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