10QSB 1 hyd10q1203.txt HYDROMER 12/31/2003 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 quarter ended December 31, 2003 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, Branchburg, New Jersey 08876-3424 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 722-5000 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 December 31, 2003 ------------------------------------------------------ Common 4,597,987 HYDROMER, INC. INDEX TO FORM 10-QSB December 31, 2003 Page No. Part I - Financial Information Consolidated Financial Statements Balance Sheets - December 31, 2003 & June 30, 2003............ 2 Statements of Income for the three months and six months ended December 31, 2003 and 2002................................... 3 Statements of Cash Flows for the six months ended December 31, 2003 and 2002................................... 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 EXHIBIT INDEX Exhibit No. Description of Exhibit ----------- ---------------------- 33.1 SEC Section 302 Certification - CEO certification....... 10 33.2 SEC Section 302 Certification - CFO certification....... 11 99.1 Certification of Manfred F. Dyck, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350........... 12 99.2 Certification of Robert Y. lee, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350........... 12 HYDROMER, INC. and CONSOLIDATED SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2003 June 30, 2003 UNAUDITED AUDITED ----------------- ------------- Assets Current Assets: Cash and cash equivalents......... $ 156,121 $ 97,676 Trade receivables less allowance for doubtful accounts of $26,519 as of December 31, 2003 and $15,097 as of June 30, 2003.............. 1,360,830 1,193,525 Inventory......................... 1,019,819 980,401 Prepaid expenses.................. 107,167 123,368 Deferred tax asset................ 316,798 316,798 Other............................. 3,312 16,575 --------- --------- Total Current Assets.............. 2,964,047 2,728,343 Property and equipment, net........ 2,773,827 2,745,148 Patents, net....................... 610,304 574,238 Trademarks......................... 37,817 37,511 Goodwill, net 490,172 490,172 --------- --------- Total Assets $ 6,876,167 $ 6,575,412 ========= ========= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable................... $ 611,931 $ 454,783 Short-term borrowings.............. 653,969 597,286 Accrued expenses................... 194,853 195,311 Current portion of mortgage payable 88,696 101,234 Income tax payable................. 53,633 16,500 --------- --------- Total Current Liabilities 1,603,082 1,365,114 Deferred tax liability............. 157,500 161,500 Long-term portion of mortgage payable 1,409,991 1,440,227 --------- --------- Total Liabilities 3,170,573 2,966,841 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, as of December 31, 2003, 4,608,904 shares issued and 4,597,987 shares outstanding; as of June 30, 2003, 4,598,904 shares issued and 4,587,987 shares outstanding................ 3,615,615 3,608,118 Contributed capital................ 577,750 577,750 Accumulated deficit................ (481,631) (571,157) Treasury stock, 10,917 common shares at cost.......................... (6,140) (6,140) --------- --------- Total Stockholders' Equity 3,705,594 3,608,571 --------- --------- Total Liabilities and Stockholders' Equity $ 6,876,167 $ 6,575,412 ========= ========= -2- HYDROMER, INC. and CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended December 31, December 31, 2003 2002 2003 2002 UNAUDITED UNAUDITED --------------------- ---------------------- Revenues Product sales and services...... $1,391,276 $ 944,094 $2,473,168 $1,847,638 Royalties, options and licenses. 590,410 562,283 1,148,383 1,083,500 -------------------- --------------------- Total Revenues.................. 1,981,686 1,506,377 3,621,551 2,931,138 Cost of Sales................... 755,670 492,077 1,343,485 982,008 -------------------- --------------------- Gross Profit.................... 1,226,016 1,014,300 2,278,066 1,949,130 Operating expenses.............. 1,061,255 918,115 2,072,925 1,788,380 -------------------- --------------------- Operating Income ............... 164,761 96,185 205,141 160,750 Interest Income................. 101 64 123 177 Interest Expense................ (32,985) (30,861) (63,745) (57,717) Other Income.................... 1,670 - 1,670 694 -------------------- --------------------- Income before provision for income taxes................... 133,547 65,388 143,189 103,904 Provision for Income Taxes..... 53,404 30,478 53,663 44,477 -------------------- --------------------- Net Income..................... $ 80,143 $ 34,910 $ 89,526 $ 59,427 ==================== ===================== Earnings Per Common Share...... $ 0.02 $ 0.01 $ 0.02 $ 0.01 ==================== ===================== Weighted Average Number of Common Shares Outstanding..... 4,597,063 4,587,987 4,592,525 4,587,987 ==================== ===================== The effects of the common stock equivalents on diluted earnings per share are not included as they have no impact. -3- HYDROMER, INC. and CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 2003 2002 UNAUDITED ----------------------- Cash Flows From Operating Activities: Net Income......................... $ 89,526 $ 59,427 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization..... 90,244 86,374 Deferred income taxes............. (4,000) 36,252 Changes in Assets and Liabilities Trade receivables............... (167,305) 34,967 Inventory....................... (39,418) 56,026 Prepaid expenses................ 16,201 62,653 Patents and Trademark........... (36,372) (33,883) Other assets.................... 13,263 6,169 Accounts payable and accrued liabilities.................... 156,692 (236,655) Income taxes payable............ 37,133 8,025 -------- -------- Net Cash Provided by Operating Activities 155,964 79,355 -------- -------- Cash Flows From Investing Activities: Cash purchases of property and equipment........................ (118,925) (71,187) -------- -------- Net Cash Used for Investing Activities (118,925) (71,187) -------- -------- Cash Flows From Financing Activities: Net borrowings against Line of Credit 56,683 27,105 Proceeds from borrowings.......... 555,000 - Repayment of borrowings........... (597,774) (28,334) Proceeds from the issuance of common stock..................... 7,497 - -------- -------- Net Cash Provided by (Used for) Financing Activities 21,406 (1,229) -------- -------- Net Increase in Cash and Cash Equivalents: 58,445 6,939 Cash and Cash Equivalents at Beginning of Period 97,676 111,148 -------- -------- Cash and Cash Equivalents at End of Period $ 156,121 $ 118,087 ======== ======== -4- HYDROMER, INC. and CONSOLIDATED SUBSIDIARY Notes to Consolidated 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. Certain reclassifications have been made to the previous year's results to present comparable financial statements. Segment Reporting: The Company operates two primary business segments. The Company evaluates the segments by revenues, total expenses and earnings before taxes. Corporate Overhead is excluded from the business segments as to not distort the contribution of each segment. The results for the six months ended December 31, by segment are: Polymer Medical Corporate Research Products Overhead Total -------------------------------------------------- 2003 Revenues $ 2,245,559 $ 1,375,992 $ 3,621,551 Expenses (1,456,255) (1,451,412) $ (570,695) (3,478,362) ------------------------------------------------- Earnings (Loss) before Income Taxes $ 789,304 $ (75,420) $ (570,695) $ 143,189 ================================================= 2002 Revenues $ 1,908,521 $ 1,022,617 $ 2,931,138 Expenses (1,249,442) (1,126,755) $ (451,037) (2,827,234) ------------------------------------------------- Earnings (Loss) before Income Taxes $ 659,079 $ (104,138) $ (451,037) $ 103,904 ================================================= The prior period segment information has been restated to conform to the current year presentation. Geographic revenues were as follows for the three months ended December 31, 2003 2002 ------------------ Domestic 82% 82% Foreign 18% 18% -5- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's revenues for the quarter ended December 31, 2003 were $1,981,686 as compared to $1,506,377 for the same period last year or an increase of 31.6%. Revenues for the six months ended December 31, 2003 were $3,621,551, up 23.6% from $2,931,138 the corresponding period a year ago. Revenues are comprised of Royalty, Options and License payments and the sale of Products and Services. Royalty, license and option revenues from patented products were $590,410 for the quarter up 5.0% from the $562,283 the same period a year ago. For the six months ended December 31, 2003, royalty, license and option revenues were $1,148,383, up 6.0% from $1,083,500 the same period a year ago. Product sales and services were $1,391,276 for the quarter ended December 31, 2003 as compared to $944,094 for the same period last year, an increase of 47.4%. For the six months ended December 31, 2003, product sales and services were $2,473,168 as compared to $1,847,638 the prior year, a 33.9% increase. Growth to our T-Hexx, contract coating, R&D Services and Biosearch product lines contributed to the increase. As of December 31, 2003, our open sales order book was approximately $1,800,000, which represents orders that are for delivery during the remainder of the current fiscal year. Some of these orders are subject to cancellation but the Company is of the opinion that no substantial cancellations will occur. Our open order book excludes though, future orders that would come up during the normal course of business for immediate delivery also during this fiscal year. For the three months ended December 31, 2003, the Company's gross profit was $1,226,016. This compares with $1,014,300 the same period last year, or a strong increase of 20.9%. For the six months ended December 31, 2003, gross profits was $2,278,066 as compared with $1,949,130 the same period the year before, an increase of 16.9%. The Company's Cost of Goods Sold was $755,670 for the quarter ended December 31, 2003 as compared with $492,077 the year prior. On a year-to-date basis, cost of goods sold was $1,343,485 this year as compared with $982,008 the corresponding period a year ago. There was a higher cost of goods sold corresponding to the increase in products and services revenues. Royalty, option and license income is included in gross profit at 100%. For the quarter ending December 31, 2003, the Company is reporting Operating income of $164,761 as compared with $96,185 the year before. For the six months ended December 31, 2003, Operating income was $205,141 as compared to $160,750 a year before. Operating expenses was $1,061,255 for the quarter ended December 31, 2003 as compared with $918,115 the year before. For the six months periods, operating expenses were $2,072,925 this year as compared with $1,788,380 the previous year. Higher personnel costs from added staffing as part of the Company's investment for the future resulted in the increase in Operating expenses. Income before Income Taxes was $133,547 for the current quarter as compared with $65,388 the same period a year before. For the six months ended December 31, 2003, Income before Income Taxes was $143,189 compared with $103,904 a year ago. The changes in Income before Income Taxes are attributed to the improvement in Operating income. Interest expense, primarily mortgage interest, the significant item to derive Income before Income Taxes from Operating income remained fairly constant at $32,985 for the three months ended December 31, 2003 and $30,861 the respective period a year ago. Interest expense for the six months ended December 31, 2003 and December 31, 2002 were $63,745 and $57,717, respectively. -6- Net Income of $80,143 ($0.02 per share) is reported for the quarter ended December 31, 2003 as compared to $34,910 ($0.01 per share) the year before. For the six months ended December 31, 2002, Net Income of $89,526 ($0.02 per share) is reported as compared with $59,427 ($0.01 per share) the year before. Income taxes for the quarter ended December 31, 2003 was $53,404 as compared with $30,478 the quarter ended December 31, 2002. For the six months ended December 31, 2003, income taxes were $53,663 as compared with $44,477 the year prior. Our long-term investment in additional staffing, primarily in research and development and engineering services, increased operating expenses in the current period for planned returns in the near future. Our investment in previous years yielded the growth that we see currently. Financial Condition Working capital decreased $2,265 during the six months ended December 31, 2003. 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 for $155,964 for the six month period ended December 31, 2003. Net income adjusted for non-cash expenses, provided $175,770 in net cash. Working capital accounts utilized $19,807 in net cash: primarily from the increase in accounts receivables of $167,305 offset by the increase in accounts payable and accrued liabilities (which provided for $156,690 in net cash). Investing activities used $118,925 on capital expenditures and financing activities provided $21,406 during the six months ended December 31, 2003. Capital expenditures (adding new production capabilities/rooms to meet current demand) were the Company's investing activities this year-to-date. The financing activities during the six month period includes a mortgage refinance, the exercise of stock options, payment of the monthly mortgage loan installments and short-term borrowings on the Line-of-Credit. During the second quarter of this fiscal year, the Company refinanced its first mortgage at a lower interest rate fixed for the term of the loan. This refinance also satisfied a financial loan covenant open under the previous loan. Also in this period, stock options issued to two Board members in 1998, for a total of 10,000 shares of common stock, nearing expiration were exercised. Additional stock options issued to two other Board members were not exercised and became expired. Disclosure Controls and Procedures The evaluation of the Company's Internal Controls Environment concluded that it was effective for the safeguarding of assets and in ensuring that management is presented material information regarding the organization. The evaluation also determined that there are areas that could be improved upon, however, the controls and procedures in place were appropriate for the type and size of the Company. The Company has again reviewed its Internal Controls Environment during the prior 90 days, and it has been determined that there have been no significant changes in internal controls or in other factors that could significantly affect the financial statements. -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 expanded in 2001 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. Item 6. Exhibits and Reports on form 8-K: a) Exhibits - none b) Reports on form 8-K - A Form 8-K was filed during the quarter ending December 31, 2003 reporting the Company's announcement of earnings for the quarter ending September 30, 2003. -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: February 12, 2004 -9- EXHIBIT 33.1 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: February 12, 2004 /s/ Manfred F. Dyck ---------------------------------- Manfred F. Dyck, President and CEO -10- EXHIBIT 33.2 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, Mr. 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, Mr. 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, Mr. 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: February 12, 2004 /s/ Robert Y. Lee ------------------------------------------------ Robert Y. Lee, Vice President of Finance and CFO -11- EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Manfred F. Dyck, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hydromer, Inc. on Form 10-QSB for the quarter ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report fairly presents in all material respects the financial condition and results of operations of Hydromer, Inc. Date: February 12, 2004 By: /s/ Manfred F. Dyck ---------------------- Manfred F. Dyck Chairman, President and Chief Executive Officer -12- EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert Y. Lee, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hydromer, Inc. on Form 10-QSB for the quarter ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report fairly presents in all material respects the financial condition and results of operations of Hydromer, Inc. Date: February 12, 2004 By: /s/ Robert Y. Lee ------------------------ Robert Y. Lee Chief Financial Officer and Vice President of Finance -13-