UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended: June 30, 1995 or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Period from __________ to __________
Commission File Number: 0-6333
HYDRON TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
New York 13-1574215
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
941 Clint Moore Road
Boca Raton, Florida 33487 (407) 994-6191
(Address of Principal Executive Offices) (Registrant's telephone number)
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 report), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No.
Number of shares of common stock outstanding as of August 7, 1995: 22,637,316
Page 1 of 14
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- June 30, 1995 and December 31, 1994
Condensed consolidated statements of operations -- Three months ended June 30,
1995 and 1994; Six months ended June 30, 1995 and 1994
Condensed consolidated statements of cash flows -- Six months ended June 30,
1995 and 1994
Notes to condensed consolidated financial statements -- June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Page 2 of 14
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1995 Dec. 31, 1994
------------------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 4,704,085 $ 5,723,664
Trade accounts receivable 2,029,762 2,044,604
Inventories 4,531,533 3,260,010
Prepaid expenses and other
current assets 186,549 100,670
----------------------------
Total current assets 11,451,929 11,128,948
Property and equipment, net 182,702 109,386
Investment in joint venture 200,000 -
Deferred product costs, less
accumulated amortization of
$3,543,534 and $3,389,667 at
1995 and 1994, respectively 2,417,927 2,571,249
----------------------------
$14,252,558 $13,809,583
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 507,919 $ 395,862
Accrued liabilities 436,521 400,262
----------------------------
Total current liabilities 944,440 796,124
Stockholders' equity:
Common stock -- $.01 par value;
30,000,000 shares authorized;
22,634,816 and 22,616,816
shares issued and outstanding
at 1995 and 1994, respectively 226,348 226,168
Additional paid-in capital 20,369,556 20,348,361
Accumulated deficit (7,287,786) (7,561,070)
----------------------------
Total stockholders' equity 13,308,118 13,013,459
----------------------------
$14,252,558 $13,809,583
============================
Note: The balance sheet at December 31, 1994 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
Page 3 of 14
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months and Six Months Ended June 30, 1995 and 1994
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
---- ---- ---- ----
Net sales $2,935,879 $2,869,003 $4,053,604 $3,299,291
Cost of sales 1,100,973 887,043 1,448,051 987,847
---------- ---------- ---------- ----------
Gross profit 1,834,906 1,981,960 2,605,553 2,311,444
---------- ---------- ---------- ----------
Expenses:
Royalty expense 127,311 137,946 183,175 159,394
Research and
development 50,342 38,916 120,553 103,792
Selling, general
& administrative 499,409 400,039 904,910 670,535
Depreciation &
amortization 86,730 87,773 170,767 172,253
---------- ---------- ---------- ----------
763,792 664,674 1,379,405 1,105,974
---------- ---------- ---------- ----------
Operating income 1,071,114 1,317,286 1,226,148 1,205,470
Interest and
investment
income 97,356 28,955 178,517 62,471
---------- ---------- ---------- ----------
Net income $1,168,470 $1,346,241 $1,404,665 $1,267,941
========== ========== ========== ==========
Net income per
common share .05 .06 .06 .06
Weighted average
number of common
shares outstanding 23,229,925 22,529,651 23,217,816 21,964,928
See notes to condensed consolidated financial statements.
Page 4 of 14
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 1995 and 1994
1995 1994
--------------------------
Operating activities:
Net cash provided by (used in)
operating activities $ 381,188 $ (107,588)
--------------------------
Investing activities:
Purchase of U.S. Treasury Bills - (3,449,019)
Capital expenditures (90,216) (44,611)
Investment in joint venture (200,000) -
Increase in deferred product costs (545) (12,504)
--------------------------
Net cash used in
investing activities (290,761) (3,506,134)
--------------------------
Financing activities:
Proceeds from issuance
of common stock, net 21,375 1,149,632
Cash dividends paid (1,131,381) -
--------------------------
Net cash (used in) provided by
financing activities (1,110,006) 1,149,632
--------------------------
Net decrease in cash
and cash equivalents (1,019,579) (2,464,090)
Cash and cash equivalents at
beginning of period 5,723,664 3,686,824
--------------------------
Cash and cash equivalents at
end of period $ 4,704,085 $ 1,222,734
==========================
See notes to condensed consolidated financial statements.
Page 5 of 14
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1995
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and six-month periods ended June
30, 1995 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1995. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Registrant and Subsidiaries' annual report on Form 10-K for the year ended
December 31, 1994.
Note B -- Inventories
Inventories consist of the following:
June 30, 1995 December 31, 1994
----------------------------------
Finished goods $3,392,813 $1,661,600
Work in progress 108,836 234,125
Raw materials and components 1,029,884 1,364,285
-----------------------------
$4,531,533 $3,260,010
=============================
Note C -- Investment in Joint Venture
On January 17, 1995, Hydron Technologies, Inc. ("HyTech") entered into an
agreement with two other companies to form a joint venture known as Hydromercial
Partners (the Joint Venture). Each company has a one-third interest in the
profits and losses of the Joint Venture, which has an initial term of two (2)
years, subject to renewal on an annual basis thereafter upon unanimous consent
of all of the Joint Venture participants.
The purpose of the Joint Venture is to provide and sell HyTech's polymer-based
skin care line by means of a thirty (30) minute commercial (Infomercial) which
the joint venture has produced. The initial capital of the Joint Venture,
$600,000, was contributed in equal shares by the Joint Venture participants, and
is being used to produce the Infomercial and conduct test marketing.
Page 6 of 14
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1995
Note D - Income Taxes
There are no tax provisions for the three (3) month and six (6) month periods
ended June 30, 1995 and 1994 due to the utilization of net operating loss
carryforwards.
Page 7 of 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business
Hydron Technologies, Inc. ("HyTech") is the owner of a broad range of consumer
and oral health care products using Hydron(R) polymers, a scientifically-proven
moisture attracting ingredient, and also owns a non-prescription drug delivery
system for topically applied pharmaceuticals, which uses the polymer. HyTech
holds U.S. and international patents on the only known means to suspend the
Hydron polymer in a stable emulsion that is cosmetically acceptable for use in
personal care/cosmetics products, creating a new moisturizing technology for the
personal care/cosmetics and pharmaceutical industries. HyTech sells specialty
personal care/cosmetics products, and to a lesser extent oral health care
products, most of which are covered by patent, license and royalty agreements.
HyTech has entered into a License Agreement with QVC, Inc. (the "QVC License
Agreement"), which gives the electronic retailer the exclusive right to purchase
licensed products from HyTech for sale in the Western Hemisphere, and a License
Agreement with National Patent Development Corp., which provides that HyTech
will generally pay royalties to National Patent on its sales and receive
royalties from National Patent from sales of certain of that company's products.
HyTech is developing other personal care/cosmetics and oral health care products
using Hydron polymers, as well as products that use Hydron polymer technology as
a drug delivery system, which HyTech intends to market through third parties or
its own efforts.
Results of Operations
Net sales for the three (3) months ended June 30, 1995 were $2,935,879, or 2%
higher than net sales of $2,869,003 for the corresponding period of the fiscal
year ended December 31, 1994 ("Fiscal 1994"). Net sales for the six (6) months
ended June 30, 1995 were $4,053,604, or 23% higher than net sales of $3,299,291
for the corresponding period of Fiscal 1994. These increases are due primarily
to the continued marketing on the QVC television shopping network of HyTech's
products. In addition, for approximately six (6) weeks after the commencement
(January 1994) of a lawsuit by Ocular Sciences, Inc. against HyTech and National
Patent Development Corporation regarding use of the Hydron trademark, no sales
were made to QVC by HyTech, although QVC was accepting backorders for HyTech's
products. It appears that QVC was assessing the nature of the claims made by the
plaintiff in the lawsuit, pending its own investigation of the matter. The
marketing program was fully reinstated in March 1994. The lawsuit was settled in
August 1994 and both parties agreed to dismiss all claims against the other and
agreed to continue to market their existing respective product lines under the
Hydron name. No damages were paid by either party.
Substantially all of the sales during the relevant periods were to QVC.
Management anticipates that sales to QVC will continue to grow as HyTech further
extends its skin care line, adds other product lines, and broadens its marketing
efforts to include other forms of electronic and conventional retailing.
Absent the consummation of marketing or distribution agreements with third
parties other than QVC, the percentage of sales to QVC and HyTech's dependence
upon QVC as a substantial customer will also increase.
Page 8 of 14
Results of Operations (continued)
During January 1995, wholly owned subsidiaries of HyTech and QVC along with
another company, formed a joint venture to produce and distribute a 30-minute
Infomercial for HyTech's products, which is tentatively scheduled to be
broadcast on various networks commencing in the middle of the third quarter of
the fiscal year ending December 31, 1995 (Fiscal 1995).
HyTech has agreed to supply the Infomercial Joint Venture with product for sale
through the Infomercial at HyTech's cost. Management believes that the
Infomercial, if successful, is a cost effective method of building brand
awareness of HyTech's Hydron polymer-based skin care line despite selling
product to the Infomercial Joint Venture at cost, because subsequent orders for
product by customers who initially purchased directly from the Infomercial will
be made through QVC, wherein HyTech will receive its customary gross profit
margins. Management expects the Infomercial to significantly broaden HyTech's
market for its consumer products.
HyTech's gross profit for the three (3) months ended June 30, 1995 decreased six
(6) percent to 63% from 69% for the corresponding period of Fiscal 1994. The
gross profit for the six (6) months ended June 30, 1995 decreased six (6)
percent to 64% from 70%. These decreases were due primarily to fluctuations in
the mix of products sold to QVC in those periods.
Research and development ("R&D") expenses reflect HyTech's efforts to identify
new product opportunities, develop and package the products for commercial sale,
perform appropriate efficacy and safety tests, and conduct consumer panel
studies and focus groups. R&D expenses increased 29% percent to $50,342 in the
second quarter of Fiscal 1995, compared to $38,916 for the same period in Fiscal
1994. Such expenses for the six (6) months ended June 30, 1995 increased 16% to
$120,553, compared to $103,792 for the corresponding period of Fiscal 1994.
These increases reflect HyTech's continual development of new products.
Selling, general and administrative expenses for the three (3) months ended June
30, 1995 increased by 25% to $499,409 from $400,039 for the corresponding period
of Fiscal 1994. Such expenses for the six (6) months ended June 30, 1995
increased 35% to $904,910, compared to $670,535 for the corresponding period of
Fiscal 1994. These increases are attributable to an overall increase in salary
requirements, expansion of full-time staff and other selling and administrative
costs necessary to administer HyTech's growth.
Interest and investment income in the first quarter of Fiscal 1995 rose 236%, to
$97,356 from $28,955 for the same period in Fiscal 1994. Such income for the six
(6) months ended June 30, 1995 increased 186% to $178,517, compared to $62,471
for the corresponding period of Fiscal 1994. These increases are due primarily
to the investment of additional cash from operations. HyTech maintains a
conservative investment strategy, deriving investment income primarily from U.S.
Treasury securities.
Page 9 of 14
Results of Operations (continued)
Net income for the three (3) months ended June 30, 1995 decreased 13%, to
$1,168,470 from $1,346,241 for the same period in Fiscal 1994. Net income for
the six (6) months ended June 30, 1995 increased 11% to $1,404,665, compared to
$1,267,941 for the corresponding period of Fiscal 1994. Such changes are due
primarily to the factors discussed above.
Liquidity and Financial Resources
HyTech's overall financial condition remains strong as reflected in the
Condensed Consolidated Balance Sheets at June 30, 1995 compared to December 31,
1994. In the first six months of Fiscal 1995, working capital remained at
approximately $10 million, primarily due to net income of $1,404,665 for the
period, offset by a $200,000 investment in Hydromercial Partners and the payment
of quarterly dividends totaling $1,131,381.
HyTech's cash flow from operations of $381,188 was a direct result of its
marketing efforts with QVC. The QVC License Agreement provides that QVC purchase
products directly from HyTech for resale to consumers, and that HyTech receive
payment from QVC thirty days after QVC's receipt of such goods.
On January 27, 1995, HyTech's Board of Directors declared a regular quarterly
cash dividend of two and one-half cents ($.025) per share. Dividends were paid
on March 31, 1995 and June 30, 1995 to shareholders of record on March 17, 1995
and June 19, 1995, respectively.
HyTech's deferred product costs have accumulated primarily from the various
agreements made with National Patent, and amounts capitalized as deferred
product costs have been based on the consideration given by HyTech to National
Patent in the form of common stock, which has been valued based on market prices
on the dates of the various agreements with National Patent.
Management believes that the amount of deferred product costs, primarily
incurred as a result of the various agreements with National Patent, will be
realized by HyTech through direct sales of its products, sale of distribution
rights and future royalties. Based upon HyTech's current sales activity, the
progress being made in developing new Hydron polymer-based products and the
market potential for these products, management believes that there has been no
permanent impairment to the carrying value of the assets and that the costs
should continue to be amortized over their respective useful lives, principally
20 years as they pertain to the National Patent agreements. Such evaluations of
the carrying value and the period over which the amount is amortized are under
continual review by HyTech.
Based on HyTech's present cash position, absence of any short or long term debt,
third-party contractual approach to manufacturing and R&D, and present business
strategy, management believes that HyTech has adequate resources to meet normal,
recurring obligations as they become due. Further, in view of the thirty (30)
day payment terms in connection with sales to QVC, management does not
anticipate any difficulty in financing foreseeable inventory requirements.
Page 10 of 14
Liquidity & Financial Resources (continued)
However, management recognizes that HyTech does not have the financial resources
to sustain a major national advertising campaign to market its products. In view
of the foregoing, management has obtained with QVC and Hydromercial Partners,
and continues to seek internationally, marketing, licensing and distribution
agreements with third parties which have greater financial resources and that
can enhance HyTech's product introductions with appropriate national marketing
support programs.
The effect of inflation has not been significant upon either the operations or
financial condition of HyTech.
Part II - Other Information
Item 4. Submission of Matters to Vote of Security Holders
(a) The Annual Meeting of Shareholders (the "Meeting") of HyTech was
held on June 9, 1995 at 10:00 a.m., local time, at the Boca Raton Marriott
Crocker Center, 5150 Town Center Circle, Boca Raton, Florida 33486.
(b) The following individuals were nominated for election as members of
the Board of Directors to hold office for a term of one (1) year until the next
annual meeting of shareholders and until their successors are elected and
qualify: Harvey Tauman, Richard Tauman, Chaudhury M. Prasad, Frank Fiur, Samuel
M. Leb, M.D., Nestor Cardero, C.P.A., Joseph A. Caccamo, Richard Banakus and
Hugues Lamotte.
A vote was taken and the results thereof were as follows:
(i) 19,286,491 votes for Harvey Tauman and 73,497 votes withheld;
(ii) 19,286,203 votes for Richard Tauman and 71,362 votes withheld;
(iii) 19,286,359 votes for Chaudhury M. Prasad and 71,286 votes
withheld;
(iv) 19,284,407 votes for Frank Fiur and 73,158 votes withheld;
(v) 19,284,107 votes for Samuel M. Leb, M.D. and 71,114 votes withheld;
(vi) 19,286,451 votes for Nestor Cardero, C.P.A. and 71,074 votes
withheld;
(vii) 19,286,491 votes for Joseph A. Caccamo and 70,941 votes withheld;
Page 11 of 14
Part II - Other Information (continued)
(viii) 19,286,651 votes for Richard Banakus and 71,074 votes withheld;
and
(ix) 19,284,651 votes for Hugues Lamotte and 72,914 votes withheld.
A plurality of the votes having been cast in favor of each of the
above-named Directors, they were duly elected to serve a one (1) year term.
(c) The final item of business was the proposal to ratify the
appointment of Ernst & Young L.L.P., the independent certified public
accountants of the Corporation, for the current fiscal year. The results of the
voting were as follows:
19,294,825 votes for the resolution,
44,467 votes against and
19,073 votes abstained.
A majority of the shares cast at the meeting have voted for resolution
no. 2, and the resolution was duly passed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 11 - Computation of Earnings Per Share
(b) Reports on Form 8-K - None
Page 12 of 14
SIGNATURES
Pursuant to the requirements 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.
By: /s/ Thomas G. Burns
Thomas G. Burns, Vice President,
Finance and Chief Financial Officer
Dated: August 7, 1995
Page 13 of 14
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Exhibit (11) - Statement Re: Computation of Earnings Per Share
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Primary:
Average shares outstanding 22,501,281 21,922,558 22,496,553 21,661,381
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 728,644 607,093 721,263 303,547
---------- ---------- ---------- ----------
Totals 23,229,925 22,529,651 23,217,816 21,964,928
========== ========== ========== ==========
Net income $1,168,470 $1,346,241 $1,404,665 $1,267,941
========== ========== ========== ==========
Per share amount $ 0.05 $ 0.06 $ 0.06 $ 0.06
========== ========== ========== ==========
Fully diluted:
Average shares outstanding 22,501,281 21,922,558 22,496,553 21,661,381
Net effect of dilutive stock
options - based on the
treasury stock method using
quarter-end market price 773,335 1,040,813 746,700 944,428
---------- ---------- ---------- ----------
Totals 23,274,616 22,963,371 23,243,253 22,605,809
========== ========== ========== ==========
Net income $1,168,470 $1,346,241 $1,404,665 $1,267,941
========== ========== ========== ==========
Per share amount $ 0.05 $ 0.06 $ 0.06 $ 0.06
========== ========== ========== ==========
Page 14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,704,085
<SECURITIES> 0
<RECEIVABLES> 2,029,762
<ALLOWANCES> 0
<INVENTORY> 4,531,533
<CURRENT-ASSETS> 11,451,929
<PP&E> 315,399
<DEPRECIATION> 132,697
<TOTAL-ASSETS> 14,252,558
<CURRENT-LIABILITIES> 944,440
<BONDS> 0
0
0
<COMMON> 226,348
<OTHER-SE> 20,369,556
<TOTAL-LIABILITY-AND-EQUITY> 13,308,118
<SALES> 4,053,604
<TOTAL-REVENUES> 4,232,121
<CGS> 1,448,051
<TOTAL-COSTS> 1,448,051
<OTHER-EXPENSES> 1,379,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,404,665
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,404,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,404,665
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
