasers of the Company's products. Sales to television retailers represented
18% of the Company's sales in 2001, down from 50% in 2000. This decrease was
substantially offset in 2001 by the addition of private label sales of $402,557.
There were no private label sales in 2000.
As a result of several factors, the Company's overall gross profit
margin decreased to 61% of net sales for 2001 versus 78% for 2000 primarily as a
result factors affecting margin: 1) a significant shift in non-catalog sales
from television retailers to lower margin private label sales, and 2) credit
13
adjustments in 2000 representing a one-time reversal of reserves for a packaging
contract that was favorably renegotiated, representing $175,000 or 8% of gross
sales in 2000. The gross profit margin of Catalog sales decreased slightly to
82% in 2001 from 83% in 2000.
Royalty expenses in 2001 were $86,574, representing a decrease of
$16,984, or 16%, from royalty expenses of $103,558 in 2000. The decrease in 2001
is commensurate with the decrease in gross sales derived from Hydron
polymer-based products by the Company. These expenses are related entirely to
the Company's obligations under the Patent Agreement with National Patent and
pertain to the use of the Hydron polymers as a formula ingredient for many of
the Company's products.
Research and Development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, develop and package the products for
commercial sale, perform appropriate efficacy and safety tests, conduct consumer
panel studies, and focus groups. R&D expenses in 2001 were $58,322, a decrease
of $25,786, or 31%, from R&D expenses of $84,108 in 2000. The amount of R&D
expenses per year varies, depending on the nature of the development work during
each year, as well as the number and type of products under development at such
time.
Selling, general and administrative ("SG&A") expenses in 2001 were
$1,456,000, representing a decrease of $470,959, or 24%, from SG&A expenses of
$1,926,959 in 2000. This decrease is the result of: 1) lower marketing expenses
associated with reducing activity with HSN in 2001 ($254,618), 2) reduced
selling and advertising expenses associated with Catalog sales ($126,635), 3)
reduced expenses related to outside consultants ($84,963), and 4) reduced
expenses for rents resulting from the switch over to outside warehousing
($48,952). These cost reductions were partially offset by: 1) increased Catalog
postage and handling associated with attracting new customers ($22,217), and 2)
increased legal expenses associated with developing patents and contracts for
new technology ($34,454).
The Company operated 2001 at a close-to-break-even cash flow rate
($23,878) while carefully investing in the future. Excluding some one-time
charges, 2001 would have a positive cash flow of $157,629. During the year,
there have been a number of one-time expenses that reduced operating cash,
including: costs associated with a patent application ($58,572), legal costs
associated with research and development technology ($84,718), and moving costs
associated with the relocation of the corporate offices to Pompano Beach
($38,217).
There were no employment contract settlement costs in 2001 or in 2000.
The Company does not currently have any employment contracts.
Interest and investment income in 2001 was $9,198, a decrease of
$11,746, or 56%, from interest income of $20,945 in 2000, due primarily to lower
cash balances resulting from the factors discussed above. The Company maintains
a conservative investment strategy with respect to its cash balances, deriving
investment income primarily from U.S. Treasury securities.
14
The Company had a net loss for 2001 of $758,696, representing a
reduction of $164,935 or 18% from the net loss of $923,631 for 2000, primarily
as a result of the significant reductions in expenses, particularly relating to
SG&A as discussed above.
Results of Operations - 2000 versus 1999
Net sales for 2000 were $2,081,468, a decrease of $511,980, or 20%,
from net sales of $2,593,448 for the year ended December 31, 1999 ("1999").
During 2000, Catalog sales increased by approximately $209,369, or 25%, from
$827,226 in 1999 to $1,036,595 in 2000. The increase in Catalog sales resulted
primarily from a substantial increase in the new customer trial and consistent
promotional offers to existing customers. The customer base for the Company was
increased by 32% during the year as trial events on the Web and through direct
mail events brought in new customers.
Non-catalog sales, including all sales to HSN and QVC, decreased by
approximately $721,350, or 41%, from $1,766,223 in 1999 to $1,044,873 in 2000.
HSN sales slowed as the show schedule decreased on the HSN domestic channel,
offset by an increase as HSE geared up for the Latin market introduction in
November.
Approximately 63% of the Company's non-catalog sales during 2000 were
to HSN and approximately 36% of non-catalog sales were to QVC. Management
anticipates that sales to HSN will grow to be a larger percentage of the
Company's sales and, absent the consummation of marketing or distribution
arrangements with third parties other than HSN, the Company's dependence upon
direct response television as a distribution channel will decrease but remain
significant. Any disruption in the Company's relationship with HSN would have a
material adverse effect on the business, financial condition and results of
operations of the Company.
As a result of several positive factors, the Company's overall gross
profit margin increased to 78% of net sales for 2000 versus 22% for 1999.
Factors improving the margin include: 1) a significant increase in high margin
Catalog sales which maintained gross profit margin of 83% in 2000 from 84% in
1999, 2) an improvement in the product mix (fewer introductory kits) sold to
electronic retailers, improving margins to 61% in 2000 from 59% in 1999; and 3)
a one-time reversal of reserves for a packaging contract that was favorably
renegotiated, representing $175,000 or 8% of gross sales in 2000. Further
exacerbating the annual gross margin comparison of 2000 to 1999, the Company
reflected an inventory write-down of $794,362 in 1999 that represented 31% of
net sales for 1999. There was no corresponding write-down of inventory for 2000.
The write-down to net realizable value represents components and finished goods
of product that the Company deems excess based on current sales levels or does
not plan to continue marketing in the future.
15
Substantially all of the inventory components and finished goods
written down resulted from the conversion to HSN from QVC as the primary channel
of distribution, or were purchased and/or manufactured prior to September 1997.
The write-down applies primarily to components and finished goods outside of the
traditional skin care product line, such as hair care, sun care, and bath and
body products. The Company will make every effort to recoup as much value as
possible as it examines various means of liquidating the current excess. Of the
excess, approximately $73,000 of the inventory was sold.
Royalty expenses in 2000 were $103,558, representing a decrease of
$38,416, or 27%, from royalty expenses of $141,974 in 1999. Royalties for 1999
included royalties due under the QVC agreement. The decrease in 2000 is
commensurate with the decrease in gross sales for the Company in 2000 when QVC
royalties are excluded. These expenses are related primarily to the Patent
Agreement with National Patent and pertain to the use of the Hydron polymers as
a formula ingredient for many of the Company's products.
Research and Development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, develop and package the products for
commercial sale, perform appropriate efficacy and safety tests, and conduct
consumer panel studies and focus groups. R&D expenses in 2000 were $84,108, a
decrease of $127,848, or 60%, from R&D expenses of $211,956 in 1999. In changing
to a new electronic retailer, the Company's first priority was to establish the
core line with the new TV audience. The need for new product introduction is
more important for the second year and beyond. The amount of R&D expenses per
year varies, depending on the nature of the development work during each year,
as well as the number and type of products under development at such time.
Selling, general and administrative ("SG&A") expenses in 2000 were
$1,926,959, representing a decrease of $233,268, or 11%, from SG&A expenses of
$2,160,227 in 1999. This decrease is the result of: 1) lower marketing and
promotional expenses ($123,000), 2) reduced expenses related to outside
consultants ($103,000), 3) reduced expenses for warehouse rent since September
($56,000), and 4) reduced insurance premiums ($47,000). These cost reductions
were partially offset by 1) increased Catalog postage and handling associated
with attracting new customers ($44,000), and 2) increased MIS expenses required
for Catalog sales growth, including Hydron Website redesign ($41,000).
There were no employment contract settlement costs in 2000, a 100%
decrease from employment contract settlement costs of $620,099 for 1999. These
costs related to the settlement terms and associated legal fees regarding
several employment contracts. These contracts, which originated during 1993 and
1994, overburdened the Company's operations during a period when the Company's
revenues could not support the contracts. The Company does not currently have
any employment contracts.
16
Interest and investment income in 2000 was $20,945, a decrease of
$59,915, or 74%, from interest income of $80,860 in 1999, due primarily to lower
cash balances resulting from the factors discussed above. The Company maintains
a conservative investment strategy, deriving investment income primarily from
U.S. Treasury securities.
The Company had a net loss for 2000 of $923,632, a reduced loss of
$2,050,510, or 69% from the net loss of $2,974,142 for 1999, primarily as a
result of the factors discussed above.
Results of Operations - 1999 versus 1998
Net sales for 1999 were $2,593,448, a decrease of $1,389,855, or 35%,
from net sales of $3,983,303 for the year ended December 31, 1998 ("1998").
During 1999, Catalog sales increased by approximately $58,000, or 8%, from
$769,000 in 1998 to $827,000 in 1999. The increase in Catalog sales resulted
primarily from an increase in the number of new customers and a major "25% off"
sale in the summer. Non-catalog sales, including all sales to QVC and HSN,
decreased by approximately $1,448,000, or 45%, from $3,214,000 in 1998 to
$1,766,000 in 1999. QVC sales slowed as the May 31, 1999 contract anniversary
date approached and the contract required the Company to refrain from selling
its products on any form of direct response television prior to September 1,
1999.
Approximately 63% of the Company's non-catalog sales during 1999 were
to QVC and approximately 37% of non-catalog sales were to HSN. Management
anticipates that sales to HSN will grow to be a larger percentage of the
Company's sales and, absent the consummation of marketing or distribution
arrangements with third parties other than HSN, the Company's dependence upon
direct response television as a distribution channel will remain significant.
Any disruption in the Company's relationship with HSN would have a material
adverse effect on the business, financial condition and results of operations of
the Company.
As a result of an inventory write-down, the Company's overall gross
profit margin decreased to 22% of net sales for 1999 from 49% for 1998. The
Company took an inventory write-down of $794,362 and $442,254 in 1999 and 1998,
respectively. The write-downs to net realizable value represent components and
finished goods of product that the Company deems excess, based on current sales
levels or does not plan to continue marketing in the future. The gross margin on
Catalog sales, excluding the write-down of inventory, increased to 84% of net
sales in 1999 from 79% in 1998. The gross margin on non-catalog sales, excluding
the write-down of inventory, grew to 59% for 1999, up from 56% of net sales for
1998. The increases in gross margins are attributable to a shift in the mix of
product sold to more profitable items.
Substantially all of the inventory components and finished goods
written down resulted from the conversion to HSN from QVC as the primary channel
of distribution, or were purchased and/or manufactured prior to September 1997.
The write-down applies primarily to components and finished goods outside of the
traditional skin care product line, such as hair care, sun care, and bath and
body products. The Company will make every effort to recoup as much value as
possible as it examines various means of liquidating the current excess.
17
Royalty expenses in 1999 were $141,974, representing a decrease of
$72,440, or 34%, from royalty expenses of $214,414 in 1998. This decrease is
commensurate with the decrease in gross sales for the Company in 1999. These
expenses are related primarily to the Patent Agreement with National Patent and
pertain to the use of the Hydron polymers as a formula ingredient for many of
the Company's products.
Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, develop and package the products for
commercial sale, perform appropriate efficacy and safety tests, and conduct
consumer panel studies and focus groups. R&D expenses in 1999 were $211,956, a
decrease of $138,873, or 40%, from R&D expenses of $350,829 in 1998. The amount
of R&D expenses per year varies, depending on the nature of the development work
during each year, as well as the number and type of products under development
at such time.
Selling, general and administrative ("SG&A") expenses in 1999 were
$2,160,227, representing a decrease of $151,052, or 7%, from SG&A expenses of
$2,311,279 in 1998. This decrease is primarily the result of lower executive
salary expense. Expenses attributed to the Catalog include advertising,
additional marketing, customer service and warehouse personnel, and related
telephone, postage and supply expenses. Advertising was the most significant
Catalog expense, totaling approximately $109,000 in 1999 and approximately
$119,000 in 1998.
Employment contract settlement costs in 1999 were $620,099, a decrease
of $7,614, or 1%, from employment contract settlement costs of $627,713 for
1998. These costs related to the settlement terms and associated legal fees
regarding several employment contracts. These contracts, which originated during
1993 and 1994, overburdened the Company's operations during a period when the
Company's revenues could not support the contracts. The Company does not
currently have any employment contracts.
Interest and investment income in 1999 was $80,860, a decrease of
$63,343, or 44%, from interest income of $144,203 in 1998, due primarily to
lower cash balances resulting from the factors discussed above. The Company
maintains a conservative investment strategy, deriving investment income
primarily from U.S. Treasury securities.
The Company had a net loss for 1999 of $2,974,142, an increase of
$1,091,475, or 58% from the net loss of $1,882,667 for 1998, primarily as a
result of the factors discussed above. Excluding the write-down of inventory and
the employment contract settlement costs, the net loss for 1999 and 1998 would
have been $1,559,681 and $812,700, respectively.
18
Liquidity and Capital Resources
The Company's working capital was approximately $ 783,020 at December
31, 2001, including cash and cash equivalents of approximately $167,067. Cash
provided from operations was $44,827. This was offset by Investing Activities
($68,705) that used cash for capital expenditures and patent costs. There were
no Financing Activities.
Management's plan to increase sales and reduce operating expenses
includes the following elements:
o Continued emphasis on Catalog sales, including sales made over
the internet, since these sales have higher profit margins and
represent markets for the Company that are growing more
rapidly than the Company's traditional television market.
o Increased use of direct marketing techniques to reach new and
current consumers such as print promotions mailed to targeted
consumers, Web site specials, promotions to other Web site
customers, and direct E-mail promotions to new customers.
o Addition of new revenue streams through expanded international
distribution achieved through the use of distribution
agreements with foreign and international distributors.
o Development, acquisition and marketing of new product lines
based on proprietary technologies that appeal to the aging
baby boomers as well as the new generation.
In addition, the Company has plans to build upon it's success in
private label sales utilizing Hydron polymer based formulas. The Company is also
pursuing international distribution agreements that will expand the Company's
distribution around the world. Regarding new products and markets, the Company
will continue to develop proprietary technology that it believes will improve
its long-term success in the skin care business.
The Company does not have the financial resources to sustain a national
advertising campaign to support distribution of its products in conventional
retail stores. In view of the foregoing, Management's strategy has been to enter
into marketing, licensing and distribution agreements with third parties which
have greater financial resources than those of the Company and that can enhance
the Company's product introductions with appropriate national marketing support
programs.
The effect of inflation has not been significant upon either the
operations or financial condition of the Company.
19
Cautionary Statement Regarding Forward Looking Statements
The statements contained in this Report on Form 10-K that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future, including, without
limitation, it's plans regarding distribution and marketing of it's products and
the development, acquisition and marketing of new products. Forward looking
statements include the Company's liquidity, anticipated cash needs and
availability, and the anticipated expense levels under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward looking statements included in this document are based on information
available to the Company on the date of this Report, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those expressed
or implied in such forward looking statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company does not have any exposure to market risk since it does not
engage in any activities with derivative financial instruments, other financial
instruments, or derivative commodity instruments, other than the temporary
investment of available cash in U.S. Treasury instruments, cash, and cash
equivalent instruments having a similar risk profile.
Item 8. Financial Statements and Supplementary Data
The Financial Statements of the Company are contained in this report
following Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
Part III
Item 10. Directors and Executive Officers of the Registrant
Identification of Directors and Executive Officers
Listed below are the directors and executive officers of the Company as
of December 31, 2001:
Name Position
---- --------
Richard Banakus Director, Chairman of the Board and Interim President
Joshua Rochlin Director
Karen Gray Director
Charles Johnston Director
Terrence McGrath Chief Operating Officer
William Fagot Chief Financial Officer
Business Experience
Richard Banakus, age 55, has served as a director of the Company since
June 1995 and as Interim President of the Company since September 19, 1997. From
April 1991 to the present, Mr. Banakus has been a private investor with
interests in a number of privately and publicly held companies. From July 1988
through March 1991, he was managing partner of Banyan Securities, Larkspur,
California, a securities brokerage firm that he founded.
Joshua Rochlin, age 35, has served as director for the Company since
January 2000. Mr. Rochlin joined GoAmerica, a wireless internet service
provider, in December 1999. He is currently Vice President of Business
Development at GoAmerica. Prior to joining GoAmerica, Mr. Rochlin was the
founder and Chief Executive Officer of MyCalendar.com, LLC from January 1999 to
December 1999. He previously served as an associate for the law firm of Rubin
Baum Levin Constant & Friedman in New York City from February 1995 to December
1998.
Karen Gray, age 43, has served as a director of the Company since
December 1997 and was a consultant to the Company on marketing and
communications matters from November 1996 to December 1999. Ms. Gray has over 17
years of management experience in marketing communications in various capacities
with various companies. From 1993 to November 1996, Ms. Gray served as Vice
President, Corporate Communications, of the Company. From June 1992 to November
1993, Ms. Gray served as President of MarCom Associates, Inc., a marketing
communications company that she founded.
Charles Johnston, age 66, has served as a director of the Company since
December 1997. Mr. Johnston is currently Chairman of Ventex Technology, Inc. an
electronic transformer company in Riviera Beach, Florida. He was previously
21
founder, Chairman and CEO of ISI Systems, a computer software company listed on
the American Stock Exchange prior to its sale in November 1989 to Teleglobe
Corporation in Montreal, Canada. Mr. Johnston also serves as a Trustee of
Worcester Polytechnic Institute in Worcester, MA and of the Institute for
Experimental Psychiatric Research at the University of Pennsylvania. In
addition, he serves as a director of the following companies: Internet Commerce
Corporation, an internet company in New York City; AuthentiDate Holding
Corporation in Schenectady, NY and McData Corporation, Bloomfield, CO.
Terrence McGrath, age 44, has served as Chief Operating Officer of the Company
since January 2000. Mr. McGrath has 20+ years marketing, brand management and
sales experience in a diverse range of consumer goods and cosmetic categories
including Procter & Gamble Toiletries Division, Noxell, makers of Cover Girl and
Noxzema products where he specialized in new category product development; The
Isaly Klondike Company where he served as VP Marketing for Klondike Ice Cream;
and Pioneer Products, where he served as VP Marketing and Sales for Betty
Crocker licensed products.
William Fagot, age 58, has served as Chief Financial Officer of the Company
since March 2000. Mr. Fagot has 20+ years experience in companies that
manufacture and market consumer products including The Seven-Up Company and
Isaly Klondike Company. He held the position of Chief Financial Officer for
these companies as well as a pension & welfare organization. He is a CPA,
obtaining his experience with Ernst & Young.
Compliance with Section 16(A) of the Securities Exchange Act of 1934
The Company's officers, directors and beneficial owners of more than
10% of any class of its equity securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 ("Reporting Persons") are required under the
Act to file reports of ownership and changes in beneficial ownership of the
Company's equity securities with the Securities and Exchange Commission. Copies
of those reports must also be furnished to the Company. Based solely on a review
of the copies of reports furnished to the Company pursuant to the Act, the
Company believes that during the year ended December 31, 2001, all filing
requirements applicable to Reporting Persons were complied with.
Item 11. Executive Compensation
The following table sets forth information for the years ended December
31, 2001, 2000 and 1999 with respect to all compensation awarded to, earned by,
or paid to the Company's Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer. None of the Company's other executive officers received
salary and bonus payments in excess of $100,000 during the year ended December
31, 2001.
22
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
- ------------------------------------------------------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPLE POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------------------------------
Richard Banakus, Interim President & CEO 2001 $ 6,410 0
- ------------------------------------------------------------------------------------------
2000 $ 20,000 0
- ------------------------------------------------------------------------------------------
1999 $ 55,771 0
- ------------------------------------------------------------------------------------------
Terrence S. McGrath, COO 2001 $122,000 0
- ------------------------------------------------------------------------------------------
2000 $110,800 0
- ------------------------------------------------------------------------------------------
William A. Fagot, CFO 2001 $107,000 0
- ------------------------------------------------------------------------------------------
2000 $ 81,200 0
- ------------------------------------------------------------------------------------------
During 2001, the members of the Board were granted options to purchase
20,000 shares of the Company's common stock for participation on the Company's
Board of Directors, subject to approval by the shareholders of the continuation
of the stock option plans and an increase to the number of shares available.
The following table sets forth certain information relating to option
exercises effected during the year ended December 31, 2001, and the value of
options held as of such date by the Company's Chief Executive Officer and all
other persons who were executive officers of the Company and its subsidiaries
for the year ended December 31, 2001. The Company does not have any outstanding
stock appreciation rights.
Aggregate Option Exercises for the Year Ended December 31, 2001 And Year End
Option Values
Number of
securities underlying Value(1) of unexercised
unexercised options in-the-money options
at December 31, 2001 at December 31, 2001
Shares Acquired Value ($) Exercisable/ Exercisable/
Name on Exercise Realized(2) Unexercisable Unexercisable
Richard Banakus -0- -0- 123,500/0 -0-/-0-
Employment Agreement
On September 19, 1997, the Board of Directors appointed Richard Banakus
to serve as President of the Company on an interim basis. The Board agreed to
pay Mr. Banakus a monthly salary of $10,000 and to reimburse his lodging
expenses in Boca Raton, Florida and travel expenses to and from California,
where Mr. Banakus resides. During April 1999, Mr. Banakus' salary was reduced to
- ------------------------
(1) Total value of unexercised options is based upon the closing price ($.320)
of the Common Stock as reported by NASDAQ on December 31, 2001.
(2) Value realized in dollars is the amount that the shareholder is deemed to
have received as the result of the exercise of options, based upon the
difference between the fair market value of the Common Stock as reported by
NASDAQ on the date of exercise and the exercise price of the options.
23
$5,000 per month. During May 1999, the Company granted Mr. Banakus options to
purchase 100,000 shares of the Company's common stock at an exercise price of
$0.8125 per share in exchange for a further salary reduction to $1,666 per
month. There were no employment contracts in 2000 and 2001.
Compensation of Directors
Employees of the Company who also serve as directors are not entitled
to any additional compensation for such service, except for Mr. Richard Banakus,
Chairman of the Board, because of his status as Interim President. The Company
does not have a written employment agreement with Mr. Banakus.
Nonemployee directors receive an annual fee of $5,000, accrued
quarterly. During 2001, each of Messrs. Richard Banakus, Karen Gray, Charles
Johnston, and Joshua Rochlin earned $5,000 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 is to assist the Company in
attracting and retaining key directors who are responsible for continuing the
growth and success of the Company. No options were granted under the 1993 Plan
during the year ended December 31, 2001.
On November 10, 1997, the Board of Directors of the Company adopted the
1997 Nonemployee Director Stock Option Plan ("1997 Plan"). This plan was
approved by the shareholders on December 17, 1997. The purpose of the 1997 Plan
is to assist the Company in attracting and retaining experienced and
knowledgeable nonemployee directors who will continue to work for the best
interests of the Company.
The 1997 Plan provides nonqualified stock options for nonemployee
directors to purchase an aggregate of 100,000 shares of Common Stock, with
grants of options to purchase 2,000 shares to each nonemployee director on
October 1, 1997, grants of options to purchase 2,000 shares on each May 1st
thereafter (starting in 1999), and grants of options to purchase 2,000 shares
upon election or appointment of any new nonemployee directors. The options are
not exercisable for a one-year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option.
The 1997 Plan also provides nonqualified stock options for nonemployee
directors who serve on committees of the Board of Directors. The options are not
exercisable for a one-year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option. No options were
granted under this provision of the 1997 Plan during the year ended December 31,
2001.
24
During August 1999, the Company agreed to grant an option to purchase
18,000 shares of the Company`s common stock to each of the five individuals
comprising the Board of Directors, subject to shareholders' approval at the next
annual meeting at an exercise price of $.64065 per share. Since the options have
been granted pending shareholders' approval, the options are reflected as
outstanding as of December 31, 2000.
In August 2001, the Company agreed to increase the options granted to
Board members each year. Subject to shareholders approval, the Company agreed to
grant option to purchase a total of 20,000 shares of the Company's common stock
to each of the four individuals comprising the Board of Director, beginning with
the calendar year 2000. Subject to shareholders approval, each Board Member will
receive options to purchase 18,000 shares of common stock at an exercise price
of $.20157 for their service in 2000 and options to purchase 20,000 shares of
common stock at an exercise price of $.4275 for their service in 2001. Since the
plan has not been amended by the shareholders, and there are insufficient
options available in the current plan, these options have not been reflected as
being outstanding as of December 31, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 2001
regarding (i) the share ownership of the Company by each person who is known to
the Company to be the record or beneficial owner of more than five percent (5%)
of the Common Stock, (ii) the share ownership of each director of the Company,
(iii) the Chief Executive Officer of the Company and each other most highly paid
executive officer of the Company who earned in excess of $100,000 during the
year ended December 31, 2001, and (iv) the share ownership of the Company of all
directors and executive officers of the Company, as a group (six persons).
25
Name and Address of Amount and Nature of Approximate
Beneficial Owner Beneficial Ownership Percent of Class
Richard Banakus 463,500(3) 9.1%
82 Verssimo Drive
Novato, CA 94947
Karen Gray 27,000(4) Less than 1%
P.O. Box 478
Cutchogue, NY 11935
Charles Johnston 104,500(5) 2.1%
706 Ocean Drive
Juno Beach, FL 33408
Joshua Rochlin 2,000(6) Less than 1%
1365 Milford Terrace
Teaneck, NJ 07666
All directors and executive officers as a group (6 persons) 597,000(7) 11.6%
Item 13. Certain Relationships and Related Transactions
No applicable transactions.
- --------------------------
(3) Consists of 340,000 shares held directly and 123,500 shares issuable upon
exercise of options.
(4) Consists of 3,000 shares held directly and 24,000 shares issuable upon
exercise of options.
(5) Consists of 80,000 shares held directly and 24,500 shares issuable upon
exercise of options.
(6) Consists of 2,000 shares issuable upon exercise of options.
(7) Consists of 423,000 shares held directly and 174,000 shares issuable upon
exercise of options.
26
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following financial statements required by Item 8 follow Item 14 of this
Report:
Page
Reports of Independent Certified Public Accountants 30
Financial Statements:
Balance Sheets, December 31, 2001 and 2000 31
Statements of Operations for the Years ended
December 31, 2001, 2000 and 1999 32
Statements of Shareholders' Equity for the Years
ended December 31, 2001, 2000 and 1999 33
Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999 34
Notes to Financial Statements 35-48
All financial schedules are omitted since the required information is not
present, is not in significant amounts sufficient to require submission of the
schedules or because the information required is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) Exhibits
3.1 Restated Certificate of Incorporation of Dento-Med Industries, Inc.
("Dento-Med"), as filed with the Secretary of State of New York on March 4,
1981.(8)
3.2 By-laws of the Company, as amended March 17, 1988.(9)
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)
- --------------------------
(8) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1985.
(9) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987.
(10) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1988.
27
3.4 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of New York on July 30,
1993.(11)
4.0 Non-Qualified Stock Option Plan.(12)
4.1 Incentive Stock Option Plan, as amended January 2, 1987.(9)
4.2 1989 Stock Option Plan(13)
4.10 1993 Nonemployee Director Stock Option Plan.(11)
10.6 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Harvey Tauman (filed therein as Exhibit 10.8).(10)
10.8 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Frank Fiur (filed therein as Exhibit 10.10).(10)
10.9 Indemnification Agreement dated September 23, 1988 between Dento-Med and
Chaudhury M. Prasad (filed therein as Exhibit 10.11).(10)
10.10 Agreement between Dento-Med and National Patent dated November 30,
1989.(14)
10.11 Indemnification Agreement dated May 9, 1989 between Dento-Med and Samuel
M. Leb, M.D.(13)
10.12 Indemnification Agreement dated May 9, 1989 between Dento-Med and Richard
Tauman.(13)
10.13 Indemnification Agreement dated January 14, 1992 between Dento-Med and
Joseph A. Caccamo, Attorney at Law, P.C.(15)
10.28 Indemnification Agreement dated April 22, 1993 between the Company and
Karen Gray.(11)
10.50 Consulting Agreement between Charles Fox Associates, Inc. and the Company
dated May 20, 1997.(16)
10.51 Personal Appearance Agreement between Mr. Charles Fox and the Company
dated May 20, 1997.(16)
- --------------------------
(11) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1993.
(12) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1986.
(13) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1989.
(14) Incorporated by reference to the Company's report on Form 8-K (date of
event - November 30, 1989).
(15) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1991.
(16) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1997.
28
10.55 Service Agreement between Lauren Anderson and the Company dated January 1,
1998.(16)
10.58 Marketing and Distribution Agreement between Home Shopping Club LP and the
Company dated September 1, 1999(17)
Amendment to 1993 Nonemployee Director Stock Option Plan.(18)
1997 Nonemployee Director Stock Option Plan.(24)
21 Subsidiaries of the Registrant.
(b) Reports on Form 8-K
None.
- --------------------------
(17) Incorporated by reference to the Company's report on Form 8-K (date of
report September 14, 1999), dated September 1, 1999.
(18) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A for the year ended December 31, 1996.
29
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Hydron Technologies, Inc.
We have audited the accompanying balance sheets of Hydron Technologies, Inc. as
of December 31, 2001 and 2000 and the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 2001, 2000,
and 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Hydron Technologies, Inc. at
December 31, 2001, 2000, and 1999, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company experienced losses from operations
in 2001, 2000, and 1999. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management has implemented
direct marketing techniques to increase the more profitable catalog sales, add
new customers and take advantage of new channels of distribution (see note 15 to
Financial Statements). The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ DASZKALBOLTON LLP
- -------------------------
DaszkalBolton LLP
Boca Raton, Florida
March 18, 2002
30
HYDRON TECHNOLOGIES, INC.
Balance Sheets
December 31,
----------------------------
2001 2000
------------ ------------
ASSETS
Current Assets
Cash $ 167,067 $ 190,946
Trade accounts receivable 61,444 136,306
Inventories 1,164,297 1,489,396
Prepaid expenses and other current assets 43,450 39,619
------------ ------------
Total current assets 1,436,258 1,856,267
Property and equipment, less accumulated depreciation 27,374 111,002
Deposits 28,203 60,403
Deferred product costs, less accumulated amortization 544,347 772,843
------------ ------------
Total assets $ 2,036,182 $ 2,800,515
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 116,559 $ 194,791
Deferred revenues 148,646 --
Accrued liabilities 388,033 464,084
------------ ------------
Total current liabilities 653,238 658,875
Commitments and contingencies -- --
Shareholders' equity
Common stock - $.01 par value
30,000,000 shares authorized; 5,035,336 shares
issued; and 4,975,136 shares outstanding 50,353 50,353
Preferred stock - $.01 par value
5,000,000 shares authorized: no shares
issued or outstanding -- --
Additional paid-in capital 19,501,837 19,501,837
Accumulated deficit (17,730,088) (16,971,392)
Treasury stock, at cost; 60,200 shares (439,158) (439,158)
------------ ------------
Total Shareholders' equity 1,382,944 2,141,640
------------ ------------
Total liabilities and shareholders equity $ 2,036,182 $ 2,800,515
============ ============
See accompanying notes
31
HYDRON TECHNOLOGIES, INC.
Statements of Operations
Year ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Net Sales $ 1,985,313 $ 2,081,468 $ 2,593,448
Cost of sales 771,480 450,478 1,237,816
Write down of inventory -- -- 794,362
----------- ----------- -----------
Gross profits 1,213,833 1,630,990 561,270
Expenses
Royalty expense 86,574 103,558 141,974
Research and development 58,322 84,108 211,956
Selling, general & administrative 1,456,000 1,926,959 2,160,227
Employment contract settlement costs -- -- 620,099
Amortization of deferred product costs 287,069 287,395 290,740
Depreciation & amortization 74,111 175,741 200,463
----------- ----------- -----------
Total expenses 1,962,076 2,577,761 3,625,459
----------- ----------- -----------
Operating loss (748,243) (946,771) (3,064,189)
Interest income 9,198 20,945 80,860
Loss on abandonment of lease (19,651) -- --
Equity in earnings of joint venture -- 2,194 9,187
----------- ----------- -----------
Loss before income taxes (758,696) (923,632) (2,974,142)
Income taxes expense -- -- --
----------- ----------- -----------
Net loss $ (758,696) $ (923,632) $(2,974,142)
=========== =========== ===========
Basic and diluted loss per share
Net loss per common share $ (0.15) $ (0.19) $ (0.60)
=========== =========== ===========
Weighted average shares
Oustanding (basic and diluted) 4,975,136 4,975,136 4,953,054
=========== =========== ===========
See accompanying notes
32
HYDRON TECHNOLOGIES, INC.
Statements of Shareholders' Equity
Common Stock Preferred Stock Additional Treasury
------------------------- ------------------------ Paid-in Accumulated Stock Total
Shares Amount Shares Amount Capital Deficit (at cost) Equity
----------- ------------ ---------- ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1998 4,960,336 $ 49,603 -- $ -- $ 19,429,931 $(13,073,618) $ (431,345) $ 5,974,571
Issuance of common
shares for service 75,000 750 -- -- 71,906 -- -- 72,656
Purchase of treasury
shares, at cost
(10,000 shares) -- -- -- -- -- -- (7,813) (7,813)
Net loss -- -- -- -- -- (2,974,142) -- (2,974,142)
----------- ------------ ---------- ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1999 5,035,336 50,353 -- -- 19,501,837 (16,047,760) (439,158) 3,065,272
Net loss -- -- -- -- -- (923,632) -- (923,632)
----------- ------------ ---------- ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2000 5,035,336 50,353 -- -- 19,501,837 (16,971,392) (439,158) 2,141,640
Net loss -- -- -- -- -- (758,696) -- (758,696)
----------- ------------ ---------- ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2001 5,035,336 $ 50,353 -- $ -- $ 19,501,837 $(17,730,088) $ (439,158) $ 1,382,944
=========== ============ ========== ============ ============ ============ ============ ============
See accompanying notes
33
HYDRON TECHNOLOGIES, INC.
Statements of Cash Flows
Year ended December 31,
-----------------------------------------
Operating Activities 2001 2000 1999
----------- ----------- -----------
Net Loss $ (758,696) $ (923,632) $(2,974,142)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 361,180 463,136 491,203
Loss on disposal of assets 19,651 -- 55,216
Equity in earnings of joint venture -- (2,194) (9,187)
Cost of stock issued for services -- -- 72,656
Write down of inventory -- -- 794,362
Change in operating assets and liabilities
Trade accounts receivable 74,862 (97,816) 390,327
Inventories 325,099 (51,104) (481,301)
Prepaid expenses and other current assets (3,831) 78,834 (45,843)
Deposits 32,198 116,047 129,137
Accounts payable (78,232) 67,248 (134,038)
Deferred revenues 148,646 -- --
Accrued liabilities (76,051) (178,404) 237,207
----------- ----------- -----------
Net cash provided (used) by operating activities 44,826 (527,885) (1,474,403)
Investing activities
Capital expenditures (10,133) -- --
Deferred product costs (58,572) -- --
Proceeds from liquidation of joint ventue -- 64,915 --
Proceeds from sale of fixed assets -- -- 8,351
----------- ----------- -----------
Net cash provided (used) by investing activities (68,705) 64,915 8,351
Financing activities
Purchase of treasury stock -- -- (7,813)
----------- ----------- -----------
Net cash used by financing activities -- -- (7,813)
----------- ----------- -----------
Net decrease in cash and cash equivalents (23,879) (462,970) (1,473,865)
Cash and cash equivalents at beginning of period 190,946 653,916 2,127,781
----------- ----------- -----------
Cash and cash equivalents at end of period $ 167,067 $ 190,946 $ 653,916
=========== =========== ===========
See accompanying notes
34
Hydron Technologies, Inc.
Notes to Financial Statements
December 31, 2001, 2000, and 1999
1. Description of Business and Summary of Significant Accounting Policies
Organization of Business
Hydron Technologies, Inc. (the "Company") sells consumer and professional
products, primarily in the personal care/cosmetics field. The Company holds the
exclusive license with National Patent Development Corporation ("National
Patent") to a Hydron polymer-based drug delivery system for topically applied,
nonprescription pharmaceutical products, which the Company intends to use to
develop proprietary products or license to third parties. The Company owns U.S.
and international patents on a method to suspend the Hydron polymer in a stable
emulsion for use in personal care/cosmetic products.
The majority of the Company's products are sold in the United States directly to
the consumer through Catalog sales and the internet, direct response television,
and on a minor level internationally through salons and doctors offices.
Basis of Presentation
The financial statements at December 31, 2000 and 1999 were consolidated and
included the accounts of the Company and its subsidiary. All significant
intercompany balances and transactions were eliminated in consolidation. The
Company's investment in a joint venture was accounted for using the equity
method of accounting. In 2001 the subsidiary was dissolved.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes $20,360 not covered by the Federal Deposit
Insurance Commission. The risk associated with these amounts is considered low
due to the credit quality of the institutions.
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents. The credit
risk associated with cash
35
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
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 Reliv International, Inc. and
QVC, Inc. which are usually paid to the Company within 30 days after receipt of
goods. The Company performs ongoing evaluations of its significant customers and
does not require collateral.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market, and
include finished goods, packaging and raw materials.
Long-Lived Assets
Long-lived assets, consisting primarily of deferred product costs, are accounted
for in accordance with Financial Accounting Standards Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." FASB Statement No. 121 requires impairment losses to
be recognized for long-lived assets when indicators of impairment are present
and the undiscounted cash flows are not sufficient to recover the assets'
carrying amount. The Company analyzes undiscounted cash flows on an annual
basis. No impairment losses have been recognized in the three year period ended
December 31, 2001.
Property and Equipment
Property and equipment, consisting primarily of furniture and equipment, is
carried at cost. Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the assets, ranging from
four to six years (see Note 6).
Deferred Product Costs
Deferred product costs consist primarily of costs incurred for the purchase and
development of patents and product rights (see Note 7). The deferred product
costs are being amortized over their estimated useful lives of eight to twenty
years using the straight-line method.
36
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Common Stock, Common Stock Options and Net Loss Per Share
When the Company issues shares of common stock in exchange for services, an
expense is recognized over the period in which the services are rendered. The
expense is based upon the fair value of such shares, in accordance with FASB
statement No. 123 using a Black-Scholes pricing model, at the date such
arrangements are consummated or authorized by the Board of Directors, with a
corresponding credit to capital.
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock options and has adopted the disclosure-only provisions
of FASB Statement No. 123, "Accounting and Disclosure of Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's stock option plans.
Preferred Stock
The Company's shareholders authorized the amendment of the Company's Certificate
of Incorporation to create a class of Preferred Stock consisting of 5,000,000
shares with a par value of $.01 per share. The Preferred Stock, which the
Corporation has authority to issue from time to time, may be issued in amounts
and designations as authorized by the Board of Directors. The Company will file
the amendment with the state of New York in 2002.
Revenue Recognition and Product Warranty
Revenue from product sales is recognized at the time of shipment. Provision is
made in the period of the sale for estimated product returns from the ultimate
end user.
Research and Development
Research and development costs are charged to operations when incurred and are
included in operating expenses.
Advertising
Advertising costs are expensed as incurred and are included in "selling, general
and administrative expenses." Advertising expenses amounted to approximately
$77,000, $192,000, and $263,000 for 2001, 2000, and 1999, respectively.
37
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
2. Fair Value of Financial Instruments
The carrying value of cash, accounts receivables, deposits, accounts payable,
and other payables approximates fair value because of their short maturities.
3. Employment Contract Settlement
For the year ended December 31, 1999, the Company recorded charges of $620,099
for the settlement and associated legal fees regarding three employment
contracts. These contracts, which originated during 1993 and 1994, overburdened
the Company's operations during a transition period when Company's revenues
could not support the contracts. The Company does not have any employment
contracts or related charges for 2001 and 2000.
4. Reclassifications
Certain amounts previously reported for 1999 have been reclassified to conform
to the classifications used in 2001 and 2000. Such reclassifications had no
effect on the reported net loss.
5. Inventories
At December 31, 2001 and 2000, inventories consist of the following:
2001 2000
---------- ----------
Finished goods $ 543,880 $ 869,082
Raw materials and components 620,417 620,314
---------- ----------
$1,164,297 $1,489,396
========== ==========
The results of operations include a charge of $794,362 for the year ended
December 31, 1999. This charge relates primarily to the write down, to net
realizable value, of components and finished goods of products that the Company
does not plan to promote in the future, which consist mainly of products outside
of the traditional skin care product line, such as hair care, sun care, bath and
body products and other products.
Although this write down has been abnormally high due to the changes in
distribution channels and packaging, Management believes that some inventory
obsolescence and revitalized packaging is an annual cost of producing revenue
growth in this industry.
38
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
6. Property and Equipment
At December 31, 2001 and 2000, property and equipment consisted of the
following:
2001 2000
----------- -----------
Furniture and equipment $ 561,907 $ 573,982
Leasehold improvements -- 468,252
----------- -----------
561,907 1,042,234
Less accumulated depreciation (534,533) (931,232)
----------- -----------
$ 27,374 $ 111,002
=========== ===========
7. Deferred Product Costs and Royalty Agreements
From 1976 through 1989, the Company and National Patent entered into various
agreements, wherein the Company obtained the exclusive worldwide rights to
market products using Hydron polymers in the consumer and oral health fields,
the two fields in which the Company has concentrated its research and
development efforts, and to utilize the Hydron polymer as a drug release
mechanism in topically applied, nonprescription pharmaceutical products. The
Hydron polymer is the underlying technology in substantially all of the
Company's products. National Patent has the exclusive worldwide rights to market
prescription drugs and medical devices using Hydron polymers. Further, each has
the right to exploit products with Hydron polymers not in the other's exclusive
fields. As consideration for product rights obtained, the Company issued
National Patent an aggregate of 220,000 shares of common stock through 1989,
valued at $5,370,000. The valuation for these shares was based on the market
prices of the Company's common stock at the dates the agreements were made.
At December 31, 2001 and 2000, deferred product costs consisted of the
following:
2001 2000
----------- -----------
Deferred product cost $ 406,368 $ 347,795
Patent cost 5,620,000 5,620,000
----------- -----------
6,026,368 5,967,795
Less accumulated amortization (5,482,021) (5,194,952)
----------- -----------
$ 544,347 $ 772,843
=========== ===========
39
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
7. Deferred Product Costs and Royalty Agreements (continued)
The agreements require the Company to pay a 5% royalty to National Patent based
on the net sales of products containing the Hydron polymer. Additionally,
National Patent is required to pay the Company a 5% royalty on its net sales of
Hydron polymer-based products, except with respect to certain excluded products.
In the area of prescription and nonprescription drugs using Hydron polymers as a
drug release mechanism, both the Company and National Patent have agreed to pay
the other a royalty equal to 5% of net sales received from third parties with
regard to such products developed. In addition, each will pay the other 25% of
any up-front license fees, royalties or similar payments received from third
parties with regard to such products developed in the area of nonprescription
drugs.
For the years ended December 31, 2001, 2000, and 1999, the Company incurred
royalties payable to National Patent of approximately $87,000, $103,000, and
$130,000, respectively. The Company has not received any royalties from National
Patent during these periods.
8. Investment in Joint Venture
During 1995, the Company entered into an agreement with QVC and another company
to form a joint venture known as Hydromercial Partners (the "Joint Venture").
The purpose of the Joint Venture was to provide and sell the Company's Hydron
polymer-based skin care line by means of a thirty (30) minute commercial
("Infomercial") which the Joint Venture produced. As of March 31, 2000, the
Joint Venture discontinued operations and was dissolved during the year ended
December 31, 2000. The Company received all inventory and 50% of the proceeds
from liquidation. The amount realized exceeded the carrying value in the balance
sheet by $2,195, which is reflected in the 2000 operating statement.
9. Significant Customer
The Company sold a substantial portion of its products to Reliv, HSN, and QVC.
The percent of the Company's sales for the years ended December 31, 2001, 2000,
and 1999 and trade receivable balances as of December 31, 2001, 2000, and 1999
are as follows:
2001 2000 1999
---- ---- ----
Percent of Sales
Reliv 20% --% --%
HSN 11% 32% 25%
QVC 7% 18% 43%
40
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
9. Significant Customer (continued)
Trade Receivables
Reliv $ 17,559 $ -- $ --
HSN $ -- $ 97,186 $ 34,743
QVC $ 33,041 $ 44,120 $ 3,747
The Company entered into a license agreement with QVC in 1993, whereby QVC was
granted exclusive rights to market and distribute the Company's proprietary
consumer products using Hydron polymers in the Western Hemisphere. The license
and subsequent amendments required that QVC meet certain minimum product
purchases. Effective May 31, 1999, the Company terminated the Renegotiated
License Agreement as a result of QVC's failure to satisfy the annual minimum
product purchase requirements for the period ended May 31, 1999. The Company
continues to sell certain product to QVC, on a non-exclusive basis, so that QVC
can resell these products to their customers who had previously purchased and
wish to re-order Hydron products.
Effective September 1, 1999, the Company entered into a marketing and
distribution agreement with HSN, that granted HSN an exclusive worldwide license
to market and distribute certain of the Company's proprietary consumer products
through various forms of electronic retailing. The Home Shopping Agreement also
granted HSN a non-exclusive license to market Hydron products through all other
methods of distribution in certain countries outside the United States.
HSN did not meet the minimum purchase requirements during the first year of the
two-year agreement. Therefore the contract did not automatically renew after
the Initial Term. Management and HSN chose not to renew the agreement for the
third year.
Effective March 1, 2001, the Company entered into an agreement with Reliv
International, Inc (Reliv) to develop and manufacture a line of private label
skin care products to be distributed through Reliv's multi-tier marketing
distribution network. The agreement requires minimum product purchases and
advance payments to cover packaging and design costs.
10. Income Taxes
The Company accounts for income taxes under FASB Statement No. 109, "Accounting
for Income Taxes" (FASB 109). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. There has
been no income tax expense during the three years ended December 31, 2001.
41
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
10. Income Taxes (continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
2001 2000 1999
----------- ----------- -----------
Net operating loss carryforwards $ 7,494,000 $ 7,135,000 $ 6,478,000
Tax credit carryforwards 180,000 180,000 180,000
Other 465,000 575,000 951,000
----------- ----------- -----------
Deferred tax assets 8,139,000 7,890,000 7,609,000
Less valuation allowance (8,139,000) (7,890,000) (7,609,000)
----------- ----------- -----------
Total net deferred taxes $ -- $ -- $ --
=========== =========== ===========
FASB 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, Management has
determined that a $8,139,000 valuation allowance at December 31, 2001 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The valuation allowance increased by $249,000, $281,000,
and $1,161,000 in 2001, 2000 and 1999, respectively. At December 31, 2001, the
Company has available net operating loss carryforwards of $20,021,000, which
will expire beginning in the year 2002 and through the year 2016. 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,
------------------------
2001 2000 1999
---- ---- ----
Tax at U.S. statutory rates (34)% (34)% (34)%
State income taxes, net of federal tax benefit (4) (4) (4)
Valuation allowance adjustments 38 38 38
---- ---- ----
-- % -- % -- %
==== ==== ====
42
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
11. Stock Options and Warrants
The number of shares of common stock reserved for issuance at December 31, 2001
was 261,100 and 411,100 for December 31, 2000.
1989 Stock Option Plan
Under the 1989 Stock Option Plan, the Company may grant incentive stock options,
nonqualified stock options and/or stock appreciation rights to key employees,
officers, directors and consultants of the Company, and its present and future
subsidiaries to purchase an aggregate of 200,000 shares of the Company's common
stock.
These options expire five years from the date of the grant. There are no
outstanding options at December 31, 2001. There are 12,100 options available for
grant under this plan at December 31, 2001.
1993 Stock Option Plan
Under the 1993 Stock Option Plan, the Company may grant incentive stock options,
nonqualified stock options and/or stock appreciation rights to key employees,
officers, directors and consultants of the Company to purchase an aggregate of
200,000 shares of the Company's common stock
These options expire five years from the date of the grant and all of the
outstanding options are exercisable at December 31, 2001. There are 3,500
options available for grant under this plan at December 31, 2001.
1993 Nonemployee Director Stock Option Plan
The 1993 Nonemployee Director Stock Option Plan provides grants of stock options
to nonemployee directors of the Company to purchase an aggregate of 50,000
shares of the Company's common stock.
These options expire five years from the date of the grant and there are no
outstanding options at December 31, 2001. There are 22,000 options available for
grant under this plan at December 31, 2001.
1997 Nonemployee Director Stock Option Plan
During 1997, the Company adopted the 1997 Nonemployee Director Stock Option
Plan. Such plan provides grants of stock options to nonemployee directors of the
Company to
43
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
11. Stock Options and Warrants (continued)
purchase an aggregate of 100,000 shares of the Company's common stock. Each
nonemployee director shall be granted an option to purchase 2,000 shares of the
Company's common stock on each May 1st throughout the term of this plan at
exercise prices equal to the average of the fair market value of the Company's
common stock during the ten business days preceding the date of the grant. In
addition, each nonemployee director who sits on a committee of the Board of
Directors shall be granted an option to purchase 500 shares of the Company's
common stock under the same pricing arrangements as above. Subject to certain
exceptions, no options granted under this plan shall be exercisable until one
year after the date of grant.
During August 1999, the Company agreed to increase the annual May 1st grant to
the Board Members from 2,000 to 20,000 shares of the Company`s common stock,
subject to shareholders' approval at the next annual meeting. Since the options
have been granted pending shareholders' approval, the options are reflected as
outstanding as of December 31, 2001.
These options expire five years from the date of grant and all outstanding
options are exercisable at December 31, 2001. There are 17,000 options available
for grant under this plan at December 31, 2001. Activity with respect to these
plans is as follows:
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
-------- -------------- -------
Outstanding at December 31, 1998 82,200 $ .53 to 28.44 $ 12.00
Stock options granted 199,500 .64 to .92 .74
Stock options expired (41,700) .53 to 28.44 15.24
--------
Outstanding at December 31, 1999 240,000 .53 to 23.91 2.06
Stock options granted 8,000 .37 .37
Stock options expired (30,000) .64 to 23.91 6.53
--------
Outstanding at December 31, 2000 218,000 .37 to 12.50 1.38
Stock options granted -- -- --
Stock options expired (11,500) .53 to 12.50 8.86
--------
Outstanding at December 31, 2001 206,500 $ .37 to 3.53 $ .96
========
The Board of Directors has approved the issuance of an additional 402,500
options, subject to the approval of a stock option plan amendment at the next
shareholders'
44
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
11. Stock Options and Warrants (continued)
meeting. These options have not been reflected as of December 31, 2001
calculations since there are insufficient options available without the
shareholders actions.
Other Options and Warrants
The Company has agreements with several consultants who are to provide
financial, business and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. In exchange, these consultants were granted warrants and nonqualified
stock options to purchase shares of the Company's common stock at prices
representing the fair market value of the shares at the date of grant. Activity
with respect to options and warrants granted to these consultants is summarized
below:
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
-------- -------------- -------
Outstanding at December 31, 1998 102,000 $13.75 to 25.00 $ 13.97
Stock options granted 50,000 2.50 2.50
Stock options expired (2,000) 25.00 25.00
--------
Outstanding at December 31, 1999 and 2000 150,000 2.50 to 25.00 10.00
Stock options expired (150,000) $ 2.50 to 13.75 $ 10.00
--------
Outstanding at December 31, 2001 --
========
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, which also requires that the information be determined
as if the Company had accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for the
years ended December 31, 2000, 1999, 1998:
45
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
11. Stock Options and Warrants (continued)
2000 1999
---- ----
Risk-free interest rate 6.0% 6.0%
Expected life 3 years 3 years
Expected volatility 702% 825%
Expected dividend yield 0% 5%
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. Since 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 1999, 1998, 1997, 1996, and 1995 awards in 1999, and the
vesting of 2000, 1999, 1998, 1997, 1996, and 1995 awards in 2000 in accordance
with Statement No. 123. There were no awards made in 2001. 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 $ 925,152 and $3,015,082
for the years ended December 31, 2000 and 1999 respectively. In addition, the
pro forma net loss per share was $.19 and $.61 per share for the years ended
December 31, 2000 and 1999 respectively.
There were no options granted during the year ended December 31, 2001. The
weighted average remaining contractual life of all options outstanding at
December 31, 2001 was 2.4 years
12. Related Party Transactions
During 1997, the Company hired a director as a marketing consultant, who was
paid approximately $43,000 for the year ended December 31, 1999. This consulting
relationship ended in December 1999.
46
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
12. Related Party Transactions (continued)
The Company has also paid a consultant, who was a director from September 1997
to October 1998, advisory fees, quality control and product testing expense
reimbursements of approximately $66,000, 63,000, and $130,000 during the years
ended December 31, 2001, 2000, and 1999 respectively. Although the contract has
expired, Management has continued this agreement on a month-to-month basis.
The Company sells products to any of the Company's shareholders at a 25%
discount from regular price. This discount is designed to acknowledge the
appreciation of the shareholders support and to promote the use of the products.
13. Commitments
The Company leases office space under a noncancelable lease agreement, which
expires in August 2003. At December 31, 2001, the future minimum rental payments
due under this noncancelable lease are $60,600 and $42,300 for the years ending
December 31, 2002 and 2003 respectively. Net rent expense was approximately
$74,900, $185,000, and $226,000 in 2001, 2000, and 1999, respectively.
14. Quarterly Financial Data (unaudited)
For the year ended December 31, 2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Net Sales $ 329,693 $ 517,157 $ 507,293 $ 631,170
Operating Income (Loss) (221,977) (136,684) (240,758) (148,824)
Net Income (Loss) (220,163) (133,942) (237,014) (167,577)
Income (Loss) per share $ (0.04) $ (0.03) $ (0.05) $ (0.03)
15. Management's Plan
The Company has incurred significant losses over the past five years. The
ability of the Company to continue as a going concern is dependent upon
increasing sales while managing operating expenses.
Management's plan to increase sales and reduce operating expenses includes
several specific actions. Catalog sales will continue to be emphasized since it
has higher profit margins and represent markets for the Company that are growing
more rapidly than the Company's traditional television market. Direct marketing
techniques will be used to
47
Hydron Technologies, Inc.
Notes to Financial Statements (continued)
15. Management's Plan (continued)
reach new and current consumers such as promotions mailed to targeted consumers,
Web site specials, promotions to other Web site customers, and direct E-mail
promotions to new customers.
In addition, the Company added a significant Private Label customer of Hydron
based formulas with a proprietary nutritional complex of additives that began
ordering in second quarter, 2001. This customer competes in the Multi-Level
Marketing category and has been successful for 13 years.
The Company is also pursuing international distribution agreements that will
expand the company's distribution around the world. Finally, the Company will
continue to develop proprietary technology that it believes will improve its
long-term success in this category.
There can be no assurances that Management's Plan will be successful and the
Company's actual results could differ materially. No estimate has been made
should Management's plan be unsuccessful.
48
[GRAPHIC OMITTED]
DaszkalBolton LLP
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Michael I. Daszkal, CPA, P.A. 2401 N.W. Boca Raton Blvd
Jeffrey A. Bolton, CPA, P.A. Boca Raton, FL 33431
Timothy R. Devlin, CPA, P.A. t: 561.367.1040
Michael S. Kridel, CPA, P.A. f: 561.750.3236
Marjorie A. Horwin, CPA, P.A. www.daszkalbolton.com
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the incorporation by reference in the Registration
Statements (Forms S-8 Nos. 33-78296,33-84554, and 33-11765) of Hydron
Technologies, Inc. and the related prospectuses of our audit report dated March
18, 2002 with respect to the balance sheets at December 31, 2001 and 2000 and
statements of operations, shareholders' equity and cash flows of Hydron
Technologies, Inc. for the years ended December 31, 2001, 2000 and 1999 in the
form 10-K.
/s/ DASZKALBOLTON LLP
- ------------------------
DaszkalBolton LLP
Boca Raton, Florida
March 29, 2002
49
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 28, 2002
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:
50