Inrad Optics, Inc. - Quarter Report: 2002 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

ý

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

 

For the quarterly period ended                                    JUNE 30, 2002

 

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)

 

 

                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   ý       No     ¨

 

Common shares of stock outstanding as of June 30, 2002:

 

5,279,090

 

INRAD, Inc.

 

INDEX

 

Part I.	FINANCIAL INFORMATION
		Item 1.	Financial Statements:
			Consolidated Balance Sheets as of June 30, 2002, (unaudited) and December 31, 2001
			Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited)
			Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited)
			Notes to Consolidated Financial Statements
		Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
			Liquidity and Capital Resources
Part II.	OTHER INFORMATION
		Item 6.	Exhibits and Reports on Form 8-K
Signatures

 

 

PART I.     FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

INRAD, Inc.

Consolidated Balance Sheets

 

		June 30,			December 31,
		2002			2001*
		Unaudited
Assets
Current assets:
Cash and cash equivalents		$	729,773		$	548,949
Accounts receivable, net		1,240,389			1,295,394
Inventories		2,215,243			2,356,884
Unbilled contract costs		347,788			391,756
Other current assets		178,386			140,366
Total Current Assets		4,711,579			4,733,349
Plant and equipment,
Plant and equipment at cost		8,929,027			8,754,197
Less: Accumulated depreciation and amortization		(5,755,676		)	(5,499,498		)
Total plant and equipment		3,173,351			3,254,699
Precious metals		309,565			309,565
Deferred Taxes		100,000			100,000
Other assets		200,844			201,459
Total Assets		$	8,495,339		$	8,599,072
Liabilities and Shareholders’ Equity
Current liabilities:
Notes Payable — Bank		$	912,110		$	750,000
Accounts payable and accrued liabilities		325,169			729,392
Current obligations under capital leases		98,657			87,021
Total current liabilities		1,335,936			1,566,413
Long Term Debt		837,890			0
Capital Lease Obligations		233,966			287,170
Total Liabilities		2,407,792			1,853,583
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 5,283,690 shares issued at June 30, 2002 and 5,135,653 at December 31, 2001		52,836			51,356
Capital in excess of par value		9,470,668			9,331,194
Accumulated deficit		(6,021,007		)	(5,222,111		)
		6,102,497			6,719,036
Less - Common stock in treasury, at cost (4,600 shares respectively)		(14,950		)	(14,950		)
Total Shareholders’ Equity		6,087,547			6,074,086
Total Liabilities & Shareholders’ Equity		$	8,495,3439		$	8,599,072

 

* Derived from Audited Financial Statements

 

See Notes to Consolidated Financial Statements.

 

3

 

INRAD, Inc.

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended June 30						Six Months Ended June 30
		2002			2001			2002			2001
Revenues:
Product sales		$	1,657,964		$	2,323,713		$	2,843,804		$	4,674,983
Contract R & D		28,000			10,000			62,625			47,378
Total Revenue		1,685,964			2,333,713			2,906,429			4,722,361
Cost and Expenses:
Cost of goods sold		1,225,727			1,528,295			2,349,584			3,036,808
Contract R & D expenses		34,562			3,609			84,841			60,412
Selling, general & administrative expenses		550,556			596,484			1,044,312			1,235,887
Internal R & D expenses		28,092			71,545			48,016			100,947
Total Cost and Expenses		1,838,937			2,199,933			3,526,753			4,434,054
Operating profit (loss)		(152,973		)	133,780			(620,324		)	288,307
Other income (expense):
Interest expense		(47,355		)	(18,583		)	(63,232		)	(18,582		)
Interest & other income, net		(1,281		)	60,637			5,260			57,387
Net (loss) income before income tax benefit and preferred stock dividends		(201,609		)	175,834			(678,296		)	327,112
Income tax benefit		0			0			0			100,000
Net (loss) income		(201,609		)	175,834			(678,296		)	427,112
Preferred stock dividends		(120,600		)	(155,000		)	(120,600		)	(155,000		)
Net (loss) income applicable to common shareholders		$	(322,209	)	$	20,834		$	(798,896	)	$	272,112
Net (loss) income per common share - basic and diluted		(.06		)	.01			(.15		)	.05
Weighted average shares outstanding		5,203,290			4,998,980			5,187,976			4,985,006

 

See Notes to Consolidated Financial Statements.

 

4

 

INRAD, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY

 

							Preferred Stock					Preferred Stock					Capital in excess of par value			Deficit			Subscription Receivable			Treasury Stock
		Common Stock					(Series A)					(Series B)
		Shares		Amount			Shares		Amount			Shares		Amount
Balance, December 31, 1999		4,100,728		41,007			500		500,000			—		—			8,237,718			(5,768,614		)	—			(14,950		)
Issuance of Preferred Stock		—		—			—		—			2,100		2,100,000			—			—			(220,000		)	—
Exercise of Options		107,000		1,070			—		—			—		—			68,430			—			—			—
Exercise of Warrants		420,000		4,200			—		—			—		—			382,050			—			—			—
Common Stock Issued on Conversion of Debt		280,000		2,800			—		—			—		—			347,200			—			—			—
Dividend on Preferred Stock		50,000		500			—		—			—		—			49,500			(50,000		)	—			—
Net income for the year		—		—			—		—			—		—			—			707,869			—			—
Balance, December 31, 2000		4,957,728		49,577			500		500,000			2,100		2,100,000			9,084,898			(5,110,745		)	(220,000		)	(14,950		)
Exercise of Options		29,250		293			—		—			—		—			30,833			—			—			—
Exercise of Warrants		51,675		516			—		—			—		—			56,683			—			—			—
Dividend on Preferred Stock		92,000		920			—		—			—		—			154,080			(155,000		)	—			—
Subscription received		—		—			—		—			—		—			—			—			220,000			—
Contribution		5,000		50			—		—			—		—			4,700			—			—			—
Net income for the year		—		—			—		—			—		—			—			43,634			—			—
Balance, December 31, 2001		5,135,653		$	51,356		500		$	500,000		2,100		$	2,100,000		$	9,331,194		$	(5,222,111	)	$	—		$	(14,950	)
401K contribution		14,037		140													20,214
Dividend on Preferred Stock		134,000		1,340													119,260			(120,600		)
Net income for the period																				(678,296		)
Balance, June 30, 2002		5,283,690		$	52,836		500		$	500,000		2,100		$	2,100,000		$	9,470,668		$	(6,021,007	)	$	—		$	(14,950	)

 

See notes to consolidated financial statements

 

5

 

INRAD, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Six months Ended June 30
		2002			2001
Cash flows from operating activities:
Net (loss) income		$	(678,296	)	$	427,112
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		256,177			160,301
401K common stock contribution		20,354			0
Deferred taxes		0			(100,000		)
Provision for bad debts		0			(463		)
Changes in assets and liabilities:
Accounts receivable		55,004			(219,585		)
Inventories		141,639			(130,615		)
Unbilled contract costs		43,968			9,144
Other current assets		(38,018		)	(128,042		)
Other assets		616			113,208
Accounts payable and accrued liabilities		(404,223		)	(87,286		)
Other current liabilities		11,636			0
Total adjustments		87,153			(383,338		)
Net cash (used in) provided by operating activities		(591,143		)	43,774
Cash flows from investing activities:
Deposits on capital commitments		0			(243,737		)
Capital expenditures		(174,831		)	(1,094,000		)
Net cash used in investing activities		(174,831		)	(1,337,737		)
Cash flows from financing activities:
Proceeds from exercise of warrants and options		0			71,137
Proceeds from issuance of preferred stock		0			220,000
Proceeds from asset based loan		1,000,000			0
Principal payments of capital lease obligations		(53,202		)	(79,880		)
Net cash provided by financing activities		946,798			211,257
Net decrease in cash and cash equivalents		180,824			(1,082,706		)
Cash and cash equivalents at beginning of period		548,949			2,233,878
Cash and cash equivalents at end of period		$	729,773		$	1,151,172

 

See Notes to Consolidated Financial Statements.

 

6

 

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, 2001 and 2000 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.

 

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 (loss) income 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- PROCEEDS FROM ASSET BASED LOAN

 

In May of 2002 the company received $1,000,000 from its bank collateralized by equipment.  The loan is for a three- year period with a five- year amortization.  In July 2002 the rate was locked in at 5.61%.

 

 

 

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

 

7

 

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. 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.

 

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 read in conjunction with the Company’s consolidated financial statements and the notes thereto presented elsewhere herein.  The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.

 

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 Revenues

 

Total sales for the three months ended June 30, 2002 were $1,686,000 as compared with total sales of $2,334,000 for the same three months in 2002; down 28 %. Total sales for the six months ended June 30, 2002 were $2,906,000 as compared with $4,722,000 for the same period last year; down 38%.

 

Product Sales

 

Product sales for the second quarter of 2002 were $1,658,000 vs. $2,324,000 for the second quarter of 2001, a decrease of 29%.  Sales for the first half of FY 2002 totaled $2,844,000 vs. $4,675,000 for the first half of 2001, down 39%.

 

Product sales were 98% of total revenues for both the second quarter and the first half of 2002, reflecting the Company’s strategic refocusing of its resources on product sales vs. R&D services.

 

Product bookings for the second quarter were $1,330,000 vs. $1,279,000 for the same period last year, up 4%. Product bookings for the first half of the year were $3,280,000 vs. $3,765,000 for the same period in 2001, down 13%.

 

The book-to-bill ratio for the second quarter of 2002 was 0.80 compared with 0.74 for the same quarter of 2001, indicating similar seasonal slowness and a continuation of the lowered demand experienced for five quarters, especially from custom optics customers in the semiconductor equipment, metrology and instrumentation sectors. The book-to-bill ratio for the first half of 2002 was 1.15 vs. 0.81 for the first half of 2001, reflecting increased order intake from customers in the defense, R&D and governmental sectors.

 

The backlog at June 30, 2002 was down 22% to $1,970,000 as compared to $2,540,000 on June 30, 2001, indicating that the Company’s sales in the third quarter of 2002 will be lower than its sales during the same period in 2001.

 

Cost of Goods Sold

 

For the six-month period ended June 30, 2002, the cost of goods sold as a percentage of product revenues was 82.6% vs. 64.9% for the same period last year. For the full year 2001, the actual cost of good sold percentage was 63.5%. Gross profit margin for the first six months was 17.4%, compared with 35.1% for the first half of 2001.

 

In dollar terms, the cost of goods sold was $2,349,000 for the first half of 2002 compared with $3,037,000 for first half of 2001, down 23%. However, product revenues were down 38% year to year for the same period.

 

The increase in the cost of goods sold percentage in comparison to 2001 was anticipated, resulting from greater decrease in sales volume than decrease in costs. The decreased sales volumes could not be entirely offset by the 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.

 

8

 

Contract Research and Development

 

Contract research and development revenues were $63,000 for the six months ended June 30, 2002, compared to $47,000 for the six months ended June 30, 2001. Related contract research and development expenditures, including allocated indirect costs, for the six months ended June 30, 2002 were $85,000 compared to $60,000 for the comparable period in 2001. Revenues for the second quarter were $28,000 compared to $10,000 in the second quarter of 2001.    The Company’s backlog of contract R&D was $28,000 at June 30, 2002, compared with $91,000 at December 31, 2001 and $227,000 at June 30, 2001.

 

The Company expects to continue to selectively seek new government-sponsored programs from time to time, as well as joint programs with certain of its customers, in technical areas related to its core businesses.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the current six-month period were $1,044,000 vs. $1,235,000 for the same period in the prior year, down 15%.  Second quarter expenses were $551,000 for the current year vs. $596,000 for the second quarter of FY 2001.  The expenses decreased due to cost cutting measures implemented by management including salary and fee reductions for executive personnel, other employees, and Board members.

 

Internal Research and Development Expenses

 

Research and development expenses for the quarter ended June 30, 2002 were $28,000 compared to $72,000 for the quarter ended June 30, 2001.  IR&D expenditures for the first half of 2002 were $48,000 compared with $101,000 in the first half of 2001.

 

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, 2001, the Company had a net deferred tax asset of approximately $2,200,000, the primary component of which was its significant net operating loss carry forward.  Through December 31, 2001, the Company had established a valuation allowance of approximately $2,100,000 in the event that the tax asset will not be realized in the future. Management determined in 2001 that future income projections mitigate the need for a full valuation allowance.

 

Interest expense

 

Interest expense for the first half of the year was $63,000 compared to $19,000 incurred in the first half of 2001.  The increase resulted from greater utilization of the Company’s credit lines for working capital purposes.

 

Net (Loss) Income

 

Net loss for the six months ended June 30, 2002 was $(678,000) compared to net income of $427,000 vs. the same period in FY 2001. Net (loss) income for the quarters ending June 30 was $(202,000) for FY 2002 and $176,000 for FY 2001.

 

(Loss) income from operations for the first six months was $(620,000) in 2002 as compared with $288,000 in 2001.  Second quarter operating (loss) profit was $(153,000) in 2002 and $134,000 in 2001.

 

Earnings Per Share

 

Basic earnings per share available to common shareholders was calculated by adjusting the net (loss) income by $121,000 in 2002 and by $155,000 in 2001 for the common stock dividend paid on Company preferred stock, divided by the weighted shares outstanding.  Diluted earnings per share for the six months ended June 30, 2002 and 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, 2002 and June 30, 2001 were $175,000 and $1,338,000, respectively.  Capital expenditures for all of 2001 were $2,224,000. The decrease reflects the major progress made during 2001 on the Company’s operational initiatives, including its plant and equipment modernization programs, its manufacturing systems deployment program, and its process re-engineering program.

 

9

 

These programs are intended to improve plant capacity, labor productivity, manufacturing cycle time, and gross margins when sales recover to pre-2002 levels. Further capital outlays in 2002 towards these goals are expected to be significantly less than in 2001.

 

Management will continue to make investments in capital acquisitions, 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 2002.

 

During the six month period ended June 30, 2002 the Company’s expenses have exceeded revenues, yielding negative cash flow from operations in the amount of ($591,000) as compared to a positive cash flow from operations in the first six months of FY2001.  Cash outflows during this period have been funded from use of previously established working capital credit lines and proceeds from an asset based loan. Where possible, the Company will seek to increase sales, and reduce expenses and cash requirements to improve future operating results and cash flows.  The current quarter yielded negative cash flow from operations in the amount of $(488,000).  This resulted primarily from losses generated during the period that were offset, to an extent, by reduced working capital requirements.

 

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.  Management expects that cash flow from operations, available cash, and use of its available lines of credit, will provide adequate liquidity for the Company’s operations in 2002.  We can give no guarantee that our efforts will be successful.

 

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.

 

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/  Daniel Lehrfeld
		Daniel Lehrfeld
		President and Chief Executive Officer
	By:	/s/  William S. Miraglia
		William S. Miraglia
		Chief Financial Officer

 

 

 

Date:    August 1, 2002

 

11