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, 1999
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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
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
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 September 30, 1999:
4,100,678 SHARES
<PAGE>
INRAD, INC.
INDEX
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<CAPTION>
PAGE NUMBER
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PART I. FINANCIAL INFORMATION........................................................................1
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1999, (unaudited)
and December 31, 1998.......................................................1
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 (unaudited)........................2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (unaudited)........................3
Notes to Consolidated Financial Statements..................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................5
Changes in Securities and Use of Proceeds...................................7
PART II. OTHER INFORMATION............................................................................8
SIGNATURES ..............................................................................................9
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INRAD, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998*
---- ----
UNAUDITED
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 295,736 $ 208,028
Accounts receivable, net 785,882 639,604
Inventories 1,215,481 1,433,081
Unbilled contract costs 192,951 125,096
Other current assets 77,054 64,626
------------ ------------
TOTAL CURRENT ASSETS 2,567,104 2,470,435
------------ ------------
PLANT AND EQUIPMENT,
Plant and equipment at cost 5,428,143 5,216,544
Less: Accumulated depreciation
and amortization (4,844,061) (4,585,761)
------------ ------------
Total plant and equipment 584,082 630,783
PRECIOUS METALS 286,788 282,396
OTHER ASSETS 149,881 154,543
------------ ------------
TOTAL ASSETS $ 3,587,855 $ 3,538,157
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - Bank $ 0 $ 107,500
Current obligations under capital leases 1,536 8,007
Accounts payable and accrued liabilities 621,029 527,991
Advances from customers (107,223) 30,887
Other current liabilities 32,400 40,400
------------ ------------
TOTAL CURRENT LIABILITIES 547,742 714,785
SECURED CONVERTIBLE PROMISSORY NOTES 250,000 250,000
SUBORDINATED CONVERTIBLE NOTES 100,000 100,000
------------ ------------
TOTAL LIABILITIES 897,742 1,064,785
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred Stock: $1,000 par value; 500 shares issued and outstanding
at September 30, 1999 and 0 shares issued and outstanding
at December 31, 1998 500,000 0
Common stock: $.01 par value; 4,100,678 shares issued at
September 30, 1999 and at December 31, 1998 41,007 41,007
Capital in excess of par value 8,237,718 8,237,718
Accumulated deficit (6,073,662) (5,790,403)
------------ ------------
2,705,063 2,488,322
Less - Common stock in treasury,
at cost (4,600 shares at September 30, 1999 and
at December 31, 1998) (14,950) (14,950)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 2,690,113 2,473,372
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,587,855 $ 3,538,157
============ ============
</TABLE>
* Derived from Audited Financial Statements
See Notes to Consolidated Financial Statements.
1
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INRAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Product sales $1,118,110 $1,015,902 $3,918,146 $ 3,397,464
Contract R & D 234,039 217,513 798,242 583,920
----------- ----------- ----------- -----------
Total Revenue 1,352,149 1,233,415 4,716,388 3,981,384
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of goods sold 827,401 762,057 2,900,527 2,548,098
Contract R & D expenses 214,962 226,306 779,138 609,109
Selling, general & administrative expenses 357,540 342,201 1,093,697 1,011,514
Internal R & D expenses 105,390 42,218 203,692 125,116
----------- ----------- ----------- -----------
Total Cost and Expenses 1,505,293 1,372,782 4,977,054 4,293,837
----------- ----------- ----------- -----------
OPERATING PROFIT (LOSS) (153,144) (139,367) (260,666) (312,453)
OTHER INCOME (EXPENSE):
Interest expense (7,713) (67,486) (26,188) (188,816)
Interest & other income, net 1,157 2,147 3,595 8,220
----------- ----------- ----------- -----------
NET LOSS (159,700) (204,706) (283,259) (493,049)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD (5,913,962) (5,446,978) (5,790,403) (5,158,635)
----------- ----------- ----------- -----------
ACCUMULATED DEFICIT, END OF PERIOD $(6,073,662) $(5,651,684) $(6,073,662) $(5,651,684)
============ ============ ============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED (0.04) (0.09) (0.07) (0.23)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,100,678 2,116,971 4,100,678 2,113,248
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
2
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INRAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (283,259) $ (493,049)
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ADJUSTMENTS TO RECONCILE NET LOSS TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 265,500 351,936
Non-cash interest - 7,627
Loss on sale of equipment - (3,500)
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable (146,278) (78,036)
Inventories 217,600 127,941
Unbilled contract costs (67,855) (121,519)
Other current assets (12,428) 29,021
Precious metals (4,392) (4,921)
Other assets (2,538) 3,283
Accounts payable and accrued liabilities 93,038 222,119
Advances from customers (138,110) (33,377)
Other current liabilities (8,000) (45,529)
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Total adjustments 196,537 455,045
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NET CASH PROVIDED BY OPERATING ACTIVITIES 86,722 38,004
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (211,599) (63,212)
Proceeds from sale of equipment - 3,500
Proceeds from redemption of Certificate of Deposit 70,000
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NET CASH USED IN INVESTING ACTIVITIES (211,599) (10,288)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 500,000 -
Principal payments of note payable - Bank (107,500) (90,000)
Principal payments of capital lease obligations (6,471) (10,925)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 386,029 (100,925)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 87,708 (128,641)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 208,028 209,142
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 295,736 $ 80,501
============ ============
</TABLE>
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, 1998 and 1997 and for the
years then ended and notes thereto included in the Company's report on Form
10-K, filed with the Securities and Exchange Commission.
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. A
valuation allowance is established when deferred tax assets are not likely to be
realized.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding. The potential dilutive effect of securities
that are common share equivalents, options, warrants, convertible notes and
convertible preferred stock, have been excluded from the diluted computation
because their effect is antidilutive.
NOTE 5 -COMMITMENTS
There are in effect employment agreements with two officers of the Company that
call for a base compensation to be mutually agreed upon at renewal. Early
termination of the agreements will result in a severance payment of between six
and nine months of base compensation. The minimum aggregate payouts under such
contracts approximate $139,000.
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 meaningful cautionary statements accompany any
forward-looking 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 nine months may not necessarily be indicative of
future results. The foregoing is not intended to be an exhaustive list of all
factors that 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.
4
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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 product sales for the third quarter of 1999 increased $102,000, or 10.0%
from the comparable quarter in 1998 and net sales for the nine months ended
September 30, 1999 increased $521,000 or 15.3% from the comparable 1998 period.
International shipments in the first nine months of 1999 were $1,642,000 (42% of
total shipments) compared to $613,000 (18%) for the first nine months of 1998.
Product sales during the third quarter of 1999 were greater than the prior year
because of increased orders in 1999 that we were able to ship during the third
quarter, primarily to our international clients.
The backlog of unfilled product orders was $1,149,000 at September 30, 1999,
compared with $1,426,000 at December 31, 1998 and $1,760,000 at September 30,
1998.
COST OF GOODS SOLD
For the nine months period ended September 30, 1999, the Company used 74% as its
estimated cost of goods sold percentage. For the previous year, 1998, the actual
cost of goods sold percentage was 74.3%. The Company believes 74% better
approximates the expected 1999 annual cost of goods sold percentage based on
estimated profitability of actual sales through September 30, 1999 and the
anticipated annual level of product shipments and related costs.
For the nine-month period ended September 30, 1998, the Company used 75% as its
estimated cost of goods sold percentage.
CONTRACT RESEARCH AND DEVELOPMENT
Contract research and development revenues were $798,000 for the nine months
ended September 30, 1999, compared to $584,000 for the nine months ended
September 30, 1998. Related contract research and development expenditures,
including allocated indirect costs, for the nine months ended September 30, 1999
were $779,000 compared to $609,000 for the comparable 1998 quarter. Revenues
increased from 1998 to 1999 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 $905,000 at September 30, 1999,
compared with $1,110,000 at December 31, 1998 and $1,213,000 at September 30,
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $16,000 or 4.7% in the
third quarter of 1999. General and administrative expenses increased due to the
hiring of a new Chief Operating Officer and President, and selling expenses
increased due to additional commissions paid independent sales agents on
international sales.
INTERNAL RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the quarter ended September 30, 1999 were
$105,000 compared to $42,000 for the quarter ended September 30, 1998. The
Company is focusing its internal Research and Development efforts in 1999 on a
few new products with short development cycles.
INTEREST EXPENSE
Interest expense was $8,000 and $67,000 for the quarters ended September 30,
1999 and 1998, respectively. Interest expense is less in 1999 because on
December 31, 1998 the Company converted $1,800,799 of notes payable and $441,789
of accrued interest into 1,979,107 shares of common stock.
5
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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 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. All required payments to Chase Manhattan
Bank have been made on time.
In March 1999, a shareowner and debtholder of the Company agreed to purchase 500
shares of 10% convertible preferred stock at the price of $1,000 per share. Two
hundred shares were purchased for $200,000 in March 1999 and the remaining three
hundred shares were purchased in June 1999 for $300,000. Dividends are payable
in common stock at the rate of $1.00 per share per annum.
Capital expenditures, including internal labor and overhead charges, for the
nine months ended September 30, 1999 and 1998 were $212,000 and $63,000,
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.
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.
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.
The Company has assessed 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 has been completed as of the second quarter of 1999. At this time
the total cost to be Y2K compliant is not estimated to be material.
The failure to correct a material Year 2000 problem could result in an
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
6
<PAGE>
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 are 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 well as potential risks in the supply chain of the Company's
suppliers and customers.
CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company sold 200 shares of its Series A 10% Convertible Preferred Stock for
$200,000 on March 25, 1999 and 300 shares on June 25, 1999. There was one
purchaser, an institution that was a major shareholder of the Company prior to
the purchase. The Series A Preferred Stock is convertible into Common Stock of
the Company at a rate of $1.00 per share. The issuance of the Series A Preferred
Stock was, and the issuance of the underlying Common Stock, if converted, will
be, exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, as not involving public offering.
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.
7
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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
--------------------------------
WARREN RUDERMAN
CHAIRMAN OF THE BOARD
By: /s/ WILLIAM S. MIRAGLIA
--------------------------------
WILLIAM S. MIRAGLIA
CHIEF FINANCIAL OFFICER
Date: November 24, 1999
9
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND
ON PAGES 1 AND 2 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 295,736
<SECURITIES> 0
<RECEIVABLES> 792,882
<ALLOWANCES> 7,000
<INVENTORY> 1,215,481
<CURRENT-ASSETS> 2,567,104
<PP&E> 5,428,143
<DEPRECIATION> 4,844,061
<TOTAL-ASSETS> 3,587,855
<CURRENT-LIABILITIES> 547,742
<BONDS> 0
0
500,000
<COMMON> 41,007
<OTHER-SE> 2,149,106
<TOTAL-LIABILITY-AND-EQUITY> 3,587,855
<SALES> 4,716,388
<TOTAL-REVENUES> 4,716,388
<CGS> 3,679,665
<TOTAL-COSTS> 4,977,054
<OTHER-EXPENSES> 203,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,593
<INCOME-PRETAX> (283,259)
<INCOME-TAX> 0
<INCOME-CONTINUING> (283,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (283,259)
<EPS-BASIC> (0.07)
<EPS-DILUTED> 0.0
</TABLE>
