UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended
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OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from July 1, 1996 to December 31, 1996
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Commission file number 0-17020
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Larson Davis Incorporated
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(Exact name of registrant as specified 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)
Registrant's telephone number, including area code (801) 375-0177
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Securities registered under section 12(b) of the 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 Act:
Common Stock, Par Value $0.001
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 25, 1997, there were 11,374,191 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
$93,000,000, computed at the closing quotation for the Issuer's common stock of
$10.25 as of March 25, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes. None.
TABLE OF CONTENTS
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Item Number and Caption Page
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PART I
1. Business 3
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 22
PART III
10. Directors and Executive Officers of the Registrant 23
11. Executive Compensation 25
12. Security Ownership of Certain Beneficial Owners and
Management 28
13. Certain Relationships and Related Transactions 29
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 31
SIGNATURES 36
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PART I
ITEM 1. BUSINESS
GENERAL
Larson Davis Incorporated ("the Company") is engaged in the design and
development of analytical instruments. The Company has been in the business of
developing, manufacturing, and marketing precision acoustical and vibration
instrumentation since 1981. The Company is currently attempting to
commercialize two additional families of products, its mass spectrometry related
instruments (the "Sensar Technology"), and its polymer analysis technology (the
"CrossCheck Technology"). In late 1996, the Company initiated sales of its
time-of-flight mass spectrometer, the TOF 2000, to the semiconductor industry
through an exclusive marketing agreement with a major distributor to this
market. The Company is currently refining other related technologies to design
low-cost, high-speed, mass spectrometry based data acquisition and digital
processing products for potential applications in other industries.
The Company has recently entered into an agreement with a leading
international vendor of insulation materials for electrical transformers in the
utility industry to design and develop products based on its CrossCheck
Technology intended to provide predictive maintenance data to the owners and
operators of large electrical transformers and related equipment. The Company
is also exploring additional applications in other industries for this
technology.
The Company is dedicating significant amounts to technological research,
product development, and marketing strategies. The Company believes that the
patents underlying its technologies represent significant advances on existing
technologies in the analytical instrumentation market and that it can design and
produce instruments that are technically superior to those available today.
However, much of the potential success of the Company depends on the successful
development of commercial products, the existence or creation of a market demand
for any products that may be developed, the ability of the Company to achieve
significant market penetration for any such products in several large markets,
and the ability of the Company to produce and market any such products on a
profitable basis. Such an effort requires a significant dedication of time,
expertise, and money, and there can be no assurance of ultimate success.
The Company is currently comprised of three active, wholly-owned subsidiaries:
LARSON DAVIS LABORATORIES CORPORATION ("LDL") focuses on the design,
development, manufacturing, and marketing of acoustics and vibration
products and services.
SENSAR CORPORATION ("Sensar") develops, manufactures, and markets
sophisticated chemical detection and analysis instrumentation and polymer
analysis technology used for quantitative and qualitative analysis.
LARSON DAVIS, LTD. ("LTD"), 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.
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This report on Form 10-K contains certain forward looking statements and
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made concerning information
currently available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including the completion of
commercial products within projected time frames, the market acceptance of
currently untested products, the ability of the Company to successfully address
technical and manufacturing problems in producing new products, entering into
strategic alliances, joint ventures, or other collaborative arrangements with
established industry partners, the success of the marketing efforts of the
Company and the entities with which it has agreements, and the ability of the
Company to obtain the necessary financing to successfully complete its goals.
Should one or more of these or other risks materialize or if the underlying
assumptions of management prove incorrect, actual results of the Company may
vary materially from those described. The Company does not intend to update
these forward looking statements, except as may occur in the regular course of
its periodic reporting obligations.
ACOUSTIC AND VIBRATION BUSINESS
The Company was established to engage in the acoustics and vibration
instrumentation industry and this business remains its "core" business. The
acoustic and vibration products of the Company are focused on precision
measurement instruments for use in a variety of industries. These products
combine very sophisticated environmental data collection systems with high-speed
data acquisition and processing systems to give users critical information
concerning acoustical or vibration based events. The Company's customers for
these products include major corporations in a variety of industries, including
automobile manufacturers, aircraft manufacturers, defense contractors, and the
United States military. Subdivisions of this market in which the Company's
instrumentation is currently being utilized are:
Environmental Monitoring provides data used to monitor, control, or avoid
noise (unwanted and/or irritable sound which has a detrimental effect on living
organisms). It includes such applications as community noise ordinance
compliance surveys, vehicle passby surveys, industrial complex perimeter
monitoring, environmental impact studies, OSHA (noise in the work place)
mandated surveys, military aircraft sonic boom monitoring, and others.
Product Design and Improvement encompasses the use by manufacturers to
optimize performance and minimize acoustic output. For example, the auto and
aircraft industries determine noise dampening properties of materials used in
insulation; a yacht manufacturer studied acoustic spectrums as an aid in
selecting efficient hull designs; and other manufacturers of items such as lawn
mowers, computer printers, office equipment, and kitchen appliances employ the
instruments to collect information on sound emissions to aid in encasement
design.
Structural Dynamics is the study of the motion of materials to determine
characteristics such as fatigue, resonance, material density, and bonding
strengths. For instance, a consultant used the Company's instrumentation to
determine the resonant frequency of the vibrations in the Statue of Liberty's
arm holding the torch. Braces were designed and installed which resulted in
doubling the torch bulb life.
Medical Applications include hardware and software used in automatic
calibration systems for medical equipment. The analysis and treatment of both
hearing and speech problems can be improved utilizing the Company's
instrumentation.
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.
As part of its ongoing research and development efforts, the Company
continues to upgrade and refine its existing products in the acoustic and
vibration market and develop new products. Over the past year, the Company has
introduced a number of new products designed to make its instruments more
sensitive and accurate, smaller and lighter weight, and easier to use. The
Company believes that its family of products in this industry are competitive on
technical sophistication, ease of use, and price.
SENSAR TECHNOLOGY
Sensar currently manufactures an ultra-sensitive, high speed, mass
spectrometer known as the TOF-2000 which has been sold to a limited number of
producers of semiconductor "chips," including Micron and Atmel. These are
highly specialized instruments which currently sell at a retail price of
approximately $150,000 to $300,000. 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 and that
require the sale of a minimum of nine instruments in 1997. Through December 31,
1996, the agreement required SAES to purchase a minimum of eight units.
Although only two instruments have been sold through SAES to date, the Company
has continued to work with SAES and has not yet sought to terminate the
exclusive nature of the agreement.
The TOF-2000 provides fabricators with real-time spectrum analysis of gases
used in microchip production. The production process requires ultra-pure gases.
Impurities such as hydrogen or oxygen in quantities as small as parts per
trillion can reduce production yield and microchip performance. The TOF-2000
has potential applications in other industries, and the Company has recently
completed a prototype model that was introduced at PittCon, the analytical
instrument industry's largest trade show that was held in March 1997, that is
significantly smaller in size, has enhanced capabilities, and can be
manufactured at a lower cost.
Mass spectrometers are frequently used as the middle component of systems
for high-speed, high sensitivity separation and identification of chemicals and
compounds. The first stage is a separation method such as liquid
chromatography, gas chromatography, or capillary electrophoresis.
The Company has new products currently in development for the following
chemical detection methods based on patented technology:
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, more timely and effectively,
analyze elements which 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 under development by the Company are
designed to do this.
The third stage of the separation and identification system is the high-
speed data acquisition system. The Company has significant expertise in this
area as a result of its experience in capturing and analyzing acoustical and
vibration events. The Company has developed hardware and an algorithm that
permits it to capture data from an event as short as 20 milliseconds. Such
rapid data acquisition and analysis is critical to the sensitivity and accuracy
of the mass spectrometer system. The Company believes that this experience and
expertise currently gives it a competitive advantage in high-speed data
acquisition and analysis over systems that are currently available. However,
the Company's ability to benefit from this advantage will depend on successfully
completing the development of the planned products, overcoming any manufacturing
difficulties, and gaining the necessary market penetration for any products that
may be commercialized. The Company is currently seeking to establish strategic
relationships with significant participants in various industries in order to
accomplish these goals.
CROSSCHECK TECHNOLOGY
The Company holds the exclusive license to a technology known as
"CrossCheck," a proprietary process used to determine, in real time, the in situ
characteristics of polymer substances. Polymers are naturally occurring or
synthetic substances comprised of long chains of multiple individual molecules
and include petrochemicals, paints, adhesives, and composites. The properties
and strength of certain polymers are determined by the quality of the bonds
linking the individual molecules. These bonds are often formed during a curing
process and are affected by heat, friction, oxidation, and contamination. The
CrossCheck Technology offers an opportunity to monitor the bonding process and
to evaluate the quality and characteristics of the resulting polymer. The
Company has been in the process of conducting laboratory research to quantify,
categorize, and document results from scientific experimentation, using such
research to develop instrumentation. The Company has delivered a limited number
of prototype instruments to third-party beta sites for evaluation and comment.
In September 1996, the Company entered into a contract with a marketing
subsidiary of Weidmann International Corporation ("Weidmann") to develop and
market products targeted at the electrical transmission and distribution 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 assist in
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
customers and its 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 be profitable for the
Company. 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 calendar year.
The Company has also investigated other 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 the areas of electrical utilities,
as described above, and in the composite, coating, and adhesive industries:
Composites Industry - - CrossCheck was developed to monitor cure rates and
determine product quality within the composites industry.
Coatings and Adhesives - - Curing characteristics of coatings and adhesives
are controlled by additives and different proportions of ingredients and
CrossCheck, as a real-time monitor of cure rate and current polymer
characteristics, has proven to be effective.
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.
Concrete Industry - - products designed to monitor rate and current status
of concrete cure to allow for intervention, verify quality, and assure
strength and hardness.
BUSINESS HISTORY
During the fiscal periods included in this report, the Company has been
involved in a number of significant business changes (see Notes to Consolidated
financial Statements; Note Q--Discontinued Operations and Note R--Acquisitions):
March 1994 - - The Company purchased all of the outstanding shares of a
corporation chartered in England and the corporation was renamed
LARSONoDAVIS, 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. In August 1995, the Company entered into an
agreement to transfer this airport noise monitoring operations to an
established consulting firm engaged in the transportation industry. The
Company also transferred the management of substantially all of its airport
contracts to the consulting firm and agreed not to compete within the
industry.
June 1994 - - With the return of the minority interest in LarsonoDavis
Info, Inc. ("Info"), a subsidiary of the Company, held by Commerce Clearing
House, the Company discontinued the operations of two of its software based
subsidiaries, Info and Advantage Software, Inc. Management terminated the
business of these subsidiaries and reduced the carrying value of the
related assets to zero.
October 1995 - - The Company acquired all of the outstanding stock of
Sensar Corporation.
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. The Company currently has technology subject to 14
patents and 5 additional patent applications. The Company also protects its
patented 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 services of certain subcontractors to
manufacture component parts for its products to minimize the amount of its
capital investment and increase its flexibility in dealing with changes in the
manufacturing processes. Approximately 20% of manufacturing is performed by
subcontractors. However, all final assembly 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.
PROPERTIES.")
PRODUCT COMPONENTS
The Company utilizes a large number of individual electronic components in
connection with the manufacture of its analytical instruments. The Company has
developed and sells its own line of high quality transducers for the acquisition
of acoustical and similar events so that it is no longer dependent on suppliers
for these component parts. Certain hardware components of the Company's mass
spectrometer based instruments are custom designed and subcontracted to
established machine shops for manufacture. The Company recently established its
own in-house machining capability by acquiring appropriate equipment and hiring
qualified individuals to manage and operate the equipment. The machine shop
provides the Company with a secondary source for its very precise transducer
components and reduces the risk of product shortages. 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 the Company's 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 a distribution agreement with an initial
term of five years. The Company has granted exclusive rights to a marketing
subsidiary of Weidmann to market predictive maintenance products to the
electrical transmission and distribution industry. 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 in
connection with the development of new products.
The Company invests in both image building and direct product advertising.
This exposure takes many forms, including participation on industry standards
boards, exhibitions at trade shows, Company sponsored training classes, direct
technical demonstrations, and industry publication advertisements.
BACKLOG
As of December 31, 1996, the Company had an order backlog believed to be
firm of approximately $1,200,000, which is not reflected in the financial
statements included elsewhere herein. This compares to a backlog at June 30,
1996, of approximately $1,500,000.
COMPETITION
LDL
The acoustics and vibration hardware products are positioned in a niche
market which caters to a technically sophisticated user base. For a number of
years this market 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. In addition to B&K, there are several smaller
companies in direct competition with the Company. In the opinion of management,
none of the competitors other than B&K has available a full line of acoustical
and vibration products, similar to that offered by the Company. There are also
a small number of large companies which produce, in most cases, isolated
products which can be adapted to certain applications in the acoustics industry.
While many of the companies which compete with the Company have greater
financial and managerial resources, management believes the Company can compete
effectively based on its ability to: (1) adapt rapidly to technology changes,
(2) technically market to specialized users, and (3) offer a complete line of
solutions to users' needs.
Sensar
The 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, Thermo
Electron Corporation and certain of its subsidiaries (including Finnigan
Corporation, Thermo Instruments Systems, Inc., and Thermo Jarrell Ash), Bio-Rad,
Micromass, Inc., Perseptive Biosystems, Inc., 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. (See "CrossCheck Technology.")
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 "Sensar Technology.")
GOVERNMENTAL REGULATION
The products of the Company are not subject to the authority of a specific
governmental regulatory agency and do not generally require approval or
certification by such agencies. 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 involve the use, storage, and
disposal of small quantities of certain hazardous chemicals. The costs to the
Company of complying with environmental regulations are not material to its
operations. The Company employs an outside service to handle the disposal of
these chemicals. The Company conducts training courses for its employees in
safety and the handling of these chemicals and maintains a safety committee to
review its policies and procedures from time to time.
MAJOR CUSTOMERS AND FOREIGN SALES
During the six months ended December 31, 1996, one customer, Measurement
and Testing, Inc., accounted for 13% of sales. There were no customers which
represented more than 10% of the total sales for the Company during the years
ended June 30, 1996, 1995, and 1994. In the six months ended December 31, 1996,
and the fiscal years ended June 30, 1996, 1995, and 1994, government sales were
not significant with sales volumes less than 5% of continuing operations for
each of the periods.
Export sales of the Company for the six months ended December 31, 1996, and
the years ended June 30, 1996, 1995, and 1994, are 57%, 33%, 53%, and 42% 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 108 employees, 26 of which are involved in
professional or technical development of products, 52 in manufacturing, 16 in
marketing and sales, and 14 in administrative and clerical. None of the
employees of the Company are represented by a union or subject to a collective
bargaining agreement, and the Company considers its relations with its employees
to be favorable.
ITEM 2. PROPERTIES
The Company owns its own administrative and manufacturing facilities in
Provo, Utah, subject to a security lien granted to a commercial financial
institution to secure a purchase money loan. The facilities include
approximately 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 on
a month-to-month basis 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
$6,500 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 six months ended December 31, 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 REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of the Company is currently listed on the Nasdaq National
Market ("NNM"), under the symbol "LDII." Prior to January 30, 1997, the
Company's common stock was listed on the Nasdaq SmallCap Market.
The following table sets forth the approximate range of high and low bids
for the common stock of the Company during the periods indicated. The
quotations presented reflect interdealer prices, without retail markup,
markdown, or commissions, and may not necessarily represent actual transactions
in the common stock.
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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
September 30, 1996 $11.00 $ 7.125
December 31, 1996 $12.375 $ 8.75
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On March 25, 1997, the closing quotation for the common stock on NNM was
$10.25. As reflected by the high and low bids on the foregoing table, the
trading price of the common stock of the Company can be volatile with dramatic
changes over short periods. The trading price may reflect market reaction to
the perceived applications of the Company's technology, the potential products
that may be based on that technology, the direction and results of research and
development efforts, and many other factors. Investors are cautioned that the
trading price of the common stock can change dramatically based on changing
market perceptions that may be unrelated to the Company and its activities.
As of March 25, 1997, there were 11,374,191 shares of common stock issued
and outstanding, held by approximately 369 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. The Company's
line of credit agreement prohibits the payment of dividends if the Company is in
violation of its loan covenants or otherwise in default under the agreement.
Other than the foregoing, there are no restrictions on the declaration or
payment of dividends set forth in the articles of incorporation of the Company
or any other agreement with its shareholders or creditors. While the required
dividends with respect to the preferred stock have been paid by the Company,
management anticipates retaining any potential future earnings for working
capital and investment in growth and expansion of the business of the Company
and does not anticipate paying dividends on the common stock in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data were derived
from the consolidated financial statements of the Company. The consolidated
financial statements of the Company for the six months ended December 31, 1996,
and for the fiscal years ended June 30, 1996, 1995, 1994, 1993, and 1992, have
been audited by independent certified public accountants. The consolidated
financial statements of the Company for the six months ended December 31, 1995,
are unaudited; however, in the Company's opinion, such statements reflect all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the financial position and results of operations of the Company
for such period. In January 1997, the Company changed its fiscal year end from
June 30 to December 31 effective December 31, 1996. The results of operations
for any interim period are not necessarily indicative of results of operations
for a full year. The selected financial data below should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Six Months Ended December 31, Year Ended June 30,
----------------------------- ---------------------------------------------------------------------
1996 1995(1) 1996(1) 1995(3) 1994(2)(3) 1993 1992
----------- ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 4,889,280 $ 4,152,273 $ 8,255,607 $ 6,515,830 $ 5,137,638 $ 6,180,082 $ 7,054,164
Income (loss) from
continuing operations $(1,643,920) $ 219,932 $(1,706,248) $ 458,511 $ (441,236) $ 130,819 $ 611,720
Earnings (loss) from
continuing operations
per common share $ (0.16) $ 0.03 $ (0.19) $ 0.07 $ (0.08) $ 0.02 $ 0.11
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
At December 31, Year Ended June 30,
------------------------- ---------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $19,906,521 $15,302,658 $19,769,028 $11,579,667 $11,011,119 $10,300,253 $10,385,117
Long-term obligations $ 1,282,894 $ 1,603,432 $ 1,136,006 $ 1,213,331 $ 1,078,073 $ 827,623 $ 886,317
Cash dividends
per common share $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
[FN]
(1) Effective October 27, 1995, the Company acquired Sensar Corporation in a
transaction accounted for as a purchase.
(2) During the quarter ended March 31, 1994, the Company acquired
Larson Davis, Ltd., in a transaction accounted for as a purchase.
(3) During the years ended June 30, 1995 and 1994, the Company discontinued
the operations of its Airport Noise Monitoring Business and its
Software Licensing Business, respectively. The results of these
operations have been segregated from continuing operations in the
Statements of Operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
consolidated financial statements and related notes contained herein.
Over the course of the last three years, the Company has acquired the
rights to a number of technologies from Brigham Young University ("BYU"), either
directly from BYU or indirectly through its acquisition of Sensar. These
technologies have placed the Company in a position to develop a number of
sophisticated analytical instruments in addition to its historical acoustical
and vibration based business. The Company believes that the patented technology
it has acquired will permit it to develop instruments that are technically
superior to those currently being offered, that will be on the cutting edge of
certain emerging markets, that will address needs in certain industries in a
more cost efficient manner, and that can be sold at prices less than alternative
solutions currently being offered. In order to accomplish its goals, the
Company initiated a research and development plan designed to convert the
underlying technologies into commercial products. These efforts are just
beginning to lead to products and have not had a significant impact on the
revenues of the Company to date. The Company originally planned to seek to
develop mass spectrometer, capillary electrophoresis, capillary chromatography,
and inductively coupled plasma instruments. Management has elected to focus
on the development of its next generation mass spectrometer instrument that
it has designated "Jaguar" and that was premiered at the 1997 PittCon
convention, and to proceed with development of the other instruments only
after the finalization and commercial acceptance of Jaguar and additional
development funds and resources are available. The Company does not anticipate
that there will be a significant impact until at least the third or fourth
quarter of fiscal 1997. The products currently being worked on by the Company
are designed for extremely sophisticated applications, and there can be no
assurance that the Company will be successful in its development efforts or
that alternative technologies may not be developed by some other entity that
provide a more advantageous solution to the needs of the various industries
targeted by the Company.
In order to obtain the necessary funding to implement its research and
development plan, the Company has sought equity financing, primarily from a
small number of private investors. The Company received net proceeds from the
issuance of common stock from private placements, and from the exercise of
warrants and options of $1,023,688 in the year ended June 30, 1995, $9,269,987
in the year ended June 30, 1996, and $1,493,489 in the six months ended December
31, 1996. Since December 31, 1996, the Company has received gross proceeds of
$4,069,393 from the exercise of warrants. This capital has been used for
various purposes, including increased research and development activities, the
reduction of the Company's operating line of credit, and general operations.
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.
As of March 25, 1997, the Company has issued and outstanding warrants to
acquire 1,449,064 shares of common stock which would yield gross proceeds to the
Company of $7,426,610 if fully exercised. (See Notes to Consolidated Financial
Statements; Note M--Stock Options and Warrants and Note U--Subsequent Events.)
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 products and to further accelerate
development activities.
New product development, prototype manufacture, and first production costs
adversely affected the results of operations of the Company in the six months
ended December 31, 1996, and the year ended June 30, 1996. These activities
generated expenses with no corresponding revenues. It is anticipated the
Company will continue to experience operating losses until new products are
brought to market and begin to generate significant sales. There can be no
assurance as to the timing of these products being brought to market or as to
the success of the products. If unsuccessful, the Company would not be able to
recover its associated research and development costs, which would have a
significant material adverse impact on the business and activities of the
Company.
DISCONTINUED OPERATIONS
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 period this agreement has
been in effect through December 31, 1996, the Company received or accrued
amounts due with respect to this transaction of $494,146. (See Notes to
Consolidated Financial Statements; Note Q--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
Arrangement."
RESULTS OF OPERATIONS
Comparison of Six Months ended December 31, 1996, and 1995
Net Sales
Net sales from continuing operations for the six months ended December 31,
1996, and 1995, were $4,889,280 and $4,152,273, respectively. This represents
an increase of $737,007, or 17.7%, for 1996 as compared to 1995. The
acquisition of Sensar occurred October 27, 1995. As such, the operations of
Sensar are included for the entire six month period ended December 31, 1996,
while the operations of Sensar were only included for approximately two months
of the six-month period ended December 31, 1995. The increase in sales is
principally due to increased revenue from Sensar products of approximately
$627,000. The remaining increase of approximately $110,000 represented a 3%
increase in the sales of acoustical and vibration instrumentation.
During the six months ended December 31, 1996, export sales experienced a
significant increase as a percentage of total sales, to 57% of sales. This
growth is due to a continuing increase in sales to the Pacific Rim and increases
in sales in Europe, compared to the prior period. The Company's export sales
are billed, collected, and denominated in U.S. dollars, other than its sales
through its subsidiary, LTD, which are in British Pound Sterling. The impact
of the foreign currency translation adjustment has not historically been
significant, aggregating approximately $80,000 at December 31, 1996. The
Company does not consider its foreign currency risks to be significant and
has not taken a position in the currency markets or derivatives in an attempt
to hedge any risk that might exist. Domestic sales, on an annualized basis,
declined compared to the prior year, but have increased compared to 1995
and 1994.
Cost of Sales and Operating Expenses
Cost of sales and operating expenses for the six months ended December 31,
1996, were $2,177,304, or 44.5% of net sales, compared to $1,182,566, or 28.5%
of sales, for the six months ended December 31, 1995. This elevated level of
cost compared to historical levels continues principally due to high cost of
materials, initial production costs, and development costs associated with
production of initial Sensar products. Management expects the cost of sales as
a percentage of sales to decline in the future to a level more consistent with
historical levels prior to the Sensar acquisition. This should occur when the
Sensar products are ready for market, product demand is achieved, and standard
production processes are established; although this result cannot yet be assured
because the Company continues to have limited production experience with these
products to date.
Selling, General, and Administrative
Selling, general, and administrative expenses increased as a percentage of
sales from 42.0% for the six months ended December 31, 1995, to 51.8% for the
corresponding period of 1996. The increase was due to several factors,
including increased audit, legal, and consulting fees, establishment of a new
European sales manager, and increased costs related to various corporate and
marketing activities. Management believes that certain costs incurred in
the period ended December 31, 1996, including costs associated with the search
for qualified independent directors, listing the Company's stock on the Nasdaq
National Market System, consulting with respect to the identification of
potential industry partners, and general costs associated with the Company's
shift in focus from being engaged in the acoustics and vibration industry
to development of a broader based scientific instrumentation, were
non-recurring in nature, and that selling, general, and administrative
expenses should decline in the future to be more consistent with historical
levels, although no assurance can be made that the Company will be successful
in reducing such expenses.
Research and Development
For the six months ended December 31, 1996, research and development costs
were $1,734,911, or 35.5% of net sales, compared to $833,407, or 20.1% of net
sales, for the six months ended December 31, 1995. The increase over the prior
period, as well as increases above historical levels, is reflective of the
Company's continuing commitment to the development of new products. (See "ITEM
1. BUSINESS: Sensar Technology" and "CrossCheck Technology.") It is
anticipated that research and development costs will continue to exceed
historical levels as a percentage of sales until the development of new products
is completed and significant sales levels of the new products are achieved.
Historical levels of research and development costs as a percentage of sales for
the fiscal years ended June 30, 1991 to 1995 have averaged approximately 11% of
sales.
Comparison of Years Ended June 30, 1996, and 1995
Net Sales
Net sales from continuing operations for the fiscal years ended June 30,
1996, and 1995, were $8,255,607 and $6,515,830, respectively. This was the
second consecutive year in which the Company posted an approximate 27% increase
in its acoustic and vibration instrumentation sales. The increased sales were
attributable to a general expansion of the underlying market, and an increase in
the unit sales of the Company's products.
The acquisition of Sensar on October 27, 1995, did not materially impact
the net sales for the year ended June 30, 1996, with approximately $607,000 in
revenue attributable to the Sensar operations during that period.
During 1996, export sales declined from 53% to 33% of total sales. This
decline was the result of decreased sales in Europe, but was also due to strong
sales increases domestically.
Cost of Sales and Operating Expenses
The Company's cost of sales and operating expenses of $3,407,613 in the
year ended June 30, 1996, and $1,916,413 in the year ended June 30, 1995,
increased as a percentage of sales from continuing operations to 41.3% from
29.4%. The increase in 1996 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 for this component by approximately 90%. Because of the use
of the remaining highly priced electronics subsystems in Sensar's inventory in
fiscal year June 30, 1996, the entire material and development costs were
expensed during the period. Cost of sales and operating expenses in the future
for the Sensar products are expected to decrease as production becomes
standardized, although this result cannot be assured since the Company has only
limited production experience with these products to date.
Selling, General, and Administrative
Selling, general, and administrative expenses remained relatively constant
as a percentage of sales for the year ended June 30, 1996, compared to the year
ended June 30, 1995. Selling, general, and administrative expenses were
$3,922,976, or 47.5% of net sales, for the year ended June 30, 1996. This
represents a small decline when compared to the year ended June 30, 1995, when
selling, general, and administrative expenses were $3,131,938, or 48.1% of net
sales.
Research and Development
The Company is involved in a high-tech industry which demands constant
improvements and development of its instrumentation to remain technically
viable. Since its inception, the Company has dedicated significant operating
funds to research and development. For the five fiscal years June 30, 1991 to
1995, research and development expenses have averaged approximately 11% of net
sales and in the year ended June 30, 1995, were $708,679, or approximately 10.9%
of net sales. The historical level of research and development commitment was
factored into the pricing structure for the Company's products.
For the fiscal year ended June 30, 1996, research and development expenses
were $2,149,384, approximately 26.0% of net sales. This level of research and
development reflects management's commitment to develop new products to enhance
the revenue potential of the Company. (See "ITEM 1. BUSINESS: Sensar
Technology and CrossCheck Technology.") Capital obtained from the sale of
common stock was used to supplement the Company's operations as a method for
funding this accelerated research and development.
Comparison of Years Ended June 30, 1995, and 1994
Net Sales
Net sales from continuing operations for the fiscal years ended June 30,
1995, and 1994, increased to $6,515,830 from $5,137,638, respectively. Sales
levels had declined in 1994 related, in part, to a general global recession.
The Company was able to maintain its established market share in a then
shrinking market. In the fiscal year ended June 30, 1995, sales increased by
27% from 1994 as compared to 1995.
Foreign sales have been an important part of the Company's business plan
for many years. For the fiscal years ended June 30, 1995, and 1994, foreign
sales as a portion of continuing operations accounted for 53% and 42%,
respectively. The increase in 1995 was partially due to the Registrant's
operations in the United Kingdom through its subsidiary, LTD.
Cost of Sales and Operating Expenses
The Company's cost of sales and operating expenses as a percentage of sales
from continuing operations for the years ended June 30, 1995, and 1994, were
29.4% and 33.5%, respectively. The Company believes its efforts to better track
costs and control inventories contributed to the decrease in cost of sales and
operating expenses between the fiscal years ended June 30, 1995, and 1994.
Selling, General, and Administrative
Selling, general, and administrative expenses declined as a percentage of
sales for the year ended June 30, 1995, compared to the year ended June 30,
1994. Selling, general, and administrative expenses were $3,131,938, or 48.1%
of net sales, for the year ended June 30, 1995, compared to $2,863,074, or 55.7%
of net sales, for the year ended June 30, 1994. The decline was largely related
to the fact that in 1994, significant general and administrative expenses were
incurred related to two acquisitions. Similar expenses were not incurred in
1995.
Research and Development
Since its inception, the Company dedicated significant operating funds to
research and development. For the years ended June 30, 1995, and 1994, this
commitment represented 10.9% and 16.2%, respectively, of the Company's net sales
from continuing operations. The Company introduced a number of new products in
1995 which caused the increased spending reflected in the fiscal year ended June
30, 1994 (the development period for products introduced in 1995).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had total current assets of $9,521,665
and total current liabilities of $2,951,754, resulting in working capital of
$6,569,911 and a working capital ratio of 3.2:1. Included in total current
liabilities is the Company's revolving line of credit with a balance of
$1,033,018. During the six months ended December 31, 1996, the Company's
principal line of credit was placed with a new financial institution. The
maximum limit on this line of credit has been increased to $3,000,000, but is
adjusted from time to time based on the amount of inventories and accounts
receivable that secure the line of credit. 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 has intangible assets totaling $5,083,712 related to product
technology acquisition costs, license rights, software development costs, and
goodwill, which are being amortized over estimated useful lives ranging from
five to fifteen years. Periodically, the Company reviews the recoverability
of these assets by comparing the carrying value of individual identifiable
intangible assets to the undiscounted estimated future net cash flows from
current and anticipated products associated with each of these assets.
Estimates of future cash flows are based on current demand for existing
products; the progress toward commercialization of future products; and
anticipated demand for existing and future products based on the Company's
market analyses and evaluations with current and potential strategic
marketing partners. Management's estimates of future manufacturing costs
and development and marketing expenses are based on historical levels
and/or industry norms. Although management believes its estimates of
recoverability of intangible assets are reasonable, there is no assurance
that actual future results will not differ from current expectations. In
the event of a change in expectations, the carrying value or amortization
period of the long-term asset would be adjusted which would affect the
Company's results of operations in the period in which such adjustment
occurred.
The Company has relied on the sale of common stock as a method to fund
increases in accounts receivable and inventories, operational losses, and
research and development efforts. During the six months ended December 31,
1996, and the year ended June 30, 1996, the Company used $1,944,738 and
$2,019,944, respectively, in operating activities. The Company anticipates it
will continue to rely on equity funding in the future. The Company received net
proceeds from the issuance of common stock on the exercise of warrants and
options in the net amount of $1,493,489 during the six months ended December 31,
1996, and $9,269,987 during the fiscal year ended June 30, 1996. Subsequent to
December 31, 1996, the Company has received gross proceeds from the exercise of
warrants for 651,103 shares of common stock in the amount of $4,069,393. There
are currently issued and outstanding warrants with respect to 1,449,064 shares
of common stock. If all of these warrants were exercised, the Company would
receive gross proceeds of $7,426,610 in additional funding. On the satisfaction
of certain conditions, the Company has agreed to issue additional warrants to
acquire up to an aggregate of 1,715,832 shares of common stock at an exercise
price of $10.75 per share. There is no obligation of the holders of these
rights to exercise them and the exercise will largely depend on the price of the
Company's common stock in the public trading market, as to which no assurance
can be given.
The Company's primary uses of cash for the transition period ended
December 31, 1996, were the funds used in operations as discussed above and
the purchase of property and equipment in the amount of $421,573. Management
expects that in the short-term, the primary uses of cash will continue to be
operations and the purchase of property and equipment due to the continued
research and development activities. In the opinion of management, current
cash balances, funds available under the line of credit, and anticipated
proceeds from exercise of warrants will provide the Company with sufficient
capital to fund its operations and development plans for the 1997 calendar
year. The Company intends to continue to fund its short-term operating and
capital requirements through equity financing, principally through the
exercise of warrants. As new products are developed and commercialized and
product demand is achieved, management believes that its long-term operating
and capital requirements will be funded principally through cash generated
from operations, supplemented as necessary from equity or long-term debt
financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth immediately
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In January 1996, the Company changed its accountants from Peterson, Siler &
Stevenson (currently known as Pritchett Siler & Hardy, P.C.) to Grant Thornton
LLP. This change was approved by the board of directors of the Company.
The report of Peterson, Siler & Stevenson on the Company's financial
statements as of June 30, 1995, and the two years then ended did not contain an
adverse opinion, or a disclaimer of opinion, nor was its report qualified or
modified as to uncertainty, audit scope, or accounting principles, other than a
limitation as to the representation of the financials on a going concern basis.
During the engagement of Peterson, Siler & Stevenson, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if not
resolved to the satisfaction of Peterson, Siler & Stevenson, would have caused
it to make reference to the subject matter of the disagreements in connection
with its reports.
The Company was not advised by Peterson, Siler & Stevenson that internal
controls necessary for the Company to develop reliable financial statements did
not exist nor that information came to its attention that led it to no longer be
able to rely on management's representations or that made it unwilling to be
associated with the financial statements prepared by management. The Company
was not advised by Peterson, Siler & Stevenson of the need to expand
significantly the scope of the Company's audit, nor was the Company advised that
any information came to the attention of Peterson, Siler & Stevenson that on
further investigation may (i) materially impact the fairness or reliability of
either a previously issued audit report or the underlying financial statements,
or the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report, or (ii) cause Peterson, Siler & Stevenson to be unwilling to rely
on management's representations or be associated with the Company's financial
statements. The Company provided its former auditors, Peterson, Siler &
Stevenson with a copy of the foregoing disclosures. The Company has filed a
concurrence of the former auditors with the foregoing statements as an exhibit
to its reports filed with the Securities and Exchange Commission.
The Company did not consult Grant Thornton LLP prior to its appointment
regarding the application of accounting principles to a specific completed or
contemplated transaction, the type of audit opinion, or other accounting advice
that was considered by the Company in reaching a decision as to an accounting,
auditing, or financial reporting issue.
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name and age of each executive officer and director
of the Company, together with all positions and offices of the Company held by
each and the term of office and the period during which each has served:
<TABLE>
<CAPTION>
Director and/or
Name Age Position and Office Held Executive Officer Since
----------------- --- ------------------------ -----------------------
<S> <C> <C> <C>
Brian G. Larson 54 President and Chairman of September 1987
the Board
Larry J. Davis 45 Vice-President and Director September 1987
Dan J. Johnson 46 Vice-President, Secretary, September 1987
Treasurer, and Director
William E. Hosker 58 Director March 1996
Gerard L. Seelig 70 Director June 1996
Craig E. Allen 45 Chief Financial Officer December 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 of the Company's predecessor and has been an
executive officer and director of the Company and its predecessor since 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 of the Company's predecessor and has been an
officer and director of the Company and its predecessor since 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 and its predecessor 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 of the Company in March
1996. Mr. Hosker was formerly employed by Hercules, Inc., from 1960 to 1995.
Mr. Hosker served in various capacities with Hercules, Inc., culminating in his
positions as corporate vice-president of International Operations, Subsidiaries,
and Ventures from 1987 to 1990 and vice-president and general manager of the
Resins Group from 1990 to 1995. Mr. Hosker is the president and owner of STAT
Associates, Inc., a business consulting firm. Mr. Hosker attended the Amos Tuck
Business School at Dartmouth University studying strategic planning and
financial analysis and the Darden Business School of the University of Virginia
studying executive marketing. He obtained a bachelor of arts degree in
biochemistry from Bowdoin College in 1960.
Gerard L. Seelig, was appointed as a director of the Company 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.
Craig E. Allen, was appointed chief financial officer of the Company in
December 1996. Mr. Allen was formerly controller of CUSA Technologies, Inc.,
from September 1994 to December 1996. Prior to that, Mr. Allen was a senior
audit manager with the accounting firm of Grant Thornton LLP where he had been
employed since 1978. Mr. Allen is a certified public accountant and received a
masters degree in accounting from Brigham Young University in 1978.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Craig E. Allen, who became the chief financial officer of the Company on
December 9, 1996, filed his initial report on Form 3 February 10, 1997. Larry
J. Davis filed a report on Form 4 for the month of December 1996 on January 14,
1997. Dan J. Johnson filed a report on Form 4 for the month of October 1996 on
February 24, 1997. The report of Nathan West on Form 4 for the month of January
1997 was filed late.
Other than the foregoing, the Company believes that all reports required by
section 16(a) for transactions in the six months ended December 31, 1996, were
timely filed.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and its
subsidiaries for the six months ended December 31, 1996, and 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, 12/31/96(2) $106,909 $ 0 $ 9,442 $ 0 0 $ 0 $ 0
President and Chairman 06/30/96 $198,779 $ 0 $ 4,500 $ 0 500,000 $ 0 $ 0
of the Board 06/30/95 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
06/30/94 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
Larry J. Davis, 12/31/96(2) $106,909 $ 0 $ 9,218 $ 0 0 $ 0 $ 0
Vice-President 06/30/96 $198,779 $ 0 $ 4,500 $ 0 500,000 $ 0 $ 0
06/30/95 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
06/30/94 $181,116 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
Dan J. Johnson, 12/31/96(2) $ 80,253 $ 0 $ 6,085 $ 0 0 $ 0 $ 0
Vice-President and 06/30/96 $160,407 $ 0 $ 4,500 $ 0 425,000 $ 0 $ 0
Secretary/Treasurer 06/30/95 $129,566 $ 0 $ 4,500 $ 0 30,000 $ 0 $ 0
06/30/94 $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.
(2) This reflects amounts paid, awarded, or accrued for the six month
transition period ended December 31, 1996.
The named executive officers were not granted any options during the six
months ended December 31, 1996.
The following table sets forth the information concerning the options
exercised by the named executive officers during the six months ended December
31, 1996, and the value of unexercised options as of December 31, 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 $2,929,938/$2,512,500
Larry J. Davis 0 $ 0 360,000/390,000 $2,929,938/$2,512,500
Dan J. Johnson 2,500 $22,813 371,365/330,000 $3,136,036/$2,062,500
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of its named executive
officers. 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 provided for initial compensation ranging from
$150,000 to $200,000 per annum. These base salaries were increased
approximately 9% in August 1996. 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, options were
granted to acquire a combined total of 825,000 shares of common stock 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 was fixed at the closing price of the
Company's common stock of $7.00 per share on May 8, 1996, the day immediately
preceding the adoption of the plan by the board of directors of the Company.
The options granted to Brian G. Larson, Larry J. Davis, and Dan J. Johnson 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 a consulting agreement with STAT Associates, Inc., Mr.
Hosker waived his monthly fee of $1,000 through September 30, 1996. (See "ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
By action dated February 21, 1997, the board of directors appointed Mr.
Hosker to act on behalf of the board in pursuing potential strategic
relationships with companies in the petrochemical and chemical industries. Mr.
Hosker has 35 years of experience in these industries and it is the judgment of
the board that his participation will facilitate the initial discussions
concerning a possible alliance. It is anticipated that Mr. Hosker will dedicate
essentially full-time to this effort over a few months. The board anticipates
compensating Mr. Hosker for his time by delivering shares of the Company's
common stock with a value of $100,000.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 25, 1997, 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 Percent of
Name of Person or Group Investment Power(1)(2) Class(3)(4)
- ------------------------------- ---------------------- -----------
<S> <C> <C> <C>
Principal Shareholders:
Brian G. Larson(5) Common Stock 445,083 3.9%
1681 West 1820 North Options 750,000 6.2%
Provo, Utah 84601 ---------
Total 1,195,083 9.9%
Larry J. Davis(6) Common Stock 774,454 6.8%
10455 North Edinburgh Options 750,000 6.2%
Highland, Utah 84003 ---------
Total 1,524,454 12.6%
Dan J. Johnson Common Stock 891 0.0%
480 East 1700 North Options 701,365 5.8%
Mapleton, Utah 84664 ---------
Total 702,256 5.8%
Summit Enterprises, Inc.,(7) Common Stock 10,760 0.1%
of Virginia Preferred Stock 200,000 100%
1308 Devils Reach Road, ---------
Suite 302 Total 210,760 1.8%
Woodbridge, Virginia 22192
Mellon Bank Corporation(8) Common Stock 761,000 6.7%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Named Executive Officers
and Directors:
Brian G. Larson ---------------------see above-------------------------
Larry J. Davis ---------------------see above-------------------------
Dan J. Johnson ---------------------see above-------------------------
William E. Hosker(9) Common Stock 12,000 0.1%
Options 200,000 1.7%
---------
Total 212,000 1.8%
Gerard L. Seelig Common Stock 0 0.0%
Options 200,000 1.7%
---------
Total 200,000 1.7%
All Officers and Directors Common Stock 1,232,428 10.8%
as a Group (6 Persons) Options 2,611,365 18.7%
---------
Total 3,843,793 27.5%
</TABLE>
[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 a weighted
average price of $4.84 per share. Of the 750,000 shares subject to options
shown for Messrs. Larson and Davis, options with respect to 330,000 shares
are not currently vested or exercisable. Of the 701,365 shares subject to
options shown for Mr. Johnson, options with respect to 285,000 shares are
not currently vested or exercisable. 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 11,374,191 shares of common stock of the
Company issued and outstanding as of March 25, 1997.
(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 46,300 shares held of record by Mr. Larson or his spouse
for the benefit of minor children and in which he disclaims direct economic
interest.
(6) The number of shares owned by Mr. Davis includes 696,362 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) Summit Enterprises, Inc., of Virginia holds all of the issued and
outstanding preferred stock of the Company. The preferred stock is
convertible into common stock at a rate determined by dividing $3.00 by the
20 day average of the trading price of the common stock. Based on the
trading price of $10.25 as of March 25, 1997, the 200,000 shares of
preferred stock is convertible into 58,537 shares. The total amount
reflects the voting rights held by Summit of one vote for each share of
preferred stock. If the preferred stock was converted to common stock
at the market price as of March 25, 1997, Summit would hold 69,297
shares of common stock, or 0.6% of the issued and outstanding common stock.
(8) These shares are held by two subsidiaries of Mellon Bank Corporation, The
Dreyfus Corporation and Dreyfus Investment Advisors, Inc. The number of
shares owned reflects the holdings of these entities as of February 28,
1997, the latest date for which the Company has information.
(9) The number of shares indicated for Mr. Hosker includes 2,500 shares held
by his wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the course of the business of the Company, the two founders and
principal shareholders of the Company have been required to guarantee certain
obligations, including its principal line of credit. The Company's principal
line of credit was placed with another financial institution subsequent to June
30, 1996, which did not require personal guarantees.
The Company entered into a Consulting Agreement dated March 19, 1996, with
STAT Associates, Inc., a Delaware corporation owned and controlled by William E.
Hosker, a director of the Company. The Agreement called for payments of
$100,000 and the reimbursement of third-party expenses incurred on behalf of the
Company. The Agreement contains confidentiality and noncompete provisions
protecting the technology and business of the Company. In accordance with the
terms of the Agreement, the consulting arrangement ended in September 1996.
Under the terms of various contractual arrangements with Brigham Young
University ("BYU"), the Company owed BYU approximately $215,500 for royalties,
license fees, and reimbursement of patent expenses, had additional upcoming
expenses of approximately $109,000, and had an obligation to issue it 6,000
shares. BYU agreed to accept shares of the Company's restricted common stock in
satisfaction of the cash obligations valued at the closing price of the
Company's common stock on July 17, 1996, of $9.00 per share discounted by 20% to
recognize the restricted nature of the securities. The Company purchased an
aggregate of 49,272 shares of common stock from two of its executive officers
and directors, at a price equal to the obligations to BYU, in order to deliver
the shares to BYU. A portion of the purchase price was paid by offsetting the
amounts due to the Company for advances made to the officers during the fiscal
year ended June 30, 1996, in the aggregate principal amount of $105,000, plus
accrued interest of approximately $5,300.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements, including the index to the financial statements,
are included immediately following the signatures to this report.
EXHIBITS
<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
filed July 3, 1989 ended June 30, 1989*
3 (3) Designation of Rights, Privileges, and Registration Statement
Preferences of 1995 Series Preferred Stock filed on Form SB-2,
Exhibit 3, SEC File
No. 33-59963*
4 (3) Bylaws Registration Statement
filed on Form S-18,
Exhibit 5, SEC File
No. 33-3365-D*
5 (4) Form of $6.25 Warrant Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
6 (10) 1987 Stock Option Plan of LarsonoDavis Exhibit to report on
Incorporated, as amended Form 10-K for the year
ended June 30, 1988*
7 (10) 1991 Employee Stock Award Plan of Exhibit to report on
LarsonoDavis Incorporated Form 10-K for the year
ended June 30, 1992*
8 (10) 1991 Director Stock Option and Stock Exhibit to report on
Award Plan of LarsonoDavis Form 10-K for the year
Incorporated ended June 30, 1992*
9 (10) 1996 Director Stock Option Plan Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
10 (10) Amended and Restated 1996 Director Exhibit to report on
Stock Option Plan Form 10-K for the
transitional period
ended December 31, 1996
11 (10) 1997 Employee Stock Purchase Plan Exhibit to report on
Form 10-K for the
transitional period
ended December 31, 1996
12 (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*
13 (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
14 (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.
15 (10) Product Development and Marketing Exhibit to report on
Agreement between Larson Davis Form 10-K for the
Incorporated and System Sales transitional period
Representatives, Inc., dated ended December 31, 1996
September 25, 1996
16 (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*
17 (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*
18 (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*
19 (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*
20 (10) Employment Agreement between Exhibit to report on
Larson Davis Incorporated and Craig E. Form 10-K for the
Allen, dated December 9, 1996 transitional period
ended December 31, 1996
21 (10) Agreement to Issue Warrants to Exhibit to report on
Congregation Ahavas Tzdokah Z'Chesed Form 8-K dated
dated May 15, 1996 May 15, 1996*
22 (10) Agreement to Issue Warrants to Ezer Exhibit to report on
Mzion Organization Form 8-K dated
dated May 15, 1996 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
dated May 15, 1996 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 dated May 15, 1996
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 (10) Agreement to Issue Warrants to Exhibit to report on
Congregation Ahavas Tzdokah Z'Chesed Form 10-K for the
dated January 9, 1997 transitional period
ended December 31, 1996
27 (10) Agreement to Issue Warrants to Ezer Exhibit to report on
Mzion Organization Form 10-K for the
dated January 9, 1997 transitional period
ended December 31, 1996
28 (10) Agreement to Issue Warrants to Exhibit to report on
Laura Huberfeld and Naomi Bodner Form 10-K for the
dated January 9, 1997 transitional period
ended December 31, 1996
29 (10) Agreement to Issue Warrants to Exhibit to report on
Connie Lerner, dated January 9, 1997 Form 10-K for the
transitional period
ended December 31, 1996
Agreements relating to research and
development work performed by the
Company in 1983 for two unrelated
funding entities
30 (10) (a) 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
31 (10) (b) 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
32 (11) Earnings (Loss) Per Share Calculation Exhibit to report on
Form 10-K for the
transitional period
ended December 31, 1996
33 (16) Letter from Peterson, Siler & Stevenson Exhibit to report on
regarding change in certifying accountants Form 8-K dated
January 23, 1996*
34 (21) Subsidiaries of Larson Davis Exhibit to report on
Incorporated Form 10-KSB for the
year ended
June 30, 1996*
35 (23) Consent of Peterson, Siler & Stevenson This Filing
(now known as Pritchett, Siler & Hardy, P.C.)
36 (23) Consent of Grant Thornton LLP This Filing
37 (27) Financial Data Schedule Exhibit to report on
Form 10-K for the
transitional period
ended December 31, 1996
</TABLE>
[FN]
*Incorporated by reference
REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the last quarter of
the transition period ended December 31, 1996.
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: September ___, 1997 By /s/ Brian G. Larson
---------------------------------------
Brian G. Larson, President
(Principal Executive Officer)
Dated: September ___, 1997 By /s/ Craig E. Allen
---------------------------------------
Craig E. Allen. Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
Dated: September 30, 1997 By /s/ Brian G. Larson
----------------------------
Brian G. Larson, Director
Dated: September 30, 1997 By /s/ Larry J. Davis
----------------------------
Larry J. Davis, Director
Dated: September 30, 1997 By /s/ Dan J. Johnson
----------------------------
Dan J. Johnson, Director
Dated: September , 1997 By
----------------------------
William E. Hosker, Director
Dated: September , 1997 By
----------------------------
Gerard L. Seelig, Director
Larson Davis Incorporated and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Grant Thornton LLP, independent certified
public accountants on the December 31, and
June 30, 1996 financial statements F-2
Report of Pritchett, Siler & Hardy, independent certified
public accountants on the June 30, 1995 and 1994
financial statements F-3
Consolidated financial statements:
Consolidated Balance Sheets as of December 31, 1996,
and June 30, 1996 and 1995 F-4
Consolidated Statements of Operations for the six
months ended December 31, 1996 and for the years
ended June 30, 1996, 1995 and 1994 F-6
Consolidated Statements of Stockholders' Equity for
the for the six months ended December 31, 1996 and
for the years ended June 30, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the six
months ended December 31, 1996, and for the years
ended June 30, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-9
</TABLE>
All Financial Statement Schedules are omitted because they are not applicable or
because the required information is contained in the Consolidated Financial
Statements or the Notes thereto.
REPORT OF INDEPENDENT
---------------------
CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
Board of Directors
Larson Davis Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of Larson Davis
Incorporated and Subsidiaries as of December 31, 1996 and June 30, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows listed in the accompanying index for the six months ended December 31,
1996 and for the year ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Larson Davis
Incorporated and Subsidiaries as of December 31, 1996 and June 30, 1996, and the
consolidated results of their operations and their consolidated cash flows for
the six months ended December 31, 1996 and for the year ended June 30, 1996, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Provo, Utah
March 12, 1997
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 listed in the
accompanying index for the years ended June 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Larson Davis Incorporated and Subsidiaries as of June 30, 1995 and the results
of their operations and their cash flows for the years ended June 30, 1995 and
1994 in conformity with generally accepted accounting principles.
/s/ PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
August 4, 1995
Larson Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
December 31, ----------------------------
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note C) $ 2,696,542 $ 3,922,660 $ 83,334
Trade accounts receivable, net of allowance
for doubtful accounts (Note H) 2,598,582 2,332,417 2,130,835
Inventories (Notes D and H) 4,096,445 2,923,650 2,152,768
Other current assets 130,096 502,211 335,666
----------- ----------- -----------
Total current assets 9,521,665 9,680,938 4,702,603
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization
(Notes E, H, and I) 1,815,455 1,610,473 1,337,574
ASSETS UNDER CAPITAL LEASE
OBLIGATIONS, net of accumulated
amortization (Note I) 613,675 356,255 303,522
LONG-TERM CONTRACTUAL
ARRANGEMENT, net of accumulated
cost recoveries (Note Q) 2,872,014 2,978,014 3,135,776
INTANGIBLE ASSETS, net of
accumulated amortization (Notes F,
H and R) 5,083,712 5,143,348 2,100,192
----------- ----------- -----------
$19,906,521 $19,769,028 $11,579,667
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Larson Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
December 31, ----------------------------
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Bank overdraft $ - $ - $ 40,039
Lines of credit (Note H) 1,033,018 1,302,306 2,219,187
Accounts payable 902,926 581,377 886,489
Accrued liabilities (Note T) 764,393 767,254 469,003
Current maturities of long-term
debt (Note I) 91,902 209,808 206,409
Current maturities of capital lease
obligations (Note I) 159,515 95,500 133,719
----------- ----------- -----------
Total current liabilities 2,951,754 2,956,245 3,954,846
LONG-TERM DEBT,
less current maturities (Note I) 759,709 778,835 958,251
CAPITAL LEASE OBLIGATIONS,
less current maturities (Note I) 523,185 357,171 255,080
----------- ----------- -----------
Total liabilities 4,234,648 4,092,251 5,168,177
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes H, I, J, M and N) - - -
STOCKHOLDERS' EQUITY (Notes K, L, M, N,
R and U)
Preferred stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
200,000 shares ($2.50 per share liquidation
value) 200 200 200
Common stock, $.001 par value; authorized
290,000,000 shares; issued and outstanding
10,717,790 shares at December 31, 1996,
10,258,406 shares at June 30, 1996 and
6,559,479 shares at June 30, 1995 10,718 10,258 6,559
Additional paid-in capital 19,999,375 18,402,999 7,406,114
Accumulated deficit (4,418,780) (2,752,360) (997,362)
Cumulative foreign currency translation
adjustment 80,360 15,680 (4,021)
----------- ----------- -----------
Total stockholders' equity 15,671,873 15,676,777 6,411,490
----------- ----------- -----------
$19,906,521 $19,769,028 $11,579,667
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Larson Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended
December 31, Year ended June 30,
-----------------------------------------------
1996 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales (Note O) $ 4,889,280 $ 8,255,607 $ 6,515,830 $ 5,137,638
----------- ----------- ----------- -----------
Costs and operating expenses
Cost of sales 2,177,304 3,407,613 1,916,413 1,718,769
Research and development 1,734,911 2,149,384 708,679 834,520
Selling, general and administrative 2,534,643 3,922,976 3,131,938 2,863,074
----------- ----------- ----------- -----------
6,446,858 9,479,973 5,757,030 5,416,363
----------- ----------- ----------- -----------
Operating profit (loss) (1,557,578) (1,224,366) 758,800 (278,725)
----------- ----------- ----------- -----------
Other income (expense)
Interest income 59,638 12,320 7,302 5,625
Interest expense (154,440) (447,907) (301,402) (270,383)
Other, net 8,460 (46,295) (6,189) 102,247
----------- ----------- ----------- -----------
(86,342) (481,882) (300,289) (162,511)
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before discontinued operations and
cumulative effect of change in
accounting principle (1,643,920) (1,706,248) 458,511 (441,236)
----------- ----------- ----------- -----------
Discontinued operations (Note Q)
Income (loss) from discontinued
operations, net of income taxes - - (770,128) 243,080
Loss on disposal of discontinued
operations, net of income taxes - - - (2,156,987)
----------- ----------- ----------- -----------
Loss from discontinued operations - - (770,128) (1,913,907)
----------- ----------- ----------- -----------
Cumulative effect of change in accounting
principle (Note G) - - - 486,992
----------- ----------- ----------- -----------
NET LOSS $(1,643,920) $(1,706,248) $ (311,617) $(1,868,151)
=========== =========== =========== ===========
Earnings (loss) per common share
Earnings (loss) from continuing
operations $ (0.16) $ (0.19) $ 0.07 $ (0.08)
Loss from discontinued operations - - (0.12) (0.33)
Cumulative effect of change in
accounting principle - - - 0.08
----------- ----------- ----------- -----------
NET LOSS $ (0.16) $ (0.19) $ (0.05) $ (0.33)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Larson Davis Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six months ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994
Cumulative
Retained foreign
Preferred stock Common stock Additional Earnings currency
---------------- -------------------- paid-in (Accumulated translation
Shares Amount Shares Amount capital deficit) adjustment Total
-------- ------ ---------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993 - $ - 5,413,127 $ 5,413 $ 4,719,264 $ 1,182,406 $ - $ 5,907,083
Shares issued on exer-
cise of options (Note M) - - 33,000 33 49,767 - - 49,800
Shares issued in various pri-
vate placements (Note L) - - 381,122 381 894,619 - - 895,000
Equity adjustment for trans-
lation of foreign currency - - - - - - 3,413 3,413
Net loss for the year - - - - - (1,868,151) - (1,868,151)
------- ------- ---------- ------- ----------- ----------- ------- -----------
Balance at June 30, 1994 - - 5,827,249 5,827 5,663,650 (685,745) 3,413 4,987,145
Shares issued on exercise
of options (Note M) - - 19,325 19 42,896 - - 42,915
Shares issued in various pri-
vate placements (Note L) - - 614,000 614 990,729 - - 991,343
Shares issued for services
rendered (Note L) - - 98,905 99 209,039 - - 209,138
Preferred shares issued
for payment of a note
payable (Note K) 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 on
exercise of options
(Note M) - - 61,117 61 142,644 - - 142,705
Shares issued on exercise
of warrants (Note M) - - 3,000,000 3,000 9,124,282 - - 9,127,282
Shares issued for payment of
interest on debt (Note L) - - 16,483 17 42,244 - - 42,261
Shares issued for services
rendered (Note L) - - 34,940 35 178,355 - - 178,390
Shares issued in Sensar
acquisition (Note R) - - 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
Shares issued in Sensar
acquisition (Note R) - - 31,336 31 80,659 - - 80,690
Shares issued for services
rendered (Note L) - - 548 1 5,000 - - 5,001
Shares issued on
exercise of options
(Note M) - - 52,500 53 368,770 - - 368,823
Shares issued on exercise
of warrants (Note M) - - 375,000 375 1,141,947 - - 1,142,322
Equity adjustment for trans-
lation of foreign currency - - - - - - 64,680 64,680
Preferred dividends - - - - - (22,500) - (22,500)
Net loss for the period - - - - - (1,643,920) - (1,643,920)
------- ------- ---------- ------- ----------- ----------- -----------
Balance at December 31,1996 200,000 $200 10,717,790 $10,718 $19,999,375 $(4,418,780) $80,360 $15,671,873
======= ======= ========== ======= =========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Larson Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
December 31, Year ended June 30,
-----------------------------------------------
1996 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Net cash provided by (used in) operating
activities (Note S) $(1,944,738) $(2,019,944) $ 33,604 $ 657,287
----------- ----------- ----------- ------------
Cash flows from investing activities
Purchase of property and equipment (421,573) (560,861) (449,917) (208,194)
Proceeds from sale of assets 35,900 49,543 59,477 263,787
Purchase of stock of
Sensar Corporation - (1,184,069) - -
Purchase of technology (25,233) (414,991) (1,235,229) (2,826,496)
Proceeds from long-term
contractual arrangement, net 106,000 157,762 - -
Patent acquisition costs (5,215) (125,577) - -
Purchase of goodwill - - - (138,721)
----------- ----------- ----------- -----------
Net cash used in
investing activities (310,121) (2,078,193) (1,625,669) (2,909,624)
----------- ----------- ----------- -----------
Cash flows from financing activities
Net change in lines of credit (269,288) (916,881) 427,687 340,500
Proceeds from long-term debt - 679,366 56,656 2,067,166
Principal payments of long-term
debt (137,032) (855,383) (230,293) (696,711)
Net proceeds from issuance of
common stock and exercise
of options and warrants 1,493,489 9,269,987 1,023,688 944,800
Principal payments on capital
lease obligations (100,608) (170,538) (67,205) (78,900)
Preferred dividends (22,500) (48,750) - -
Increase (decrease) in
bank overdraft - (40,039) 40,039 -
----------- ----------- ----------- -----------
Net cash provided by
financing activities 964,061 7,917,762 1,250,572 2,576,855
----------- ----------- ----------- -----------
Effect of exchange rates on cash 64,680 19,701 (7,434) 3,413
----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (1,226,118) 3,839,326 (348,927) 327,931
Cash and cash equivalents at
beginning of period 3,922,660 83,334 432,261 104,330
----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period $ 2,696,542 $ 3,922,660 $ 83,334 $ 432,261
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these 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 and principles of consolidation
-------------------------------------------------
Larson Davis Incorporated (the Company) is primarily engaged in the design,
development, manufacture, and marketing of analytical instruments 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.
Occasionally, the Company enters into long-term contracts under which
products are sold and services delivered over the term of the contract.
Revenue under long-term contracts is recognized on the percentage-of-
completion method. These contracts are typically fixed price agreements
for the sale and installation of existing products.
3. Depreciation and amortization
-----------------------------
Property and equipment are stated at cost. Depreciation and amortization
are provided in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under
capital leases and leasehold improvements are amortized over the shorter of
the lives of the respective leases or over the service lives of the asset.
The straight-line method of depreciation is followed for financial reporting
purposes and accelerated methods are used for income tax purposes.
4. Income taxes
------------
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. An
allowance against deferred tax assets is recorded when it is more likely
than not that such tax benefits will not be realized. 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. Earnings (loss) per common share
--------------------------------
Earnings (loss) per common share are computed by dividing net income (loss)
by the weighted average common and dilutive common equivalent shares
outstanding during each period. Common stock equivalents represent the
dilutive effect of the exercise of stock options and warrants, and the
conversion of preferred stock. Earnings used in the calculation are reduced
(loss is increased) by the dividends paid to preferred stockholders. Fully
diluted earnings (loss) per share is not materially different from primary
earnings (loss) per share.
The weighted average shares outstanding were 10,410,820 for the six months
ended December 31, 1996 and 9,317,297, 6,227,707 and 5,824,345 for the years
ended June 30, 1996, 1995 and 1994, respectively.
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 trade receivables.
The Company provides credit according to the terms of individual contracts,
in the normal course of business.
10. Intangible assets
-----------------
The Company capitalizes costs incurred to acquire product technology and
patents. The amounts are amortized on the straight-line method over the
estimated useful life or the terms of the respective technology or patent,
whichever is shorter. The amortization periods range from 5 to 15 years.
The Company capitalizes all costs incurred to develop software after
technological feasibility has been established. Amortization of these costs
is calculated using the greater of the amount computed using (a) the ratio of
current gross sales to the total current and anticipated future gross sales
or (b) the straight-line method over estimated useful lives of 5 to 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
10 years.
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by comparing the carrying
value to the undiscounted estimated future cash flows of the related assets
and necessary adjustments, if any, are recorded.
11. Translation of foreign currencies
---------------------------------
The foreign subsidiary's asset and liability accounts, which are originally
recorded in the appropriate local currency, are translated, for consolidated
financial reporting purposes, into U.S. dollar amounts at period-end
exchange rates. Revenue and expense accounts are translated at the average
rates for the period. Transaction gains and losses, the amounts of which
are not material, are included in general and administrative expenses.
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 or loss but are reported in the same
manner as translation adjustments. Foreign currency translation adjustments
are accumulated as a separate component of stockholders' equity.
12. Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Estimates also affect the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from these estimates. Such
estimates of significant accounting sensitivity are the allowance for
doubtful accounts 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
the respective balance sheet dates are reasonable.
13. Fair value of financial instruments
-----------------------------------
Calculation of estimated fair value of financial instruments 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 sheets, 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.
14. Reclassifications - not material
--------------------------------
Certain reclassifications have been made to the June 30, 1996, 1995 and 1994
financial statements to conform with the December 31, 1996 presentation.
NOTE B - CHANGE IN FISCAL YEAR END
On January 23, 1997, the Board of Directors of the Company approved a change
of its fiscal year end from June 30, to December 31, effective December 31,
1996. The following is selected financial data for the six month transition
period ended December 31, 1996 and the comparable prior year period.
<TABLE>
<CAPTION>
Six months ended
December 31,
---------------------------
1996 1995
----------- ----------
(unaudited)
<S> <C> <C>
Net sales $ 4,889,280 $4,152,273
----------- ----------
Cost and operating expenses
Cost of sales and operating expenses 2,177,304 1,182,566
Research and development 1,734,911 833,407
Selling, general and administrative 2,534,643 1,742,080
----------- ----------
6,446,858 3,758,053
----------- ----------
Operating profit (loss) (1,557,578) 394,220
Other income (expense), net (86,342) (174,288)
----------- ----------
Net income (loss) $(1,643,920) $ 219,932
=========== ==========
Earnings (loss) per common share $ (0.16) $ 0.03
=========== ==========
</TABLE>
NOTE C - CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents at December 31, 1996 and June 30, 1996
are approximately $2,300,000 and $2,600,000, respectively 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 D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
------------ -------------------------
1996 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Raw materials $1,276,413 $1,129,835 $ 669,433
Work in process 1,398,229 680,972 765,617
Finished goods 1,421,803 1,112,843 717,718
---------- --------- ----------
$4,096,445 $2,923,650 $2,152,768
========== ========== ==========
</TABLE>
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives are as follows:
<TABLE>
<CAPTION>
June 30,
December 31, ------------------------
Years 1996 1996 1995
----- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Land - $ 25,000 $ 25,000 $ 25,000
Buildings and improvements 5-30 984,965 966,969 946,153
Machinery and equipment 5-10 2,426,317 2,249,482 1,827,020
Furniture and fixtures 3-10 529,221 386,644 212,380
---------- ---------- ----------
3,965,503 3,628,095 3,010,553
Less accumulated
depreciation and amortization (2,150,048) (2,017,622) (1,672,979)
---------- ---------- ----------
$1,815,455 $1,610,473 $1,337,574
========== ========== ==========
</TABLE>
NOTE F - 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 15 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 assets.
The following is a summary of intangible assets and estimated useful lives:
<TABLE>
<CAPTION>
June 30,
December 31, ------------------------
Years 1996 1996 1995
----- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Acquired technology 10-15 $3,621,730 $3,588,793 $ 799,182
Capitalized software
development costs 5-10 1,932,333 1,907,101 1,587,705
Goodwill 10 142,277 142,277 142,277
Patents 5-10 139,229 134,015 8,439
---------- ---------- ----------
5,835,569 5,772,186 2,537,603
Less accumulated
amortization (751,857) (628,838) (437,411)
---------- ---------- ----------
$5,083,712 $5,143,348 $2,100,192
========== ========== ==========
</TABLE>
NOTE G - INCOME TAXES
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". The
cumulative effect of this change in accounting principle was $486,992 in the
year ended June 30, 1994.
The income tax expense on continuing operations reconciled to the tax
computed at the statutory federal rate of 34% is as follows:
<TABLE>
<CAPTION>
Six months ended Year ended June 30,
December 31, --------------------------------------
1996 1996 1995 1994
---------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Income taxes (benefit) at
statutory rate $(558,933) $(580,124) $155,894 $(150,020)
State income taxes (benefit),
net of federal tax effect (54,249) (56,306) 15,131 (14,561)
Amortization of acquired
technology 30,398 31,447 - -
Operating losses (carryforwards)
with no current tax benefit
(expense) 579,600 595,189 (183,840) 163,983
Other, net 3,184 9,794 12,815 598
--------- --------- -------- ---------
Income tax expense $ - $ - $ - $ -
========= ========= ======== =========
</TABLE>
Deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
December 31, -------------------------
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Deferred tax assets
Benefit of net operating loss carry-
forward $3,099,642 $2,488,443 $ 582,301
Accrued vacation 21,692 56,438 27,847
Allowance for doubtful accounts 14,920 5,116 5,855
Depreciation of property and equipment - - 26,935
Other, net 224 224 130
---------- ---------- ----------
3,136,478 2,550,221 643,068
Less valuation allowance (2,490,596) (1,913,470) (459,107)
---------- ---------- ----------
645,882 636,751 183,961
---------- ---------- ----------
Deferred tax liabilities:
Capitalized software development costs
and amortization of intangible assets (626,682) (617,668) (183,961)
Depreciation of property and equipment (19,200) (19,083) -
---------- ---------- ----------
(645,882) (636,751) (183,961)
---------- ---------- ----------
Net deferred tax asset (liability) $ - $ - $ -
========== ========== ==========
</TABLE>
The Company has sustained net operating losses in each of the periods
presented. There were no deferred tax assets or income tax benefits
recorded in the financial statements for net deductible temporary
differences or net operating loss carryforwards because the likelihood of
realization of the related tax benefits cannot be established. Accordingly,
a valuation allowance has been recorded to reduce the net deferred tax asset
to zero and consequently, there is no income tax provision or benefit for
any of the periods presented. The increase (decrease) in the valuation
allowance was $577,126, $1,454,363, ($381,591), and $840,698 for the six
months ended December 31, 1996 and for the years ended June 30, 1996, 1995
and 1994, respectively.
As of December 31, 1996, the Company had a net operating loss carryforward
for tax reporting purposes of approximately $8,300,000 expiring in various
years through 2011. Utilization of approximately $3,100,000 of the total
net operating loss is dependent on the profitable operation of Sensar
Corporation in the future under the separate return limitation rules and
Internal Revenue Code Section 382 limitations on the carryforward of net
operating losses after a change in ownership. The valuation allowance
associated with the preacquisition Sensar net operating losses is
approximately $1,160,000, and if realized, will be recognized by reducing
costs allocated to acquired technology in the purchase of Sensar.
NOTE H - LINES OF CREDIT
Lines of credit are as follows:
<TABLE>
<CAPTION>
June 30,
December 31, -------------------------
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Prime plus 2.5% (10.75% at December 31,
1996) revolving line of credit;
maximum available of $3,000,000;
commitment fee equal to .50% per
annum of the unused amount;
collateralized by inventories, trade
accounts receivable, equipment, and
intangible assets; due September 30,
2000(A) $1,033,018 $ - $ -
Prime plus 2.75% revolving line of
credit; maximum available of
$2,400,000; collateralized by trade
accounts receivable and inventories;
paid and terminated in October 1996 - 1,302,306 1,920,215
11% revolving line of credit; paid and
terminated in June 1996 - - 298,972
---------- ---------- ----------
$1,033,018 $1,302,306 $2,219,187
========== ========== ==========
</TABLE>
(A) At December 31, 1996, the outstanding line of credit contains certain
covenants including, but not limited to, provisions that the Company
maintain certain levels of net worth, achieve certain results of operations,
meet certain financial ratios, and restrict the amount of capital
expenditures. At times, the Company has been in violation of certain of
these covenants. The lender monitors the Company's compliance with these
covenants. Under the line of credit agreement, the lender is required to
notify the Company when it considers an event of default to have occurred.
Through December 31, 1996, and subsequent thereto, the Company has not been
notified by the lender of any event of default.
NOTE I - LONG-TERM OBLIGATIONS
1. Debt
----
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
December 31, -------------------------
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
8.25% note payable to a commercial
bank, collateralized by property,
payable in monthly installments
of $8,246 including interest; due
January 1999 $762,928 $775,907 $ 808,003
9.0% note payable to a finance
company in monthly installments
of $15,845 including interest,
due March 1997 45,792 134,354 300,000
Other installment loans 42,891 78,382 56,657
-------- -------- ---------
851,611 988,643 1,164,660
Less current maturities (91,902) (209,808) (206,409)
-------- -------- ---------
$759,709 $778,835 $ 958,251
======== ======== =========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $ 91,902
1998 50,338
1999 701,803
2000 7,568
Thereafter -
--------
$851,611
========
</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. Assets under capital lease obligations are as follows:
<TABLE>
<CAPTION>
June 30,
December 31, -------------------------
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Equipment $1,110,450 $748,099 $625,789
Less accumulated amortization (496,775) (391,844) (322,267)
---------- -------- --------
$ 613,675 $356,255 $303,522
========== ======== ========
</TABLE>
Total amortization on equipment under capital lease obligations was $82,434
for the six months ended December 31, 1996 and $158,693, $111,496 and
$68,755 for the years ended June 30, 1996, 1995 and 1994, respectively.
Total future minimum lease payments, under capital lease obligations are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $219,855
1998 219,804
1999 195,830
2000 122,214
2001 73,805
Thereafter 2,927
--------
Total minimum lease payments 834,435
Less amount representing interest (151,735)
--------
Present value of net minimum capital
lease payments 682,700
Less current maturities 159,515
--------
$523,185
========
</TABLE>
3. Operating leases
----------------
The Company leases certain office and manufacturing space and equipment
under operating leases. The lease on a portion of the Company's office
space terminated in November 1996, and is currently leased on a month-to-
month basis. The Company is currently negotiating the renewal of this
lease. Leases of equipment expire through 1998. Minimum future payments
under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $ 9,782
1998 3,261
Thereafter -
-------
$13,043
=======
</TABLE>
Total rent expense under operating leases was $75,408 for the six months
ended December 31, 1996 and $83,857, $62,932, and zero for the years ended
June 30, 1996, 1995 and 1994, respectively.
NOTE J - 401(K) PROFIT SHARING PLAN
In February 1995, the Company adopted a 401(k) profit sharing plan under
which eligible employees may choose to contribute up to 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 with the
second year of service and participants are fully vested after six years of
service. The Company contributed $38,581 for the six months ended December
31, 1996, and $34,594 and $15,282 for the years ended June 30, 1996 and
1995, respectively.
NOTE K - PREFERRED STOCK
During the year ended June 30, 1995, the Company issued 200,000 shares of
preferred stock in payment of $500,000 of short-term debt. The preferred
stock has a liquidation preference equal to $2.50 per share, plus unpaid
dividends. 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 or the option of
the Company at the rate of $3.00 per share divided by an amount equal to the
average of the closing bid prices for the common stock for the twenty
consecutive trading days immediately prior to the date that the holder
provides notice of such conversion. The Company may redeem the preferred
stock for $2.50 per share plus unpaid dividends. The preferred stockholders
are entitled to one vote for each share of preferred stock held.
NOTE L - COMMON STOCK
During the six months ended December 31, 1996 and the year ended June 30,
1996, the Company issued 548 shares and 34,940 shares respectively, of
common stock valued at prices ranging from $4.75 to $9.13 per share, for
services rendered. During the year ended June 30, 1996 the Company also
issued 16,483 shares of common stock, at prices ranging from $2.19 to $2.88
per share, as payment of interest on the Company's long-term debt. The
Company also issued 98,905 shares of common stock during the year ended June
30, 1995 valued at prices ranging from $1.25 to $2.50 per share for services
rendered and for reimbursement of certain research, development and other
costs. The common stock was valued at fair market value as determined by
the closing price of the Company's stock on the date of the transaction.
During the years ended June 30, 1995 and 1994, the Company issued 614,000
and 381,122 shares of common stock in various private placements at prices
ranging from $1.63 to $1.75 and $2.15 to $3.32 per share, respectively.
Proceeds to the Company, less expenses of $34,767 and $175,000,
respectively, were $991,343 and $895,000, respectively.
NOTE M - STOCK OPTIONS AND WARRANTS
1. Stock-based compensation plans
------------------------------
During the periods presented in the accompanying financial statements, the
Company has granted stock options under three stock option plans; the 1991
Director Stock Option Plan (the 1991 Director Plan), the 1996 Director Stock
Option Plan (the 1996 Director Plan), and the 1987 Employee Stock Option
Plan (the 1987 Employee Plan). The Company has also granted options under
executive employment agreements.
Under the 1991 Director Plan, the Company granted 30,000 options to each
director for each year of service, up to an aggregate of 450,000 options.
Options granted under this plan vested immediately and expire five years
after the grant. The 1991 Director Plan terminated July 1, 1996.
Under the 1996 Director Plan, the Company granted options to each director
to acquire 200,000 shares of common stock (for a total of 1,000,000 options)
at $7.00 per share. Options under the 1996 Director Plan vested 25% on the
grant date and 25% for each year of service thereafter and expire five years
after their vesting date.
Under the 1987 Employee Plan, as amended in 1994, the Company may grant
options to acquire up to 750,000 shares of common stock, of which 728,453
have been granted as of December 31, 1996. Options granted under the 1987
Employee Plan vest at varying dates from zero to five years after the grant
date and expire five years after the vesting date.
In January 1996, the Company granted options to three executives under newly
executed employment agreements. The agreements granted options to acquire
an aggregate of 825,000 shares of common stock at an exercise price of $4.25
per share. The options under the employment agreements vest 20% on the
grant date and 20% on each year of service thereafter, and expire in January
2006.
A summary of the status of the options granted under the Company's stock
option plans and employment agreements at December 31, 1996, and June 30,
1996, 1995, and 1994 and changes during the periods then ended is presented
in the table below:
<TABLE>
<CAPTION>
Year ended June 30,
Six months ended ----------------------------------------------------------------------------------
December 31, 1996 1996 1995 1994
------------------------- ------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 3,092,906 $4.88 930,430 $2.89 788,000 $2.24 820,000 $1.96
Granted 10,000 10.50 2,237,476 5.63 652,800 2.75 101,000 3.66
Exercised (52,500) 6.76 (61,117) 2.33 (19,325) 2.22 (33,000) 1.51
Forfeited (565) 2.06 (13,883) 2.33 (8,245) 2.06 (100,000) 1.60
Canceled - - - - (482,800) 1.70 - -
--------- --------- -------- --------
Outstanding at
end of period 3,049,841 4.87 3,092,906 4.88 930,430 2.89 788,000 2.24
========= ========= ======== ========
Exercisable at end
of period 1,364,860 $3.90 1,370,430 $3.97 930,430 $2.89 788,000 $2.24
========= ========= ===== ======== ========
Weighted average
fair value
of options
granted $5.35 $3.06 $1.19 $1.78
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the periods ended December 31, 1996 and
June 30, 1996, 1995 and 1994, respectively: risk-free interest rates of
5.9%, 6.1%, 7.4% and 6.7%, expected dividend yields of zero for all periods,
expected lives of 5.0, 6.4, 4.0 and 4.1 years, and expected volatility of
50%, 47%, 59% and 60%.
A summary of the status of the options outstanding under the Company's stock
option plans and employment agreements at December 31, 1996 is presented
below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.00 - $3.99 792,365 2.52 years $2.66 792,365 $2.66
$4.00 - $5.99 1,247,476 8.03 4.52 322,495 4.54
$6.00 - $10.50 1,010,000 5.88 7.03 250,000 7.00
--------- ---------
$2.00 - $10.50 3,049,841 5.89 $4.87 1,364,860 $3.90
========= =========
</TABLE>
1. Stock-based compensation plans - continued
------------------------------------------
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, since all options granted under these plans
were granted at fair market value of the stock on the date of the grant no
compensation cost has been recognized in the accompanying financial
statements for options granted under these plans. Had compensation cost for
these plans been determined based on the fair value of the options at the
grant dates for awards under these plans consistent with the method
prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company's net loss and loss
per common share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Six months ended Year ended
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C> <C>
Net loss As reported $(1,643,920) $(1,706,248)
Pro forma (2,310,698) (2,192,447)
Loss per common share As reported $(0.16) $(0.19)
Pro forma (0.22) (0.24)
</TABLE>
2. Stock warrants
--------------
In conjunction with a private placement in May 1995, the Company issued
warrants to acquire additional common stock of the Company to a group of
investors. Since that time, the Company has issued additional warrants to
this group as the previously outstanding warrants were exercised. A summary
of the status of common stock underlying the warrants issued at December 31,
1996, and June 30, 1996, 1995, and 1994 and changes during the periods then
ended is presented in the table below:
<TABLE>
<CAPTION>
Year ended June 30,
Six months ended -------------------------------------------------------------------------------------
December 31, 1996 1996 1995 1994
-------------------------- ---------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 2,100,167 $5.71 1,000,000 $3.00 - $ - - $ -
Issued 375,000 6.25 4,100,167 4.51 1,000,000 3.00 - -
Exercised (375,000) 3.25 (3,000,000) 3.17 - - - -
--------- ---------- ---------
Outstanding at
end of period 2,100,167 $6.25 2,100,167 $5.71 1,000,000 $3.00 - $ -
========= ========== =========
</TABLE>
2. Stock warrants - continued
--------------------------
The warrants outstanding at December 31, 1996 expire on November 1, 1998
(Note U).
NOTE N - COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in litigation as a normal part of
its ongoing operations. At December 31, 1996, there was no litigation which
would have a material impact on the financial condition of the Company.
During January 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 at $4.25 per
share, and an automobile allowance. Total annual salaries payable under
these agreements are approximately $550,000 plus specified increases in each
calendar year 1997 through 2000. The employment agreements may be
terminated under certain circumstances. In the event of a termination of
the employment agreement other than by the Company for cause, the officer
will receive severance pay in 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 shall immediately vest with respect to all
shares of common stock subject to such option. Additionally, in the event
of disability or death of the officer, certain benefits are payable to the
officer or his family.
The Company has also entered into licensing agreements for the use of
certain patented technology, a substantial portion of which is owned by a
university, which is also a stockholder of the Company. The licensing
agreements require royalty payments through the ends of the lives of the
underlying patents which expire at various dates through 2013. Royalty
payments are equal to specified percentages of the sales amounts of certain
products, but not less than minimum annual royalty requirements of up to
$146,000 per year.
Royalty expenses included in the statements of operations were $82,000 for
the six months ended December 31, 1996 and $92,919, $73,937 and 69,536 for
the years ended June 30, 1996, 1995 and 1994, respectively.
NOTE O - SALES
Sales by geographical area are as follows:
<TABLE>
<CAPTION>
Six months
ended Year ended June 30,
December 31, ----------------------------------------
1996 1996 1995 1994
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States $2,005,065 $5,428,961 $2,920,953 $2,848,762
Western Europe 1,060,059 1,363,051 1,740,174 1,332,727
Eastern Europe 222,928 222,270 651,746 330,885
Scandinavia 80,096 113,418 189,828 51,119
Pacific Rim 1,382,078 810,349 741,927 218,537
Australia 32,160 92,481 94,412 156,728
Canada 74,060 129,576 169,428 140,386
Latin America 15,503 65,918 4,291 7,179
Middle East 6,798 29,583 3,071 51,315
Africa 10,533 - - -
---------- ---------- ---------- ----------
$4,889,280 $8,255,607 $6,515,830 $5,137,638
========== ========== ========== ==========
</TABLE>
During the six months ended December 31, 1996, one customer accounted for
13% of net sales. During the years ended June 30, 1996, 1995, and 1994, no
customers accounted for more than 10% of net sales.
NOTE P - RELATED PARTY TRANSACTIONS
In the ordinary course of business of the Company, the two founders and
principal stockholders of the Company have been required to guarantee
certain obligations, including its principal line of credit. The personal
guarantees of the principal line of credit of the Company were eliminated
when it was placed with another financial institution in October 1996.
The Company entered into a consulting agreement in March 1996, with a
corporation owned and controlled by a director of the Company. Under the
terms of the agreement, the corporation agreed to provide the Company with
advisory and consulting services concerning the commercialization of the
technology held by Sensar Corporation, the identification of markets for
such products, the establishment of marketing contacts, and the development
of an operational plan for the development and marketing of products based
on the Sensar technology. The agreement called for compensation of $100,000
and the reimbursement of third-party expenses incurred on behalf 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 a university, the
Company owed approximately $215,500 for royalties, license fees, and
reimbursement of patent expenses, had additional upcoming expenses of
approximately $109,000, and had an obligation to issue it 6,000 shares. The
university agreed to accept shares of the Company's restricted common stock
in satisfaction of the cash obligations. The stock was valued at the
closing price of the Company's common stock on July 17, 1996, of $9.00 per
share discounted by 20% to recognize the restricted nature of the
securities. The Company purchased an aggregate of 49,272 shares of common
stock from two of its executive officers and directors, at a price equal to
the obligations to the university, in order to deliver the shares to the
university. A portion of the purchase price was paid by offsetting amounts
due to the Company for advances made to the officers during the fiscal year
ended June 30, 1996 in the aggregate principal amount of $105,000, plus
accrued interest of approximately $5,300.
NOTE Q - DISCONTINUED OPERATIONS
Airport Noise Monitoring Business
---------------------------------
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 tangible assets and contracts
related to the airport noise monitoring business and assumed approximately
$100,000 of the Company's liabilities. HMMH also entered into a licensing
agreement with the Company, which transfers the ownership of the Company's
related software for application in the airport noise monitoring industry.
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 transaction 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 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 six months ended December 31, 1996 and the year ended June 30,
1996, the Company recognized royalty payments from HMMH in the amounts of
$106,000 and $388,146, respectively.
Software Licensing Business
---------------------------
During the year ended June 30, 1994, with the return of the minority
interest shares in Larson Davis Info, Inc. ("Info"), the Board of Directors
decided, pursuant to a plan effective June 30, 1993, to discontinue the
operations and pursue the sale or licensing of the software technologies
then owned by Info and Advantage Software, Inc. In as much as the Company
was unable to locate a buyer for the technologies, management elected to
reduce the carrying value of the related assets to zero as of June 30, 1994,
resulting in a loss of $2,156,987.
The airport noise monitoring and software licensing businesses have been
accounted for as discontinued operations, and accordingly, the results of
their operations are segregated from continuing operations in the
accompanying statements of operations. Net sales, costs and operating
expenses, other income and expense, and income taxes of these businesses for
the fiscal years ended June 30, 1995 and 1994, have been reclassified as
discontinued operations.
Summary operating results of discontinued operations for the fiscal years
ended June 30, 1995 and 1994, excluding the loss on disposal, are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net sales $2,374,697 $1,272,517
========== ==========
Operating profit (loss) $ (697,017) $ 307,004
========== ==========
Income (loss) before income taxes $ (770,128) $ 243,080
Income taxes (benefit) - -
----------- ----------
Income (loss) from discontinued operations $ (770,128) $ 243,080
========== ==========
</TABLE>
NOTE R - ACQUISITIONS
Sensar Corporation
------------------
Effective October 27, 1995, the Company acquired 100% of the stock of Sensar
Corporation (Sensar). Sensar holds manufacturing and distribution rights to
patented technology developed at Brigham Young University related to time-
of-flight mass spectrometers. The Company issued 586,387 shares and 31,336
shares of common stock during the year ended June 30, 1996 and the six
months ended December 31, 1996, respectively (valued at an aggregate of
$1,590,636), assumed an outstanding obligation of Sensar with regard to a
line of credit in the amount of $535,823 at October 27, 1995, and paid
$280,000 to Sensar to be used by Sensar to redeem 1,400,000 shares of its
common stock. This transaction was accounted for using the purchase method
of accounting; accordingly the purchased assets and liabilities have been
recorded at their estimated fair value at the date of acquisition, with the
excess purchase price of $2,774,707 being allocated to acquired technology.
A useful life of 15 years has been determined with amortization being
calculated using the straight-line method. The results of operations of the
acquired business have been included in the financial statements since the
date of acquisition.
Larson Davis, Ltd.
------------------
During the quarter ended March 31, 1994, the Company purchased all of the
outstanding common shares of Industrial & Marine Acoustics, Ltd, (IMA), a
corporation chartered in England, for a cash payment of 6,000 British pounds
(approximately $9,300). IMA was formerly an independent sales
representative of the Company for Great Britain. The acquisition was
accounted for using the purchase method of accounting, with the excess
purchase price allocated to goodwill. Goodwill is being amortized over 10
years. Results of operations of IMA subsequent to March 1994 have been
reflected in the consolidated statements of operations. Subsequently,
management renamed the British subsidiary Larson Davis, Ltd. and has
developed an expanded service and repair center to serve the European
Community.
Airport Noise Monitoring Business
---------------------------------
On June 30, 1994, the Company completed the acquisition of substantially all
of the intangible assets of Technology Integration Incorporated, a
privately-held Massachusetts Corporation ("TII") for a total cost of
$2,508,541. The Company acquired TII's rights and obligations to
approximately 25 contracts for the installation, maintenance, and support of
airport noise monitoring systems. In addition, the Company acquired all
rights to the ANOMS software developed by TII for use in airport noise
monitoring systems, a principal competitor of the Company's own proprietary
software. The Company also hired 10 former employees of TII who were an
integral part of TII's airport noise monitoring business. The Company
intended to complete existing contracts with ANOMS and then combine ANOMS
and its own proprietary software to produce an enhanced product. However,
effective June 30, 1995, the Company decided to discontinue its selling,
installation and maintenance of airport noise and operations monitoring
systems (Note Q).
The following unaudited pro forma summary represents the combined results of
operations as if the acquisitions had occurred as of the beginning of each
year presented and do not purport to be indicative of what would have
occurred had the acquisitions been made as of the dates set forth, or of
results which may occur in the future.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Net sales $8,544,000 $7,365,000 $ 5,817,000
Loss from continuing
operations (1,821,000) (515,000) (1,312,000)
Loss from discontinued
operations - (770,000) (3,163,000)
Net loss (1,821,000) (1,285,000) (4,475,000)
Loss per share (0.20) (0.19) (0.69)
</TABLE>
NOTE S - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six months ended
December 31, Year ended June 30,
-----------------------------------------------
1996 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
are as follows:
Net loss $(1,643,920) $(1,706,248) $ (311,617) $(1,868,151)
Adjustment to reconcile net loss to
net cash provided by (used in)
operating activities
Depreciation 189,151 278,417 217,790 222,020
Amortization 243,991 350,120 517,948 550,635
Provision for losses on
accounts receivable 28,834 20,000 875 2,000
Stock issued in payment
of compensation 22,657 178,390 219,708 -
Stock issued in payment
of interest - 42,261 - -
Loss (gain) on sale of
property and equipment (8,460) (17,014) 6,189 (102,247)
Loss on disposal of discontinued
operations - - - 2,156,986
Changes in assets and
liabilities
Trade accounts receivable (294,999) (221,582) (520,395) 1,060,112
Inventories (1,172,795) (770,882) 2,464 (355,507)
Other current assets 372,115 (166,545) 233,507 (893,896)
Due from related party - - 29,817 47,808
Accounts payable 321,549 (305,112) (303,477) 459,898
Accrued liabilities (2,861) 298,251 (59,205) (59,186)
Deferred income taxes - - - (515,000)
Income taxes payable - - - (48,185)
----------- ----------- ----------- ----------
Net cash provided by
(used in) operating
activities $(1,944,738) $(2,019,944) $ 33,604 $ 657,287
============ =========== =========== ===========
</TABLE>
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Six months ended Year ended June 30,
December 31, -----------------------------------
1996 1996 1995 1994
---------------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash paid during
the period for
Interest $144,399 $400,686 $355,988 $270,383
Income taxes - - - 78,980
</TABLE>
Significant non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended Year ended June 30,
December 31, -----------------------------------
1996 1996 1995 1994
---------------- -------- -------- --------
<S> <C> <C> <C> <C>
Acquisition of equipment
through long-term
obligations $240,876 $ 234,210 $189,747 $ 100,976
Issuance of common stock
for purchase of Sensar
(Note R) 80,690 1,509,946 - -
Issuance of preferred
stock in satisfaction
of debt - - 500,000 -
Conversion of short-term
debt into long-term
debt - - 300,000 -
Acquisition of software and
technology through
issuance and assumption
of liabilities - - - 2,029,047
</TABLE>
NOTE T - ACCRUED LIABILITIES
Accrued liabilities are composed of the following:
<TABLE>
<CAPTION>
June 30,
December 31, ---------------------
1996 1996 1995
------------ -------- --------
<S> <C> <C> <C>
Accrued compensation $326,364 $338,385 $279,083
Customer deposits 253,500 - -
Payable to officers - 105,000 -
Payroll taxes 90,622 78,605 58,445
Other 93,907 245,264 131,475
-------- -------- --------
$764,393 $767,254 $469,003
======== ======== ========
</TABLE>
NOTE U - SUBSEQUENT EVENTS
In January 1997, the Board of Directors approved a reduction in the exercise
price of 1,715,832 of the outstanding warrants from an exercise price of
$6.25 to $5.30 per share. In consideration of this reduction, the holders
of the warrants have agreed to the early exercise of these warrants which
were otherwise permitted to be exercised until November 1, 1998. The
holders agreed to exercise a portion of the warrants on or before January
31, 1997 (which exercise has occurred and resulted in gross proceeds to the
Company of approximately $4,069,000) and the remaining portion of the
warrants on or before April 16, 1997 (which exercise, if it occurs, will
result in additional proceeds to the Company of approximately $5,025,000).
On the satisfaction of certain conditions, the Company has agreed to issue
replacement warrants at an exercise price of $10.75 per share equal in
number to those exercised.
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 amended annual report of Larson Davis
incorporated on Form 10-K/A for the year ended December 31, 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
March 26, 1997
CONSENT
We have issued our report dated March 12, 1997, accompanying the consolidated
financial statements of Larson Davis Incorporated included in the amended
Annual Report of Larson Davis Incorporated on Form 10-K/A for the six months
ended December 31, 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
March 28, 1997
