UNITED STATES


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q10-Q/A

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  SEPTEMBERJUNE 30, 20032004

OR

o

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

Photonic Products Group, Inc.

PHOTONIC PRODUCTS GROUP, Inc.

(Exact name of registrant as specified in its charter)

 

New Jersey

22-200324722-2004247

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

181 Legrand Avenue, Northvale, NJ  07647

(Address of principal executive offices)

(Zip Code)

 

 

 

(201) 767-1910

(Registrant’s telephone number, including area code)

 

INRAD, Inc.  181 Legrand Ave, Northvale, NJ 07647

(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.

 

Yesý            No           o

Indicate by check mark whether the registrant is an accelerated filer ) as defined in Rule 12b-2 of the Exchange Act).

Yeso            No           ý

Common shares of stock outstanding as of September 30, 2003:August 1, 2004:

5,307,3537,160,903

 

 



 

Photonic Products Group, Inc.PHOTONIC PRODUCTS GROUP, INC.

INDEX

 

Page Number

Part I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Consolidated Balance Sheets as of SeptemberJune 30, 2003,2004, (unaudited) and December 31, 20022003

3

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and NineSix Months Ended SeptemberJune 30, 20032004 and 20022003 (unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20032004 and 20022003 (unaudited)

Consolidated statement of Shareholders’ equity for the three years ended December 31, 2002 and the nine months ended September 30, 20035

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

9

 

 

 

 

 

 

Liquidity and Capital Resources

12

 

 

 

 

Part II.

OTHER INFORMATIONItem 3.

Quantitative and Qualitative Disclosures About Market Risk

13

 

 

 

 

 

Item 4.

Controls &and Procedures

13

 

 

 

 

Part II.

OTHER INFORMATION

Item 5.14

Submission of Matters to a Vote of Security Holders

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

14

 

 

Signatures

Certifications15 – Sections 906 and 302

 

2



 

Photonic Products Group, Inc.PHOTONIC PRODUCTS GROUP, INC AND SUBSIDIARIES

Consolidated Balance SheetsCONSOLIDATED BALANCE SHEETS

 

 

September 30,

 

December 31,

 

 

2003

 

2002

 

 

June 30,
2004

 

December 31,
2003

 

 

Unaudited

 

Audited

 

 

Unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

798,408

 

$

1,155,074

 

 

$

1,755,605

 

$

1,282,160

 

Accounts receivable, net

 

624,195

 

1,041,262

 

Accounts receivable (after allowance for doubtful accounts of $40,000 in 2004 and 2003)

 

805,890

 

973,415

 

Inventories

 

2,143,105

 

2,082,932

 

 

2,125,511

 

2,219,116

 

Unbilled contract costs

 

164,350

 

341,541

 

 

 

191,767

 

Other current assets

 

84,044

 

80,675

 

 

109,951

 

76,941

 

Total Current Assets

 

3,814,102

 

4,701,484

 

 

4,874,957

 

4,743,399

 

Plant and equipment,

 

 

 

 

 

 

 

 

 

 

Plant and equipment at cost

 

9,394,013

 

9,307,753

 

 

10,385,421

 

9,824,498

 

Less: Accumulated depreciation

 

 

 

 

 

and amortization

 

(6,430,653

)

(6,008,008

)

Less: Accumulated depreciation and amortization

 

(6,893,095

)

(6,572,278

)

Total plant and equipment

 

2,963,360

 

3,299,745

 

 

3,492,326

 

3,252,220

 

Precious Metals

 

309,565

 

309,565

 

 

309,565

 

309,565

 

Other assets

 

200,734

 

198,131

 

Intangible Assets

 

443,750

 

443,750

 

Other Assets

 

203,368

 

102,187

 

Total Assets

 

$

7,287,761

 

$

8,508,925

 

 

$

9,245,966

 

$

8,851,121

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

Notes Payable - Bank

 

$

 

$

751,074

 

Note payable -Other

 

$

12,492

 

124,917

 

 

$

55,800

 

$

68,292

 

Current portion of long term debt

 

 

927,549

 

Accounts payable and accrued liabilities

 

479,452

 

368,337

 

 

1,232,005

 

993,150

 

Current obligations under capital leases

 

83,965

 

98,657

 

 

99,664

 

99,664

 

Total current liabilities

 

575,909

 

2,270,534

 

 

1,387,469

 

1,161,106

 

 

 

 

 

 

 

 

 

 

 

Secured Note Payable

 

1,700,000

 

 

 

Subordinated Convertible Debenture

 

1,000,000

 

1,000,000

 

Secured and Convertible Notes Payable

 

5,200,000

 

4,200,000

 

Other Long Term Notes

 

88,819

 

116,728

 

Capital Lease Obligations

 

126,905

 

188,513

 

 

40,309

 

88,848

 

Total liabilities

 

3,402,814

 

3,459,047

 

 

6,716,597

 

5,566,682

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

10% convertible preferred stock, Series A no par value; 500 sharres issued and outstanding respectively

 

500,000

 

500,000

 

10% convertible preferred stock, Series A no par value; 500 shares issued and outstanding respectively

 

500,000

 

500,000

 

 

 

 

 

 

 

 

 

 

 

10% convertible preferred stock, Series B no par value; 2,100 shares issued and outstanding respectively

 

2,100,000

 

2,100,000

 

 

2,100,000

 

2,100,000

 

 

 

 

 

 

 

 

 

 

 

Common stock: $.01 par value; 40,000,000 authorized 5,311,953 shares issued at September 30, 2003 and 5,283,690 issued at December 31, 2002

 

53,119

 

52,836

 

Common stock: $.01 par value; 40,000,000 authorized 5,579,903 shares issued at June 30, 2004 and 5,445,953 issued December 31, 2003

 

55,799

 

54,459

 

Capital in excess of par value

 

9,482,263

 

9,470,676

 

 

9,698,003

 

9,534,523

 

Commom stock dividend due to preferred shareholders

 

53,600

 

 

 

Accumulated deficit

 

(8,289,085

)

(7,058,684

)

 

(9,809,483

)

(8,889,593

)

 

3,899,897

 

5,064,828

 

 

2,544,319

 

3,299,389

 

Less - Common stock in treasury, at cost (4,600 shares respectively)

 

(14,950

)

(14,950

)

 

(14,950

)

(14,950

)

Total Shareholders’ Equity

 

3,884,947

 

5,049,878

 

 

2,529,369

 

3,284,439

 

Total Liabilities & Shareholders’ Equity

 

$

7,287,761

 

$

8,508,925

 

 

$

9,245,966

 

$

8,851,121

 

 

See Notes to Consolidated Financial Statements

 


*Derived from Audited Financial Statements

13



Photonic Products Group, Inc.

Consolidated Statement of Operations

(Unaudited)

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales

 

$

1,405,663

 

$

1,344,569

 

$

3,727,497

 

$

4,188,373

 

Contract R & D

 

 

 

26,136

 

62,625

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

1,405,663

 

1,344,569

 

3,753,633

 

4,250,998

 

 

 

 

 

 

 

 

 

 

 

Cost and Expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

1,119,973

 

1,104,692

 

2,967,345

 

3,480,233

 

Contract R & D expenses

 

 

2,324

 

18,779

 

61,207

 

Selling, general & administrative expenses

 

570,842

 

572,386

 

1,664,870

 

1,616,702

 

Internal R & D expenses

 

34,992

 

41,407

 

115,903

 

89,423

 

Total Cost and Expenses

 

1,725,807

 

1,720,809

 

4,766,897

 

5,247,565

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(320,144

)

(376,240

)

(1,013,264

)

(996,567

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(57,880

)

(35,808

)

(165,059

)

(99,040

)

Interest & other income (expense), net

 

(2,449

)

2,992

 

1,522

 

8,250

 

 

 

 

 

 

 

 

 

 

 

Net loss before preferred stock dividends

 

(380,473

)

(409,056

)

(1,176,801

)

(1,087,357

)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

 

(53,600

)

(120,600

)

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common shareholders

 

$

(380,473

)

$

(409,056

)

$

(1,230,401

)

$

(1,207,957

)

 

 

 

 

 

 

 

 

 

 

Net loss income per common share - basic and diluted

 

$

(0.07

)

$

(0.08

)

$

(0.23

)

$

(0.23

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

5,283,690

 

5,203,290

 

5,283,690

 

5,187,976

 

See Notes to Consolidated Financial Statements

See Notes to Consolidated Financial Statements

2



 

Photonic Products Group, Inc.

Consolidated Statements of Cash FlowsOperations

(Unaudited)

 

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

 

 

(Unaudited)

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(1,176,801

)

$

(1,087,357

)

 

 

 

 

 

 

Adjustments to reconcile net loss to cash (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

422,645

 

381,014

 

401K common stock contribution

 

11,870

 

20,354

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

417,067

 

332,544

 

Inventories

 

(60,173

)

171,171

 

Unbilled contract costs

 

177,191

 

43,987

 

Other current assets

 

(3,369

)

(74,244

)

Other assets

 

(2,603

)

379

 

Accounts payable and accrued liabilities

 

111,114

 

(254,374

)

Other current liabilities

 

 

 

11,636

 

 

 

 

 

 

 

Total adjustments

 

1,073,742

 

632,467

 

Net cash (used in)  by operating activities

 

(103,059

)

(454,890

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(86,259

)

(309,946

)

 

 

 

 

 

 

Net cash used in investing activities

 

(86,259

)

(309,946

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from notes payable

 

1,700,000

 

1,000,000

 

Principal payments of notes

 

(112,425

)

 

 

Principal payments of bank debt

 

(1,678,623

)

 

Principal payments of capital lease obligations

 

(76,300

)

(283,325

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(167,348

)

716,675

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(356,666

)

(48,161

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,155,074

 

548,949

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

798,408

 

$

500,788

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30

 

2004

 

2003

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

1,917,221

 

1,147,117

 

3,723,123

 

2,347,960

 

 

 

 

 

 

 

 

 

 

 

Cost and Expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

1,384,632

 

945,261

 

2,913,536

 

1,866,018

 

Selling, general & administrative expenses

 

705,667

 

544,477

 

1,361,505

 

1,093,744

 

Internal R & D expenses

 

16,688

 

25,343

 

52,096

 

80,911

 

Total Cost and Expenses

 

2,106,987

 

1,515,081

 

4,327,137

 

3,040,673

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(189,766

)

(367,964

)

(604,014

)

(692,713

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(76,470

)

(71,383

)

(153,537

)

(105,837

)

Other

 

1,514

 

1,160

 

2,486

 

2,496

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

(264,722

)

(438,187

)

(755,065

)

(796,054

)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

(164,820

)

(53,600

)

(164,820

)

(53,600

)

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common shareholders

 

$

(429,542

)

$

(491,787

)

$

(919,885

)

$

(849,654

)

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.08

)

$

(0.09

)

$

(0.17

)

$

(0.16

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

5,480,386

 

5,283,690

 

5,457,759

 

5,283,690

 

 

See Notes to Consolidated Financial Statements

 

34



 

PHOTINICPHOTONIC PRODUCTS GROUP, INC.INC AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended June 30,

 

2004

 

2003

 

 

(Unaudited)

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(755,065

)

$

(796,045

)

 

 

 

 

 

 

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

320,817

 

284,170

 

401K common stock contribution

 

 

11,870

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

167,525

 

207,868

 

Inventories

 

93,605

 

(221,578

)

Unbilled contract costs

 

191,769

 

75,301

 

Other current assets

 

(33,010

)

(28,778

)

Other assets

 

(101,181

)

(2,603

)

Accounts payable and accrued liabilities

 

238,855

 

46,943

 

 

 

 

 

 

 

Total adjustments

 

878,378

 

373,193

 

Net cash provided by (used in) operating activities

 

123,313

 

(422,852

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(560,928

)

(52,205

)

 

 

 

 

 

 

Net cash used in investing activities

 

(560,928

)

(52,205

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from secured notes payable

 

 

 

1,700,000

 

Proceeds from senior convertible debenture

 

1,000,000

 

 

 

Principal payments of bank debt

 

 

 

(1,678,623

)

Principal payments of notes

 

(40,401

)

(74,950

)

Principal payments of capital lease obligations

 

(48,539

)

(49,719

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

911,060

 

(103,292

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

473,445

 

(578,349

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,282,160

 

1,155,074

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,755,605

 

$

576,725

 

See Notes to Consolidated Financial Statements

5



PHOTONIC PRODUCTS GROUP, INC. AND SUSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

 

 

Common Stock

 

Preferred

 

Stock

 

Preferred

 

Stock

 

(Series A)

(Series B)

Shares

 

Amount

Shares

 

Amount

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2001

 

5,135,603

 

$

51,356

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

14,037

 

140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

5,283,640

 

$

52,836

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

28,263

 

283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

5,445,903

 

$

54,459

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2004

 

5,579,903

 

$

55,799

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

 

 

Common Stock

 

Preferred Stock
(Series A)

 

Preferred Stock
(Series B)

 

Capital in
excess of
par value

 

 

 

 

 

 

 

 

Total
Shareowners’
Equity

 

 

Capital in
excess of
par value

 

Deficit

 

Payable/
Receivable

 

Treasury
Stock

 

Total
Shareholders’
Equity

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Deficit

 

Payable/
Receivable

 

Treasury
Stock

 

 

Balance, December 31, 2000

 

4,957,678

 

49,577

 

500

 

500,000

 

2,100

 

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of Options

 

29,250

 

293

 

 

 

 

 

30,833

 

 

 

 

 

31,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of Warrants

 

51,675

 

516

 

 

 

 

 

56,683

 

 

 

 

 

57,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

92,000

 

920

 

 

 

 

 

154,080

 

(155,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription received

 

 

 

 

 

 

 

 

 

220,000

 

 

 

220,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution

 

5,000

 

50

 

 

 

 

 

4,700

 

 

 

 

 

4,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year

 

 

 

 

 

 

 

 

43,633

 

 

 

 

43,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2001

 

5,135,603

 

$

51,356

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

$

9,331,194

 

$

(5,222,112

)

$

 

$

(14,950

)

$

6,745,488

 

 

$

9,331,194

 

$

(5,222,112

)

$

 

$

(14,950

)

$

6,745,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

14,087

 

140

 

 

 

 

 

20222

 

 

20,362

 

 

 

 

 

 

 

20222

 

 

 

 

 

 

20,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

119260

 

(120,600

)

 

 

 

 

 

 

 

119260

 

(120,600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

 

(1,715,972

)

 

 

 

(1,715,972

)

 

 

(1,715,972

)

 

 

(1,715,972

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

5,283,690

 

$

52,836

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

$

9,470,676

 

$

(7,058,684

)

$

 

$

(14,950

)

$

5,049,878

 

 

$

9,470,676

 

$

(7,058,684

)

$

 

$

(14,950

)

$

5,049,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock dividend payable

 

 

 

 

 

 

 

 

 

53,600

 

 

 

53,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

28,263

 

283

 

 

 

 

 

11,587

 

 

 

 

 

11,870

 

 

11,587

 

 

 

 

11,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52,260

 

(53,600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

(1,230,401

)

 

 

 

(1,230,401

)

 

 

(1,777,309

)

 

 

(1,777,309

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2003

 

5,311,953

 

$

53,119

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

$

9,482,263

 

$

(8,289,085

)

$

53,600

 

$

(14,950

)

$

3,884,947

 

Balance, December 31, 2003

 

$

9,534,523

 

$

(8,889,593

)

$

 

$

(14,950

)

$

3,284,439

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

163,480

 

(164,825

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

(755,065

)

 

 

 

 

(755,065

)

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2004

 

$

9,698,003

 

$

(9,809,483

)

$

 

$

(14,950

)

$

2,529,369

 

 

See Notesnotes to consolidated financial statements

 

46



 

Photonic Products Group,PHOTONIC PRODUCTS GROUP, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 -SUMMARY OF ACCOUNTING POLICIES

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of Photonic Products Group,PHOTONIC PRODUCTS GROUP, 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.  The Company changed its name form INRAD, Inc., effective September 27, 2003.  The name change was approved by Shareholders as evidenced by a majority vote tabulated at the August 27, 2003 Shareholders’ Meeting.  It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements as of December 31, 20022003 and 20012002 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.

Inventory Valuation

 

Inventories are valued on a lower of cost (first-in-first-out basis) or market basis (net realizable value).  Work In Process inventory for the period is stated at actual cost, not in excess of estimated realizable value.

Inventories are comprised of the following:

 

 

June 30,
2004

 

December 31,
2003

 

 

 

 

 

 

 

Raw materials

 

$

548,836

 

$

543,116

 

Work in process, including manufactured parts and components

 

1,002,106

 

1,275,000

 

Finished goods

 

574,569

 

401,000

 

 

 

$

2,125,511

 

$

2,219,116

 

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 Income (Loss)Loss Per Share

 

Basic and diluted net (loss) incomeloss per share is computed using the weighted average number of common shares outstanding for the period ended SeptemberJune 30, 2003.2004.  The potential dilutive effect of securities, which are common share equivalents, options, warrants, convertible notes and convertible preferred stock and their associated dividends have been excluded from the diluted computation because their effect is antidilutive.

Stock Based Compensation

 

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation costs for options has been recognized in the financial statements.  The chart below setsset forth the Company’scompany’s net loss per share for the ninethree and threesix months ended SeptemberJune 30, 20032004 and 2002,2003, as reported on a pro forma basis as if the compensation cost of stock options had been determined in accordance with SFAS 123.

 

 

For the three months ended
September 30,

 

For the nine months end
September 30,

 

 

For the three months ended

 

For the six months end

 

June 30,
2004

 

June 30,
2003

June 30,
2004

 

June 30,
2003

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

Net Loss, as reported

 

$

(38­0,473

)

$

(409,056

)

$

(1,230,401

)

$

(1,207,957

)

 

$

(429,542

)

$

(491,787

)

$

(919,885

)

$

(849,654

)

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(58,115

)

(72,980

)

(174,345

)

(218,939

)

Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax effects

 

(33,414

)

(47,124

)

(66,827

)

(94,248

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net loss

 

$

(438,588

)

$

(482,036

)

$

(1,404,746

)

$

(1,426,896

)

 

$

(462,956

)

$

(538,911

)

$

(986,712

)

$

(943,902

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

(.07

)

(0.08

)

(.23

)

(.23

)

 

(.08

)

(.09

)

(.17

)

(.16

)

Pro forma

 

(.08

)

(0.09

)

(.27

)

(.28

)

 

(.08

)

(.16

)

(.18

)

(.18

)

 

57



 

NOTE 2- CHANGES IN LONG TERM DEBT

 

At the end of the fourth quarter of 2002 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in January 2006 and bears an interest rate of 6%. The note was amended in 2004 to clarify its conversion features. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the purchase price of stock issued (and/or securities issued that are convertible into Common Stock) for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June of 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of 1830 months and bears interest at the rate of 6.5% per annum.  The Company’s Board of Directors approved the issuance of 200,000 warrants to the major investor as a fee for the issuance of the Note and in the 1st quarter of 2004 approved the issuance of an additional 200,000 warrants as a fee for extending the note to January 31, 2005. The warrants are exercisable at $0.425 per share and $1.08 per share, respectively, approximately a 15% discount to market, and expire in March 2008 and May 2008. The Note is secured by all assets of the Corporation.Company.

 

In OctoberAt the end of the fourth quarter of 2003 the Company received $1,500,000 in proceeds from the formissuance of a three-yearSubordinated Convertible Promissory Note.  The Note bearingis due in January 2006 and bears an interest rate of 6%.  The note was amended in 2004 to clarify its conversion features.  Interest accrues yearly and along with principal may be converted into Common Stock, and/or securities convertible into Common Stock, at 6.5%.  Interest is payable ata conversion rate equal to the endpurchase price of stock issued, and/or securities issued that are convertible into Common Stock, for cash after the date of the Note term in common stockto an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.  The proceeds offrom the noteNote are to be usedintended for acquisitions as part ofuse in the Company’s ongoing M&A activity.

Critical Accounting Policies

Our significant accounting polices are described in Note 1 of the consolidated financial statements, that were prepared in accordance with accounting principles generally accepted in the United States of America.  In preparing our financial statements we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report.  Our actual results may differ from these estimates under different assumptions or conditions.acquisition program.

 

For additional information regarding our critical accounting policiesIn April 2004 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in March 2007 and estimates, seebears an interest rate of 6%. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the section entitled “Managements Discussionpurchase price of stock issued (and/or securities issued that are convertible into Common Stock) for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and AnalysisHolder.  The Holder of Financial Conditionthe Note is a related party to a major shareholder of the Company.

The conversion of the above convertible notes in the aggregate principal amount of $3,500,000 is subject to a conversion price equal to the price at which equity is first raised for cash after the issuance of the notes.  During the 2nd quarter of 2004 the Company entered into an agreement to raise equity via a private placement, as described in the Capital and ResultsLiquidity Resources section. As a result of Operations” in our annual report on form 10-K for the year ended December 31, 2002.private placement the Notes are now convertible into an aggregate of 3,500,000 Units consisting of 3,500,000 shares of common stock and Warrants to acquire 2,625,000 shares of common stock at a price of $1.35 per share.

8



ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. 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 Litigation Reform Act of 1995. The events described in the forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits of acquisitions to be made by us, projections involving anticipated revenues, earnings, or other aspects of our operating results. The words “may”, “will”, “expect”, “believe”, “anticipate”, “project”, “plan”, “intend”, “estimate”, and “continue”, and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Actual results may vary from these forward-looking statements for many reasons, including the following factors: adverse changes in economic or industry conditions in general or in the markets served by the Company and its customers, actions by competitors, and inability to add new customers and/or maintain customer relationships.  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.  Investors are encouraged to review the risk factors set forth in the Company’s most recent Form 10-K as filed with the Securities and Exchange Commission in March 2002.April 2004. Any one or more of these uncertainties, risks, and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise.

 

6



Readers are further cautioned that the Company’s financial results can vary from quarter to quarter, and the financial results for any period may not necessarily be indicative of future results.

 

The following discussion and analysis should be readCritical Accounting Policies

Our significant accounting polices are described in conjunction withNote 1 of the Company’s consolidated financial statements, that were prepared in accordance with accounting principles generally accepted in the United States of America.  In preparing our financial statements we made estimates and judgments that affect the results of our operations and the notes thereto presented elsewhere herein.  The discussionvalue of assets and liabilities we report.  Our actual results should not be construed to imply any conclusion that such results will necessarily continue in the future.may differ from these estimates under different assumptions or conditions.

 

For additional information regarding our critical accounting policies and estimates, see the section entitled “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on form 10-K for the year ended December 31, 2003.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Company’s un-audited 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.

 

Total RevenuesRevenue

 

Total sales for the three months ended SeptemberJune 30, 20032004 were $1,406,000$1,917,000 as compared with total sales of $1,345,000$1, 147,000 for the same three months in 2002;2003; up 4%.67 %. Total sales for the ninesix months ended SeptemberJune 30, 20032004 were $3,754,000$3,723,000 as compared with $4,251,000$2,348,000 for the same period last year; down 11%up 59%.Sales of INRAD laser accessories to both OEM’s and researchers was stronger than in the same period a year ago, as were deliveries of INRAD optical components to defense sector OEM’s.  Sales of custom optical components by the “new” Laser Optics (the business unit formed in December 2003 from the merger of the assets of Laser Optics, Inc. and those of INRAD custom optics) was strong to customers in the aerospace, defense, and process control and metrology sectors. Sales to one aerospace customer represented 21% of revenues in this quarter. Sales to one process control and metrology sector customer represented 15% of revenues in this quarter.

 

Product Sales

Product salesBookings for the third quarter of 2003 were $1,406,000 vs. $1,345,000 for the third quarter of 2002, an increase of 4%.  Sales for the first nine of FY 2003 totaled $3,727,000 vs. $4,188,000 for the first half of 2002, down 11%.

Product sales accounted for 100% of total revenues for the third quarter and 99% for the first nine months of 2003, reflecting the Company’s strategic refocusing of its resources on product sales vs. R&D services.

Product bookings for the thirdsecond quarter were $2,056,000 vs. $980,000$2,400,000 as compared with $1,798,000 for the same period last year, up 110%34%. Product bookingsBookings for the first nine monthshalf of the year were $4,968,000$5,429,000 vs. $4,267,000$2,912,000 for the same period in 2002,2003, up 18%86%.  The increase in product bookings for the quarter vs. the prior year quarter resulted from bookings of OEM orders placed earlier than in prior periods for following year requirements, and pick up in orders from the research and defense sector customers.

9



 

The book-to-bill ratio for the thirdsecond quarter of 20032004 was 1.461.25 compared with 0.731.59 for the same quarter of 2002. The book-to-bill2003, and compared with a ratio of 1.12 for the nine monthsall of 2003, indicating continued strong demand from the Company’s customer base for its products. However, customer and competitive pressures have, as anticipated, continued to cause us to hold our prices firm in most instances.

In this year’s second quarter, OEM order intake was 1.33 vs. 1.02strong for optical components from both INRAD and Laser Optics, and for INRAD laser accessories. Orders from four major OEM customers accounted for 65% of the total bookings in this quarter. One order was from a major defense industry OEM, ATK Missile Systems Division, who placed another follow-on production order for INRAD proprietary filter crystals used in their anti-aircraft missile warning systems. Another order was from Northrop Grumman Defensive Systems Division for proprietary filter crystals used in their anti-aircraft missile warning systems. The third and fourth were from a major defense electro-optical systems OEM and from a process control and metrology sector major OEM for relatively large quantities of various precision custom optical components from our Laser Optics business unit.

Bookings in the first nine monthshalf of 2002.the year usually include OEM orders from INRAD customers placed in the first half for goods deliverable over the coming twelve months.  This seasonal trend was absent in the first quarter of 2003, when major OEM accounts pushed out new orders to the second and third quarters due to high inventory levels. Due to this trend, the bookings in the second half of 2004 are not anticipated to equal those in the first half.

 

The backlog at SeptemberJune 30, 20032004 was up 58%106% to $2,540,000$3,890,000 as compared to $1,605,000$1,890,000 on SeptemberJune 30, 2002.2003.  The Backlog increased 70% during the second half of 2004, up from $1,300,000$2,286,000 on December 31, 2002 primarily due to increased bookings from2003.

The backlog on June 30, 2004 and high first half order intake indicates continued strong sales performance is anticipated in the defense and OEM sectors.3rd quarter.

 

Cost of Goods Sold

 

For the nine-monthsix-month period ended SeptemberJune 30, 2003,2004, the cost of goods sold as a percentage of product revenues was 80.0%78.3% vs. 83.0%79.5% for the same period last year. For the full year 2002,2003, the actual cost of good sold percentage was 83.9%. Gross profit margin for the first ninesix months was 20.0%21.7%, compared with 17.0%20.5% for the first nine monthshalf of 2002.2003.

 

In dollar terms, the cost of goods sold was $2,967,000$2,914,000 for the first nine monthshalf of 2004 compared with $1,847,000 for first half of 2003, compared with $3,480,000 for first nine months of 2002, down 13%up 58%. Product revenues were down 11%up 60% year to year for the same period.

 

The decreaseincrease in gross margin percentage in the cost of goods sold percentagefirst six months in comparison to 2002the same period last year, was the result of personnel reductions, salary reductions and other cost cutting measures implemented by management.

Inventory costs for the year were determined from perpetual inventory records, adjusted to net realizable value.

Contract Research and Development

Contract research and development revenues were $26,000 for the nine months ended September 30, 2003, compared to $63,000 for the nine months ended September 30, 2002. Related contract research and development expenditures, including allocated indirect costs, for the nine months ended September 30, 2003 were $19,000 compared to $61,000 for the comparable period in 2002. There were no revenues in the quarter for either period and as of the end of the current quarter backlog was $0.

7



The Company expects to continue to selectively seek new government-sponsored programs from time to time,increased sales volume as well as joint programsthe capitalization of certain overhead costs associated with certainthe building renovations required as a result of its customers, in technical areasthe relocation of Laser Optics, Inc. to NJ. This increase resulted despite increased labor costs related to its core businesses.all personnel within Northvale, NJ-based operations being restored to full work-hours and full salaries, as required to meet the needs of the Company’s increasing backlogs, following two years of reduced work-hours. As well, this increase was despite inefficiencies associated with preparation in the first quarter for discontinuance of Connecticut-based operations acquired from Laser Optics, Inc. late last year and inefficiencies associated with start-up of Laser Optics operations in Northvale, NJ in the second quarter.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the current nine-monthsix-month period were $1,665,000$1,362,000 vs. $1,626,000$1,094,000 for the same period in the prior year, up 2.0%24%ThirdSecond quarter expenses were $571,000$706,000 for the current year vs. $572,000$554,000 for the thirdsecond quarter of FY 2002.  2003.  The expenses increased for the year due to increases in salesselling and general management personnel implementedresulting from the acquisition of the assets of the former Laser Optics, Inc., and merger of their operations and personnel with INRAD custom optics to expand our customer base,form the “new” Laser Optics business unit of PPGI. The increase was also attributable to increased costs of advisory services and to advisory servicestravel expenses incurred in connection with the company’s merger and acquisition program.program, as well as increased costs for advertising and travel expenses related to increased sales efforts during the period. At the beginning of FY 2004 directors’ fees and officers’ salary reductions of 15% that went into effect during FY 2002 were restored.  Also, all temporary layoffs affecting other personnel were eliminated during FY 2004.  As a result, labor costs increased without a corresponding increase in the number of employees.

 

Internal Research and Development Expenses

 

Research and development expenses for the quarter ended SeptemberJune 30, 20032004 were $35,000$17,000 compared to $41,000$25,000 for the quarter ended SeptemberJune 30, 2002.  IR&D2003.  Independent research and development expenditures for the first nine monthshalf of 20032004 were $116,000$52,000 compared with $89,000$81,000 in the first half of 2002.2003. The increasedecrease was the result of partially re-focusing engineering efforts madeto production in the development of miniaturized Pockels cells and process improvements in growth of key synthetic crystals.this quarter.

 

Federal Deferred Tax Benefit10

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.  Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  At December 31, 2002, the Company had a net deferred tax asset of

approximately $2,700,000, the primary component of which was its significant net operating loss carry forward.  The Company has established a 100% valuation allowance for the  $2,700,000 in the event that the tax asset will not be realized in the future.



 

Interest expense

 

Interest expense for the first nine monthshalf of the year was $165,000$154,000 compared to $99,000$106,000 incurred in the first nine monthshalf of 2002.  The increase resulted from greater utilization2003.  Interest expense increased over prior periods due to the increased borrowing needs experienced by the Company, and 1.5% higher interest rates. Borrowing needs increased due to the need for capital for the laser Optics acquisition.  During 2003, a secured note in the principle amount of $1,700,000 at 6.0% interest was issued to pay off bank debt that was at rates approximating the prime rate of interest. In 2003, a $1,500,000 subordinated convertible note and in 2004 a $1,000,000 subordinated convertible note were issued to provide funds for acquisition purposes. Interest on the secured and convertible notes is accrued, and payment is due upon the maturity of the Company’s credit lines for working capital purposes.notes

 

Net Loss

 

Net loss for the ninesix months ended SeptemberJune 30, 20032004 was $(1,177,000)$(755,000) compared to a net loss of $(1,087,000) vs.$(796,000) as compared to the same period in FY 2002.2003. Net loss for the quarters ending SeptemberJune 30 was $(380,000)$(265,000) for FY 20032004 and $(409,000)$(438,000) for FY 2002.2003.

 

Loss from operations for the first ninesix months was $(1,013,000)$(604,000) in 20032004 as compared with $(997,000)$(693,000) in 2002.  The third2003.  Second quarter operating loss was $(320,000)$(190,000) in 20032004 and $(376,000)$(368,000)  in 2002.2003.

 

Earnings Per Share

 

Basic earnings per share available to common shareholders was calculated by adjusting the net loss by $165,000 in 2004 and by $54,000 in 2003 and by $121,000 in 2002 for the common stock dividend paid on Company preferred stock, divided by the weighted shares outstanding.  Diluted earnings per share for the ninesix months ended SeptemberJune 30, 20032004 and SeptemberJune 30, 20022003 were not calculated because theirthe effect of outstanding options, warrants and convertible securities was anti-dilutive.

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Liquidity and capital resources

 

Capital expenditures, including purchases and a portion of applicable internal labor and overhead charges, for the ninesix months ended September,June, 2004 and 2003 were $561,000 and 2002 were $86,000 and $309,000,$52,000, respectively.  Capital expenditures for all of 20022003 were $554,000.$101,000.  The amountsincrease in costs represent minimal expenditures for replacement of capital equipment necessitated byat the needend of its useful life and for the restructuring of the Northvale, NJ operations to conserve cash duringaccommodate the current economic downturn.merge-in of operations from the former Connecticut –based operations of Laser Optics.

 

Management will continue to make investments in capital acquisitions from time to time, both in equipment and acquisition of complementary businesses, to pursue its objective of growth in shareholder value and to maintain a competitive edge in the markets that it serves. The Company believes that it has the financial resources necessary to implement its capital expenditure needs in 2003.

 

8The Company currently has capital on-hand to continue its acquisition plan for the near term.  The Company continues to search for additional sources for infusion of capital to be used for additional acquisitions to follow.



 

During the ninesix month period ended SeptemberJune 30, 2003,2004, cash outflows were funded from cash proceeds from a subordinated convertible promissory notenotes received in 20022004, 2003 and positive cash flow from operations for the third quarter of $320,000.2002.  Where possible, the Company will seek to increase sales, and reduce expenses and cash requirementsimprove margins to improve future operating results and cash flows.  Management expects that cash flow from operations and use of its existing cash reserves, will provide adequate liquidity for the Company’s operations in 2003.2004.  The current nine-six month period yielded negativepositive cash flow from operations in the amount of $(103,000)$123,000.

At the end of the fourth quarter of 2002 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in January 2006 and bears an interest rate of 6%. This resulted primarily from losses generated duringThe note was amended in 2004 to clarify its conversion features. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the periodpurchase price of stock issued (and/or securities issued that were offset,are convertible into Common Stock) for cash after the date of the Note to an extent,unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by reduced working capital requirements, advances from customersthe Issuer and decreases in inventories previously built upHolder.  The Holder of the Note is a related party to ensure meeting customer delivery requirements.a major shareholder of the Company.

 

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June of 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of 1830 months and bears interest at the rate of 6.5% per annum.  As a resultThe Company’s Board of Directors approved the loan guarantee,issuance of 200,000 warrants to the major investor hasas a lien onfee for the issuance of the Note and in the 2nd quarter of 2004 approved the issuance of an additional 200,000 warrants as a fee for extending the note to January 31, 2005. The warrants are exercisable at $0.425 per share and $1.08 per share, respectively, approximately a 15% discount to market, and expire in March 2008 and May 2008. The Note is secured by all assets of the Company.

 

In OctoberAt the end of the fourth quarter of 2003 the Company received $1,500,000 in proceeds from the formissuance of a three yearSubordinated Convertible Promissory Note.  The Note bearingis due in January 2006 and bears an interest at the rate of 6.5% per annum.6%.  The note was amended in 2004 to clarify its conversion features.  Interest accrues yearly and along with principal may be converted to common stockinto Common Stock, and/or securities convertible into Common Stock, at a conversion rate equal to the purchase price of stock issued, and/or securities issued that are convertible into Common Stock, for cash after the date of the noteNote to an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the note,Note, at a price mutually agreed upon as fair value by issuerthe Issuer and holder.Holder.  The holderHolder of the noteNote is a related party to a major shareholder of the Company.  The proceeds from the Note are intended for use in the Company’s acquisition program.

In April 2004 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note.  The Note is due in March 2007 and bears an interest rate of 6%. Interest accrues yearly and along with principal may be converted into Common Stock, (and/or securities convertible into common shares), at a conversion rate equal to the purchase price of stock issued (and/or securities issued that are convertible into Common Stock) for cash after the date of the Note to an unrelated third party investor, or if no such issuance takes place within twenty four months of the date of the Note, at a price mutually agreed upon as fair value by the Issuer and Holder.  The Holder of the Note is a related party to a major shareholder of the Company.

 

9During the 2nd quarter of 2004 the Company entered into an agreement with an investment banking firm to raise equity via a private placement that was not registered with the Securities and Exchange Commission. In July 2004, the Company issued 1,581,000 Units consisting of 1,581,000 shares and warrants to acquire an additional 1,185,750 shares at $1.35 per share.  The Company also issued 276,675 warrants at an exercise price of $1.35 to the placement agent engaged for the private offering. This resulted in net proceeds to the Company of approximately $1,350,000. The funds are to be utilized in the furtherance to the company’s M&A program, capital equipment purchases and to meet general working capital requirements. The conversion of the above convertible notes in the aggregate

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principal amount of $3,500,000 is subject to a conversion price equal to the price at which equity is first raised for cash. As a result of the private placement the Notes are now convertible into an aggregate of 3,500,000 Units consisting of 3,500,000 shares of common stock and Warrants to acquire 2,625,000 shares of common stock at a price of $1.35 per share.

PART IIItem 3.    OTHER INFORMATIONQuantitative and Qualitative Disclosures About Market Risk

The Company believes that it has limited exposure to changes in interest rates from investments in certain money market accounts.  The Company does not utilize derivative instruments or other market risk sensitive instruments to manage exposure to interest rate changes.  The Company believes that a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company’s interest sensitive money market accounts at June 30, 2004.

ITEM 4.      CONTROLS AND PROCEDURES

 

Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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PART II.    OTHER INFORMATION

ITEM 52.      CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

On August 27, 2003During the Annual Meeting2nd quarter of Shareholders2004 the Company entered into an agreement with an investment banking firm to raise equity via a private placement that was held for Shareholdersnot registered with the Securities and Exchange Commission. In July, 2004 the Company issued 1,462,425 Units consisting of record as1,581,000 shares of June 30, 2003.common stock and warrants to acquire an additional 1,462,425 shares at $1.35 per share.  This resulted in net proceeds to the Company of approximately $1,350,000. The meetngoffering was held atsubscribed to by approximately fifty six investors comprised of institutional funds and accredited investors. The funds are to be utilized in the offices of Lowenstein Sandler, PC, 65 Livingston Avenue, New Jersey.  The following are  the resultsfurtherance of the Shareholder vote:Company’s M&A program, capital equipment purchases and to meet general working capital requirements.

 

Vote forThe offering closed on July 30, 2004.  As part of the change in Corporate nameoffering agreement the Company will undertake efforts to Photonic Products Group, Inc.

3,363,899 IN FAVOR

1,454,684 AGAINST

4,500 ABSTAINED

Vote onregister the increase in commonstock issued as part of the offering with the Securities and Exchange Commission and there can be no “piggy back” registration of any other shares, issued but not registered, as part of this registration.  Directors, officers and a major shareholder of the Company have signed an agreement prohibiting them from selling shares of the Company authorized to 40,000,000

3,057,015 IN FAVOR

1,456,230 AGAINST

303,800 ABSTAINED

Vote on increasestock in their possession for a period of six months commencing from the total numberdate of Common shares authorized to be issued under the 2000 Equity Compensation Programfirst offering in May 2004.

2,348,418 IN FAVOR

1,465,380 AGAINST

304,800 ABSTAINED

Election of Mr. John rich to serve as Director for the ensuing three years

3,369,149 IN FAVOR

1,456,896 ABSTAINED

The following remain as Directors for the balance of their respective terms:

Mr. Thomas Lenagh, Chairman

Mr. Jan Winston

Mr. Frank Wiedeman

Mr. Daniel Lehrfeld

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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.

31.1Certification byof Principle executive Officer pursuant to rule 13a-14(a)/15d-14(a)

31.2Certification of Principle executive Officer pursuant to rule 13a-14(a)/15d-14(a)

The following exhibit shall not be deemed “filed” for purposes of Section 18 of the ChiefSecurities and Exchange Act of 1934 or otherwise subject to the liability of that Section.  In addition Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

32Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2      Certification by the Chiefand Principle Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1      Certification by the Chief Executive Officer Pursuantpursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2      Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(B)       Reports on Form 8-K:

 

None.On July 12, 2004, under Item 5, Other Events, summarizing the first closing of a private placement.

 

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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.

 

 

 

Photonic Products Group,PHOTONIC PRODUCTS GROUP, Inc.

 

 

 

 

 

By:

   /s//s/  Daniel Lehrfeld

 

 

 

Daniel Lehrfeld

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

By:

   /s//s/  William S. Miraglia

 

 

William S. Miraglia

 

Chief Financial Officer

 

Date:   October 31, 2003August 4, 2004

 

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