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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17020
Larson Davis Incorporated
(Exact name of registrant as specified in its charter)
Nevada 87-0429944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1681 West 820 North, Provo, Utah 84601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 375-0177
Securities registered under section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under section 12(g) of the Act:
Common Stock, Par Value $0.001
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 25, 1998, there were 12,524,589 shares of the Issuer's common
stock, par value $0.001, issued and outstanding. The aggregate market value of
the Issuer's voting stock held by nonaffiliates of the Issuer was approximately
$35,135,527, computed at the closing quotation for the Issuer's common stock of
$2.8125 as of March 25, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes. None.
TABLE OF CONTENTS
Item Number and Caption Page
PART I
1. Business.................................................................................... 3
2. Properties.................................................................................. 12
3. Legal Proceedings........................................................................... 12
4. Submission of Matters to a Vote of Security Holders......................................... 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 13
6. Selected Financial Data..................................................................... 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 16
8. Financial Statements and Supplementary Data................................................. 23
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.................................................................................. 23
PART III
10. Directors and Executive Officers of the Registrant.......................................... 25
11. Executive Compensation...................................................................... 27
12. Security Ownership of Certain Beneficial Owners and Management.............................. 31
13. Certain Relationships and Related Transactions.............................................. 34
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 35
SIGNATURES........................................................................................... 41
PART I
ITEM 1. BUSINESS
GENERAL
LarsonoDavis Incorporated (the "Company") is engaged in the design and
development of analytical instruments. The Company has been in the business of
developing, manufacturing, and marketing precision acoustical and vibration
instrumentation since 1981. The Company is currently committed to
commercializing four additional families of products, its mass spectrometry
related instruments (the "time-of-flight mass spectrometry" or "TOFMS
Technology"), its polymer analysis technology (the "CrossCheck Technology"), its
separation technology (the "SFC Technology"), and its particle analysis
technology (the "PAMS Technology"). The TOFMS and the SFC Technologies have
just been launched in 1998, the CrossCheck Technology is also available, while
the PAMS Technology is not scheduled for availability until 1999.
The Company is dedicating significant amounts to technological research,
product development, and marketing strategies. The Company believes that the
patents underlying its technologies are either unique or represent advances on
existing technologies in the analytical instrumentation market and that it can
design and produce instruments that are competitive in this market. However,
much of the potential success of the Company depends on the successful
development of commercial products, the existence or creation of a market demand
for any products that may be developed, the ability of the Company to achieve
significant market penetration for any such products in several large markets
against strong competition, the ability to enforce its patents, and the ability
of the Company to produce and market any such products on a profitable basis.
Such an effort requires a significant dedication of time, expertise, and money,
and there can be no assurance of ultimate success.
The Company is currently comprised of two active, wholly-owned
subsidiaries:
LARSONoDAVIS LABORATORIES CORPORATION ("LDL") focuses on the design,
development, manufacturing, and marketing of acoustics and vibration
products and services.
SENSAR CORPORATION ("Sensar") develops, manufactures, and markets
sophisticated chemical detection and analysis instrumentation and polymer
analysis technology used for quantitative and qualitative analysis.
Unless the context otherwise requires, when used herein, the term "the
Company" refers to LarsonoDavis Incorporated and its operating subsidiaries.
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This report on Form 10-K contains certain forward looking statements and
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made concerning information
currently available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including the completion of
commercial products within projected time frames, the market acceptance of
products, the ability of the Company to successfully address technical and
manufacturing problems in producing new products, the Company's ability to enter
into favorable strategic alliances, joint ventures, or other collaborative
arrangements with established industry partners, the success of the marketing
efforts of the Company and the entities with which it has agreements, the
success of the Company in developing its technology and designing and
constructing products based on that technology, the ability of the Company
to successfully protect its patent rights to prevent competitors from
benefiting from the technology, the ability of the Company to compete with
larger, more established entities, and the ability of the Company to obtain
the necessary financing to successfully complete its goals. Should one or
more of these or other risks materialize or if the underlying assumptions
of management prove incorrect, actual results of the Company may vary materially
from those described. The Company does not intend to update these forward
looking statements, except as may occur in the regular course of its periodic
reporting obligations.
ACOUSTIC AND VIBRATION BUSINESS
The Company was established to engage in the acoustics and vibration
instrumentation industry and this business remains its "core" business. The
acoustic and vibration products of the Company are focused on precision
measurement instruments for use in a variety of industries. These products
combine very sophisticated environmental data collection systems with high-speed
data acquisition and processing systems to give users critical information
concerning acoustical or vibration based events. The Company's customers for
these products include major corporations in a variety of industries, including
automobile manufacturers, aircraft manufacturers, and defense contractors, and
the United States military. Subdivisions of this market in which the Company's
instrumentation is currently being utilized are:
Environmental Monitoring provides data used to monitor, control, or avoid
noise (unwanted and/or irritable sound which has a detrimental effect on
living organisms). It includes such applications as community noise
ordinance compliance surveys, vehicle passby surveys, industrial complex
perimeter monitoring, environmental impact studies, OSHA (noise in the work
place) mandated surveys, military aircraft sonic boom monitoring, and
others.
Product Design and Improvement encompasses the use by manufacturers to
optimize performance and minimize acoustic output. For example, the auto
and aircraft industries determine noise dampening properties of materials
used in insulation; a yacht manufacturer studied acoustic spectrums as an
aid in selecting efficient hull designs; and other manufacturers of items
such as lawn mowers, computer printers, office equipment, and kitchen
appliances employ the instruments to collect information on sound emissions
to aid in encasement design.
Structural Dynamics is the study of the motion of materials to determine
characteristics such as fatigue, resonance, material density, and bonding
strengths. For instance, a consultant used the Company's instrumentation
to determine the resonant frequency of the vibrations in the Statue of
Liberty's arm holding the torch. Braces were designed and installed which
resulted in doubling the torch bulb life.
Medical Applications include hardware and software used in automatic
calibration systems for medical equipment. The analysis and treatment of
both hearing and speech problems can be improved utilizing the Company's
instrumentation.
Professional Sound includes both manufacturers and consultants. The
Company provides equipment used to certify compliance by sound products
(such as amplifiers, mixers, equalizers, speakers, and microphones) with
published specifications. Field engineers rely on portable instrumentation
to evaluate the acoustic characteristics of a room or building.
Defense and Government applications range from ship/vehicle identification
based on spectrum analysis to artillery blast noise studies.
As part of its ongoing research and development efforts, the Company
continues to upgrade and refine its existing products in the acoustic and
vibration market and develop new products. Over the past year, the Company has
introduced a number of new products designed to make its instruments more
sensitive and accurate, smaller and lighter weight, and easier to use. The
Company believes that its family of products in this industry are competitive on
technical sophistication, ease of use, and price.
TOFMS Technology
Mass spectrometry is an important technique for the analysis of chemicals
in a wide variety of industries such as pharmaceutical/biotechnology,
semiconductor, chemical/polymer and consumer products. Mass spectrometry is
used to identify unknown chemicals, quantify known materials, and to determine
the structural and chemical properties of molecules. TOFMS is currently the
fastest growing mass spectrometry technique. It determines the mass-to-charge
ratio of ions by measuring the time it takes for the ion to reach the detector.
Sensar is a technology leader in time-of-flight mass spectrometry (TOFMS),
holding key patents in this rapidly developing technology. Instruments based on
TOFMS acquire data very fast and have high sensitivity. Sensar currently
manufactures the TOF2000, a process gas analyzer for measuring parts per billion
impurities in process gases. The TOF2000 is sold primarily to the semiconductor
industry where process gas purity is critical to the production of
microelectronics. Customers for the TOF2000 include semiconductor
manufacturers, ultra pure gas producers, and gas purifier manufacturers. SAES
Getters S.p.A. ("SAES"), a gas purifier manufacturer, has distribution rights
for the TOF2000 in the semiconductor industry under a five-year agreement
through 1999. In exchange for exclusivity in this market, SAES is required to
meet certain annual minimum sales requirements. To date, sales in the
semiconductor industry have been disappointing, below the minimums of the
distribution arrangement. Factors responsible for this performance have been
volatility in capital spending in the semiconductor market and product
performance issues in the field. Sensar, SAES, and current customers are
working to correct product weaknesses. Further, the Company is seeking to
develop additional markets in environmental applications for the TOF2000 so that
the product is not as dependent on the semiconductor market.
Sensar will expand the scope of its TOFMS technology with the launch of its
Jaguar mass detector in 1998. Unlike the TOF2000, which is used for gas
analysis, Jaguar is designed for liquid analysis. Jaguar is based upon Sensar
technology found in the TOF2000 as well as new developments for which Sensar is
seeking and has received patent coverage. Designed as a detector for liquid
chromatography, Jaguar will establish a new standard for speed, sensitivity, and
dynamic range for liquid chromatography-mass spectrometry (LC-MS). LC-MS is a
rapidly growing technology used in the pharmaceutical and biotechnology
industries for drug discovery, combinatorial chemistry, metabolic, and
degradation profiling of pharmaceuticals, peptide mapping and protein
sequencing, and quality assurance. Sensar expects to ship beta Jaguar units in
March 1998, and the first production units in June 1998. The Company is
currently seeking to establish strategic marketing relationships for this
exciting new product.
CrossCheck Technology
The Company holds the exclusive license to a technology utilized in the
"CrossCheck" product, a process used to measure resistance of materials in real
time. The instrument differs from other devices that also measure resistance in
that CrossCheck is a compact device operating with low voltage alternating
current with the ability to measure resistance to very high levels. CrossCheck
is of interest across a wide industrial base. For example, CrossCheck has been
successfully applied to determine the curing characteristics of paints, coatings
and epoxy materials. As these materials cure, the chemical changes that occur
cause a detectable change in the measured resistance. Disposable probes can be
quickly coated with the material to be monitored; CrossCheck then provides real-
time data that is used to evaluate the quality and characteristics of the
material under test. CrossCheck can also be used to monitor liquids in
pipelines and tankage. Measurement of the bulk resistance of liquids provides
information that can be used to determine when chemical changes may have
occurred in the liquid or when a different liquid may have been introduced into
a liquid stream. The Company is actively pursuing placement of prototype
instruments within key industrial and university sites. Results from these
evaluations have been used to refine the design for production models of the
CrossCheck technology.
The Company has concentrated on application of CrossCheck within major
industrial segments which provide the largest potential markets for this
product. These markets include:
Paints and Coatings - Laboratory work at Larson-Davis and at selected
industrial sites confirm the effectiveness of CrossCheck as a real-time
monitor of the curing process. This market segment will be the major focus
of sales and marketing efforts in 1998.
Adhesives - Cure rates of adhesives are affected by material composition,
additives and contaminants. CrossCheck is an effective real-time cure-rate
monitor for these materials.
Power industry - Transformer oils and switching box oils are eventually
degraded by temperature, chemical contamination and electrical discharge
effects. CrossCheck is being evaluated as a real-time monitor to assess
the extent of change in these oils.
Petroleum pipeline industry - CrossCheck can determine the change in
resistance of fluids as the material composition changes. In a joint
project with a major pipeline company, CrossCheck is being evaluated as a
method to precisely determine the point of interface between adjacent
fluids in petroleum product pipelines.
Concrete industry - The cure rate of concrete products can be determined by
measurement of the electrical properties of the concrete slurry.
CrossCheck is being evaluated for application in this large industrial
segment.
Supercritical Fluid Chromatography
In March 1998, Sensar introduced its first separations instrument, the
Series 3000 Supercritical Fluid Chromatograph (SFC). This high performance
instrument was designed to uniquely meet the requirements for separations within
the chemical, petroleum, and polymer industries. The Company has obtained
rights to patents held by Brigham Young University that protect the use of small
diameter, capillary columns with this instrument. The Series 3000 allows an
analyst to evaluate chemical mixtures which are not adequately separated by
other techniques such as gas chromatography (GC) or liquid chromatography (LC).
The Series 3000 SFC is especially effective in the separation of compounds
demonstrating low to moderate volatility.
Sensar designed the Series 3000 SFC to immediately meet the requirements of
the petroleum industry. The Series 3000 meets all of the requirements of ASTM
Method D5186 that specifically requires SFC technology for the determination of
aromatic content of diesel and jet fuels. This method is now mandated for
analysis of all diesel and jet fuels sold within the State of California and is
being considered by other regulatory agencies. The Series 3000 SFC has been
designed to allow modifications as other regulatory bodies throughout the world
adopt similar regulations.
SFC has been available commercially for the past decade. The Series 3000
provides significant advantages over competitive SFC systems presently
available; specifically the Series 3000 provides: (1) the capability to use
both capillary and large bore packed columns; (2) improved sensitivity through
the use of improved column technology; (3) improved reproducibility through the
effective use of temperature control of electrical components; and (4) ease-of-
use through design features oriented to routine laboratory use.
The Series 3000 immediately meets the unique requirements of analysts in
the chemical industry:
Petroleum industry - The Series 3000 is the only system designed
specifically to meet the requirements of ASTM Method D5186 as described
above. The Series 3000 will also be used to separate mixtures of high
molecular weight oil components in heavy crude oils and refinery products.
Surfactants - The Series 3000 is uniquely suited for the analysis of non-
ionic surfactants. These compounds are found in home-care products, food
products, paints and coatings, and numerous other industrial and consumer
products.
Polymers - Low molecular weight polymers, polymer additives and source
chemicals used in polymer production are readily separated with the Series
3000 SFC.
Chemical industry - Highly reactive materials such as isocyanates cannot be
separated by other chromatographic techniques including GC or LC. The
Series 3000 SFC is uniquely suited for the separation of thermally unstable
compounds.
Environmental - The Series 3000 is expected to provide complementary
confirmation of contaminants found in the environment including pesticides,
herbicides, and various industrial waste products including dioxins. The
Series 3000 is also capable of determining the concentration of explosives
in environmental samples.
Particle Analysis Mass Spectrometry (PAMS)
The measurement of particles in clean room air and fabrication tool areas
is a major concern of the microchip fabrication industry. Methods exist for the
measurement of particles larger than one micron (less than one ten thousandth of
an inch) in diameter. However, the techniques are not now commercially
available which adequately address the problem of sub-micron sized particles.
Sensar has entered into an agreement with Lucent Technologies for the exclusive
rights to a particle analysis technique developed by Lucent that addresses this
problem area.
The PAMS technique uses a high powered laser to disintegrate small
particles into charged ions which can then be analyzed by mass spectrometric
techniques. The high speed data retrieval and highly sensitive detection
techniques developed by Sensar for use with its time-of-flight mass
spectrometers are suited for the commercialization of the Lucent technique.
When commercialized, PAMS will provide semiconductor fabrication facilities with
real-time capability of providing critical information on particle contamination
including: (1) concentration of particles within a specific area; (2) the size
distribution of the particles; and (3), the elemental composition of the
particles. With this information, fabrication facility managers can take
preventive and corrective actions specific to the type of particles identified
within a fabrication tool or area.
The PAMS technology is currently under development and instrument design
and testing has not been completed. The Company does not expect to introduce a
commercial product in 1998, and no assurance can be given that the Company will
be successful in finalizing a commercial product based on this technology.
BUSINESS HISTORY
During recent years, the Company has been involved in a number of
significant business changes as follows:
March 1994 - The Company purchased all of the outstanding shares of a
corporation chartered in England and the corporation was renamed
LARSONoDAVIS, LTD. ("LTD"). LTD has served as a European distribution
point and expanded service and repair center for the Company. In December
1997, the board of directors approved the closure of LTD, which was
effectively completed in March 1998. Sales and service activities were
assumed by new sales distributors in the United Kingdom.
June 1994 - The Company acquired substantially all of the intangible assets
of a privately-held Massachusetts corporation related to the airport noise
monitoring industry. Also purchased were the rights to approximately 25
contracts for the installation, maintenance, and support of airport noise
monitoring systems. In August 1995, the Company entered into an agreement
to transfer this airport noise monitoring operations to an established
consulting firm engaged in the transportation industry. The Company also
transferred the management of substantially all of its airport contracts to
the consulting firm and agreed not to compete within the industry.
June 1994 - With the return of the minority interest in LarsonoDavis Info,
Inc. ("Info"), a subsidiary of the Company, held by Commerce Clearing
House, the Company discontinued the operations of two of its software based
subsidiaries, Info and Advantage Software, Inc. Management terminated the
business of these subsidiaries and reduced the carrying value of the
related assets to zero.
October 1995 - The Company acquired all of the outstanding stock of Sensar
Corporation.
November 1997 - Senior management of the Company was reorganized, with
three of the five directors resigning and the Company employing a new chief
executive officer. The Company recognized restructuring and other charges
in connection with this change. (See Note B to the Consolidated Financial
Statements.
PATENTS AND TRADEMARKS
The technology owned or licensed by the Company is proprietary in nature.
In connection with the design and construction of its precision acoustical and
vibration measurement instrumentation and its proprietary software, the Company
primarily relies on confidentiality and nondisclosure agreements with its
employees, appropriate security measures, copyrights, and the encoding of its
software in order to protect the proprietary nature of its technology rather
than patents which are difficult to obtain in the computer software area,
require public disclosure, and can often be successfully avoided by
sophisticated computer programmers.
The Company is the exclusive licensee of key patents belonging to Brigham
Young University regarding its TOFMS, CrossCheck, and SFC technologies. The
Company has also licensed patented technology from Lucent Technologies regarding
PAMS. Sensar has obtained additional patents through its own development
efforts that are the sole property of the Company. The technology contained in
these patents results in the competitive advantages of the Sensar products. The
Company believes that patents are an important part of doing business in the
analytical instrument industry and intends to protect all of its intellectual
property from unauthorized use.
The Company has also registered "NOISEBADGE" to use as a trademark in the
marketing of noise level meters with the United States Office of Patents and
Trademarks.
MANUFACTURING AND ASSEMBLY
The Company is involved in the manufacture of both its hardware and
software products. It utilizes the services of certain subcontractors to
manufacture component parts for its products to minimize the amount of its
capital investment and increase its flexibility in dealing with changes in the
manufacturing processes. Approximately 20% of manufacturing is performed by
subcontractors. However, all final assembly and testing procedures are done by
the Company's employees as part of its quality control program. Manufacturing
activities occupy approximately 16,500 square feet of the Company's facilities.
(See "ITEM 2. PROPERTIES.")
PRODUCT COMPONENTS
The Company utilizes a large number of individual electronic components in
connection with the manufacture of its analytical instruments. The Company has
developed, manufactures, and sells its own line of high quality transducers for
the acquisition of acoustical and similar events so that it is no longer
dependent on suppliers for these component parts. Certain hardware components
of the Company's mass spectrometer based instruments are custom designed and
subcontracted to established machine shops for manufacture. The Company
established its own in-house machining capability in 1996 by acquiring
appropriate equipment and hiring qualified individuals to manage and operate the
equipment. The machine shop provides the Company with a secondary source for
its very precise transducer components and reduces the risk of product
shortages. The machine shop also provides prototype parts to aid in the
development of new products. Most of the other components utilized by the
Company are available from a number of manufacturers and the Company's decisions
with respect to suppliers are based on availability of the necessary component,
the reliability of the supplier in meeting its commitments, and pricing.
The Company purchases certain supplies from third-parties for installation
in environmental noise monitoring systems. Generally, these supplies consist of
"brand name" computers, printers, and other peripherals, and are readily
available from a variety of manufacturers or suppliers.
MARKETING AND DISTRIBUTION
The Company markets and distributes its acoustics and vibration hardware
products primarily through independent manufacturer's representatives in the
United States and stocking distributors throughout the rest of the world. The
efforts of these representatives are supported by the Company's in-house staff
of marketing and technical personnel.
The Company's TOF2000 is currently being marketed within the semiconductor
industry by SAES under a 5-year distribution agreement. The Company is building
new distribution channels for its other TOFMS, SFC, and CrossCheck products.
Distribution options under consideration by the Company include direct sales,
manufacturers representatives, and marketing arrangements with established
instrument vendors for TOFMS, SFC, and CrossCheck. Catalog distribution of
CrossCheck is also being investigated.
The Company invests in both image building and direct product advertising.
This exposure takes many forms, including participation on industry standards
boards, exhibitions at trade shows, Company sponsored training classes, direct
technical demonstrations, and industry publication advertisements.
BACKLOG
As of December 31, 1997, the Company had an order backlog believed to be
firm of approximately $1,080,000, which is not reflected in the financial
statements included elsewhere herein. This compares to a backlog at December
31, 1996, of approximately $1,200,000.
COMPETITION
LDL
The acoustics and vibration hardware products are positioned in a niche
market which caters to a technically sophisticated user base. For a number of
years this market has been dominated by a single competitor. This competitor,
Bruel & Kjaer, has traditionally been the largest supplier of acoustics and
vibration instrumentation in the world. In addition, there are several smaller
companies in direct competition with the Company. In the opinion of management,
none of the other competitors other than Bruel & Kjaer has available a full line
of acoustical and vibration products, similar to that offered by the Company.
There are also a small number of large companies which produce, in most cases,
isolated products which can be adapted to certain applications in the acoustics
industry.
While many of the companies which compete with the Company have greater
financial and managerial resources, management believes the Company can compete
effectively based on its ability to: (1) adapt rapidly to technology changes,
(2) technically market to specialized users, and (3) offer a complete line of
solutions to users' needs.
Sensar
The Sensar products compete in various segments of the multi-billion
analytical instrument market. The Company seeks to position itself in niche
markets where it has technological advantages and can distinguish itself from
larger, better known companies, and offer favorable pricing. In spite of this,
the competition in these market segments is intense, especially in mass
spectrometry. Acquisitions in the past year in the mass spectrometry segment
involving large instrument companies seeking to add TOFMS capabilities will have
a great effect on the competitive landscape in 1998. These acquisitions,
however, demonstrate the strong market demand for LC-MS products such as the
Sensar Jaguar. Competition in the SFC and CrossCheck markets is much less
intense. There are only two significant competitors in the SFC market and none
for a hand-held resistivity meter such as CrossCheck.
GOVERNMENTAL REGULATION
The products of the Company are not subject to the authority of a specific
governmental regulatory agency and do not generally require approval or
certification by such agencies. They are, however, compliant to general
industry standards such as "CE Mark," FCC (where appropriate), and various
acoustical standards. There are no existing, or to the knowledge of the
Company, pending governmental regulations, that would have a material effect on
the business conducted by the Company.
ENVIRONMENTAL COMPLIANCE
The manufacturing activities of the Company involve the use, storage, and
disposal of small quantities of certain hazardous chemicals. The costs to the
Company of complying with environmental regulations are not material to its
operations. The Company employs an outside service to handle the disposal of
these chemicals. The Company conducts training courses for its employees in
safety and the handling of these chemicals and maintains a safety committee to
review its policies and procedures from time to time.
MAJOR CUSTOMERS AND FOREIGN SALES
During the twelve months ended December 31, 1997, one customer, Spectra
s.r.l., accounted for 12% of sales. During the six months ended December 31,
1996, another customer, Measurement and Testing, Inc., accounted for 13% of
sales. There were no customers which represented more than 10% of the total
sales for the Company during the years ended June 30, 1996 and 1995. Government
sales were not significant in any of the periods included in the accompanying
financial statements, with sales volumes less than 5% of continuing operations
for each of the periods.
Export sales of the Company for the twelve months ended December 31, 1997,
the six months ended December 31, 1996, and the years ended June 30, 1996 and
1995, are 52%, 59%, 34%, and 53% of revenues from continuing operations,
respectively. The Company exported its products into a number of geographical
markets that are more specifically identified in Note Q to the Consolidated
Financial Statements of the Company.
PERSONNEL
As of December 31, 1997, the Company had 121 employees, 40 of which were
involved in professional or technical development of products, 50 in
manufacturing, 16 in marketing and sales, and 15 in administrative and clerical.
None of the employees of the Company are represented by a union or subject to a
collective bargaining agreement, and the Company considers its relations with
its employees to be favorable.
ITEM 2. PROPERTIES
The Company owns its own administrative and manufacturing facilities in
Provo, Utah, subject to a security lien granted to a commercial financial
institution to secure a purchase money loan. The facilities include
approximately 13,200 square feet of administrative, engineering, and research
and development space and approximately 11,500 square feet of manufacturing,
storage, and shipping space.
In addition, the Company leases approximately 18,300 square feet of space
located immediately across the street from the Company's corporate headquarters
in Provo, Utah, that is being used by the Sensar division. This space is leased
under an operating lease with a current monthly payment of $13,730 and which
expires March 31, 1999. The Company has the option to renew this lease for up
to five additional one-year terms, with an increase of 4% in the monthly lease
payment with each extension. Approximately 5,000 square feet of the space is
being used for manufacturing, storage, and shipping and the remaining space is
used for development, marketing, and administrative functions.
Management considers the existing facilities of the Company to be in good
condition and currently sufficient for its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings and,
to the best of its knowledge, no such proceedings by or against the Company have
been instigated or threatened. To the knowledge of management, there are no
material proceedings pending or threatened against any director or executive
officer of the Company, whose position in any such proceeding would be adverse
to that of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended December 31, 1997, the Company did not hold a
shareholders' meeting and no matters were submitted to a vote of the security
holders of the Company, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of the Company is currently listed on the Nasdaq National
Market ("NNM"), under the symbol "LDII." Prior to January 30, 1997, the
Company's common stock was listed on the Nasdaq SmallCap Market.
The following table sets forth the approximate range of high and low bids
for the common stock of the Company during the periods indicated. The
quotations presented reflect interdealer prices, without retail markup,
markdown, or commissions, and may not necessarily represent actual transactions
in the common stock.
Quarter Ended High Bid Low Bid
September 30, 1995 $ 6.40 $ 3.16
December 31, 1995 $ 6.32 $ 3.40
March 31, 1996 $ 6.08 $ 4.08
June 30, 1996 $ 11.32 $ 5.24
September 30, 1996 $ 11.00 $ 7.125
December 31, 1996 $ 12.375 $ 8.75
March 31, 1997 $ 13.875 $ 9.25
June 30, 1997 $ 11.125 $ 7.25
September 30, 1997 $ 9.50 $ 7.50
December 31, 1997 $ 7.6875 $ 2.625
On March 25, 1998, the closing quotation for the common stock on NNM was
$2.8125. As reflected by the high and low bids on the foregoing table, the
trading price of the common stock of the Company can be volatile with dramatic
changes over short periods. The trading price may reflect market reaction to
the perceived applications of the Company's technology, the potential products
that may be based on that technology, the direction and results of research and
development efforts, and many other factors. Investors are cautioned that the
trading price of the common stock can change dramatically based on changing
market perceptions that may be unrelated to the Company and its activities.
As of March 25, 1998, there were 12,524,589 shares of common stock issued
and outstanding, held by approximately 406 shareholders of record.
The Company has not paid dividends with respect to its common stock. The
Company presently has 3,500 shares of its 1998 Series A Preferred Stock issued
and outstanding which prohibit the payment of dividends on the common stock if
the annual dividend of $40 per share of preferred stock is in arrears. The
Company's line of credit agreement prohibits the payment of dividends if the
Company is in violation of its loan covenants or otherwise in default under the
agreement. Other than the foregoing, there are no restrictions on the
declaration or payment of dividends set forth in the articles of incorporation
of the Company or any other agreement with its shareholders or creditors.
Management anticipates retaining any potential future earnings for working
capital and investment in growth and expansion of the business of the Company
and does not anticipate paying dividends on the common stock in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data were derived
from the Consolidated Financial Statements of the Company. In January 1997, the
Company changed its fiscal year end from June 30 to December 31 effective
December 31, 1996. The Consolidated Financial Statements of the Company for the
fiscal year ended December 31, 1997, for the six months ended December 31, 1996,
and for the fiscal years ended June 30, 1996, 1995, 1994, and 1993, have been
audited by independent certified public accountants. The Consolidated Financial
Statements of the Company for the year ended December 31, 1996, are unaudited;
however, in the Company's opinion, such statements reflect all adjustments,
consisting only of normal recurring items, necessary for a fair presentation of
the financial position and results of operations of the Company for such period.
The selected financial data below should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto and "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
STATEMENT OF OPERATIONS DATA
Six Months
Ended
December
Year Ended December 31, 31, Year Ended June 30,
------------------------- ------------ ----------------------------------------------------------
1997(1) 1996 1996 1996(2) 1995(4) 1994(3)(4) 1993
---------- ---------- ---------- ---------- ---------- ----------- ----------
(unaudited)
Net sales $ 8,313,328 $ 8,992,614 $ 4,889,280 $ 8,255,607 $6,515,830 $5,137,638 $6,180,082
Cost and operating
expenses
Cost of sales $ 6,074,883 $ 4,469,351 $ 2,177,304 $ 3,407,613 $1,916,413 $1,718,769 $2,553,105
Research and
Development $ 4,860,993 $ 3,055,705 $ 1,734,911 $ 2,149,384 $ 708,679 $ 834,520 $ 868,957
Selling, general,
and administrative $ 6,019,282 $ 4,643,721 $ 2,534,643 $ 3,922,976 $3,131,938 $2,863,074 $2,374,707
Unusual and Non-
recurring charges $ 5,937,355 - - - - - -
Operating profit (loss) $(14,579,185) $(3,176,163) $(1,557,578) $(1,224,366) $ 758,800 $ (278,725) $ 383,313
Other income
(expense) $ (238,626) $ (393,936) $ (86,342) $ (481,882) $ (300,289) $ (162,511) $ (252,496)
Income (loss) from
continuing operations $(14,817,811) $(3,570,099) $(1,643,920) $(1,706,248) $ 458,511 $ (441,236) $ 130,819
Basic Earnings (loss)
from continuing
operations per
common share $ (1.29) $ (0.38) $ (0.16) $ (0.21) $ 0.08 $ (0.08) $ 0.02
BALANCE SHEET DATA
At December 31, At June 30,
--------------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
Total assets $12,195,430 $19,906,521 $19,769,028 $11,579,667 $11,011,119 $10,300,253
Long-term obligations $ 1,275,512 $ 1,282,894 $ 1,136,006 $ 1,213,331 $ 1,078,073 $ 827,623
Cash dividends
per common share $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
[FN]
(1) For the year ended December 31, 1997, there are unusual and nonrecurring
charges of $5,937,355 ($0.52 per share) included in operating loss and in
loss from continuing operations. These unusual and nonrecurring charges
related to the restructuring of the Company and certain impairment losses
recognized in the fourth quarter of 1997. (See Note B to Consolidated
Financial Statements.) Exclusive of these unusual and nonrecurring
charges, operating loss and loss from continuing operations for the year
ended December 31, 1997, would have been $8,641,830 and $8,880,456,
respectively.
(2) Effective October 27, 1995, the Company acquired Sensar Corporation in
a transaction accounted for as a purchase.
(3) During the quarter ended March 31, 1994, the Company acquired
LarsonoDavis, Ltd., in a transaction accounted for as a purchase.
(4) During the years ended June 30, 1995 and 1994, the Company
discontinued the operations of its Airport Noise Monitoring
Business and its Software Licensing Business, respectively. The
results of these operations have been segregated from continuing
operations in the Consolidated Statements of Operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes contained herein.
RECENT DEVELOPMENTS
The Company has historically been engaged in designing and manufacturing
precision acoustical and vibration instrumentation. Beginning in 1994 and
continuing to the present, the Company has acquired the rights to a number of
core technologies and has dedicated significant time, effort, and expense to a
research and development effort to create products designed for the scientific
instrumentation industry. In November 1997, the board of directors appointed
Andrew C. Bebbington as new chief executive officer of the Company. The board
believes that the new chief executive officer can reverse the severe losses of
the Company through a combination of restructuring and redirection of priorities
and can lead the Company into the next stage of its development; the
finalization of products, establishment of standardized manufacturing, and
market penetration for existing and developing products. In connection with the
appointment of Mr. Bebbington, Brian G. Larson, a co-founder of the Company and
the former chief executive officer, resigned. In addition, Larry J. Davis, a
co-founder of the Company and the vice-president of product development, and Dan
J. Johnson, a vice-president and former chief financial officer of the Company
also resigned. Each of the former executives also resigned their position on
the board of directors of the Company. In connection with their resignations,
these former executives entered into termination agreements with the Company, in
lieu of cancellation of their employment agreements, which provided for, among
other things, the issuance of an aggregate of 200,000 shares of common stock,
the surrender of options to acquire an aggregate of 1,425,000 shares of common
stock at prices ranging from $4.25 to $7.00 per share, and three months of
severance pay. Mr. Larson and Mr. Johnson provided consulting services to the
Company and the new chief executive officer for a 60-day transition period
following their resignations, and Mr. Davis has entered into an employment
arrangement with the Company to provide his services as a scientist and engineer
in connection with the ongoing development of the Company's technologies.
Mr. Bebbington, with the strong endorsement of the outside board members,
immediately undertook an evaluation of all aspects of the Company's operations,
research and development projects, sales and marketing approaches, product
offerings, personnel and management, contractual arrangements, and overall cost
structure. As a result, the new chief executive officer recommended and the
board of directors approved in December 1997 additional restructuring steps and
certain changes in the strategic direction of the Company. This resulted in a
reduction of personnel, the cessation of certain peripheral business activities,
a renewed focus on certain research and development projects, and a de-emphasis
or abandonment of other projects. These restructuring activities and certain
other events in the fourth quarter of 1997 have resulted in unusual and
nonrecurring charges to the Statement of Operations for the year ended December
31, 1997 in the aggregate amount of $5,937,355. (See Note B to the Consolidated
Financial Statements.)
Largely as a result of the change in strategic direction, certain
inventories have been rendered obsolete or overstocked. Accordingly, a write
down of inventory in the amount of $614,000 was recognized in the fourth
quarter of 1997. In addition, the Company recognized other adjustments and
significant expenses in the fourth quarter of 1997. The most significant of
these related to increases in the estimated provision for warranty work,
adjustments to inventories related to the absorption of labor and overhead
into cost of sales, and the reversal of the sales revenue for two instruments
pending final acceptance by the customer. Other material expenses recorded
in the fourth quarter in excess of normal operating expenses include
significant costs incurred towards the development of the TOFMS and the SFC
products and costs associated with the recruitment and relocation of the
new chief executive officer.
OVERVIEW
Over the course of the last four years, the Company has acquired the rights
to a number of technologies from Brigham Young University ("BYU"), either
directly from BYU or indirectly through its acquisition of Sensar. These
technologies have placed the Company in a position to develop a number of
sophisticated analytical instruments in addition to its historical acoustical
and vibration based business. The Company has also entered into a license
agreement with Lucent Technologies, Inc. (formerly Bell Labs), in which it
acquired the sole rights to technology developed by Lucent.
In order to accomplish its goals, the Company initiated research and
development plans designed to convert the underlying technologies into
commercial products. The Company currently has one commercial product available
based on these acquired technologies, its time of flight mass spectrometer
("TOF2000") and has just introduced beta models of its Jaguar mass spectrometer
and its SFC instrument. In addition, the Company continues to introduce
acoustic and vibration products and has made significant advances toward
additional products. However, there have been unanticipated delays in the
finalization of many of these products. The Company has just recently begun
commercial production of its Model 824 analyzer and does not expect commercial
production of the Jaguar product until the second quarter of 1998, both of which
were originally scheduled for the first quarter of 1997. The Company does not
anticipate that there will be a significant impact on its revenues until after
these and other products the Company is working on have been introduced and have
established market acceptance. While management of the Company continues to
believe, and is committed to, develop a range of superior products designed to
meet the needs of significant markets, the products currently being developed by
the Company are designed for sophisticated applications, and there can be no
assurance that the Company will be successful in its development and marketing
efforts or that alternative technologies may not be developed by some other
entity that provide a more advantageous solution to the needs of the various
industries targeted by the Company. If the Company is unable to successfully
develop the targeted products or the development of such products continues to
be delayed, the Company's ability to obtain the necessary financing to continue
its research and development program may be adversely affected.
The Company is presently unable to fund its increased research,
development, and other activities from operations and has sought and obtained
equity financing, primarily from private placements to a small number of private
investors, in order to meet these costs. This capital has been and is currently
being used for various purposes, including further research and development
activities, costs associated with the market introduction of new key products,
and general operations. The most recent equity placement by the Company was for
gross proceeds of $3.5 million completed in February 1998. Assuming that the
Company can successfully launch its proposed new products and that they are
sufficiently accepted in the market to permit a substantial increase in the
Company's revenues during 1998, the Company would anticipate that the proceeds
from this private placement will provide adequate capital to meet its projected
requirements through the end of fiscal 1998. But in the event that such
products do not produce significant increases in revenues during 1998, the
Company will continue to be reliant on obtaining outside financing to fund its
operations in 1998. If this is the case, there can be no assurance as to the
Company's ability to obtain such financing or, if available, that such financing
can be obtained on terms favorable to the Company.
RESULTS OF OPERATIONS
Comparison of Years ended December 31, 1997, and 1996
The Company changed its fiscal year end from June 30 to December 31,
effective December 31, 1996. The Company's audited financial statements cover
the six months ended December 31, 1996, and the year ended June 30, 1996.
Financial information for the year ended December 31, 1996, is unaudited and has
been derived from these two periods and is presented for comparative purposes
only.
Net Sales
Net sales for the years ended December 31, 1997, and 1996, were $8,313,328
and $8,992,614, respectively. This represents a decrease of $679,286, or 7.6%,
for 1997 as compared to 1996. The overall decrease is principally the result of
a decrease in sales in the acoustical and vibration product families. Sales of
acoustical and vibration products for the year ended December 31, 1997, reflect
decreases from last year primarily due to the delayed introduction of certain
new products. The Company originally anticipated that these new acoustical
products would be available at the beginning of 1997. The introduction of the
Company's Model 814 and DSP 80 Series products have only recently begun shipping
and the introduction of the Model 824 and associated options have been delayed
with volume shipments starting in the first quarter of 1998. In the interim,
sales of the Company's prior products declined. Management expects that these
recent introductions will cause acoustical and vibration product sales to return
to and exceed historical levels, although no assurance can be made that such
expectation will be realized.
Current year revenue from the Company's chemical analysis instruments was
approximately the same as in the prior year. The Company currently markets its
TOF2000 to the semi-conductor industry through SAES. Under the terms of the
marketing agreement, SAES was obligated to sell a minimum of nine units in 1997
in order to maintain its exclusive rights, a target that was not met. Sales of
the TOF2000 through SAES have historically been hampered by the parties'
inability to mutually agree on acceptable performance standards for the
instrumentation and the Company has had difficulty in meeting certain heightened
specifications required by certain new end users. However, the most recent
instruments shipped by the Company to SAES customers have been and are being
subjected to extensive testing under the supervision of SAES and others, and the
Company believes that many of the open specification issues have been or are
being resolved. At December 31, 1997, the Company has reversed revenue
recognition in the amount of approximately $430,000 on two units pending
resolution of certain issues and subsequent customer acceptance shipped and that
was originally recognized in the third quarter.
During the year ended December 31, 1997, export sales represented 52% of
net sales compared to 49% for the year ended December 31, 1996. The Company's
export sales are billed, collected, and denominated in U.S. dollars, other than
its sales through its subsidiary, LTD, which are in British Pounds Sterling.
The impact of foreign currency translation adjustments has not historically been
significant, aggregating approximately $65,000 at December 31, 1997. The
Company does not consider its foreign currency risks to be significant and has
not taken a position in the currency markets or derivatives in an attempt to
hedge any risk that might exist.
Cost of Sales
Cost of sales for the year ended December 31, 1997 was $6,074,883, or 73.1%
of net sales, compared to $4,469,351, or 49.7% of net sales for the year ended
December 31, 1996. The increase in 1997 of cost of sales as a percentage of net
sales is due to a variety of significant factors, including: (1) the absorption
of higher fixed manufacturing expenses and personnel costs on decreased acoustic
and vibration sales in 1997; (2) costs related to meeting heightened
specifications of the TOF2000 product, as well as certain other provisions; (3)
increases in estimated provisions for excess and obsolete inventories,
principally associated with the restructuring of operations and changes in
strategic direction of the Company; and (4) increases in the Company's estimated
provisions for warranty work. The Company anticipates that as the manufacturing
process of its new products becomes standardized, costs of goods sold as a
percentage of net sales will return to 1996 levels. However, such a result will
depend on the Company's ability to standardize the manufacturing process and
control costs for its newly developed products, for which no assurance can be
given.
Selling, General, and Administrative
Selling, general, and administrative expenses increased to $6,019,282, or
72.4% of net sales, for the year ended December 31, 1997, compared to
$4,643,721, or 51.6% of net sales, for the year ended December 31, 1996. The
increase in the dollar amount of selling, general, and administrative expenses
was due to several factors, including increased costs associated with the
pursuit of strategic marketing and research alliances; costs associated with the
implementation of a new electronic data processing system; costs associated with
holding a stockholders' meeting in 1997, including the preparation of the annual
report and proxy statement; and increased costs associated with other corporate
and marketing activities. The increase is also due to the Company incurring
costs, including the cost of additional employees necessary to establish the
infrastructure to support the Company's anticipated growth, and the recruitment
and relocation costs of the new chief executive officer. The new chief
executive officer has implemented certain cost control procedures, reduced
overhead, and restructured operations to reduce nonessential spending in this
area. However, it is not anticipated that selling, general, and administrative
expenses can be reduced to an acceptable percentage of revenues unless and until
sales increase substantially. Such increase is dependent on the successful
introduction of new products and increased product demand for both new and
existing products, which is the Company's highest priority. However, there can
be no assurance that the Company will be successful in accomplishing such
goals.
Research and Development
Research and development expenses increased to $4,860,993, or 58.5% of net
sales, for the year ended December 31, 1997, compared to $3,055,705, or 34.0% of
net sales, for the year ended December 31, 1996. The increase in the amount of
research and development expenses over the prior period, as well as over
historical levels, is due to the Company's continuing commitment to the research
and development of new products from technologies acquired in recent years. The
increased expenses principally relate to the employment of additional scientists
and engineers, costs associated with materials and supplies used in the
prototype development process, and services from outside professionals. The new
chief executive officer has implemented certain cost control procedures, reduced
overhead, and restructured operations to reduce nonessential spending in this
area. However, it is anticipated that research and development costs will
continue to exceed historical levels as a percentage of net sales at least until
the development of new products is completed and significant sales levels of the
new products are achieved. Historical levels of research and development costs
as a percentage of sales for the fiscal years ended June 30, 1991 to 1995,
averaged approximately 11% of sales.
Unusual and Nonrecurring Charges
During the fourth quarter of 1997, the Company recognized unusual and
nonrecurring charges in the amount of $5,937,355. The charges relate to
restructuring charges of $3,197,121 associated with the termination of former
management and employees, exit costs for certain activities, and the write-down
of assets as a result of changes in strategic direction of the Company. For a
further description of the restructuring activities, see the discussion under
"Recent Developments" above. The Company also recognized impairment losses of
$2,740,234 in the fourth quarter of 1997, related to the write-down of the
carrying value of certain assets. See Note B to the Consolidated Financial
Statements.
Non-cash portions of the unusual and nonrecurring charges were
approximately $5,615,000.
Comparison of Six Months ended December 31, 1996, and 1995
Net Sales
Net sales from continuing operations for the six months ended December 31,
1996, and 1995, were $4,889,280 and $4,152,273, respectively. This represents
an increase of $737,007, or 17.7%, for 1996 as compared to 1995. The
acquisition of Sensar occurred October 27, 1995. As such, the operations of
Sensar are included for the entire six month period ended December 31, 1996,
while the operations of Sensar were only included for approximately two months
of the six-month period ended December 31, 1995. The increase in sales is
principally due to increased revenue from Sensar products of approximately
$627,000.
During the six months ended December 31, 1996, export sales experienced a
significant increase as a percentage of total sales, to 57% of sales. This
growth was due to a continuing increase in sales to the Pacific Rim and
increases in sales in Europe, compared to the prior period. Domestic sales, on
an annualized basis, declined compared to the prior year, but have increased
compared to 1995 and 1994.
Cost of Sales
Cost of sales for the six months ended December 31, 1996, were $2,177,304,
or 44.5% of net sales, compared to $1,182,566, or 28.5% of sales, for the six
months ended December 31, 1995. This elevated level of cost compared to
historical levels continues principally due to high cost of materials, initial
production costs, and development costs associated with production of initial
Sensar products.
Selling, General, and Administrative
Selling, general, and administrative expenses increased as a percentage of
sales from 42.0% for the six months ended December 31, 1995, to 51.8% for the
corresponding period of 1996. The increase was due to several factors,
including increased audit, legal, and consulting fees, establishment of a new
European sales manager, and increased costs related to various corporate and
marketing activities.
Research and Development
For the six months ended December 31, 1996, research and development costs
were $1,734,911, or 35.5% of net sales, compared to $833,407, or 20.1% of net
sales, for the six months ended December 31, 1995. The increase over the prior
period, as well as increases above historical levels, is reflective of the
Company's continuing commitment to the development of new products.
Comparison of Years Ended June 30, 1996, and 1995
Net Sales
Net sales from continuing operations for the fiscal years ended June 30,
1996, and 1995, were $8,255,607 and $6,515,830, respectively. This represents
an approximate 27% increase in its acoustic and vibration instrumentation sales.
The increased sales were attributable to a general expansion of the underlying
market, and an increase in the unit sales of the Company's products.
The acquisition of Sensar on October 27, 1995, did not materially impact
the net sales for the year ended June 30, 1996, with approximately $607,000 in
revenue attributable to the Sensar operations during that period.
During 1996, export sales declined from 53% to 33% of total sales. This
decline was the result of decreased sales in Europe, but was also due to strong
sales increases domestically.
Cost of Sales and Operating Expenses
The Company's cost of sales and operating expenses of $3,407,613 in the
year ended June 30, 1996, and $1,916,413 in the year ended June 30, 1995,
increased as a percentage of sales from continuing operations to 41.3% from
29.4%. The increase in 1996 was due primarily to the high cost of materials,
initial production costs, and development costs associated with production of
initial Sensar products. Prior to the Company's acquisition, Sensar purchased
major electronics subsystems from a third party. The pricing structure was
based on the premise of a high price for a limited number of systems to provide
the manufacturer a way to recover development costs. Since the acquisition of
Sensar, the Company has designed a replacement subsystem which reduced the cost
of the electronics for this component by approximately 90%. Because of the use
of the remaining highly priced electronics subsystems in Sensar's inventory in
fiscal year June 30, 1996, the entire material and development costs were
expensed during the period.
Selling, General, and Administrative
Selling, general, and administrative expenses remained relatively constant
as a percentage of sales for the year ended June 30, 1996, compared to the year
ended June 30, 1995. Selling, general, and administrative expenses were
$3,922,976, or 47.5% of net sales, for the year ended June 30, 1996. This
represents a small decline when compared to the year ended June 30, 1995, when
selling, general, and administrative expenses were $3,131,938, or 48.1% of net
sales.
Research and Development
The Company is involved in a high-tech industry which demands constant
improvements and development of its instrumentation to remain technically
viable. Since its inception, the Company has dedicated significant operating
funds to research and development. For the five fiscal years June 30, 1991 to
1995, research and development expenses averaged approximately 11% of net sales
and in the year ended June 30, 1995, were $708,679, or approximately 10.9% of
net sales.
For the fiscal year ended June 30, 1996, research and development expenses
were $2,149,384, approximately 26.0% of net sales. This level of research and
development reflects management's commitment to develop new products to enhance
the revenue potential of the Company.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has relied on the sale of common stock as the
primary method to fund its working capital needs, operational losses, and
research and development efforts. During the year ended December 31, 1997, the
six months ended December 31, 1996, and the year ended June 30, 1996, the
Company used $5,122,057, $1,944,738 and $2,019,944, respectively, in operating
activities. The Company anticipates it will continue to rely on equity funding
in the near future to fund its operations. The Company received net proceeds
from the issuance of common stock, principally from the exercise of warrants and
options, in the net amount of $4,627,630 during the year ended December 31,
1997, $1,493,489 during the six months ended December 31, 1996, and $9,269,987
during the fiscal year ended June 30, 1996. Subsequent to December 31, 1997,
the Company has received approximately $400,000 from the exercise of warrants
and gross proceeds of $3,500,000 from the private placement of preferred stock
and warrants. The warrants issued in the most recent private placement give the
holders the right to purchase 700,000 shares of common stock at $4.50 per share
and the Company currently has outstanding warrants to acquire 2,100,167 shares
of common stock at prices ranging from $5.30 to $8.75 per share. There is no
obligation of the holders of these rights to exercise them and the exercise will
largely depend on the price of the Company's common stock in the public trading
market, as to which no assurance can be given. The Company does not anticipate
that the outstanding warrants will be exercised unless the trading price of the
Company's common stock exceeds the exercise price of the warrants at some time
in the future.
At December 31, 1997, the Company had total current assets of $6,160,440
and total current liabilities of $4,066,915, resulting in working capital of
$2,093,525 and a working capital ratio of 1.5:1. Included in total current
liabilities is the Company's revolving line of credit with a balance of
$1,198,766. Limitations on the borrowing base for this line of credit have
become so restrictive that it is not a significant source of reasonably priced
working capital, and consequently the Company has decided to terminate this line
of credit as of March 31, 1998. The Company will use a portion of its current
cash holdings for this purpose.
The Company has intangible assets totaling $3,100,447 principally related
to product technology acquisition costs. Periodically, the Company reviews the
recoverability of these assets by comparing the carrying value of individual
identifiable intangible assets to the undiscounted estimated future net cash
flows from current and anticipated products associated with each of these
assets. Estimates of future cash flows are based on current demand for existing
products; the progress toward commercialization of future products; and
anticipated demand for existing and future products based on the Company's
market analyses and evaluations with current and potential strategic marketing
partners. Management's estimates of future manufacturing costs and development
and marketing expenses are based on historical levels and/or industry norms. In
the course of the review of the Company's assets and strategic direction
undertaken by new management, approximately $1,650,000 in intangible assets were
written down during the fourth quarter of 1997. See discussion above under
"Recent Developments" and Note B to the Consolidated Financial Statements.
Although management believes its current estimates of recoverability of
intangible assets are reasonable, there is no assurance that actual future
results will not differ from current expectations. In the event of a change in
expectations, the carrying value or amortization period of the long-term asset
would be adjusted which would affect the Company's results of operations in the
period in which such adjustment occurred.
The Company's primary uses of cash for the year ended December 31, 1997,
were the funds used in operations as discussed above and the purchase of
property and equipment in the amount of $1,041,383. Management expects that in
the short-term, the primary use of cash will continue to be operations due to
the continued research and development activities, but also expects to use
approximately $1,200,000 to terminate its line of credit. In the opinion of
management, current cash balances, including proceeds from the exercise of
warrants and the private placement completed subsequent to year end, will
provide the Company with sufficient capital to fund its operations and
development plans for the 1998 calendar year. However, the Company's ability to
do so will depend on the successful introduction of new products so as to
substantially increase the Company's revenues during 1998. As conditions
permit, the Company intends to seek to establish a reasonably priced line of
credit with a financial institution. As new products are developed and
commercialized and product demand is achieved, management believes that its
long-term operating and capital requirements will be funded principally through
cash generated from operations, supplemented as necessary from equity or long-
term debt financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth immediately
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In January 1996, the Company changed its accountants from Peterson, Siler &
Stevenson (currently known as Pritchett Siler & Hardy, P.C.) to Grant Thornton
LLP. This change was approved by the board of directors of the Company.
The report of Peterson, Siler & Stevenson on the Company's financial
statements as of June 30, 1995, and the two years then ended did not contain an
adverse opinion, or a disclaimer of opinion, nor was its report qualified or
modified as to uncertainty, audit scope, or accounting principles, other than a
limitation as to the representation of the financials on a going concern basis.
During the engagement of Peterson, Siler & Stevenson, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if not
resolved to the satisfaction of Peterson, Siler & Stevenson, would have caused
it to make reference to the subject matter of the disagreements in connection
with its reports.
The Company was not advised by Peterson, Siler & Stevenson that internal
controls necessary for the Company to develop reliable financial statements did
not exist nor that information came to its attention that led it to no longer be
able to rely on management's representations or that made it unwilling to be
associated with the financial statements prepared by management. The Company
was not advised by Peterson, Siler & Stevenson of the need to expand
significantly the scope of the Company's audit, nor was the Company advised that
any information came to the attention of Peterson, Siler & Stevenson that on
further investigation may (i) materially impact the fairness or reliability of
either a previously issued audit report or the underlying financial statements,
or the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report, or (ii) cause Peterson, Siler & Stevenson to be unwilling to rely
on management's representations or be associated with the Company's financial
statements. The Company provided its former auditors, Peterson, Siler &
Stevenson with a copy of the foregoing disclosures. The Company has filed a
concurrence of the former auditors with the foregoing statements as an exhibit
to its reports filed with the Securities and Exchange Commission.
The Company did not consult Grant Thornton LLP prior to its appointment
regarding the application of accounting principles to a specific completed or
contemplated transaction, the type of audit opinion, or other accounting advice
that was considered by the Company in reaching a decision as to an accounting,
auditing, or financial reporting issue.
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name and age of each executive officer and director
of the Company, together with all positions and offices of the Company held by
each and the term of office and the period during which each has served:
Director and/or
Name Age Position and Office Held Executive Officer Since
-------------------- --- ------------------------ -----------------------
Andrew C. Bebbington 37 President and Chairman November 1997
of the Board
Jeffrey S. Cohen 37 Chief Operating Officer
and Director February 1998
William E. Hosker 59 Director March 1996
Gerard L. Seelig 71 Director June 1996
Craig E. Allen 46 Chief Financial Officer December 1996
A director's regular term is for a period of three years or until his
successor is duly elected and qualified. The terms of the board are staggered
so that one-third of the board is subject to election at each annual
shareholders' meeting. Andrew C. Bebbington and Jeffrey S. Cohen were appointed
to serve until the next annual meeting and election of directors; the current
term of William E. Hosker expires at the 1999 annual meeting and the current
term of Gerard L. Seelig expires at the 2000 annual meeting.
There is no family relationship among the current directors and executive
officers. The following sets forth brief biographical information for each
director and executive officer of the Company.
Andrew C. Bebbington, was appointed as a director and president of the
Company in November 1997. Mr. Bebbington was formerly president of Neslab
Instruments Inc. for a period of six years, as well as serving on the board of
directors of Life Sciences International PLC until its purchase by Thermo
Electron, Inc., in March 1997. Prior to this position, Mr. Bebbington served as
business development director of Life Sciences for a period of four years during
which time he was responsible for coordinating Life Sciences' rapid expansion
through acquisition. Mr. Bebbington is a graduate of the London School of
Economics and a Chartered Accountant. Mr. Bebbington served in the KPMG
consulting practice specializing in mergers, acquisitions, and other strategic
and financial planning activities.
Jeffrey S. Cohen, was appointed as a director of the Company in February
1998 and to serve as chief operating officer of the Company. Mr. Cohen was
formerly a vice-president at Orion Research, a subsidiary of Thermedics
Corporation, itself a subsidiary of Thermo Electron Inc. Prior to this
position, Mr. Cohen has held a variety of positions encompassing senior
management roles in engineering, operations, and marketing for several different
organizations. He holds a masters degree from the University of Lowell in
computer engineering, and an undergraduate degree in microbiology from The
University of Massachusetts at Amherst. He also holds an MBA from Northeastern
University.
William E. Hosker, was appointed as a director and a member of the audit
committee of the Company in March 1996. Mr. Hosker was formerly employed by
Hercules, Inc., from 1960 to 1995. Mr. Hosker served in various capacities with
Hercules, Inc., culminating in his positions as corporate vice-president of
International Operations, Subsidiaries, and Ventures from 1987 to 1990 and vice-
president and general manager of the Resins Group from 1990 to 1995. Mr. Hosker
is the president and owner of STAT Associates, Inc., a business consulting firm.
Mr. Hosker attended the Amos Tuck Business School at Dartmouth University
studying strategic planning and financial analysis and the Darden Business
School of the University of Virginia studying executive marketing. He obtained
a bachelor of arts degree in biochemistry from Bowdoin College in 1960.
Gerard L. Seelig, was appointed as a director of the Company and a member
of the audit committee in June 1996. Mr. Seelig currently serves on the board
of directors of a number of privately-held companies and has taught as a
visiting professor at Columbia Graduate School of Business and Rutgers Graduate
School of Management. Prior to his retirement, Mr. Seelig served as executive
vice-president of Allied-Signal, Inc., and as president of its Electronics and
Instrumentation Sector from 1983 to 1988. Prior to joining Allied-Signal, Inc.,
Mr. Seelig spent 12 years at ITT in senior executive positions. Prior to that,
Mr. Seelig worked for ten years at Lockheed Corporation where he was corporate
vice-president and president of Lockheed Electronics Company. Mr. Seelig
received a masters degree in industrial management from New York University in
1954 and a bachelors degree in electrical engineering from Ohio State University
in 1948.
Craig E. Allen, was appointed chief financial officer of the Company in
December 1996. Mr. Allen was formerly controller of CUSA Technologies, Inc.,
from September 1994 to December 1996. Prior to that, Mr. Allen was a senior
audit manager with the accounting firm of Grant Thornton LLP where he had been
employed since 1978. Mr. Allen is a certified public accountant and received a
masters degree in accounting from Brigham Young University in 1978.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The report of Nathan West on Form 4 for the month of December 1997
reporting the award of 480 shares of common stock was filed late. William E.
Hosker did not file a report for the month of October 1997, regarding the grant
of shares to him for consulting services. (See "ITEM 11. EXECUTIVE
COMPENSATION: Compensation of Directors.") Brian G. Larson, the former chief
executive officer of the Company, did not file a report for the month of August
1997 regarding the exercise of certain compensatory options held by him.
Other than the foregoing, the Company believes that all reports required by
section 16(a) for transactions in the year ended December 31, 1997, were timely
filed.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and its
subsidiaries for the year ended December 31, 1997, the six months ended December
31, 1996, and the fiscal years ended June 30, 1996 and 1995, to the chief
executive officer of the Company and the other executive officers of the Company
who received compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------
Annual Compensation Awards Payoffs
------------------------------- -------------------- --------
Other
Annual All Other
Compen- Restricted LTIP Compen-
Name and sation Stock Options/ Payouts sation
Principal Position Year Salary($) Bonus($) ($)(1) Awards($) SARs(#) ($) ($)
- ------------------------ --------- --------- ---------- ------- --------- ------- ------ ----------
Andrew C. Bebbington, 12/31/97(2) $ 31,250 $ 0 $ 575 $ 0 1,000,000 $ 0 $ 0
CEO and Chairman
of the Board
Brian G. Larson, 12/31/97 $196,001 $ 0 $18,416 $ 0 0 $ 0 $1,165,643(5)
Former CEO and 12/31/96(3) $106,909 $ 0 $ 9,442 $ 0 0 $ 0 $ 0
Chairman of the Board 06/30/96 $198,779 $ 0 $ 4,500 $ 0 500,000(4) $ 0 $ 0
06/30/95 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
Larry J. Davis, 12/31/97 $211,687 $ 0 $14,896 $ 0 0 $ 0 $ 73,143(5)
Former Vice-President 12/31/96(3) $106,909 $ 0 $ 9,218 $ 0 0 $ 0 $ 0
06/30/96 $198,779 $ 0 $ 4,500 $ 0 500,000(4) $ 0 $ 0
06/30/95 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
Dan J. Johnson, 12/31/97 $147,008 $ 0 $15,671 $ 0 0 $ 0 $ 112,350(5)
Former Vice-President 12/31/96(3) $ 80,253 $ 0 $ 6,085 $ 0 0 $ 0 $ 0
and Secretary/Treasurer 06/30/96 $160,407 $ 0 $ 4,500 $ 0 425,000(4) $ 0 $ 0
06/30/95 $129,566 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
[FN]
(1) These amounts reflect the benefit to the named executive officers of
automobiles provided to such officers by the Company and amounts paid
by the Company for health, disability, and life insurance.
(2) Mr. Bebbington accepted the positions of chief executive officer and a
member of the board of directors effective November 17, 1997. Mr.
Bebbington was not previously an employee of the Company. The foregoing
table reflects amounts paid, awarded, or accrued for Mr. Bebbington from
November 17, 1997, to December 31, 1997.
(3) This reflects amounts paid, awarded, or accrued for the six month
transition period ended December 31, 1996.
(4) These options were cancelled in November 1997 pursuant to the provisions
of the termination agreements entered into between the former executive
officers and the Company.
(5) These amounts reflect the value of termination payments to former officers
and directors, including the value of common stock received, plus
severance and accrued vacation paid in 1997.
The following table sets forth the information concerning the options
granted to the named executive officers during the year ended December 31, 1997.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual
Individual Grants Rates of Stock Appreciation for Option Term
- ------------------------------------------------------------------------ --------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number of Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees During Base Price Expiration 5% 10%
Name Granted (#) Fiscal Year ($/share) Date ($) ($)
- ------------------------------------------------------------------------ --------------------------------------------
Andrew C. Bebbington 1,000,000 83.2% $5.75(1) (2) $2,157,591 $4,994,417
[FN]
(1) The option was granted at $5.75 per share but, if exercised at a time at
which the common stock of the Company is trading at less than $7.50,
options with respect to 500,000 shares could be exercised at the higher
of 80% of the trading price or $3.60 per share. Subsequent to December
31, 1997, this option was terminated in favor of an option to purchase
1,000,000 shares of common stock, of which the right to exercise is
immediately vested with respect to 250,000 shares at $3.60 per share;
the right to exercise will vest with respect to 83,333 shares on each
of December 31, 1998, 1999, and 2000, at $3.60 per share; and the right
to exercise will vest with respect to 166,667 shares on each of December
31, 1998, 1999, and 2000, at $4.50 per share, $5.50 per share, and $6.50
per share, respectively.
(2) The option expires with respect to each block of stock five years
subsequent to the vesting of the right to exercise such block of stock.
The right to exercise vests with respect to 250,000 shares on November
17, 1997, and, subject to certain performance criteria, with respect to
250,000 shares on each of December 31, 1998, 1999, and 2000.
The following table sets forth the information concerning the options
exercised by the named executive officers during the year ended December 31,
1997, and the value of unexercised options as of December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------
Brian G. Larson 220,000 $1,975,000 30,000/0 $0/$0
Larry J. Davis 30,000 $288,750 220,000/0 $119,438/$0
Dan J. Johnson 30,000 $262,500 246,365/0 $181,536/$0
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with its chief executive
officer (CEO) and chief operating officer (COO) as of November 1997 and February
1998, respectively. These agreements have initial terms that expire December
31, 2000, and February 2, 1999, respectively, but renew automatically so there
is always an unexpired one-year term. The employment agreements require
devotion of the full business time of the executive to the Company, prohibit the
executive from competing in any fashion with the Company during the term of the
agreement and for one year subsequent to termination, and prohibit disclosure or
use by the executive of trade secrets or other confidential information of the
Company for a period of three years subsequent to termination.
The employment agreements provide for annual compensation of $250,000 and
$140,000 for the CEO and COO, respectively, plus certain guaranteed bonuses for
1998 only. Under the terms of the employment agreements, the salary for Mr.
Cohen is subject to an annual increase as may be determined by the board of
directors or the compensation committee of the Company. Bonuses in future years
may be paid at the discretion of the board of directors or compensation
committee based on performance.
In connection with the execution of the employment agreements, the CEO was
granted options to acquire 1,000,000 shares of common stock with an exercise
price of between $3.60 and $6.50 per share. The COO was granted options to
acquire 300,000 shares of common stock with an exercise price of $2.99 per
share. The right to exercise such options vest in the executive with respect to
25% of the shares as of the date of grant and an additional 25% each year
thereafter. The vesting of 112,500 of the options held by Mr. Cohen are based
on him meeting certain performance criteria established by the Company in future
years. The options expire, if not previously exercised, five years after
vesting.
In the event that the executive is disabled or dies during the term of his
employment agreement, he is entitled to the better of (i) the benefits under any
disability policy maintained by the Company; or (ii) his base salary for a
period of 90 days.
The employment agreements can be terminated by the Company for cause by
showing that the executive has materially breached the terms of the employment
agreement, that the executive, in the reasonable determination of the board of
directors, has been grossly negligent or engaged in material willful or gross
misconduct in the performance of his duties, or that the executive has committed
or been convicted of fraud, embezzlement, theft, dishonesty, or other criminal
conduct against the Company. On the sale or transfer of all or substantially
all of the assets of the Company, the merger of the Company into another entity,
the termination of the business of the Company, a change in control of the
Company, or the continued breach by the Company of the employment agreement
after 20 days written notice, the executive has the right to terminate the
employment agreement. In the event of a termination of the employment agreement
other than by the Company for cause, the executive will receive an amount equal
to the amount of salary that would otherwise accrue to executive during the
remaining employment period, except that in the case of the CEO, the amount will
not be less than his base salary for a one-year period. In addition, the
options held by the executive that had not previously vested, except those that
are performance based, would immediately vest and become exercisable.
The Company agrees to indemnify the executives and hold them harmless from
liability for acts or decisions made by the executive in connection with
providing services to the Company to the greatest extent permitted by law. The
Company has an obligation to use its best efforts to obtain officer's and
director's insurance covering the executive. Each of the executives agree to
indemnify the Company and hold it harmless from liabilities arising from their
acts or omissions in violation of their duties under the employment agreements
that constitute fraud, gross negligence, or willful and knowing violations.
COMPENSATION OF DIRECTORS
The Company compensates its outside directors for service on the board of
directors by payment of a monthly fee of $1,000, payment of $2,000 for each
board meeting attended, and reimbursement of expenses incurred in attending
board meetings. The Company does not separately compensate its board members
who are also employees of the Company for their service on the board. The
Company adopted its 1996 Director Stock Option Plan pursuant to which each of
the five then current directors received an option to acquire 200,000 shares of
common stock of the Company at an exercise price of $7.00 per share. The right
to exercise this option vests with respect to 25% of the shares as of the date
of grant and an additional 25% of the shares on each succeeding anniversary of
the grant provided that the individual holder is then a director of the Company.
The exercise price of these options was fixed at the closing price of the
Company's common stock of $7.00 per share on May 8, 1996, the day immediately
preceding the adoption of the plan by the board of directors of the Company.
The options granted to Brian G. Larson, Larry J. Davis, and Dan J. Johnson were
subject to the approval of the plan by the shareholders of the Company, which
approval was obtained at the June 1997 annual meeting. The options granted to
Messrs. Larson, Davis and Johnson were later cancelled in connection with their
termination agreements. Because of a consulting agreement with STAT Associates,
Inc., Mr. Hosker waived his monthly fee of $1,000 through September 30, 1996.
(See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
In 1997, the board of directors appointed Mr. Hosker to act on behalf of
the board in pursuing potential strategic relationships with companies in the
petrochemical and chemical industries. This required a significant time
commitment from Mr. Hosker over a period of several months. The board
compensated Mr. Hosker for his time by delivering 15,135 shares of the
Company's common stock with a then current value of $95,540.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company does not have a compensation committee. Consequently, the
entire board, other than the particular individual executive officer involved,
participates in the setting of compensation for senior management. Prior to
November 14, 1997, when they resigned from all positions with the Company, the
executive officers who also served as directors were Brian G. Larson, Larry J.
Davis, and Dan J. Johnson. On November 17, 1997, Andrew C. Bebbington became
the Company's chief executive officer and was appointed to the board of
directors. Recently, Jeffrey Cohen has been hired as the Company's chief
operating officer and appointed as a member of the board.
Subsequent to their termination as employees of the Company, Mr. Larson and
Mr. Johnson exercised options to acquire 30,000 shares and 246,365 shares of
common stock, respectively. Mr. Larson delivered a promissory note to the
Company in the principal amount of $109,313 in connection with the exercise
of his options and Mr. Johnson delivered a promissory note in the principal
amount of $616,878 in connection with the exercise of his options. Mr.
Johnson had also earlier delivered a promissory note in the principal amount of
$69,375 in connection with his exercise of an option to acquire 30,000 shares
in June 1997. Each of the notes provide for interest of 8% to 8.5% per annum
and payment in three annual installments of interest and one-third of th
principal amount.
Mr. Larson and Mr. Johnson also agreed to reimburse the Company for an
aggregate of $247,766 in trust fund deposits made on their behalf with the
Internal Revenue Service in connection with 200,000 shares of common stock
issued to them pursuant to their termination agreements. The Company has
withheld delivery of 68,352 shares of common stock to secure this obligation.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth, as of March 25, 1998, the number of shares
of the Company's common stock, par value $0.001, held of record or beneficially
by each person who held of record or was known by the Company to own
beneficially, more than 5% of the Company's common stock, and the name and
shareholdings of each officer and director and of all officers and directors as
a group.
Amount and Nature of Ownership
--------------------------------------
Sole Voting and Percent of
Name of Person or Group Investment Power(1) Class(2)(3)
- -------------------------------- ------------------- -----------
Principal Shareholders:
Larry J. Davis(4) Common Stock 735,338 5.9%
10455 North Edinburgh Options 220,000 1.7%
Highland, Utah 84003 -------
Total 955,338 7.5%
Mellon Bank Corporation(5) Common Stock 775,000 6.2%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Named Executive Officers
and Directors:
Andrew C. Bebbington(6) Common Stock 0 0%
Options 1,000,000 7.4%
---------
Total 1,000,000 7.4%
Jeffrey S. Cohen(7) Common Stock 1,000 0%
Options 300,000 2.3%
-------
Total 301,000 2.3%
William E. Hosker(8) Common Stock 27,135 0.2%
Options 30,000 0.2%
------
Total 57,135 0.5%
Gerard L. Seelig(9) Common Stock 0 0%
Options 200,000 1.6%
-------
Total 200,000 1.6%
All Officers and Directors Common Stock 31,957 0.3%
as a Group (6 Persons) Options 1,552,500 11.0%
---------
Total 1,584,457 11.3%
[FN]
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record, and each shareholder has sole
voting and investment power.
(2) The percentages shown are based on 12,524,589 shares of common stock of
the Company issued and outstanding as of March 25, 1998.
(3) The percentage ownership for the options held by the indicated individuals
is based on an adjusted total of issued and outstanding shares giving
effect only to the exercise of each individual's options.
(4) Mr. Davis was a co-founder of the Company and a prior executive officer
and director. Mr. Davis resigned from these positions in November 1997.
Mr. Davis is currently an employee of the Company.
(5) These shares are held by Mellon Bank Corporation and its subsidiaries,
Mellon Bank, N.A. and The Dreyfus Corporation. The number of shares
owned reflects the holdings of these entities as of January 20, 1998,
the latest date for which the Company has information.
(6) The options held by Mr. Bebbington were granted to him in connection with
his agreement to assume the positions of chief executive officer and a
director of the Company. Options with respect to 250,000 shares are
currently vested. The remainder will vest with respect to 250,000 shares
on each of December 31, 1998, 1999, and 2000. The exercise price of the
options ranges from $3.60 per share to $6.50 per share.
(7) The options held by Mr. Cohen were granted to him in connection with his
agreement to become the chief operating officer and a director of the
Company. Options with respect to 75,000 shares are currently vested.
Options with respect to 37,500 shares will vest on each of December 31,
1998, 1999, and 2000. Options with respect to an additional 37,500
shares will vest on the same dates if Mr. Cohen meets certain performance
criteria established by the Company in the future. The options have an
exercise price of $2.99 per share.
(8) The number of shares indicated for Mr. Hosker includes 2,500 shares held
by his wife. The options held by Mr. Hosker have an exercise price of
$3.00 per share and were issued in exchange for the cancellation of
options to acquire 200,000 shares at $7.00 per share granted to
Mr. Hosker when he became a member of the board of directors.
(9) The option held by Mr. Seelig was granted to him in connection with his
joining the board of directors. The option vests with respect to 50,000
shares annually and 100,000 shares are currently vested. The option has
an exercise price of $7.00 per share.
1998 SERIES A PREFERRED STOCK
In February 1998, the Company designated its 1998 Series A Preferred Stock
consisting of 3,500 shares, par value $0.001 per share. All of these shares
were issued, together with warrants to acquire common stock of the Company at an
exercise price of $4.50 per share (the "$4.50 Warrants"), in a private placement
to a limited number of individuals. The 1998 Series A Preferred Stock bears a
dividend of 4% per annum. The shares of 1998 Series A Preferred Stock and
accrued dividends are convertible at any time subsequent to 90 days after
issuance into that number of shares calculated by dividing the sum of $1,000
plus any accrued but unpaid dividends by an amount equal to the lower of (i)
$3.60, or (ii) 85% of the average of the closing price for the common stock for
the ten trading days immediately preceding the notice of conversion.
The following table sets forth, as of March 25, 1998, the number of shares
of the 1998 Series A Preferred Stock held of record or beneficially by each
person who held of record or was known by the Company to own beneficially, more
than 5% of the Company's 1998 Series A Preferred Stock. None of such
shareholders would hold 5% or more the Company's common stock if the 1998 Series
A Preferred Stock was converted based on the closing price for the Company's
common stock of $2.8125 on March 25, 1998, and the $4.50 Warrants held by such
individuals were exercised.
Amount and Nature of Ownership
--------------------------------------
Sole Voting and Percent of
Name of Person or Group Investment Power(1) Class(2)(3)
- -------------------------------- ------------------- -----------
Principal Shareholders:
The Ace Foundation Preferred Stock 595 17.0%
$4.50 Warrants 119,000
BHSY Special Projects Preferred Stock 306.25 8.8%
$4.50 Warrants 61,250
Charles Kushner Preferred Stock 490 14.0%
$4.50 Warrants 98,000
Murray Kushner Preferred Stock 280 8.0%
$4.50 Warrants 56,000
Jules Norducht Preferred Stock 350 10.0%
$4.50 Warrants 70,000
Common Stock 20,000
Wayne Saker Preferred Stock 245 7.0%
$4.50 Warrants 49,000
Richard Stadmaur Preferred Stock 210 6.0%
$4.50 Warrants 42,000
[FN]
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record, and each shareholder has sole
voting and investment power.
(2) Shows the percentage held of the 3,500 issued and outstanding shares of
1998 Series A Preferred Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the course of the business of the Company, the two founders and
principal shareholders of the Company have been required to guarantee certain
obligations, including its principal line of credit. The Company's principal
line of credit was placed with another financial institution in October 1996,
which did not require personal guarantees.
The Company entered into a Consulting Agreement dated March 19, 1996, with
STAT Associates, Inc., a Delaware corporation owned and controlled by William E.
Hosker, a director of the Company. The Agreement called for payments of
$100,000 and the reimbursement of third-party expenses incurred on behalf of the
Company. The Agreement contains confidentiality and noncompete provisions
protecting the technology and business of the Company. In accordance with the
terms of the Agreement, the consulting arrangement ended in September 1996. The
Company entered into a separate consulting agreement with William E. Hosker in
1997 pursuant to which Mr. Hosker was issued 15,135 shares of common stock
valued at $95,540.
Under the terms of various contractual arrangements with Brigham Young
University ("BYU"), the Company owed BYU approximately $215,500 for royalties,
license fees, and reimbursement of patent expenses, had additional upcoming
expenses of approximately $109,000, and had an obligation to issue it 6,000
shares. BYU agreed to accept shares of the Company's restricted common stock in
satisfaction of the cash obligations valued at the closing price of the
Company's common stock on July 17, 1996, of $9.00 per share discounted by 20% to
recognize the restricted nature of the securities. The Company purchased an
aggregate of 49,272 shares of common stock from two of its executive officers
and directors, at a price equal to the obligations to BYU, in order to deliver
the shares to BYU. A portion of the purchase price was paid by offsetting the
amounts due to the Company for advances made to the officers during the fiscal
year ended June 30, 1996, in the aggregate principal amount of $105,000, plus
accrued interest of approximately $5,300.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements, including the index to the financial statements,
are included immediately following the signatures to this report.
EXHIBITS
SEC
Exhibit Reference
No. No. Title of Document Location
- ------- --------- ---------------------------------------------- -----------------------
1 (3) Articles of Incorporation, as amended Exhibit to report on
November 3, 1987 Form 10-K for the year
ended June 30, 1988*
2 (3) Certificate of Amendment to the Exhibit to report on
Articles of Incorporation Form 10-K for the year
filed July 3, 1989 ended June 30, 1989*
3 (3) Designation of Rights, Privileges, and Registration Statement
Preferences of 1995 Series Preferred Stock filed on Form SB-2,
Exhibit 3, SEC File
No. 33-59963*
4 (3) Designation of Rights, Privileges, and Exhibit to report on
Preferences of 1998 Series A Preferred Stock Form 8-K dated
February 13, 1998*
5 (3) Bylaws Registration Statement
filed on Form S-18,
Exhibit 5, SEC File
No. 33-3365-D*
6 (4) Form of Registration Rights Agreement Exhibit to report on
Form 8-K dated
February 13, 1998*
7 (4) Form of $6.25 Warrant Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
8 (4) Form of $4.50 Warrant Exhibit to report on
Form 8-K dated
February 13, 1998*
9 (10) 1987 Stock Option Plan of LarsonoDavis Exhibit to report on
Incorporated, as amended Form 10-K for the year
ended June 30, 1988*
10 (10) 1991 Employee Stock Award Plan of Exhibit to report on
LarsonoDavis Incorporated Form 10-K for the year
ended June 30, 1992*
11 (10) 1991 Director Stock Option and Stock Exhibit to report on
Award Plan of LarsonoDavis Form 10-K for the year
Incorporated ended June 30, 1992*
12 (10) Amended and Restated 1996 Director Exhibit to report on
Stock Option Plan Form 10-Q for
the quarter ended
March 31, 1997*
13 (10) 1997 Employee Stock Purchase Plan Exhibit to report on
Form 10-K for
the transitional
period ended
December 31, 1996*
14 (10) 1997 Stock Option and Award Plan Exhibit to report on
Form 10-Q for the
quarter ended
March 31, 1997*
15 (10) Technology License, Assumption, and Exhibit to report on
Maintenance Agreement between Form 8-K/A dated
LarsonoDavis Incorporated and June 30, 1995*
Harris Miller Miller & Hanson, Inc.,
dated August 15, 1995
16 (10) Semiconductor Industry TOF Marketing Exhibit to report on
Agreement between Sensar Corporation Form 10-QSB dated
(subsidiary of LarsonoDavis Incorporated) September 30, 1995*
and SAES Getters S.p.A.
17 (10) Product Development and Marketing Exhibit to report on
Agreement between LarsonoDavis Form 10-K for
Incorporated and System Sales the transitional
Representatives, Inc., dated period ended
September 25, 1996 December 31, 1996*
18 (10) Technical Information Agreement and Exhibit to report on
Patent License Agreement between Form 10-Q for the
LarsonoDavis Incorporated and quarter ended
Lucent Technologies, Inc., June 30, 1997*
effective as of July 1, 1997
19 (10) Consulting Agreement between LarsonoDavis Exhibit to report on
Incorporated and STAT Associates, Inc., Form 8-K dated
dated March 19, 1996 March 19, 1996*
20 (10) Executive Employment Agreement between Exhibit to report on
LarsonoDavis Incorporated and Brian G. Form 10-QSB dated
Larson, dated January 3, 1996 March 31, 1996*
21 (10) Termination Agreement between Exhibit to report on
LarsonoDavis Incorporated and Form 10-Q for the
Brian G. Larson dated November 14, 1997 quarter ended
September 30, 1997*
22 (10) Executive Employment Agreement between Exhibit to report on
LarsonoDavis Incorporated and Larry J. Form 10-QSB dated
Davis, dated January 3, 1996 March 31, 1996*
23 (10) Termination Agreement between Exhibit to report on
LarsonoDavis Incorporated and Form 10-Q for the
Larry J. Davis dated November 14, 1997 quarter ended
September 30, 1997*
24 (10) Executive Employment Agreement between Exhibit to report on
LarsonoDavis Incorporated and Dan J. Form 10-QSB dated
Johnson, dated January 3, 1996 March 31, 1996*
25 (10) Termination Agreement between Exhibit to report on
LarsonoDavis Incorporated and Form 10-Q for the
Dan J. Johnson dated November 14, 1997 quarter ended
September 30, 1997*
26 (10) Employment Agreement between Exhibit to report on
LarsonoDavis Incorporated and Craig E. Form 10-K for
Allen, dated December 9, 1996 the transitional
period ended
December 31, 1996*
27 (10) Executive Employment Agreement This Filing
between LarsonoDavis Incorporated
and Andrew Bebbington,
effective November 17, 1997
28 (10) Executive Employment Agreement This Filing
between LarsonoDavis Incorporated
and Jeffrey Cohen, dated February 2, 1998
29 (10) Agreement to Issue Warrants to Exhibit to report on
Congregation Ahavas Tzdokah Z'Chesed Form 8-K dated
dated May 15, 1996 May 15, 1996*
30 (10) Agreement to Issue Warrants to Ezer Exhibit to report on
Mzion Organization Form 8-K dated
dated May 15, 1996 May 15, 1996*
31 (10) Form of Agreement to Issue Warrants to Exhibit to report on
Laura Huberfeld and Naomi Bodner Form 8-K dated
dated May 15, 1996 May 15, 1996*
32 (10) Form of Agreement to Issue Warrants to Exhibit to report on
Jeffrey Rubin, Lenore Katz, Robert Cohen, Form 8-K dated
Jeffrey Cohen, Allyson Cohen, and May 15, 1996*
Shawn Zimberg dated May 15, 1996
33 (10) Agreement to Issue Warrants entered into Exhibit to report on
between LarsonoDavis Incorporated and Form 8-K dated
Connie Lerner, dated May 29, 1996 May 28, 1996*
34 (10) Agreement to Issue Warrants to Exhibit to: report on
Congregation Ahavas Tzdokah Z'Chesed Form 10-K for
dated January 9, 1997, as amended the transitional
April 16, 1997, June 5, 1997, and period ended
November 14, 1997 December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
35 (10) Agreement to Issue Warrants to Ezer Exhibit to: report on
Mzion Organization dated January 9, 1997, Form 10-K for
as amended April 16, 1997, June 5, 1997, the transitional
and November 14, 1997 period ended
December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
36 (10) Agreement to Issue Warrants to Exhibit to: report on
Laura Huberfeld and Naomi Bodner Form 10-K for
dated January 9, 1997, as amended the transitional
April 16, 1997, June 5, 1997, and period ended
November 14, 1997 December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
37 (10) Agreement to Issue Warrants to Exhibit to: report on
Connie Lerner, dated January 9, 1997, Form 10-K for
as amended April 16, 1997, June 5, 1997, the transitional
and November 14, 1997 period ended
December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
Agreements relating to research and
development work performed by the
Company in 1983 for two unrelated
funding entities:
38 (10) (a) License Option Agreement between Exhibit to report on
LarsonoDavis Laboratories and Form 10-K for the year
LDL Research and Development, ended June 30, 1988*
Ltd., dated August 31, 1983
39 (10) (b) Cross License Option between Exhibit to report on
LarsonoDavis Laboratories and Form 10-K for the year
LDL Research and Development II, ended June 30, 1988*
Ltd., dated November 21, 1983
40 (16) Letter from Peterson, Siler & Stevenson Exhibit to report on
regarding change in certifying accountants Form 8-K dated
January 23, 1996*
41 (21) Subsidiaries of LarsonoDavis Incorporated Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
42 (23) Consent of Peterson, Siler & Stevenson This Filing
(now known as Pritchett, Siler & Hardy, P.C.)
43 (23) Consent of Grant Thornton LLP This Filing
44 (27) Financial Data Schedule This Filing
45 (27) Amended and Restated Financial Data This Filing
Schedule for the period ended
June 30, 1996
[FN]
*Incorporated by reference
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1997, the
Company did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
LARSONoDAVIS INCORPORATED
Dated: March 27, 1998 By /s/ Andrew Bebbington
Andrew Bebbington, President
(Principal Executive Officer)
Dated: March 27, 1998 By /s/ Craig Allen
Craig Allen, Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
Dated: March 27, 1998 By /s/ Andrew Bebbington
Andrew Bebbington, Director
Dated: March 20, 1998 By /s/ William E. Hosker
William E. Hosker, Director
Dated: March 27, 1998 By /s/ Gerard L. Seelig
Gerard L. Seelig, Director
Dated: March 27, 1998 By /s/ Jeffrey Cohen
Jeffrey Cohen, Director
LarsonoDavis Incorporated and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Financial Statements:
Report of Grant Thornton LLP, independent certified public accountants
on the December 31, 1997 and 1996, and June 30, 1996 financial statements F-2
Report of Pritchett, Siler & Hardy, independent certified public accountants
on the June 30, 1995 financial statements F-3
Consolidated financial statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996,
and June 30, 1996 F-4
Consolidated Statements of Operations for the year ended
December 31, 1997, for the six months ended December 31, 1996,
and for the years ended June 30, 1996 and 1995 F-6
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1997, for the six months ended December 31, 1996,
and for the years ended June 30, 1996 and 1995 F-7
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, for the six months ended December 31, 1996,
and for the years ended June 30, 1996 and 1995 F-9
Notes to Consolidated Financial Statements F-10
All financial statement schedules are omitted because they are not applicable or
because the required information is contained in the Consolidated Financial
Statements or the Notes thereto.
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
LarsonoDavis Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of LarsonoDavis
Incorporated and Subsidiaries as of December 31, 1997 and 1996, and June 30,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1997, for the six months
ended December 31, 1996 and for the year ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LarsonoDavis
Incorporated and Subsidiaries as of December 31, 1997 and 1996, and June 30,
1996, and the consolidated results of their operations and their consolidated
cash flows for the year ended December 31, 1997, for the six months ended
December 31, 1996, and for the year ended June 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
Provo, Utah
February 20, 1998
INDEPENDENT AUDITORS' REPORT
Board of Directors
LarsonoDavis Incorporated and Subsidiaries
Provo, Utah
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of LarsonoDavis Incorporated and
Subsidiaries for the year ended June 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
consolidated cash flows of LarsonoDavis Incorporated and Subsidiaries for the
year ended June 30, 1995, in conformity with generally accepted accounting
principles.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
August 4, 1995
LarsonoDavis Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------------ June 30,
1997 1996 1996
------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 1,212,473 $ 2,696,542 $ 3,922,660
Trade accounts receivable, net of
allowance for doubtful accounts (Note H) 2,215,945 2,598,582 2,332,417
Inventories (Notes D and H) 2,631,562 4,096,445 2,923,650
Other current assets 100,460 130,096 502,211
------------- ------------- -------------
Total current assets 6,160,440 9,521,665 9,680,938
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
and amortization (Notes B, E, H and I) 2,165,467 1,815,455 1,610,473
ASSETS UNDER CAPITAL
LEASE OBLIGATIONS,
net of accumulated amortization (Note I) 681,576 613,675 356,255
LONG-TERM CONTRACTUAL
ARRANGEMENT, net of
accumulated cost recoveries
(Notes B and S) 87,500 2,872,014 2,978,014
INTANGIBLE ASSETS, net of
accumulated amortization
(Notes B, F, H and T) 3,100,447 5,083,712 5,143,348
------------- ------------- -------------
$ 12,195,430 $ 19,906,521 $ 19,769,028
============= ============= =============
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
------------------------------- -------------
1997 1996 1996
-------------- ------------- -------------
CURRENT LIABILITIES
Lines of credit (Note H) $ 1,198,766 $ 1,033,018 $ 1,302,306
Accounts payable 1,080,624 902,926 581,377
Accrued liabilities (Note G) 1,518,147 764,393 767,254
Current maturities of long-term debt (Note I) 50,729 91,902 209,808
Current maturities of capital lease
obligations (Note I) 218,649 159,515 95,500
-------------- ------------- -------------
Total current liabilities 4,066,915 2,951,754 2,956,245
LONG-TERM DEBT
less current maturities (Note I) 716,697 759,709 778,835
CAPITAL LEASE OBLIGATIONS,
less current maturities (Note I) 558,815 523,185 357,171
-------------- ------------- -------------
Total liabilities 5,342,427 4,234,648 4,092,251
-------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes H, I, L, O and P)
- - -
STOCKHOLDERS' EQUITY
(Notes B, M, N, O, T and V)
Preferred stock, $.001 par value; authorized 10,000,000
shares; issued and outstanding zero shares at December 31,
1997 and 200,000 shares at December 31, 1996 and June 30,
1996 - 200 200
Common stock, $.001 par value; authorized 290,000,000 shares;
issued and outstanding 12,125,393 shares at December 31,
1997, 10,717,790 shares at December 31, 1996, and
10,258,406 shares at June 30, 1996 12,125 10,718 10,258
Additional paid-in capital 26,097,332 19,999,375 18,402,999
Accumulated deficit (19,251,591) (4,418,780) (2,752,360)
Note receivable from exercise of options (69,375) - -
Cumulative foreign currency translation adjustments 64,512 80,360 15,680
-------------- ------------- -------------
Total stockholders' equity 6,853,003 15,671,873 15,676,777
-------------- ------------- -------------
$ 12,195,430 $ 19,906,521 $ 19,769,028
============== ============= =============
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Six months
ended ended Year ended June 30,
December 31, December 31, --------------------------------
1997 1996 1996 1995
--------------- ---------------- -------------- --------------
Net sales (Note Q) $ 8,313,328 $ 4,889,280 $ 8,255,607 $ 6,515,830
--------------- ---------------- -------------- --------------
Cost and operating expenses
Cost of sales 6,074,883 2,177,304 3,407,613 1,916,413
Research and development 4,860,993 1,734,911 2,149,384 708,679
Selling, general and administrative 6,019,282 2,534,643 3,922,976 3,131,938
Unusual and nonrecurring charges (Note B) 5,937,355 - - -
--------------- ---------------- -------------- --------------
22,892,513 6,446,858 9,479,973 5,757,030
--------------- ---------------- -------------- --------------
Operating profit (loss) (14,579,185) (1,557,578) (1,224,366) 758,800
--------------- ---------------- -------------- --------------
Other income (expense)
Interest income 140,870 59,638 12,320 7,302
Interest expense (301,411) (154,440) (447,907) (301,402)
Other, net (78,085) 8,460 (46,295) (6,189)
--------------- ---------------- -------------- --------------
(238,626) (86,342) (481,882) (300,289)
--------------- ---------------- -------------- --------------
Income (loss) from continuing operations (14,817,811) (1,643,920) (1,706,248) 458,511
Loss from discontinued operations, net of
income taxes (Note S) - - - (770,128)
--------------- ---------------- -------------- --------------
Net loss $ (14,817,811) $ (1,643,920) $ (1,706,248) $ (311,617)
=============== ================ ============== ==============
Earnings (loss) per
common share (Note K)
Basic
Income (loss) from
continuing operations $ (1.29) $ (0.16) $ (0.21) $ 0.08
Net loss (1.29) (0.16) (0.21) (0.05)
Diluted
Income (loss) from
continuing operations (1.29) (0.16) (0.21) 0.07
Net loss (1.29) (0.16) (0.21) (0.05)
Weighted average common and common equivalent
shares
Basic 11,507,701 10,410,820 8,138,722 6,100,992
Diluted 11,507,701 10,410,820 8,138,722 6,227,707
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31, 1997, six months ended December 31, 1996
and years ended June 30, 1996 and 1995
Note Cumulative
receivable foreign
Preferred stock Common stock Additional Accumu- from currency
------------------ -------------------- paid-in lated exercise translation
Shares Amount Shares Amount capital deficit of options adjustments Total
--------- -------- --------- --------- ----------- ---------- ----------- ------------ -----------
Balances at July 1,
1994 - $ - 5,827,249 $ 5,827 $5,663,650 $ (685,745) $ - $ 3,413 $ 4,987,145
Shares issued upon
exercise of options
(Note O) - - 19,325 19 42,896 - - - 42,915
Shares issued in
various private
placements (Note N) - - 614,000 614 990,729 - - - 991,343
Shares issued for
services rendered
(Note N) - - 98,905 99 209,039 - - - 209,138
Preferred shares
issued for payment
of a note payable
(Note M) 200,000 200 - - 499,800 - - - 500,000
Equity adjustment for
translation of
foreign currency - - - - - - - (7,434) (7,434)
Net loss for the year - - - - - (311,617) - - (311,617)
--------- -------- ---------- --------- ---------- ----------- ---------- ---------- -----------
Balances at June 30,
1995 200,000 200 6,559,479 6,559 7,406,114 (997,362) - (4,021) 6,411,490
Shares issued upon
exercise of options
(Note O) - - 61,117 61 142,644 - - - 142,705
Shares issued on
exercise of warrants
(Note O) - - 3,000,000 3,000 9,124,282 - - - 9,127,282
Shares issued for
payment of interest
on debt (Note N) - - 16,483 17 42,244 - - - 42,261
Shares issued for
services rendered
(Note N) - - 34,940 35 178,355 - - - 178,390
Shares issued in
Sensar acquisition
(Note T) - - 586,387 586 1,509,360 - - - 1,509,946
Equity adjustment for
translation of
foreign currency - - - - - - - 19,701 19,701
Preferred dividends - - - - - (48,750) - - (48,750)
Net loss for the year - - - - - (1,706,248) - - (1,706,248)
--------- -------- --------- --------- ----------- ---------- ----------- ------------ -----------
Balances at June 30,
1996 200,000 200 10,258,406 10,258 18,402,999 (2,752,360) - 15,680 15,676,777
Shares issued in
Sensar acquisition
(Note T) - - 31,336 31 80,659 - - - 80,690
Shares issued for
services rendered
(Note N) - - 548 1 5,000 - - - 5,001
Shares issued upon
exercise of options
(Note O) - - 52,500 53 368,770 - - - 368,823
Shares issued on
exercise of warrants
(Note O) - - 375,000 375 1,141,947 - - - 1,142,322
Equity adjustment for
translation of
foreign currency - - - - - - - 64,680 64,680
Preferred dividends - - - - - (22,500) - - (22,500)
Net loss for the
period - - - - - (1,643,920) - - (1,643,920)
--------- -------- ---------- --------- ---------- ----------- ---------- ---------- -----------
Balances at
December 31, 1996 200,000 200 10,717,790 10,718 19,999,375 (4,418,780) - 80,360 15,671,873
Shares issued for
services rendered
(Note N) - - 54,849 55 262,104 - - - 262,159
Shares issued upon
exercise of options
(Note O) - - 217,631 218 115,407 - (69,375) - 46,250
Shares surrendered in
payment of advance
(Note N) - - (1,739) (2) (9,998) - - - (10,000)
Shares purchased
under employee stock
purchase plan
(Note O) - - 15,407 15 83,986 - - - 84,001
Shares issued on
exercise of warrants
(Note O) - - 862,613 862 4,496,517 - - - 4,497,379
Shares issued to
former executives
(Note B) - - 200,000 200 1,149,800 - - - 1,150,000
Conversion of
preferred stock (200,000) (200) 58,842 59 141 - - - -
(Note M)
Equity adjustment for
translation of
foreign currency - - - - - - - (15,848) (15,848)
Preferred dividends - - - - - (15,000) - - (15,000)
Net loss for the year - - - - - (14,817,811) - - (14,817,811)
--------- -------- ---------- --------- ---------- ----------- ---------- ---------- -----------
Balances at
December 31, 1997 - $ - 12,125,393 $ 12,125 $6,097,332 (19,251,591) $ (69,375) $ 64,512 $ 6,853,003
========= ======== ========== ========= ========== =========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Six months ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
------------ ---------------- ----------- ------------
Increase (decrease) in cash and cash equivalents
Net cash provided by (used in) operating
activities (Note U) (5,122,057) (1,944,738) (2,019,944) 33,604
----------- ----------- ----------- ------------
Cash flows from investing activities
Purchase of property and equipment (1,041,383) (421,573) (560,861) (449,917)
Proceeds from sale of assets 44,543 35,900 49,543 59,477
Purchase of stock of Sensar Corporation - - (1,184,069) -
Purchase of technology - (25,233) (414,991) (1,235,229)
Proceeds from long-term contractual arrangement 265,646 106,000 157,762 -
Patent acquisition costs (123,017) (5,215) (125,577) -
----------- ----------- ----------- ------------
Net cash used in investing activities (854,211) (310,121) (2,078,193) (1,625,669)
----------- ----------- ----------- ------------
Cash flows from financing activities
Net change in lines of credit 165,748 (269,288) (916,881) 427,687
Proceeds from long-term obligations 68,571 - 679,366 56,656
Principal payments of long-term debt (152,756) (137,032) (855,383) (230,293)
Net proceeds from issuance of common stock
and exercise of options and warrants 4,627,630 1,493,489 9,269,987 1,023,688
Principal payments on capital
lease obligations (186,146) (100,608) (170,538) (67,205)
Preferred dividends (15,000) (22,500) (48,750) -
Increase (decrease) in bank overdraft - - (40,039) 40,039
----------- ----------- ----------- ------------
Net cash provided by
financing activities 4,508,047 964,061 7,917,762 1,250,572
----------- ----------- ----------- ------------
Effect of exchange rates on cash (15,848) 64,680 19,701 (7,434)
----------- ----------- ----------- ------------
Net increase (decrease) in cash
and cash equivalents (1,484,069) (1,226,118) 3,839,326 (348,927)
Cash and cash equivalents at
beginning of period 2,696,542 3,922,660 83,334 432,261
----------- ----------- ----------- ------------
Cash and cash equivalents at
end of period $ 1,212,473 $ 2,696,542 $ 3,922,660 $ 83,334
=========== =========== =========== ============
The accompanying notes are an integral part of these financial statements.
Larson.Davis Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996, and June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Business activity and principles of consolidation
Larson Davis Incorporated (the Company) is primarily engaged in the design,
development, manufacture, and marketing of analytical instruments. The
Company sells its measurement instruments to private industries and
governmental agencies for both industrial and research applications. The
accompanying consolidated financial statements of the Company include the
accounts of the Company and its wholly-owned subsidiaries; LarsonoDavis
Laboratories Corporation, Sensar Corporation, and Larson Davis Ltd. (a UK
Corporation). All significant intercompany transactions and accounts have
been eliminated in consolidation.
2. Revenue recognition
The Company recognizes revenues on the majority of its product sales and
services at the time of product delivery or the rendering of services.
Significant future obligations or contingencies such as satisfaction of
customer mandated performance criteria, unilateral rights to return
products, etc. delay revenue recognition until the obligation is satisfied
or contingency resolved. Cost of insignificant obligations are accrued when
revenue is recognized.
3. Depreciation and amortization
Property and equipment are stated at cost. Depreciation and amortization
are provided in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under
capital leases and leasehold improvements are amortized over the shorter of
the lives of the respective leases or over the service lives of the asset.
The straight-line method of depreciation is followed for financial reporting
purposes and accelerated methods are used for income tax purposes.
4. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, 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. An
allowance against deferred tax assets is recorded when it is more likely
than not that such tax benefits will not be realized.
5. Cash and cash equivalents
For purposes of the financial statements, the Company considers all highly
liquid debt instruments with an original maturity of three months or less
when purchased to be cash equivalents.
6. Inventories
Inventories consisting of raw materials, work-in process, and finished goods
are stated at the lower of cost or market. During 1997, the Company changed
its method of determining the cost of inventory from the average cost method
to the first-in, first-out (FIFO) method. The effect of the change was not
material. Prior to the change, the Company used the average cost method,
which approximated the first-in-first-out method.
7. Earnings (loss) per common share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128
established new standards for computing and presenting earnings per share
(EPS). SFAS No. 128 requires the presentation of basic and diluted EPS.
Basic EPS are calculated by dividing earnings (loss) available to common
shareholders by the weighted average number of common shares outstanding
during each period. Diluted EPS are similarly calculated, except that the
weighted average number of common shares outstanding includes common shares
that may be issued subject to existing rights with dilutive potential. The
EPS for all prior periods have been restated as required by SFAS No. 128.
8. Research and development costs
The Company conducts research and development to develop new products and
product improvements. Research and development costs have been charged to
expense as incurred.
9. Concentrations of credit risk
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash equivalents and trade receivables.
The Company maintains its cash and cash equivalents principally at one major
financial institution. Cash equivalents are invested through a daily
repurchase agreement with the financial institution. The agreement provides
for the balance of available funds to be invested in an undivided interest
in one or more direct obligations of, or obligations that are fully
guaranteed as to principal and interest by, the United States Government, or
an agency thereof. These securities are not a deposit and are not insured
by the Federal Deposit Insurance Corporation.
At December 31, 1997, one customer represents 19% of accounts receivable and
no other customers represent more than 10% of accounts receivable.
Otherwise, concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of customers and their
dispersion across many geographic regions and industries. The Company
reviews customers' credit histories before extending credit. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and
other information.
10. Intangible assets
The Company capitalizes costs incurred to acquire product technology and
patents. The amounts are amortized on the straight-line method over the
estimated useful life or the terms of the respective technology or patent,
whichever is shorter. The original estimated useful lives range from 5 to
15 years.
The Company capitalizes costs incurred to develop software after
technological feasibility has been established. Amortization of these costs
is calculated using the greater of the amount computed using (a) the ratio
of current gross sales to the total current and anticipated future gross
sales or (b) the straight-line method over original estimated useful lives
of 5 to 10 years. Software development costs capitalized for the year ended
December 31, 1997, the six months ended December 31, 1996, and the years
ended June 30, 1996 and 1995, were $0, $25,233, $77,984, and $570,873,
respectively.
The Company capitalized as goodwill, the excess acquisition costs over the
fair value of the net assets acquired, in connection with the purchase of a
subsidiary, which costs are being amortized on the straight-line method over
10 years.
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by comparing the carrying
value to the undiscounted estimated future cash flows of the related assets
and necessary adjustments, if any, are recorded. During 1997, certain
adjustments were recognized for the impairment of intangible assets. See
Note B.
11. Translation of foreign currencies
The foreign subsidiary's asset and liability accounts, which are originally
recorded in the appropriate local currency, are translated, for consolidated
financial reporting purposes, into U.S. dollar amounts at period-end
exchange rates. Revenue and expense accounts are translated at the average
rates for the period. Transaction gains and losses, the amounts of which
are not material, are included in general and administrative expenses.
Foreign currency translation adjustments are accumulated as a separate
component of stockholders' equity.
12. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Estimates also affect the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from these estimates. Such
estimates of significant accounting sensitivity are the allowance for
doubtful accounts, the allowance for inventory overstock or obsolescence,
and the estimated useful lives of property and equipment and intangible
assets. Additionally, certain estimates which are affected by expected
future gross revenues or royalty receipts are capitalized software costs,
the long-term contractual arrangement and patents on proprietary technology.
On an ongoing basis, management reviews such estimates, and if necessary,
makes changes to them. The effect of changes in estimates are reflected in
the financial statements in the period of the change. Management believes
the estimates used in determining carrying values of assets as of the
respective balance sheet dates were reasonable at the dates the estimates
were made. During 1997, adjustments to certain estimates were recognized.
See Note B.
13. Fair value of financial instruments
The estimated fair value of financial instruments is not presented because,
in management's opinion, the carrying amounts and estimated fair values of
financial instruments in the accompanying consolidated balance sheets, with
the exception of the long-term contractual arrangement, is not materially
different. In the past, it has not been practicable to estimate the fair
value of the long-term contractual arrangement, since its value was
dependent on the future revenues of an unrelated entity, which was not
readily determinable by the Company. However, recent events have caused
management to believe that this asset has been impaired and appropriate
adjustments have been made to the carrying value of the asset. See Note B.
14. Stock options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Under APB 25, because the exercise price of the Company's share options
equals or exceeds the market price of the underlying shares on the date of
grant, the Company does not recognize any compensation expense.
15. Recently issued Statements of Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with
reclassification of financial statements for earlier periods provided for
comparative purposes required. Adoption of SFAS No. 130 is not expected to
have a material effect on the Company's financial statements.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Adoption of SFAS No. 131 will not
have an effect on the Company's financial position or results of operations,
but will result in disclosures about the Company's products and services not
previously required.
NOTE B - UNUSUAL AND NONRECURRING CHARGES
In the fourth quarter of 1997, the Company recognized unusual and
nonrecurring charges as follows:
Restructuring charges:
Termination settlements with former executives
and employees, and other related costs $ 1,471,870
Write down of assets:
Intangible assets 1,649,373
Property and equipment 75,878
-----------
Total restructuring charges 3,197,121
-----------
Impairment charges:
Long-term contractual arrangement 2,556,903
Other impairment charge 183,331
-----------
Total impairment charges 2,740,234
-----------
Total unusual and nonrecurring charges $ 5,937,355
===========
1. Restructuring charges
In November 1997, the Company announced the restructuring of its executive
management team. The board of directors appointed Andrew Bebbington as the
new chief executive officer and as a member of the board of directors. In
connection with the appointment of the new chief executive officer, the
board accepted the resignation of three members of the executive management
team, including the former chief executive officer and the former vice-
president of product development, and the former chief financial officer,
all of whom also served as members of the board of directors. The former
vice-president of product development subsequently entered into an
employment arrangement to provide his services as a scientist and engineer
in connection with the ongoing development of the Company's technologies. In
conjunction with their resignation, these former executives entered into
termination agreements with the Company which provided for, among other
things, the issuance of an aggregate of 200,000 shares of common stock, the
surrender of options to acquire an aggregate of 1,425,000 shares of common
stock at prices ranging from $4.25 to $7.00 per share, the cancellation of
the balance of each of their five-year employment contracts, and three
months of severance pay.
Under the direction of the new chief executive officer, and with the
endorsement of the outside board members, an evaluation was made of existing
research and development projects, marketing arrangements, manufacturing
processes, the products offered, licensing agreements, and the overall cost
structure of the Company. As a result of this evaluation, additional
restructuring steps were recommended and approved by the board of directors
in December 1997. These additional steps have been implemented and have
resulted in a reduction of personnel, the closure of the UK subsidiary, the
discontinuance of certain peripheral business activities, and a new focus on
a revised strategic direction for the Company. The narrowed focus on certain
elements of the strategic direction of the Company is expected to result in
the earlier commercialization of certain technologies and the revitalization
of the existing product line. The changes in strategic direction also
resulted in the discontinuance or de-emphasis of certain other projects. As
a result of the changes in the direction of the Company, the carrying values
of certain intangible assets and property and equipment have been impaired
and associated losses recognized. Additionally, largely as a result of the
change in strategic direction, certain inventories have been rendered
obsolete or overstocked. Accordingly, a write down in the carrying value of
inventories in the amount of $614,000 has been recognized and is included in
cost of sales.
2. Impairment charges
In December 1997, certain events occurred which caused management to
question the recoverability of the carrying costs of the long-term
contractual arrangement created as a result of the discontinuation of a
business. See Note S for details of this arrangement. The carrying value
of this asset is dependent on the future revenue stream derived from the
sale of environmental noise monitoring systems. This market has become
increasingly competitive forcing a probable renegotiation of this contract.
The carrying value of this asset at December 31, 1997 has been reduced to
$87,500, management's estimate of the current value of the asset, and an
impairment loss of $2,556,903 has been recognized.
The unusual and nonrecurring charges include noncash elements of
approximately $5,615,000. The current or future cash requirements are
approximately $322,000, of which approximately $220,000 was paid prior to
December 31, 1997.
In addition to the write down of inventories, referred to above, the Company
recognized other adjustments and significant expenses in the fourth quarter
of 1997. The most significant of these adjustments included in the fourth
quarter were adjustments related to increases in the estimated provision for
warranty work, adjustments to inventories related to the absorption of labor
and overhead into cost of sales, and the reversal of the sales revenue for
two instruments pending final acceptance by the customer. Other material
expenses recorded in the fourth quarter that affect the comparability
between quarters include significant costs incurred towards the development
of the new time-of-flight mass spectrometry and the supercritical fluid
chromatography products and costs associated with the recruitment and
relocation of the new chief executive officer.
NOTE C - CHANGE IN FISCAL YEAR END
On January 23, 1997, the Board of Directors of the Company approved a change
of its fiscal year end from June 30, to December 31, effective December 31,
1996. The following is selected financial data for the year ended December
31, 1997 and the comparable twelve months ended December 31, 1996, which
includes the six month transition period ended December 31, 1996.
1997 1996
------------- -------------
(unaudited)
Net sales $ 8,313,328 $ 8,992,614
------------- -------------
Costs and operating expenses
Cost of sales 6,074,883 4,469,351
Research and development 4,860,993 3,055,705
Selling, general and administrative 6,019,282 4,643,721
Unusual and nonrecurring charges 5,937,355 -
------------- -------------
22,892,513 12,168,777
------------- -------------
Operating loss (14,579,185) (3,176,163)
Other income (expense), net (238,626) (393,936)
------------- -------------
Net loss $ (14,817,811) $ (3,570,099)
============= =============
Loss per common share (1.29) $ (0.38)
============= =============
NOTE D - INVENTORIES
Inventories consist of the following:
December 31,
---------------------------- June 30,
1997 1996 1996
------------ ------------ ------------
Raw materials $ 1,127,335 $ 1,276,413 $ 1,129,835
Work in process 700,055 1,398,229 680,972
Finished goods 804,172 1,421,803 1,112,843
------------ ------------ ------------
$ 2,631,562 $ 4,096,445 $ 2,923,650
============ ============ ============
During the fourth quarter of 1997, the Company made certain changes in
estimates related to excess and obsolete inventories in the amount of
$614,000, principally related to write downs associated with the
restructuring of the operations and changes in strategic direction of the
Company. Prior to the change in strategic direction, the Company's practice
was to write off inventory directly to cost of sales as it was identified as
being obsolete, the amounts of which were not material to the financial
statements.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives are as follows:
December 31,
------------------------------ June 30,
Years 1997 1996 1996
----- ------------- ------------- -------------
Land - $ 25,000 $ 25,000 $ 25,000
Buildings and improvements 5-30 1,109,412 984,965 966,969
Machinery and equipment 3-10 1,710,082 2,426,317 2,249,482
Furniture and fixtures 3-10 631,401 529,221 386,644
------------- ------------- -------------
3,475,895 3,965,503 3,628,095
Less accumulated depreciation
and amortization (1,310,428) (2,150,048) (2,017,622)
------------- ------------- -------------
$ 2,165,467 $ 1,815,455 $ 1,610,473
============= ============= =============
NOTE F - INTANGIBLE ASSETS
Intangible assets consist of acquired technology, capitalized software
development costs, goodwill, and patents. The long-term value of these
assets is connected to the application of technologies and software costs to
viable products which management believes can be successfully marketed by
the Company. On an ongoing basis, management reviews the valuation and
amortization of intangible assets to determine possible impairment by
comparing the carrying value to the undiscounted estimated future cash flows
of the related assets and necessary adjustments, if any, are recorded.
During 1997, the carrying value of certain intangible assets was adjusted to
better reflect management's current expectations for the realizability of
these assets. The principal adjustment relates to the write off of
capitalized software formerly expected to be used in certain future
products, but that are now not expected to be developed under new
management. See Note B. Management believes current and projected sales
levels of its existing and planned products will support the carrying costs
of the assets, as adjusted.
The following is a summary of intangible assets:
December 31,
----------------------------- June 30,
1997 1996 1996
------------ ------------- -------------
Acquired technology $ 3,364,326 $ 3,621,730 $ 3,588,793
Capitalized software development costs 189,920 1,932,333 1,907,101
Goodwill - 142,277 142,277
Patents 262,248 139,229 134,015
------------ ------------- -------------
3,816,494 5,835,569 5,772,186
Less accumulated amortization (716,047) (751,857) (628,838)
------------ ------------- -------------
$ 3,100,447 $ 5,083,712 $ 5,143,348
============ ============= =============
NOTE G - ACCRUED LIABILITIES
Accrued liabilities are composed of the following:
December 31,
---------------------------- June 30,
1997 1996 1996
------------ ------------ -------------
Accrued compensation $ 516,271 $ 326,364 $ 338,385
Customer deposits 201,816 253,500 -
Payable to officers - - 105,000
Payroll taxes 166,798 90,622 78,605
Royalties 163,730 19,732 13,461
Warranty 216,930 - -
Other 252,602 74,175 231,803
------------ ------------ ------------
$ 1,518,147 $ 764,393 $ 767,254
============ ============ ============
NOTE H - LINES OF CREDIT
Lines of credit are as follows:
December 31,
--------------------------- June 30,
1997 1996 1996
------------ ------------ ------------
Prime plus 2.5% (11% at
December 31, 1997) revolving line of credit;
maximum available of $3,000,000; commitment
fee equal to .50% per annum of the unused
amount; collateralized by inventories, trade
accounts receivable, equipment, and intangible
assets; due
September 30, 2000 (A) $ 1,198,766 $ 1,033,018 $ -
Prime plus 2.75% revolving line of credit;
maximum available of $2,400,000;
collateralized by trade accounts receivable
and inventories; paid and terminated in
October 1996 - - 1,302,306
------------ ------------ ------------
$ 1,198,766 $ 1,033,018 $ 1,302,306
============ ============ ============
(A) At December 31, 1997, the outstanding line of credit contains certain
covenants including, but not limited to, provisions that the Company
maintain certain levels of net worth, achieve certain results of operations,
meet certain financial ratios, and restrict the amount of capital
expenditures. At times, including at December 31, 1997, the Company has
been in violation of certain of these covenants. Subsequent to December 31,
1997, the Company has notified the lender of its intent to terminate this
line of credit as of March 31, 1998 and payoff the line of credit from
available cash and cash equivalents.
NOTE I - LONG-TERM OBLIGATIONS
1. Debt
Long-term debt consists of the following:
December 31,
--------------------------- June 30,
1997 1996 1996
------------ ------------ ------------
8.25% note payable to a commercial bank,
collateralized by property, payable in monthly
installments of $8,246 including interest, due
January 1999 $ 726,456 $ 762,928 $ 775,907
9.0% note payable to a finance company in
monthly installments of $15,845 including
interest, paid March 1997 - 45,792 134,354
Other installment loans 40,970 42,891 78,382
----------- ----------- -----------
767,426 851,611 988,643
Less current maturities (50,729) (91,902) (209,808)
----------- ----------- -----------
$ 716,697 $ 759,709 $ 778,835
=========== =========== ===========
Aggregate maturities of long-term debt are as follows:
Year ending December 31,
- ------------------------
1998 $ 50,729
1999 703,585
2000 13,112
Thereafter -
----------
$ 767,426
==========
2. Capital leases
The Company leases certain equipment on 36 to 60 month capital leases.
Substantially all of the leases contain provisions that convey title to the
Company or that allows the Company to acquire the equipment at the end of
the lease term through payment of a nominal amount. Assets under capital
lease obligations are as follows:
December 31,
-------------------------- June 30,
1997 1996 1996
----------- ----------- -----------
Equipment $ 1,134,973 $ 1,110,450 $ 748,099
Less accumulated amortization (453,397) (496,775) (391,844)
----------- ----------- -----------
$ 681,576 $ 613,675 $ 356,255
=========== =========== ===========
Total amortization expense on equipment under capital lease obligations was
$218,919 for the year ended December 31, 1997, $82,434 for the six months
ended December 31, 1996, and $158,693 and $111,496 for the years ended June
30, 1996 and 1995, respectively.
Total future minimum lease payments, under capital lease obligations are
as follows:
Year ending December 31,
- ------------------------
1998 $ 328,252
1999 241,035
2000 197,410
2001 149,002
2002 24,701
Thereafter -
-----------
Total minimum leases payments 940,400
Less amount representing interest (162,936)
-----------
Present value of net minimum
capital lease payments 777,464
Less current maturities 218,649
-----------
$ 558,815
===========
3. Operating leases
The Company leases certain office and manufacturing space and equipment
under operating leases. The lease on office and manufacturing space expires
in March 1999, but is renewable at the option of the Company for five
additional one-year periods with an increase of 4% per year in the lease
payment. Leases of equipment expire through 2002. Minimum future payments
under non-cancelable operating leases are as follows:
Year ending December 31,
- ------------------------
1998 $ 175,156
1999 51,586
2000 10,396
2001 10,396
2002 5,198
Thereafter -
-----------
$ 252,732
===========
Total rent expense under operating leases was $142,616 for the year ended
December 31, 1997, $75,408 for the six months ended December 31, 1996, and
$83,857 and $62,932 for the years ended June 30, 1996 and 1995,
respectively.
NOTE J - INCOME TAXES
The income tax expense (benefit) on continuing operations reconciled to the
tax computed at the statutory federal rate of 34% is as follows:
Six months
Year ended ended Year ended June 30,
December 31, December 31, ------------------------
1997 1996 1996 1995
-------------- -------------- ----------- -----------
Income taxes (benefit) at
statutory rate $ (5,038,056) $ (558,933) $(580,124) $ 155,894
State income taxes (benefit)
net of federal tax effect (488,988) (54,249) (56,306) 15,131
Amortization of acquired technology 60,797 30,398 31,447 -
Settlement with former directors 165,750 - - -
Operating losses (carryforwards)
with no current tax benefit (expense) 5,292,150 579,600 595,189 (183,840)
Other, net 8,347 3,184 9,794 12,815
------------- ------------- --------- ---------
Income tax expense $ - $ - $ - $ -
============= ============= ========= =========
Deferred income tax assets and liabilities are as follows:
December 31,
------------------------------ June 30,
1997 1996 1996
------------- ------------- -------------
Deferred tax assets
Benefit of net operating
loss carryforwards $ 6,334,645 $ 3,099,642 $ 2,488,443
Capitalized software development
costs and amortization of
intangible assets 746,839 - -
Inventory allowances 335,327 - -
Employee termination costs 261,251 - -
Accrued liabilities 129,153 21,692 56,438
Allowance for doubtful accounts 32,776 14,920 5,116
Other, net 4,271 224 224
------------- ------------- -------------
7,844,262 3,136,478 2,550,221
Less valuation allowance (7,759,162) (2,490,596) (1,913,470)
------------- ------------- -------------
85,100 645,882 636,751
------------- ------------- -------------Deferred tax liabilities
Capitalized software development costs and
amortization of
intangible assets - (626,682) (617,668)
Depreciation of property and equipment (85,100) (19,200) (19,083)
------------- ------------- -------------
(85,100) (645,882) (636,751)
------------- ------------- -------------
Net deferred tax asset (liability) $ - $ - $ -
============= ============= =============
The Company has sustained net operating losses in each of the periods
presented. There were no deferred tax assets or income tax benefits
recorded in the financial statements for net deductible temporary
differences or net operating loss carryforwards because the likelihood of
realization of the related tax benefits cannot be established. Accordingly,
a valuation allowance has been recorded to reduce the net deferred tax asset
to zero and consequently, there is no income tax provision or benefit for
any of the periods presented. The increase (decrease) in the valuation
allowance was $5,268,566, $577,126, $1,454,363, and ($381,591) for the year
ended December 31, 1997, the six months ended December 31, 1996, and for
the years ended June 30, 1996 and 1995, respectively.
As of December 31, 1997, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $17,000,000 expiring in various
years through 2012. Utilization of approximately $3,100,000 of the total
net operating loss is dependent on the profitable operation of Sensar
Corporation in the future under the separate return limitation rules and
limitations on the carryforward of net operating losses after a change in
ownership. The valuation allowance associated with the preacquisition
Sensar net operating losses is approximately $1,160,000, and if realized,
will be recognized by reducing costs allocated to acquired technology in the
purchase of Sensar.
NOTE K - EARNINGS (LOSS) PER COMMON SHARE
The following data show the amounts used in computing earnings (loss) per
common share, including the effect on income (loss) of preferred stock
dividends and the weighted average number of shares and dilutive potential
common stock.
Six months
Year ended ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
-------------- ------------- ------------ -----------
Income (loss) from continuing
operations $ (14,817,811) $ (1,643,920) $(1,706,248) $ 458,511
Dividends on preferred stock (15,000) (22,500) (48,750) -
------------- ------------- ----------- ----------
Income (loss) from continuing
operations applicable to
common stock (14,832,811) (1,666,420) (1,754,998) 458,511
Loss from discontinued operations - - - (770,128)
------------- ------------- ----------- ----------
Net loss applicable to common stock $ (14,832,811) $ (1,666,420) $(1,754,998) $ (311,617)
============= ============= =========== ==========
Common shares outstanding during the
entire period 10,717,790 10,258,406 6,559,479 5,827,249
Weighted average common shares issued
during the period 789,911 152,414 1,579,243 273,743
------------- ------------- ----------- ----------
Weighted average number of common
shares used in basic EPS 11,507,701 10,410,820 8,138,722 6,100,992
Dilutive effect of stock options
and warrants - - - 126,715
------------- ------------- ----------- ----------
Weighted average number of common
shares and dilutive potential common
stock used in diluted EPS 11,507,701 10,410,820 8,138,722 6,227,707
============= ============= =========== ==========
Included in income (loss) from continuing operations for the year ended
December 31, 1997 are unusual and nonrecurring charges of $5,937,355. The
effect of these unusual and nonrecurring charges on net loss was $0.52 per
common share.
For the year ended December 31, 1997, the six months ended December 31,
1996, and the year ended June 30, 1996, all of the options and warrants that
were outstanding, as described in Note O, were not included in the
computation of diluted EPS because to do so would have been anti-dilutive.
For the year ended June 30, 1995, options and warrants to acquire 245,000
shares and 500,000 shares of common stock, respectively, were not included
in the computation of diluted EPS because their exercise price was greater
than the average market price of the common stock during the year.
Additionally, as described in Note V, certain transactions occurred after
December 31, 1997, which, had they taken place during fiscal 1997, would
have changed the number of common shares or potential common shares
outstanding during the period.
NOTE L - 401(K) PROFIT SHARING PLAN
In February 1995, the Company adopted a 401(K) profit sharing plan under
which eligible employees may choose to contribute up to 15% of their wages
on a pre-tax basis, subject to IRS limitations. Employees who have
completed six months of qualified service with the Company are eligible to
enroll in the plan. The Company will match 50% of the employee's
contribution to the plan up to a maximum of 1.5% of the employee's eligible
annual salary. The Company's contributions vest at a rate of 20% per year
beginning with the second year of service and participants are fully vested
after six years of service. The Company contributed $67,242 for the year
ended December 31, 1997, $38,581 for the six months ended December 31, 1996,
and $34,594 and $15,282 for the years ended June 30, 1996 and 1995,
respectively.
NOTE M - PREFERRED STOCK
During the year ended June 30, 1995, the Company issued 200,000 shares of
preferred stock in payment of $500,000 of short-term debt. The preferred
stock had a liquidation preference equal to $2.50 per share, plus unpaid
dividends. This preferred stock paid cumulative dividends at a rate of
$0.225 per share per annum, payable monthly. The preferred stock was
convertible into common stock at the option of the holder or the option of
the Company at the rate of $3.00 per share divided by an amount equal to the
average of the closing bid prices for the common stock for the twenty
consecutive trading days immediately prior to the date that the holder
provides notice of such conversion. The preferred stock was converted, in
accordance with the governing provisions of the designation, into 58,842
shares of common stock effective April 30, 1997.
NOTE N - COMMON STOCK
During the year ended December 31, 1997, the six months ended December 31,
1996 and the years ended June 30, 1996 and 1995, the Company issued 54,849
shares, 548 shares, 34,940 shares and 98,905 shares, respectively, of common
stock valued at prices ranging from $3.38 to $13.25 per share, $9.13 per
share, $4.75 to $6.00 per share, and $2.50 per share, respectively, for
services rendered. During the year ended December 31, 1997, an officer
surrendered 1,739 shares of common stock in payment of a non-interest
bearing advance. During the year ended June 30, 1996 the Company also
issued 16,483 shares of common stock, at prices ranging from $2.19 to $2.88
per share, as payment of interest on the Company's long-term debt. The
common stock was valued at fair market value as determined by the closing
price of the Company's stock on the date of the transaction.
During the year ended June 30, 1995, the Company issued 614,000 shares of
common stock in various private placements at prices ranging from $1.63 to
$1.75 per share. Proceeds to the Company, less expenses of $34,767, were
$991,343.
NOTE O - STOCK OPTIONS AND WARRANTS
1. Stock-based compensation plans
During the periods presented in the accompanying financial statements, the
Company has granted stock options under four stock option plans; the 1991
Director Stock Option Plan (the 1991 Director Plan), the 1996 Director Stock
Option Plan (the 1996 Director Plan), the 1997 Stock Option and Award Plan
(the 1997 Employee Plan), and the 1987 Stock Option Plan (the 1987 Employee
Plan). The Company has also granted options under executive employment
agreements.
Under the 1991 Director Plan, the Company granted 30,000 options annually to
each director, up to an aggregate of 750,000 options. Options granted under
this plan vested immediately and expire five years after the grant. The
1991 Director Plan terminated July 1, 1996.
Under the 1996 Director Plan, the Company has reserved 1,400,000 shares of
common stock to be granted to directors of the Company. In 1996, the
Company granted options to each director to acquire 200,000 shares of common
stock (for a total of 1,000,000 options) at $7.00 per share. Options under
the 1996 Director Plan vest 25% on the grant date and 25% for each year of
service thereafter and expire five years after their vesting date. Of the
options granted in 1996, options with respect to 600,000 shares were
canceled in 1997. See Note B.
Under the 1987 Employee Plan, as amended in 1994, the Company may grant
options to acquire up to 750,000 shares of common stock, of which options to
acquire 728,453 shares have been granted as of December 31, 1997. Options
granted under the 1987 Employee Plan vest at varying dates from zero to five
years after the grant date and expire five years after the vesting date.
The 1997 Employee Plan was approved by the shareholders in 1997. The 1997
Employee Plan reserves 750,000 shares of common stock for issuance pursuant
to stock options or stock awards granted, of which 417,135 shares have been
granted or options awarded as of December 31, 1997. Options granted under
the 1997 Employee Plan vest at varying dates from one to five years after
the grant date and expire five years after the vesting date.
In January 1996, the Company granted options to three executives under newly
executed employment agreements. The agreements granted options to acquire
an aggregate of 825,000 shares of common stock at an exercise price of $4.25
per share. The options under the employment agreements vested 20% on the
grant date and 20% for each year of service thereafter, and would have
expired in January 2006. All of the options granted in 1996 were canceled
in 1997. See Note B.
In conjunction with the 1997 employment of the new chief executive officer,
the Company granted options to acquire 1,000,000 shares of common stock. The
options were granted at $5.75 per share, but are exercisable at the lower of
the grant price or 80% of the trading price on the date of exercise (but not
less than $3.60 per share). These options vest 25% on the grant date and
25% per year for each of the next three years, although the vesting of
500,000 of the options is subject to the achievement of certain performance
targets. The options expire five years after vesting. Subsequent to
December 31, 1997, this option was terminated in favor of an option to
purchase 1,000,000 shares of common stock, of which the right to exercise is
immediately vested with respect to 250,000 shares at $3.60 per share; the
right to exercise will vest with respect to 83,333 shares on each of
December 31, 1998, 1999, and 2000 at $3.60 per share; and the right to
exercise will vest with respect to 166,667 shares on each of December 31,
1998, 1999, and 2000, at $4.50 per share, $5.50 per share, and $6.50 per
share, respectively.
A summary of the status of the options granted under the Company's stock
option plans and employment agreements at December 31, 1997 and 1996, and
June 30, 1996 and 1995 and changes during the periods then ended is
presented in the table below:
Year ended June 30,
Year ended Six months ended ---------------------------------------
December 31, 1997 December 31, 1996 1996 1995
-------------------- ------------------- ------------------- -------------------
Weighted- Weighted- Weighted- Weighted-
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
---------- --------- --------- --------- --------- --------- --------- ---------
Outstanding at
beginning of period 3,049,841 $ 4.87 3,092,906 $ 4.88 930,430 $ 2.89 788,000 $ 2.24
Granted 1,202,000 6.14 10,000 10.50 2,237,476 5.63 652,800 2.75
Exercised (290,000) 2.68 (52,500) 6.76 (61,117) 2.33 (19,325) 2.22
Forfeited - - (565) 2.06 (13,883) 2.33 (8,245) 2.06
Canceled (1,425,000) 5.41 - - - - (482,800) 1.70
---------- --------- --------- --------
Outstanding at end
of period 2,536,841 5.42 3,049,841 4.87 3,092,906 4.88 930,430 2.89
========== ========= ========= =======
Exercisable at
end of period 1,174,355 $ 4.49 1,364,860 $ 3.90 1,370,430 $ 3.97 930,430 $ 2.89
========== ========= ========= =======
Weighted average fair
value of options
granted $ 3.04 $ 5.35 $ 3.06 $1.19
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the periods ended December 31, 1997 and
1996, and June 30, 1996 and 1995, respectively: risk-free interest rates of
6.0%, 5.9%, 6.1% and 7.4%, expected dividend yields of zero for all periods,
expected lives of 5.8, 5.0, 6.4 and 4.0 years, and expected volatility of
42%, 50%, 47% and 59%.
A summary of the status of the options outstanding under the Company's stock
option plans and employment agreements at December 31, 1997 is presented
below:
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life price exercisable price
- ------------------------ ----------- ----------- --------- ----------- ---------
$ 2.00 - $ 3.99 512,365 1.82 years $ 2.69 512,365 $ 2.69
$ 4.00 - $ 5.99 1,412,476 6.05 5.55 459,990 5.39
$ 6.00 - $ 10.50 612,000 5.78 7.41 202,000 7.03
--------- ---------
$ 2.00 - $ 10.50 2,536,841 5.13 $ 5.42 1,174,355 $ 4.49
========= =========
The Company adopted the 1997 Employee Stock Purchase Plan (the Stock
Purchase Plan) effective as of February 1, 1997. The maximum number of
shares of common stock which are available under this plan is 100,000
shares. The Stock Purchase Plan provides an opportunity to the employees of
the Company to purchase shares of common stock in the Company at 85% of fair
market value on each offering date. During the year ended December 31,
1997, the employees of the Company purchased 15,407 shares of common stock
for gross proceeds of $84,001.
The Company accounts for these plans under APB 25 and related
interpretations. Accordingly, since all options granted under these plans
were granted at or in excess of fair market value of the stock on the date
of the grant, no compensation cost has been recognized in the accompanying
financial statements for options granted under these plans. Had
compensation cost for these plans been determined based on the fair value of
the options at the grant dates for awards under these plans consistent with
the method prescribed by SFAS 123, the Company's net loss and loss per
common share would have been increased to the pro forma amounts indicated
below:
Six months
Year ended ended Year ended
December 31, December 31, June 30,
1997 1996 1996
-------------- -------------- --------------
Net loss As reported $(14,817,811) $(1,643,920) $(1,706,248)
Pro forma (16,118,507) (2,310,698) (2,192,447)
Loss per common share As reported $(1.29) $(0.16) $(0.21)
Pro forma (1.40) (0.22) (0.27)
2. Stock warrants
In conjunction with a private placement in May 1995, the Company issued
warrants to a group of investors to acquire common stock of the Company.
Since that time, the Company has issued additional warrants to this group as
the previously outstanding warrants were exercised.
In January 1997, the Board of Directors approved a reduction in the exercise
price, from $6.25 to $5.30 per share, of certain of these warrants related
to 1,715,832 shares of common stock. In consideration of this reduction,
the holders of the warrants agreed to the early exercise of the warrants
which were otherwise permitted to be exercised until November 1, 1998. The
holders agreed to exercise 767,810 shares on or before January 31, 1997,
which exercise occurred and resulted in gross proceeds to the Company of
$4,069,393. This initial issuance was priced at $6.25 per share and
resulted in the issuance of 651,103 shares, with 116,707 shares held in
reserve, because the reduced pricing was contingent upon the timely exercise
of the warrants related to all 1,715,832 shares.
The agreement relating to the exercise of the remaining 948,022 warrants was
amended on November 14, 1997. The exercise price remained at $5.30 per
share or an aggregate of $5,024,517 to be paid in ten equal installments
commencing November 15, 1997, and continuing on the day that is five weeks
subsequent to the preceding payment until the full amount is paid. On
receipt of each payment, the Company agreed to issue a certificate
representing the stock then being acquired, calculated at an exercise price
of $5.30 per share, and issue a replacement warrant covering the same number
of shares. Additionally, on receipt of the first payment, the Company
agreed to deliver certificates representing the 116,707 shares held in
reserve and to issue replacement warrants for the 767,810 shares, exercised
in January 1997, referred to in the previous paragraph. Replacement
warrants have an exercise price of $8.75 per share and are exercisable at
any time through April 16, 2003. In the event that a warrant holder fails
to make one or more payments when due, that portion of the outstanding
warrants that was then due would thereafter have an exercise price of
$6.25 per share and the holder would not be entitled to a replacement
warrant, if and when the outstanding warrant is exercised.
A summary of the status of common stock underlying the warrants issued at
December 31, 1997 and 1996, and June 30, 1996 and 1995 and changes during
the periods then ended is presented in the table below:
Year ended June 30,
Year ended Six months ended -----------------------------------------
December 31, 1997 December 31, 1996 1996 1995
------------------- --------------------- ------------------- -------------------
Weighted- Weighted- Weighted- Weighted-
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
--------- -------- --------- --------- --------- --------- --------- ---------
Outstanding at
beginning of period 2,100,167 $ 6.25 2,100,167 $ 5.71 1,000,000 $3.00 - $ -
Issued 862,613 8.75 375,000 6.25 4,100,167 4.51 1,000,000 3.00
Exercised (862,613) 5.30 (375,000) 3.25 (3,000,000) 3.17 - -
--------- --------- ---------- ---------
Outstanding at end
of period 2,100,167 $ 6.89 2,100,167 $ 6.25 2,100,167 $5.71 1,000,000 $3.00
========= ========= ========= =========
NOTE P - COMMITMENTS AND CONTINGENCIES
1. Litigation
The Company is from time to time involved in litigation as a normal part of
its ongoing operations. At December 31, 1997, there was no litigation which
would have a material impact on the financial condition of the Company.
2. Employment agreements
In November 1997, the Company terminated employment agreements with three
officers (see Note B) and entered into a letter agreement (to be followed by
a definitive employment agreement) with a new Chief Executive Officer which
provides for, among other things, a base salary of $250,000 per year and
bonuses based on the achievement of performance targets (including a
guaranteed bonus of $100,000 for 1998). The initial term of the agreement is
from November 17, 1997 through December 31, 2000 and, thereafter, is
automatically renewed for one year periods until terminated. The agreement
also contains provisions that would entitle the Chief Executive Officer to
the greater of his remaining base compensation or one year's salary plus the
vesting of all time-based options and one half of the performance-based
options in the event of the change in control of the Company and a
termination of his employment.
3. Licensing agreements
The Company has also entered into licensing agreements for the use of
certain patented technology. Certain of the patents are owned by a
university, which is also a stockholder of the Company. These licensing
agreements require royalty payments through the ends of the lives of the
underlying patents which expire at various dates through 2013. Royalty
payments are equal to specified percentages of the sales amounts of certain
products, but not less than minimum annual royalty requirements of up to
$156,000 per year.
Effective July 1, 1997, the Company entered into a Technical Information
Agreement and a Patent License Agreement with Lucent Technologies, Inc. (the
Agreements). Under the Agreements, the Company was granted certain rights
to technologies related to the manufacture of particle analysis systems and
related rights to market such systems. Using the technology acquired under
the Agreements, coupled with other technology already owned or licensed, the
Company intends to manufacture and market a particle analyzing mass
spectrometer.
Under the Agreements, the Company made an initial payment of $200,000 for
the rights granted thereunder. Additionally, the Company is obligated to
pay royalties ranging from 5% to 8% of the market value of items sold
pursuant to the Agreements, subject to minimum periodic installments
starting at a total of $250,000 payable during the year ended June 30, 1999
and increasing to a total of $600,000 payable during the year ended June 30,
2003. The Agreements have an initial term of six years, although the
Company may effectively extend the Agreements thereafter by continuing to
pay the percentage royalties, subject to a minimum annual payment of
$600,000.
Royalty expenses included in the statements of operations were $172,144 for
the year ended December 31, 1997, $82,000 for the six months ended December
31, 1996, and $92,919 and $73,937 for the years ended June 30, 1996 and
1995, respectively.
NOTE Q - SALES
Sales by geographical area are as follows:
Six months
Year ended ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
United States $ 3,970,719 $ 2,005,065 $ 5,428,961 $ 2,920,953
Europe 3,181,688 1,363,083 1,698,739 2,581,748
Pacific Rim 856,663 1,414,238 902,830 836,339
Canada 163,449 74,060 129,576 169,428
Other 140,809 32,834 95,501 7,362
------------ ------------ ------------ ------------
Total $ 8,313,328 $ 4,889,280 $ 8,255,607 $ 6,515,830
============ ============ ============ ============
During the year ended December 31, 1997, one customer accounted for 12% of
net sales and during the six months ended December 31, 1996, one customer
accounted for 13% of net sales. During the years ended June 30, 1996, and
1995, no customers accounted for more than 10% of net sales.
NOTE R - RELATED PARTY TRANSACTIONS
In the ordinary course of business of the Company, the two founders and
principal stockholders of the Company have been required to guarantee
certain obligations, including its principal line of credit. The personal
guarantees of the principal line of credit of the Company were eliminated
when it was placed with another financial institution in October 1996.
The Company has entered into consulting arrangements during 1997 and 1996,
with a corporation owned and controlled by a director of the Company. Under
the terms of the arrangements, the corporation agreed to provide the Company
with advisory and consulting services concerning the commercialization of
the technology held by Sensar Corporation, the identification of markets for
such products, the establishment of marketing contacts, and the development
of an operational plan for the development and marketing of products based
on the Sensar technology. Under the arrangements the Company has incurred
compensation expense of $95,540 and $100,000 in 1997 and 1996, respectively,
plus the reimbursement of third-party expenses incurred on behalf of the
Company.
Under the terms of various contractual arrangements with a university, the
Company owed approximately $215,500 for royalties, license fees, and
reimbursement of patent expenses, had additional upcoming expenses of
approximately $109,000, and had an obligation to issue 6,000 shares of
common stock to the university. The university agreed to accept shares of
the Company's restricted common stock in satisfaction of the cash
obligations. The stock was valued at the closing price of the Company's
common stock on July 17, 1996, of $9.00 per share discounted by 20% to
recognize the restricted nature of the securities. The Company purchased an
aggregate of 49,272 shares of common stock from two of its executive
officers and directors, at a price equal to the obligations to the
university, in order to deliver the shares to the university. A portion of
the purchase price was paid by offsetting amounts due to the Company for
advances made to the officers during the fiscal year ended June 30, 1996 in
the aggregate principal amount of $105,000, plus accrued interest of
approximately $5,300.
NOTE S - DISCONTINUED OPERATIONS
In connection with a decision by the Company in the year ended June 30,
1995, the Company entered into an agreement to divest its airport noise
monitoring business. Under the terms of this agreement Harris Miller Miller
and Hanson, Inc. (HMMH), an established consulting firm with its primary
business related to transportation industry acoustic and vibration analysis,
purchased all of the Company's tangible assets and contracts related to the
airport noise monitoring business and assumed approximately $100,000 of the
Company's liabilities. HMMH also entered into a licensing agreement with
the Company, which transfers the ownership of the Company's related software
for application in the airport noise monitoring industry. Under the
licensing agreement, the Company is entitled to installment payments of
$150,000 annually plus a varying royalty of 2 1/2% to 4% on gross revenues
of HMMH resulting from the sale, installation, upgrade, and maintenance of
airport noise and operations monitoring systems for the lesser of ten years
or the term of the contract.
The accompanying consolidated financial statements reflect the transaction
with the carrying value of the long-term contractual arrangement being
assigned the basis of the net assets sold or licensed and no gain or loss
being recognized at the date of the transaction. The Company has recognized
the proceeds received on a "cost recovery" method whereby the carrying cost
of the asset was reduced accordingly. In December 1997, certain events
occurred which caused management to question the recoverability of the
carrying cost of this long-term contractual arrangement and accordingly, the
Company recognized an impairment loss (see Note B).
During the year ended December 31, 1997, the six months ended December 31,
1996, and the year ended June 30, 1996, the Company recognized payments from
HMMH in the amounts of $265,646, $106,000, and $388,146, respectively.
The airport noise monitoring business has been accounted for as discontinued
operations, and accordingly, the results of its operations are segregated
from continuing operations in the accompanying statements of operations.
Net sales, costs and operating expenses, other income and expense, and
income taxes of this business for the fiscal year ended June 30, 1995 has
been reclassified as discontinued operations.
Summary operating results of discontinued operations for the fiscal year
ended June 30, 1995 are as follows:
Net sales $ 2,374,697
Operating loss (697,017)
Loss before income taxes (770,128)
Income taxes (benefit) -
Loss from discontinued operations (770,128)
NOTE T - ACQUISITION
Effective October 27, 1995, the Company acquired 100% of the stock of Sensar
Corporation (Sensar). Sensar holds manufacturing and distribution rights to
patented technology developed at Brigham Young University related to time-
of-flight mass spectrometers. The Company issued 586,387 shares and 31,336
shares of common stock during the year ended June 30, 1996 and the six
months ended December 31, 1996, respectively (valued at an aggregate of
$1,590,636), assumed an outstanding obligation of Sensar with regard to a
line of credit in the amount of $535,823 at October 27, 1995, and paid
$280,000 to Sensar to be used by Sensar to redeem 1,400,000 shares of its
common stock. This transaction was accounted for using the purchase method
of accounting; accordingly the purchased assets and liabilities have been
recorded at their estimated fair value at the date of acquisition, with the
excess purchase price of $2,774,707 being allocated to acquired technology.
A useful life of 15 years has been determined with amortization being
calculated using the straight-line method. The results of operations of the
acquired business have been included in the financial statements since the
date of acquisition.
The following unaudited pro forma summary represents the combined results of
operations as if the acquisition of Sensar had occurred as of the beginning
of each year presented. This summary does not purport to be indicative of
what would have occurred had the acquisition been made as of the dates set
forth, or of results which may occur in the future.
Year ended June 30,
-----------------------------
1996 1995
------------- -------------
Net sales $ 8,544,000 $ 7,365,000
Loss from continuing operations (1,821,000) (515,000)
Loss from discontinued operations - (770,000)
Net loss (1,821,000) (1,285,000)
Loss per share (0.20) (0.19)
NOTE U - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six months
Year ended ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
Cash flows from operating activities are as follows:
Net loss $(14,817,811) $ (1,643,920) $(1,706,248) $ (311,617)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 487,687 189,151 278,417 217,790
Amortization 672,848 243,991 350,120 517,948
Provision for losses on accounts receivable 41,146 28,834 20,000 875
Provision for inventory write downs 614,000 - - -
Provision for impairment losses 4,246,367 - - -
Stock issued in payment of compensation 1,412,159 22,657 178,390 219,708
Stock issued in payment of interest - - 42,261 -
Loss (gain) on sale of property and equipment 78,085 (8,460) (17,014) 6,189
Changes in assets and liabilities
Trade accounts receivable 331,491 (294,999) (221,582) (520,395)
Inventories 850,883 (1,172,795) (770,882) 2,464
Other current assets 29,636 372,115 (166,545) 233,507
Due from related party - - - 29,817
Accounts payable 177,698 321,549 (305,112) (303,477)
Accrued liabilities 753,754 (2,861) 298,251 (59,205)
------------ ------------ ----------- ---------
Net cash provided by (used in) operating
activities $ (5,122,057) $ (1,944,738) $ 2,019,944) $ 33,604
============ ============ =========== =========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 299,438 $ 144,399 $ 400,686 $ 355,988
Income taxes - - - -
Significant noncash investing and financing
activities
Acquisition of equipment through long-term
obligations $ 326,960 $ 240,876 $ 234,210 $ 189,747
Note receivable issued in exercise of stock options 69,375 - - -
Issuance of common stock for purchase of
Sensar (Note R) - 80,690 1,509,946 -
Issuance of preferred stock in satisfaction of debt - - - 500,000
Conversion of short-term debt into long-term debt - - - 300,000
NOTE V - SUBSEQUENT EVENTS
1. Private placement
In February 1998, the Company completed the private placement of 100 Units,
each Unit consisting of 35 shares of 1998 Series A Preferred Stock (the
Preferred Stock) and 7,000 Warrants (Warrants) to purchase common stock, at
a purchase price of $35,000 per Unit, or an aggregate gross sales price of
$3,500,000. The Preferred Stock is convertible, at the election of the
holder, at any time subsequent to 90 days after the closing of the offering
into that number of shares of common stock calculated by dividing $1,000,
plus any accrued but unpaid dividends, by the lower of (i) $3.60 or (ii) 85%
of the average closing price of the common stock for the ten trading days
preceding the notice of conversion as reported by the Nasdaq National Market
System on which the Company's common stock is traded. Until conversion, the
Preferred Stock bears an annual dividend of 4%, or $40 per share per annum.
If not previously converted, the Preferred Stock will automatically convert
into shares of common stock as of December 31, 1999. In addition, the
Company can require the conversion of the Preferred Stock if it makes a
public offering of its common stock at any time subsequent to February 1,
1999. The Company paid a finder's fee of 6%, or an aggregate of $210,000,
and expects to incur legal, accounting, listing fees, and other costs of the
offering estimated to be approximately $35,000.
Each Warrant gives the holder the right to purchase one share of common
stock at an exercise price of $4.50 per share. If not earlier exercised,
the Warrants expire July 30, 2000. The Company can provide 30 days written
notice to the holders of the Warrants at any time that the closing price of
the Company's common stock equals or exceeds $6.50 per share for 20
consecutive trading days as reported on the Nasdaq National Market System.
If the holders do not exercise the Warrants by the end of the 30 day period,
the Warrants would then expire.
2. Stock options
In February 1998, the Company granted options to a newly hired chief
operating officer to purchase 300,000 shares of common stock at $2.9875 per
share. The options vest 25% on the grant date and 25% per year for each of
the next three years and expire five years after vesting. The vesting of
112,500 shares over the next three years is subject to the achievement of
certain performance objectives.
Also in February 1998, certain former executive officers of the Company
exercised their remaining options to acquire 276,365 shares of common stock,
at prices ranging from $2.06 to $3.64 per share, by delivering to the
Company notes in the aggregate amount of $726,190. The notes bear interest
at 8.5% and are payable in three equal annual installments.
In March 1998, the Company has also granted options to existing employees
and a current director to purchase 367,500 shares of common stock
principally at $3.1375 per share. The options vest in varying percentages
over the next three years and expire five years after vesting. Concurrently
with the granting of these options, the Company canceled existing options
previously granted to certain employees and the director to purchase 382,000
shares of common stock at prices ranging from $4.69 to $10.50 per share.