FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-11668
INRAD, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-2003247
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
181 Legrand Avenue, Northvale, NJ, 07647
(Address of principal executive offices) (Zip Code)
(201) 767-1910
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on
which registered
-------------------------- ----------------------------
-------------------------- ----------------------------
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 Per Share
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 [X]
Aggregate market value of the registrant's Common Stock, par value $0.01
per share, held by non-affiliates as of March 8, 1996 was approximately $96,000.
Common shares of stock outstanding as of March 8, 1996:
2,106,571 shares
INRAD, INC.
INDEX
Page
Part I
Item 1. Business........................................................1
Item 2. Properties......................................................7
Item 3. Legal Proceedings...............................................7
Item 4. Submission of Matters to a Vote
of Security Holders.............................................7
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.................................8
Item 6. Selected Financial Data.........................................9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations......................................................9
Item 8. Financial Statements
and Supplementary Data.........................................15
Item 9. Changes In and Disagreements
With Accountants On Accounting
and Financial Disclosure.......................................15
Part III
Item 10. Directors and Executive Officers
of the Registrant..............................................16
Item 11. Executive Compensation.........................................18
Item 12. Security Ownership of Certain
Beneficial Owners and Management...............................18
Item 13. Certain Relationships
and Related Transactions.......................................20
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K.............................21
Signatures...................................................................23
Note: Page F-1 follows Page 23.
i
PART I
Item 1. Business.
INRAD, Inc., (the "Company" or "INRAD"), incorporated in New Jersey in
1973, designs, develops, manufactures and markets crystals and products
incorporating crystals which are used primarily for controlling and augmenting
laser radiation. These products, which represent INRAD's core business, are
designed either for incorporation by original equipment manufacturers in their
lasers and laser systems, for use by scientists and engineers in their research
and development with lasers, or as stand-alone subsystems or instruments for
general use with lasers. These products are sold under the INRAD trademark,
which has been registered in the United States Patent Office.
In order to effectively utilize lasers, it is often necessary to control,
modify, or augment the laser beam. The Company's products perform these
functions with lasers which are currently being used in communications,
medicine, surveying, military range finding and target illumination, materials
processing, color separation, printing and a wide variety of research
applications, including applications in laser fusion, isotope separation and
spectroscopy.
INRAD also manufactures precision optics and optical assemblies for its
customers. Most of these optics are supplied with reflective and antireflective
optical coatings produced in INRAD's Thin Film Department.
INRAD's company-funded research and development program is supplemented by
federally funded R&D grants and contracts in technical areas related to INRAD's
core business.
Products
The Company's products include: crystals; crystal components such as
Q-switches, polarizers, waveplates and rotators; integrated systems such as
harmonic generators, electronic devices for laser components and laser
pulsewidth measuring instruments; and opto-mechanical assemblies and optical
components. The Company sells crystals as blanks or as precision polished
elements. Wherever possible, the Company emphasizes the manufacture and sale of
its components, integrated systems, and instruments that incorporate its own
crystals. The Company also performs research and development for industry and
government in the area of crystal and laser technology.
The following table illustrates the Company's sales for each major
category of its product line during the past three years:
1
Year Ended December 31,
-----------------------
1995 1994 1993
-----------------------------------------------------------------------
Category Sales % Sales % Sales %
- -------- ----- - ----- - ----- -
$ $ $
Crystals 986,194 18 1,265,642 21 990,958 16
Crystal Components 2,277,565 42 2,312,372 39 2,212,894 35
Systems &
Instruments 1,083,670 20 1,415,702 24 1,876,846 30
Contract Research &
Development 1,084,609 20 1,002,203 16 1,164,076 19
---------- --- ---------- --- ---------- ---
TOTAL $5,432,038 100 $5,995,919 100 $6,244,774 100
========== === ========== === ========== ===
Although the growth of crystals, including new crystals grown at high
temperatures, will continue to be an integral part of the Company's business,
the Company believes that laser manufacturers and users will increase their
demand for components, systems and computer-based instruments more rapidly than
they will increase their demand for unpackaged crystals. The Company's
manufacturing and marketing efforts are being directed to this anticipated
change in demand.
Products Manufactured by the Company
Single Crystals
The Company produces, by various techniques, some 38 types of crystals
which, because of their purity, internal structure, and high perfection have
unique optical, electronic or electro-optical properties. Crystals are a form of
solid matter having a regular internal structure, with atoms and molecules
arranged in a precise way to form a solid internal pattern that repeats itself
over and over again in all directions.
Crystal Components
Electro-optic and nonlinear crystal devices can alter the intensity,
polarization or wavelength of a laser beam. The Company has developed and
manufactures a line of Q-switches, harmonic generators, and associated
electronics. These devices are sold individually to scientists throughout the
world as well as on an OEM basis to laser manufacturers.
Harmonic Generation Systems and Instruments
Harmonic generation systems enable the users of lasers to convert the
fundamental frequency of the laser to another frequency required for a specific
end use. A harmonic, which is a multiple of the fundamental frequency, is
obtained by passing a laser beam through a suitable nonlinear crystal. Harmonic
2
generators are also used to mix the output frequency of one laser with that of
another laser to produce a different frequency. Harmonic generators are
presently useful in spectroscopy, lithography, semiconductor processing, optical
data storage and scientific research.
Following the development of microprocessor-based tunable lasers, which
automatically produce a range of frequencies, the Company developed a product
called the Autotracker. When used in conjunction with these lasers, the
Autotracker automatically generates tunable ultraviolet light for use in
spectroscopic applications.
An Infrared Autotracker was then designed to cover the wavelength region
from 1.5 to 4.5 microns. Further product developments are planned to extend the
wavelength region of tunability to 11 microns using a group of new crystals now
being developed and grown at INRAD. In 1991, the Company introduced an
Autotracker specifically designed to work with Titanium Sapphire lasers. These
lasers are an advance in solid state tunable sources and are now being marketed
by many major laser manufacturers.
In 1994, the Company introduced a new harmonic generator for use with
ultrafast lasers having pulsewidths in the femtosecond and picosecond ranges.
The product is sold on an OEM basis to the world's largest manufacturer of
ultrafast lasers.
The Company has developed and produces a line of Autocorrelators which can
measure extremely short laser pulses. Accurate measurement of pulsewidth is
important in studies of chemical and biological reactions, as well as in the
development of high speed electronics, ultrafast lasers and laser diodes for
communications. The Model 5-14LD Autocorrelator is capable of measuring laser
pulsewidths from 100 femtoseconds to 75 picoseconds from any type of laser
system, and has the highest sensitivity of any commercial autocorrelator. The
Model 5-14BX Autocorrelator can measure in real time the pulsewidth of high
repetition rate lasers. By using a combination of precision mechanical and
optical engineering in conjunction with a computer interface, this
autocorrelator is ideal for setting up and monitoring fast and ultrafast lasers.
Precision Optics
The Company also produces a line of precision optical components used in
laser and other optical systems. These include lenses, windows, polarizers,
retardation plates, Brewster windows, attenuation systems, rotators and gimbal
mounts.
Optical Coatings
In order to meet performance requirements, most optical components require
thin film coatings on their surfaces. Depending on the design, optical coatings
can refract, reflect, or transmit specific wavelengths. INRAD uses computerized
coating equipment and has built its coating facility within a temperature and
humidity controlled clean room.
3
The Company's coating facility produces a wide variety of sophisticated
coatings on many different substrates for use in its own products, as well as
for customers who purchase coated optics manufactured by the Company to their
specifications.
Research and Development
The Company's research and development activities currently focus on
developing new proprietary products as well as new end uses for its existing
products. The Company is primarily engaged in research on crystal growth,
harmonic generation, and electro-optics. This combination allows the Company to
introduce new products based on crystals developed within the Company. A staff
of 13 scientists and engineers, including 4 at the Ph.D. level, enables the
Company to develop new crystals, devices and instruments and also to participate
in sponsored research.
Company-funded research expenditures during the years ended December 31,
1995, 1994, and 1993 were $305,626 (7.0% of net product sales), $365,856 (7.3%),
and $315,006 (6.2%), respectively.
In 1990 the Company established a Federal Research and Development Program
Group in order to augment its own funded R&D efforts. This group actively seeks
government support in technical areas in which the Company has expertise, and
has promise for the development of new commercial products in which the
government has requirements. Scientific, manufacturing and support personnel
from within the Company are assigned to the Federal R&D Group to carry out
government funded programs.
The Federal R&D Programs Group has been particularly successful in winning
awards under the Federal Small Business Innovative Research (SBIR) Program.
These programs have led to several inventions and the Company has been awarded
five U.S. patents, has filed several patent applications and is preparing
additional applications. The Company is seeking strategic partners to
commercialize the technologies developed from these programs.
During 1995, 1994 and 1993, the Company was awarded funded R&D programs
totalling approximately $316,000, $573,000 and $1,871,000, respectively. The
programs range in duration from six to twenty-four months. All programs are
monitored for technical accomplishments and are subject to final audit by the
sponsoring government agency or its designated audit agency.
Revenues from contract research and development were $1,084,609, $1,002,203
and $1,164,076 during the years ended December 31, 1995, 1994, and 1993,
respectively. The Company expects to continue to actively seek new
government-sponsored programs as well as joint programs with certain of its
customers in technical areas related to its core business.
4
Markets
In 1995, 1994 and 1993 the Company's domestic product sales were made to
end users in the following market areas:
Market 1995 1994 1993
------ ---- ---- ----
Industrial 67% 45% 42%
Universities 7% 10% 19%
National Laboratories 9% 7% 12%
Government 17% 38% 27%
--- --- ---
Total Domestic 100% 100% 100%
=== === ===
In recognition of the sharp reductions in the U.S. defense budgets, the
Company has refocused its marketing strategy to place a greater emphasis on
industrial, medical and scientific applications. This change in emphasis has
resulted in a larger percentage of sales to industrial users in 1995.
The Company does not have similar information about the end use of products
sold abroad. Foreign sales accounted for 19% of total product sales in 1995, 24%
in 1994, and 26% in 1993. Worldwide, the Company has approximately 250
customers, one of which accounted for 12% and 16% of net product sales in 1994
and 1993, respectively. No foreign customer accounted for more than 10% of net
product sales in 1995. Additionally, three U.S. customers each accounted for
more than 10% of net product sales in 1995, and two customers each accounted for
more than 10% of net product sales in 1994. No domestic customer accounted for
more than 10% of net product sales in 1993.
Long-Term Contracts
Certain of the Company's orders from customers provide for periodic
deliveries at fixed prices over a period which may be greater than one year. In
such cases the Company attempts to obtain firm price commitments from its raw
material suppliers for the materials necessary to fulfill the order.
Marketing
The Company markets its products domestically through its own sales staff,
supervised by the Vice President - Marketing and Sales. Independent sales agents
are used in major overseas markets, including Canada, Europe and the Far East.
The current sales staff consists of four employees. The Company plans,
subject to availability of resources, to implement a significant sales and
marketing program in 1996, including additional sales staff, increased
advertising and trade show participation, development of additional marketing
materials, and greatly increased contact with existing and potential customers.
5
Backlog
The Company's order backlog as of December 31, 1995 included approximately
$1,470,000 of product orders and $413,000 of contract R&D, most of which is
scheduled to be completed in 1996. On December 31, 1994, the backlog included
$1,116,000 of product orders and $1,223,000 of contract R&D.
Competition
The Company believes that there are relatively few companies which offer
the wide range of products sold by the Company. Within each product category,
however, there is competition. Although price is a principal factor in certain
product categories, the principal means of competition in most product
categories are product design, performance and quality. Based on its performance
to date, the Company believes that it can compete successfully in terms of
price, product design, product performance and quality, although no assurances
can be given in this regard.
Employees
As of December 31, 1995, the Company had 52 full-time employees. The
Company provides health, dental, disability and life insurance, a 401(k) plan,
sick leave and paid holidays and vacations to its employees and has paid
year-end bonuses to employees in certain years. None of its employees are
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.
Patents and Licenses
The Company holds United States patents for: a chemical process involving
the use of zeolites for regioselective photochlorination; a composite membrane
for the photochemical degradation of organic contaminants in ground water; a
chemical process for selective functionalization of fullerenes; and a unique
chemical reactor. The Company is seeking strategic partners to commercialize the
technologies patented by INRAD.
Although the Company has relied in the past on its manufacturing and
technological expertise, rather than on any patents, to maintain its position in
the industry, it is now additionally seeking patent protection for inventions
resulting from its research programs. The Company takes precautionary and
protective measures to safeguard its design, 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. Such licenses are
generally available to all but a limited number of countries.
6
Although the manufacture, sale and use of lasers are subject to extensive
federal and state regulations which indirectly affect the Company, there are no
federal regulations nor any unusual state regulations which directly affect the
manufacture or sale of the Company's products other than those which generally
affect companies engaged in manufacturing operations in New Jersey.
Sales in the European Community for electronic instruments require EC
certification; the Company is now engaging in obtaining such certification.
Item 2. Properties.
The Company occupies approximately 31,000 square feet of space located at
181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease expiring on
October 31, 1996. The Company has an option to renew the lease for two
additional terms of five years each. The 1995 annual rent was approximately
$298,000. The Company also paid real estate taxes and insurance premiums which
aggregated approximately $59,000 during 1995.
Item 3. Legal Proceedings.
There is no material litigation pending against the Company as of the date
hereof.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
(a) Market Information.
The Company's common stock, par value $.01 per share, is traded in the OTC
Bulletin Board under the symbol INRD.
The following table sets forth the range of selling prices for the Common
Stock in each fiscal quarter from the quarter ended March 31, 1994, through the
quarter ended December 31, 1995 as reported by the National Association of
Securities Dealers NASDAQ System:
Sales Price
-----------
High Low
---- ---
Quarter ended March 31, 1995 ........................ 1/2 1/2
Quarter ended June 30, 1995 ......................... 3/4 3/8
Quarter ended September 30, 1995 .................... 3/4 3/8
Quarter ended December 31, 1995 ..................... 3/4 3/8
Quarter ended March 31, 1994 ........................ 1 5/8 1 1/4
Quarter ended June 30, 1994 ......................... 1 1/2 1
Quarter ended September 30, 1994 .................... 1 13/16
Quarter ended December 31, 1994 ..................... 1 1/4 1/2
(b) Holders.
As of March 8, 1996, there were 188 record owners of the Common Stock.
(c) Dividends.
The Company did not pay any cash dividends on its Common Stock during the
years ended December 31, 1995, 1994 or 1993. Payment of dividends will be at the
discretion of the Company's Board of Directors and will depend, 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.
8
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,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
$ $ $ $ $
Revenues 5,432,038 5,995,919 6,244,774 5,684,259 6,178,651
Net Income
(Loss) (968,878) (873,394) (1,807,106) (1,534,151) (569,442)
Net Income
(Loss) Per
Share (0.46) (0.41) (1.27) (1.10) (0.41)
Dividends
Paid None None None None None
Total
Assets 5,296,044 6,083,264 7,535,448 7,909,697 8,154,329
Long-Term
Obligations 2,359,131 934,420 1,689,965 662,265 593,921
Shareholders'
Equity 1,808,467 2,677,345 3,550,739 4,299,888 5,834,039
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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.
Overview of Financial Condition
As shown in the accompanying financial statements, the Company reported a
net loss of approximately $969,000 for the year ended December 31, 1995, and
also incurred losses in 1994 and 1993. During the past three years, the
Company's working capital requirements were met in part on the basis of
borrowings from, and issuance of common stock and warrants to, shareowners
including the principal shareowner.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
9
described in Note 2 in the accompanying financial statements (see also Liquidity
and Capital Resources under this Item 7).
Results of Operations
The following table sets forth, for the past three years, the percentage
relationship to total revenues from product sales and contract research and
development of certain items included in the Company's consolidated statement of
operations.
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
% % %
Revenues:
Net product sales 80.0 83.3 81.4
Contract research and development 20.0 16.7 18.6
----- ----- -----
100.0 100.0 100.0
Interest and other income 0.3 0.2 0.1
----- ----- -----
100.3 100.2 100.1
================================================================================
Costs and expenses:
Cost of goods sold* 83.7 82.6 88.6
Write off of discontinued inventory* -- -- 11.8
Plant consolidation costs 1.7 -- --
Contract research and
development* 97.7 97.0 99.2
Selling, general and
administrative expenses 19.0 18.2 18.6
Internal research and
development** 7.0 7.3 6.2
Interest expense 5.3 5.6 5.1
================================================================================
Net income (loss) (17.8) (14.6) (28.9)
* calculated as a percentage of their respective revenues
** calculated as a percentage of net product sales
Net Product Sales
Net product sales were $4,347,429, $4,993,716 and $5,080,698 in 1995, 1994
and 1993, respectively. Product sales in 1995 were lower than the prior year due
to a significantly lower opening backlog and insufficient short term orders in
1995. Product sales in 1994 were comparable with 1993 levels.
International sales, as a percentage of total product sales, were 19%, 24%
and 26% for 1995, 1994, and 1993, respectively. The dollar value and percentage
of international sales decreased in 1995 compared to 1994, and decreased in 1994
compared to 1993. Bookings of new orders, particularly for laser systems and
10
instruments, were lower in 1995 than in 1994, and resulted in lower shipments in
1995 compared to the prior year. In the first quarter of 1993, the Company made
a shipment totalling $375,000 to one customer. This nonrecurring shipment
accounts for the dollar and percentage decrease in 1994 compared to 1993.
The Company's backlog of product orders as of December 31, 1995 was
approximately $1,470,000, compared to approximately $1,116,000 at December 31,
1994.
Cost of Goods Sold
As a percentage of net product sales, cost of goods sold was 83.7%, 82.6%
and 88.6% for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company continued its efforts to reduce expenses in 1995. The most
significant cost reductions have continued to be in the form of labor and
related items such as payroll taxes and benefits. The increase in the cost of
goods sold percentage from 1994 to 1995 is attributable to lower than expected
sales compared to relatively fixed overhead costs such as wages, depreciation
and rent. The decrease from 1993 to 1994 is attributable to cost reductions
achieved as a result of closing the Company's Inrad Optical Systems subsidiary
and management's program to reduce expenses.
Prices for raw materials and purchased components have been relatively
stable in 1995 and 1994, while labor costs rose in both years.
Write Off of Discontinued Inventory
During the fourth quarter of 1993 the Company recorded an inventory write
off of approximately $600,000 in connection with the discontinuance of certain
products and product lines within certain market segments. The Company is
focusing its future efforts in industrial, medical and scientific markets which
it believes offer greater growth potential and improved profit margin. The
Company recorded a writedown in 1993 for products not consistent with this
direction.
Contract Research and Development
Contract research and development revenues were $1,084,609, $1,002,203 and
$1,164,076 for the years ended December 31, 1995, 1994 and 1993, respectively.
Related contract R&D expenditures, including allocated indirect costs, were
$1,059,668, $971,932 and $1,155,204. Revenues increased from 1994 to 1995 as a
result of a greater emphasis by the Company's scientific and technical personnel
on funded programs. Revenues decreased from 1993 to 1994 primarily because of
lower bookings in 1994 and increased effort by the Company's scientific and
technical personnel on internal R&D and manufacturing projects rather than
sponsored programs. The programs are typically fixed price contracts and provide
11
for recovery of direct costs and an allocation of indirect manufacturing costs
and, depending on their terms, recovery of general and administrative costs.
The Company intends to focus its future funded research efforts on programs
closely aligned with its core business. This is likely to result in lower
bookings of funded research programs and lower contract revenues and expenses in
1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 1995 decreased $55,042 or
5.1% compared to 1994, and in 1994 decreased $75,673 or 6.5% compared to 1993.
In 1995, selling commissions on international sales decreased and the Company
allocated a higher portion of G&A costs to contracts; these decreases were
partially offset by higher sales salaries and advertising and marketing costs.
Subject to availability of resources, the Company expects to increase certain
selling costs in 1996, including additional sales staff and increased
advertising and trade show participation. The decrease in SG&A expenses from
1993 to 1994 occurred primarily because of decreases in selling and
administrative salaries, advertising and trade shows, offset by higher selling
commissions on international sales and certain other administrative expenses.
Internal Research and Development Expenses
Research and development expenses for 1995 were $305,626 (7.0% of product
sales) compared with 1994 expenditures of $365,856 (7.3% of product sales). R&D
expenses for 1993 were $315,006 (6.2% of product sales).
During 1995, the Company decreased its emphasis on development of new
products and increased its short-term efforts on sales and marketing of existing
products. As a result, R&D expenditures decreased in 1995. This trend is
expected to continue in 1996. In 1994, the Company's R&D expenses increased over
1993 because the Company's scientific and technical personnel spent a greater
portion of their time on product development projects in line with the Company's
goal at that time of bringing more new products to market.
Income taxes
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 bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. At
December 31, 1995, the Company had a net deferred tax asset of $2,181,000, the
primary component of which was its significant net operating loss carryforward.
12
The Company has established a valuation allowance to fully offset this deferred
tax asset because its history of operating losses makes it uncertain that the
tax asset will be realized.
Inflation
The Company's policy is to periodically review its pricing of standard
products to keep pace with current costs. As to special and long-term contracts,
management endeavors to take potential inflation into account in pricing
decisions. The impact of inflation on the Company's business has not been
material to date.
Liquidity and Capital Resources
On August 31, 1995, the Company signed an agreement with Chemical Bank
amending the terms of its credit facility. The new agreement requires monthly
principal payments of $5,000 from September 1995 until December 1996, and
monthly principal payments of $10,000 thereafter until March 1998. A final
payment of $170,000 is due on April 1, 1998. Borrowings bear interest at prime
(8.5% at December 31, 1995) + 2 1/4%. The agreement also amended the financial
covenants contained in the original agreement. The Company continues to be
required to maintain compliance with affirmative and negative covenants,
including limitations on capital expenditures, dividends and new indebtedness,
and compliance with financial ratios tied to accounts receivable and debt
service (as defined). Chemical Bank also agreed to waive any defaults which
existed under the previous facility. Borrowings are secured by accounts
receivable, plant and equipment not previously liened, and the personal
guarantee of the Company's principal shareowner.
In connection with the new Chemical Bank agreement, a shareowner and
Subordinated Convertible Note holder agreed to maintain a certificate of deposit
with Chemical Bank in the amount of $245,000 as collateral for the loan. Once
the principal balance of the loan is reduced below $245,000, with each principal
payment made by the Company, a like amount may be withdrawn from the collateral
deposit.
In April 1995, the Company received $225,000 from a shareowner and
Subordinated Convertible Note holder of the Company through the issuance of
$125,000 of 8% Subordinated Convertible Notes due December 15, 2000 (convertible
at $1.00 per share) and 250,000 warrants at $0.40 per share. The warrants
entitle the holder to purchase 250,000 shares of Common Stock at $0.6875 per
share. The first six semiannual interest payments due under the Note are payable
in the form of additional notes and do not require a cash outlay. On September
27, 1995, the Company raised an additional $100,000 from the same shareowner in
the form of a 10% Unsecured Demand Convertible Promissory Note. The Note is
convertible into Common Stock of the Company at the conversion price of $1.00;
interest is also payable in Common Stock at the same conversion price. The
proceeds from issuance of the Subordinated Notes, Warrants and Demand Note were
13
used to reduce short-term liabilities, including trade debt. Although by its
terms the Note is due on demand, it cannot be repaid until the Chemical Bank
debt has been repaid in full. The Demand Note has been classified as noncurrent
in the Company's December 31, 1995 balance sheet because the Note holder has
agreed not to demand payment prior to December 31, 1996.
In 1993, the Company raised $1,000,000 in new capital from a private
investment group through the issuance of $746,215 of seven-year 10% subordinated
convertible notes and 203,028 shares of common stock. The first six semi-annual
interest payments due under the note are payable in the form of additional notes
and do not require a cash outlay.
During September 1993, the Company borrowed $100,000 in the form of two
promissory notes from a shareowner of the Company. On December 16, 1993, the
shareowner exchanged the existing promissory notes for a new seven-year 10%
subordinated convertible note in the amount of $74,621 and 20,303 shares of
common stock.
The entire amount of all Subordinated Convertible Notes (issued both in
1993 and 1995) may be redeemed by the Company after December 15, 1998; they are
subordinated to any outstanding indebtedness to Chemical Bank and other secured
indebtedness of the Company. At December 31, 1995 the Company was in violation
of certain terms of these notes; subsequent to year end, the Company obtained
waivers from the holders of the notes and modified the financial covenants in
the debt agreements.
In 1993, the principal shareowner and President of the Company exchanged an
unsecured demand note in the amount of $1,030,000 for a new promissory note
maturing on December 31, 1996, in the amount of $566,049 (including $154,049 of
accrued interest) and 494,400 shares of common stock. By mutual informal
agreement, beginning with the quarter ended June 30, 1995, the Company has
deferred interest payments to its principal shareowner. The payments are
expected to be resumed in 1996 and are expected to include both the scheduled
quarterly payment and any deferred payments. Although by its terms the
indebtedness to the shareowner is due on December 31, 1996, it cannot be repaid
until the Chemical Bank debt has been repaid in full. The shareowner loan has
been classified as noncurrent in the Company's December 31, 1995 balance sheet
because the shareowner has agreed not to demand payment prior to December 31,
1996.
The Company's Secured Promissory Notes bear interest at 7%, are secured by
certain of the Company's precious metals, and are convertible at any time into
200,000 shares of common stock. The Notes also contain acceleration clauses
which would allow the holder, a shareowner of the Company, to accelerate the
maturity date and demand payment if certain events occur. The maturity date of
the Secured Notes is July 8, 1997.
As a result of the new Chemical Bank agreement, the Company's monthly
principal requirement was reduced by $10,000. Renegotiation of the equipment
leases in 1995 resulted in a reduction of the total monthly lease payments by
14
approximately $8,000. Certain leases by their original terms mature in 1996,
whch will also reduce the Company's cash requirements in 1996. The Company has
also identified certain non-operating assets which it intends to sell to
generate additional cash flows. Where possible, the Company will continue to
reduce expenses and cash requirements to improve future operating results and
cash flows. Management expects that cash flow from operations, in addition to
cash generated from asset sales in 1996, will provide adequate liquidity for the
Company's operations in 1996. If, however, the Company's cash flow from
operations is not maintained at satisfactory levels, the Company may seek
additional financing to supplement the cash flow.
Because of the circumstances described above relating to the Company's
ability to improve operating results and cash flows, there is substantial doubt
about the Company's ability to continue as a going concern.
Capital expenditures, including internal labor and overhead charges, for
the years ended December 31, 1995, 1994 and 1993 were $166,000, $193,000 and
$379,000, respectively. During 1993, the Company completed lease financing for
the purchase of new equipment totalling approximately $110,000. Until the
Company is generating satisfactory amounts of cash flow from its operations, it
is expected that future capital expenditures will be kept to a minimum.
Management believes that in the short term, this limitation will not have a
material effect on operations.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements are set forth on pages F-1
through F-17. Page F-1 follows page 23.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
15
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The following table sets forth the names and ages of each of the members of
the Company's Board of Directors, the other positions and offices presently held
by each such person with the Company, the period during which each such person
has served on the Company's Board of Directors, and the principal occupations
and employment of each such person during the past five years.
Director Positions; Business
Name and Age Since Experience
------------ ----- ----------
Warren Ruderman, 1973 Chairman of the Board of Directors,
76 President and Chief Executive Officer
(1973 - Present).
Stanley A. Kitzinger, 1984 Financial Consultant (1986 - Present);
79 Senior Vice President (1980-1986) of
International Investors, Inc. (mutual
funds investment); Senior Vice
President (1980-1986) of Van Eck
Management Corp. (investment
management); Director (1989-1991) of
Mutual Series Fund, Inc. (mutual funds
investment).
William B. Maxson, 1989 Consultant (1990 - Present); Vice
65 President (1984-1990), Air Force
Programs Cypress International
(marketing and business development
firm); Officer, United States Air
Force (1952 - 1984), retiring with
rank of Major General in 1984.
Donald H. Gately, 1995 Management Consultant (1990 - Present);
76 Chief Operating Officer, Datamax
Corporation (1994 - 1996)
The directors serve one-year terms. Pursuant to agreements between the
Company and Hoechst Celanese Corporation ("Hoechst"), Hoechst may designate a
representative for nomination to the Company's Board of Directors; the Company
has agreed to use its best efforts to have a designated representative elected
16
to the Board of Directors. At the present time Hoechst has not designated a
representative to the Board.
Pursuant to an agreement between INRAD and Clarex, Ltd. ("Clarex"), the
Company has agreed to use its best efforts to have two individuals selected by
Clarex elected to the Board of Directors as long as any of the subordinated
convertible notes are outstanding. A representative has not been designated by
Clarex at the present time.
Executive Officers of the Registrant
The following table sets forth the name and age of each executive officer
of the Company, the period during which each such person has served as an
executive officer and the positions and offices with the Company held by each
such person:
Officer Positions and Offices
Name and Age Since With the Company
- ------------ ----- ----------------
Warren Ruderman, 76 1973 ...... Chairman of Board of Directors
President and
Chief Executive Officer
Maria Murray, 38 1995 ...... Vice President - Marketing
and Sales
Glenn Nosti, 40 1994 ...... Vice President - Manufacturing
Ronald Tassello, 38 1989 ...... Vice President - Finance
and Secretary
Warren Ruderman has served as President and Chairman of the Board of
Directors of the Company since he founded it in 1973. Prior to 1973, he founded
and served as the President of Isomet Corporation, a manufacturer of
acousto-optic devices for the laser industry, and was a Teaching Fellow,
Lecturer in Chemistry, research scientist and consultant at Columbia University.
Dr. Ruderman was a founder and served as a director of the Melex Corporation (a
life sciences company acquired by Revlon, Inc. in 1975). Dr. Ruderman holds a
doctorate in Chemical Physics from Columbia University, and is a Fellow of the
New York Academy of Sciences.
Maria Murray joined the Company in January 1989 as Manager, Federal R&D
Programs, and was appointed Vice President, Marketing and Sales in 1995. Prior
to joining INRAD, she held positions in electrical design engineering in the
laser and communication industries. She holds a B.S.E.E. degree in Electrical
Engineering from the University of Central Florida.
Glenn Nosti joined the Company as a Senior Sales Engineer in July 1990. He
was subsequently appointed Vice President, Manufacturing in 1994. Prior to
joining INRAD, he held positions as Marketing Manager or National Sales Manager
at companies within the laser optics industry. He received a B.S. in Business
17
Administration from East Carolina University and an M.B.A. in Marketing from
Fairleigh Dickinson University.
Ronald Tassello joined the Company as Secretary and Controller in October,
1989 and was appointed Vice President, Finance in 1990. Prior to joining INRAD,
he was employed as Senior Manager in the Hackensack office of Price Waterhouse
LLP, an accounting and consulting firm. He held various positions with Price
Waterhouse LLP from 1983 to 1989. He received a B.B.A. from Pace University and
is a certified public accountant.
None of the officers of the Company has an employment contract with the
Company; each serves at the pleasure of the Board of Directors.
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth, for the years ended December 31, 1995, 1994
and 1993, the cash compensation paid by the Company and its subsidiaries, to or
with respect to the Company's Chief Executive Officer, the only executive
officer whose total annual salary and bonus exceeded $100,000, for services
rendered in all capacities as an executive officer during such period:
Long-Term
Annual Compensation(A) Compensation
Name and Current ---------------------- ------------ All Other
Principal Position Year Salary Bonus Options Granted Compensation ($)
- ------------------ ---- ------ ----- --------------- ----------------
Warren Ruderman, 1995 $130,000 none none none
President and Chief
Executive Officer
1994 $130,000 none none none
1993 $130,500 none none none
(A) During the periods covered, no Executive Officer received perquisites
(i.e., personal benefits) in excess of the lesser of $50,000 or 10% of such
individual's reported salary and bonus.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table presents certain information with respect to the
security ownership of the directors of the Company and the security ownership of
the only individuals or entities known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock as of March 1, 1996. The Company
18
has been advised that all individuals listed have the sole power to vote and
dispose of the number of shares set opposite their names in the table.
Percent of
Name and Address Number of shares Common Stock
- --------------------------------------------------------------------------------
Warren Ruderman(1) 1,081,400 51.3
c/o INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
Clarex, Ltd. 1,845,513(2) 50.9
c/o Bank of Nova Scotia
Trust Company Bahamas Ltd.
P.O. Box N1355
Nassau, Bahamas
Hoechst Celanese Corp. 300,000 14.2
Routes 202-206 North
Box 2500
Somerville, NJ 08876
William F. Nicklin 203,089(3) 9.3
33 Grand Avenue
Newburgh, NY 12550
Stanley A. Kitzinger 4,800(4) 0.2
c/o INRAD, Inc.
William Maxson 3,162(4) 0.1
c/o INRAD, Inc.
Donald H. Gately 16,417(5) 0.8
c/o INRAD, Inc.
Directors and Executive 1,115,404(6) 52.2
Officers as a group
(7 persons)
(1) By virtue of his shareholdings, Warren Ruderman may be deemed to be a
"parent" of the Company as that term is defined in the Rules and
Regulations of the Securities Act of 1933, as amended.
(2) Including 1,522,485 shares subject to options, warrants or convertible
notes exercisable or convertible within 60 days.
(3) Including 72,562 shares subject to convertible notes convertible
within 60 days.
(4) Including 1,500 shares subject to options exercisable within 60 days.
(5) Including 16,417 shares subject to warrants within 60 days.
(6) Including 29,042 shares subject to options or warrants within 60 days.
19
Item 13. Certain Relationships and Related Transactions
In 1993, the principal shareowner and President of the Company exchanged an
unsecured demand note for a new promissory note maturing on December 31, 1996 in
the amount of $566,049 (including $154,049 of accrued interest) and 494,400
shares of common stock. The new note bears interest at 7% and is unsecured.
Interest expense related to the shareowner loan was approximately $72,000,
$74,000 and $106,000 in 1995, 1994 and 1993, respectively.
Repayment of the shareowner loan has been subordinated to the prior
repayment of the Company's indebtedness to Chemical Bank and to other secured
indebtedness of the Company. The principal shareowner has guaranteed borrowings
under the Company's existing credit facility with Chemical Bank. By mutual
informal agreement, beginning with the quarter ended June 30, 1995, the Company
has deferred interest payments to its principal shareowner. The payments are
expected to be resumed in 1996 and are expected to include both the scheduled
quarterly payment and any deferred payments. Although by its terms the
indebtedness to the shareowner is due on December 31, 1996, it cannot be repaid
until the Chemical Bank debt has been repaid in full. The shareowner loan has
been classified as noncurrent in the Company's December 31, 1995 balance sheet
because the shareowner has agreed not to demand payment prior to December 31,
1996.
20
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a) Financial statements filed as part of this report:
See Index to Consolidated Financial Statements at F-1.
(b) Exhibits filed as part of this report:
The following exhibits are incorporated by reference to exhibits in
the Company's Registration Statement or amendments thereto on Form
S-18 (Registration No. 2-83689), initially filed with the Securities
and Exchange Commission on May 11, 1983:
Exhibit No.
Present in Registration
Exhibit Statement or
No. Description of Exhibit or Amendments
- ------- ---------------------- ----------------
3.1 Restated Certificate of Incorpor- 3.1 of Amendment
ation, as amended. No. 1.
3.2 By-laws, as amended. 3.2 of Amendment
No. 1.
10.4 License agreement, dated September 10.11 of Amendment
1981, between the Company and No. 1.
Lambda Physik.
10.5 Key-Man Insurance Policy on the 10.12 of Amendment
life of Warren Ruderman. No. 2.
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1985:
10.6 Common Stock Purchase and Option Agreements, dated
10/14/85 and 11/17/85, between the Company and Celanese
Corporation (now Hoechst Celanese Corporation).
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1990:
10.8 INRAD, Inc. Key Employee Compensation Plan.
21
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1991:
10.9 Lease dated October 4, 1991 between S&R Costa
as lessor and the Company as lessee.
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1992:
10.10 Agreement with Chemical Bank Regarding Line of Credit.
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1993:
10.11 Stock and Note Purchase Agreement with exhibits.
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-Q for the quarter ended March 31,
1994:
10.12 Amended and Restated Chemical Bank Agreement.
The following exhibits form an attachment to this Report:
10.13 Amendment and Waiver Agreement between INRAD and Chemical
Bank dated August 31, 1995.
10.14 Subordinated Convertible Note dated April 9, 1995 between
Clarex Limited and INRAD, Inc.
10.15 Unsecured Demand Convertible Promissory Note dated
September 27, 1995 between Clarex Limited and INRAD, Inc.
11.1 A statement regarding computation of per-share earnings
is omitted because the computation can be clearly determined
from the material contained herein.
22.1 Subsidiaries of the Company
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INRAD INC.
By: /s/ Warren Ruderman
------------------------------
Warren Ruderman, President
and Chief Executive Officer
Dated: March 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Warren Ruderman President, Chief March 26, 1996
- ------------------------ Executive Officer
Warren Ruderman and Director (Principal
Executive Officer)
/s/ Stanley A. Kitzinger Director March 26, 1996
- ------------------------
Stanley A. Kitzinger
/s/ Donald H. Gately Director March 26, 1996
- ------------------------
Donald H. Gately
/s/ William B. Maxson Director March 26, 1996
- ------------------------
William B. Maxson
/s/ Ronald Tassello Vice President, March 26, 1996
- ------------------------ Finance and Secretary
Ronald Tassello (Principal Financial and
Accounting Officer)
23
INRAD, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Consolidated Financial Statements Page
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 1995 and 1994 F-3
Consolidated Statement of Operations for each of the three years
in the period ended December 31, 1995 F-4
Consolidated Statement of Cash Flows for each of the three years
in the period ended December 31, 1995 F-5
Consolidated Statement of Shareowners' Equity for each
of the three years in the period ended December 31, 1995 F-6
Notes to Consolidated Financial Statements F-7 to F-16
Financial Statement Schedules
Schedule II - Valuation and qualifying accounts and Reserves F-17
NOTE: All other schedules are either not applicable or the information is
included in the consolidated financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board
of Directors of INRAD, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of INRAD,
Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As described in Note 2 to the financial
statements, the Company has suffered recurring losses from operations and, for
each of the three years in the period ended December 31, 1995, cash outflows
have been funded in part on the basis of borrowings from, and issuance of common
stock and warrants to, shareowners including the principal shareowner. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Price Waterhouse LLP
Morristown, New Jersey
March 15, 1996
F-2
INRAD, INC.
CONSOLIDATED BALANCE SHEET
December 31,
------------
Assets 1995 1994
------ ------
Current assets:
Cash and cash equivalents $ 37,981 $ 119,718
Certificate of Deposit 70,000 70,000
Accounts receivable, net 804,834 609,155
Inventories 1,671,673 1,897,772
Unbilled contract costs 151,649 156,717
Assets held for sale 279,111 --
Other current assets 61,699 50,167
----------- -----------
Total current assets 3,076,947 2,903,529
Plant and equipment, net 1,788,080 2,742,531
Precious metals 280,001 311,797
Other assets 151,016 125,407
----------- -----------
Total assets $ 5,296,044 $ 6,083,264
=========== ===========
Liabilities and Shareowners' Equity
Current liabilities:
Note payable - Bank 60,000 $ 520,000
Current obligations under capital leases 190,754 311,199
Subordinated Convertible Notes -- 846,116
Accounts payable and accrued liabilities 708,403 625,452
Advances from customers 116,205 116,560
Other current liabilities 53,084 52,172
----------- -----------
Total current liabilities 1,128,446 2,471,499
Note payable - Bank 320,000 --
Obligations under capital leases 75,088 183,632
Secured Promissory Notes 250,000 250,000
Subordinated Convertible Notes 1,080,623 --
Unsecured Demand Convertible Note 100,000 --
Note payable - Shareowner 533,420 500,788
----------- -----------
Total liabilities 3,487,577 3,405,919
----------- -----------
Commitments (Note 10)
Shareowners' equity:
Common stock: $.01 par value;
2,121,571 shares issued 21,216 21,216
Capital in excess of par value 6,067,991 5,967,991
Accumulated deficit (4,212,740) (3,243,862)
----------- -----------
1,876,467 2,745,345
Less - Common stock in treasury,
at cost (15,000 shares) (68,000) (68,000)
----------- -----------
Total shareowners' equity 1,808,467 2,677,345
----------- -----------
Total liabilities and shareowners' equity $ 5,296,044 $ 6,083,264
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
INRAD, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31,
-----------------------
1995 1994* 1993*
---- ---- ----
Revenues:
Net product sales $ 4,347,429 $ 4,993,716 $ 5,080,698
Contract research and development 1,084,609 1,002,203 1,164,076
----------- ----------- -----------
5,432,038 5,995,919 6,244,774
----------- ----------- -----------
Costs and expenses:
Cost of goods sold 3,638,582 4,123,490 4,502,928
Write off of discontinued inventory -- -- 600,000
Plant consolidation costs 94,228 -- --
Contract research and development
expenses 1,059,668 971,932 1,155,204
Selling, general and administrative
expenses 1,033,547 1,088,589 1,164,262
Internal research and development
expenses 305,626 365,856 315,006
----------- ----------- -----------
6,131,651 6,549,867 7,737,400
----------- ----------- -----------
Operating profit (loss) (699,613) (553,948) (1,492,626)
Other income (expense):
Interest expense (285,646) (332,954) (319,974)
Interest and other income, net 16,381 13,508 5,494
----------- ----------- -----------
Net income (loss) $ (968,878) $ (873,394) $(1,807,106)
=========== =========== ===========
Net income (loss) per share $(0.46) $(0.41) $(1.27)
------ ------ ------
* Prior year amounts have been reclassified to conform to current year
presentation (Note 1).
See Notes to Consolidated Financial Statements.
F-4
INRAD, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (968,878) $ (873,394) $(1,807,106)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 718,145 728,058 733,198
Noncash interest 142,139 126,581 --
Plant consolidation costs 64,751 -- --
Changes in assets and liabilities:
Accounts receivable (195,679) 294,194
Inventories 226,099 195,517 818,300
Unbilled contract costs 5,068 61,265 (43,060)
Other current assets (11,532) (8,205) (25,340)
Precious metals 31,796 4,442 4,354
Other assets (16,415) (6,176) (5,673)
Accounts payable and accrued liabilities 82,951 (249,319) (63,477)
Advances from customers (355) (5,759) (183,449)
Other current liabilities 912 25,986 (550)
----------- ----------- -----------
Total adjustments 1,047,880 1,166,584 1,047,730
----------- ----------- -----------
Net cash provided by (used in)
operating activities 79,002 293,190 (759,376)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (166,450) (174,110) (262,970)
Purchase of Certificate of Deposit -- (70,000) --
Proceeds from sale of equipment 49,700 -- --
----------- ----------- -----------
Net cash used in investing activities (116,750) (244,110) (262,970)
----------- ----------- -----------
Cash flows from financing activities:
Repayments of note payable - Bank (140,000) (230,000) --
Borrowings of note payable - Other -- -- 350,000
Net borrowings of note payable - Shareowner -- -- 484,049
Proceeds from issuance of subordinated
convertible notes 125,000 -- 746,215
Net proceeds from issuance of common stock -- -- 248,016
Proceeds from issuance of unsecured
demand convertible note 100,000 -- --
Proceeds from sale of common stock warrants 100,000 -- --
Principal payments of capital lease obligations (228,989) (260,065) (257,947)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (43,989) (490,065) 1,570,333
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (81,737) (440,985) 547,987
Cash and cash equivalents at beginning of year 119,718 560,703 12,716
----------- ----------- -----------
Cash and cash equivalents at end of year $ 37,981 $ 119,718 $ 560,703
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-5
INRAD, INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Common Stock Capital in Accumulated Treasury
Shares Amount excess of deficit stock
------ ------ par value ------- -----
---------
Balance, December 31, 1992 1,403,840 $ 14,039 $ 4,917,211 $ (563,362) $ 68,000
Common stock issued 717,731 7,177 1,050,780 -- --
Net loss for the year -- -- -- (1,807,106) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1993 2,121,571 21,216 5,967,991 (2,370,468) 68,000
Net loss for the year -- -- -- (873,394) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 2,121,571 21,216 5,967,991 (3,243,862) 68,000
Net loss for the year -- -- -- (968,878) --
Common stock warrants issued -- -- 100,000 -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 2,121,571 $ 21,216 $ 6,067,991 $(4,212,740) $ 68,000
========= =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
F-6
INRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES:
Nature of Operations:
INRAD is a manufacturer of crystals, crystal devices, electro-optic and optical
components, and sophisticated laser subsystems and instruments. INRAD's
principal customers include commercial instrumentation companies and OEM laser
manufacturers, research laboratories, government agencies, and defense
contractors. The Company's products are sold domestically using its own sales
staff, and in major overseas markets, principally Europe and the Far East, using
independent sales agents.
Basis of Presentation:
The consolidated financial statements include the accounts of INRAD, Inc. and
its wholly-owned subsidiaries. Intercompany transactions and balances have been
eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Inventory Valuation:
Inventories, including certain precious metals consumed in the manufacturing
process, are valued at the lower of cost (determined predominantly on the
first-in, first-out basis) or market.
Precious Metals:
Precious metals not consumed in the manufacturing process are valued at cost,
cost being determined on the first-in, first-out basis.
Plant and Equipment:
Plant and equipment are stated at cost. Depreciation is computed under the
straight-line method utilizing an estimated useful life of seven years.
Leasehold improvements are amortized over the remaining term of the lease.
The Company constructs a portion of its equipment. Internal labor and overhead
charges capitalized in the construction of equipment amounted to approximately
$100,000, $97,000 and $147,000 in 1995, 1994 and 1993, respectively.
Contract Research and Development:
Revenues from sponsored research and development are recorded using the
percentage-of-completion method. Under this method, revenues are recognized
based on direct labor and other direct costs incurred compared with total
estimated direct costs. Contract R&D costs include allocations of plant overhead
and general and administrative costs.
F-7
Internal Research and Development Costs:
Internal research and development costs are charged to expense as incurred.
Prior to January 1, 1995, internal research and development costs included
direct charges and allocations of plant overhead costs. Effective January 1,
1995, the Company modified its reporting to charge allocations of plant overhead
costs directly to cost of goods sold. This reclassification has no effect on
operating profit (loss) or net income (loss). Prior year amounts have been
reclassified to conform to the current year presentation.
Income taxes:
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 bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Cash Flow Information:
The Company considers all highly liquid investments with original maturity dates
of three months or less to be cash equivalents. The Company's Certificate of
Deposit is not included in cash equivalents because the CD serves as collateral
for a letter of credit. It is anticipated that the underlying contract will be
completed in 1996 and the letter of credit canceled.
Capital lease obligations of approximately $110,000 at December 31, 1993 were
incurred when the Company entered into leases for new equipment.
Cash interest paid during the years ended December 31, 1995, 1994 and 1993 was
$113,447, $200,195 and $206,859, respectively.
Net Loss Per Share:
Net loss per share is computed using the weighted average number of common
shares outstanding during the year. The weighted average number of shares used
in computing net loss per share was 2,106,571, 2,106,571 and 1,420,302 for the
years ended December 31, 1995, 1994 and 1993, respectively.
The effect of common stock equivalents has been excluded from the computation
because their effect is antidilutive.
NOTE 2 - LIQUIDITY AND FUNDING OF OPERATIONS:
As shown on the accompanying financial statements, the Company reported a net
loss of approximately $969,000 for the year ended December 31, 1995, and also
incurred losses in 1994 and 1993. During the past three years, the Company's
working capital requirements were met by cash provided by operating activities,
and by borrowings from, and issuance of common stock and warrants to,
shareowners including the principal shareowner.
The Company continued to take steps in 1995 to reduce expenses, to reduce cash
requirements through reduction in lease and bank payment schedules, and to raise
cash through the sale of certain nonoperating assets. Where possible, the
Company will continue to reduce expenses and cash requirements to improve future
operating results.
F-8
Management expects that cash flow from operations, in addition to cash generated
from asset sales in 1996, will provide adequate liquidity for the Company's
operations in 1996. If, however, the Company's cash flow from operations is not
maintained at satisfactory levels, the Company may seek financing to supplement
its cash flow.
Due to the circumstances described above relating to Company's ability to
improve operating results and cash flows, there is substantial doubt about the
Company's ability to continue as a going concern.
NOTE 3 - DISCONTINUANCE OF CERTAIN PRODUCTS:
During the fourth quarter of 1993, the Company recorded an inventory write off
of $600,000 in connection with the discontinuance of certain products and
product lines within certain market segments. The Company is focusing its future
efforts in industrial, medical and scientific markets which it believes offer
greater growth potential and improved profit margin. The Company recorded a
writedown in 1993 for products not consistent with this direction.
NOTE 4 - ACCOUNTS RECEIVABLE:
Accounts receivable are comprised of the following:
December 31,
------------
1995 1994
---- ----
Accounts receivable $809,834 $614,155
Reserve for bad debts (5,000) (5,000)
-------- --------
$804,834 $609,155
======== ========
NOTE 5 - INVENTORIES:
Inventories are comprised of the following:
December 31,
------------
1995 1994
---- ----
Raw materials $ 176,619 $ 181,422
Work in process, including
manufactured parts and components 1,343,021 1,461,543
Finished goods 152,033 254,807
--------- ---------
$1,671,673 $1,897,772
========== ==========
Cost of sales for interim periods was computed using an estimated overall gross
profit percentage which is adjusted at each December 31 based upon an annual
inventory count. In 1995, 1994 and 1993, the fourth quarter operating results
included an adjustment to decrease operating profits by approximately $77,000,
$190,000 and $1,160,000 (including a writedown of $600,000 for certain
products), respectively.
F-9
NOTE 6 - PLANT AND EQUIPMENT:
Plant and equipment is comprised of the following:
December 31,
------------
1995 1994
---- ----
Furniture and fixtures $ 319,539 $ 313,234
Machinery and equipment 6,633,292 7,389,265
Leasehold improvements 809,749 902,789
Construction in progress 84,617 77,836
----------- -----------
7,847,197 8,683,124
Less: Accumulated depreciation
and amortization (6,059,117) (5,940,593)
----------- -----------
$ 1,788,080 $ 2,742,531
=========== ===========
Depreciation expense (including amortization of capital leases) for the years
ended December 31, 1995, 1994 and 1993 was $715,892, $724,289 and $727,119,
respectively.
In the fourth quarter of 1995, management implemented a program to sell certain
nonoperating equipment to raise additional cash. At December 31, 1995, this
equipment is carried at its net book value of $279,111, which management
estimates is realizable value. The equipment has been classified as a current
asset because management expects the equipment to be sold within the next year.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities comprise the following:
December 31,
------------
1995 1994
---- ----
Trade accounts payable and
accrued purchases $381,923 $338,837
Payroll taxes payable 32,356 42,321
Accrued vacation 89,946 90,524
Accrued professional fees 142,020 109,146
Accrued liabilities - other 62,158 44,624
-------- --------
$708,403 $625,452
======== ========
F-10
NOTE 8 - DEBT:
The Company's debt obligations as of December 31, 1995 and 1994 are as follows:
December 31,
------------
1995 1994
---- ----
Note Payable - Bank $ 380,000 $ 520,000
Subordinated Convertible Notes 1,080,623 846,116
Unsecured Demand Convertible Note 100,000 --
Note Payable - Shareowner 533,420 500,788
Secured Promissory Notes 250,000 250,000
---------- ----------
$2,344,043 $2,116,904
========== ==========
On August 31, 1995, the Company signed an agreement with Chemical Bank amending
the terms of its credit facility. The new agreement requires monthly principal
payments of $5,000 from September 1995 until December 1996, and monthly
principal payments of $10,000 thereafter until March 1998. A final payment of
$170,000 is due on April 1, 1998. Borrowings bear interest at prime (8.5% at
December 31, 1995) + 2 1/4%. The agreement also amended the financial covenants
contained in the original agreement . The Company continues to be required to
maintain compliance with affirmative and negative covenants, including
limitations on capital expenditures, dividends and new indebtedness, and
compliance with financial ratios tied to accounts receivable and debt service
(as defined). Chemical Bank also agreed to waive any defaults which existed
under the previous facility.
Borrowings are secured by accounts receivable, plant and equipment not
previously liened, and the personal guarantee of the Company's principal
shareowner.
In connection with the new agreement, a shareowner and Subordinated Convertible
Note holder agreed to maintain a certificate of deposit with Chemical Bank in
the amount of $245,000 as collateral for the loan. Once the principal balance of
the loan is reduced below $245,000, with each principal payment made by the
Company, a like amount may be withdrawn from the collateral deposit.
In April 1995, the Company received $225,000 from a shareowner and Subordinated
Convertible Note holder of the Company through the issuance of $125,000 of 8%
Subordinated Convertible Notes due December 15, 2000 (convertible at $1.00 per
share) and 250,000 warrants at $0.40 per share. The warrants entitle the holder
to purchase 250,000 shares of Common Stock at $0.6875 per share. Twenty-five
percent of the Notes may be redeemed at any time if the Company consummates a
public offering of its Common Stock. In connection with this transaction, the
Company issued 50,000 warrants to purchase Common Stock at $1.00 per share. On
September 27, 1995, the Company raised an additional $100,000 from the same
shareowner in the form of a 10% Unsecured Demand Convertible Promissory Note.
The Note is convertible into Common Stock of the Company at the conversion price
of $1.00; interest is also payable in Common Stock at the same conversion price.
Although by its terms the Note is due on demand, it cannot be repaid until the
Chemical Bank debt has been repaid in full. The Demand Note has been classified
as noncurrent in the accompanying balance sheet because the Note holder has
agreed not to demand payment prior to December 31, 1996.
In 1993, the Company raised $1,000,000 in cash from a private investment group
through the issuance of $746,215 of 10% Subordinated Convertible Notes due
December 15, 2000 (the "notes") and 203,028 shares of the Company's common stock
at $1.25 per share. As part of this transaction, the Company issued warrants
(expiring on December 15, 2000) which entitle the holders to purchase 171,675
shares of the Company's common stock at $1.50 per share. The warrants have been
recorded at $68,670 resulting in a discount on the notes of $68,670. During
F-11
September 1993, the Company borrowed $100,000 in the form of promissory notes
from a shareowner of the Company. On December 16, 1993, these promissory notes
were extinguished and $74,621 of the notes and 20,303 shares of the Company's
common stock at $1.25 per share were issued. The notes are convertible at any
time up to their maturity date into shares of the Company's common stock at
$1.25 per share (to be adjusted for dividends, stock splits, etc.). Twenty-five
percent of the notes may be redeemed by the Company after December 15, 1996, but
before December 15, 1998, if the Company has a public offering of its shares of
common stock.
The entire amount of all Subordinated Convertible Notes (issued both in 1993 and
1995) may be redeemed by the Company after December 15, 1998; they are
subordinated to any outstanding indebtedness to Chemical Bank and other secured
indebtedness of the Company. These notes also contain certain covenants and
restrictions, including financial ratios tied to accounts receivable and debt
service (as defined). Interest is payable semiannually on these notes, and the
first six interest payments are payable in the form of additional notes. At
December 31, 1995 the Company was in violation of certain covenants of these
notes; subsequent to year end, the Company obtained waivers from the holders of
the notes and modified the financial covenants in the debt agreements.
In 1993, an unsecured demand note of $1,030,000 bearing interest at 10% per
annum held by the President and principal shareowner was extinguished, and a
promissory note maturing on December 31, 1996 in the amount of $566,049
(including $154,049 of accrued interest), and 494,400 shares of the Company's
common stock at $1.25 per share were issued. The promissory note bears interest
at 7%. However, a discount of $97,893 has been recorded on the promissory note
to reflect the difference between the actual rate of interest on the note and an
estimated market rate. Repayment of the promissory note has been subordinated to
any outstanding indebtedness to Chemical Bank and other secured indebtedness of
the Company. By mutual informal agreement, beginning with the quarter ended June
30, 1995, the Company has deferred interest payments to its principal
shareowner. The payments are expected to be resumed in 1996 and are expected to
include both the scheduled quarterly payment and any deferred payments. The
interest obligations have been accrued by the Company and are included in
accounts payable and accrued liabilities. Interest expense related to the
shareowner loan was approximately $72,000, $74,000 and $106,000 in 1995, 1994
and 1993, respectively. Although by its terms the indebtedness to the shareowner
is due on December 31, 1996, it cannot be repaid until the Chemical Bank debt
has been repaid in full. The shareowner loan has been classified as noncurrent
in the accompanying balance sheet because the shareowner has agreed not to
demand payment prior to December 31, 1996.
The Company's Secured Promissory Notes bear interest at 7%, are secured by
certain of the Company's precious metals, and are convertible at any time into
200,000 shares of common stock. The Notes also contain acceleration clauses
which would allow the holder, a shareowner of the Company, to accelerate the
maturity date and demand payment if certain events occur. The maturity date of
the Secured Notes is July 8, 1997.
Annual maturities of bank and other debt obligations, including noncash interest
on subordinated notes, are as follows:
1996 $ 60,000
1997 1,036,049
1998 200,000
1999 --
2000 1,254,346
---------
$2,550,395
==========
F-12
NOTE 9 - INCOME TAXES:
A reconciliation of the income tax (benefit) computed at the statutory federal
income tax rate to the reported amount follows:
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Federal statutory rate 34% 34% 34%
Tax (benefit) at federal statutory rates $(329,419) $(296,954) $(614,416)
Loss in excess of available benefit 311,995 283,155 596,056
Other, net 17,424 13,799 18,360
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
At December 31, 1995 the Company had net operating loss carryforwards for
financial statement and tax purposes of approximately $5,319,000 and 5,697,000,
respectively. The tax loss carryforward expires at various dates through 2010.
Deferred tax assets (liabilities) comprise the following:
December 31, December 31,
1995 1994
---- ----
Deferred tax assets
Inventory capitalization adjustment 60,000 73,000
Inventory reserves 10,000 4,000
Vacation liabilities 62,000 62,000
Other 12,000 --
Loss carryforwards 2,279,000 2,046,000
----------- -----------
Gross deferred tax assets 2,423,000 2,185,000
----------- -----------
Deferred tax liabilities
Depreciation $ (242,000) $ (375,000)
----------- -----------
Gross deferred tax liabilities $ (242,000) $ (375,000)
----------- -----------
2,181,000 1,810,000
Valuation allowance (2,181,000) (1,810,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
NOTE 10 - LEASE COMMITMENTS:
The Company leases its office and manufacturing facility under an operating
lease which expires in 1996. The lease provides for additional rental payments
based upon a pro rata share of real estate taxes and certain other expenses and
has renewal options for two five-year periods. The lease also provides for
inflationary increases based on changes in the consumer price index. Rental
expense was $298,000, $309,000 and $342,000 in 1995, 1994 and 1993,
respectively.
F-13
The Company subleased a portion of its premises in December 1995. The Company
recorded a charge of approximately $95,000 in the fourth quarter of 1995 for the
write-off of leasehold improvements and incremental costs incurred to move and
consolidate the remaining leased space.
The Company has entered into noncancellable lease agreements for certain
equipment which are recorded as capital leases. These leases are secured by the
related equipment and are for five year terms. During 1995, the Company has been
able to formally modify its leases with certain lessors and has informally
agreed with several others to modify the payment terms and, in most cases,
extend the repayment period and thereby reduce the monthly payment requirements.
The modifications did not result in a significant gain or loss. The following is
a summary of assets under capital lease at:
December 31,
------------
1995 1994
---- ----
Equipment under capital lease $1,367,554 $1,367,554
Less: Accumulated amortization (916,644) (717,200)
--------- ---------
$ 450,910 $ 650,354
========== ==========
Future minimum lease payments at December 31, 1995 are payable as follows:
Capital Operating
Leases Leases
-------- --------
1996 $198,111 $204,590
1997 87,174 --
1998 4,824 --
-------- --------
Total minimum lease payments 290,109 $204,590
========
Less: Amount representing
interest (24,267)
---------
Present value of minimum capital lease
payments (including $190,754 classified
as current obligations under
capital leases) $ 265,842
=========
The operating lease payments are net of sublease payments to INRAD of
approximately $48,000.
NOTE 11 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS:
Export sales, primarily to customers in Europe, Asia and Canada, amounted to
19%, 24% and 26% of net product sales in 1995, 1994, and 1993, respectively.
Sales to one foreign customer were 12% and 16% of net product sales in 1994 and
1993, respectively. No foreign customer accounted for more than 10% of net
product sales in 1995. Additionally, three U.S. customers each accounted for
more than 10% of net product sales in 1995, and two U.S. customers each
F-14
accounted for more than 10% of net product sales in 1994. No U.S. customer
accounted for more than 10% of net product sales in 1993.
NOTE 12 - CAPITAL STOCK:
The Company's authorized capital stock consists of 1,000,000 shares of preferred
stock, without nominal or par value, and 6,000,000 shares of common stock, par
value $.01 per share. The Company had 2,106,571 common shares outstanding at
December 31, 1995 and 1994. There were no preferred shares issued or outstanding
in either year. The Company has reserved 1,756,089 shares of common stock for
issurance upon conversion of the Subordinated Convertible Notes, Secured
Promissory Notes and Unsecured Demand Convertible Note (Note 8) and upon
exercise of outstanding warrants and options (Notes 8 and 13).
NOTE 13 - EMPLOYEE BENEFIT PLANS:
During 1990 the Company adopted the Key Employee Compensation Program (the
"Program"). In 1995, the Board of Directors, subject to shareowner approval at
the next annual shareowner's meeting, increased the maximum number of shares
which may be awarded under the program from 70,000 to 500,000. The number of
shares issuable is subject to adjustment for stock dividends, stock splits, etc.
The Company has reserved 500,000 shares of common stock for issuance under the
plan.
The Program provides for the granting of incentive stock options, compensatory
stock options, stock appreciation rights and shares of common stock to certain
full time employees of the Company under terms and at prices to be determined at
the discretion of a committee appointed by the Board of Directors. Certain
outside directors are eligible to receive compensatory stock options and stock
appreciation rights. Subject to modification by the committee, options are
generally exercisable in 25% installments beginning one year after the date of
grant and continuing for each of the four years thereafter. All options were
granted at the market value at the date of grant. To date, none of the options
have been exercised. The following table summarizes the activity for the three
years ended December 31, 1995:
Option
Shares Price
- ----------------------------------------------------------------------------
Balance at December 31, 1992 50,500 $1.25
- -----------------------------------------------------------------------------
Granted -- --
Canceled (7,500) $1.25
- -----------------------------------------------------------------------------
Balance at December 31, 1993 43,000 $1.25
- -----------------------------------------------------------------------------
Granted 34,000 $1.25
Canceled (16,000) $1.25
- -----------------------------------------------------------------------------
Balance at December 31, 1994 61,000 $1.25
- -----------------------------------------------------------------------------
Granted 77,000 $1.00
Canceled (11,000) $1.25
- -----------------------------------------------------------------------------
Balance at December 31, 1995 127,000 $1.00--$1.25
=============================================================================
The Company maintains a 401(k) savings plan for all eligible (as defined in the
plan) employees. The 401(k) plan allows employees to contribute from 1% to 15%
of their compensation on a salary reduction, pre-tax basis. The 401(k) plan also
provides that the Company, at the discretion of the Board of Directors, may
F-15
match employee contributions. The Company did not contribute any amounts to the
401(k) plan during 1995, 1994 or 1993.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock-based employee compensation plans. The statement defines a fair market
value based method of accounting for employee stock options and similar equity
instruments and encourages the use of that method of accounting for all employee
stock compensation plans. However, SFAS No. 123 also permits the measurement of
compensation costs using the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." If the Company elects to account for its employee
stock compensation plans under the guidance prescribed by APB Opinion No. 25,
the Company will be required to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 had been applied. The accounting requirements of this new standard
are effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has not made a decision as to which method it
will utilize.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount at December 31, 1995 of the Company's short-term financial
instruments approximates fair value because of the short maturity of those
instruments. The fair value of the Company's debt could not be determined
without incurring excessive costs.
F-16
INRAD, INC.
Schedule II - Valuation and qualifying accounts and Reserves
Balance at ----------- Additions ------------
beginning of Charged to costs Charged to Balance at
period and expenses other accounts Deductions end of period
-------------------------------------------------------------------------------
Valuation Allowance on
Net Deferred Tax Assets:
Year ended
December 31, 1995 1,810,000 -- 371,000 (1) -- 2,181,000
Year ended
December 31, 1994 1,477,000 -- 333,000 (1) -- 1,810,000
Year ended
December 31, 1993 661,000 -- 816,000 (1) -- 1,477,000
(1) Change in net deferred tax assets.
F-17