U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to
Commission file number 0-19827
HYMEDIX, INC.
(Exact name of registrant, as specified in its charter)
Delaware 22-3279252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2245 Route 130, Dayton, New Jersey 08810
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (908) 274-2288
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
<PAGE>
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
State registrant's revenues for its most recent fiscal year: $1,986,798
The aggregate market value of the voting stock held by non-affiliates, based
upon the average of the bid and asked price of the Common Stock on March 26,
1997 as reported by The OTC Bulletin Board, was approximately $1,132,324. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates for this purpose but not necessarily for other
purposes.
The number of shares of Common Stock outstanding as of March 26, 1997 was
5,713,500.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
Documents Incorporated by Reference
Part of Form 10-KSB
Document into which incorporated
Proxy statement for 1997 Special Part III
Meeting in Lieu of Annual Meeting of
Stockholders to be filed with the
Securities and Exchange Commission on
or before April 30, 1997.
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HYMEDIX, INC.
INDEX
Page No.
PART I
Item 1. Description of Business 4
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 7. Financial Statements 13
Item 8. Changes in and Disagreements with Accountants on 13
Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control 14
Persons; Compliance with Section 16(a) of the
Exchange Act
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial Owners 18
and Management
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits and Reports on Form 8-K 18
SIGNATURES 23
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PART I
Item 1. Description of Business.
Background
HYMEDIX, Inc. ("HYMEDIX") was incorporated in Delaware on December 20,
1993 as a wholly-owned subsidiary of Servtex International Inc. (the
"Predecessor"). On February 23, 1994, the Predecessor merged with and into
HYMEDIX, Inc. and, concurrently, a wholly-owned subsidiary of the Predecessor
was merged with and into HYMEDIX International, Inc. ("HYMEDIX International"),
which resulted in HYMEDIX International becoming a wholly-owned subsidiary of
HYMEDIX (collectively, the "Acquisition Merger"). The Acquisition Merger was
accounted for as a recapitalization of HYMEDIX International and an acquisition
by HYMEDIX International of the Predecessor using historical values of the
assets and liabilities of the Predecessor. HYMEDIX International was
incorporated in October, 1985 under the name Kingston Technologies, Inc. As used
in this Form 10-KSB, unless the context otherwise requires, the term "Company"
collectively means HYMEDIX, HYMEDIX International and their respective
predecessors.
The Company has been engaged through HYMEDIX International in the
development and commercialization of medical and skin care products based on its
proprietary synthetic HYPAN(R) hydrogels and memory polymers. These hydrophilic
polymers are biocompatible and highly versatile, and enable the Company to
develop products and components with advantageous characteristics for a number
of medical and other markets. The majority of the Company's revenues to date has
been in the form of license and distribution fees.
Products
The Company has developed two product lines in the past several years,
a line of synthetic dressings for the treatment of chronic wounds, and a line of
moisturizing creams and gels for the consumer skin care markets. In addition,
the Company has several product development agreements with companies in the
fields of drug delivery and permanent implants.
Skin Care Products
The Company has developed a line of moisturizing creams and gels based
on the emulsifying capabilities of its hydrophilic polymer systems and is
introducing them to the United States market under the trade name BIONIQ(R). The
Company is also introducing a similar line of skin care products to Asian
markets through a marketing partner. In the United States, the Company's
principal means of distribution of BIONIQ products is direct response
television. Starting in October 1995, the Company began selling BIONIQ on a
major direct response television network. The BIONIQ product line presently
consists of Body Therapy(TM), a moisturizing lotion; Replenishing Complex(TM), a
moisturizing gel; Facial Formula(TM) (Dry/Normal) and Facial Formula(TM)
(Normal/Oily), facial creams; Hydrating Cleanser(TM) (Dry/Normal) and Clarifying
Cleanser(TM) (Normal/Oily), facial cleansers;
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Cucumber Refining Solution(TM) (Dry/Normal) and Tropical Refining Solution(TM)
(Normal/Oily), facial toners; and Baby Therapy(TM), a body lotion for babies.
Additional products are under development. The Company is exploring other
marketing channels for BIONIQ, including other direct selling methods, and
retail chains.
Wound Care Products
The Company has developed a line of seven products for the chronic
wound care markets, six of which have received market clearance from the FDA,
and one of which does not require FDA clearance. In November 1995, the Company
entered into an agreement with ProCyte Corporation ("ProCyte") granting it a
license to make, have made, use and sell products for the wound care field using
the Company's HYPAN(R) technology. The rights are worldwide, except for Asia,
and are exclusive, except as to one of the products. The license includes
exclusive worldwide rights to the drug delivery applications of HYPAN technology
for wound healing. ProCyte is a development stage company with a principal focus
in wound care. Under the terms of the agreement, the Company will receive
certain research and development, milestone and royalty payments from ProCyte.
In addition, the Company will receive shares of ProCyte's common stock over a
two year period, subject to certain restrictions.
Research & Development Contracts
The Company is working on the development of products for other medical
products companies under several R&D contracts. In 1991, the Company entered
into a three year development agreement (which has been extended for both a
fourth and a fifth year on substantially similar terms) with a major private
U.S. medical products company for medical products using HYPAN(R) hydrogels in
areas other than wound care; ophthalmology; urology; the use of embolics and
catheters and guidewires in cardiology and radiology; and certain types of drug
delivery. This medical products company's primary focus has been on a permanent
implant. The Company's HYPAN(R) polymers are presently being evaluated by two
major ophthalmic pharmaceutical companies. The Company has entered into two R&D
agreements for indwelling products, one covering embolic materials, and another
covering spinal disc replacements.
Specialty Chemicals
Since 1988, the Company has sold HYPAN(R) hydrogels to the cosmetics
and personal care industry (the "Trade") through a marketing partner, LIPO
Chemicals, Inc. ("LIPO"). In 1992, the Company granted LIPO a three year option
to manufacture the Company's polymers for sale to the Trade in return for
royalties of 10% of LIPO's net sales of HYPAN(R). In December, 1995, LIPO
exercised its option to manufacture HYPAN for sale to the Trade.
Regulatory Approvals
The Company's products are subject to extensive regulation by U.S. and
foreign governmental authorities for efficacy, safety and quality. For U.S.
regulatory purposes, it is
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anticipated that most of the Company's products (other than cosmetics and
toiletries products) will be deemed medical devices under the Federal Food, Drug
and Cosmetic Act (the "FFDCA") although some products may be treated as
pharmaceutical agents (drugs) under the FFDCA, depending on their intended use
and applicable regulatory policies.
Technology and Patents
The Company has developed several families of patented synthetic
hydrogels (i.e., hydrophilic polymer systems which do not dissolve in water)
which can be used in a broad range of medical and other applications. These
multi-block copolymers are tradenamed HYPAN(R), an acronym for hydrolyzed
polyacrylonitrile (PAN). In addition to HYPAN(R) hydrogels, the Company has
developed temperature activated polymer systems with precise inherent shape
memories.
The Company's polymers, the processes for making them and a number of
specific products and applications are covered by U.S. and foreign patents. Most
of the polymers currently used in the Company's products are covered under
patents issued or filed since 1990. These polymers have been extensively tested
for biocompatibility by both the Company and its licensees.
Competition
The Company is engaged in highly competitive markets for its products.
In the skin care markets, the Company will be competing against companies such
as Beiersdorf, L'Oreal, Estee Lauder, Avon, as well as Mary Kay, Hydron
Technologies and NuSkin, among many others.
The Company believes that its principal competitors in the wound care
markets will be ConvaTec, a division of Bristol-Meyers Squibb, Smith & Nephew
Plc, 3M Corporation, Dow B. Hickam, Acme United, Polymedica, Carrington Labs,
Johnson & Johnson and Kendall, among others. These Company's have substantially
more resources then HYMEDIX.
Manufacturing and Raw Materials
The Company's principal raw materials are Polyacrylonitrile (PAN) and a
variety of other readily available chemicals.
The Company manufactures HYPAN(R) materials at its Dayton, New Jersey
facility. The Company believes that it presently has the capacity it needs to
meet its HYPAN(R) hydrogel production requirements for the next three years, and
that its raw materials for its operations are and will continue to be available
for the foreseeable future. The Company's skin care products are manufactured to
its specifications by contract manufacturers.
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Employees
The Company presently employs fifteen (15) people, eight (8) of whom
are engaged in management, marketing and administration; two (2) in regulatory
affairs and quality assurance and control; one (1) in production; and four (4)
in research and product development. None of the Company's personnel is
represented by a union, and the Company believes its personnel relations are
excellent.
Item 2. Description of Property.
The Company rents approximately 32,000 square feet of office,
laboratory and manufacturing space at 2235 Route 130 in Dayton, New Jersey under
a lease with annual rentals of approximately $537,000. The lease expires at the
end of 1997. At this facility the Company can manufacture approximately 5 tons
of HYPAN(R) a year (enough capacity for the foreseeable future). The facility
also provides all of the Company's office and laboratory space requirements.
Item 3. Legal Proceedings.
In September, 1993, HYMEDIX International's former President filed a
Complaint against HYMEDIX International in the Superior Court of New Jersey, Law
Division, Middlesex County. The Complaint names HYMEDIX International, each
member of HYMEDIX International's Board of Directors, and Kingston Technologies
Limited Partnership as defendants. The Complaint alleges (i) that HYMEDIX
International wrongfully terminated the former President's employment, (ii) that
he is owed $367,500 in deferred compensation and $74,500 in back salary, (iii)
that $323,138 is owed him based on his claim that an agreement between him and
KTLP to consolidate and extend the maturity date on three promissory notes that
KTLP had executed in his favor was signed by him under duress and is, therefore,
void, and (iv) that KTLP's General Partners failed to disclose to the former
President at the time he signed the promissory note extension that HYMEDIX
International planned to terminate his employment. The $74,500 in back salary
was paid in January, 1994. In July 1996, a jury trial judgment was rendered
against HYMEDIX and KTLP in the amount of $805,964 plus interest on plaintiff's
claims for deferred compensation and the KTLP promissory notes. The defendants
are appealing this verdict.
In November, 1994, an individual filed a complaint against the Company
in the Superior Court of New Jersey, Law Division, Mercer County, alleging that
the company owes him eight percent of all monies invested in the Company by his
contacts, including a principal stockholder of the Company. The complaint
alleges that the Company owes the former consultant approximately $5,000,000 and
warrants for the Company's common stock. The Company has filed an Answer denying
all substantive allegations of this complaint. Pre-trial discovery is currently
being conducted in this matter.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the period October 1, 1996 through December 31, 1996.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Predecessor's Common Stock had been listed and traded on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
since January 30, 1992 upon the closing of the Predecessor's initial public
offering under the symbol SVTX. The Predecessor's Common Stock was delisted from
trading on NASDAQ on October 21, 1993 due to its failure to meet NASDAQ's
listing maintenance requirements. After the Acquisition Merger, the Company's
Common Stock was relisted on the NASDAQ SmallCap Market under the symbol HYMX.
During the third quarter of 1994, the Company's total stockholders' equity fell
below the minimum $1,000,000 of capital and surplus necessary to maintain its
listing on the NASDAQ SmallCap Market. Consequently, NASDAQ delisted the
Company's common stock from the NASDAQ SmallCap Market on October 27, 1994.
HYMEDIX shares are currently quoted and continue to be traded on The Over The
Counter ("OTC") Electronic Bulletin Board under the symbol HYMX.
The following table sets forth the range of the high and low bid prices
for each of the Company's (including the Predecessor's) foregoing securities as
reported by The OTC Bulletin Board for the eight quarterly periods ended
December 31, 1996.
Common Stock
------------
Period High Low
------ ---- ---
1995:
1st quarter $2.75 $1.25
2nd quarter 2.75 1.00
3rd quarter 2.50 1.00
4th quarter 2.50 0.50
1996:
1st quarter $1.50 $0.50
2nd quarter 1.00 0.50
3rd quarter 0.50 0.50
4th quarter 1.25 0.50
The stock price ranges represent the high and low bid quotations as
listed by The OTC Bulletin Board and reflect inter-dealer prices without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
As of the close of business on March 25, 1996, there were 93 holders of
record of the Company's Common Stock. The Company believes that it had
approximately 400 beneficial owners of such securities as of such date.
The Company has paid no cash dividends in respect of its Common Stock
and the Company has no intention to pay cash dividends in the foreseeable
future.
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Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
This report contains 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. Actual results could differ
materially from those projected in the forward-looking statements as a
result of the risk factors set forth below. The industry in which the
Company competes is characterized by rapid changes in technology and
frequent new product introductions. The Company believes that its
long-term growth depends largely on its ability to continue to enhance
existing products and to introduce new products and technologies that
meet the continually changing requirements of customers. While the
Company has devoted significant resources to the development of new
products and technologies, there can be no assurance that it can
continue to introduce new products and technologies on a timely basis
or that certain of its products and technologies will not be rendered
noncompetitive or obsolete by its competitors.
Overview
HYMEDIX, Inc. ("HYMEDIX") was incorporated in Delaware on December 20,
1993 as a wholly-owned subsidiary of Servtex International Inc. (the
"Predecessor"). On February 23, 1994, the Predecessor merged with and into
HYMEDIX, Inc. and, concurrently, a wholly-owned subsidiary of the Predecessor
was merged with and into HYMEDIX International, Inc. ("HYMEDIX International")
which resulted in HYMEDIX International becoming a wholly-owned subsidiary of
HYMEDIX (collectively, the "Acquisition Merger"). The Acquisition Merger was
accounted for as a recapitalization of HYMEDIX International and an acquisition
of the Predecessor by HYMEDIX International using historical values of the
assets and liabilities of the Predecessor. As used in this Form 10-KSB, unless
the context otherwise requires, the term "Company" collectively means HYMEDIX,
HYMEDIX International and their respective predecessors. HYMEDIX International
was incorporated in October, 1985 under the name Kingston Technologies, Inc. In
February, 1994, at the time of the Acquisition Merger, the Company raised
approximately $3.6 million net proceeds from the private placement of common
stock and warrants (the "Private Placement"). Prior to the date of the
Acquisition Merger the financial statements of the Company reflect the financial
results of HYMEDIX International only.
Results of Operations
Revenues
The Company's total revenues for the fiscal year ended December 31,
1996 were $1,986,798, versus $2,262,114 for the fiscal year ended 1995, a
decrease of 12.2%. The decreased revenues for fiscal year 1996 from the previous
year primarily came from (1) a decrease of $332,000 in license, royalty and
distribution fees; (2) decreased income of
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$69,167 in research and development contracts; (3) reduced net sales of $219,709
in wound care products; and (4) an increase of $349,731 in domestic and
international sales of skin care products. The decrease in license, royalty and
distribution fees is primarily attributable to the fact that the ProCyte
licensing agreement was closed in late 1995, and the reduced net sales in wound
care products is primarily attributable to the fact that the Company is now
licensing rather than selling those products.
Costs and Expenses
Cost of sales for the fiscal year ended December 31, 1996 was $406,549
versus $341,773 for fiscal year 1995, an increase of 19.0%. The 19.0% increase
in cost of sales was largely in line with the 17.5% increase in net product
sales. Selling, general and administrative expenses increased to $2,000,863 for
the year ended December 31, 1996 from the previous year level of $1,973,340. The
increase was principally due to higher legal expenses incurred for the defense
of two lawsuits previously filed against the Company. Research and development
costs for the fiscal year were $650,907 as compared to $547,202 for the fiscal
year 1995, an increase of 19.0%, resulting from increased work days and costs of
the research and development staff. Additionally, to account for the Company's
potential liability with respect to the recent legal judgment rendered against
it and described in detail elsewhere herein, an accrual of $805,964 has been
recorded in a separate line item under costs and expenses.
Other (Expenses) Income
Total other expense, net increased to $315,830 for the fiscal year
ended December 31, 1996 from a net expense of $200,766 for the 1995 fiscal year.
The increase of $115,064 was primarily attributable to interest expense related
to the issuance of convertible bonds in the aggregate principal amount of
$1,131,000 during the first half of 1996 and the interest expense accrual
related to the legal judgment.
As a result of the decreased revenues and increased costs and expenses
described above, the Company incurred a net loss of $2,193,315 for the fiscal
year ended December 31, 1996 versus $800,967 for the fiscal year 1995.
Liquidity, Capital Resources and Changes in Financial Condition
The Company had $42,562 in cash and cash equivalents on hand as of
December 31, 1996 versus $183,026 on December 31, 1995. The working capital
deficit $(6,656,003) on December 31, 1996 represents an increase of $2,369,452
from the previous year-end level of $(4,286,551). The increase in working
capital deficit was primarily attributable to the net loss incurred in 1996. The
Company's two term loans, advanced to the Company by licensees pursuant to
license agreements, in the principal amounts of $1,500,000 and $1,00,000,
respectively, each have been classified as current liabilities inasmuch as they
are in technical default as a result of certain interest payments not having
been made in accordance with the terms of the license agreements relating to
such loans.
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During the first quarter of 1996, the Company issued a convertible bond
in the principal amount of $150,000 (the "September Bond") pursuant to a
Convertible Bond Purchase Agreement effective March 5, 1996, by and among the
Company, HYMEDIX International and Su Chen Huang. The September Bond bears
interest at a rate of 7% per annum and matures on September 5, 1997. The
September Bond is convertible in whole at any time prior to payment or
prepayment into one hundred fifty thousand (150,000) shares of common stock of
the Company. Interest on the September Bond is payable at maturity or upon
prepayment or conversion thereof.
In April of 1996, the Company issued convertible bonds in the aggregate
principal amount of $981,000 (the "June Bonds") pursuant to a Convertible Bond
Purchase Agreement effective February 27, 1996, by and among the Company,
HYMEDIX International, First Taiwan Investment and Development, Inc. and the
Purchasers (as defined therein). The June Bonds bear interest at a rate of 7%
per annum and mature on June 1, 1997. The June Bonds are convertible in whole or
in part at any time prior to payment or prepayment into one thousand (1,000)
shares of common stock of the Company for each one thousand dollars ($1,000) of
principal amount outstanding. Interest on the June Bonds is payable at maturity
or upon prepayment or conversion thereof. The June Bonds may be subject to
mandatory prepayment by the Company under certain circumstances.
Both the June Bonds and the September Bond are structured in such a way
as to permit the Company, subject to certain terms and conditions, including
approval of the Bondholders (as hereinafter defined), to make withdrawals from a
special account (the "Special Account") up to the principal amount of the bonds
on a periodic basis and to require the Company to reduce the amount withdrawn
with respect to the Special Account by making payments into the Special Account.
As of December 31, 1996, the Company had made various withdrawals from and
repayments to the Special Account resulting in a net withdrawal of $905,400.
Pursuant to a Security Agreement dated as of August 8, 1996, by and
among the Company and the Bondholder Representative (as defined therein), in
order to induce the Purchasers and Su Chen Huang (collectively, the
"Bondholders") to approve future withdrawals by the Company from the special
account, the Company granted to the Bondholder Representative, for the ratable
benefit of the Bondholders, a security interest in all of the Company's assets
and properties.
The Company is currently in discussions with potential investors to
receive additional financing for the Company's operations in 1997, and
management continues to seek other financing alternatives for the Company. While
the Company is appealing the $805,964 judgment rendered against it in 1996, it
is possible that the Company will lose that appeal or that the plaintiff will
assert his claim against the Company prior to adjudication of the appeal. In
either event or in the event that proceeds from the financing alternatives are
not sufficient to finance the Company's operations in 1997, there is no
assurance that sufficient funds will be available to the Company to continue its
operations.
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Risk Factors and Cautionary Statements
When used in this Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission, the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expect to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, including those discussed under this caption "Risk
Factors and Cautionary Statements," that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
wishes to advise readers that the factors listed below could cause the Company's
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
The Company will NOT undertake and specifically declines any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
[bullet] The Company's revenues and income are derived primarily from
the development and commercialization of medical and skin care products. The
medical and skin care products industry is highly competitive. Such competition
could negatively impact the Company's market share and therefore reduce the
Company's revenues and income.
[bullet] Competition may also result in a reduction of average unit
prices paid for the Company's products. This, in turn, could reduce the
percentage of profit margin available to the Company for its product sales.
[bullet] The Company's future operating results are dependent on its
ability to develop, produce and market new and innovative products and
technologies, and to successfully enter into favorable licensing and
distribution relationships. There are numerous risks inherent in this complex
process, including rapid technological change and the requirement that the
Company develop procedures to bring to market in a timely fashion new products
and services that meet customers' needs.
[bullet] Historically, the Company's operating results have varied from
fiscal period to fiscal period; accordingly, the Company's financial results in
any particular fiscal period are not necessarily indicative of results for
future periods.
[bullet] The Company may offer a broad variety of products and
technologies to customers around the world. Changes in the mix of products and
technologies comprising revenues could cause actual operating results to vary
from those expected.
[bullet] The Company's success is partly dependent on its ability to
successfully predict and adjust production capacity to meet demand, which is
partly dependent upon the ability of external suppliers to deliver components
and materials at reasonable prices and in
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a timely matter; capacity or supply constraints, as well as purchase
commitments, could adversely affect future operating results.
[bullet] The Company offers its products and technologies directly and
through indirect distribution channels. Changes in the financial condition of,
or the Company's relationship with, distributors, licensees and other indirect
channel partners, could cause actual operating results to vary from those
expected.
[bullet] The Company does business and continues to seek to develop
business on a worldwide basis. Global and/or regional economic factors and
potential changes in laws and regulations affecting the company's business,
including without limitation, currency exchange rate fluctuations, changes in
monetary policy and tariffs, and federal, state and international laws
regulating its products, could impact the Company's financial condition or
future results of operations.
[bullet] The market price of the Company's securities could be subject
to fluctuations in response to quarter to quarter variations in operating
results, market conditions in the medical and skin care products industry, as
well as general economic conditions and other factors external to the Company.
[bullet] As described above in "Legal Proceedings," a judgment was
rendered against the Company in the amount of $805,964 in connection with a
legal proceeding to which the Company was a party. Although the Company has
filed a notice of appeal in this matter, there can be no assurances that the
Company will be successful in such appeal or that the plaintiff will not move to
collect on the judgment prior to adjudication of the appeal. If the appeal is
unsuccessful or if the plaintiff moves to collect on the judgment, it could have
a materially adverse affect on the Company's financial condition and future
operating results.
Item 7. Financial Statements.
See Financial Statement beginning on page F-1.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Set forth below is certain background information with respect
to the directors and executive officers of the Company, including information
furnished by them as to their principal occupations for the last five years,
certain other directorships held by them and their ages as of December 31, 1995.
Each of the Directors and Officers set forth below, other than Dr. Jennings,
also hold the same position with HYMEDIX International.
Director or
Executive
Name Age Position(s) with the Company Officer Since
Vladimir A. Stoy, Ph.D. 55 Vice Chairman 1994
(non-executive)
and Director
William G. Gridley, Jr.(3) 68 Chairman, Chief Financial 1994
Officer, Secretary
and Director
Joseph Y. Peng 48 President, Chief Executive 1994
Officer, and Treasurer
George P. Stoy 48 Vice President of Engineering 1994
and Director
Charles K. Kliment, 64 Vice President of Research 1994
Ph.D. and Development
Jan Lovy, Ph.D. 44 Vice President of 1994
Polymer Research
Sheng-Hsiung Hsu 53 Director 1994
Dr. Hsia-Fu Chao(1)(3) 61 Director 1994
Shu-Jean Kuo Chou 58 Director 1994
Michael K. Hsu(1)(2)(3) 38 Director 1994
William J. Golden 47 Director 1996
Edward H. Jennings, 60 Director 1994
Ph.D.(1)(2)
- ------------------------------
(1) Member of the Compensation Committee of the Board of Directors
(2) Member of the Audit Committee of the Board of Directors
(3) Member of the Executive Committee of the Board of Directors
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Vladimir A. Stoy, Ph.D., Vice Chairman and Director. Dr. Stoy has
served as Vice Chairman of the Board of HYMEDIX since January 1, 1996; prior to
that he was Chairman. Dr. Stoy has served as Chairman of the Board of HYMEDIX
International since 1986; he has held this position in a non-executive capacity
since late 1993, when he became a consultant to the Company and has served as
Chairman of the Board of HYMEDIX since the Acquisition Merger. Dr. Stoy received
his Ph.D. in macromolecular chemistry, and spent eleven years at the Academy of
Sciences in Prague, serving for some time as Head of the Laboratory of
Biomedical Applications. A major part of his 90 patents and numerous
publications are related to hydrogel technology. Dr. Stoy is the inventor of
HYPAN(R) technology. He currently spends approximately 30% of his time as a
consultant to HYMEDIX, spending the balance of his time with S.K.Y. Polymers, a
company he controls and of which he is President. Under a Licensing Agreement,
S.K.Y. has licensed to the Company all of its technology in the Company's areas
of interest (the "Sky License Agreement"). See "Certain Transactions."
William G. Gridley, Jr., Chairman, Chief Financial Officer, Secretary
and Director. Mr. Gridley was President and a Director of HYMEDIX from the
Acquisition Merger to January 1, 1996, when he became Chairman. Prior to joining
HYMEDIX International in 1986, Mr. Gridley was President of Brandywine
Investors, an investment management firm which he founded. From 1979 to 1983, he
was President of Crescent Diversified, Ltd. and Competrol BVI, the United States
investment vehicles of the Olayan Group. From 1973 to 1979, he was Executive
Vice President of the American Express Bank. Prior to that, he was a Vice
President of the Chase Manhattan Bank. Mr. Gridley is Vice Chairman of Tuskegee
University and a member of the Board of Managers of the Jane Coffin Childs
Memorial Fund for Medical Research. He is a graduate of Yale University.
Joseph Y. Peng, President, Chief Executive Officer and Treasurer. Mr.
Peng was Vice President, Chief Financial Officer and Secretary of HYMEDIX since
the Acquisition Merger to January 1, 1996, when he became President. Mr. Peng
joined HYMEDIX International in 1993. Before joining HYMEDIX International, Mr.
Peng was the President of an investment and corporate brokerage firm that he
founded. He was Executive Vice President and head of the New Business and New
Venture Division of Collins Co., Ltd. from 1988 to 1991, and was its Chief
Financial Officer from 1983 to 1987. Between 1979 and 1983, Mr. Peng was the
Director of Strategic Planning and Business Development at Tatung Co. of
America, the U.S. affiliate of a leading conglomerate based in Taiwan. Mr. Peng
worked for Citicorp's Taiwan organization for four years until his departure in
1977, at which time he held the title of Financial Controller. Mr. Peng holds an
M.B.A. degree from the Harvard Business School, a Master's degree in Management
Science and a B.S. degree in Electronic Engineering.
George P. Stoy, Vice President of Engineering and Director. Mr. Stoy
has served as Vice President of Engineering of HYMEDIX since the Acquisition
Merger. Mr. Stoy has been with HYMEDIX International since its inception. Mr.
Stoy has been involved in the development of HYPAN(R) technology from its early
stages, and is responsible for the development of processing technology and
product design. Mr. Stoy is an inventor or co-inventor of numerous inventions
that are the subject of patents and patent applications. Mr.
Page 15
<PAGE>
Stoy holds a Masters degree in Mechanical Engineering. Mr. Stoy is the brother
of Vladimir A. Stoy.
Charles K. Kliment, Ph.D., Vice President of Research and Development.
Dr. Kliment has been Vice President of Research and Development of HYMEDIX since
the Acquisition Merger. Dr. Kliment joined HYMEDIX International in 1990 as Vice
President of Research and Development. Dr. Kliment worked for ten years at the
Academy of Sciences in Prague with Professor Otto Wichterle on the development
of soft contact lenses and other biomedical uses of HYDRON hydrogels. From 1969
to 1974, he was the Research and Development Manager of National Patent
Development Corporation. From 1974 to 1984 Dr. Kliment was Director of Research
of NPD Optical Corporation. In 1984, he moved to Tyndale Plains-Hunter, Ltd. as
Vice President and worked there until 1990, primarily with hydrophilic
polyurethanes.
Jan Lovy, Ph.D., Vice President of Polymer Research. Dr. Lovy has been
Vice President of Polymer Research of HYMEDIX since the Acquisition Merger. Dr.
Lovy joined HYMEDIX International in 1985 and has served as its Vice President
of Polymer Research since 1988. Dr. Lovy received his Ph.D. from the Institute
of Macromolecular Chemistry in Prague, and has been the recipient of numerous
patents and the author of some 23 papers on polymer chemistry and nuclear
magnetic resonance spectroscopy. Dr. Lovy has primary responsibility for
materials research and development.
Sheng-Hsiung Hsu, Director. Mr. Hsu has served as a Director of HYMEDIX
since the Acquisition Merger. Mr. Hsu joined HYMEDIX International as a Director
in 1993. Mr. Hsu is the Chairman of First Taiwan Venture Capital Inc. In 1973,
he founded Cal-Comp Electronics, Inc. which is now the world's largest
electronic calculator manufacturer. He currently serves as the Chairman and the
President of Cal-Comp Electronics, Inc. He is also the founder and Executive
Director of Compal Electronics, Inc., a major monitor and notebook PC
manufacturer in Taiwan. Mr. Hsu also holds various positions in a number of
corporations and entities, including Baotek Industrial Materials Ltd., Electric
Appliance Manufactures' Association, and Electric & Electronic Production
Development Association.
Dr. Hsia-Fu Chao, Director. Dr. Chao has served as a Director of
HYMEDIX since the Acquisition Merger. Dr. Chao joined HYMEDIX International as a
Director in 1993. Dr. Chao is the Chairman of First Taiwan Investment Holding
Inc. He is a Director of First Taiwan Investment Banking Group. Dr. Chao has
practiced medicine for over 30 years. He is a specialist in Gastroenterology and
Gastroenterological Oncology. In 1963, he started his medical career as a
Resident in Veterans General Hospital, Taipei. He was the Chief of Division of
Gastroenterological Oncology when he left in 1980. Dr. Chao then joined China
Medical Center, Taipei. He was the Chairman from 1984 to 1986 and now serves as
a Consultant Physician and a Director of CMC. He has also taught in National
Yang Ming Medical University and National Defense Medical Center. He graduated
from National Defense Medical Center in 1961 and was a Fellow in medicine at the
Washington University, U.S.A..
Shu-Jean Kuo Chou, Director. Mrs. Kuo has served as a Director of
HYMEDIX since the Acquisition Merger. Mrs. Kuo joined HYMEDIX International as a
Director in
Page 16
<PAGE>
1993. Mrs. Kuo is a Director of First Taiwan Investment Holding Inc. Mrs. Kuo
comes from a family with a long business history in Taiwan and is an active
investor; she has over 30 years of experience of investing in a variety of
industries, including banking, tourism, and transportation. Mrs. Kuo currently
serves as a Managing Director of Taiwan Allied Container Terminal Corp., one of
the largest container terminals in Taiwan.
Michael K. Hsu, Director. Mr. Hsu has served as a Director of HYMEDIX
since the Acquisition Merger. Mr. Hsu joined HYMEDIX International as a Director
in 1993. Mr. Hsu is the Executive Vice President of First Taiwan Investment
Holding Inc. He is also the Executive Vice President of First Taiwan Venture
Capital and First Taiwan Investment & Development. His position is to lead the
equity investment of the corporate finance segments of First Taiwan Investment
Banking Group, which he co-founded in 1989. Mr. Hsu has had ten years of
experience in the financial service industry, principally in investments and
corporate finance. Prior to 1989 he was the Associate Director of Baring
Research (Taiwan), a subsidiary of Baring Securities Ltd. He started his career
as a manager and a special assistant to the President in China Development Corp,
in 1984. Mr. Hsu holds an M.B.A. degree from National Chiao Tung University and
a B.S. degree from the Tunghai University in Taiwan.
William J. Golden, CFA, Director. Mr. Golden has served as a Director
of HYMEDIX since November, 1996. Mr. Golden is Director of the Community
Technology Fund (CTF), the venture capital affiliate of Boston University.
Founded in 1974, CTF currently has $30 million of private equity capital under
management and has invested in over 120 portfolio companies located throughout
the United States. Mr. Golden has over 21 years of experience as an investor,
consultant and Chief Financial Officer. Previously he was a Senior Management
Consultant at Arthur D. Little, Inc. (ADL) where he performed market research on
many later stage venture capital investments for both Fortune 100 corporations
and venture capital firms. Mr. Golden is a director of a number of healthcare
technology companies including Cynosure, Inc., Lab Connections, Inc., MDI
Instruments, Inc. and Sequenom, Inc.
Edward H. Jennings, Ph.D., Director. Dr. Jennings has been Director of
HYMEDIX since the Acquisition Merger. Dr. Jennings is a Professor of Finance at
The Ohio State University, where he served as President from 1981 to 1990. He
was President of the University of Wyoming from 1979 to 1981, and prior to that
held administrative positions at the University of Iowa and teaching positions
at various universities. Dr. Jennings serves as Chairman of the Board of Mt.
Carmel Hospital and is a Director of Lancaster Colony Corporation, Borden
Chemicals and Plastics Limited Partnership, Super Foods Services, Inc. and HEAF
Corporation. He was previously a Director of Banc One Corporation and Ohio Bell
Corporation.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of
Page 17
<PAGE>
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent stockholders are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company, during fiscal year 1996 all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with.
Item 10. Executive Compensation.
Information concerning Executive Compensation for the Company's last
fiscal year is incorporated herein by reference to the heading "Executive
Compensation" in the Company's Proxy Statement for its 1997 Special Meeting in
Lieu of Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission (the "Commission") on or before April 30, 1997.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Information concerning Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to the heading "Principal
Stockholders" in the Company's Proxy Statement for its 1997 Special Meeting in
Lieu of Annual Meeting of Stockholders to be filed with the Commission on or
before April 30, 1997.
Item 12. Certain Relationships and Related Transactions.
Information concerning Certain Relationships and Related Transactions
is incorporated herein by reference to the heading "Certain Relationships and
Related Transactions" in the Company's Proxy Statement for its 1997 Special
Meeting in Lieu of Annual Meeting of Stockholders to be filed with the
Commission on or before April 30, 1997.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description
2.1 Amended and Restated Agreement of Merger and Plan of Reorganization,
dated as of January 24, 1994 by and among Servtex International
Inc., Kingston Technologies, Inc., KTI Acquisition Corp. and certain
affiliates of Servtex International Inc., filed pursuant to Rule
14a-6 as Exhibit F to Proxy Statement of the Registrant (then
Servtex International Inc.), dated February 12, 1994, and
incorporated by reference herein.
2.2 Agreement of Merger, dated as of February 23, 1994 by and between
Servtex International Inc. and HYMEDIX, Inc., filed
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<PAGE>
pursuant to Rule 14a-6 as Exhibit A to Proxy Statement of the
Registrant (then Servtex International Inc.), dated February 12,
1994, and incorporated by reference herein.
3.1 Certificate of Incorporation, filed pursuant to Rule 14a-6 as
Exhibit B to Proxy Statement of the Registrant (then Servtex
International Inc.), dated February 12, 1994, and incorporated by
reference herein.
3.2 Certificate of Designation, Preference and Rights of Series A
Redeemable Preferred Stock, filed as Exhibit (2) to Form 8-K, dated
February 23, 1994, of the Registrant and incorporated by reference
herein.
3.3 By-Laws of the Registrant, filed pursuant to Rule 14a-6 as Exhibit C
to Proxy Statement of the Registrant (then Servtex International
Inc.), dated February 12, 1994, and incorporated by reference
herein.
4.1* Specimen Certificate of the Registrant's Common Stock, $.001 par
value.
10.1* Form of the Underwriter's Warrant issued to First Flushing
Securities, Inc. as a broker's fee for negotiating the merger of KTI
Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of the Registrant with and into HYMEDIX International.
10.2** Option and License Agreement dated November 7, 1986 by and between
HYMEDIX International and ORC, as amended by Amendment Number 1 to
Option and License Agreement dated January 9, 1987.
10.3* Promissory Note, dated January 9, 1987, made by HYMEDIX
International to the order of ORC, for $500,000.
10.4* Indenture of Lease dated July 7, 1987 by and between Fresh Ponds
Associates and HYMEDIX International, as amended by First Amendment
to Lease, dated September 13, 1993, Second Amendment to Lease, dated
September 15, 1993, and Third Amendment to Lease, dated January 15,
1994; and the related Installment Promissory Note, dated October 1,
1993, made by HYMEDIX International to the order of Fresh Ponds
Associates for $404,300.90.
10.5* Promissory Note, dated September 29, 1987, made by HYMEDIX
International to the order of ORC, for $1,000,000.
10.6** Agreement, dated December 22, 1988, by and between Kingston
Hydrogels Limited Partnership and LIPO Chemicals, Inc., as amended
by Amendment No. 1, effective June 1, 1990 and as further amended by
Amendment Agreement, dated June 14, 1990.
10.7* Loan and Security Agreement, dated October 30, 1989, by and between
HYMEDIX International and Pilkington Visioncare, Inc. ("PVI").
Page 19
<PAGE>
10.8* Promissory Note in the amount of $1,000,000, dated October 30, 1989,
by HYMEDIX International, in favor of PVI
10.9* Assignment of Patent, dated October 30, 1989 by HYMEDIX
International in favor of PVI.
10.10** License and Supply Agreement, dated October 30, 1989, between
HYMEDIX International and PVI, along with Addendum thereto dated
July 10, 1991.
10.11* Contribution Agreement, dated August 7, 1990, by and between
Kingston Technologies Limited Partnership ("KTLP") and HYMEDIX
International.
10.12* Royalty Assignment Agreement, effective August 8, 1990, by and
between HYMEDIX International and Research Corporation Technologies,
Inc. ("RCT").
10.13* Assignment of Patents, dated August 8, 1990, by KTLP in favor of
HYMEDIX International.
10.14* Form of Amended and Restated Warrant to Purchase Common Stock, dated
February 23, 1994, delivered to Cheung Hok Sau.
10.15* Form of Amended and Restated Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to the Trustees of Boston
University.
10.16* Right to Purchase Agreement, dated June 30, 1992, between HYMEDIX
International and Lipo Chemicals, Inc.
10.17* License Agreement, dated June 30, 1992, between HYMEDIX
International and Lipo Chemicals, Inc.
10.18* Form of Amended and Restated Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to Synreal Corporation
N.V.
10.19* Form of Amended and Restated Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to Azreal Corporation N.V.
10.20* Form of Amended and Restated Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to Dr. Hsia Fu Chao.
10.21 Amended and Restated 1991 Incentive and Non-Qualified Stock Option
Plan, filed pursuant to Rule 14a-6 as Exhibit E to Proxy Statement
of the Registrant (then Servtex International Inc.), dated February
12, 1994, and incorporated by reference herein.
10.22* Employment Agreement, dated April 3, 1992, by and between HYMEDIX
International and Alan L. Hershey, as amended by Agreement, dated
January 4, 1993.
10.23* Form of Amended and Restated Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to First Taiwan Investment
Holding Inc.
10.24* Registration Rights Agreement, dated May 28, 1993, by and between
HYMEDIX International and the Trustees of Boston University.
Page 20
<PAGE>
10.25* Form of Amended and Restated Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to the Trustees of Boston
University.
10.26* Form of Amended and Restated Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to First Taiwan Investment
and Development Inc.
10.27* Amended and Restated Registration Rights Agreement, dated February
23, 1994, by and among RCT, First Taiwan Investment Holding Inc. and
First Taiwan Venture Capital Inc.. 10.28** Marketing and
Distribution Agreement, dated
July 30, 1993, by and between HYMEDIX International and Brady Medical
Products, Co.
10.29* Evaluation Agreement, dated December 1, 1993, by and between HYMEDIX
International and Alcon Laboratories, Inc.
10.30* Capital Contribution Agreement, dated February 23, 1994, by and
between the Registrant and RCT.
10.31* Demand Registration Rights Agreement, dated February 23, 1994, by
and between the Registrant RCT.
10.32* Option to Wall Street Group.
10.33* Redeemable Common Stock Purchase Warrant, dated February 23, 1994,
made by the Registrant to First Taiwan Investment Holding Inc.
10.34* Form of Warrant issued to Selling Stockholders (Domestic) in the
private placements which closed February, 1994.
10.35* Form of Warrant issued to Selling Stockholders (International) in
the private placements which closed February, 1994.
10.36** Development Services and Licensing Agreement, dated December 20,
1991, between HYMEDIX International and W. L. Gore and Associates,
Inc.
10.37* Joint Venture Agreement, dated May 31, 1994, by and among the
Registrant, Beijing General Pharmaceutical Corp., First Taiwan
Investment Banking Group and Technological Innovation Corporation of
China.
10.38*** Agreement, dated November 29, 1994, by and between HYMEDIX
International and Bausch & Lomb.
10.39*** Director Stock Option Plan, effective as of May 31, 1994.
10.40**** Development Services and Licensing Agreement, dated December 20,
1991, between HYMEDIX International and W. L. Gore and Associates,
Inc.
10.41***** Distribution, Kno-How Transfer, Licensing and Manufacturing and
Supply Agreement dated August 21, 1995, by and between HYMEDIX
International, Inc. and Europa Magnetics Corporation.
10.42# License Agreement dated November 15, 1995, by and between ProCyte
Corporation and HYMEDIX International, Inc.
Page 21
<PAGE>
10.43# Master Terms and Conditions For Purchase Orders dated September 19,
1995, by and between Home Shopping Club, Inc. and HYMEDIX
International, Inc.
10.44## Convertible Bond Purchase Agreement, effective February 27, 1996, by
and among the Company, HYMEDIX International, First Taiwan
Investment and Development, Inc., and the Purchasers (as defined
therein)
10.45## Convertible Bond Purchase Agreement, effective March 5, 1996, by and
among the Company, HYMEDIX International, and Su Chen Huang.
10.46### Security Agreement dated as of August 8, 1996, by and among the
Company and the Bondholder Representative (as defined therein).
21* Subsidiaries of the Registrant.
27 Financial Data Schedule
-----------------------
* Previously filed as an Exhibit to the Registrant's Form SB-2
Registration Statement (No. 33-78638) originally filed on May 5, 1994
and incorporated herein by reference.
** Previously filed (and Confidential Treatment requested pursuant to Rule
406 under the Securities Act) as an Exhibit to the Registrant's Form
SB-2 Registration Statement (No. 33-78638) originally filed on May 5,
1994 and incorporated herein by reference.
*** Previously filed as an Exhibit to the Registrant's Form 10-KSB
originally filed April 17, 1995.
**** Previously filed (and Confidential Treatment requested pursuant to Rule
24-b2 under the Securities Exchange Act of 1934) as an Exhibit to the
Registrant's Amendment No. 1 to Form 10-KSB/A originally filed April 30,
1995.
***** Previously filed as an Exhibit to the Registrant's Form 10-QSB
originally filed November 15, 1995.
# Previously filed as an Exhibit to the Registrant's Form 10-KSB
originally filed March 30, 1996.
## Previously filed as an Exhibit to the Registrant's Form 10-QSB
originally filed May 15, 1996.
### Previously filed as an Exhibit to the Registrant's Form 10-QSB
originally filed November 13, 1996.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1994.
Page 22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HYMEDIX, INC.
(Registrant)
By: /s/ Joseph Y. Peng
Joseph Y. Peng
President (Principal Executive Officer)
Date: March 28, 1997
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/ Joseph Y. Peng President (Principal March 28, 1997
- ------------------------------- Executive Officer,
Joseph Y. Peng Treasurer)
By: /s/ William G. Gridley, Jr. Chief Financial Officer March 28, 1997
- ------------------------------- (Secretary, Principal
William G. Gridley, Jr. Financial Officer and
Principal Accounting
Officer); Director
By: /s/ Vladimir A. Stoy Director March 28, 1997
- -------------------------------
Vladimir A. Stoy
By: /s/ George P. Stoy Director March 28, 1997
- -------------------------------
George P. Stoy
By: /s/ William J. Golden Director March 28, 1997
- -------------------------------
William J. Golden
By: /s/ Edward H. Jennings Director March 28, 1997
- -------------------------------
Edward H. Jennings
By: /s/ Sheng-Hsiung Hsu Director March 28, 1997
- -------------------------------
Sheng-Hsiung Hsu
Page 23
<PAGE>
By: /s/ Dr. Hsia-Fu Chao Director March 28, 1997
- -------------------------------
Dr. Hsia-Fu Chao
By: /s/ Shu-Jean Kuo Chou Director March 28, 1997
- -------------------------------
Shu-Jean Kuo Chou
By: /s/ Michael K. Hsu Director March 28, 1997
- -------------------------------
Michael K. Hsu
Page 24
<PAGE>
HYMEDIX, INC. AND SUBSIDIARY
INDEX
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994 F-4
Statements of Changes in Stockholders' Deficit for the
Years Ended December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HYMEDIX, Inc.:
We have audited the accompanying consolidated balance sheets of HYMEDIX, Inc. (a
Delaware corporation) and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' deficit,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HYMEDIX, Inc. and subsidiary as
of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss in
each of the last three years, has a working capital deficit, has a net capital
deficiency and is not in compliance with certain loan provisions at December 31,
1996. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 3. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Princeton, New Jersey
February 21, 1997
F-2
<PAGE>
HYMEDIX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $42,562 $31,295
Restricted cash (Note 7) 225,600 0
Short-term investments (Note 2) 0 151,731
Accounts receivable 57,316 31,258
Inventories (Note 2) 408,296 477,938
Other current assets 38,523 57,227
------------- -------------
Total current assets 772,297 749,449
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $723,391 and $633,044 in
1996 and 1995, respectively (Notes 2 and 5) 115,178 206,174
PATENTS, net of accumulated amortization of $315,630 and
$284,190 in 1996 and 1995, respectively (Note 2) 124,957 156,397
OTHER ASSETS (Note 9) 168,000 0
------------- -------------
Total assets $1,180,432 $1,112,020
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable (Note 7) $4,162,843 $3,031,843
Accounts payable and accrued expenses (Note 6) 2,400,271 1,844,935
Accrued legal judgment (Note 12) 805,964 0
Deferred revenue (Note 2) 0 100,000
Liabilities related to discontinued operation (Note 4) 59,222 59,222
------------- -------------
Total current liabilities 7,428,300 5,036,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)
STOCKHOLDERS' DEFICIT (Notes 9 and 11):
8%Senior Convertible Preferred Stock, $3.00 par value, 800,000 shares
authorized, 10,190 shares issued and outstanding in
1996 and 1995, respectively 30,570 30,570
Preferred Stock, $.01 par value, 3,000 shares authorized,
150 shares issued and outstanding in 1996 and 1995, respectively 2 2
Common stock, $.001 par value, 20,000,000 shares authorized,
5,713,500 shares issued and outstanding in 1996 and 1995,
respectively 5,713 5,713
Additional paid-in capital 15,642,174 15,635,301
Accumulated deficit (20,426,327) (18,095,566)
Subscription receivable (1,500,000) (1,500,000)
------------- -------------
Total stockholders' deficit (6,247,868) (3,923,980)
------------- -------------
Total liabilities and stockholders' deficit $1,180,432 $1,112,020
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
HYMEDIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- -------------
<S> <C> <C> <C>
REVENUES (Note 2):
Net product sales $843,798 $717,947 $444,963
License, royalty and distribution fees
(Notes 4 and 9) 868,000 1,200,000 0
Research and development contracts (Note 9) 275,000 344,167 293,333
------------- ----------- -------------
Total revenues 1,986,798 2,262,114 738,296
------------- ----------- -------------
COSTS AND EXPENSES (Note 2):
Cost of sales 406,549 341,773 227,472
Selling, general and administrative 2,000,863 1,973,340 3,050,946
Research and development 650,907 547,202 994,729
Legal judgment 805,964 0 0
------------- ----------- -------------
Total costs and expenses 3,864,283 2,862,315 4,273,147
------------- ----------- -------------
Loss from operations (1,877,485) (600,201) (3,534,851)
------------- ----------- -------------
OTHER (EXPENSE) INCOME:
Interest expense (321,163) (204,944) (205,356)
Interest income 5,333 4,178 890
------------- ----------- -------------
Total other expense, net (315,830) (200,766) (204,466)
------------- ----------- -------------
Net loss ($2,193,315) ($800,967) ($3,739,317)
============= =========== =============
NET LOSS PER COMMON SHARE (Note 2) ($.41) ($.16) ($.68)
============= =========== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 2) 5,713,500 5,713,500 5,673,829
============= =========== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE>
HYMEDIX, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
8% Senior Convertible
Preferred Stock Preferred Stock Common Stock
--------------------- -------------------------------------------------------
Number Number Number Additional
of of of Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------- ------- ------ ------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 0 $ 0 0 $ 0 16,034 $1,604 $10,669,293
Net loss -- 1994 0 0 0 0 0 0 0
Effect of merger and
recapitalization (Note 1) 0 0 0 0 5,697,466 4,109 4,379,546
Stock offering costs 0 0 0 0 0 0 (913,536)
Issuance of preferred stock 10,190 30,570 150 2 0 0 1,499,998
Preferred stock dividends 0 0 0 0 0 0 0
------- ------ ----- --- ---------- ----- -----------
BALANCE, December 31, 1994 10,190 30,570 150 2 5,713,500 5,713 15,635,301
Net loss -- 1995 0 0 0 0 0 0 0
Preferred stock dividends 0 0 0 0 0 0 0
------- ------ ----- --- ---------- ----- -----------
BALANCE, December 31, 1995 10,190 30,570 150 2 5,713,500 5,713 15,635,301
Net loss -- 1996 0 0 0 0 0 0 0
Adjustment of stock offering
costs 0 0 0 0 0 0 6,873
Preferred stock dividends 0 0 0 0 0 0 0
------- ------ ----- --- ---------- ----- -----------
BALANCE, December 31, 1996 10,190 $30,570 150 $ 2 5,713,500 $5,713 $15,642,174
======= ====== ===== === ========== ===== ===========
</TABLE>
Accumulated Subscription
Deficit Receivable
------------ ------------
BALANCE, December 31, 1993 ($13,246,264) $ 0
Net loss -- 1994 (3,739,317) 0
Effect of merger and
recapitalization (Note 1) (54,085) 0
Stock offering costs 0 0
Issuance of preferred stock 0 (1,500,000)
Preferred stock dividends (117,487) 0
------------ ------------
BALANCE, December 31, 1994 (17,157,153) (1,500,000)
Net loss -- 1995 (800,967) 0
Preferred stock dividends (137,446) 0
------------ ------------
BALANCE, December 31, 1995 (18,095,566) (1,500,000)
Net loss -- 1996 (2,193,315) 0
Adjustment of stock offering
costs 0 0
Preferred stock dividends (137,446) 0
------------ ------------
BALANCE, December 31, 1996 ($20,426,327) ($ 1,500,000)
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-5
<PAGE>
HYMEDIX, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,193,315) ($ 800,967) ($3,739,317)
Adjustments to reconcile net loss to
net cash used by operating activities-
Depreciation and amortization 122,436 126,268 131,856
(Increase) decrease in-
Accounts receivable (26,058) 4,206 (29,425)
Inventories 69,642 (67,759) (297,873)
Other assets (149,296) 41,397 (469)
Increase (decrease) in-
Accounts payable and accrued expenses 424,763 355,737 752,210
Accrued legal judgment 805,964 0 0
Deferred revenue (100,000) 23,334 (173,334)
----------- ----------- -----------
Net cash used in operating activities (1,045,864) (317,784) (3,356,352)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES --
Capital expenditures 0 0 (105,548)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from recapitalization 0 0 4,329,570
Proceeds from issuance of preferred stock 0 0 30,570
Proceeds from issuance of notes payable 1,131,000 107,480 0
Restricted cash (225,600) 0 0
Principal payments 0 0 (427,523)
Stock offering costs 0 0 (913,536)
----------- ----------- -----------
Net cash provided by financing activities 905,400 107,480 3,019,081
----------- ----------- -----------
Net decrease in cash and cash equivalents (140,464) (210,304) (442,819)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 183,026 393,330 836,149
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 42,562 $ 183,026 $ 393,330
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $ 0 $ 0 $ 118,493
Preferred stock issued through subscription receivable 0 0 1,500,000
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
HYMEDIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS:
HYMEDIX, Inc. (the Company) is engaged primarily in the development and
commercialization of biomedical and skin care products based on
proprietary advanced hydrogels. These hydrophilic polymers are
biocompatible and highly versatile, and enable the Company to develop and
manufacture products and components with many characteristics for a
variety of medical products and other markets. The majority of the
Company's revenues to date are in the form of license and distribution
fees. As of December 31, 1996, four of the Company's product lines
encompass over 57% of net product sales.
The Company was incorporated in Delaware on December 20, 1993, as a
wholly-owned subsidiary of Servtex International, Inc. (Servtex). On
February 23, 1994, Servtex merged with and into the Company and,
concurrently, a wholly-owned subsidiary of Servtex was merged with and
into HYMEDIX International, Inc. (HYMEDIX International), which resulted
in HYMEDIX International becoming a wholly-owned subsidiary of the
Company. HYMEDIX International was incorporated in October, 1985 under
the name Kingston Technologies, Inc. Upon the consummation of the merger,
the holders of common stock of HYMEDIX International received
approximately 92% of the common shares of the Company. Accordingly, the
merger with Servtex has been accounted for as an acquisition of Servtex
by HYMEDIX International. Servtex had no operations and its assets were
not significant prior to the merger.
The accompanying consolidated 1996, 1995 and 1994 financial statements
include the accounts of the Company and HYMEDIX International, Inc. All
significant intercompany transactions have been eliminated in
consolidation.
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-7
<PAGE>
Revenues and Cost Recognition-
Revenues are derived primarily from option and license agreements,
research and development contracts and the sales of hydrogels and skin
care products. Such revenues are recognized when all significant
obligations of the Company have been satisfied. The costs associated
with the option fees and license fees and research and development
expenses are recognized as incurred.
Short-term Investments-
Short-term investments include an investment in a mutual fund which is
included in cash and cash equivalents for purposes of reporting cash
flows in 1995.
Inventories-
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and include material, labor and overhead
costs. As of December 31, inventories are comprised as follows-
1996 1995
---------------- ---------------
Finished goods $299,115 $351,860
Raw materials 109,181 126,078
---------------- ---------------
$408,296 $477,938
================ ===============
Property and Equipment-
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful lives
of the assets ranging from three to five years.
Patents-
Patents are amortized using the straight-line method over a 14-year
period. The Company reviews the recoverability of long-lived assets on
a periodic basis in order to identify conditions which may indicate
possible impairment. The assessment for potential impairment is based
primarily on the Company's ability to recover the unamortized balance
of its long-lived assets from expected future undiscounted cash flows.
Deferred Revenue-
The Company has entered into certain agreements for which it received
funds in advance of services to be performed (e.g., consulting
services). Such amounts are classified as deferred revenue until the
contractual events specified in the agreement have occurred.
Stock-Based Compensation-
The Company accounts for stock-based compensation using the intrinsic
value method.
F-8
<PAGE>
Net Loss Per Common Share-
Net loss per common share is computed by dividing the net loss for the
period, after consideration of dividends and accretion related to
preferred stock where applicable, by the weighted average number of
common shares outstanding after giving retroactive effect to the merger
and reorganization discussed above. The net loss per common share
computation does not give effect to the shares issuable upon the
conversion of the preferred stock and bonds, outstanding warrants or
options because their inclusion would have been antidilutive.
(3) BASIS OF PRESENTATION:
The Company incurred a net loss and negative operating cash flow in each
of the last three years ended December 31, 1996. The Company also has a
working capital deficit, a net capital deficit and was not in compliance
with certain loan provisions at December 31, 1996.
The Company is currently in discussions with potential investors to
receive additional financing, however, there is no assurance that such
financing will be consummated. Management believes that the Company will
have adequate resources to finance its operations in 1997. The Company is
appealing a judgment in amount of $805,964 which was rendered against it
(see Note 12). If the Plaintiff moves to collect on the judgment prior to
adjudication of the appeal, or if a verdict is rendered against the
Company in appellate court, the Company must attempt to finance both its
operations and satisfaction of the judgment. Management believes this
will be difficult. Management plans to continue to seek and evaluate
financing alternatives for the Company. In the event that cash flow from
operations and the anticipated proceeds from the financing, if any, are
not sufficient to fund the Company's operations in 1997, there is no
assurance that other sources of funds will be available to the Company.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments related to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
(4) RELATED PARTY TRANSACTIONS:
The Company is the sole general partner in Kingston Diagnostics, L.P.
(KDLP), an entity which ceased operations in 1991 and no longer conducts
any business activities. KDLP had separate activities, personnel and
facilities from the Company and its activities were unrelated to those of
the Company. All liabilities of KDLP, which amount to $59,222 at December
31, 1996 and 1995, respectively, have been reflected in the accompanying
balance sheets.
During 1995, the Company entered into a licensing and distribution
agreement with a company affiliated with a shareholder of the Company.
The Company received $700,000 from this shareholder and in return the
Company granted the exclusive distribution and manufacturing rights to
its skin care and wound care products in Asia (see Note 9).
F-9
<PAGE>
The Company entered into a license agreement with S.K.Y. Polymers, Inc.
(SKY), an entity controlled by one of the Company's directors, to obtain
rights with respect to the use of SKY's technology. Under the agreement,
SKY has granted the Company an exclusive right to all of its technology
in the Company's principal fields of interest, and rights of first
refusal in certain other fields, in return for a monthly license
maintenance fee of $10,000 and royalties of 4% of the Company's revenues
from products using SKY's proprietary technology. The monthly license fee
has been regularly paid and no royalties have been paid to date. This
agreement terminates December 31, 2000.
(5) PROPERTY AND EQUIPMENT:
At December 31, property and equipment is as follows-
1996 1995
--------- --------
Machinery and equipment $223,756 224,405
Office equipment and furniture and fixtures 25,249 25,249
Leasehold improvements 589,564 589,564
--------- --------
838,569 839,218
Less- Accumulated depreciation (723,391) 633,044)
--------- --------
$115,178 206,174
========= ========
Depreciation and amortization of property and equipment was $90,996,
$92,443 and $100,416 in 1996, 1995 and 1994, respectively.
(6) ACCOUNTS PAYABLE AND
ACCRUED EXPENSES:
At December 31, accounts payable and accrued expenses consists of-
1996 1995
---------- ----------
Accounts payable -- trade $866,227 $734,202
Accrued compensation 385,940 387,825
Accrued interest payable 678,725 357,562
Accrued preferred dividends 392,379 254,933
Other accrued expenses 77,000 110,413
---------- ----------
$2,400,271 $1,844,935
========== ==========
(7) NOTES PAYABLE:
Notes payable consists of the following as of December 31-
1996 1995
---------- ----------
Note payable, bearing interest at 7%,
interest only payable quarterly,
matures in January 2007, unsecured (a)
(see Note 9). $1,500,000 $1,500,000
Note payable, bearing interest at 7%,
interest only payable semiannually,
matures in October 1999, secured by
a patent (a) (see Note 9). 1,000,000 1,000,000
F-10
<PAGE>
Convertible bonds, bearing interest at
7% payable upon maturity in 1997,
secured by substantially all the
assets of the Company (b).
1,131,000 0
Note payable, bearing interest at 3%,
payable on demand, unsecured 458,326 458,326
Note payable, bearing interest at 8%,
payable on demand, unsecured 72,317 72,317
Demand note payable, bearing interest
at 10%, interest payable
periodically, unsecured. 1,200 1,200
---------- ----------
$4,162,843 $3,031,843
========== ==========
(a) During 1996, 1995 and 1994, the Company has not made interest
payments in accordance with the terms of the note payable
agreement. As a result, the Company is in technical default with
the agreement and therefore, the related debt has been
classified as a current liability in the accompanying
consolidated balance sheets.
(b) During 1996, the Company issued convertible bonds in the
principal amount of $1,131,000. The bonds are convertible into
1,131,000 shares of the Company's common stock. Such shares have
been reserved by the Company. The bonds may be subject to
mandatory prepayment under certain conditions. Certain proceeds
from the bond issuance are held by a representative of the
bondholders (agent). The Company's ability to borrow such
proceeds is subject to approval by the agent.
(8) INCOME TAXES:
The Company provides for taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," (SFAS 109) which
requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns.
In accordance with SFAS 109, the Company has evaluated its ability to
realize the future tax benefits associated with its net operating loss
carryforwards. At December 31, 1996, the Company had net operating loss
carryforwards of approximately $16,500,000 for Federal income tax
purposes which expire through 2011. Based on its operating history, the
Company has provided a valuation allowance of approximately $5,600,000 as
a full valuation allowance against the deferred tax asset as of December
31, 1996 because it could not determine that it was more likely than not
that such benefits would be realized.
As a result of a previous recapitalization, a change in ownership, as
defined for tax purposes, has occurred which will restrict the
availability of net operating loss carryforwards. The maximum amount of
net operating losses prior to the change in ownership (approximately
$5,000,000) which can be utilized in any given year is approximately
$1,300,000.
F-11
<PAGE>
(9) SIGNIFICANT AGREEMENTS:
The Company granted a license agreement covering the exclusive rights to
all surgically applied eye care products developed by the Company to
Optical Radiation Corporation (ORC). ORC subsequently assigned these
rights to another company which is active in the intraocular lenses
business. In connection therewith. In 1987 the Company received
$1,500,000 in licensing fees and a loan of $1,500,000, (see Note 7) as
up-front payments stipulated by the agreement. In connection with the
license agreement, the Company may receive royalties based on a
percentage of sales of those products associated with the agreement. No
royalties have been received or earned through December 31, 1996.
The Company granted an exclusive license for its soft contact lens
products in October 1989 to Pilkington Visioncare, Inc. (PVI). In
consideration thereof, the Company obtained a $1,000,000, 7% ten-year
interest only loan from PVI (see Note 7). No soft contact lens products
have been completed, and no royalties have been received or earned under
the license agreement.
In 1991, the Company entered into a Development Services and Licensing
Agreement with a private medical products company. Under this agreement
and subsequent extensions, the private medical products company has paid
the Company $100,000, $100,000 and $200,000 in fees for the years 1996,
1995 and 1994, respectively. These amounts have been reflected in
research and development contract revenues in the accompanying
consolidated statements of operations.
During August 1995, the Company entered into a distribution and licensing
agreement with Europa Magnetics Corporation Limited (EMC), a company
affiliated with a shareholder of the Company. The agreement gives EMC the
exclusive right to market and distribute the Company's skin care and
wound care products in Asia. During 1995, the Company received $700,000
for the granting of these exclusive rights which has been reflected in
license, royalty and distribution fees in the accompanying consolidated
statements of operations. Under this agreement, if EMC manufactures
products in Asia, it would pay the Company up to a 7% royalty on all
partially or fully manufactured skin care and wound care products
produced in Asia. No royalties have been received or earned through
December 31, 1996.
During November 1995, the Company entered into an agreement with a
company granting it exclusive rights to manufacture and distribute the
Company's wound care products worldwide except for Asia. In addition, the
Company granted exclusive worldwide rights to the drug delivery
application of the polymer technology for wound healing. The agreement
calls for certain upfront, research and development and milestone
payments in both cash and restricted common stock, subject to certain
restrictions, and for royalties. The Company received cash and restricted
common stock of the company under this agreement which has been reflected
in licenses, royalty and distribution fees in the accompanying
consolidated statements of operations.
(10) COMMITMENTS AND CONTINGENCIES:
The Company leases certain office and manufacturing facilities under
arrangements accounted for as operating leases. Rent expense aggregated
$538,000, $538,000 and $537,000 for the years ended December 31, 1996,
1995 and 1994, respectively. These
F-12
<PAGE>
leases require the Company to pay all executory costs such as property
taxes, maintenance and insurance. The aggregate minimum lease payments
of all noncancellable leases as of December 31, 1996 are as follows-
For the Years Ending December 31-
1997 $563,000
1998 32,000
1999 23,000
(11) STOCKHOLDERS' DEFICIT:
During 1994, the Company issued $1,500,000 of 9% preferred stock to
Research Corporation Technologies, Inc. ("RCT"), the owner of a 20%
interest in the Company's royalties under certain exclusive lens
products licenses, in exchange for the right to receive the first
$1,500,000 of royalties due to RCT. The $1,500,000 due from RCT has
been recorded as a subscription receivable at December 31, 1996 and
1995. The preferred stock is redeemable by the Company (but not by RCT)
in six years, and is convertible after June 30, 1995 into the Company's
common stock at $5.75 a share, with the Company having the right to
redeem the preferred stock if RCT elects to convert.
The Company maintains an Employee Stock Option Plan and is authorized
to grant options at fair value to purchase up to 500,000 shares of the
Company's stock. The options are exercisable in varying percentages.
Transactions under the Option Plan are as follows-
Shares
Under Weighted Average
Option Exercise Price
--------- ------------------
Outstanding December 31, 1993 320,551 $3.34
Granted 70,810 $6.19
Expired (45,083) $4.08
---------
Outstanding December 31, 1994 346,278 $3.83
(exercisable 243,622 shares)
Expired (20,730) $3.89
---------
Outstanding December 31, 1995
(exercisable 321,798 shares) 325,548 $3.82
Granted 99,000 $0.77
Expired (5,629) $3.20
---------
Outstanding December 31, 1996
(exercisable 323,419 shares) 418,919 $3.11
=========
F-13
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1996-
Weighted Weighted Number Weighted
Number Average Average Exercisable Average
Range of Outstanding Remaining Exercise at Exercise
Exercise Prices at 12/31/96 Life Price 12/31/96 Price
- --------------- ----------- ---- ----- -------- -----
$.75 to $1.99 99,000 10 $ .77 6,000 $ 1.00
$2 to $3.99 261,919 3 3.33 261,919 3.33
$4 to $5.99 53,000 3 5.69 51,500 5.72
$6 to $12 5,000 5 10.40 4,000 11.00
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation ("FAS 123"), which was
effective as of January 1, 1996, the fair value of option grants is
estimated on the date of grant using the Black-Scholes option pricing
model for proforma footnote purposes with the following assumptions
used for grants in all years; dividend yield 0%, risk-free interest
rate of 5.42% and expected option life of six years. Expected
volatility was assumed to be 77.71% in 1996. The weighted average fair
value of options granted in 1996 was $.36.
F-14
<PAGE>
As permitted by FAS 123, the Company has chosen to continue accounting
for stock options at their intrinsic value. Accordingly, no
compensation expense has been recognized for its stock option
compensation. Had the fair value method of accounting been applied to
the Company's stock option plans, the tax-effected impact would be as
follows-
1996 1995
------------ ---------
Net loss as reported ($2,193,315) ($800,967)
Estimated fair value of the
year's option grants, net of tax 35,640 0
------------ ---------
Net loss adjusted ($2,228,955) ($800,967)
============ =========
Adjusted net loss per share ($.41) ($.16)
============ =========
This proforma impact only takes into account options granted since
January 1, 1995 and is likely to increase in future years as additional
options are granted and amortized ratably over the vesting period.
The Company has outstanding warrants entitling the holders thereof to
purchase 811,764 common shares. The warrants are exercisable at varying
prices ranging from $2.13 to $9.59 per share, subject to certain
adjustments, as defined, and expire through February 23, 1999.
(12) LITIGATION:
The Company's former president filed a claim against the Company, the
Company's Directors and Kingston Technologies Limited Partnership (a
shareholder). The complaint, filed in September 1993, alleged that the
Company wrongfully terminated the former president, that he was owed
$367,500 in deferred compensation and $74,500 in back salary and that
approximately $323,000 was owed him based on his claim that an
agreement signed by him was signed under duress and is therefore void.
The Company has filed an answer denying most of the former president's
claims for relief. The Company paid $74,500 in 1994 resulting in the
parties settling the claim regarding back salary. In July 1996, a
judgment was rendered against the Company in the amount of $805,964
plus interest in connection with this case. Although the Company is
appealing this judgment, the Company has accrued the judgment plus
interest in the accompanying consolidated financial statements as of
December 31, 1996.
In addition, an individual filed a complaint against the Company
alleging that the Company owed him eight percent of all monies invested
in the Company by his contacts. The complaint alleges that the Company
owes him approximately $5,000,000 and warrants to purchase the
Company's common stock. The Company has filed a response denying these
claims. The outcome of this second matter is uncertain at this time.
Accordingly, no provision for any liability that may result upon
adjudication of this lawsuit has been made in the accompanying
consolidated financial statements.
F-15
<PAGE>
TABLE OF EXHIBITS
Exhibit No. Page Number
2.1 Amended and Restated Agreement of Merger and
Plan of Reorganization, dated as of January 24,
1994 by and among Servtex International Inc.,
Kingston Technologies, Inc., KTI Acquisition
Corp. and certain affiliates of Servtex
International Inc., filed pursuant to Rule 14a-6
as Exhibit F to Proxy Statement of the
Registrant (then Servtex International Inc.),
dated February 12, 1994, and incorporated by
reference herein.
2.2 Agreement of Merger, dated as of February 23,
1994 by and between Servtex International Inc.
and HYMEDIX, Inc., filed pursuant to Rule 14a-6
as Exhibit A to Proxy Statement of the
Registrant (then Servtex International Inc.),
dated February 12, 1994, and incorporated by
reference herein.
3.1 Certificate of Incorporation, filed pursuant to
Rule 14a-6 as Exhibit B to Proxy Statement of
the Registrant (then Servtex International
Inc.), dated February 12, 1994, and incorporated
by reference herein.
3.2 Certificate of Designation, Preference and
Rights of Series A Redeemable Preferred Stock,
filed as Exhibit (2) to Form 8-K, dated February
23, 1994, of the Registrant and incorporated by
reference herein.
3.3 By-Laws of the Registrant, filed pursuant to
Rule 14a-6 as Exhibit C to Proxy Statement of
the Registrant (then Servtex International
Inc.), dated February 12, 1994, and incorporated
by reference herein.
4.1* Specimen Certificate of the Registrant's Common
Stock, $.001 par value.
10.1* Form of the Underwriter's Warrant issued to
First Flushing Securities, Inc. as a broker's
fee for negotiating the merger of KTI
Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of the Registrant with
and into HYMEDIX International.
10.2** Option and License Agreement dated November 7,
1986 by and between HYMEDIX International and
ORC, as amended by Amendment Number 1 to Option
and License Agreement dated January 9, 1987.
10.3* Promissory Note, dated January 9, 1987, made by
HYMEDIX International to the order of ORC, for
$500,000.
10.4* Indenture of Lease dated July 7, 1987 by and
between Fresh Ponds Associates and HYMEDIX
International, as amended by First Amendment to
Lease, dated September 13, 1993, Second
Amendment to Lease, dated September 15, 1993,
and Third Amendment to Lease, dated January 15,
1994; and the related Installment Promissory
Note, dated October 1, 1993, made by HYMEDIX
International to the order of Fresh Ponds
Associates for $404,300.90.
10.5* Promissory Note, dated September 29, 1987, made
by HYMEDIX International to the order of ORC,
for $1,000,000.
10.6** Agreement, dated December 22, 1988, by and
between Kingston Hydrogels Limited Partnership
and LIPO Chemicals, Inc., as amended by
Amendment No. 1, effective June 1, 1990 and as
further amended by Amendment Agreement, dated
June 14, 1990.
10.7* Loan and Security Agreement, dated October 30,
1989, by and between HYMEDIX International and
Pilkington Visioncare, Inc. ("PVI").
Page 40
<PAGE>
10.8* Promissory Note in the amount of $1,000,000,
dated October 30, 1989, by HYMEDIX
International, in favor of PVI
10.9* Assignment of Patent, dated October 30, 1989 by
HYMEDIX International in favor of PVI.
10.10** License and Supply Agreement, dated October 30,
1989, between HYMEDIX International and PVI,
along with Addendum thereto dated July 10, 1991.
10.11* Contribution Agreement, dated August 7, 1990, by
and between Kingston Technologies Limited
Partnership ("KTLP") and HYMEDIX International.
10.12* Royalty Assignment Agreement, effective August
8, 1990, by and between HYMEDIX International
and Research Corporation Technologies, Inc.
("RCT").
10.13* Assignment of Patents, dated August 8, 1990, by
KTLP in favor of HYMEDIX International.
10.14* Form of Amended and Restated Warrant to Purchase
Common Stock, dated February 23, 1994, delivered
to Cheung Hok Sau.
10.15* Form of Amended and Restated Common Stock Purchase
Warrant, dated February 23, 1994, made by the
Registrant to the Trustees of Boston University.
10.16* Right to Purchase Agreement, dated June 30,
1992, between HYMEDIX International and Lipo
Chemicals, Inc.
10.17* License Agreement, dated June 30, 1992, between
HYMEDIX International and Lipo Chemicals, Inc.
10.18* Form of Amended and Restated Common Stock
Purchase Warrant, dated February 23, 1994, made
by the Registrant to Synreal Corporation N.V.
10.19* Form of Amended and Restated Common Stock
Purchase Warrant, dated February 23, 1994, made
by the Registrant to Azreal Corporation N.V.
10.20* Form of Amended and Restated Common Stock
Purchase Warrant, dated February 23, 1994, made
by the Registrant to Dr. Hsia Fu Chao.
10.21 Amended and Restated 1991 Incentive and
Non-Qualified Stock Option Plan, filed pursuant
to Rule 14a-6 as Exhibit E to Proxy Statement of
the Registrant (then Servtex International
Inc.), dated February 12, 1994, and incorporated
by reference herein.
10.22* Employment Agreement, dated April 3, 1992, by
and between HYMEDIX International and Alan L.
Hershey, as amended by Agreement, dated January
4, 1993.
10.23* Form of Amended and Restated Common Stock
Purchase Warrant, dated February 23, 1994, made
by the Registrant to First Taiwan Investment
Holding Inc.
10.24* Registration Rights Agreement, dated May 28,
1993, by and between HYMEDIX International and
the Trustees of Boston University.
10.25* Form of Amended and Restated Common Stock
Purchase Warrant, dated February 23, 1994, made
by the Registrant to the Trustees of Boston University.
10.26* Form of Amended and Restated Common Stock
Purchase Warrant, dated February 23, 1994, made
by the Registrant to First Taiwan Investment and
Development Inc.
10.27* Amended and Restated Registration Rights
Agreement, dated February 23, 1994, by and among
RCT, First Taiwan Investment Holding Inc. and
First Taiwan Venture Capital Inc..
10.28** Marketing and Distribution Agreement, dated July
30, 1993, by and between HYMEDIX International
and Brady Medical Products, Co.
Page 41
<PAGE>
10.29* Evaluation Agreement, dated December 1, 1993, by
and between HYMEDIX International and Alcon
Laboratories, Inc.
10.30* Capital Contribution Agreement, dated February
23, 1994, by and between the Registrant and RCT.
10.31* Demand Registration Rights Agreement, dated
February 23, 1994, by and between the Registrant
RCT.
10.32* Option to Wall Street Group.
10.33* Redeemable Common Stock Purchase Warrant, dated
February 23, 1994, made by the Registrant to
First Taiwan Investment Holding Inc.
10.34* Form of Warrant issued to Selling Stockholders
(Domestic) in the private placements which
closed February, 1994.
10.35* Form of Warrant issued to Selling Stockholders
(International) in the private placements which
closed February, 1994.
10.36** [Intentionally Omitted]
10.37* Joint Venture Agreement, dated May 31, 1994, by
and among the Registrant, Beijing General
Pharmaceutical Corp., First Taiwan Investment
Banking Group and Technological Innovation
Corporation of China. 10.38*** Agreement, dated
November 29, 1994, by and between HYMEDIX
International and Bausch & Lomb.
10.39*** Director Stock Option Plan, effective as of May
31, 1994.
10.40**** Development Services and Licensing Agreement,
dated December 20, 1991, between HYMEDIX
International and W. L. Gore and Associates,
Inc.
10.41***** Distribution, Know-How Transfer, Licensing and
Manufacturing and Supply Agreement, dated August
21, 1995 by and between HYMEDIX International,
Inc. and Europa Magnetics Corporation. 10.42#
License Agreement dated November 15, 1995, by
and between Procyte Corporation and HYMEDIX
International, Inc
10.43# Master Terms and Conditions For Purchase Orders
dated September 19, 1995, by and between Home
Shopping Club, Inc. and HYMEDIX International,
Inc
10.44## Convertible Bond Purchase Agreement, effective
February 27, 1996, by and among the Company,
HYMEDIX International, First Taiwan Investment
and Development, Inc., and the Purchasers (as
defined therein)
10.45## Convertible Bond Purchase Agreement, effective
March 5, 1996, by and among the Company, HYMEDIX
International, and Su Chen Huang.
10.46### Security Agreement dated as of August 8, 1996,
by and among the Company and the Bondholder
Representative (as defined therein).
21* Subsidiaries of the Registrant.
27 Financial Data Schedule
- -----------------------
Page 42
<PAGE>
* Previously filed as an Exhibit to the Registrant's Form SB-2 Registration
Statement (No. 33-78638) originally filed on May 5, 1994 and incorporated
herein by reference.
** Previously filed (and Confidential Treatment requested pursuant to Rule
406 under the Securities Act) as an Exhibit to the Registrant's Form SB-2
Registration Statement (No. 33-78638) originally filed on May 5, 1994 and
incorporated herein by reference.
*** Previously filed as an Exhibit to the Registrant's Form 10-KSB originally
filed April 17, 1995.
**** Previously filed (and Confidential Treatment requested pursuant to Rule
24-b2 under the Securities Exchange Act of 1934) as an Exhibit to the
Registrant's Amendment No. 1 to Form 10-KSB/A originally filed April 30,
1995.
***** Previously filed as an Exhibit to the Registrant's Form 10-QSB originally
filed November 15, 1995.
# Previously filed as an Exhibit to the Registrant's Form 10-KSB originally
filed March 30, 1996.
## Previously filed as an Exhibit to the Registrant's Form 10-QSB originally
filed May 15, 1996.
### Previously filed as an Exhibit to the Registrant's Form 10-QSB originally
filed November 13, 1996.
Page 43
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 42,526
<SECURITIES> 0
<RECEIVABLES> 57,316
<ALLOWANCES> 0
<INVENTORY> 408,296
<CURRENT-ASSETS> 772,297
<PP&E> 838,569
<DEPRECIATION> 723,391
<TOTAL-ASSETS> 1,180,432
<CURRENT-LIABILITIES> 7,428,300
<BONDS> 1,131,000
0
30,572
<COMMON> 5,713
<OTHER-SE> (6,284,153)
<TOTAL-LIABILITY-AND-EQUITY> 1,180,432
<SALES> 843,798
<TOTAL-REVENUES> 1,986,798
<CGS> 406,549
<TOTAL-COSTS> 3,058,319
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 805,964
<INTEREST-EXPENSE> 321,163
<INCOME-PRETAX> (2,193,315)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,193,315)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,193,315)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.41)
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