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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from..................to .............................
Commission file number 0-11668
INRAD, Inc.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2003247
- ------------------------------------ -----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
181 Legrand Avenue, Northvale, NJ, 07647
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(201) 767-1910
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant None
to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
- ------------------------------------ ------------------------------------
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 Per Share
- --------------------------------------------------------------------------------
(Title of class)
________________________________________________________________________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No__.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
Aggregate market value of the registrant's Common Stock, par value $0.01
per share, held by non-affiliates as of March 11, 1997 was approximately
$96,000.
Common shares of stock outstanding as of March 11, 1997:
2,109,271 shares
INRAD, INC.
INDEX
Page
----
Part I
Item 1. Business......................................1
Item 2. Properties....................................7
Item 3. Legal Proceedings.............................7
Item 4. Submission of Matters to a Vote
of Security Holders...........................7
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters...............8
Item 6. Selected Financial Data.......................9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations....................................9
Item 8. Financial Statements
and Supplementary Data.......................15
Item 9. Changes In and Disagreements
With Accountants On Accounting
and Financial Disclosure.....................15
Part III
Item 10. Directors and Executive Officers
of the Registrant............................16
Item 11. Executive Compensation.......................18
Item 12. Security Ownership of Certain
Beneficial Owners and Management.............18
Item 13. Certain Relationships
and Related Transactions.....................20
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K...........21
Signatures.....................................................24
Note: Page F-1 follows Page 25.
i
PART I
Item 1. Business.
INRAD, Inc., (the "Company" or "INRAD"), incorporated in New Jersey in
1973, designs, develops, manufactures and markets crystals and products
incorporating crystals which are used primarily for controlling and augmenting
laser radiation. These products, which represent INRAD's core business, are
designed either for incorporation by original equipment manufacturers in their
lasers and laser systems, for use by scientists and engineers in their research
and development with lasers, or as stand-alone subsystems or instruments for
general use with lasers. These products are sold under the INRAD trademark,
which has been registered in the United States Patent Office.
In order to effectively utilize lasers, it is often necessary to control,
modify, or augment the laser beam. The Company's products perform these
functions with lasers which are currently being used in communications,
medicine, surveying, military range finding and target illumination, materials
processing, color separation, printing and a wide variety of research
applications, including applications in laser fusion, isotope separation and
spectroscopy.
INRAD also manufactures precision optics and optical assemblies for its
customers. Most of these optics are supplied with reflective and antireflective
optical coatings produced in INRAD's Thin Film Department.
INRAD's company-funded research and development program is supplemented by
federally funded R&D grants and contracts in technical areas related to INRAD's
core business.
Products
The Company's products include: crystals; crystal components such as
Q-switches, polarizers, waveplates and rotators; integrated systems such as
harmonic generators, electronic devices for laser components and laser
pulsewidth measuring instruments; and opto-mechanical assemblies and optical
components. The Company sells crystals as blanks or as precision polished
elements. Wherever possible, the Company emphasizes the manufacture and sale of
its components, integrated systems, and instruments that incorporate its own
crystals. The Company also performs research and development for industry and
government in the area of crystal and laser technology.
The following table illustrates the Company's sales for each major category
of its product line during the past three years:
1
Year Ended December 31,
-----------------------
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
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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.
3
The Company's coating facility produces a wide variety of sophisticated
coatings on many different substrates for use in its own products, as well as
for customers who purchase coated optics manufactured by the Company to their
specifications.
Research and Development
The Company's research and development activities currently focus on
developing new proprietary products as well as new end uses for its existing
products. The Company is primarily engaged in research on crystal growth,
harmonic generation, and electro-optics. This combination allows the Company to
introduce new products based on crystals developed within the Company. A staff
of 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.
4
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
5
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.
6
Regulation
Foreign sales of certain of the Company's products may require export
licenses from the United States Department of Commerce. Such licenses are
generally available to all but a limited number of countries.
Although the manufacture, sale and use of lasers are subject to extensive
federal and state regulations which indirectly affect the Company, there are no
federal regulations nor any unusual state regulations which directly affect the
manufacture or sale of the Company's products other than those which generally
affect companies engaged in manufacturing operations in New Jersey.
Sales in the European Community for electronic instruments require EC
certification; the Company is now engaging in obtaining such certification.
Item 2. Properties.
The Company occupies approximately 31,000 square feet of space located at
181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease expiring on
October 31, 2001. The Company has an option to renew the lease for one
additional term of five years. The 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. Legal Proceedings.
There is no material litigation pending against the Company as of the date
hereof.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information.
The Company's common stock, par value $.01 per share, is traded in the OTC
Bulletin Board under the symbol INRD.
The following table sets forth the range of selling prices for the Common
Stock in each fiscal quarter from the quarter ended March 31, 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.
8
Item 6. Selected Financial Data
The following data is qualified in its entirety by the financial statements
presented elsewhere in this Annual Report on Form 10-K.
As of December 31, or
For the Year Ended December 31,
-------------------------------
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. 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.
9
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.
10
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.
11
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
12
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
13
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.
14
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. Financial Statements and Supplementary Data.
The Company's consolidated financial statements are set forth on pages F-1
through F-17. Page F-1 follows page 25.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
On August 29, 1996, the Company filed Form 8-K reporting a change in its
independent accountant.
15
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
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
16
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
17
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. 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 $100,000, for services
rendered in all capacities as an executive officer during such period:
Long-Term
Annual Compensation(A) Compensation
Name and Current ------------------------- --------------- All Other
Principal Position Year Salary Bonus Options Granted Compensation ($)
- ------------------ ---- ------ ----- --------------- ----------------
Warren Ruderman, 1996 $130,000 none none none
President and Chief
Executive Officer
1995 $130,000 none none none
1994 $130,000 none none none
(A) During the periods covered, no Executive Officer received perquisites (i.e.,
personal benefits) in excess of the lesser of $50,000 or 10% of such
individual's reported salary and bonus.
Compensation of Directors
Each non-employee director is paid $500 for each board meeting they attend.
18
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.
19
(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. 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.
20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements filed as part of this report:
See Index to Consolidated Financial Statements at F-1.
(b) Exhibits filed as part of this report:
The following exhibits are incorporated by reference to exhibits in
the Company's Registration Statement or amendments thereto on Form
S-18 (Registration No. 2-83689), initially filed with the Securities
and Exchange Commission on May 11, 1983:
Exhibit No.
Present in Registration
Exhibit Statement or
No. Description of Exhibit or Amendments
- --- ---------------------- -------------
3.1 Restated Certificate of 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.
21
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1991:
10.9 Lease dated October 4, 1991 between S&R Costa as
lessor and the Company as lessee.
The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1992:
10.10 Agreement with 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.
22
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
23
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)
24
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY:
State or Territory
Company of Incorporation
------- ----------------
INRAD Optical Systems, Inc. New Jersey
25
INRAD, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Consolidated Financial Statements Page
----
Reports of Independent Accountants F-2 - F3
Consolidated Balance Sheets at December 31, 1996 and 1995 F-4
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1996 F-6
Consolidated Statement of Shareowners' Equity for each
of the three years in the period ended December 31, 1996 F-7
Notes to Consolidated Financial Statements F-8 to F-17
NOTE: All schedules are either not applicable or the information is included in
the consolidated financial statements or notes thereto.
F-1
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
F-2
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
F-3
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.
F-4
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.
F-5
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.
F-6
INRAD, INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Common Stock Capital in Accumulated Treasury
------------ ---------- ----------- --------
Shares Amount excess of deficit stock
------ ------ --------- ------- -----
par value
---------
Balance, December 31, 1993 2,121,571 $21,216 $5,967,991 $(2,370,468) $68,000
Net loss for the year - - - (873,394) -
--------- ------- ---------- ------------ -------
Balance, December 31, 1994 2,121,571 21,216 5,967,991 (3,243,862) 68,000
Net loss for the year - - - (968,878) -
Common stock warrants issued - - 100,000 - -
--------- ------- ---------- ------------ -------
Balance, December 31, 1995 2,121,571 21,216 6,067,991 (4,212,740) 68,000
--------- ------- ---------- ------------ -------
Net loss for the year - - - (373,774) -
Issuance of treasury stock - - (16,200) - (16,200)
--------- ------- ---------- ------------ -------
Balance, December 31, 1996 2,121,571 $21,216 $6,051,791 $(4,586,514) $51,800
========= ======= ========== ============ =======
See Notes to Consolidated Financial Statements.
F-7
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.
F-8
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.
F-9
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.
F-10
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
F-11
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
F-12
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
F-13
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.
F-14
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.
F-15
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.
F-16
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.
F-17