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.
For the fiscal year ended December 31, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________.
Commission file number 0-19827
HYMEDIX, INC.
(Name of Small Business Issuer 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)
Issuer's Telephone Number, Including Area Code: (732) 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____
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. [X]
State registrant's revenues for its most recent fiscal year: $1,783,331
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,
1998 as reported by The OTC Bulletin Board, was approximately $64,280. 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, 1998 was
5,713,500.
Transitional Small Business Disclosure Format (Check one): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be delivered
to stockholders in connection with the Annual Meeting of Stockholders to filed
with the Securities and Exchange Commission on or before April 30, 1998 are
incorporated by reference into Part III hereof. With the exception of the
portions of such Proxy Statement expressly incorporated into this Annual Report
on Form 10-KSB by reference, such Proxy Statement shall not be deemed filed as
part of this Annual Report on Form 10-KSB.
<PAGE>
HYMEDIX, INC.
INDEX
Page No.
PART I
Item 1. Description of Business 2
Item 2. Description of Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 7
Item 6. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants on 14
Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control 15
Persons; Compliance with Section 16(a) of the Exchange
Act
Item 10. Executive Compensation 19
Item 11. Security Ownership of Certain Beneficial Owners 19
and Management
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits and Reports on Form 8-K 19
SIGNATURES 24
<PAGE>
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.
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. Until February, 1997 the Company's
principal means of distribution of BIONIQ(R) products was direct response
television. When the monthly volume of direct response television sales did not
meet the marketing company's expectations, direct response selling was
discontinued. While continuing to seek another means of distribution, the
<PAGE>
Company sells a small amount of BIONIQ(R) products itself on the internet and
by responding to telephone orders. The BIONIQ(R) 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; 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 skin
care products are under development. The Company is exploring other marketing
channels for BIONIQ(R), including other direct selling methods.
WOUND CARE PRODUCTS
The Company had 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. ProCyte modified one of the Company's wound care
products, and has introduced it to the market. In late 1997, the ProCyte
license agreement was modified to limit its rights to that specific product.
The Company is seeking a new marketing partner or licensee for its remaining
wound care products.
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
fifth and a sixth 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 a
major ophthalmic pharmaceutical company. 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(R) for sale to the Trade. While LIPO
develops its manufacturing capability, the Company continues to manufacture and
sell HYPAN(R) hydrogels to LIPO for sale to the Trade.
<PAGE>
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 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,
most of the competitors having substantially more resources than 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.
EMPLOYEES
The Company presently employs thirteen (13) people, seven (7) of whom are
engaged in management, marketing and administration; one (1) in regulatory
affairs and quality assurance and control; one (1) in production; and four (4)
<PAGE>
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 22,000 square feet of office, laboratory
and manufacturing space at 2245 Route 130 in Dayton, New Jersey under a lease
with annual rentals of approximately $444,000. The lease expired at the end of
1997. The Company is presently negotiating a new lease of the same space with a
new landlord. 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.
There can be no assurance that the Company will be able to negotiate a lease
upon satisfactory terms, if at all, with the new landlord of the current space;
as a result, the Company may have to incur substantial costs associated with
finding new space, negotiating a new lease and moving the offices and
laboratories of the Company.
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, after a jury trial,
judgement 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 have appealed the verdict. The appeal was
heard in December 1997, and a decision is expected in the near future.
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. Pre-trial discovery is currently
being conducted in this matter and a trial date has not been scheduled.
<PAGE>
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 from October 1, 1997 through December 31, 1997.
<PAGE>
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 foregoing securities as reported by The OTC Bulletin
Board for the eight quarterly periods ended December 31, 1997.
Common Stock
Period High Low
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
1997:
1st quarter $1.13 $0.50
2nd quarter 1.06 0.25
3rd quarter 0.50 0.03
4th quarter 0.06 0.03
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, 1997, there were 122 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.
<PAGE>
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.
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, the Company currently has limited resources and 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").
Recently Issued Accounting Standards
In the fourth quarter of 1997, the Company adopted Financial Accounting
Standard No. 128, Earnings Per Share, (FAS 128) which requires the presentation
of both basic and diluted earnings per share. Basic and diluted earnings per
share as calculated in accordance with FAS 128 does not differ from earnings
per share reported in prior periods.
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income, which establishes standards for
reporting comprehensive income and its components, and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes revised reporting and disclosure requirements for operating
segments. The Company will adopt Statement Nos. 130 and 131 by year-end 1998.
These Statements increase disclosure only and will have no effect on the
Company's consolidated financial position or results of operations.
RESULTS OF OPERATIONS
REVENUES
The Company's total revenues for the fiscal year ended December 31, 1997
were $1,783,331, versus $1,986,798 for the fiscal year ended 1996, a decrease
of 10.2%. The decreased revenues for fiscal year 1997 from the previous year
primarily came from (1) a decrease of $279,110 in license, royalty and
distribution fees; (2) reduced net sales of $30,366 in wound care products; and
(3) a decrease of $353,537 in domestic and international sales of skin care
products. The decreased revenues were partially offset by an increase of
$459,546 in net sales of hydrogels' to LIPO Chemicals, Inc. The decrease in
license, royalty and distribution fees is primarily attributable to the fact
that a one-time $500,000 milestone payment under the ProCyte licensing
agreement was received in July 1996, and the reduced domestic sales in skin
care products is primarily attributable to the discontinuance of direct
response television network marketing program.
COSTS AND EXPENSES
Cost of sales for the fiscal year ended December 31, 1997 was $606,004
versus $406,549 for fiscal year 1996, an increase of 49.1%. The 49.1% increase
in cost of sales was largely due to the $100,000 inventory reserve established
in 1997 for aged BIONIQ products, the 9.0% increase in net product sales and
reduced sales in highly profitable skin care products. Selling, general and
administrative expenses decreased to $1,303,440 for the year ended December 31,
1997 from the previous fiscal year level of $2,000,863. The decrease was
principally due to a reduction in legal and staff expenses. Research and
development costs for fiscal year were $538,540 as compared to $650,907 for
fiscal year 1996, a decrease of 17.3%, resulting from decreased work days and
decreased costs of the research and development staff.
LEGAL JUDGMENT
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 ("KTLP") as defendants. The Complaint alleges (i) that
HYMEDIX International wrongfully terminated the former President's employment,
<PAGE>
(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, after a jury
trial, judgement 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.
OTHER (EXPENSE) INCOME
Total other expense-net increased to $374,509 for the fiscal year ended
December 31, 1997 from $315,830 for the 1996 fiscal year. The increase of
$58,679 was primarily attributable to the realized loss on sale of investments
resulting from the decreased value of certain restricted common stock that the
Company acquired through a manufacturing and distribution rights agreement, and
interest expense related to the outstanding convertible bonds and the interest
accrual related to the legal judgement.
As a result of the decreased revenues and costs and expenses described
above, the Company incurred a lower net loss of $1,039,162 for fiscal year
ended December 31, 1997 versus $2,193,315 for fiscal year ended 1996.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
The Company had $51,381 in cash and cash equivalents on hand as of
December 31, 1997 versus $42,562 on December 31, 1996. The working capital
deficit of $7,705,283 on December 31, 1997 represents an increase of $1,049,280
from the previous year-end level of $6,656,003. The increase in working capital
deficit was primarily attributable to the net loss incurred in 1997.
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
$1,000,000, respectively, each have been classified as current liabilities as
they are in technical default as a result of certain interest payments not
having been made.
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 matured (after being extended) on
December 31, 1997. The Company is negotiating to extend the due date of the
bond. The September Bond is convertible in whole at any time prior to payment
<PAGE>
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 approximately $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 matured (after being extended) on December 31, 1997.
The Company is negotiating to extend the due date of the bonds. 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.
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, 1997, the Company had made various
withdrawals from and repayments to the Special Account.
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.
In June of 1997, the Company received a payment of a $100,000 refundable
deposit from a potential distributor with whom the Company has reached an
agreement in principle regarding certain aspects of the Company's consumer skin
care business. The Company has agreed to grant the distributor an option to
negotiate an agreement with the Company with respect to the Company's skin care
product in certain territories or to match the terms of any such agreement that
the Company may negotiate with a third party, on a right-of-first refusal
basis. This option expires on the earlier of June 30, 2001 or the date on which
the Company reaches any such third party agreement. The $100,000 deposit would
be refundable to the distributor in the event any such third party agreement is
consummated or creditable against amounts payable under any definitive
agreement between the Company and this distributor. This option is subject to
negotiation and execution of a definitive agreement regarding this matter.
The Company is currently in discussions with potential investors to
receive additional financing, however, there is no assurance that such
financing will be consummated upon acceptable terms, if at all. Management
<PAGE>
believes that the Company will have adequate resources to finance its
operations in 1998. However, 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 decision
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. In addition, the Company's secured convertible
bonds are both past due, and while the Company is managing to make some
payments on past due interest and principal, there is no assurance that
sufficient funds will be available to the Company to service these debts and to
continue its operations. 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 1998, there can be no assurance
that other sources of funds will be available to the Company.
YEAR 2000 COMPLIANCE
As of December 31, 1997, the Company has not assessed whether or not the
systems that are currently in place are Year 2000 compliant. However,
management believes that the cost of and time to install a new system would not
be substantial.
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.
o The Company had a net loss of approximately $1,309,162 for the fiscal
year ended December 31, 1997 and had an accumulated deficit at December 31,
1997 of approximately $7,705,283. The Company has experienced ongoing losses
from operations. The Company has a limited cash balance and is in technical
<PAGE>
default on the Company's two term loans. There can be no assurance that the
Company's revenues will grow sufficiently to fund its operations and achieve
profitability. 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 a financing, if any, are not sufficient to fund
the Company's operations in 1998, there can be no assurance that other sources
of funds will be available to the Company.
o 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 appealed
the judgment in this matter, there can be no assurance 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. The appeal was heard in December
1997, and a decision is expected in the near future. If the appeal is
unsuccessful or if the plaintiff moves to collect on the judgment, it could
have a material adverse affect on the Company's financial condition and future
operating results.
o 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. 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.
o 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. There can be no assurance that the Company will be able to
successfully develop and commercialize any new products or technologies.
o 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.
o 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.
o 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
<PAGE>
and materials at reasonable prices and in a timely manner; capacity or supply
constraints, as well as purchase commitments, could adversely affect future
operating results.
o 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.
o 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.
o 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.
ITEM 7. FINANCIAL STATEMENTS.
See Financial Statements beginning on Page F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
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 March 31, 1998.
Each of the Directors and Officers set forth below, other than Dr. Jennings,
also hold the same position with HYMEDIX International.
<TABLE>
<CAPTION>
Director or
Executive
Name Age Position(s) with the Company(1) Officer Since
<S> <C> <C> <C>
Vladimir A. Stoy, Ph.D. 56 Vice Chairman (non-executive) and 1994
Director
Charles K. Kliment, Ph.D. 65 President and Chief Executive Officer 1994
William G. Gridley, jr.(3) 69 Chairman, Chief Financial Officer, 1994
Secretary, Treasurer and Director
George P. Stoy 50 Vice President of Engineering and
Director 1994
Jan Lovy, Ph.D. 46 Vice President of Polymer Research 1994
Sheng-Hsiung Hsu 55 Director 1994
Dr. Hsia-Fu Chao(1)(3) 63 Director 1994
Shu-Jean Kuo Chou 60 Director 1994
Michael K. Hsu(1)(2)(3) 40 Director 1994
John E. Bagalay, Jr., 64 Director 1994
Ph.D., J.D.(1)(2)(3)
Edward H. Jennings, 62 Director 1994
Ph.D.(1)(2)
</TABLE>
(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
<PAGE>
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."
CHARLES K. KLIMENT, PH.D., President and Chief Executive Officer. 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.
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.
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. Stoy holds a
Masters degree in Mechanical Engineering. Mr. Stoy is the brother of Vladimir
A. Stoy.
<PAGE>
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 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
<PAGE>
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.
JOHN E. BAGALAY, JR., PH.D., J.D., Director. Dr. Bagalay has served as a
Director of HYMEDIX since the Acquisition Merger. Dr. Bagalay joined HYMEDIX
International as a Director in 1993. Dr. Bagalay is Managing Director of
Community Technology Fund, the venture capital affiliate of Boston University.
Dr. Bagalay was formerly General Counsel of Lower Colorado River Authority, a
regulated electric utility in Austin Texas; General Counsel of Houston First
Financial Group; and General Counsel of Texas Commerce Bancshares, Inc. He has
over thirty years' experience in the financing of private and publicly held
companies. He is a Director and member of the Executive Committee of Seragen,
Inc., Wave Systems Corp. and of Cellcor, Inc., each of which a publicly held
company. He is a Director of several privately held companies in the medical
and high technology business sectors.
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 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 1997 all Section
16(a) filing requirements applicable to its officers, directors and greater
than ten-percent beneficial owners were complied with.
<PAGE>
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 1998 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, 1998.
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 1998 Special Meeting in
Lieu of Annual Meeting of Stockholders to be filed with the Commission on or
before April 30, 1998.
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 1998 Special
Meeting in Lieu of Annual Meeting of Stockholders to be filed with the
Commission on or
before April 30, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
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.
<PAGE>
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").
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.
<PAGE>
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.
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.
<PAGE>
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# Master Terms and Conditions For Purchase Orders dated September 19,
1995, by and between Home Shopping Club, Inc. and HYMEDIX
International, Inc.
10.43## 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).
10.44## Convertible Bond Purchase Agreement, effective March 5, 1996, by and
among the Company, HYMEDIX International, and Su Chen Huang.
10.45### Security Agreement dated as of August 8, 1996, by and among the
Company and the Bondholder Representative (as defined therein).
10.46# License Agreement dated November 15, 1995, by and between ProCyte
Corporation and HYMEDIX International, Inc.
21* Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
- -----------------------
* 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>
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the fourth quarter of 1997.
<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/ Charles K. Kliment, Ph.D.
______________________________
Charles K. Kliment, Ph.D.
President (Principal Executive Officer)
Date:March 31, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
By: /s/Charles K. Kliment President, (Principal Executive Officer) March 31, 1998
__________________________
Charles K. Kliment
By: /s/ William G. Gridley, jr. Chairman, Chief Financial March 31, 1998
____________________________
William G. Gridley, jr. Officer (Secretary, Treasurer,
Principal Financial Officer
and Principal Accounting
Officer); Director
By: /s/Vladimir A. Stoy Director March 31, 1998
____________________________
Vladimir A. Stoy
By: /s/George P. Stoy Director March 31, 1998
____________________________
George P. Stoy
By: /s/ John E. Bagalay, Jr. Director March 31, 1998
____________________________
John E. Bagalay, Jr.
By: /s/ Edward H. Jennings Director March 31, 1998
____________________________
Edward H. Jennings
By: /s/ Sheng-Hsiung Hsu Director March 31, 1998
____________________________
Sheng-Hsiung Hsu
By: /s/ Dr. Hsia-Fu Chao Director March 31, 1998
____________________________
Dr. Hsia-Fu Chao
By: /s/ Shu-Jean Kuo Chou Director March 31, 1998
____________________________
Shu-Jean Kuo Chou
By: /s/ Michael K. Hsu Director March 31, 1998
____________________________
Michael K. Hsu
</TABLE>
<PAGE>
HYMEDIX, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
<TABLE>
<CAPTION>
HYMEDIX, INC. AND SUBSIDIARY
INDEX
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Deficit for the Years
Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 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, 1997. 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.
ARTHUR ANDERSEN LLP
Princeton, New Jersey
March 20, 1998
<PAGE>
<TABLE>
<CAPTION>
HYMEDIX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $51,381 $42,562
Restricted cash (Note 7) 0 225,600
Accounts receivable 226,649 57,316
Inventories, net (Note 2) 235,746 408,296
Other current assets 54,992 38,523
----------- -----------
Total current assets 568,768 772,297
INVESTMENTS (Notes 2 and 9) 105,469 168,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $810,279 and $723,391 in
1997 and 1996, respectively (Notes 2 and 5) 28,290 115,178
PATENTS, net of accumulated amortization of $347,070 and
$315,630 in 1997 and 1996, respectively (Note 2) 93,517 124,957
----------- -----------
Total assets $796,044 $1,180,432
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable (Note 7) $4,067,596 $4,162,843
Accounts payable and accrued expenses (Note 6) 3,341,269 2,400,271
Accrued legal judgment (Note 12) 805,964 805,964
Liabilities related to discontinued line of 59,222 59,222
business (Note 4)
----------- -----------
Total current liabilities 8,274,051 7,428,300
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)
STOCKHOLDERS' DEFICIT (Notes 2 and 11):
8% Senior Convertible Preferred Stock, $3.00 par value, 800,000
shares authorized, 10,190 shares issued and outstanding in 30,570 30,570
1997 and 1996, respectively
Preferred Stock, $.01 par value, 3,000 shares authorized, 150 2 2
shares issued and outstanding in 1997 and 1996, respectively
Common stock, $.001 par value, 20,000,000 shares authorized,
5,713,500 shares issued and outstanding in 1997 and 1996, 5,713 5,713
respectively
Additional paid-in capital 15,642,174 15,642,174
Unrealized loss from available for sale investments (53,531) 0
Accumulated deficit (21,602,935) (20,426,327)
Subscription receivable (1,500,000) (1,500,000)
----------- -----------
Total stockholders' deficit (7,478,007) (6,247,868)
----------- -----------
Total liabilities and stockholders' deficit $796,044 $1,180,432
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
HYMEDIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
REVENUES (Note 2):
Net product sales $919,441 $843,798 $717,947
License, royalty and distribution fees 588,890 868,000 1,200,000
(Notes 4 and 9)
Research and development contracts (Note 9) 275,000 275,000 344,167
----------- ---------- -----------
Total revenues 1,783,331 1,986,798 2,262,114
----------- ---------- -----------
COSTS AND EXPENSES (Note 2):
Cost of sales 606,004 406,549 341,773
Selling, general and administrative 1,303,440 2,000,863 1,973,340
Research and development 538,540 650,907 547,202
Legal judgment 0 805,964 0
----------- ---------- -----------
Total costs and expenses 2,447,984 3,864,283 2,862,315
----------- ---------- -----------
Loss from operations (664,653) (1,877,485) (600,201)
----------- ---------- -----------
OTHER (EXPENSE) INCOME:
Realized loss on sale of investments (Note 2) (34,061) 0 0
Interest expense (341,400) (321,163) (204,944)
Interest income 952 5,333 4,178
----------- ---------- -----------
Total other expense, net (374,509) (315,830) (200,766)
----------- ---------- -----------
Net loss ($1,039,162) ($2,193,315) ($800,967)
=========== ========== ===========
BASIC LOSS PER COMMON SHARE (Note 2) ($.21) ($.41) ($.16)
=========== ========== ===========
DILUTED LOSS PER COMMON SHARE (Note 2) ($.21) ($.41) ($.16)
=========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 2) 5,713,500 5,713,500 5,713,500
=========== ========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
HYMEDIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8% Senior
Convertible Unrealized
Preferred Stock Preferred Stock Common Stock Loss From
------------------- ------------------- ------------------ Additional Available
Number Number of Number of Paid-in For Sale Accumulated Subscription
of Shares Amount Shares Amount Shares Amount Capital Investments Deficit Receivable
--------- --------- --------- --------- --------- --------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1994 10,190 $30,570 150 $2 5,713,500 $5,713 $15,635,301 $0 ($17,157,153) ($1,500,000)
Net loss -- 1995 0 0 0 0 0 0 0 0 (800,967) 0
Preferred stock
dividends 0 0 0 0 0 0 0 0 (137,446) 0
--------- --------- --------- ----- --------- --------- ----------- -------- ----------- -----------
BALANCE,
December 31, 1995 10,190 30,570 150 2 5,713,500 5,713 15,635,301 0 (18,095,566) ( 1,500,000)
Net loss -- 1996 0 0 0 0 0 0 0 0 (2,193,315) 0
Adjustment of stock 0 0 0 0 0 0 6,873 0 0 0
offering costs
Preferred stock
dividends 0 0 0 0 0 0 0 0 (137,446) 0
--------- --------- --------- ----- --------- --------- ----------- -------- ----------- -----------
BALANCE,
December 31, 1996 10,190 30,570 150 2 5,713,500 5,713 15,642,174 0 (20,426,327) (1,500,000)
Net loss -- 1997 0 0 0 0 0 0 0 0 (1,039,162) 0
Preferred stock
dividends 0 0 0 0 0 0 0 0 (137,446) 0
Unrealized loss 0 0 0 0 0 0 0 (53,531) 0 0
from available
for sale
investments
--------- --------- --------- ----- --------- --------- ----------- -------- ----------- -----------
BALANCE,
December 31, 1997 10,190 $30,570 150 $2 5,713,500 $5,713 $15,642,174 ($53,531) ($21,602,935) ($1,500,000)
========= ========= ========= ===== ========= ========= =========== ======== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYMEDIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,039,162) ($2,193,315) ($800,967)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 118,328 122,436 126,268
Realized loss on sale of investments 34,061 0 0
Restricted common stock received for manufacturing
and distribution rights (75,000) (168,000) 0
Reserve for inventories 100,000 0 0
(Increase) decrease in-
Accounts receivable (169,333) (26,058) 4,206
Inventories 72,550 69,642 (67,759)
Other current assets (16,469) 18,704 41,397
Increase (decrease) in-
Accounts payable and accrued expenses 803,552 424,763 355,737
Accrued legal judgment 0 805,964 0
Deferred revenue 0 (100,000) 23,334
---------- ---------- ----------
Net cash used in operating activities (171,473) (1,045,864) (317,784)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES --
Proceeds from the sale of investments 49,939 0 0
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 0 1,131,000 107,480
Restricted cash 225,600 (225,600) 0
Principal repayments of notes payable (95,247) 0 0
---------- ---------- ----------
Net cash provided by financing activities 130,353 905,400 107,480
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 8,819 (140,464) (210,304)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 42,562 183,026 393,330
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $51,381 $42,562 $183,026
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $145,660 $0 $0
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<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. For the year ended December 31, 1997, two of the Company's
product lines encompass over 76% of net product sales. For the year ended
December 31, 1996, four of the Company's product lines encompassed over 57%
of net product sales. In addition, one of the Company's customers accounted
for 84% of total accounts receivable as of December 31, 1997 and 43% of
total revenues for the year then ended. As of December 31, 1996, one of the
Company's customers accounted for 100% of total accounts receivable and two
of the Company's customers accounted for 57% of total revenues for the year
then ended.
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 1997, 1996 and 1995 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.
<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.
Cash and Cash Equivalents-
Cash and cash equivalents include an investment in a mutual fund which is
included in cash and cash equivalents for purposes of reporting cash
flows.
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-
te97 1996
---------- ----------
Raw materials $108,673 $109,181
Work in process 29,610 0
Finished goods 197,463 299,115
---------- ----------
335,746 408,296
Less- reserve for obsolete inventory (100,000) 0
---------- ----------
$235,746 $408,296
========== ==========
Investments-
The Company's investments, which represent restricted common stock that
the Company received for manufacturing and distribution rights, are
considered available for sale investments. Accordingly, these investments
are carried at fair market value in the accompanying consolidated balance
sheets, with the difference between cost and market value recorded as a
component of stockholders' deficit. Realized gains or losses on sales of
investments, as determined on a specific identification basis, are
included in the consolidated statements of operations.
The total unrealized loss on investments as of December 31, 1997 is
$53,531. There were no unrealized gains or losses as of December 31,
1996.
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.
<PAGE>
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.
Stock-Based Compensation-
The Company accounts for stock-based compensation using the intrinsic
value method.
LOSS PER SHARE-
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," (SFAS 128) which
requires presentation in the consolidated statements of operations of
both basic and diluted loss per share. Basic loss per share is computed
by dividing the net loss for the period, after consideration of dividends
related to preferred stock where applicable, by the weighted average
number of common shares outstanding. Net loss available to common
stockholders represents the net loss less preferred stock dividends
($137,446) for the years ended December 31, 1997, 1996 and 1995. Basic
loss per common share as calculated in accordance with SFAS 128 does not
differ from loss per share reported in prior periods. None of the common
shares issuable under either the Company's stock option plan, or the
conversion of the preferred stock, bonds or outstanding warrants were
included in the computation of loss per common share assuming dilution
because their inclusion would have been antidilutive. Thus, there is no
difference between the weighted average common shares outstanding to
weighted average common shares outstanding assuming dilution.
Reclassifications-
Certain reclassifications have been made to the prior years financial
statements to conform with the current year presentation.
(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, 1997. The Company also has a
working capital deficit, a net capital deficit and was not in compliance
with certain loan provisions at December 31, 1997.
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 1998. 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
<PAGE>
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 1998, 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, 1997 and 1996, 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 stockholder of the Company. The
Company received $700,000 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).
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. As of January 1, 1998, this
agreement was changed whereby SKY would receive $2,000 per month for
license maintenance fees. This agreement will terminate at the later of:
(i) the expiration of the last to expire of the patents encompassed within
the technology or (ii) January 1, 2013.
A portion of the Company's convertible bonds are held by First Taiwan, the
majority stockholder of the Company. These bonds, bear interest at 7%
payable upon demand and are secured by substantially all the assets of the
Company (see Note 7).
(5) PROPERTY AND EQUIPMENT:
At December 31, property and equipment is as follows-
1997 1996
--------- ---------
Machinery and equipment $223,756 $223,756
Office equipment and furniture and fixtures 25,249 25,249
Leasehold improvements 589,564 589,564
--------- ---------
838,569 838,569
Less- Accumulated depreciation (810,279) (723,391)
--------- ---------
$28,290 $115,178
========= =========
Depreciation and amortization of property and equipment was $86,888,
$90,996 and $92,443 in 1997, 1996 and 1995, respectively.
<PAGE>
(6) ACCOUNTS PAYABLE AND
ACCRUED EXPENSES:
At December 31, accounts payable and accrued expenses consists of-
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C> <C>
Accounts payable $1,293,505 $866,227
Accrued compensation 426,185 385,940
Accrued interest payable 891,873 678,725
Accrued preferred dividends 529,825 392,379
Refundable option deposit 99,000 0
Other accrued expenses 100,881 77,000
--------- ---------
$3,341,269 $2,400,271
========= =========
(7) NOTES PAYABLE:
Notes payable consists of the following as of December 31-
1997 1996
---------- ---------
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
Convertible bonds, bearing interest at
7% payable upon on demand, secured bysubstantially all the
assets of the Company (b). 1,035,753 1,131,000
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
---------- ----------
$4,067,596 $4,162,843
========== ==========
</TABLE>
(a) During 1997, 1996 and 1995, 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.
<PAGE>
(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. The
bonds were originally due June 1, 1997, however, the due date was
extended until December 31, 1997. The Company is currently
negotiating to extend the due date of these bonds.
(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, 1997, the Company had net operating loss
carryforwards of approximately $17,200,000 for Federal income tax
purposes which expire through 2012. Based on its operating history, the
Company has provided a valuation allowance of approximately $5,900,000 as
a full valuation allowance against the deferred tax asset as of December
31, 1997 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 use of net
operating loss carryforwards. The maximum amount of net operating losses
incurred prior to the change in ownership (approximately $5,000,000)
which can be utilized in any given year is approximately $1,300,000.
(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 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. The Company earned approximately $200,000
of royalties under this agreement for the year ended December 31, 1997.
No royalties have been earned prior to 1997.
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
this license agreement.
<PAGE>
In 1991, the Company entered into a Development Services and Licensing
Agreement with a medical products company. Under this agreement and
subsequent extensions, the medical products company has paid the Company
$100,000, $100,000 and $100,000 in fees for the years 1997, 1996 and
1995, 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 stockholder 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, 1997.
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. This agreement was terminated
during 1997.
(10) COMMITMENTS AND CONTINGENCIES:
The Company leases certain office and manufacturing facilities under
arrangements accounted for as operating leases. Rent expense aggregated
$519,000, $538,000 and $538,000 for the years ended December 31, 1997,
1996 and 1995, respectively. These 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, 1997 are as follows-
For the Years Ending December 31-
1998 $11,004
1999 10,795
2000 8,496
2001 8,496
2002 7,080
The office and manufacturing facilities lease expired during 1997. The
Company is currently in the process of negotiating a new lease.
<PAGE>
(11) STOCKHOLDERS' DEFICIT:
During 1994, the Company issued $1,500,000 of 9% preferred stock to
Research Corporation Technologies, Inc. ("RCT"), which has 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 is reflected as a
subscription receivable at December 31, 1997 and 1996. 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-
<TABLE>
<CAPTION>
Shares Weighted
Under Average
Option Exercise Price
--------- --------------
<S> <C> <C>
Outstanding December 31, 1994 346,278 $3.83
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
Expired (52,748) $2.85
---------
Outstanding December 31, 1997 (exercisable 300,421 shares) 366,171 $3.15
=========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997-
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise Prices at 12/31/97 Remaining Life Exercise Price at 12/31/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$0.75 to $1.99 92,000 9 $0.77 27,500 $0.80
$2 to $3.99 216,171 3 $3.37 216,171 $3.37
$4 to $5.99 53,000 2 $5.69 52,250 $5.71
$6 to $12 5,000 4 $10.40 4,500 $10.67
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation ("SFAS 123"), 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. There were no grants made
during 1997 and 1995.
<PAGE>
As permitted by SFAS 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-
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net loss as reported ($1,039,162) ($2,193,315) ($800,967)
Estimated fair value of the year's option grants, 0 35,640 0
net of tax ------------ ------------ ----------
Net loss adjusted ($1,039,162) ($2,228,955) ($800,967)
============ ============ ==========
Adjusted net loss per share ($.21) ($.41) ($.16)
============ ============ ==========
</TABLE>
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 183,421 common shares. The warrants are exercisable at varying
prices ranging from $3.00 to $9.59 per share, subject to certain
adjustments, as defined, and expire through January 19, 2000.
(12) LITIGATION:
The Company's former president filed a claim against the Company, the
Company's Directors and Kingston Technologies Limited Partnership (a
stockholder). 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, 1997
and 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 as a result of 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 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.
<PAGE>
TABLE OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
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.
<PAGE>
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").
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.
<PAGE>
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.
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.
<PAGE>
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# Master Terms and Conditions For Purchase Orders dated September 19,
1995, by and between Home Shopping Club, Inc. and HYMEDIX
International, Inc.
10.43## 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).
10.44## Convertible Bond Purchase Agreement, effective March 5, 1996, by and
among the Company, HYMEDIX International, and Su Chen Huang.
10.45### Security Agreement dated as of August 8, 1996, by and among the
Company and the Bondholder Representative (as defined therein).
10.46# License Agreement dated November 15, 1995, by and between ProCyte
Corporation and HYMEDIX International, Inc.
21* Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
- -----------------------
* 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule
</LEGEND>
<CIK> 0000880634
<NAME> HYMEDIX INC
<MULTIPLIER> 1
<CURRENCY> 4
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 51,381
<SECURITIES> 0
<RECEIVABLES> 226,649
<ALLOWANCES> 0
<INVENTORY> 235,746
<CURRENT-ASSETS> 568,768
<PP&E> 838,569
<DEPRECIATION> 810,279
<TOTAL-ASSETS> 769,044
<CURRENT-LIABILITIES> 8,274,051
<BONDS> 1,035,753
0
30,572
<COMMON> 5,713
<OTHER-SE> (7,514,292)
<TOTAL-LIABILITY-AND-EQUITY> 796,044
<SALES> 919,441
<TOTAL-REVENUES> 1,783,331
<CGS> 606,004
<TOTAL-COSTS> 2,447,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 341,400
<INCOME-PRETAX> (1,039,162)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,039,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,039,162)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
