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 JUNE 30, 2001
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to ___________________
Commission file number 0-11668
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INRAD, INC.
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(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
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(Address of principal executive offices)
(Zip Code)
(201) 767-1910
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(Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Common shares of stock outstanding as of June 30, 2001:
5,101,003
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INRAD, INC.
INDEX
<Table>
<Caption>
Page Number
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PART I. FINANCIAL INFORMATION....................................................... 1
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2001, (unaudited)
and December 31, 2000............................................. 1
Consolidated Statements of Operations for the three and Six
Months Ended June 30, 2001 and 2000 (unaudited)................... 2
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2000 (unaudited)................... 3
Notes to Consolidated Financial Statements........................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 5
Liquidity and capital resources .................................. 7
PART II. OTHER INFORMATION........................................................... 8
Item 6. Exhibits and Reports on Form 8-K.................................. 8
SIGNATURES ............................................................................ 9
</Table>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INRAD, Inc.
Consolidated Balance Sheets
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000*
---- -----
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,151,171 $ 2,233,878
Accounts receivable, net 1,457,098 1,237,050
Inventories 1,893,304 1,762,689
Unbilled contract costs 514,959 524,103
Deferred taxes 100,000 0
Other current assets 190,349 62,307
----------- -----------
TOTAL CURRENT ASSETS 5,306,881 5,820,027
----------- -----------
PLANT AND EQUIPMENT,
Plant and equipment at cost 7,649,913 6,555,913
Less: Accumulated depreciation
and amortization (5,309,819) (5,149,518)
----------- -----------
Total plant and equipment 2,340,094 1,406,395
PRECIOUS METALS 307,265 307,265
OTHER ASSETS 426,597 296,068
----------- -----------
TOTAL ASSETS $ 8,380,837 $ 7,829,755
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities 894,605 1,017,320
Current obligations under capital leases 133,024 97,596
----------- -----------
TOTAL CURRENT LIABILITIES 1,027,629 1,114,916
CAPITAL LEASE OBLIGATIONS 246,179 326,059
----------- -----------
TOTAL LIABILITIES 1,273,808 1,440,975
----------- -----------
SHAREHOLDERS' EQUITY:
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
Common stock: $.01 par value; 15,000,000 authorized 5,105,603
shares issued at June 30, 2001 and 4,957,678 at December 31, 2000 51,056 49,577
Capital in excess of par value 9,309,556 9,084,898
Accumulated deficit (4,838,633) (5,110,745)
----------- -----------
7,121,979 6,623,730
Subscription receivable 0 (220,000)
Less - Common stock in treasury,
at cost (4,600 shares respectively) (14,950) (14,950)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 7,107,029 6,388,780
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 8,380,837 $ 7,829,755
=========== ===========
</Table>
* Derived from Audited Financial Statements
See Notes to Consolidated Financial Statements.
1
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INRAD, Inc.
Consolidated Statements of Operations
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES:
Product sales $ 2,323,713 $ 1,481,960 $ 4,674,983 $ 2,581,160
Contract R & D 10,000 255,458 47,378 614,955
----------- ----------- ----------- -----------
Total Revenue 2,333,713 1,737,418 4,722,361 3,196,115
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of goods sold 1,528,295 871,721 3,036,808 1,451,987
Contract R & D expenses 3,609 296,655 60,412 538,921
Selling, general & administrative expenses 596,484 452,717 1,235,887 904,827
Internal R & D expenses 71,545 112,586 100,947 282,064
----------- ----------- ----------- -----------
Total Cost and Expenses 2,199,933 1,733,679 4,434,054 3,177,799
----------- ----------- ----------- -----------
OPERATING PROFIT (LOSS) 133,780 3,739 288,307 18,316
OTHER INCOME (EXPENSE):
Interest expense (18,583) (4,374) (18,582) (11,423)
Interest & other income, net 60,637 3,453 57,387 7,481
----------- ----------- ----------- -----------
NET INCOME BEFORE INCOME TAX
BENEFIT AND PREFERRED STOCK DIVIDENDS 175,834 2,818 327,112 14,374
INCOME TAX BENEFIT 0 0 100,000 0
Preferred stock dividends (155,000) 0 (155,000) 0
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO
common shareholders $ 20,834 $ 2,818 $ 272,112 $ 14,374
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE -
BASIC AND DILUTED .01 .01 .05 .01
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,998,980 4,157,769 4,985,006 4,157,769
=========== =========== =========== ===========
</Table>
See Notes to Consolidated Financial Statements.
2
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INRAD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
<Table>
<Caption>
PREFERRED STOCK PREFERRED STOCK
COMMON STOCK (SERIES A) (SERIES B)
------------ ---------- ----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- ------ -------- ------ ----------
Balance, December 31, 1999 4,100,678 41,007 500 500,000 -- --
Issuance of Preferred Stock -- -- -- -- 2,100 2,100,000
Exercise of Options 107,000 1,070 -- -- -- --
Exercise of Warrants 420,000 4,200 -- -- -- --
Common Stock Issued on Conversion of Debt 280,000 2,800 -- -- -- --
Dividend on Preferred Stock 50,000 500 -- -- -- --
Net income for the year -- -- -- -- -- --
--------- ------- --- -------- ----- ----------
Balance, December 31, 2000 4,957,678 $49,577 500 $500,000 2,100 $2,100,000
Exercise of Options 29,300 293 -- -- -- --
Exercise of Warrants 26,675 266 -- -- -- --
Dividend on Preferred Stock 92,000 920 -- -- -- --
Issuance of Preferred Stock -- -- -- -- -- --
--------- ------- --- -------- ----- ----------
Net income for the year
5,105,653 $51,056 500 $500,000 2,100 $2,100,000
Balance, June 30, 2001
<Caption>
CAPITAL IN SUBSCRIPTION TREASURY
EXCESS OF DEFICIT RECEIVABLE STOCK
PAR VALUE
----------- ----------- ------------ ---------
Balance, December 31, 1999 8,237,718 (5,768,614) -- (14,950)
Issuance of Preferred Stock -- -- (220,000) --
Exercise of Options 68,430 -- -- --
Exercise of Warrants 382,050 -- -- --
Common Stock Issued on Conversion of Debt 347,200 -- -- --
Dividend on Preferred Stock 49,500 (50,000) -- --
Net income for the year -- 707,869 -- --
----------- ----------- --------- --------
Balance, December 31, 2000 $ 9,084,898 $(5,110,745) $(220,000) $(14,950)
Exercise of Options 30,833 -- --
Exercise of Warrants 39,745 -- --
Dividend on Preferred Stock 154,080 (155,000) -- --
Issuance of Preferred Stock -- 220,000 --
Net income for the year 427,112
----------- ----------- --------- --------
Balance, June 30, 2001 9,309,556 (4,838,633) 0 (14,950)
</Table>
See notes to consolidated financial statements
3
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INRAD, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30
------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 427,112 $ 14,374
----------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 160,301 127,638
Deferred taxes (100,000) 0
Provision for bad debts (463) 0
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable (219,585) (84,919)
Inventories (130,615) (319,596)
Unbilled contract costs 9,144 (46,919)
Other current assets (128,042) 7,435
Precious metals 0 (869)
Other assets 113,208 (28,986)
Accounts payable and accrued liabilities (87,286) 149,331
Other current liabilities 0 3,304
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Total adjustments (383,338) (193,583)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 43,774 (179,209)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits on capital commitments (243,737) 0
Capital expenditures (1,094,000) (198,440)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,337,737) (198,440)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options 71,137 319,875
Proceeds from issuance of preferred stock 220,000 0
Principal payments of capital lease obligations (79,880) 0
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 211,257 319,875
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,082,706) (57,774)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,233,878 377,169
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,151,172 $ 319,395
=========== =========
</Table>
See Notes to Consolidated Financial Statements.
4
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INRAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 -SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of INRAD,
Inc. (the "Company") reflect all adjustments, which are of a normal recurring
nature, and disclosures which, in the opinion of management, are necessary for a
fair statement of results for the interim periods. It is suggested that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements as of December 31, 2000 and 1999 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 periods ended June 30, 2001 and June 30, 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.
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 Per Share
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding. The potential dilutive effect of
securities, 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.
NOTE 2- EXERCISE OF WARRANTS
On Feb 15, 2001 26,675 warrants were exercised and 26,675 of shares of INRAD,
Inc. was issued for capital received of $40,013.
NOTE 3 PREFERRED STOCK
The Company received the balance of the subscription receivable for its Series
B, 10% preferred stock. Capital received in this transaction was $220,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following information contains forward-looking statements, including
statements with respect to the revenues to be realized from existing backlog
orders and ability to generate sufficient cash flow in the future. The Company
wishes to insure that 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: adverse
changes in economic or industry conditions in general or in the markets served
by the Company and its customers, actions by competitors, inability to maintain
customer relationships and/or add new customers, or other inability to operate
with a positive cash flow. Readers are further cautioned that the Company's
financial results can vary from quarter to quarter, and the financial results
reported for the first six months may not necessarily be indicative of future
results. The foregoing is not intended to be an exhaustive list of all factors,
which could cause actual results to differ materially from those expressed in
forward-looking statements made by the Company. 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 2001.
5
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RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's unaudited consolidated financial statements presented elsewhere
herein. The discussion of results should not be construed to imply any
conclusion that such results will necessarily continue in the future.
Product Sales
Product sales for the second quarter of 2001 were $2,324,000 vs. $1,482,000 for
the second quarter of 2000, an increase of 57%. Sales for the first half of FY
2001 totaled $4,675,000 vs. $2,581,000 for the first half of 2000, up 81%.
Product sales were higher in this year's first half due to record backlog at the
beginning of the fiscal year coupled with continued strong orders through the
first quarter of the year.
Product bookings for the quarter were $1,279,000 vs. $1,758,000 for the same
period last year, down 27%. Product bookings for the first half of the year were
$3,765,000 vs. $3,367,000 for the same period in 2000. The book-to-bill ratio
for the first half was .81 vs. 1.3 for the first half of 2000. The decrease in
new orders and in the book to bill ratio as compared with the prior year
reflects adverse economic conditions currently affecting capital spending in the
semiconductor inspection and telecommunications sectors of the Photonics
industry. Softness in new order releases from OEM customers in these industry
sectors is responsible for the sharp decline in new orders. Industry forecasts
anticipate a continuation of these adverse conditions in these sectors through
the balance of 2001, and possibly beyond.
Backlog at June 30, 2001 was $2,540,000 compared to $3,448,000 on December 31,
2000 and $2,272,000 on June 30, 2000.
Cost of Goods Sold
For the six-month period ended June 30, 2001, the cost of goods sold as a
percentage of product revenues was 64.9%. For the full year 2000, the actual
cost of good sold percentage was 54.5%. Inventory costs for the year were
determined by physical inventory, adjusted to net realizable value.
The increase in cost of goods sold in comparison to 2000 was anticipated,
resulting from investments in management and engineering personnel required for
process re-engineering, manufacturing systems implementation, and infrastructure
that will support the Company's growth plans.
Contract Research and Development
Contract research and development revenues were $47,000 for the six months ended
June 30, 2001, compared to $615,000 for the six months ended June 30, 2000.
Related contract research and development expenditures, including allocated
indirect costs, for the six months ended June 30, 2001 were $60,000 compared to
$539,000 for the comparable period in 2000. Revenues for the second quarter were
$10,000 compared to $255,000 in the second quarter of 2000. The decrease in R&D
revenue year to year is due to lower opening backlog of R&D contracts this year,
resulting from the winding down of contract programs. The Company's backlog of
contract R&D was $227,000 at June 30, 2001, compared with $210,000 at December
31, 2000 and $494,000 at June 30, 2000 The Company's backlog of contract R&D
showed a net increase compared to the previous year end as a result of the award
of a new Small Business Innovative Research contract award from NASA relating to
characterization of non-linear optical crystals utilized at high average power
in laser systems operating in the ultra-violet region of the electro-magnetic
spectrum. The Company expects to continue to focus its future efforts on
technology programs closely aligned with its core business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the current six-month period
were $1,275,000 vs. $905,000 for the same period in the prior year. Second
quarter expenses were $618,000 for the current year vs. $453,000 for the second
quarter of FY 2000. The expenses increased due to increases in personnel, trade
show and advertising costs and a lower amount of total costs allocated to
Contract Research & Development activities this year due to lower sales in that
category.
Internal Research and Development Expenses
Research and development expenses for the quarter ended June 30, 2001 were
$71,000 compared to $113,000 for the quarter ended June 30, 2000. IR&D
expenditures for the first half of 2001 were $101,000 compared with $282,000 in
the first half of 2000. The higher costs in the same period a year ago were
largely due to costs of the development of an Optical Parametric Oscillator
prototype operating in the infrared waveband, curtailed last year. That
technology was sold during the third quarter of 2000. In general, the Company is
focusing its internal Research and Development efforts in 2001 on a few new
products and related manufacturing processes having short development cycles.
6
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Federal Deferred Tax Benefit
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, 2000, the Company had a net deferred tax asset of approximately
$2,100,000, the primary component of which was its significant net operating
loss carry forward. Through December 31, 2000, the Company had established a
valuation allowance to fully offset this deferred tax asset in the event that
the tax asset will not be realized in the future. Management has determined that
future income projections mitigate the need for a full valuation allowance. As
such, a portion of the allowance was reduced in the 1st quarter.
Other Income/expense
Other income recorded during the quarter includes $44,000 received as a result
of the sale of warrants that were issued to the Company at the time of the sale
of its OPO technology in the third quarter of FY 2000. The balance of "other
income" represents interest income earned.
Net Income
Net income for the six months ended June 30, 2001 was $427,000 compared to
$14,000 vs. the same period in FY 2000. Net income for the quarters ending June
30 was $176,000 for FY 2001 and $3,000 for FY 2000.
Income from operations for the first six months was $270,000 in 2001 as compared
with $18,000 in 2000. Second quarter operating profit was $115,000 in 2001 and
$4,000 in 2000.
Earnings Per Share
Basic earnings per share available to common shareholders was calculated by
reducing net income by $155,000 for the common stock dividend paid on Company
preferred stock, divided by the weighted shares outstanding. Primary earnings
per share for the six months ended June 30, 2001 were not calculated because
their effect was anti-dilutive.
Liquidity and capital resources
Capital expenditures, including purchases, deposits, and a portion of applicable
internal labor and overhead charges, for the six months ended June 30, 2001 and
June 30, 2000 were $1,338,000 and $198,000, respectively. Capital expenditures
for all of 2000 were $582,000. The increase reflects implementation by the
Company of its strategic plan to modernize, expand, and strengthen its plant,
equipment, and manufacturing operations. This calls for major investments in new
equipment and facilities in order to maintain preeminence in the field of
crystal components and custom precision optics manufacturing and attain the
Company's objectives of growth in shareholder value. As long as cash flows from
operations are adequate and/or other financing means can be arranged, management
will continue to make investments in capital acquisitions to insure that the
Company maintains a competitive edge in the markets that it serves.
During the six month period ended June 30, 2001 and for the prior fiscal year
the Company generated a profit. Cash outflows during these periods have
additionally been funded from the proceeds of issuance of preferred stock to
shareowners, as further described in the Company's most recent Annual Report,
Form 10-K, and conversion of certain warrants and exercise of stock options. The
Company's future liquidity is dependent upon its ability to continue to generate
adequate cash flow from operations, to finance its working capital needs, and to
raise financial capital to fund its capital expansion plans. The current
six-month period yielded positive cash flow from operations in the amount of $
44,000 as compared to a negative cash flow from operations in the first six
months of FY 2000. This resulted primarily from the increase in net income,
netted against increases in working capital requirements for accounts receivable
and accounts payable resulting from overall increases in production and sales.
7
<Page>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
11. An exhibit showing the computation of per-share earnings is omitted
because the computation can be clearly determined from the material
contained in this Quarterly Report on Form 10-Q.
(B) Reports on Form 8-K:
None.
8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INRAD, INC.
By: /s/ Daniel Lehrfeld
------------------------------------
DANIEL LEHRFELD
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
By: /s/ William S. Miraglia
------------------------------------
WILLIAM S. MIRAGLIA
CHIEF FINANCIAL OFFICER
Date: August 14, 2001
9