Item 1. Business.
INRAD, Inc., (the "Company" or "INRAD"), incorporated in New Jersey in 1973, designs, develops, manufactures and markets crystals and products incorporating crystals which are used primarily for controlling and augmenting laser radiation. These products, which represent INRAD's core business, are designed either for incorporation by original equipment manufacturers in their lasers and laser systems, for use by scientists and engineers in their research and development with lasers, or as stand-alone subsystems or instruments for general use with lasers. These products are sold under the INRAD trademark, which has been registered in the United States Patent Office.
In order to effectively utilize lasers, it is often necessary to control, modify, or augment the laser beam. The Company's products perform these functions with lasers which are currently being used in communications, medicine, surveying, military range finding and target illumination, materials processing, color separation, printing and a wide variety of research applications, including applications in laser fusion, isotope separation and spectroscopy.
INRAD also manufactures precision optics and optical assemblies for its customers. Most of these optics are supplied with reflective and antireflective optical coatings produced in INRAD's Thin Film Department.
INRAD's company-funded research and development program is supplemented by federally funded R&D grants and contracts in technical areas related to INRAD's core business.
Products
The Company's products include: crystals; crystal components such as Q-switches, polarizers, waveplates and rotators; integrated systems such as harmonic generators, electronic devices for laser components and laser pulsewidth measuring instruments; and opto-mechanical assemblies and optical components. The Company sells crystals as blanks or as precision polished elements. Wherever possible, the Company emphasizes the manufacture and sale of its components, integrated systems, and instruments that incorporate its own crystals. The Company also performs research and development for industry and government in the area of crystal and laser technology.
The following table illustrates the Company's sales for each major category of its product line during the past three years:
Year Ended December 31, ----------------------- 1996 1995 1994 ------------------------------------------------------ Category Sales % Sales % Sales % - -------- ----- - ----- - ----- - $ $ $
Crystals & Crystal Components 3,563,983 62 3,263,759 60 3,578,014 60
Systems & Instruments 1,677,092 29 1,083,670 20 1,415,702 24
Contract Research & Development 489,930 9 1,084,609 20 1,002,203 16 ------- - --------- -- ---------- --
TOTAL $5,731,005 100 $5,432,038 100 $5,995,919 100 ========== === ========== === ========== ===
Although the growth of crystals, including new crystals grown at high temperatures, will continue to be an integral part of the Company's business, the Company believes that laser manufacturers and users will increase their demand for components, systems and computer-based instruments more rapidly than they will increase their demand for unpackaged crystals. The Company's manufacturing and marketing efforts are being directed to this anticipated change in demand.
Products Manufactured by the Company
Single Crystals
The Company produces, by various techniques, some 38 types of crystals which, because of their purity, internal structure, and high perfection have unique optical, electronic or electro-optical properties. Crystals are a form of solid matter having a regular internal structure, with atoms and molecules arranged in a precise way to form a solid internal pattern that repeats itself over and over again in all directions.
Crystal Components
Electro-optic and nonlinear crystal devices can alter the intensity, polarization or wavelength of a laser beam. The Company has developed and manufactures a line of Q-switches, harmonic generators, and associated electronics. These devices are sold individually to scientists throughout the world as well as on an OEM basis to laser manufacturers.
Harmonic Generation Systems and Instruments
Harmonic generation systems enable the users of lasers to convert the fundamental frequency of the laser to another frequency required for a specific end use. A harmonic, which is a multiple of the fundamental frequency, is obtained by passing a laser beam through a suitable nonlinear crystal. Harmonic generators are also used to mix the output frequency of one laser with that of another
laser to produce a different frequency. Harmonic generators are presently useful in spectroscopy, lithography, semiconductor processing, optical data storage and scientific research.
Following the development of microprocessor-based tunable lasers, which automatically produce a range of frequencies, the Company developed a product called the Autotracker. When used in conjunction with these lasers, the Autotracker automatically generates tunable ultraviolet light for use in spectroscopic applications.
An Infrared Autotracker was then designed to cover the wavelength region from 1.5 to 4.5 microns. Further product developments are planned to extend the wavelength region of tunability to 11 microns using a group of new crystals now being developed and grown at INRAD. In 1991, the Company introduced an Autotracker specifically designed to work with Titanium Sapphire lasers. These lasers are an advance in solid state tunable sources and are now being marketed by many major laser manufacturers.
In 1994, the Company introduced a new harmonic generator for use with ultrafast lasers having pulsewidths in the femtosecond and picosecond ranges. This product is sold on an OEM basis to the world's largest manufacturer of ultrafast lasers.
The Company has developed and produces a line of Autocorrelators which can measure extremely short laser pulses. Accurate measurement of pulsewidth is important in studies of chemical and biological reactions, as well as in the development of high speed electronics, ultrafast lasers and laser diodes for communications. The Model 5-14LD Autocorrelator is capable of measuring laser pulsewidths from 100 femtoseconds to 75 picoseconds from any type of laser system, and has the highest sensitivity of any commercial autocorrelator. The Model 5-14BX Autocorrelator can measure in real time the pulsewidth of high repetition rate lasers. By using a combination of precision mechanical and optical engineering in conjunction with a computer interface, this autocorrelator is ideal for setting up and monitoring fast and ultrafast lasers.
Precision Optics
The Company also produces a line of precision optical components used in laser and other optical systems. These include lenses, windows, polarizers, retardation plates, Brewster windows, attenuation systems, rotators and gimbal mounts.
Optical Coatings
In order to meet performance requirements, most optical components require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect, or transmit specific wavelengths. INRAD uses computerized coating equipment and has built its coating facility within a temperature and humidity controlled clean room.
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 four 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, 1996, 1995, and 1994 were $170,750 (3.3% of net product sales), $305,626 (7.0% of net product sales), and $365,856 (7.3%),respectively.
In 1990 the Company established a Federal Research and Development Program Group in order to augment its own funded R&D efforts. This group actively seeks government support in technical areas in which the Company has expertise, and has promise for the development of new commercial products in which the government has requirements. Scientific, manufacturing and support personnel from within the Company are assigned to the Federal R&D Group to carry out government funded programs.
The Federal R&D Programs Group has been particularly successful in winning awards under the Federal Small Business Innovative Research (SBIR) Program. These programs have led to several inventions and the Company has been awarded six U.S. patents, has filed several patent applications and is preparing additional applications. The Company is seeking strategic partners to commercialize some of the technologies developed from these programs.
During 1996, 1995 and 1994, the Company was awarded funded R&D programs totaling approximately $152,000, $316,000, and $573,000, respectively. The programs range in duration from six to twenty-four months. All programs are monitored for technical accomplishments and are subject to final audit by the sponsoring government agency or its designated audit agency.
Revenues from contract research and development were $489,930, $1,084,609, and $1,002,203 during the years ended December 31, 1996, 1995, and 1994, 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 1996, 1995 and 1994 the Company's domestic product sales were made to end users in the following market areas:
Market 1996 1995 1994 ------ ---- ---- ----
Industrial 66% 67% 45% Universities 13% 7% 10% National Laboratories 8% 9% 7% Government 13% 17% 38% --- ---- ----
Total Domestic 100% 100% 100% ==== ==== ====
In recognition of the sharp reductions in the U.S. defense budgets, the Company has refocused its marketing strategy to place a greater emphasis on industrial, medical and scientific applications. This change in emphasis has resulted in a larger percentage of sales to industrial users in 1996 and 1995.
The Company does not have similar information about the end use of products sold abroad. Foreign sales accounted for 16% of total product sales in 1996, 19% in 1995, and 24% in 1994. Worldwide, the Company has approximately 210 customers, one of which accounted for 11% of net product sales in 1996, 1995 and 1994. Another accounted for 12% and 11% of net product sales in 1996 and 1995, respectively. Additionally, one other customer accounted for over 10% of net product sales in 1995, and another accounted for over 10% of net product sales in 1994. One foreign customer accounted for over 10% of net product sales in 1994. No foreign customer accounted for over 10% of product sales in either 1996 or 1995.
Long-Term Contracts
Certain of the Company's orders from customers provide for periodic deliveries at fixed prices over a period which may be greater than one year. In such cases the Company attempts to obtain firm price commitments from its raw material suppliers for the materials necessary to fulfill the order.
Marketing
The Company markets its products domestically through its own sales staff, supervised by the Vice President - Marketing and Sales. Independent sales agents are used in major overseas markets, including Canada, Europe and the Pacific Rim.
The current sales staff consists of four degreed professionals plus support personnel. The Company plans, subject to availability of resources, to implement a significant sales and marketing program in 1997, including additional sales staff, increased advertising and trade show participation, development of additional
marketing materials, and greatly increased contact with existing and potential customers.
Backlog
The Company's order backlog as of December 31, 1996 included approximately $1,672,000 of product orders and $75,000 of contract R&D, most of which is scheduled to be completed in 1997. On December 31, 1995, the backlog included $1,470,000 of product orders and $413,000 of contract R&D.
Competition
The Company believes that there are relatively few companies which offer the wide range of products sold by the Company. Within each product category, however, there is competition. Although price is the principal factor in certain product categories, the principal means of competition in most product categories are not only price, but also include product design, product performance, quality 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, 1996, the Company had 58 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 the technologies patented by INRAD.
Although the Company has relied in the past on its manufacturing and technological expertise, rather than on any patents, to maintain its position in the industry, it is now additionally seeking patent protection for inventions resulting from its research programs. The Company takes precautionary and protective measures to safeguard its design, technical and manufacturing data and relies on nondisclosure agreements with its employees to protect its proprietary information.
Regulation
Foreign sales of certain of the Company's products may require export licenses from the United States Department of Commerce. Such licenses are generally available to all but a limited number of countries.
Although the manufacture, sale and use of lasers are subject to extensive federal and state regulations which indirectly affect the Company, there are no federal regulations nor any unusual state regulations which directly affect the manufacture or sale of the Company's products other than those which generally affect companies engaged in manufacturing operations in New Jersey.
Sales in the European Community for electronic instruments require EC certification; the Company is now engaging in obtaining such certification.
Item 2.
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 1996 annual rent was approximately $237,000. The Company also paid real estate taxes and insurance premiums which aggregated approximately $45,000 during 1996.
Item 3.
Item 3. Legal Proceedings.
There is no material litigation pending against the Company as of the date hereof.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information.
The Company's common stock, par value $.01 per share, is traded in the OTC Bulletin Board under the symbol INRD.
The following table sets forth the range of selling prices for the Common Stock in each fiscal quarter from the quarter ended March 31, 1995, through the quarter ended December 31, 1996 as reported by the National Association of Securities Dealers Nasdaq System:
Sales Price ---------------- High Low ---- ---
Quarter ended March 31, 1996............................9/16 1/4 Quarter ended June 30, 1996.............................7/16 1/4 Quarter ended September 30, 1996........................5/16 5/16 Quarter ended December 31, 1996..........................3/8 1/4
Quarter ended March 31, 1995.............................1/2 1/2 Quarter ended June 30, 1995..............................3/4 3/8 Quarter ended September 30, 1995.........................3/4 3/8 Quarter ended December 31, 1995..........................3/4 3/8
(b) Holders.
As of March 11, 1997, there were 181 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, 1996, 1995 or 1994. Payment of dividends will be at the discretion of the Company's Board of Directors and will depend, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company's loan agreement with its bank currently prohibits it from paying dividends. The Company does not anticipate paying cash dividends in the immediate future.
(d) Recent Sales of Unregistered Securities.
In January 1996, the Company issued a total of 2,700 shares of its common stock to its employees. The issuance was exempt from registration as either not involving a sale or as an exempt private placement pursuant to Section 4(2) of the Securities Act.
Item 6.
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, -------------------------------
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- $ $ $ $ $
Revenues 5,731,005 5,432,038 5,995,919 6,244,774 5,684,259
Net Loss (373,774) (968,878) (873,394) (1,807,106) (1,534,151)
Net Loss Per Share (0.18) (0.46) (0.41) (1.27) (1.10)
Dividends Paid None None None None None
Total Assets 4,715,205 5,296,044 6,083,264 7,535,448 7,909,697
Long-Term Obligations 2,351,561 2,359,131 934,420 1,689,965 662,265
Shareholders' Equity 1,434,693 1,808,467 2,677,345 3,550,739 4,299,888
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.
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, ----------------------- 1996 1995 1994 ---- ---- ---- % % % Revenues: Net product sales 91.5 80.0 83.3 Contract research and development 8.5 20.0 16.7 ----- ----- -----
100.0 100.0 100.0 Interest and other income 0.3 0.3 0.2 ----- ----- ----- 100.3 100.3 100.2
==============================================================================
Costs and expenses: Cost of goods sold* 74.8 83.7 82.6 Plant consolidation costs -- 1.7 -- Contract research and development* 102.5 97.7 97.0 Selling, general and administrative expenses 21.7 19.0 18.2 Internal research and development** 3.3 7.0 7.3 Interest expense 4.9 5.3 5.6
==============================================================================
Net loss (6.5) (17.8) (14.6)
* calculated as a percentage of their respective revenues ** calculated as a percentage of net product sales
Net Product Sales
Net product sales were $5,241,075, $4,347,429, and $4,993,716 in 1996, 1995 and 1994, respectively. Product sales in 1996 were 20% greater than the prior year due to a sales and marketing program that began early in 1996. Product sales in 1995 were lower than the prior year due to a significantly lower opening backlog and insufficient short term orders in 1995.
International sales, as a percentage of total product sales, were 16 %, 19%, and 24% for 1996, 1995, and 1994, respectively. The dollar value of international sales increased in 1996 compared to 1995, and decreased in 1995 compared to 1994. Bookings of new orders, particularly for laser systems and instruments, were higher in 1996 than in 1995, and resulted in higher shipments in 1996 compared to the prior year.
The Company's backlog of product orders as of December 31, 1996 was approximately $1,672,000, compared to approximately $1,470,000 at December 31, 1995.
Cost of Goods Sold
As a percentage of net product sales, cost of goods sold was 74.8%, 83.7% and 82.6% for the years ended December 31, 1996, 1995 and 1994, respectively. The Company continued its efforts to monitor expenses in 1996. The decrease in the cost of goods sold percentage from 1995 to 1996 is attributable to increased sales compared to relatively fixed costs such as wages, depreciation and rent. The increase from 1994 to 1995 is attributable to lower than expected sales compared to relatively fixed costs.
Prices for raw materials and purchased components have been relatively stable in 1996 and 1995, while labor costs rose in both years.
Contract Research and Development
Contract research and development revenues were $489,930, $1,084,609, and $1,002,203 for the years ended December 31, 1996, 1995 and 1994, respectively. Related contract R&D expenditures, including allocated indirect costs, were $502,367, $1,059,668, and $971,932. Revenues decreased from 1996 to 1995 based on the Company's policy to focus its funded research efforts on programs closely aligned with its core business. Revenues increased from 1994 to 1995 as a result of a greater emphasis by the Company's scientific and technical personnel on funded programs. 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 1996 increased $211,530, or 20.5% compared to 1995, and in 1995 decreased $55,042 or 5.1% compared to 1994. In 1996, selling salaries and commissions increased, and the Company allocated a lower amount to contracts; these increases in costs were partially offset by lower professional fees and a reduction in rent cost. In 1995, selling commissions on international sales decreased and the Company allocated a higher portion of G&A costs to contracts; these decreases were partially offset by higher sales salaries and advertising and marketing costs. Subject to availability of resources, the Company expects to increase certain selling costs in 1997, including additional sales staff and increased advertising and trade show participation.
Internal Research and Development Expenses
Research and development expenses for 1996 were $170,750 (3.3% of product sales) compared with 1995 expenditures of $305,626 (7.0% of product sales). R&D expenses for 1994 were $365,856 (7.3% of product sales).
During 1996, the Company continued to decrease its emphasis on development of new products and increased its short-term efforts on sales and marketing of existing products. As a result, R&D expenditures decreased in 1996. This level is expected to continue in 1997.
Income taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. At December 31, 1996, the Company had a net deferred tax asset of $2,304,000, 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.
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 (8.25% at December 31, 1996) + 2 1/4%. The agreement also amended the financial covenants contained in the original agreement. The Company continues to be required to maintain compliance with affirmative and negative covenants, including limitations on capital expenditures, dividends and new indebtedness, and compliance with a financial ratio tied to
accounts receivable. Chase Manhattan Bank also agreed to waive any defaults which existed under the previous facility. Borrowings are secured by accounts receivable and the personal guarantee of the Company's principal shareowner.
In addition, in connection with the new Chase Manhattan Bank agreement, a shareowner and Subordinated Convertible Note holder agreed to maintain a certificate of deposit with Chase Manhattan Bank in the amount of $245,000 as collateral for the loan. Once the principal balance of the loan is reduced below $222,700, with each principal payment made by the Company, an amount may be withdrawn from the collateral deposit to maintain a 1.1 to 1 collateral to loan ratio.
In April 1995, the Company received $225,000 from a shareowner and Subordinated Convertible Note holder of the Company through the issuance of $125,000 of 8% Subordinated Convertible Notes due December 15, 2000 (convertible at $1.00 per share) and 250,000 warrants at $0.40 per share. The warrants entitle the holder to purchase 250,000 shares of Common Stock at $0.6875 per share. The first six semiannual interest payments due under the Note are payable in the form of additional notes and do not require a cash outlay. On September 27, 1995, the Company raised an additional $100,000 from the same shareowner in the form of a 10% Unsecured Demand Convertible Promissory Note. The Note is convertible into Common Stock of the Company at the conversion price of $1.00; interest is also payable in Common Stock at the same conversion price. The proceeds from issuance of the Subordinated Notes, Warrants and Demand Note were used to reduce short-term liabilities, including trade debt. Although by its terms the Note is due on demand, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The Demand Note has been classified as noncurrent in the Company's December 31, 1996 balance sheet because the Note holder has agreed not to demand payment prior to January 1, 1998.
In 1993, the Company raised $1,000,000 in new capital from a private investment group through the issuance of $746,215 of seven-year 10% subordinated convertible notes and 203,028 shares of common stock. The first six semi-annual interest payments due under the note were payable in the form of additional notes and did not require a cash outlay. Beginning in 1997 the Company will have to pay cash interest.
During September 1993, the Company borrowed $100,000 in the form of two promissory notes from a shareowner of the Company. On December 16, 1993, the shareowner exchanged the existing promissory notes for a new seven-year 10% subordinated convertible note in the amount of $74,621 and 20,303 shares of common stock.
The entire amount of all Subordinated Convertible Notes (issued both in 1993 and 1995) may be redeemed by the Company after December 15, 1998; they are subordinated to any outstanding indebtedness to Chase Manhattan Bank and other secured indebtedness of the Company. At December 31, 1996 the Company was in violation of certain terms of these notes; subsequent to year end, the
Company obtained waivers from the holders of the notes and modified the financial covenants in the debt agreements.
In 1993, the principal shareowner and President of the Company exchanged an unsecured demand note for a new promissory note maturing on December 31, 1996 in the amount of $566,049 (including $154,049 of accrued interest) and 494,400 shares of common stock. The new note bears interest at 7% and is unsecured. Interest expense related to the shareowner loan was approximately $72,000, $72,000 and $74,000 in 1996, 1995 and 1994, respectively. This note has been classified as noncurrent in the Company's December 31, 1996 Balance Sheet because the note holder has agreed not to demand payment prior to January 1, 1998.
The Company's Secured Promissory Notes bear interest at 7%, are secured by certain of the Company's precious metals, and are convertible at any time into 200,000 shares of common stock. The Notes also contain acceleration clauses which would allow the holder, a shareowner of the Company, to accelerate the maturity date and demand payment if certain events occur. The maturity date of the Secured Notes is July 8, 1997. This note has been classified as noncurrent in the Company's December 31, 1996 Balance Sheet because the note holder has agreed not to demand payment prior to January 1, 1998.
Where possible, the Company will continue to reduce expenses and cash requirements to improve future operating results and cash flows. Management expects that cash flow from operations will provide adequate liquidity for the Company's operations in 1996. If, however, the Company's cash flow from operations is not maintained at satisfactory levels, the Company may seek additional financing to supplement the cash flow.
Because of the circumstances described above relating to the Company's ability to improve operating results and cash flows, there is substantial doubt about the Company's ability to continue as a going concern.
Capital expenditures, including internal labor and overhead charges, for the years ended December 31, 1996, 1995 and 1994 were $238,000, $166,000, and $193,000, 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 $374,000 for the year ended December 31, 1996, and also incurred losses in 1995 and 1994. During the past three years, the Company's working capital requirements were met in part on the basis of borrowings from, and issuance of common stock and warrants to, shareowners including the principal shareowner and the sale of certain non-operating assets.
These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2 in the accompanying financial statements (see also Liquidity and Capital Resources under this Item 7).
Item 8.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements are set forth on pages through. Page follows page 25.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
On August 29, 1996, the Company filed Form 8-K reporting a change in its independent accountant.
PART III
Item 10.
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 77 Directors, President and Chief Executive Officer (1973 - Present).
William B. Maxson, 1989 Consultant (1990 - Present); 66 Vice President (1984-1990), Air Force Programs Cypress International (marketing and business development firm); Officer, United States Air Force (1952 - 1984), retiring with rank of Major General in 1984.
Donald H. Gately, 1995 Management Consultant 77 (1990 - 1994); Chief Operating Officer, Datamax Corporation (1994 - 1996)
Aaron Dean 1996 Financial Analyst and Vice 35 President(1996 - Present) Prudential Securities (investment banking firm); Vice President (1995 - 1996) M.D. Sass Associates (investment banking firm); Vice President (1990 - 1995) Arnhold and S. Bleichroeder, Inc. (investment banking firm).
The directors serve one-year terms. Pursuant to agreements between the Company and Hoechst Celanese Corporation ("Hoechst"), Hoechst may designate a representative for nomination to the Company's Board of Directors; the Company has agreed to use its best efforts to have a designated representative elected to the
Board of Directors. At the present time Hoechst has not designated a representative to the Board.
Pursuant to an agreement between INRAD and Clarex, Ltd. ("Clarex"), the Company has agreed to use its best efforts to have two individuals selected by Clarex elected to the Board of Directors as long as any of the subordinated convertible notes are outstanding. Aaron Dean has been selected by Clarex as one representative; a second representative has not been designated at the present time.
Executive Officers of the Registrant
The following table sets forth the name and age of each executive officer of the Company, the period during which each such person has served as an executive officer and the positions and offices with the Company held by each such person:
Officer Positions and Offices Name and Age Since With the Company - ------------ ----- ----------------
Warren Ruderman, 77 1973.........Chairman of Board of Directors President and Chief Executive Officer
Maria Murray, 39 1995.........Vice President - Marketing and Sales
Glenn Nosti, 41 1994.........Vice President - Manufacturing
James Greco, 40 1996.........Controller and Secretary
Warren Ruderman has served as President and Chairman of the Board of Directors of the Company since he founded it in 1973. Prior to 1973, he founded and served as the President of Isomet Corporation, a manufacturer of acousto-optic devices for the laser industry, and was a Teaching Fellow, Lecturer in Chemistry, Research Scientist and Consultant at Columbia University. Dr. Ruderman was a founder and served as a director of the Melex Corporation (a life sciences company acquired by Revlon, Inc. in 1975). Dr. Ruderman holds a doctorate in Chemical Physics from Columbia University, and is a Fellow of the New York Academy of Sciences.
Maria Murray joined the Company in January 1989 as a Sales Engineer, became Vice President of R&D Programs in 1993, and was appointed Vice President, Marketing and Sales in 1995. Prior to joining INRAD, she held positions in electronic design engineering in the laser and communication industries. She holds a B.S.E.E. degree in Electrical Engineering from the University of Central Florida.
Glenn Nosti joined the Company as a Senior Sales Engineer in July 1990. He was subsequently appointed Vice President, Manufacturing in 1994. Prior to joining INRAD, he held positions as Marketing Manager or National Sales Manager at companies within
the laser optics industry. He received a B.S. in Business Administration from East Carolina University and an M.B.A. in Marketing from Fairleigh Dickinson University.
James Greco joined the Company as Secretary and Controller in July 1996. Prior to joining INRAD, he held positions as Controller of Divisions within National Cleaning Contractors from 1989-1996. He received a B.B.A. from Pace University and is a certified public accountant.
None of the officers of the Company has an employment contract with the Company; each serves at the pleasure of the Board of Directors.
Item 11.
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth, for the years ended December 31, 1996, 1995 and 1994, 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:
(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.
Item 12.
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, 1997. The Company has been advised that all individuals listed have the sole power to vote and dispose of the number of shares set opposite their names in the table.
Percent of Name and Address Number of shares Common Stock - --------------------------------------------------------------------------------
Warren Ruderman(1) 1,106,400 52.5 c/o INRAD, Inc. 181 Legrand Avenue Northvale, NJ 07647
Clarex, Ltd. 1,919,889 (2) 50.9 c/o Bank of Nova Scotia Trust Company Bahamas Ltd. P.O. Box N1355 Nassau, Bahamas
Hoechst Celanese Corp. 300,000 14.2 Routes 202-206 North Box 2500 Somerville, NJ 08876
William F. Nicklin 210,527 (3) 9.3 33 Grand Avenue Newburgh, NY 12550
William Maxson 3,162 (4) 0.1 c/o INRAD, Inc.
Donald H. Gately 16,417 (5) 0.8 c/o INRAD, Inc.
Aaron Dean 61,675 (6) 2.9 c/o INRAD, Inc.
Directors and Executive 1,207,504 (7) 54.9 Officers as a group (7 persons)
(1) By virtue of his shareholdings, Warren Ruderman may be deemed to be a "parent" of the Company as that term is defined in the Rules and Regulations of the Securities Act of 1933, as amended.
(2) Including 1,596,861 shares subject to options, warrants or convertible notes exercisable or convertible within 60 days.
(3) Including 80,000 shares subject to convertible notes convertible within 60 days.
(4) Including 1,500 shares subject to options exercisable within 60 days.
(5) Including 16,417 shares subject to warrants within 60 days.
(6) Including 51,675 shares subject to warrants within 60 days.
(7) Including 89,342 shares subject to options or warrants within 60 days.
Item 13.
Item 13. Certain Relationships and Related Transactions
In 1993, the principal shareowner and President of the Company exchanged an unsecured demand note for a new promissory note maturing on December 31, 1996 in the amount of $566,049 (including $154,049 of accrued interest) and 494,400 shares of common stock. The new note bears interest at 7% and is unsecured. Interest expense related to the shareowner loan was approximately $72,000, $72,000 and $74,000 in 1996, 1995 and 1994, respectively.
Repayment of the shareowner loan has been subordinated to the prior repayment of the Company's indebtedness to Chase Manhattan Bank and to other secured indebtedness of the Company. The principal shareowner has guaranteed borrowings under the Company's existing credit facility with Chase Manhattan Bank. By mutual informal agreement, the Company has deferred certain interest payments to its principal shareholder. During the year ended December 31, 1996, the Company made three quarterly interest payments representing nine months of interest past due from 1995. Subject to adequate cash flow, the Company will continue to make interest payments to its principal shareholder. Although by its terms the indebtedness to the shareholder is due on December 31, 1996, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The shareholder loan has been classified as noncurrent in the accompanying balance sheet because the shareholder has agreed not to demand payment prior to January 1, 1998.
During the years ended December 31, 1996, 1995 and 1994 approximately 8%, 9% and 12% respectively of the company's net product sales were through a foreign agent, in which the principal shareholder has an investment.
PART IV
Item 14.
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.
(b) Exhibits filed as part of this report:
The following exhibits are incorporated by reference to exhibits in the Company's Registration Statement or amendments thereto on Form S-18 (Registration No. 2-83689), initially filed with the Securities and Exchange Commission on May 11, 1983:
Exhibit No. Present in Registration Exhibit Statement or No. Description of Exhibit or Amendments - --- ---------------------- -------------
3.1 Restated Certificate of 3.1 of Amendment 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 Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1993:
10.11 Stock and Note Purchase Agreement with exhibits.
The following exhibit is incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1995:
10.12 Amended and Restated Chase Manhattan Bank Agreement.
The following exhibits are incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the quarter ended December 31, 1995:
10.13 Amendment and Waiver Agreement between INRAD and Chase Manhattan Bank dated August 31, 1995.
10.14 Subordinated Convertible Note dated April 9, 1995 between Clarex Limited and INRAD, Inc.
10.15 Unsecured Demand Convertible Promissory Note dated September 27, 1995 between Clarex Limited and INRAD, Inc.
The following exhibits form an attachment to this report:
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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INRAD INC.
By: /s/ Warren Ruderman ----------------------- Warren Ruderman, President and Chief Executive Officer
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
/s/ Warren Ruderman President, Chief March 27, 1997 - -------------------- Executive Officer Warren Ruderman and Director (Principal Executive Officer)
/s/ Aaron Dean Director March 27, 1997 - -------------------- Aaron Dean
/s/ Donald H. Gately Director March 27, 1997 - -------------------- Donald H. Gately
/s/ William B. Maxson Director March 27, 1997 - --------------------- William B. Maxson
/s/ James L. Greco Controller and March 27, 1997 - ------------------ Secretary James L. Greco (Principal Financial and Accounting Officer)
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY:
State or Territory Company of Incorporation ------- ----------------
INRAD Optical Systems, Inc. New Jersey
INRAD, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Consolidated Financial Statements Page ----
Reports of Independent Accountants -
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996
Consolidated Statement of Shareowners' Equity for each of the three years in the period ended December 31, 1996
Notes to Consolidated Financial Statements to
NOTE: All schedules are either not applicable or the information is included in the consolidated financial statements or notes thereto.
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, 1996, and the related consolidated statements of operations, shareowners' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit 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, 1996, and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the financial statements, the Company has had recurring losses and has substantial debt service obligations. These factors, among others, as discussed in Note 2 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP Parsippany, New Jersey March 6, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors of INRAD, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of INRAD, Inc. and its subsidiaries at December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has suffered recurring losses from operations and, for each of the two years in the period ended December 31, 1995, cash outflows have been funded in part on the basis of borrowings from, and issuance of common stock and warrants to, shareowners including the principal shareowner. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Price Waterhouse LLP Morristown, New Jersey March 15, 1996
INRAD, INC.
CONSOLIDATED BALANCE SHEETS
December 31, ------------ Assets 1996 1995 - ------ ---- ----
Current assets: Cash and cash equivalents $ 194,577 $ 37,981 Certificate of Deposit 70,000 70,000 Accounts receivable, net 735,160 804,834 Inventories 1,735,144 1,671,673 Unbilled contract costs 59,350 151,649 Assets held for sale -- 279,111 Other current assets 60,292 61,699 --------- --------- Total current assets 2,854,523 3,076,947
Plant and equipment, net 1,431,931 1,788,080 Precious metals 279,248 280,001 Other assets 149,503 151,016 --------- --------- Total assets $4,715,205 $5,296,044 ========= =========
Liabilities and Shareowners' Equity
Current liabilities: Note payable - Bank 92,500 60,000 Current obligations under capital leases 73,399 190,754 Accounts payable and accrued liabilities 640,943 708,403 Advances from customers 73,244 116,205 Other current liabilities 48,865 53,084 --------- --------- Total current liabilities 928,951 1,128,446
Note payable - Bank 227,500 320,000 Obligations under capital leases 4,751 75,088 Secured Promissory Notes 250,000 250,000 Subordinated Convertible Notes 1,203,261 1,080,623 Unsecured Demand Convertible Note 100,000 100,000 Note payable - Shareowner 566,049 533,420 --------- --------- Total liabilities 3,280,512 3,487,577 --------- ---------
Commitments Shareowners' equity: Common stock: $.01 par value; 2,121,571 shares issued 21,216 21,216 Capital in excess of par value 6,051,791 6,067,991 Accumulated deficit (4,586,514) (4,212,740) --------- --------- 1,486,493 1,876,467 Less - Common stock in treasury, at cost (12,300 shares at December 31, 1996; 15,000 shares at December 31, 1995) (51,800) (68,000) --------- --------- Total shareowners' equity 1,434,693 1,808,467 --------- --------- Total liabilities and shareowners' equity $4,715,205 $5,296,044 ========= =========
See Notes to Consolidated Financial Statements.
INRAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, ----------------------- 1996 1995 1994* ---- ---- ----
Revenues: Net product sales $5,241,075 $4,347,429 $4,993,716 Contract research and development 489,930 1,084,609 1,002,203 --------- --------- --------- 5,731,005 5,432,038 5,995,919 --------- --------- ---------
Costs and expenses: Cost of goods sold 3,922,517 3,638,582 4,123,490 Plant consolidation costs - 94,228 - Contract research and development expenses 502,367 1,059,668 971,932 Selling, general and administrative expenses 1,245,077 1,033,547 1,088,589 Internal research and development expenses 170,750 305,626 365,856 --------- --------- --------- 5,840,711 6,131,651 6,549,867 --------- --------- ---------
Operating Loss (109,706) (699,613) (553,948)
Other income (expense): Interest expense (283,390) (285,646) (332,954) Interest and other income, net 19,322 16,381 13,508 --------- --------- ---------
Net loss $(373,774) $(968,878) $(873,394) ========= ========= =========
Net loss per share $(0.18) $(0.46) $(0.41) ======= ====== ======
Weighted average shares outstanding 2,109,138 2,106,571 2,106,571 ========= ========= =========
* Prior year amounts have been reclassified to conform to current year presentation (Note 1).
See Notes to Consolidated Financial Statements.
INRAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ----
Cash flows from operating activities: Net loss $ (373,774) $ (968,878) $ (873,394) ---------- ---------- ---------- Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 601,881 718,145 728,058 Noncash interest 155,269 142,139 126,581 Plant consolidation costs - 64,751 - Gain on sale of equipment (8,621) - - Changes in assets and liabilities: Accounts receivable 69,674 (195,679) 294,194 Inventories (63,471) 226,099 195,517 Unbilled contract costs 92,299 5,068 61,265 Other current assets 1,405 (11,532) (8,205) Precious metals 754 31,796 4,442 Other assets (17,467) (16,415) (6,176) Accounts payable and accrued liabilities (67,460) 82,951 (249,319) Advances from customers (42,961) (355) (5,759) Other current liabilities (4,218) 912 25,986 ---------- ---------- ---------- Total adjustments 717,084 1,047,880 1,166,584 ---------- ---------- ---------- Net cash provided by operating activities 343,310 79,002 293,190 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures (238,202) (166,450) (174,110) Purchase of Certificate of Deposit - - (70,000) Proceeds from sale of equipment 299,180 49,700 - ---------- ---------- ---------- Net cash provided by (used in) investing activities 60,978 (116,750) (244,110) ---------- ---------- ---------- Cash flows from financing activities: Repayments of note payable - Bank (60,000) (140,000) (230,000) Proceeds from issuance of subordinated convertible notes 125,000 - Proceeds from issuance of unsecured demand convertible note 100,000 - Proceeds from sale of common stock warrants 100,000 - Principal payments of capital lease obligations (187,692) (228,989) (260,065) ---------- ---------- ---------- Net cash used in financing activities (247,692) (43,989) (490,065) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 156,596 (81,737) (440,985) Cash and cash equivalents at beginning of year 37,981 119,718 560,703 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 194,577 $ 37,981 $ 119,718 ========== ========== ==========
See Notes to Consolidated Financial Statements.
INRAD, INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
See Notes to Consolidated Financial Statements.
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 $110,000, $100,000, and $97,000 in 1996, 1995 and 1994, 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.
See Notes to Consolidated Financial Statements.
Internal Research and Development Costs:
Internal research and development costs are charged to expense as incurred.
Prior to January 1, 1995, internal research and development costs included direct charges and allocations of plant overhead costs. Effective January 1, 1995, the Company modified its reporting to charge allocations of plant overhead costs directly to cost of goods sold. This reclassification has no effect on operating profit (loss) or net income (loss). Prior year amounts have been reclassified to conform to the current year presentation.
Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
Cash Flow Information:
The Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. The Company's Certificate of Deposit is not included in cash equivalents because the CD serves as collateral for a letter of credit. It is anticipated that the underlying contract will be completed in 1997 and the letter of credit canceled.
Cash interest paid during the years ended December 31, 1996, 1995 and 1994 was $109,497, $113,447, and $200,195, respectively.
Net Loss Per Share:
Net loss per share is computed using the weighted average number of common shares outstanding during the year. The weighted average number of shares used in computing net loss per share was 2,109,138, 2,106,571, and 2,106,571 for the years ended December 31, 1996, 1995 and 1994, respectively.
The effect of common stock equivalents has been excluded from the computation because their effect is antidilutive.
Impairment of Long-Lived Assets:
Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. Under provisions of the Statement, 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 in relation to the operating performance and future undiscounted cash flows of the underlying business. SFAS No. 121 requires analysis of each item on an individual asset-by-asset basis, where applicable. 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.
See Notes to Consolidated Financial Statements.
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 $374,000 for the year ended December 31, 1996, and also incurred losses in 1995 and 1994. In addition, the Company has substantial debt service obligations. During the past three years, the Company's working capital requirements were met by cash provided by operating activities, and by borrowings from, and issuance of common stock and warrants to, shareowners including the principal shareowner. The Company continued to take steps in 1996 to reduce expenses, to reduce cash requirements through reduction in lease and bank payment schedules, and to raise cash through the sale of certain nonoperating assets.
Management expects that cash flow from operations, will provide adequate liquidity for the Company's operations in 1997. If, however, the Company's cash flow from operations is not maintained at satisfactory levels, the Company may seek financing to supplement its cash flow.
Due to the circumstances described above relating to Company's ability to improve operating results and cash flows, there is substantial doubt about the Company's ability to continue as a going concern.
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable are comprised of the following: December 31, ------------ 1996 1995 ---- ----
Accounts receivable $740,160 $809,834 Allowance for doubtful accounts (5,000) (5,000) -------- -------- $735,160 $804,834 ======== ========
NOTE 4 - INVENTORIES:
Inventories are comprised of the following: December 31, ------------ 1996 1995 ---- ----
Raw materials $ 184,116 $ 176,619 Work in process, including manufactured parts and components 1,430,086 1,343,021 Finished goods 120,942 152,033 ---------- ---------- $1,735,144 $1,671,673 ========== ==========
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 1996, 1995 and 1994, the fourth
See Notes to Consolidated Financial Statements.
quarter operating results included an adjustment to decrease (increase) operating losses by approximately $164,000, (77,000) and (190,000), respectively.
NOTE 5 - PLANT AND EQUIPMENT:
Plant and equipment is comprised of the following:
December 31, 1996 1995 ---- ---- Furniture and fixtures $ 361,501 $ 319,539 Machinery and equipment 6,913,950 6,633,292 Leasehold improvements 809,749 809,749 Construction in progress 0 84,617 --------- --------- 8,085,200 7,847,197 Less: Accumulated depreciation and amortization (6,653,269) (6,059,117) --------- --------- $1,431,931 $1,788,080 ========= =========
Depreciation expense (including amortization of capital leases) for the years ended December 31, 1996, 1995 and 1994 was $594,352, $715,892, and $724,289, respectively.
In the fourth quarter of 1995, management implemented a program to sell certain nonoperating equipment to raise additional cash. At December 31, 1995, this equipment is carried at its net book value of $279,111, and was sold in 1996 for $299,180.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities comprise the following:
December 31, 1996 1995 ---- ---- Trade accounts payable and accrued purchases $376,825 $381,923 Payroll taxes payable 37,917 32,356 Accrued vacation 93,342 89,946 Accrued professional fees 43,576 142,020 Accrued liability - shareowners 60,863 40,964 Accrued liability - Other 28,420 21,194 ------- ------- $640,943 $708,403 ======= =======
See Notes to Consolidated Financial Statements
NOTE 7 - DEBT:
The Company's debt obligations as of December 31, 1996 and 1995 are as follows:
December 31, 1996 1995 ---- ----
Note Payable - Bank $ 320,000 $ 380,000 Subordinated Convertible Notes 1,203,261 1,080,623 Unsecured Demand Convertible Note 100,000 100,000 Note Payable - Shareowner 566,049 533,420 Secured Promissory Notes 250,000 250,000 --------- --------- 2,439,310 $2,344,043 ========= =========
On February 6, 1997, the Company signed an agreement with Chase Manhattan Bank (successor to Chemical Bank) amending the terms of its credit facility. The new agreement requires monthly principal payments of $10,000 for January 1997, and 7,500 from February 1997 until December 1997, monthly principal payments of $10,000 from January 1998 until December 1998, and monthly principal payments of 12,500 from January 1999 until August 1999. A final payment of $7,500 is due on September 1, 1999. Borrowings bear interest at prime (8.25% at December 31, 1996) + 2 1/4%. The agreement also amended the financial covenants contained in the original agreement . The Company continues to be required to maintain compliance with affirmative and negative covenants, including limitations on capital expenditures, dividends and new indebtedness, and compliance with a financial ratio tied to accounts receivable. Chase Manhattan Bank also agreed to waive any defaults which existed under the previous facility. Borrowings are secured by accounts receivable and the personal guarantee of the Company's principal shareowner.
In connection with the new agreement, a shareowner and Subordinated Convertible Note holder agreed to maintain a certificate of deposit with Chase Manhattan Bank in the amount of $245,000 as collateral for the loan. Once the principal balance of the loan is reduced below $222,700, with each principal payment made by the Company, an amount may be withdrawn from the collateral deposit to maintain a 1.1 to 1 collateral to loan ratio.
In April 1995, the Company received $225,000 from a shareowner and Subordinated Convertible Note holder of the Company through the issuance of $125,000 of 8% Subordinated Convertible Notes due December 15, 2000 (convertible at $1.00 per share) and 250,000 warrants at $0.40 per share. The warrants entitle the holder to purchase 250,000 shares of Common Stock at $0.6875 per share. Twenty-five percent of the Notes may be redeemed at any time if the Company consummates a public offering of its Common Stock. In connection with this transaction, the Company issued 50,000 warrants to purchase Common Stock at $1.00 per share. On September 27, 1995, the Company raised an additional $100,000 from the same shareowner in the form of a 10% Unsecured Demand Convertible Promissory Note. The Note is convertible into Common Stock of the Company at the conversion price of $1.00; interest is also payable in Common Stock at the same conversion price. Although by its terms the Note is due on demand, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The Demand Note has been classified as noncurrent in the accompanying balance sheet because the Note holder has agreed not to demand payment prior to January 1, 1998.
See Notes to Consolidated Financial Statements
In 1993, the Company raised $1,000,000 in cash from a private investment group through the issuance of $746,215 of 10% Subordinated Convertible Notes due December 15, 2000 (the "notes") and 203,028 shares of the Company's common stock at $1.25 per share. As part of this transaction, the Company issued warrants (expiring on December 15, 2000) which entitle the holders to purchase 171,675 shares of the Company's common stock at $1.50 per share. The warrants have been recorded at $68,670 resulting in a discount on the notes of $68,670. During September 1993, the Company borrowed $100,000 in the form of promissory notes from a shareowner of the Company. On December 16, 1993, these promissory notes were extinguished and $74,621 of the notes and 20,303 shares of the Company's common stock at $1.25 per share were issued. The notes are convertible at any time up to their maturity date into shares of the Company's common stock at $1.25 per share (to be adjusted for dividends, stock splits, etc.). Twenty-five percent of the notes may be redeemed by the Company after December 15, 1996, but before December 15, 1998, if the Company has a public offering of its shares of common stock.
The entire amount of all Subordinated Convertible Notes (issued both in 1993 and 1995) may be redeemed by the Company after December 15, 1998; they are subordinated to any outstanding indebtedness to Chase Manhattan Bank and other secured indebtedness of the Company. These notes also contain certain covenants and restrictions, including financial ratios tied to accounts receivable and debt service (as defined). Interest is payable semiannually on these notes, and the first six interest payments are payable in the form of additional notes. At December 31, 1996 and 1995 the Company was in violation of certain covenants of these notes; subsequent to the year ends, the Company obtained waivers from the holders of the notes and modified the financial covenants in the debt agreements.
In 1993, an unsecured demand note of $1,030,000 bearing interest at 10% per annum held by the President and principal shareowner was extinguished, and a promissory note maturing on December 31, 1996 in the amount of $566,049 (including $154,049 of accrued interest), and 494,400 shares of the Company's common stock at $1.25 per share were issued. The promissory note bears interest at 7%. However, a discount of $97,893 has been recorded on the promissory note to reflect the difference between the actual rate of interest on the note and an estimated market rate. Repayment of the promissory note has been subordinated to any outstanding indebtedness to Chase Manhattan Bank and other secured indebtedness of the Company. By mutual informal agreement, beginning with the quarter ended June 30, 1995, the Company has deferred interest payments to its principal shareowner. The payments are expected to be resumed in 1997 and are expected to include both the scheduled quarterly payment and any deferred payments. The interest obligations have been accrued by the Company and are included in accounts payable and accrued liabilities. Interest expense related to the shareowner loan was approximately $72,000, $72,000, and $74,000 in 1996, 1995 and 1994, respectively. Although by its terms the indebtedness to the shareowner is due on December 31, 1996, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The shareowner loan has been classified as noncurrent in the accompanying balance sheet because the shareowner has agreed not to demand payment prior to January 1, 1998.
The Company's Secured Promissory Notes bear interest at 7%, are secured by certain of the Company's precious metals, and are convertible at any time into 200,000 shares of common stock. The Notes also contain acceleration clauses which would allow the holder, a shareowner of the Company, to accelerate the maturity date and demand payment if certain events occur. The maturity date of the Secured Notes is July 8, 1997. The note has been classified as noncurrent in the accompanying balance sheet because the noteholder has agreed not to demand payment prior to January 1, 1998.
Annual maturities of bank and other debt obligations, including noncash interest on subordinated notes, are as follows:
1997 $ 92,500 1998 1,036,049 1999 107,500 2000 1,254,346 --------- $2,490,395 ---------
See Notes to Consolidated Financial Statements
NOTE 8 - INCOME TAXES:
A reconciliation of the income tax (benefit) computed at the statutory federal income tax rate to the reported amount follows:
Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ----
Federal statutory rate 34% 34% 34% --- --- --- Tax (benefit) at federal statutory rates $(127,160) $(329,419) $(296,954) Loss in excess of available benefit 115,955 311,995 283,155 Other, net 11,205 17,424 13,799 -------- -------- -------- $ - $ - $ - ======== ======== ========
At December 31, 1996 the Company had net operating loss carryforwards for financial statement and tax purposes of approximately $5,660,000 and 5,599,176, respectively. The tax loss carryforward expires at various dates through 2010.
Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carryforwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. Accordingly, the actual utilization of the net operating loss and other carryforwards for tax purposes may be limited annually to a percentage (approximately 7%) of the fair market value of the Company at the time of any such ownership change.
Deferred tax assets (liabilities) comprise the following:
December 31, December 31, 1996 1995 ---- ---- Deferred tax assets Inventory capitalization adjustment $ 11,000 $ 60,000 Inventory reserves 20,000 10,000 Vacation liabilities 30,000 62,000 Other 18,000 12,000 Loss carryforwards 2,240,000 2,279,000 ---------- ---------- Gross deferred tax assets 2,319,000 2,423,000 ---------- ----------
Deferred tax liabilities Depreciation (15,000) (242,000) ---------- ---------- Gross deferred tax liabilities (15,000) (242,000) ---------- ---------- 2,304,000 2,181,000 Valuation allowance (2,304,000) (2,181,000) ---------- ---------- Net deferred tax assets $ 0 $ 0 ========== ==========
See Notes to Consolidated Financial Statements.
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 $237,000, $298,000, and $309,000 in 1996, 1995 and 1994, respectively.
The Company subleased a portion of its premises in December 1995. The Company recorded a charge of approximately $95,000 in the fourth quarter of 1995 for the write-off of leasehold improvements and incremental costs incurred to move and consolidate the remaining leased space.
The Company has entered into noncancellable lease agreements for certain equipment which are recorded as capital leases. These leases are secured by the related equipment and are for five year terms. During 1995, the Company has been able to formally modify its leases with certain lessors and has informally agreed with several others to modify the payment terms and, in most cases, extend the repayment period and thereby reduce the monthly payment requirements. The modifications did not result in a significant gain or loss. The following is a summary of assets under capital lease at:
December 31, 1996 1995 ---- ----
Equipment under capital lease $ 790,532 $ 1,367,554 Less: Accumulated amortization (607,449) (916,644) ----------- ----------- $ 183,083 $ 450,910 =========== ===========
Future minimum lease payments at December 31, 1996 are payable as follows:
Capital Operating Leases Leases ------ ------
1997 $78,009 $ 195,564 1998 4,825 195,564 1999 195,564 2000 195,564 2001 162,970 ------- -------
Total minimum lease payments 82,834 $ 945,226 =======
Less: Amount representing interest (4,684) -------
Present value of minimum capital lease payments (including $73,399 classified as current obligations under capital leases) $78,150 =======
See Notes to Consolidated Financial Statements.
NOTE 10 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS:
Export sales, primarily to customers in Europe, Asia and Canada, amounted to 16%, 19% and 24% of net product sales in 1996, 1995, and 1994, respectively.
Sales to one foreign customer was 12% of net product sales in 1994. No foreign customer accounted for more than 10% of net product sales in 1996 and 1995. Additionally, one U.S. customer accounted for more than 10% of net product sales in 1996, 1995 and 1994. One other U.S. customer accounted for over 10% of net product sales in 1996 and 1995. Additionally, one other U.S. customer accounted for over 10% of net product sales in 1995 and another accounted for over 10% in 1994. During the years ended December 31, 1996, 1995 and 1994 approximately 8%, 9% and 12% respectively of the company's net product sales were through a foreign agent, in which the principal shareholder has an investment.
NOTE 11 - CAPITAL STOCK:
The Company's authorized capital stock consists of 1,000,000 shares of preferred stock, without nominal or par value, and 6,000,000 shares of common stock, par value $.01 per share. The Company had 2,109,271 and 2,106,571 common shares outstanding at December 31, 1996 and 1995, respectively. There were no preferred shares issued or outstanding in either year. The Company has reserved 2,334,937 shares of common stock for issuance upon conversion of the Subordinated Convertible Notes, Secured Promissory Notes and Unsecured Demand Convertible Note (Note 7) and upon exercise of outstanding warrants and options (Notes 7 and 12).
NOTE 12 - EMPLOYEE BENEFIT PLANS:
During 1990 the Company adopted the Key Employee Compensation Program (the "Program"). In 1995 the maximum number of shares which may be awarded under the program was increased from 70,000 to 500,000. The number of shares issuable is subject to adjustment for stock dividends, stock splits, etc. The Company has reserved 500,000 shares of common stock for issuance under the plan.
The Program provides for the granting of incentive stock options, compensatory stock options, stock appreciation rights and shares of common stock to certain full time employees of the Company under terms and at prices to be determined at the discretion of a committee appointed by the Board of Directors. Certain outside directors are eligible to receive compensatory stock options and stock appreciation rights. Subject to modification by the committee, options are generally exercisable in 25% installments beginning one year after the date of grant and continuing for each of the four years thereafter. The maximum term of the grant is ten years. All options were granted at the market value or above at the date of grant. To date, none of the options have been exercised. The following table summarizes the options granted under the plan for the three years ended December 31, 1996: Weighted Average Shares Price
------------------------------------------------------------------- Outstanding at December 31, 1993 43,000 $1.25 ------------------------------------------------------------------- Granted 34,000 $1.25 Expired/forfeited (16,000) $1.25 ------------------------------------------------------------------- Outstanding at December 31, 1994 61,000 $1.25 ------------------------------------------------------------------- Granted 77,000 $1.00 Expired/forfeited (11,000) $1.25 ------------------------------------------------------------------- Outstanding at December 31, 1995 127,000 $1.10 -------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Granted 20,000 $1.00 Expired (9,000) 1.25 Forfeited (27,000) $1.00 ------------------------------------------------------------------- Outstanding at December 31, 1996 111,000 $1.09 ======= ===== ------------------------------------------------------------------- Exercisable at December 31, 1996 45,750 $1.18 ====== ===== -------------------------------------------------------------------
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 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would not have been impacted.
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996 and 1995: expected volatility of 250%; weighted average risk-free rate of 6.008%; and weighted average expected life of 10 years.
The weighted average grant date fair value of options granted during 1996 and 1995 was $0.38 and $0.28, respectively.
The following table summarizes information about the stock options outstanding at December 31, 1996:
Options outstanding Options exercisable ------------------------------------------------------------------ Number Weighted Weighted Number Weighted outstanding average average exercisable average Range of at December remaining exercise at December exercise exercise 31, 1996 contractual price 31, 1996 price prices life - -------------------------------------------------------------------------------- $1.00 - $1.25 111,000 8.01 years $1.09 45,750 $1.18
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 1996, 1995 or 1994.
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount at December 31, 1996 and 1995 of the Company's short-term financial instruments approximates fair value because of the short maturity of those instruments. The fair value of the Company's debt could not be determined without incurring excessive costs.
See Notes to Consolidated Financial Statements.