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 March 31, 2000 -------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________to_________ Commission file number 0-11668 ------- INRAD, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) New Jersey 22-2003247 - --------------------------------------------- ---------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) 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 May 1, 2000: 4,176,078 shares INRAD, Inc. INDEX Page Number ----------- Part I. FINANCIAL INFORMATION.............................................1 Item 1. Financial Statements: Consolidated Balance Sheets as of March 31, 2000, (unaudited) and December 31, 1999.......................1 Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999 (unaudited)........2 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (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...............6 Part II. OTHER INFORMATION.................................................7 Item 6. Exhibits and Reports on Form 8-K........................7 Signatures ...............................................................8 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INRAD, Inc. Consolidated Balance Sheets March 31, December 31, 2000 1999* ---- ---- Unaudited Assets Current assets: Cash and cash equivalents $ 467,631 $ 377,169 Accounts receivable, net 754,854 741,558 Inventories 1,535,612 1,336,285 Unbilled contract costs 215,529 460,713 Other current assets 96,004 91,970 ----------- ----------- Total current assets 3,069,630 3,007,695 ----------- ----------- Plant and equipment, Plant and equipment at cost 5,639,195 5,543,244 Less: Accumulated depreciation and amortization (4,962,770) (4,898,951) ----------- ----------- Total plant and equipment 676,425 644,293 Precious metals 306,395 306,396 Other assets 157,989 154,803 ----------- ----------- Total assets $ 4,210,439 $ 4,113,227 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 814,740 $ 603,458 Advances from customers 11,056 152,608 Other current liabilities 27,927 12,000 ----------- ----------- Total current liabilities 853,723 768,066 Secured Convertible Promissory Notes 250,000 250,000 Subordinated Convertible Notes -- 100,000 ----------- ----------- Total liabilities 1,103,723 1,118,066 ----------- ----------- Shareholders' equity: Preferred Stock: $1,000 par value; 500 shares issued and outstanding at March 31, 2000 and at December 31, 1999 500,000 500,000 Common stock: $.01 par value; 4,180,678 shares issued at March 31, 2000 and 4,100,678 at December 31, 1999 41,807 41,007 Capital in excess of par value 8,336,918 8,237,718 Accumulated deficit (5,757,059) (5,768,614) ----------- ----------- 3,121,666 3,010,111 Less - Common stock in treasury, at cost (4,600 shares at March 31, 2000 and at December 31, 1999) (14,950) (14,950) ----------- ----------- Total shareholders' equity 3,106,716 2,995,161 ----------- ----------- Total liabilities and shareholders' equity $ 4,210,439 $ 4,113,227 =========== =========== * Derived from Audited Financial Statements See Notes to Consolidated Financial Statements. 1 INRAD, Inc. Consolidated Statements of Operations (Unaudited) Three Months Ended March 31 --------------------------- 2000 1999 ---- ---- Revenues: Product sales $ 1,099,200 $ 1,415,620 Contract R & D 359,497 249,857 ----------- ----------- Total Revenue 1,458,697 1,665,477 ----------- ----------- Cost and Expenses: Cost of goods sold 580,266 1,047,558 Contract R & D expenses 242,265 262,742 Selling, general & administrative expenses 452,110 356,827 Internal R & D expenses 169,478 33,871 ----------- ----------- Total Cost and Expenses 1,444,119 1,700,998 ----------- ----------- Operating profit (loss) 14,578 (35,521) Other income (expense): Interest expense (7,049) (9736) Interest & other income, net 4,026 1,424 ----------- ----------- Net income (loss) 11,555 (44,592) Accumulated deficit, beginning of period (5,768,614) (5,790,403) ----------- ----------- Accumulated deficit, end of period $(5,757,059) $(5,834,995) =========== =========== Net income (loss) per common share 0.01 (0.01) =========== =========== Weighted average shares outstanding 4,127,345 4,100,678 =========== =========== See Notes to Consolidated Financial Statements. 2 INRAD, Inc. Consolidated Statements of Cash Flows (Unaudited) Three months Ended March 31 --------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net income (loss) $ 11,555 $ (44,592) --------- --------- Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 63,819 88,350 Changes in assets and liabilities: Accounts receivable (13,296) (99,780) Inventories (199,327) 138,450 Unbilled contract costs 245,184 (59,991) Other current assets (4,034) (7,427) Precious metals 1 (3,760) Other assets (3,146) (1870) Accounts payable and accrued liabilities 211,282 85,511 Advances from customers (141,552) 56,153 Other current liabilities 15,927 (8,000) --------- --------- Total adjustments 174,858 99,286 --------- --------- Net cash provided by (used in) operating activities 186,413 143,044 --------- --------- Cash flows from investing activities: Capital expenditures (95,951) (92,611) --------- --------- Net cash used in investing activities (95,951) (92,611) --------- --------- Cash flows from financing activities: Proceeds from issuance of preferred stock 0 200,000 Principal payments of note payable - Bank 0 (37,500) Principal payments of capital lease obligations 0 (2,071) --------- --------- Net cash provided by (used in) financing activities 0 160,429 --------- --------- Net increase (decrease) in cash and cash equivalents 90,462 210,862 Cash and cash equivalents at beginning of period 377,169 208,028 --------- --------- Cash and cash equivalents at end of period $ 467,631 $ 418,890 ========= ========= 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, 1999 and 1998 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 For the period ended March 31, 2000 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. For the period ended March 31, 1999, interim inventories, as well as cost of goods sold were computed using the gross profit method of inventory valuation and applying an estimated gross profit percentage based on the actual values for the preceding fiscal year. 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) Per Share Basic and diluted net income (loss) per share is computed using the weighted average number of common shares outstanding. The potential dilutive effect of securities, which are common share equivalents, options, warrants, convertible notes and convertible preferred stock, have been excluded from the diluted computation because their effect is antidilutive. NOTE 2 -DEBT Secured Convertible Promissory Note The Promissory note has been classified as non-current in the accompanying balance sheet because the Note holder has agreed not to demand payment prior to April 1, 2001. Subordinated Convertible Notes During September 1993, the company borrowed $100,000 in the form of a promissory note from a shareowner of the Company. On December 16, 1993, the promissory note was extinguished and a $74,621 10% subordinated convertible note and 20,303 shares of the Company's commons stock at $1.25 were issued. The note is convertible at any time up to the maturity date into shares of the Company's common stock at $1.25 per share (to be adjusted for dividends, stock splits, etc.). On March 15, 2000, the note along with its accrued interest through December 31, 1999 was converted into 80,000 shares of the Company's common stock. 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following information contains forward-looking statements, including statements with respect to the revenues to be realized from existing backlog orders and ability to generate sufficient cash flow in the future. The Company wishes to insure that any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe harbor provided by the Private Securities Reform Act of 1995. Actual results may vary from these forward-looking statements due to the following factors: inability to maintain customer relationships and/or add new customers; unforeseen overhead expenses that may adversely affect financial results or other inability to operate with a positive cash flow. Readers are further cautioned that the Company's financial results can vary from quarter to quarter, and the financial results reported for the first three months may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors, which could cause actual results to differ materially from those expressed in forward-looking statements made by the Company. For more information about the Company, please review the Company's most recent Form 10-K filed with the Securities & Exchange Commission. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future. Net Product Sales Net product sales for the first quarter of 2000 were $1,099,000 vs. $1,415,000 for the first quarter of 1999. Sales were lower compared to the first quarter of 1999 due to a larger portion of the backlog being scheduled for delivery later in the current fiscal year when compared to shipment schedules in the first quarter of 1999. Also, shipments of the Company's Systems and Instruments product line were well below first quarter 1999 levels. New Product bookings were at $1,609,000, resulting in a $512,000 (35%) increase in unfilled product orders for the quarter. Backlog at March 31, 2000 $1,946,000 compared to $1,438,000 on December 31, 1999 and $1,733,000 on March 31, 1999. Cost of Goods Sold Cost of goods sold decreased in comparison to the same period in 1999 due to lower sales volume and increased cost efficiencies. Costs for the quarter, were determined utilizing perpetual inventory records adjusted to net realizable value. For the three- month period ended March 31, 1999, the Company used 74% as its estimated cost of goods sold as a percentage of product revenues. For the full year 1999, the actual cost of good sold percentage was 68.9%. Cost of goods sold percentage for the three-month period ended March 31, 2000 improved to 53%. Contract Research and Development Contract research and development revenues were $359,000 for the three months ended March 31, 2000, compared to $250,000 for the three months ended March 31, 1999. Current period revenues included a one-time adjustment for under-absorbed overhead costs of $130,000. Related contract research and development expenditures, including allocated indirect costs, for the quarter ended March 31, 2000 were $242,000 compared to $263,000 for the comparable 1999 quarter. The Company's backlog of contract R&D was $730,000 at March 31, 2000, compared with $1,089,000 at December 31, 1999 and $1,101,000 at March 31, 1999. 5 Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $451,000 in the first quarter of 2000 compared to $357,000 in the same period in the prior year. Selling, general and administrative expenses increased due to the hiring of a new president, new sales personnel, and other increased selling and personnel costs. Internal Research and Development Expenses Research and development expenses for the quarter ended March 31, 2000 were $169,000 compared to $34,000 for the quarter ended March 31, 1999. The increase reflects a major effort to develop and demonstrate a Optical Parametric Oscillator prototype operating in the infrared wave band for application to a new class of scientific instruments. Interest Expense Interest expense was $7,000 and $10,000 for the quarters ended March 31, 2000 and 1999, respectively. Interest expense is less in 2000 because on September 30, 1999 the Company completed payment of the bank note payable to Chase Manhattan Bank. LIQUIDITY AND CAPITAL RESOURCES 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. Capital expenditures, including internal labor and overhead charges, for the three months ended March 31, 2000 and 1999 were $96,000 and $93,000, respectively. As long as cash flows from operations are adequate and/or other financing terms can be arranged, management will continue to make investments in capital acquisitions to insure that the Company maintains a competitive edge in the market place. During the three month period ended March 31, 2000 and for the prior fiscal year the Company generated a profit. Cash outflows during these periods have been funded on the basis of issuance of preferred stock to, shareowners, as further described in the Company's Annual Report on Form 10-K. The Company's liquidity is dependent upon its ability to continue to improve operating results and thereby generate adequate cash flow from operations. Through the current quarter and for the three years in the period ended December 31, 1999 the company has generated positive cash flow from operations. Management anticipates that cash flow from operations will continue to remain positive Year 2000 Issue The Company has satisfactorily implemented a plan to ensure that its systems are compliant with the requirements to process transactions in the year 2000. To date, the Company has not experienced any adverse affects related to the year 2000. 6 PART II. OTHER INFORMATION ITEM 5. APPOINTMENT OF CHIEF EXECUTIVE OFFICER On May 5, 2000 Dr. Warren Ruderman retired as Chief Executive Officer after twenty seven years as founder and leader of the Company. Mr. Daniel Lehrfeld, the Company president, was appointed to the position. Tom Lenagh was elected Chairman of the Board, a position also formerly held by Dr. Ruderman. Dr. Ruderman will remain as a Director of the Company. 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 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/ Daniel Lehrfeld ----------------------------------------------- Daniel Lehrfeld President and Chief Executive Officer By: /s/ William S. Miraglia ----------------------------------------------- William S. Miraglia Chief Financial Officer (Chief Accounting Officer) Date: May 10, 2000 8