Inrad Optics, Inc. - Annual Report: 2009 (Form 10-K)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended: December 31, 2009

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 No.)

181 Legrand Avenue, Northvale, NJ		07647
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code 201-767-1910

Securities registered pursuant to Section 12(b) of the Act: None

		Name of each exchange
Title of each class		on which registered

Securities registered pursuant to section 12(g) of the Act:

Common stock, par value $.01 Per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o. No ý.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o. No ý.

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $10,057,576 (For purposes of determining this amount, only directors, executive officers and shareholders with voting power of 10% or more of our stock have been deemed affiliates.)

Note. If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Shares outstanding as of March 29, 2010

11,552,150

Documents Incorporated by Reference

Portions of the registrant's definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered by this report are incorporated by reference in Part III.

Photonic Products Group, Inc.

INDEX

Part I

Item 1.	Business	3

Item 1A.	Risk Factors	7

Item 1B.	Unresolved Staff Comments	9

Item 2.	Properties	9

Item 3.	Legal Proceedings	9

Item 4.	Reserved	9

Part II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	10

Item 6.	Selected Financial Data	11

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	11

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	18

Item 8.	Financial Statements and Supplementary Data	19

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	19

Item 9A	Controls and Procedures	19

Item 9B	Other Information	19

Part III

Item 10.	Directors, Executive Officers and Corporate Governance	20

Item 11.	Executive Compensation	20

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	20

Item 13.	Certain Relationships and Related Transactions, and Director Independence	20

Item 14.	Principal Accounting Fees and Services	20

Part IV

Item 15	Exhibits and Financial Statement Schedules	21

Signatures		23

PART 1

Caution Regarding Forward Looking Statements

This Annual 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 Annual Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of the Company’s plans or strategies, projected or anticipated benefits of acquisitions made by the Company, projections involving anticipated revenues, earnings, or other aspects of the Company’s 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. The Company cautions 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 the Company’s control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect the Company’s results include, but are not limited to, the risks and uncertainties discussed in Items 1A, 7 and 7A. Any one or more of these uncertainties, risks, and other influences could materially affect the Company’s results of operations and whether forward-looking statements made by the Company ultimately prove to be accurate. 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 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. The Company’s actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise, except as otherwise required by law.

Item 1. Business

Photonic Products Group, Inc. (the “Company” or “PPGI”), incorporated in New Jersey in 1973, develops, manufactures and markets products and services for use in diverse photonics industry sectors via its multiple business units.

Prior to September, 2003, PPGI was named and did business solely as Inrad, Inc. Company management, the Board of Directors, and shareholders approved the name change in 2003.

In November 2003, the Company purchased the assets and certain liabilities of Laser Optics, Inc. of Bethel, CT. Laser Optics, Inc. was a custom optics and optical coating services provider, in business since 1966. PPGI integrated the Bethel team and their operations into the Company’s Northvale, NJ operations in mid-2004, combining them with Inrad’s custom optics and optical coating product lines under the Laser Optics name.

In October 2004, the Company acquired MRC Precision Metal Optics, Inc. (“MRC”) of Sarasota Florida, a precision metal optics and diamond-turned aspheric optics manufacturer, specializing in CNC and single point diamond machining, optical polishing, nickel plating, aluminum, albemet and beryllium machining. MRC also provides opto-mechanical assembly services.

PPGI’s products fall into two main categories: optical components (which include standard and custom optical components, optical assemblies, single crystals, and crystal components), and laser system accessories (which include wavelength conversion products and Pockel’s cells that use nonlinear crystals for laser wavelength conversion).

The Company is an optical component, subassembly, and sub-system supplier to original equipment manufacturers (“OEM”), research institutes and researchers in the photonics industry.

Administrative, engineering and manufacturing operations are in a 42,000 square foot building located in Northvale, New Jersey, about 15 miles northwest of New York City, and in a 25,000 square foot building located in Sarasota, FL. The headquarters of the Company are located in the Northvale facility.

Custom optic manufacturing is a major product area for PPGI. The Company specializes in high-end precision components. It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Laser Optics and MRC business units. Glass, metal, and crystal substrates are processed using modern manufacturing equipment, complex processes and techniques to manufacture components, deposit optical thin films, and assemble sub-components used in advanced Photonic systems. The majority of custom optical components and optical coating services supplied are used in inspection, process control systems, defense and aerospace electro-optical systems, laser system applications, industrial scanners, and medical system applications.

The Company also develops and manufactures synthetic optical crystals, optical crystal components, and laser accessories through its INRAD business unit. It grows synthetic crystals with electro-optic (EO), non-linear and optical properties for use in both its standard and custom products. The majority of crystals, crystal components and laser accessories manufactured are used in laser systems, defense EO systems, and R&D applications by engineers within corporations, universities and national laboratories.

The following table summarizes the Company’s product sales by product categories during the past three years. Laser accessories include all non-linear and electro-optical crystal components.

	Years Ended December 31,
	2009				2008				2007
Category	Sales		%		Sales		%		Sales		%
Optical Components	$	10,350,000		94	$	14,750,000		90	$	13,410,000		89
Laser Accessories		701,000		6		1,551,000		10		1,690,000		11
TOTAL	$	11,051,000		100	$	16,301,000		100	$	15,100,000		100

Products Manufactured by the Company

Optical Components

a) Custom Optics and Optical Coating Services

Manufacturing of high-performance custom optics is at present a major product area for PPGI, and is addressed in the marketplace through the three separate brands of INRAD, Laser Optics and MRC.

Laser Optics was formed in 2003 with the combination of INRAD’s custom optics and optical coating services and those of Laser Optics, Inc. which the Company acquired. The Company had been active in the field since 1973, and Laser Optics, Inc. since 1966.

The Laser Optics business unit produces custom products manufactured to its customer’s requirements. It specializes in the manufacture of optical components, optical coatings (ultra-violet wavelengths through infra-red wavelengths) and subassemblies for military, aerospace, industrial and medical marketplace. Planar, prismatic and spherical components are fabricated from glass and synthetic crystals, including fused silica, quartz, infra-red materials (including germanium, zinc selenide and zinc sulfide), magnesium fluoride and silicon. Components consist of mirrors, lenses, prisms, waveplates, polarizing optics, monochrometers, x-ray mirrors, and cavity optics for lasers.

Most optical components and sub-assemblies require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect, or transmit specific wavelengths. Laser Optics optical coating specialties include high laser damage resistance, polarizing, high reflective, anti-reflective, infra-red, and coating to complex custom multi-wavelength requirements on a wide range of substrate materials. Laser Optics coating capability is mainly directed towards optical components it manufactures, as well as customer furnished components. Coating deposition process technologies employed included electron beam, thermal, and ion assist.

MRC Optics, established in 1983, is a fully integrated precision metal optics and optical assembly manufacturer. The Company employs high precision CNC and diamond machining, polishing, plating, aluminum, albemet, beryllium and stainless steel opto-mechanical design, component manufacturing and assembly services in the manufacture of custom optics. MRC has developed custom processes to support prototyping through medium to high rates of production for large and small metal mirrors, thermally stable optical mirrors, low RMS surface finish polished mirrors, diamond machined precision aspheric and planar mirrors, reflective porro prisms, and arc-second accuracy polygons and motor assemblies. Plating specialties include void-free gold and electroless nickel.

b) UV Filter Optical Components

The INRAD crystals and crystal components product lines include crystalline filter materials, including both patented and proprietary materials, that have unique transmission and absorption characteristics that enable them to be used in critical applications in defense systems such as missile warning sensors. Such materials include nickel sulphate, and proprietary materials such as UVC-7 and LAC.

Laser Accessories

The INRAD business unit manufactures crystal-based products that are used in laser systems. These products include wavelength conversion crystals, Pockel’s cells, and wavelength conversion instruments.

a) Crystal Components

Certain synthetic crystals, because of their internal structure, have unique optical, non-linear, or electro-optical properties that are essential to application in or with laser systems. Electro-optic and nonlinear crystal devices can alter the intensity, polarization or wavelength of a laser beam. Developing growth processes for high quality synthetic crystals and manufacturing and design processes for crystal components lies at the heart of the INRAD laser accessory product lines. Other crystal components, both standard and custom, are used in laser research and in commercial laser systems to change the wavelength of laser light. Synthetic crystals currently in production include Lithium Niobate, Beta Barium Borate, Alpha Barium Borate, KDP, deuterated KDP Zinc Germanium DiPhosphide, as well as other species.

b) Pockel’s Cells

INRAD manufactures a line of Pockel’s Cells and associated electronics. Pockel’s cells are used in applications that require fast switching of the polarization direction of a beam of light. These uses include Q-switching of laser cavities to generate pulsed laser light, coupling light into and out from regenerative amplifiers, and light intensity modulation. These devices are sold on an OEM basis to laser manufacturers, researcher institutes and laser system design engineers.

c) Harmonic Generation Systems

PPGI’s Inrad business unit designs and manufactures harmonic generation laser accessories. Harmonic generation systems enable the users of lasers to convert the fundamental frequency of the laser to another frequency required for specific applications. Harmonic generators are used in spectroscopy, semiconductor processing, medical lasers, optical data storage and scientific research.

Many commercial lasers have automatic tuning features, allowing them to produce a range of frequencies. The INRAD Autotracker product, when used in conjunction with these lasers, automatically generates tunable ultraviolet light or infrared light for use in spectroscopic applications.

Markets

In 2009, 2008 and 2007 the Company’s product sales were made to customers in the following market areas:

Market (In thousands)	2009				2008				2007
Defense/Aerospace	$	7,454	(68	)%	$	10,329	(63	)%	$	9,456	(63	)%
Process control & metrology		2,339	(21	)%		4,692	(29	)%		3,760	(25	)%
Laser systems (non-military)		138	(1	)%		463	(3	)%		932	(6	)%
Universities & national laboratories		492	(4	)%		203	(1	)%		352	(2	)%
Other		628	(6	)%		614	(4	)%		600	(4	)%
Total	$	11,051	(100	)%	$	16,301	(100	)%	$	15,100	(100	)%

Major market sectors served by the Company include defense and aerospace, process control & metrology, laser systems (non-military), universities and national laboratories, and various other markets not separately classified. The “defense and aerospace” area consists of sales to OEM defense electro-optical systems and subsystems manufacturers, manufacturers of non-military satellite-based electro-optical systems and subsystems, and direct sales to governments where the products have the same end-use. The “process control and metrology” area consists of customers who are OEM manufacturers of capital equipment used in manufacturing process implementation and control, optics-based metrology and quality assurance, and inventory and product control equipment. Examples of applications for such equipment include semiconductor (i.e., chip) fabrication and testing and inventory management and distribution control. The “laser systems” market area consists principally of customers who are OEM manufacturers of industrial, medical, and R&D lasers. “Universities and National Laboratories” consists of product sales to researchers at such institutions. The “Other” category represents sales to market areas that, while they may be the object of penetration plans by the Company, are not currently large enough to list individually (example: bio-medical), and sales through third parties for whom the end-use sector is not known.

The Company is a provider of optical components, both specialty crystal components and high precision custom optical components for customers in the aerospace and defense electro-optical systems sector. End-use applications include military laser systems, military electro-optical systems, satellite-based systems, and missile warning sensors and systems that protect aircraft. The dollar volume of shipments of product within this sector depends in large measure on the U.S. Defense Department budget and its priorities, that of foreign governments, the timing of their release of contracts to their prime equipment and systems contractors, and the timing of competitive awards from this customer community to the Company. The Company’s sales of products to this customer sector increased as a percentage of total sales in 2009, although revenue in this sector fell by almost 28% and 21% from 2008 and 2007, respectively, as the decline in sales in these market areas was less than the decline in sales all other market areas on a percentage basis. Defense/aerospace sector sales represented approximately 68% of sales in 2009 and 63% of sales in both 2008 and 2007. The Company believes that the defense and aerospace sector will continue to represent a significant market for the Company’s products and offers an ongoing opportunity for growth given the Company’s capabilities in specialty crystal, glass and metal precision optics.

Sales in the Process Control and Metrology market sector, the Company’s second largest market, decreased in 2009 both as a percentage of total sales and in relative sales dollars. This reflected the impact of the economic recession, particularly in the commercial market and within the customer base that the Company serves. Sales were $2,339,000 or 21% of total sales compared to sales in 2008 of $4,692,000 or 29% of total sales, and sales in 2007 of $3,760,000 or 25% of total sales. Despite the downturn in 2009, the Company believes that the optical and x-ray inspection segment of the semiconductor industry offers continued opportunities which match its capabilities in precision optics, crystal products, and monochrometers.

The Company serves the non-military laser industry as an OEM supplier of standard and custom optical components and laser accessories. In this sector, 2009 sales were $138,000 or 1%. In 2008, sales were 463,000 or 3% of total sales compared with sales in 2007 of $932,000 or 6% of total sales. The sales decline over the last few years primarily reflects the decline in orders from one major customer in this market.

Sales to customers within the University and National Laboratories market sector consist primarily of the Company’s legacy systems, Pockel’s cells and related repairs. In 2009, the sales increased to $492,000 or 4% of total sales primarily reflecting a large order from one national laboratory. This follows a sales decline in 2008 to $203,000 from $352,000 in 2007.

Other sector sales have been in the $500,000 to $700,000 range historically and growth remained relatively flat at $628,000 in 2009, compared to sales of $614,000 and $600,000 in 2008 and 2007, respectively.

The Company’s export sales, which are primarily to customers in countries within Europe, the Near East and Japan, amounted to approximately 7.2%, 5.2%, and 9.5% of product sales in 2009, 2008 and 2007, respectively.

The Company had sales to three major domestic customers which accounted for 17.7% and 13.8%, and 9.8% of sales in 2009. Each customer is an electro-optical systems division of a major U.S. defense corporation who manufactures systems for U.S. and allied foreign governments. In 2008, the same three customers represented 8.7%, 21.6% and 5.9% of sales, respectively. Sales to these markets are mainly through independent distributors.

During the past three years, sales to the Company’s top five customers represented approximately 51.6%, 58.8% and 56.9% of sales, respectively, in the aggregate. These top customers have been manufactures either in the Defense sector or the process control and metrology sector. Given the concentration of sales within a small number of customers, the loss of any of these customers would have a significant negative impact on the Company and its business units.

Long-Term Contracts

Certain of the Company’s agreements with customers provide for periodic deliveries at fixed prices over a long period of time. In such cases, as in most other cases as well, the Company attempts to obtain firm price commitments, as well as, cash advances from these suppliers for the purchase of the materials necessary to fulfill the order.

Marketing and Business Development

The Company’s two Northvale, NJ-based business units and its MRC Optics subsidiary market their products domestically through their sales, marketing and customer service teams, located in Northvale and Sarasota, respectively, led by the Corporate Vice President–Sales and Marketing. The Company has moved towards a strategy of utilizing these combined sales and marketing resources for cross-selling all products, across all business lines.

Independent sales agents are used in countries in major non-U.S. markets, including Canada, UK, EU, Israel, and Japan.

Trade show participation, Internet-based marketing, media and non-media advertising and promotion, and international sales representative and distributor relationships are coordinated at the corporate level under the auspices of the corporate Vice President – Marketing and Sales.

Backlog

The Company’s order backlog at December 31, 2009 was $4,359,000, essentially all of which is expected to be shipped in 2010. The Company’s order backlog as of December 31, 2008 and 2007 was $6,102,000 and $9,432,000, respectively.

Competition

Within each product category in which the Company’s business units are active, there is competition.

Changes in the Photonics industry have had an effect on suppliers of custom optics. As end users have introduced products requiring large volumes of optical components, suppliers have responded either by staying small and carving out niche product areas or by ramping up their own manufacturing capacity and modernizing their manufacturing methods to meet higher volume production rates. Many custom optics manufacturers lack in-house thin film coating capability. As a result, there are fewer well-rounded competitors in the custom optics arena, and many are equipped with modern facilities and manufacturing methods. The Company has and continues to judiciously deploy capital towards modernizing its facilities, and has staffed its manufacturing groups with individuals with comprehensive experience in manufacturing management, manufacturing engineering, advanced finishing processes and optical coating processes. The Company competes on the basis of providing consistently high quality products delivered on time, developing and maintaining strong customer relationships, and continuously improving its capabilities, labor productivity, cost structure, and product cycle times.

Competition for the Company’s laser accessories is limited, but competitors’ products are generally lower priced. The Company’s laser accessories are considered to be high quality and generally offer a combination of features not available elsewhere. Because of the Company’s in-house crystal growth capability, the Company’s staff is knowledgeable about matching appropriate crystals to given applications for its laser accessories.

For the crystal product area, price, quality, delivery, and customer service are market drivers. With advancing globalization, many of the Company’s competitors supplying non-linear optical crystals are overseas and can offer significantly reduced pricing for some crystal species. Sales in this arena are declining, but the Company has been able to retain a base by providing the quality and customer service needed by certain OEM customers not readily available from others, and by offering proprietary crystal components for which the Company is either the sole source or one of the few available sources. On many occasions, the quality of the crystal component drives the ultimate performance of the component or instrument into which it is installed. Thus, quality and technical support are considered to be valuable attributes for a crystal supplier by some, but not all, OEM customers.

Although price is a principal factor in many product categories, competition is also based on product design, product performance, customer confidence, quality, delivery, and customer service. The Company is a sole-source supplier of products to several major customers who are leaders in their industries. Based on its performance to date, the Company believes that it can continue to compete successfully in its niches, although no assurances can be given in this regard.

Employees

As of the close of business on March 29, 2010, the Company had 81 full-time employees.

Patents and Licenses

The Company relies on its manufacturing and technological expertise, rather than on patents, to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its design and technical and manufacturing data, and relies on nondisclosure agreements with its employees to protect its proprietary information.

Regulation

Foreign sales of certain of the Company’s products may require export licenses from the United States Department of Commerce or Department of State. Such licenses are generally available to all but a limited number of countries and are obtained when necessary. Company sales in 2009, 2008 and 2007 requiring U.S. State Department export approval represented less than 1.0% of total sales. In all cases, the required export approvals were granted.

There are no other federal regulations or any unusual state regulations that directly affect the sale of the Company’s products other than those environmental compliance regulations that generally affect companies engaged in manufacturing operations in New Jersey and Florida.

Item 1A. Risk Factors

The Company cautions investors that its performance (and, therefore, any forward looking statement) is subject to risks and uncertainties. Various important factors, including but not limited to the following, may cause the Company’s future results to differ materially from those projected in any forward looking statement.

a)	As general economic conditions deteriorate, the Company’s financial results may suffer

Significant economic downturns or recessions in the United States or Europe, such as the current economic environment in which the Company operates, could adversely affect the Company’s business, by causing a temporary or longer term decline in demand for the Company’s goods and services and thus its revenues. The economic uncertainty has resulted in our key customers delaying orders due to decreased demand by the end users of their products and their difficulty in assessing and projecting end-user needs.

b)	The Company has exposure to Government Markets

Sales to customers in the defense industry have increased in the recent past. These customers in turn generally contract with a governmental entity, typically the U.S. government. Most governmental programs are subject to funding approval and can be modified or terminated with no warning upon the determination of a legislative or administrative body. The current economic crisis is having significant effects on government spending and it is particularly difficult, at this time, to assess how this will impact our defense industry customers and the timing and volume of business we do with them. The loss or failure to obtain certain contracts or a loss of a major government customer could have a material adverse effect on our business, results of operations or financial condition.

c)	The Company’s revenues are concentrated in its largest customer accounts

For the year ended December 31, 2009, five customer accounts represented in the aggregate of approximately 52% of total revenues, and three customers accounted for 41% of revenues. These three customers each represented approximately 18%, 14% and 10% of sales, respectively. Since we are a supplier of custom manufactured components to OEM customers, the relative size and identity of our largest customer accounts changes somewhat from year to year. In the short term, the loss of any of these large customer accounts or a decline in demand in the sectors they represent, could have a material adverse effect on business, our results of operations, and our financial condition.

d)	The Company depends on, but may not succeed in, developing and acquiring new products and processes

In order to meet the Company’s strategic objectives, the Company needs to continue to develop new processes, to improve existing processes, and to manufacture and market new products. As a result, the Company may continue to make investments in the future in process development and additions to its product portfolio. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a way that achieves market acceptance or other pertinent targeted results. The Company also cannot be sure that it will be successful in acquiring complementary products or technologies or that it will have the human or financial resources to pursue or succeed in such activities.

e)	The Company’s business success depends on its ability to recruit and retain key personnel

The Company depends on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on the Company’s ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that the Company will be able to retain or attract the personnel necessary for its success, despite the Company’s effort to do so. The loss of the services of the Company’s key personnel could have a material adverse affect on its business, on its results of operations, or on its financial condition.

f)	The Company may not be able to fully protect its intellectual property

The Company currently holds one material patent applicable to an important product, but does not in general rely on patents to protect its products or manufacturing processes. The Company generally relies on a combination of trade secret and employee non-competition and nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps the Company takes will be adequate to prevent misappropriation of the Company’s technology. In addition, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company. Asserting the Company’s rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the Company’s business, results of operations or financial condition.

g)	Many of the Company’s customer’s industries are cyclical

The Company’s business is significantly dependent on the demand its customers experience for their products. Many of their end users are in industries that historically have experienced a cyclical demand for their products. The industries include but are not limited to, the defense electro-optics industry and the manufacturers of process control capital equipment for the semiconductor tools industry. As a result, demand for the Company’s products are subject to cyclical fluctuations, and this could have a material adverse effect on our business, results of operations, or financial condition.

h)	The Company’s stock price may fluctuate widely

The Company’s stock is thinly traded. Many factors, including, but not limited to, future announcements concerning the Company, its competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding the Company’s industries in the financial press or investment advisory publications, could cause the market price of the Company’s stock to fluctuate substantially. In addition, the Company’s stock price may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts, or market or market-sector declines, may materially and adversely affect the market price of the Company’s Common Stock. In addition, any information concerning the Company, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than the Company could in the future contribute to volatility in the market price of the Company’s Common Stock.

i)	The Company’s manufacturing processes require products from limited sources of supply

The Company utilizes many relatively uncommon materials and compounds to manufacture its products. Examples include optical grade quartz, specialty optical glasses, scarce natural and manmade crystals, beryllium and its alloys, and high purity chemical compounds. Failure of the Company’s suppliers to deliver sufficient quantities of these necessary materials on a timely basis, or to deliver contaminated or inferior quality materials, or to markedly increase their prices could have an adverse effect on the Company’s business, despite its efforts to secure long term commitments from the Company’s suppliers. Adverse results might include reducing the Company’s ability to meet commitments to its customers, compromising the Company’s relationship with its customers, adversely affecting the Company’s ability to meet expanding demand for its products, or causing the Company’s financial results to deteriorate.

j)	The Company faces competition

The Company encounters substantial competition from other companies positioned to serve the same market sectors that the Company serves. Some competitors may have financial, technical, capacity, marketing or other resources more extensive than ours, or may be able to respond more quickly than the Company to new or emerging technologies and other competitive pressures. Some competitors have manufacturing operations in low-cost labor regions such as the Far East and Eastern Europe and can offer products at lower price than the Company. The Company may not be successful in winning orders against the Company’s present or future competitors, and competition may have a material adverse effect on our business, results of operations or financial condition.

Item 1B. Unresolved Staff Comments

Not applicable

Item 2. Properties

Administrative, engineering and manufacturing operations are housed in a 42,000 square foot building located in Northvale, New Jersey and in a 25,000 square foot building located in Sarasota, FL. The headquarters of the Company are in its Northvale facility. On November 1, 2008, the Company signed an extension of its Northvale lease for two years to October 31, 2010. The Company has an option for renewing the lease for two additional two year periods, at fixed terms, through October 31, 2012.

Photonic Products Group, Inc’s subsidiary, MRC Precision Metal Optics, is located in Sarasota, FL pursuant to a net lease expiring on August 31, 2010. MRC Optics has the option of extending the lease for three additional two year periods through August 31, 2016, at fixed terms.

The facilities are adequate to meet current and future projected production requirements.

The total rent for these leases was approximately $582,000, $588,000 and $570,000 in 2009, 2008 and 2007, respectively. The Company also paid real estate taxes and insurance premiums that totaled approximately $172,000 in 2009, $179,000 in 2008 and $189,000 in 2007.

Item 3. Legal Proceedings

There are no legal proceedings involving the Company as of the date hereof.

Item 4. Reserved

None

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

a) Market Information

The Company’s Common Stock, with a par value of $0.01 per share, is traded on the OTC Bulletin Board under the symbol PHPG.

The following table sets forth the range of high and low closing prices for the Company’s Common Stock in each fiscal quarter from the quarter ended March 31, 2008 through the quarter ended December 31, 2009, as reported by the National Association of Securities Dealers NASDAQ System. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

	Price
	High		Low

Quarter ended December 31, 2009	$	1.50	$	1.00

Quarter ended September 30, 2009		1.50		.96

Quarter ended June 30, 2009		1.90		1.27

Quarter ended March 31, 2009		2.00		1.50

Quarter ended December 31, 2008		2.80		1.40

Quarter ended September 30, 2008		3.25		1.45

Quarter ended June 30, 2008		4.20		2.90

Quarter ended March 31, 2008		4.60		3.51

As of March 29, 2010 the Company’s closing stock price was $1.00 per share.

b) Shareholders

As of March 15 2010, there were approximately 158 shareholders of record of our Common Stock. The number of shareholders of record of common stock was approximated, based upon the Shareholders’ Listing provided by the Company’s Transfer Agent. As of the same date, the Company estimates that there are an additional 590 beneficial shareholders.

c) Dividends

There was no common stock dividend paid in 2009 or 2008. In 2007, the Company paid an annual dividend of 134,000 shares of Common Stock on its outstanding Series A and Series B convertible preferred stock, valued at the closing price on the dividend date. The value of the dividend was $238,167.

The Series A convertible preferred stock consisted of 500 shares outstanding at a stated value of $1,000 per share and convertible into common shares at the rate of $1.00 per share was converted into 500,000 common shares of the Company’s stock in April 2007. A total of 2,032 shares of the Series B convertible preferred stock consisting of 2,082 shares at a stated value of $1,000 per share and convertible into common shares at the rate of $2.50 per share were converted in October and November of 2007. The remaining 50 shares of Series B preferred stock were redeemed by the Company for a cash payment of $50,000 and an accrued stock dividend of 1,332 common shares.

The Company has not historically paid cash dividends. Payment of cash dividends is at the discretion of the Company’s Board of Directors and depends, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company does not anticipate paying cash dividends in the immediate future.

d) Recent Sales of Unregistered Securities

There were no sales of unregistered securities during 2009.

e) Securities Authorized for Issuance under Equity Compensation Plans

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average price of outstanding options, warrants and rights		Number of securities remaining for future issuance under equity compensation plans

2000 Equity Compensation Program approved by shareholders		1,233,719	$	1.12		3,615,177

Item 6. Selected Financial Data

The following data is qualified in its entirety by the financial statements presented elsewhere in this Annual Report on Form 10-K.

	As of December 31, or
	For the Year Ended December 31,
	2009			2008		2007		2006		2005
Revenues	$	11,051,127		$	16,301,209	$	15,099,878	$	13,921,127	$	13,785,057

Net (loss) income		(2,799,992	)		1,098,421		1,880,081		772,266		(11,398	)

Net (loss) income applicable to common shareholders	$	(2,799,992	)	$	1,098,421	$	1,641,914	$	537,766	$	(145,398	)

Earnings per share
Basic (loss) earnings per share		(0.25	)		0.10		0.19		0.07		(0.02	)
Diluted (loss) earnings per share		(0.25	)		0.08		0.13		0.06		(0.02	)

Weighted average shares
Basic		11,331,258			10,902,061		8,609,822		7,572,637		7,218,244
Diluted		11,331,258			15,619,304		13,777,114		11,915,090		7,218,244

Common stock dividends on Preferred shares		—			—		238,167		234,500		134,000
Total assets		12,610,740			15,732,149		16,077,947		15,316,260		13,481,021
Long-term obligations		2,844,946			2,853,663		2,990,730		6,299,767		5,963,411
Shareholders’ equity		7,777,715			10,124,175		7,712,799		5,236,703		3,929,407

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

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.

Critical Accounting Policies

The Company’s 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 the Company’s financial statements, the Company made estimates and judgments that affect the results of its operations and the value of assets and liabilities the Company reports. The Company’s actual results may differ from these estimates.

The Company believes that the following summarizes critical accounting polices that require significant judgments and estimates in the preparation of the Company’s consolidated financial statements.

Revenue Recognition

The Company records revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB 104, revenues are recorded when all four of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the sales price is fixed or determinable; and collectability is reasonably assured. Losses on contracts are recorded when identified.

Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost of manufactured goods includes material, labor and overhead.

The Company records a reserve for slow moving inventory as a charge against earnings for all products identified as surplus, slow moving or discontinued. Excess work-in-process costs are charged against earnings whenever estimated costs-of-completion exceed unbilled revenues.

Goodwill and Intangible assets

Intangible assets with finite lives are amortized on a straight-line basis over the assets’ estimated useful life up to 14 years. The Company periodically evaluates on an annual basis, or more frequently when conditions require, whether events or circumstances have occurred indicating the carrying amount of intangible assets may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the associated undiscounted future cash flows compared to the related carrying amount of assets to determine if an impairment loss should be recognized.

Goodwill and intangible assets not subject to amortization are tested in December of each year for impairment, or more frequently if events and circumstances indicate that the assets might have become impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

Share-based compensation

Stock based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is estimated based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.

Results of Operations

The following table summarizes the Company’s product sales by product categories during the past three years:

	Years Ended December 31,
	2009				2008				2007
Category	Sales		%		Sales		%		Sales		%
(In thousands)
Optical Components	$	10,350		94	$	14,750		90	$	13,410		89
Laser Accessories		701		6		1,551		10		1,690		11
TOTAL	$	11,051		100	$	16,301		100	$	15,100		100

The following table provides information on the Company’s sales to its major business sectors during the past three years:

Market		2009				2008				2007
						(In thousands)
Defense/Aerospace	$	7,454	(68	)%	$	10,329	(63	)%	$	9,456	(63	)%
Process control & metrology		2,339	(21	)%		4,692	(29	)%		3,760	(25	)%
Laser systems (non-military)		138	(1	)%		463	(3	)%		932	(6	)%
Universities & national laboratories		492	(4	)%		203	(1	)%		352	(2	)%
Other		628	(6	)%		614	(4	)%		600	(4	)%
Total	$	11,051	(100	)%	$	16,301	(100	)%	$	15,100	(100	)%

The following table sets forth, for the past three years, the percentage relationship of statement of operations categories to total revenues.

	Years ended December 31,
	2009			2008			2007
Revenues:
Product sales		100.0	%		100.0	%		100.0	%
Costs and expenses:
Cost of goods sold		80.5	%		70.5	%		60.5	%
Gross profit margin		19.5	%		29.5	%		39.5	%
Selling, general and administrative expenses		29.7	%		23.7	%		23.6	%
Goodwill impairment charge		14.1	%		—	%		—	%
(Loss) income from operations		(24.3	) %		5.9	%		15.9	%
Net (loss) income		(25.3	) %		6.7	%		12.5	%

Revenues

Total revenues were $11,051,000 in 2009, $16,301,000 in 2008 and $15,100,000 in 2007 reflecting the consolidated results from all three business units. Revenues decreased 32% in 2009 compared with increases of 8% in 2008 and 8.5% in 2007. Overall, sales were impacted by the severe economic recession and delayed defense procurement which negatively affected demand for the Company’s products.

Sales to the Defense and Aerospace sector showed revenue declines, down by almost 28% and 21% from 2008 and 2007, respectively. Sales were $7,454,000, lower by $2,875,000 from 2008 and $2,002,000 from 2007. Defense spending on electro-optical systems over the fiscal period has slowed, impacting the demand for the Company’s services in manufacturing custom products for its OEM customers.

The Company serves the non-military laser industry as an OEM supplier of standard and custom optical components and laser accessories. In this sector, 2009 sales declined to $138,000 or 1% of total sales. In 2008, sales were $463,000 or 3% of total sales compared with sales in 2007 of $932,000 or 6% of total sales. The sales decline over the last few years primarily reflects the decline in orders from one major customer in this market.

Sales to customers within the University and National Laboratories market sector increased to $492,000 or 4% of total sales primarily reflecting a large order from one specific customer. This follows a sales decline in 2008 to $203,000 from $352,000 in 2007.

Other sector sales have been in the $500,000 to $700,000 range historically and remained relatively flat at $628,000 in 2009, compared to other sector sales of $614,000 and $600,000 in 2008 and 2007, respectively.

The Company has refocused its sales and marketing efforts to expand current markets, add to its customer base, increase sales and marketing efforts in the international segment and in developing new products, so as to be positioned to take advantage of new opportunities as economic conditions improve and industry demand strengthens.

Bookings

The Company booked new orders totaling $9.5 million in 2009, down from $13.0 million in 2007 and $17.8 million in 2007 reflecting a decline across the business sectors that the Company serves. Despite the decrease, the Company was able to add several new customers while maintaining most of its existing customer base.

In 2008, the bookings decrease from the prior year was partly attributable to lower orders for legacy INRAD laser accessories and decreased demand for crystal components from one large customer. Additionally, bookings in our MRC Optics business decreased from 2007 levels. MRC had two large bookings near the end of 2007 which were scheduled to carry through 2008 and into 2009. In the second half of 2008, MRC orders decreased as the impact of the economic downturn and defense sector slowdown affected our commercial customer’s and they experienced a slowdown in their business activities and demand for its products. This carried over into 2009.

Bookings in 2007 were up due to increased demand for optical components, mainly in our Laser Optics and MRC Optics brands. In particular, orders from one large INRAD customer in the Process Control and Metrology sector and one large Laser Optics OEM customer in the Defense/Aerospace sector contributed significantly to the increase in 2007 from 2006. One large new Defense/Aerospace OEM was added in 2007 while orders from another declined by 50%. Additionally, a large new OEM customer in the Process Control and Metrology sector was added in 2007.

The decline in bookings in 2009 affected the Company’s backlog as of December 31, 2009 which decreased to $4.4 million, down from $6.1 million at December 31, 2008 and $9.4 million at December 31, 2007.

Cost of Goods Sold and Gross Profit Margin

Cost of goods sold as a percentage of sales was 80.5%, 70.5% and 60.5%, for the years ended December 31, 2009, 2008 and 2007, respectively. In dollar terms, 2009 cost of goods sold was $8,897,000 which is down 22.5% from $11,487,000 in 2008, compared with a 32% sales decline over the comparable period.

The increase in Cost of Goods Sold percentage in 2009 compared to 2008 is primarily due to the significant decline in sales volume during the year, net of cost reductions implemented by the Company during the year. Compared to last year, material cost as a percentage of sales remained unchanged from 2008 although in dollar terms material costs declined by $913,000, as expected with the lower sales volume levels. Total manufacturing wages and salaries declined by approximately $832,000 but rose by 5.6 percentage points, as a percentage of sales. Non-labor operating costs excluding depreciation also fell in dollar terms in 2009 by approximately $606,000 or 26.7% from 2008, but as a percentage of sales, increased by about 1.1 percentage points from the prior year.

In 2008, Cost of Goods Sold compared to 2007 was up 25.7% from $9,141,000 and was 70.5% of sales compared to 60.5% in 2007. Approximately 8% of the increase related to higher sales volumes, but the major part of the increase was due to other factors. Material cost as a percentage of sales increased in 2008 due partly to a change in product/sales mix, including several new OEM products which were weighted towards a higher cost material content than in 2007. Contributing to this was the conclusion of an agreement with one large OEM customer which included customer supplied materials in 2007 and early 2008. The Company was required to purchase material for ongoing orders for this customer over the last nine months of 2008 and resulted in an increase in material cost of sales for the year. Also, production problems during 2007 at our Florida operation resulted in higher than expected material costs from rework requirements, relative to 2008.

Production labor costs, in dollar terms, rose by approximately 32% from 2007. Increases in employment levels of production personnel to support higher sales volumes, contributed to the higher costs during 2008. Also, as noted above, production issues which affected material costs, as noted above, also resulted in inefficiencies and excessive rework that negatively impacted labor and overhead costs throughout most of the year. This also resulted in direct inventory write-offs and increased reserves against work in process during the year which totaled approximately $48,000 and $161,000, respectively.

Gross margin in 2009 was $2,154,000 or 19.5% which was down from 2008 gross margin of $4,815,000 or 29.5%. This compares with a gross margin of $5,959,000 or 39.5% in 2007.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $3,278,000 in 2009, down $580,000 or 15% from 2008, and as a percentage of sales represented 29.7% of sales in 2009 and 23.7% of sales in 2008. The decline in dollar expense resulted mainly from reductions in SG&A salaries and wages and fringe benefits reflecting personnel reductions implemented in the first quarter of 2009 and continued cost management throughout the year. Overall SG&A salary and wages decreased by 14.5% over the prior year. Non-payroll SG&A expenses excluding depreciation also declined by 15.5% compared to 2008.

Selling, general and administrative expenses in 2008 increased in dollar terms from those in 2007 by $296,000, or 8.3%. Higher wage, recruitment and relocation costs related to new personnel during the year contributed to the increase. In addition, sales travel and trade show expenses related to increased business development activity increased during the year. Travel expenses also rose as a result of more frequent travel by corporate staff between our operation centers in New Jersey and Florida. Stock-based compensation expenses rose due to sign-on grants to new employees and the expense associated with fully vested stock option awards to the Company’s former CEO. These were offset by reductions in commission expenses to independent sales agents and lower consulting costs. Increases in SG&A salaries and wages reflected both annual SG&A pay increases as well as one-time living allowances paid to replacement sales staff brought on at the end of 2007.

Operating (Loss) Income

The Company had an operating loss of $2,682,000 in 2009 after recording a non-cash charge for the impairment of goodwill of $1,558,000, as discussed in Note 4 of the Company’s Consolidated Financial Statements. Excluding the charge for goodwill impairment, the Company had an operating loss of $1,124,000 primarily reflecting the significant decrease in sales, as discussed above.

The Company had operating income of $957,000 in 2008 which was a decline from $2,397,000 in the previous year as a result of the increases in the Company’s cost of sales and lower margins related to production inefficiencies and increased labor and overhead costs in our MRC business unit, as well as a less profitable sales mix and higher selling, general and administrative costs.

Operating income in 2007 was $2,397,000, or 15.9% of sales, up $1,481,000 or 161% from the prior year.

Other Income and Expenses

Net interest expense of $130,000 in 2009 declined 23.5% from $170,000 in 2008. Interest expense was $167,000 in 2009 compared to $236,000 in 2008 which reflects the positive impact of the Company’s continued reduction in debt and long term notes. Interest income for 2009 was $37,000 down from $66,000 in 2008 mainly as a result of reductions in bank interest rates on invested cash balances.

Net interest expense of $170,000 in 2008 was down 34.8% from $261,000 in 2007. Interest expense was $236,000 compared to $424,000 in 2007. The reduction in net interest expense reflects the positive impact of the Company’s continued reduction in debt and long term notes and capital lease balances due to both scheduled amortization and accelerated principal re-payments, including the $1,700,000 subordinated convertible debt in the first quarter of 2008. Interest income for 2008 was $66,000, down from $163,000 in 2007 as the result of lower cash balances available for investment during the year and reductions in bank interest rates on invested cash balances.

Income Taxes

In 2009, the Company did not record a current provision for either state tax or federal alternative minimum tax due to the losses incurred for both income tax and financial reporting purposes.

In 2008, the Company recorded a current provision for state tax and federal alternative minimum tax of $100,000 and $5,000, respectively, after the application of net operating losses of $523,000 against federal tax. In 2007, the Company recorded income tax expense in the amount of $250,000 after utilizing net operating losses of approximately $2,700,000 to offset federal taxes payable.

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 statements 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, 2009, the Company had a total net deferred tax asset balance of $2,857,000, an increase of $716,000 from 2008 primarily from the increase to the net operating loss carry forward position that resulted for the losses incurred in 2009 and depreciation. Although the Company believes that the current year’s losses were caused by the recent economic conditions, the Company has increased the valuation allowance to $2,449,000 to fully offset the current year’s increase in the deferred tax asset.

As of December 31, 2009 and 2008, the Company recognized a portion of the net deferred tax assets in the amount of $408,000 which the Company’s management is reasonably assured will be fully utilized in future periods. In evaluating the Company’s ability to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income that is consistent with the plans and estimates that management is using to manage the underlying business. The Company’s valuation allowance as of December 31, 2009 will be maintained until management concludes that it is more likely than not that the remaining deferred tax assets will be realized. When sufficient positive evidence exists, the Company’s income tax expense will be reduced by the decrease in its valuation allowance. An increase or reversal of the Company’s valuation allowance could have a significant negative or positive impact on the Company’s future earnings.

At December 31, 2007, the Company had a net deferred tax asset of approximately $2,041,000, the primary component of which was net operating loss carry forwards. Through December 31, 2007, the Company had established a valuation allowance to fully offset this deferred tax asset in the event the tax asset will not be realized in the future. The Company determined that based on a recent history of consistent earnings and future income projections, a full valuation allowance was no longer required. Accordingly, during the year ended December 31, 2008, the Company reduced the valuation allowance and recognized a deferred tax benefit available from the Company’s net operating loss carry forward position of $408,000 based on the effective federal tax rate of 34%. This resulted in the Company recording a net benefit from income taxes of $303,000 after offsetting the deferred tax benefit against the current tax provision. At December 31, 2008, the Company had net deferred tax asset balance of $2,141,000 offset by a valuation allowance of $1,733,000.

Net (Loss) Income

The Company had a net loss of $2,800,000 in 2009 attributable to a $1,558,000 non-cash charge for goodwill impairment, as well as lower sales volumes and reduced profit margins which were somewhat offset by manufacturing and SG&A cost reductions. Net income in 2008 was $1,098,000, down $782,000 from net income of $1,880,000.

Net (Loss) Income Applicable to Common Shareholders and (Loss) Earnings per Common Share

Net (loss) income applicable to common shareholders is arrived at after deducting the value of the stock dividends issued by the Company to the holders of its Series A and Series B convertible preferred stock. The dividend value is calculated by reference to the market price of the common shares on the dividend distribution date. The number of common shares issued in settlement of the dividend is determined based on the coupon rate of the preferred shares, the total shares outstanding, and the conversion price of each series of preferred shares.

In 2009 and 2008, the Company did not pay common stock dividends as all Preferred Series A and B stock had been redeemed in the prior year. In April of 2007 and 2006, the Company distributed common stock dividends valued at $238,200 and $234,500, respectively to the holders of its Series A and B convertible preferred stock.

In 2007, all of the shares of the Series A convertible preferred stock and approximately 98% of the shares of the Series B convertible preferred stock were converted by the preferred shareholders into 812,800 shares of the Company’s common stock. The stock of the remaining holder of 50 shares of Series B convertible preferred stock was redeemed by the Company on the payment of $50,000, the liquidation value, plus an accrued stock dividend of $5,000.

As a result, net loss applicable to common shareholders in 2009 was $2,800,000 or $(0.25) per share basic and diluted, compared to net income applicable to common shareholders in 2008 which was $1,098,000, or $0.10 per share basic and $0.08 per share diluted. Net income applicable to common shareholders for the same period in 2007 was $1,642,000, and earnings per share were $0.19 per share basic and $0.13 per share diluted.

Liquidity and Capital Resources

A major source of cash in recent years has been from operating cash flows. Other sources of cash include proceeds received from the exercise of stock options, short-term borrowing, and issuance of common stock. The Company’s major uses of cash in the past three years have been for capital expenditures and for repayment and servicing of outstanding debt.

Supplemental information pertaining to our source and use of cash is presented below:

Selected Sources (uses) of cash	Years ended December 31,
	2009			2008			2007
	(In thousands)
Net cash provided by operations	$	815		$	548		$	3,001

Net Proceeds from issuance of common stock, exercise of stock options and warrants		162			1,064			395

Capital Expenditures		(211	)		(785	)		(247	)

Principal payments on lease obligations		—			(47	)		(196	)

Principal payments on debt obligations		(137	)		(1,715	)		(1,647	)

In 2009, the Company primarily used excess cash to repay outstanding debt and finance capital expenditures. In 2008 and 2007, excess cash was used to retire the Company’s convertible preferred shares, in addition to accelerating the repayment of debt and financing of capital expenditures.

During 2009, 84,500 stock options were exercised for proceeds of $96,600 at a weighted exercise price of $1.14 per share and converted into an equivalent number of shares of the Company’s common stock. This compares with proceeds from the exercise of stock options of $285,000 in 2008, with 182,000 stock options exercised at a weighted average exercise price of approximately $1.42 per share. By comparison, in 2007, proceeds from the exercise of stock options were $445,000 with 651,100 stock options exercised at a weighted average exercise price of $0.68 each and converted into an equivalent number of shares of common stock

During 2009, a total of 50,000 warrants issued pursuant to a 2004 private placement were exercised by warrant holders with a total exercise price of $67,500. Also in July 2009, 893,790 warrants with an exercise price of $1.35 expired unexercised. These warrants were originally issued as part of a private placement of common stock in 2004 in which the Company issued 1,581,000 Units consisting of 1,581,000 shares and warrants, exercisable through August 2009, to acquire an additional 1,185,750 shares at $1.35 per share. In addition, 276,675 warrants were issued to the agent for the private placement. During 2008, 518,635 warrants from the private placement were exercised by warrant holders. A total of 375,520 warrants with a total exercise price of $507,000 were surrendered to the Company in exchange for the issuance of 375,250 shares of the Company’s common stock. An additional 142,385 placement agent warrants were exercised using a cashless feature available for these warrants, in exchange for 89,702 shares of the Company’s common stock.

In May 2009, the Company repaid a Promissory Note prior to maturity, in the amount of $125,000 and accrued interest of $4,212, which represented the balance of a Note issued by the Company as part of the purchase price of MRC in 2004, to the sole shareholder of the acquired company.

In March 2009, the maturity date of a $1,000,000 Subordinated Convertible Promissory Note to Clarex Limited (“Clarex”), a major shareholder and debt holder, was extended to April 1, 2011. The note bears interest at 6% and was originally due in January 2006, extended to December 31, 2008 and subsequently again to April 1, 2009. Interest accrues yearly and along with principal may be converted into common stock, (and/or securities convertible into common shares). The Note is convertible into 1,000,000 Units consisting of 1,000,000 shares of common stock and warrants. The warrants had an original expiration date of August 2009 and allowed the holder to acquire 750,000 shares of common stock at a price of $1.35 per share. The expiration date of the warrants under the conversion terms have been extended to April 1, 2014.

In March of 2009, the maturity date of a $1,500,000 Subordinated Convertible Promissory Note bearing interest at 6% was extended to April 1, 2011. The note was originally due in January 2006 and was subsequently extended to April 1, 2009. Interest accrues yearly and along with principal may be converted into Common Stock, and/or securities convertible into Common Stock. The note is convertible into 1,500,000 Units consisting of 1,500,000 shares of Common Stock and Warrants to acquire 1,125,000 shares of Common stock at a price of $1.35 per share up to August 2009. The original expiration date of warrants of August 2009 was extended to April 1, 2014. The holder of the note is a major shareholder of the Company.

On January 29, 2008, the Company repaid in full a $1,700,000 Secured Promissory Note held by Clarex, including accrued interest of $477,444. The note was originally issued in June 2003 for a period of 18 months at an interest rate of 6% per annum and was secured by all assets of the Company. As additional consideration for the note, the Company issued 200,000 warrants to Clarex. In 2004, the note was extended for an additional 36 months and the Company issued 200,000 additional warrants to Clarex. The initial and subsequent warrants were exercisable at $0.425 per share and $1.08 per share, respectively, and had an expiration date of March 31, 2008 and May 18, 2008. The note was extended again, to December 31, 2008, without issuance of warrants or any other further consideration.

In March, 2008, Clarex elected to exercise the 200,000 warrants expiring on March 31, 2008 and the Company issued 200,000 shares of its common stock for proceeds of $85,000.

In May, 2008, Clarex exercised the remaining 200,000 warrants set to expire on May 18, 2008 for $216,000 and the Company issued 200,000 shares of its common stock.

In December 2007, the Company repaid the outstanding balance of $554,600 principal and accrued interest of $1,740 of the original $700,000 loan from Clarex, retiring this debt. The loan was originally issued in February 2006 to provide the Company with financing to fund the acquisition of certain capital assets required for expanded capabilities to meet customer demand. The terms called for repayment in equal monthly installments, including interest and principal, commencing March 2006, until maturity in March 2013 at an annual interest rate of 6.75% and allowed for early repayment.

On June 28, 2007, the Company accelerated payment of $500,000 on the outstanding balance of a $1,000,000 Subordinated Convertible Promissory Note and subsequently, on September 17, 2007, paid the remaining balance of principal and interest on this note, in full, in the amount of $697,000, consisting of $500,000 in remaining principal and $197,000 in accrued interest. The Company originally received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note in 2004. The note had an interest rate of 6% and was initially due on March 31, 2007, but its term was extended in early 2007 to March 31, 2008. Interest accrued yearly and along with principal was convertible into Common Stock, (and/or securities convertible into common shares). The note was convertible into 1,000,000 Units consisting of 1,000,000 shares of Common Stock and Warrants, exercisable through July 2009, to acquire 750,000 shares of Common Stock at a price of $1.35 per share. The note holder was a major shareholder of the Company.

On April 16, 2007, the Company called for the full redemption of its $500,000 Series A 10% Convertible Preferred Stock (the “Series A”). On April 30, 2007, Clarex Limited, the holder of all the shares of the Series A, notified the Company that it had decided to convert all 500 preferred shares into 500,000 shares of the Company’s common stock, in accordance with the Series A agreement.

On October 25, 2007, two principal holders, two outside Directors, and the Company’s CEO, notified the Company they were exercising their right to convert their shares of the Company’s $2,082,000 Series B 10% Convertible Preferred Stock (the “Series B”) into common stock at the specified conversion price of $2.50 per share. In the aggregate, these holder’s shares of the Series B represented 1,560 shares or 75% of the total of 2,082 issued and outstanding Series B shares. Subsequently, on October 29, the Company issued a call for the redemption of the remaining balance of 522 issued and outstanding Series B shares on November 29, 2007. The 10 holders of these shares had the option of converting their shares into common stock prior to the redemption date. Nine holders elected to convert, and the remaining holder elected to redeem the preferred shares for cash and a final stock dividend accrued to the redemption date. In all, the Series B was converted into 812,800 shares of common stock through conversion, and through redemption into a cash payment of $50,000 and an accrued final stock dividend of 1,332 shares of common stock.

In 2009, non-cash investments in the amount of $800,000 were redeemed compared to a purchase of $800,000 in 2008.

Capital expenditures for the year ended December 31, 2009 were $211,000 and included planned expenditures primarily for manufacturing and optical testing equipment that increased production capacity at our Northvale, New Jersey location. During the year, a review program for planned capital expenditures was instituted, in order to identify and defer expenditures, where practical, to minimize the impact on the Company’s cash flows. Offsetting the impact of capital expenditures on cash flows was the receipt of $5,000 from the sale of fully depreciated surplus manufacturing equipment during the fourth quarter of 2009. In 2009, the Company purchased precious metal manufacturing tools for $53,000 offset by the receipt of $16,000 for similar precious metal tools that were sold as part of the purchase.

This compares to capital expenditures in 2008 and 2007 of approximately $784,000 and $247,000, respectively. In 2008, capital expenditures were primarily for increased production capacity and capability in both our Sarasota, Florida and Northvale, New Jersey locations. Offsetting the impact of capital expenditures on cash flows was the receipt of $10,000 from the sale of surplus manufacturing equipment during the second quarter of 2008.

As a result of the above, cash and cash equivalents increased by $1,397,000 for 2009. In 2008, cash and cash equivalents decreased by $1,724,000 reflecting lower cash provided from operations and after cash used in investing activities for capital expenditures and increased cash used in financing activities related to the Company’s repayment of convertible debt. The Company had certificates of deposit with terms greater than three months and showed these separately from cash and cash equivalents on the balance sheet. For 2007, cash and cash equivalents increased by $1,318,000 to $4,396,000, after net cash outlays for debt repayments and redemptions of $1,697,000.

A summary of the Company’s contractual cash obligations at December 31, 2009 is as follows:

Contractual Obligations	Total		Less than 1 Year		1-3 Years		4-5 Years		Greater Than 5 Years
	(In thousands)
Convertible notes payable	$	2,500	$	—	$	2,500	$	—	$	—
Notes payable-other, including interest		550		23		69		46		412
Operating leases (1)		451		451		—		—		—
Total contractual cash obligations	$	3,501	$	474	$	2,569	$	46	$	412

(1) Excludes all future lease renewal options available to Company and which have not yet been exercised.

Overview of Financial Condition

As shown in the accompanying financial statements, the Company reported a net loss of $2,800,000, which included a non-cash charge for goodwill of $1,558,000 and recorded net income of $1,098,000 in 2008 and $1,880,000 in 2007. During 2009, 2008 and 2007, the Company’s working capital requirements were provided by positive cash flow from its operations.

Net cash provided by operations was $815,000 in 2009, $548,000 in 2008 and $3,001,000 in 2007. The increase in cash provided by operations was primarily the results of the net improvement in working capital requirements, which includes a decrease in accounts receivable and inventory (excluding reserves) offset by an increase in accounts payable and accrued liabilities and customer advances, and offset by a decrease from the net loss, after adjusting for the non-cash charge for goodwill. The Company’s management expects that future cash flow from operations and its existing cash reserves will provide adequate liquidity for the Company’s operations and working capital requirements in 2010.

Off-Balance Sheet Arrangements

The Company did not have any off-balance sheet arrangements at December 31, 2009 and 2008.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company believes that it has limited exposure to changes in interest rates from investments in certain money market accounts. The Company does not utilize derivative instruments or other market risk sensitive instruments to manage exposure to interest rate changes.

Item 8. Financial Statements and Supplementary Data

The financial statements and supplementary financial information required to be filed under this Item are presented commencing on page 24 of the Annual Report on Form 10-K, and are incorporated herein by reference.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures as of December 31, 2009 are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding disclosure.

b) Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that:

·	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

·	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Our management assessed the effectiveness of our system of internal control over financial reporting as of December 31, 2009. In making this assessment, management used the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment and the criteria set forth by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2009.

Our annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

c) Changes in Internal Control over Financial Reporting

There have been no significant changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 9B Other Information

None

PART III

Item 10. Directors and Executive Officers of the Registrant and Corporate Governance