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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 March 31, 1998
Commission File Number 0-10683
HYDROMER, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2303576
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(State of incorporation) (IRS Employer
Identification No.)
35 Columbia Road, Branchburg, New Jersey 08876-3518
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(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
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(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 March 31, 1998
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Common Stock 4,378,904
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HYDROMER, INC.
INDEX TO FORM 10-QSB
March 31, 1998
Page No.
Part 1 - Financial Information
Condensed Financial Statements
Balance Sheets - March 31, 1998 & June 30, 1997 ..................... 2
Statements of Operations for the three & nine month period
March 31, 1998 and 1997 ............................................. 3
Statements of Cash Flows for the nine months ended
March 31, 1998 and 1997 ............................................. 4
Notes to Financial Statements ....................................... 5
Management's Discussion and Analysis of the Financial Condition
and Results of Operation .......................................... 6-7
Part II - Other Information ............................................... 8
1
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HYDROMER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
(UNAUDITED) (AUDITED)
1998 1997
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 790,444 $ 716,045
Trade receivables less allowance for doubtful accounts of $8,831 and
$8,831, respectively .................................................. 515,571 431,150
Other receivables ......................................................... 14,069 --
Inventory ................................................................. 139,128 148,753
Prepaid expenses .......................................................... 119,526 77,567
Deferred tax1 asset ....................................................... 100,000 100,000
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Total Current Assets ........................................................... 1,678,738 1,473,515
Property and Equipment, net .................................................... 371,340 271,743
Deferred Tax Asset ............................................................. 121,684 262,856
Other Assets ................................................................... 9,376 11,968
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$ 2,181,138 $ 2,020,082
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................................... $ 68,439 $ 29,213
Accrued expenses .......................................................... 91,263 167,678
Income tax payable ........................................................ 34,925 40,223
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Total Current Liabilities ...................................................... 194,627 237,114
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Stockholders' Equity
Common stock - no par value, authorized 6,000,000 shares, issued
and outstanding, 4,378,904 shares ..................................... 2,922,708 2,922,708
Contributed capital ...................................................... 577,750 577,750
Accumulated deficit ....................................................... (1,376,439) (1,711,350)
Cash Dividends paid ....................................................... (131,368) --
Treasury stock, 10,917 common shares at cost .............................. (6,140) (6,140)
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Total Stockholders' Equity ..................................................... 1,986,511 1,782,968
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$ 2,181,138 $ 2,020,082
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</TABLE>
2
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HYDROMER, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1997
1998 UNAUDITED 1998 UNAUDITED
UNAUDITED RESTATED UNAUDITED RESTATED
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<S> <C> <C> <C> <C>
REVENUES:
Product sales and services .................. $ 135,918 $ 194,523 $ 427,078 $ 535,399
Royalties, options and licenses Fees ........ 497,038 289,338 1,368,383 954,081
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632,956 483,861 1,795,461 1,489,480
Cost of Product Sales ............................ 62,436 58,517 166,447 177,627
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Gross profit .............................. 570,520 425,344 1,629,014 1,311,853
Selling, General and Administrative .............. 500,852 358,858 1,256,426 1,005,110
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Operating Income .......................... 69,668 66,486 372,588 306,743
Interest Income .................................. 8,284 2,949 25,138 7,403
Other tax expense (benefit) ...................... (81,641) 29,040 (81,641) 87,037
Other
Income
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Income before provision for income taxes .. 159,593 40,395 479,367 227,109
Provision for Income Taxes Expense (Benefit) ..... 63,745 (8,921) 144,458 (27,800)
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Net Income ................................ $ 95,848 $ 49,316 $ 334,909 $ 254,909
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Income Per Common Share ................... $ 0.022 $ 0.011 $ 0.077 $ 0.058
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Weighted Average Common Shares Outstanding ....... 4,378,904 4,367,987 4,378,904 4,367,987
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</TABLE>
3
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HYDROMER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
UNAUDITED UNAUDITED
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................................... $ 334,909 $ 254,909
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities
Depreciation and amortization .................................... 47,798 29,304
Gain on sale of securities ....................................... -- --
Changes in Assets and Liabilities
Trade receivables .............................................. (84,421) (117,686)
Inventory ...................................................... 9,625 13,690
Prepaid expenses ............................................... (41,959) (31,739)
Deferred tax asset ............................................. 141,172 (158,438)
Other assets ................................................... (11,477) 37
Accounts payable and accrued liabilities ....................... (37,189) 215,416
Income taxes payable ........................................... (5,298) 33,111
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Net Cash from Operating Activities ......................... 353,160 238,604
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CASH FLOWS FROM INVESTING ACTIVITIES:
Cash purchases of property and equipment ........................... (147,393) (19,918)
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Net Cash Used in Investing Activities ..................... (147,393) (19,918)
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Cash Dividends Paid ..................................................... (131,368) --
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Net Increase (Decrease) in Cash and Cash Equivalents .................... 74,399 218,686
Cash and Cash Equivalents at Beginning of Year .......................... 716,045 167,900
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Cash and Cash Equivalents at End of Quarter ............................. $ 790,444 $ 386,586
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</TABLE>
4
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HYDROMER, INC.
Notes to Financial Statements
The company has filed a restated annual form 10K-SB and accordingly, has
restated the financial results for the quarter ended 03/31/97 on this 10QSB. The
prior period Financial Statements have been restated to reflect the under
reporting of royalty receivables from a licensee. The restatement affected
royalty revenues and as a result the restatement was significant enough to
classify the company as a personal holding company requiring a significant tax
accrual at year-end, a portion of which was also restated in this quarter.
On August 14, 1997 the Company entered into an agreement with a consulting firm
whereby the firm will help create a business plan and assist the Company to get
listed on a regional stock exchange. Hydromer is obligated for payment of a
$2,500 monthly fee to the firm, cancelable anytime. Additionally, upon certain
criteria being met, the firm is entitled to 150,000 warrants to purchase the
Company's common stock at $0.1875. Mr. Brice, Vice-President and CFO of the
Company is a partner in the firm.
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.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the quarter ended March 31, 1998 were $632,956, up 31% from the
same period last year. For the 9 months ended March 31, 1998, revenues were up
20.5% to $1,795,461 over the same period last year. This increase is revenues
are attributable to increased use of the Company's technology through license
agreements with its clients. This increase in usage equates to increased royalty
income, which was up 71.8% for the quarter and 43.4% for the nine months ended
March 31, 1998.
Gross profit for the quarter was $570,520 vs. $425,344 for the same period last
year or an increase of 34.1% and $1,629,014 for the nine months ended March 31,
1998 vs. $1,311,853 for the same period last year or an increase of 24.2%. This
increase again is related to the increase in royalties, options and license fees
from the use of the Company's technologies in over 15 licensing agreements.
Operating costs (SG&A and Research and Development) were $500,852 for the
quarter, up $141,994 or 40% over the same period last year and $1,256,426 for
the 9 month period, up $251,316 or 25.0% over last year. This increase in costs
is attributable to the Company's expanding service to its clients. Employee
costs, especially R&D, are up to support the new technologies being developed
and provide improved customer service to clients. Lab costs are up over last
year to react to the expanding curiosity of our prospects and their associated
needs for samples and prototypes. Finally, new costs associated with the
Company's expansion into coating services are up over last year as well.
Net income for the quarter ended March 31, 1998 was $95,848, up 94.4% over the
same period last year. Earnings per share were $0.022 for the quarter compared
to $0.011 for the same period last year. For the 9 months ended March 31, 1998,
the Company reported earnings of $334,909 or $0.08 per common share, up 31.0%
over the same period last year for both earnings and earnings per share. The
Company recorded a net tax refund in the amount of $81,641 in the current
quarter representing a reimbursement for taxes paid as a personal holding
company. An amendment was filed claiming that certain contracts do not meet the
test of passive income and accordingly, were not included in calculating the
revenue split between passive and other. The IRS agreed and returned the portion
of taxes paid plus interest.
6
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Financial Condition
Working capital increased by $247,710 to $1,484,111 at March 31, 1998 from
$1,236,401 at June 30, 1997. This increase includes a dividend paid to
shareholders in the amount of $131,368. Excluding the dividend paid, working
capital increased $370,427 for the nine months ended March 31, 1998. The Company
believes that future revenues will provide a sufficient cash flow to maintain
operations at current levels.
7
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PART II - Other Information
Item 5. Other Information
On March 23, 1998 U.S. Patent 4,119,094 expired. 13 licenses included this
patent. In some cases other patents were also included with license. The Company
has decided to reprice its coating solutions to offset part of the royalty
costs. The Company is actively trying to replace this loss in revenue by selling
the solutions to companies on an exclusive non-marketing basis, on a
non-exclusive basis or as straight product sales. Additionally, the Company is
introducing newer, patented technologies to these clients to replace their
existing production coating. Although the full impact is not known, the Company
feels it will not have a material impact once the replacement sales are made.
SUBSEQUENT EVENT - See related party transactions
On April 16, 1998, the Board of Directors approved a cash dividend of $0.03 per
share payable to the Company's shareholders as September 1, 1998.
RELATED PARTY TRANSACTION
On May 8, 1998, the Company approved a commitment letter from a Commercial Bank
to buy a facility that is owned by Biosearch Medical Products, Inc.,
("Biosearch") of which Manfred F. Dyck is President and CEO as well as a
significant shareholder. The facility is located at 35 Industrial Parkway,
Somerville, NJ and includes labs, offices space and warehouse space. Biosearch,
as part of the lease agreement with Hydromer, has a prepaid lease for 3 years.
The facility has an appraised value of $1,370,000. The purchase price of the
building and land is $1,195,000, which includes $345,000 in prepaid rental,
credited to Biosearch. Under the terms of the commitment, the bank will finance
a mortgage of $850,000. The remaining liability will be booked as deferred rent
and amortized over the life of the lease. The mortgage carries a fixed interest
rate at approximately prime which will be determined at date of closing.
Hydromer will occupy approximately 35% of the facility and will move its R&D and
administrative functions to the new facility. Its existing facility will be
expanded for manufacturing and compounding as well as continue to house Quality
Assurance and Quality Control.
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 March 31, 1998.
8
<PAGE>
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/
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Kenneth P. Brice
Vice President -
Finance & Administration
Chief Financial Officer
DATE: May 12, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 298,335
<SECURITIES> 0
<RECEIVABLES> 279,368
<ALLOWANCES> 0
<INVENTORY> 158,587
<CURRENT-ASSETS> 846,476
<PP&E> 694,755
<DEPRECIATION> (479,487)
<TOTAL-ASSETS> 1,133,120
<CURRENT-LIABILITIES> 65,522
<BONDS> 0
0
0
<COMMON> 2,922,708
<OTHER-SE> (1,855,110)
<TOTAL-LIABILITY-AND-EQUITY> 1,067,598
<SALES> 142,023
<TOTAL-REVENUES> 407,023
<CGS> 47,908
<TOTAL-COSTS> 258,276
<OTHER-EXPENSES> 89,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,786
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,786
<EPS-PRIMARY> .003
<EPS-DILUTED> 0
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