HYMEDIX INC, 10KSB40, 1999-03-31

HYMEDIX INC
10KSB40, 1999-03-31
ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES

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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, 1998 .

|_| 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.
(Exact name of registrant, as specified in its charter)

Delaware 22-3279252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2245 Route 130, Dayton, New Jersey 08810
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (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 __

Page 1 of 24

<PAGE>

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|

State registrant's revenues for its most recent fiscal year: $1,651,665

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,
1999 as reported by The OTC Bulletin Board, was approximately $75,213. 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, 1999 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, 1999
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.

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<PAGE>

HYMEDIX, INC.

INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I

Item 1. Description of Business 4
Item 2. Description of Property 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8

PART II

Item 5. Market for Common Equity and Related Stockholder Matters 8

Item 6. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations

Item 7. Financial Statements 16

Item 8. Changes in and Disagreements with Accountants on 16
Accounting and Financial Disclosure

PART III

Item 9. Directors, Executive Officers, Promoters and Control 17
Persons; Compliance with Section 16(a) of the
Exchange Act

Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners 20
and Management

Item 12. Certain Relationships and Related Transactions 20
Item 13. Exhibits and Reports on Form 8-K 21

SIGNATURES 24

</TABLE>

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<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 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 its HYMEDIX International
subsidiary, 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 has also introduced 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
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

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<PAGE>

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 an eighth
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 three R&D agreements for
indwelling products, one covering embolic materials, another covering spinal
disc replacements and a third relating to heart valves.

License Agreements

The Company has an Option and License Agreement for the intro-occular
Memory Lens(TM) with the Mentor Corporation. The Memory Lens has been on the
market in Europe since 1995, and at the beginning of 1998 gained FDA approval
for sales in the U.S. market. The Company is realizing royalty payments from the
sales of the Memory lens world-wide.

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"). The Company signed a new Marketing and Distribution
Agreement with LIPO Chemicals, Inc. on December 22, 1998, pursuant to which LIPO
will retain its exclusive distribution rights worldwide, and the rights to
manufacture two grade of HYPAN TN polymers, while the Company will keep the
rights to manufacture all of the other grades.

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

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<PAGE>

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 fourteen (14) people, eight (8) 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)
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 rental payments of approximately $354,000 (excluding
utilities). The lease expires on June 30, 2003. At this facility, the Company
can manufacture approximately 5 tons of HYPAN(R) a year (enough annual

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<PAGE>

capacity for the foreseeable future). The facility also provides all of the
Company's office and laboratory space requirements.

Item 3. Legal Proceedings.

In September, 1993, HYMEDIX International's former President filed a
Complaint against HYMEDIX International in the Superior Court of New Jersey, Law
Division, Middlesex County. The Complaint named HYMEDIX, 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, (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, judgment was rendered against HYMEDIX, HYMEDIX International and KTLP in
the amount of $805,964 plus interest. In April 1998, $438,464 of the judgment
was reversed on appeal. The $367,500 claim for deferred compensation was
affirmed by the Appellate Court. Accordingly, the Company reversed $438,464 of
the accrued legal judgment plus related accrued interest in 1998. The Company
has accrued the affirmed judgment plus interest in the accompanying consolidated
financial statements as of December 31, 1998.

An individual filed a complaint against the Company and certain First
Taiwan entities, alleging that the Company owed him eight percent of all monies
invested in the Company as a result of his contacts. The complaint alleged that
the Company owed him approximately $5,000,000 and warrants to purchase the
Company's common stock. In December 1998, a settlement agreement was signed by
the individual, the Company and First Taiwan and its affiliates. The Company
agreed to pay the individual $200,000 plus interest over a thirty-six month
period commencing January 1, 2000. This amount is accrued for in the
accompanying consolidated financial statements as of December 31, 1998. In
addition, the Company agreed to issue warrants to purchase the equivalent of
seven percent of the issued and outstanding common stock of the Company as of
November 30, 1998, on a fully diluted basis, giving effect to the issuance of
common stock underlying the warrants as though all of these warrants were fully
exercised. The warrants may be exercised by the individual, in whole or in part
or parts at any time during a ten year period commencing January 23, 1999, and
have an exercise price of $.01 per share of common stock underlying the
warrants. The warrants provide for an anti-dilution adjustment in the event of
any change in the capitalization of the Company which would otherwise have a
dilutive effect on the warrants.

The settlement agreement also provides the Company the option to
purchase all or part of the warrants and the common stock issued to the
individual thereunder if the market capitalization of the Company exceeds
$15,000,000. If the Company or the other parties to the litigation default on
any of the terms of the settlement agreement, the individual is entitled to
enter a judgment against the Company and the other parties to the litigation in
the amount of $2,000,000, provided that the individual gives written notice of
the default and the default is not cured within sixty days.

Pursuant to the settlement agreement, the Company issued the individual
warrants to

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<PAGE>

purchase 430,048 shares of the Company's common stock on January 22, 1999.

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, 1998 through December 31, 1998.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

The Predecessor's Common Stock had been listed and traded on the Nasdaq
National Market since January 30, 1992 upon the closing of the Predecessor's
initial public offering. The Predecessor's common stock was delisted from
trading on the Nasdaq National Market on October 21, 1993, due to its failure to
meet the Nasdaq National Market listing maintenance requirements. After the
Acquisition Merger, the common stock was accepted for listing 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 necessary to
maintain its listing on the Nasdaq SmallCap Market. Consequently, Nasdaq
delisted the 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, 1998.

<TABLE>
<CAPTION>
Common Stock
------------
Period High Low
------ ---- ---
<S> <C> <C>
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

1998:
-----

1st quarter $0.04 $0.02

2nd quarter 0.04 0.02

3rd quarter 0.04 0.02

4th quarter 0.04 0.02

</TABLE>

The stock price ranges represent the high and low bid quotations as
listed by The OTC

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<PAGE>

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, 1999, 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.

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 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 April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP requires all costs incurred as start-up costs or
organization costs be expensed as incurred. Adoption of this SOP is required for
fiscal years beginning after December 15, 1998. The Company does not believe
that the new

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<PAGE>

standard will have a material impact on the Company's consolidated financial
statements.

In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1. "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP requires that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of this SOP is required for fiscal years beginning after
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.

Results of Operations

Revenues

The Company's total revenues for the fiscal year ended December 31,
1998 were $1,651,665, versus $1,783,331 for the fiscal year ended 1997, a
decrease of 7.4%. The decreased revenues for fiscal year 1998 from the previous
year primarily resulted from (1) a decrease of $332,808 in license, royalty and
distribution fees; (2) a decrease of $17,500 in research and development fees;
and (3) a decrease of $46,150 in domestic and international sales of skin care
products. The decrease in revenues were partially offset by an increase of
$264,792 in net sales of hydrogels to LIPO Chemicals, Inc. The decrease in
license, royalty and distribution fees is primarily attributable to the fact
that $275,000 in milestone payments and a $77,757 royalty payment were received
in 1997 under a licensing agreement which was terminated at the end of 1997,
offset by a $19,949 increase in other royalties.

Costs and Expenses

Cost of sales for the fiscal year ended December 31, 1998 was $388,630
versus $606,004 for fiscal year 1997, a decrease of 35.9%. The 35.9% decrease in
cost of sales was attributable to the product mix, lower costs due to revisions
in the standard costs of certain products, and the $100,000 inventory reserve
established in 1997 for aged BIONIQ products. Selling, general and
administrative expenses decreased by 8.6% to $1,191,316 for the year ended
December 31, 1998 from the previous fiscal year level of $1,303,440. The
decrease was principally due to a reduction in premises and staff expenses.
Research and development costs for fiscal year were $440,835 as compared to
$538,540 for fiscal year 1997, a decrease of 18.1%, resulting from the
termination of the license agreement with S.K.Y. Polymers, Inc.

Legal Judgment and Settlement

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<PAGE>

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, judgment was rendered against HYMEDIX, HYMEDIX
International and KTLP in the amount of $805,964 plus interest. In April 1998,
$438,464 of the judgment was reversed on appeal. The $367,500 claim for deferred
compensation was affirmed by the Appellate Court. Accordingly, the Company
reversed $438,464 of the accrued legal judgment plus related accrued interest in
1998. The Company has accrued the affirmed judgment plus interest in the
accompanying consolidated financial statements as of December 31, 1998.

Pursuant to the settlement agreement, the Company issued the individual
warrants to purchase 430,048 shares of the Company's common stock on January 22,
1999.

Other (Expense) Income

Total other expenses, net decreased by 57.1% to $160,579 for the fiscal
year ended December 31, 1998 from $374,509 for the 1997 fiscal year. The
decrease was mainly attributable to the reversal of interest accrued on a legal
judgment reversed during the first quarter of 1998, a decrease in debt principal
outstanding, the collection of a receivable previously written off by the
Company in a prior year, offset by the realized loss on sales of investments
resulting from the decrease in value of shares of a certain common stock held by
the Company.

As a result of the decreased revenues and costs and expenses described
above, the Company incurred a lower net loss of $295,531 for fiscal year ended
December 31, 1998 versus $1,039,162 for fiscal year ended 1997.

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Liquidity, Capital Resources and Changes in Financial Condition

The Company had $25,336 in cash and cash equivalents on hand as of
December 31, 1998 versus $51,381 on December 31, 1997. The working capital
deficit of $7,779,525 on December 31, 1998 represents an increase of $74,242, or
1%, from the previous year-end level of $7,705,283. The increase in working
capital deficit was primarily attributable to the net loss incurred in 1998.

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 March
31, 1998. 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 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 March 31, 1998. 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, 1998, 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.

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<PAGE>

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.

Management believes that the Company will have adequate resources to
finance its operations in 1999. On April 29, 1998 the appellate court reversed
$438,464 of the legal judgment against the Company but affirmed the remaining
$367,500 against the Company. If the Plaintiff moves to collect on the judgment,
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 1999, there is no assurance that
other sources of funds will be available to the Company.

Year 2000 Compliance

The Company's current information and computer systems will be affected
by the Year 2000 issue ("Y2K"), which refers to the inability of computerized
systems to process dates beyond December 31, 1999. The Company is formulating a
Y2K Plan to address the Company's Y2K issues. Based on its current assessments
from the Y2K Plan, the Company does not expect at present that it will
experience a disruption of its operations as a result of the change to the new
millennium.

Based upon a preliminary review of systems, the Company estimates that
the total cost of achieving Y2K readiness for the Company's internal systems and
equipment will be less than $10,000. Since no significant issues have arisen
based on the Company's preliminary assessments, the Company has not yet
developed a contingency plan to address any material Y2K issues. A contingency
plan, if required, will be developed immediately upon completion of the
Company's assessment.

The Company is assessing the state of readiness of its major suppliers
and customers through written inquiry and evaluation of responses. The Company
intends to follow up with those suppliers or customers that indicate material
problems. Alternate suppliers or service providers will be identified for those
whose responses indicate an unusually high risk of a Y2K problem. The Company's
evaluation of business processes that are not related to information systems,
and the development of contingency plans where such evaluation identifies a high
risk of a Y2K problem should be completed by the third quarter of 1999. The main
risks associated with the Y2K problem are the uncertainties as to whether the
Company's suppliers can continue to perform their services

Page 13 of 24

<PAGE>

for the Company uninterrupted by the Y2K event, and whether the Company's
non-retail customers can continue to operate their business uninterrupted by the
Y2K event. Although the state of readiness of the Company's suppliers and
customers will be monitored and evaluated, and contingency plans will be
developed, no assurances can be given as to the eventual state of readiness of
the Company's suppliers and/or customers. Nor can any assurances be given as to
eventual effectiveness of the Company's contingency plans.

While the Company continues to believe that the Y2K matters discussed
above will not have a materially adverse impact on the Company's business,
financial condition or results of operations, it is not possible to determine
with certainty whether or to what extent the Company may be affected. The
Company has not developed a reasonably likely worst case scenario with respect
to Y2K problems the Company may encounter.

The preceding discussion contains forward-looking information within
the meaning of Section 21E of the Exchange Act. This disclosure is also subject
to protection under the Year 2000 Information and Readiness Disclosure Act of
1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness
Disclosure" as defined therein. Actual results may differ materially from such
projected information due to changes in the underlying assumptions.

Page 14 of 24

<PAGE>

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 expected 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 $295,531 for the fiscal year ended
December 31, 1998 and had an accumulated deficit at December 31, 1998 of
$7,853,153. The Company has experienced ongoing losses from operations. The
Company has a limited cash balance and is in technical 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 1999,
there can be no assurance that other sources of funds will be available to the
Company.

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.

Page 15 of 24

<PAGE>

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
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 Statement beginning on page F-1.

Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

Page 16 of 24

<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, 1999.
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. 57 Vice Chairman (non-executive) and 1994
Director

Charles K. Kliment, Ph.D. 66 President and Chief Executive Officer 1994

William G. Gridley, jr.(3) 70 Chairman, Chief Financial Officer, 1994
Secretary, Treasurer and Director

George P. Stoy 51 Vice President of Engineering and Director 1994

Sheng-Hsiung Hsu 56 Director 1994

Dr. Hsia-Fu Chao(1)(3) 64 Director 1994

Shu-Jean Kuo Chou 61 Director 1994

Michael K. Hsu(1)(2)(3) 41 Director 1994

John E. Bagalay, Jr.(1)(2)(3) 65 Director 1994
Ph.D., J.D.

Edward H. Jennings, Ph.D.(1)(2) 63 Director 1994

</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 17 of 24

<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,
Treasurer 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 18 of 24

<PAGE>

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 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

Page 19 of 24

<PAGE>

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 is 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 1998 all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with.

Item 10. Executive Compensation.

Information concerning Executive Compensation for the Company's last
fiscal year is incorporated herein by reference to the heading "Executive
Compensation" in the Company's Proxy Statement for its 1999 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, 1999.

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 1999 Special Meeting in
Lieu of Annual Meeting of Stockholders to be filed with the Commission on or
before April 30, 1999.

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 1999 Special
Meeting in Lieu of Annual Meeting of Stockholders to be filed with the
Commission on or before April 30, 1999.

Page 20 of 24

<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

(a) Exhibits.

Exhibit No. Description

2.1 Amended and Restated Agreement of Merger and Plan of
Reorganization, dated as of January 24, 1994 by and among
Servtex International Inc., Kingston Technologies, Inc., KTI
Acquisition Corp. and certain affiliates of Servtex
International Inc., filed pursuant to Rule 14a-6 as Exhibit F
to Proxy Statement of the Registrant (then Servtex
International Inc.), dated February 12, 1994, and incorporated
by reference herein.
2.2 Agreement of Merger, dated as of February 23, 1994 by and
between Servtex International Inc. and HYMEDIX, Inc., filed
pursuant to Rule 14a-6 as Exhibit A to Proxy Statement of the
Registrant (then Servtex International Inc.), dated February
12, 1994, and incorporated by reference herein.
3.1 Certificate of Incorporation, filed pursuant to Rule
14a-6 as Exhibit B to Proxy Statement of the Registrant
(then Servtex International Inc.), dated February 12, 1994,
and incorporated by reference herein.
3.2 Certificate of Designation, Preference and Rights of Series A
Redeemable Preferred Stock, filed as Exhibit (2) to Form 8-K,
dated February 23, 1994, of the Registrant and incorporated
by reference herein.
3.3 By-Laws of the Registrant, filed pursuant to Rule 14a-6 as
Exhibit C to Proxy Statement of the Registrant (then Servtex
International Inc.), dated February 12, 1994, and incorporated
by reference herein.
4.1* Specimen Certificate of the Registrant's Common Stock, $.001
par value.
10.1* Form of the Underwriter's Warrant issued to First Flushing
Securities, Inc. as a broker's fee for negotiating the merger
of KTI Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of the Registrant with and into HYMEDIX
International.
10.2** Option and License Agreement dated November 7, 1986 by and
between HYMEDIX International and ORC, as amended by Amendment
Number 1 to Option and License Agreement dated January 9, 1987.
10.3* Promissory Note, dated January 9, 1987, made by HYMEDIX
International to the order of ORC, for $500,000.
10.4* Indenture of Lease dated July 7, 1987 by and between Fresh
Ponds Associates and HYMEDIX International, as amended by First
Amendment to Lease, dated September 13, 1993, Second Amendment
to Lease, dated September 15, 1993, and Third Amendment to
Lease, dated January 15, 1994; and the related Installment
Promissory Note, dated October 1, 1993, made by HYMEDIX
International to the order of Fresh Ponds Associates for
$404,300.90.
10.5* Promissory Note, dated September 29, 1987, made by HYMEDIX
International to the order of ORC, for $1,000,000.
10.6** Agreement, dated December 22, 1988, by and between Kingston
Hydrogels Limited Partnership and LIPO Chemicals, Inc., as
amended by Amendment No. 1, effective June 1, 1990 and as
further amended by Amendment Agreement, dated June 14, 1990.
10.7* Loan and Security Agreement, dated October 30, 1989, by and
between HYMEDIX International and Pilkington Visioncare,
Inc. ("PVI").
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.

Page 21 of 24

<PAGE>

10.15* Form of Amended and Restated Common Stock Purchase Warrant,
dated February 23, 1994, made by the Registrant to the Trustees
of Boston University.
10.16* Right to Purchase Agreement, dated June 30, 1992, between
HYMEDIX International and Lipo Chemicals, Inc.
10.17* License Agreement, dated June 30, 1992, between HYMEDIX
International and Lipo Chemicals, Inc.
10.18* Form of Amended and Restated Common Stock Purchase Warrant,
dated February 23, 1994, made by the Registrant to Synreal
Corporation N.V.
10.19* Form of Amended and Restated Common Stock Purchase Warrant,
dated February 23, 1994, made by the Registrant to Azreal
Corporation N.V.
10.20* Form of Amended and Restated Common Stock Purchase Warrant,
dated February 23, 1994, made by the Registrant to
Dr. Hsia Fu Chao.
10.21 Amended and Restated 1991 Incentive and Non-Qualified Stock
Option Plan, filed pursuant to Rule 14a-6 as Exhibit E to Proxy
Statement of the Registrant (then Servtex International Inc.),
dated February 12, 1994, and incorporated by reference herein.
10.22* Employment Agreement, dated April 3, 1992, by and between
HYMEDIX International and Alan L. Hershey, as amended by
Agreement, dated January 4, 1993.
10.23* Form of Amended and Restated Common Stock Purchase Warrant,
dated February 23, 1994, made by the Registrant to First Taiwan
Investment Holding Inc.
10.24* Registration Rights Agreement, dated May 28, 1993, by and
between HYMEDIX International and the Trustees of Boston
University.
10.25* Form of Amended and Restated Common Stock Purchase Warrant,
dated February 23, 1994, made by the Registrant to the Trustees
of Boston University.
10.26* Form of Amended and Restated Common Stock Purchase Warrant,
dated February 23, 1994, made by the Registrant to First Taiwan
Investment and Development Inc.
10.27* Amended and Restated Registration Rights Agreement, dated
February 23, 1994, by and among RCT, First Taiwan Investment
Holding Inc. and First Taiwan Venture Capital Inc..
10.28** Marketing and Distribution Agreement, dated July 30, 1993, by
and between HYMEDIX International and Brady Medical Products,
Co.
10.29* Evaluation Agreement, dated December 1, 1993, by and between
HYMEDIX International and Alcon Laboratories, Inc.
10.30* Capital Contribution Agreement, dated February 23, 1994, by and
between the Registrant and RCT.
10.31* Demand Registration Rights Agreement, dated February 23, 1994,
by and between the Registrant RCT.
10.32* Option to Wall Street Group.
10.33* Redeemable Common Stock Purchase Warrant, dated February 23,
1994, made by the Registrant to First Taiwan Investment Holding
Inc.
10.34* Form of Warrant issued to Selling Stockholders (Domestic) in
the private placements which closed February, 1994.
10.35* Form of Warrant issued to Selling Stockholders (International)
in the private placements which closed February, 1994.
10.36** Development Services and Licensing Agreement, dated
December 20, 1991, between HYMEDIX International and
W. L. Gore and Associates, Inc.
10.37* Joint Venture Agreement, dated May 31, 1994, by and among the
Registrant, Beijing General Pharmaceutical Corp., First Taiwan
Investment Banking Group and Technological Innovation
Corporation of China.
10.38*** Agreement, dated November 29, 1994, by and between HYMEDIX
International and Bausch & Lomb.
10.39*** Director Stock Option Plan, effective as of May 31, 1994.
10.40**** Development Services and Licensing Agreement, dated
December 20, 1991, between HYMEDIX International and
W. L. Gore and Associates, Inc.
10.41***** Distribution, Kno-How Transfer, Licensing and Manufacturing
and Supply Agreement dated August 21, 1995, by and between
HYMEDIX International, Inc. and Europa Magnetics Corporation.
10.42# Master Terms and Conditions For Purchase Orders dated
September 19, 1995, by and between Home Shopping Club Inc.
and HYMEDIX International, Inc.

Page 22 of 24

<PAGE>

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).
21* Subsidiaries of the Registrant.
27 Financial Data Schedule.

- - -----------------------
* Previously filed as an Exhibit to the Registrant's Form SB-2
Registration Statement (No. 33-78638)
originally filed on May 5, 1994 and incorporated herein by reference.
** Previously filed (and Confidential Treatment requested pursuant to
Rule 406 under the Securities Act) as an Exhibit to the Registrant's
Form SB-2 Registration Statement (No. 33-78638) originally filed on
May 5, 1994 and incorporated herein by reference.
*** Previously filed as an Exhibit to the Registrant's Form 10-KSB
originally filed April 17, 1995.
**** Previously filed (and Confidential Treatment requested pursuant to
Rule 24-b2 under the Securities Exchange Act of 1934) as an Exhibit
to the Registrant's Amendment No. 1 to Form 10-KSB/A originally
filed April 30, 1995.
***** Previously filed as an Exhibit to the Registrant's Form 10-QSB
originally filed November 15, 1995.
# Previously filed as an Exhibit to the Registrant's Form 10-QSB
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 15, 1996.

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1998.

Page 23 of 24

<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.
By: /s/ Charles K. Kliment
---------------------------
Charles K. Kliment, Ph.D.
President (Principal Executive Officer)
Date: March 31, 1999

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 March 31 , 1999
------------------------------- Officer)
Charles K. Kliment

By: /s/ William G. Gridley, Jr. Chairman, Chief Financial March 31 , 1999
--------------------------- Officer (Secretary, Treasurer,
William G. Gridley, Jr. Principal Financial Officer
and Principal Accounting
Officer); Director

By: /s/ Vladimir A. Stoy Director March 31 , 1999
----------------------
Vladimir A. Stoy

By: /s/ George P. Stoy Director March 31 , 1999
----------------------
George P. Stoy

By: /s/ John E. Bagalay, Jr. Director March 31 , 1999
-------------------------------
John E. Bagalay, Jr.

By: /s/ Edward H. Jennings Director March 31 , 1999
-------------------------------
Edward H. Jennings

By: /s/ Sheng-Hsiung Hsu Director March 31 , 1999
----------------------
Sheng-Hsiung Hsu

By: /s/ Dr. Hsia-Fu Chao Director March 31 , 1999
-----------------------
Dr. Hsia-Fu Chao

By: /s/ Shu-Jean Kuo Chou Director March 31 , 1999
------------------------------
Shu-Jean Kuo Chou

By: /s/ Michael K. Hsu Director March 31 , 1999
----------------------
Michael K. Hsu
</TABLE>

Page 24 of 24
<PAGE>

HYMEDIX, Inc. and Subsidiary

Consolidated Financial Statements As Of December 31, 1998 And 1997

And For Each Of The Three Years In The Period Ended December 31, 1998

Together With

Report Of Independent Public Accountants

<PAGE>

HYMEDIX, INC. AND SUBSIDIARY

INDEX

<TABLE>

<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2

FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3

Consolidated Statements of Operations for the Years Ended December
31, 1998, 1997 and 1996 F-4

Consolidated Statements of Changes in Stockholders' Deficit for the
Years Ended December 31, 1998, 1997 and 1996 F-5

Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996 F-6

Notes to Consolidated Financial Statements F-7
</TABLE>

F-1

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To HYMEDIX, Inc.:

We have audited the accompanying consolidated balance sheets of HYMEDIX, Inc. (a
Delaware corporation) and subsidiary (the "Company") as of December 31, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 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,
1998. 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 17, 1999

F-2
<PAGE>

HYMEDIX, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>

ASSETS 1998 1997
------ ----------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $25,336 $51,381
Accounts receivable 217 226,649
Inventories, net (Note 2) 162,546 235,746
Other current assets 103,454 54,992
----------------- -----------------

Total current assets 291,553 568,768

INVESTMENTS (Notes 2 and 9) 0 105,469

PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $834,692 and $810,279 in
1998 and 1997, respectively (Notes 2 and 5) 5,255 28,290

PATENTS, net of accumulated amortization of $378,510 and
$347,070 in 1998 and 1997, respectively (Note 2) 62,077 93,517

SECURITY DEPOSIT 59,040 0
----------------- -----------------

Total assets $417,925 $796,044
================= =================

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Notes payable (Notes 4 and 7) $4,046,979 $4,067,596
Accounts payable and accrued expenses (Note 6) 3,656,599 3,400,491
Accrued legal judgment (Note 12) 367,500 805,964
----------------- -----------------

Total current liabilities 8,071,078 8,274,051
----------------- -----------------

ACCRUED LEGAL SETTLEMENT (Note 12) 200,000 0
----------------- -----------------

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
1998 and 1997, respectively 30,570 30,570
Preferred Stock, $.01 par value, 3,000 shares authorized, 150
shares issued and outstanding in 1998 and 1997, respectively 2 2
Common stock, $.001 par value, 20,000,000 shares authorized,
5,713,500 shares issued and outstanding in 1998 and 1997,
respectively 5,713 5,713
Additional paid-in capital 15,646,474 15,642,174
Accumulated other comprehensive loss 0 (53,531)
Accumulated deficit (22,035,912) (21,602,935)
Subscription receivable (1,500,000) (1,500,000)
----------------- -----------------

Total stockholders' deficit (7,853,153) (7,478,007)
----------------- -----------------

Total liabilities and stockholders' deficit $417,925 $796,044
================= =================
</TABLE>

The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.

F-3
<PAGE>

HYMEDIX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

1998 1997 1996
------------------ ----------------- -----------------

<S> <C> <C> <C>
REVENUES (Note 2):
Net product sales $1,138,083 $919,441 $843,798
License, royalty and distribution fees
(Notes 4 and 9) 256,082 588,890 868,000
Research and development contracts (Note 9) 257,500 275,000 275,000
------------------ ----------------- -----------------

Total revenues 1,651,665 1,783,331 1,986,798
------------------ ----------------- -----------------

COSTS AND EXPENSES (Note 2):
Cost of sales 388,630 606,004 406,549
Selling, general and administrative 1,191,316 1,303,440 2,000,863
Research and development 440,835 538,540 650,907
Legal judgment and settlement (Note 12) (234,164) 0 805,964
------------------ ----------------- -----------------

Total costs and expenses 1,786,617 2,447,984 3,864,283
------------------ ----------------- -----------------

Loss from operations (134,952) (664,653) (1,877,485)
------------------ ----------------- -----------------

OTHER (EXPENSE) INCOME:
Realized loss on sale of investments (Note 2) (6,561) (34,061) 0
Interest expense (Note 12) (251,091) (341,400) (321,163)
Other income (Note 4) 97,073 952 5,333
------------------ ----------------- -----------------

Total other expense, net (160,579) (374,509) (315,830)
------------------ ----------------- -----------------

Net loss ($295,531) ($1,039,162) ($2,193,315)
================== ================= =================

BASIC LOSS PER COMMON SHARE (Note 2) ($.08) ($.21) ($.41)
================== ================= =================

DILUTED LOSS PER COMMON SHARE (Note 2) ($.08) ($.21) ($.41)
================== ================= =================

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.

F-4

<PAGE>

HYMEDIX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>

8% Senior Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- -------------------- -------------------
Comprehensive Number Number of Number of
Loss of Shares Amount Shares Amount Shares Amount
-------------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 10,190 $30,570 150 $2 5,713,500 $5,713

Net loss -- 1996 ($2,193,315) 0 0 0 0 0 0
Adjustment of stock offering costs 0 0 0 0 0 0 0
Preferred stock dividends 0 0 0 0 0 0 0
------------- ------ ------- --- -- --------- ------

Comprehensive loss ($2,193,315)
===========

BALANCE, December 31, 1996 10,190 30,570 150 2 5,713,500 5,713

Net loss -- 1997 ($1,039,162) 0 0 0 0 0 0
Preferred stock dividends 0 0 0 0 0 0 0
Unrealized loss from available for sale
Investments (53,531) 0 0 0 0 0 0
----------- ------ ------- --- -- --------- ------

Comprehensive loss ($1,092,693)
===========

BALANCE, December 31, 1997 10,190 30,570 150 2 5,713,500 5,713

Net loss -- 1998 ($295,531) 0 0 0 0 0 0
Preferred stock dividends 0 0 0 0 0 0 0
Unrealized gain from available for sale
Investments 53,531 0 0 0 0 0 0
Issuance of warrants 0 0 0 0 0 0 0
----------- ------ ------- --- -- --------- ------

Comprehensive loss ($242,000)
===========

BALANCE, December 31, 1998 10,190 $30,570 150 $2 5,713,500 $5,713
====== ======= === == ========= ======

</TABLE>

Unrealized
Gain (Loss)
From
Additional Available
Paid-in For Sale Accumulated Subscription
Capital Investments Deficit Receivable
------------ ------------- ------------- -------------

<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 $15,635,301 $0 ($18,095,566) ($1,500,000)

Net loss -- 1996 0 0 (2,193,315) 0
Adjustment of stock offering costs 6,873 0 0 0
Preferred stock dividends 0 0 (137,446) 0
----------- ------- ------------- -----------

Comprehensive loss

BALANCE, December 31, 1996 15,642,174 0 (20,426,327) (1,500,000)

Net loss -- 1997 0 0 (1,039,162) 0
Preferred stock dividends 0 0 (137,446) 0
Unrealized loss from available for sale
Investments 0 (53,531) 0 0
----------- ------- ------------- -----------

Comprehensive loss

BALANCE, December 31, 1997 15,642,174 (53,531) (21,602,935) (1,500,000)

Net loss -- 1998 0 0 (295,531) 0
Preferred stock dividends 0 0 (137,446) 0
Unrealized gain from available for sale
Investments 0 53,531 0 0
Issuance of warrants 4,300 0 0 0
----------- ------- ------------- -----------

Comprehensive loss

BALANCE, December 31, 1998 $15,646,474 $0 ($22,035,912) ($1,500,000)
=========== ======= ============ ============

</TABLE>

The accompanying notes to consolidated financial statements are
an integral part of these statements.

F-5

<PAGE>

HYMEDIX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>

1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($295,531) ($1,039,162) ($2,193,315)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 55,853 118,328 122,436
Realized loss on sale of investments 6,561 34,061 0
Issuance of warrants 4,300 0 0
Restricted common stock received for
manufacturing and distribution rights 0 (75,000) (168,000)
Reserve for inventories 0 100,000 0
(Increase) decrease in-
Accounts receivable 226,432 (169,333) (26,058)
Inventories 73,200 72,550 69,642
Other current assets (48,462) (16,469) 18,704
Security deposit (59,040) 0 0
Increase (decrease) in-
Accounts payable and accrued expenses 118,662 803,552 424,763
Accrued legal judgment and settlement, net (238,464) 0 805,964
Deferred revenue 0 0 (100,000)
--------------- ---------------- ----------------

Net cash used in operating activities (156,489) (171,473) (1,045,864)
--------------- ---------------- ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of investments 152,439 49,939 0
Purchases of property and equipment (1,378) 0 0
--------------- ---------------- ----------------

Net cash provided by investing activities 151,061 49,939 0
--------------- ---------------- ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 0 0 1,131,000
Restricted cash 0 225,600 (225,600)
Principal repayments of notes payable (20,617) (95,247) 0
--------------- ---------------- ----------------

Net cash (used in) provided by financing
activities (20,617) 130,353 905,400
--------------- ---------------- ----------------

Net (decrease) increase in cash and cash
equivalents (26,045) 8,819 (140,464)

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 51,381 42,562 183,026
--------------- ---------------- ----------------

CASH AND CASH EQUIVALENTS, END OF YEAR $25,336 $51,381 $42,562
=============== ================ ================

SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $2,383 $145,660 $0
=============== ================ ================
</TABLE>

The accompanying notes to consolidated financial statements are an
integral part of these statements.

F-6
<PAGE>

HYMEDIX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) NATURE OF OPERATIONS:

HYMEDIX, Inc. (the Company) is engaged primarily in the development and
commercialization of biomedical and skin care products based on
proprietary advanced hydrogels. These hydrophilic polymers are
biocompatible and highly versatile, and enable the Company to develop and
manufacture products and components with many characteristics for a
variety of medical products and other markets. For the years ended
December 31, 1998 and 1997, two of the Company's product lines encompass
over 71% and 76% of net product sales, respectively. For the year ended
December 31, 1996, four of the Company's product lines encompassed over
57% of net product sales. For the year ended December 31, 1998, two of
the Company's customers accounted for 47% and 17% of the total revenues.
For the year ended December 31, 1997, one of the Company's customers
accounted for 43% of total revenues and as of December 31, 1997, 84% of
accounts receivable was due from such customer. For the year ended
December 31, 1996 two of the Company's customers accounted for 57% of
total revenues.

The accompanying consolidated 1998, 1997 and 1996 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.

Revenues and Cost Recognition-

Revenues are derived primarily from the sales of hydrogels and skin
care products, option and license agreements and research and
development contracts. Such revenues are recognized upon shipment of
products and/or 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 includes an investment in a mutual fund which
is included in cash and cash equivalents for purposes of reporting cash
flows.

F-7
<PAGE>

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-

<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Raw materials $109,103 $108,673
Work in process 3,198 29,610
Finished goods 150,245 197,463
--------------- ---------------

262,546 335,746

Less- reserve for obsolete inventory (100,000) (100,000)
--------------- ---------------

$162,546 $235,746
=============== ===============
</TABLE>

Investments-

As of December 31, 1997, the Company's investments, which represented
restricted common stock that the Company received for manufacturing and
distribution rights, were considered available for sale investments.
Accordingly, these investments, which were subsequently sold during
1998, were 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
losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statements of
operations.

As of December 31, 1998 and 1997 the total unrealized loss on
investments was $0 and $53,531, respectively.

Property and Equipment-

Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful lives
of the assets ranging from three to five years.

Patents-

Patents are amortized using the straight-line method over a 14-year
period.

Long-Lived Assets-

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.

F-8
<PAGE>

Loss Per Share-

The Company has 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 increased by preferred stock dividends
($137,446) for the years ended December 31, 1998, 1997 and 1996. 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 (which aggregated $1,711,738 as of December 31, 1998) 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, 1998. The Company also has a
working capital deficit, a net capital deficit and was not in compliance
with certain loan provisions at December 31, 1998.

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 1999. In addition, a
judgement in the amount of $367,500 has been rendered against the Company
(see Note 12) and the Company also entered an agreement to settle certain
litigation against the Company for $200,000 plus interest to be paid over
thirty-six months beginning on January 1, 2000 (see Note 12). Financing
the judgement and settlement as well as the Company's operations will be
difficult. Management plans to continue to seek and evaluate financing
alternatives for the Company. In the event that cash flow from operations
and the anticipated proceeds from the financing, if any, are not
sufficient to fund the Company's operations and obligations in 1999,
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 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

F-9
<PAGE>

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 terminated on October 31, 1998.

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).

Substanially all other income recorded in 1998 relates to the collection
of a receivable previously written off by the Company in a prior year.

(5) PROPERTY AND EQUIPMENT:

At December 31, property and equipment is as follows-
<TABLE>
<CAPTION>

1998 1997
-------------- ---------------
<S> <C> <C>
Machinery and equipment $223,756 $223,756
Office equipment and furniture and fixtures 26,627 25,249
Leasehold improvements 589,564 589,564
-------------- ---------------

839,947 838,569
Less- Accumulated depreciation (834,692) (810,279)
-------------- ---------------
$5,255 $28,290
============== ===============
</TABLE>

Depreciation and amortization of property and equipment was $24,413,
$86,888 and $90,996 in 1998, 1997 and 1996, respectively.

(6) ACCOUNTS PAYABLE AND
ACCRUED EXPENSES:

At December 31, accounts payable and accrued expenses consists
of-
<TABLE>
<CAPTION>

1998 1997
--------------- ---------------
<S> <C> <C>
Accounts payable $1,305,553 $1,293,505
Accrued compensation 304,974 426,185
Accrued interest payable 1,140,580 891,873
Accrued preferred dividends 667,270 529,825
Refundable option deposit 99,000 99,000
Other accrued expenses 139,222 160,103
--------------- ---------------
$3,656,599 $3,400,491
=============== ===============
</TABLE>

F-10

<PAGE>

(7) NOTES PAYABLE:

Notes payable consists of the following as of December 31-
<TABLE>
<CAPTION>

1998 1997
--------------- ----------------
<S> <C> <C>
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 by substantially all the assets of the Company (b).
1,015,136 1,035,753
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
--------------- ----------------
$4,046,979 $4,067,596
=============== ================
</TABLE>

(a) During 1998, 1997 and 1996, the Company has not made interest
payments in accordance with the terms of the note payable
agreement. As a result, the Company is in technical default with
the agreement and therefore, the related debt has been
classified as a current liability in the accompanying
consolidated balance sheets.

(b) During 1996, the Company issued convertible bonds in
the principal amount of $1,131,000. The bonds are
convertible into 1,131,000 shares of the Company's
common stock. Such shares have been reserved by the
Company. The bonds may be subject to mandatory
prepayment under certain conditions. Certain proceeds
from the bond issuance are held by a representative of
the bondholders (agent). The Company's ability to
borrow such proceeds is subject to approval by the
agent. The bonds were originally due June 1, 1997,
however, the due date was extended and the balance
outstanding is due on demand.

(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, 1998, the Company had net operating loss
carryforwards of approximately $17,000,000 for Federal income tax
purposes which expire through 2018. Based on its operating history, the
Company has provided a valuation allowance of approximately $5,800,000 as
a full valuation allowance against the deferred tax asset as of December
31, 1998 because it could not determine that it was more likely than not
that such benefits would be realized.

F-11

<PAGE>

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 $250,000
and $200,000 of royalties under this agreement for the years ended
December 31, 1998 and 1997, respectively. No royalties were 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.

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 in fees for each of the three years ended 1998. 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. 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, 1998.

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
called 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.

F-12

<PAGE>

(10) COMMITMENTS AND CONTINGENCIES:

The Company leases certain office and manufacturing facilities under
arrangements accounted for as operating leases. Rent expense approximated
$560,000, $519,000, and $538,000 for the years ended December 31, 1998,
1997 and 1996, 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, 1998 are as follows-
<TABLE>
<CAPTION>

For the Years Ending December 31-
---------------------------------
<S> <C>
1999 $365,035
2000 362,736
2001 362,736
2002 361,320
2003 177,120
</TABLE>

(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, 1998 and 1997. 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 Under Weighted Average
Option Exercise Price
-------------- ------------------
<S> <C> <C>
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
Expired (44,466) $3.20
--------------
Outstanding December 31, 1998 (exercisable 321,705 shares) 321,705 $3.14
==============
</TABLE>

F-13

<PAGE>

The following table summarizes information about stock options
outstanding at December 31, 1998-
<TABLE>
<CAPTION>

Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Average Average Exercisable Average
Prices at 12/31/98 Remaining Life Exercise Price at 12/31/98 Exercise Price
----------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.75 to $1.99 92,000 8 $0.77 92,000 $0.77
$2 to $3.99 171,705 3 $3.41 171,705 $3.41
$4 to $5.99 53,000 1 $5.69 53,000 $5.69
$6 to $12 5,000 3 $10.40 5,000 $10.40
</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 1998 and 1997.

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>

1998 1997 1996
----------------- --------------- ----------------
<S> <C> <C> <C>
Net loss as reported ($295,531) ($1,039,162) ($2,193,315)
Estimated fair value of the year's option grants,
net of tax 0 0 35,640
----------------- --------------- ----------------
Net loss adjusted ($295,531) ($1,039,162) ($2,228,955)
================= =============== ================
Adjusted basic and diluted net loss per share ($.08) ($.21) ($.41)
================= =============== ================
</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 112,500 common shares. The warrants are exercisable at varying
prices ranging from $3.00 to $5.75 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

F-14
<PAGE>

duress and is therefore void. The Company 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 judgement was rendered against the Company in the amount
of $805,964 plus interest in connection with this case. In April 1998,
$438,464 of the judgement was reversed on appeal. The $367,500 claim for
deferred compensation was affirmed by the Appellate Court. Accordingly,
the Company reversed $438,464 of the accrued legal judgement plus related
accrued interest in 1998. The Company has accrued the affirmed judgement
plus interest in the accompanying consolidated financial statements as of
December 31, 1998.

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 alleged that the Company owed him
approximately $5,000,000 and warrants to purchase the Company's common
stock. In December 1998, a settlement agreement was signed by the
individual, the Company and First Taiwan and its affiliates. The Company
agreed to pay the individual $200,000 plus interest over a thirty-six
month period commencing January 1, 2000. This amount is accrued for in
the accompanying consolidated financial statements as of December 31,
1998. In addition, the Company agreed to issue warrants to purchase the
equivalent of seven percent of the issued and outstanding common stock of
the Company as of November 30, 1998 (430,048 shares) giving effect to an
inclusion of the common stock underlying the warrants as though all of
the warrants issued under the settlement were exercised. The warrants may
be exercised by the individual, in whole or in part or parts at any time
during a ten year period commencing January 23, 1999 and ending on
January 22, 2009, and have an exercise price of $.01 per warrant. The
warrants and the common stock issued provide for an anti-dilution
adjustment in the event of any change in the capitalization of the
Company which would otherwise dilute the warrants or the common stock.
the Company has valued the warrants at their estimated fair value of
$4,300 using the Black Scholes method.

The settlement agreement also provides the Company the option to purchase
all or part of the warrants and the common stock issued to the individual
pursuant to the settlement agreement if the market capitalization of the
Company exceeds $15,000,000. If the Company or the other parties to the
litigation default on any of the terms of the settlement agreement, the
individual is entitled to enter a judgement against the Company and other
parties to the litigation in the amount of $2,000,000, provided that the
individual gives written notice of the default and it is not cured within
sixty days.

Pursuant to the settlement agreement, the Company issued the individual
warrants to purchase 430,048 shares of the Company's common stock on
January 22, 1999.

F-15

<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 25,336
<SECURITIES> 0
<RECEIVABLES> 217
<ALLOWANCES> 0
<INVENTORY> 162,546
<CURRENT-ASSETS> 291,553
<PP&E> 839,947
<DEPRECIATION> 834,692
<TOTAL-ASSETS> 417,925
<CURRENT-LIABILITIES> 8,071,078
<BONDS> 1,015,136
0
30,572
<COMMON> 5,713
<OTHER-SE> (7,889,438)
<TOTAL-LIABILITY-AND-EQUITY> 417,925
<SALES> 1,138,083
<TOTAL-REVENUES> 1,651,665
<CGS> 388,630
<TOTAL-COSTS> 1,786,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 251,091
<INCOME-PRETAX> (295,531)
<INCOME-TAX> 0
<INCOME-CONTINUING> (295,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (295,531)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)

</TABLE>