10QSB 1 hyd10q902.txt HYDROMER 9/30/02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three months ended September 30, 2002 Commission File Number 0-10683 HYDROMER, INC. -------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-2303576 --------------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 35 Industrial Pkwy, Somerville, New Jersey 08876-3518 ------------------------------------------ ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 526-2828 ------------------ Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock Without Par Value ------------------------------ (Title of class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s,) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding or each of the issuer's classes of Common Stock as of the close of the period covered by this report. Class Outstanding at September 30, 2002 ---------------------------------------------------------- Common 4,587,987 HYDROMER, INC. INDEX TO FORM 10-QSB September 30, 2002 Page No. Part I - Financial Information Consolidated Financial Statements Balance Sheets - September 30, 2002 & June 30, 2002.....................................2 Statements of Income for the three months ended September 30, 2002 and 2001.......................3 Statements of Cash Flows for the three months ended September 30, 2002 and 2001.......................4 Notes to Financial Statements......................5 Management's Discussion and Analysis of the Financial Condition and Results of Operation......6 Part II - Other Information..................................8 SEC Section 302 Certification - CEO certification...........10 SEC Section 302 Certification - CFO certification...........11 -1- HYDROMER, INC. and CONSOLIDATED SUBSIDIARY BALANCE SHEETS September 30, June 30, 2002 2002 (UNAUDITED) (AUDITED) ------------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents........... $ 180,807 $ 111,148 Trade receivables less allowance for doubtful accounts of $5,303 as of September 30, 2002 and $8,140 as of June 30, 2002................... 1,079,990 1,131,427 Inventory........................... 953,554 972,580 Prepaid expenses ................... 81,948 127,733 Deferred tax asset.................. 297,861 306,360 Other............................... 6,433 11,100 --------- --------- Total Current Assets................. 2,600,593 2,660,348 --------- --------- Property and equipment, net.......... 2,787,689 2,786,521 Patents, net......................... 498,797 488,173 Trademarks........................... 41,619 42,411 Goodwill, net........................ 490,172 490,172 --------- --------- Total Assets $6,418,870 $6,467,625 ========= ========= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable..................... $ 427,521 $ 580,614 Short-term borrowings................ 565,913 500,000 Accrued expenses .................... 216,640 194,065 Current portion of mortgage payable . 77,917 77,917 Income tax payable................... 5,500 - --------- --------- Total Current Liabilities 1,293,491 1,352,596 --------- --------- Deferred tax Liability................ 98,500 98,500 Long-term portion of mortgage payable ............................. 1,527,617 1,541,784 --------- --------- Total Liabilities 2,919,608 2,992,880 --------- --------- Stockholders' Equity Preferred stock - no par value, authorized 1,000,000 shares, no shares issued and outstanding - - Common stock - no par value, authorized 15,000,000 shares, issued 4,598,904 shares and outstanding, 4,587,987 shares....... 3,608,118 3,608,118 Contributed capital.................. 577,750 577,750 Accumulated deficit................... (680,466) (704,983) Treasury stock, 10,917 common shares at cost....................... (6,140) (6,140) --------- --------- Total Stockholders' Equity 3,499,262 3,474,745 --------- --------- Total Liabilities and Stockholders' Equity $6,418,870 $6,467,625 ========= ========= -2- HYDROMER, INC. and CONSOLIDATED SUBSIDIARY STATEMENTS OF INCOME Three Months Ended September 30, 2002 2001 UNAUDITED UNAUDITED ------------------------------------------------------------------------- Revenues Product sales and services............. $ 903,544 $ 796,984 Royalties, options and licenses........ 521,217 632,412 ---------- ---------- Total Revenues 1,424,761 1,429,396 Cost of Sales........................... 489,931 390,335 ---------- ---------- Gross Profit............................ 934,830 1,039,061 Operating expenses...................... 870,265 991,705 ---------- ---------- Operating Income........................ 64,565 47,356 Interest Income......................... 113 805 Interest Expense........................ (26,856) (15,178) Other Income............................ 694 - ---------- ---------- Income before provision for income taxes 38,516 32,983 Provision for (Benefit from) Income Taxes 13,999 (66,230) ---------- ---------- Net Income.............................. $ 24,517 $ 99,213 ========== ========== Earnings Per Common Share............... $ 0.01 $ 0.02 ========== ========== Weighted Average Number of Common Shares Outstanding..................... 4,587,987 4,587,987 ========== ========== Dilutive effect of Outstanding Stock Options................................ - 232,900 Dilutive Weighted Average Number of Common Shares Outstanding.............. 4,587,987 4,820,887 Earnings Per Common Share - Assuming Dilution...................... $ 0.01 $ 0.02 ========== ========== Certain amounts have been reclassified for comparative purposes. -3- HYDROMER, INC. and CONSOLIDATED SUBSIDIARY STATEMENTS OF CASH FLOWS Three Months Ended September 30, 2002 2001 UNAUDITED UNAUDITED ------------------------------------------------------------------------- Cash Flows From Operating Activities: Net Income........................ $ 24,517 $ 99,213 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.... 40,260 46,759 Deferred income taxes............ 8,499 (66,230) Changes in Assets and Liabilities Trade receivables............... 51,437 (78,502) Inventory....................... 19,026 (112,926) Prepaid expenses................ 45,785 2,530 Patents and Trademark........... (9,832) (50,284) Other assets.................... 4,667 (2,239) Accounts payable and accrued liabilities.................... (130,518) 174,880 Income taxes payable............ 5,500 - ------- ------- Net Cash Provided by Operating Activities 59,341 13,201 ------- ------- Cash Flows From Investing Activities: Cash purchases of property and equipment........................ (41,428) (373,786) ------- ------- Net Cash Used for Investing Activities (41,428) (373,786) ------- ------- Cash Flows From Financing Activities: Net borrowings against Line of Credit........................... 65,913 25,000 Proceeds from long term borrowings - 333,177 Repayment of long term borrowings. (14,167) (14,167) ------- ------- Net Cash Provided by Financing Activities 51,746 344,010 Net Increase (Decrease) in Cash and Cash Equivalents : 69,659 (16,575) Cash and Cash Equivalents at Beginning of Period 111,148 74,189 ------- ------- Cash and Cash Equivalents at End of Period $ 180,807 $ 57,614 ======= ======= -4- HYDROMER, INC. and CONSOLIDATED SUBSIDIARY Notes to Financial Statements In the opinion of management, the accompanying unaudited financial statements include all adjustments (consisting of only normal adjustments) necessary for a fair presentation of the results for the interim periods. Segment Reporting: The Company operates two primary business segments. The Company evaluates the segments by revenues, total expenses and earnings before taxes. The results for the three months ended September 30, by segment are: Polymer Research Medical Products Total ----------------------------------------------- 2002 Revenues.............. $ 890,814 $ 533,947 $1,424,761 Expenses.............. 787,582 598,663 1,386,245 --------------------------------------------- Earnings before Income Taxes................ $ 103,232 $ (64,716) $ 38,516 ============================================= 2001 Revenues............... $ 897,655 $ 531,741 $1,429,396 Expenses............... 887,750 508,663 1,396,413 --------------------------------------------- Earnings before Income Taxes................. $ 9,905 $ 23,078 $ 32,983 ============================================= Geographic revenues were as follows for the three months ended September 30, 2002 2001 -------------------------- Domestic 82% 84% Foreign 18% 16% New Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets". SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least on an annual basis. The Company adopted SFAS 142 commencing with this fiscal quarter, opting not to adopt SFAS 142 early. Had the Company elected for early adoption of SFAS 142, it would not have had a material effect on net income and earnings per share for the three months ended September 30, 2001. -5- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's Products and Services revenues for the quarter ended September 30, 2002 were $903,544 up 13.4% from $796,984 the same period the year before. Revenue from Royalty, Options and License payments were $521,217 for the current quarter, down 17.6% from $632,412 the same period a year ago. Overall, total revenues for the September 2002 quarter of $1,424,761 were flat to the same period last year of $1,429,396. Product sales and services were $903,544 for the quarter ended September 30, 2002 as compared to $796,984 for the same period the year before, an increase of 13.4%. Included in the 2001 results was the negative impact of production issues to revenues, including from the requirement to replace 30-year old machinery unexpectedly. Greater customer acceptance and new product enhancements also further contributed to an increase in product sales in the 2003 fiscal year first quarter when compared to the prior year's quarter. This includes the T-HEXX(r) product line as a result of marketing and the establishment of a distributorship network and our enhanced anti-fog condensation coating solution. Royalty, license and option revenues from patented products were $521,217 as compared with $632,412 the same period a year ago. The 2001 results included a $75,000 validation payment from one of our licensees. There were no new payments from options or license agreements this year. The Company's gross profit was down 10.0% to $934,830 from $1,039,061 for the same period last year. The Company's Cost of Goods Sold was $489,931 for the quarter ended September 30, 2002 as compared with $390,335 the year prior. Higher product sales as compared with services revenues, a larger mix of lower margin product sales and increased labor costs from overtime to meet our customer demands resulted in the increase in the Cost of Goods Sold. Redesign of our customer's medical device has delayed our coating services revenues to later this fiscal year after their initial launch last year. Higher product sales from our Biosearch subsidiary, which have lower gross margins than that of the Hydromer's chemical based sales, also increased Cost of Goods Sold. Royalty, option and license income is included in gross profit at 100%. Operating income for the period ending September 30, 2002 was $64,565 as compared with $47,356 the year prior. Operating expenses was lower at $870,265 for the quarter ended September 30, 2002 compared with $991,705 the respective period the year before. Staffing reductions plus the consolidation of operations into one facility are the primary cost savings reflected in the current quarter as compared to the previous year. Income before taxes was $38,516 for the 2003 fiscal year first quarter as compared with $32,983 for the same period last year. Lower operating expenses offset by lower gross profit (primarily from a higher mix of product sales) and higher interest expense resulted in an increase in pre-tax income for the quarter ended September 30, 2002. A greater utilization of the line of credit and draw against the construction loan for the expanded facility reduced pre-tax income in the 2002 quarter. In the 2001 quarter, interest expense related to the construction loan was capitalized. -6- Net income for the quarter ended September 30, 2002 was $24,517 as compared with $99,213 for the same quarter the previous year. A provision for Income taxes of $13,999 was recorded for the three months ended September 30, 2002 as compared to a benefit for income taxes of $66,230 the quarter a year before. Certain tax credits have been realized during the current quarter reducing the effective tax rate to below statutory rates. During the quarter the previous year, the net tax benefit also included changes to the valuation allowance on existing tax attributes. Earnings per share were $0.01 for the quarter, down $0.01 from the $0.02 reported the same period the year before. Differences in the tax provision (benefit) between the periods are reflected in the change in the earnings per share. Financial Condition Working capital was relatively unchanged, decreasing $650 from June 30, 2002 to September 30, 2002. Management believes that its current working capital and available line of credit, along with expected income and expense streams, are sufficient to maintain its current level of operations. Net operating activities provided $59,341 during the quarter. Net income adjusted for non-cash items provided for $73,276 during the three months ended September 30, 2002. Cash provided from accounts receivable, inventories and prepaid assets were used for accounts payable and accrued liabilities. $9,832 was used for new and existing patent and trademark coverage. Investing activities used $41,428 on capital expenditures during the first quarter and financing activities provided $51,746. Capital expenditures in the quarter were primarily for new equipment for use in production. During the quarter, there was a net $65,913 utilization of the line of credit for temporary cash needs. Disclosure Controls and Procedures The Internal Controls Environment of the Company was evaluated as of August 23, 2002 with the findings presented to the audit committee, which consists of independent directors, and the Company's independent auditors. The conclusion of the evaluation was that the Company's Internal Controls were effective for the safeguarding of assets and in ensuring that management is presented material information regarding the organization. Although there are areas that could be improved upon, the controls and procedures in place were appropriate for the type and size of the Company. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls since our last evaluation as of August 23, 2002. -7- PART II - Other Information The Company currently operates entirely from its owned facility in Branchburg, New Jersey since the beginning of the 2002 calendar year. Prior to that, a portion of the Company's manufacturing and quality assurance functions were located at 35 Columbia Road, also in Branchburg, New Jersey. The Columbia Road facility was under a lease with a party not affiliated with the Company. The Company's facility, located at 35 Industrial Parkway, Branchburg, NJ was purchased in June 1998 from Biosearch Medical Products, Inc., then an affiliated party. The Company completed its facility expansion allowing it to consolidate all of its operations into one location. The facility is secured by mortgages through banks. The existing facility will be adequate for the Company's operations for the foreseeable future. On July 15, 2002, the Company entered into a new revolving line of credit facility with a new financial institution for $750,000, replacing the previous line of credit. This change allows the Company for better financial management. Item 6. Exhibits and Reports on form 8-K: a) Exhibits - none b) Reports on form 8-K - There were no reports on Form 8-K filed for the quarter ending September 30, 2002 -8- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on his behalf by the undersigned thereunto duly authorized. HYDROMER, INC. /s/ Robert Y. Lee Robert Y. Lee Chief Financial Officer DATE: November 12, 2002 -9- I, Manfred F. Dyck, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Hydromer, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer, Mr. Robert Y. Lee and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer, Mr. Robert Y. Lee and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer, Mr. Robert Y. Lee and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Manfred F. Dyck ---------------------------------- Manfred F. Dyck, President and CEO I, Robert Y. Lee certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Hydromer, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer, Manfred F. Dyck and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer, Manfred F. Dyck and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer, Manfred F. Dyck and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Robert Y. Lee --------------------------------- Robert Y. Lee, Vice President of Finance and CFO