Item 1. Business
INRAD, Inc., (the "Company" or "INRAD"), incorporated in New Jersey in 1973, develops, manufactures and markets products for use in many Photonics Industry sectors via its four related product categories: Custom Optics, Crystals and Components, Systems, and Thin Film Services. Its current customers include leading corporations in the following industries: Commercial Laser Systems, Semiconductor Inspection and Process Control Equipment, Fiberoptic Telecommunication Instruments, and Defense Electro-Optics. The Company's customers also include researchers at National Laboratories and Universities worldwide.
INRAD manufactures precision custom optics, crystals, and components. Glass and crystal substrates are processed using modern manufacturing equipment and techniques to prepare, polish, and deposit thin films, thereby producing elements used in advanced photonic systems. In addition, the Company grows crystals with electro-optic, nonlinear, and optical properties for use in its standard products and custom products. The majority of our Crystals, Crystal Components, and System products supplied are used in laser systems and defense electro-optical systems. The majority of our custom optical components and thin film services are used in inspection and process control systems and defense EO systems. The balance of the products are used by the research community.
The Company announced in 2002 that it is intent on implementing a plan to transform the Company into a portfolio of businesses serving the Photonics industry. A merger and acquisitions
advisory firm, The DAK Group, was employed in the fourth quarter of 2002 to assist management in this process. Capital needed to make the acquisitions or mergers will be through the issuance of equity-based instruments, necessary to achieve this plan.
No assurances can be given that we will be able to identify and attract appropriate acquisition targets or raise the capital required.
Products
Custom optic manufacturing is a major product area for the Company. INRAD specializes in high-end precision components. Because of its specialized capability in the growth and handling of crystal materials, the Company maintains a strong market position in birefringent crystal components, in processing substrate materials such as quartz, calcite, lithium niobate, and magnesium fluoride, all of which are widely used in the semiconductor inspection and defense electro-optics industries. INRAD has in-house thin film deposition capability and highly developed assembly techniques, thus strengthening our product offerings for these sectors.
The Company also grows crystals and finishes them for several applications. Electro-optic and nonlinear crystals are produced for commercial laser systems. Several of these same nonlinear crystals are incorporated into devices that are designed and marketed by INRAD as standard products. The crystal product line also includes materials that have unique transmission and absorption characteristics, enabling them to be used as filters in defense systems.
In addition, INRAD offers a product line of laser accessory products. Most employ nonlinear crystals to perform the function of wavelength conversion or pulsewidth measurement.
In summary, the Company is a supplier to original equipment manufacturers in the Photonics industry. Particular strengths include strong capability in crystal growth, crystal handling, precise finishing of crystal and glass materials for optical applications, and thin film deposition.
The following table summarizes the Company's product sales by product categories and contract research and development sales during the past three years:
Products Manufactured by the Company
Custom OEM Optics
The Company produces precision optical components and assemblies for its OEM customers. The Company is known in the Photonics industry for its expertise in manufacturing polarizing components, either from birefringent crystals or by combining glass substrates and optical thin films. Custom components include waveplates, beam displacers, rotators, and phase shift plates. One major polarizing product line consists of Polarizing Beam Splitter (PBS) assemblies for a wide variety of wavelength regions. The polarizer product area is complemented by a diverse offering of plano elements, including
etalons, windows, wedges, and prisms. The Company's customers include leading corporations in their industries.
Optical Coatings
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. The Inrad 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 custom coated optics manufactured by the Company to their specifications. Wavelength range coverage includes ultraviolet, visible, and near infrared.
The Company expanded its thin film department in 2000 and 2001 by hiring additional staff, installing state-of-the-art chambers, and upgrading the coating facility. The company is now able to offer ion-assisted deposition (IAD) coatings as part of its repertoire. This deposition technique provides higher performance coatings, that are more resistant to laser damage and harsh environmental conditions. Thus, the Company is better able to serve its laser systems, optical inspection, telecommunications and defense customers. The Company's infrared coating product line has also been strengthened by the addition of modern equipment, dedicated solely to the mid-IR wavelength region.
Crystals & Components
The Company produces crystals that, because of their internal structure, have unique optical, non-linear, or electro-optical properties. 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 on an OEM basis to laser manufacturers and individually to researchers throughout the world. In 2002, the Company developed and introduced a new line of miniature Q-switches, designated the IMP series. Additionally, the Company introduced a series of high speed and quick rise-time Q-switch electronic drivers designated the RapidPulse series.
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. Harmonic generators are currently used in spectroscopy, semiconductor processing, medical lasers, optical data storage and scientific research.
Many commercial lasers have automatic tuning features, allowing them to produce a range of frequencies. The INRAD Autotracker, when used in conjunction with these lasers, automatically generates tunable ultraviolet light or infrared light for use in spectroscopic applications.
The Company produces a Harmonic Generator for use with ultra fast lasers having pulsewidths in the femtosecond and picosecond regime. This product is sold on an OEM basis to manufacturers of ultra fast lasers and to researchers in the scientific community.
The Company markets a line of Autocorrelators that 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, ultra fast lasers and laser diodes for communications. Since January 2000, a strategic alliance has been in effect with A.P.E. of Berlin, Germany, to market a product line of five Autocorrelators in the U.S., manufactured by A.P.E. In 2002, the Company was instrumental in conceptualizing and introducing an OEM autocorrelator that measures the pulsewidth of ultrafast laser excitation pulses used in Multi-Photon Excitation microscopy right at the surface of the specimen under test.
Research and Development
The Company's research and development activities currently focus on developing new proprietary crystal products, improving growth processes, and on new manufacturing process technologies for optical components. This combination allows the Company to introduce new products based on crystals, and to enhance its capabilities and productivity in optical component manufacturing.
Company-funded internal research and development expenditures during the years ended December 31, 2002, 2001, and 2000 were $134,424 (2.4% of product sales), $201,603 (2.6% of product sales), and $369,463 (5.4% of net product sales).
Contract R&D programs are typically fixed price contracts and provide for recovery of direct costs and an allocation of indirect costs, and, depending on their terms, recovery of general and administrative costs. 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. These programs are typically not profitable, but are pursued when the technology to be advanced is in line with the Company's future product plans.
Contract research and development revenues were $87,397, $189,168, and $1,045,011 for the years ended December 31, 2002, 2001 and 2000, respectively. Related contract R&D expenditures, including allocated indirect costs, were $63,098, $63,530, and $1,188,647. The decline in Contract R&D revenues in 2002 was expected and is part of a strategic re-focusing by the Company of its resources onto sales of products and non-R&D services.
Markets
In 2002, 2001 and 2000 the Company's product sales were made to customers in the following market areas:
Export sales, primarily to customers in Europe, the Near East and Japan, amounted to 19.0%, 31.4%, and 38.4% of product sales in 2002, 2001 and 2000, respectively. No foreign customer accounted for more than 10% of product sales in 2002. One foreign customer accounted for 10.7% of product sales in 2001 and for 13% of product sales in 2000. In 2002 one U.S. customer accounted for 13.4% of product sales. One U.S. customer accounted for 17.7% of product sales in 2001, one U.S. customer accounted for over 13% and another for 12.2% of product sales in 2000.
Within the Laser Systems customer sector, sales in 2002 were down 35% from the prior year, reflecting the impact of declines in laser systems shipments for semiconductor inspection equipment and telecommunications applications. 2001 had been an exceptionally strong year for the Company and its products serving these sectors. The Company competes for market share to increase its revenue levels for these products, and the Company continues to develop, and to seek to acquire, complementary products to broaden its product lines. The laser industry is expected to experience
renewed growth as new applications are demonstrated continually. The Company also serves the laser industry as a supplier of custom optics and as such continues to seek opportunities to increase revenues from this customer sector.
Demand in the Semiconductor Tools market for the Company's products continued to be weak in 2002, as that customer sector continued to be in the grip of the deepest cyclical downturn in decades with its attendant drop-off in capital spending on new tools and instruments. Sales in 2002 were off 25% from the prior year. Nevertheless, the optical and x-ray inspection segment of the semiconductor industry offers continued opportunities for Inrad's capabilities in precision optics, crystal products, and monochrometers.
The Telecommunications customer sector experienced a precipitous downturn in 2001, and remained "dead" throughout 2002, with virtually no new sales of miniature waveplates, and limited sales of components for inspection instruments. The Company's future participation as a supplier to the network component manufacturers will depend upon the technology approaches employed at the time the industry recovers. In the meantime, Inrad has an ongoing program to improve manufacturing capabilities and productivity through process re-engineering and acquisition of complementary capabilities. Such improvements are important to optimizing cost structure in this highly competitive market sector.
The Company is a provider of specialty crystals for defense electro-optical systems, in particular missile warning sensors and systems intended to protect aircraft, and laser systems. The Company produces proprietary product lines of ultra-violet band-pass filter crystals. The volume of shipments of these crystals depends on the Defense Department budget and its priorities, and the timing of contracts from the U.S. and foreign governments to the Company's customers. In the post- 9/11 era, government spending priorities for such systems have risen sharply and deployment has been accelerated. Additionally, U.S. political leaders have proposed adapting such systems as well to the protection of commercial aircraft. The Company's sales for such products to this customer sector increased by 14% in 2002, and bookings are expected to increase significantly in 2003, with ramp-up of shipments and revenues throughout the year. Revenues from this source are expected to continue at a historically high rate for several years. The Company also provides custom optics and infrared crystals to the defense sector. Demand for these products is expected to remain high.
The University and National Laboratories customer sector weakened significantly in 2002, as research budgets and priorities changed rapidly. However, this sector remains an important source of revenues and new product introduction opportunities for the Company.
Long-Term Contracts
Certain of the Company's orders from customers provide for periodic deliveries at fixed prices over a period that 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 and Business Development
The Company markets its products domestically through its own sales staff, supervised by the Vice President-Marketing and Sales, and two Vice Presidents of Business Development. Independent sales agents are used in countries in major non-US markets, including Canada, Europe, the Near East and Japan.
The Company increased its sales and marketing staff to four professionals and two support personnel during 2002.
Backlog
The Company's order backlog as of December 31, 2002 included $1,300,000 of product orders and approximately $28,000 of R&D contracts. Backlog on December 31, 2001 included $1,541,000 of product orders and approximately $89,000 of contract R&D; On December 31, 2000, the backlog included $3,448,000 of product orders and $200,000 of contract R&D. The Contract R&D backlog has declined as forecast in keeping with the Company's strategic refocusing of operations onto sales of products and non-R&D services.
Competition
The Company believes that there are relatively few companies that offer the wide range of products sold by the Company. However, within each product category, there is competition.
Changes in the Photonics industry have had an effect on suppliers of custom optics. As end users have introduced products requiring large volumes of optical components, suppliers have responded either by carving out niche product areas or by ramping up their own manufacturing capacity and modernizing their manufacturing methods to meet higher volume run rates. Many custom optics manufacturers lack inhouse thin film coating capability. As a result, there are fewer well-rounded competitors in the custom optics arena, but they are equipped with modern facilities and progressive manufacturing methods. The Company has judiciously deployed capital towards modernizing its facility, and has staffed the manufacturing group with individuals with comprehensive experience in manufacturing management, manufacturing engineering, advanced finishing processes, thin-film coating processes, and capacity expansion. The Company competes on the basis of providing consistently high quality products, establishing strong customer relations, and continuously improving its labor productivity, cost structure, and product cycle times.
Competition for the Company's systems is limited, but competitors' products are generally lower priced. The Company's systems are considered to be high end and generally offer a combination of features not available elsewhere. Because of our in-house crystal growth capability, our staff is knowledgeable about matching appropriate crystals to given applications.
For the crystal product area, quality, delivery, and customer service are market drivers. Many of the Company's competitors are overseas and can offer significantly reduced pricing for some crystal species. The Company has been able to retain and grow its customer base by providing the quality and customer service needed by OEM customers. Oftentimes the quality of the crystal component drives the ultimate performance of the component or instrument into which it is installed. Thus quality and technical support are considered to be valuable attributes for a crystal supplier by many, but not all, OEM customers.
Although price is the principal factor in certain product categories, the principal means of competition in most product categories are not only price, but also include product design, product performance, quality, delivery, and customer service. Based on its performance to date, the Company believes that it can continue to compete successfully, although no assurances can be given in this regard.
Employees
As of December 31, 2002, the Company had 50 full time employees and no part time employees. As of December 31, 2001, the Company had 57 full time employees and 1 part time employee. As of December 31, 2000, the Company had 74 full-time employees and 9 part-time employees. The Company provides health, dental, disability and life insurance, a 401(k) plan, as well as sick leave, paid holidays and vacations to its full-time employees and has an incentive pay program covering all
employees. 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 relies on its manufacturing and technological expertise, rather than on patents, to maintain its competitive position in the industry. 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.
In 2002 the Company was awarded two patents for two crystal material inventions resulting from its research programs in the field of UV filter crystals.
Additionally, the Company holds United States patents for: a thermal conductivity meter (t-Master), 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 fictionalization of fullerenes; a unique chemical reactor; and zeolite membranes able to effect separations at high temperatures. In 2000, the Company sold its technology applicable to tunable mid-IR lasers, including a patent, to an instrument systems company
Regulation
Foreign sales of certain of the Company's products may require export licenses from the United States Department of Commerce or Department of State. Such licenses are generally available to all but a limited number of countries and are obtained when necessary.
There are no federal regulations nor any unusual state regulations which directly affect the sale of the Company's products other than those environmental compliance regulations which generally affect companies engaged in manufacturing operations in New Jersey.
Business Risk
(a) As general economic conditions deteriorate, our financial results suffer.
Significant economic downturns or recessions in the United States or Europe could adversely affect our business, by causing a temporary or longer term decline in demand for our goods and services. Additionally, our revenues and earnings may be affected by general economic factors, such as excessive inflation, currency fluctuations and employment levels.
(b) Many of our customers industries are cyclical.
Our business is significantly dependent on the demand our customers experience for their products. Many of their end users are in industries that historically have experienced a cyclical demand for their products, including but not limited to semiconductor manufacturing, defense electro-optics systems manufacturing, and telecommunications infrastructure expansion. Therefore, as a result, demand for our products and our financial results of operations are subject to cyclical fluctuations.
(c) We face competition.
We may encounter substantial competition from other companies positioned to serve the same market sectors that we serve. Some competitors may have financial, technical, marketing or other resources more extensive than ours, or may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not be successful in winning orders
against our present or future competitors, which may adversely affect our business, our growth objectives, our financial condition, and our operating results.
(d) Our manufacturing processes require products from limited sources of supply.
We utilize many relatively uncommon materials and compounds to manufacture our products. Examples include optical grade quartz, specialty optical glasses, scarce natural and manmade crystals, and high purity chemical compounds. Failure of our suppliers to deliver sufficient quantities of these necessary materials on a timely basis, or to deliver contaminated or inferior quality materials, or to markedly increase their prices could have an adverse effect on our business, despite our efforts to secure long term commitments from our suppliers. Adverse results might include reducing our ability to meet commitments to our customers, compromising our relationship with our customers, adversely affecting our ability to meet expanding demand for our products, or causing our financial results to deteriorate.
(e) Our business success depends on our being able to recruit and retain key personnel.
Our existing business and our expansion plans depend on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on our ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that we will be able to retain or attract the personnel necessary for our success, despite our effort to do so. The loss of the services of our key personnel could have a material adverse affect on our business, on our results of operations, or on our financial results.
(f) We depend on, but may not succeed in, developing and acquiring new products and processes.
In order to meet our strategic objectives, we must continue to develop, manufacture and market new products, and to develop new processes and to improve existing processes. As a result, we expect to continue to make significant investments in research and development and to continue to consider from time to time the strategic acquisition of businesses, products, or technologies complementary to our business. There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products and processes in a way that achieves market acceptance or other pertinent targeted results. Nor can we be sure that we will be successful in acquiring complementary businesses, products, or technologies. Failure to do so could have a material adverse affect on our ability to grow our business
(g) We may not be able to fully protect our intellectual property.
We do not currently hold any material patents applicable to our most important products or manufacturing processes and instead rely on a combination of trade secret, and employee non-competition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps we take will be adequate to prevent misappropriation of our technology. Also, there can be no assurance that, in the future, third parties will not assert infringement claims against us. Asserting our rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting our business, results of operations or financial condition.
(h) We may not succeed in our strategy of acquiring complementary businesses or in integrating acquired businesses.
Our business strategy includes expanding our production capacities, our product lines and our market reach through both internal growth and acquisition of complementary businesses. We may not succeed in finding or completing acquisitions of such businesses, nor can we be assured that we will be
able to raise the financial capital needed for the acquisition. Acquisitions may result in per share financial dilution of our common stock from the issuance of equity securities. They may also result in the taking on of debt and contingent liabilities, and amortization expenses related to intangible assets acquired, any of which could have a material adverse affect on our business, financial condition or results of operations. Also, acquired businesses may be experiencing operating losses. Any acquisition will involve numerous risks, including difficulties in the assimilation of the acquired company's people, operations and products, uncertainties associated with operating in new markets and working with new customers, and the potential loss of the acquired company's key employees. To date, we have had little experience in acquiring or integrating businesses.
(i) Our operations may be adversely affected if we fail to keep pace with industry developments.
We serve industries and market sectors which will be affected by future technological developments. The introduction of products or processes utilizing new developments could render our existing products or processes obsolete or unmarketable. Our continued success will depend upon our ability to develop and introduce on a timely and cost-effective basis new products, processes, and manufacturing capabilities that keep pace with developments and address increasingly sophisticated customer requirements. There can be no assurance that we will be successful.
(j) Product yield problems and product defects that are not detected until in service could increase our costs and/or reduce our revenues.
Changes in our own or in our suppliers' manufacturing processes, or the use of defective or contaminated materials by us, could result in an adverse effect on our ability to achieve acceptable manufacturing yields, delivery performance, and product reliability. To the extent that we do not achieve such yields, delivery performance or product reliability, our business, operating results, financial condition and customer relationships could be adversely affected. Additionally, our customers may discover defects in our products after the products have been put into service in their systems. In addition, some of our products are combined by our customers with products from other vendors, which may contain defects, making it difficult and costly to ascertain whose product carries liability. Any of the foregoing developments could result in increased costs and warranty expenses, loss of customers, diversion of technical resources, legal action by our customers, or damage to the Company's reputation.
(k) Our stock price may fluctuate.
Many factors, including, future announcements concerning us, our competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding our industries in the financial press or investment advisory publications, could cause the market price of our stock to fluctuate substantially. In addition, our stock price may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts, or market or market-sector declines, may materially and adversely affect the market price of our common stock. In addition, any information concerning us, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than us could in the future contribute to volatility in the market price of our common stock.
(l) International sales account for a significant portion revenues.
Sales to customers in countries other than the United States accounted for approximately 19%, 31% and 38% of revenues during the years ended December 31, 2002, 2001, and 2000, respectively. We anticipate that international sales will continue to account for a significant portion of our revenues for
the foreseeable future. In particular, although our international sales are denominated in U.S. dollars, currency exchange fluctuations in countries where we do business could have a material adverse effect on our business, financial condition or results of operations, by making us less price-competitive than foreign manufacturers
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, 2006. The Company has an option to renew the lease for an additional term of five years, and to lease 11,000 square feet of additional adjoining space in the same building commencing in 2003. The 2002 annual rent was approximately $224,000. The Company also paid real estate taxes and insurance premiums that total to approximately $41,000 during 2002. The Company also leases approximately 950 square feet of space at 148 Veterans Drive, Northvale, New Jersey pursuant to a gross lease renewable on a month-to-month basis.
Item 3.
Item 3. Legal Proceedings
There are no legal proceedings involving 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 closing prices for the Common Stock in each fiscal quarter from the quarter ended March 31, 2001 through the quarter ended December 31, 2002 as reported by the National Association of Securities Dealers NASDAQ System. Such Over the Counter quotations reflect inter-dealer prices, without retail markup, markdown or commissions and may not necessarily reflect actual transactions.
(b) Holders
As of February 24, 2003, there were approximately 650 record owners of the Common Stock. The number of record owners of common stock was approximated based upon the number of Proxy Statements requested by the Company's Transfer Agent for the Annual shareholders' Meeting held August 7, 2002.
(c) Dividends
The Company did not pay any cash dividends on its Common Stock during the years ended December 31, 2002, 2001 or 2000. The Company paid a common stock dividend of 134,000 shares of common stock on its Series A and Series B convertible preferred stock in 2002, valued at $121,000. The Company paid a common stock dividend of 92,000 shares of common stock on its Series A and Series B convertible preferred stock in 2001, valued at $155,000. Payment of cash dividends will be at the discretion of the Company's Board of Directors and will depend, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company does not anticipate paying cash dividends in the immediate future.
(d) Recent Sales of Unregistered Securities
In 2002 the Company issued a Subordinated Convertible Promissory Note for proceeds of $1,000,000. The Holder of the Note is a related party to a major Shareholder of the Company. The note bears interest at the rate of 6% per annum and has a maturity date of January 31, 2006. The note is convertible into common shares of the Company at a conversion price that shall be (a) the price at which common stock is first issued for cash after the date of the Note to an unrelated third party investor or (b) the price mutually agreed upon by the Issuer and Holder at its then fair market value if no such issuance has occurred within 12 months of the date of the Note, December 31, 2002.
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.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Critical Accounting Policies
Our significant accounting polices are described in Note 1 of the consolidated financial statements, that were prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report. Our actual results may differ from these estimates.
We believe that the following summarizes critical accounting polices that require significant judgments and estimates in our preparation of our consolidated financial statements.
The Company records revenue, other than on Contract R&D revenues, when product is shipped. Revenue on Contract R&D is accounted for using the percentage-of-completion method, whereby revenue and profits are recognized through out the performance of the contracts. Percentage-of-completion is determined by relating the actual cost of work performed to date to the estimated total cost for each contract. Losses on contracts are recorded when identified.
The Company records an allowance for doubtful accounts receivable as a charge against earnings for revenue for items that have been reviewed and carry a risk of non-collection in the future. The Company has not experienced a non-collection of accounts receivable materially affecting the results of operations.
The Company records slow moving inventory reserve as a charge against earnings for all products on hand that have not been sold to customers in the past twelve months. An additional reserve is recorded for product on hand that may not be sold to customers within the upcoming twelve months.
From time to time, estimated accruals are recorded as a charge against earnings based on known circumstances where it is probable that a liability has been incurred or is expected to be incurred and the amount can be reasonably estimated.
Results of Operations
The following table summarizes the Company's product sales by product categories, and contract research and development sales during the past three years:
The next 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.
*calculated as a percentage of their respective revenues **calculated as a percentage of product sales Total Revenues
Total revenues decreased 31% to $5,569,118 in 2002. Total revenues increased 2% to $8,075,205 in 2001 from $7,909,967 in 2000, a new record for the Company.
Product Sales
Product sales were $5,481,721, $7,886,037, and $6,864,956, in 2002, 2001 and 2000 respectively. Product sales in 2002 reflected 98.4% of total sales and were 30% lower than in 2001. Product sales in 2001 were 14.9% higher than in 2000, reflecting 97.7% of total revenues.
New bookings of product orders in 2002 were $5,190,000, 14% lower than in 2001. New bookings of product orders in 2001 were $5,979,000, approximately 22% lower than in 2000.
The product book to bill ratio was 0.96, .76, and 1.29 in 2002, 2001, and 2000, respectively.
The Company's backlog of product orders as of December 31, 2002 was approximately $1,300,000, compared to approximately $1,541,000 as of December 31, 2001 and $3,448,000 at December 31, 2000.
The decline in revenues in 2002 was sharpest in the Custom Optics area, off by $1,075,000 from the prior year. Continuing excess inventories and lack of demand from customers in the Semiconductor Process Control and Inspection sector and Telecommunications Instrument sector characterized 2002. Additionally, sales of Systems and Instruments were off $695,000 in 2002 from the record high of $1,851,000 in 2001. System and Instrument sales declines reflected decreased demand from the R&D sector partially in light of federal budget funding uncertainties for R&D in the aftermath of 9/11. This was in contrast to System and Instrument sales in 2001, when demand for these laser accessory products was strong from customers in the Laser OEM and University and National Lab (i.e. R&D) industry sectors.
Sales of Custom Optics in 2001 had been up 2% compared to the prior year at $3,211,793, following a 31% increase the prior year, but were disappointing when compared to expectations only a year earlier. The precipitous and unprecedented rapid drop in demand from OEM's in the Telecommunications and Semiconductor Inspection and Process Control sectors slowed order intake significantly in 2001; this slowness continued throughout 2002. Several OEM customers in these sectors required delivery "push-outs" into 2002. Nevertheless, revenues for Custom Optics in 2001 were at a historic high, helped by a strong backlog at the beginning of the year, a contract from a major new OEM, and continuing new orders from customers engaged in new product development.
Sales of Crystals and Components in 2002 were up 3% from the prior year, following a 25% decline the year before. This relatively good result for 2002, in a year when demand overall was weak, resulted from a strong increase in demand from Defense Electro-Optics sector customers for crystal components.
Sales to Laser Systems manufacturers in 2002 decreased 35% to $1,699,000, or 31% of product sales, as compared with $2,602,000 or 33% of product sales in 2001. OEM customers reported increasing inventories as demand slackened.
Sales to Semiconductor sector equipment manufacturers in 2002 declined 25% to $1,535,000, or 28% of product sales, as compared with $2,050,000 or 26% of product sales in 2001. Sales to semiconductor sector equipment manufacturers in 2001 increased 61% to $2,069,000, or 26% of product sales, as compared with $1,285,000 or 19% of product sales in 2000.
Sales to Telecommunications sector equipment manufacturers in 2002 declined 71% to $274,000, or 5% of product sales, as compared with $983,000 or 12% of product sales in 2001. Sales to the telecommunications sector in 2001 decreased 27% to $983,000, or 12% of product sales, as compared with $1,353,00 or 20% of product sales in 2000.
Sales to Government and Defense sector customers in 2002 increased 14% to $987,000, or 18% of product sales, as compared with $856,000 in 2001. Sales to Government and Defense industry customers in 2001 decreased 25% to $856,000, or 11% of product sales, as compared with $1,150,000 or 17% of product sales in 1999.
Sales to researchers in Universities and National Laboratories declined by 52% to $493,000, or 9% of product sales, as compared with $1,002,000 or 13% in 2001. Sales to researchers in Universities and National Laboratories in 2001 increased 15% to $1,002,000, or 13% of product sales, as compared with $687,000 or 10% in 2000.
International product sales, as a percentage of total product sales, were 19.0%, 34.1%, and 38.6%, for 2002, 2001, and 2000, respectively.
Cost of Goods Sold and Gross Profit Margin
As a percentage of product sales, cost of goods sold was 83.9%, 63.6% and 54.5% for the years ended December 31, 2002, 2001 and 2000, respectively. Gross profit margin as a percentage of product sales was 16.1%, 36.4%, and 45.5% for 2002, 2001, and 2000, respectively.
In 2002 cost of goods sold percentage increased due to declining sales volumes and draw-down of inventories. Fixed costs are a major component of the total cost structure. Management and the Board of Directors decided to reduce such costs in 2002 only up to the point where further reductions would impede the Company's ability to perform for its current customers or to rebound in future when macroeconomic conditions improve. The implementation of head-count reduction, reduced work-hours, and other cost saving measures decreased non-inventory expenses by approximately 15%. The reduction of these expenses could not offset the impact of a sales volume decline of 30%. In 2001 the cost of goods sold percentage increased due to increased manufacturing overhead costs for newly formed departments including production control and manufacturing engineering and the absorption of additional overhead costs in production that resulted from decreased volumes in Contract R&D sales.
Costs of purchased components have been relatively stable in 2002, 2001 and 2000. Unit costs of raw materials such as crystal quartz and high grade optical glasses have increased in the last year.
Unit labor costs rose in all years. In 2000 labor costs increased as well due to payment of bonuses under the Company's incentive pay program, in which bonus income is earned by all employees when the Company meets or exceeds its operating profit and revenue targets. No bonus income was earned in 2002 or 2001.
Contract Research and Development
Contract R&D 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. These programs are typically not profitable, but are pursued when the technology to be advanced is in line with the Company's future product plans.
Contract research and development revenues were $87,397, $189,168, and $1,045,011 for the years ended December 31, 2002, 2001 and 2000, respectively. Related contract R&D expenditures, including allocated indirect costs, were $63,098, $63,530, and $1,188,647. One new Contract R&D program, valued at $70,000, was booked in 2002. Revenue in 2002 came mainly from activities on that contract. The decline in Contract R&D revenues is part of a strategic re-focusing by the Company of its resources onto sales of products and non-R&D services, and the lack of availability of R&D funding for crystal materials research.
The Company expects to continue to selectively seek new government-sponsored programs from time to time, as well as joint programs with certain of its customers, in technical areas related to its core businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 2002 decreased $226,000 or 9.0% compared to 2001.
The decrease in 2002 was attributable to overall reduction in personnel costs as well as cost savings implemented in other expense areas. The costs decreased despite the implementation of the Company's
plan to augment its sales force during the year. The Company will continue to seek ways to reduce costs during this current economic downturn.
There was a decrease in expenses in 2001 related to lower legal fees and costs relative to raising additional capital. However, significant increased costs were incurred in SG&A because of inclusion of administrative costs that had previously been allocated to R&D contracts, because of increases in personnel dedicated to the implementation of new internal computer network and Enterprise Resource Planning System (ERP), because of costs associated with the Company's implementation of a proactive merger and acquisition program aimed at finding and evaluating complementary businesses and products, and by increased business travel expenses.
In 2000, general and administration expenses increased due to increases in salaries, including, performance sharing incentive compensation, increases in personnel, including the inclusion of a full-time CEO/President and Director of Human Resources on the general management team, and increases in recruiting expenses. Additionally, administrative costs also increased due to the legal expenses and other costs incurred as a result of the private convertible preferred stock offering, application for NASDAQ registration, development of new and revised employee stock option programs, and other shareholder related activities.
Internal Research and Development Expenses
Company-funded research expenditures during the years ended December 31, 2002, 2001, and 2000 were $134,424 (2.5% of product sales) $201,603 (2.6% of net product sales), and $369,643 (5.4% of net product sales). During 2000 the Company sold its tunable mid-IR laser technology to an instrument company as part of the Company's strategy to concentrate its resources on its core business. The sale was responsible for curtailment of what had been a large portion of IR&D expenditures in the prior year and the first half of fiscal year 2000.
During 2002 and 2001, the Company narrowed its focus of internal research and development efforts onto new crystal products and production methods, and new optical component manufacturing technologies. As a result, internal R&D expenditures declined in 2002, and are expected to continue at this level in 2003.
Special Charges
At the end of 2000, the Company announced a sweeping manufacturing process re-engineering program to modernize manufacturing methods, implement modern production machinery, incorporate a production control function for planning and scheduling, modernize and reconfigure its physical plant for efficient operational flow, increase labor productivity, improve operating margins, and lead ultimately to ISO certification of the Company. The special charges associated with this program were $299,763 ($.06 per share on a basic and diluted basis) for the year ended December 31, 2001. This effort continued throughout 2002, although at a greatly diminished rate.
Operating Income
Losses from operations in 2002 were $(1,504,400) compared to operating losses of $(6,104) in 2001 and operating income of $400,478 in 2000. Losses during 2002 were due to continued weak demand in major market sectors served by the Company and its products. Losses in 2001 were the result of special charges associated with the manufacturing reengineering program.
Other Income and Expenses
Interest expense increased over prior periods due to the increased borrowing needs experienced by the Company. During 2001, the company received $44,800 from the sale of 40,000 shares of an equity
derivative received as part of the compensation from the sale of its tunable mid-IR laser technology in 2000.
Preferred Stock Dividend
During 2002 dividends in common stock valued at $120,600 were issued to holders of the Company's Class B preferred stock (84,000 shares of common stock valued at $.90 per share) and the holder of the Company's Class A preferred stock (50,000 shares valued at $.90 per share). During 2001 dividends in common stock valued at $155,000 were issued to holders of the Company's Class B preferred stock (42,000 shares of common stock valued at $2.50 per share) and the holder of the Company's Class A preferred stock (50,000 shares of common stock at $1.00 per share). Net income used in earnings per share calculations included these charges in 2002 and 2001 in order to derive net income available to common shareholders in. In 2000, common stock dividends of $50,000 were issued to holders of the Company's Class A preferred stock (50,000 shares of common stock valued at $1.00 per share).
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. At December 31, 2002, the Company had a net deferred tax asset of approximately $2,826,000, the primary component of which was its significant net operating loss carry forward. The Company has established a valuation allowance to offset this deferred tax asset in the event that the tax asset will not be realized in the future. In 2002, $100,000 of the deferred tax asset previously classified as an asset was eliminated due to the Company's recurring losses and uncertainty as to the Company's ability to generate taxable income in future years.
Inflation
The Company's policy is to periodically review pricing of its products to keep pace with current costs, market demands, and competitive factors. 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
During the second quarter of 2002 the Company received $1,000,000 from its bank collateralized by equipment. The loan is for a 3 year period with a 5 year amortization and bears an interest rate of 5.61%. Due to violation of certain bank covenants in 2003 the loan has been classified as a current liability.
At the end of the fourth quarter of 2002 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note. The note is due in January 2006 and bears an interest rate of 6%. Interest accrues yearly and along with principal may be converted to common stock at a conversion rate equal to the purchase price of stock issued for cash after the date of the note to an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the note, at a price mutually agreed upon as fair value by issuer and holder. The holder of the note is a related party to a major shareholder of the Company.
The Company had available a $1,000,000 Line of Credit from its bank. The note bears interest at the Bank's prime rate and is payable upon demand. The note is secured by certain assets of the Company. Borrowings against this note were approximately $750,000 as of December 31, 2002. The
borrowings under this line are currently limited to approximately $750,000 until covenant violations are remedied. The Company is currently working with the bank to develop criteria that will allow for permanent reestablishment of the loans. Such criteria may include, but are not limited to, successful implementation of the Company's acquisition program, increased sales volumes and return to profitability. Interest and principal payments due on both loans are, and have always remained, current.
Capital expenditures, including internal labor and overhead charges, for the years ended December 31, 2002, 2001 and 2000 were approximately $554,000, $2,224,000, and $582,000, respectively. Capital expenditures in 2002 and 2001 were used for expansion and renovation of facilities and for the acquisition of equipment. The expenditures were financed in part from capital raised in the 2000 private offering of series B convertible preferred stock and in part by the asset loan secured in the second quarter of 2002. There are no major expenditures for capital equipment anticipated for FY 2003.
A summary of our contractual cash obligations at December 31, 2002 is as follows:
Overview of Financial Condition
As shown in the accompanying financial statements, the Company reported a net loss of $(1,716,000) for 2002 and net income of approximately $44,000, and $708,000 for the years ended December 31, 2001, and 2000. During the past three years, the Company's working capital requirements were met by additional bank borrowings, issuance of subordinated notes and issuance of common and preferred stock to shareowners.
EBITDA for 2002 was $(985,000) and net cash used in operations was $(807,000). Operating capital was augmented by borrowings of $1,000,000 from the Company's asset based credit facility. EBITDA for 2001 was approximately $351,000 and net cash used in operations was approximately $(470,000). Operating capital was augmented by borrowings of $750,000 from the Company's revolving credit agreement.
In January of 2002 the Company was successful in securing a $1,000,000 revolving credit line, and a $1,000,000 asset based term loan. Total additional borrowing against these credit facilities provided the working capital required in 2002. The Company is currently in violation of certain covenants provided for in the loan agreements.
In December 2002 the company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note. The Company is anticipating continued distressed market conditions during 2003 and will use the proceeds from the note to meet its working capital needs in 2003.
Where possible, the Company will continue to increase sales, and reduce expenses and cash requirements to improve future operating results and cash flows. Management expects that cash flow from operations and use of available cash reserves, will provide adequate liquidity for the Company's operations in 2003.
The Company has an active program to align its expenses with present and projected revenues and with its commitments to its customers. During the recessionary year of 2001, employment was reduced in September from 83 to 69, a decline of 17%, through lay-off and attrition. Senior executives of the Company voluntarily accepted a 15% cut in pay, and Directors' fees were reduced 20%. In the first week of January 2002, employment was further reduced to 58, a further decline of 16%, through lay-off and attrition. Reductions were again made in January 2003 to 50 employees, reflecting the continued business weakness. The Company believes that its current cash reserves coupled with its cost reduction and control program will allow the Company to maintain its fiscal viability throughout 2003.
The Company announced in 2002 that it is intent on implementing a plan to transform the Company into a portfolio of businesses serving the Photonics industry. A merger and acquisitions advisory firm, The DAK Group, was employed in the fourth quarter of 2002 to assist management in this process. Capital needed to make the acquisitions or mergers will be through the issuance of equity-based instruments, necessary to achieve this plan.
No assurances can be given that we will be able to identify and attract appropriate acquisition targets or raise the capital required.
Item 7A.
Item 7A. Discussion of Market Risk
Effect of interest rate fluctuations on interest sensitive financial instruments.
We are exposed to changes in interest rates from investments in certain money market accounts. We do not utilize derivative instruments or other market risk sensitive instruments to manage exposure to interest rate changes. We believe that a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive money market accounts at December 31, 2002.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements are set forth on pages through.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The directors hold office for staggered terms ranging from one to three years.
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 with the Company held by each such person:
Daniel Lehrfeld has served as Chief Executive Officer and President since May 2000. He joined the Company in 1999 as President and Chief Operating Officer. Prior to joining the Company, Mr. Lehrfeld held the position of Vice President and General Manager of Electro-Optic Systems, a division successively of the Raytheon, GM/Hughes Electronics and Magnavox Electronic Systems Corporations. He has also held executive positions with Philips Laboratories and Grumman Aerospace Corporation. Mr. Lehrfeld holds B.S. and M.S. degrees from Columbia University School of Engineering and Applied Science and an M.B.A. degree from the Columbia Graduate School of Business.
Maria Murray joined the Company in January 1989, became Vice President of R&D Programs in 1993, and was appointed Sr. Vice President, Business Development in 1999. Prior to joining INRAD, Ms. Murray held positions in electronic design engineering in the laser and communication industries. She holds a B.S. degree in Electrical Engineering from the University of Central Florida.
William S. Miraglia joined the Company as Secretary and Chief Financial Officer in June 1999. Previously, he held the position of Vice President of Finance for a division of UNC, Inc., a NYSE aviation company. Prior to his last position, Mr. Miraglia has held management positions in the aerospace industry and in public accounting. He holds a B.B.A. from Pace University, and an M.B.A from Long Island University and is a Certified Public Accountant.
Devaunshi Sampat joined the Company in 1998. In 1999 she was appointed Vice President of Marketing and Sales. Prior to joining the Company, Ms. Sampat held sales management positions within the Photonics industry with Princeton Instruments and Oriel Instruments. Ms. Sampat holds a B.S. in Medical Technology from the University of Bridgeport.
Thomas A. Caughey joined the Company in 1978. He has focused on the development and improvement of the Company's crystal devices and systems, and on their application by the Company's numerous customers. In 2000, he was appointed Vice President of R&D and Customer Support. Prior to joining INRAD, Dr. Caughey was a Research Associate at Texas Tech University. He holds a Doctorate in Physical Chemistry from the University of Wisconsin-Madison, and a B.S. degree in Chemistry from the University of Michigan-Ann Arbor.
James J. Hoey joined the Company in 2002 as Vice President of Business Development for Custom Optics. Prior to joining INRAD, he was Manager for Business Development for Zygo Corporation for three years, and Business Unit Manager and Business Development Manager for Deposition Sciences for five years. Earlier, at Spectra Physics Lasers, Uniphase Corporation, and Melles Griot Corporation, he held marketing and sales management positions. He holds a bachelor's degree in aerospace engineering from Northrop Institute of Technology.
Each of the executive officers has been elected by the Board of Directors to serve as an officer of the Company until the next election of officers, as provided by the Company's by-laws.
Item 11.
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth, for the years ended December 31, 2002, 2001 and 2000, the cash compensation paid by the Company and its subsidiaries, to o with respect to the Company's Officers, whose total annual salary and bonus exceeded $100,000, for services rendered in all capacities as an executive officer during such period:
*Reflects deferred payout of bonus granted in recognition of asset sale in 2000. Full proceeds invested in Company Series B Preferred stock. The Company is party to an employment agreement with this officer that provides for a minimum annual salary.
The aggregate minimum commitment under this agreement is as follows:
**Reflects payroll paid since hire date, October 2002.
During the periods covered, no 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 $400 for each board meeting they attend, and $200 for each conference call meeting in which they participate.
Compensation Committee Interlock and Insider Participation in the compensation committee
Frank Wiedeman, Director
Jan Winston, Director
John Rich, Director
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 each individual or entity known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock as of March 1, 2003. Percentages that include ownership of options or convertible securities are calculated assuming exercise or conversion by each individual or entity of the options, (including "out-of-the-money optons"), or convertible securities owned by each individual or entity separately without considering the dilutive effect of option exercises and security conversions by any other individual or entity. 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.
(1)Including 900,000 shares subject to convertible preferred stock exercisable or convertible within 60 days.
(2)Includes 2,380,952 shares subject to convertible promissory notes at a stated conversion of $0.42, the market value of the Company's common shares on the date of issuance of the Note.
(3)Including 48,000 shares subject to convertible preferred stock and 258,200 shares subject to options exercisable within 60 days.
(4)Including 61,900 shares subject to options exercisable within 60 days.
(5)Including 28,400 shares subject to options exercisable within 60 days.
(6)Including 12,000 shares subject to convertible preferred stock and 3,300 shares subject to options exercisable or convertible within 60 days.
(7)Including 4,000 shares subject to convertible preferred stock exercisable or convertible within 60 days and 3,400 shares subject to options exercisable or convertible within 60 days.
(8)Including 620,755 shares subject to convertible preferred stock, stock options, and warrants exercisable within 60 days.
Equity Compensation Plan Information
The following table gives information about our Common Stock that may be issued upon the exercise of options, warrants and rights under our Key Employee Compensation Plan and our 2000 Equity Compensation Program, as of December 31, 2002. These plans were our only equity compensation plans in existence as of December 31, 2002.
Item 13.
Item 13. Certain Relationship and Related Transactions
During the years ended December 31, 2002, 2001 and 2000 approximately 4%, 3%, and 6%, respectively of the Company's net product sales were through a foreign agent, in which, Warren Ruderman a principal shareholder has an investment. Terms of sales to this foreign agent were substantially the same as to unrelated foreign agents.
During 2002, Welland Ltd., a related party to Clarex, Ltd., received a 6% Subordinated Convertible Promissory Note due January 31, 2006, resulting in proceeds to the Company of $1,000,000.
During 2000, Clarex, Ltd., a shareowner and debt holder purchased 1000 shares of 10% convertible preferred stock for $1,000,000, converted a 10% convertible secured note and received 200,000 shares of the Company's common stock and exercised 345,000 of warrants and received 345,000 shares of the Company's common stock.
During 2000, the following directors and officers of the Company purchased 263 shares of 10% convertible preferred stock for $263,000:
Item 14.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic SEC filings. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
Item 14B. Form 8K Filed:
Convertible Subordinated Promissory Note, filed January 16, 2003.
Item 14C. 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:
Present
Exhibit No.
Description of Exhibit
Exhibit No. in Registration Statement or or Amendments
3.1
Restated Certificate of Incorporation, as amended.
3.1 of Amendment No. 1.
3.2
By-laws, as amended.
3.2 of Amendment No. 1.
3.3
Certificate of Amendment of Certificate of Incorporation
3.4
Exhibit A-Series A 10% Convertible Preferred Stock
3.5
Exhibit B-Series B 10% Convertible Preferred Stock
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:
10.1
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, 1991:
10.2*
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:
10.3
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, 1993:
10.5
Stock and Note Purchase Agreement with exhibits.
The following exhibits are incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1995:
10.6
Subordinated Convertible Note dated April 9, 1995 between Clarex Limited and INRAD, Inc.
10.7
Unsecured Demand Convertible Promissory Note dated September 27, 1995 between Clarex Limited and INRAD, Inc.
The following exhibits are incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1996:
10.8
Addendum to lease dated October 4, 1991, between S&R Costa as lessor and the Company as lessee.
10.9
Amendment and waiver to the stock and purchase agreement dated as of December 15, 1993.
The following exhibits are incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1999:
10.10*
Employment contract with Devaunshi Sampat.
10.11*
Employment contract with Daniel Lehrfeld.
10.12*
INRAD, Inc. 2000 Equity Compensation Program.
11.1
A statement regarding computation of per-share earnings is omitted because the computation can be clearly determined from the material contained herein.
23.2
Consent from Holtz Rubenstein & Co, LLP.
*Management contracts and employment agreements
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.
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/ THOMAS LENAGH Thomas Lenagh
Chairman of the Board
of Directors
April 2, 2003
/s/ DANIEL LEHRFELD Daniel Lehrfeld
President, Chief
Executive Officer
and Director
April 2, 2003
/s/ FRANK WIEDEMAN Frank Wiedeman
Director
April 2, 2003
/s/ JOHN RICH John Rich
Director
April 2, 2003
/s/ JAN WINSTON Jan Winston
Director
April 2, 2003
/s/ WILLIAM S. MIRAGLIA William S. Miraglia
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
April 2, 2003
CERTIFICATION FOR 10-K
I, Daniel Lehrfeld, certify that:
1.I have reviewed this annual report on Form 10-K of INRAD, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 2, 2003
/s/ DANIEL LEHRFELD Chief Executive Officer
CERTIFICATION FOR 10-K
I, William S. Miraglia, certify that:
1.I have reviewed this annual report on Form 10-K of INRAD, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 2, 2003
/s/ WILLIAM S. MIRAGLIA Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of INRAD, Inc. on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission (the "Report"), I, Daniel Lehrfeld, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.
Dated: April 2, 2003
/s/ DANIEL LEHRFELD Daniel Lehrfeld
Chief Executive Officer
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and has not been filed as part of the Report or as a separate disclosure document.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of INRAD, Inc. on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission (the "Report"), I, Daniel Lehrfeld, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(3) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.
Dated: April 2, 2003
/s/ WILLIAM S. MIRAGLIA William S. Miraglia
Chief Financial Officer
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and has not been filed as part of the Report or as a separate disclosure document.
INRAD, INC. AND SUBSIDIARY
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2002
CONTENTS
Independent Auditors' Report
Board of Directors and Shareowners
Inrad, Inc. and Subsidiary
Northvale, New Jersey
We have audited the accompanying consolidated balance sheets of Inrad, Inc. and0 Subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareowners' equity and cash flows for the three years ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inrad, Inc. and Subsidiary as of December 31, 2002 and 2001 and the results of their operations and their cash flows for the three years then ended, in conformity with accounting principles generally accepted in the United States of America.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
February 14, 2003
INRAD, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
INRAD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
INRAD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
See notes to consolidated financial statements
INRAD, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
INRAD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2002
1. Nature of Business and Summary of Significant Accounting Policies
a. Nature of Operations
Inrad, Inc. and Subsidiary (the "Company") is a manufacturer of crystals, crystal devices, electro-optic and optical components, and sophisticated laser subsystems and instruments. The Company'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.
b. Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Upon consolidation, all intercompany accounts and transactions are eliminated.
c. Allowance for doubtful accounts
Management must make estimates of the uncollectability of accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.
d. Depreciation and amortization
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed using the straight-line method over the estimated useful lives of the related assets or the remaining term of the lease, whichever is shorter. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations.
e. Inventories
Inventories, including certain precious metals consumed in the manufacturing process, are stated at the lower of cost (first-in, first-out method) or market.
f. Income taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
g. Impairment of long-lived assets
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not effect the Company's financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimate undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, and impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the assets might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
h. Stock-based compensation
The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and accounts for stock issued for services provided by other than employees in accordance with and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company's stock and the exercise price. During December 2002, the Company issued all stock options at fair market value. A new measurement date for purposes of determining compensation is established when there is a substantive change to the terms of an underlying option.
i. 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.
j. Internal research and development costs
Internal research and development costs are charged to expense as incurred
k. Precious metals
Precious metals not consumed in the manufacturing process are valued at cost, cost being determined on the first-in, first-out basis.
l. 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 period. Actual amounts could differ from those estimates.
m. Advertising costs
Advertising costs are charged to operations when the advertising first takes place. Included in selling, general and administrative expenses are advertising costs of $62,000, $45,000 and $43,000 for the years ended December 31, 2002, 2001 and 2000.
n. Statement of cash flows
For purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Interest paid during the years ended December 31, 2002, 2001 and 2000 was $135,001, $91,154 and $15,327, respectively.
In 2000, the Company converted $350,000 of notes payable into 280,000 shares of its common stock.
During 2000, the Company entered into capital lease obligations approximating $470,000 in connection with the acquisition of plant equipment.
Income taxes paid were $580 in 2002, $16,756 in 2001 and none in 2000.
o. Concentration of risk
The Company invests its excess cash in deposits and money market accounts with major financial institutions and in commercial paper of companies with strong credit ratings. Generally, the investments mature within ninety days, and therefore, are subject to little risk. The Company has not experienced losses related to these investments.
The concentration of credit risk in the Company's accounts receivable is mitigated by the Company's credit evaluation process, reasonably short collection terms and the geographical dispersion of revenue.
The Company utilizes many relatively uncommon materials and compounds to manufacture its products. Therefore, any failure by its suppliers to deliver materials of an adequate quality and quantity could have an adverse effect on the Company's ability to meet the commitments of its customers.
p. Net (loss) income per common share
The basic net (loss) income per share is computed using weighted average number of common shares outstanding for the applicable period. The diluted (loss) income per share is computed using the weighted average number of common shares plus common equivalent shares outstanding, except if the effect on the per share amounts, including equivalents, would be anti-dilutive.
q. Comprehensive income (loss)
Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity.
r. Shipping and handling costs
The company has included freight out as a component of selling, general and administrative expenses that amounted to $30,242 in 2002, $42,675 in 2001 and $33,323 in 2000.
s. Recently issued accounting pronouncements
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 requires that a liability for cost that is associated with and exit or disposal activity be recognized when the liability is incurred. It supersedes the guidance in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring". Under EITF 94-3, an entity recognized a liability for and exit cost on the date that the entity committed itself to an exit plan. Under SFAS 146, an entity's commitment to a plan does not, by itself, create a present obligation that meets the definition of a liability. SFAS 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a significant impact on the Company.
In November 2002, the FASB issued Interpretation No. 45 (FIN), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit and warranty obligations. It also clarifies that at the time a company issues a guarantee, a company must recognize an initial liability for the fair value of the obligations assumes under that guarantee and must disclose that information in its interim and annual financial statements. The provisions of FIN 45 relating to initial recognition and measurement must be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have a significant impact on the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123", which amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for stock-based compensation to employees under APB Opinion No. 25 and related interpretations. The adoption of SFAS No. 148 is not expected to have a significant impact on the Company, as they have yet to issue stock-based employee compensation.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is required to be applied to preexisting entities of the Company as of the beginning of the first quarter after June 15, 2003. FIN 46 is required to be applied to all new entities with which the Company becomes involved beginning February 1, 2003. The adoption of FIN 46 is not expected to have a significant impact on the Company.
2. Inventories
Inventories are comprised of the following:
3. Property and Equipment
Property and equipment are comprised of the following:
4. Bank Loans
In January 2002 the Company repaid its obligation with its bank and entered into a new agreement with another bank. This agreement provides for a $1,000,000 Line of Credit at the bank's prime rate, and a $1,000,000 Asset Based Loan at 5.61%.
In January 2003 the Company was in violation of certain financial covenants required under the loan agreements. The Bank agreed to extend the loans through March 2003. The Company is in negotiations with the Bank to determine the criteria by which the Bank will extend the loans for Fiscal 2003. As a result of the violations of the covenants all bank debt has been classified as a current liability. The Line of Credit that is secured primarily by accounts receivable and inventory has been limited to the current borrowings of approximately $750,000. The Asset Based Loan that is secured by certain equipment owned by the Company currently has a balance of approximately $928,000. Interest and principal payments due on both loans are, and have always remained, current.
5. Subordinated Convertible Promissory Note
In 2002, the Company issued a Subordinated Convertible Promissory Note for proceeds of $1,000,000. The Holder of the Note is a related party to a major Shareholder of the Company. The note bears interest at the rate of 6% per annum and has a maturity date of January 31, 2006. The note is convertible into common shares of the Company at a conversion price that shall be (a) the price at which common stock is first issued for cash after the date of the Note to an unrelated third party investor or (b) the price mutually agreed upon by the Issuer and Holder at its then fair market value if no such issuance has occurred within 12 months of December 31, 2002, the date of the Note.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are comprised of the following:
7. Capital Leases
Capital leases consist of the following:
Maturities of capital leases are as follows:
Capital lease obligations are collateralized by property and equipment with cost and related accumulated depreciation approximating $470,000 and $121,000 respectively at December 31, 2002.
8. Income Taxes
A reconciliation of the income tax (benefit) computed at the statutory Federal income tax rate to the reported amount follows:
At December 31, 2002, the Company has Federal and State net operating loss carryforwards for tax purposes of approximately $7,027,000 and $1,840,000, respectively. The tax loss carryforwards expire at various dates through 2022.
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 carryfowards for tax purposes may be limited annually to a percentage (approximately 6%) of the fair market value of the Company at the time of any such ownership change.
The provision (benefit) for income taxes consists of the following:
Deferred tax assets (liabilities) comprise the following:
9. Related Party Transactions
During the years ended December 31, 2002, 2001 and 2000 approximately 4%, 3%, and 6%, respectively of the Company's net product sales were through a foreign agent, in which, Warren Ruderman a principal shareholder has an investment.
During 2002, Welland Ltd., a related party to Clarex, Ltd., received a 6% Subordinated Convertible Promissory Note due January 31, 2006, resulting in proceeds to the Company of $1,000,000.
During 2000, Clarex, Ltd., a shareowner and debt holder purchased 1,000 shares of 10% convertible preferred stock for $1,000,000, converted a 10% convertible secured note and received 200,000 shares of the Company's common stock and exercised 345,000 of warrants and received 345,000 shares of the Company's common stock.
During 2000, the following directors and officers of the Company purchased 253 shares of 10% convertible preferred stock for $253,000:
10. Commitments
a. Lease commitment
The Company leases its office and manufacturing facility under an operating lease which expires in 2006. 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 that was exercised during 2001. Rental expense was approximately $224,000, $212,000 and $206,000 in 2002, 2001 and 2000, respectively, and real estate taxes were $41,000, $39,000 and $38,000 in 2002, 2001 and 2000, respectively.
Future minimum annual rentals are payable as follows:
b. Retirement plans
The Company maintains a 401(k) savings plan for all eligible employees (as defined in the plan). 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 contributed $11,870 in the form of 28,263 shares of the Company's common stock in 2002, distributed in March 2003 and $20,362 in the form of 14,037 shares of the Company's common stock in 2001, distributed in February 2002.
c. Employment agreements
The Company is party to an employment agreement with an officer that provides for a minimum annual salary.
The aggregate minimum commitment under this agreement is as follows:
11. Product Sales, Foreign Sales and Sales to Major Customers
The Company's sales for each major category of its product line are as follows:
Export sales, primarily to customers in Europe, Asia and Canada, amounted to 19%, 31% and 38% of net product sales in 2002, 2001 and 2000, respectively.
No foreign customer accounted for more than 10% of product sales in 2002. One foreign customer accounted for 10.7% of product sales in 2001 and for 13% of product sales in 2000. In 2002 one U.S. customer accounted for 13.4% of product sales. One U.S. customer accounted for 17.7% of product sales in 2001, one U.S. customer accounted for over 13% and another for 12.2% of product sales in 2000.
12. Shareowners' Equity
a. Common shares reserved
Common shares reserved at December 31, 2001, are as follows:
b. Preferred stock
The Company has authorized 1,000,000 shares of preferred stock, no par value, which the Board of Directors has the authority to issue from time to time in a series. The Board of Directors also has the authority to fix, before the issuance of each series, the number of shares in each series and the designation, preferences, rights and limitations of each series.
In 2000, the Company sold 2,100 shares of Series B (the "Preferred Stock"), 10% convertible preferred stock at a price of $1,000 per share for proceeds of $2,100,000. Each share of Preferred Stock is convertible, at the option of the holder at any time, into common stock at the rate of $2.50 per share. Dividends on outstanding preferred stock are payable in common stock at the rate of $2.50 per share. The Preferred Stock has senior preference and priority as to the dividend as well as distributions and payments upon the liquidation, dissolution, or winding up of affairs before any payment to other shareowners of the Company.
For the years ended December 31, 2002, 2001 and 2000, the Company paid a common stock dividend equal to $121,000, $105,000 and $50,000, respectively.
c. Stock options
(i) The Company has adopted two stock option plans which provide for the granting of options to employees, officers, directors, and others who render services to the Company. Under these plans in the aggregate, options to purchase no more than 2,000,000 shares of common stock may be granted, at a price which may not be less than the fair market value per share.
Under the 1991 Stock Option Plan the Company may grant options to purchase up to 500,000 shares of Common Stock to its officers, key employees and other who render services to the Company. The 1991 Stock Option Plan expired in December 2001.
Under the 2000 Equity Compensation Program, the Company may grant options to purchase up to 1,500,000 shares of Common Stock. The Equity Compensation Program authorizes the issuance of incentive stock options. The 2000 equity compensation plan expires in August 2010.
A summary of the status of the Company's program as of December 31, 2002, 2001and 2000, and changes during the years then ended is presented below:
The following table summarizes information about stock options outstanding at December 31, 2002:
(ii) The Company has elected the disclosure-only provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FASB 123") in accounting for its employee stock options. Accordingly, no compensation expense has been recognized. Had the Company recorded compensation expense for the stock options based on the fair value at the grant date for awards, consistent with the provisions of FASB 123, the Company's
net income (loss) and net income (loss) per share applicable to common shareowners would have changed to the following pro forma amounts:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following range of weighted-average assumptions were used for grants during the years ended December 31, 2002, 2001 and 2000:
d. Warrants
At December 31, 2000, the Company had outstanding 26,675 common stock warrants exercisable at $1.50, and 25,000 exercisable at $.69. In 2001, the warrants were exercised resulting in net proceeds to the Company of $57,000.
e. Income per common share A reconciliation of income from continuing operations and basic to diluted share amounts is presented below.
13. Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of the following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash, current receivables and payables and certain other short-term financial instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt, including the current portion, was estimated using a discounted cash flow analysis, based on the Company's assumed incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of variable and fixed rate debt at December 31, 2002 approximates fair value.
14. Quarterly Data (Unaudited)
Summary quarterly results were as follows:
(a)Quarterly income per share amounts may not total to the annual amounts due to changes in weighted-average shares outstanding during the year. 15. Special Charges
At the end of 2000, the Company announced a process engineering redesign program to formalize production operations, and improve profitability through margin improvement. The special charges associated with this program were $299,763 ($.06 per share on a basic and diluted basis) for the year ended December 31, 2001.
INRAD, INC.
INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Item 7A. Discussion of Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationship and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 14B. Form 8K Filed
Item 14C. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
CERTIFICATION FOR 10-K
CERTIFICATION FOR 10-K
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
INRAD, INC. AND SUBSIDIARY REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED DECEMBER 31, 2002
CONTENTS
Independent Auditors' Report
INRAD, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
INRAD, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
INRAD, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
INRAD, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS