UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the year ended December 31, 2002 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission file Number 0-6333
HYDRON TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
New York 13-1574215
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2201 West Sample Road, Building 9, Suite 7B, Pompano Beach, FL 33073
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 861-6400
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $1,680,405 based upon the closing price of $0.33 on March
12, 2003.
Number of shares of Common Stock outstanding as of March 15, 2003: 7,050,136
Documents Incorporated by Reference: None
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PART I
Item 1. Business
Introduction
Hydron(TM) Technologies, Inc. ("the Company"), a New York corporation
organized on January 30, 1948, maintains its principal office at 2201 West
Sample Road, Building 9, Suite 7B, Pompano Beach, Florida 33073 and its
telephone number is (954) 861-6400.
Hydron(TM) Technologies, Inc. markets a broad range of consumer and
oral health care products using a moisture-attracting ingredient (the
"Hydron(TM) polymer"), and owns a non-prescription drug delivery system for
topically applied pharmaceuticals, which uses such polymer. The Company holds
U.S. and international patents on, what Management believes is, the only known
cosmetically acceptable method to suspend the Hydron(TM) linear polymer in a
stable emulsion for use in personal care/cosmetic products. The Company is
developing other personal care/cosmetic products for consumers using its
patented technology and would, when appropriate, either seek licensing
arrangements with third parties, or develop and market proprietary products
through its own efforts. Management believes that because of their unique
properties, products that utilize the Hydron(TM) polymer have the potential for
wide acceptance in consumer and professional health care markets.
Hydron Branded Skin Care Products
The Company has been engaged in the development of various consumer
products using Hydron(TM) polymers since 1986. The Company's products are
designed to address concerns about aging, and include Hydron(TM) skincare, hair
care, bath and body and sun care. The Company currently has thirty-nine
individual products available in the following product lines: skin care (22
products), hair care (7 products), bath and body (8 products) and sun care (2
products). These products are also packaged into collections and sold at a more
favorable value than the individual products sold separately. All of the
products are available through the Hydron(TM) Catalog and Web site
www.hydron.com ("Catalog").
Management believes that the Company's product lines are unique and
offer the following competitive benefits: the moisturizers self-adjust to match
the skin's optimal pH balance soon after they are applied to the skin; they
become water-insoluble on the skin's surface, and unlike all other water-based
cremes and lotions, are not removed by the skin's perspiration or plain water;
they are oxygen-permeable, allowing the skin to breathe; they do not emulsify
the skin's natural moisturizing agents, as do conventional cremes and lotions;
and they attract and hold water, creating a cushion of moisture on the skin's
surface that promotes penetration of other beneficial product ingredients, all
while leaving no greasy after-feel.
The Company's products are dermatologist tested and approved for all
skin types. Products for use around the eye area are also ophthalmologist tested
and safe for contact lens wearers. Most of the Company's moisturizing products
2
Item 1. Business (continued)
are based on the Company's patented emulsion system, which permits the product
ingredients to deliver their intended benefits over an extended period of time
and in a more efficient manner.
Management believes that the Hydron(TM) emulsion system can enhance the
effectiveness of topical over-the-counter medications. The emulsion system is
designed to deposit a polymer film on the skin's surface which has a number of
advantages over traditional lotions: promotes hydration of the outer layer of
skin, improves penetration into the skin's pores, and has good tactility and
flexibility. The Company expects to continue to focus research and development
resources on proprietary technology-based products as determined by Management's
assessment of consumer demand.
The Company discovered that the Hydron(TM) emulsion system also adjusts
pH on the skin to match the pH of the stratum corneum, the skin's surface layer.
It is evident in recent skin research (see Kligman, in "Dry Skin and
Moisturizers, Chemistry and Function", editors Marie Loden and Howard I.
Maibach, CRC Press, New York, p 3-9 2002) that the pH range of the emulsion
system is ideal for contributing to the skin's natural healing process and
enzyme production responsible for rebuilding the skin's lipid barrier. A patent
application was filed February 14, 2002 to cover this technology, which also
applies to a new acne treatment system.
Super-oxygenated Fluids and Compositions
Since August 2000, the Company has been researching and developing a
new technology that provides a method for the delivery of oxygen into the skin
and tissue at depths considered medically therapeutic without the use of the
bloodstream. The Company filed for patent protection as of February 2001. The
patent application is pending. Management anticipates that as a result of its
continuing research into tissue oxygenation, the Company's primary focus will
begin to shift from personal care/cosmetic products to developing/licensing
applications or products based upon this new technology.
This technology has far reaching implications in that oxygen can now be
delivered into skin that does not receive sufficient oxygen from the
bloodstream. Management believes that this approach to tissue oxygenation
developed by Hydron(TM) is unique. It utilizes an existing technology that
infuses liquid with oxygen at 20+ times normal levels to create a
super-oxygenated liquid filled with micro-bubbles of highly pressurized oxygen.
When placed in contact with the skin, the highly saturated fluid and
micro-bubbles are transferred directly to the skin through osmosis and kinetic
diffusion.
Research and development efforts to date have included clinical
testing, in-vitro bacteriological testing, micro-bubble size analysis, packaging
prototypes, and stability testing. Clinical testing on healthy subjects was
conducted at the University of Massachusetts Medical School; Department of
Thoracic Surgery producing an average increase in subcutaneous tissue
oxygenation of 54% in healthy individuals. Management believes that these tests
provided the first-ever evidence that subcutaneous tissue could be oxygenated
from the outside in.
3
Item 1. Business (continued)
The skin treatment is expected to have numerous applications in wound
healing and anti-aging skincare treatments. Current medical research shows that
each year, in the United States alone, medical problems associated with oxygen
deprivation to the skin and tissues can affect over 16 million diabetics, two
million burn patients, 600,000 individuals with impaired circulatory systems and
countless other applications, from individuals suffering with chronic wounds to
extending the life of organs for transplant during transportation. Likewise,
medical problems associated with anaerobic bacteria (i.e. organisms that thrive
in the absence of oxygen) such as acne, diaper rash, post-operative infections
and periodontal disease may be reduced or eliminated by application of this
technology.
Oxygen is also is an essential factor in aging as the facial skin loses
about 40% of oxygen carrying capacity by age 65 (a factor in diminished collagen
formulation and wrinkling). As a result, anti-aging/wrinkling applications of
this technology may ultimately lead to a new line of skincare applications and
products.
In July 2002, the Company reached an agreement for licensing existing
machine technology from Life International Products, Inc. that included issuance
of 325,000 shares of new Hydron(TM) stock and future royalty payments. This will
allow Hydron(TM) to be able to manufacture future products under Hydron(TM)'s
tissue oxygenation pending patent. The company plans additional efficacy testing
to further evaluate the technology and future potential products. It is
anticipated that efficacy testing will require an additional 12 to 24 months.
Initial testing will be focused on cell viability and gene expression within
oxygen-deprived tissues subsequently exposed to super-oxygenated saline
solutions.
On December 10, 2002, Hydron(TM) completed a non-brokered private
placement of 1,750,000 Units at $.20 per Unit ($350,000), to several accredited
investors including its chairman, Richard Banakus and a director, Ron Saul. Each
Unit is comprised of one share of common stock and one three-year option to buy
one additional common share at $.20. The proceeds will be added to the Company's
working capital and enable Hydron(TM) Technologies to maintain its catalog
business, while supporting basic development of Hydron(TM)'s patent pending skin
and tissue oxygenation technology and associated intellectual property.
Professional Products
The Company has also developed and currently markets a group of
Hydron(TM) polymer-based products for dental professionals under the
Hydrocryl(TM) brand name. These include a heat cured material used in the
manufacture of dentures, as well as cold cure kits used in connection with the
relining or repairing of existing Hydrocryl(TM) or conventional acrylic dentures
that is necessitated by the continual changes that occur in the tissue structure
of the mouth. Management believes that the hydrophilic, or moisture attracting
properties, of these Hydron(TM) polymer-based products give them competitive
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Item 1. Business (continued)
advantages over conventional acrylic dentures and denture repair kits, which are
not hydrophilic. Sales of Hydrocryl(TM) brand name products were minimal in
2002, 2001 and 2000.
Distribution
The majority of the Company's products are currently sold in the United
States through Hydron(TM) direct marketing channels (proprietary Catalog and the
World Wide Web site). The Company also sells its products to private label
customers, television retailers and, to a lesser extent, internationally through
salons and doctors offices.
While in prior years television retail was the primary focus for the
marketing and distribution of the Company's products, Management believes that
the Company's exclusive agreements with television retailers had limited the
marketing opportunities to build its business through additional sales channels.
Under exclusive contracts with television retailers the Company neither
controlled its airtime nor the selling priorities of those television retailers,
effectively handicapping the Company's ability to influence sales trends.
The Company began diversifying away from television retailers in 2001
with continued focus on developing the Catalog business and the addition of a
private label customer to provide additional cash flow. Further, the Company has
been pursuing new international distribution and new products that would
significantly augment Hydron(TM)'s direct marketing efforts. This development
includes filing a patent in February 2002 on new acne formulas that provide
marked performance improvements versus other over-the-counter products currently
on the market.
Catalog Sales
The Company's full color brochure offers personal care products for
sale directly to consumers. The Catalog also provides information on new
products, educates consumers on proper skin care and facilitates consumer
re-ordering. The Company sells its products on the World Wide Web and regularly
transmits E-mail broadcasts to its customer base. Catalog sales represents
approximately 68.5% of Hydron's total annual sales in 2002 and 55.2% in 2001.
The Company is continuing to explore new ways to enhance Catalog sales and
operations.
Private Label Contracting
Effective March 1, 2001, the Company entered into an agreement with
Reliv International, Inc ("Reliv") to develop and manufacture a line of private
label skin care products under their brand name, ReversAge(R). Five products
were introduced in August 2001 at a national sales meeting to Reliv's multi-tier
marketing distribution network. A sixth new product was introduced in February
2002. The agreement requires minimum product purchases and advance payments to
cover packaging and design costs. Reliv is a public company traded on NASDAQ
(symbol RELV). Private label sales represent approximately 7.8% of Hydron's
total annual sales in 2002 and 18.9% in 2001.
5
Item 1. Business (continued)
International
The Company sells product to an Australia-based health and beauty
products distributor for retail salon stores and medical offices in Australia
and New Zealand. The Company also distributes dental products into Spain and, to
a lesser extent, other countries. Although this category is not significant at
this time, Management is committed to the expansion of international sales and
believes that international sales represent one of the foundations for the
future growth of the Company.
Retail
The Company has established minor levels of retail distribution.
Initially, utilizing excess inventory, the Company has sold product on a
limited, promotional basis to several retailers utilizing current packaging
configurations. It is anticipated that any significant retail effort of core
Hydron(TM) products would require investment in repackaging.
Research and Development
The Company expects to continue to focus research and development
resources on additional Hydron(TM) polymer-based products, as well as other
proprietary technology-based products as determined by Management's assessment
of consumer demand. The Company's research and development efforts during 2002
continued to achieve greater diversification among the Company's product lines
by development of new products targeted at the aging baby boomer marketplace.
Management has completed development of an acne ingredient delivery
system. The technology allows for acidic ingredients to be delivered to the
straum corneum of skin at neutral pH (~6.8 to 7.0) where it then gradually
adjusts to match the pH of the stratum corneum below 5.5. This delivery
technique avoids the irritation and burning associated with traditional acne
ingredients that deliver ingredients at pH values as low as 2.0. Hydron(TM)
filed for provisional patent protection in February 2002 with a subsequent
utility patent filed in February 2003 for the US and international markets.
In the acne market, the medicinal cure is often more irritating and
elicits more redness than the skin breakout. The new system significantly
reduces the harshness and irritation caused by most acne products currently in
the marketplace. This technology is being presented to potential private label
customers.
The Company is also continuing to research new technology-based and
possibly patentable skin treatment systems that would augment its product line.
During the last two years, the Company's research and development efforts
advanced groundbreaking research into oxygenated skin treatments that may
provide anti-aging treatments, wound treatments and healing enhancement. Where
possible, the Company will license these technologies to other company's expert
in their respective fields. Research and development efforts include product
formulation, clinical testing, packaging design and prototypes, extensive
product safety and stability testing conducted by medical professionals,
efficacy studies to support product claims, and consumer research.
6
Item 1. Business (continued)
Charles Fox, a consultant and a former member of the Company's Board of
Directors from September 1997 to October 1998, leads the Company's research and
development efforts. Mr. Fox was formerly director of product development for
Warner Lambert Company's personal products division and president of the Society
of Cosmetic Chemists.
Patented Technology
The Company strongly believes that technology and patent protection are
essential to providing a sound foundation for a new product. The Company was
granted U.S. Patent No. 4,883,659, dated November 28, 1989, and U.S. Patent No.
5,039,516, dated August 13, 1991, which cover a stable moisturizing emulsion
containing an unusual emulsifying agent, as well as the Hydron(TM)polymer and a
unique combination of ingredients. These patents have expiration dates of
November 28, 2006 and August 13, 2008, respectively. During 1999 the Company was
granted U.S. Patent No. 5,879,684 for its "Line Smoothing Complex" formula. This
product has been clinically shown to reduce fine lines and wrinkles. The patent
has an expiration date of April 11, 2017. In addition, the Company has
registered several trademarks relating to its cosmetic products.
The Company has also received patent protection for its emulsification
process in several countries to facilitate distribution and sale of these
products outside of the United States. The Hydron(TM) polymer, utilized in
cosmetic emulsions, creates a thin moisture-attracting film that is non-greasy;
is not dissolved by sebaceous oils or perspiration; does not emulsify the skin's
natural oils and humectants; and allows the skin to breathe. The film is
insoluble in water and resistant to rub-off, but can easily be removed with
cleanser and water.
The Company subsequently discovered that the Hydron(TM) emulsion system
also adjusts pH on the skin to match the pH of the stratum corneum, the skin's
surface layer. It is evident in recent skin research that the pH range of the
emulsion system is essential for contributing to the skin's natural healing
process and enzyme production responsible for rebuilding the skin's lipid
barrier. The Company filed a provisional patent application related to acid
based ingredient delivery, including acne ingredients in February 2002 with the
corresponding utility patent application and international filings in February
2003.
The Company also developed the super-oxygenation technology to deliver
vital oxygen to skin and tissue without using the bloodstream. A provisional
application was filed in February 2001 with the utility patent and associated
international filings in January 2002. The Company is awaiting initial office
action on the part of the US Patent and Trademark Office.
7
Item 1. Business (continued)
Manufacturing and Raw Materials
Hydron(TM) polymer-based products are manufactured exclusively for the
Company by independent third parties. The Company has used principally two
manufacturers of cosmetic products because of the quality of their production
and reasonable costs. To date, contract manufacturing has allowed the Company to
meet inventory requirements in a timely manner. All raw material and packaging
components for the Company's consumer and professional product lines are readily
available to the Company from a variety of sources.
The Company is not dependent on any sole manufacturer except that the
Company's ability to obtain additional supply of the Hydron(TM) polymer is
dependent on GP Strategies Corporation (formerly known as National Patent
Development Corporation) ("GPS") and its assignee, Hydro-Med Sciences, Inc.
("Hydron-Med"), which owns certain proprietary information relating to the
manufacture of the Hydron(TM) polymer. Under the terms of an agreement with GPS,
as amended and restated (the "GPS Agreement"), GPS is obligated to supply the
Company with up to 3,000 kilograms of the Hydron(TM) polymer for so long as GPS
manufactures the Hydron(TM) polymer, and the Company is obligated to purchase
its first 3,000 kilograms of Hydron(TM) polymer from GPS. In the event GPS is
unable to manufacture and supply the Company with its requested quantity of
Hydron(TM) polymer, GPS is obligated to provide the Company with information and
assistance regarding all technology and manufacturing procedures (including
know-how) possessed by GPS and use in connection with the manufacture of the
Hydron(TM) polymer.
The Company is currently negotiating certain changes in the GPS
Agreement with Hydro-Med, including the provisions relating to supply of the
Hydron(TM) polymer. Hydro-Med has advised the Company that it has disposed of
the equipment used in the manufacture of the Hydron(TM) polymer and no longer
has the in-house capability of manufacturing the Hydron(TM) polymer. The Company
is engaged in discussions with Hydro-Med regarding alternative sources for the
Hydron(TM) polymer and for changes in the royalty structure. See discussion
under "Agreement with GPS" below. Although the Company's inventory of the
Hydron(TM) polymer is sufficient to satisfy current requirements, the loss of,
or significant reduction in, a commercially suitable supply of the Hydron(TM)
polymer would have a material adverse effect on the Company and its business.
Agreement with GPS
Under the terms of the GPS Agreement, the Company has an exclusive
worldwide license to manufacture, market or use non-prescription products that
include the Hydron(TM) polymer in the consumer field, including in connection
with cosmetic products and certain personal care products, and in the oral
health field, including dentures. Under the GPS Agreement, GPS retained the
exclusive right to manufacture, sell or distribute any prescription drug or
medical device made with the Hydron(TM) polymer, other than in the oral health
field. In addition, under the GPS Agreement, the Company and GPS may each
8
Item 1. Business (continued)
manufacture, sell, and use non-prescription drug products that include the
Hydron(TM) polymer as an active ingredient that are not included in their
respective exclusive fields.
Under the GPS Agreement, GPS also licenses to the Company the trademark
Hydron(TM) for use in connection with the manufacture, marketing and use of
products using Hydron(TM) polymers as permitted under the GPS Agreement.
Under the terms of the GPS Agreement, the Company and GPS are each
required to pay to the other a royalty of five percent (5%) of their respective
net sales of Hydron(TM) polymer products, except for sales of non-prescription
drug products utilizing the Hydron(TM) polymer as an active ingredient to third
parties where the seller receives an up-front license fee, royalty or similar
payment where the seller shall pay the other party a royalty of twenty-five
percent (25%) of such payments. For the years ended December 31, 2002, 2001 and
2000, the Company has paid or accrued for payment to GPS approximately $0,
$87,000 and $104,000, respectively. No royalty expense was required in 2002 as
the definition of applicable products was changed creating a surplus accrual. An
aggregate of $127,437 was accrued and unpaid as of December 31, 2002. This
amount is adequate to cover any royalties that might be payable through 2002.
The Company has not received any royalty payments, or been advised of any sales
that would entitle them to royalty payments during this period.
GPS has assigned its rights under the GPS Agreement to Hydro-Med. In
December 2002, the Company and Hydro-Med reached an agreement in principle to
amend the GPS Agreement to adjust their respective obligations to make royalty
payments. Under the terms of this agreement in principle, the Company's
obligation to pay accrued, but unpaid royalties, would also be eliminated.
However, Hydro-Med has requested certain other changes to the GPS Agreement,
including changes relating to Hydro-Med's obligation to supply the Hydron(TM)
polymer, that are unacceptable to the Company. Accordingly, as of March 31,
2003, the Company has not entered in to a binding agreement to amend the terms
of the GPS Agreement.
Inventory
The Company did not have any backorder of firm booked orders as of
December 31, 2002, and generally delivers its orders within two weeks of the
date orders are booked. Although the Company's business in not seasonal, orders
placed by Hydron(TM)'s private label customers and television retailers
fluctuate on a monthly and quarterly basis. Orders placed by the Company's
Catalog customers are generally shipped within two days of the placement of the
order.
Most items can be produced within a 90-day period. Finished good
inventory will average between 6 - 12 months of sales. Packaging components must
be printed in larger quantities and the level of those types of items may exceed
12 months sales. The inventory level of the Hydron(TM) polymer, which is unique
and comes from a single source, exceed several years and it is stored in two
locations to ensure availability.
9
Item 1. Business (continued)
Government Regulation
Most of the Company's skin care, hair care, and bath and body products
are "cosmetics" as that term is defined under the Federal Food, Drug and
Cosmetics Act ("FDC Act"), and must comply with the labeling requirements of the
FDC Act, the Fair Packaging and Labeling Act ("FPL Act"), and the regulations
thereunder. Some of the Company's products (i.e. its topical analgesic and
products that contain a sunscreen or Triclosan) are also classified as
over-the-counter drugs. Additional regulatory requirements for such products
include additional labeling requirements, registration of the manufacturer and
semi-annual update of the drug list. Management believes that it is in
compliance with these requirements and that it faces no material costs
associated with such compliance.
Competition
The skin care business is characterized by vigorous competition
throughout the world. Product recognition, quality, performance and price have
significant influence on customers' choices among competing products and brands.
Advertising, promotion, merchandising, the pace and timing of new product
introductions and line extensions also have a significant impact on the consumer
buying decisions. The Company competes against a number of marketers of skin
care products, many of which have substantially greater resources than the
Company. Although the Company is in competition with all skin care brands,
direct competition in electronic retailing and catalog sales includes Principal
Secret, ProActiv, Physician's Advice, Susan Lucci, Signature Club A, Marilyn
Miglin, Dr. Graff, and Serious Skin Care.
Seasonality
The Company's results of operations are not subject to seasonal
fluctuations.
Employees
The Company satisfies its human resource needs utilizing an outsourcing
firm that provides all administrative services relating to payroll, personnel
and employee benefits. Management continues to hire, fire, set pay rates and
supervise its staff. This arrangement enables the Company to reduce its
administrative and benefits costs relating to employees. The Company as of
December 31, 2002 had nine full time positions.
10
Item 2. Properties
The Company maintains its offices at 2201 West Sample Road, Building 9,
Suite 7B, Pompano Beach, Florida 33073. The lease on this office space (3,750
square feet) expires August 31, 2003 and required a monthly rent of
approximately $5,400, including taxes and common area expenses.
In August 2000, the Company's lease for its main warehouse at 95
Mayhill Street, Saddle Brook, New Jersey 07663 expired. The monthly rent was
approximately $14,000. The Company moved the majority of its finished goods and
components to a public warehouse at 14-01 Maple Avenue, Fair Lawn, New Jersey
07410 with a monthly rent of approximately $3,000 per month.
In addition, the Company moved out of its local warehouse space, of
approximately 3,200 square feet, at 1120 Holland Drive, Suites 9 and 19, Boca
Raton, Florida 33487, pursuant to a lease that expired in April 2000, at a
monthly rent of approximately $2,900. This warehouse was subleased in April 1999
to an independent third party under terms similar to the original lease
including the required rent and other payments. The Company no longer has any
obligation under either lease. Management believes that it's current office and
warehouse facilities are satisfactory for its present needs.
Item 3. Legal Proceedings
The Company is not a party to, and its property is not the subject of,
any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the year
ended December 31, 2002.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock is quoted on the OTC Bulletin Board, a
regulated quotation service for over-the-counter securities not listed or traded
on NASDAQ or a national securities exchange, under the symbol HTEC.OB. The
following tables indicate the high and low closing prices for the Company's
Common Stock as reported by the OTC Bulletin Board.
High Low
Closing Closing
Price Price
2002
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Fourth Quarter $0.29 $0.20
Third Quarter 0.45 0.16
Second Quarter 0.34 0.21
First Quarter 0.39 0.25
2001
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Fourth Quarter $0.44 $0.30
Third Quarter 0.50 0.35
Second Quarter 0.53 0.19
First Quarter 0.24 0.13
As of February 11, 2003, there were approximately 3,955 shareholders of
record of the Company's Common Stock. The Board of Directors will determine the
payment of dividends in the future in light of conditions then existing,
including the Company's earnings and financial condition.
Item 6. Selected Financial Data
Years Ended December 31,
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2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Net Sales $ 1,671,641 $ 2,132,717 $ 2,203,847 $ 2,665,513 $ 4,003,477
Operating (Loss) (905,868) (748,243) (946,771) (3,064,189) (2,067,349)
Interest and Investment Income 1,028 9,198 20,945 80,860 144,203
Net (Loss) (904,840) (758,696) (923,632) (2,974,142) (1,882,667)
Basic & Diluted Earnings
(Loss) per Common Share (0.17) (0.15) (0.19) (0.60) (0.38)
Total Assets 1,468,549 2,036,182 2,800,515 3,835,303 6,641,433
Total Shareholders' Equity 887,606 1,382,944 2,141,640 3,065,272 5,974,571
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
In 2002 the Company virtually eliminated sales made through television
retailers as the result of terminating the exclusive relationship with HSN in
late 2001 and as revenues derived from resales by QVC to prior customers
declined. Management expects that in 2003 and beyond, an increasing portion of
its sales will be generated from direct marketing by the Company through use of
direct response mail, Catalog print and sales made on its web site. Management
also expects that the Company will generate an increasing portion of its
revenues from sales made through private label customers and will look for other
opportunities to sell the Company's products through similar arrangements.
Management anticipates introducing new cosmetic products based on its
oxygenation technology, which will open doors for new distribution. However, the
types and timing of the introduction of new cosmetic products will depend upon
the results of further clinical testing.
Management believes that the Company's survival and success is
dependent upon its ability to enhance distribution of its current products
through its proprietary Catalog and web site, the expansion of consumer access,
particularly through third-party licensing arrangements; development of new
products for retail distribution and the use of alternative channels of
distribution such as private labeling and expansion into international markets.
Management believes that when patents are issued related to oxygenation
technology, the Company will be likely to generate licensing income in the
medical and related fields. The Company's ability to develop and market new
cosmetic and OTC products will be significantly enhanced.
Results of Operations - 2002 versus 2001
Total net sales for 2002 were $1,671,641; a decrease of $461,076, or
21.6%, from net sales of $2,132,717 for the year ended December 31, 2001. Skin
care products net sales for 2002 were $1,498,384, a decrease of $467,743 or
23.8% from $1,966,127 in 2001. Professional products net sales for 2002 were
$30,108, an increase of $10,922 or 56.9% from $19,186 in 2001.
Skin care products consist of catalog sales, television retail, and
private label sales. During 2002, direct marketing catalog sales decreased
slightly by $31,263 or 2.6% from $1,178,252 in 2001 to $1,146,989 in 2002. The
reduction in catalog sales resulted primarily from an increase in sales made
with promotional discounts. Television retail sales in 2002 were $19,177, a
decrease of $328,454 or 94.5% from $347,631 in 2001. The decrease in television
retail sales reflects the termination of the HSN agreement in late 2001, as well
as declining revenues received from repeat sales by QVC to prior purchasers of
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
the Company's products. Sales to television retailers represented 1.1% of the
Company's sales in 2002, down from 16.3% in 2001. Private label sales were
$131,208 in 2002; a reduction of $271,349 or 67.4% from sales of $402,557 in
2001, primarily the result of pipeline fill shipped to the customer in the
second half of 2001. Professional sales consist of dental products sold to
dental labs for use in manufacturing dentures. Dental product sales in 2002 were
$30,108, an increase $10,922 or 56.9% from $19,186 in 2001. This increase was
the result of our customer increasing their backroom stock after Hydron had
delays in filling orders in 2002 when one of the required components was
discontinued. It took several months for the Company to certify a new
manufacturer and qualify their component for insertion in Hydron's dental
product.
Over 97% of the Company's products are sold in the United States. The
Company sells skin care products in Australia and dental products in Spain and
Canada. In 2001, the Company also sold skin products to a pilot distributor in
Taiwan, but that business was not continued in 2002. International sales are not
material at this time and represented 1.7% and 2.5% of total sales for 2002 and
2001 respectively.
Cost of sales was $763,358 for 2002, a decrease of $179,302 or 19.0%
from cost of sales of $942,660 for 2001. Cost of sales was 45.7% of total sales
in 2002 compared to 44.2% in 2001. The increase in the cost of sales percentage
reflects an increase in the cost of shipments to our customers that was not
passed on in the customer's billings. Shipping cost in 2002 were $174,911, an
increase of $3,731 or 2.2% from $171,180 in 2001. In 2002, 81.8% of the shipping
costs were billed to customers compare to 86.1% in 2001. The Company monitors
its inventory levels closely and writes-down any inventory in excess of one-year
supply. Cost of sales include charges of $128,893 in 2002 to adjust inventories
to one-year supply valued at the lower of cost or realizable value on a FIFO
basis. Similar charges for 2001 were $154,594. Cost increases are not material
to catalog sales and the private label contracts provide for a pass through of
any cost increases incurred in that segment.
The Company's overall gross profit margin decreased slightly to 54.3%
of net sales for 2002 versus 55.8% for 2001, as the increased shipping costs
were not reflected in the customer billings. The gross profit margin of catalog
sales decreased slightly to 80.3% in 2002 from 81.9% in 2001 as the result of
the mix of products and collections sold.
Royalty expenses in 2002 were $0, representing a decrease of $86,574 or
100%, from royalty expenses of $86,574 in 2001. No royalty expense was required
in 2002 as the definition of applicable products was changed, creating a surplus
accrual. An aggregate of $127,437 was accrued and unpaid as of December 31,
2002. This amount is adequate to cover any royalties that might be payable
through December 2002.
Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, develop and package the products for
commercial sale, perform appropriate efficacy and safety tests, conduct consumer
panel studies, and focus groups. R&D expenses in 2002 were $68,257, an increase
of $9,935 or 17.0%, from R&D expenses of $58,322 in 2001. The amount of R&D
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
expenses per year varies, depending on the nature of the development work during
each year, as well as the number and type of products under development at such
time.
Selling, general, and administrative ("SG&A") expenses in 2002 were
$1,430,170, representing a slight increase of $2,054 or 0.1%, from SG&A expenses
of $1,432,224 in 2001. Sales commissions for 2002 were $57,201, a substantial
increase of $51,079 from $6,122 in 2001. This increase was directly related to
commission paid during the Company's 2002 promotional program to introduce its
product line to several retail chains. Employee payroll and benefits were
$577,435 in 2002, an increase of $41,380 or 7.7% from $536,055 in 2001. Payroll
increased 5.0% and the remaining increase reflected the escalating cost of
medical benefits. Insurance expense for 2002 was $99,880, an increase of $22,674
or 29.4% from $77,206 in 2001. This increase is directly related to the
increased cost of Directors and Officers insurance. All other SG&A expenses in
2002 were $695,654, a decrease of $117,187 or 14.4% from $812,841 in 2001. This
decrease includes reductions in royalties, legal and audit fees, computer
technology services and travel expenses.
Depreciation and amortization in 2002 was $315,724, a decrease of
$45,456 or 12.6% from $361,180 in 2001. This decrease relates to the
depreciation of the leasehold improvements associated with the Company's
previous office facility. The lease on that facility expired September 2001 and
the offices were relocated.
Interest and investment income in 2002 was $1,028, a decrease of $8,170
or 88.8%, from interest income of $9,198 in 2001, due primarily to lower cash
balances resulting from the factors discussed above. The Company maintains a
conservative investment strategy with respect to its cash balances, deriving
investment income primarily from U.S. Treasury securities.
The Company had a net loss for 2002 of $904,840, representing an
increase of $146,144 or 19.3% from the net loss of $758,696 for 2001, primarily
a result of the factors discussed above.
Results of Operations - 2001 versus 2000
Net sales for 2001 were $2,132,717, a decrease of $71,130 or 3.2%, from
net sales of $2,203,847 for the year ended December 31, 2000. Skin care products
net sales for 2001 were $1,966,127, a decrease of $105,814 or 5.1% from
$2,071,941 in 2000. Professional products net sales for 2001 were $19,186, an
increase of $9,659 or 101.4% from $9,527 in 2000. Freight revenues for 2001 were
$147,404, an increase of $25,025 or 20.4% from freight revenues of $122,379 in
2000.
Skin care products consist of catalog sales, private label, television
retail, and international sales. During 2001, direct marketing catalog sales
were $1,178,252, an increased of $151,184 or 14.7%, from $1,027,068 in 2000. The
increase in direct marketing catalog sales resulted primarily from an increase
in new customer trial and the continuation of promotional offers to existing
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
customers. Private label sales in 2001 were $402,557. There were no private
label sales in 2000. Television retail sales were $347,631 in 2001, a decrease
of $697,242 or 66.7%, from $1,044,873 in 2000. The decrease in sales to
television retailers HSN and QVC primarily reflect the limited airtime provided
by HSN during the first nine months of the year and the termination of the
exclusive sales agreement with HSN, as well as declining revenues received from
resales by QVC to prior purchasers of the Company's products. Sales to
television retailers represented 16.3% of the Company's sales in 2001, down from
47.4% in 2000. In 2001, the Company had initial sales of $33,355 to a new
distributor in Taiwan. This is an introductory effort to determine if this new
distributor and the Hydron products can impact the skin care market in Taiwan.
Over 97% of the Company's products are sold in the United States. The
Company sells skin care products in Australia and Dental products in Spain and
Canada. In 2001, skin care products were also sold in Taiwan. International
sales are not material at this time and represented 2.5% and 1.5% of total sales
in 2001 and 2000 respectively.
Cost of sales was $942,660 for 2001, an increase of $370,777 or 64.8%
from $571,883 in 2000. Cost of sales was 44.2% of total sales in 2001 compared
to 25.9% in 2000. The increase in 2001 reflects a shift of sales away from high
margin television retail sales (61.1%) with high promotional costs to private
label sales that have lower margins (38.1%) and minimal promotional costs. In
addition, cost of sales in 2000 reflected a one-time savings of $175,000 when a
packaging contract was favorably renegotiated. The Company monitors its
inventory levels closely and writes-down any inventory in excess of one-year
supply. Cost of sales include charges of $154,594 in 2001 to adjust inventories
to one-year supply valued at the lower of cost or realizable value on a FIFO
basis. There were no similar charges for 2000. The Company has been able to
absorb the cost increases in Catalog cost of sales and the Private Label
contracts provide for a pass through of any cost increases incurred in that
segment.
As a result of the above factors, the Company's overall gross profit
margin decreased to 55.8% of net sales for 2001 versus 74.1% for 2000.
Royalty expenses in 2001 were $86,574, representing a decrease of
$16,984 or 16.4%, from royalty expenses of $103,558 in 2000. The decrease in
2001 is commensurate with the decrease in gross sales derived from Hydron(TM)
polymer-based products by the Company. These expenses are related entirely to
the Company's obligations under the GPS Agreement with Hydro-Med and pertain to
the use of the Hydron(TM) polymers as a formula ingredient for many of the
Company's products.
Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, develop and package the products for
commercial sale, perform appropriate efficacy and safety tests, conduct consumer
panel studies, and focus groups. R&D expenses in 2001 were $58,322, a decrease
of $25,786 or 30.7%, from R&D expenses of $84,108 in 2000. The amount of R&D
expenses per year varies, depending on the nature of the development work during
each year, as well as the number and type of products under development at such
time.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Selling, general, and administrative ("SG&A") expenses in 2001 were
$1,432,224, representing a decrease of $495,709 or 25.7%, from SG&A expenses of
$1,927,933 in 2000. This decrease is the result of: 1) lower marketing expenses
associated with reducing activity with HSN in 2001 ($254,618), 2) reduced
selling and advertising expenses associated with Catalog sales ($126,162), 3)
reduced expenses related to outside consultants ($84,963), and 4) reduced
expenses for rents resulting from the switch over to outside warehousing
($48,952). These cost reductions were partially offset by: 1) increased Catalog
postage and handling associated with attracting new customers ($22,217), and 2)
increased legal expenses associated with developing patents and contracts for
new technology ($34,454).
The Company operated 2001 at a close-to-break-even cash flow rate
($23,879) while carefully investing in the future. Excluding some one-time
charges, 2001 would have a positive cash flow of $157,628. During the year,
there have been a number of one-time expenses that reduced operating cash,
including: costs associated with a patent application ($58,572), legal costs
associated with research and development technology ($84,718), and moving costs
associated with the relocation of the corporate offices to Pompano Beach
($38,217).
Interest and investment income in 2001 was $9,198, a decrease of
$11,747 or 56%, from interest income of $20,945 in 2000, due primarily to lower
cash balances resulting from the factors discussed above. The Company maintains
a conservative investment strategy with respect to its cash balances, deriving
investment income primarily from U.S. Treasury securities.
The Company had a net loss for 2001 of $758,696, representing a
reduction of $164,936 or 18% from the net loss of $923,632 for 2000, primarily
as a result of the significant reductions in expenses, particularly relating to
SG&A as discussed above.
Results of Operations - 2000 versus 1999
Net sales for 2000 were $2,203,847; a decrease of $461,666 or 17.3%,
from net sales of $2,665,513 for the year ended December 31, 1999. Skin care
products net sales for 2000 were $2,071,941, a decrease of $515,810 or 19.9%
from $2,587,751 in 1999. Professional products net sales for 2000 were $9,527,
an increase of $3,830 or 67.2% from $5,697 in 1999. Freight revenues for 2000
were $122,379, an increase of $50,314 or 69.8% from freight revenues of $72,065
in 1999.
Skin care products consist of catalog sales, private label, television
retail, and international sales. During 2000, direct marketing catalog sales
were $1,027,068, an increased of $205,539 or 25.0%, from $821,529 in 1999. The
increase in direct marketing catalog sales resulted primarily from an increase
in new customer trial and the continuation of promotional offers to existing
customers. Television retail sales were $1,044,873 in 2000, a decrease of
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
$721,350 or 40.8%, from $1,766,223 in 1999. HSN sales slowed as the show
schedule decreased on the HSN domestic channel, offset by an increase as HSE
(Home Shopping Espanol) geared up for the Latin market introduction in November.
Approximately 63% of the Company's television retail sales during 2000
were to HSN and approximately 36% to QVC. Management anticipates that sales to
HSN will grow to be a larger percentage of the Company's sales and, absent the
consummation of marketing or distribution arrangements with third parties other
than HSN, the Company's dependence upon direct response television as a
distribution channel will decrease but remain significant. Any disruption in the
Company's relationship with HSN would have a material adverse effect on the
business, financial condition, and results of operations of the Company. Sales
to television retailers represented 47.4% of the Company's sales in 2000, down
from 68.1% in 1999.
Over 97% of the Company's products are sold in the United States. The
Company sells skin care products in Australia and dental products in Spain and
Canada. International sales are not material at this time and represented 1.5%
in 2000.
Cost of sales was $571,883 for 2000, a decrease of $733,718 or 56.2%
from $1,305,601 in 1999. The cost of sales decrease reflects 1) lower overall
sales and 2) a shift in sales from lower margin television sales (61%) to high
margin catalog sales (83%). In addition, cost of sales in 2000 reflected a
one-time savings of $175,000 when a packaging contract was favorably
renegotiated. The Company monitors its inventory levels closely and writes-down
any inventory in excess of one-year supply. Inventories are valued at the lower
of cost or realizable value on a FIFO basis. Cost of sales was 25.9% of total
sales in 2000 compared to 49.0% in 1999.
The Company reflected an inventory write-down of $794,362 in 1999 that
represented 31% of net sales for 1999. There was no corresponding write-down of
inventory for 2000. The write-down to net realizable value represents components
and finished goods of product that the Company deems excess based on current
sales levels or does not plan to continue marketing in the future.
Substantially all of the inventory components and finished goods
written down resulted from the conversion to HSN from QVC as the primary channel
of distribution, or were purchased and/or manufactured prior to September 1997.
The write-down applies primarily to components and finished goods outside of the
traditional skin care product line, such as hair care, sun care, and bath and
body products. The Company will make every effort to recoup as much value as
possible as it examines various means of liquidating the current excess. Of the
excess, approximately $73,000 of the inventory was sold.
As a result of the above factors, the Company's overall gross profit
margin increased to 74.1% of net sales for 2000 versus 21.2% for 1999.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Royalty expenses in 2000 were $103,558, representing a decrease of
$38,416, or 27.1%, from royalty expenses of $141,974 in 1999. Royalties for 1999
included royalties due under the QVC agreement. The decrease in 2000 is
generally commensurate with the decrease in gross sales for the Company in 2000
when QVC royalties are excluded. These expenses are related primarily to the GPS
Agreement with Hydro-Med and pertain to the use of the Hydron(TM) polymers as a
formula ingredient for many of the Company's products.
Research and Development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, develop and package the products for
commercial sale, perform appropriate efficacy and safety tests, and conduct
consumer panel studies and focus groups. R&D expenses in 2000 were $84,108, a
decrease of $127,848, or 60.3%, from R&D expenses of $211,956 in 1999. In
changing to a new electronic retailer, the Company's first priority was to
establish the core line with the new TV audience. The need for new product
introduction is more important for the second year and beyond. The amount of R&D
expenses per year varies, depending on the nature of the development work during
each year, aw well as the number and type of products under development at such
time.
Selling, general, and administrative ("SG&A") expenses in 2000 were
$1,927,933, representing a decrease of $236,574 or 10.9%, from SG&A expenses of
$2,164,507 in 1999. This decrease is the result of: 1) lower marketing and
promotional expenses ($123,000), 2) reduced expenses related to outside
consultants ($103,000), 3) reduced expenses for warehouse rent since September
($56,000), and 4) reduced insurance premiums ($47,000). These cost reductions
were partially offset by 1) increased Catalog postage and handling associated
with attracting new customers ($44,000), and 2) increased MIS expenses required
for Catalog sales growth, including Hydron(TM) Website redesign ($41,000).
There were no employment contract settlement costs in 2000, a 100%
decrease from employment contract settlement costs of $620,099 for 1999. These
costs related to the settlement terms and associated legal fees regarding
several employment contracts. These contracts, which originated during 1993 and
1994, overburdened the Company's operations during a period when the Company's
revenues could not support the contracts. The Company does not currently have
any employment contracts.
Interest and investment income in 2000 was $20,945, a decrease of
$59,915, or 74%, from interest income of $80,860 in 1999, due primarily to lower
cash balances resulting from the factors discussed above. The Company maintains
a conservative investment strategy, deriving investment income primarily from
U.S. Treasury securities.
The Company had a net loss for 2000 of $923,632, a reduced loss of
$2,050,510, or 69% from the net loss of $2,974,142 for 1999, primarily as a
result of the factors discussed above.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources
The Company's working capital was approximately $ 532,729 at December
31, 2002, including cash and cash equivalents of approximately $291,136. Cash
used by operating activities was $203,117 and $22,814 was invested in patents.
This was offset by proceeds from financing activities of $350,000.
The Company does not have any material debt, long-term capital leases,
or long-term operating leases. The lease on the current office facility expires
August 31, 2004 and the Company expects to renew the lease on a short-term
basis. There are no capital expenditures under constructs and no long-term
commitments other than royalty payments under an agreement with GP Strategies
Corporation (See note 5 to Financial Statements). The Company does not have any
lines of credit. There are no purchase order commitments that exceed 90 days.
The Company completed a non-brokered private placement of 1,750,000
Units at $.20 per Unit ($350,000), on December 10, 2002 to several accredited
investors. Each Unit is comprised of one share of common stock and one
three-year option to buy one additional common share at $.20.
The Company has incurred significant losses over the past five years
and generates a negative cash flow on a monthly basis. The ability of the
Company to continue as a going concern is dependent upon increasing sales,
managing operating expenses, and obtaining additional equity financing.
Management's plan to increase sales and reduce operating expenses
includes the following elements:
o Licensing proprietary and possibly patentable technologies, including
skin and tissue oxygenation and the acne ingredient delivery system,
where appropriate to third party companies.
o Continued emphasis on Catalog sales, including sales made over the
internet, since these sales have higher profit margins and represent
markets for the Company that are growing more rapidly than the
Company's traditional television market.
o Increased use of direct marketing techniques to reach new and current
consumers such as print promotions mailed to targeted consumers, Web
site specials, promotions to other Web site customers, and direct
E-mail promotions to new customers.
o Addition of new revenue streams through expanded international
distribution achieved through the use of distribution agreements with
foreign and international distributors.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
o Development, acquisition and marketing of new product lines based on
proprietary technologies that appeal to the aging baby boomers as well
as the new generation.
o In addition, the Company has plans to build upon its success in private
label sales utilizing Hydron(TM) polymer based formulas. The Company is
also pursuing international distribution agreements that will expand
the Company's distribution around the world.
o Regarding new products and markets, the Company will continue to
develop proprietary technology that it believes will improve its
long-term success in the skin care business, such as the acne
ingredient delivery system. The Company's Super Oxygenated fluid and
composition technology should allow significant advances in skin care
products and open application and licensing opportunities beyond the
skin care category.
o The Company does not have the financial resources to sustain a national
advertising campaign to support distribution of its products in
conventional retail stores. In view of the foregoing, Management's
strategy has been to enter into marketing, licensing and distribution
agreements with third parties which have greater financial resources
than those of the Company and that can enhance the Company's product
introductions with appropriate national marketing support programs.
There can be no assurances that Management's Plan will be successful
and the Company's actual results could differ materially. No estimate has been
made should Management's plan be unsuccessful.
Change in Accounting Principle and New Accounting Pronouncements
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statement
No. 4,44, and 64, Amendment of the FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of FASB
No. 13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of FASB 145 related to classification of debt
extinguishments are effective for fiscal years beginning after May 15, 2002. The
provisions of SFAS 145 related to lease modifications is effective for
transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have
a material impact on the Company's financial position.
In November 2002, the FASB issued FASB interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and disclosure Requirements for Guarantees,
including indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements for
interim or annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a material impact on the Company's financial position or on its
results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" - an amendment of FASB
Statement No. 123 "Accounting and Disclosure of Stock-Based Compensation". SFAS
No. 148 amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No.148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure requirements of SFAS No. 148 have been implemented in Note 1 and Note
10 to the accompanying financial statements, and the interim reporting
requirements will be adopted in the first interim period in 2003. We have not
determined whether we will undertake a change to the fair value method in the
near future. As our supplemental disclosure in Note 1 and Note 10 indicates, our
adoption of the fair value provisions of SFAS No. 123 would not have a negative
effect on our Consolidated Income Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The adoption of FIN 46
did not have a material impact on the Company's financial position or on its
results of operations.
Shipping and handling billings and costs have been reclassified in the
2002, 2001, and 2000 financial statements to conform to the provisions of
Emerging Issues Task Force No. 00 -10, "Accounting for Shipping and Handling
Fees and Costs". These reclassifications have no effect on reported net income.
In 2002, 2001, and 2000 the Company reclassified $143,149, $147,404, and
$122,379 respectively, of shipping fees to Net sales and $174,911, $171,180, and
$121,405 respectively, to cost of sales. Selling, general and administration
expenses were reduced accordingly.
The effect of inflation has not been significant upon either the
operations or financial condition of the Company.
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cautionary Statement Regarding Forward Looking Statements
The statements contained in this Report on Form 10-K that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future, including, without
limitation, it's plans regarding distribution and marketing of it's products and
the development, acquisition and marketing of new products. Forward looking
statements include the Company's liquidity, anticipated cash needs and
availability, and the anticipated expense levels under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward looking statements included in this document are based on information
available to the Company on the date of this Report, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those expressed
or implied in such forward-looking statements.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, sales and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to bad debts,
inventories, investments, intangible assets, income taxes, restructuring, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies are significant
in preparation of our financial statements.
Allowance for Sales Returns
Hydron records product sales when persuasive evidence of an arrangement
exists, shipment has occurred, the price to the buyer is fixed or determinable
and collectibility is reasonably assured. Catalog sales are sold on a cash basis
with a 30-day guarantee. Returns have been less than $10,000 annually for the
last five years. A provision is made at the time sales are recognized for the
estimated cost of product warranties. Private label sales are sold on account
and are collected in 30 to 45 days. If there is a production or packaging
problem, the Company would correct the problem and replace the product sold. To
minimize that possibility, the Company inspects all production batches before
they are packaged to insure quality, effectiveness, and consistency.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Inventory Valuation
Hydron initially values inventory at actual cost to purchase and/or
manufacture inventory. We periodically review these values to ascertain that the
inventory continues to maintain a market value that is in excess of its recorded
cost. Generally, reductions in value of inventory below cost are caused by our
maintenance of stocks of products in excess of demand. We regularly review
inventory quantities on hand and, where necessary, record provisions for excess
and obsolete inventory based on either our estimated forecast of products demand
and production requirement or historical trailing usage of the product. If our
sales do not materialize as planned or at historic levels, we may have to
increase our reserve for excess and obsolete inventory. This would reduce our
earnings and cash flows.
Packaging changes are planned far in advance in order to limit the
impact of out-dated or obsolete components. Private label customers are required
to prepay the cost of packaging materials in order to take advantage of volume
discounts and protect the Company from any sudden packaging changes.
24
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following financial statements required by Item 8 follow Item 14 of this
Report:
Page
Reports of Independent Certified Public Accountants 33
Financial Statements:
Balance Sheets
December 31, 2002 and 2001 34
Statements of Operations
Years ended December 31, 2002, 2001 and 2000 35
Statements of Changes in Shareholders'
Equity for the Years ended December 31, 2002, 2001 and 2000 36
Statements of Cash Flow
Years ended December 31, 2002, 2001 and 2000 37
Notes to Financial Statements 38-51
All financial schedules are omitted since the required information is
not present, is not in significant amounts sufficient to require submission of
the schedules or because the information required is included in the
Consolidated Financial Statements or notes thereto.
25
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(a)(3) Exhibits
3.1 Restated Certificate of Incorporation of Dento-Med Industries, Inc.
("Dento-Med"), as filed with the Secretary of State of New York on March 4,
1981.(1)
3.2 By-laws of the Company, as amended March 17, 1988.(2)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of New York on November 14, 1988
(filed as Exhibit 3.2 therein).(3)
3.4 Certificate of Amendment of the Restated Certificate of Incorporation of
Dento-Med, as filed with the Secretary of State of New York on July 30,
1993.(4)
4.0 Non-Qualified Stock Option Plan.(5)
10.50 Consulting Agreement between Charles Fox Associates, Inc. and the Company
dated May 20, 1997.(6)
10.51 Personal Appearance Agreement between Mr. Charles Fox and the Company
dated May 20, 1997.(6)
10.55 Service Agreement between Lauren Anderson and the Company dated January 1,
1998.(6)
10.56 Specimen of Subscription Agreement and Investment Letter, Private
Placement offering completed December 10, 2002.(7)
Marketing and Distribution Agreement between Home Shopping Club LP and the
Company dated September 1, 1999(8)
1997 Nonemployee Director Stock Option Plan.(9)
(b) Reports on Form 8-K
-Current Report on Form 8-K, dated November 14, 2002 reporting items 7
and 9.
-Current Report on Form 8-K, dated January 2, 2003 reporting item 5
----------------------
(1) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1985.
(2) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987.
(3) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1988.
(4) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1993.
(5) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1986.
(6) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1997.
(7) Incorporated by reference to the Company's report on Form 8-K (date of
report January 2, 2003)
(8) Incorporated by reference to the Company's report on Form 8-K (date of
report September 14, 1999), dated September 1, 1999.
(9) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A for the year ended December 31, 1996.
26
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Other Events; Non-brokered private placement.
27
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Hydron Technologies, Inc.
We have audited the accompanying balance sheets of Hydron Technologies, Inc. as
of December 31, 2002 and 2001 and the related statements of operations, changes
in shareholders' equity and cash flows for the years ended December 31, 2002,
2001, and 2000. 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 auditing standards generally accepted
in the United States. 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 Hydron(TM) Technologies, Inc.
at December 31, 2002, 2001, and 2000, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company experienced losses from operations
in 2002, 2001, and 2000. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management has implemented
direct marketing techniques to increase the more profitable catalog sales, add
new customers and take advantage of new channels of distribution (see note 11 to
Financial Statements). The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 13 to the financial statements, the accompanying 2002,
2001, and 2000 financial statements have been restated.
/s/ DaszkalBolton LLP
Boca Raton, Florida
March 18, 2003
28
HYDRON TECHNOLOGIES, INC.
Balance Sheets
December 31,
----------------------------
2002 2001
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 291,136 $ 167,067
Trade accounts receivable 40,000 61,444
Inventories 742,529 1,164,297
Prepaid expenses and other current assets 40,007 43,450
------------ ------------
Total current assets 1,113,672 1,436,258
Property and equipment, less accumulated
depreciation of $552,459 and $534,533 at
2002 and 2001, respectively 9,448 27,374
Deposits 20,817 28,203
Deferred product costs, less accumulated
amortization of $5,317,262 and $5,482,021 at
2002 and 2001, respectively 324,613 544,347
------------ ------------
Total Assets $ 1,468,549 $ 2,036,182
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 133,983 $ 116,559
Royalties payable 127,437 148,992
Deferred revenues 96,390 148,646
Accrued liabilities 223,133 239,041
------------ ------------
Total current liabilities 580,943 653,238
Commitments and contingencies -- --
Shareholders' equity
Preferred stock - $.01 par value -- --
5,000,000 shares authorized; no shares issued
or outstanding
Common stock - $.01 par value 71,103 50,353
30,000,000 shares authorized; 7,110,336 shares
5,035,336 shares issued ; and 7,050,136 shares and
4,975,136 shares outstanding at 2002 and 2001, respectively
Additional paid-in capital 19,890,587 19,501,837
Accumulated deficit (18,634,926) (17,730,088)
Treasury stock, at cost; 60,200 shares (439,158) (439,158)
------------ ------------
Total Shareholders' equity 887,606 1,382,944
------------ ------------
Total liabilities and shareholders equity $ 1,468,549 $ 2,036,182
============ ============
See accompanying notes to financial statements
29
HYDRON TECHNOLOGIES, INC.
Statements of Operations
Year ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net Sales $ 1,671,641 $ 2,132,717 $ 2,203,847
Cost of sales 763,358 942,660 571,883
------------ ------------ ------------
Gross profits 908,283 1,190,057 1,631,964
Expenses
Royalty expense -- 86,574 103,558
Research and development 68,257 58,322 84,108
Selling, general & administration 1,430,170 1,432,224 1,927,933
Depreciation & amortization 315,724 361,180 463,136
------------ ------------ ------------
Total expenses 1,814,151 1,938,300 2,578,735
------------ ------------ ------------
Operating loss (905,868) (748,243) (946,771)
Interest income 1,028 9,198 20,945
Loss on abandonment of lease -- (19,651) --
Equity in earnings of joint venture -- -- 2,194
------------ ------------ ------------
Loss before income taxes (904,840) (758,696) (923,632)
Income taxes expense -- -- --
------------ ------------ ------------
Net loss $ (904,840) $ (758,696) $ (923,632)
============ ============ ============
Basic and diluted loss per share
Net loss per common share $ (0.17) $ (0.15) $ (0.19)
============ ============ ============
Weighted average shares
outstanding (basic and diluted) 5,201,369 4,975,136 4,975,136
See accompanying notes to financial statements
30
HYDRON TECHNOLOGIES, INC.
Statement of Shareholders' Equity
Common Stock Preferred Stock Additional Treasury
-------------------------- ------------------------- Paid-in Accumulated Stock Total
Shares Amount Shares Amount Capital Deficit (at cost) Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1999 5,035,336 $ 50,353 -- -- $ 19,501,837 $(16,047,758) $ (439,158) $ 3,065,274
Net loss -- -- -- -- -- (923,632) -- (923,632)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2000 5,035,336 50,353 -- -- 19,501,837 (16,971,390) (439,158) 2,141,642
Net loss -- -- -- -- -- (758,696) -- (758,696)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2001 5,035,336 50,353 -- -- 19,501,837 (17,730,086) (439,158) 1,382,946
Issuance of
Common shares
for license
agreement 325,000 3,250 -- -- 52,000 -- -- 55,250
Private placement
of common shares 1,750,000 17,500 -- -- 332,500 -- -- 350,000
Compensation
expense from
stock option
awards -- -- -- -- 4,250 -- -- 4,250
Net loss -- -- -- -- -- (904,840) -- (904,840)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2002 7,110,336 $ 71,103 -- -- $ 19,890,587 $(18,634,926) $ (439,158) $ 887,606
============ ============ ============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
31
HYDRON TECHNOLOGIES, INC.
Statements of Cash Flows
Year ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Operating Activities
Net Loss $ (904,840) $ (758,696) $ (923,632)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 315,724 361,180 463,136
Loss on disposal of assets -- 19,651 --
Equity in earnings of joint venture -- -- (2,194)
Compensation expense from stock option awards 4,250
Change in operating assets and liabilities
Trade accounts receivables 21,444 74,862 (97,816)
Inventories 421,768 325,099 (51,104)
Prepaid expenses and other current assets 3,443 (3,831) 78,834
Deposits 7,386 32,198 116,047
Accounts payable 17,424 (78,232) 67,248
Deferred revenues (52,256) 148,646 --
Accrued liabilities (37,460) (76,051) (178,404)
---------- ---------- ----------
Net cash provided (used) by operating activities (203,117) 44,826 (527,885)
Investing activities
Capital Expenditures, net -- (10,133) --
Deferred product costs (22,814) (58,572) --
Proceeds from liquidation of joint venture -- -- 64,915
---------- ---------- ----------
Net cash provided (used) by investing activities (22,814) (68,705) 64,915
Financing activities
Proceeds from private placement of 1,750,000 shares
of Common Stock 350,000 -- --
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 124,069 (23,879) (462,970)
Cash and cash equivalents at beginning of period 167,067 190,946 653,916
---------- ---------- ----------
Cash and cash equivalents at end of period $ 291,136 $ 167,067 $ 190,946
========== ========== ==========
Noncash investing and financing activities
Market value of stock issued for license agreement $ 55,250 -- --
See accompanying notes to financial statements
32
Hydron Technologies, Inc.
Notes to Financial Statements
December 31, 2002, 2001, and 2000
1. Description of Business and Summary of Significant Accounting Policies
Organization of Business
Hydron(TM) Technologies, Inc. (the "Company") sells consumer and
professional products, primarily in the personal care/cosmetics field. The
Company holds the exclusive license with National Patent Development Corporation
("National Patent") to a Hydron(TM) polymer-based drug delivery system for
topically applied, nonprescription pharmaceutical products, which the Company
intends to use to develop proprietary products or license to third parties. The
Company owns U.S. and international patents on a method to suspend the
Hydron(TM) polymer in a stable emulsion for use in personal care/cosmetic
products.
The majority of the Company's products are sold in the United States
directly to the consumer through Catalog sales and the internet, direct response
television, and on a minor level internationally through salons and doctors
offices.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes $277,886 which are covered by the
Federal Deposit Insurance Commission.
The Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash equivalents. The
credit risk associated with cash equivalents is considered low due to the credit
quality of the issuers of the financial instruments.
Concentration of Credit Risk
Trade accounts receivable are due primarily from Reliv International,
Inc. and QVC, Inc., which are usually paid to the Company within 30 days after
receipt of goods. The Company performs ongoing evaluations of its significant
customers and does not require collateral. At December 31, 2002, the entire
amount due is from an international broker and is secured by funds in escrow.
33
Hydron Technologies, Inc.
Notes to Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market, and include finished goods, packaging, and raw materials.
Long-Lived Assets
Hydron(TM) reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of its intangible
assets, management performs an analysis of the anticipated undiscounted future
net cash flows of the individual assets over the remaining amortization period.
Hydron(TM) recognizes an impairment loss if the carrying value of the asset
exceeds the expected future cash flows. As of December 31, 2002, there was no
deemed impairment of long-lived assets.
Property and Equipment
Property and equipment, consisting primarily of furniture and
equipment, is carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from four to six
years (see Note 4).
Deferred Product Costs
Deferred product costs consist primarily of costs incurred for the
purchase and development of patents and product rights (see Note 5). The
deferred product costs are being amortized over their estimated useful lives of
eight to twenty years using the straight-line method.
Common Stock, Common Stock Options, and Net Loss Per Share
When the Company issues shares of common stock in exchange for
services, an expense is recognized over the period in which the services are
rendered. The expense is based upon the fair value of such shares, in accordance
with FASB statement No. 123 using a Black-Scholes pricing model, at the date
such arrangements are consummated or authorized by the Board of Directors, with
a corresponding credit to capital.
34
Hydron Technologies, Inc.
Notes to Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
(continued)
The Company has elected to follow Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its stock options and has adopted the
disclosure-only provisions of FASB Statement No. 123, "Accounting and Disclosure
of Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Company's stock option plans.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Account Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. The Company has elected to use the
intrinsic value method of accounting for stock compensation in accordance with
APB No. 25 and related interpretations. The disclosure provision of Statement
No. 148 have been adopted by the Company with appropriate disclosure included in
Note 10, Stock Options and Warrants.
Revenue Recognition and Product Warranty
The Company recognizes revenue when
o Persuasive evidence of an arrangement exists
o Shipment has occurred
o Price is fixed or determinable, and
o Collectability is reasonably assured
Subject to these criteria, the Company recognizes revenue at the time
of shipment of the relevant merchandise. The Company offers its customers a
thirty-day products warranty and estimates an allowance for sales returns based
on historical experience with product returns.
Shipping and Handling Fees
The Company follows the provisions of Emerging Issues Task Force Issue
No. 00 -10, "Accounting for Shipping and Handling Fees and Costs." Any amounts
billed to third-party customers for shipping and handling is included as a
component of revenue. Shipping and handling costs incurred are included as a
component of cost of sales.
35
Hydron Technologies, Inc.
Notes to Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Cost of Sales
Products are manufactured through third parties under contract and Cost
of sales includes the cost of ingredients, packaging material, assembly and
processing costs. Inbound freight, internal transfers, and component handling
costs are charged to Cost of sales. Costs associated with shipping product to
customers is included in cost of sales. The cost of warehousing finished product
that is available for sale is included in selling, general, and administrative
expenses.
Advertising
Advertising costs are expensed as incurred and are included in
"selling, general and administrative expenses." Advertising expenses amounted to
approximately $72,000, $77,000, and $192,000, for 2002, 2001, and 2000,
respectively.
Reclassifications
Shipping and handling billings and costs have been reclassified in the
2002, 2001, and 2000 financial statements to conform to the provisions of
Emerging Issues Task Force No. 00 -10, "Accounting for Shipping and Handling
fees and Costa". These reclassifications have no effect on reported net income.
In 2002, 2001 and 2000, the Company reclassified $143,149, $147,404, and
$122,379, respectively, of shipping fees to Net sales and $174,911, $171,180,
$121,405, respectively, of shipping costs to cost of sales. Selling, general,
and administrative expenses were reduced accordingly.
2. Fair Value of Financial Instruments
The carrying value of cash, accounts receivables, deposits, accounts
payable, and other payables approximates fair value because of their short
maturities.
36
Hydron Technologies, Inc.
Notes to Financial Statements
3. Inventories
At December 31, 2002 and 2001, inventories consist of the following:
2002 2001
---------- ----------
Finished Goods $ 208,748 $ 543,880
Raw materials and components 533,781 620,417
---------- ----------
$ 742,529 $1,164,297
========== ==========
The company's earnings were reduced for excess inventory by $128,893,
$154,594 and $0, for the years ended December 31, 2002, 2001 and 2000,
respectively.
4. Property and Equipment
At December 31, 2002 and 2001, property and equipment consisted of the
following:
2002 2001
---------- ----------
Furniture and equipment $ 561,907 $ 561,907
Less accumulated depreciation (552,459) (534,533)
---------- ----------
$ 9,448 $ 27,374
========== ==========
Depreciation for the year ended December 31, 2002, 2001 and 2000 was
approximately $17,926, $74,111, and $175,741 respectively.
5. Deferred Product Costs and Royalty Agreements
From 1976 through 1989, the Company and GP Strategies Corporation
(formerly known as National Patent Development Corporation) ("GPS") entered into
various agreements, wherein the Company obtained the exclusive worldwide rights
to market products using Hydron(TM) polymers in the consumer and oral health
fields, the two fields in which the Company has concentrated its research and
development efforts, and to utilize the Hydron(TM) polymer as a drug release
mechanism in topically applied, nonprescription pharmaceutical products. The
Hydron(TM) polymer is the underlying technology in substantially all of the
Company's products. GPS has the exclusive worldwide license to market
prescription drugs and medical devices using Hydron(TM) polymers. Further, each
has the right to exploit products with Hydron(TM) polymers not in the other's
exclusive fields. As consideration for product rights obtained, the Company
37
Hydron Technologies, Inc.
Notes to Financial Statements
5. Deferred Product Costs and Royalty Agreements (continued)
issued GPS an aggregate of 220,000 shares of common stock through 1989, valued
at $5,370,000. The valuation for these shares was based on the market prices of
the Company's common stock at the dates the agreements were made.
At December 31, 2002 and 2001, deferred product costs consisted of the
following:
2002 2001
------------ ------------
Deferred product cost $ 271,875 $ 406,368
Patent cost 5,370,000 5,620,000
------------ ------------
5,641,875 6,026,368
Less accumulated amoritization (5,317,262) (5,482,021)
------------ ------------
$ 324,613 $ 544,347
============ ============
Amortization for the year ended December 31, 2002, 2001 and 2000 was
approximately $ 297,798, $287,069, and $287,395 respectively. Estimated future
amortization of intangible assets are as follows:
2003 $ 183,278
2004 23,343
2005 23,343
2006 23,343
2007 12,293
------------
$ 265,600
============
Under the terms of the GPS Agreement, the Company and GPS are each
required to pay to the other a royalty of five percent (5%) of their respective
net sales of Hydron(TM) polymer products, except for sales of non-prescription
drug products utilizing the Hydron(TM) polymer as an active ingredient to third
parties where the seller receives an up-front license fee, royalty or similar
payment where the seller shall pay the other party a royalty of twenty-five
percent (25%) of such payments. For the years ended December 31, 2002, 2001 and
2000, the Company has paid or accrued for payment to GPS approximately $0,
$87,000 and $104,000, respectively. No royalty expense was required in 2002 as
the definition of applicable products was charged, creating a surplus accrual.
An aggregate of $127,437 was accrued and unpaid as of December 31, 2002. This
amount is adequate to cover any royalties that might be payable through that
date. The Company has not received any royalty payments, or been advised of any
sales that would entitle them to royalty payments during this period.
38
Hydron Technologies, Inc.
Notes to Financial Statements
5. Deferred Product Costs and Royalty Agreements (continued)
The Company is not dependent on any sole manufacturer except that the
Company's ability to obtain additional supply of the Hydron(TM) polymer is
dependent on GP Strategies Corporation (formerly known as National Patent
Development Corporation) ("GPS") and its assignee, Hydro-Med Sciences, Inc.
("Hydron-Med"), which owns certain proprietary information relating to the
manufacture of the Hydron(TM) polymer. Under the terms of an agreement with GPS,
as amended and restated (the "GPS Agreement"), GPS is obligated to supply the
Company with up to 3,000 kilograms of the Hydron(TM) polymer for so long as GPS
manufactures the Hydron(TM) polymer, and the Company is obligated to purchase
its first 3,000 kilograms of Hydron(TM) polymer from GPS. In the event GPS is
unable to manufacture and supply the Company with its requested quantity of
Hydron(TM) polymer, GPS is obligated to provide the Company with information and
assistance regarding all technology and manufacturing procedures (including
know-how) possessed by GPS and use in connection with the manufacture of the
Hydron(TM) polymer.
The Company is currently negotiating certain changes in the GPS
Agreement with Hydro-Med, including the provisions relating to supply of the
Hydron(TM) polymer. Hydro-Med has advised the Company that it has disposed of
the equipment used in the manufacture of the Hydron(TM) polymer and no longer
has the in-house capability of manufacturing the Hydron(TM) polymer. The Company
is engaged in discussions with Hydro-Med regarding alternative sources for the
Hydron(TM) polymer. See discussion under "Agreement with GPS" below. Although
the Company's inventory of the Hydron(TM) polymer is sufficient to satisfy
current requirements, the loss of, or significant reduction in, a commercially
suitable supply of the Hydron(TM) polymer would have a material adverse effect
on the Company and its business.
GPS has assigned its rights under the GPS Agreement to Hydro-Med. In
December 2002, the Company and Hydro-Med reached an agreement in principle to
amend the GPS Agreement to eliminate their respective obligations to make
royalty payments. Under the terms of this agreement in principle, the Company's
obligation to pay accrued, but unpaid royalties, would also be eliminated.
However, Hydro-Med has requested certain other changes to the GPS Agreement,
including changes relating to Hydro-Med's obligation to supply the Hydron(TM)
polymer, that are unacceptable to the Company. Accordingly, as of March 31,
2003, the Company has not entered in to a binding agreement to amend the terms
of the GPS Agreement.
39
Hydron Technologies, Inc.
Notes to Financial Statements
6. Accrued Liabilities
Accrued liabilities represent expenses that apply to the reported
period and have not been billed by the provider or paid by the Company. At
December 31, 2002 and 2001, accrued liabilities consisted of the following:
2002 2001
---------- ----------
Dividends payable $ 83,163 $ 83,163
Director fee payable 50,008 30,004
Legal and audit fees 23,134 68,300
Other 66,828 57,574
---------- ----------
$ 223,133 $ 239,041
7. Significant Customer
The Company sold a substantial portion of its products to Reliv, HSN,
and QVC. The percent of the Company's sales for the years ended December 31,
2002, 2001, and 2000 and trade receivable balances as of December 31, 2002,
2001, and 2000 are as follows:
2002 2001 2000
-------- -------- --------
Percent of Sales
Reliv 9% 20% 0%
HSN 0% 1% 32%
QVC 1% 7% 18%
Trade Receivables
Reliv $ -- $ 17,559 $ --
HSN $ -- $ -- $ 97,186
QVC $ -- $ 33,041 $ 44,120
Effective March 1, 2001, the Company entered into an agreement with
Reliv International, Inc (Reliv) to develop and manufacture a line of private
label skin care products to be distributed through Reliv's multi-tier marketing
distribution network. Five products were introduced in August 2001, and a sixth
product was added in February 2002. The agreement requires minimum product
purchases and advance payments to cover packaging and design costs.
8. Income Taxes
The Company accounts for income taxes under FASB Statement No. 109,
"Accounting for Income Taxes" (FASB 109). Deferred income tax assets and
40
Hydron Technologies, Inc.
Notes to Financial Statements
8. Income Taxes (continued)
liabilities are determined based upon differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. There has been no income tax expense during the three years ended
December 31, 2002.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred income taxes are as follows:
2002 2001 2000
------------ ------------ ------------
Net operating loss carryforwards $ 7,890,000 $ 7,494,000 $ 7,135,000
Tax credit carry forwards 180,000 180,000 180,000
Other 230,000 465,000 575,000
------------ ------------ ------------
Deferred tax assets 8,300,000 8,139,000 7,890,000
Less valuation allowance (8,300,000) (8,139,000) (7,890,000)
------------ ------------ ------------
Total net deferred taxes $ -- $ -- $ --
============ ============ ============
FASB 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, Management
has determined that an $8,300,000 valuation allowance at December 31, 2002 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The valuation allowance increased by $161,000, $249,000,
and $281,000 in 2002, 2001 and 2000, respectively. At December 31, 2002, the
Company has available net operating loss carryforwards of $20,762,000, which
will expire beginning in the year 2003 and through the year 2022.
41
Hydron Technologies, Inc.
Notes to Financial Statements
8. Income Taxes (continued)
The reconciliation of income tax rates, computed at the U.S. federal
statutory tax rates, to income tax expense is as follows:
Year ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Tax at U.S. statutory rates -34% -34% -34%
State income taxes, net of federal tax benefit -4% -4% -4%
Valuation allowance adjustments 38% 38% 38%
-------- -------- --------
0% 0% 0%
======== ======== ========
9. Stock Options and Warrants
The number of shares of common stock reserved for issuance was
2,036,100 for December 31, 2002 and 261,100 for 2001. This includes 1,750,000
shares for the private placement subscription agreements completed December 10,
2002.
1997 Nonemployee Director Stock Option Plan
During 1997, the Company adopted the 1997 Nonemployee Director Stock
Option Plan. Such plan provides grants of stock options to nonemployee directors
of the Company to purchase an aggregate of 100,000 shares of the Company's
common stock.
Each nonemployee director shall be granted an option to purchase 2,000
shares of the Company's common stock on each May 1st throughout the term of this
plan at exercise prices equal to the average of the fair market value of the
Company's common stock during the ten business days preceding the date of the
grant. In addition, each nonemployee director who sits on a committee of the
Board of Directors shall be granted an option to purchase 500 shares of the
Company's common stock under the same pricing arrangements as above. Subject to
certain exceptions, no options granted under this plan shall be exercisable
until one year after the date of grant.
During August 1999, the Company agreed to increase the annual May 1st
grant to the Board Members from 2,000 to 20,000 shares of the Company`s common
stock, subject to shareholders' approval at the next annual meeting. Since the
options have been granted pending shareholders' approval, the options are
reflected as outstanding as of December 31, 2002. These options expire five
years from the date of grant and all outstanding options are exercisable at
December 31, 2002. There are no options available for grant under this plan at
December 31, 2002. Activity with respect to these plans is as follows:
42
Hydron Technologies, Inc.
Notes to Financial Statements
9. Stock Options and Warrants (continued)
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
----------- ---------------- --------
Outstanding at December 31, 1999 240,000 $ 0.53 to 23.91 $ 2.06
Stock options granted 8,000 0.37 0.37
Stock options expired (30,000) 0.64 to 23.91 6.53
-----------
Outstanding at December 31, 2000 218,000 0.37 to 12.50 1.38
Stock options granted -- -- --
Stock options expired (11,500) 0.53 to 12.50 8.86
-----------
Outstanding at December 31, 2001 206,500 0.37 to 3.53 0.96
Stock options granted 81,000 0.20 to 0.43 0.32
Stock options expired (64,000) 0.31 to 3.53 1.34
-----------
Outstanding at December 31, 2002 223,500 $ 0.20 to 2.42 $ 0.62
===========
The Board of Directors has approved the issuance of an additional
353,500 options, subject to the approval of a stock option plan amendment at the
next shareholders' meeting. These options have not been reflected as of December
31, 2002 calculations since there are insufficient options available without the
shareholders actions.
Other Options and Warrants
The Company completed a non-brokered private placement of 1,750,000
Units at $.20 per Unit ($350,000), on December 10, 2002 to several accredited
investors. Each Unit is comprised of one share of common stock and one
three-year option to buy one additional common share at $.20. As of December 31,
2002 all 1,750,000 options are outstanding.
The Company has agreements with several consultants who are to provide
financial, business and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. In exchange, these consultants were granted warrants and nonqualified
stock options to purchase shares of the Company's common stock at prices
representing the fair market value of the shares at the date of grant. Activity
with respect to options and warrants granted to these consultants is summarized
below:
43
Hydron Technologies, Inc.
Notes to Financial Statements
9. Stock Options and Warrants (continued)
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
----------- --------------- --------
Outstanding at December 31, 2000 150,000 $ 2.50 to 25.00 $ 10.00
Stock options expired (150,000) 2.50 to 13.75 10.00
-----------
Outstanding at December 31, 2001 --
Stock options granted 25,000 0.22 0.22
-----------
Outstanding at December 31, 2002 25,000 $ 0.22 $ 0.22
===========
Research and Development cost for the year ended December 31, 2002
included $5,250 representing the fair value of option granted to the Company's
technical consultant.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the information be
determined as if the Company had accounted for its stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
-------- -------- --------
Risk-free interest rate 4.5% * 6%
Expected life 5 years * 5 years
Expected volatility 159% * 825%
Expected dividend yield 0% * 5%
*No options were granted in 2001
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Since the Company's stock options have characteristics significantly
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in Management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
44
Hydron Technologies, Inc.
Notes to Financial Statements
9. Stock Options and Warrants (continued)
For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The effect
of compensation expense from stock option awards on proforma net income reflects
only the vesting of 2000, 1999, 1998, 1997, and 1996 awards in 2000, and the
vesting of 2002, 2000, 1999, and 1998 awards in 2002 in accordance with
Statement No. 123. There were no awards made in 2001. Because compensation
expense associated with the stock option award is recognized over the vesting
period, the initial impact of applying Statement No. 123 may not be indicative
of compensation expense in future years, when the effect of the amortization of
multiple awards will be reflected in pro forma net income.
The following table illustrates the effect on the net income and
earnings per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock based employee compensation:
Year ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income, as reported $ (904,840) $ (758,696) $ (923,632)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects $ (12,500) $ -- $ (1,520)
---------- ---------- ----------
Pro Forma net income $ (917,340) $ (758,696) $ (925,152)
========== ========== ==========
Basic and diluted loss per share
As reported $ (0.17) $ (0.15) $ (0.19)
========== ========== ==========
Pro forma $ (0.18) $ (0.15) $ (0.19)
========== ========== ==========
There were no options granted during the year ended December 31, 2001.
The weighted average remaining contractual life of all options outstanding at
December 31, 2002 was 2.9 years.
45
Hydron Technologies, Inc.
Notes to Financial Statements
10. Commitments
The Company leases office space under a noncancelable lease agreement,
which expires in August 2003. At December 31, 2002, the future minimum rental
payments due under this noncancelable lease are $42,300 for the year ending
December 31, 2003. Net rent expense was approximately $70,000, $74,900, and
$185,000 in 2002, 2001, and 2000, respectively.
11. Quarterly Financial Data (unaudited)
For the year ended December 31, 2002
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Net Sales $ 424,686 $ 538,761 $ 332,929 $ 375,265
Operating income (loss) (194,756) (198,394) (204,174) (308,544)
Net income (loss) (194,459) (198,041) (204,048) (308,292)
Income (loss) per share $ (0.04) $ (0.04) $ (0.04) $ (0.05)
12. Management's Plan
The Company has incurred significant losses over the past five years.
The ability of the Company to continue as a going concern is dependent upon
increasing sales while managing operating expenses.
Management's plan to increase sales and reduce operating expenses
includes the following elements:
o Licensing proprietary and possibly patentable technologies, including
skin and tissue oxygenation and the acne ingredient delivery system,
where appropriate to third party companies.
o Continued emphasis on Catalog sales, including sales made over the
internet, since these sales have higher profit margins and represent
markets for the Company that are growing more rapidly than the
Company's traditional television market.
o Increased use of direct marketing techniques to reach new and current
consumers such as print promotions mailed to targeted consumers, Web
46
Hydron Technologies, Inc.
Notes to Financial Statements
12. Management's Plan (continued)
site specials, promotions to other Web site customers, and direct
E-mail promotions to new customers.
o Addition of new revenue streams through expanded international
distribution achieved through the use of distribution agreements with
foreign and international distributors.
o Development, acquisition and marketing of new product lines based on
proprietary technologies that appeal to the aging baby boomers as well
as the new generation.
o In addition, the Company has plans to build upon its success in private
label sales utilizing Hydron(TM) polymer based formulas. The Company is
also pursuing international distribution agreements that will expand
the Company's distribution around the world.
o Regarding new products and markets, the Company will continue to
develop proprietary technology that it believes will improve its
long-term success in the skin care business, such as the acne
ingredient delivery system. The Company's Super Oxygenated fluid and
composition technology should allow significant advances in skin care
products and open application and licensing opportunities beyond the
skin care category.
o The Company does not have the financial resources to sustain a national
advertising campaign to support distribution of its products in
conventional retail stores. In view of the foregoing, Management's
strategy has been to enter into marketing, licensing and distribution
agreements with third parties which have greater financial resources
than those of the Company and that can enhance the Company's product
introductions with appropriate national marketing support programs.
There can be no assurances that Management's Plan will be successful
and the Company's actual results could differ materially. No estimate has been
made should Management's plan be unsuccessful.
13. Restatements
Subsequent to filing the Company's Form S-3 on February 11, 2004, the
Securities and Exchange Commission requested additional disclosures and
reclassifications to be included. These additional disclosures and
reclassifications had no effect on the previously reported total assets or net
income.
47
DaszkalBolton LLP
[GRAPHIC OMITTED] ----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Michael I. Daszkal, CPA, P.A. 2401 N.W. Boca Raton Blvd
Jeffrey A. Bolton, CPA, P.A. Boca Raton, FL 3343
Timothy R. Devlin, CPA, t: 561.367.1040
Michael S. Kridel, CPA, P.A. f: 561.750.3236
Marjorie A. Horwin, CPA, P.A. www.daszkalbolton.com
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
--------------------------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements (Forms S-8 Nos. 33-78296, 33-84554, and 33-11765) of Hydron
Technologies, Inc. and the related prospectuses of our audit report dated March
18, 2003 with respect to the balance sheets at December 31, 2002 and 2001and
statements of operations, changes in shareholder' equity and cash flows of
Hydron Technologies, Inc. for the years ended December 31, 2002, 2001 and 2000
in the Form 10-K.
/s/ DASZKAL BOLTON LLP
Boca Raton, Florida
March 18, 2003
48
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hydron Technologies, Inc.
(Registrant)
By: /s/ RICHARD BANAKUS
----------------------------------
Richard Banakus, Interim President
Date: June 2, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
49
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
Item 307 of Regulation S-K
I, Richard Banakus, certify that:
1. I have reviewed this annual report on Form 10-K of Hydron Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepare;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (March 31, 2003); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls;
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ RICHARD BANAKUS
----------------------------
Richard Banakus
Chief Executive Officer
June 2, 2004
50
Certification of Chief Operating Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
Item 307 of Regulation S-K
I, Terrence S. McGrath, certify that:
1. I have reviewed this annual report on Form 10-K of Hydron Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepare;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (March 31, 2003); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls;
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ TERRENCE S. MCGRATH
---------------------------------
Terrence S. McGrath
Chief Operating Officer
June 2, 2004
51
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
Item 307 of Regulation S-K
I, William A. Lauby, certify that:
1. I have reviewed this annual report on Form 10-K of Hydron Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepare;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (March 31, 2003); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls;
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ WILLIAM A LAUBY
-----------------------------
William A. Lauby
Chief Financial Officer
June 2, 2004
52