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, 1999 ------------------------------------------------- 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, 1999: 4,100,678 shares INRAD, Inc. INDEX Page Number ----------- Part I. FINANCIAL INFORMATION..................................................1 Item 1. Financial Statements: Consolidated Balance Sheets as of March 31, 1999, (unaudited) and December 31, 1998..........................1 Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 (unaudited)................................................2 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 (unaudited)................................................3 Notes to Consolidated Financial Statements.................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................5 Changes in Securities and Use of Proceeds..................9 Part II. OTHER INFORMATION.....................................................9 Item 6. Exhibits and Reports on Form 8-K...........................9 Signatures ...................................................................10 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INRAD, Inc. Consolidated Balance Sheets March 31, December 31, 1999 1998* ---- ----- Unaudited Assets Current assets: Cash and cash equivalents $ 418,890 $ 208,028 Accounts receivable, net 739,384 639,604 Inventories 1,294,631 1,433,081 Unbilled contract costs 185,087 125,096 Other current assets 72,053 64,626 ----------- ----------- Total current assets 2,710,045 2,470,435 ----------- ----------- Plant and equipment, Plant and equipment at cost 5,309,154 5,216,544 Less: Accumulated depreciation and amortization (4,671,860) (4,585,761) ----------- ----------- Total plant and equipment 637,294 630,783 Precious metals 286,156 282,396 Other assets 154,163 154,543 ----------- ----------- Total assets $ 3,787,658 $ 3,538,157 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Note payable - Bank $ 70,000 $ 107,500 Current obligations under capital leases 5,936 8,007 Accounts payable and accrued liabilities 613,502 527,991 Advances from customers 87,040 30,887 Other current liabilities 32,400 40,400 ----------- ----------- Total current liabilities 808,878 714,785 Secured Convertible Promissory Notes 250,000 250,000 Subordinated Convertible Notes 100,000 100,000 ----------- ----------- Total liabilities 1,158,878 1,064,785 ----------- ----------- Shareholders' equity: Preferred Stock: $1,000 par value; 200 shares issued and outstanding at March 31, 1999 and 0 shares issued and outstanding at December 31, 1998 200,000 0 Common stock: $.01 par value; 4,100,678 shares issued at March 31, 1999 and at December 31, 1998 41,007 41,007 Capital in excess of par value 8,237,718 8,237,718 Accumulated deficit (5,834,995) (5,790,403) ----------- ----------- 2,643,730 2,488,322 Less - Common stock in treasury, at cost (4,600 shares at March 31, 1999 and at December 31, 1998) (14,950) (14,950) ----------- ----------- Total shareholders' equity 2,628,780 2,473,372 ----------- ----------- Total liabilities and shareholders' equity $ 3,787,658 $ 3,538,157 =========== =========== * Derived from Audited Financial Statements See Notes to Consolidated Financial Statements. 1 INRAD, Inc. Consolidated Statements of Operations (Unaudited) Three Months Ended March 31 ----------------------------- 1999 1998 ---- ---- Revenues: Product sales $ 1,415,620 $ 1,213,671 Contract R & D 249,857 165,663 ----------- ----------- Total Revenue 1,665,477 1,379,334 ----------- ----------- Cost and Expenses: Cost of goods sold 1,047,558 922,592 Contract R & D expenses 262,742 175,136 Selling, general & administrative expenses 356,827 324,034 Internal R & D expenses 33,871 33,299 ----------- ----------- Total Cost and Expenses 1,700,998 1,455,061 ----------- ----------- Operating profit (loss) (35,521) (75,727) Other income (expense): Interest expense (9,736) (61,016) Interest & other income, net 665 1,424 ----------- ----------- Net income (loss) (44,592) (135,319) Accumulated deficit, beginning of period (5,790,403) (5,158,635) ----------- ----------- Accumulated deficit, end of period $(5,834,995) $(5,293,954) =========== =========== Net loss per common share - basic and diluted (0.01) (0.06) =========== =========== Weighted average shares outstanding 4,100,678 2,109,271 =========== =========== See Notes to Consolidated Financial Statements. 2 INRAD, Inc. Consolidated Statements of Cash Flows (Unaudited) Three months Ended March 31 --------------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net income (loss) $ (44,592) $(135,319) --------- --------- Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 88,350 117,312 Changes in assets and liabilities: Accounts receivable (99,780) (96,509) Inventories 138,450 79,500 Unbilled contract costs (59,991) (106,948) Other current assets (7,427) (12,815) Precious metals (3,760) (4,921) Other assets (1,870) (630) Accounts payable and accrued liabilities 85,511 146,205 Advances from customers 56,153 11,681 Other current liabilities (8,000) (27,334) --------- --------- Total adjustments 187,636 105,541 --------- --------- Net cash provided by (used in) operating activities 143,044 (29,778) --------- Cash flows from investing activities: Capital expenditures (92,611) (23,984) --------- --------- Net cash used in investing activities (92,611) (23,984) --------- --------- Cash flows from financing activities: Proceeds from issuance of preferred stock 200,000 0 Principal payments of note payable - Bank (37,500) (30,000) Principal payments of capital lease obligations (2,071) (7,142) --------- --------- Net cash provided by (used in) financing activities 160,429 (37,142) --------- --------- Net increase (decrease) in cash and cash equivalents 210,862 (90,904) Cash and cash equivalents at beginning of period 208,028 209,142 --------- --------- Cash and cash equivalents at end of period $ 418,890 $ 118,238 ========= ========= 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, 1998 and 1997 and for the years then ended and notes thereto included in the Company's report on Form 10-K, filed with the Securities and Exchange Commission. 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. 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, warrents, convertible notes and convertilbe preferred stock, have been excluded from the diluted computation because their effect is antidilutive. NOTE 2 - INVENTORIES AND COST OF GOODS SOLD For the three month period ended March 31, 1999, the Company used 74% as its estimated cost of goods sold percentage. For the previous year, 1998, the actual cost of goods sold percentage was 74.3%. The Company believes 74% better approximates the expected 1999 annual cost of goods sold percentage based on estimated profitability of actual sales through March 31, 1999 and the anticipated annual level of product shipments and related costs. 4 For the three month period ended March 31, 1998, the Company used 76% as its estimated cost of goods sold percentage. NOTE 3 -DEBT Secured Convertible Promissory Note Although by its terms the Note was due on July 8, 1997, it cannot be repaid until the Chase 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 April 1, 2000. 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 1999 increased $202,000, or 17% from the comparable quarter in 1998. International shipments in the first three months of 1999 were $488,000 (34% of total shipments) compared to $262,000 (22%) for the first three months of 1998. Product 5 sales during the first quarter of 1999 were greater than the prior year because of increased orders in 1999 that we were able to ship during the first quarter, primarily to our international clients. The backlog of unfilled product orders was $1,733,000 at March 31, 1999, compared with $1,426,000 at December 31, 1998 and $1,902,000 at March 31, 1998. Cost of Goods Sold For the three months period ended March 31, 1999, the Company used 74% as its estimated cost of goods sold percentage. For the previous year, 1998, the actual cost of goods sold percentage was 74.3%. The Company believes 74% better approximates the expected 1999 annual cost of goods sold percentage based on estimated profitability of actual sales through March 31, 1999 and the anticipated annual level of product shipments and related costs. For the three month period ended March 31, 1998, the Company used 76% as its estimated cost of goods sold percentage. Contract Research and Development Contract research and development revenues were $250,000 for the three months ended March 31, 1999, compared to $165,000 for the three months ended March 31, 1998. Related contract research and development expenditures, including allocated indirect costs, for the quarter ended March 31, 1999 were $263,000 compared to $175,000 for the comparable 1998 quarter. Revenues increased from 1998 to 1999 due to a higher opening backlog of contracts. The Company expects to continue to focus its future efforts on programs closely aligned with its core business. The Company's backlog of contract R&D was $1,101,000 at March 31, 1999, compared with $1,110,000 at December 31, 1997 and $1,157,000 at March 31, 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $33,000 or 10%, in the first quarter of 1999. General and administrative expenses increased due to the hiring of a new Chief Executive Officer and President, and selling expenses increased due to additional commissions paid independent sales agents on international sales. Internal Research and Development Expenses Research and development expenses for the quarter ended March 31, 1999 were $34,000 compared to $33,000 for the quarter ended March 31, 1998. The Company is focusing its internal Research and Development efforts in 1999 on a few new products with short development cycles. Interest Expense Interest expense was $10,000 and $61,000 for the quarters ended March 31, 1999 and 1998, respectively. Interest expense is less in 1999 because on December 31, 1998 the Company converted $1,800,799 of notes payable and $441,789 of accrued interest into 1,979,107 shares of common stock. 6 LIQUIDITY AND CAPITAL RESOURCES During the quarter ended March 31, 1997, the Company signed an agreement with Chase Manhattan Bank (successor to Chemical Bank) amending the terms of its credit facility. The new agreement requires monthly principal payments of $10,000 for January 1997, and $7,500 from February 1997 until December 1997, monthly principal payments of $10,000 from January 1998 until December 1998, and monthly principal payments $12,500 from January 1999 until August 1999. A final payment of $7,500 is due on September 1, 1999. All required payments to Chase Manhattan Bank have been made on time. In March 1999, a shareowner and debtholder of the Company agreed to purchase 500 shares of 10% convertible preferred stock at the price of $1,000 per share. Two hundred shares were purchased for $200,000 in March 1999 and the remaining three hundred shares will be 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, 1999 and 1998 were $93,000 and $24,000, 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 three month period ended March 31, 1999 and for each of the three years in the period ended December 31, 1998, the Company had losses from operations. Cash outflows during these periods have been funded on the basis of borrowings from, and issuance of common and preferred stock and warrants to, shareowners including the principal shareowner, as further described in the Company's Annual Report on Form 10-K. The Company's liquidity is dependent upon its ability to improve operating results and thereby generate adequate cash flow from operations. It will also depend upon the continued willingness of a Shareowner note holder to extend the due date of their note. 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. Year 2000 Issue The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any computer programs and hardware as well as software products and certain equipment and machinery that are date sensitive may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities for both the Company and its customers who rely on its products. The Company has divided the Year 2000 issue into two main areas: internal information technology ("IT") and non-IT systems, including embedded technology such as microprocessors; 7 and external agents including critical suppliers, customers and other third parties the Company utilizes for various processing functions. The Company is evaluating new IT software systems to replace its non Y2K compliant system. In the event we do not find a system that meets our requirements, an upgrade that is Y2K compliant is available for our current system. To date, based upon reviewing hardware, it has been determined that a small amount of older computer equipment must be replaced, but the type and amount are not significant and will be replaced in the ordinary course as systems are upgraded. Financing has been arranged with a leasing company for the Company to lease hardware and software. The Company is in the process of assessing its Year 2000 exposure as it pertains to non-IT systems, including manufacturing, research and development and key relationships, such as vendors and customers. This includes the process of identifying and prioritizing critical suppliers and customers and communicating with them about their plans and progress in addressing the Year 2000 problem. The Company also utilizes third-party vendors for processing data and payments, e.g. payroll services, 401 (k) plan administration, check processing, medical benefits processing, etc. The Company has initiated communications with these vendors to determine the status of their systems. Should these vendors not be compliant in a timely manner, the Company may be required to process transactions manually or delay processing until such time as the vendors are Year 2000 compliant. The review of non-IT systems and key third party relationships is expected to be completed by the end of the second quarter of 1999. At this time the total cost to be Y2K compliant can not be estimated. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The future costs of the Company's Year 2000 efforts are expected to be funded through future operating cash flows and the financing of hardware and software. The requirements for the correction of Year 2000 issues and the date on which the Company believes it will complete the Year 2000 modifications are based on management's current best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that may cause such material differences include, but are not limited to, the availability of personnel trained in this area, the ability to locate and collect all relevant computer data and similar uncertainties. No contingency plans are developed to date. Contingency plans will be prepared so that the Company's critical business processes can be expected to continue to function on January 1, 2000 and beyond. The Company's contingency plans will be structured to address both remediation of systems and their components and overall business operating risk. These plans 8 are intended to mitigate both internal risks as will a potential risks in the supply chain of the Company's suppliers and customers. Changes in Securities and Use of Proceeds The Company sold 200 shares of its Series A 10% Convertible Preferred Stock for $200,000 on March 25, 1999. There was one purchaser, an institution which was a major shareholder of the Company prior to the purchase. The Series A Preferred Stock is convertible into Common Stock of the Company at a rate of $1.00 per share. The issuance of the Series A Preferred Stock was, and the issuance of the underlying Common Stock, if converted, will be, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as not involving public offering. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 10.25 Agreement with Clarex to purchase 500 shares of Preferred Stock. 10.26 Employment contract with Devaunshi Sampat. 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. 9 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/ Charles J. Lucy ------------------------------------- Charles J. Lucy President and Chief Executive Officer By: /s/ James L. Greco ------------------------------------- James L. Greco Chief Financial Officer (Chief Accounting Officer) Date: May 12, 1999 10