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, 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 November 13, 1998: 4,910,136
Page 1 of 16
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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, 1998 and
December 31, 1997
Condensed consolidated statements of operations -- Three months ended
September 30, 1998 and 1997; Nine months ended September 30, 1998
and 1997
Condensed consolidated statements of cash flows -- Nine months ended
September 30, 1998 and 1997
Notes to condensed consolidated financial statements --
September 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 4. Submission of Matters to Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Page 2 of 16
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
ASSETS (UNAUDITED) (NOTE)
Current assets:
Cash and cash equivalents $ 2,923,693 $ 2,133,722
Trade accounts receivable 399,304 554,476
Inventories 2,248,644 2,798,395
Prepaid expenses and other
current assets 95,760 131,562
----------- -----------
Total current assets 5,667,401 5,618,155
Property and equipment, net 582,020 734,670
Investment in joint venture 49,363 288,055
Deferred product costs, less
accumulated amortization of
$4,546,076 and $4,313,950 at
1998 and 1997, respectively 1,428,353 1,660,479
Deposits 339,984 449,984
----------- -----------
$ 8,067,121 $ 8,751,343
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 391,727 $ 580,597
Accrued liabilities 494,638 313,508
----------- ----------
Total current liabilities 886,365 894,105
Shareholders' equity:
Common stock -- $.01 par value;
30,000,000 shares authorized;
4,960,336 shares issued; and
4,910,136 shares outstanding 247,968 247,968
Additional paid-in capital 19,231,566 19,231,566
Accumulated deficit (11,867,433) (11,190,951)
Treasury stock, at cost, 50,200 shares (431,345) (431,345)
----------- -----------
Total shareholders' equity 7,180,756 7,857,238
----------- -----------
$ 8,067,121 $ 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 16
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<TABLE>
<CAPTION>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 964,539 $ 1,445,484 $ 3,300,222 $ 6,494,189
Cost of sales 377,827 556,226 1,384,599 2,490,789
----------- ----------- ----------- -----------
Gross profit 586,712 889,258 1,915,623 4,003,400
----------- ----------- ----------- -----------
Expenses:
Royalty expense 53,112 84,787 172,520 349,042
Research and
development 80,647 84,172 327,802 246,647
Selling, general
& administrative 670,991 1,830,249 1,849,150 4,367,933
Depreciation &
amortization 128,429 133,441 385,010 372,838
----------- ----------- ----------- -----------
933,179 2,132,649 2,734,482 5,336,460
----------- ----------- ----------- -----------
Operating loss (346,467) (1,243,391) (818,859) (1,333,060)
Interest income 38,350 42,782 106,069 171,840
Infomercial equity pick-up 2,829 (60,821) 36,308 27,726
----------- ----------- ----------- -----------
Loss before
income taxes (305,288) (1,261,430) (676,482) (1,133,494)
Income tax
expense (benefit) -- (2,000) -- --
----------- ----------- ----------- -----------
Net loss $ (305,288) $(1,259,430) $ (676,482) $(1,133,494)
=========== =========== =========== ===========
Basic and diluted earnings
per share - Net loss
per common share $ (.06) $ (.26) $ (.14) $ (.23)
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 4 of 16
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
----------- -----------
Operating activities:
Net cash provided by (used in)
operating activities $ 515,205 $ (787,265)
----------- -----------
Investing activities:
Capital expenditures, net (234) (313,276)
Distribution received from joint venture 275,000 --
Increase in deferred product costs -- (6,633)
----------- -----------
Net cash provided by (used in)
investing activities 274,766 (319,909)
----------- -----------
Financing activities:
Proceeds from issuance
of common stock, net -- 96,250
Repurchase of common stock -- (431,345)
Cash dividends paid -- (1,233,918)
----------- -----------
Net cash used in
financing activities -- (1,569,013)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 789,971 (2,676,187)
Cash and cash equivalents at
beginning of period 2,133,722 5,603,708
----------- -----------
Cash and cash equivalents at
end of period $ 2,923,693 $ 2,927,521
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 5 of 16
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine month periods ended September 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.
All common shares and per share amounts have been adjusted to give retroactive
effect to a one-for-five reverse stock split which became effective on October
16, 1998. (See Note G).
NOTE B -- INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Finished goods $ 1,239,254 $ 1,731,767
Work in progress 194,814 270,480
Raw materials and components 814,576 796,148
----------- -----------
$ 2,248,644 $ 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 nine month period ended September 30, 1998,
and there were no sales by the Company to New Hydromercial Partners during the
nine months ended September 30, 1998. During the three and nine months ended
September 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 16
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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. Based on the results of the test market, completed in
August 1998, GRC and the Company have decided not to devote any additional
resources to this project at this time. During the three and nine months ended
September 30, 1998, the Company had sales of approximately $36,000 to GRC
relating to the test marketing of the infomercial. In addition, the Company's
share of the re-editing costs were approximately $31,000, and are included in
Selling, General and Administrative expenses for the three and nine months ended
September 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 two-year 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.
Page 7 of 16
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE D -- DISTRIBUTION AGREEMENT (continued)
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.
NOTE E - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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) $ (305,288) $(1,259,430) $ (676,482) $(1,133,494)
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 4,910,136 4,928,065 4,910,136 4,928,065
Effect of dilutive securities: Stock options
and warrants -- -- -- --
----------- ----------- ----------- -----------
Denominator for dilutive earnings per share
(adjusted weighted-average) 4,910,136 4,928,065 4,910,136 4,928,065
=========== =========== =========== ===========
Basic earnings per share $ (.06) $ (.26) $ (.14) $ (.23)
=========== =========== =========== ===========
Diluted earnings per share $ (.06) $ (.26) $ (.14) $ (.23)
=========== =========== =========== ===========
</TABLE>
Page 8 of 16
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE E - EARNINGS PER SHARE (continued)
Options and warrants to purchase 194,700 shares of common stock were outstanding
at September 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 periods.
NOTE F - 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 9 of 16
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE G - SUBSEQUENT EVENTS
On October 1, 1998, shareholders approved a one-for-five reverse split of the
Company's common stock, which had been previously authorized by the Company's
Board of Directors. This reverse stock split, which became effective on October
16, 1998, reduced the number of shares outstanding from 24,545,816 to 4,910,136.
The number of authorized shares and the par value of the common stock remain at
30,000,000 shares and $.01 per share, respectively. All references in the
financial statements to the number of shares and per share amounts of the
Company's common stock have been retroactively restated to reflect the reduced
number of common shares outstanding.
Page 10 of 16
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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 September 30, 1998 were $964,539, a
decrease of $480,945, or 33%, from net sales of $1,445,484 for the three months
ended September 30, 1997. Net sales for the nine months ended September 30, 1998
were $3,300,222, a decrease of $3,193,967, or 49%, from net sales of $6,494,189
for the nine months ended September 30, 1997. These decreases are primarily the
result of decreases in sales to QVC. Net catalog sales were $167,650 and
$580,104 for the three and nine months ended September 30, 1998, respectively as
compared to $309,249 and $1,099,877 for the three and nine months ended
September 30, 1997, respectively.
Page 11 of 16
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RESULTS OF OPERATIONS (CONTINUED)
Approximately 83% and 79% of the Company's sales during the three months ended
September 30, 1998 and 1997, respectively, were to QVC and its related entities.
Approximately 82% and 83% of the Company's sales during the nine months ended
September 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 61% and 62% for the three months ended
September 30, 1998 and 1997, respectively. The gross profit margin was 58% and
62% for the nine months ended September 30, 1998 and 1997, respectively. These
decreases resulted principally from the sale of approximately $248,000 of sample
size products to QVC for promotional activities at a gross margin of
approximately 15%. The gross profit margin on the Company's catalog ("Catalog")
sales was 84% and 77% for the three months ended September 30, 1998 and 1997,
respectively, and 78% and 79% for the nine months ended September 30, 1998 and
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
September 30, 1998 were $80,647, a decrease of $3,525, or 4%, from R&D expenses
of $84,172 for the three months ended September 30, 1997. Such expenses for the
nine months ended September 30, 1998 were $327,802, an increase of $81,155, or
33%, from R&D expenses of $246,647 for the nine months ended September 30, 1997.
The increase for the nine months ended September 30, 1998 resulted primarily
from clinical studies performed with respect to various products with costs of
approximately $100,000 incurred during the first six months of fiscal 1998. No
such clinical studies were performed during the three or nine months ended
September 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
September 30, 1998 were $670,991, a decrease of $1,159,258, or 63%, from SG&A
expenses of $1,830,249 for the three months ended September 30, 1997. Such
expenses for the nine months ended September 30, 1998 were $1,849,150, a
decrease of $2,518,783, or 58%, from SG&A expenses of $4,367,933 for the nine
months ended September 30, 1997.
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 September 30, 1998 were $128,010, a decrease of $560,824, or
81%, from Catalog SG&A expenses of $688,834 for the three months ended September
30, 1997. Total Catalog SG&A expenses for the nine months ended September 30,
1998 were $340,501, a decrease of $1,601,535, or 82%, from Catalog SG&A expenses
of $1,942,036 for the nine months ended September 30, 1997.
Page 12 of 16
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RESULTS OF OPERATIONS (CONTINUED)
SG&A expenses, other than catalog related expenses, for the three months ended
September 30, 1998 were $542,981, a decrease of $598,434, or 52%, from
non-catalog SG&A expenses of $1,141,415 for the three months ended September 30,
1997. Total non-catalog SG&A expenses for the nine months ended September 30,
1998 were $1,508,649, a decrease of $917,248, or 38%, from non-catalog SG&A
expenses of $2,425,897 for the nine months ended September 30, 1997. These
decreases in non-catalog SG&A expenses resulted primarily from decreased payroll
expense and lower legal expense. Legal expenses incurred during the nine months
ended September 30, 1998 pertaining to the current litigation are substantially
lower than the legal expenses incurred during the nine months ended September
30, 1998 pertaining a dispute between the Company and certain shareholders
(including then current directors of the Company) who were members of a group
("the 13D Group").
Interest and investment income for the three months ended September 30, 1998 was
$38,350, a decrease of $4,432, or 10%, from interest and investment income of
$42,782 for the three months ended September 30, 1997. Interest and investment
income for the nine months ended September 30, 1998 was $106,069, a decrease of
$65,771, or 38%, from interest and investment income of $171,840 for the nine
months ended September 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 net loss for the three months ended September 30, 1998 was $305,288, as
compared to a net loss of $1,259,430 for the three months ended September 30,
1997. The net loss for the nine months ended September 30, 1998 was $676,482, as
compared to a net loss of $1,133,494 for the nine months ended September 30,
1997. The decreases in the net losses resulted primarily from the factors
discussed above. The Catalog generated profits of approximately $0 and $77,000
for the three and nine months ended September 30, 1998, respectively, as
compared to net losses of approximately ($486,917) and ($1,180,227) for the
three and nine months ended September 30, 1997, respectively.
LIQUIDITY AND FINANCIAL RESOURCES
The Company's overall financial condition remains consistent as reflected in the
Condensed Consolidated Balance Sheets at September 30, 1998 and December 31,
1997. Working capital at September 30, 1998 and December 31, 1997 was
approximately $4.8 million and $4.7 million, respectively, including cash and
cash equivalents of approximately $2.9 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 $515,000 and a distribution received
from New Hydromercial Partners of approximately $275,000.
Investing activities provided net cash of $274,766 for the nine months ended
September 30, 1998 and used $319,909 for the nine months ended September 30,
1997. The investing activities during the nine months ended September 30, 1998
consisted primarily of a distribution received from New Hydromercial Partners.
Page 13 of 16
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LIQUIDITY AND FINANCIAL RESOURCES (CONTINUED)
There were no financing activities during the nine months ended September 30,
1998. Net cash used in financing activities for the nine months ended September
30, 1997 of $1,569,013 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 nine months ended September 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 Company has determined that it will need to modify or replace certain
portions of its software so that its computer systems will function properly
with respect to dates in the Year 2000 and beyond. Management does not expect
that this project will have a significant effect on operations. While The
Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no guarantee that the systems of other companies on which
The Company's systems and operations rely will be converted on a timely basis
and will not have a material effect on The Company. The cost of the Year 2000
initiatives is not expected to be material to The Company's results of
operations or financial position.
The effect of inflation has not been significant upon either the operations or
financial condition of the Company.
Page 14 of 16
<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 F to "Notes to Consolidated Financial Statements"
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Shareholders ("Meeting") of Hydron Technologies, Inc.
was held on October 1, 1998.
b) The second item of business was the approval of an amendment to the Company's
Certificate of Incorporation to effect a one for five reverse stock split of the
Company's common stock. The results of the voting on this resolution were as
follows: 18,861,980 votes for, 2,827,693 votes against and 117,808 votes
abstained. A majority of the shares voting at the Meeting having been cast in
favor of the resolution, the resolution was duly passed.
c) The third item of business was the approval of an amendment to the Company's
Certificate of Incorporation to authorize up to 5,000,000 share of preferred
stock. The results of the voting on this resolution were as follows: 12,450,502
votes for, 1,734,625 votes against and 116,252 votes abstained. A majority of
the shares outstanding having been cast in favor of the resolution, the
resolution was duly passed.
d) The final item of business was the proposal to ratify the appointment of
Ernst & Young LLP, the independent certified public accountants for the Company,
for the current fiscal year. The results of the voting on this resolution were
as follows: 20,706,582 votes for, 137,402 votes against and 163,497 votes
abstained. A majority of the shares voting at the Meeting having been cast in
favor of the resolution, the resolution was duly passed.
Page 15 of 16
<PAGE>
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Shareholders who wish to present proposals at the 1999 Annual Meeting of
Shareholders must do so in writing which must be received by the Secretary of
the Company at the address set forth on the first page of the Form 10-Q no later
than April 26, 1999 in order for such proposals to be considered for inclusion
in the Company's proxy statement relating to that meeting. In addition, the
proxy solicited by the Board of Directors for the 1999 Annual Meeting of
Shareholders will confer discretionary authority to vote on any shareholder
proposal presented at the meeting, unless the Company is provided with notice of
such proposal no later than July 11, 1999.
ITEM 5. OTHER INFORMATION
On November 13, 1998, the Company was notified by the Nasdaq Stock Market,
Inc. that its shares will no longer be listed on the Nasdaq National Market due
to noncompliance with the market value of public float requirement. Effective
with the opening of business on November 18, 1998, the Company's shares will be
listed on the Nasdaq SmallCap Market under the symbol HTEC.
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: November 13, 1998
Page 16 of 16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,923,693
<SECURITIES> 0
<RECEIVABLES> 399,304
<ALLOWANCES> 0
<INVENTORY> 2,248,644
<CURRENT-ASSETS> 5,667,401
<PP&E> 1,166,206
<DEPRECIATION> 584,186
<TOTAL-ASSETS> 8,067,121
<CURRENT-LIABILITIES> 886,365
<BONDS> 0
0
0
<COMMON> 247,968
<OTHER-SE> 19,231,566
<TOTAL-LIABILITY-AND-EQUITY> 8,067,121
<SALES> 3,300,222
<TOTAL-REVENUES> 3,442,599
<CGS> 1,384,599
<TOTAL-COSTS> 1,384,599
<OTHER-EXPENSES> 2,734,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (676,482)
<INCOME-TAX> 0
<INCOME-CONTINUING> (676,482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (676,482)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.14)
</TABLE>
