UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 1-10013
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Larson Davis Incorporated
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(Name of small business issuer in its charter)
Nevada 87-0429944
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1681 West 820 North, Provo, Utah 84601
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (801) 375-0177
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Securities registered under section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under section 12(g) of the Exchange Act:
Common Stock, Par Value $0.001
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 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 /__/
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. /__/
As of October 3, 1996, there were 10,445,686 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
$86,000,000, computed at the closing quotation for the Issuer's common stock of
$9.375 as of October 3, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (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 list documents should
be clearly described for identification purposes (e.g., annual report to
security holders for fiscal year ended December 24, 1990). None.
Transitional Small Business Disclosure Format (check one):
Yes /__/ No / x /
Page 1 of consecutively numbered pages,
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including exhibits pages through .
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Item Number and Caption Page
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PART I
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1. Description of Business.................................. 3
2. Description of Property.................................. 10
3. Legal Proceedings........................................ 11
4. Submission of Matters to a Vote of Security Holders...... 11
PART II
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5. Market for Common Equity and Related Stockholder Matters. 12
6. Management's Discussion and Analysis or Plan of Operation 13
7. Financial Statements..................................... 16
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure...................... 16
PART III
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9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act............................................. 18
10. Executive Compensation................................... 20
11. Security Ownership of Certain Beneficial Owners
and Management........................................... 23
12. Certain Relationships and Related Transactions........... 24
PART IV
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13. Exhibits and Reports on Form 8-K......................... 26
</TABLE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Larson Davis Incorporated ("the Company") is engaged in the development,
manufacture, and marketing of precision measuring instrumentation related to the
environmental sciences, along with accompanying computer software technology.
The Company sells its measurement instruments to private industry and
governmental agencies for both industrial and military applications. The
Company is comprised of three active, wholly-owned subsidiaries:
LARSON DAVIS LABORATORIES CORPORATION ("LDL") focuses on the design,
development, manufacturing, and marketing of products and services related
to the measurement and analysis of environmental occurrences associated
with acoustics and vibration.
SENSAR CORPORATION ("Sensar") develops, manufactures, and markets
sophisticated chemical detection and analysis instrumentation used for
quantitative and qualitative analysis.
LARSON DAVIS, LTD. ("LTD"), is a European distribution entity located in
the United Kingdom.
Unless the context otherwise requires, when used herein, the term "the
Company" refers to Larson Davis Incorporated and its operating subsidiaries.
RECENT EVENTS
In September, 1996, the Company entered into an exclusive contract with a
marketing subsidiary of Weidmann International Corporation ("Weidmann") to
develop and market products targeted at the electrical transmission and
distribution predictive maintenance market. Weidmann is the world's largest
vendor of advanced insulation materials for electrical transformer assemblies
and engages in the design of transformer and switching equipment. The Company
will provide the diagnostic monitoring technologies like CrossCheck, vibration
monitoring, thermography, and chemical analysis, while Weidmann will provide its
knowledge of the industry to the identification, design, and development of
products intended for this market. On completion of marketable products, the
parties anticipate that Weidmann will provide rapid entrance in the industry
through established clients and a major industry presence. However, the target
products have not yet been developed or fully identified, and there can be no
assurance that this market will become a major source of revenues or profitable
for the Company in the near future. The Company anticipates that it will spend
a significant part of its planned research and development expenses on
development of these products during the 1997 fiscal year. (See "Planned
Development.")
ACOUSTIC AND VIBRATION BUSINESS
The acoustic and vibration products of the Company are focused on precision
measuring instruments for use in a variety of industries. 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.
Predictive Maintenance is an emerging industry in which characteristics of
rotating or moving machinery are analyzed to predict failure points. Based on
information obtained, planned service can be performed. Currently, the
Company's instrumentation is being used by helicopter manufacturers, power plant
turbine operators, paper producers, and others.
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.
PLANNED DEVELOPMENT
The Company has implemented a plan to increase its expenditure of funds for
the development of new products to seek to enhance revenue potential. Much of
the development will center around CrossCheck, patents recently acquired from
Brigham Young University ("BYU"), and products and technologies held by Sensar.
(See "Patents and Trademarks.")
In order to obtain the necessary financing to implement this plan, the
Company has sought equity funds. The Company received net proceeds from the
issuance of common stock and the exercise of options and warrants in the amounts
of $9,269,987 during the fiscal year ended June 30, 1996. This capital has
been used for various purposes, including the partial funding of acquisitions,
reduction of short and long-term debt, general operations, and as a source of
funding the increased development activities. Management intends to use only
funds available from non-operating and non-debt sources to continue product
development in excess of historical research and development levels.
The Company currently has issued and outstanding warrants to acquire in
excess of 2,100,000 shares of common stock which would yield gross proceeds to
the Company of approximately $11,000,000 if fully exercised. (See Notes to
Consolidated Financial Statements; Note L--Stock Options and Warrants.) The
holders of such warrants have no obligation to exercise the warrants and the
decision to do so will be largely dependent on the trading price for the
Company's common stock in the public market, about which no assurances can be
given. However, if the holders do elect to exercise the warrants, management
would use the funds to pay for the planned development and to further accelerate
development activities.
New product development, prototype, and first production costs adversely
affected the results of the Company in the fiscal year ended June 30, 1996.
These activities generated expenses with no corresponding revenues. It is
anticipated the Company will continue to experience operating losses during the
current fiscal year as a result of similar development expenditures. (See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.")
TECHNOLOGY DEVELOPMENT
CrossCheck
The Company holds the exclusive license to a technology known as
"CrossCheck," a proprietary hardware and process used to determine, in real
time, the in situ characteristics of polymer substances. To date, the Company
has developed prototype instrumentation; laboratory research is on-going to
quantify, categorize, and document results from scientific experimentation;
limited third party beta testing has been completed and is proceeding; the first
production instrumentation units have been manufactured; and initial orders have
been taken for delivery of production instruments.
The Company has investigated potential applications for CrossCheck within a
number of industries. To seek to maximize its immediate economic benefit from
this technology, the Company has concentrated its efforts in developing
products and relationships in three areas:
Electrical Utilities - - CrossCheck has proven to be effective in
monitoring oil in electrical transformers to detect changing chemical
characteristics in real time as a predictive maintenance tool. The Company
has entered into a development agreement with Weidmann, a leader in
marketing to the electrical utility industry, to design, develop, and
market sophisticated monitoring instrumentation to this market. A major
component to the anticipated system is CrossCheck, and an array of products
performing various functions related to monitoring transformers and
switches are envisioned.
Composites Industry - - CrossCheck was developed to solve problems within
the composites industry. The Company has recently hired a Ph.D. level
scientist, previously employed by one of the largest suppliers of resins to
the composite industry, to act as a technical sales person in this area.
Through his contacts, beta CrossCheck instruments have been placed for
evaluation. As a result of third party testing, initial orders have been
received for the first CrossCheck production units.
Coatings and Adhesives - - Curing characteristics of coatings and adhesives
are controlled by additives and different proportions of ingredients.
Demonstrations of the effectiveness of CrossCheck as a real-time monitor of
cure rate and current polymer characteristics of these compounds have been
made to potential users within the industry. Discussions are on-going to
develop appropriate manufacturing procedures needed to implement CrossCheck
based products for this industry.
The Company continues to pursue opportunities in other industries, among
which are:
Lubrication Industry - - products designed to monitor subtle changes in
oils as they age, wear, become contaminated, or change due to environmental
exposure;
Environmental Monitoring - - products designed to test and monitor ground
water, lakes, streams, or storage containers for contamination;
Chemical Inventory - - products designed to indicate the quality of stored
chemicals to assure quality at the time of use; and
Concrete Industry - - products designed to monitor rate and current status
of concrete cure to allow for intervention, verify quality, and assure
strength and hardness.
Time-of-Flight Mass Spectrometer Technology
With the acquisition of CrossCheck and Sensar, the Company committed to
commercializing patented technology related to chemical analysis. Sensar
currently manufactures and markets ultra-sensitive, high speed, mass
spectrometers which have been sold to various producers of semiconductor
"chips." These are highly specialized instruments which currently sell at a
retail price of approximately $250,000 and more. The Company entered into a
five-year agreement with SAES Getters S.p.A., a major international distributor
of scientific instrumentation ("SAES"), for SAES to act as the exclusive
distributor to market these instruments to the semiconductor industry. In order
to maintain its exclusive rights, SAES is required to meet certain annual
minimum sales requirements that escalate over the term of the agreement.
Advantages to the patented time-of-flight mass spectrometer technology are
instrument size, speed of analysis, extremely high sensitivity, and ease of use.
These characteristics allow the further development of new analytical
instrumentation. New products for the following chemical detection methods are
currently in development:
Capillary Electrophoresis ("CE") and Capillary Chromatography ("CC") are
techniques used to separate chemicals. When coupled with the Company's
mass spectrometer technology, the user can also timely and more effectively
analyze the chemicals that result from the separation process. Sensitivity
is essential because of the small sample size normally involved. These
separation techniques are useful in biomedical analysis and have only
become feasible with a CE mass spectrometer because of the Company's
technology.
Inductively Coupled Plasmas ("ICP") are rapid separation techniques which
replace tedious and time-consuming atomic absorption and emission
spectroscopies currently used. Current ICP/MS instrumentation is not
sensitive enough to detect many trace level elements contained within
samples. The instruments currently being developed by the Company are
designed to do this.
The Company is currently developing a series of new products utilizing the
unique characteristics of the patented time-of-flight technology. Introduction
of initial prototypes of one or more of these potential products is targeted for
February, 1997, at Pitt-Con, the industry's largest trade show, although no
assurance can be given that the Company will be able to meet this internally
established deadline.
BUSINESS HISTORY
During the most recent three fiscal years the Company has been involved in
a number of significant business changes:
March 1994 - - The Company purchased all of the outstanding shares of a
corporation chartered in England and the corporation was renamed LARSON
DAVIS, LTD. LTD serves as a European distribution point and expanded
service and repair center for the Company.
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.
June 1994 - - With the return of the minority interest in Larson Davis
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.
August 1995 - - The Company entered into an agreement to transfer its
airport noise monitoring operations to an established consulting firm
engaged in the transportation industry. The Company also transferred
substantially all of its airport contracts and agreed not to compete within
the industry. (See Notes to Consolidated Financial Statements; Note P--
Discontinued Operations.)
October 1995 - - The Company acquired all of the outstanding stock of
Sensar Corporation. (See Notes to Consolidated Financial Statements; Note
Q--Acquisition.)
PATENTS AND TRADEMARKS
The technology owned 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 CrossCheck technology held by the Company is subject to the protection
of United States patents, including several continuations-in-part, and
international patent applications. The technology held by Sensar is also
protected by patents. Each of these patents has a remaining life of at least
ten years. The Company also protects its patent and technology by
confidentiality and nondisclosure procedures similar to those used with its non-
patented technology to further ensure the proprietary nature of the technology.
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 service 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 is done by the Company's employees
as part of its quality control program. Manufacturing activities occupy
approximately 17,000 square feet of the Company's facilities. (See "ITEM 2.
DESCRIPTION OF PROPERTY.")
PRODUCT COMPONENTS
The Company utilizes a large number of individual electronic components in
connection with the manufacture of its precision instrumentation. The Company
has developed and sells its own line of high quality transducers 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. 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. The
efforts of these representatives are supported by an in-house staff of marketing
and technical personnel. Instrumentation connected with the Company's mass
spectrometer technology is currently being marketed within the semiconductor
industry by SAES under an exclusive, distribution agreement with an initial term
of five years. Under a recently executed agreement, the Company has granted
exclusive rights to a marketing subsidiary of Weidmann to market predictive
maintenance products to the electrical transmission and distribution industry.
(See "Recent Events.") This agreement has an initial term of ten years, subject
to the satisfaction of certain contractual commitments by both parties. The
Company anticipates that it may enter into similar arrangements with established
companies in specific industries as new products are developed.
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.
CURRENT ORDERS
As of October 3, 1996, the Company had an order backlog believed to be firm
of approximately $1,500,000, which is not reflected in the financial statements
included elsewhere herein. The Company anticipates filling this backlog within
approximately 75 days. This compares to a backlog in October of 1995 of
approximately $1,200,000, which took approximately 60 days to fill.
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 was dominated by a single competitor, Bruel & Kjaer ("B&K").
B&K has traditionally been the largest supplier of acoustics and vibration
instrumentation in the world. B&K was purchased by a German company which had
no previous ties to the acoustics and vibration industry in 1992, and currently
has a much reduced presence in the market although it is still much larger than
the Company.
In addition to B&K, there are several smaller companies in direct
competition with the Company. None of these other competitors has available the
full line of products 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 mass spectrometer market is dominated by a number of large companies
with individual sales ranging from $250 million to over $2 billion. Significant
portions of those sales are attributable to the mass spectrometer segment.
These companies include Perkin-Elmer/Sciex, Fisons Group/VG Instruments,
Finnigan Corporation, Thermo Jarrell Ash, Bio-Rad, and Beckman Instruments.
Competition among these companies is intense, so developing or otherwise
obtaining the most current technology is important. The nature of the market
has been for these companies to establish formal strategic alliances with
smaller, technically adept companies. The Company plans to develop its acquired
technology into a family of instruments to address perceived needs within the
mass spectrometer and related markets. Once suitable products are developed,
the Company intends to pursue formal marketing alliances, although there can be
no assurance that it will be successful in these efforts.
The Company has entered into an exclusive marketing agreement with SAES to
sell its TOF 2000 to the semiconductor industry. In addition, it has entered
into an exclusive agreement to design, develop, and market products intended for
the electrical transmission and distribution market with a marketing subsidiary
of Weidmann. (See "Technology Development.")
GOVERNMENTAL REGULATION
The products of the Company are not subject to the authority of a specific
governmental regulatory agency and do not generally require the approval or
certification by such agencies. In addition, 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 do 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
There were no customers which represented more than 10% of the total
revenues for the Company during the years ended June 30, 1996, or 1995. In
fiscal years ended June 30, 1996, and 1995, government sales were not
significant with sales volumes less than 5% of continuing operations for each of
the years.
Export sales of the Company for the years ended June 30, 1996, and 1995,
are 34% and 54% of revenues from continuing activities, respectively. The
Company exported its products into a number of geographical markets that are
more specifically identified in the notes to the consolidated financial
statements of the Company.
PERSONNEL
The Company currently has 104 employees, 25 of which are involved in
professional or technical development of products, 51 in manufacturing, 16 in
marketing and sales, and 12 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. DESCRIPTION OF PROPERTY
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 12,000 square feet of administrative, engineering, and research
and development space and approximately 12,000 square feet of manufacturing,
storage, and shipping space.
In addition, the Company rents approximately 10,000 square feet of space
under a one-year contract (renewable annually) that is located immediately
across the street from the Company's corporate headquarters in Provo, Utah, and
that is being used by the Sensar group. Approximately 5,000 square feet of the
space is being used for manufacturing, storage, and shipping and the remaining
space is used for development and administrative functions. The monthly payment
is approximately $6,200 per month. The Company also rents approximately 1,200
of office space in Red Car, England, to serve as the headquarters of LTD at a
monthly rate of approximately $425. This space is leased on a month-to-month
basis.
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 Company's fiscal year ended June 30, 1996, the Company did not
hold an annual 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 COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of the Company is listed on the National Association of
Securities Dealers, Inc., Automated Quotation system ("Nasdaq"), under the
symbol "LDII."
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.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
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September 30, 1994 $ 4.875 $2.625
December 31, 1994 $ 3.38 $2.00
March 31, 1995 $ 3.00 $2.00
June 30, 1995 $ 4.1666 $2.25
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
</TABLE>
On October 3, 1996, the closing quotation for the common stock on NASDAQ
was $9.375. As reflected by the high and low bids on the foregoing table, the
trading volume of the common stock of the Company is limited, creating
significant changes in the trading price of the common stock as a result of
relatively minor changes in the supply and demand. Consequently, potential
investors should be aware that the price of the common stock in the trading
market can change dramatically over short periods as a result of factors
unrelated to the earnings and business activities of the Company.
As of October 3, 1996, there were 10,445,686 shares of common stock issued
and outstanding, held by approximately 350 shareholders of record.
The Company has not paid dividends with respect to its common stock. The
Company has 200,000 shares of its 1995 preferred stock issued and outstanding
which prohibit the payment of dividends on the common stock if the annual
dividend of $0.225 per share of preferred stock is in arrears. 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. While the required dividends with respect to the
preferred stock have been paid by the Company, management anticipates retaining
any potential 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. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
CERTAIN FINANCIAL DATA
The following financial data of the Company is not covered by an opinion of
independent certified public accountants and should be read in conjunction with
the financial statements and related notes of the Company for the periods
indicated included elsewhere herein. It is a summary of management's analysis
of the effect of planned development spending for the fiscal year ended June 30,
1996. Cost of sales and operating expenses and research and development
expenses have been restated as a percentage of revenues based on an arithmetic
average of the audited expenditures in these categories for the five years ended
June 30, 1995. Management believes that this provides an indication of the
effect of the increased development efforts implemented by the Company during
the 1996 fiscal year, although it does not necessarily reflect the results of
operations that would have occurred if such planned development had not been
undertaken.
<TABLE>
<CAPTION>
Five-Year June 30, 1996
June 30, 1996 Average Restatement
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<S> <C> <C> <C>
Revenue $ 8,255,607 $ 8,255,607
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Cost of sales and operating expenses 4,101,436 42.5% 3,508,633
Research and development 1,955,877 10.8% 891,606
Selling, general and administrative 3,422,660 3,422,660
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9,479,973 7,822,899
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Core business contribution - 432,708
Planned development - (1,657,074)
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Operating (loss) $ (1,224,366) $ (1,224,366)
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</TABLE>
DISCONTINUED OPERATION
In a transaction completed August 15, 1995, the Company entered into an
agreement to divest its airport noise monitoring business. As a result, the
Company is no longer a general contractor for these systems, although it still
manufactures and sells acoustic instrumentation used in the systems. Under the
terms of the agreement, Harris Miller Miller & Hanson, Inc. ("HMMH"), an
established consulting firm with its primary business related to transportation
industry acoustic and vibration analysis, purchased essentially all of the
Company's assets and contracts related to the airport noise monitoring business
and assumed approximately $100,000 of the Company's liabilities. The Company
discontinued operations in this area and agreed not to compete with HMMH. HMMH
agreed to use its best efforts to utilize the Company's instrumentation in
future contracts and receives "most favored nations treatment" from the Company
in pricing.
The Company was paid a one-time fee and is entitled to varying royalty
payments over the life of the agreement. During the ten-month period this
agreement was in effect for the fiscal year ended June 30, 1996, the Company
received or accrued amounts due with respect to this transaction of $388,146.
(See Notes to Consolidated Financial Statements; Note P--Discontinued
Operations.) These amounts were offset against the carrying value of associated
assets reflected on the balance sheet of the Company under the caption "Long-
Term Contractual Arrangements."
SIGNIFICANT FINANCIAL CHANGES - STATEMENTS OF INCOME
Total Revenue
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 is the
second consecutive year in which the Company posted an approximate 27% increase
in its acoustic and vibration instrumentation sales. Management expects this
sales strength to continue within the LDL market. The increased sales are
attributed to a general expansion of the underlying market, and an increase in
the unit sales of the Company's products.
The acquisition of Sensar in October of 1995 provides the Company with an
opportunity for increased future sales by the introduction of new products and
the expansion of the Company's potential markets. Management of the Company
does not anticipate that the planned introduction of newly developed and planned
instrumentation in the first calendar quarter of 1997 will have an immediate
impact on sales levels, but believes that such introduction will assist the
Company in its efforts to establish product distribution agreements with
established firms in various product markets.
Cost of Sales and Operating Expenses
The Company's cost of sales and operating expenses of $2,598,586 in the
year ended June 30, 1995, and $4,101,436 in the year ended June 30, 1996,
increased as a percentage of sales from continuing operations from 40% to 50%.
The increase in 1996 is 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 by approximately 90%. Because of the use of the remaining
highly priced electronics subsystems in Sensar's inventory in fiscal year 1996,
the entire material and development costs were expensed during the period.
Management does not expect the higher cost to continue. (See "Planned
Development.") Cost of sales and operating expenses for the Sensar products are
expected to parallel those of the Company's other instrumentation in the range
of 40% to 43%, although this result cannot be assured since the Company has only
limited production experience with these products to date.
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. Over the previous five years, research and
development expenses have averaged approximately 11% of net sales and in the
year ended June 30, 1995, were $708,679, or approximately 11% of net sales. It
is anticipated this aggressive approach to research and development will
continue and the Company will dedicate significant levels of available resources
to this activity. This level of research and development commitment has been
factored into the pricing structure for the Company's products.
For the fiscal year ended June 30, 1996, research and development expenses
were $1,955,877, approximately 24% of net sales, as a result of management's
commitment to develop new products to enhance the revenue potential of the
Company and the availability of equity funds for such purpose. Capital obtained
from the sale of common stock has been used to supplement the Company's
operations as a method for funding this accelerated research and development.
It is anticipated this higher expenditure level will continue for a period of
time dictated by available capital reserves, after which research and
development expense will return to previous ranges.
SIGNIFICANT FINANCIAL CHANGES - BALANCE SHEET
Trade Accounts Receivable
The Company's accounts receivable increased by 9% from June 30, 1995, to
1996. Sales from continuing operations grew 27% for the same period. On June
30, 1996, the balance of $2,332,417 represents a receivable aging of 103 days as
compared with 119 days in 1995. The Company extends 60 day terms on its foreign
sales to compensate for international shipping time, additional time required
for incoming inspection, and reshipment to end users by its representatives.
The Company considers its collection policy to be sound and its net accounts
receivable to be fully collectable.
Inventories
Inventories for the years ended June 30, 1996, and 1995, were $2,923,650
and $2,152,768, respectively. The increase is in part the result of the
acquisition of Sensar and combining its inventory with that of the Company's
then existing inventory. Another contributing factor is that at June 30, 1996,
finished goods inventory was approximately $395,000 higher than in the previous
year. This increase is a result of the normal manufacturing cycle and
fluctuations in finished good inventory levels.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
The Company recognizes income on long-term contracts on a percentage-of-
completion method while billings to customers are made on milestones specified
in agreements. (See Notes to Consolidated Financial Statements; Note A--Summary
of Significant Accounting Policies.) The $378,700 balance of this account
represents accrued amounts which the Company will bill in the normal course of
its business.
Long-Term Contractual Arrangement
Note P--Discontinued Operations, in the Notes to Consolidated Financial
Statements, details the effect of the disposal of the airports business on the
balance sheet as of June 30, 1996. Net Long-Term Contractual Arrangement is
reflected at $2,978,014 and will continue to be amortized. (See "Discontinued
Operations.")
Current Liabilities
Current liabilities decreased $998,601 from June 30, 1995, to June 30,
1996. This decrease is primarily due to reductions in short-term notes payable
of $885,925. Other current liability accounts varied as a result of normal
operations. The Company utilized proceeds from the issuance of common stock in
fiscal 1996 to reduce liabilities and repay debts.
CAPITAL AND LIQUIDITY
At June 30, 1996, the Company had total current assets of $9,680,938 and
total current liabilities of $2,956,245, resulting in a working capital ratio of
3.3:1. Included in total current liabilities is approximately $1,302,000
representing the Company's revolving line of credit. The Company's principal
line of credit has been placed with a new financial institution since June 30,
1996. The limit on this line of credit has been increased to $3,000,000 and is
adjusted from time to time based on ratios of inventories and accounts
receivable levels. The Company is in the first year of a three-year agreement.
The Company anticipates the line of credit will continue to remain available to
it.
The Company received net proceeds from the issuance of common stock and the
exercise of warrants and options in the net amount of $9,269,987 during the
fiscal year ended June 30, 1996. Subsequent to the fiscal year end of
June 30, 1996, the Company has received net proceeds from the sale of
170,000 shares of common stock of approximately $725,000. There are currently
issued and outstanding warrants with respect to in excess of 2,100,000
shares of common stock. If all of these warrants and options were exercised,
the Company would receive gross proceeds of approximately $11,000,000 in
additional funding. 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 has relied on the sale of common stock as a way to fund growth,
operational losses, and research and development efforts. The Company
anticipates this source of capital may be utilized as needed in the future. In
the opinion of management, the Company currently has sufficient capital to fund
its operations and development plans for the 1997 fiscal year.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included beginning at
page . See page for the index to the financial statements.
----- -----
ITEM 8. 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 were their reports 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 their appointment
regarding the application of accounting principles to a specific completed or
contemplated transaction, the type of audit opinion, or seeking other 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 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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:
<TABLE>
<CAPTION>
Director and/or
Name Age Position and Office Held Executive Officer Since
-------------------- --- ------------------------ -----------------------
<S> <C> <C> <C>
Brian G. Larson 53 President and Chairman of
the Board September, 1987
Larry J. Davis 45 Vice-President and Director September, 1987
Dan J. Johnson 45 Vice-President, Secretary,
Treasurer, and Director September, 1987
William E. Hosker 58 Director, Business Development
Coordinator March, 1996
Gerard L. Seelig 70 Director June, 1996
</TABLE>
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. The current term of Brian G. Larson expires at the 1996
annual meeting; the current term of Larry J. Davis expires at the 1997 annual
meeting; Dan J. Johnson's term would have expired at the 1995 annual meeting,
but he is continuing to serve until the next election; and William E. Hosker and
Gerald L. Seelig were appointed in 1996 to serve until the next annual meeting
and election of directors.
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.
Brian G. Larson, was a founder and has been an executive officer and
director of the Company since its inception in 1981. Mr. Larson earned his
masters of business administration from Brigham Young University in 1972 and a
bachelor's degree in electrical engineering from the same institution in 1971.
During the time he was attending Brigham Young University, Mr. Larson worked as
a design engineer in the medical research laboratory of Brigham Young
University.
Larry J. Davis, was a founder and has been an officer and director of the
Company since its inception in 1981. Mr. Davis earned his electrical
engineering degree from Brigham Young University in 1974, where he graduated
Magna Cum Laude.
Dan J. Johnson, has served as the vice-president in charge of
administration and financial strategy, asset control, and fiscal operations of
the Company since 1984 and a director since 1987. Prior to that time, he was
a director of finance for Fiber Technology Corporation. Mr. Johnson has also
been previously employed with a public accounting firm.
William E. Hosker, was appointed as a director and business development
coordinator 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 finance 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 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, including president of ITT's Industrial and
Commercial Products Company and as executive vice-president of the parent
corporation. Prior to that, Mr. Seelig worked for ten years at Lockhead
Corporation where he was corporate vice-president and president of Lockhead
Electronics Company. Mr. Seelig is a member of the Dean's Advisory Council of
the Rutgers Graduate School of Management and was designated as the school's
first Distinguished Executive Lecturer in 1987. He was invited to become a
Visiting Professor and Executive-In-Residence at the Columbia Graduate School of
Business in 1988 and served for three years as a member of its board of
overseers. Mr. Seelig received a masters degree in industrial management from
New York University in 1954 and a bachelors degree in electrical engineering
form Ohio State University in 1948.
Section 16(a) Beneficial Ownership Reporting Compliance
The outside directors of the Company did not timely report the award of
options under the terms of the 1996 Director Stock Option Plan. The awards to
the directors who are also employees were made subject to approval of the plan
by the shareholders of the Company which has not yet been obtained.
The executive officers of the Company did not timely report the award of
options under the terms of their employment agreements dated January 1996.
Other than the foregoing, the Company believes that all reports required by
section 16(a) for transactions in the fiscal year ended June 30, 1996, were
timely filed.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and its
subsidiaries for the fiscal years ended June 30, 1996, 1995, and 1994 to the
chief executive officer of the Company and the other executive officers of the
Company who received compensation in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------------
Annual Compensation Awards Payoffs
------------------------------- -------------------- --------
Other
Annual All Other
Compen- Restricted LTIP Compen-
Name and sation Stock Options/ Payouts sation
Principal Position Year Salary($) Bonus($) ($)(1) Awards($) SARs(#) ($) ($)
- ------------------------ --------- --------- ---------- ------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brian G. Larson, 1996 $198,779 $ 0 $ 4,500 $ 0 500,000 $ 0 $ 0
President and Chairman 1995 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
of the Board 1994 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
Larry J. Davis, 1996 $198,779 $ 0 $ 4,500 $ 0 500,000 $ 0 $ 0
Vice-President 1995 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
1994 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
Dan J. Johnson, 1996 $160,407 $ 0 $ 4,500 $ 0 425,000 $ 0 $ 0
Vice-President and 1995 $129,566 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
Chief Financial Officer 1994 $129,566 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
</TABLE>
[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.
The following table sets forth the options granted to the named executive
officers during the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
(a) (b) (c) (d) (e)
% of Total
Options/
SARs
Options/ Granted to Exercise
SARs Employees or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date
<S> <C> <C> <C> <C>
Brian G. Larson 300,000(1) $4.25 1/3/2006
200,000(2) 26% $7.00 5/7/2004(3)
Larry J. Davis 300,000(1) $4.25 1/3/2006
200,000(2) 26% $7.00 5/7/2004(3)
Dan J. Johnson 225,000(1) $4.25 1/3/2006
200,000(2) 22% $7.00 5/7/2004(3)
</TABLE>
[FN]
(1) These options were granted in connection with the execution of employment
agreements and are currently 20% vested. An additional 20% of the shares
subject to these options will become vested and exercisable on each of the
next four anniversaries of the date of grant.
(2) These options were granted pursuant to the 1996 Director Stock Option Plan
and are currently 25% vested. An additional 25% will vest on each of the
next three anniversaries of the date of grant. The options awarded to the
directors who are also employees of the Company are subject to the approval
of the 1996 Director Stock Option Plan by the shareholders of the Company.
(3) The options expire with respect to shares subject to such options five
years after the right to exercise the option becomes vested for individual
shares.
The following table sets forth the information concerning the options
exercised by the named executive officers during the fiscal year ended June 30,
1996, and the value of unexercised options as of June 30, 1996.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Brian G. Larson 0 0 360,000/390,000 $2,280,600/$1,780,350
Larry J. Davis 0 0 360,000/390,000 $2,280,600/$1,780,350
Dan J. Johnson 0 0 374,430/330,000 $2,454,389/$1,443,750
</TABLE>
Executive Employment Agreements
The Company has employment agreements with its executive officers, Brian G.
Larson, Larry J. Davis, and Dan J. Johnson. These employment agreements were
entered into as of January 3, 1996, and have a term of five years. 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.
The employment agreements provide for compensation to Mr. Larson and Mr.
Davis of $200,000 per annum and $150,000 per annum for Mr. Johnson. Under the
terms of the employment agreements, the salaries are subject to an annual
increase as may be determined by the board of directors or the compensation
committee of the Company; provided that, such increase shall not be less than a
percentage equal to the sum of the increase in the consumer price index, plus
6%. Bonuses may be paid at the discretion of the board of directors or
compensation committee.
In connection with the execution of the employment agreements, Messrs.
Larson and Davis were granted options to acquire 300,000 shares of common stock
and Mr. Johnson an option to acquire 225,000 shares of common stock, each with
an exercise price of $4.25 per share. The right to exercise such options vest
in the executive with respect to 20% of the shares as of the date of grant and
an additional 20% on each following anniversary of the date of grant. The
options expire if not previously exercised on January 3, 2006.
Under the terms of the agreements, the Company maintains key-man life
insurance policies on the lives of the executives in the amount of $2,000,000,
each, but is not obliged to pay annual premiums in excess of 8% of the
executives base salary. The Company furnishes the executives with automobiles,
and with health, medical, and disability insurance.
In the event that the executive is disabled 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; (ii) 50% of his base salary for the
unexpired employment term; or (iii) his base salary for the initial six months
of disability, one-half of his base salary during the next three months of
disability, and one-fourth of his base salary during the next three months of
disability. The executive is also entitled to receive incentive compensation
during the initial six months of any disability based on the incentive
compensation paid to the executive during the preceding fiscal year.
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 greater of two times the then current annual salary or the amount of
salary that would otherwise accrue during the remaining employment period. In
addition, the right to exercise the options granted pursuant to the employment
agreements shall immediately vest with respect to all shares of common stock
subject to such option and the Company shall maintain all employee benefit plans
for a period equal to the greater of two years or the remaining employment
period.
If the employment agreements are terminated as a result of the death of the
executive, the right to exercise the option with respect to all shares shall
immediately vest in the estate or heirs of the executive, the Company shall
maintain the employee benefits for the family of the executive for a period
equal to the greater of two years or the remaining employment period, and the
Company shall pay an amount equal to 90% of the proceeds of the life insurance
policy maintained by the Company on the executive or, if no policy is then in
effect, an amount equal to the then current annual salary plus a pro rata
portion of the incentive compensation based on the number of full months of
employment during the year of the executive's death, payable in six equal
monthly installments.
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 has adopted its 1996 Director Stock Option Plan pursuant to which each
of the five 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 were 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 are
subject to the approval of the plan by the shareholders of the Company. The
Company anticipates submitting the plan to the shareholders at its next annual
meeting. Because of the consulting agreement with STAT Associates, Inc., Mr.
Hosker waived his monthly fee of $1,000 during the fiscal year ended June 30,
1996. (See "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
ITEM 11. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 3, 1996, 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.
<TABLE>
<CAPTION>
Amount and Nature of Ownership
Sole Voting and
Investment Percent of
Name of Person or Group Power(1)(2) Class(3)(4)
<S> <C> <C> <C>
Principal Shareholders:
Brian G. Larson(5) Common Stock 474,583 4.5%
1681 West 1820 North Options 750,000 6.7%
Provo, Utah 84601 ----------
Total 10.9%
1,224,583
Larry J. Davis(6) Common Stock 776,284 7.4%
10455 North Edinburgh Options 750,000 6.7%
Highland, Utah 84003 ----------
Total 13.6%
1,526,284
Dan J. Johnson Common Stock 0 0.0%
480 East 1700 North Options 704,430 6.3%
Mapleton, Utah 84664 -------
Total 6.3%
704,430
Summit Enterprises, Inc., Common Stock 10,760 0.0%
of Virginia Preferred Stock 200,000 1.9%
1308 Devils Reach Road, Suite 302 -------
Woodbridge, Virginia 22192 Total 210,760 1.9%
Officers and Directors:
Brian G. Larson --------------------------see above-------------------------
Larry J. Davis --------------------------see above-------------------------
Dan J. Johnson --------------------------see above-------------------------
William E. Hosker(7) Common Stock 12,000 0.1%
Options 200,000 2.0%
-------
Total 212,000
Gerard L. Seelig Common Stock 0 0.0%
Options 200,000 1.9%
-------
Total 200,000
All Officers and Directors Common Stock 1,262,867 12.1%
as a Group (5 Persons) Options 2,604,430 20.0%
---------
Total 3,867,297 29.6%
</TABLE>
(footnotes contained on following page)
[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) These options have been issued to the executive officers and directors
pursuant to the 1987 Employee Stock Option Plan, the 1991 Director Stock
Option Plan and the 1996 Director Stock Option Plan. The options have
exercise prices ranging from $2.0625 to $7.00 per share with an weighted
average price of $4.82 per share. Of the 750,000 shares subject to
options shown for Messrs. Larson and Davis, options with respect to
240,000 shares are not currently vested or exercisable. In addition,
options to acquire 200,000 shares are subject to the approval of the
1996 Director Stock Option Plan by the shareholders of the Company.
Of the 704,430 shares subject to options shown for Mr. Johnson, options
with respect to 180,000 shares are not currently vested or exercisable.
In addition, options to acquire 200,000 shares are subject to the approval
of the 1996 Director Stock Option Plan by the shareholders of the Company.
Of the 200,000 shares subject to options shown for Messrs. Hosker and
Seelig, options with respect to 150,000 shares are not currently vested
or exercisable.
(3) The percentages shown are based on 10,445,686 shares of common stock of the
Company issued and outstanding as of October 3, 1996.
(4) 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.
(5) The number of shares indicated for Mr. Larson includes 25,000 shares held
by his wife and 34,600 shares held of record by Mr. Larson for the benefit of
his minor children and in which he disclaims direct economic interest.
(6) The number of shares owned by Mr. Davis includes 702,362 shares held
jointly with his wife over which he exercises joint investment and voting
control and 64,000 shares which are held of record by Mr. Davis for the
benefit of his minor children and in which he disclaims direct economic
interest.
(7) The number of shares indicated for Mr. Hosker includes 2,500 shares held by
his wife.
ITEM 12. 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 principal line of
credit of the Company was placed with another financial institution subsequent
to June 30, 1996, which transaction 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 and the business development coordinator for the Company.
Under the terms of the Agreement, STAT Associates agreed to provide the Company
with advisory and consulting services concerning the reduction of the technology
held by Sensar to marketable products, 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. The Agreement calls for monthly compensation of $16,667 for
a six-month period, or an aggregate 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.
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 current fiscal year in the aggregate principal amount of
$105,000, plus accrued interest of approximately $5,300.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements and schedules are included immediately
following the signatures to this report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Grant Thornton LLP, independent certified public accountants
on the June 30, 1996, financial statements
Report of Peterson, Siler & Stevenson, independent certified public accountants
on the June 30, 1995, financial statements
Consolidated Balance Sheet as of June 30, 1996
Consolidated Statements of Operations for the years ended June 30, 1996
and 1995
Consolidated Statement of Stockholders' Equity for the years ended
June 30, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended June 30, 1996
and 1995
Notes to Consolidated Financial Statements
</TABLE>
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.
EXHIBITS
<TABLE>
<CAPTION>
SEC
Exhibit Reference
No. No. Title of Document Location
--- --- ----------------- --------
<S> <C> <C> <C>
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
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) Bylaws Registration Statement
filed on Form S-18,
Exhibit 5, SEC File
No. 33-3365-D*
5 (4) Form of $6.25 Warrant This Filing
Agreements relating to research and
development work performed by the
Company in 1983 for two unrelated
funding entities
6 (10) (a) Purchase Option Agreement between Exhibit to report on
Larson Davis Laboratories, and Form 10-K for the year
LDL Research and Development, ended June 30, 1988*
Ltd., dated August 31, 1983
7 (10) (b) License Option Agreement between Exhibit to report on
Larson Davis Laboratories and Form 10-K for the year
LDL Research and Development, ended June 30, 1988*
Ltd., dated August 31, 1983
8 (10) (c) Cross License Option between Exhibit to report on
Larson Davis Laboratories and Form 10-K for the year
LDL Research and Development II, ended June 30, 1988*
Ltd., dated November 21, 1983
9 (10) (d) Purchase Option between Exhibit to report on
Larson Davis Laboratories and Form 10-K for the year
LDL Research and Development II, ended June 30, 1988*
Ltd., dated November 21, 1983
10 (10) 1987 Stock Option Plan of Larson Davis Exhibit to report on
Incorporated, as amended Form 10-K for the year
ended June 30, 1988*
11 (10) 1991 Employee Stock Award Plan of Exhibit to report on
Larson Davis Incorporated Form 10-K for the year
ended June 30, 1992*
12 (10) 1991 Director Stock Option and Stock Exhibit to report on
Award Plan of Larson Davis Form 10-K for the year
Incorporated ended June 30, 1992*
13 (10) 1996 Director Stock Option Plan This Filing
14 (10) Agreement between Larson Davis Laboratories Registration Statement
and Summit Enterprises, Inc., of Virginia filed on Form SB-2,
dated May 24, 1995 Exhibit 20, SEC File
No. 33-59963*
15 (10) Technology License, Assumption, and Exhibit to report on
Maintenance Agreement between Form 8-K/A dated
Larson Davis 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 Larson Davis Incorporated) September 30, 1995*
and SAES Getters S.p.A.
17 (10) Consulting Agreement between Larson Davis Exhibit to report on
Incorporated and STAT Associates, Inc., Form 8-K dated
dated March 19, 1996 March 19, 1996*
18 (10) Executive Employment Agreement between Exhibit to report on
Larson Davis Incorporated and Brian G. Form 10-QSB dated
Larson, dated January 3, 1996 March 31, 1996*
19 (10) Executive Employment Agreement between Exhibit to report on
Larson Davis Incorporated and Larry J. Form 10-QSB dated
Davis, dated January 3, 1996 March 31, 1996*
20 (10) Executive Employment Agreement between Exhibit to report on
Larson Davis Incorporated and Dan J. Form 10-QSB dated
Johnson, dated January 3, 1996 March 31, 1996*
21 (10) Agreement to Issue Warrants to Exhibit to report on
Congregation Ahavas Tzdokah Z'Chesed Form 8-K dated
May 15, 1996*
22 (10) Agreement to Issue Warrants to Ezer Exhibit to report on
Mzion Organization Form 8-K dated
May 15, 1996*
23 (10) Form of Agreement to Issue Warrants to Exhibit to report on
Laura Huberfeld and Naomi Bodner Form 8-K dated
May 15, 1996*
24 (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
25 (10) Agreement to Issue Warrants entered into Exhibit to report on
between Larson Davis Incorporated and Form 8-K dated
Connie Lerner, dated May 29, 1996 May 28, 1996*
26 (11) Statement of Computation of Earnings (Loss) This Filing
Per Share
27 (16) Letter from Peterson, Siler & Stevenson Exhibit to report on
regarding change in certifying accountants Form 8-K dated
January 23, 1996*
28 (21) Subsidiaries of Larson Davis This Filing
Incorporated
29 (23) Consent of Peterson, Siler & Stevenson This Filing
(now known as Pritchett, Siler & Hardy, P.C.)
30 (23) Consent of Grant Thornton LLP This Filing
31 (27) Financial Data Schedule This Filing
*Incorporated by reference
</TABLE>
REPORTS ON FORM 8-K
The Company filed reports on Form 8-K during the last quarter of its fiscal
year ended June 30, 1996, dated April 23, 1996, May 15, 1996, and May 28, 1996.
These reports described, respectively, (i) the amendment of the agreement with
the holders of the Company's warrants, the addition of Mr. Hosker as a board
member, and the hiring of certain employees by the Company; (ii) the receipt of
proceeds from the exercise of outstanding warrants and execution of an agreement
to issue $6.25 warrants under certain circumstances; and (iii) the receipt of
proceeds from the exercise of outstanding warrants and the issuance of $6.25
warrants. None of the reports required the filing of financial statements.
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.
LARSON DAVIS INCORPORATED
Dated: October 11, 1996 By /s/ Brian G. Larson
----------------------------
Brian G. Larson, President
(Principal Executive Officer)
Dated: October 11, 1996 By /s/ Dan J. Johnson
----------------------------
Dan J. Johnson, Secretary/Treasurer
(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: October 11, 1996 By /s/ Brian G. Larson
----------------------------
Brian G. Larson, Director
Dated: October 11, 1996 By /s/ Larry J. Davis
----------------------------
Larry J. Davis, Director
Dated: October 11, 1996 By /s/ Dan J. Johnson
----------------------------
Dan J. Johnson, Director
Dated: October , 1996 By
----- ----------------------------
William E. Hosker, Director
Dated: October , 1996 By
----- ----------------------------
Gerard L. Seelig, Director
LARSON-DAVIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
JUNE 30, 1996
REPORT OF INDEPENDENT
---------------------
CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
Board of Directors
Larson-Davis Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheet of Larson-Davis
Incorporated and Subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of Larson-
Davis Incorporated and Subsidiaries as of and for the year ended June 30, 1995,
were audited by other auditors whose report dated August 4, 1995 on those
statements included an explanatory paragraph that questioned the Company's
ability to continue as a going concern.
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 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Larson-Davis
Incorporated and Subsidiaries as of June 30, 1996, and the consolidated results
of their operations and their consolidated cash flows for the year then ended,
in conformity with generally accepted accounting principles.
Provo, Utah
August 30, 1996
PRITCHETT, SILER & HARDY
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION
430 EAST 400 SOUTH
SALT LAKE CITY, UTAH 84111
(801) 328-2727 FAX (801) 328-1123
INDEPENDENT AUDITORS' REPORT
Board of Directors
LARSON-DAVIS INCORPORATED AND SUBSIDIARIES
Provo, Utah
We have audited the accompanying consolidated balance sheet of Larson-Davis
Incorporated and Subsidiaries at June 30, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows 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 did not audit the financial
statements of Larson-Davis, Ltd., a wholly owned subsidiary, which statements
constitute approximately 4% of total assets and 14% of total revenues of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Larson-Davis, Ltd., is based solely on the report of
the other auditors.
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, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Larson-Davis
Incorporated and Subsidiaries as of June 30, 1995 and the results of their
operations and their cash flows for the year ended June 30, 1995, in conformity
with generally accepted accounting principles.
/s/ Pritchett, Siler & Hardy, P.C.
PRITCHETT, SILER & HARDY, P.C.
August 4, 1995
Larson-Davis Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents (Note B) $ 3,922,660
Trade accounts receivable, net (Note G) 2,332,417
Inventories (Notes C and G) 2,923,650
Costs and estimated earnings in excess of
billings on uncompleted contracts 378,700
Other current assets 123,511
----------
Total current assets 9,680,938
PROPERTY AND EQUIPMENT, net
(Notes D and H) 1,610,473
ASSETS UNDER CAPITAL LEASE OBLIGATIONS,
net (Note H) 356,255
LONG-TERM CONTRACTUAL ARRANGEMENT,
net of accumulated amortization of $388,146
(Notes E and P) 2,978,014
INTANGIBLE ASSETS, net (Note E) 5,143,348
----------
10,088,090
----------
$19,769,028
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Notes payable (Note G) $ 1,333,262
Accounts payable 581,377
Accrued liabilities 767,254
Current maturities of long-term
obligations (Note H) 178,852
Current maturities of capital lease
obligations (Note H) 95,500
----------
Total current liabilities 2,956,245
LONG-TERM OBLIGATIONS,
less current maturities (Note H) 778,835
CAPITAL LEASE OBLIGATIONS,
less current maturities (Note H) 357,171
COMMITMENTS AND CONTINGENCIES (Notes H,
I, L and M) -
STOCKHOLDERS' EQUITY (Notes J, K, L, Q and S)
Preferred stock, $.001 par value; 10,000,000
shares authorized; issued and outstanding 200,000
shares 200
Common stock, $.001 par value; 290,000,000
shares authorized; issued and outstanding
10,258,406 shares 10,258
Additional paid-in capital 18,402,999
Accumulated deficit (2,752,360)
Cumulative foreign currency translation
adjustment 15,680
----------
Total stockholders' equity 15,676,777
----------
$19,769,028
===========
</TABLE>
The accompanying notes are an integral part of this statement.
Larson-Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
1996 1995
-------------- --------------
<S> <C> <C>
Net sales (Note N) $ 8,255,607 $6,515,830
Costs and operating expenses
Cost of sales and operating expenses 4,101,436 2,598,586
Research and development 1,955,877 708,679
Selling, general and administrative 3,422,660 2,449,765
------------ ---------
9,479,973 5,757,030
----------- ---------
Operating profit (loss) (1,224,366) 758,800
Other income (expense)
Interest income 12,320 7,302
Interest expense (447,907) (301,402)
Other (46,295) (6,189)
(481,882) (300,289)
-------- --------
Income (loss) from continuing operations
before discontinued operations (1,706,248) 458,511
Discontinued operations (Note P)
Loss from operations of discontinued
airport installation division - (770,128)
-- --------
NET LOSS $(1,706,248)$ (311,617)
=========== ===========
Earnings (loss) per common share
Earnings (loss) from continuing operations $(0.19) $ 0.07
Loss from discontinued operations - (0.12)
--------- ----------
NET LOSS (0.19) $(0.05)
========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
Larson-Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996 and 1995
Cumulative
foreign
Additional currency
Preferred stock Common stock paid-in Accumulated translation
------------------- ------------------
Shares Amount Shares Amount capital deficit adjustment Total
------ ------ ------ ------ ------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance 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
at $1.50 to $2.56 per
share (Note K) - - 19,325 19 42,896 - - 42,915
Shares issued on exercise
of warrants from $1.63 to
$1.75 per share (Note K) - - 614,000 614 990,729 - - 991,343
Shares issued for services
rendered at $1.25 to
$2.50 per share (Note K) - - 98,905 99 209,039 - - 209,138
Preferred shares issued
for payment of a note
payable (Note J) 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)
------- ---- ---------- ------- ----------- ------------ ------- -----------
Balance 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
at $1.60 to $2.75 per
share (Note L) - - 61,117 61 142,644 - - 142,705
Shares issued on exercise
of warrants from $2.50
to $3.50 per share,
(Note K) - - 3,000,000 3,000 9,124,282 - - 9,127,282
Shares issued for payment of
interest on debt at $2.19 to
$2.88 per share (Note K) - - 16,483 17 42,244 - - 42,261
Shares issued for services
rendered at $4.75 to
$6.00 per share (Note K) - - 34,940 35 178,355 - - 178,390
Shares issued in Sensar
acquisition at $5.76 per
share (Note Q) - - 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)
------- ---- ---------- ------- ----------- ------------ ------- -----------
Balance at June 30,1996 200,000 $200 10,258,406 $10,258 $18,402,999 $(2,752,360) $15,680 $15,676,777
======= ==== ========== ======= =========== ============ ======= ===========
</TABLE>
Larson-Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
1996 1995
------------- --------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $(1,706,248) $ (311,617)
----------- -----------
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 278,417 217,790
Amortization 738,266 517,948
Provision for losses on accounts receivable 20,000 875
Stock issued in payment of compensation 178,390 219,708
Stock issued in payment of interest 42,261 -
(Gain) loss on sale of property and equipment (17,014) 6,189
Changes in assets and liabilities
Trade accounts receivable (221,582) (520,395)
Inventories (770,882) 2,464
Other current assets 11,837 (198,022)
Due from related party - 29,817
Costs and estimated earnings in excess
of billings on uncompleted contracts (178,382) 431,529
Accounts payable (305,112) (303,477)
Accrued liabilities 298,251 (59,205)
------------ -----------
Total adjustments 74,450 345,221
------------ -----------
Net cash provided by (used in)
operating activities (1,631,798) 33,604
------------- -----------
Cash flows from investing activities
Purchase of property and equipment (560,861) (449,917)
Proceeds from sale of assets 49,543 59,477
Purchase of stock of Sensar Corporation (1,184,069) (1,235,229)
Purchase of technology (414,991) -
Costs of contractual arrangements (230,384) -
Patent acquisition of costs (125,577) -
------------ -----------
Net cash used in investing activities (2,466,339) (1,625,669)
------------ -----------
Cash flows from financing activities
Proceeds from notes payable and long-term
obligations 679,366 334,343
Principal payments of notes payable and
long-term obligations (1,772,264) (80,293)
Net proceeds from issuance of common stock and
exercise of options 9,269,987 1,023,688
Principal payments on capital lease obligations (170,538) (67,205)
Preferred dividends (48,750) -
Increase (decrease) in bank overdraft (40,039) 40,039
------------ -----------
Net cash provided by
financing activities 7,917,762 1,250,572
------------ -----------
Effect of exchange rates on cash 19,701 (7,434)
Net increase (decrease) in cash and cash equivalents 3,839,326 (348,927)
Cash and cash equivalents at beginning of year 83,334 432,261
------------ -----------
Cash and cash equivalents at end of year $3,922,660 $ 83,334
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Larson-Davis Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
-----------------
Larson-Davis Incorporated (the Company) is primarily engaged in the
development, manufacture, and marketing of precision measuring
instrumentation related to the environmental sciences, and accompanying
computer hardware and software technology. The Company sells its
measurement instruments to private industries and governmental agencies for
both industrial and military applications. The accompanying consolidated
financial statements of the Company include the accounts of the Company and
its wholly-owned subsidiaries; Larson-Davis 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. With
respect to recognizing long-term contract revenues and charging expenses to
operations, the Company has adopted the percentage of completion method of
recognizing revenues and expenses.
The amount of revenue recognized at the statement date on long-term
contracts is that portion of the total contract price that costs expended to
date bears to anticipated final total cost, based on current estimates of
cost to complete. At the time a loss on a contract becomes known, the
entire amount of the estimated ultimate loss is recognized in the financial
statements. Contract costs include all direct labor and benefits, materials
unique to or installed in the project, indirect cost allocations, and
employee benefits expense. As long-term contracts extend over one or more
years, revisions in costs and earnings estimates during the course of the
work are reflected in the accounting period in which the facts that require
the revision become known.
Proceeds relating to the long-term contractual arrangement are recorded on a
"cost recovery" method at such time as receipt of the related future
proceeds are reasonably assured.
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.
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. Research tax credits
are recognized as utilized.
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 using the average cost method,
which approximates the first-in-first-out method.
7. Net earnings (loss) per share
-----------------------------
Primary net earnings (loss) per share are computed by dividing net earnings
(loss) by the weighted average common and dilutive common equivalent shares
outstanding during each period. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding stock options
and warrants.
The weighted average number of shares outstanding were 9,317,297 in 1996 and
6,227,707 in 1995.
8. Research and development costs
------------------------------
The Company conducts research and development to develop new products or
product improvements not directly related to a specific project. 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 receivables. The
Company provides credit according to the terms of individual contracts, in
the normal course of business.
10. Recently issued accounting pronouncements
-----------------------------------------
In March of 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 (SFAS No. 121) - "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS No. 123)
"Accounting for Stock-Based Compensation". SFAS No. 123 recommends changes
to the recognition of expense in connection with the grant of stock options.
The standard encourages, but does not require, companies to recognize
compensation expense (equal to the fair value of the options at the grant
dates) ratably over the vesting periods. Additionally, if the fair market
value method is not adopted the standard sets forth new minimum disclosure
requirements to reflect the proforma adjusted net income calculated by
applying the fair value requirement. The Company intends to continue the
recognition of expense under Accounting Principles Board Opinion No. 25, and
to adopt the additional disclosure requirements set forth in SFAS No. 123.
SFAS No. 121 and SFAS No. 123 are effective for fiscal years beginning after
December 15, 1995, although earlier adoption is permitted. The Company does
not believe that the adoption of SFAS No. 121 or SFAS No. 123 will have a
material effect on the Company's consolidated financial statements.
11. Dividends
---------
The Company distributed preferred stock dividends on 200,000 shares of
issued and outstanding preferred stock in the amount of $48,750 in 1996.
12. 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 patent, whichever is
shorter. The amortization periods range from 5 to 17 years.
The Company capitalizes all costs incurred to develop software after
technological feasibility has been established. Amortization of these costs
is computed using the straight-line method over estimated useful lives of
approximately 10 years.
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
7 years.
13. 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.
Gains and losses on intercompany foreign currency transactions, where
settlement is not planned or anticipated in the foreseeable future, are not
included in determining net earnings but are reported in the same manner as
translation adjustments. Foreign currency translation adjustments are
accumulated as a separate component of stockholders' equity.
14. 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 and the allowance for inventory overstock or obsolescence.
Additionally, certain estimates which are affected by expected future gross
revenues or royalty receipts are capitalized software costs, long-term
contractual arrangement and patents on proprietary technology. Management
believes the estimates used in determining carrying values of assets as of
June 30, 1996 are reasonable.
15. Fair value of financial instruments
-----------------------------------
Calculation of estimated fair value of financial instruments in accordance
with SFAS 107 is not presented because, in management's opinion, this
calculation would not result in a material difference between carrying
amounts and estimated fair values of financial instruments as presented on
the accompanying consolidated balance sheet, with the exception of the long-
term contractual arrangement. It is not practicable to estimate the fair
value of this asset, since its value is dependent on the future revenues of
an unrelated entity, which is not readily determinable by the Company.
16. Reclassifications-Not Material
------------------------------
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 presentation.
NOTE B - CASH AND CASH EQUIVALENTS
Included in cash is approximately $2,600,000 of securities purchased
through a daily repurchase agreement with a bank. 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.
In addition, the Company maintains, a certificate of deposit in the amount
of $400,000 to secure a letter of credit related to a performance bond for a
third party. Accordingly, this cash amount is currently restricted.
NOTE C - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $1,129,835
Work in process 680,972
Finished goods 1,112,843
----------
$2,923,650
==========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives are as
follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C> <C>
Land - $ 25,000
Buildings and improvements 5-30 966,969
Machinery and equipment 5-10 2,249,482
Furniture and fixtures 5-10 386,644
----------
3,628,095
Less accumulated depreciation and
amortization (2,017,622)
----------
$1,610,473
==========
</TABLE>
Total depreciation expense related to property and equipment was $278,417
and $217,790 for the years ended June 30, 1996 and 1995, respectively.
NOTE E - INTANGIBLE ASSETS
Intangible assets consist of acquired technology, capitalized software
development costs, goodwill, and patents which are being amortized using the
straight line method over useful lives ranging from 5 to 17 years.
The long-term value of these assets is connected to the application of
technologies and software costs to viable products which can be successfully
marketed by the Company. Management believes current and projected sales
levels of its existing and planned products will support the carrying costs
of the technologies.
The following is a summary of intangible assets:
<TABLE>
<CAPTION>
<S> <C>
Acquired technology $3,588,793
Capitalized software development costs 1,907,101
Goodwill 142,277
Patents 134,015
Less accumulated amortization (628,838)
----------
$5,143,348
==========
</TABLE>
A large portion of the acquired technology was purchased from unrelated
third party entities with which the Company has also entered into royalty
contracts (Note M). Royalty expense included in the statement of operations
for the year ended June 30, 1996 and 1995, were $92,919 and $73,937,
respectively.
The Company made a decision to divest its Airports Noise Monitoring business
during the fiscal year ended June 30, 1995 (Note P), and entered into a
definitive agreement during August of 1995 to sell the associated assets.
As a result of this agreement the Company sold its Airport Noise and
Operations Monitoring Software (ANOMS) and surrendered control of the
respective assets in exchange for a long-term contractual arrangement.
NOTE F - INCOME TAXES
Income tax provision consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $ 0 $ 0
Deferred 0 0
------ -----
$ 0 $ 0
====== =====
Deferred income tax assets and liabilities
are as follows:
Deferred tax assets (liabilities)
Allowance for doubtful accounts $ 5,116 $5,855
Reserve for obsolete inventory 37,366 0
Amortization - technology 219,963 310,609
Accrued vacation 56,438 27,847
Net operating loss carry forward 1,895,730 582,301
Other, net 224 130
Accelerated depreciation (2,279) 26,935
Capitalized software development costs (2,099,956) (494,570)
Valuation allowance (112,602) (459,107)
------------- ---------
Deferred taxes $ 0 $ 0
============ ========
</TABLE>
There were no deferred tax assets or income tax assets or income tax
benefits recorded in the financial statements for net deductible temporary
differences or net operating loss carryforwards due to the fact that the
likelihood of realization of the related tax benefits cannot be established.
As of June 30, 1996, the Company had a net operating loss carry forward for
tax reporting purposes of approximately $5,100,000 expiring in various years
through 2011. Utilization of approximately $2,800,000 of the total net
operating loss is dependent on the profitable operation of Sensar Corporation
in the future due to application of the separate return limitation and due
to application of Internal Revenue Code Section 382 limitations on the
carryforward of net operating losses after a change in ownership.
NOTE G - NOTES PAYABLE
Notes payable are as follows:
<TABLE>
<CAPTION>
<S> <C>
Prime plus 2.75% (11% at June 30, 1996) revolving
line of credit payable to a bank with funds
available based on accounts receivable and
inventories by which it is collateralized to a
maximum of $2,400,000 with interest payable
monthly; principal due September 1996;
personally guaranteed by two directors /
stockholders $1,302,306
8% note payable in monthly installments
of $3,000 including interest; due May 1997 30,956
----------
$1,333,262
==========
</TABLE>
NOTE H - LONG-TERM OBLIGATIONS
1. Debt
----
<TABLE>
<CAPTION>
<S> <C>
Long-term debt consists of the following:
8.25% note payable to a commercial bank,
collateralized by real estate, payable in
monthly installments of $8,246 including
interest; due January 1999 $775,907
9.75% and 9.9% installment loans payable to
a financing company, collateralized by
automobiles, payable in monthly install-
ments aggregating $1,201 including
interest, due July 2000 47,426
9.0% note payable to a finance company in
monthly installments of $15,845 including
interest, due March 1997 134,354
-------
957,687
Less current maturities (178,852)
--------
$778,835
========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending
June 30,
-----------
1997 $178,852
1998 48,576
1999 53,030
2000 57,894
2001 48,158
Thereafter 571,177
--------
$957,687
========
</TABLE>
2. Capital leases
--------------
The Company leases certain equipment on 36 to 60 month capital leases. The
leases contain provisions for the Company to acquire the equipment at the
end of the lease term through either payment of a nominal amount or, in
other cases, the greater of fair market value or 10% of the original
equipment cost.
<TABLE>
<CAPTION>
<S> <C>
Equipment $748,099
Less accumulated amortization (391,844)
--------
$356,255
========
</TABLE>
Total amortization on equipment under capital lease obligations
was $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:
<TABLE>
<CAPTION>
<S> <C>
Year ending
June 30,
-----------
1997 $161,751
1998 140,688
1999 125,699
2000 66,553
2001 43,575
Thereafter -
--------
Total minimum lease payments 538,266
Less amount representing interest 85,595
--------
Present value of net minimum capital
lease payments 452,671
Less current maturities 95,500
--------
$357,171
========
</TABLE>
3. Operating leases
----------------
The Company leases certain office space and equipment under operating leases
expiring through 1998. Minimum future payments under these non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending
June 30,
-----------
1997 $ 83,274
1998 50,343
Thereafter -
--------
$133,617
========
</TABLE>
Total rent expense under operating leases was $83,857 in 1996 and $62,932
in 1995.
NOTE I - 401(K) PROFIT SHARING PLAN
The Company offers and participates in a 401(k) profit sharing plan under
which eligible employees may choose to contribute up to 6% 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 after the
first year and participants are fully vested after six years. The Company
contributed $34,594 to the plan in 1996 and $15,282 in 1995.
NOTE J - 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. This preferred
stock pays cumulative dividends at a rate of $0.225 per share per annum,
payable monthly. The preferred stock is convertible into common stock at
the option of the holder at a conversion price of $2.50 per share. The
preferred stockholders are not entitled to voting rights.
NOTE K - COMMON STOCK
During the year ended June 30, 1996 the Company issued 3,000,000 shares of
common stock, valued at prices ranging from $2.50 to $3.50, in various
private placements as a result of unrelated parties exercising outstanding
warrants. Net proceeds to the Company after expenses of $372,717 were
$9,127,282.
Also during the year ended June 30, 1996, the Company issued, for services
rendered, 34,940 shares of common stock valued at prices ranging from $4.75
to $6.00 per share, with a total value of $178,390. The Company also issued
16,483 shares of common stock, at prices ranging from $2.19 to $2.88 per
share, with a total value of $42,261, as payment of interest on the
Company's long-term debt.
During the years ended June 30, 1996 and 1995, the Company issued 61,117 and
19,325 shares respectively, of common stock to certain officers, directors,
shareholders and an employee upon exercise of common stock options at prices
ranging from $1.50 to $2.75 per share.
Also during 1995, the Company issued 614,000 shares of common stock in
various private placements at prices ranging form $1.63 to $1.75 per share.
In one of the private placements, warrants to purchase 500,000 shares of
common stock at $2.50 per share and 500,000 shares of common stock at $3.50
per share were also issued (Note L). Net proceeds to the Company less
expenses of $34,767 were $991,343.
The Company also issued 98,905 shares of common stock during 1995 valued at
prices ranging from $1.25 to $2.50 per share for services rendered and in
payment of legal fees and research and development costs valued at $209,138.
NOTE L - STOCK OPTIONS AND WARRANTS
1. Stock options
-------------
During 1991, the Board of Directors and Shareholders approved the Company's
1991 Directors Stock Option Plan. The plan calls for the annual granting of
30,000 options to each director (up to an aggregate of 450,000 options) for
each year of service. The plan expires July 1, 1996.
During 1996, the Board of Directors approved the Company's 1996 Director
Stock Option Plan. The plan calls for the granting of up to 200,000 options
to each director (total of 1,000,000 options), wherein each option
represents the right to purchase one share of common stock at $7 per share.
Options vest at the rate of 25% at the date of grant and 25% for each year
of service thereafter. The options granted are pending approval of the plan
by the stockholders.
During 1996 and 1995, the Company granted to third parties 150,000 options
at $4.75 to $8.00 in connection with consulting agreements.
During 1996, the Board of Directors approved the Company's Executive
Employment Agreements. The agreements call for granting 300,000 options at
$4.25 to each of two directors and 225,000 options at $4.25 to a third
director, which vest at the rate of 20% at the date of grant and 20% for
each year of service thereafter.
During 1994, the board of Directors and Shareholders approved revisions and
extended the 1987 Employee Stock Option Plan. The plan authorizes options
to be issued to employees that qualify as incentive stock options under the
Internal Revenue Code. There were 95,000 options granted during 1996 at
prices ranging from $4.68 to $5.75. There were 80,000 options granted
during 1995 at prices ranging from $2.06 to $2.27. During 1996, 61,117
options were exercised at prices ranging from $1.60 to $2.75 and 19,325
exercised in 1995 at prices ranging from $1.50 to $2.56.
<TABLE>
<CAPTION>
1991 1987 1996
Executive Director Employee Director
Agreements Plan Plan Plan Other
---------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Outstanding at July 1, 1994 - 270,000 448,755 - -
Granted - 90,000 80,000 - 50,000
Exercised - - (19,325) - -
Forfeited - - - - -
Outstanding at June 30, 1995 - 360,000 509,430 - 50,000
Granted 825,000 - 95,000 1,000,000 100,000
Exercised - - (61,117) - -
Forfeited - - (13,883) - -
--------- --------- --------- ----------- -------
Outstanding at June 30 ,1996 825,000 360,000 529,430 1,000,000 150,000
========= ========= ========= =========== ========
Exercisable at June 30, 1996 165,000 360,000 434,430 250,000 150,000
========= ========= ========= =========== ========
$2.31 to $1.50 to $4.75 to
Price per share $4.25 $3.85 $2.75 $7.00 $8.00
========== ========== ========== ============ ========
</TABLE>
2. Warrants
--------
During the year ended June 30, 1996, 3,000,000 shares of stock were issued
upon exercise of warrants ranging in price from $2.50 to $3.50 in connection
with various private placements of common stock (Note K). In addition, the
Company issued warrants to purchase 4,100,169 shares of common stock for
$3.25 to $6.25 per share which expire in December 1997. As of June 30,
1996, 2,100,169 warrants were outstanding. Warrant activity is as
follows:
<TABLE>
<CAPTION>
Warrants
--------
<S> <C>
Outstanding at July 1, 1994 712,905
Granted 1,000,000
Exercised (712,905)
Forfeited -
-----------
Outstanding at June 30, 1995 1,000,000
Granted 4,100,169
Exercised (3,000,000)
Forfeited -
-----------
Outstanding at June 30, 1996 2,100,169
===========
Exercisable at June 30, 1996 2,100,169
===========
Price per share $3.25 to
$6.25
===========
</TABLE>
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in litigation as a normal part of
its ongoing operations. At June 30, 1996, there was no litigation which in
management's estimation would have a material impact on the consolidated
financial statements of the Company.
During 1996, the Company entered into employment agreements with three
officers. The agreements provide among other things for terms of annual
salary, minimum annual salary increases equal to the increase in the
consumer price index plus 6%, the granting of 825,000 options, and an
automobile allowance. Total annual salaries payable under these
agreements are approximately $550,000 in each year 1997 through 2000,
and $275,000 in 2001. In addition, in March 1996, the Company
entered into a consulting agreement with a company owned and controlled
by a director of the Company. The agreement provides compensation
aggregating $100,000 to be paid over a six month period ending in September
1996.
The Company has also entered into licensing agreements to acquire certain
technology, which require payments through the year 2010. Minimum royalty
payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 114,000
1998 116,000
1999 116,000
2000 116,000
2001 116,000
Thereafter 1,101,833
----------
Total minimum royalty payments $1,679,833
==========
</TABLE>
NOTE N - SALES
Revenues by geographical area are as follows:
<TABLE>
<CAPTION>
Year ended North Pacific Europe/
June 30, America Rim Africa Total
-------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
1996 $5,624,455 $902,830 $1,728,322 $8,255,607
1995 3,090,381 836,339 2,589,110 6,515,830
</TABLE>
NOTE O - RELATED PARTY TRANSACTIONS
In addition to matters disclosed in Notes K, L, M and S, related party
transactions are as follows:
During the year ended June 30, 1996, two directors of the Company pledged
personal assets (stock of the Company) as collateral for certain short-term
debts. As of June 30, 1996 all related loans had been repaid and the
directors were released from their guarantees. As a normal course of
business two directors provide personal guarantees without compensation for
the Company's revolving line of credit (Note G).
During the year ended June 30, 1996, the Company loaned an aggregate of
$105,000 to two officers and directors at 8% per annum. The loans were
repaid during the year and as of June 30, 1996 there was no balance due the
Company. Interest income of $5,295 was collected.
NOTE P - DISCONTINUED OPERATIONS
In connection with a decision by the Company in fiscal 1995, the Company
entered into an agreement, completed in August 1995, 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 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
technology. Also included in the agreement is a covenant for the Company to
discontinue operations in and to not compete with HMMH within the airport
noise monitoring industry. In return HMMH agreed to use its best efforts to
utilize the Company's instrumentation in future contracts and will receive
"most favored nations treatment" from the Company in pricing.
The Company was paid a one-time fee of $125,000 and is guaranteed
installment payments of $150,000 annually for the lesser of ten years or the
term of the contract. The Company will also receive 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.
The royalty is not dependent on HMMH's revenues being directly related to
the acquired technology. HMMH has the right to buy out the installment
nature of its obligation to the Company by making a balloon payment at the
end of year 3, 5, 7, or 10 in the amount of $3,000,000, $2,200,000,
$1,700,000 or $875,000, respectively, as a prepayment of all guaranteed and
anticipated royalties due. If at the end of year 10 a balloon payment has
not been made, HMMH will continue to make royalty payments of 3% for an
additional five years. At the point of prepayment or the end of year 15,
the technology portion of the assets licensed by HMMH will be transferred to
them without lien or other encumbrance. Until then, the Company has placed
in escrow the source codes related to pertinent computer software and
allows, through an exclusive license agreement, HMMH full access and use of
the technology.
The Company's consolidated financial statements as of and for the year
ended June 30, 1995 reflect the subsequent event with the carrying value of
the long-term contractual arrangement being assigned the basis of the net
assets sold and no gain or loss being currently recognized. Management
estimates the proceeds from the contractual arrangement will equal or exceed
the carrying value of the respective asset and currently is applying such
proceeds received on a "cost recovery" method whereby the carrying cost of
the asset is reduced accordingly.
During the year ended June 30, 1996, the Company recognized royalty
payments from HMMH in the amount of $388,146.
NOTE Q - 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 of common
stock (valued at $1,509,946), 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 $1,873,432 being allocated to
acquired technology. A useful life of five 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 proforma summary represents the combined results of
operations as if the acquisition had occurred as of July 1, 1994, and do not
purport to be indicative of what would have occurred had the acquisition
been made as of July 1, 1994, or of results which may occur in the future.
<TABLE>
<CAPTION>
Year ended June 30,
1996 1995
-------------- -------------
<S> <C> <C>
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)
</TABLE>
NOTE R - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended June 30,
1996 1995
--------------- ---------------
Supplemental disclosure of cash flow information:
<S> <C> <C>
Cash paid during the year for
Interest $400,686 $355,988
Income taxes - -
</TABLE>
Non cash investing and financing activities:
During the year ended June 30, 1996, the Company had the following non-cash
financing transactions. The Company issued 586,387 shares of common stock,
at a value of $1,509,946, to a third party to purchase 100% of the stock of
Sensar Corporation (Note Q). Also during 1996, the Company acquired
equipment through the incurrence of long-term obligations totaling $234,210.
During the year ended June 30, 1995, the Company had the following non-cash
financing transactions. The Company issued 43,405 shares of common stock,
at a value of $108,423, to employees in payment of compensation. The
Company issued 200,000 shares of preferred stock in payment of $500,000 of
short-term debt and converted $300,000 of short-term debt to long-term debt.
The Company issued 30,500 shares of restricted common stock, at a value of
$38,215, for payment for services rendered. The Company issued 25,000
shares of common stock, at a value of $62,500, for payment for services
rendered. The Company issued 5,125 shares of common stock, at a value of
$10,575, to an officer for cancellation of 8,245 stock options. The Company
acquired equipment through incurrence of long-term obligations totaling
$189,747.
NOTE S - SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Company issued 170,000 shares of common
stock upon the exercise of warrants ranging in price from $3.25 to $8.00.
Subsequent to June 30, 1996, the Company entered into an agreement on a
prime plus 2.5% revolving line of credit. The agreement is with a
financial institution for amounts up to $3,000,000 collateralized by
accounts receivable and inventory. Interest only payable monthly,
principal due August 2000.
Also subsequent to June 30, 1996, the Company purchased 49,272 shares of
common stock from two directors, at a value of approximately $365,000. The
stock was then reissued to a third party as payment of royalty obligations
of Sensar Corporation.
REPORT OF INDEPENDENT
---------------------
CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
Board of Directors
Larson-Davis Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheet of Larson-Davis
Incorporated and Subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Larson-Davis
Incorporated and Subsidiaries as of June 30, 1996, and the consolidated results
of their operations and their consolidated cash flows for the year then ended,
in conformity with generally accepted accounting principles.
Provo, Utah
August 30, 1996
LARSON DAVIS INCORPORATED
(a Nevada corporation)
Warrant for the Purchase of
Shares of Common Stock, Par Value $0.001
----------
THIS WARRANT WILL BE VOID
AFTER 11:59 P.M. MOUNTAIN TIME ON NOVEMBER 1, 1998
This Warrant has not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and is a "restricted security" within the
meaning of Rule 144 promulgated under the Securities Act. This Warrant has been
acquired for investment and may not be sold or transferred without complying
with Rule 144 in the absence of an effective registration or other compliance
under the Securities Act.
This certifies that, for value received, (the
--------------------------
"Holder"), is entitled to subscribe for, purchase, and receive fully
----------
paid and nonassessable shares of common stock, par value $0.001 (the "Warrant
Shares"), of Larson Davis Incorporated, a Nevada corporation (the "Company"), at
the price of $6.25 per Warrant Share (the "Exercise Price"), at any time or from
time to time subsequent to November 1, 1996 and prior to 11:59 p.m. mountain
time on November 1, 1998 (the "Exercise Period"), on presentation and surrender
of this Warrant with the purchase form attached hereto, duly executed, at the
principal office of the Company at 1681 West 820 North, Provo, Utah 84601, and
by paying in full and in lawful money of the United States of America by cash or
cashier's check, the Exercise Price for the Warrant Shares as to which this
Warrant is exercised, on all the terms and conditions hereinafter set forth.
The number of Warrant Shares to be received on exercise of this Warrant and the
Exercise Price may be adjusted on the occurrence of such events as described
herein. If the subscription rights represented hereby are not exercised by
11:59 p.m. mountain time on November 1, 1998, this Warrant shall automatically
become void and of no further force or effect, and all rights represented hereby
shall cease and expire.
Subject to the terms set forth herein, this Warrant may be exercised by the
Holder in whole or in part by execution of the form of exercise attached hereto
and payment of the Exercise Price in the manner described above.
1. Exercise of Warrants. On the exercise of all or any portion of this
Warrant in the manner provided above, the Holder exercising the same shall be
deemed to have become a holder of record of the Warrant Shares for all purposes,
and certificates for the securities so purchased shall be delivered to the
Holder within a reasonable time, but in no event longer than ten days after this
Warrant shall have been exercised as set forth above. If this Warrant shall be
exercised in respect to only a part of the Warrant Shares covered hereby, the
Holder shall be entitled to receive a similar Warrant of like tenor and date
covering the number of Warrant Shares with respect to which this Warrant shall
not have been exercised. On the exercise of all or any portion of this Warrant,
at the instruction of the Holder, the Company shall offset any amounts due by it
to Holder against payment of the exercise price for the Warrants.
2. Limitation on Transfer. Subject to the restrictions set forth in
paragraph 7 hereof, this Warrant is transferable at the offices of the Company.
In the event this Warrant is assigned in the manner provided herein, the
Company, upon request and upon surrender of this Warrant by the Holder at the
principal office of the Company accompanied by payment of all transfer taxes, if
any, payable in connection therewith, shall transfer this Warrant on the books
of the Company. If the assignment is in whole, the Company shall execute and
deliver a new Warrant or Warrants of like tenor to this Warrant to the
appropriate assignee expressly evidencing the right to purchase the aggregate
number of shares of common stock purchasable hereunder; and if the assignment is
in part, the Company shall execute and deliver to the appropriate assignee a new
Warrant or Warrants of like tenor expressly evidencing the right to purchase the
portion of the aggregate number of Warrant Shares as shall be contemplated by
any such transfer, and shall concurrently execute and deliver to the Holder a
new Warrant of like tenor to this Warrant evidencing the right to purchase the
remaining portion of the Warrant Shares purchasable hereunder which have not
been transferred to the assignee.
3. Exchange of Warrants. This Warrant is exchangeable, on the
presentation and surrender hereof by the Holder at the office of the Company,
for a new Warrant or Warrants of like tenor representing in the aggregate the
right to subscribe for and purchase the number of Warrant Shares which may be
subscribed for and purchased hereunder.
4. Fully Paid Shares. The Company covenants and agrees that the Warrant
Shares which may be issued on the exercise of the rights represented by this
Warrant will be, when issued, fully paid and nonassessable and free from all
taxes, liens, and charges with respect to the issue thereof. The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will have authorized
and reserved a sufficient number of shares of common stock to provide for the
exercise of the rights represented by this Warrant.
5. Antidilution Provisions. The Warrant Price and number of Warrant
Shares purchasable pursuant to this Warrant may be subject to adjustment from
time to time as follows:
(a) If the Company shall take a record of the holders of its common
stock for the purpose of entitling them to receive a dividend in shares,
the Warrant Price in effect immediately prior to such record date shall be
proportionately decreased, such adjustment to become effective immediately
after the opening of business on the day following such record date.
(b) If the Company shall subdivide the outstanding shares of common
stock into a greater number of shares, combine the outstanding shares of
common stock into a smaller number of shares, or issue by reclassification
any of its shares, the Warrant Price in effect immediately prior thereto
shall be adjusted so that the Holder of this Warrant thereafter surrendered
for exercise shall be entitled to receive, after the occurrence of any of
the events described, the number of Warrant Shares to which the Holder
would have been entitled had such Warrant been exercised immediately prior
to the occurrence of such event. Such adjustment shall become effective
immediately after the opening of business on the day following the date on
which such subdivision, combination, or reclassification, as the case may
be, becomes effective.
(c) If any capital reorganization or reclassification of the
Company's common stock, or consolidation or merger of the Company with
another corporation or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of
common stock shall be entitled to receive stock, securities, or assets with
respect to or in exchange for common stock, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful
adequate provisions shall be made whereby the Holder of this Warrant shall
thereafter have the right to acquire and receive on exercise hereof such
shares of stock, securities, or assets as would have been issuable or
payable (as part of the reorganization, reclassification, consolidation,
merger, or sale) with respect to or in exchange for such number of
outstanding common shares of the Company as would have been received on
exercise of this Warrant immediately before such reorganization,
reclassification, consolidation, merger, or sale.
In any such case, appropriate provision shall be made with respect to
the rights and interests of the Holder of this Warrant to the end that the
provisions hereof shall thereafter be applicable in relation to any shares
of stock, securities, or assets thereafter deliverable on the exercise of
this Warrant. In the event of a merger or consolidation of the Company
with or into another corporation or the sale of all or substantially all of
its assets which results in the issuance of a number of shares of common
stock of the surviving or purchasing corporation greater or less than the
number of shares of common stock of the Company outstanding immediately
prior to such merger, consolidation, or purchase are issuable to holders of
common stock of the Company, then the Warrant Price in effect immediately
prior to such merger, consolidation, or purchase shall be adjusted in the
same manner as though there was a subdivision or combination of the
outstanding shares of common stock of the Company. The Company will not
effect any such consolidation, merger, or sale unless prior to the
consummation thereof the successor corporation resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument mailed or delivered to the Holder hereof at
its last address appearing on the books of the Company, the obligation to
deliver to such Holder such shares of stock, securities, or assets as, in
accordance with the foregoing provisions, such Holder may be entitled to
acquire on exercise of this Warrant.
(d) If: (i) the Company shall take a record of the holders of its
shares of common stock for the purpose of entitling them to receive a
dividend payable otherwise than in cash, or any other distribution in
respect of the shares of common stock (including cash), pursuant to,
without limitation, any spin-off, split-off, or distribution of the
Company's assets; or (ii) the Company shall take a record of the holders of
its shares of common stock for the purpose of entitling them to subscribe
for or purchase any shares of any class or to receive any other rights; or
(iii) in the event of any classification, reclassification, or other
reorganization of the shares which the Company is authorized to issue,
consolidation or merger of the Company with or into another corporation, or
conveyance of all or substantially all of the assets of the Company; or
(iv) in the event of the voluntary or involuntary dissolution, liquidation,
or winding up of the Company; then, and in any such case, the Company shall
mail to the Holder of this Warrant, at least 30 days prior thereto, a
notice stating the date or expected date on which a record is to be taken
for the purpose of such dividend, distribution or rights, or the date on
which such classification, reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation, or winding up, as the case
may be. Such notice shall also specify the date or expected date, if any
is to be fixed, as of which holders of shares of common stock of record
shall be entitled to participate in such dividend, distribution, or rights,
or shall be entitled to exchange their shares of common stock for
securities or other property deliverable upon such classification,
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation, or winding up, as the case may be.
(e) If the Company, at any time while this Warrant shall remain
unexpired and unexercised, sells shares of common stock to an affiliate of
the Company, excluding shares issued on the exercise of options issued and
outstanding as of the date hereof and shares issued to officers and
directors under stock option plans of the Company existing as of the date
hereof, at a price lower than the Exercise Price provided herein, as the
same may from time to time be adjusted pursuant to this section 5, then the
Exercise Price of these Warrants shall be reduced automatically to such
lower price at which the Company has sold common stock.
(f) No fraction of a share shall be issued on exercise, but, in lieu
thereof, the Company, notwithstanding any other provision hereof, may pay
therefor in cash at the fair value of any such fractional share at the time
of exercise.
6. Disposition of Warrants or Warrant Shares. The registered owner of
this Warrant, by acceptance hereof, agrees for himself and any subsequent
owner(s) that, before any disposition is made of any Warrant Shares, the
owner(s) shall give written notice to the Company describing briefly the manner
of any such proposed disposition. No such disposition shall be made unless and
until:
(a) the Company has received an opinion from counsel for the owner(s)
of the Warrant Shares stating that no registration under the Securities Act
is required with respect to such disposition; or
(b) a registration statement or post-effective amendment to a
registration statement under the Securities Act has been filed by the
Company and made effective by the Commission covering such proposed
disposition.
7. Registration of Warrant Shares. On request of the Holder, the Company
shall use its best efforts to file a registration statement under the Securities
Act to register the resale of the Warrant Shares issuable on the exercise of
this Warrant, shall utilize its best efforts to cause such registration
statement to become effective as soon as is commercially reasonable, and shall
maintain the effectiveness of such registration statement for a period of two
years, unless the Company's legal counsel is of the reasonable opinion that
registration is not required in order to dispose of the Warrant Shares. The
Holder(s) shall cooperate with the Company and shall furnish such information as
the Company may request in connection with any such registration statement
hereunder, on which the Company shall be entitled to rely.
8. Governing Law. This agreement shall be construed under and be
governed by the laws of the state of Nevada.
9. Notices. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by second day express delivery or
registered mail, return receipt requested and postage prepaid; if sent by
registered mail or certified mail, return receipt requested and postage prepaid;
or if sent by second day express delivery:
If to the Company, to: Larson Davis Incorporated
Attn: Brian G. Larson, President
1681 West 820 North
Provo, Utah 84601
Facsimile Transmission: (801) 375-0182
Confirmation: (801) 375-0177
If to the Holder:
---------------------------------
---------------------------------
Facsimile Transmission: ( ) -
--- ---- -----
Confirmation: ( ) -
---- ---- -----
With copies to:
---------------------------------
---------------------------------
Facsimile Transmission: ( ) -
--- ---- -----
Confirmation: ( ) -
---- ---- -----
or other such addresses and facsimile numbers as shall be furnished by any party
in the manner for giving notices hereunder, and any such notice, demand,
request, or other communication shall be deemed to have been given as of the
date so delivered or sent by facsimile transmission, three days after the date
so mailed, or two days after the date so sent by second day delivery.
10. Loss, Theft, Destruction, or Mutilation. Upon receipt by the Company
of reasonable evidence of the ownership of and the loss, theft, destruction, or
mutilation of this Warrant, the Company will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
11. Taxes. The Company will pay all taxes in respect of the issue of this
Warrant or the Warrant Shares issuable upon exercise thereof.
DATED this 30th day of May, 1996.
LARSON DAVIS INCORPORATED
By
Brian G. Larson, President
Form of Assignment
(to be signed only upon assignment of Warrant)
TO: Larson Davis Incorporated
Attn: President
1681 West 820 North
Provo, Utah 84601
FOR VALUE RECEIVED, does hereby sell, assign, and
-----------------
transfer unto the right to purchase shares of
-------------------- -----------
common stock of LARSON DAVIS INCORPORATED (the "Company"), evidenced by the
attached Warrant, and does hereby irrevocably constitute and appoint
attorney to transfer such right on the books of the Company
- -----------------
with full power of substitution in the premises.
DATED this day of , 19 .
----- ---------- ---
Signature:
Signature Guaranteed:
NOTICE: The signature to the form of assignment must correspond with the name
as written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
Form Of Purchase
(to be signed only upon exercise of Warrant)
TO: Larson Davis Incorporated
Attn: President
1681 West 820 North
Provo, Utah 84601
The undersigned, the owner of the attached Warrant, hereby irrevocably
elects to exercise the purchase rights represented by the Warrant for, and to
purchase thereunder, shares of the common stock of LARSON DAVIS
-----------
INCORPORATED and herewith makes payment of $ therefor (at the rate of
-----------
$6.25 per share of common stock). Please issue the shares of common stock as to
which this Warrant is exercised in accordance with the enclosed instructions
and, if the Warrant is being exercised with respect to less than all of the
shares to which it pertains, prepare and deliver a new Warrant of like tenor for
the balance of the shares of common stock purchasable under the attached
Warrant.
DATED this day of , 19 .
----- ---------- ---
Signature:
Signature Guaranteed:
LARSON DAVIS INCORPORATED
1996 DIRECTOR STOCK OPTION PLAN
Larson Davis Incorporated, a Nevada corporation (the "Company"), hereby
adopts this "1996 Director Stock Option Plan" (the "Plan"), effective as of May
9, 1996, under which options to acquire stock of the Company are granted to
individuals who are serving as directors of the Company, on the terms and
conditions set forth herein.
1. Purpose of the Plan. The Plan is intended to aid the Company in
maintaining and developing a management team, attracting qualified directors
capable of assisting in the future success of the Company, and rewarding those
individuals who have contributed to the success of the Company. It is designed
to aid the Company in retaining the services of current directors and in
attracting new directors when needed for future operations and growth and to
provide such individuals with an incentive to remain directors of the Company,
to use their best efforts to promote the success of the Company's business, and
to provide them with an opportunity to obtain or increase a proprietary interest
in the Company. The above aims will be effectuated through the granting of
options ("Options") to purchase shares of common stock of the Company, par value
$0.001 per share (the "Stock"), subject to the terms and conditions of this
Plan. It is intended that the Options issued pursuant to this Plan include,
when designated as such at the time of grant, options which qualify as Incentive
Stock Options ("Incentive Options") within the meaning of section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any amendment or
successor provision of like tenor.
2. Shareholder Approval. The Plan shall become effective immediately on
adoption by the board of directors of the Company (the "Board"). However, any
rights granted under the Plan shall be conditioned on the approval of the Plan
by the Company's shareholders in the manner set forth below:
(a) Within 12 months after the Plan has been adopted by the Board,
the Plan shall be submitted for approval by those shareholders of the
Company who are entitled to vote on such matters at a duly held
shareholders' meeting or approved by the written consent of the holders of
a majority (or, to qualify for the issuance of Incentive Options, the
written consent of the holders of all) of the issued and outstanding Stock
of the Company. If the Plan is presented at a shareholders' meeting, it
shall be approved by the affirmative vote of the holders of a majority of
the issued and outstanding Stock in attendance, in person or by proxy, at
such meeting. Notwithstanding the foregoing, the Plan may be approved by
the shareholders in any other manner not inconsistent with the Company's
articles of incorporation and bylaws, the applicable provisions of state
corporate laws, and the applicable provisions of the Code and regulations
adopted thereunder.
(b) In the event the Plan is so approved, the secretary of the
Company shall, as soon as practicable following the date of final approval,
prepare and attach to this Plan certified copies of all relevant
resolutions adopted by the shareholders and the Board. All Options
previously granted under this Plan shall be deemed to have been granted as
of the date of approval by the shareholders.
(c) In the event the Plan is not approved by the shareholders on or
before the date that is one year subsequent to the date of this Plan, all
Options previously granted under the Plan shall be deemed to have been
granted as of the date that is one year subsequent to the adoption of this
Plan by the Board and any Options granted thereafter shall be deemed to be
granted as of the date of approval by the board of directors or other
administrator under the terms of this Plan. As a result of the failure to
obtain shareholder approval within the time specified, none of the Options
issued under this Plan will qualify as Incentive Options. In addition,
none of the Options issued or deemed issued prior to shareholder approval
will qualify for the exemption provided in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
3. Administration of the Plan. Administration of the Plan shall be
determined by the Board. Subject to compliance with applicable provisions of
the governing law, the Board may delegate administration of the Plan or specific
administrative duties with respect to the Plan, on such terms and to such
committees of the Board as it deems proper. Any action taken with respect to
the Plan by the Board shall be approved by a majority vote of those members of
the Board in attendance at a meeting at which a quorum is present. Any action
taken with respect to the Plan by a committee designated by the Board shall be
approved as specified by the Board at the time of delegation. The
interpretation and construction of the terms of the Plan by the Board or a duly
authorized committee shall be final and binding on all participants in the Plan
absent a showing of demonstrable error. No member of the Board or duly
authorized committee shall be liable for any action taken or determination made
in good faith with respect to the Plan.
Transactions under this Plan involving officers, directors, and beneficial
owners of more than 10% of any class of equity security registered pursuant to
section 12 of the Exchange Act are intended to comply with all applicable
conditions of Rule 16b-3 ("Rule 16b-3") promulgated under the Exchange Act, or
any amendment or successor rule of like tenor. To the extent any provisions of
the Plan, or any action taken by an administrator fails to so comply, it shall
be deemed null and void to the extent permitted by law and deemed advisable by
the Board or the duly authorized committee.
4. Shares of Stock Subject to the Plan. A total of 1,400,000 shares of
Stock may be subject to, or issued pursuant to, Options granted under the terms
of this Plan. To the extent permitted for plans qualifying under Rule 16b-3,
(i) any shares subject to an Option under the Plan, which Option for any reason
expires or is forfeited, terminated, or surrendered unexercised as to such
shares, shall be added back to the total number of shares reserved for issuance
under the terms of this Plan, and (ii) if any right to acquire Stock granted
under the Plan is exercised by the delivery of shares of Stock or the
relinquishment of rights to shares of Stock, only the net shares of Stock issued
(the shares of Stock issued less the shares of Stock surrendered) shall count
against the total number of shares reserved for issuance under the terms of this
Plan.
5. Term. This Plan shall be in effect from the date hereof until close
of business May 3, 1999.
6. Grant to Board Members. Each individual who is a member of the Board
as of the effective date of this Plan and each individual who becomes a member
of the Board during the term of this Plan shall be awarded an Option to acquire
200,000 shares of Stock at an exercise price equal to the closing bid price for
the Stock on the date of grant or the date of extension of an offer to become a
director, as designated by the Board at the time, as reported on the National
Association of Securities Dealers Automated Quotation system ("Nasdaq"), or, if
the Stock is not then listed on Nasdaq, as reported by another reliable
quotation medium with respect to the principal trading market for the Stock of
the Company; provided that, if such Option is intended to qualify as an
Incentive Option and the recipient owns (either of record or beneficially) Stock
possessing more than 10% of the combined voting power of the issued and
outstanding securities of the Company as determined under the provisions of the
Code and the rules and regulations promulgated thereunder, the exercise price
shall be 110% of such bid price. Options granted under this Plan are intended
to be granted under the terms of a "formula plan" as that term is defined
pursuant to rule 16b-3 promulgated under the Exchange Act and, to the extent
that the recipient is also an employee of the Company or otherwise qualified
under the Code, to qualify as Incentive Options and, as such, are subject to the
limitations set forth in this Plan and the applicable statutes, regulations, and
rules governing the issuance, transfer, exercise, and holding of such options.
7. Reservation of Stock on Granting of Option. At the time of granting
any Option under the terms of this Plan, there will be reserved for issuance on
the exercise of the Option the number of shares of Stock of the Company subject
to such Option. The Company may reserve either authorized but unissued shares
or issued shares that have been reacquired by the Company.
8. Term of Options and Certain Limitations on Right to Exercise.
(a) The Options shall be exercisable with respect to the shares
subject to such Options for a period of five years after the right to
acquire such shares become vested as provided below.
(b) The term of the Option, once it is granted, may be reduced only
as provided for in this Plan under the written provisions of the Option.
(c) Unless otherwise specifically provided by the written provisions
of the Option, no holder or his or her legal representative, legatee, or
distributee will be, or shall be deemed to be, a holder of any shares
subject to an Option unless and until the holder exercises his or her right
to acquire all or a portion of the Stock subject to the Option and delivers
the required consideration to the Company in accordance with the terms of
this Plan and then only to the extent of the number of shares of Stock
acquired. Except as specifically provided in this Plan or as otherwise
specifically provided by the written provisions of the Option, no
adjustment to the exercise price or the number of shares of Stock subject
to the Option shall be made for dividends or other rights for which the
record date is prior to the date the Stock subject to the Option is
acquired by the holder.
(d) Options under the Plan shall vest and become exercisable twenty-
five percent (25%) at the time of the grant of the Option and an additional
twenty-five percent (25%) on each of the first three anniversaries of the
original date of grant; provided that, the holder of the Option is a
director of the Company as of such anniversaries. If the holder is no
longer a director of the Company for any reason, all invested Options shall
terminate and shall thereafter be null and void.
(e) If any individual who receives an Option under the terms of this
Plan is terminated or resigns from the Company within six months of such
Option being granted, the unexercised portion of the Option, whether or not
vested, shall be null and void, and such individual shall have no further
rights thereunder as of the date of such termination or resignation.
(f) In no event may an Option be exercised after the expiration of
its term.
9. Payment of Exercise Price. The exercise of any Option shall be
contingent on receipt by the Company of cash, certified bank check to its order,
or other consideration acceptable to the Company; provided that, payment may be
made in whole or in part in shares of Stock of the Company or by the surrender
of Options to acquire Stock from the Company, which Stock or Options shall be
valued at their then fair market value as determined by the Board or a duly
authorized committee; provided, however, that if, at the time of grant of an
Option, the Company is subject to the provisions of section 16(b) of the
Exchange Act, such Stock and/or Options surrendered must have been owned by the
optionee for more than six months.
10. Withholding. If the grant or exercise of an Option pursuant to this
Plan is subject to withholding or other trust fund payment requirements of the
Code or applicable state or local laws, the holder of such Option must, as a
condition precedent to exercising the Options, deliver to the Company cash equal
to such withholding obligation or evidence satisfactory to the Company that such
withholding obligation has otherwise been met.
11. Incentive Options--Additional Provisions. In addition to the other
restrictions and provisions of this Plan, any Option granted hereunder that is
intended to be an Incentive Option shall meet the following further
requirements:
(a) The exercise price of an Incentive Option shall not be less than
the fair market value of the Stock on the date of grant as determined by
the Board or a duly authorized committee and permitted by the applicable
provisions of the Code
(b) No Incentive Option may be granted under the Plan to any
individual that owns (either of record or beneficially) Stock possessing
more than 10% of the combined voting power of the Company or any parent or
subsidiary corporation unless both the exercise price is at least 110% of
the fair market value of the Stock on the date the Option is granted and
the Incentive Option by its terms is not exercisable more than five years
after the date it is granted.
(c) Incentive Options may be granted only to employees of the Company
or its subsidiaries and only in connection with that employee's employment
by the Company or the subsidiary. Notwithstanding the above, directors and
other individuals who have contributed to the success of the Company or its
subsidiaries may be granted Incentive Options under the Plan, subject to,
and to the extent permitted by, applicable provisions of the Code and
regulations promulgated thereunder, as they may be amended from time to
time.
(d) The aggregate fair market value (determined as of the date the
Incentive Option is granted) of the shares of Stock with respect to which
Incentive Options are exercisable for the first time by any individual
during any calendar year under the Plan (and all other plans of the Company
and its subsidiaries) may not exceed $100,000.
(e) No Incentive Option shall be transferable other than by will or
the laws of descent and distribution and shall be exercisable, during the
lifetime of the optionee, only by the optionee to whom the Incentive Option
is granted.
(f) No stock appreciation rights or other rights can be granted in
tandem with an Incentive Option.
(g) No individual acquiring shares of Stock pursuant to any Incentive
Option granted under this Plan shall sell, transfer, or otherwise convey
the Stock until after the date that is both two years from the date the
Incentive Option was granted and one year from the date the Stock was
acquired pursuant to the exercise of the Incentive Option. If any
individual makes a disqualifying disposition, he or she shall notify the
Company within 30 days of such transaction.
(h) No Incentive Option may be exercised unless the holder was,
within three months of such exercise, and had been since the date the
Incentive Option was granted, an eligible employee of the Company as
specified in the applicable provisions of the Code, unless the employment
was terminated as a result of the death or disability (as defined in the
Code and the regulations promulgated thereunder as they may be amended from
time to time) of the employee or the employee dies within three months of
the termination. In the event of termination as a result of disability,
the holder shall have a one year period following termination in which to
exercise the Incentive Option. In the event of death of the holder, the
Incentive Option must be exercised within six months of the issuance of
letters testamentary or administration or the appointment of an
administrator, executor, or personal representative, but not later than one
year after the date of termination of employment. An authorized absence or
leave approved by the Board or a duly authorized committee for a period of
90 days or less shall not be considered an interruption of employment for
any purpose under the Plan.
(i) All Incentive Options shall be deemed to contain such other
limitations and restrictions as are necessary to conform the Incentive
Option to the requirements for "incentive stock options" as defined in
section 422 of the Code, or any amendment or successor statute of like
tenor.
All of the foregoing restrictions and limitations are based on the governing
provisions of the Code as of the date of adoption of this Plan. If at any time
the Code is amended to permit the qualification of an Option as an incentive
stock option without one or more of the foregoing restrictions or limitations or
the terms of such restrictions or limitations are modified, the Board or a duly
authorized committee may grant Incentive Options, and may modify outstanding
Incentive Options in accordance with such changes, all to the extent that such
action by the Board or duly authorized committee does not disqualify the Options
from treatment as incentive stock options under the provisions of the Code as
may be amended from time to time.
12. Awards to Directors and Officers. To the extent the Company is
subject to section 16(b) of the Exchange Act, Options granted under the Plan to
directors and officers (as defined in Rule 16a-1 promulgated under the Exchange
Act or any amendment or successor rule of like tenor) intended to qualify for
the exemption from section 16(b) of the Exchange Act provided in Rule 16b-3
shall be subject to the following requirements, in addition to the other
restrictions and limitations set forth in this Plan:
(a) With respect to any award, the exercise price may not be less
than the minimum required by applicable state law.
(b) Approval of the Plan by the shareholders of the Company shall
have been solicited substantially in accordance with the rules and
regulations in effect under section 14(a) of the Exchange Act or any
amendment or successor statute in effect at the time of the approval or, if
the Company is not subject to section 14(a) of the Exchange Act at the time
of shareholder approval, such information as would have been required
concerning the Plan under section 14(a) is provided to the shareholders at
the first annual meeting of shareholders subsequent to the Company becoming
subject to such rules.
(c) An Option or, if exercised, the Stock acquired on exercise, may
not be transferred prior to the date that is more than six months
subsequent to the date of the grant of the Option.
(d) An Option may not be transferred other than by will or the laws
of descent and distribution, pursuant to a qualified domestic relations
order as defined by the Code or Title 1 of the Employee Retirement Income
Security Act, or as otherwise permitted by the provisions of 16b-3, or
successor statute of like tenor, as they may be amended from time to time.
(e) Any cash settlement of Options, withholding of shares of Stock to
satisfy the tax withholding obligations of the Company under the Code, or
surrender or withholding of shares of Stock to pay the exercise price of
the Option, shall be made in accordance with the requirements of Rule 16b-3
or any amendment or successor rule of like tenor.
All of the foregoing restrictions and limitations are based on the governing
provisions of the Exchange Act and the rules and regulations promulgated
thereunder as of the date of adoption of this Plan. If at any time the
governing provisions are amended to permit an Option to be granted or exercised
pursuant to Rule 16b-3 or any amendment or successor rule of like tenor without
one or more of the foregoing restrictions or limitations, or the terms of such
restrictions or limitations are modified, the Board or a duly authorized
committee may award Options to directors and officers, and may modify
outstanding Options, in accordance with such changes, all to the extent that
such action by the Board or a duly authorized committee does not disqualify the
Options from exemption under the provisions of Rule 16b-3 or any amendment or
successor rule of similar tenor.
13. Dilution or Other Adjustment. In the event that the number of shares
of Stock of the Company from time to time issued and outstanding is increased
pursuant to a stock split or a stock dividend, the number of shares of Stock
then covered by each outstanding Option granted hereunder shall be increased
proportionately, with no increase in the total purchase price of the shares then
so covered, and the number of shares of Stock subject to the Plan shall be
increased by the same proportion. In the event that the number of shares of
Stock of the Company from time to time issued and outstanding is reduced by a
combination or consolidation of shares, the number of shares of Stock then
covered by each outstanding Option granted hereunder shall be reduced
proportionately, with no reduction in the total purchase price of the shares
then so covered, and the number of shares of Stock subject to the Plan shall be
reduced by the same proportion. In the event that the Company should transfer
assets to another corporation and distribute the stock of such other corporation
without the surrender of Stock of the Company, and if such distribution is not
taxable as a dividend and no gain or loss is recognized by reason of section 355
of the Code or any amendment or successor statute of like tenor, then the total
purchase price of the Stock then covered by each outstanding Option shall be
reduced by an amount that bears the same ratio to the total purchase price then
in effect as the market value of the stock distributed in respect of a share of
the Stock of the Company, immediately following the distribution, bears to the
aggregate of the market value at such time of a share of the Stock of the
Company plus the stock distributed in respect thereof. In the event that the
Company distributes the stock of a subsidiary to its shareholders, makes a
distribution of a major portion of its assets, or otherwise distributes
significant portion of the value of its issued and outstanding Stock to its
shareholders, the number of shares then subject to each outstanding Option and
the Plan, or the exercise price of each outstanding Option, may be adjusted in
the reasonable discretion of the Board or a duly authorized committee. All such
adjustments shall be made by the Board or duly authorized committee, whose
determination upon the same, absent demonstrable error, shall be final and
binding on all participants under the Plan. No fractional shares shall be
issued, and any fractional shares resulting from the computations pursuant to
this section shall be eliminated from the respective Option Award. No
adjustment shall be made for cash dividends, for the issuance of additional
shares of Stock for consideration approved by the Board, or for the issuance to
stockholders of rights to subscribe for additional Stock or other securities.
14. Assignment. No Option granted under this Plan shall be transferable
other than by will or the laws of descent and distribution, pursuant to a
qualified domestic relations order as defined in the Code or, to the extent
permitted by section 16b-3, to family members of the Option holder or entities
created for their benefit. Except as permitted by the foregoing, each Option
granted under the Plan and the rights and privileges thereby conferred shall not
be transferred, assigned, pledged, or hypothecated in any way (whether by
operation of law or otherwise), and shall not be subject to execution,
attachment, or similar process. On any attempt to transfer, assign, pledge,
hypothecate, or otherwise dispose of the Option, or of any right or privilege
conferred thereby, contrary to the provisions thereof, or on the levy of any
attachment or similar process on such rights and privileges, the Option and such
rights and privileges shall immediately become null and void.
15. Listing and Registration of Shares. Each Option shall be subject to
the requirement that if at any time the Board shall determine, in its sole
discretion, that it is necessary or desirable to list, register, or qualify the
shares covered thereby on any securities exchange or under any state or federal
law, or obtain the consent or approval of any governmental agency or regulatory
body as a condition of, or in connection with, the granting of such Option or
the issuance or purchase of shares thereunder, such Option may not be exercised
in whole or in part unless and until such listing, registration, consent, or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board.
16. Options. Options granted under the Plan shall be represented by a
written agreement which shall be executed by the Company and which shall contain
such terms and conditions as may be permitted under the terms of this Plan.
17. No Right of Employment. Nothing contained in this Plan or any Option
shall be construed as conferring on a director, officer, or employee any right
to continue or remain as a director, officer, or employee of the Company or its
subsidiaries.
18. Amendment of the Plan. This Plan may not be amended more than once
during any six month period, other than to comport with changes in the Code or
the Employee Retirement Income Security Act or the rules and regulations
promulgated thereunder. Subject to the foregoing and, if the Company is subject
to the provisions of section 16(b) of the Exchange Act, the limitations of Rule
16b-3 promulgated under the Exchange Act or any amendment or successor rule of
like tenor, the Board or a duly authorized committee may modify and amend the
Plan in any respect; provided, however, that to the extent such amendment or
modification would cause the Plan to no longer comply with the applicable
provisions of the Exchange Act with respect to Options granted to officers or
directors under Rule 16b-3 or any amendment or successor rule of like tenor or
with the provisions of the Code governing incentive stock options as they may be
amended from time to time, such amendment or modification shall also be approved
by the shareholders of the Company.
Subject only to the foregoing, the Plan shall be deemed to be automatically
amended as is necessary (i) with respect to the issuance of Incentive Options,
to maintain the Plan in compliance with the provisions of section 422 of the
Code, and regulations promulgated thereunder from time to time, or any amendment
or successor statute thereto, and (ii) with respect to Options granted to
officers and directors of the Company, to maintain the Plan in compliance with
the provisions of Rule 16b-3 promulgated under the Exchange Act or any amendment
or successor rule of like tenor.
ATTEST:
/s/ Brian G. Larson
Brian G. Larson, Chairman
SECRETARY'S CERTIFICATE
The undersigned, the duly constituted and elected secretary of Larson Davis
Incorporated, hereby certifies that a duly constituted meeting of the
shareholders held on , 1996, pursuant to notice and at which a
---------------
quorum was present in accordance with the requirements of law and the Company's
articles of incorporation and bylaws, the foregoing 1996 Director Stock Option
Plan was approved by the affirmative vote of the holders of a majority of the
shares of common stock voted at such meeting.
DATED this day of , 1996.
----- ---------------
LARSON DAVIS INCORPORATED
By
Dan J. Johnson, Secretary
Larson-Davis Incorporated and Subsidiaries
EARNINGS (LOSS) PER SHARE CALCULATION
Year ended June 30,
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Income (loss) from continuing operations $ (1,726,082) $ 458,511
Dividends on preferred stock (48,750) -
-------------- -------------
Income (loss) from continuing operations applicable to
common stock (1,774,832) 458,511
Loss from discontinued operations - (770,128)
------------- --------------
Net loss applicable to common stock $ (1,774,832) $ (311,617)
============== ==============
Shares:
Common shares outstanding during the entire year 6,559,479 5,827,249
Weighted average common shares issued during the year 1,579,243 273,743
------------- -------------
Weighted average common shares outstanding during
the year 8,138,722 6,100,992
Dilutive effect of common stock equivalents under stock
warrants and options 1,178,575 126,715
------------- -------------
Weighted average common and dilutive common
equivalent shares outstanding 9,317,297 6,227,707
============= =============
Earnings (loss) per common share:
Continuing operations $ (0.19) $ 0.07
Discontinued operations - (0.12)
------------- --------------
Net earnings (loss) $ (0.19) $ (0.05)
============== ==============
</TABLE>
Because outstanding options and warrants qualify as common stock equivalents,
primary earnings per share and fully diluted earnings per share are the same.
LIST OF SUBSIDIARIES
OF
LARSON DAVIS INCORPORATED
1. Larson Davis Laboratories Corporation, a Utah corporation
2. LD Info, Inc., a Nevada corporation
3. Advantage Software, Inc., a Utah corporation
4. Larson Davis, Ltd., an entity formed under the laws of Great Britain
5. Sensar Corporation, a Utah corporation
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated August
4, 1995 relating to the June 30, 1995 financial statements of Larson-Davis
incorporated, appearing in the annual report of Larson-Davis incorporated on
Form 10-KSB for the year ended June 30, 1996, into the following registration
statements filed on behalf of Larson-Davis incorporated: registration statement
on Form S-8, SEC File No. 33-35751, filed July 5, 1990; registration statement
on Form S-8, SEC File No. 33-44784, filed December 30, 1991; registration
statement on Form S-3, SEC No. 333-1505, effective as of March 22, 1996; and
registration statement on Form S-3, SEC No. 333-6527, effective as of August 2,
1996.
/s/ Pritchett, Siler & Hardy, P.C.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
October 9, 1996
CONSENT
We have issued our report dated August 30, 1996, accompanying the consolidated
financial statements included in the Annual Report of Larson-Davis Incorporated
on Form 10-KSB for the year ended June 30, 1996. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Larson-Davis Incorporated on Forms S-3 (File No. 333-1505, effective March 22,
1996 and File No. 333-6527, effective August 2, 1996) and on Forms S-8 (File No.
33-44784, filed December 30, 1991 and File No. 33-35751, filed July 5, 1990).
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Provo, Utah
October 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEETS AS OF JUNE 30, 1996, AND STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,922,660
<SECURITIES> 0
<RECEIVABLES> 2,346,134
<ALLOWANCES> (13,717)
<INVENTORY> 2,923,650
<CURRENT-ASSETS> 9,680,938
<PP&E> 3,628,095
<DEPRECIATION> (2,017,622)
<TOTAL-ASSETS> 19,769,028
<CURRENT-LIABILITIES> 2,956,245
<BONDS> 0
<COMMON> 10,258
0
200
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,769,028
<SALES> 8,255,607
<TOTAL-REVENUES> 8,255,607
<CGS> 4,101,436
<TOTAL-COSTS> 9,479,973
<OTHER-EXPENSES> 46,295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 435,587
<INCOME-PRETAX> (1,706,248)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,706,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,706,248)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
