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, 1998
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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
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(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
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- ------------------------- ---------------------------
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, 1999:
4,096,078 shares
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INRAD, INC.
INDEX
Page
----
Part I
Item 1. Business......................................1
Item 2. Properties....................................6
Item 3. Legal Proceedings.............................6
Item 4. Submission of Matters to a Vote
of Security Holders...........................6
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters...............7
Item 6. Selected Financial Data.......................8
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations....................................8
Item 7A. Quantitative and qualitative discussion
about market ................................14
Item 8. Financial Statements
and Supplementary Data.......................14
Item 9. Changes In and Disagreements
With Accountants On Accounting
and Financial Disclosure.....................14
Part III
Item 10. Directors and Executive Officers
of the Registrant............................15
Item 11. Executive Compensation.......................16
Item 12. Security Ownership of Certain
Beneficial Owners and Management.............16
Item 13. Certain Relationships
and Related Transactions.....................18
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K...........19
Signatures.....................................................22
Note: Page F-1 follows Page 22.
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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, measuring 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 drivers 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:
Year Ended December 31,
-----------------------
1998 1997 1996
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Category Sales % Sales % Sales %
- -------- ----- - ----- - ----- -
$ $ $
Crystals &
Crystal Components $3,372,802 63 $3,934,178 73 $3,563,983 62
Systems &
Instruments 1,201,472 23 1,048,877 19 1,677,092 29
Contract Research &
Development 776,594 14 436,374 8 489,930 9
------- ------- -------
TOTAL $5,350,868 100 $5,419,429 100 $5,731,005 100
========== === ========== === ========== ===
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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.
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 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
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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,
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 seven 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,
1998, 1997, and 1996 were $159,245 (3.4% of net product sales), $114,021 (2.2%
of net product sales), and $170,750 (3.3% of net product sales).
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 1998, 1997 and 1996, the Company was awarded funded R&D programs
totaling approximately $1,323,000, $945,000 and $152,000, respectively. The
programs range in duration from six to twenty-four months. All programs are
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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 $776,594, $436,374
and $489,930 during the years ended December 31, 1998, 1997, and 1996,
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.
Markets
In 1998, 1997 and 1996 the Company's domestic product sales were made to
end users in the following market areas:
Market 1998 1997 1996
------ ---- ---- ----
Industrial 79% 77% 66%
Universities 10% 9% 13%
National Laboratories 3% 4% 8%
Government 8% 10% 13%
-- --- ---
Total Domestic 100% 100% 100%
==== ==== ====
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 21% of total product sales in 1998,
16% in both 1997 and 1996. No foreign customer accounted for over 10% of net
product sales in 1998, 1997 or 1996. One U.S. customer accounted for 13%, 14%
and 12% of net product sales in 1998, 1997 and 1996, respectively. One other
U.S. customer accounted for 11% of net product sales in 1996.
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 three degreed professionals plus
support personnel. The Company plans to increase its sales and marketing program
in 1999, which includes advertising, trade show participation, development of
additional marketing materials, and greatly increased contact with existing and
potential customers. In addition the Company intends to increase its sales
staff.
Backlog
The Company's order backlog as of December 31, 1998 included approximately
$1,426,000 of product orders and $1,110,000 of contract R&D, most of which is
scheduled to be completed in 1999. On December 31, 1997, the backlog included
$1,862,000 of product orders and $573,000 of contract R&D.
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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, 1998, the Company had 57 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 was awarded 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.
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.
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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 1998 annual rent was approximately $196,000.
The Company also paid real estate taxes and insurance premiums which aggregated
approximately $42,000 during 1998.
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, 1997, through the
quarter ended December 31, 1998 as reported by the National Association of
Securities Dealers NASDAQ System:
Bid Price
---------
High Low
---- ---
Quarter ended March 31, 1998............................7/16 13/32
Quarter ended June 30, 1998..............................1/2 3/8
Quarter ended September 30, 1998.........................3/8 5/16
Quarter ended December 31, 1998.........................5/16 5/16
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
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 February 12, 1999, there were 193 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, 1998, 1997 or 1996. 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.
On December 1998, the Company issued a total of 1,979,107 unregistered
shares of its common stock as payment on certain notes totaling $1,800,000 and
accrued interest totaling $442,000 to its president and another shareowner note
holder. This transaction is exempt from registration as an exempt private
placement pursuant to section 4(2) of the Securities Act.
In May 1998, the Company issued a total of 7,700 shares of its common
stock to its employees. This transaction is exempt from registration as either
not involving a sale or as an exempt private placement pursuant to section 4(2)
of the Securities Act.
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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
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.
As of December 31, or
For the Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
$ $ $ $ $
Revenues 5,350,868 5,419,429 5,731,005 5,432,038 5,995,919
Net Loss (631,768) (572,121) (373,774) (968,878) (873,394)
Net Loss per
Common Share (0.30) (0.27) (0.18) (0.46) (0.41)
Dividends
Paid None None None None None
Total
Assets 3,538,157 4,093,459 4,715,205 5,296,044 6,083,264
Long-Term
Obligations 350,000 2,257,153 2,351,561 2,359,131 934,420
Shareholders'
Equity 2,473,372 862,572 1,434,693 1,808,467 2,677,345
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 materially from these forward-looking statements due to the following
factors: inability to maintain customer relationships and/or add new customers;
failure to consummate the sale of $500,000 of preferred stock or arrange
alternative financing; 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.
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.
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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,
-----------------------
1998 1997 1996
---- ---- ----
% % %
Revenues:
Net product sales 85.5 91.9 91.5
Contract research and development 14.5 8.1 8.5
---- ---- ----
100.0 100.0 100.0
Interest and other income 0.2 0.2 0.3
----- ----- -----
100.2 100.2 100.3
===============================================================================
Costs and expenses:
Cost of goods sold* 74.3 77.6 74.8
Plant consolidation costs -- -- --
Contract research and
development* 106.7 100.3 102.5
Selling, general and
administrative expenses 25.5 24.5 21.7
Internal research and
development** 3.5 2.2 3.3
Interest expense 4.6 4.7 4.9
===============================================================================
Net loss (11.8) (10.6) (6.5)
* calculated as a percentage of their respective revenues
** calculated as a percentage of net product sales
Net Product Sales
Net product sales were $4,574,274, $4,983,055 and $5,241,075, in 1998,
1997 and 1996, respectively. Product sales in 1998 were 8% less than 1997 due to
bookings being less in 1998 as compared to the same period of 1997. Product
sales in 1997 were 5% less than 1996, also due to less bookings.
International sales, as a percentage of total product sales, were 21%, 16%
and 16 for 1998, 1997, and 1996, respectively.
The Company's backlog of product orders as of December 31, 1998 was
approximately $1,426,000, compared to approximately $1,862,000 at December 31,
1997.
Cost of Goods Sold
As a percentage of net product sales, cost of goods sold was 74.3%, 77.6%
and 74.8% for the years ended December 31, 1998, 1997 and 1996, respectively. In
1998, the cost of goods sold percentage decreased from 1997 due to increased
allocations of overhead to contract research and research and development
expenses and due to lower depreciation expenses in 1998. The increase in the
cost of goods sold percentage from 1996 to 1997 is attributable to lower sales
compared to relatively fixed costs such as wages, depreciation and rent.
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Prices for raw materials and purchased components have been relatively
stable in 1998, 1997 and 1996, while labor costs rose in all years.
Contract Research and Development
Contract research and development revenues were $776,594, $436,374 and
$489,930 for the years ended December 31, 1998, 1997 and 1996, respectively.
Related contract R&D expenditures, including allocated indirect costs, were
$828,850, $437,623 and $502,367. Revenues increased in 1998 over 1997 due to a
larger opening backlog and increased bookings in 1998. 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. 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 1998 increased $33,436, or
2.5% compared to 1997, and in 1997 increased $83,844 or 6.7% compared to 1996.
In 1998, selling, general and administration expenses increased due to increases
in salaries and additional recruiting expenses. 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.
Subject to availability of resources, the Company expects to increase certain
selling costs in 1999, including additional sales staff.
Internal Research and Development Expenses
Company-funded research expenditures during the years ended December 31,
1998, 1997, and 1996 were $159,245 (3.5% of net product sales), $114,021 (2.2%
of net product sales), and $170,750 (3.3% of net product sales). During 1998,
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
increased slightly in 1998 and decreased in 1997. This level is expected to
continue in 1999.
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, 1998, the Company had a net deferred tax asset of $2,751,000,
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 Issue
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any computer
programs and hardware as well as software products and certain equipment and
machinery that are date sensitive may recognize a date using "00" as the Year
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1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers who rely on its
products.
The Company has divided the Year 2000 issue into two main areas: internal
information technology ("IT") and non-IT systems, including embedded technology
such as microprocessors; and external agents including critical suppliers,
customers and other third parties the Company utilizes for various processing
functions.
The Company is evaluating new IT software systems to replace its non Y2K
compliant system. In the event we do not find a system that meets our
requirements, an upgrade that is Y2K compliant is available for our current
system. To date, based upon reviewing hardware, it has been determined that a
small amount of older computer equipment must be replaced, but the type and
amount are not significant and will be replaced in the ordinary course as
systems are upgraded. Financing has been arranged with a leasing company for the
Company to lease hardware and software.
The Company is in the process of assessing its Year 2000 exposure as it
pertains to non-IT systems, including manufacturing, research and development
and key relationships, such as vendors and customers. This includes the process
of identifying and prioritizing critical suppliers and customers and
communicating with them about their plans and progress in addressing the Year
2000 problem. The Company also utilizes third-party vendors for processing data
and payments, e.g. payroll services, 401 (k) plan administration, check
processing, medical benefits processing, etc. The Company has initiated
communications with these vendors to determine the status of their systems.
Should these vendors not be compliant in a timely manner, the Company may be
required to process transactions manually or delay processing until such time as
the vendors are Year 2000 compliant. The review of non-IT systems and key third
party relationships is expected to be completed by the end of the second quarter
of 1999. At this time the cost to be Y2K compliant cannot be estimated.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
The future costs of the Company's Year 2000 efforts are expected to be
funded through future operating cash flows and the financing of hardware and
software. The requirements for the correction of Year 2000 issues and the date
on which the Company believes it will complete the Year 2000 modifications are
based on management's current best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third-party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
may cause such material differences include, but are not limited to, the
availability of personnel trained in this area, the ability to locate and
collect all relevant computer data and similar uncertainties.
No contingency plans have been developed to date. Contingency plans will
11
<PAGE>
be prepared so that the Company's critical business processes can be expected to
continue to function on January 1,2000 and beyond. The Company's contingency
plans will be structured to address both remediation of systems and their
components and overall business operating risk. These plans are intended to
mitigate both internal risks as well as potential risks in the supply chain of
the Company's suppliers and customers.
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. 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 (7.75% at December
31, 1998) + 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. 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. On December 31, 1998
the certificate of deposit was in the amount of $140,250.
In December 1998, the Company entered into a number of transactions to
improve its balance sheet and in effect increase its shareowner equity. These
transactions converted $1,800,799 of notes payable and $441,789 of accrued
interest into 1,979,107 shares of its common stock. The notes converted into
equity are as follows:
In April 1995, the Company received $225,000 from a shareowner and
Subordinated Convertible Note holder of the Company through the issuance
of a $125,000 8% Subordinated Convertible Note 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. 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. Both of these notes along with their accrued interest
were converted into a total of 299,194 shares of common stock at the note
conversion price of $1.00 per share on December 31, 1998.
In 1993, the Company raised $1,000,000 in cash from a private investment
12
<PAGE>
group through the issuance of a $746,215 10% Subordinated Convertible Note
due December 15, 2000 (the "note") and 203,028 shares of the Company's
common stock at $1.25 per share. As part of this transaction, the Company
issued warrants (expiring on December 15, 2000) which entitle the holders
to purchase 171,675 shares of the Company's common stock at $1.50 per
share. The warrants have been recorded at $68,670 resulting in a discount
on the notes of $68,670. On December 31, 1998 this note along with its
accrued interest was converted into 960,000 shares of the Company's common
stock.
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. This
note along with its accrued interest was converted into 684,921 shares of
the Company's common stock on December 31, 1998. Interest expense related
to the shareowner loan was approximately $57,000, $57,000 and $72,000 in
1998, 1997 and 1996, respectively.
As a result of the forgoing the Company expects interest expense for 1999
to be significantly less then it was in 1998.
During September 1993, the Company borrowed $100,000 in the form of a
promissory note from a shareowner of the Company. On December 16, 1993, this
promissory note was extinguished and a $74,621 10% subordinated convertible note
and 20,303 shares of the Company's common stock at $1.25 per share were issued.
The note is convertible at any time up to the maturity date into shares of the
Company's common stock at $1.25 per share (to be adjusted for dividends, stock
splits, etc.).
The entire amount of the Subordinated Convertible Note 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. This note also contains certain covenants and restrictions, including
financial ratios tied to accounts receivable and debt service (as defined).
Interest is payable semiannually on this note, and the first six interest
payments are payable in the form of additional notes. At December 31, 1998 and
1997 the Company was not in violation of the covenants of this note. At December
31, 1996 the Company was in violation of certain covenants of this note;
subsequent to the year end, the Company obtained a waiver from the holder of the
note and modified the financial covenants in the debt agreements.
The Company's Secured Promissory Note bears interest at 7%, is secured by
certain of the Company's precious metals, and is convertible at any time into
200,000 shares of common stock. The Note also contains 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 was July 8, 1997. However, the noteholder has agreed not to
demand payment prior to January 1, 2000, therefore the note has been classified
as noncurrent in the accompanying balance sheet.
In March 1999, a shareowner and debtholder of the Company has agreed to
purchase 500 shares of 10% convertible preferred stock at the price of $1,000
per share. Two hundred shares will be purchased for $200,000 in March 1999 and
the remaining three hundred shares will be purchased in June 1999 for $300,000.
Dividends are payable in common stock at the rate of $1.00 per share.
13
<PAGE>
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, 1998, 1997 and 1996 were $ 95,000, $86,000 and
$238,000, 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 $632,000 for the year ended December 31, 1998, and
also incurred losses in 1997 and 1996. During the past three years, the
Company's working capital requirements were met in part on the basis of issuance
of common stock 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 and the sale of $500,000 of preferred
stock will provide adequate liquidity for the Company's operations in 1999. The
Company plans to hire additional manufacturing management and sales personnel,
and to purchase fixed assets, in order to improve operations; however a loss is
anticipated in 1999. 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.
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
also described in Note 2 in the accompanying financial statements.
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-15. Page F-1 follows page 23.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
14
<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
79 Directors, Chief Technology Officer
1999, President and Chief
Executive Officer (1973-1999)
Charles Lucy, 1998 President and Chief Executive Officer
73 (1999), Management Consultant
(1989 - 1996)
Vice-President Telecommunications
Group Corning, Inc.
(1977 - 1988)
Thomas Lenagh, 1998 Management Consultant (1990 - Present);
72
Frank Wiedeman, 1998 Executive Director (1980 - Present)
84 American Capital Management Inc.
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.
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. Thomas Lenagh and Frank Wiedeman have been
selected by Clarex as their representatives.
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, 79 1973 Chairman of the Board of
Directors, Chief Technology Officer
1999, President and Chief
15
<PAGE>
Executive Officer (1973-1999)
Charles Lucy, 73 1999 President and Chief Executive Officer
(1999), Management Consultant
(1989 - 1996)
Vice-President Telecommunications
Group Corning, Inc.
(1977 - 1988)
Maria Murray, 41 1995 Vice President - Marketing
and Sales
James Greco, 42 1996 Chief Financial Officer and
Secretary
Ilya Zwieback, 50 1998 Vice President - Crystal Growth
Warren Ruderman has served as President and Chairman of the Board of
Directors of the Company since he founded it in 1973. In March of 1999 Dr.
Ruderman assumed the title of Chief Technology Officer and will continue to be
Chairman of the Board. 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.
Charles Lucy joined the Company in March of 1999 as President and Chief
Executive Officer. Prior to joining the Company, Mr. Lucy was a management
consultant from 1989 to 1996. From 1952 to 1988 Mr. Lucy was employed by
Corning, Inc., and the last 9 years as Vice President and Director of
International Operations.
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
and was appointed Chief Financial Officer in 1998. 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.
Ilya Zwieback joined the Company in 1992 as Senior Research Scientist and
left the Company in 1996 to join Lockheed Sanders as Senior Physicist. In 1997
Dr. Zwieback rejoined the Company as Manager of Crystal Growth and in 1998 was
appointed Vice President, Crystal Growth. Dr. Zwieback holds a Doctorate of
Physics in semiconductors from Moscow Institute of Steel and Alloys.
Charles Lucy has an employment contract which calls for an annual salary
of $120,000, after six months of service the contract can be cancelled by either
16
<PAGE>
party with 30 days notice. None of the officers of the Company has an employment
contract with the Company; each serves at the pleasure of the Board of
Directors.
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth, for the years ended December 31, 1998,
1997 and 1996, 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, 1998 $130,000 none none none
President and Chief
Executive Officer
1997 $130,000 none none none
1996 $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.
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, 1999. 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 1,791,946 43.7
c/o INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
Clarex, Ltd. 2,187,214 (1) 46.9
c/o Bank of Nova Scotia
Trust Company Bahamas Ltd.
PO Box N1355
Nassau, Bahamas
17
<PAGE>
Hoechst Celanese Corp. 300,000 7.3
Routes 202-206 North
Box 2500
Somerville, NJ 08876
William F. Nicklin 210,527 (2) 5.0
33 Grand Avenue
Newburgh, NY 12550
Frank Wiedeman 51,500 (3) 1.2
c/o INRAD, Inc.
Directors and Executive 1,883,146 (4) 45.0
Officers as a group
(7 persons)
(1) Including 570,000 shares subject to options, warrants or convertible
notes exercisable or convertible within 60 days.
(2) Including 80,000 shares subject to convertible notes convertible
within 60 days.
(3) Including 50,000 shares subject to options exercisable within 60
days.
(4) Including 89,250 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,
$57,000 and $72,000 in 1998, 1997 and 1996, respectively. On December 31, 1998
this note along with its accrued interest was converted into 684,921 shares of
the Company's Common Stock.
During the years ended December 31, 1998, 1997 and 1996 approximately 4%,
4%, and 8%, 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.
On December 31, 1998, a shareowner and debtholder converted $1,234,730 of
notes and $322,917 of accrued interest into 1,294,186 shares of the Company's
Common Stock.
18
<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:
7 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
Incorporation, as amended. No. 1.
3.2 By-laws, as amended. 3.2 of Amendment
No. 1.
10.4 License agreement, dated September 10.11 of Amendment
1981, between the Company and No. 1.
Lambda Physik.
10.5 Key-Man Insurance Policy on the 10.12 of Amendment
life of Warren Ruderman. No. 2.
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1985:
10.6 Common Stock Purchase and Option Agreements, dated 10/14/85 and
11/17/85, between the Company and Celanese Corporation (now
Hoechst Celanese
Corporation).
The following exhibit is incorporated by reference to the 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.
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
19
<PAGE>
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 fiscal year 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.
The following exhibits are incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year 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 are incorporated by reference to the report to the
Securities and Exchange Commission on form 10-K for the fiscal year ended
December 31, 1997:
22.1 Subsidiaries of the Company
23.1 Consent from Price Waterhouse LLP
23.2 Consent from Grant Thornton LLP
The following exhibits form an attachment to this report:
10.19 Agreement with Clarex to convert 1995 subordinated convertible
note with accrued interest into common stock.
10.20 Agreement with Clarex to convert unsecured demand convertible
note
20
<PAGE>
with accrued interest into common stock.
10.21 Agreement with Clarex to convert 1993 subordinated convertible
note with accrued interest into common stock.
10.22 Agreement with Ruderman to convert promissory note with accrued
interest into common stock.
10.23 Agreement with Clarex to convert accrued interest on secured
promissory note into common stock.
10.24 Employment contract with Charles Lucy.
22.1 Subsidiaries of the Company.
23.2 Consent from Grant Thornton LLP.
27.1 Financial data schedule.
21
<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/ Charles Lucy
-----------------------------------
Charles Lucy, President
and Chief Executive Officer
Dated: March 19, 1999
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/ Charles Lucy President, Chief March 19, 1999
- ---------------------- Executive Officer
Charles Lucy and Director (Principal
Executive Officer)
/s/ Warren Ruderman Chief Technology Officer March 19, 1999
- ---------------------- and Chairman of the Board
Warren Ruderman of Directors
/s/ Thomas Lenagh Director March 19, 1999
- ----------------------
Thomas Lenagh
/s/ Frank Wiedeman Director March 19, 1999
- ----------------------
Frank Wiedeman
/s/ James L. Greco Chief Financial Officer March 19, 1999
- ---------------------- and Secretary
James L. Greco (Principal Financial and
Accounting Officer)
22
<PAGE>
INRAD, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Consolidated Financial Statements Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998 F-4
Consolidated Statement of Shareowners' Equity for each
of the three years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7 to F-15
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, 1998 and 1997, and the related consolidated
statements of operations, shareowners' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. 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, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1998, 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. This factor, 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 5, 1999 (except for Note 14, as to which date is March 19, 1999)
F-2
<PAGE>
INRAD, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------
Assets 1998 1997
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 208,028 $ 209,142
Certificate of deposit 0 70,000
Accounts receivable, net 639,604 654,827
Inventories 1,433,081 1,546,541
Unbilled contract costs 125,096 102,363
Other current assets 64,626 64,145
----------- -----------
Total current assets 2,470,435 2,647,018
Plant and equipment:
Plant and equipment at cost 5,216,544 5,121,379
Less: Accumulated depreciation
and amortization (4,585,761) (4,124,715)
----------- -----------
Total plant and equipment 630,783 996,664
Precious Metals 282,396 278,693
Other assets 154,543 171,084
----------- -----------
Total assets $ 3,538,157 $ 4,093,459
=========== ===========
Liabilities and Shareowners' Equity
Current liabilities:
Note payable - bank $ 107,500 $ 120,000
Current obligations under capital leases 8,007 12,262
Accounts payable and accrued liabilities 527,991 720,214
Advances from customers 30,887 63,329
Other current liabilities 40,400 57,929
----------- -----------
Total current liabilities 714,785 973,734
Note payable - bank 0 107,500
Obligations under capital leases 0 8,683
Secured Convertible Promissory Note 250,000 250,000
Subordinated Convertible Notes 100,000 1,224,921
Unsecured Demand Convertible Note 0 100,000
Note payable - Shareowner 0 566,049
----------- -----------
Total liabilities 1,064,785 3,230,887
----------- -----------
Shareowners' equity:
Common stock: $.01 par value; 4,100,678 shares
issued at December 31, 1998; 2,121,571
shares at December 31, 1997 41,007 21,216
Capital in excess of par value 8,237,718 6,051,791
Accumulated deficit (5,790,403) (5,158,635)
----------- -----------
2,488,322 914,372
Less common stock in treasury, at cost; 4,600
shares issued December 31, 1998; 12,300
shares issued December 31, 1997 (14,950) (51,800)
----------- -----------
Total shareowners' equity 2,473,372 862,572
----------- -----------
Total liabilities and shareowners' equity $ 3,538,157 $ 4,093,459
=========== ===========
See Notes to Consolidated Statements
F-3
<PAGE>
INRAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net product sales $ 4,574,274 $ 4,983,055 $ 5,241,075
Contract research and development 776,594 436,374 489,930
----------- ----------- -----------
5,350,868 5,419,429 5,731,005
----------- ----------- -----------
Costs and expenses:
Cost of goods sold 3,396,603 3,864,506 3,922,517
Contract research and development
expenses 828,850 437,623 502,367
Selling, general and administrative
expenses 1,362,357 1,328,921 1,245,077
Internal research and development
expenses 159,245 114,021 170,750
----------- ----------- -----------
5,747,055 5,745,071 5,840,711
----------- ----------- -----------
Operating Loss (396,187) (325,642) (109,706)
Other income (expense):
Interest expense (244,533) (256,482) (283,390)
Interest and other income, net 8,952 10,003 19,322
----------- ----------- -----------
Net loss $ (631,768) $ (572,121) $ (373,774)
=========== =========== ===========
Net loss per common share-basic
and diluted $ (0.30) $ (0.27) $ (0.18)
=========== =========== ===========
Weighted average common shares outstanding 2,119,609 2,109,271 2,109,138
=========== =========== ===========
</TABLE>
See Notes to Consolidated Statements
F-4
<PAGE>
INRAD, INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Capital in
--------------------- excess of Accumulated Treasury
Shares Amount par value deficit stock
------ ------ --------- ------- -----
<S> <C> <C> <C> <C> <C>
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)
to employees
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
Issuance of treasury stock -- -- 36,850 -- (36,850)
to employees
Common stock issued on 1,979,107 19,791 2,222,777
conversion of debt
Net loss for the year -- -- -- (631,768) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 4,100,678 $ 41,007 $ 8,237,718 $(5,790,403) $ 14,950
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Statements
F-5
<PAGE>
INRAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(631,768) $(572,121) $(373,774)
--------- --------- ---------
Adjustments to reconcile net loss
to cash provided by operating
activities:
Depreciation and amortization 481,402 530,610 601,881
Noncash interest 206,244 21,660 155,269
Gain on sale of equipment (3,500) (3,800) (8,621)
Changes in assets and liabilities:
Accounts receivable 15,223 80,333 69,674
Inventories 113,460 188,603 (63,471)
Unbilled contract costs (22,733) (43,012) 92,299
Other current assets (481) (3,853) 1,405
Precious metals (3,703) 555 754
Other assets (3,817) (30,717) (17,467)
Accounts payable and accrued
liabilities 53,131 101,965 (67,460)
Advances from customers (32,442) (9,915) (42,961)
Other liabilities (17,529) 9,064 (4,218)
--------- --------- ---------
Total adjustments 785,255 841,493 717,084
--------- --------- ---------
Net cash provided by
operating activities 153,487 269,372 343,310
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (95,163) (86,208) (238,202)
Proceeds from sale of equipment 3,500 3,800 299,180
Proceeds from redemption of
certificate of deposit 70,000 0 0
--------- --------- ---------
Net cash (used in) provided by
investing activities (21,663) (82,408) 60,978
--------- --------- ---------
Cash flows from financing activities:
Repayments of note payable - bank (120,000) (92,500) (60,000)
Principal payments of capital
lease obligations (12,938) (79,899) (187,692)
--------- --------- ---------
Net cash used in
financing activities (132,938) (172,399) (247,692)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (1,114) 14,565 156,596
Cash and cash equivalents at
beginning of year 209,142 194,577 37,981
--------- --------- ---------
Cash and cash equivalents at end of year $ 208,028 $ 209,142 $ 194,577
========= ========= =========
</TABLE>
See Notes to Consolidated Statements
F-6
<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
$7,000, $15,000 and $110,000 in 1998, 1997 and 1996, 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.
Internal Research and Development Costs:
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
F-7
<PAGE>
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. A valuation allowance is established when deferred tax
assets are not likely to be realized.
Cash Flow Information:
The Company considers all highly liquid investments with original maturity dates
of three months or less to be cash equivalents.
Cash interest paid during the years ended December 31, 1998, 1997 and 1996 was
$51,673, $40,525 and $109,497, respectively.
In December 1998 the Company converted $1,800,779 of notes payable and $441,789
of accrued interest into 1,979,107 shares of its Common Stock.
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 2,119,609, 2,109,271 and 2,109,138 for
the years ended December 31, 1998, 1997 and 1996, respectively.
The effect of options and warrants outstanding during the year and convertible
notes have been excluded from the computation because their effect is
antidilutive. At December 31, 1998 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, 1998 the Company had outstanding 146,500 stock
options exercisable at $1.00, and 33,000 exercisable at $1.25.
See Note 7 for a description of the convertible notes.
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.
NOTE 2 - LIQUIDITY AND FUNDING OF OPERATIONS:
As shown on the accompanying financial statements, the Company reported a net
loss of approximately $632,000 for the year ended December 31, 1998, and also
incurred losses in 1997 and 1996. During the past three years, the Company's
working capital requirements were met by cash provided by operating activities.
Management expects that cash flow from operations and the sale of $500,000 of
preferred stock, will provide adequate liquidity for the Company's operations in
1999. The Company plans to hire additional manufacturing and sales personnel,
and purchase additional fixed assets, in order to improve operations; however a
loss is anticipated in 1999. If the Company's cash flow from operations is not
maintained at satisfactory levels, however, 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.
F-8
<PAGE>
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable are comprised of the following:
December 31,
------------
1998 1997
---- ----
Accounts receivable $ 646,604 $ 661,827
Allowance for doubtful accounts (7,000) (7,000)
--------- ---------
$ 639,604 $ 654,827
========= =========
NOTE 4 - INVENTORIES:
Inventories are comprised of the following:
December 31,
------------
1998 1997
---- ----
Raw materials $ 157,360 $ 168,976
Work in process, including
manufactured parts and components 1,171,023 1,285,157
Finished goods 104,698 92,408
---------- ----------
$1,433,081 $1,546,541
========== ==========
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 1998, 1997 and 1996, the fourth quarter operating results
included an adjustment for the annual inventory count that decreased (increased)
operating losses by approximately $34,000, $(33,000) and $164,000, respectively.
NOTE 5 - PLANT AND EQUIPMENT:
Plant and equipment are comprised of the following:
December 31,
------------
1998 1997
---- ----
Furniture and fixtures $ 188,446 $ 171,515
Machinery and equipment 4,611,683 4,536,143
Leasehold improvements 416,415 413,721
----------- -----------
5,216,544 5,121,379
Less accumulated depreciation
and amortization (4,585,761) (4,124,715)
----------- -----------
$ 630,783 $ 996,664
=========== ===========
Depreciation expense (including amortization of capital leases) for the years
ended December 31, 1998, 1997 and 1996 was $461,044, $521,475 and $594,352,
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.
F-9
<PAGE>
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities comprise the following:
December 31,
------------
1998 1997
---- ----
Trade accounts payable and
accrued purchases $288,682 $249,758
Payroll taxes payable 42,888 34,492
Accrued vacation 121,693 98,289
Accrued professional fees 41,601 50,129
Accrued liability - shareowners 0 96,597
Accrued interest 925 163,063
Accrued liability - other 32,202 27,886
-------- --------
$527,991 $720,214
======== ========
NOTE 7 - DEBT:
The Company's debt obligations as of December 31, 1998 and 1997 are as
follows:
December 31,
------------
1998 1997
---- ----
Note Payable - Bank $ 107,500 $ 227,500
Subordinated Convertible Notes 100,000 1,224,921
Unsecured Demand Convertible Note 0 100,000
Note Payable - Shareowner 0 566,049
Secured Promissory Notes 250,000 250,000
---------- ----------
$ 457,500 $2,368,470
========== ==========
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 (7.75% at December 31,
1998) + 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. Borrowings are collateralized 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. On December 31, 1998, the
certificate of deposit was in the amount of $140,250.
In April 1995, the Company received $225,000 from a shareowner and Subordinated
Convertible Note holder of the Company through the issuance of a $125,000 8%
Subordinated Convertible Note 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. In
F-10
<PAGE>
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. Both of these notes, along with their
accrued interest, were converted into a total of 299,194 shares of common stock
at the note conversion price of $1.00 per share on December 31, 1998.
In 1993, the Company raised $1,000,000 in cash from a private investment group
through the issuance of a $746,215 10% Subordinated Convertible Note due
December 15, 2000 (the "note") and 203,028 shares of the Company's common stock
at $1.25 per share. As part of this transaction, the Company issued warrants
(expiring on December 15, 2000) which entitle the holders to purchase 171,675
shares of the Company's common stock at $1.50 per share. The warrants have been
recorded at $68,670, resulting in a discount on the notes of $68,670. On
December 31, 1998, this note, along with its accrued interest, was converted
into 960,000 shares of the Company's common stock.
During September 1993, the Company borrowed $100,000 in the form of a promissory
note from a shareowner of the Company. On December 16, 1993, this promissory
note was extinguished and a $74,621 10% subordinated convertible note and 20,303
shares of the Company's common stock at $1.25 per share were issued. The note is
convertible at any time up to the maturity date into shares of the Company's
common stock at $1.25 per share (to be adjusted for dividends, stock splits,
etc.).
The entire amount of the Subordinated Convertible Note may be redeemed by the
Company after December 15, 1998; it is subordinated to any outstanding
indebtedness to Chase Manhattan Bank and other secured indebtedness of the
Company. This note also contains certain covenants and restrictions, including
financial ratios tied to accounts receivable and debt service (as defined).
Interest is payable semiannually on this note, and the first six interest
payments are payable in the form of additional notes. At December 31, 1998 and
1997, the Company was not in violation of the covenants of this note. At
December 31, 1996, the Company was in violation of certain covenants of this
note; subsequent to the year end, the Company obtained a waiver from the holder
of the note 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. This note along with its accrued interest was converted
into 684,921 shares of the Company's common stock on December 31, 1998. Interest
expense related to the shareowner loan was approximately $57,000, $57,000 and
$72,000 in 1998, 1997 and 1996, respectively.
The Company's Secured Convertible Promissory Note bears interest at 7%, is
collateralized by certain of the Company's precious metals, and is convertible
at any time into 200,000 shares of common stock. The Note also contains
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 Note was July 8, 1997. However, the noteholder has
agreed not to demand payment prior to January 1, 2000; therefore the note has
been classified as noncurrent in the accompanying balance sheet.
Annual maturities of bank and other debt obligations, including noncash interest
on subordinated notes, are as follows:
1999 $ 107,500
2000 350,000
---------
$ 457,500
=========
F-11
<PAGE>
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,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
--------- --------- ---------
Tax (benefit) at Federal statutory rates $(214,801) $(194,480) $(127,160)
Loss in excess of available benefit 189,828 181,355 115,955
Other, net 24,973 13,125 11,205
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for tax
purposes of approximately $6,414,000. The tax loss carryforward expires at
various dates through 2018.
Internal Revenue Code Section 382 places a limitation on the utilization of
Federal net operating loss and other credit carryforwards when an ownership
change, as defined by the tax law, occurs. Generally, this occurs when a greater
than 50 percentage point change in ownership occurs. Accordingly, the actual
utilization of the net operating loss and other carryforwards for tax purposes
may be limited annually to a percentage (approximately 6%) of the fair market
value of the Company at the time of any such ownership change.
Deferred tax assets (liabilities) comprise the following:
December 31, December 31,
1998 1997
---- ----
Deferred tax assets
Inventory capitalization adjustment$ -- $ 1,000
Inventory reserves 20,000 20,000
Vacation liabilities 44,000 33,000
Other 3,000 67,000
Depreciation 119,000 48,000
Loss carryforwards 2,565,000 2,354,000
----------- -----------
Gross deferred tax assets 2,751,000 2,523,000
Valuation allowance (2,751,000) (2,523,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
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,
$196,000, and $237,000 in 1998, 1997 and 1996, respectively, and real estate
taxes were $42,000, $41,000 and $41,000 in 1998, 1997 and 1996, respectively.
F-12
<PAGE>
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 three to five year terms.
December 31,
1998 1997
---- ----
Equipment under capital lease $ 22,690 $ 132,690
Less: Accumulated amortization (8,093) (75,565)
--------- ---------
$ 14,597 $ 57,125
========= =========
Future minimum lease payments at December 31, 1998 are payable as follows:
Capital Operating
Leases Leases
------ ------
1999 $ 8,602 $ 195,564
2000 0 195,564
2001 0 162,970
-------- ----------
Total minimum lease payments $ 8,602 $ 554,098
==========
Less amount representing interest (595)
--------
Present value of minimum capital lease 8,007
========
NOTE 10 - PRODUCT SALES, EXPORT SALES AND SALES TO MAJOR CUSTOMERS:
The Company's sales for each major category of its product line are as follows:
1998 1997 1996
---------------------------------------
Crystals and
Crystal Components $3,372,802 $3,934,178 $3,563,983
Systems and Instruments 1,201,472 1,048,877 1,677,092
---------- ---------- ----------
TOTAL $4,574,274 $4,983,055 $5,241,075
========== ========== ==========
Export sales, primarily to customers in Europe, Asia and Canada, amounted to
21%, 16% and 16% of net product sales in 1998, 1997 and 1996, respectively.
No foreign customer accounted for more than 10% of net product sales in 1998,
1997 and 1996. One U.S. customer accounted for more than 13%, 14% and 12% of net
product sales in 1998, 1997 and 1996, respectively. One other U.S. customer
accounted for over 11% of net product sales in 1996. During the years ended
December 31, 1998, 1997 and 1996, approximately 4%, 4% and 8%, 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 4,096,078 common shares outstanding at
December 31, 1998 and 2,109,271 common shares outstanding at December 31, 1997.
There were no preferred shares issued or outstanding in either year. The Company
has reserved 1,268,092 shares of common stock for issuance upon conversion of
the
F-13
<PAGE>
Subordinated Convertible Notes, Secured Promissory Notes (Note 7) and upon
exercise of outstanding warrants and all options available under the plan (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, 1998:
Weighted
Average
Shares Price
------------------------------------------------------------------
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
------------------------------------------------------------------
Granted 9,500 $1.00
Expired (1,250) $1.00
Forfeited (21,750) $1.00
------------------------------------------------------------------
Outstanding at December 31, 1998 189,000 $1.05
======= =====
------------------------------------------------------------------
Exercisable at December 31, 1998 87,000 $1.10
====== =====
------------------------------------------------------------------
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 1998, 1997 and 1996 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 account 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 1998 was expected volatility of 250%;
weighted average risk-free rate of 5.71% and weighted average expected life of
10 years; in 1997 expected volatility of 250%; weighted average risk-free rate
of 6.24%; and weighted average expected life of 10 years; and in 1996 expected
volatility of 250%; weighted average risk-free rate of 6.008%; and weighted
F-14
<PAGE>
average expected life of 10 years.
The weighted average grant date fair value of options granted during 1998, 1997
and 1996 was $0.41, $0.32 and $0.38, respectively.
Options outstanding Options exercisable
------------------------------------------------------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise at December contractual exercise at December exercise
prices 31, 1998 life price 31, 1998 price
- --------------------------------------------------------------------------------
$1.00 - $1.25 189,000 7.60 years $1.05 87,000 $1.10
The Company maintains a 401(k) savings plan for all eligible (as defined in the
plan) employees. The 401(k) plan allows employees to contribute from 1% to 15%
of their compensation on a salary reduction, pre-tax basis. The 401(k) plan also
provides that the Company, at the discretion of the Board of Directors, may
match employee contributions. The Company did not contribute any amounts to the
401(k) plan during 1998, 1997 or 1996.
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount at December 31, 1998 and 1997 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, at December 31, 1998
and 1997 (see Note 7) could not be determined without incurring excessive costs.
NOTE 14 - SUBSEQUENT EVENT:
In March 1999, a shareowner and debtholder of the Company has agreed to purchase
500 shares of 10% convertible preferred stock at a price of $1,000 per share.
Two hundred shares will be purchased in March 1999 for $200,000 and the three
hundred shares will be purchased in June 1999 for $300,000. Dividends are
payable in common stock at the rate of $1.00 per share.
F-15
INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
Exhibit 10.19
Mr. Peter Turnquest December 31, 1998
Clarex Limited
P.O. Box N3016
Nassau, Bahamas
Dear Mr. Turnquest:
This letter is written to evidence the agreement between Inrad, Inc. (the
"Company") and you, with respect to your $154,346 principal sum plus $12,348 of
accrued interest to December 31, 1998 which the company presently owes you (the
Indebtedness) on your subordinated convertible note of April 9, 1995.
By signing below, you hereby agree that as payment for the entire amount of this
Indebtedness of $166,694 you will receive 166,694 shares of the Company's Common
Stock (the "Shares").
You further acknowledge that the Indebtedness represents the entire amount owed
to you by the Company for borrowed money as of the date hereof (as opposed to
compensation and benefits).
By signing below, you also represent to the Company that: ( i ) you are able to
bear the economic risk of the investment in the Shares, ( ii ) you recognize and
agree that the Shares have not been registered under the Securities Act of 1933,
as amended ( the "Act"), ( iii) you recognize and agree that you will be
required to continue to bear the risk of investment in the Shares for an
indefinite period, ( iv ) you recognize and agree that such Shares must be held
by you indefinitely unless a subsequent disposition is registered under the Act
or is exempted from registration under all applicable federal and state
securities laws, ( v ) you recognize and agree that the Company will enter stop
transfer notations in its records with respect to the stock certificates
representing the shares, ( vi ) you have knowledge and experience with respect
to the Company and its business and in financial and business affairs generally
so that you are capable of evaluating the merits and risks of the prospective
investment; ( vii ) the Shares are being acquired for your own account for
investment purposes and not with the view of resale or distribution thereof by
you and (viii) you recognize and agree that a restrictive legend will be placed
on the certificates representing the Shares summarizing the restrictions on
transferability outlined above. At the request of Clarex, the Company will make
its best efforts to register the Shares, only if it qualifies to use Securities
and Exchange Commission form S3.
Please confirm your acceptance of the terms of this letter by signing below.
Very truly yours,
James L. Greco
Chief Financial Officer
Agreed to as of the 31st day of December, 1998
Clarex Limited
INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
exhibit 10.20
Mr. Peter Turnquest December 31, 1998
Clarex Limited
P.O. Box N3016
Nassau, Bahamas
Dear Mr. Turnquest:
This letter is written to evidence the agreement between Inrad, Inc. (the
"Company") and you, with respect to your $100,000 principal sum plus $32,500 of
accrued interest to December 31, 1998 which the company presently owes you (the
Indebtedness) on your unsecured demand convertible note of September 27, 1995.
By signing below, you hereby agree that as payment for the entire amount of this
Indebtedness of $132,500 you will receive 132,500 shares of the Company's Common
Stock (the "Shares").
You further acknowledge that the Indebtedness represents the entire amount owed
to you by the Company for borrowed money as of the date hereof (as opposed to
compensation and benefits).
By signing below, you also represent to the Company that: ( i ) you are able to
bear the economic risk of the investment in the Shares, ( ii ) you recognize and
agree that the Shares have not been registered under the Securities Act of 1933,
as amended ( the "Act"), ( iii) you recognize and agree that you will be
required to continue to bear the risk of investment in the Shares for an
indefinite period, ( iv ) you recognize and agree that such Shares must be held
by you indefinitely unless a subsequent disposition is registered under the Act
or is exempted from registration under all applicable federal and state
securities laws, ( v ) you recognize and agree that the Company will enter stop
transfer notations in its records with respect to the stock certificates
representing the shares, ( vi ) you have knowledge and experience with respect
to the Company and its business and in financial and business affairs generally
so that you are capable of evaluating the merits and risks of the prospective
investment; ( vii ) the Shares are being acquired for your own account for
investment purposes and not with the view of resale or distribution thereof by
you and (viii) you recognize and agree that a restrictive legend will be placed
on the certificates representing the Shares summarizing the restrictions on
transferability outlined above. At the request of Clarex, the Company will make
its best efforts to register the Shares, only if it qualifies to use Securities
and Exchange Commission Form S3.
Please confirm your acceptance of the terms of this letter by signing below.
Very truly yours,
James L. Greco
Chief Financial Officer
Agreed to as of the 31st day of December, 1998
Clarex Limited
INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
Exhibit 10.21
Mr. Peter Turnquest December 31, 1998
Clarex Limited
P.O. Box N3016
Nassau, Bahamas
Dear Mr. Turnquest:
This letter is written to evidence the agreement between Inrad, Inc. (the
"Company") and you, with respect to your $1,000,000 principal sum plus $200,000
of accrued interest to December 31, 1998 which the company presently owes you
(the Indebtedness) on your subordinated convertible note of December 15, 1993.
By signing below, you hereby agree that as payment for the entire amount of this
Indebtedness of $1,200,000 you will receive 960,000 shares of the Company's
Common Stock (the "Shares").
You further acknowledge that the Indebtedness represents the entire amount owed
to you by the Company for borrowed money as of the date hereof (as opposed to
compensation and benefits).
By signing below, you also represent to the Company that: ( i ) you are able to
bear the economic risk of the investment in the Shares, ( ii ) you recognize and
agree that the Shares have not been registered under the Securities Act of 1933,
as amended ( the "Act"), ( iii) you recognize and agree that you will be
required to continue to bear the risk of investment in the Shares for an
indefinite period, ( iv ) you recognize and agree that such Shares must be held
by you indefinitely unless a subsequent disposition is registered under the Act
or is exempted from registration under all applicable federal and state
securities laws, ( v ) you recognize and agree that the Company will enter stop
transfer notations in its records with respect to the stock certificates
representing the shares, ( vi ) you have knowledge and experience with respect
to the Company and its business and in financial and business affairs generally
so that you are capable of evaluating the merits and risks of the prospective
investment; ( vii ) the Shares are being acquired for your own account for
investment purposes and not with the view of resale or distribution thereof by
you and (viii) you recognize and agree that a restrictive legend will be placed
on the certificates representing the Shares summarizing the restrictions on
transferability outlined above. At the request of Clarex, the company will make
its best efforts to register the Shares, only if it qualifies to use Securities
and Exchange commission Form S3.
Please confirm your acceptance of the terms of this letter by signing below.
Very truly yours,
James L. Greco
Chief Financial Officer
Agreed to as of the 31st day of December, 1998
Clarex Limited
INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
Exhibit 10.22
Dr. Warren Ruderman December 31, 1998
45 Duane Lane
Demarest, NJ 07627
Dear Dr. Ruderman:
This letter is written to evidence the agreement between Inrad, Inc. (the
"Company") and you, with respect to the $566,049 principal sum plus $118,872 of
accrued interest which the company presently owes you (the Indebtedness).
By signing below, you hereby agree that as payment for the entire amount of this
Indebtedness of $684,921 you will receive 684,921 shares of the Company's Common
Stock (the "Shares").
You further acknowledge that the Indebtedness represents the entire amount owed
to you by the Company for borrowed money as of the date hereof (as opposed to
compensation and benefits).
By signing below, you also represent to the Company that: ( i ) you are able to
bear the economic risk of the investment in the Shares, ( ii ) you recognize and
agree that the Shares have not been registered under the Securities Act of 1933,
as amended ( the "Act"), ( iii) you recognize and agree that you will be
required to continue to bear the risk of investment in the Shares for an
indefinite period, ( iv ) you recognize and agree that such Shares must be held
by you indefinitely unless a subsequent disposition is registered under the Act
or is exempted from registration under all applicable federal and state
securities laws, ( v ) you recognize and agree that the Company will enter stop
transfer notations in its records with respect to the stock certificates
representing the shares, ( vi ) you have knowledge and experience with respect
to the Company and its business and in financial and business affairs generally
so that you are capable of evaluating the merits and risks of the prospective
investment; ( vii ) the Shares are being acquired for your own account for
investment purposes and not with the view of resale or distribution thereof by
you and (viii) you recognize and agree that a restrictive legend will be placed
on the certificates representing the Shares summarizing the restrictions on
transferability outlined above. At your request, the Company will make its best
efforts to register the Shares, only if it qualifies to use Securities and
Exchange Commission Form S3.
Please confirm your acceptance of the terms of this letter by signing below.
Very truly yours,
James L. Greco
Chief Financial Officer
Agreed to as of the 31st day of December, 1998
Warren Ruderman
INRAD, Inc.
181 Legrand Avenue
Northvale, NJ 07647
Exhibit 10.23
Mr. Peter Turnquest December 31, 1998
Clarex Limited
P.O. Box N3016
Nassau, Bahamas
Dear Mr. Turnquest:
This letter is written to evidence the agreement between Inrad, Inc. (the
"Company") and you, with respect to your $43,740 of accrued interest to December
31, 1998 which the company presently owes you (the Indebtedness) on your secured
note of July 8, 1994, in the principal amount of $250,000.
By signing below, you hereby agree that as payment for the entire amount of this
Indebtedness of $43,740 you will receive 34,992 shares of the Company's Common
Stock (the "Shares").
You further acknowledge that the Indebtedness represents the entire amount owed
to you by the Company for borrowed money as of the date hereof (as opposed to
compensation and benefits).
By signing below, you also represent to the Company that: ( i ) you are able to
bear the economic risk of the investment in the Shares, ( ii ) you recognize and
agree that the Shares have not been registered under the Securities Act of 1933,
as amended ( the "Act"), ( iii) you recognize and agree that you will be
required to continue to bear the risk of investment in the Shares for an
indefinite period, ( iv ) you recognize and agree that such Shares must be held
by you indefinitely unless a subsequent disposition is registered under the Act
or is exempted from registration under all applicable federal and state
securities laws, ( v ) you recognize and agree that the Company will enter stop
transfer notations in its records with respect to the stock certificates
representing the shares, ( vi ) you have knowledge and experience with respect
to the Company and its business and in financial and business affairs generally
so that you are capable of evaluating the merits and risks of the prospective
investment; ( vii ) the Shares are being acquired for your own account for
investment purposes and not with the view of resale or distribution thereof by
you and (viii) you recognize and agree that a restrictive legend will be placed
on the certificates representing the Shares summarizing the restrictions on
transferability outlined above. At the request of Clarex, the Company will make
its best efforts to register the Shares, only if it qualifies to use Securities
and Exchange Commission form S3.
Please confirm your acceptance of the terms of this letter by signing below.
Very truly yours,
James L. Greco
Chief Financial Officer
Agreed to as of the 31st day of December, 1998
Clarex Limited
Memorandum
To: Mr. Charles J. Lucy
From: Board of Directors
INRAD, Inc.
Subject: Employment Contract
Date: March 10, 1999
The board of Directors of INRAD, Inc. offers you the position of President and
Chief Executive Officer of INRAD with all the usual authority commensurate with
the Chief Executive Officer title. In this role you will assume the
responsibility of operating the company and will have the authority to make the
decisions necessary for the success of the business, subject to the Board's
review and approval where appropriate. As President and Chief Executive Officer
you will also be a member of the Board of Directors.
A. Salary
The base salary will be Ten Thousand ($10,000) Dollars per month, payable
monthly, based on a minimum of three days per week present at the Northvale
office or on business travel.
B. Duration and Termination
Duration will be a minimum of six consecutive months in either a CEO or
consultant capacity. Terminable by either party after a minimum duration upon
one month's notice.
C. Capital Investment
The Board recognizes there is a need for capital investment immediately to allow
you to make the necessary staff and operational changes. Clarex has committed to
invest $500,000 in INRAD at once or in stages as needed by INRAD in 1999.
C. Commuting and Living Expenses
INRAD will pay all commuting and living expenses related to your presence in
Northvale or on company business. Living expenses will include rental of
mutually agreed suitable quarters for you and your wife, or up to $150 per night
hotel expense until such quarters are engaged.
D. Dr. Ruderman
Effective on your start date, Dr. Ruderman will step out of the role of the
President and Chief Executive Officer and become Chief Scientific Officer of the
company. He will of course continue to serve as Chairman of the Board of
Directors. As the new President and Chief Executive Officer you will have,
subject to the Board of Directors, complete authority and responsibility for
operating the company.
<PAGE>
E. Company Benefits
You may set your own vacation time as operations will allow. A summary of life
insurance and health benefits is available at your request.
Your signing and returning a copy of this offer will constitute your acceptance
of the terms and conditions of this offer and your election to the position of
President and Chief Executive Officer of INRAD.
We would like you to assume the responsibilities of the Presidency effective
March 10, 1999.
Sincerely, Accepted by:
----------------------------- --------------------------
Warren Ruderman C.J. Lucy
Chairman of the Board of Directors
INRAD, Inc.
Exhibit 23-2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 5, 1999 (except for Note 14, as to which
the date is March 19, 1999), accompanying the consolidated financial statements
and included in the Annual Report of INRAD, Inc. on Form 10-K for the year ended
December 31, 1998. We hereby 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 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES F3 AND F4 ON THE COMPANY'S 10K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 208,028
<SECURITIES> 0
<RECEIVABLES> 646,604
<ALLOWANCES> 7,000
<INVENTORY> 1,433,081
<CURRENT-ASSETS> 2,470,435
<PP&E> 5,216,544
<DEPRECIATION> 4,585,761
<TOTAL-ASSETS> 3,538,157
<CURRENT-LIABILITIES> 714,785
<BONDS> 350,000
0
0
<COMMON> 41,007
<OTHER-SE> 2,435,365
<TOTAL-LIABILITY-AND-EQUITY> 3,538,157
<SALES> 5,350,868
<TOTAL-REVENUES> 5,350,868
<CGS> 4,225,453
<TOTAL-COSTS> 4,225,453
<OTHER-EXPENSES> 1,521,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,533
<INCOME-PRETAX> (631,768)
<INCOME-TAX> 0
<INCOME-CONTINUING> (631,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (631,768)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
