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, 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 October 30, 1998:
2,116,971 shares
<PAGE>
INRAD, Inc.
INDEX
Page Number
-----------
Part I. FINANCIAL INFORMATION..................................................1
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998,
(unaudited) and December 31, 1997.........................1
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998
and 1997 (unaudited)......................................2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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.......................5
Part II. OTHER INFORMATION ...................................................9
Item 6. Exhibits and Reports on Form 8-K..........................9
Signatures ..................................................................10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INRAD, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997*
---- -----
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 80,501 $ 209,142
Certificate of Deposit 0 70,000
Accounts receivable, net 732,863 654,827
Inventories 1,418,600 1,546,541
Unbilled contract costs 223,882 102,363
Other current assets 35,124 64,145
----------- -----------
Total current assets 2,490,970 2,647,018
----------- -----------
Plant and equipment,
Plant and equipment at cost 5,184,591 5,121,379
Less: Accumulated depreciation
and amortization (4,476,651) (4,124,715)
----------- -----------
Total plant and equipment 707,940 996,664
Precious metals 283,614 278,693
Other assets 167,801 171,084
----------- -----------
Total assets $ 3,650,325 $ 4,093,459
=========== ===========
Current liabilities:
Note payable - Bank $ 137,500 $ 120,000
Current obligations under capital leases 6,985 12,262
Accounts payable and accrued liabilities 942,333 720,214
Advances from customers 29,952 63,329
Other current liabilities 12,400 57,929
----------- -----------
Total current liabilities 1,129,170 973,734
Note payable - Bank 0 107,500
Obligations under capital leases 3,035 8,683
Secured Promissory Notes 250,000 250,000
Subordinated Convertible Notes 1,232,548 1,224,921
Unsecured Demand Convertible Note 100,000 100,000
Note payable - Shareowner 566,049 566,049
----------- -----------
Total liabilities 3,280,802 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 (5,651,684) (5,158,635)
----------- -----------
384,473 914,372
Less - Common stock in treasury,
at cost (4,600 shares at September 30, 1998;12,300
at December 31, 1997) (14,950) (51,800)
----------- -----------
Total shareholders' equity 369,523 862,572
----------- -----------
Total liabilities and shareholders' equity $ 3,650,325 $ 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 September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,015,902 $ 1,412,167 $ 3,397,464 $ 3,714,402
Contract R & D 217,513 109,925 583,920 314,971
----------- ----------- ----------- -----------
Total Revenue 1,233,415 1,522,092 3,981,384 4,029,373
----------- ----------- ----------- -----------
Cost and Expenses:
Cost of goods sold 762,057 1,059,631 2,548,098 2,856,184
Contract R & D expenses 226,306 106,632 609,109 310,105
Selling, general & administrative expenses 342,201 323,078 1,011,514 1,024,893
Internal R & D expenses 42,218 25,001 125,116 87,686
----------- ----------- ----------- -----------
Total Cost and Expenses 1,372,782 1,514,342 4,293,837 4,278,868
----------- ----------- ----------- -----------
Operating profit (loss) (139,367) 7,750 (312,453) (249,495)
Other income (expense):
Interest expense (67,486) (63,895) (188,816) (193,719)
Interest & other income, net 2,147 5,098 8,220 8,666
----------- ----------- ----------- -----------
Net income (loss) (204,706) (51,047) (493,049) (434,548)
Accumulated deficit, beginning of period (5,446,978) (4,970,015) (5,158,635) (4,586,514)
----------- ----------- ----------- -----------
Accumulated deficit, end of period $(5,651,684) $(5,021,062) $(5,651,684) $(5,021,062)
=========== =========== =========== ===========
Basic and Diluted Net income (loss) per share (0.09) (0.03) (0.23) (0.21)
=========== =========== =========== ===========
Weighted average shares outstanding 2,116,971 2,109,271 2,113,248 2,109,271
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
INRAD, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended September 30
------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(493,049) $(434,548)
--------- ---------
Adjustments to reconcile net income
(loss) to cash provided by operating activities:
Depreciation and amortization 351,936 398,028
Noncash interest 7,627 --
Gain on sale of equipment (3,500) (3,800)
Changes in assets and liabilities:
Accounts receivable (78,036) (15,971)
Inventories 127,941 78,180
Unbilled contract costs (121,519) (32,645)
Other current assets 29,021 36,498
Precious metals (4,921) --
Other assets 3,283 (22,818)
Accounts payable and accrued liabilities 222,119 207,321
Advances from customers (33,377) 12,383
Other current liabilities (45,529) (34,757)
--------- ---------
Total adjustments 455,045 622,419
--------- ---------
Net cash provided by operating activities (38,004) 187,871
--------- ---------
Cash flows from investing activities:
Capital expenditures (63,212) (74,239)
Proceeds from sales of equipment 3,500 3,800
Proceeds from redemption of Certificate of Deposit 70,000 0
--------- ---------
Net cash provided by (used in) investing activities 10,288 (70,439)
--------- ---------
Cash flows from financing activities:
Principal payments of note payable - Bank (90,000) (70,000)
Principal payments of capital lease obligations (10,925) (69,562)
--------- ---------
Net cash used in financing activities (100,925) (139,562)
--------- ---------
Net decrease in cash and cash equivalents (128,641) (22,130)
Cash and cash equivalents at beginning of period 209,142 194,577
--------- ---------
Cash and cash equivalents at end of period $ 80,501 $ 172,447
========= =========
</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 dilutive effect of
securities which are common share equivalents, have been excluded from the
diluted computation because their effect is antidilutive.
NOTE 2 - INVENTORIES AND COST OF GOODS SOLD
For the six month period ended September 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 September 30, 1998 and the
anticipated annual level of product shipments and related costs.
For the nine month period ended September 30, 1997, the Company used 76.9% as
its estimated cost of goods sold percentage.
4
<PAGE>
NOTE 3 - DEBT
Note Payable - Shareowner
By mutual informal agreement, the Company has deferred certain interest payments
to its principal shareowner. During the nine month period ended September 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 October 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 October 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 October 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.
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
5
<PAGE>
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 third quarter of 1998 decreased $396,000, or 28% from the
comparable quarter in 1997 and net sales for the nine months ended September 30,
1998 decreased $ 317,000 or 9% from the comparable 1997 period. International
shipments in the first nine months of 1998 were $613,000 (18% of total
shipments) compared to $512,000 (14%) for the first nine months of 1997. Product
sales during the nine months ended September 30, 1998 were less than the prior
year because the bookings were less in 1998 than in 1997. During the third
quarter of 1998 product sales were less than the same period in 1997 due to a
lower opening backlog.
The backlog of unfilled product orders was $1,760,000 at September 30, 1998,
compared with $1,862,000 at December 31, 1997 and $2,250,000 at September 30,
1997.
Cost of Goods Sold
For the nine month period ended September 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 September 30, 1998 and the
anticipated annual level of product shipments and related costs.
For the nine month period ended September 30, 1997, the Company used 76.9% as
its estimated cost of goods sold percentage.
Contract Research and Development
Contract research and development revenues for the third quarter of 1998
increased $107,000 or 98%, from the comparable quarter in 1997, and revenues for
the nine months ended September 30, 1998 and 1997 were $584,000 and $315,000,
respectively. Related contract research and development expenditures, including
allocated indirect costs, for the quarter ended September 30, 1998 were $226,000
compared to $107,000 for the comparable 1997 quarter; expenses for the nine
month period ended September 30, 1998 and 1997 were $609,000 and $310,000,
respectively. Revenues increased from 1997 to 1998 due to a higher opening
backlog of
6
<PAGE>
contracts. The Company expects to continue to focus its future efforts on
contract research and development programs closely aligned with its core
business.
The Company's backlog of contract R&D was $1,213,000 at September 30, 1998,
compared with $573,000 at December 31, 1997 and $605,000 at September 30, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $13,000 for the fist nine
months of 1998. The decrease is due to increased contract research and
development revenues, which resulted in a greater allocation of General and
Administrative expenses to contract research and development expenses. During
the third quarter of 1998, Selling, General and Administrative Expenses
increased $19,000 as compared to 1997
Internal Research and Development Expenses
Research and development expenses for the quarter ended September 30, 1998 were
$42,000 compared to $25,000 for the quarter ended September 30, 1997. Expenses
for the nine months ended September 30, 1998 were $125,000 compared to $88,000
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 $67,000 for the quarter ended September 30, 1998 compared
to $64,000 for the quarter ended September 30, 1997, and $189,000 and $194,000
for the nine months ended September 30, 1998 and 1997, respectively.
Year 2000 Issue
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any computer
programs and hardware as well as software products and certain equipment and
machinery that are date sensitive may recognize a date using "00" as the Year
1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers who rely on its
products.
The Company has divided the Year 2000 issue into two main areas: internal
information technology ("IT") and non-IT systems, including embedded technology
such as microprocessors; and external agents including critical suppliers,
customers and other third parties the Company utilizes for various processing
functions.
The Company is evaluating new IT software systems to replace its non Y2K
compliant system. In the event we do not find a system that meets our
requirements, an upgrade that is Y2K compliant is available for our current
system. To date, based upon reviewing hardware, it has been determined that a
small amount of older computer equipment must be replaced, but the type and
amount are not significant and will be replaced in the ordinary course as
systems are upgraded. Financing has been arranged with a leasing company for the
Company to lease hardware and software.
7
<PAGE>
The Company is in the process of assessing its Year 2000 exposure as it pertains
to non-IT systems, including manufacturing, research and development and key
relationships, such as vendors and customers. This includes the process of
identifying and prioritizing critical suppliers and customers and communicating
with them about their plans and progress in addressing the Year 2000 problem.
The Company also utilizes third-party vendors for processing data and payments,
e.g. payroll services, 401 (k) plan administration, check processing, medical
benefits processing, etc. The Company has initiated communications with these
vendors to determine the status of their systems. Should these vendors not be
compliant in a timely manner, the Company may be required to process
transactions manually or delay processing until such time as the vendors are
Year 2000 compliant. The review of non-IT systems and key third party
relationships is expected to be completed by the end of the second quarter of
1999. At this time the cost to be Y2K compliant can not be estimated.
The failure to correct a material Year 2000 problem could result in a
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
The future costs of the Company's Year 2000 efforts are expected to be funded
through future operating cash flows and the financing of hardware and software.
The requirements for the correction of Year 2000 issues and the date on which
the Company believes it will complete the Year 2000 modifications are based on
management's current best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that may cause such
material differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and collect all relevant
computer data and similar uncertainties.
No contingency plans developed to date, contingency plans will be prepared so
that the Company's critical business processes can be expected to continue to
function on January 1,2000 and beyond. The Company's contingency plans will be
structured to address both remediation of systems and their components and
overall business operating risk. These plans are intended to mitigate both
internal risks as will a potential risks in the supply chain of the Company's
suppliers and customers.
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
8
<PAGE>
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 October 1, 1999.
Capital expenditures, including internal labor and overhead charges, for the
nine months ended September 30, 1998 and 1997 were $63,000 and $74,000,
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, 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.
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: November 16, 1998
10
<TABLE> <S> <C>
<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 10Q for the year to date and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 80,501
<SECURITIES> 0
<RECEIVABLES> 739,863
<ALLOWANCES> 7,000
<INVENTORY> 1,418,600
<CURRENT-ASSETS> 2,490,970
<PP&E> 5,184,591
<DEPRECIATION> 4,476,651
<TOTAL-ASSETS> 3,650,325
<CURRENT-LIABILITIES> 1,129,170
<BONDS> 2,151,632
0
0
<COMMON> 21,216
<OTHER-SE> 348,307
<TOTAL-LIABILITY-AND-EQUITY> 3,650,325
<SALES> 3,981,384
<TOTAL-REVENUES> 3,981,384
<CGS> 3,157,207
<TOTAL-COSTS> 3,157,207
<OTHER-EXPENSES> 1,136,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188,816
<INCOME-PRETAX> (493,049)
<INCOME-TAX> 0
<INCOME-CONTINUING> (493,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (493,049)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
