<PAGE>
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 June 30, 1998
---------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ---------------------
Commission file number 0-11668
-------------------------------------------------------
INRAD, Inc.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2003247
- --------------------------------------------- ------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
INRAD, Inc. 181 Legrand Avenue, Northvale, NJ 07647
(Address of principal executive offices)
(Zip Code)
(201) 767-1910
---------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(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
------ ------
Common shares of stock outstanding as of July 30, 1998:
2,116,971 shares
<PAGE>
INRAD, Inc.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Part I. FINANCIAL INFORMATION........................................................................1
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1998, (unaudited)
and December 31, 1997.......................................................1
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 (unaudited).............................2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (unaudited)....................................3
Notes to Consolidated Financial Statements..................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................6
Part II. OTHER INFORMATION ..........................................................................9
Item 6. Exhibits and Reports on Form 8-K............................................9
Signatures .............................................................................................10
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INRAD, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997*
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 142,531 $ 209,142
Certificate of Deposit 70,000 70,000
Accounts receivable, net 825,429 654,827
Inventories 1,382,791 1,546,541
Unbilled contract costs 186,327 102,363
Other current assets 62,434 64,145
----------- -----------
Total current assets 2,669,512 2,647,018
----------- -----------
Plant and equipment,
Plant and equipment at cost 5,169,229 5,121,379
Less: Accumulated depreciation
and amortization (4,359,338) (4,124,715)
----------- -----------
Total plant and equipment 809,891 996,664
Precious metals 283,614 278,693
Other assets 170,065 171,084
----------- -----------
Total assets $ 3,933,082 $ 4,093,459
----------- -----------
----------- -----------
Liabilities and Shareholders' Equity
Current liabilities:
Note payable - Bank $ 135,000 $ 120,000
Current obligations under capital leases 8,174 12,262
Accounts payable and accrued liabilities 941,385 720,214
Advances from customers 75,010 63,329
Other current liabilities 16,951 57,929
----------- -----------
Total current liabilities 1,176,520 973,734
Note payable - Bank 32,500 107,500
Obligations under capital leases 3,779 8,683
Secured Promissory Notes 250,000 250,000
Subordinated Convertible Notes 1,230,005 1,224,921
Unsecured Demand Convertible Note 100,000 100,000
Note payable - Shareowner 566,049 566,049
----------- ----------
Total liabilities 3,358,853 3,230,887
----------- -----------
Shareholders' equity:
Common stock: $.01 par value; 2,121,571 shares issued 21,216 21,216
Capital in excess of par value 6,014,941 6,051,791
Accumulated deficit (5,446,978) (5,158,635)
--------- ---------
589,179 914,372
Less - Common stock in treasury,
at cost (4,600 shares at June 30, 1998;12,300
at December 31, 1997) (14,950) (51,800)
----------- -----------
Total shareholders' equity 574,229 862,572
----------- -----------
Total liabilities and shareholders' equity $ 3,933,082 $ 4,093,459
----------- -----------
----------- -----------
</TABLE>
- ----------
* Derived from Audited Financial Statements
See Notes to Consolidated Financial Statements.
1
<PAGE>
INRAD, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales $1,167,891 $1,254,063 $ 2,381,562 $ 2,302,235
Contract R & D 200,744 99,920 366,407 205,046
----------- ------------ ------------ ------------
1,368,635 1,353,983 2,747,969 2,507,281
----------- ------------ ------------ ------------
Cost and Expenses:
Cost of goods sold 863,449 999,942 1,786,041 1,796,553
Contract R & D expenses 207,667 97,006 382,803 203,473
Selling, general & administrative expenses 345,279 342,227 669,313 701,815
Internal R & D expenses 49,599 34,811 82,898 62,685
----------- ------------ ------------ ------------
1,465,994 1,473,986 2,921,055 2,764,526
----------- ------------ ------------ ------------
Operating profit (loss) (97,359) (120,003) (173,086) (257,245)
Other income (expense):
Interest expense (60,314) (64,620) (121,330) (129,824)
Interest & other income, net 4,649 1,417 6,073 3,568
----------- ------------ ------------ ------------
Net income (loss) (153,024) (183,206) (288,343) (383,501)
Accumulated deficit, beginning of period (5,293,954) (4,786,809) (5,158,635) (4,586,514)
----------- ------------ ------------ ------------
Accumulated deficit, end of period $(5,466,978) $(4,970,015) $(5,446,978) $(4,970,015)
----------- ------------ ------------ ------------
Basic and Diluted Net income (loss) per share (0.08) (0.09) (0.14) (0.18)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Weighted average shares outstanding 2,113,417 2,109,271 2,111,356 2,109,271
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
INRAD, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months Ended June 30
-------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (288,343) $ (383,501)
--------------- ---------------
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization 234,624 264,552
Noncash interest 5,083 --
Gain on sale of equipment (3,500) --
Changes in assets and liabilities:
Accounts receivable (170,602) 60,685
Inventories 163,750 (92,923)
Unbilled contract costs (83,964) (33,084)
Other current assets 1,711 (1,230)
Precious metals (4,921) --
Other assets 1,019 (22,247)
Accounts payable and accrued liabilities 221,171 239,802
Advances from customers 11,681 58,486
Other current liabilities (40,978) (29,210)
--------------- --------------
Total adjustments 335,074 444,831
--------------- --------------
Net cash provided by operating activities 46,731 61,330
--------------- --------------
Cash flows from investing activities:
Capital expenditures (47,850) (53,561)
Proceeds from sales of equipment 3,500 --
--------------- --------------
Net cash used in investing activities (44,350) (53,561)
--------------- --------------
Cash flows from financing activities:
Principal payments of note payable - Bank (60,000) (47,500)
Principal payments of capital lease obligations (8,992) (50,445)
--------------- --------------
Net cash used in financing activities (68,992) (97,945)
--------------- --------------
Net decrease in cash and cash equivalents (66,611) (90,176)
Cash and cash equivalents at beginning of period 209,142 194,577
--------------- --------------
Cash and cash equivalents at end of period $ 142,531 $ 104,401
--------------- --------------
--------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
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, 1997 and 1996 and for the
years then ended and notes thereto included in the Company 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
Basic and diluted net income (loss) per share is computed using the weighted
average number of common shares outstanding. The potential diluted effect of
securities which are common share equivalents, have been excluded from the
diluted computation because their effect is antidilutive.
4
<PAGE>
NOTE 2 - INVENTORIES AND COST OF GOODS SOLD
For the six month period ended June 30 1998, the Company used 75% as its
estimate cost of goods sold percentage. For the previous year, 1997, the actual
cost of goods sold percentage was 77.6%. The Company believes 75% better
approximates the expected 1998 annual cost of goods sold percentage based on
estimated profitability of actual sales through June 30, 1998 and the
anticipated annual level of product shipments and related costs.
For the six month period ended June 30, 1997, the Company used 78% as its
estimated cost of goods sold percentage.
NOTE 3 - DEBT
Note Payable - Shareowner
By mutual informal agreement, the Company has deferred certain interest payments
to its principal shareowner. During the six month period ended June 30, 1998,
the Company did not make any interest payments. The Company's ability make the
remaining quarterly interest payments in 1998 is subject to adequate cash flow.
Although by its terms the indebtedness to the shareowner was due on December 31,
1996, it cannot be repaid until the Chase Bank debt has been repaid in full,
which is expected to be on September 1, 1999. The shareowner loan has been
classified as noncurrent in the accompanying balance sheet because the
shareowner has agreed not to demand payment prior to July 1, 1999.
Unsecured Demand Convertible Note
Although by its terms the Note is due on demand, it cannot be repaid until the
Chase 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 July 1, 1999.
Secured Promissory Note
Although by its terms the Note was due on July 8, 1997, it cannot be repaid
until the Chase 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 July 1, 1999.
Subordinated Convertible Notes
The two semi annual cash interest payments (of $50,000 each) that were due in
1997 and the one that was due in 1998, were not made and the debt holder agreed
not to request payment prior to January 15, 1999. The interest obligation has
been accrued by the Company and is included in Accounts Payable and Accrued
Liabilities.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following information contains forward-looking statements, including
statements with respect to the revenues to be realized from existing backlog
orders and ability to generate sufficient cash flow in the future. The Company
wishes to insure that any forward-looking statements are accompanied by
meaningful cautionary statements in order to comply with the terms of the safe
harbor provided by the Private Securities Reform Act of 1995. Actual results may
vary from these forward-looking statements due to the following factors:
inability to maintain customer relationships and/or add new customers;
unforeseen overhead expenses that may adversely affect financial results or
other inability to operate with a positive cash flow. Readers are further
cautioned that the Company's financial results can vary from quarter to quarter,
and the financial results reported for the first six months may not necessarily
be indicative of future results. The foregoing is not intended to be an
exhaustive list of all factors which could cause actual results to differ
materially from those expressed in forward-looking statements made by the
Company. For more information about the Company, please review the Company's
most recent Form 10-K filed with the Securities & Exchange Commission.
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 second quarter of 1998 decreased $86,000, or 7% from the
comparable quarter in 1997 and net sales for the six months ended June 30, 1998
increased $ 79,000 or 3% from the comparable 1997 period. International
shipments in the first six months of 1998 were $422,000 (18% of total shipments)
compared to $404,000 (18%) for the first six months of 1997. Product sales
during the six months ended June 30, 1998 were greater than the prior year
because the opening backlog was greater in 1998 than in 1997.
The backlog of unfilled product orders was $1,609,000 at June 30, 1998, compared
with $1,862,000 at December 31, 1997 and $2,147,000 at June 30, 1997.
Cost of Goods Sold
For the six month period ended June 30, 1998, the Company used 75% as its
estimated cost of goods sold percentage. For the previous year, 1997, the actual
cost of goods sold percentage was 77.6%. The Company believes 75% better
approximates the expected 1998 annual cost of goods sold percentage based on
estimated profitability of actual sales through June 30, 1998 and the
anticipated annual level of product shipments and related costs.
For the six month period ended June 30, 1997, the Company used 78% as its
estimated cost of goods sold percentage.
6
<PAGE>
Contract Research and Development
Contract research and development revenues for the second quarter of 1998
increased $101,000 or 100%, from the comparable quarter in 1997, and revenues
for the six months ended June 30, 1998 and 1997 were $366,000 and $205,000,
respectively. Related contract research and development expenditures, including
allocated indirect costs, for the quarter ended June 30, 1998 were $208,000
compared to $97,000 for the comparable 1997 quarter; expenses for the six month
period ended June 30, 1998 and 1997 were $382,000 and $203,000, respectively.
Revenues increased from 1997 to 1998 due to a higher opening backlog of
contracts. The Company expects to continue to focus its future efforts on
programs closely aligned with its core business.
The Company's backlog of contract R&D was $1,024,000 at June 30, 1998, compared
with $573,000 at December 31, 1997 and $629,000 at June 30, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $32,000 for the fist six
months of 1998. The decrease is due to increased contract research and
development revenues, which resulted in a greater allocation of Selling, General
and Administrative expenses to contract research and development expenses.
During the second quarter of 1998, Selling, General and Administrative Expenses
increased $3,000 as compared to 1997
Internal Research and Development Expenses
Research and development expenses for the quarter ended June 30, 1998 were
$50,000 compared to $35,000 for the quarter ended June 30, 1997. Expenses for
the six months ended June 30, 1998 were $83,000 compared to $63,000 for the
comparable 1997 period. The Company is focusing its internal Research and
Development efforts in 1998 on a few new products with short development cycles.
Interest Expense
Interest expense was $60,000 for the quarter ended June 30, 1998 compared to
$65,000 for the quarter ended June 30, 1997, and $121,000 and $ 130,000 for the
six months ended June 30, 1998 and 1997, respectively.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 1997, the Company signed an agreement with
Chase Manhattan Bank (successor to Chemical Bank) amending the terms of its
credit facility. The new agreement requires monthly principal payments of
$10,000 for January 1997, and $7,500 from February 1997 until December 1997,
monthly principal payments of $10,000 from January 1998 until December 1998, and
monthly principal payments $12,500 from January 1999 until August 1999. A final
payment of $7,500 is due on September 1, 1999. The Company's cash flow
requirements increased in 1997 because the Company was to begin making cash
interest payments ($110,000 annually) on its Subordinated Convertible Notes
issued in 1993. The two payments due in 1997 and the first payment due in 1998
were not made and the debt holder has agreed not to request payment prior to
January 15, 1999. The interest obligation has been accrued by the Company and is
included in Accounts Payable and Accrued Liabilities. In addition, the debt
holders of the Unsecured Demand convertible Note, Secured Promissory Note and
Note Payable - Shareowner have all agreed to extend the due date of their loans
to July 1, 1999.
Capital expenditures for the six months ended June 30, 1998 and 1997 were
$48,000 and $54,000, 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 six month period ended June 30, 1998 and for each of the three years
in the period ended December 31, 1997, the Company had 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, shareowners including the
principal shareowner, as further described in the Company's Annual Report on
Form 10-K. The Company's liquidity is dependent upon its ability to improve
operating results and thereby generate adequate cash flow from operations. It
will also depend upon the continued willingness of Shareowner creditors to
extend the due date of their loans. 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.
8
<PAGE>
PART II. OTHER INFORMATION
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:
None.
9
<PAGE>
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
-------------------------------------
Warren Ruderman
President and Chief Executive Officer
By: /s/ James L. Greco
-------------------------------------
James L. Greco
Controller
(Chief Accounting Officer)
Date: August 14, 1998
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES TWO AND THREE ON THE COMPANY'S 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 142,531
<SECURITIES> 0
<RECEIVABLES> 832,429
<ALLOWANCES> 7,000
<INVENTORY> 1,382,791
<CURRENT-ASSETS> 2,669,512
<PP&E> 5,169,229
<DEPRECIATION> 4,359,338
<TOTAL-ASSETS> 3,933,082
<CURRENT-LIABILITIES> 1,176,520
<BONDS> 2,182,333
0
0
<COMMON> 21,216
<OTHER-SE> 553,013
<TOTAL-LIABILITY-AND-EQUITY> 3,933,082
<SALES> 2,747,969
<TOTAL-REVENUES> 2,747,969
<CGS> 2,168,844
<TOTAL-COSTS> 2,168,864
<OTHER-EXPENSES> 752,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,330
<INCOME-PRETAX> (288,343)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,343)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
