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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11668
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INRAD, Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2003247
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
INRAD, Inc. 181 Legrand Avenue, Northvale, NJ 07647
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(Address of principal executive offices)
(Zip Code)
(201) 767-1910
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(Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Common shares of stock outstanding as of October 15, 1996:
2,109,271 SHARES
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INRAD, INC.
INDEX
Page Number
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PART I. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . 1
Item 1 Financial Statements:
Consolidated Balance Sheet as of September 30,
1996 and December 31, 1995 (unaudited) . . . . . . . 1
Consolidated Statement of Operations for the Three
and Nine Months Ended September 30, 1996 and
1995 (unaudited) . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995
(unaudited). . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 7
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INRAD, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 352,979 $ 37,981
Certificate of Deposit 70,000 70,000
Accounts receivable, net 657,052 804,834
Inventories 1,516,819 1,671,673
Unbilled contract costs 75,519 151,649
Assets held for sale - 279,111
Other current assets 28,390 61,699
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TOTAL CURRENT ASSETS 2,700,759 3,076,947
PLANT AND EQUIPMENT, NET 1,553,520 1,788,080
PRECIOUS METALS 279,247 280,001
OTHER ASSETS 150,201 151,016
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TOTAL ASSETS $ 4,683,727 $ 5,296,044
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - Bank $ 105,000 $ 60,000
Current obligations under capital leases 91,505 190,754
Accounts payable and accrued liabilities 651,429 708,403
Advances from customers 17,955 116,205
Other current liabilities 68,435 53,084
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TOTAL CURRENT LIABILITIES 934,324 1,128,446
NOTE PAYABLE - BANK 230,000 320,000
OBLIGATIONS UNDER CAPITAL LEASES 17,891 75,088
SECURED PROMISSORY NOTES 250,000 250,000
SUBORDINATED CONVERTIBLE NOTES 1,179,417 1,080,623
UNSECURED DEMAND CONVERTIBLE NOTE 100,000 100,000
NOTE PAYABLE - SHAREHOLDER 557,892 533,420
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TOTAL LIABILITIES 3,269,524 3,487,577
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COMMITMENTS (NOTE 10)
SHAREHOLDERS' EQUITY:
Common stock: $.01 par value; 2,121,571
shares issued 21,216 21,216
Capital in excess of par value 6,051,791 6,067,991
Accumulated deficit (4,607,004) (4,212,740)
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1,466,003 1,876,467
Less - Common stock in treasury,
at cost (12,300 shares at September 30, 1996;
15,000 shares at December 31, 1995) (51,800) (68,000)
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TOTAL SHAREHOLDERS' EQUITY 1,414,203 1,808,467
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,683,727 $ 5,296,044
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
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INRAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Net product sales $ 1,307,043 $ 1,079,249 $ 3,871,342 $ 3,117,913
Contract research
and development 122,973 225,535 450,616 888,934
--------- --------- --------- ----------
1,430,016 1,304,784 4,321,958 4,006,847
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COSTS AND EXPENSES:
Cost of goods sold 995,181 923,303 3,020,977 2,666,361
Contract research and
development expenses 124,406 221,871 451,203 870,332
Selling, general and
administrative
expenses 275,616 243,584 915,655 733,556
Internal research and
development expenses 61,877 56,392 129,752 247,816
--------- --------- --------- ----------
1,457,080 1,445,150 4,517,587 4,518,065
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OPERATING PROFIT
(LOSS) (27,064) (140,366) (195,629) (511,218)
OTHER INCOME (EXPENSE):
Interest expense (70,439) (63,172) (215,007) (211,156)
Interest and other
income, net 2,733 6,602 16,372 13,352
--------- --------- --------- ----------
NET INCOME (LOSS) (94,770) (196,936) (394,264) (709,022)
ACCUMULATED DEFICIT,
BEGINNING OF PERIOD (4,512,234) (3,755,948) (4,212,740) (3,243,862)
--------- --------- --------- ----------
ACCUMULATED DEFICIT,
END OF PERIOD $(4,607,004) $(3,952,884) $(4,607,004) $(3,952,884)
--------- --------- --------- ----------
--------- --------- --------- ----------
NET INCOME (LOSS) PER SHARE $(0.05) $(0.09) $(0.19) $(0.34)
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,109,271 2,106,571 2,109,093 2,106,571
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
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INRAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (394,264) $ (709,022)
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ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
to cash provided by operating activities:
Depreciation and amortization 418,596 564,432
Noncash interest 123,269 104,305
Gain on sale of equipment (8,621) -
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 147,782 (69,253)
Inventories 154,854 148,720
Unbilled contract costs 76,130 (66,644)
Other current assets 33,307 14,061
Precious metals 754 28,490
Other assets (16,093) (29,124)
Accounts payable and accrued liabilities (56,973) 73,670
Advances from customers (47,770) 64,971
Other current liabilities (35,128) (30,700)
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TOTAL ADJUSTMENTS 790,107 802,928
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NET CASH PROVIDED BY OPERATING ACTIVITIES 395,843 93,906
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (178,577) (140,308)
Proceeds from sale of equipment 299,180 47,925
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NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 120,603 (92,383)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of note payable - Bank (45,000) (125,000)
Principal payments of capital lease obligations (156,448) (168,582)
Proceeds from demand note - 100,000
Proceeds from sale of common stock warrants - 100,000
Proceeds from issuance of subordinated
convertible note - 125,000
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NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (201,448) 31,418
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 314,998 32,941
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,981 119,718
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 352,979 $ 152,659
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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INRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of INRAD,
Inc. (the "Company") reflect all adjustments, which are of a normal recurring
nature, and disclosures which, in the opinion of management, are necessary for a
fair statement of results for the interim periods. It is suggested that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements as of December 31, 1995 and 1994 and for the
years then ended and notes thereto included in the Registrant's Annual Report on
Form 10-K, filed with the Securities and Exchange Commission.
INVENTORY VALUATION
Interim inventories as well as cost of goods sold are computed by using the
gross profit method of interim inventory valuation and applying an estimated
gross profit percentage based on the actual values for the preceding fiscal
year, unless the company believes that a different gross profit percentage may
more accurately reflect its current year's cost of goods sold and gross profit.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common shares outstanding. The effect of common stock equivalents has been
excluded from the computation because their effect is antidilutive.
4
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NOTE 2 - INVENTORIES AND COST OF GOODS SOLD
For the nine month period ended September 30, 1996, the Company used 78% as its
estimated cost of goods sold percentage. For the previous year, 1995, the
actual cost of goods sold percentage was 83.7%. The Company believes 78% better
approximates the expected 1996 annual cost of goods sold percentage based on
estimated profitability of actual sales through September 30, 1996 and the
anticipated annual level of product shipments and related costs.
For the nine month period ended September 30, 1995, the Company used 85.5% as
its estimated cost of goods sold percentage.
NOTE 3 - INCOME TAXES
Deferred tax assets (liabilities) comprise the following:
September 30, December 31,
1996 1995
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DEFERRED TAX ASSETS
Inventory capitalization adjustment $ 60,000 $ 60,000
Inventory reserves 10,000 10,000
Vacation liabilities 62,000 62,000
Other 23,000 12,000
Loss carryforwards 2,414,000 2,279,000
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Gross deferred tax assets 2,569,000 2,423,000
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DEFERRED TAX LIABILITIES
Depreciation (230,000) (242,000)
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Gross deferred tax liabilities (230,000) (242,000)
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2,339,000 2,181,000
Valuation allowance (2,339,000) (2,181,000)
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Net deferred tax assets $ 0 $ 0
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5
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NOTE 4 - DEBT
NOTE PAYABLE - SHAREHOLDER
By mutual informal agreement, the Company has deferred certain interest payments
to its principal shareholder. During the nine month period ended September 30,
1996, the Company made three quarterly interest payments representing nine
months of interest past due from 1995. Subject to adequate cash flow, the
Company may continue to make interest payments to its principal shareholder.
Although by its terms the indebtedness to the shareholder is due on December 31,
1996, it cannot be repaid until the Chemical Bank debt has been repaid in full.
The shareholder loan has been classified as noncurrent in the accompanying
balance sheet because the shareholder has agreed not to demand payment prior to
September 30, 1997.
UNSECURED DEMAND CONVERTIBLE NOTE
Although by its terms the Note is due on demand, it cannot be repaid until the
Chemical Bank debt has been repaid in full. The Demand Note has been classified
as noncurrent in the accompanying balance sheet because the Note holder has
agreed not to demand payment prior to September 30, 1997.
SECURED PROMISSORY NOTE
Although by its terms the Note is due on July 8, 1997, it cannot be repaid until
the Chemical Bank debt has been repaid in full. The Promissory Note has been
classified as noncurrent in the accompanying balance sheet because the Note
holder has agreed not to demand payment prior to September 30, 1997.
NOTE 5 - TREASURY STOCK
During the quarter ended March 31, 1996, the Company issued 2,700 shares of
Common Stock previously held in treasury. The difference between the cost of
the treasury shares and the proceeds received was charged to capital in excess
of par value.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's unaudited consolidated financial statements presented elsewhere
herein. The discussion of results should not be construed to imply any
conclusion that such results will necessarily continue in the future.
NET PRODUCT SALES
Net sales for the third quarter of 1996 increased $228,000, or 21%, from the
comparable quarter in 1995, and net sales for the nine months ended September
30, 1996 increased $753,000, or 24%, from the comparable 1995 period.
International shipments in the first nine months of 1996 were $664,000 (17% of
total shipments) compared to $540,000 (17%) for the first nine months of 1995.
(The shipments for the quarter and nine months ended September 30, 1996 were
higher than the comparable periods in 1995 because of a higher backlog and an
improved rate of orders which could be shipped on a short-term basis.) The
Company's sales and marketing program, implemented in 1996, has resulted in an
increased order rate in the nine months ended September 30, 1996.
The backlog of unfilled product orders was $2,004,000 at September 30, 1996,
compared with $1,470,000 at December 31, 1995 and $1,441,000 at September 30,
1995.
COST OF GOODS SOLD
For the nine month period ended September 30, 1996, the Company used 78% as its
estimated cost of goods sold percentage. For the previous year, 1995, the
actual cost of goods sold percentage was 83.7%. The Company believes 78% better
approximates the expected 1996 annual cost of goods sold percentage based on
estimated profitability of actual sales through September 30, 1996 and the
anticipated annual level of product shipments and related costs.
For the nine month period ended September 30, 1995, the Company used 85.5% as
its estimated cost of goods sold percentage.
CONTRACT RESEARCH AND DEVELOPMENT
Contract research and development revenues for the third quarter of 1996
decreased $103,000, or 46%, from the comparable quarter in 1995, and revenues
for the nine months ended September 30, 1996 and 1995 were $451,000 and
$889,000, respectively. Related contract research and development expenditures,
including allocated indirect costs, for the quarter ended September 30, 1996
were $124,000 compared to $222,000 for the comparable 1995 quarter; expenses for
the nine month period ended September 30, 1996 and 1995 were $451,000 and
$870,000, respectively. Revenues decreased from 1995 to 1996 due to a lower
backlog of contracts, reflecting planned efforts to focus funded programs more
closely on the Company's core business.
The Company's backlog of contract R&D was $37,000 at September 30, 1996,
compared with $413,000 at December 31, 1995 and $627,000 at September 30, 1995.
7
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $32,000, or 13%, in the
third quarter of 1996 and $182,000, or 25%, for the nine months ended September
30, 1996 compared to the same period in 1995. The increase is due primarily to
higher selling expenses, including sales salaries, advertising, commissions on
higher international sales, and a lower allocation of general and administrative
overhead to contract research and development. Subject to availability of
resources, the Company expects to continue to increase certain selling costs in
1996, including additional sales staff and advertising.
INTERNAL RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the quarter ended September 30, 1996 were
$62,000 compared to $56,000 for the quarter ended September 30, 1995. Expenses
for the nine months ended September 30, 1996 were $130,000 compared to $248,000
for the comparable 1995 period. The Company is focusing its internal research
and development efforts in 1996 to a few new products with short development
cycles.
INTEREST EXPENSE
Interest expense was $70,000 for the quarter ended September 30, 1996 compared
to $63,000 for the quarter ended September 30, 1995, and $215,000 and $211,000
for the nine months ended September 30, 1996 and 1995, respectively.
8
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LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 1996, the Company sold equipment, from which
the proceeds to the Company were approximately $299,000. The Company utilized a
portion of these proceeds to repay in full certain lease obligations. Repayment
of these lease obligations reduced the Company's monthly payment requirements by
approximately $7,000. Renegotiation of the payment terms of certain leases in
1995 and repayment of others in 1996 has resulted in a reduction of the total
monthly lease payments of approximately $19,000. Certain leases by their
original terms mature in 1996, which will further reduce the Company's cash
requirements. The Company's cash flow requirements will increase beginning in
1997 because (1) the monthly principal payment requirement to the bank increases
from $5,000 to $10,000, and (2) the Company must begin making cash interest
payments ($110,000 annually) on its Subordinated Convertible Notes issued in
1993. During the nine month period ended September 30, 1996, the Company made
three quarterly interest payments, representing nine months of interest past due
from 1995 to its principal shareholder. Subject to adequate cash flow, the
Company may continue to make interest payments to its principal shareholder.
Capital expenditures, including internal labor and overhead charges, for the
nine months ended September 30, 1996 and 1995 were $179,000 and $140,000,
respectively. Until the Company is generating satisfactory amounts of cash flow
from its operations, it is expected that future capital expenditures will be
kept to a minimum. Management believes that in the short term, this limitation
will not have a material effect on operations.
During the nine month period ended September 30, 1996 and for each of the three
years in the period ended December 31, 1995, the Company has suffered recurring
losses from operations. Cash outflows during these periods have been funded on
the basis of borrowings from, and issuance of common stock and warrants to
shareholders, including the principal shareholder, as further described in the
Company's Annual Report on Form 10-K. Management expects that cash flow from
operations, in addition to cash generated from the assets sold during the first
quarter, will provide adequate liquidity for the Company's operations in 1996.
This will substantially depend, however, on the Company's ability to improve
operating results and thereby generate adequate cash flow from operations.
Because of the uncertainty relating to the Company's ability to improve
operating results and cash flows, there is substantial doubt about the Company's
ability to continue as a going concern.
9
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 20, 1996, the Annual Meeting of Shareholders of INRAD, Inc. was held.
At the meeting, ballots for the election of five directors, each to serve for
the ensuing year and thereafter until his or her successor shall be duly elected
and qualified were cast as follows:
FOR AGAINST WITHHELD ABSTENTIONS
--- ------- -------- -----------
Warren Ruderman 1,589,403 2,900 516,968
Stanley A. Kitzinger 1,589,153 3,150 516,968
Aaron Dean 1,589,403 2,900 516,968
William B. Maxson 1,589,053 3,250 516,968
Donald Gately 1,589,053 3,250 516,968
Also at the meeting, ballots for the proposal to ratify and approve the proposal
to increase the maximum number of shares which may be awarded under the Key
Employee Compensation Program were cast as follows:
FOR: 1,391,682
AGAINST: 11,884
ABSTAIN: --
ABSTENTIONS: 705,705
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
11. An exhibit showing the computation of per-share earnings is omitted
because the computation can be clearly determined from the material
contained in this Quarterly Report on Form 10-Q.
27. Financial Data Schedule.
(B) Reports on Form 8-K:
On August 29, 1996, the registrant filed a Form 8-K, Item 4, Change in
Certifying Accountant.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INRAD, Inc.
By: /s/ Warren Ruderman
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Warren Ruderman
President and Chief Executive
Officer
By: /s/ James L. Greco
------------------------------------
James L. Greco
Controller
(Chief Accounting
Officer)
Date: November 1, 1996
11
