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Inrad Optics, Inc. - Quarter Report: 2003 September (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 SEPTEMBER 30, 2003

 

OR

 

o

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

 

Photonic Products Group, Inc.

(Exact name of registrant as specified in its charter)

 

New Jersey

 

22-2003247

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer
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)

 

INRAD, Inc.  181 Legrand Ave, Northvale, NJ 07647

(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   ý     No   o

Common shares of stock outstanding as of September 30, 2003:

5,307,353

 

 



 

Photonic Products Group, Inc.

 

INDEX

 

Part I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2003, (unaudited) and December 31, 2002

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (unaudited)

 

 

 

 

 

 

 

Consolidated statement of Shareholders’ equity for the three years ended December 31, 2002 and the nine months ended September 30, 2003

 

 

 

 

 

 

 

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 4.

Controls & Procedures

 

 

 

 

 

 

Item 5.

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

 

Signatures

 

 

 

Certifications – Sections 906 and 302

 

 



 

Photonic Products Group, Inc.

Consolidated Balance Sheets

 

 

 

September 30,

 

December 31,

 

 

 

2003

 

2002

 

 

 

Unaudited

 

Audited

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

798,408

 

$

1,155,074

 

Accounts receivable, net

 

624,195

 

1,041,262

 

Inventories

 

2,143,105

 

2,082,932

 

Unbilled contract costs

 

164,350

 

341,541

 

Other current assets

 

84,044

 

80,675

 

Total Current Assets

 

3,814,102

 

4,701,484

 

Plant and equipment,

 

 

 

 

 

Plant and equipment at cost

 

9,394,013

 

9,307,753

 

Less: Accumulated depreciation

 

 

 

 

 

and amortization

 

(6,430,653

)

(6,008,008

)

Total plant and equipment

 

2,963,360

 

3,299,745

 

Precious Metals

 

309,565

 

309,565

 

Other assets

 

200,734

 

198,131

 

Total Assets

 

$

7,287,761

 

$

8,508,925

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Notes Payable - Bank

 

$

 

$

751,074

 

Note payable -Other

 

$

12,492

 

124,917

 

Current portion of long term debt

 

 

927,549

 

Accounts payable and accrued liabilities

 

479,452

 

368,337

 

Current obligations under capital leases

 

83,965

 

98,657

 

Total current liabilities

 

575,909

 

2,270,534

 

 

 

 

 

 

 

Secured Note Payable

 

1,700,000

 

 

 

Subordinated Convertible Debenture

 

1,000,000

 

1,000,000

 

Capital Lease Obligations

 

126,905

 

188,513

 

Total liabilities

 

3,402,814

 

3,459,047

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

10% convertible preferred stock, Series A no par value; 500 sharres 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; 40,000,000 authorized 5,311,953 shares issued at September 30, 2003 and  5,283,690 issued at December 31, 2002

 

53,119

 

52,836

 

Capital in excess of par value

 

9,482,263

 

9,470,676

 

Commom stock dividend due to preferred shareholders

 

53,600

 

 

 

Accumulated deficit

 

(8,289,085

)

(7,058,684

)

 

 

3,899,897

 

5,064,828

 

Less - Common stock in treasury, at cost (4,600 shares respectively)

 

(14,950

)

(14,950

)

Total Shareholders’ Equity

 

3,884,947

 

5,049,878

 

Total Liabilities & Shareholders’ Equity

 

$

7,287,761

 

$

8,508,925

 

 

See Notes to Consolidated Financial Statements

 


*Derived from Audited Financial Statements

 

1



 

Photonic Products Group, Inc.

Consolidated Statement of Operations

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales

 

$

1,405,663

 

$

1,344,569

 

$

3,727,497

 

$

4,188,373

 

Contract R & D

 

 

 

26,136

 

62,625

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

1,405,663

 

1,344,569

 

3,753,633

 

4,250,998

 

 

 

 

 

 

 

 

 

 

 

Cost and Expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

1,119,973

 

1,104,692

 

2,967,345

 

3,480,233

 

Contract R & D expenses

 

 

2,324

 

18,779

 

61,207

 

Selling, general & administrative expenses

 

570,842

 

572,386

 

1,664,870

 

1,616,702

 

Internal R & D expenses

 

34,992

 

41,407

 

115,903

 

89,423

 

Total Cost and Expenses

 

1,725,807

 

1,720,809

 

4,766,897

 

5,247,565

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(320,144

)

(376,240

)

(1,013,264

)

(996,567

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(57,880

)

(35,808

)

(165,059

)

(99,040

)

Interest & other income (expense), net

 

(2,449

)

2,992

 

1,522

 

8,250

 

 

 

 

 

 

 

 

 

 

 

Net loss before preferred stock dividends

 

(380,473

)

(409,056

)

(1,176,801

)

(1,087,357

)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

 

(53,600

)

(120,600

)

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common shareholders

 

$

(380,473

)

$

(409,056

)

$

(1,230,401

)

$

(1,207,957

)

 

 

 

 

 

 

 

 

 

 

Net loss income per common share - basic and diluted

 

$

(0.07

)

$

(0.08

)

$

(0.23

)

$

(0.23

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

5,283,690

 

5,203,290

 

5,283,690

 

5,187,976

 

 

See Notes to Consolidated Financial Statements

See Notes to Consolidated Financial Statements

 

2



 

Photonic Products Group, Inc.

Consolidated Statements of Cash Flows

 

 

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

 

 

(Unaudited)

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(1,176,801

)

$

(1,087,357

)

 

 

 

 

 

 

Adjustments to reconcile net loss to cash (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

422,645

 

381,014

 

401K common stock contribution

 

11,870

 

20,354

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

417,067

 

332,544

 

Inventories

 

(60,173

)

171,171

 

Unbilled contract costs

 

177,191

 

43,987

 

Other current assets

 

(3,369

)

(74,244

)

Other assets

 

(2,603

)

379

 

Accounts payable and accrued liabilities

 

111,114

 

(254,374

)

Other current liabilities

 

 

 

11,636

 

 

 

 

 

 

 

Total adjustments

 

1,073,742

 

632,467

 

Net cash (used in)  by operating activities

 

(103,059

)

(454,890

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(86,259

)

(309,946

)

 

 

 

 

 

 

Net cash used in investing activities

 

(86,259

)

(309,946

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from notes payable

 

1,700,000

 

1,000,000

 

Principal payments of notes

 

(112,425

)

 

 

Principal payments of bank debt

 

(1,678,623

)

 

Principal payments of capital lease obligations

 

(76,300

)

(283,325

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(167,348

)

716,675

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(356,666

)

(48,161

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,155,074

 

548,949

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

798,408

 

$

500,788

 

 

See Notes to Consolidated Financial Statements

 

3



 

PHOTINIC PRODUCTS GROUP, INC.

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

 

 

 

Common Stock

 

Preferred Stock
(Series A)

 

Preferred Stock
(Series B)

 

Capital in
excess of
par value

 

 

 

 

 

 

 

 

Total
Shareowners’
Equity

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

 

Deficit

 

Payable/
Receivable

 

Treasury
Stock

 

 

Balance, December 31, 2000

 

4,957,678

 

49,577

 

500

 

500,000

 

2,100

 

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of Options

 

29,250

 

293

 

 

 

 

 

30,833

 

 

 

 

 

31,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of Warrants

 

51,675

 

516

 

 

 

 

 

56,683

 

 

 

 

 

57,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

92,000

 

920

 

 

 

 

 

154,080

 

(155,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription received

 

 

 

 

 

 

 

 

 

220,000

 

 

 

220,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution

 

5,000

 

50

 

 

 

 

 

4,700

 

 

 

 

 

4,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year

 

 

 

 

 

 

 

 

43,633

 

 

 

 

43,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2001

 

5,135,603

 

$

51,356

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

$

9,331,194

 

$

(5,222,112

)

$

 

$

(14,950

)

$

6,745,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

14,087

 

140

 

 

 

 

 

20222

 

 

20,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

134,000

 

1,340

 

 

 

 

 

119260

 

(120,600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

 

(1,715,972

)

 

 

 

(1,715,972

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

5,283,690

 

$

52,836

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

$

9,470,676

 

$

(7,058,684

)

$

 

$

(14,950

)

$

5,049,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock dividend payable

 

 

 

 

 

 

 

 

 

53,600

 

 

 

53,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401K contribution

 

28,263

 

283

 

 

 

 

 

11,587

 

 

 

 

 

11,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

(1,230,401

)

 

 

 

(1,230,401

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2003

 

5,311,953

 

$

53,119

 

500

 

$

500,000

 

2,100

 

$

2,100,000

 

$

9,482,263

 

$

(8,289,085

)

$

53,600

 

$

(14,950

)

$

3,884,947

 

 

See Notes to consolidated financial statements

 

4



 

Photonic Products Group, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 -SUMMARY OF ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of Photonic Products Group, 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.  The Company changed its name form INRAD, Inc., effective September 27, 2003.  The name change was approved by Shareholders as evidenced by a majority vote tabulated at the August 27, 2003 Shareholders’ Meeting.  It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements as of December 31, 2002 and 2001 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 for the period ended September 30, 2003.  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.

 

Stock Based Compensation

 

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation costs for options has been recognized in the financial statements.  The chart below sets forth the Company’s net loss per share for the nine and three months ended September 30, 2003 and 2002, as reported on a pro forma basis as if the compensation cost of stock options had been determined in accordance with SFAS 123.

 

 

 

For the three months ended
September 30,

 

For the nine months end
September 30,

 

 

 

 

2003

 

2002

 

2003

 

2002

 

Net Loss, as reported

 

$

(38­0,473

)

$

(409,056

)

$

(1,230,401

)

$

(1,207,957

)

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(58,115

)

(72,980

)

(174,345

)

(218,939

)

 

 

 

 

 

 

 

 

 

 

Pro forma net loss

 

$

(438,588

)

$

(482,036

)

$

(1,404,746

)

$

(1,426,896

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted income per share:

 

 

 

 

 

 

 

 

 

As Reported

 

(.07

)

(0.08

)

(.23

)

(.23

)

Pro forma

 

(.08

)

(0.09

)

(.27

)

(.28

)

 

5



 

 

NOTE 2- CHANGES IN LONG TERM DEBT

 

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June of 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of 18 months and bears interest at the rate of 6.5% per annum.  The Note is secured by all assets of the Corporation.

 

In October 2003 the Company received $1,500,000 in the form of a three-year Convertible Promissory Note, bearing interest at 6.5%.  Interest is payable at the end of the Note term in common stock of the Company.  The proceeds of the note are to be used for acquisitions as part of the Company’s ongoing M&A activity.

 

Critical Accounting Policies

 

Our significant accounting polices are described in Note 1 of the consolidated financial statements, that were prepared in accordance with accounting principles generally accepted in the United States of America.  In preparing our financial statements we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report.  Our actual results may differ from these estimates under different assumptions or conditions.

 

For additional information regarding our critical accounting policies and estimates, see the section entitled “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on form 10-K for the year ended December 31, 2002.

 

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 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.

 

6



 

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 September 30, 2003 were $1,406,000 as compared with total sales of $1,345,000 for the same three months in 2002; up 4%. Total sales for the nine months ended September 30, 2003 were $3,754,000 as compared with $4,251,000 for the same period last year; down 11%.

 

Product Sales

 

Product sales for the third quarter of 2003 were $1,406,000 vs. $1,345,000 for the third quarter of 2002, an increase of 4%.  Sales for the first nine of FY 2003 totaled $3,727,000 vs. $4,188,000 for the first half of 2002, down 11%.

 

Product sales accounted for 100% of total revenues for the third quarter and 99% for the first nine months of 2003, reflecting the Company’s strategic refocusing of its resources on product sales vs. R&D services.

 

Product bookings for the third quarter were $2,056,000 vs. $980,000 for the same period last year, up 110%. Product bookings for the first nine months of the year were $4,968,000 vs. $4,267,000 for the same period in 2002, up 18%.  The increase in product bookings for the quarter vs. the prior year quarter resulted from bookings of OEM orders placed earlier than in prior periods for following year requirements, and pick up in orders from the research and defense sector customers.

 

The book-to-bill ratio for the third quarter of 2003 was 1.46 compared with 0.73 for the same quarter of 2002. The book-to-bill ratio for the nine months of 2003 was 1.33 vs. 1.02 for the first nine months of 2002.

 

The backlog at September 30, 2003 was up 58% to $2,540,000 as compared to $1,605,000 on September 30, 2002.  The Backlog increased from $1,300,000 on December 31, 2002 primarily due to increased bookings from the defense and OEM sectors.

 

Cost of Goods Sold

 

For the nine-month period ended September 30, 2003, the cost of goods sold as a percentage of product revenues was 80.0% vs. 83.0% for the same period last year. For the full year 2002, the actual cost of good sold percentage was 83.9%. Gross profit margin for the first nine months was 20.0%, compared with 17.0% for the first nine months of 2002.

 

In dollar terms, the cost of goods sold was $2,967,000 for the first nine months of 2003 compared with $3,480,000 for first nine months of 2002, down 13%. Product revenues were down 11% year to year for the same period.

 

The decrease in the cost of goods sold percentage in comparison to 2002 was the result of 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.

 

Contract Research and Development

 

Contract research and development revenues were $26,000 for the nine months ended September 30, 2003, compared to $63,000 for the nine months ended September 30, 2002. Related contract research and development expenditures, including allocated indirect costs, for the nine months ended September 30, 2003 were $19,000 compared to $61,000 for the comparable period in 2002. There were no revenues in the quarter for either period and as of the end of the current quarter backlog was $0.

 

 

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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 nine-month period were $1,665,000 vs. $1,626,000 for the same period in the prior year, up 2.0%.  Third quarter expenses were $571,000 for the current year vs. $572,000 for the third quarter of FY 2002.  The expenses increased for the year due to increases in sales personnel, implemented to expand our customer base, and to advisory services in connection with the company’s acquisition program.

 

Internal Research and Development Expenses

 

Research and development expenses for the quarter ended September 30, 2003 were $35,000 compared to $41,000 for the quarter ended September 30, 2002.  IR&D expenditures for the first nine months of 2003 were $116,000 compared with $89,000 in the first half of 2002. The increase was the result of efforts made in the development of miniaturized Pockels cells and process improvements in growth of key synthetic crystals.

 

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, 2002, the Company had a net deferred tax asset of

approximately $2,700,000, the primary component of which was its significant net operating loss carry forward.  The Company has established a 100% valuation allowance for the  $2,700,000 in the event that the tax asset will not be realized in the future.

 

Interest expense

 

Interest expense for the first nine months of the year was $165,000 compared to $99,000 incurred in the first nine months of 2002.  The increase resulted from greater utilization of the Company’s credit lines for working capital purposes.

 

Net Loss

 

Net loss for the nine months ended September 30, 2003 was $(1,177,000) compared to a net loss of $(1,087,000) vs. the same period in FY 2002. Net loss for the quarters ending September 30 was $(380,000) for FY 2003 and $(409,000) for FY 2002.

 

Loss from operations for the first nine months was $(1,013,000) in 2003 as compared with $(997,000) in 2002.  The third quarter operating loss was $(320,000) in 2003 and $(376,000)  in 2002.

 

Earnings Per Share

 

Basic earnings per share available to common shareholders was calculated by adjusting the net loss by $54,000 in 2003 and by $121,000 in 2002 for the common stock dividend paid on Company preferred stock, divided by the weighted shares outstanding.  Diluted earnings per share for the nine months ended September 30, 2003 and September 30, 2002 were not calculated because their effect was anti-dilutive.

 

Liquidity and capital resources

 

Capital expenditures, including purchases and a portion of applicable internal labor and overhead charges, for the nine months ended September, 2003 and 2002 were $86,000 and $309,000, respectively.  Capital expenditures for all of 2002 were $554,000.  The amounts represent minimal expenditures for capital equipment, necessitated by the need to conserve cash during the current economic downturn.

 

Management will continue to make investments in capital acquisitions from time to time, 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 2003.

 

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During the nine month period ended September 30, 2003, cash outflows were funded from cash proceeds from a subordinated convertible promissory note received in 2002 and positive cash flow from operations for the third quarter of $320,000.  Where possible, the Company will seek to increase sales, and reduce expenses and cash requirements to improve future operating results and cash flows.  Management expects that cash flow from operations and use of its existing cash reserves, will provide adequate liquidity for the Company’s operations in 2003.  The current nine- month period yielded negative cash flow from operations in the amount of $(103,000).  This resulted primarily from losses generated during the period that were offset, to an extent, by reduced working capital requirements, advances from customers and decreases in inventories previously built up to ensure meeting customer delivery requirements.

 

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June of 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of  18 months and bears interest at the rate of 6.5% per annum.   As a result of the loan guarantee, the major investor has a lien on all assets of the Company.

 

In October of 2003 the Company received $1,500,000 in the form of a three year Convertible Promissory Note, bearing interest at the rate of 6.5% per annum.  Interest accrues yearly and along with principal may be converted to common stock at a conversion rate equal to the purchase price of stock issued for cash after the date of the note to an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the note, at a price mutually agreed upon as fair value by issuer and holder.  The holder of the note is a major shareholder of the Company.

 

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PART II.    OTHER INFORMATION

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

ITEM 5.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

On August 27, 2003 the Annual Meeting of Shareholders was held for Shareholders of record as of June 30, 2003.  The meetng was held at the offices of Lowenstein Sandler, PC, 65 Livingston Avenue, New Jersey.  The following are  the results of the Shareholder vote:

 

Vote for the change in Corporate name to Photonic Products Group, Inc.

 

3,363,899 IN FAVOR

 

1,454,684 AGAINST

 

4,500 ABSTAINED

 

Vote on the increase in common shares of the Company authorized to 40,000,000

 

3,057,015 IN FAVOR

 

1,456,230 AGAINST

 

303,800 ABSTAINED

 

Vote on increase in the total number of Common shares authorized to be issued under the 2000 Equity Compensation Program

 

2,348,418 IN FAVOR

 

1,465,380 AGAINST

 

304,800 ABSTAINED

 

Election of Mr. John rich to serve as Director for the ensuing three years

 

3,369,149 IN FAVOR

 

1,456,896 ABSTAINED

 

The following remain as Directors for the balance of their respective terms:

 

Mr. Thomas Lenagh, Chairman

Mr. Jan Winston

Mr. Frank Wiedeman

Mr. Daniel Lehrfeld

 

 

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ITEM 6EXHIBITS 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.

31.1      Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2      Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1      Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2      Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(B)                      Reports on Form 8-K:

 

None.

 

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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.

 

 

 

Photonic Products Group, Inc.

 

 

 

 

 

By:

   /s/  Daniel Lehrfeld

 

 

 

Daniel Lehrfeld

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

By:

   /s/  William S. Miraglia

 

 

 

William S. Miraglia

 

 

Chief Financial Officer

 

Date: October 31, 2003

 

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