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: September 30, 1997 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)
1001 Yamato Road, Suite 403
Boca Raton, Florida 33431 (561) 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 reports), 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 November 13, 1997: 24,796,816
Page 1 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- September 30, 1997 and December 31,
1996
Condensed consolidated statements of operations -- Three months ended
September 30, 1997 and 1996; Nine months ended September 30, 1997 and 1996
Condensed consolidated statements of cash flows -- Nine months ended
September 30, 1997 and 1996
Notes to condensed consolidated financial statements -- September 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Page 2 of 15
<PAGE>
<TABLE>
<CAPTION>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 DEC. 31, 1996
------------------------------------------------
ASSETS UNAUDITED) (NOTE)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,927,521 $ 5,603,708
Trade accounts receivable 701,207 611,731
Inventories 3,118,957 2,826,684
Prepaid expenses and other
current assets 462,034 517,583
-----------------------------------------------
Total current assets 7,209,719 9,559,706
Property and equipment, net 751,411 579,692
Investment in joint venture 265,854 238,128
Deferred product costs, less
accumulated amortization of
$4,326,857 and $4,005,576 at
1997 and 1996, respectively 1,737,572 1,962,220
Deposits 448,769 401,394
----------------------------------------------
$10,413,325 $12,741,140
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 622,179 $ 453,337
Accrued liabilities 378,910 306,323
-----------------------------------------------
Total current liabilities 1,101,089 759,660
Shareholders' equity:
Common stock -- $.01 par value;
30,000,000 shares authorized; 24,796,816 and
23,228,511 shares issued and outstanding
at 1997 and 1996, respectively 247,968 232,285
Additional paid-in capital 19,231,566 20,351,654
Accumulated deficit (9,735,953) (8,602,459)
Treasury stock, at cost, 251,000 shares (431,345) -
-----------------------------------------------
Total shareholders' equity 9,312,236 11,981,480
-----------------------------------------------
$10,413,325 $12,741,140
==============================================
</TABLE>
Note: The balance sheet at December 31, 1996 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 15
<PAGE>
<TABLE>
<CAPTION>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ---
<S> <C> <C> <C> <C>
Net sales $ 1,445,484 2,003,192 $ 6,494,189 $ 7,036,833
Cost of sales 556,226 848,395 2,490,789 2,856,261
------------ ---------- ------------ ------------
Gross profit 889,258 1,154,797 4,003,400 4,180,572
------------ ----------- ------------ ------------
Expenses:
Royalty expense 84,787 93,114 349,042 331,162
Research and
development 84,172 128,825 246,647 382,886
Selling, general
& administrative 1,830,249 719,919 4,367,933 1,975,115
Distribution Agreement
expense -- 3,145,305 - 3,145,305
Depreciation &
amortization 133,441 107,092 372,838 321,277
------------ ----------- ---------- -----------
2,132,649 4,194,255 5,336,460 6,155,745
----------- ------------ ------------ ------------
Operating loss (1,243,391) (3,039,458) (1,333,060) (1,834,937)
Interest income 42,782 86,635 171,840 223,538
Infomercial equity pick-up (60,821) 13,017 27,726 (83,302)
---------- -------- ------------ ------------
Loss before income
taxes (1,261,430) (2,939,806) (1,133,494) (1,834,937)
Income tax
expense (benefit) (2,000) 4,000 -- 26,000
----------- ---------- ------------ -----------
Net loss $ (1,259,430) $ (2,943,806) $ (1,133,494) $ (1,860,937)
============ ============= ============= ==============
Loss per share (.05) (.12) (.05) (.08)
Weighted average shares 24,051,631 24,217,630 24,051,631 24,217,630
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 4 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- -----------
Operating activities:
Net cash provided by (used in)
operating activities $ (787,265) $ 2,777,134
--------------------------
Investing activities:
Capital expenditures, net (313,276) 844
Investment in joint venture -- (152,667)
Increase in deferred product costs (6,633) (6,335)
--------------------------
Net cash used in
investing activities (319,909) (158,158)
--------------------------
Financing activities:
Proceeds from issuance
of common stock, net 96,250 1,253,000
Repurchase of common stock (431,345) --
Cash dividends paid (1,233,918) (1,713,239)
--------------------------
Net cash used in
financing activities (1,569,013) (460,239)
--------------------------
Net decrease in cash
and cash equivalents (2,676,187) 2,158,737
Cash and cash equivalents at
beginning of period 5,603,708 4,346,587
--------------------------
Cash and cash equivalents at
end of period $ 2,927,521 $ 6,505,324
==========================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
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 of Hydron Technologies, Inc.
("HyTech"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three- and nine-month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes included in the Registrant and Subsidiaries' Annual Report on Form
10-K for the year ended December 31, 1996.
NOTE B -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------------------------
<S> <C> <C>
Finished goods $1,848,817 $1,880,112
Work in progress 293,794 95,241
Raw materials and components 976,346 851,331
---------- ----------
$3,118,957 $2,826,684
============================
</TABLE>
NOTE C -- INVESTMENT IN JOINT VENTURE
During 1995, HyTech entered into an agreement with two other companies to form a
joint venture known as Hydromercial Partners (the "Joint Venture"). Each company
shared equally in the profits and losses of the Joint Venture, which had an
initial term of two years, subject to renewal on an annual basis thereafter upon
unanimous consent of all of the Joint Venture participants. The purpose of the
Joint Venture was to provide and sell HyTech's polymer-based skin care line by
means of a thirty minute commercial ("Infomercial") which the Joint Venture
produced. On July 19, 1996, in conjunction with the amendment of the license
agreement between QVC, Inc. ("QVC") and HyTech (the "QVC License Agreement"),
the Joint Venture was dissolved (effective May 31, 1996) and a new partnership,
New Hydromercial Partners ("Infomercial Partnership"), was formed. The
Infomercial Partnership is an equal partnership between HyTech and QVC to
promote Hydron products and continue the same activities as the Joint Venture.
(See Note D)
Page 6 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Note D - Distribution Agreement
HyTech entered into the QVC License Agreement in 1993. The initial term of the
QVC License Agreement was two years, with automatic two year renewals if certain
minimum product purchase requirements were met by QVC. On July 19, 1996, HyTech
and QVC modified the QVC License Agreement ("Amended License Agreement") to
provide HyTech with certain retail marketing rights and increases in the minimum
product purchase requirements by QVC. QVC must meet those requirements, on an
annual basis, to maintain its exclusive rights to market Hydron consumer
products through direct response television in North, South and Central America.
No obligation exists for QVC to purchase HyTech's product except to maintain
such exclusive rights, and no assurances can be given that QVC will meet the
escalating minimum purchase levels for subsequent years in order to maintain
such exclusive rights. If QVC does not meet such minimum purchase levels, then
each of HyTech and QVC has the right to terminate the Amended License Agreement,
in which event HyTech may seek other marketing and distribution arrangements for
its products, which may include distribution arrangements with QVC on a
nonexclusive basis. Although management believes that there are other avenues
for selling its products, including the Hydron catalog, which was initiated in
November 1996, the loss of QVC as a customer would have a material adverse
effect on HyTech's business.
Pursuant to the Amended License Agreement, certain retail marketing rights
formerly held by Direct to Retail ("DTR"), which rights were granted by QVC to
DTR under a separate agreement, reverted back to HyTech. Such retail marketing
rights include prestige retail channels of distribution such as traditional
department and specialty stores, boutique stores and beauty salons, as well as
catalog sales. QVC is entitled to receive a commission from HyTech on any such
sales.
On June 11, 1997, HyTech and QVC renegotiated the Amended License Agreement
("Renegotiated License Agreement") pursuant to which the term of the Amended
License Agreement was extended for one year, commencing as of June 1, 1997.
In October 1997, HyTech agreed to further amend the Renegotiated Licensing
Agreement with QVC. (See Note G)
Page 7 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE E - INCOME TAXES
The tax provision for the three month and nine month periods ended September 30,
1996 represents the Alternative Minimum Tax due after utilization of the
available net operating loss carryforwards.
NOTE F - CONTINGENCIES
On September 30, 1997, Harvey Tauman, formerly Chairman, Chief Executive
Officer, President and Treasurer of HyTech, whose employment was terminated by
HyTech on September 19, 1997, commenced an action (the "Action") against HyTech
in the Circuit Court of the Fifteenth Judicial District in and for Palm Beach
County, Florida. In his complaint in the Action, Mr. Tauman alleges that HyTech
breached his employment contract upon the termination of his employment and
seeks damages of not less than $4,000,000, plus interest and costs. Mr. Tauman
also seeks a declaration that his employment was terminated without cause and
that he may continue to exercise his stock options for the duration of their
term notwithstanding the termination of his employment.
On November 4, 1997, HyTech served and filed its answer to the complaint in the
Action and asserted counterclaims against Mr. Tauman seeking various relief
against him including an award of compensatory and punitive damages of not less
than $6,000,000, together with appropriate interest, costs and expenses. In its
counterclaims, HyTech seeks a declaration, among other things, that Mr. Tauman
breached his employment agreement as a result of wrongful and fraudulent
performance of his duties under the contract. Among other allegations, HyTech
contends in its counterclaims that Mr. Tauman improperly caused HyTech to make
payments of personal expenses upon the submission by Mr. Tauman of false expense
reports and receipts, caused HyTech improperly to enter into consulting
agreements with members of his family and with friends without Board approval,
misrepresented to the Board the financial condition of HyTech and its prospects
in order to obtain a grant to himself of bonuses and stock options to which he
would otherwise not have been entitled, cause the submission to the Board of
false projections of HyTech's revenues in order to cause the Board to declare
dividends of which he was a substantial recipient and to approve a share
repurchase plan, caused HyTech to pay for accounting services rendered to him
and to other members of his family, and intentionally breached his fiduciary
duties to HyTech.
Management is unable, at this time, to estimate the likelihood or scope of
liability, if any, it may incur as a result of Mr. Tauman's claims or the
likelihood of success of its counterclaims.
Page 8 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE G - SUBSEQUENT EVENTS
In October 1997, HyTech agreed to amend the Renegotiated License Agreement with
QVC, primarily as a result of a five month decline in HyTech's on-air sales.
HyTech is currently working with QVC to find a permanent spokesperson for its
on-air show and to revamp the monthly show format. While developing this new
format, HyTech has agreed to reduce its scheduled airtime to two hours per month
from four hours, commencing in November 1997. HyTech has the right however, at
its discretion, to reinstate the previous airtime provisions upon 60 days notice
and intends to do so at such time as the on-air spokesperson and revised show
format are finalized.
Page 9 of 15
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
Hydron Technologies, Inc. ("HyTech") markets 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 such polymer. HyTech holds
U.S. and international patents on the only known means to suspend the Hydron
polymer in a stable emulsion that is cosmetically acceptable for use in personal
care/cosmetic products, thereby creating a new moisturizing technology for the
personal care/cosmetic and pharmaceutical industries. HyTech sells specialty
personal care/cosmetic 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. ("QVC"), as amended
(the "Amended QVC License Agreement"), which gives QVC certain exclusive rights
to purchase licensed products from HyTech for sale in the Western Hemisphere. In
addition, HyTech has entered into a license agreement with National Patent
Development Corp. ("National Patent"), which provides for reciprocal royalty
payments based on the sale of certain of each party's products. HyTech is
developing other personal care/cosmetic products for consumers and health care
products for professionals using Hydron polymers. HyTech also believes that its
patented technology could be used as a drug delivery system in proprietary
products, in which Hydron polymers act as a drug release mechanism. HyTech
intends to explore the efficacy of using its technology for such purposes and
would, when appropriate, either seek licensing arrangements with third parties,
or develop and market proprietary products through its own efforts.
Management anticipates the HyTech will discontinue marketing of its vitamin,
mineral and nutritional supplement line in 1998. HyTech is currently exploring
alternatives for disposing of the remaining vitamin, mineral and nutritional
supplement inventory.
At the present time, management of HyTech does not believe that QVC will meet
the stipulated minimum product purchase requirements at the May 31, 1998
measurement date, a milestone which indicates that the Amended License Agreement
will not automatically renew. HyTech has not determined what actions, if any, it
plans to take under such circumstances.
RESULTS OF OPERATIONS
Net sales for the three months ended September 30, 1997 were $1,445,484, or 28%
lower than net sales of $2,003,192 for the corresponding period in the fiscal
year ended December 31, 1996 ("Fiscal 1996"). Net sales for the nine months
ended September 30, 1997 were $6,494,189, or 8% lower than net sales of
$7,036,833 for the corresponding period in Fiscal 1996. These decreases are
primarily the result of decreases in sales to QVC, net of new sales through the
Hydron catalog, which was initiated in November 1996. Net catalog sales were
$309,249 and $1,099,877 for the three and nine months ended September 30, 1997,
respectively.
Page 10 of 15
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RESULTS OF OPERATIONS (CONTINUED)
Sales to QVC, the Infomercial Partnership and international vendors were
$1,136,235 and $5,394,312 for the three and nine months ended September 30,
1997, respectively, as compared to $2,003,192 and $7,036,833 for the
corresponding periods in Fiscal 1996, respectively. The 43% and 23% decrease in
sales for the three and nine months ended September 30, 1997, respectively, over
the corresponding periods in Fiscal 1996 are primarily the result of lower
on-air sales, in the five months ended October 31, 1997. In October 1997, HyTech
agreed to amend it current licensing agreement with QVC, principally as a result
of the decline in HyTech's on-air sales. HyTech is currently working with QVC to
find a permanent on-air spokesperson and to revamp its monthly show format.
While developing this new format, HyTech has agreed to reduce its scheduled
airtime to two hours per month from the current four hours. HyTech has the right
however, at its discretion, to reinstate the previous airtime provisions upon 60
days notice and, intends to do so at such time as the on-air spokesperson and
revised show format are finalized.
In addition, sales to the Infomercial Partnership during the nine months ended
September 30, 1997 were approximately $484,000 lower than sales in the
corresponding period in Fiscal 1996. The Infomercial was partially modified and
re-released in the third quarter of 1997 with nominal results. The partners are
currently discussing the status of the Infomercial and the possibility of future
projects for the Infomercial Partnership.
With the exception of Hydron catalog sales, substantially all of the sales
during the relevant periods were to QVC and its related entities, including the
Infomercial Partnership and QVC Europe. HyTech has no marketing or distribution
arrangements with any third parties other than QVC. Accordingly, the percentage
of HyTech's sales to QVC and HyTech's dependence upon QVC as a substantial
customer will remain significant and any disruption in HyTech's relationship
with QVC would have a material adverse effect on the business of HyTech.
HyTech's gross profit margin for the three months ended September 30, 1997
increased to 62% from 58% for the corresponding period in Fiscal 1996. The gross
profit margin for the nine months ended September 30, 1997 increased to 62% from
59% for the corresponding period in Fiscal 1996. These increases resulted
principally from gross profit margins, of approximately 79%, generated by sales
through the Hydron catalog for both the three months and nine months ended
September 30, 1997. The gross profit margin on sales to QVC, the Infomercial
Partnership and international vendors was 57% and 58% for the three and nine
months ended September 30, 1997, respectively, as compared to 58% and 59% for
the corresponding periods in Fiscal 1996, respectively. The gross profit margin
decreases, in respect of these sales, were due primarily to fluctuations in the
mix of the products sold to QVC in those periods and reduced pricing on the
products sold to QVC as a result of the Amended License Agreement.
Page 11 of 15
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RESULTS OF OPERATIONS (CONTINUED)
Research and development ("R&D") expenses reflect HyTech's efforts to identify
new product opportunities, develop and package the products for commercial sale,
perform appropriate efficacy and safety tests, and conduct consumer panel
studies and focus groups. R&D expenses decreased 35% to $84,172 for the three
months ended September 30, 1997, compared to $128,825 for the corresponding
period in Fiscal 1996. Such expenses for the nine months ended September 30,
1997 decreased 36% to $246,647, compared to $382,886 for the corresponding
period in Fiscal 1996. These decreases reflect the renegotiation of certain
research and development contracts. In addition, R&D expenses vary from period
to period depending on the number and type of products under development at such
time.
Selling, general and administrative ("SG&A") expenses for the three months ended
September 30, 1997 increased by 154% to $1,830,249 from $719,919 for the
corresponding period in Fiscal 1996. Such expenses for the nine months ended
September 30, 1997 increased 121% to $4,367,933, compared to $1,975,115 for the
corresponding period in Fiscal 1996.
The increases in SG&A expenses are primarily the result of expenses associated
with the Hydron catalog, which was initiated in November 1996. Catalog expenses
were $688,834 and $1,942,036 for the three and nine month periods ended
September 30, 1997, respectively. Overall expenses attributed to the catalog
include advertising, additional marketing, customer service and warehouse
personnel and related telephone, postage and supplies expense.
SG&A expenses, other than catalog related expenses, were $1,141,415 and
$2,425,897 for the three and nine month periods ended September 30, 1997,
respectively, as compared to $719,919 and $1,975,115 for the corresponding
periods in Fiscal 1996, respectively. The increases of 59% and 23% for the three
and nine month periods ended September 30, 1997, respectively, were due to legal
expenses of approximately $430,000 and $470,000, respectively, incurred in
connection with the dispute between HyTech and certain shareholders of HyTech
(including certain current directors of HyTech) who were members of a group
("the 13D Group") through the date of the termination of Mr. Tauman's
employment, including the legal fees and expenses of the 13D Group reimbursed by
HyTech. This increase in legal fees was partially offset by a reduction of
approximately $102,000 in promotional expenses associated with the Hydron
newsletter sent to QVC customers in Fiscal 1996.
HyTech's short term focus is to reduce SG&A expenses, primarily relating to the
promotion of its catalog operations. HyTech expects SG&A expenses to decrease
slightly in the fourth quarter, as certain previously contracted expenses run
their course. HyTech expects SG&A expenses to decrease significantly in the
first quarter of 1998 as the result of, among other things, the cancelation of
sport and event sponsorships. In addition, certain expenses, such as legal fees
relating to the matters between HyTech and the 13D Group, will not be recurring
in fiscal 1998. However, HyTech will incur legal fees and related expenses in
connection with the pending litigation with Mr. Tauman.
Page 12 of 15
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RESULTS OF OPERATIONS (CONTINUED)
Distribution Agreement expense of $3,145,305 in the third quarter of Fiscal
1996, pertains to costs incurred in connection with the execution of the Amended
License Agreement. In connection with the execution and delivery of the Amended
License Agreement, HyTech granted DTR an option to purchase 1.5 million shares
of HyTech's common stock at $.01 per share, resulting in a one-time non-cash
charge against earnings of approximately $3.1 million. Such option was exercised
on January 6, 1997.
Interest and investment income for the three months ended September 30, 1997
decreased 51%, to $42,782 from $86,635 for the corresponding period in Fiscal
1996. Such income for the nine months ended September 30, 1997 decreased 23% to
$171,840, compared to $223,538 for the corresponding period in Fiscal 1996.
These decreases are due primarily to lower cash balances and lower interest
rates. HyTech maintains a conservative investment strategy, deriving investment
income primarily from U.S. Treasury securities.
Net loss for the three month period ended September 30, 1997 decreased to
($1,259,430) from ($2,943,806) for the corresponding period in Fiscal 1996. Net
loss for the nine months ended September 30, 1997 decreased to ($1,133,494),
compared to ($1,860,937) for the corresponding period in Fiscal 1996. Such
changes are due primarily to the items discussed above.
LIQUIDITY AND FINANCIAL RESOURCES
HyTech's overall financial condition remains sound as reflected in the condensed
consolidated balance sheets, with working capital in excess of $6 million at
September 30, 1997.
HyTech's cash flow used in operations of $787,265 was a direct result, among
other things, of funding the start-up operations of the Hydron catalog and the
purchases of the vitamin, mineral and nutritional supplement inventory. Cash
flow from QVC remained significant, as 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.
HyTech paid regular quarterly cash dividends of two and one-half cents ($0.025)
per share on March 31, 1997 ($619,421) and July 3, 1997 ($614,497) to
shareholders of record on March 17, 1997 and June 26, 1997, respectively.
The Board of Directors of the Company had authorized the repurchase of up to
1,000,000 shares of the Company's common stock from time to time in the open
market through March 31, 1998, and as of November 13, 1997, 251,000 shares had
been purchased at an average price per share of $1.72.
On September 19, 1997, HyTech suspended the payment of quarterly dividends for
the remainder of the fiscal year and canceled HyTech's stock repurchase plan.
Page 13 of 15
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LIQUIDITY AND FINANCIAL RESOURCES (CONTINUED)
Based on HyTech's present cash position, the absence of any short or long term
debt, HyTech's contractual arrangements with third parties for manufacturing and
R&D, and HyTech's present business strategy, management believes that HyTech has
adequate resources to meet normal, recurring obligations as they become due.
Further, in view of the thirty (30) day payment terms in connection with sales
to QVC, management does not anticipate any difficulty in financing foreseeable
inventory requirements. However, since sales to QVC represent approximately 80%
of HyTech's net sales for the nine months ended September 30, 1997, termination
of the Renegotiated License Agreement or any significant reduction in the volume
of sales to QVC would have a material adverse effect on HyTech's business.
HyTech does not have the financial resources to sustain a major national
advertising campaign to market its products in a conventional retail mode. In
view of the foregoing, management's strategy has been to enter into marketing,
licensing and distribution agreements with third parties (such as QVC and the
Infomercial Partnership) that have greater financial resources than those of
HyTech and that can enhance HyTech's product introductions with appropriate
national marketing support programs. HyTech intends to expand its sales efforts
in international markets through similar arrangements, although there can be no
assurance that it will be successful in so doing.
The effect of inflation has not been significant upon either the operations or
financial condition of HyTech.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding HyTech's expectations, hopes, intentions,
beliefs or strategies regarding the future. Forward looking statements include
HyTech's liquidity, anticipated cash needs and availability, and the anticipated
expense levels under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." All forward looking statements
included in this document are based on information available to HyTech on the
date of this Report, and HyTech assumes no obligation to update any such forward
looking statement. It is important to note the HyTech's actual results could
differ materially from those expressed or implied in such forward looking
statements. You should also consult the "Risk Factors" section in HyTech's
Annual Report on Form 10-K for the year ended December 31, 1996 as well as those
factors listed from time to time in HyTech's other reports filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 and the Securities Act of 1933.
Page 14 of 15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note F to "Notes to Consolidated Financial Statements"
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 11 - Computation of Earnings Per Share
(b) Current reports on Form 8-K:
a. (Date of Report, September 19, 1997), reporting item 5.
b. (Date of Report, September 30, 1997), reporting item 5.
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: November 13, 1997
Page 15 of 15
<PAGE>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Exhibit (11) - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
--------------- ---------------- -------------------------------
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 24,051,631 22,664,849 24,051,631 22,664,849
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price - 1,552,781 - 627,303
--------------- ---------------- -------------------------------
Totals 24,051,631 24,217,630 24,051,631 23,292,152
=============== ================ ===============================
Net income $ (1,259,430) $ (2,943,806) $ (1,133,494) $ (1,860,937)
=============== ================ ===============================
Per share amount $ (0.05) $ (0.12) $ (0.05) $ (0.08)
=============== ================ ===============================
Fully diluted:
Average shares outstanding 24,051,631 22,664,849 24,051,631 22,664,849
Net effect of dilutive stock
options - based on the
treasury stock method using
quarter-end market price -0- 1,552,781 -0- 1,552,781
--------------- ---------------- -------------------------------
Totals 24,051,631 24,217,630 24,051,631 24,217,630
=============== ================ ===============================
Net income $ (1,259,430) $ (2,943,806) $ (1,133,494) $ (1,860,937)
=============== ================ ===============================
Per share amount $ (0.05) $ (0.12) $ (0.05) $ (0.08)
=============== ================ ===============================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,927,521
<SECURITIES> 0
<RECEIVABLES> 701,207
<ALLOWANCES> 0
<INVENTORY> 3,118,957
<CURRENT-ASSETS> 7,209,719
<PP&E> 1,142,447
<DEPRECIATION> 391,036
<TOTAL-ASSETS> 10,413,325
<CURRENT-LIABILITIES> 1,101,089
<BONDS> 0
0
0
<COMMON> 247,968
<OTHER-SE> 19,231,566
<TOTAL-LIABILITY-AND-EQUITY> 10,413,325
<SALES> 6,494,189
<TOTAL-REVENUES> 6,693,755
<CGS> 2,490,789
<TOTAL-COSTS> 2,490,789
<OTHER-EXPENSES> 5,336,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,133,494)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,133,494)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,133,494)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
