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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
For the fiscal year ended DECEMBER 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________________ to _______________________
Commission file number 0-11668
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INRAD, INC.
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(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
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(Address of principal executive offices) (Zip Code)
(201) 767-1910
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(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
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(Title of class)
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(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 11, 1998 was approximately
$103,000.
Common shares of stock outstanding as of March 11, 1998:
2,109,271 SHARES
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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 7A. Quantitative and qualitative discussion
about market ................................15
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.............19
Item 13. Certain Relationships
and Related Transactions.....................20
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K...........21
Signatures................................................24
Note: Page F-1 follows Page 25.
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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:
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YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
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CATEGORY SALES % SALES % SALES %
- -------- ----- - ----- - ----- -
$ $ $
Crystals &
Crystal Components 3,934,178 73 3,563,983 62 3,263,759 60
Systems &
Instruments 1,048,877 19 1,677,092 29 1,083,670 20
Contract Research &
Development 436,374 8 489,930 9 1,084,609 20
------- ------- ----------
TOTAL $5,419,429 100 $5,731,005 100 $5,432,038 100
========== === ========== === ========== ===
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
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.
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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.
This 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 50 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.
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,
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harmonic generation, and electro-optics. This combination allows the Company to
introduce new products based on crystals developed within the Company. A staff
of eleven scientists and engineers, including five 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, 1997, 1996, and 1995 were $114,021 (2.2% of net product sales), $170,750
(3.3% of net product sales), and $305,626 (7.0%),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 which have promise for the development of new commercial products
for 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 ten U.S. patents, and has filed additional applications. The Company is
seeking strategic partners to commercialize some of the technologies developed
from these programs.
During 1997, 1996 and 1995, the Company was awarded funded R&D programs
totaling approximately $945,000, $152,000, and $316,000, 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 $436,374,
$489,930, and $1,084,609 during the years ended December 31, 1997, 1996, and
1995, respectively. The Company expects to continue seeking new
government-sponsored programs, as well as joint programs with certain of its
customers, in technical areas related to its core business.
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MARKETS
In 1997, 1996 and 1995 the Company's domestic product sales were
made to end users in the following market areas:
MARKET 1997 1996 1995
------ ---- ---- ----
Industrial 77% 66% 67%
Universities 9% 13% 7%
National Laboratories 4% 8% 9%
Government 10% 13% 17%
--- ---- ----
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.
The Company does not have similar information about the end use of
products sold abroad. Export sales primarily to customers in Canada, Europe,
Near East and the Pacific Rim, amounted to 16% of total product sales in 1997,
16% in 1996, and 19% in 1995. No foreign customer accounted for over 10% of net
product sales in 1997, 1996 or 1995. One U.S. customer accounted for 14%, 12%
and 11% of net product sales in 1997, 1996 and 1995 respectively. One other U.S.
customer accounted for 11% of net product sales in both 1996 and 1995.
Additionally, one other customer accounted for over 10% of net product sales in
1995.
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, Near East
and the Pacific Rim.
The current sales staff consists of four degreed professionals plus
support personnel. The Company plans to continue it sales and marketing program
in 1998, which includes advertising, trade show participation, development of
additional marketing materials, and greatly increased contact with existing and
potential customers.
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In addition the Company intends to increase its sales staff.
BACKLOG
The Company's order backlog as of December 31, 1997 included
approximately $1,862,000 of product orders and $573,000 of contract R&D, most of
which is scheduled to be completed in 1998. On December 31, 1996, the backlog
included $1,672,000 of product orders and $75,000 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 the principal factor
in certain product categories, the principal means of competition in most
product categories are not only price, but also include product design, product
performance, quality, delivery and customer service. Based on its performance to
date, the Company believes that it can compete successfully in terms of price,
product design, product performance, quality and customer service although no
assurances can be given in this regard.
EMPLOYEES
As of December 31, 1997, the Company had 53 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; a
unique chemical reactor; and zeolite membranes able to effect separations at
high temperatures. The Company is seeking strategic partners to commercialize,
license or sell these patented technologies.
The company recently received a U.S. patent for a Thermal Conductivity
Meter (t-Master) that the company has begun to market principally to the
semiconductor industry. The t-Master, which is useful for the measurement of the
thermal conductivity of thin films, was recognized by a 1997 R&D 100 award as
one of the year's 100 most technologically significant products and processes.
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.
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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.
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, 2001. The Company has an option to renew the lease for one
additional term of five years. The 1997 annual rent was approximately $196,000.
The Company also paid real estate taxes and insurance premiums which aggregated
approximately $41,000 during 1997.
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.
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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 Bid prices for the Common
Stock in each fiscal quarter from the quarter ended March 31, 1996, through the
quarter ended December 31, 1997 as reported by the National Association of
Securities Dealers Nasdaq System:
BID PRICE
HIGH LOW
Quarter ended March 31, 1997.......... 9/32 9/32
Quarter ended June 30, 1997........... 9/32 9/32
Quarter ended September 30, 1997...... 9/32 9/32
Quarter ended December 31, 1997....... 17/32 9/32
Quarter ended March 31, 1996........... 3/8 1/4
Quarter ended June 30, 1996........... 5/16 1/4
Quarter ended September 30, 1996...... 5/16 1/4
Quarter ended December 31, 1996....... 5/16 1/4
Such Over the Counter quotations reflect inter-dealer prices, without retail
markup, markdown or commissions and may not necessarily reflect actual
transactions.
(b) HOLDERS.
As of March 11, 1998, there were 175 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, 1997, 1996 or 1995. 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's loan agreement with its bank currently
prohibits it from paying dividends. The Company does not anticipate paying cash
dividends in the immediate future.
(d) RECENT SALES OF UNREGISTERED SECURITIES.
In January 1996, the Company issued a total of 2,700 shares of its common stock
to its employees. The issuance was exempt from registration as either not
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involving a sale or as an exempt private placement pursuant to Section 4(2) of
the Securities Act.
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.
<TABLE>
<CAPTION>
As of December 31, or
For the Year Ended December 31,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Revenues 5,419,429 5,731,005 5,432,038 5,995,919 6,244,774
Net Loss (572,121) (373,774) (968,878) (873,394) (1,807,106)
Net Loss per
Common Share (0.27) (0.18) (0.46) (0.41) (1.27)
Dividends
Paid None None None None None
Total
Assets 4,093,459 4,715,205 5,296,044 6,083,264 7,535,448
Long-Term
Obligations 2,257,153 2,351,561 2,359,131 934,420 1,689,965
Shareholders'
Equity 862,572 1,434,693 1,808,467 2,677,345 3,550,739
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following information contains forward-looking statements,
including, statements with respect to the revenues to be realized from existing
backlog orders and ability to generate sufficient cash flow in the future. The
Company wishes to insure that any forward-looking statements are accompanied by
meaningful cautionary statements in order to comply with the terms of the safe
harbor provided by the Private Securities Reform Act of 1995. Actual results may
vary from these forward-looking statements due to the following factors:
inability to maintain customer relationships and/or add new customers;
unforeseen overhead expenses that may adversely affect financial results or
other inability's to operate with a positive cash flow. Readers are further
cautioned that the Company's financial results can vary from quarter to quarter,
and the financial results for any period may not necessarily be indicative of
future results. The foregoing is not intended to be an exhaustive list of all
factors which could cause actual results to differ materially from those
expressed in forward-looking statements made by the Company.
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The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the notes thereto
presented elsewhere herein. The discussion of results should not be construed to
imply any conclusion that such results will necessarily continue in the future.
RESULTS OF OPERATIONS
The following 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,
------------------------------
1997 1996 1995
---- ---- ----
% % %
Revenues:
Net product sales 91.9 91.5 80.0
Contract research and development 8.1 8.5 20.0
----- ---- -----
100.0 100.0 100.0
Interest and other income 0.2 0.3 0.3
----- ----- -----
100.2 100.3 100.3
=======================================================================
Costs and expenses:
Cost of goods sold* 77.6 74.8 83.7
Plant consolidation costs -- -- 1.7
Contract research and
development* 100.3 102.5 97.7
Selling, general and
administrative expenses 24.5 21.7 19.0
Internal research and
development** 2.2 3.3 7.0
Interest expense 4.7 4.9 5.3
=======================================================================
Net loss (10.6) (6.5) (17.8)
* calculated as a percentage of their respective revenues
** calculated as a percentage of net product sales
NET PRODUCT SALES
Net product sales were $4,983,055, $5,241,075, and $4,347,429 in 1997,
1996 and 1995, respectively. Product sales in 1997 were 5% less than the prior
year due to bookings being less in the first half of 1997 as compared to the
same period of 1996. Product sales in 1996 were 20% greater than in 1995 due to
a sales and marketing program that began early in 1996.
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International sales, as a percentage of total product sales, were 16%,
16%, and 19% for 1997, 1996, and 1995, respectively. The dollar value of
international sales decreased in 1997 as compared to 1996. The dollar value of
international sales increased in 1996 as compared to 1995.
The Company's backlog of product orders as of December 31, 1997 was
approximately $1,862,000, compared to approximately $1,672,000 at
December 31, 1996.
COST OF GOODS SOLD
As a percentage of net product sales, cost of goods sold was 77.6%,
74.8% and 83.7% for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company continued its efforts to monitor expenses in 1997. The
increase in the cost of goods sold percentage from 1996 to 1997 is attributable
to less sales compared to relatively fixed costs such as wages, depreciation and
rent. The decrease from 1995 to 1996 is increased sales compared to relatively
fixed costs.
Prices for raw materials and purchased components have been relatively
stable in 1997 and 1996, while labor costs rose in both years.
CONTRACT RESEARCH AND DEVELOPMENT
Contract research and development revenues were $436,374, $489,930, and
$1,084,609 for the years ended December 31, 1997, 1996 and 1995, respectively.
Related contract R&D expenditures, including allocated indirect costs, were
$437,623, $502,367, and $1,059,668. Revenues decreased from 1996 to 1997 based
on the Company's policy to focus its funded research efforts on programs closely
aligned with its core business, and due to the low opening backlog. Revenues
also decreased from 1995 to 1996 also as a result of the Company's policy to
focus its funded research efforts on programs closely aligned with its core
business. The programs are typically fixed price contracts and provide 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 continue focusing its future funded research
efforts on programs closely aligned with its core business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in 1997 increased $83,844,
or 6.7% compared to 1996, and in 1996 increased $211,530 or 20.5% compared to
1995. In 1997, selling salaries, travel and advertising increased and the
Company allocated a lower amount to contracts; these increases in costs were
partially offset by lower commissions. In 1996, selling salaries and commissions
increased and the Company allocated a lower portion of G&A costs to contracts;
these increases were partially offset by lower professional fees and a reduction
in rent costs. Subject to availability of resources, the Company expects to
increase certain selling costs in 1998, including additional sales staff.
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INTERNAL RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for 1997 were $114,022 (2.2% of
product sales) compared with 1996 expenditures of $170,750 (3.3% of product
sales. R&D expenses for 1995 were $305,626 (7.0% of product sales).
During 1997, the Company continued to focus its internal research and
development efforts on a few new products with short development cycles. As a
result, R&D expenditures decreased in 1997. This level is expected to continue
in 1998.
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 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, 1997, the Company had a net deferred tax asset of $2,523,000,
the primary component of which was its significant net operating loss
carryforward. The Company has established a valuation allowance to fully offset
this deferred tax asset in the event that operating losses continue and make it
uncertain that the tax asset will be realized.
YEAR 2000
The company is conducting a review of its computer systems to identify
the systems that could be affected by the year 2000 issue and will develop an
implementation plan to resolve the issue. The year 2000 issue is the result of
computer programs being written using two digits rather then four to define the
applicable year. Any programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather then the year 2000. This could result in
a major system failure or miscalculations. The Company presently believes that,
with modifications to existing software and conversions to new software, the
year 2000 problem will not pose significant problems. However, if such
modifications and conversions are not completed timely, the year 2000 problem
may have a material impact on the operations of the Company.
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 February 6, 1997, the Company signed an agreement with Chase Manhattan
Bank (successor to Chemical Bank) amending the terms of its credit facility.
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The new agreement requires monthly principal payments of $10,000 for January,
1997, and 7,500 from February 1997 until December 1997, monthly principal
payments of $10,000 from January 1998 until December 1998, and monthly
principal payments of 12,500 from January 1999 until August 1999. A final
payment of $7,500 is due on September 1, 1999. Borrowings bear interest at
prime (8.50% at December 31, 1997) + 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 a financial ratio tied to accounts
receivable. Chase Manhattan Bank also agreed to waive any defaults which
existed under the previous facility. Borrowings are secured by accounts
receivable and the personal guarantee of the Company's principal shareowner.
In addition, in connection with the new Chase Manhattan Bank agreement,
a shareowner and Subordinated Convertible Note holder agreed to maintain a
certificate of deposit with Chase Manhattan Bank in the amount of $245,000 as
collateral for the loan. Once the principal balance of the loan is reduced below
$222,700, with each principal payment made by the Company, an amount may be
withdrawn from the collateral deposit to maintain a 1.1 to 1 collateral to loan
ratio.
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
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 Chase Manhattan
Bank debt has been repaid in full. The Demand Note has been classified as
noncurrent in the Company's December 31, 1997 balance sheet because the Note
holder has agreed not to demand payment prior to January 1, 1999.
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 were payable in the form of additional
notes and did not require a cash outlay. In 1997 the Company was required to
begin making cash interest payments. The two semiannual payments of $50,000 that
were due in 1997 were not made and the debt holder has agreed not to request
payment prior to July 15, 1998. The interest obligation has been accrued by the
Company and is included in accounts payable and accrued interest.
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.
13
<PAGE>
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 Chase Manhattan Bank and other
secured indebtedness of the Company. At December 31, 1996 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 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 $57,000, $72,000 and $72,000 in 1997, 1996 and 1995 respectively.
This note has been classified as noncurrent in the Company's December 31, 1997
Balance Sheet because the note holder has agreed not to demand payment prior to
January 1, 1999.
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. This note has been classified as noncurrent
in the Company's December 31, 1997 Balance Sheet because the note holder has
agreed not to demand payment prior to January 1, 1999.
Because of the circumstances described below 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, 1997, 1996 and 1995 were $86,000, $238,000 and
$166,000, respectively. Until the Company is generating satisfactory amounts of
cash flow from its operations, it is expected that future capital expenditures
will be kept to a minimum. Management believes that in the short term, this
limitation will not have a material effect on operations.
OVERVIEW OF FINANCIAL CONDITION
As shown in the accompanying financial statements, the Company
reported a net loss of approximately $572,000 for the year ended December 31,
1997, and also incurred losses in 1996 and 1995. 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 and the sale of certain non-operating
assets.
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 will provide adequate
liquidity for the Company's operations in 1998. 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.
14
<PAGE>
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 in the accompanying financial
statements (see also Liquidity and Capital Resources under this Item 7).
Item 7A. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK.
Not applicable
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 25.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On August 29, 1996, the Company filed Form 8-K reporting a change in
its independent accountant.
15
<PAGE>
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
78 Directors, President and Chief
Executive Officer (1973 -
Present).
William B. Maxson, 1989 Consultant (1990 - Present);
67 Vice 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
78 (1990 - 1994); Chief
Operating Officer, Datamax
Corporation (1994 - 1996)
Aaron Dean 1996 Financial Analyst and Vice
36 President(1996 - Present)
Prudential Securities
(investment banking firm);
Vice President (1995 - 1996)
M.D. Sass Associates
(investment banking firm);
Vice President (1990 - 1995)
Arnhold and S. Bleichroeder,
Inc. (investment banking
firm).
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
to the Board of Directors. At the present time Hoechst has not designated a
representative to the Board.
16
<PAGE>
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. Aaron Dean has been selected by Clarex as one
representative; a second representative has not been designated 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, 78 1973...............Chairman of Board of Directors
President and Chief Executive
Officer
Maria Murray, 40 1995...............Vice President - Marketing
and Sales
James Greco, 41 1996...............Controller 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 a Sales Engineer,
became Vice President of R&D Programs in 1993, and was appointed Vice President,
Marketing and Sales in 1995. Prior to joining INRAD, she held positions in
electronic 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.
James Greco joined the Company as Secretary and Controller in July
1996. Prior to joining INRAD, he held positions as Controller of Divisions
within National Cleaning Contractors from 1989-1996. 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.
17
<PAGE>
Item 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for the years ended December 31, 1997,
1996 and 1995, 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 $100,000, for services
rendered in all capacities as an executive officer during such period:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(A) COMPENSATION
NAME AND CURRENT ---------------------- ------------ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED COMPENSATION ($)
- ------------------ ---- ------ ----- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Warren Ruderman, 1997 $130,000 none none none
President and Chief
Executive Officer
1996 $130,000 none none none
1995 $130,000 none none none
</TABLE>
(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.
COMPENSATION OF DIRECTORS
Each non-employee director is paid $500 for each board meeting they
attend, and $250 for each conference call meeting in which they
participate.
18
<PAGE>
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, 1998. The Company
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) 1,106,400 52.5
c/o INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
Clarex, Ltd. 1,969,874 (2) 52.4
c/o Bank of Nova Scotia
Trust Company Bahamas Ltd.
PO Box N1355
Nassau, Bahamas
Hoechst Celanese Corp. 300,000 14.2
Routes 202-206 North
Box 2500
Somerville, NJ 08876
William F. Nicklin 210,527 (3) 9.6
33 Grand Avenue
Newburgh, NY 12550
William Maxson 3,162 (4) 0.1
c/o INRAD, Inc.
Donald H. Gately 16,417 (5) 0.8
c/o INRAD, Inc.
Aaron Dean 61,675 (6) 2.9
c/o INRAD, Inc.
Directors and Executive 1,209,204 (7) 55.0
Officers as a group
(6 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 1,646,846 shares subject to options, warrants or
convertible notes exercisable or convertible within 60 days.
(3) Including 80,000 shares subject to convertible notes convertible
within 60 days.
(4) Including 1,500 shares subject to options exercisable within 60 days.
19
<PAGE>
(5) Including 16,417 shares subject to warrants within 60 days.
(6) Including 51,675 shares subject to warrants within 60 days.
(7) Including 91,092 shares subject to options or warrants within 60 days.
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 $57,000, $72,000 and $72,000 in 1997, 1996 and 1995,
respectively.
Repayment of the shareowner loan has been subordinated to the prior
repayment of the Company's indebtedness to Chase Manhattan Bank and to other
secured indebtedness of the Company. The principal shareowner has guaranteed
borrowings under the Company's existing credit facility with Chase Manhattan
Bank. By mutual informal agreement, the Company has deferred certain interest
payments to its principal shareholder. During the year ended December 31,
1997, the Company did not make any quarterly interest payments. Subject to
adequate cash flow, the Company will continue to make interest payments to
its principal shareholder. Although by its terms the indebtedness to the
shareholder is due on December 31, 1996, it cannot be repaid until the Chase
Manhattan Bank debt has been repaid in full. The shareholder loan has been
classified as noncurrent in the accompanying balance sheet because the
shareholder has agreed not to demand payment prior to January 1, 1999.
During the years ended December 31, 1997, 1996 and 1995
approximately 4%, 8% and 9%, respectively of the Company's net product sales
were through a foreign agent, in which the principal shareholder has an
investment. Terms of sales to this foreign agent were substantially the same
as to unrelated foreign agents.
20
<PAGE>
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 3.1 of Amendment No. 1.
Incorporation, as amended.
3.2 By-laws, as amended. 3.2 of Amendment No. 1.
10.4 License agreement, dated September 10.11 of Amendment No. 1.
1981, between the Company and
Lambda Physik.
10.5 Key-Man Insurance Policy on the 10.12 of Amendment No. 2.
life of Warren Ruderman.
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 Company's proxy
statement filed with the Securities and Exchange Commission related to the
annual meeting held on June 20, 1996:
10.8 INRAD, Inc. Key Employee Compensation Plan.
21
<PAGE>
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 Chase Manhattan 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,
1995:
10.12 Amended and Restated Chase Manhattan Bank Agreement.
The following exhibits are incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the quarter ended December
31, 1995:
10.13 Amendment and Waiver Agreement between INRAD and Chase Manhattan
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.
22
<PAGE>
The following exhibits are incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the quarter ended December
31, 1996:
10.16 Amendment and waiver between INRAD and Chase Manhattan Bank dated
February 6, 1997.
10.17 Addendum to lease dated October 4, 1991, between S&R Costa as lessor
and the Company as leasee.
10.18 Amendment and waiver to the stock and purchase agreement dated as of
December 15, 1993.
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
23.1 Consent from Price Waterhouse LLP
23.2 Consent from Grant Thornton LLP
27.1 Financial Data Schedule
The following exhibits form an attachment to this report:
22.1 Subsidiaries of the Company
23.1 Consent from Price Waterhouse LLP
23.2 Consent from Grant Thornton LLP
27.1 Financial Data Schedule
23
<PAGE>
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, 1998
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, 1998
- ------------------- Executive Officer
Warren Ruderman and Director (Principal
Executive Officer)
/s/ Aaron Dean Director March 26, 1998
- -------------------
Aaron Dean
/s/ Donald H. Gately Director March 26, 1998
- --------------------
Donald H. Gately
/s/ William B. Maxson Director March 26, 1998
- ---------------------
William B. Maxson
/s/ James L. Greco Controller and Secretary March 26, 1998
- ------------------ (Principal Financial and
James L. Greco Accounting Officer)
24
<PAGE>
INRAD, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
CONSOLIDATED FINANCIAL STATEMENTS PAGE
Reports of Independent Certified Public Accountants F-2 - F3
Consolidated Balance Sheets at December 31, 1997 and 1996 F-4
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997 F-5
Consolidated Statement of Shareowners' Equity for each
of the three years in the period ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1997 F-7
Notes to Consolidated Financial Statements F-8 to F-18
NOTE: All schedules are either not applicable or the information is included in
the consolidated financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
INRAD, Inc.
We have audited the accompanying consolidated balance sheet of INRAD, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareowners' equity, and cash flows for the years then
ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of INRAD, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has had recurring losses and has substantial debt service obligations.
These factors, among others, as discussed in Note 2 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
New York, New York
March 6, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors of INRAD, Inc.
In our opinion, the accompanying consolidated statements of operations, of cash
flows and of changes in shareowners' equity for the year ended December 31, 1995
present fairly, in all material respects, the results of operations and cash
flows of INRAD, Inc. and its subsidiaries for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of INRAD, Inc.
for any period subsequent to December 31, 1995.
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 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-3
<PAGE>
INRAD, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 209,142 $ 194,577
Certificate of deposit 70,000 70,000
Accounts receivable, net 654,827 735,160
Inventories 1,546,541 1,735,144
Unbilled contract costs 102,363 59,350
Other current assets 64,145 60,292
------------ ------------
TOTAL CURRENT ASSETS 2,647,018 2,854,523
PLANT AND EQUIPMENT, NET 996,664 1,431,931
PRECIOUS METALS 278,693 279,248
OTHER ASSETS 171,084 149,503
------------ ------------
TOTAL ASSETS $ 4,093,459 $ 4,715,205
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank 120,000 92,500
Current obligations under capital leases 12,262 73,399
Accounts payable and accrued liabilities 720,214 640,943
Advances from customers 63,329 73,244
Other current liabilities 57,929 48,865
------------ ------------
TOTAL CURRENT LIABILITIES 973,734 928,951
NOTE PAYABLE - BANK 107,500 227,500
OBLIGATIONS UNDER CAPITAL LEASES 8,683 4,751
SECURED PROMISSORY NOTES 250,000 250,000
SUBORDINATED CONVERTIBLE NOTES 1,224,921 1,203,261
UNSECURED DEMAND CONVERTIBLE NOTE 100,000 100,000
NOTE PAYABLE - SHAREOWNER 566,049 566,049
------------ ------------
TOTAL LIABILITIES 3,230,887 3,280,512
------------ ------------
COMMITMENTS
SHAREOWNERS' EQUITY:
Common stock: $.01 par value; 2,121,571 shares issued 21,216 21,216
Capital in excess of par value 6,051,791 6,051,791
Accumulated deficit (5,158,635) (4,586,514)
------------ ------------
914,372 1,486,493
Less - Common stock in treasury,
at cost (12,300 shares) (51,800) (51,800)
------------ ------------
TOTAL SHAREOWNERS' EQUITY 862,572 1,434,693
------------ ------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 4,093,459 $ 4,715,205
============ ============
</TABLE>
See Notes to Consolidated Statements.
F-4
<PAGE>
INRAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net product sales $4,983,055 $5,241,075 $4,347,429
Contract research and development 436,374 489,930 1,084,609
---------- ---------- ----------
5,419,429 5,731,005 5,432,038
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold 3,864,506 3,922,517 3,638,582
Plant consolidation costs 94,228
Contract research and development
expenses 437,623 502,367 1,059,668
Selling, general and administrative
expenses 1,328,921 1,245,077 1,033,547
Internal research and development
expenses 114,021 170,750 305,626
---------- ---------- ----------
5,745,071 5,840,711 6,131,651
---------- ---------- ----------
OPERATING LOSS (325,642) (109,706) (699,613)
OTHER INCOME (EXPENSE):
Interest expense (256,482) (283,390) (285,646)
Interest and other income, net 10,003 19,322 16,381
---------- ---------- ----------
NET LOSS $(572,121) $(373,774) $(968,878)
========== ========== ==========
NET LOSS PER COMMON SHARE $(0.27) $(0.18) $(0.46)
========== ========== ==========
Weighted average common shares outstanding 2,109,271 2,109,138 2,106,571
========== ========== ==========
</TABLE>
See Notes to Consolidated Statements.
F-5
<PAGE>
INRAD, INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN ACCUMULATED TREASURY
SHARES AMOUNT EXCESS OF DEFICIT STOCK
PAR VALUE
<S> <C> <C> <C> <C> <C>
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
Net loss for the year - - - (373,774) -
Issuance of treasury stock - - 16,200 - (16,200)
--------- ------- ---------- ----------- -------
Balance, December 31, 1996 2,121,571 21,216 6,051,791 (4,586,514) 51,800
--------- ------- ---------- ----------- -------
Net loss for the year - - - (572,121) -
--------- ------- ---------- ----------- -------
Balance, December 31, 1997 2,121,571 $21,216 $6,051,791 $(5,158,635) $51,800
========= ======= ========== =========== =======
</TABLE>
See Notes to Consolidated Statements.
F-6
<PAGE>
INRAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (572,121) $ (373,774) $ (968,878)
----------- ---------- ----------
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 530,610 601,881 718,145
Noncash interest 21,660 155,269 142,139
Plant consolidation costs - - 64,751
Gain on sale of equipment (3,800) (8,621) -
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 80,333 69,674 (195,679)
Inventories 188,603 (63,471) 226,099
Unbilled contract costs (43,012) 92,299 5,068
Other current assets (3,853) 1,405 (11,532)
Precious metals 555 754 31,796
Other assets (30,717) (17,467) (16,415)
Accounts payable and accrued liabilities 101,965 (67,460) 82,951
Advances from customers (9,915) (42,961) (355)
Other liabilities 9,064 (4,218) 912
----------- ---------- ----------
Total adjustments 841,493 717,084 1,047,880
----------- ---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 269,372 343,310 79,002
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (86,208) (238,202) (166,450)
Proceeds from sale of equipment 3,800 299,180 49,700
----------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (82,408) 60,978 (116,750)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable - Bank (92,500) (60,000) (140,000)
Proceeds from issuance of subordinated
convertible notes 125,000
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 (79,899) (187,692) (228,989)
----------- ---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (172,399) (247,692) (43,989)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 14,565 156,596 (81,737)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 194,577 37,981 119,718
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 209,142 $ 194,577 $ 37,981
=========== ========== ==========
</TABLE>
See Notes to Consolidated Statements.
F-7
<PAGE>
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 shorter of the economic life or
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
$15,000, $110,000, and $100,000 in 1997, 1996 and 1995, 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-8
<PAGE>
INTERNAL RESEARCH AND DEVELOPMENT COST
Internal research and development costs are charged to expense as incurred.
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 certificate of deposit
serves as collateral for a letter of credit. It is anticipated that the
underlying contract will be completed in 1998 and the letter of credit canceled.
Cash interest paid during the years ended December 31, 1997, 1996 and 1995
was $40,525, $109,497, and $113,447, respectively.
NET LOSS PER COMMON SHARE:
Net loss per common 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 2,109,271, 2,109,138, and 2,106,571 for
the years ended December 31, 1997, 1996 and 1995, respectively.
The effect of options and warrants outstanding during the year have been
excluded from the computation because their effect is antidilutive. At December
31, 1997 the Company had outstanding 300,000 warrants exercisable at $0.6875;
12,700 exercisable at $1.00; 175,392 exercisable at $1.50. Also at December 31,
1997 the Company had outstanding 169,500 stock options exercisable at $1.00, and
33,000 exercisable at $1.25.
IMPAIRMENT OF LONG-LIVED ASSETS:
Impairment losses are recognized when expected future cash flows are less than
the assets' carrying value. Accordingly, when indicators of impairment are
present, the Company will evaluate the carrying value of property, plant and
equipment and other long term assets in relation to the operating performance
and future undiscounted cash flows of the underlying business. The amount of the
impairment loss is the excess of the carrying amount of the impaired asset over
the fair value of the asset. Generally, fair value represents the expected
future cash flows from the use of the asset or group of assets, discounted at an
interest rate commensurate with the risks involved.
ADVERTISING:
The Company expenses advertising costs as incurred.
F-9
<PAGE>
NOTE 2 - LIQUIDITY AND FUNDING OF OPERATIONS:
As shown on the accompanying financial statements, the Company reported a net
loss of approximately $572,000 for the year ended December 31, 1997, and also
incurred losses in 1996 and 1995. In addition, the Company has substantial debt
service obligations. 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 warrants to a shareowner. The
Company continued to take steps in 1997 to reduce expenses and to reduce cash
requirements through reduction in bank debt payments.
Management expects that cash flow from operations, will provide adequate
liquidity for the Company's operations in 1998. 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 - ACCOUNTS RECEIVABLE:
Accounts receivable are comprised of the following:
DECEMBER 31,
1997 1996
---- ----
Accounts receivable $661,827 $740,160
Allowance for doubtful accounts (7,000) (5,000)
-------- --------
$654,827 $735,160
======== ========
NOTE 4 - INVENTORIES:
Inventories are comprised of the following:
DECEMBER 31,
1997 1996
---- ----
Raw materials $ 168,976 $ 184,116
Work in process, including
manufactured parts and components 1,285,157 1,430,086
Finished goods 92,408 120,942
---------- ----------
$1,546,541 $1,735,144
========== ==========
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 1997, 1996 and 1995, the fourth quarter operating results
included an adjustment to decrease (increase) operating losses by approximately
$(33,000), $ 164,000 and $(77,000), respectively.
F-10
<PAGE>
NOTE 5 - PLANT AND EQUIPMENT:
Plant and equipment are comprised of the following:
DECEMBER 31,
1997 1996
---- ----
Furniture and fixtures $ 171,515 $ 361,501
Machinery and equipment 4,536,143 6,913,950
Leasehold improvements 413,721 809,749
----------- -----------
5,121,379 8,085,200
Less: Accumulated depreciation
and amortization (4,124,715) (6,653,269)
----------- -----------
$ 996,664 $ 1,431,931
=========== ===========
Depreciation expense (including amortization of capital leases) for the years
ended December 31, 1997, 1996 and 1995 was $521,475, $594,352, and $715,892,
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 was carried at its net book value of $279,111, and was sold in 1996
for $299,180.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities comprise the following:
DECEMBER 31,
1997 1996
---- ----
Trade accounts payable and
accrued purchases $249,758 $376,825
Payroll taxes payable 34,492 37,917
Accrued vacation 98,289 93,342
Accrued professional fees 50,129 43,576
Accrued liability - shareowners 96,597 39,624
Accrued interest 163,063 26,340
Accrued liability - other 27,886 23,319
-------- --------
$720,214 $640,943
======== ========
F-11
<PAGE>
NOTE 7 - DEBT:
The Company's debt obligations as of December 31, 1997 and 1996 are as follows:
DECEMBER 31,
1997 1996
---- ----
Note Payable - Bank $ 227,500 $ 320,000
Subordinated Convertible Notes 1,224,921 1,203,261
Unsecured Demand Convertible Note 100,000 100,000
Note Payable - Shareowner 566,049 566,049
Secured Promissory Notes 250,000 250,000
------------ -----------
$ 2,368,470 $ 2,439,310
============ ===========
On February 6, 1997, the Company signed an agreement with Chase Manhattan
Bank (successor to Chemical Bank) amending the terms of its credit facility.
The new agreement requires monthly principal payments of $10,000 for January
1997, and $ 7,500 from February 1997 until December 1997, monthly principal
payments of $10,000 from January 1998 until December 1998, and monthly
principal payments of $ 12,500 from January 1999 until August 1999. A final
payment of $7,500 is due on September 1, 1999. Borrowings bear interest at
prime (8.50% at December 31, 1997) + 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 a financial ratio tied to accounts
receivable. Chase Manhattan Bank also agreed to waive any defaults which
existed under the previous facility. Borrowings are secured by accounts
receivable 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
Chase Manhattan Bank in the amount of $245,000 as collateral for the loan.
Once the principal balance of the loan is reduced below $222,700, with each
principal payment made by the Company, an amount may be withdrawn from the
collateral deposit to maintain a 1.1 to 1 collateral to loan ratio.
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 $0.6875 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 Chase
Manhattan 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 January 1, 1999.
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
F-12
<PAGE>
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. In 1997
the Company was required to begin making cash interest payments. The two
semiannual payments of $50,000 that were due in 1997 were not made and the
debt holder has agreed not to request payment prior to July 15, 1998. The
interest obligation has been accrued by the Company and is included in
accounts payable and accrued liabilities. During 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 10% subordinated convertible 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 Chase Manhattan 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, 1997 the Company was not in violation of
the covenants of these notes. At December 31, 1996 and 1995 the Company was
in violation of certain covenants of these notes; subsequent to the year
ends, 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 Chase Manhattan Bank
and other secured indebtedness of the Company. By mutual informal agreement,
beginning with the quarter ended March 31, 1996, the Company has deferred
interest payments to its principal shareowner. The payments are expected to
be resumed in 1998. 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 $57,000, $72,000,
and $72,000 in 1997, 1996 and 1995, respectively. Although by its terms the
indebtedness to the shareowner was due on December 31, 1996, it cannot be
repaid until the Chase Manhattan 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
January 1, 1999.
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
Company is behind in making six quarterly interest payments and the debt
holder has agreed not to request payment prior to July 15, 1998. The interest
obligations have been accrued by the Company and are included in accounts
payable and accrued liabilities. The maturity date of the Secured Notes was
July 8, 1997. The note has been classified as noncurrent in the accompanying
balance sheet because the noteholder has agreed not to demand payment prior
to January 1, 1999.
F-13
<PAGE>
Annual maturities of bank and other debt obligations, including noncash interest
on subordinated notes, are as follows:
1998 $ 120,000
1999 1,023,549
2000 1,254,346
----------
$2,397,895
==========
NOTE 8 - INCOME TAXES:
A reconciliation of the income tax (benefit) computed at the statutory federal
income tax rate to the reported amount follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
----------- ---------- -----------
Tax (benefit) at federal statutory rates $ (194,480) $(127,160) $ (329,419)
Loss in excess of available benefit 181,355 115,955 311,995
Other, net 13,125 11,205 17,424
----------- ---------- -----------
$ - $ - $ -
=========== ========== ===========
</TABLE>
At December 31, 1997 the Company had net operating loss carryforwards for tax
purposes of approximately $5,885,000. The tax loss carryforward expires at
various dates through 2012.
Internal Revenue Code Section 382 places a limitation on the utilization of
Federal net operating loss and other credit carryforwards when an ownership
change, as defined by the tax law, occurs. Generally, this occurs when a
greater than 50 percentage point change in ownership occurs. Accordingly, the
actual utilization of the net operating loss and other carryforwards for tax
purposes may be limited annually to a percentage (approximately 7%) of the
fair market value of the Company at the time of any such ownership change.
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS
Inventory capitalization adjustment $ 1,000 $ 11,000
Inventory reserves 20,000 20,000
Vacation liabilities 33,000 30,000
Other 67,000 18,000
Depreciation 48,000 -
Loss carryforwards 2,354,000 2,240,000
---------- ----------
Gross deferred tax assets 2,523,000 2,319,000
---------- ----------
DEFERRED TAX LIABILITIES
Depreciation - (15,000)
---------- ----------
F-14
<PAGE>
Gross deferred tax liabilities - (15,000)
---------- ----------
2,523,000 2,304,000
Valuation allowance (2,523,000) (2,304,000)
---------- ----------
Net deferred tax assets $ 0 $ 0
========== ==========
</TABLE>
NOTE 9 - LEASE COMMITMENTS:
The Company leases its office and manufacturing facility under an operating
lease which expires in 2001. The lease provides for additional rental payments
based upon a pro rata share of real estate taxes and certain other expenses and
has a renewal option for one five-year period. Rental expense was $196,000,
$237,000, and $298,000 in 1997, 1996 and 1995, respectively and real estate
taxes were $41,000, $41,000 and $54,000 in 1997, 1996 and 1995, respectively.
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,
1997 1996
---- ----
Equipment under capital lease $ 132,690 $ 790,532
Less: Accumulated amortization (75,565) (607,449)
--------- ---------
$ 57,125 $ 183,083
========= =========
Future minimum lease payments at December 31, 1997 are payable as follows:
Capital Operating
Leases Leases
------ ------
1998 $ 14,210 $ 195,564
1999 9,385 195,564
2000 195,564
2001 162,970
---------- ---------
Total minimum lease payments 23,595 $ 749,662
=========
Less: Amount representing interest (2,650)
----------
F-15
<PAGE>
Present value of minimum capital
lease payments (including $12,262
classified
as current obligations
under capital leases) $ 20,945
==========
NOTE 10 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS:
Export sales, primarily to customers in Europe, Asia and Canada,
amounted to 16%, 16% and 19% of net product sales in 1997, 1996, and 1995,
respectively.
No foreign customer accounted for more than 10% of net product sales in 1997,
1996 and 1995. One U.S. customer accounted for more than 14%, 12% and 11% of net
product sales in 1997, 1996 and 1995 respectively. One other U.S. customer
accounted for over 11% of net product sales in 1996 and 1995. Additionally, one
other U.S. customer accounted for 10% of net product sales in 1995. During the
years ended December 31, 1997, 1996 and 1995 approximately 4%, 8% and 9%,
respectively of the Company's net product sales were through a foreign agent, in
which the principal shareholder has an investment.
NOTE 11 - 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 2,109,271 common shares outstanding at
December 31, 1997 and 1996. There were no preferred shares issued or outstanding
in either year. The Company has reserved 2,344,937 shares of common stock for
issuance upon conversion of the Subordinated Convertible Notes, Secured
Promissory Notes and Unsecured Demand Convertible Note (Note 7) and upon
exercise of outstanding warrants and options (Notes 7 and 12).
NOTE 12 - EMPLOYEE BENEFIT PLANS:
During 1990 the Company adopted the Key Employee Compensation Program (the
"Program"). In 1995 the maximum number of shares which may be awarded under the
program was increased 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. The maximum term of
the grant is ten years. All options were granted at the market value or above at
the date of grant. To date, none of the options have been exercised. The
following table summarizes the options granted under the plan for the three
years ended December 31, 1997:
F-16
<PAGE>
Weighted
Average
Shares Price
- ---------------------------------------------------------------------------
Outstanding at December 31, 1994 61,000 $1.25
- ---------------------------------------------------------------------------
Granted 77,000 $1.00
Expired/forfeited (11,000) $1.25
- ---------------------------------------------------------------------------
Outstanding at December 31, 1995 127,000 $1.10
- ---------------------------------------------------------------------------
Granted 20,000 $1.00
Expired (9,000) $1.25
Forfeited (27,000) $1.00
- ---------------------------------------------------------------------------
Outstanding at December 31, 1996 111,000 $1.09
- ---------------------------------------------------------------------------
Granted 123,000 $1.00
Expired (9,500) $1.09
Forfeited (22,000) $1.04
- ---------------------------------------------------------------------------
Outstanding at December 31, 1997 202,500 $1.04
======= =====
- ---------------------------------------------------------------------------
Exercisable at December 31, 1997 49,750 $1.16
====== =====
- ---------------------------------------------------------------------------
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for its option plan under APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations
and, accordingly, no compensation cost has been recognized for the stock
option plan. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1997, 1996
and 1995 consistent with the provisions of SFAS No. 123, the Company's net
loss and loss per share would not have been impacted.
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before 1995. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for grants in 1997 was expected
volatility of 250%; weighted average risk-free rate of 6.24%; and weighted
average expected life of 10 years; and for 1996 and 1995 expected volatility
of 250%; weighted average riskfree rate of 6.008%; and weighted average
expected life of 10 years.
The weighted average grant date fair value of options granted during
1997, 1996 and 1995 was $0.32, $0.38 and $0.28 respectively.
The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------- --------------------------------------
Number Weighted average Number
Range of exercise outstanding at remaining Weighted average exercisable at Weighted average
prices December 31, 1997 contractual life exercise price December 31, 1996 exercise price
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.25 202,500 8.60 years $1.04 49,750 $1.16
</TABLE>
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
F-17
<PAGE>
Directors, may match employee contributions. The Company did not contribute
any amounts to the 401(k) plan during 1997, 1996 or 1995.
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount at December 31, 1997 and 1996 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-18
<PAGE>
Exhibit 22.1
SUBSIDIARIES OF THE COMPANY:
State or Territory
Company of Incorporation
------- ------------------
INRAD Optical Systems, Inc. New Jersey
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of INRAD, Inc. of our report dated March 15, 1996,
which appears on page F-3 of this Annual Report on Form 10-K of INRAD, Inc.
for the year ended December 31, 1997.
PRICE WATERHOUSE LLP
Morristown, New Jersey
March 23, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 6, 1998, accompanying the consolidated
financial statements and included in the Annual Report of INRAD, Inc. on Form
10K for the year ended December 31, 1997. We hearby consent to the
incorporation by reference of said report in the Registration Statement of
INRAD, Inc. on Form S-8 SEC File No. 333-17883, effective December 13, 1996).
GRANT THORNTON LLP
New York, New York
March 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES F4 AND F5 OF THE COMPANY'S 10K FOR THE FISCAL YEAR AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000719494
<NAME> INRAD, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 209,142
<SECURITIES> 0
<RECEIVABLES> 661,827
<ALLOWANCES> 7,000
<INVENTORY> 1,546,541
<CURRENT-ASSETS> 2,647,018
<PP&E> 5,121,379
<DEPRECIATION> 4,124,715
<TOTAL-ASSETS> 4,093,459
<CURRENT-LIABILITIES> 973,734
<BONDS> 2,257,153
0
0
<COMMON> 21,216
<OTHER-SE> 841,356
<TOTAL-LIABILITY-AND-EQUITY> 4,093,459
<SALES> 5,419,429
<TOTAL-REVENUES> 5,419,429
<CGS> 4,302,129
<TOTAL-COSTS> 4,302,129
<OTHER-EXPENSES> 114,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,482
<INCOME-PRETAX> (572,121)
<INCOME-TAX> 0
<INCOME-CONTINUING> (572,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (572,121)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> 0
</TABLE>
