-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ROYIRE25X2Ie8fBj9DN1dd01ON7S/xcUTfteXg6uLxwNkHG7tWPzoE/nsKO2cSzp y96D5vQRNkmm7ZfX9l2jDg== 0000929638-98-000138.txt : 19980401 0000929638-98-000138.hdr.sgml : 19980401 ACCESSION NUMBER: 0000929638-98-000138 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYMEDIX INC CENTRAL INDEX KEY: 0000880634 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 223279252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19827 FILM NUMBER: 98582926 BUSINESS ADDRESS: STREET 1: 2235 RTE 130 CITY: DAYTON STATE: NJ ZIP: 08810 BUSINESS PHONE: 9082742288 FORMER COMPANY: FORMER CONFORMED NAME: SERVTEX INTERNATIONAL INC /NY/ DATE OF NAME CHANGE: 19930328 10-K 1 FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1997. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________. Commission file number 0-19827 HYMEDIX, INC. (Name of Small Business Issuer in Its Charter) Delaware 22-3279252 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2245 Route 130, Dayton, New Jersey 08810 (Address of Principal Executive Offices, including Zip Code) Issuer's Telephone Number, Including Area Code: (732) 274-2288 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State registrant's revenues for its most recent fiscal year: $1,783,331 The aggregate market value of the voting stock held by non-affiliates, based upon the average of the bid and asked price of the Common Stock on March 26, 1998 as reported by The OTC Bulletin Board, was approximately $64,280. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates for this purpose but not necessarily for other purposes. The number of shares of Common Stock outstanding as of March 26, 1998 was 5,713,500. Transitional Small Business Disclosure Format (Check one): Yes No X DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to filed with the Securities and Exchange Commission on or before April 30, 1998 are incorporated by reference into Part III hereof. With the exception of the portions of such Proxy Statement expressly incorporated into this Annual Report on Form 10-KSB by reference, such Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-KSB. HYMEDIX, INC. INDEX Page No. PART I Item 1. Description of Business 2 Item 2. Description of Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Common Equity and Related Stockholder Matters 7 Item 6. Management's Discussion and Analysis of Financial 8 Condition and Results of Operations Item 7. Financial Statements 14 Item 8. Changes in and Disagreements with Accountants on 14 Accounting and Financial Disclosure PART III Item 9. Directors, Executive Officers, Promoters and Control 15 Persons; Compliance with Section 16(a) of the Exchange Act Item 10. Executive Compensation 19 Item 11. Security Ownership of Certain Beneficial Owners 19 and Management Item 12. Certain Relationships and Related Transactions 19 Item 13. Exhibits and Reports on Form 8-K 19 SIGNATURES 24 PART I ITEM 1. DESCRIPTION OF BUSINESS. BACKGROUND HYMEDIX, Inc. ("HYMEDIX") was incorporated in Delaware on December 20, 1993 as a wholly-owned subsidiary of Servtex International Inc. (the "Predecessor"). On February 23, 1994, the Predecessor merged with and into HYMEDIX, Inc. and, concurrently, a wholly-owned subsidiary of the Predecessor was merged with and into HYMEDIX International, Inc. ("HYMEDIX International"), which resulted in HYMEDIX International becoming a wholly-owned subsidiary of HYMEDIX (collectively, the "Acquisition Merger"). The Acquisition Merger was accounted for as a recapitalization of HYMEDIX International and an acquisition by HYMEDIX International of the Predecessor using historical values of the assets and liabilities of the Predecessor. HYMEDIX International was incorporated in October, 1985 under the name Kingston Technologies, Inc. As used in this Form 10-KSB, unless the context otherwise requires, the term "Company" collectively means HYMEDIX, HYMEDIX International and their respective predecessors. The Company has been engaged through HYMEDIX International in the development and commercialization of medical and skin care products based on its proprietary synthetic HYPAN(R) hydrogels and memory polymers. These hydrophilic polymers are biocompatible and highly versatile, and enable the Company to develop products and components with advantageous characteristics for a number of medical and other markets. PRODUCTS The Company has developed two product lines in the past several years, a line of synthetic dressings for the treatment of chronic wounds, and a line of moisturizing creams and gels for the consumer skin care markets. In addition, the Company has several product development agreements with companies in the fields of drug delivery and permanent implants. SKIN CARE PRODUCTS The Company has developed a line of moisturizing creams and gels based on the emulsifying capabilities of its hydrophilic polymer systems and is introducing them to the United States market under the trade name BIONIQ(R). The Company is also introducing a similar line of skin care products to Asian markets through a marketing partner. Until February, 1997 the Company's principal means of distribution of BIONIQ(R) products was direct response television. When the monthly volume of direct response television sales did not meet the marketing company's expectations, direct response selling was discontinued. While continuing to seek another means of distribution, the Company sells a small amount of BIONIQ(R) products itself on the internet and by responding to telephone orders. The BIONIQ(R) product line presently consists of Body Therapy(TM), a moisturizing lotion; Replenishing Complex(TM), a moisturizing gel; Facial Formula(TM) (Dry/Normal) and Facial Formula(TM) (Normal/Oily), facial creams; Hydrating Cleanser(TM) (Dry/Normal) and Clarifying Cleanser(TM) (Normal/Oily), facial cleansers; Cucumber Refining Solution(TM) (Dry/Normal) and Tropical Refining Solution(TM) (Normal/Oily), facial toners; and Baby Therapy(TM), a body lotion for babies. Additional skin care products are under development. The Company is exploring other marketing channels for BIONIQ(R), including other direct selling methods. WOUND CARE PRODUCTS The Company had developed a line of seven products for the chronic wound care markets, six of which have received market clearance from the FDA, and one of which does not require FDA clearance. In November, 1995, the Company entered into an agreement with ProCyte Corporation ("ProCyte") granting it a license to make, have made, use and sell products for the wound care field using the Company's HYPAN(R) technology. ProCyte modified one of the Company's wound care products, and has introduced it to the market. In late 1997, the ProCyte license agreement was modified to limit its rights to that specific product. The Company is seeking a new marketing partner or licensee for its remaining wound care products. RESEARCH & DEVELOPMENT CONTRACTS The Company is working on the development of products for other medical products companies under several R&D contracts. In 1991, the Company entered into a three year development agreement (which has been extended for both a fifth and a sixth year on substantially similar terms) with a major private U.S. medical products company for medical products using HYPAN(R) hydrogels in areas other than wound care; ophthalmology; urology; the use of embolics and catheters and guidewires in cardiology and radiology; and certain types of drug delivery. This medical products company's primary focus has been on a permanent implant. The Company's HYPAN(R) polymers are presently being evaluated by a major ophthalmic pharmaceutical company. The Company has entered into two R&D agreements for indwelling products, one covering embolic materials, and another covering spinal disc replacements. SPECIALTY CHEMICALS Since 1988, the Company has sold HYPAN(R) hydrogels to the cosmetics and personal care industry (the "Trade") through a marketing partner, LIPO Chemicals, Inc. ("LIPO"). In 1992, the Company granted LIPO a three year option to manufacture the Company's polymers for sale to the Trade in return for royalties of 10% of LIPO's net sales of HYPAN(R). In December, 1995, LIPO exercised its option to manufacture HYPAN(R) for sale to the Trade. While LIPO develops its manufacturing capability, the Company continues to manufacture and sell HYPAN(R) hydrogels to LIPO for sale to the Trade. REGULATORY APPROVALS The Company's products are subject to extensive regulation by U.S. and foreign governmental authorities for efficacy, safety and quality. For U.S. regulatory purposes, it is anticipated that most of the Company's products (other than cosmetics and toiletries products) will be deemed medical devices under the Federal Food, Drug and Cosmetic Act (the "FFDCA") although some products may be treated as pharmaceutical agents (drugs) under the FFDCA, depending on their intended use and applicable regulatory policies. TECHNOLOGY AND PATENTS The Company has developed several families of patented synthetic hydrogels (i.e., hydrophilic polymer systems which do not dissolve in water) which can be used in a broad range of medical and other applications. These multi-block copolymers are tradenamed HYPAN(R), an acronym for hydrolyzed polyacrylonitrile (PAN). In addition to HYPAN(R) hydrogels, the Company has developed temperature activated polymer systems with precise inherent shape memories. The Company's polymers, the processes for making them and a number of specific products and applications are covered by U.S. and foreign patents. Most of the polymers currently used in the Company's products are covered under patents issued or filed since 1990. These polymers have been extensively tested for biocompatibility by both the Company and its licensees. COMPETITION The Company is engaged in highly competitive markets for its products, most of the competitors having substantially more resources than HYMEDIX. MANUFACTURING AND RAW MATERIALS The Company's principal raw materials are Polyacrylonitrile (PAN) and a variety of other readily available chemicals. The Company manufactures HYPAN(R) materials at its Dayton, New Jersey facility. The Company believes that it presently has the capacity it needs to meet its HYPAN(R) hydrogel production requirements for the next three years, and that its raw materials for its operations are and will continue to be available for the foreseeable future. The Company's skin care products are manufactured to its specifications by contract manufacturers. EMPLOYEES The Company presently employs thirteen (13) people, seven (7) of whom are engaged in management, marketing and administration; one (1) in regulatory affairs and quality assurance and control; one (1) in production; and four (4) in research and product development. None of the Company's personnel is represented by a union, and the Company believes its personnel relations are excellent. ITEM 2. DESCRIPTION OF PROPERTY. The Company rents approximately 22,000 square feet of office, laboratory and manufacturing space at 2245 Route 130 in Dayton, New Jersey under a lease with annual rentals of approximately $444,000. The lease expired at the end of 1997. The Company is presently negotiating a new lease of the same space with a new landlord. At this facility the Company can manufacture approximately 5 tons of HYPAN(R) a year (enough capacity for the foreseeable future). The facility also provides all of the Company's office and laboratory space requirements. There can be no assurance that the Company will be able to negotiate a lease upon satisfactory terms, if at all, with the new landlord of the current space; as a result, the Company may have to incur substantial costs associated with finding new space, negotiating a new lease and moving the offices and laboratories of the Company. ITEM 3. LEGAL PROCEEDINGS. In September, 1993, HYMEDIX International's former President filed a Complaint against HYMEDIX International in the Superior Court of New Jersey, Law Division, Middlesex County. The Complaint names HYMEDIX International, each member of HYMEDIX International's Board of Directors, and Kingston Technologies Limited Partnership as defendants. The Complaint alleges (i) that HYMEDIX International wrongfully terminated the former President's employment, (ii) that he is owed $367,500 in deferred compensation and $74,500 in back salary, (iii) that $323,138 is owed him based on his claim that an agreement between him and KTLP to consolidate and extend the maturity date on three promissory notes that KTLP had executed in his favor was signed by him under duress and is, therefore, void, and (iv) that KTLP's General Partners failed to disclose to the former President at the time he signed the promissory note extension that HYMEDIX International planned to terminate his employment. The $74,500 in back salary was paid in January, 1994. In July 1996, after a jury trial, judgement was rendered against HYMEDIX and KTLP in the amount of $805,964 plus interest on plaintiff's claims for deferred compensation and the KTLP promissory notes. The defendants have appealed the verdict. The appeal was heard in December 1997, and a decision is expected in the near future. In November, 1994, an individual filed a complaint against the Company in the Superior Court of New Jersey, Law Division, Mercer County, alleging that the company owes him eight percent of all monies invested in the Company by his contacts, including a principal stockholder of the Company. The complaint alleges that the Company owes the former consultant approximately $5,000,000 and warrants for the Company's common stock. Pre-trial discovery is currently being conducted in this matter and a trial date has not been scheduled. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the period from October 1, 1997 through December 31, 1997. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Predecessor's Common Stock had been listed and traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since January 30, 1992 upon the closing of the Predecessor's initial public offering under the symbol SVTX. The Predecessor's Common Stock was delisted from trading on NASDAQ on October 21, 1993 due to its failure to meet NASDAQ's listing maintenance requirements. After the Acquisition Merger, the Company's Common Stock was relisted on the NASDAQ SmallCap Market under the symbol HYMX. During the third quarter of 1994, the Company's total stockholders' equity fell below the minimum $1,000,000 of capital and surplus necessary to maintain its listing on the NASDAQ SmallCap Market. Consequently, NASDAQ delisted the Company's common stock from the NASDAQ SmallCap Market on October 27, 1994. HYMEDIX shares are currently quoted and continue to be traded on The Over The Counter ("OTC") Electronic Bulletin Board under the symbol HYMX. The following table sets forth the range of the high and low bid prices for each of the Company's foregoing securities as reported by The OTC Bulletin Board for the eight quarterly periods ended December 31, 1997. Common Stock Period High Low 1996: 1st quarter $1.50 $0.50 2nd quarter 1.00 0.50 3rd quarter 0.50 0.50 4th quarter 1.25 0.50 1997: 1st quarter $1.13 $0.50 2nd quarter 1.06 0.25 3rd quarter 0.50 0.03 4th quarter 0.06 0.03 The stock price ranges represent the high and low bid quotations as listed by The OTC Bulletin Board and reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. As of the close of business on March 25, 1997, there were 122 holders of record of the Company's Common Stock. The Company believes that it had approximately 400 beneficial owners of such securities as of such date. The Company has paid no cash dividends in respect of its Common Stock and the Company has no intention to pay cash dividends in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below. The industry in which the Company competes is characterized by rapid changes in technology and frequent new product introductions. The Company believes that its long-term growth depends largely on its ability to continue to enhance existing products and to introduce new products and technologies that meet the continually changing requirements of customers. While the Company has devoted significant resources to the development of new products and technologies, the Company currently has limited resources and there can be no assurance that it can continue to introduce new products and technologies on a timely basis or that certain of its products and technologies will not be rendered noncompetitive or obsolete by its competitors. Overview HYMEDIX, Inc. ("HYMEDIX") was incorporated in Delaware on December 20, 1993 as a wholly-owned subsidiary of Servtex International Inc. (the "Predecessor"). On February 23, 1994, the Predecessor merged with and into HYMEDIX, Inc. and, concurrently, a wholly-owned subsidiary of the Predecessor was merged with and into HYMEDIX International, Inc. ("HYMEDIX International") which resulted in HYMEDIX International becoming a wholly-owned subsidiary of HYMEDIX (collectively, the "Acquisition Merger"). The Acquisition Merger was accounted for as a recapitalization of HYMEDIX International and an acquisition of the Predecessor by HYMEDIX International using historical values of the assets and liabilities of the Predecessor. As used in this Form 10-KSB, unless the context otherwise requires, the term "Company" collectively means HYMEDIX, HYMEDIX International and their respective predecessors. HYMEDIX International was incorporated in October, 1985 under the name Kingston Technologies, Inc. In February, 1994, at the time of the Acquisition Merger, the Company raised approximately $3.6 million net proceeds from the private placement of common stock and warrants (the "Private Placement"). Recently Issued Accounting Standards In the fourth quarter of 1997, the Company adopted Financial Accounting Standard No. 128, Earnings Per Share, (FAS 128) which requires the presentation of both basic and diluted earnings per share. Basic and diluted earnings per share as calculated in accordance with FAS 128 does not differ from earnings per share reported in prior periods. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting comprehensive income and its components, and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes revised reporting and disclosure requirements for operating segments. The Company will adopt Statement Nos. 130 and 131 by year-end 1998. These Statements increase disclosure only and will have no effect on the Company's consolidated financial position or results of operations. RESULTS OF OPERATIONS REVENUES The Company's total revenues for the fiscal year ended December 31, 1997 were $1,783,331, versus $1,986,798 for the fiscal year ended 1996, a decrease of 10.2%. The decreased revenues for fiscal year 1997 from the previous year primarily came from (1) a decrease of $279,110 in license, royalty and distribution fees; (2) reduced net sales of $30,366 in wound care products; and (3) a decrease of $353,537 in domestic and international sales of skin care products. The decreased revenues were partially offset by an increase of $459,546 in net sales of hydrogels' to LIPO Chemicals, Inc. The decrease in license, royalty and distribution fees is primarily attributable to the fact that a one-time $500,000 milestone payment under the ProCyte licensing agreement was received in July 1996, and the reduced domestic sales in skin care products is primarily attributable to the discontinuance of direct response television network marketing program. COSTS AND EXPENSES Cost of sales for the fiscal year ended December 31, 1997 was $606,004 versus $406,549 for fiscal year 1996, an increase of 49.1%. The 49.1% increase in cost of sales was largely due to the $100,000 inventory reserve established in 1997 for aged BIONIQ products, the 9.0% increase in net product sales and reduced sales in highly profitable skin care products. Selling, general and administrative expenses decreased to $1,303,440 for the year ended December 31, 1997 from the previous fiscal year level of $2,000,863. The decrease was principally due to a reduction in legal and staff expenses. Research and development costs for fiscal year were $538,540 as compared to $650,907 for fiscal year 1996, a decrease of 17.3%, resulting from decreased work days and decreased costs of the research and development staff. LEGAL JUDGMENT In September, 1993, HYMEDIX International's former President filed a Complaint against HYMEDIX International in the Superior Court of New Jersey, Law Division, Middlesex County. The Complaint names HYMEDIX International, each member of HYMEDIX International's Board of Directors, and Kingston Technologies Limited Partnership ("KTLP") as defendants. The Complaint alleges (i) that HYMEDIX International wrongfully terminated the former President's employment, (ii) that he is owed $367,500 in deferred compensation and $74,500 in back salary, (iii) that $323,138 is owed him based on his claim that an agreement between him and KTLP to consolidate and extend the maturity date on three promissory notes that KTLP had executed in his favor was signed by him under duress and is, therefore, void, and (iv) that KTLP's General Partners failed to disclose to the former President at the time he signed the promissory note extension that HYMEDIX International planned to terminate his employment. The $74,500 in back salary was paid in January, 1994. In July 1996, after a jury trial, judgement was rendered against HYMEDIX and KTLP in the amount of $805,964 plus interest on plaintiff's claims for deferred compensation and the KTLP promissory notes. The defendants are appealing this verdict. OTHER (EXPENSE) INCOME Total other expense-net increased to $374,509 for the fiscal year ended December 31, 1997 from $315,830 for the 1996 fiscal year. The increase of $58,679 was primarily attributable to the realized loss on sale of investments resulting from the decreased value of certain restricted common stock that the Company acquired through a manufacturing and distribution rights agreement, and interest expense related to the outstanding convertible bonds and the interest accrual related to the legal judgement. As a result of the decreased revenues and costs and expenses described above, the Company incurred a lower net loss of $1,039,162 for fiscal year ended December 31, 1997 versus $2,193,315 for fiscal year ended 1996. LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION The Company had $51,381 in cash and cash equivalents on hand as of December 31, 1997 versus $42,562 on December 31, 1996. The working capital deficit of $7,705,283 on December 31, 1997 represents an increase of $1,049,280 from the previous year-end level of $6,656,003. The increase in working capital deficit was primarily attributable to the net loss incurred in 1997. The Company's two term loans, advanced to the Company by licensees pursuant to license agreements, in the principal amounts of $1,500,000 and $1,000,000, respectively, each have been classified as current liabilities as they are in technical default as a result of certain interest payments not having been made. During the first quarter of 1996, the Company issued a convertible bond in the principal amount of $150,000 (the "September Bond") pursuant to a Convertible Bond Purchase Agreement effective March 5, 1996, by and among the Company, HYMEDIX International and Su Chen Huang. The September Bond bears interest at a rate of 7% per annum and matured (after being extended) on December 31, 1997. The Company is negotiating to extend the due date of the bond. The September Bond is convertible in whole at any time prior to payment or prepayment into one hundred fifty thousand (150,000) shares of common stock of the Company. Interest on the September Bond is payable at maturity or upon prepayment or conversion thereof. In April of 1996, the Company issued convertible bonds in the aggregate principal amount of approximately $981,000 (the "June Bonds") pursuant to a Convertible Bond Purchase Agreement effective February 27, 1996, by and among the Company, HYMEDIX International, First Taiwan Investment and Development, Inc. and the Purchasers (as defined therein). The June Bonds bear interest at a rate of 7% per annum and matured (after being extended) on December 31, 1997. The Company is negotiating to extend the due date of the bonds. The June Bonds are convertible in whole or in part at any time prior to payment or prepayment into one thousand (1,000) shares of common stock of the Company for each one thousand dollars ($1,000) of principal amount outstanding. Interest on the June Bonds is payable at maturity or upon prepayment or conversion thereof. Both the June Bonds and the September Bond are structured in such a way as to permit the Company, subject to certain terms and conditions, including approval of the Bondholders (as hereinafter defined), to make withdrawals from a special account (the "Special Account") up to the principal amount of the bonds on a periodic basis and to require the Company to reduce the amount withdrawn with respect to the Special Account by making payments into the Special Account. As of December 31, 1997, the Company had made various withdrawals from and repayments to the Special Account. Pursuant to a Security Agreement dated as of August 8, 1996, by and among the Company and the Bondholder Representative (as defined therein), in order to induce the Purchasers and Su Chen Huang (collectively, the "Bondholders") to approve future withdrawals by the Company from the special account, the Company granted to the Bondholder Representative, for the ratable benefit of the Bondholders, a security interest in all of the Company's assets and properties. In June of 1997, the Company received a payment of a $100,000 refundable deposit from a potential distributor with whom the Company has reached an agreement in principle regarding certain aspects of the Company's consumer skin care business. The Company has agreed to grant the distributor an option to negotiate an agreement with the Company with respect to the Company's skin care product in certain territories or to match the terms of any such agreement that the Company may negotiate with a third party, on a right-of-first refusal basis. This option expires on the earlier of June 30, 2001 or the date on which the Company reaches any such third party agreement. The $100,000 deposit would be refundable to the distributor in the event any such third party agreement is consummated or creditable against amounts payable under any definitive agreement between the Company and this distributor. This option is subject to negotiation and execution of a definitive agreement regarding this matter. The Company is currently in discussions with potential investors to receive additional financing, however, there is no assurance that such financing will be consummated upon acceptable terms, if at all. Management believes that the Company will have adequate resources to finance its operations in 1998. However, the Company is appealing a judgment in amount of $805,964 which was rendered against it (see Note 12). If the Plaintiff moves to collect on the judgment prior to adjudication of the appeal, or if a decision is rendered against the Company in appellate court, the Company must attempt to finance both its operations and satisfaction of the judgment. Management believes this will be difficult. In addition, the Company's secured convertible bonds are both past due, and while the Company is managing to make some payments on past due interest and principal, there is no assurance that sufficient funds will be available to the Company to service these debts and to continue its operations. Management plans to continue to seek and evaluate financing alternatives for the Company. In the event that cash flow from operations and the anticipated proceeds from the financing, if any, are not sufficient to fund the Company's operations in 1998, there can be no assurance that other sources of funds will be available to the Company. YEAR 2000 COMPLIANCE As of December 31, 1997, the Company has not assessed whether or not the systems that are currently in place are Year 2000 compliant. However, management believes that the cost of and time to install a new system would not be substantial. RISK FACTORS AND CAUTIONARY STATEMENTS When used in this Form 10-KSB and in future filings by the Company with the Securities and Exchange Commission, the Company's press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expect to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including those discussed under this caption "Risk Factors and Cautionary Statements," that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and wishes to advise readers that the factors listed below could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company will NOT undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. o The Company had a net loss of approximately $1,309,162 for the fiscal year ended December 31, 1997 and had an accumulated deficit at December 31, 1997 of approximately $7,705,283. The Company has experienced ongoing losses from operations. The Company has a limited cash balance and is in technical default on the Company's two term loans. There can be no assurance that the Company's revenues will grow sufficiently to fund its operations and achieve profitability. Management plans to continue to seek and evaluate financing alternatives for the Company. In the event that cash flow from operations and the anticipated proceeds from a financing, if any, are not sufficient to fund the Company's operations in 1998, there can be no assurance that other sources of funds will be available to the Company. o As described above in "Legal Proceedings," a judgment was rendered against the Company in the amount of $805,964 in connection with a legal proceeding to which the Company was a party. Although the Company has appealed the judgment in this matter, there can be no assurance that the Company will be successful in such appeal or that the plaintiff will not move to collect on the judgment prior to adjudication of the appeal. The appeal was heard in December 1997, and a decision is expected in the near future. If the appeal is unsuccessful or if the plaintiff moves to collect on the judgment, it could have a material adverse affect on the Company's financial condition and future operating results. o The Company's revenues and income are derived primarily from the development and commercialization of medical and skin care products. The medical and skin care products industry is highly competitive. Such competition could negatively impact the Company's market share and therefore reduce the Company's revenues and income. Competition may also result in a reduction of average unit prices paid for the Company's products. This, in turn, could reduce the percentage of profit margin available to the Company for its product sales. o The Company's future operating results are dependent on its ability to develop, produce and market new and innovative products and technologies, and to successfully enter into favorable licensing and distribution relationships. There are numerous risks inherent in this complex process, including rapid technological change and the requirement that the Company develop procedures to bring to market in a timely fashion new products and services that meet customers' needs. There can be no assurance that the Company will be able to successfully develop and commercialize any new products or technologies. o Historically, the Company's operating results have varied from fiscal period to fiscal period; accordingly, the Company's financial results in any particular fiscal period are not necessarily indicative of results for future periods. o The Company may offer a broad variety of products and technologies to customers around the world. Changes in the mix of products and technologies comprising revenues could cause actual operating results to vary from those expected. o The Company's success is partly dependent on its ability to successfully predict and adjust production capacity to meet demand, which is partly dependent upon the ability of external suppliers to deliver components and materials at reasonable prices and in a timely manner; capacity or supply constraints, as well as purchase commitments, could adversely affect future operating results. o The Company offers its products and technologies directly and through indirect distribution channels. Changes in the financial condition of, or the Company's relationship with, distributors, licensees and other indirect channel partners, could cause actual operating results to vary from those expected. o The Company does business and continues to seek to develop business on a worldwide basis. Global and/or regional economic factors and potential changes in laws and regulations affecting the Company's business, including without limitation, currency exchange rate fluctuations, changes in monetary policy and tariffs, and federal, state and international laws regulating its products, could impact the Company's financial condition or future results of operations. o The market price of the Company's securities could be subject to fluctuations in response to quarter to quarter variations in operating results, market conditions in the medical and skin care products industry, as well as general economic conditions and other factors external to the Company. ITEM 7. FINANCIAL STATEMENTS. See Financial Statements beginning on Page F-1 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Set forth below is certain background information with respect to the directors and executive officers of the Company, including information furnished by them as to their principal occupations for the last five years, certain other directorships held by them and their ages as of March 31, 1998. Each of the Directors and Officers set forth below, other than Dr. Jennings, also hold the same position with HYMEDIX International.
Director or Executive Name Age Position(s) with the Company(1) Officer Since Vladimir A. Stoy, Ph.D. 56 Vice Chairman (non-executive) and 1994 Director Charles K. Kliment, Ph.D. 65 President and Chief Executive Officer 1994 William G. Gridley, jr.(3) 69 Chairman, Chief Financial Officer, 1994 Secretary, Treasurer and Director George P. Stoy 50 Vice President of Engineering and Director 1994 Jan Lovy, Ph.D. 46 Vice President of Polymer Research 1994 Sheng-Hsiung Hsu 55 Director 1994 Dr. Hsia-Fu Chao(1)(3) 63 Director 1994 Shu-Jean Kuo Chou 60 Director 1994 Michael K. Hsu(1)(2)(3) 40 Director 1994 John E. Bagalay, Jr., 64 Director 1994 Ph.D., J.D.(1)(2)(3) Edward H. Jennings, 62 Director 1994 Ph.D.(1)(2)
(1) Member of the Compensation Committee of the Board of Directors (2) Member of the Audit Committee of the Board of Directors (3) Member of the Executive Committee of the Board of Directors VLADIMIR A. STOY, PH.D., Vice Chairman and Director. Dr. Stoy has served as Vice Chairman of the Board of HYMEDIX since January 1, 1996; prior to that he was Chairman. Dr. Stoy has served as Chairman of the Board of HYMEDIX International since 1986; he has held this position in a non-executive capacity since late 1993, when he became a consultant to the Company and has served as Chairman of the Board of HYMEDIX since the Acquisition Merger. Dr. Stoy received his Ph.D. in macromolecular chemistry, and spent eleven years at the Academy of Sciences in Prague, serving for some time as Head of the Laboratory of Biomedical Applications. A major part of his 90 patents and numerous publications are related to hydrogel technology. Dr. Stoy is the inventor of HYPAN(R) technology. He currently spends approximately 30% of his time as a consultant to HYMEDIX, spending the balance of his time with S.K.Y. Polymers, a company he controls and of which he is President. Under a Licensing Agreement, S.K.Y. has licensed to the Company all of its technology in the Company's areas of interest (the "Sky License Agreement"). See "Certain Transactions." CHARLES K. KLIMENT, PH.D., President and Chief Executive Officer. Dr. Kliment has been Vice President of Research and Development of HYMEDIX since the Acquisition Merger. Dr. Kliment joined HYMEDIX International in 1990 as Vice President of Research and Development. Dr. Kliment worked for ten years at the Academy of Sciences in Prague with Professor Otto Wichterle on the development of soft contact lenses and other biomedical uses of HYDRON hydrogels. From 1969 to 1974, he was the Research and Development Manager of National Patent Development Corporation. From 1974 to 1984 Dr. Kliment was Director of Research of NPD Optical Corporation. In 1984, he moved to Tyndale Plains-Hunter, Ltd. as Vice President and worked there until 1990, primarily with hydrophilic polyurethanes. WILLIAM G. GRIDLEY, JR., Chairman, Chief Financial Officer, Secretary and Director. Mr. Gridley was President and a Director of HYMEDIX from the Acquisition Merger to January 1, 1996, when he became Chairman. Prior to joining HYMEDIX International in 1986, Mr. Gridley was President of Brandywine Investors, an investment management firm which he founded. From 1979 to 1983, he was President of Crescent Diversified, Ltd. and Competrol BVI, the United States investment vehicles of the Olayan Group. From 1973 to 1979, he was Executive Vice President of the American Express Bank. Prior to that, he was a Vice President of the Chase Manhattan Bank. Mr. Gridley is Vice Chairman of Tuskegee University and a member of the Board of Managers of the Jane Coffin Childs Memorial Fund for Medical Research. He is a graduate of Yale University. GEORGE P. STOY, Vice President of Engineering and Director. Mr. Stoy has served as Vice President of Engineering of HYMEDIX since the Acquisition Merger. Mr. Stoy has been with HYMEDIX International since its inception. Mr. Stoy has been involved in the development of HYPAN(R) technology from its early stages, and is responsible for the development of processing technology and product design. Mr. Stoy is an inventor or co-inventor of numerous inventions that are the subject of patents and patent applications. Mr. Stoy holds a Masters degree in Mechanical Engineering. Mr. Stoy is the brother of Vladimir A. Stoy. JAN LOVY, PH.D., Vice President of Polymer Research. Dr. Lovy has been Vice President of Polymer Research of HYMEDIX since the Acquisition Merger. Dr. Lovy joined HYMEDIX International in 1985 and has served as its Vice President of Polymer Research since 1988. Dr. Lovy received his Ph.D. from the Institute of Macromolecular Chemistry in Prague, and has been the recipient of numerous patents and the author of some 23 papers on polymer chemistry and nuclear magnetic resonance spectroscopy. Dr. Lovy has primary responsibility for materials research and development. SHENG-HSIUNG HSU, Director. Mr. Hsu has served as a Director of HYMEDIX since the Acquisition Merger. Mr. Hsu joined HYMEDIX International as a Director in 1993. Mr. Hsu is the Chairman of First Taiwan Venture Capital Inc. In 1973, he founded Cal-Comp Electronics, Inc. which is now the world's largest electronic calculator manufacturer. He currently serves as the Chairman and the President of Cal-Comp Electronics, Inc. He is also the founder and Executive Director of Compal Electronics, Inc., a major monitor and notebook PC manufacturer in Taiwan. Mr. Hsu also holds various positions in a number of corporations and entities, including Baotek Industrial Materials Ltd., Electric Appliance Manufactures' Association, and Electric & Electronic Production Development Association. DR. HSIA-FU CHAO, Director. Dr. Chao has served as a Director of HYMEDIX since the Acquisition Merger. Dr. Chao joined HYMEDIX International as a Director in 1993. Dr. Chao is the Chairman of First Taiwan Investment Holding Inc. He is a Director of First Taiwan Investment Banking Group. Dr. Chao has practiced medicine for over 30 years. He is a specialist in Gastroenterology and Gastroenterological Oncology. In 1963, he started his medical career as a Resident in Veterans General Hospital, Taipei. He was the Chief of Division of Gastroenterological Oncology when he left in 1980. Dr. Chao then joined China Medical Center, Taipei. He was the Chairman from 1984 to 1986 and now serves as a Consultant Physician and a Director of CMC. He has also taught in National Yang Ming Medical University and National Defense Medical Center. He graduated from National Defense Medical Center in 1961 and was a Fellow in medicine at the Washington University, U.S.A.. SHU-JEAN KUO CHOU, Director. Mrs. Kuo has served as a Director of HYMEDIX since the Acquisition Merger. Mrs. Kuo joined HYMEDIX International as a Director in 1993. Mrs. Kuo is a Director of First Taiwan Investment Holding Inc. Mrs. Kuo comes from a family with a long business history in Taiwan and is an active investor; she has over 30 years of experience of investing in a variety of industries, including banking, tourism, and transportation. Mrs. Kuo currently serves as a Managing Director of Taiwan Allied Container Terminal Corp., one of the largest container terminals in Taiwan. MICHAEL K. HSU, Director. Mr. Hsu has served as a Director of HYMEDIX since the Acquisition Merger. Mr. Hsu joined HYMEDIX International as a Director in 1993. Mr. Hsu is the Executive Vice President of First Taiwan Investment Holding Inc. He is also the Executive Vice President of First Taiwan Venture Capital and First Taiwan Investment & Development. His position is to lead the equity investment of the corporate finance segments of First Taiwan Investment Banking Group, which he co-founded in 1989. Mr. Hsu has had ten years of experience in the financial service industry, principally in investments and corporate finance. Prior to 1989 he was the Associate Director of Baring Research (Taiwan), a subsidiary of Baring Securities Ltd. He started his career as a manager and a special assistant to the President in China Development Corp, in 1984. Mr. Hsu holds an M.B.A. degree from National Chiao Tung University and a B.S. degree from the Tunghai University in Taiwan. JOHN E. BAGALAY, JR., PH.D., J.D., Director. Dr. Bagalay has served as a Director of HYMEDIX since the Acquisition Merger. Dr. Bagalay joined HYMEDIX International as a Director in 1993. Dr. Bagalay is Managing Director of Community Technology Fund, the venture capital affiliate of Boston University. Dr. Bagalay was formerly General Counsel of Lower Colorado River Authority, a regulated electric utility in Austin Texas; General Counsel of Houston First Financial Group; and General Counsel of Texas Commerce Bancshares, Inc. He has over thirty years' experience in the financing of private and publicly held companies. He is a Director and member of the Executive Committee of Seragen, Inc., Wave Systems Corp. and of Cellcor, Inc., each of which a publicly held company. He is a Director of several privately held companies in the medical and high technology business sectors. EDWARD H. JENNINGS, PH.D., Director. Dr. Jennings has been Director of HYMEDIX since the Acquisition Merger. Dr. Jennings is a Professor of Finance at The Ohio State University, where he served as President from 1981 to 1990. He was President of the University of Wyoming from 1979 to 1981, and prior to that held administrative positions at the University of Iowa and teaching positions at various universities. Dr. Jennings serves as Chairman of the Board of Mt. Carmel Hospital and is a Director of Lancaster Colony Corporation, Borden Chemicals and Plastics Limited Partnership, Super Foods Services, Inc. and HEAF Corporation. He was previously a Director of Banc One Corporation and Ohio Bell Corporation. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company, during fiscal year 1997 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. ITEM 10. EXECUTIVE COMPENSATION. Information concerning Executive Compensation for the Company's last fiscal year is incorporated herein by reference to the heading "Executive Compensation" in the Company's Proxy Statement for its 1998 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the "Commission") on or before April 30, 1998. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information concerning Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to the heading "Principal Stockholders" in the Company's Proxy Statement for its 1998 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Commission on or before April 30, 1998. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information concerning Certain Relationships and Related Transactions is incorporated herein by reference to the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement for its 1998 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Commission on or before April 30, 1998. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
Exhibit No. Description 2.1 Amended and Restated Agreement of Merger and Plan of Reorganization, dated as of January 24, 1994 by and among Servtex International Inc., Kingston Technologies, Inc., KTI Acquisition Corp. and certain affiliates of Servtex International Inc., filed pursuant to Rule 14a-6 as Exhibit F to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 2.2 Agreement of Merger, dated as of February 23, 1994 by and between Servtex International Inc. and HYMEDIX, Inc., filed pursuant to Rule 14a-6 as Exhibit A to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 3.1 Certificate of Incorporation, filed pursuant to Rule 14a-6 as Exhibit B to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 3.2 Certificate of Designation, Preference and Rights of Series A Redeemable Preferred Stock, filed as Exhibit (2) to Form 8-K, dated February 23, 1994, of the Registrant and incorporated by reference herein. 3.3 By-Laws of the Registrant, filed pursuant to Rule 14a-6 as Exhibit C to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 4.1* Specimen Certificate of the Registrant's Common Stock, $.001 par value. 10.1* Form of the Underwriter's Warrant issued to First Flushing Securities, Inc. as a broker's fee for negotiating the merger of KTI Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Registrant with and into HYMEDIX International. 10.2** Option and License Agreement dated November 7, 1986 by and between HYMEDIX International and ORC, as amended by Amendment Number 1 to Option and License Agreement dated January 9, 1987. 10.3* Promissory Note, dated January 9, 1987, made by HYMEDIX International to the order of ORC, for $500,000. 10.4* Indenture of Lease dated July 7, 1987 by and between Fresh Ponds Associates and HYMEDIX International, as amended by First Amendment to Lease, dated September 13, 1993, Second Amendment to Lease, dated September 15, 1993, and Third Amendment to Lease, dated January 15, 1994; and the related Installment Promissory Note, dated October 1, 1993, made by HYMEDIX International to the order of Fresh Ponds Associates for $404,300.90. 10.5* Promissory Note, dated September 29, 1987, made by HYMEDIX International to the order of ORC, for $1,000,000. 10.6** Agreement, dated December 22, 1988, by and between Kingston Hydrogels Limited Partnership and LIPO Chemicals, Inc., as amended by Amendment No. 1, effective June 1, 1990 and as further amended by Amendment Agreement, dated June 14, 1990. 10.7* Loan and Security Agreement, dated October 30, 1989, by and between HYMEDIX International and Pilkington Visioncare, Inc. ("PVI"). 10.8* Promissory Note in the amount of $1,000,000, dated October 30, 1989, by HYMEDIX International, in favor of PVI 10.9* Assignment of Patent, dated October 30, 1989 by HYMEDIX International in favor of PVI. 10.10** License and Supply Agreement, dated October 30, 1989, between HYMEDIX International and PVI, along with Addendum thereto dated July 10, 1991. 10.11* Contribution Agreement, dated August 7, 1990, by and between Kingston Technologies Limited Partnership ("KTLP") and HYMEDIX International. 10.12* Royalty Assignment Agreement, effective August 8, 1990, by and between HYMEDIX International and Research Corporation Technologies, Inc. ("RCT"). 10.13* Assignment of Patents, dated August 8, 1990, by KTLP in favor of HYMEDIX International. 10.14* Form of Amended and Restated Warrant to Purchase Common Stock, dated February 23, 1994, delivered to Cheung Hok Sau. 10.15* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to the Trustees of Boston University. 10.16* Right to Purchase Agreement, dated June 30, 1992, between HYMEDIX International and Lipo Chemicals, Inc. 10.17* License Agreement, dated June 30, 1992, between HYMEDIX International and Lipo Chemicals, Inc. 10.18* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to Synreal Corporation N.V. 10.19* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to Azreal Corporation N.V. 10.20* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to Dr. Hsia Fu Chao. 10.21 Amended and Restated 1991 Incentive and Non-Qualified Stock Option Plan, filed pursuant to Rule 14a-6 as Exhibit E to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 10.22* Employment Agreement, dated April 3, 1992, by and between HYMEDIX International and Alan L. Hershey, as amended by Agreement, dated January 4, 1993. 10.23* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to First Taiwan Investment Holding Inc. 10.24* Registration Rights Agreement, dated May 28, 1993, by and between HYMEDIX International and the Trustees of Boston University. 10.25* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to the Trustees of Boston University. 10.26* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to First Taiwan Investment and Development Inc. 10.27* Amended and Restated Registration Rights Agreement, dated February 23, 1994, by and among RCT, First Taiwan Investment Holding Inc. and First Taiwan Venture Capital Inc.. 10.28** Marketing and Distribution Agreement, dated July 30, 1993, by and between HYMEDIX International and Brady Medical Products, Co. 10.29* Evaluation Agreement, dated December 1, 1993, by and between HYMEDIX International and Alcon Laboratories, Inc. 10.30* Capital Contribution Agreement, dated February 23, 1994, by and between the Registrant and RCT. 10.31* Demand Registration Rights Agreement, dated February 23, 1994, by and between the Registrant RCT. 10.32* Option to Wall Street Group. 10.33* Redeemable Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to First Taiwan Investment Holding Inc. 10.34* Form of Warrant issued to Selling Stockholders (Domestic) in the private placements which closed February, 1994. 10.35* Form of Warrant issued to Selling Stockholders (International) in the private placements which closed February, 1994. 10.36** Development Services and Licensing Agreement, dated December 20, 1991, between HYMEDIX International and W. L. Gore and Associates, Inc. 10.37* Joint Venture Agreement, dated May 31, 1994, by and among the Registrant, Beijing General Pharmaceutical Corp., First Taiwan Investment Banking Group and Technological Innovation Corporation of China. 10.38*** Agreement, dated November 29, 1994, by and between HYMEDIX International and Bausch & Lomb. 10.39*** Director Stock Option Plan, effective as of May 31, 1994. 10.40**** Development Services and Licensing Agreement, dated December 20, 1991, between HYMEDIX International and W. L. Gore and Associates, Inc. 10.41***** Distribution, Kno-How Transfer, Licensing and Manufacturing and Supply Agreement dated August 21, 1995, by and between HYMEDIX International, Inc. and Europa Magnetics Corporation. 10.42# Master Terms and Conditions For Purchase Orders dated September 19, 1995, by and between Home Shopping Club, Inc. and HYMEDIX International, Inc. 10.43## Convertible Bond Purchase Agreement, effective February 27, 1996, by and among the Company, HYMEDIX International, First Taiwan Investment and Development, Inc., and the Purchasers (as defined therein). 10.44## Convertible Bond Purchase Agreement, effective March 5, 1996, by and among the Company, HYMEDIX International, and Su Chen Huang. 10.45### Security Agreement dated as of August 8, 1996, by and among the Company and the Bondholder Representative (as defined therein). 10.46# License Agreement dated November 15, 1995, by and between ProCyte Corporation and HYMEDIX International, Inc. 21* Subsidiaries of the Registrant. 27 Financial Data Schedule.
- ----------------------- * Previously filed as an Exhibit to the Registrant's Form SB-2 Registration Statement (No. 33-78638) originally filed on May 5, 1994 and incorporated herein by reference. ** Previously filed (and Confidential Treatment requested pursuant to Rule 406 under the Securities Act) as an Exhibit to the Registrant's Form SB-2 Registration Statement (No. 33-78638) originally filed on May 5, 1994 and incorporated herein by reference. *** Previously filed as an Exhibit to the Registrant's Form 10-KSB originally filed April 17, 1995. **** Previously filed (and Confidential Treatment requested pursuant to Rule 24- b2 under the Securities Exchange Act of 1934) as an Exhibit to the Registrant's Amendment No. 1 to Form 10-KSB/A originally filed April 30, 1995. ***** Previously filed as an Exhibit to the Registrant's Form 10-QSB originally filed November 15, 1995. # Previously filed as an Exhibit to the Registrant's Form 10-KSB originally filed March 30, 1996 ## Previously filed as an Exhibit to the Registrant's Form 10-QSB originally filed May 15, 1996. ### Previously filed as an Exhibit to the Registrant's Form 10-QSB originally filed November 13, 1996. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of 1997. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HYMEDIX, INC. (Registrant) By/s/ Charles K. Kliment, Ph.D. ______________________________ Charles K. Kliment, Ph.D. President (Principal Executive Officer) Date:March 31, 1998 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date By: /s/Charles K. Kliment President, (Principal Executive Officer) March 31, 1998 __________________________ Charles K. Kliment By: /s/ William G. Gridley, jr. Chairman, Chief Financial March 31, 1998 ____________________________ William G. Gridley, jr. Officer (Secretary, Treasurer, Principal Financial Officer and Principal Accounting Officer); Director By: /s/Vladimir A. Stoy Director March 31, 1998 ____________________________ Vladimir A. Stoy By: /s/George P. Stoy Director March 31, 1998 ____________________________ George P. Stoy By: /s/ John E. Bagalay, Jr. Director March 31, 1998 ____________________________ John E. Bagalay, Jr. By: /s/ Edward H. Jennings Director March 31, 1998 ____________________________ Edward H. Jennings By: /s/ Sheng-Hsiung Hsu Director March 31, 1998 ____________________________ Sheng-Hsiung Hsu By: /s/ Dr. Hsia-Fu Chao Director March 31, 1998 ____________________________ Dr. Hsia-Fu Chao By: /s/ Shu-Jean Kuo Chou Director March 31, 1998 ____________________________ Shu-Jean Kuo Chou By: /s/ Michael K. Hsu Director March 31, 1998 ____________________________ Michael K. Hsu
HYMEDIX, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
HYMEDIX, INC. AND SUBSIDIARY INDEX REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To HYMEDIX, Inc.: We have audited the accompanying consolidated balance sheets of HYMEDIX, Inc. (a Delaware corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HYMEDIX, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss in each of the last three years, has a working capital deficit, has a net capital deficiency and is not in compliance with certain loan provisions at December 31, 1997. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 3. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Princeton, New Jersey March 20, 1998
HYMEDIX, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 ------ ----------- ----------- CURRENT ASSETS: Cash and cash equivalents (Note 2) $51,381 $42,562 Restricted cash (Note 7) 0 225,600 Accounts receivable 226,649 57,316 Inventories, net (Note 2) 235,746 408,296 Other current assets 54,992 38,523 ----------- ----------- Total current assets 568,768 772,297 INVESTMENTS (Notes 2 and 9) 105,469 168,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $810,279 and $723,391 in 1997 and 1996, respectively (Notes 2 and 5) 28,290 115,178 PATENTS, net of accumulated amortization of $347,070 and $315,630 in 1997 and 1996, respectively (Note 2) 93,517 124,957 ----------- ----------- Total assets $796,044 $1,180,432 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Notes payable (Note 7) $4,067,596 $4,162,843 Accounts payable and accrued expenses (Note 6) 3,341,269 2,400,271 Accrued legal judgment (Note 12) 805,964 805,964 Liabilities related to discontinued line of 59,222 59,222 business (Note 4) ----------- ----------- Total current liabilities 8,274,051 7,428,300 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 10 and 12) STOCKHOLDERS' DEFICIT (Notes 2 and 11): 8% Senior Convertible Preferred Stock, $3.00 par value, 800,000 shares authorized, 10,190 shares issued and outstanding in 30,570 30,570 1997 and 1996, respectively Preferred Stock, $.01 par value, 3,000 shares authorized, 150 2 2 shares issued and outstanding in 1997 and 1996, respectively Common stock, $.001 par value, 20,000,000 shares authorized, 5,713,500 shares issued and outstanding in 1997 and 1996, 5,713 5,713 respectively Additional paid-in capital 15,642,174 15,642,174 Unrealized loss from available for sale investments (53,531) 0 Accumulated deficit (21,602,935) (20,426,327) Subscription receivable (1,500,000) (1,500,000) ----------- ----------- Total stockholders' deficit (7,478,007) (6,247,868) ----------- ----------- Total liabilities and stockholders' deficit $796,044 $1,180,432 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
HYMEDIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 ----------- ---------- ----------- REVENUES (Note 2): Net product sales $919,441 $843,798 $717,947 License, royalty and distribution fees 588,890 868,000 1,200,000 (Notes 4 and 9) Research and development contracts (Note 9) 275,000 275,000 344,167 ----------- ---------- ----------- Total revenues 1,783,331 1,986,798 2,262,114 ----------- ---------- ----------- COSTS AND EXPENSES (Note 2): Cost of sales 606,004 406,549 341,773 Selling, general and administrative 1,303,440 2,000,863 1,973,340 Research and development 538,540 650,907 547,202 Legal judgment 0 805,964 0 ----------- ---------- ----------- Total costs and expenses 2,447,984 3,864,283 2,862,315 ----------- ---------- ----------- Loss from operations (664,653) (1,877,485) (600,201) ----------- ---------- ----------- OTHER (EXPENSE) INCOME: Realized loss on sale of investments (Note 2) (34,061) 0 0 Interest expense (341,400) (321,163) (204,944) Interest income 952 5,333 4,178 ----------- ---------- ----------- Total other expense, net (374,509) (315,830) (200,766) ----------- ---------- ----------- Net loss ($1,039,162) ($2,193,315) ($800,967) =========== ========== =========== BASIC LOSS PER COMMON SHARE (Note 2) ($.21) ($.41) ($.16) =========== ========== =========== DILUTED LOSS PER COMMON SHARE (Note 2) ($.21) ($.41) ($.16) =========== ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 2) 5,713,500 5,713,500 5,713,500 =========== ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
HYMEDIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 8% Senior Convertible Unrealized Preferred Stock Preferred Stock Common Stock Loss From ------------------- ------------------- ------------------ Additional Available Number Number of Number of Paid-in For Sale Accumulated Subscription of Shares Amount Shares Amount Shares Amount Capital Investments Deficit Receivable --------- --------- --------- --------- --------- --------- ----------- ----------- ----------- ------------ BALANCE, December 31, 1994 10,190 $30,570 150 $2 5,713,500 $5,713 $15,635,301 $0 ($17,157,153) ($1,500,000) Net loss -- 1995 0 0 0 0 0 0 0 0 (800,967) 0 Preferred stock dividends 0 0 0 0 0 0 0 0 (137,446) 0 --------- --------- --------- ----- --------- --------- ----------- -------- ----------- ----------- BALANCE, December 31, 1995 10,190 30,570 150 2 5,713,500 5,713 15,635,301 0 (18,095,566) ( 1,500,000) Net loss -- 1996 0 0 0 0 0 0 0 0 (2,193,315) 0 Adjustment of stock 0 0 0 0 0 0 6,873 0 0 0 offering costs Preferred stock dividends 0 0 0 0 0 0 0 0 (137,446) 0 --------- --------- --------- ----- --------- --------- ----------- -------- ----------- ----------- BALANCE, December 31, 1996 10,190 30,570 150 2 5,713,500 5,713 15,642,174 0 (20,426,327) (1,500,000) Net loss -- 1997 0 0 0 0 0 0 0 0 (1,039,162) 0 Preferred stock dividends 0 0 0 0 0 0 0 0 (137,446) 0 Unrealized loss 0 0 0 0 0 0 0 (53,531) 0 0 from available for sale investments --------- --------- --------- ----- --------- --------- ----------- -------- ----------- ----------- BALANCE, December 31, 1997 10,190 $30,570 150 $2 5,713,500 $5,713 $15,642,174 ($53,531) ($21,602,935) ($1,500,000) ========= ========= ========= ===== ========= ========= =========== ======== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements.
HYMEDIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($1,039,162) ($2,193,315) ($800,967) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 118,328 122,436 126,268 Realized loss on sale of investments 34,061 0 0 Restricted common stock received for manufacturing and distribution rights (75,000) (168,000) 0 Reserve for inventories 100,000 0 0 (Increase) decrease in- Accounts receivable (169,333) (26,058) 4,206 Inventories 72,550 69,642 (67,759) Other current assets (16,469) 18,704 41,397 Increase (decrease) in- Accounts payable and accrued expenses 803,552 424,763 355,737 Accrued legal judgment 0 805,964 0 Deferred revenue 0 (100,000) 23,334 ---------- ---------- ---------- Net cash used in operating activities (171,473) (1,045,864) (317,784) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES -- Proceeds from the sale of investments 49,939 0 0 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable 0 1,131,000 107,480 Restricted cash 225,600 (225,600) 0 Principal repayments of notes payable (95,247) 0 0 ---------- ---------- ---------- Net cash provided by financing activities 130,353 905,400 107,480 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 8,819 (140,464) (210,304) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 42,562 183,026 393,330 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $51,381 $42,562 $183,026 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $145,660 $0 $0 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. HYMEDIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF OPERATIONS: HYMEDIX, Inc. (the Company) is engaged primarily in the development and commercialization of biomedical and skin care products based on proprietary advanced hydrogels. These hydrophilic polymers are biocompatible and highly versatile, and enable the Company to develop and manufacture products and components with many characteristics for a variety of medical products and other markets. For the year ended December 31, 1997, two of the Company's product lines encompass over 76% of net product sales. For the year ended December 31, 1996, four of the Company's product lines encompassed over 57% of net product sales. In addition, one of the Company's customers accounted for 84% of total accounts receivable as of December 31, 1997 and 43% of total revenues for the year then ended. As of December 31, 1996, one of the Company's customers accounted for 100% of total accounts receivable and two of the Company's customers accounted for 57% of total revenues for the year then ended. The Company was incorporated in Delaware on December 20, 1993, as a wholly-owned subsidiary of Servtex International, Inc. (Servtex). On February 23, 1994, Servtex merged with and into the Company and, concurrently, a wholly-owned subsidiary of Servtex was merged with and into HYMEDIX International, Inc. (HYMEDIX International), which resulted in HYMEDIX International becoming a wholly-owned subsidiary of the Company. HYMEDIX International was incorporated in October, 1985 under the name Kingston Technologies, Inc. Upon the consummation of the merger, the holders of common stock of HYMEDIX International received approximately 92% of the common shares of the Company. Accordingly, the merger with Servtex has been accounted for as an acquisition of Servtex by HYMEDIX International. Servtex had no operations and its assets were not significant prior to the merger. The accompanying consolidated 1997, 1996 and 1995 financial statements include the accounts of the Company and HYMEDIX International, Inc. All significant intercompany transactions have been eliminated in consolidation. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenues and Cost Recognition- Revenues are derived primarily from option and license agreements, research and development contracts and the sales of hydrogels and skin care products. Such revenues are recognized when all significant obligations of the Company have been satisfied. The costs associated with the option fees and license fees and research and development expenses are recognized as incurred. Cash and Cash Equivalents- Cash and cash equivalents include an investment in a mutual fund which is included in cash and cash equivalents for purposes of reporting cash flows. Inventories- Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and include material, labor and overhead costs. As of December 31, inventories are comprised as follows- te97 1996 ---------- ---------- Raw materials $108,673 $109,181 Work in process 29,610 0 Finished goods 197,463 299,115 ---------- ---------- 335,746 408,296 Less- reserve for obsolete inventory (100,000) 0 ---------- ---------- $235,746 $408,296 ========== ========== Investments- The Company's investments, which represent restricted common stock that the Company received for manufacturing and distribution rights, are considered available for sale investments. Accordingly, these investments are carried at fair market value in the accompanying consolidated balance sheets, with the difference between cost and market value recorded as a component of stockholders' deficit. Realized gains or losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statements of operations. The total unrealized loss on investments as of December 31, 1997 is $53,531. There were no unrealized gains or losses as of December 31, 1996. Property and Equipment- Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets ranging from three to five years. Patents- Patents are amortized using the straight-line method over a 14-year period. The Company reviews the recoverability of long-lived assets on a periodic basis in order to identify conditions which may indicate possible impairment. The assessment for potential impairment is based primarily on the Company's ability to recover the unamortized balance of its long-lived assets from expected future undiscounted cash flows. Stock-Based Compensation- The Company accounts for stock-based compensation using the intrinsic value method. LOSS PER SHARE- In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS 128) which requires presentation in the consolidated statements of operations of both basic and diluted loss per share. Basic loss per share is computed by dividing the net loss for the period, after consideration of dividends related to preferred stock where applicable, by the weighted average number of common shares outstanding. Net loss available to common stockholders represents the net loss less preferred stock dividends ($137,446) for the years ended December 31, 1997, 1996 and 1995. Basic loss per common share as calculated in accordance with SFAS 128 does not differ from loss per share reported in prior periods. None of the common shares issuable under either the Company's stock option plan, or the conversion of the preferred stock, bonds or outstanding warrants were included in the computation of loss per common share assuming dilution because their inclusion would have been antidilutive. Thus, there is no difference between the weighted average common shares outstanding to weighted average common shares outstanding assuming dilution. Reclassifications- Certain reclassifications have been made to the prior years financial statements to conform with the current year presentation. (3) BASIS OF PRESENTATION: The Company incurred a net loss and negative operating cash flow in each of the last three years ended December 31, 1997. The Company also has a working capital deficit, a net capital deficit and was not in compliance with certain loan provisions at December 31, 1997. The Company is currently in discussions with potential investors to receive additional financing, however, there is no assurance that such financing will be consummated. Management believes that the Company will have adequate resources to finance its operations in 1998. The Company is appealing a judgment in amount of $805,964 which was rendered against it (see Note 12). If the plaintiff moves to collect on the judgment prior to adjudication of the appeal, or if a verdict is rendered against the Company in appellate court, the Company must attempt to finance both its operations and satisfaction of the judgment. Management believes this will be difficult. Management plans to continue to seek and evaluate financing alternatives for the Company. In the event that cash flow from operations and the anticipated proceeds from the financing, if any, are not sufficient to fund the Company's operations in 1998, there is no assurance that other sources of funds will be available to the Company. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. (4) RELATED PARTY TRANSACTIONS: The Company is the sole general partner in Kingston Diagnostics, L.P. (KDLP), an entity which ceased operations in 1991 and no longer conducts any business activities. KDLP had separate activities, personnel and facilities from the Company and its activities were unrelated to those of the Company. All liabilities of KDLP, which amount to $59,222 at December 31, 1997 and 1996, respectively, have been reflected in the accompanying balance sheets. During 1995, the Company entered into a licensing and distribution agreement with a company affiliated with a stockholder of the Company. The Company received $700,000 and in return the Company granted the exclusive distribution and manufacturing rights to its skin care and wound care products in Asia (see Note 9). The Company entered into a license agreement with S.K.Y. Polymers, Inc. (SKY), an entity controlled by one of the Company's directors, to obtain rights with respect to the use of SKY's technology. Under the agreement, SKY has granted the Company an exclusive right to all of its technology in the Company's principal fields of interest, and rights of first refusal in certain other fields, in return for a monthly license maintenance fee of $10,000 and royalties of 4% of the Company's revenues from products using SKY's proprietary technology. The monthly license fee has been regularly paid and no royalties have been paid to date. As of January 1, 1998, this agreement was changed whereby SKY would receive $2,000 per month for license maintenance fees. This agreement will terminate at the later of: (i) the expiration of the last to expire of the patents encompassed within the technology or (ii) January 1, 2013. A portion of the Company's convertible bonds are held by First Taiwan, the majority stockholder of the Company. These bonds, bear interest at 7% payable upon demand and are secured by substantially all the assets of the Company (see Note 7). (5) PROPERTY AND EQUIPMENT: At December 31, property and equipment is as follows- 1997 1996 --------- --------- Machinery and equipment $223,756 $223,756 Office equipment and furniture and fixtures 25,249 25,249 Leasehold improvements 589,564 589,564 --------- --------- 838,569 838,569 Less- Accumulated depreciation (810,279) (723,391) --------- --------- $28,290 $115,178 ========= ========= Depreciation and amortization of property and equipment was $86,888, $90,996 and $92,443 in 1997, 1996 and 1995, respectively. (6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES: At December 31, accounts payable and accrued expenses consists of-
1997 1996 --------- --------- Accounts payable $1,293,505 $866,227 Accrued compensation 426,185 385,940 Accrued interest payable 891,873 678,725 Accrued preferred dividends 529,825 392,379 Refundable option deposit 99,000 0 Other accrued expenses 100,881 77,000 --------- --------- $3,341,269 $2,400,271 ========= ========= (7) NOTES PAYABLE: Notes payable consists of the following as of December 31- 1997 1996 ---------- --------- Note payable, bearing interest at 7%, interest only payable quarterly, matures in January 2007, unsecured (a) (see Note 9). $1,500,000 $1,500,000 Note payable, bearing interest at 7%, interest only payable semiannually, matures in October 1999, secured by a patent (a) (see Note 9). 1,000,000 1,000,000 Convertible bonds, bearing interest at 7% payable upon on demand, secured bysubstantially all the assets of the Company (b). 1,035,753 1,131,000 Note payable, bearing interest at 3%, payable on demand, unsecured 458,326 458,326 Note payable, bearing interest at 8%, payable on demand, unsecured 72,317 72,317 Demand note payable, bearing interest at 10%, interest payable periodically, unsecured. 1,200 1,200 ---------- ---------- $4,067,596 $4,162,843 ========== ==========
(a) During 1997, 1996 and 1995, the Company has not made interest payments in accordance with the terms of the note payable agreement. As a result, the Company is in technical default with the agreement and therefore, the related debt has been classified as a current liability in the accompanying consolidated balance sheets. (b) During 1996, the Company issued convertible bonds in the principal amount of $1,131,000. The bonds are convertible into 1,131,000 shares of the Company's common stock. Such shares have been reserved by the Company. The bonds may be subject to mandatory prepayment under certain conditions. Certain proceeds from the bond issuance are held by a representative of the bondholders (agent). The Company's ability to borrow such proceeds is subject to approval by the agent. The bonds were originally due June 1, 1997, however, the due date was extended until December 31, 1997. The Company is currently negotiating to extend the due date of these bonds. (8) INCOME TAXES: The Company provides for taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS 109) which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. In accordance with SFAS 109, the Company has evaluated its ability to realize the future tax benefits associated with its net operating loss carryforwards. At December 31, 1997, the Company had net operating loss carryforwards of approximately $17,200,000 for Federal income tax purposes which expire through 2012. Based on its operating history, the Company has provided a valuation allowance of approximately $5,900,000 as a full valuation allowance against the deferred tax asset as of December 31, 1997 because it could not determine that it was more likely than not that such benefits would be realized. As a result of a previous recapitalization, a change in ownership, as defined for tax purposes, has occurred which will restrict the use of net operating loss carryforwards. The maximum amount of net operating losses incurred prior to the change in ownership (approximately $5,000,000) which can be utilized in any given year is approximately $1,300,000. (9) SIGNIFICANT AGREEMENTS: The Company granted a license agreement covering the exclusive rights to all surgically applied eye care products developed by the Company to Optical Radiation Corporation (ORC). ORC subsequently assigned these rights to another company which is active in the intraocular lenses business. In 1987 the Company received $1,500,000 in licensing fees and a loan of $1,500,000, (see Note 7) as up-front payments stipulated by the agreement. In connection with the license agreement, the Company may receive royalties based on a percentage of sales of those products associated with the agreement. The Company earned approximately $200,000 of royalties under this agreement for the year ended December 31, 1997. No royalties have been earned prior to 1997. The Company granted an exclusive license for its soft contact lens products in October 1989 to Pilkington Visioncare, Inc. (PVI). In consideration thereof, the Company obtained a $1,000,000, 7% ten-year interest only loan from PVI (see Note 7). No soft contact lens products have been completed, and no royalties have been received or earned under this license agreement. In 1991, the Company entered into a Development Services and Licensing Agreement with a medical products company. Under this agreement and subsequent extensions, the medical products company has paid the Company $100,000, $100,000 and $100,000 in fees for the years 1997, 1996 and 1995, respectively. These amounts have been reflected in research and development contract revenues in the accompanying consolidated statements of operations. During August 1995, the Company entered into a distribution and licensing agreement with Europa Magnetics Corporation Limited (EMC), a company affiliated with a stockholder of the Company. The agreement gives EMC the exclusive right to market and distribute the Company's skin care and wound care products in Asia. During 1995, the Company received $700,000 for the granting of these exclusive rights which has been reflected in license, royalty and distribution fees in the accompanying consolidated statements of operations. Under this agreement, if EMC manufactures products in Asia, it would pay the Company up to a 7% royalty on all partially or fully manufactured skin care and wound care products produced in Asia. No royalties have been received or earned through December 31, 1997. During November 1995, the Company entered into an agreement with a company granting it exclusive rights to manufacture and distribute the Company's wound care products worldwide except for Asia. In addition, the Company granted exclusive worldwide rights to the drug delivery application of the polymer technology for wound healing. The agreement calls for certain upfront, research and development and milestone payments in both cash and restricted common stock, subject to certain restrictions, and for royalties. The Company received cash and restricted common stock of the company under this agreement which has been reflected in licenses, royalty and distribution fees in the accompanying consolidated statements of operations. This agreement was terminated during 1997. (10) COMMITMENTS AND CONTINGENCIES: The Company leases certain office and manufacturing facilities under arrangements accounted for as operating leases. Rent expense aggregated $519,000, $538,000 and $538,000 for the years ended December 31, 1997, 1996 and 1995, respectively. These leases require the Company to pay all executory costs such as property taxes, maintenance and insurance. The aggregate minimum lease payments of all noncancellable leases as of December 31, 1997 are as follows- For the Years Ending December 31- 1998 $11,004 1999 10,795 2000 8,496 2001 8,496 2002 7,080 The office and manufacturing facilities lease expired during 1997. The Company is currently in the process of negotiating a new lease. (11) STOCKHOLDERS' DEFICIT: During 1994, the Company issued $1,500,000 of 9% preferred stock to Research Corporation Technologies, Inc. ("RCT"), which has a 20% interest in the Company's royalties under certain exclusive lens products licenses, in exchange for the right to receive the first $1,500,000 of royalties due to RCT. The $1,500,000 due from RCT is reflected as a subscription receivable at December 31, 1997 and 1996. The preferred stock is redeemable by the Company (but not by RCT) in six years, and is convertible after June 30, 1995 into the Company's common stock at $5.75 a share, with the Company having the right to redeem the preferred stock if RCT elects to convert. The Company maintains an Employee Stock Option Plan and is authorized to grant options at fair value to purchase up to 500,000 shares of the Company's stock. The options are exercisable in varying percentages. Transactions under the Option Plan are as follows-
Shares Weighted Under Average Option Exercise Price --------- -------------- Outstanding December 31, 1994 346,278 $3.83 Expired (20,730) $3.89 --------- Outstanding December 31, 1995 (exercisable 321,798 shares) 325,548 $3.82 Granted 99,000 $0.77 Expired (5,629) $3.20 --------- Outstanding December 31, 1996 (exercisable 323,419 shares) 418,919 $3.11 Expired (52,748) $2.85 --------- Outstanding December 31, 1997 (exercisable 300,421 shares) 366,171 $3.15 =========
The following table summarizes information about stock options outstanding at December 31, 1997-
Number Weighted Weighted Number Weighted Range of Outstanding Average Average Exercisable Average Exercise Prices at 12/31/97 Remaining Life Exercise Price at 12/31/97 Exercise Price $0.75 to $1.99 92,000 9 $0.77 27,500 $0.80 $2 to $3.99 216,171 3 $3.37 216,171 $3.37 $4 to $5.99 53,000 2 $5.69 52,250 $5.71 $6 to $12 5,000 4 $10.40 4,500 $10.67
In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS 123"), the fair value of option grants is estimated on the date of grant using the Black-Scholes option pricing model for proforma footnote purposes with the following assumptions used for grants in all years; dividend yield 0%, risk-free interest rate of 5.42% and expected option life of six years. Expected volatility was assumed to be 77.71% in 1996. The weighted average fair value of options granted in 1996 was $.36. There were no grants made during 1997 and 1995. As permitted by SFAS 123, the Company has chosen to continue accounting for stock options at their intrinsic value. Accordingly, no compensation expense has been recognized for its stock option compensation. Had the fair value method of accounting been applied to the Company's stock option plans, the tax-effected impact would be as follows-
1997 1996 1995 ---------- ---------- ---------- Net loss as reported ($1,039,162) ($2,193,315) ($800,967) Estimated fair value of the year's option grants, 0 35,640 0 net of tax ------------ ------------ ---------- Net loss adjusted ($1,039,162) ($2,228,955) ($800,967) ============ ============ ========== Adjusted net loss per share ($.21) ($.41) ($.16) ============ ============ ==========
This proforma impact only takes into account options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The Company has outstanding warrants entitling the holders thereof to purchase 183,421 common shares. The warrants are exercisable at varying prices ranging from $3.00 to $9.59 per share, subject to certain adjustments, as defined, and expire through January 19, 2000. (12) LITIGATION: The Company's former president filed a claim against the Company, the Company's Directors and Kingston Technologies Limited Partnership (a stockholder). The complaint, filed in September 1993, alleged that the Company wrongfully terminated the former president, that he was owed $367,500 in deferred compensation and $74,500 in back salary and that approximately $323,000 was owed him based on his claim that an agreement signed by him was signed under duress and is therefore void. The Company has filed an answer denying most of the former president's claims for relief. The Company paid $74,500 in 1994 resulting in the parties settling the claim regarding back salary. In July 1996, a judgment was rendered against the Company in the amount of $805,964 plus interest in connection with this case. Although the Company is appealing this judgment, the Company has accrued the judgment plus interest in the accompanying consolidated financial statements as of December 31, 1997 and 1996. In addition, an individual filed a complaint against the Company alleging that the Company owed him eight percent of all monies invested in the Company as a result of his contacts. The complaint alleges that the Company owes him approximately $5,000,000 and warrants to purchase the Company's common stock. The Company has filed a response denying these claims. The outcome of this matter is uncertain at this time. Accordingly, no provision for any liability that may result upon adjudication of this lawsuit has been made in the accompanying consolidated financial statements. TABLE OF EXHIBITS
Exhibit No. Description 2.1 Amended and Restated Agreement of Merger and Plan of Reorganization, dated as of January 24, 1994 by and among Servtex International Inc., Kingston Technologies, Inc., KTI Acquisition Corp. and certain affiliates of Servtex International Inc., filed pursuant to Rule 14a-6 as Exhibit F to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 2.2 Agreement of Merger, dated as of February 23, 1994 by and between Servtex International Inc. and HYMEDIX, Inc., filed pursuant to Rule 14a-6 as Exhibit A to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 3.1 Certificate of Incorporation, filed pursuant to Rule 14a-6 as Exhibit B to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 3.2 Certificate of Designation, Preference and Rights of Series A Redeemable Preferred Stock, filed as Exhibit (2) to Form 8-K, dated February 23, 1994, of the Registrant and incorporated by reference herein. 3.3 By-Laws of the Registrant, filed pursuant to Rule 14a-6 as Exhibit C to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 4.1* Specimen Certificate of the Registrant's Common Stock, $.001 par value. 10.1* Form of the Underwriter's Warrant issued to First Flushing Securities, Inc. as a broker's fee for negotiating the merger of KTI Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Registrant with and into HYMEDIX International. 10.2** Option and License Agreement dated November 7, 1986 by and between HYMEDIX International and ORC, as amended by Amendment Number 1 to Option and License Agreement dated January 9, 1987. 10.3* Promissory Note, dated January 9, 1987, made by HYMEDIX International to the order of ORC, for $500,000. 10.4* Indenture of Lease dated July 7, 1987 by and between Fresh Ponds Associates and HYMEDIX International, as amended by First Amendment to Lease, dated September 13, 1993, Second Amendment to Lease, dated September 15, 1993, and Third Amendment to Lease, dated January 15, 1994; and the related Installment Promissory Note, dated October 1, 1993, made by HYMEDIX International to the order of Fresh Ponds Associates for $404,300.90. 10.5* Promissory Note, dated September 29, 1987, made by HYMEDIX International to the order of ORC, for $1,000,000. 10.6** Agreement, dated December 22, 1988, by and between Kingston Hydrogels Limited Partnership and LIPO Chemicals, Inc., as amended by Amendment No. 1, effective June 1, 1990 and as further amended by Amendment Agreement, dated June 14, 1990. 10.7* Loan and Security Agreement, dated October 30, 1989, by and between HYMEDIX International and Pilkington Visioncare, Inc. ("PVI"). 10.8* Promissory Note in the amount of $1,000,000, dated October 30, 1989, by HYMEDIX International, in favor of PVI 10.9* Assignment of Patent, dated October 30, 1989 by HYMEDIX International in favor of PVI. 10.10** License and Supply Agreement, dated October 30, 1989, between HYMEDIX International and PVI, along with Addendum thereto dated July 10, 1991. 10.11* Contribution Agreement, dated August 7, 1990, by and between Kingston Technologies Limited Partnership ("KTLP") and HYMEDIX International. 10.12* Royalty Assignment Agreement, effective August 8, 1990, by and between HYMEDIX International and Research Corporation Technologies, Inc. ("RCT"). 10.13* Assignment of Patents, dated August 8, 1990, by KTLP in favor of HYMEDIX International. 10.14* Form of Amended and Restated Warrant to Purchase Common Stock, dated February 23, 1994, delivered to Cheung Hok Sau. 10.15* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to the Trustees of Boston University. 10.16* Right to Purchase Agreement, dated June 30, 1992, between HYMEDIX International and Lipo Chemicals, Inc. 10.17* License Agreement, dated June 30, 1992, between HYMEDIX International and Lipo Chemicals, Inc. 10.18* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to Synreal Corporation N.V. 10.19* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to Azreal Corporation N.V. 10.20* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to Dr. Hsia Fu Chao. 10.21 Amended and Restated 1991 Incentive and Non-Qualified Stock Option Plan, filed pursuant to Rule 14a-6 as Exhibit E to Proxy Statement of the Registrant (then Servtex International Inc.), dated February 12, 1994, and incorporated by reference herein. 10.22* Employment Agreement, dated April 3, 1992, by and between HYMEDIX International and Alan L. Hershey, as amended by Agreement, dated January 4, 1993. 10.23* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to First Taiwan Investment Holding Inc. 10.24* Registration Rights Agreement, dated May 28, 1993, by and between HYMEDIX International and the Trustees of Boston University. 10.25* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to the Trustees of Boston University. 10.26* Form of Amended and Restated Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to First Taiwan Investment and Development Inc. 10.27* Amended and Restated Registration Rights Agreement, dated February 23, 1994, by and among RCT, First Taiwan Investment Holding Inc. and First Taiwan Venture Capital Inc.. 10.28** Marketing and Distribution Agreement, dated July 30, 1993, by and between HYMEDIX International and Brady Medical Products, Co. 10.29* Evaluation Agreement, dated December 1, 1993, by and between HYMEDIX International and Alcon Laboratories, Inc. 10.30* Capital Contribution Agreement, dated February 23, 1994, by and between the Registrant and RCT. 10.31* Demand Registration Rights Agreement, dated February 23, 1994, by and between the Registrant RCT. 10.32* Option to Wall Street Group. 10.33* Redeemable Common Stock Purchase Warrant, dated February 23, 1994, made by the Registrant to First Taiwan Investment Holding Inc. 10.34* Form of Warrant issued to Selling Stockholders (Domestic) in the private placements which closed February, 1994. 10.35* Form of Warrant issued to Selling Stockholders (International) in the private placements which closed February, 1994. 10.36** Development Services and Licensing Agreement, dated December 20, 1991, between HYMEDIX International and W. L. Gore and Associates, Inc. 10.37* Joint Venture Agreement, dated May 31, 1994, by and among the Registrant, Beijing General Pharmaceutical Corp., First Taiwan Investment Banking Group and Technological Innovation Corporation of China. 10.38*** Agreement, dated November 29, 1994, by and between HYMEDIX International and Bausch & Lomb. 10.39*** Director Stock Option Plan, effective as of May 31, 1994. 10.40**** Development Services and Licensing Agreement, dated December 20, 1991, between HYMEDIX International and W. L. Gore and Associates, Inc. 10.41***** Distribution, Kno-How Transfer, Licensing and Manufacturing and Supply Agreement dated August 21, 1995, by and between HYMEDIX International, Inc. and Europa Magnetics Corporation. 10.42# Master Terms and Conditions For Purchase Orders dated September 19, 1995, by and between Home Shopping Club, Inc. and HYMEDIX International, Inc. 10.43## Convertible Bond Purchase Agreement, effective February 27, 1996, by and among the Company, HYMEDIX International, First Taiwan Investment and Development, Inc., and the Purchasers (as defined therein). 10.44## Convertible Bond Purchase Agreement, effective March 5, 1996, by and among the Company, HYMEDIX International, and Su Chen Huang. 10.45### Security Agreement dated as of August 8, 1996, by and among the Company and the Bondholder Representative (as defined therein). 10.46# License Agreement dated November 15, 1995, by and between ProCyte Corporation and HYMEDIX International, Inc. 21* Subsidiaries of the Registrant. 27 Financial Data Schedule.
- ----------------------- * Previously filed as an Exhibit to the Registrant's Form SB-2 Registration Statement (No. 33-78638) originally filed on May 5, 1994 and incorporated herein by reference. ** Previously filed (and Confidential Treatment requested pursuant to Rule 406 under the Securities Act) as an Exhibit to the Registrant's Form SB-2 Registration Statement (No. 33-78638) originally filed on May 5, 1994 and incorporated herein by reference. *** Previously filed as an Exhibit to the Registrant's Form 10-KSB originally filed April 17, 1995. **** Previously filed (and Confidential Treatment requested pursuant to Rule 24- b2 under the Securities Exchange Act of 1934) as an Exhibit to the Registrant's Amendment No. 1 to Form 10-KSB/A originally filed April 30, 1995. ***** Previously filed as an Exhibit to the Registrant's Form 10-QSB originally filed November 15, 1995. # Previously filed as an Exhibit to the Registrant's Form 10-KSB originally filed March 30, 1996 ## Previously filed as an Exhibit to the Registrant's Form 10-QSB originally filed May 15, 1996. ### Previously filed as an Exhibit to the Registrant's Form 10-QSB originally filed November 13, 1996. EX-27 2 FINANCIAL DATA SCHEDULE
5 Financial Data Schedule 0000880634 HYMEDIX INC 1 4 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 51,381 0 226,649 0 235,746 568,768 838,569 810,279 769,044 8,274,051 1,035,753 0 30,572 5,713 (7,514,292) 796,044 919,441 1,783,331 606,004 2,447,984 0 0 341,400 (1,039,162) 0 (1,039,162) 0 0 0 (1,039,162) (.21) (.21)
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