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, 1998 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 August 11, 1998: 24,545,816
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 -- June 30, 1998 and December 31,
1997
Condensed consolidated statements of operations -- Three months ended June
30, 1998 and 1997; Six months ended June 30, 1998 and 1997
Condensed consolidated statements of cash flows -- Six months ended June
30, 1998 and 1997
Notes to condensed consolidated financial statements -- June 30, 1998
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
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1998 December 31, 1997
---------------------------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 2,634,439 $ 2,133,722
Trade accounts receivable 409,160 554,476
Inventories 2,384,273 2,798,395
Prepaid expenses and other
current assets 176,745 131,562
---------------------------------
Total current assets 5,604,617 5,618,155
Property and equipment, net 631,424 734,670
Investment in joint venture 46,534 288,055
Deferred product costs, less
accumulated amortization of
$4,468,701 and $4,313,950 at
1998 and 1997, respectively 1,505,728 1,660,479
Deposits 354,642 449,984
---------------------------------
$ 8,142,945 $ 8,751,343
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 216,014 $ 580,597
Accrued liabilities 440,887 313,508
---------------------------------
Total current liabilities 656,901 894,105
Shareholders' equity:
Common stock -- $.01 par value;
30,000,000 shares authorized;
24,796,816 shares issued; and
24,545,816 shares outstanding 247,968 247,968
Additional paid-in capital 19,231,566 19,231,566
Accumulated deficit (11,562,145) (11,190,951)
Treasury stock, at cost, 251,000 shares (431,345) (431,345)
---------------------------------
Total shareholders' equity 7,486,044 7,857,238
---------------------------------
$ 8,142,945 $ 8,751,343
=================================
Note: The balance sheet at December 31, 1997 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
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months and Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,024,465 $ 2,640,501 $ 2,335,683 $ 5,048,705
Cost of sales 463,366 936,844 1,006,772 1,934,563
----------- ----------- ----------- -----------
Gross profit 561,099 1,703,657 1,328,911 3,114,142
----------- ----------- ----------- -----------
Expenses:
Royalty expense 63,514 143,291 119,408 264,255
Research and
development 128,826 81,832 247,155 162,475
Selling, general
& administrative 572,532 1,407,431 1,178,159 2,537,684
Depreciation &
amortization 128,224 133,261 256,581 239,397
----------- ----------- ----------- -----------
893,096 1,765,815 1,801,303 3,203,811
----------- ----------- ----------- -----------
Operating loss (331,997) (62,158) (472,392) (89,669)
Interest income 36,775 58,110 67,719 129,058
Infomercial equity pick-up 13,447 40,298 33,479 88,547
----------- ----------- ----------- -----------
Income (loss) before
income taxes (281,775) 36,250 (371,194) 127,936
Income tax
expense -- -- -- 2,000
----------- ----------- ----------- -----------
Net income (loss) $ (281,775) $ 36,250 $ (371,194) $ 125,936
=========== =========== =========== ===========
Basic and diluted earnings
per share - Net income
(loss) per common share $ (.01) $ .00 $ (.02) $ .01
</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)
Six Months Ended June 30, 1998 and 1997
1998 1997
-----------------------------
Operating activities:
Net cash provided by (used in)
operating activities $ 224,301 $ (452,509)
-----------------------------
Investing activities:
Capital expenditures, net 1,416 (286,805)
Distribution from joint venture 275,000 --
Increase in deferred product costs -- (6,633)
-----------------------------
Net cash provided by (used in)
investing activities 276,416 (293,438)
-----------------------------
Financing activities:
Proceeds from issuance
of common stock, net -- 96,250
Repurchase of common stock -- (399,095)
Cash dividends paid -- (619,421)
-----------------------------
Net cash used in
financing activities -- (922,266)
-----------------------------
Net increase (decrease) in cash
and cash equivalents 500,717 (1,668,213)
Cash and cash equivalents at
beginning of period 2,133,722 5,603,708
-----------------------------
Cash and cash equivalents at
end of period $ 2,634,439 $ 3,935,495
=============================
See notes to condensed consolidated financial statements.
Page 5 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1998
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.
(the "Company"), 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, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
Note B -- Inventories
Inventories consist of the following:
June 30, 1998 December 31, 1997
-------------------------------------
Finished goods $1,455,186 $1,731,767
Work in progress 151,211 270,480
Raw materials and components 777,876 796,148
-------------------------------------
$2,384,273 $2,798,395
=====================================
Note C -- Investment in Joint Venture
On July 19, 1996, in conjunction with the amendment of a licensing agreement
between the Company and QVC, Inc. ("QVC"), a partnership ("New Hydromercial
Partners") was formed between the Company and QVC to assume the activities of a
previous joint venture, which included the promotion and sale of the Company's
Hydron polymer-based skin care line by means of a thirty (30) minute commercial
(the "Infomercial"). The Infomercial, in its original format, will no longer be
aired and was not aired during the six month period ended June 30, 1998, and
there were no sales by the Company to New Hydromercial Partners during the six
months ended June 30, 1998. During the three and six months ended June 30, 1997,
the Company had sales of approximately $9,000 and $33,000, respectively to New
Hydromercial Partners. New Hydromercial Partners continues to market through a
continuity program to the customers who made purchases through the original
Infomercial.
Page 6 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
Note C -- Investment in Joint Venture (continued)
In April 1998, the Company, New Hydromercial Partners and Guthy-Renker
Corporation ("GRC") entered into an agreement, whereby GRC agreed to edit and
test market the 30-minute Hydron skin care Infomercial previously produced by
New Hydromercial Partners. Under the terms of the agreement, the Company and GRC
will share equally in the cost of re-editing the original Infomercial. The
Company will be reimbursed for such re-editing expenses upon determination of
the success of the test marketing. GRC agreed to test market, at its own
expense, the re-edited Infomercial on regional broadcast and cable networks
nationwide for a period of six to nine months in order to evaluate product sales
and re-order rates.
If the test marketing is successful, New Hydromercial Partners will be
reimbursed by GRC for a portion of the cost of producing the original
Infomercial. GRC will then receive an exclusive license to distribute the
Company's products in North America through infomercials, short form
commercials, database marketing (excluding current databases), package inserts,
space advertising and credit card syndication, subject to certain escalating
minimum product and media purchases. GRC will also have non-exclusive rights to
sell Hydron products internationally. GRC is specifically excluded from selling
Hydron products through television shopping channels and mass retail. GRC will
purchase from the Company certain products to be sold to consumers via
television, and will purchase additional products not featured in the re-edited
Infomercial on a consignment basis.
Upon completion of successful test marketing, the Company has agreed to grant
GRC an option to purchase up to 100,000 shares of the Company's common stock at
an exercise price equal to the then current market price. Such option will be
exercisable only if GRC meets certain product and media purchase requirements
during the first 12-month period following the test marketing. The option is
exercisable for a period of 5 years. At the conclusion of the first and second
year periods following the determination to proceed with the re-edited
Infomercial, the Company will grant GRC options to purchase up to an additional
250,000 and 150,000 shares, respectively, under similar terms and conditions.
Page 7 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
Note D - Distribution Agreement
The Company entered into a license agreement with QVC ("QVC License Agreement")
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. In 1996, the Company and QVC modified the QVC License Agreement
("Amended License Agreement"), whereby the Company reacquired certain retail
marketing rights to the Hydron product line. Such retail marketing rights
include prestige retail channels of distribution such as traditional department
and specialty stores, boutique stores and beauty salons, as well as catalog
sales. QVC is entitled to receive a commission from the Company on any such
sales. In addition, the Amended License Agreement increased the minimum product
purchase requirements QVC must meet, on an annual basis over a two-year term
ending May 31, 1998, to maintain its exclusive rights to market Hydron consumer
products through direct response television in the Western Hemisphere.
On June 11, 1997, the Company 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.
Under the terms of the Renegotiated License Agreement, QVC must meet certain
minimum product purchase requirements during each two-year term of the
agreement, including annual minimum product purchase requirements, to maintain
its exclusive rights. No obligation exists for QVC to purchase the Company's
product, except to maintain such exclusive rights, and no assurances can be
given that QVC will meet the escalating minimum purchase levels for subsequent
years in order to maintain such exclusive rights. If QVC meets the stipulated
minimum product purchase requirements, then the Renegotiated License Agreement
renews automatically. If QVC does not meet the minimum product purchase
requirements, then the Company can elect to continue or terminate the
Renegotiated License Agreement. Although QVC did not meet the minimum product
purchase requirements for the current term ended May 31, 1998, the Company
elected to continue the Renegotiated License Agreement. If, in the future, the
Renegotiated License Agreement terminates, the Company may seek other marketing
and distribution arrangements for its products, which may include distribution
arrangements with QVC on a nonexclusive basis. Although management believes that
there are other avenues for selling its products, including the Hydron catalog,
the loss of QVC as a customer would have a material adverse effect on the
Company's business.
Page 8 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
Note E - Income Taxes
The tax provision for the six month period ended June 30, 1997 represents the
Alternative Minimum Tax due after utilization of the available net operating
loss carryforwards.
Note F - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) is both the numerator
for basic earnings per share (income
available to common shareholders) and the
numerator for diluted earnings per share
(income available to common shareholders
after assumed conversions or exercise
of outstanding options and warrants,
if dilutive) $ (281,755) $ 36,250 $ (371,194) $ 125,936
=========================================================
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 24,545,816 24,099,069 24,545,816 24,099,069
Effect of dilutive securities: Stock options
and warrants -- 2,551 -- 8,490
---------------------------------------------------------
Denominator for dilutive earnings per share
(adjusted weighted-average) 24,545,816 24,101,620 24,545,816 24,107,559
=========================================================
Basic earnings per share $(.01) $.00 $(.02) $.01
=========================================================
Diluted earnings per share $(.01) $.00 $(.02) $.01
=========================================================
</TABLE>
Page 9 of 15
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
Note F - Earnings Per Share (continued)
Options and warrants to purchase 963,500 shares of common stock were outstanding
at June 30, 1998, but were not included in the computation of diluted earnings
per share because the effect would be antidilutive to the net loss per share for
the period.
Note G - Contingencies
On September 30, 1997, Harvey Tauman, formerly Chairman, Chief Executive
Officer, President and Treasurer of the Company, whose employment was terminated
by the Company on September 19, 1997, commenced an action (the "Action") against
the Company 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 the Company 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, the Company 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, the Company 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, the
Company contends in its counterclaims that Mr. Tauman improperly caused the
Company to make payments of personal expenses upon the submission by Mr. Tauman
of false expense reports and receipts, caused the Company 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 the
Company and its prospects in order to obtain a grant to himself of bonuses and
stock options to which he would otherwise not have been entitled, caused the
submission to the Board of false projections of the Company'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 the Company to pay for accounting
services rendered to him and to other members of his family, and intentionally
breached his fiduciary duties to the Company.
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 10 of 15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business
Hydron Technologies, Inc. (the "Company") 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. The
Company 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. The
Company sells specialty personal care/cosmetic products, and to a lesser extent
oral health care products, most of which are covered by patent, license and/or
royalty agreements. The Company has entered into a License Agreement with QVC,
Inc. ("QVC"), as amended and renegotiated (the "Renegotiated License
Agreement"), which gives QVC certain exclusive rights to purchase licensed
products from the Company for sale in the Western Hemisphere. In addition, the
Company 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. The Company is developing other
personal care/cosmetic products for consumers using Hydron polymers. The Company
also uses its patented technology as a drug delivery system in some of its
proprietary products, in which Hydron polymers act as a drug release mechanism.
The Company intends to continue to explore the efficacy of using its technology
for such purposes and would, when appropriate, either seek licensing
arrangements with third parties, or develop and market proprietary products
through its own efforts.
Substantially all of the Company's net sales are derived from sales to QVC under
the Renegotiated License Agreement. Pursuant to the Renegotiated License
Agreement, if QVC fails to meet the stipulated minimum product purchase
requirements at any measurement date, the Company alone can elect to continue or
terminate the agreement. Although QVC did not meet such stipulated minimums at
the May 31, 1998 measurement date, the Company elected to continue the
Renegotiated License Agreement.
Results of Operations
Net sales for the three months ended June 30, 1998 were $1,024,465, a decrease
of $1,616,036, or 61%, from net sales of $2,640,501 for the three months ended
June 30, 1997. Net sales for the six months ended June 30, 1998 were $2,335,683,
a decrease of $2,713,022, or 54%, from net sales of $5,048,705 for the six
months ended June 30, 1997. These decreases are primarily the result of
decreases in sales to QVC. Net catalog sales were $161,822 and $412,454 for the
three and six months ended June 30, 1998, respectively as compared to $329,565
and $693,947 for the three and six months ended June 30, 1997, respectively.
Page 11 of 15
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Results of Operations (continued)
Approximately 84% of the Company's sales during both of the three months ended
June 30, 1998 and 1997 were to QVC and its related entities. Approximately 82%
and 84% of the Company's sales during the six months ended June 30, 1998 and
1997, respectively, were to QVC and its related entities. Management anticipates
that sales to QVC will continue to be a substantial percentage of the Company's
sales and, absent the consummation of marketing or distribution arrangements
with third parties other than QVC, the Company's dependence upon QVC as a
substantial customer will remain significant. Any disruption in the Company's
relationship with QVC would have a material adverse effect on the business,
financial condition and results of operations of the Company.
The Company's gross profit margin was 55% and 57% for the three and six months
ended June 30, 1998, respectively. The gross profit margin was 65% and 62% for
the three and six months ended June 30, 1997, respectively. These decreases
resulted principally from the sale of approximately $174,000 of sample size
products to QVC for promotional activities at a gross margin of approximately
15%. QVC is about to launch two off-air promotions, which include these sample
size products, designed to encourage both first-time and continued use of our
products. The gross profit margin on the Company's catalog ("Catalog") sales was
84% and 76% for the three and six months ended June 30, 1998, respectively, as
compared to 67% and 74% for the three and six months ended June 30, 1997,
respectively.
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 for the three months ended
June 30, 1998 were $128,826, an increase of $46,994, or 57%, from R&D expenses
of $81,832 for the three months ended June 30, 1997. Such expenses for the six
months ended June 30, 1998 were $247,155, an increase of $84,680, or 52%, from
R&D expenses of $162,475 for the six months ended June 30, 1997. These increases
resulted primarily from clinical studies performed with respect to various
products with costs of approximately $100,000 incurred evenly over the six month
period ended June 30, 1998. No such clinical studies were performed during the
three or six months ended June 30, 1997. The amount of R&D expenses per year
varies, depending on the nature of the Company's 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 for the three months ended
June 30, 1998 were $572,532, a decrease of $834,899, or 59%, from SG&A expenses
of $1,407,431 for the three months ended June 30, 1997. Such expenses for the
six months ended June 30, 1998 were $1,178,159, a decrease of $1,359,525, or
54%, from SG&A expenses of $2,537,684 for the six months ended June 30, 1997.
Page 12 of 15
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Results of Operations (continued)
These decreases in SG&A expenses resulted primarily from reduced advertising and
promotional expenses involving the Catalog. Total Catalog SG&A expenses for the
three months ended June 30, 1998 were $97,331, a decrease of $665,722, or 87%,
from Catalog SG&A expenses of $763,053 for the three months ended June 30, 1997.
Total Catalog SG&A expenses for the six months ended June 30, 1998 were
$212,491, a decrease of $1,040,711, or 83%, from Catalog SG&A expenses of
$1,253,202 for the six months ended June 30, 1997.
SG&A expenses, other than catalog related expenses, for the three months ended
June 30, 1998 were $475,201, a decrease of $169,177, or 26%, from non-catalog
SG&A expenses of $644,378 for the three months ended June 30, 1997. Total
non-catalog SG&A expenses for the six months ended June 30, 1998 were $965,668,
a decrease of $318,814, or 25%, from non-catalog SG&A expenses of $1,284,482 for
the six months ended June 30, 1997. These decreases in non-catalog SG&A expenses
resulted primarily from decreased payroll expense.
Interest and investment income for the three months ended June 30, 1998 was
$36,775, a decrease of $21,335, or 37%, from interest and investment income of
$58,110 for the three months ended June 30, 1997. Interest and investment income
for the six months ended June 30, 1998 was $67,719, a decrease of $61,339, or
48%, from interest and investment income of $129,058 for the six months ended
June 30, 1997. These decreases were due primarily to lower cash balances in the
1998 periods compared to the 1997 periods. The Company maintains a conservative
investment strategy, deriving investment income primarily from U.S. Treasury
securities.
The joint venture equity pick-up for the three months ended June 30, 1998 was
$13,447, a decrease of $26,851, or 67%, from the joint venture equity pick-up of
$40,298 for the three months ended June 30, 1997. Such equity pick-up for the
six months ended June 30, 1998 was $33,479, a decrease of $55,068, or 62%, from
the joint venture equity pick-up of $88,547 for the six months ended June 30,
1997. This equity pick-up represents the Company's proportionate share of New
Hydromercial Partner's net income for the same period.
The net loss for the three months ended June 30, 1998 was ($281,775), as
compared to net income of $36,250 for the three months ended June 30, 1997. The
net loss for the six months ended June 30, 1998 was ($371,194), as compared to
net income of $125,936 for the six months ended June 30, 1997. The decreases in
net income resulted primarily from the factors discussed above. The Catalog
generated profits of approximately $27,000 and $77,000 for the three and six
months ended June 30, 1998, respectively, as compared to net losses of
approximately ($572,000) and ($803,000) for the three and six months ended June
30, 1997, respectively.
Page 13 of 15
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Liquidity and Financial Resources
The Company's overall financial condition remains strong as reflected in the
Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.
Working capital at June 30, 1998 and December 31, 1997 was approximately $4.9
million and $4.7 million, respectively, including cash and cash equivalents of
approximately $2.6 million and $2.1 million, respectively. The Company's
increase in cash and cash equivalents was the result primarily of cash flow from
operations of approximately $224,000 and a distribution received from New
Hydromercial Partners of approximately $275,000.
Investing activities provided net cash of $276,416 for the six months ended June
30, 1998 and used $293,438 for the six months ended June 30, 1997. The investing
activities during the six months ended June 30, 1998 consisted primarily of a
distribution received from New Hydromercial Partners.
There were no financing activities during the six months ended June 30, 1998.
Net cash used in financing activities for the six months ended June 30, 1997 of
$922,266 related primarily to the payment of dividends and the acquisition of
treasury stock. The payment of dividends was suspended and the stock repurchase
program was canceled by the Board of Directors in September 1997. The payment of
dividends in the future will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings and financial
condition.
Based on the Company's present cash position, absence of any short or long term
debt, arrangements with third parties for contractual manufacturing and R&D, and
the Company's present business strategy, management believes that the Company
has adequate resources to meet normal, recurring obligations as they become due.
Further, in view of the thirty day payment terms in connection with sales to
QVC, management does not anticipate any difficulty in financing foreseeable
inventory requirements. However, since sales to QVC represent approximately 82%
of the Company's net sales for the six months ended June 30, 1998, termination
of the Renegotiated License Agreement or any further significant reduction in
the volume of sales to QVC would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company does not have the financial resources to sustain a national
advertising campaign to market its products in a conventional retail mode. In
view of the foregoing, management's strategy has been to enter into marketing,
licensing and distribution agreements with third parties (such as QVC, New
Hydromercial Partners and GRC) 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.
Page 14 of 15
<PAGE>
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 the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future. 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. You should also consult the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 as
well as those factors listed from time to time in the Company's other reports
filed with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 and the Securities Act of 1933.
Part II - Other Information
Item 1. Legal Proceedings
See Note G to "Notes to Consolidated Financial Statements"
Item 6. Exhibits and Reports on Form 8-K
None
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 11, 1998
Page 15 of 15
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