UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 21
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 35
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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 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. 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 some of these costs incurred in
the period ended December 31, 1996, 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 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.
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.
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 This Filing
Stock Option Plan
11 (10) 1997 Employee Stock Purchase Plan This Filing
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 This Filing
Agreement between Larson Davis
Incorporated and System Sales
Representatives, Inc., dated
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 This Filing
Larson Davis Incorporated and Craig E.
Allen, dated December 9, 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 This Filing
Congregation Ahavas Tzdokah Z'Chesed
dated January 9, 1997
27 (10) Agreement to Issue Warrants to Ezer This Filing
Mzion Organization
dated January 9, 1997
28 (10) Agreement to Issue Warrants to This Filing
Laura Huberfeld and Naomi Bodner
dated January 9, 1997
29 (10) Agreement to Issue Warrants to This Filing
Connie Lerner, dated January 9, 1997
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 This Filing
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 This Filing
</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: March 28, 1997 By /s/ Brian G. Larson
---------------------------------------
Brian G. Larson, President
(Principal Executive Officer)
Dated: March 28, 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: March 28, 1997 By /s/ Brian G. Larson
----------------------------
Brian G. Larson, Director
Dated: March 28, 1997 By /s/ Larry J. Davis
----------------------------
Larry J. Davis, Director
Dated: March 28, 1997 By /s/ Dan J. Johnson
----------------------------
Dan J. Johnson, Director
Dated: March 25, 1997 By /s/ William E. Hosker
----------------------------
William E. Hosker, Director
Dated: March 24, 1997 By /s/ Gerard L. Seelig
----------------------------
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 did not audit the financial statements of Larson Davis, Ltd., a
wholly-owned subsidiary, which statements constitute approximately 4% of total
assets and 14% of total revenues of the related 1995 consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Larson Davis,
Ltd., is based solely on the report of the other auditors.
We conducted our 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, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Larson Davis
Incorporated and Subsidiaries as of June 30, 1995 and the results of their
operations and their cash flows for the 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 and operating expenses 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
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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> <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>
<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.
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.
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>
North America $2,082,934 $5,558,537 $3,090,381 $2,989,148
Europe 1,221,575 1,531,790 2,581,748 1,714,731
Asia 1,530,385 1,006,881 744,998 269,852
Other 54,386 158,399 98,703 163,907
---------- ---------- ---------- ----------
Total $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.
LARSON DAVIS INCORPORATED
AMENDED AND RESTATED
1996 DIRECTOR STOCK OPTION PLAN
Larson Davis Incorporated, a Nevada corporation (the "Company"), adopts
this "1996 Director Stock Option Plan" (the "Plan"), effective as of May 9,
1996, as subsequently amended and restated, under which options to acquire stock
of the Company are granted to individuals who are serving as directors of the
Company, on the terms and conditions set forth herein.
1. Purpose of the Plan. The Plan is intended to aid the Company in
maintaining and developing a management team, attracting qualified directors
capable of assisting in the future success of the Company, and rewarding those
individuals who have contributed to the success of the Company. It is designed
to aid the Company in retaining the services of current directors and in
attracting new directors when needed for future operations and growth and to
provide such individuals with an incentive to remain directors of the Company,
to use their best efforts to promote the success of the Company's business, and
to provide them with an opportunity to obtain or increase a proprietary interest
in the Company. The above aims will be effectuated through the granting of
options ("Options") to purchase shares of common stock of the Company, par value
$0.001 per share (the "Stock"), subject to the terms and conditions of this
Plan.
2. Shareholder Approval. The Plan shall become effective immediately on
adoption by the board of directors of the Company (the "Board"). In addition,
the Plan shall be submitted for approval by the Company's shareholders in the
manner set forth below:
(a) The Plan shall be submitted for approval by those shareholders of
the Company who are entitled to vote on such matters at the next duly held
shareholders' meeting or approved by the written consent of the holders of
a majority of the issued and outstanding Stock of the Company. If the Plan
is presented at a shareholders' meeting, it shall be approved by the
affirmative vote of the holders of a majority of the issued and outstanding
Stock in attendance, in person or by proxy, at such meeting.
Notwithstanding the foregoing, the Plan may be approved by the shareholders
in any other manner not inconsistent with the Company's articles of
incorporation and bylaws, the applicable provisions of state corporate
laws, and the applicable provisions of the Code and regulations adopted
thereunder.
(b) In the event the Plan is so approved, the secretary of the
Company shall, as soon as practicable following the date of final approval,
prepare and attach to this Plan certified copies of all relevant
resolutions adopted by the shareholders and the Board. All Options
previously granted under this Plan shall be deemed to have been granted as
of the date of final approval by the board of directors.
3. Administration of the Plan. Administration of the Plan shall be
determined by the Board. Subject to compliance with applicable provisions of
the governing law, the Board may delegate administration of the Plan or specific
administrative duties with respect to the Plan, on such terms and to such
committees of the Board as it deems proper. Any action taken with respect to
the Plan by the Board shall be approved by a majority vote of those members of
the Board in attendance at a meeting at which a quorum is present. Any action
taken with respect to the Plan by a committee designated by the Board shall be
approved as specified by the Board at the time of delegation. The
interpretation and construction of the terms of the Plan by the Board or a duly
authorized committee shall be final and binding on all participants in the Plan
absent a showing of demonstrable error. No member of the Board or duly
authorized committee shall be liable for any action taken or determination made
in good faith with respect to the Plan.
4. Shares of Stock Subject to the Plan. A total of 1,400,000 shares of
Stock may be subject to, or issued pursuant to, Options granted under the terms
of this Plan. In calculating the number of shares, (i) any shares subject to an
Option under the Plan, which Option for any reason expires or is forfeited,
terminated, or surrendered unexercised as to such shares, shall be added back to
the total number of shares reserved for issuance under the terms of this Plan,
and (ii) if any right to acquire Stock granted under the Plan is exercised by
the delivery of shares of Stock or the relinquishment of rights to shares of
Stock, only the net shares of Stock issued (the shares of Stock issued less the
shares of Stock surrendered) shall count against the total number of shares
reserved for issuance under the terms of this Plan.
5. Term. This Plan shall be in effect from the date hereof until close
of business May 9, 1999.
6. Grant to Board Members. Each individual who is a member of the Board
as of the effective date of this Plan and each individual who becomes a member
of the Board during the term of this Plan shall be awarded an Option to acquire
200,000 shares of Stock at an exercise price equal to the closing bid price for
the Stock on the date of grant or the date of extension of an offer to become a
director, as designated by the Board at the time, as reported on the Nasdaq
Stock Market ("Nasdaq"), or, if the Stock is not then listed on Nasdaq, as
reported by another reliable quotation medium with respect to the principal
trading market for the Stock of the Company.
7. Reservation of Stock on Granting of Option. At the time of granting
any Option under the terms of this Plan, there will be reserved for issuance on
the exercise of the Option the number of shares of Stock of the Company subject
to such Option. The Company may reserve either authorized but unissued shares
or issued shares that have been reacquired by the Company.
8. Term of Options and Certain Limitations on Right to Exercise.
(a) The Options shall be exercisable with respect to the shares
subject to such Options for a period of five years after the right to
acquire such shares become vested as provided below.
(b) The term of the Option, once it is granted, may be reduced only
as provided for in this Plan under the written provisions of the Option.
(c) Unless otherwise specifically provided by the written provisions
of the Option, no holder or his or her legal representative, legatee, or
distributee will be, or shall be deemed to be, a holder of any shares
subject to an Option unless and until the holder exercises his or her right
to acquire all or a portion of the Stock subject to the Option and delivers
the required consideration to the Company in accordance with the terms of
this Plan and then only to the extent of the number of shares of Stock
acquired. Except as specifically provided in this Plan or as otherwise
specifically provided by the written provisions of the Option, no
adjustment to the exercise price or the number of shares of Stock subject
to the Option shall be made for dividends or other rights for which the
record date is prior to the date the Stock subject to the Option is
acquired by the holder.
(d) Options under the Plan shall vest and become exercisable twenty-
five percent (25%) at the time of the grant of the Option and an additional
twenty-five percent (25%) on each of the first three anniversaries of the
original date of grant; provided that, the holder of the Option is a
director of the Company as of such anniversaries. If the holder is no
longer a director of the Company for any reason, all unvested Options shall
terminate and shall thereafter be null and void.
(e) If any individual who receives an Option under the terms of this
Plan is terminated or resigns from the Company within six months of such
Option being granted, the unexercised portion of the Option, whether or not
vested, shall be null and void, and such individual shall have no further
rights thereunder as of the date of such termination or resignation.
(f) In no event may an Option be exercised after the expiration of
its term.
9. Payment of Exercise Price. The exercise of any Option shall be
contingent on receipt by the Company of cash, certified bank check to its order,
or other consideration acceptable to the Company; provided that, payment may be
made in whole or in part in shares of Stock that have been held for at least six
months, valued at the then fair market value of the stock as determined by the
board of directors or a duly authorized committee.
10. Withholding. If the grant or exercise of an Option pursuant to this
Plan is subject to withholding or other trust fund payment requirements of the
Code or applicable state or local laws, the holder of such Option must, as a
condition precedent to exercising the Options, deliver to the Company cash equal
to such withholding obligation or evidence satisfactory to the Company that such
withholding obligation has otherwise been met.
11. Awards to Directors and Officers. To the extent the Company is
subject to section 16(b) of the Exchange Act, Options granted under the Plan to
directors and officers (as defined in Rule 16a-1 promulgated under the Exchange
Act or any amendment or successor rule of like tenor) intended to qualify for
the exemption from section 16(b) of the Exchange Act provided in Rule 16b-3
shall be subject to the following requirements, in addition to the other
restrictions and limitations set forth in this Plan:
(a) With respect to any award, the exercise price may not be less
than the minimum required by applicable state law.
(b) An Option or, if exercised, the Stock acquired on exercise, may
not be transferred prior to the date that is more than six months
subsequent to the date of the grant of the Option.
(c) Any cash settlement of Options or surrender or withholding of
shares of Stock to pay the exercise price of the Option, shall be made in
accordance with the requirements of Rule 16b-3 or any amendment or
successor rule of like tenor.
All of the foregoing restrictions and limitations are based on the governing
provisions of the Exchange Act and the rules and regulations promulgated
thereunder as of the date of adoption of this Plan. If at any time the
governing provisions are amended to permit an Option to be granted or exercised
pursuant to Rule 16b-3 or any amendment or successor rule of like tenor without
one or more of the foregoing restrictions or limitations, or the terms of such
restrictions or limitations are modified, the Board or a duly authorized
committee may award Options to directors and officers, and may modify
outstanding Options, in accordance with such changes, all to the extent that
such action by the Board or a duly authorized committee does not disqualify the
Options from exemption under the provisions of Rule 16b-3 or any amendment or
successor rule of similar tenor.
12. Dilution or Other Adjustment. In the event that the number of shares
of Stock of the Company from time to time issued and outstanding is increased
pursuant to a stock split or a stock dividend, the number of shares of Stock
then covered by each outstanding Option granted hereunder shall be increased
proportionately, with no increase in the total purchase price of the shares then
so covered, and the number of shares of Stock subject to the Plan shall be
increased by the same proportion. In the event that the number of shares of
Stock of the Company from time to time issued and outstanding is reduced by a
combination or consolidation of shares, the number of shares of Stock then
covered by each outstanding Option granted hereunder shall be reduced
proportionately, with no reduction in the total purchase price of the shares
then so covered, and the number of shares of Stock subject to the Plan shall be
reduced by the same proportion. In the event that the Company should transfer
assets to another corporation and distribute the stock of such other corporation
without the surrender of Stock of the Company, and if such distribution is not
taxable as a dividend and no gain or loss is recognized by reason of section 355
of the Code or any amendment or successor statute of like tenor, then the total
purchase price of the Stock then covered by each outstanding Option shall be
reduced by an amount that bears the same ratio to the total purchase price then
in effect as the market value of the stock distributed in respect of a share of
the Stock of the Company, immediately following the distribution, bears to the
aggregate of the market value at such time of a share of the Stock of the
Company plus the stock distributed in respect thereof. In the event that the
Company distributes the stock of a subsidiary to its shareholders, makes a
distribution of a major portion of its assets, or otherwise distributes
significant portion of the value of its issued and outstanding Stock to its
shareholders, the number of shares then subject to each outstanding Option and
the Plan, or the exercise price of each outstanding Option, may be adjusted in
the reasonable discretion of the Board or a duly authorized committee. All such
adjustments shall be made by the Board or duly authorized committee, whose
determination upon the same, absent demonstrable error, shall be final and
binding on all participants under the Plan. No fractional shares shall be
issued, and any fractional shares resulting from the computations pursuant to
this section shall be eliminated from the respective Option Award. No
adjustment shall be made for cash dividends, for the issuance of additional
shares of Stock for consideration approved by the Board, or for the issuance to
stockholders of rights to subscribe for additional Stock or other securities.
13. Assignment. No Option granted under this Plan shall be transferable
other than by will or the laws of descent and distribution, pursuant to a
qualified domestic relations order as defined in the Code or to family members
of the Option holder or entities created for their benefit. Except as permitted
by the foregoing, each Option granted under the Plan and the rights and
privileges thereby conferred shall not be transferred, assigned, pledged, or
hypothecated in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment, or similar process. On any attempt to
transfer, assign, pledge, hypothecate, or otherwise dispose of the Option, or of
any right or privilege conferred thereby, contrary to the provisions thereof, or
on the levy of any attachment or similar process on such rights and privileges,
the Option and such rights and privileges shall immediately become null and
void.
14. Listing and Registration of Shares. Each Option shall be subject to
the requirement that if at any time the Board shall determine, in its sole
discretion, that it is necessary or desirable to list, register, or qualify the
shares covered thereby on any securities exchange or under any state or federal
law, or obtain the consent or approval of any governmental agency or regulatory
body as a condition of, or in connection with, the granting of such Option or
the issuance or purchase of shares thereunder, such Option may not be exercised
in whole or in part unless and until such listing, registration, consent, or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board.
15. Options. Options granted under the Plan shall be represented by a
written agreement which shall be executed by the Company and which shall contain
such terms and conditions as may be permitted under the terms of this Plan.
16. No Right of Employment. Nothing contained in this Plan or any Option
shall be construed as conferring on a director, officer, or employee any right
to continue or remain as a director, officer, or employee of the Company or its
subsidiaries.
17. Amendment of the Plan. This Plan may not be amended more than once
during any six month period, other than to comport with changes in the Code or
the Employee Retirement Income Security Act or the rules and regulations
promulgated thereunder. Subject to the foregoing and, if the Company is subject
to the provisions of section 16(b) of the Exchange Act, the limitations of Rule
16b-3 promulgated under the Exchange Act or any amendment or successor rule of
like tenor, the Board or a duly authorized committee may modify and amend the
Plan in any respect; provided, however, that to the extent such amendment or
modification would cause the Plan to no longer comply with the applicable
provisions of the Exchange Act with respect to Options granted to officers or
directors under Rule 16b-3 or any amendment or successor rule of like tenor or
with the provisions of the Code governing incentive stock options as they may be
amended from time to time, such amendment or modification shall also be approved
by the shareholders of the Company.
Subject only to the foregoing, the Plan shall be deemed to be automatically
amended as is necessary to maintain the Plan in compliance with the provisions
of Rule 16b-3 promulgated under the Exchange Act or any amendment or successor
rule of like tenor.
ATTEST:
Brian G. Larson, Chairman
SECRETARY'S CERTIFICATE
The undersigned, the duly constituted and elected secretary of Larson Davis
Incorporated, hereby certifies that a duly constituted meeting of the
shareholders held on , 1997, pursuant to notice and at which a
---------------
quorum was present in accordance with the requirements of law and the Company's
articles of incorporation and bylaws, the foregoing 1996 Director Stock Option
Plan was approved by the affirmative vote of the holders of a majority of the
shares of common stock voted at such meeting.
DATED this day of , 1997.
----- ---------------
LARSON DAVIS INCORPORATED
By
Dan J. Johnson, Secretary
LARSON DAVIS INCORPORATED
1997 EMPLOYEE STOCK PURCHASE PLAN
Adopted by the Board of Directors
Effective February 1, 1997
1. Purposes. The 1997 Employee Stock Purchase Plan of Larson Davis
Incorporated (the "Plan"), is intended to provide a method whereby employees of
LarsonoDavis Incorporated and any subsidiary corporation thereof (hereinafter
referred to, unless the context otherwise requires, as the "Company"), will have
an opportunity to acquire a proprietary interest in the Company through the
purchase of shares of common stock of the Company, $0.001 par value (the "Common
Stock"). It is the intention of the Company to have the Plan qualify as an
"employee stock purchase plan" under section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The provisions of the Plan shall, accordingly,
be construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. Eligibility.
(a) Any person (an "Employee") who has been employed for more than 6
months by (i) the Company, or (ii) any subsidiary corporation that is
designated as a participant in the Plan by the board of directors and would
be a "subsidiary corporation" as that term is defined in section 424 of the
Code, shall be eligible to participate in the Plan.
(b) Any provision of the Plan to the contrary notwithstanding, no
Employee shall be granted an option to participate in the Plan:
(i) if, immediately after the grant, such Employee would own
stock, and/or hold outstanding options to purchase stock, possessing
5% or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company (for
purposes of this paragraph the rules of section 424(d) of the Code
shall apply in determining stock ownership of any Employee); or
(ii) which permits his or her rights to purchase stocks under all
employee stock purchase plans of the Company and its subsidiaries to
accrue at a rate which exceeds $25,000 of the fair market value of the
stock (determined at the time such option is granted) for each
calendar year in which such option is outstanding at any time.
3. Offering Period. The Plan will be implemented as four offerings
per year (the "Offerings") on the date that is ten business days subsequent
to the filing of each of the Company's quarterly reports on Form 10-Q and
annual report on Form 10-K (each an "Offering Date") until December 31, 1998
(the "Offering Termination Date"). The period from the first Offering Date
to the Offering Termination Date shall be referred to herein as the
"Offering Period."
4. Participation.
(a) Participation in the Plan for any eligible Employee may begin
only as of the date the Plan has been approved by the board of directors
(January 30, 1997) and a registration statement has been filed by the
Company (the "Effective Date") of the Plan and on each subsequent January 1
and July 1 of each calendar year (each a "Plan Entry Date"). All eligible
Employees may participate in the Plan as of the Effective Date of the Plan
by delivering, within 14 days after such Effective Date, a completed form
to the treasurer of the Company or his designee (the "Plan Administrator")
indicating the Employee's intention to participate. Subsequently, all
eligible Employees may participate in the Plan by delivering prior to each
subsequent Plan Entry Date a completed form to the Plan Administrator
indicating the Employee's intention to participate as of such subsequent
Plan Entry Date. The Company will maintain an account (a "Payment
Account") for all Employees participating in the Plan. No interest will be
paid or allowed on any money paid into the Plan or credited to the Payment
Account of any participating Employee.
(b) A participating Employee may authorize a payroll deduction into
his or her Payment Account of a specified dollar amount per pay period or
may make separate lump sum payments into such Payment Account during the
Offering Period; provided however, that the aggregate of all payroll
deductions and lump sum payments into such Payment Account may not exceed
20% of his or her monetary compensation during the Offering Period. The
term "monetary compensation" means regular straight-time earnings, payments
for overtime, shift differentials, and sales commissions, all prior to
deduction of taxes and other withholding charges, but excludes incentive
compensation, bonuses, and other special payments. An Employee may elect to
authorize a payroll deduction from the Employee's compensation by
completing an authorization for payroll deduction on the form provided by
the Company and filing it with the office of the Plan Administrator. An
Employee may make lump sum payments into his or her Payment Account by
delivering a personal or official bank check in the amount of such payment
to the Plan Administrator.
(c) A participating Employee may alter the amount of his or her
payroll deductions during the Offering Period by filing an amended payroll
deduction authorization with the Plan Administrator at least 3 days prior
to the Effective Date of such change. In no event may an Employee make any
such alteration more frequently than monthly.
5. Granting of Option.
(a) Subject to the provisions of paragraph 2(b) and paragraph 6, a
participating Employee shall be deemed to have been granted on each
Offering Date, and to have exercised on such date, an option (an "Option")
to purchase that number of shares of Common Stock determined by dividing
the amount in the Employee's Payment Account by the Option Exercise Price
on the Offering Date determined as provided in subparagraph (b) below.
(b) The purchase price of a share of Common Stock purchased pursuant
to the Plan (the "Option Exercise Price") shall be 85% of the Fair Market
Value (defined below) of a share of Common Stock on the date of grant of
such option. As used herein, the term "Fair Market Value" shall mean the
closing price of the Common Stock on the Nasdaq Stock Market on the
applicable Offering Date (or on the most recent preceding day on which
shares of Common Stock were traded in the event that no shares of Common
Stock shall have been traded on the Offering Date), or, if the Common
Stock is not then traded on the Nasdaq Stock Market, the reported price
for the Common Stock on the Offering Date or the most recent preceding
day for which such quotations are available as reported by the exchange
or market on which the Common Stock is then traded, or, if no such
quotations are available for a date within a reasonable time prior to
the Offering Date, the value of the Common Stock as determined by the
board of directors of the Company using any reasonable means.
6. Exercise of Option. With respect to the Offerings during the Offering
Period:
(a) Unless a participating Employee gives written notice to the Plan
Administrator as provided in paragraph (d) below that the Employee elects
not to exercise the Employee's Options or as provided in paragraph 8 below
that the Employee elects to withdraw from the Plan, his or her unexercised
Options, if any, will be deemed to have been exercised automatically on the
Offering Date for the purchase of the number of full shares of Common Stock
which the accumulated amount in his or her Payment Account at that time
will purchase at the applicable Option Exercise Price.
(b) The Plan Administrator shall reduce the Employee's Payment
Account on each Offering Date in the aggregate amount of the Option
Exercise Price for the Common Stock purchased.
(c) The exercise of Options to purchase shares of Common Stock shall
not be less than 25 shares. Fractional shares will not be issued under the
Plan. Any accumulated payroll deductions and lump sum payments which would
have been used to purchase fractional shares shall be retained in the
employee's Payment Account.
(d) An Employee may elect not to exercise available Options by
providing written notice of such election to the Plan Administrator at
least three days prior to any Offering Date. Such election shall remain in
effect until revoked in writing, which revocation shall be effective three
days after such written notice is provided to the Plan Administrator.
(e) Any excess in an Employee's Payment Account on the Offering
Termination Date will be distributed to the Employee.
7. Delivery. As promptly as practicable after the exercise or deemed
exercise of a participating Employee's Options on each Offering Date, the
Company will deliver to each Employee, as appropriate, the certificate or
certificates representing the shares of Common Stock purchased upon the exercise
or deemed exercise of such Employee's Options.
8. Withdrawal.
(a) A participating Employee may withdraw payroll deductions and lump
sum payments remaining in his or her Payment Account at any time prior to
the Offering Termination Date by giving written notice of withdrawal to the
Plan Administrator. Any such withdrawal shall not be effective until three
days after delivery of notice to the Plan Administrator. All of the
Employee's payroll deductions and lump sum payments remaining in his or her
Payment Account will be paid to the Employee promptly after receipt of such
notice of withdrawal and no further payroll deductions will be made from
his or her pay and no further lump sum payments will be accepted during the
Offering Period, except as provided herein. The Company may, at its
option, treat an attempt by an Employee to borrow on the security of his or
her Payment Account as an election, under this paragraph 8, to withdraw
such amounts in the Payment Account.
(b) An Employee who withdraws or is deemed to have withdrawn amounts
from his or her Payment Account in accordance with this paragraph 8 may not
participate in another Offering until the next Plan Entry Date following
such withdrawal. An Employee's withdrawal from an Offering will not have
any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company.
(c) Upon termination of the Employee's employment for any reason,
including retirement but excluding death or disability while in the employ
of the Company or a subsidiary, the payroll deductions and lump sum
payments credited to his or her Payment Account will be returned to the
Employee or, in the case of his or her death subsequent to the termination
of employment, to the person or persons entitled thereto under paragraph
11.
(d) Upon termination of the Employee's employment because of
disability or death, the Employee or his or her beneficiary (as defined in
paragraph 11) shall have the right to elect, by written notice given to the
Plan Administrator prior to the expiration of the period of 30 days
commencing with the date of the disability or death of the Employee,
either:
(i) to withdraw all of the payroll deductions and lump sum
payments credited to the Employee's Payment Account under the Plan; or
(ii) to exercise the Employee's Options for the purchase of the
number of full shares of Common Stock which the accumulated payroll
deductions and lump sum payments in the Employee's Payment Account at
the date of the Employee's disability or death will purchase at the
applicable Option Exercise Price, and any excess in such account will
be returned to the Employee or said beneficiary.
In the event that no such written notice of election shall be duly
received by the office of the Plan Administrator, the Employee or
beneficiary shall automatically be deemed to have elected to withdraw the
payroll deductions and lump sum payments remaining in the Employee's
Payment Account at the date of the Employee's disability or death and the
same will be paid promptly to the Employee or said beneficiary.
9. Stock.
(a) The maximum number of shares of Common Stock which shall be made
available for sale under the Plan is 100,000 shares (subject to further
adjustment upon changes in capitalization of the Company as provided in
paragraph 14). If the total number of shares for which Options are
exercised exceeds the number of shares of Common Stock which remain
available for issue under the Plan, the Company shall make a pro rata
allocation of the shares available for delivery and distribution in as
nearly a uniform manner as shall be practicable and as it shall determine
to be equitable, and the balance of payroll deductions and lump sum
payments credited to the Payment Account of each participating Employee
under the Plan shall be returned to him or her as promptly as possible.
The Company may purchase shares on the open market in order to have shares
available for purchase by Employees in the Offering.
(b) No Employee will have any interest in Common Stock covered by his
or her Option until such Option has been exercised.
(c) Common Stock to be delivered to an Employee under the Plan will
be registered in the name of the Employee, or, if the Employee so directs,
by written notice to the Company prior to the Offering Date, in the names
of the Employee and one such other person as may be designated by the
Employee, as joint tenants with rights of survivorship, to the extent
permitted by applicable law.
10. Administration. The Plan shall be administered by the board of
directors of the Company. The board shall designate an individual to carry out
the decisions of the board of directors who shall be designated as the Plan
Administrator. The interpretation and construction of any provision of the Plan
and the adoption of rules and regulations for administering the Plan shall be
made by the Plan Administrator or the board of directors. Determinations made
by the board with respect to any matter or provision contained in the Plan shall
be final, conclusive, and binding upon the Company and upon all Employees, their
heirs, or legal representatives. Any rule or regulation adopted by the board of
directors shall remain in full force and effect unless and until altered,
amended, or repealed by the board. The Company, the Plan Administrator and the
board of directors, or their representatives, employees and agents, shall not be
liable to any Employee or any other person for losses sustained or liabilities
incurred as a result of any good faith error in judgment or mistake of law or
fact, or for any act done or omitted to be done in good faith in administering
the Plan, unless such error, mistake, act or omission was performed or omitted
fraudulently or constituted willful misconduct. The Company shall indemnify
board members and the Plan Administrator, to the fullest extent permitted by
applicable statute, for any expenses incurred in defending a civil or criminal
action or proceeding, arising out of action taken or omitted to be taken with
respect to administration of the Plan, in advance of the final disposition of
such action or proceeding, upon receipt of an undertaking by the person
indemnified to repay such payment if such member shall be adjudicated not to
have acted in good faith in the reasonable belief that such member's action was
in the best interest of the Company.
11. Designation of Beneficiary. A participating Employee may file a
written designation of a beneficiary who is to receive any shares of Common
Stock and/or cash in the event of the death of the Employee prior to the
delivery of such shares or cash to the Employee. Such designation of
beneficiary may be changed by the Employee at any time by written notice to the
Plan Administrator. Upon the death of a participating Employee and upon receipt
by the Company of proof of the identity and existence at the Employee's death of
a beneficiary validly designated by the Employee under the Plan, and notice of
election of the beneficiary to exercise the Option, the Company shall deliver
such stock and/or cash to such beneficiary. In the event of the death of a
participating Employee and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Employee's death, the Company
shall deliver such stock and/or cash to the executor or administrator of the
estate of the Employee, or if no such executor or administrator has been
appointed (to the knowledge of the Plan Administrator), the Company, in its
discretion, may deliver such stock and/or cash to the spouse or to any one or
more dependents of the Employee as the Company may designate. No beneficiary
shall, prior to the death of the Employee by whom he has been designated,
acquire any interest in the stock or cash credited to the Employee under the
Plan.
12. Transferability. Neither payroll deductions and lump sum payments
credited to a participating Employee's Payment Account nor any rights with
regard to the exercise of an Option or to receive stock under the Plan may be
assigned, transferred, pledged, or otherwise disposed of in any way by the
Employee otherwise than by will or the laws of descent and distribution. Any
such attempted assignment, transfer, pledge, or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with paragraph 8.
13. Use of Funds. All payroll deductions and lump sum payments received
or held by the Company under this Plan may be used by the Company for any
corporate purpose and the Company shall not be obligated to segregate such
amounts.
14. Effect of Changes of Common Stock.
(a) In the event of any changes of outstanding shares of the Common
Stock by reason of stock dividends, subdivisions, combinations, and
exchanges of shares, recapitalizations, or mergers in which the Company is
the surviving corporation, the aggregate number and class of shares
available under this Plan and the Option Exercise Price per share shall be
appropriately adjusted by the board of directors of the Company, whose
determination shall be conclusive. Any such adjustments may provide for
the elimination of any fractional shares which would otherwise become
subject to any Options.
(b) If the Company shall at any time merge into or consolidate with
another corporation and the Company is the surviving entity, the holder of
each Option then outstanding will thereafter be entitled to receive upon
the exercise of such Option for each share as to which such Option shall be
exercised the securities or property which a holder of one share of the
Common Stock was entitled to receive upon and at the time of such merger or
consolidation, and the board of directors of the Company shall take such
steps in connection with such merger or consolidation as the board of
directors shall deem necessary to assure that the provisions of (a) above
shall thereafter be applicable, as nearly as reasonably may be, in relation
to the said securities or property as to which such holder of such option
might thereafter be entitled to receive thereunder. In the event of a
merger of consolidation in which the Company is not the surviving entity,
or of a sale of assets in which the Company is not the surviving entity,
the Plan shall terminate, and all payroll deductions and lump sum payments
credited to participating Employees' Payment Accounts shall be returned to
them.
15. Amendment or Termination. The board of directors of the Company may
at any time terminate or amend the Plan. Except as hereinafter provided, no
such termination can affect Options previously granted, nor may an amendment
make any change in any Option theretofore granted which would adversely affect
the rights of any Employee nor may an amendment be made without the approval of
the stockholders of the Company within 12 months of such amendment if such
amendment would (a) materially increase the benefits accruing to Employees under
the Plan, (b) materially increase the number of shares which may be issued under
the Plan, or (c) materially modify the requirements as to eligibility for
participation under the Plan.
16. Withholding Taxes. All withholding and employment taxes payable with
respect to the amount of payroll deductions remitted to any participating
Employee's Payment Account will be deducted from the salary or other
compensation paid by the Company to such participating Employee and will not
reduce the amounts remitted to the Employee's Payment Account hereunder.
17. Notices. All notices or other communications by an Employee to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received by the Plan Administrator.
18. Approval of Stockholders. The Plan has been adopted by the board of
directors of the Company, but is subject to the approval of the stockholders of
the Company within 12 months of the date of adoption of the Plan by the board of
directors.
Adopted by the Board of Directors
effective , 1997
---------------
Approved by the Shareholders
effective , 1997
---------------
PRODUCT DEVELOPMENT AND MARKETING AGREEMENT
THIS PRODUCT DEVELOPMENT AND MARKETING AGREEMENT (this "Agreement") is made
and entered into as of the 25th day of September, 1996, by and between LARSON
DAVIS INCORPORATED, a Nevada corporation ("Larson Davis"), and SYSTEM SALES
REPRESENTATIVES, INC., a Vermont corporation ("SSRI"), based on the following:
Premises
A. SSRI has established businesses through which it sells products and
provides services in the Electrical Industry (as defined in this Agreement).
B. Larson Davis is the owner of certain technology that it believes will
permit it to develop and manufacture products ("Products") for sale through the
established businesses of SSRI to the Electrical Industry.
C. The parties desire to each provide resources and to cooperate in the
identification, design, development, and marketing of Products to the Electrical
Industry, on the terms and conditions set forth in this Agreement.
D. On completion of the development of Products, the parties desire that
SSRI act as the exclusive world-wide sales representative for the Products in
the Electrical Industry on the terms and conditions set forth in this Agreement.
Agreement
NOW, THEREFORE, based on the foregoing premises and for and in
consideration of the covenants and agreements hereinafter set forth, and the
mutual benefits to the parties to be derived therefrom, it is hereby agreed as
follows:
1. Definitions. The following terms shall have the meanings indicated
when used in this Agreement:
"Alpha Version" - The initial prototype of a Product suitable for
demonstration and initial testing of the potential capabilities and
functionalities of the Product to be evaluated internally by the parties
for design and function suggestions.
"Beta Version" - A prototype of the proposed Product designed to be
provided to third-parties for testing and evaluation of design and
functionality by potential users of the Product.
"Electrical Industry" - That industry comprised of (i) electrical
generators, transmission entities, and marketers of commercial electrical
energy; and (ii) industrial and commercial owners and users of electrical
transmission, distribution, and generation apparatus to the extent that the
marketing and sale of Products is targeted for use in such electrical
apparatus.
"Products" - Monitoring systems for application in electrical
transmission, distribution, and generation apparatus as they are
identified, designed, and developed by the parties under the terms of this
Agreement, which will include all unique products identified by the parties
and developed under the terms of this Agreement that are based on the
Technology and designed to be marketed to the Electrical Industry, all as
more specifically identified on Exhibit "A" attached hereto and
incorporated herein by this reference, as such exhibit may be modified from
time to time.
"SSRI" - System Sales Representatives, Inc., a Vermont corporation,
and any firm, partnership, corporation, limited liability company, or other
legal entity that directly or indirectly controls or is controlled by or is
under common control with System Sales Representatives, Inc., including its
corporate parent, Weidmann International Corporation.
"Technology" - The knowledge, techniques, expertise, and skills owned
by LarsonoDavis, but only to the extent that they are currently owned by
LarsonoDavis, which will be incorporated into the design and development of
the Products, specifically including the patents and other technology
listed on Exhibit "B" attached hereto and incorporated herein by this
reference, as they exist as of the date of this Agreement and as they may
be developed, expanded, and refined during the course of this Agreement.
"Technology" shall not include knowledge, techniques, expertise, and skills
generally known or used by third parties.
2. Design and Feasibility Stage. The parties agree to undertake the
following efforts, which are collectively referred to as the "design and
feasibility stage." Each party will be responsible for its own costs incurred
by it in connection with meeting its obligations as set forth below. During the
design and feasibility stages, and for a period of 30 days following completion
of such stage, either party can terminate this Agreement at any time on 30 days
written notice to the other party.
2.1 Identification of Products. LarsonoDavis has initially targeted
the development of certain Products based on its Technology that it
believes have potential application in the Electrical Industry. SSRI has
experience and expertise in selling Products to the Electrical Industry and
in understanding the needs of such industry. The initial phase of the
Product development will be the joint identification of potential Products
with the highest expectations for success, based on the perceived demand in
the Electrical Industry for such Products, the technological feasibility of
such Products, the manufacturing costs and potential pricing of such
Products, and similar factors deemed critical by the parties, on a
cooperative basis by SSRI and Larson Davis. Larson Davis shall provide
individuals skilled in engineering and the technical aspects of the
Technology, and SSRI shall provide individuals experienced and
knowledgeable about the Electrical Industry, potential competing products,
and marketing in such industry. The Product design team shall work
cooperatively to identify and provide the initial design criteria for
potential Products for marketing in the Electrical Industry. The parties
have agreed to undertake such initial Product identification and design on
the time schedule set forth on Exhibit "C" attached hereto and incorporated
herein by this reference, as may be amended from time to time by the mutual
consent of the parties.
2.2 Development of Products. Subsequent to the completion of the
Product identification and design, Larson Davis, with the input of the SSRI
design team, shall undertake the development of the identified Products,
including both hardware and software. Larson Davis shall provide the
technical support for such development while SSRI shall provide input on
the Product specifications plus compliance with all applicable industry
standards (for example, compliance with applicable standards of Underwriter
Laboratory, ANSI, IEC, and other industry groups). On completion of an
Alpha Version of the hardware and software, Larson Davis shall conduct
internal Product test programs and complete the additional development
effort to create a Beta Version suitable for testing by SSRI and potential
customers. SSRI shall identify leading customers of the Product in the
Electrical Industry and make suitable arrangements for beta site testing of
the Product by such customers and shall provide any necessary interface
between LarsonoDavis and such potential customers with respect to the
testing and feedback for Product refinement. The parties shall work
together, with Larson Davis providing technical expertise and SSRI
providing marketing input and feedback from potential users of the Product,
to refine the Product and incorporate the suggestions arising from the
testing of the Alpha and Beta Versions, all to the extent commercially
reasonable. The Product development is targeted by the parties to be
completed in the time frame set forth in Exhibit "C," as may be amended
from time to time by the mutual consent of the parties.
2.3 Marketing Plan and Market Analysis. At the time of delivery by
Larson Davis of the Beta Version of any particular Product, SSRI shall
initiate a formal marketing plan and market analysis ("Marketing Plan and
Analysis") of the potential and markets for the Product, including pricing,
competition, Product introduction strategies, customary warranties and
technical support, size of potential market, production requirements, rate
of potential market penetration, sales minimums, marketing strategies,
advertising campaign, identification of trade shows targeted for
demonstrations, and advertising budget. The parties anticipate that the
Marketing Plan and Analysis will be completed in the time frame specified
on Exhibit "C," as may be amended from time to time by the mutual consent
of the parties.
2.4 Development of Production Plan. Larson Davis, with the input of
SSRI, shall develop a production plan ("Production Plan") specifying the
production facilities required for manufacturing the Products, the
identification of any third-party manufacturers for components to be used
in the Products and/or the Products, the need for and size of the inventory
necessary for Product introduction and ongoing sales, the timing and size
of initial deliveries, the identification and quantification of necessary
quality controls, and the extent of field and in-house technical support.
The parties anticipate that the production design shall be completed on the
schedule set forth on Exhibit "C," as may be amended from time to time by
the mutual consent of the parties.
3. Manufacturing and Marketing Conventions. Subsequent to the completion
of the design and feasibility stage, the parties shall, based on the information
developed for and contained in the Marketing Plan and Analysis and Production
Plan, cooperate to agree to commercially reasonable manufacturing and marketing
conventions as set forth below. Until an agreement in writing on these matters
is reached or the parties agreed in writing that Larson Davis should commit to
the construction or furnishing of production facilities by entering into an
agreement with a third-party for the production of the Products, by commencing
construction of production facilities, by committing to purchase a material
amount of equipment (in excess of $10,000), or by otherwise making a material
commitment with respect to such production facilities, either party can
terminate this Agreement on 30 days written notice to the other party.
3.1 Pricing of Products. The parties agree to openly discuss fair
and equitable pricing of the Products based on the Marketing Plan and
Analysis, Production Plan, and such other information as may be available
to the parties concerning industry expectations, expected demand, costs of
manufacturing, and other factors influencing the pricing of the Products.
The parties agree to work together in good faith to agree on the price, and
changes thereto, to SSRI of the Products, although it is anticipated that
the Products will be sold to SSRI by Larson Davis at a discount of
approximately 25% from the anticipated sales price to customers in the
Electrical Industry. The price of the Products to SSRI can only be changed
on 60 days written notice to SSRI by Larson Davis and may not be changed
more than once in any 12 month period. If a change in the price to SSRI at
any time during the term of this Agreement would result in less than a 25%
discount to SSRI, SSRI shall have the right, at any time during the 60 day
period following the written notice to SSRI of the price change, to
terminate this Agreement by delivering written notice of its intent to do
so to Larson Davis during such period. Any such termination shall take
effect 30 days after the written notice from SSRI to Larson Davis.
3.2 Procedure for Orders. Products shall be ordered by completing an
order form agreed to by the parties and containing such terms and
conditions as may be commercially reasonable in the Electrical Industry.
The order form may be amended from time to time on agreement of the
parties. Orders placed with Larson Davis on the order forms can only be
accepted by LarsonoDavis and shall not be binding absent such acceptance.
Product orders must specifically set forth information with respect to the
identity of the Products desired, shipping instructions, and requested
delivery dates. To the extent commercially reasonably, orders shall be
filled by Larson Davis in compliance with the information provided.
3.3 Cancellation Charges. The parties shall agree on a cancellation
policy that contains a minimum period for such cancellation to be effective
and provides for an appropriate charge for all untimely cancellations. The
cancellation policy may differ depending on the size and materiality of the
order, the uniqueness of the Products ordered, the production planning time
requirement, and other factors the parties deem reasonable.
3.4 Manner of Payment. All orders shall be placed directly by SSRI.
Payment for orders shall be due from SSRI within 30 days of shipment of the
Product. In the event that any amount has not been paid to Larson Davis
within 90 days of shipment, the unpaid portion of the obligation shall
thereafter bear interest at a rate of 1-1/2% per month.
3.5 Sales Minimums. Based on the Marketing Plan and Analysis and the
Production Plan, the parties shall agree on minimum sales amounts for each
Product in the geographical areas of the world. Such sales minimums may
provide for an initial introduction period with increasing amounts to be
met during subsequent time periods. The minimum sales amounts shall be set
forth on Exhibit "D" attached hereto and incorporated herein by this
reference which shall be attached to this Agreement and become a part
thereof. SSRI's exclusive rights to market and sell the Products shall
remain in effect so long as the minimums set forth on Exhibit "D" for the
identified geographical markets are met or exceeded. To the extent that
such sales minimums are not met for a particular geographic market,
LarsonoDavis shall have the right to terminate SSRI's exclusive rights to
such geographical market by providing 30 days written notice to SSRI of its
failure to meet the minimum sales requirements. Subsequent to the
termination SSRI's exclusive rights in any geographical market, Larson
Davis shall have the right to directly, or indirectly through sales
representatives or distributors, sell Products into such geographical
market; provided that, such failure was not the result of Larson Davis not
delivering Products or meeting production schedules.
3.6 Warranty of Products. Based on the Marketing Plan and Analysis
and the Production Plan, the parties shall establish the terms and
conditions of the warranties to be provided to the end user of the Products
by Larson Davis and the terms and conditions of any support and maintenance
program to be offered to end users of the Products by Larson Davis, Larson
Davis will provide all services required by the warranty and support
agreements in a commercially reasonable manner. Larson Davis shall also
make available an employee to sit on boards or committees in which SSRI is
a member that establish or recommend standards in the Electrical Industry.
4. Appointment of SSRI. On agreement by the parties to the manufacturing
and marketing conventions pursuant to Section 3 and subject to all of the terms
of this Agreement, Larson Davis appoints SSRI as its sole and exclusive world-
wide (the "Territory") representative in the Electrical Industry to market and
sell the Products identified on Exhibit "A." The Products included on Exhibit
"A" shall be updated by the mutual consent of the parties in writing from time
to time during the term of this Agreement. SSRI accepts this appointment and
agrees to use its commercially reasonable efforts to promote the image, product
identification, and sale of the Products in the Electrical Industry. SSRI shall
not offer for sale in any geographical market in which it has the exclusive
rights to market the Products other products that compete with the Products
subsequent to the date that is six months after the market introduction (first
commercial sales subsequent to the refinement of the Beta Version testing) of
any Product. Larson Davis represents and confirms that it will not, directly or
indirectly, sell, offer to sell, or permit the sale of, Products to the
Electrical Industry, directly or through distributors other than SSRI, except to
the extent that SSRI is no longer the exclusive distributor in all or a portion
of the Territory. SSRI acknowledges that Larson Davis has existing products and
is and will continue to develop additional products outside of the terms of this
Agreement that are not specifically designed for use in the Electrical Industry
but which may have applications in such industry. Nothing in this Agreement
shall restrict Larson Davis' right to market such products, directly or
indirectly, in any industry, including the Electrical Industry or to market the
Products developed under this Agreement outside of the Electrical Industry. As
new Products are identified, designed, and developed pursuant to the terms of
this Agreement and identified as such in writing by SSRI and Larson Davis, they
shall be added to Exhibit "A" and become subject to the terms and conditions of
this Agreement.
5. Marketing Responsibilities. SSRI shall use its commercially
reasonable efforts to solicit orders for sales of the Products by advertising,
making symposium presentations, mailings, sponsoring booths at trade shows,
arranging for trade journal articles, and such other methods as may be
appropriate to the marketing of the Products in the Electrical Industry, in
accordance with the Marketing Plan and Analysis as it may be updated from time
to time. SSRI shall from time to time, but not less often than semi-annually
provide LarsonoDavis with a written update to its Marketing Plan and Analysis
and review any changes thereto with LarsonoDavis. In the course of marketing
the Products, SSRI shall actively seek out new applications for the Products in
the Electrical Industry and shall provide commercially reasonable follow-up of
sales leads obtained from any source. SSRI shall be responsible for all
expenses for marketing and sales efforts for the Products within the Electrical
Industry, except that Larson Davis shall provide, at its cost, Product brochures
and application notes. SSRI's marketing efforts shall include, without
limitation, advertising, mailing of marketing materials, participating in trade
shows, conducting surveys, and conducting demonstrations of the Products, in
accordance with the Marketing Plan and Analysis as it may be updated from time
to time. SSRI shall not make any claims or warranties with respect to the
Products, except as authorized in writing by LarsonoDavis. Larson Davis shall
provide in a timely manner and in good faith, any technical data and assistance
reasonably required by SSRI in performing its marketing functions. Larson Davis
shall provide SSRI with literature, technical specifications, engineering
materials, and such other information as may be needed to design a marketing
program and solicit sales of the Products. Larson Davis shall promptly refer any
inquiries, requests, and/or orders for the Products in the Electrical Industry
to SSRI and SSRI will promptly notify LarsonoDavis of any inquiries, requests,
and/or orders for the Products related to other markets. SSRI may pursue such
sales to other markets unless Larson Davis, within ten days, notifies SSRI that
for SSRI to do so would conflict with other marketing or distribution rights
with respect to LarsonoDavis' products then in effect.
6. Manufacturing of Products. Subsequent to the agreement of the parties
on the Manufacturing and Marketing Conventions, LarsonoDavis shall, at its cost,
make arrangements for production facilities for the Products in accordance with
the Production Plan. Larson Davis shall use commercially reasonable efforts to
manufacture the Products in a timely manner and to maintain an appropriate level
of inventory to meet the sales efforts of SSRI. SSRI shall provide Larson Davis
on an ongoing basis with estimates of its future requirements and information
concerning its marketing efforts and the potential impact of such efforts on
production requirements. Larson Davis shall provide SSRI on an ongoing basis
with estimates of its production capacity and timing and the potential impact of
the production efforts of Larson Davis on the marketing of SSRI and the
fulfillment of orders in accordance with the terms included in such orders.
Larson Davis shall manufacture, package, and ship the Products in accordance
with good business practices. Larson Davis shall provide adequate installation
and operation instructions with all Products. Deliveries of Products shall be
made in accordance with the directions of SSRI, to the extent commercially
reasonable. All shipments shall be free on board at Larson Davis' manufacturing
facilities. All costs of shipping, export or import licenses, tariffs, duties,
and transfer taxes required to deliver the Products shall be paid by the
customer.
7. Trade Secrets.
(a) Information disclosed by one party to the other party in
connection with Product development, marketing, and sales as contemplated
by this Agreement, including the names and locations of customers,
marketing plans, or other business information, and any proprietary
technical information, shall be held confidential by the party to whom such
information is disclosed. Each party agrees not to disclose any such
information to any person, firm, or entity without the prior written
consent of the other party. This section 13 shall not apply to (i)
information that at the time of disclosure to a party hereto was already in
the possession of the recipient; (ii) information that is or becomes
published or otherwise made generally available to the public, other than
by a breach of this Agreement; and (iii) information that is obtained by a
party hereto from a third party, other than a representative or affiliate
of the other party hereto, without obligation of confidentiality by any
party in the chain of disclosure.
(b) System Sales Representatives, Inc., agrees to obtain the written
agreement of any other entity included in the definition of "SSRI" which
has access to the confidential information of LarsonoDavis to be bound by
the provisions of this section.
(c) It is also agreed that monetary damages for any breach of the
provisions of this section 13 are inadequate and, without prejudice to the
other rights and remedies otherwise available to it, each party, or any
successor to the business of any such party, shall be entitled to seek and
obtain temporary or injunctive relief for any breach or threatened breach
of any of the provisions of section 13 of this Agreement without the
necessity of posting a bond.
(d) The terms of this section 13 shall apply during the term of this
Agreement, any renewal thereof, and for three years after termination or
expiration of this Agreement.
8. Non-Solicitation. The parties agree that during the term of this
Agreement, any renewal thereof, and for one year after termination or expiration
of this Agreement, the parties will not, directly or indirectly, solicit for
employment, service or consulting arrangement, or hire any employee of the other
party; provided, however, that the foregoing provision will not prevent the
parties from employing any such person who contacts them on his or her own
initiative without any direct or indirect solicitation by the party in question.
9. Ownership of Technology. SSRI acknowledges that the Technology is
owned by Larson Davis and Larson Davis acknowledges that technology owned or
developed by SSRI may be incorporated into or used by the Products. The parties
agree that nothing in this Agreement, including any developments, advances, or
refinements as a result of the work undertaken pursuant to this Agreement, shall
give SSRI any ownership or claim to ownership in the Technology or Larson Davis
any ownership or claim to ownership in SSRI's technology. To the extent that a
Product incorporates the Technology and technology owned by SSRI, neither party
can manufacture or market such Product subsequent to the term of this Agreement
without the joint agreement of both parties.
10. Term of Agreement and Termination.
(a) Subject to the specific provisions of sections 2 and 3 permitting
the parties to terminate this Agreement on 30 days written notice under
certain circumstances, the initial term of this Agreement shall be for ten
years, commencing upon the date first written above, and may be renewed for
renewal terms of five years each only on the written consent of the parties
thereto, unless sooner terminated by either party as provided herein.
(b) In the event that either party shall, during the initial or
renewal terms of this Agreement, commit a material breach of this
Agreement, the other party may, after 60 days written notice of said breach
and if said breach is not fully remedied during said 60 day period,
immediately terminate this Agreement upon the expiration of said 60 day
notice period. Notwithstanding the foregoing, if the breaching party
promptly commences and diligently pursues a cure of the breach following
receipt of such notice but such breach cannot be cured within said 60 day
period despite its good faith efforts, said period shall be extended for
such additional time as may reasonably be required to effect a cure (but in
no event longer than an additional 30 days).
(c) In the event that, at any time during the term or any renewal
term hereof, either party terminates its business, or any bankruptcy,
reorganization, arrangement, insolvency, or liquidation proceedings, or
other proceedings for the relief of debtors, are instituted by or against
such party, and, if instituted against such party, are allowed against such
party or are not consented or dismissed, stayed, or otherwise nullified
within 30 days after such institution, the other party may, upon written
notice to such party, terminate this Agreement effective immediately.
(d) In the event that no Beta Version of a Product is developed,
delivered, installed, refined, and ready to be manufactured by June 30,
1998, this Agreement may be terminated by either party hereto upon 30 days
written notice to the other party hereto (unless otherwise agreed in a
writing by the parties). Such notice must be given not later than August
1, 1998.
(e) Neither party shall be liable to the other for compensation,
reimbursement, lost profits, incidental, or consequential damages, or
damages of any other kind or character because of termination of this
Agreement pursuant to the aforesaid termination provisions (or because of
its non-renewal.) Termination or expiration of this Agreement shall be
without prejudice to any claims by either party against the other existing
on the date of termination or expiration.
(f) The provisions of sections 7, 8, 9, 10, 12 and 13 shall survive
termination of this Agreement for any reason.
11. Insurance. LarsonoDavis shall obtain and maintain, at its own
expense, such Product liability insurance as is generally carried in Larson
Davis' industry, which insurance shall name SSRI as an additional insured. Such
insurance shall provide adequate protections for SSRI and LarsonoDavis against
any such claims or suits in amounts to be agreed to by the parties. Larson
Davis shall have such insurance in place at the time of delivery of any Beta
Version to third parties and submit to SSRI a fully paid policy or certificate
of insurance naming SSRI as an insured party and providing that the insurer
shall not terminate or materially modify such insurance without written notice
to SSRI at least 30 days in advance thereof.
12. Indemnification.
(a) Larson Davis acknowledges that SSRI is an independent
representative without any authority or control over the production or
quality of Products or the conduct of Larson Davis' employees. Therefore,
LarsonoDavis hereby indemnifies and holds SSRI harmless from, and against
all liability, claims, losses, costs, expenses, or damages however caused
by reason of any Products manufactured or designed by LarsonoDavis (whether
or not defective) or any act or omission of Larson Davis, including, but
not limited to, any injury (whether to body, property, personal, or
business character or reputation) sustained by any person or to any person
or to property, and for infringement of any patent rights or other rights
of third parties, and for any violation of municipal, state, federal laws,
or regulations governing the Products or their sale, which may result from
the solicitation of orders for delivery, or the distribution of Products in
the Territory. Notwithstanding the foregoing, Larson Davis shall have no
obligation to indemnify or hold SSRI harmless for any liability, claims,
losses, costs, expenses, or damages caused by any act or omission of SSRI.
For purposes of this indemnity, if SSRI receives any notice in writing of
any claim against it for which indemnification will be sought hereunder,
SSRI shall notify Larson Davis in writing within 45 days after SSRI
receives any such notice. Larson Davis shall have the right but not the
obligation of contesting, defending, litigating, or settling any matter in
respect of which indemnification is claimed, and all expenses (including,
without limitation, attorneys' fees) incurred in connection therewith shall
be paid by Larson Davis. In the event Larson Davis declines to contest,
defend, litigate, or settle any such claim, Larson Davis shall immediately
notify SSRI, and Larson Davis shall then be liable for, shall indemnify
SSRI against, and shall pay all defense costs and expenses, including
reasonable attorneys' fees incurred by SSRI in defending, litigating, or
settling any such claim. In the event LarsonoDavis does contest, defend,
litigate, or settle such claim, SRI shall nevertheless have the right to
retain personal counsel in any such contest, defense, litigation, or
settlement and, unless Larson Davis shall fail vigorously to prosecute or
defend such matter, as the case may be, Larson Davis shall not be liable
for any expense or legal fees incurred by SSRI in any such participation.
LarsonoDavis shall have the exclusive right, in its discretion exercised in
good faith and upon the advice of counsel, to settle any such matter,
either before or after the initiation of litigation, at such time and upon
such terms as it deems fair and reasonable; provided that, SSRI's consent
shall be required for any entry of judgment or any settlement (i) which
does not result in or include as an unconditional term thereof the giving
by the claimant to SSRI of a release from all liability as to such matter
or (ii) which results in any adverse consequences to SSRI.
(b) SSRI hereby indemnifies and holds Larson Davis harmless from and
against all liability, claims, losses, costs, expenses, or damages incurred
or suffered by Larson Davis by reason of the assertion of any claim or the
institution of any litigation against Larson Davis, which is based upon any
breach by SSRI of this Agreement. Notwithstanding the foregoing, SSRI
shall have no obligation to indemnify or hold Larson Davis harmless for any
liability, claims, losses, costs, expenses, or damages caused by any act or
omission of Larson Davis. For purposes of this indemnity, if Larson Davis
receives any notice in writing of any claim against it for which
indemnification will be sought hereunder, Larson Davis shall notify SSRI in
writing within 45 days after Larson Davis receives any such notice. SSRI
shall have the right but not the obligation of contesting, defending,
litigating, or settling any matter in respect of which indemnification is
claimed, and all expenses (including, without limitation, attorneys' fees)
incurred in connection therewith shall be paid by SSRI. In the event SSRI
declines to contest, defend, litigate, or settle any such claim, SSRI shall
immediately notify Larson Davis, and SSRI shall then be liable for, shall
indemnify Larson Davis against, and shall pay all defense costs and
expenses, including reasonable attorneys' fees incurred by Larson Davis in
defending, litigating, or settling any such claim. In the event SSRI does
contest, defend, litigate, or settle such claim, LarsonoDavis shall
nevertheless have the right to retain personal counsel in any such contest,
defense, litigation, or settlement and, unless SSRI shall fail vigorously
to prosecute or defend such matter, as the case may be, SSRI shall not be
liable for any expense or legal fees incurred by Larson Davis in any such
participation. SSRI shall have the exclusive right, in its discretion
exercised in good faith and upon the advice of counsel, to settle any such
matter, either before or after the initiation of litigation, at such time
and upon such terms as it deems fair and reasonable; provided that, Larson
Davis' consent shall be required for any entry of judgment or any
settlement (i) which does not result in or include as an unconditional term
thereof the giving by the claimant to Larson Davis of a release from all
liability as to such matter or (ii) which results in any adverse
consequences to Larson Davis.
13. Arbitration.
(a) Any disputes arising under this Agreement shall, if not resolved
between the parties within 60 days after written notice of any alleged
violation or breach of this Agreement has occurred, be submitted to final
and binding arbitration under the Commercial Arbitration Rules of the
American Arbitration Association. The Arbitrator shall be selected by
mutual agreement of the parties within 30 days after a demand for
arbitration is filed with the American Arbitration Association. If the
parties fail to select an Arbitrator, an Arbitrator shall be selected by
the Regional Administrator of the American Arbitration Association, or by
his delegate. The Arbitrator shall have the authority to resolve all
issues in dispute with respect to this Agreement, including the
Arbitrator's own jurisdiction. All expenses of arbitration shall be borne
equally.
(b) Arbitration proceedings shall be conducted in Dover, Delaware,
unless the parties otherwise mutually agree in writing. This agreement to
arbitrate may be specifically enforced in any court of competent
jurisdiction. Judgment upon the award rendered by the Arbitrator may be
entered in any court having jurisdiction thereof.
(c) THE UNDERSIGNED ACKNOWLEDGE THAT THIS AGREEMENT CONTAINS AN
AGREEMENT TO ARBITRATE. AFTER SIGNING THIS AGREEMENT, WE UNDERSTAND THAT
WE WILL NOT BE ABLE TO BRING A LAWSUIT CONCERNING ANY DISPUTE THAT MIGHT
ARISE WHICH IS COVERED BY THE ARBITRATION AGREEMENT, UNLESS IT INVOLVES A
QUESTION OF CONSTITUTIONAL OR CIVIL RIGHTS. INSTEAD, WE AGREE TO SUBMIT
ANY SUCH DISPUTE TO AN IMPARTIAL ARBITRATOR.
14. Relationship. Nothing in this Agreement shall be construed to
constitute either party as the agent of the other, nor shall either party have
any authority to bind the other in any respect, it being intended that each
shall remain an independent contractor responsible only for its own actions.
15. Notices. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:
If to Larson Davis, to: Larson Davis Laboratories
Attn: Brian G. Larson, President
1681 West 820 North
Provo, Utah 84601
Fax: (801) 375-0182
Confirmation: (801) 375-0177
With a copy to: Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Fax: (801) 531-7091
Confirmation: (801) 531-7090
If to SSRI, to: System Sales Representatives, Inc.
Attn: Werner Heidemann, President
P. O. Box 1388
Industrial Parkway
Lyndonville, Vermont 05851
Fax: (802) 748-8630
Confirmation: (802) 748-3936
With a copy to: Weidmann Technical Services, Inc.
Attn: David C. Payne, President
P. O. Box 403
46 Main Street
St. Johnsbury, Vermont
Fax: (802) 748-5439
Confirmation: (802) 748-8727
James G. Wheeler, Esq.
Downs Rachlin & Martin, PC
9 Prospect Street
P. O. Box 99
St. Johnsbury, Vermont 05819-0099
or such other addresses and facsimile numbers as shall be furnished in writing
by any party in the manner for giving notices hereunder, and any such notice,
demand, request, or other communication shall be deemed to have been given as of
the date so delivered or sent by facsimile transmission, three days after the
date so mailed, or one day after the date so sent by overnight delivery.
16. Miscellaneous. This Agreement: (i) may be executed in any number of
counterparts, each of which, when executed by both parties to this Agreement,
shall be deemed to be an original, and all of which counterparts together shall
constitute one and the same instrument; (ii) shall be governed by and construed
under the laws of Delaware applicable to contracts made, accepted, and performed
wholly within Delaware, without application of principles on conflicts of law;
(iii) constitutes the entire agreement of the parties with respect to its
subject matters, superseding all prior oral and written communications,
proposals, negotiations, representations, understandings, courses of dealing,
agreements, contracts, and the like between the parties in such respect; (iv)
may be amended, modified, or terminated, and any right under this Agreement may
be waived in whole or in part, only by a writing signed by both parties; (v)
contains headings only for convenience, which headings do not form part, and
shall not be used in construction, of this Agreement; (vi) shall bind and inure
to the benefit of the parties and their respective legal representatives,
successors, and assigns, except that this Agreement may not be assigned except
with the prior written consent of the other party hereto; (vii) is not intended
to inure to the benefit of any third party beneficiary; and (viii) may be
enforced only in courts located within the state of Delaware, and the parties
hereby agree that such courts shall have venue and exclusive subject matter and
personal jurisdiction, and consent to service of process by registered mail,
return receipt requested, or by any other manner provided by law.
IN WITNESS WHEREOF, the parties have hereunto set their respective hands
and seals as of the date first above written.
Larson Davis:
LARSON DAVIS INCORPORATED
By /s/ Dan J. Johnson
Dan J. Johnson, Vice-President
SSRI:
SYSTEM SALES REPRESENTATIVES, INC.
By /s/ Werner Heidemann
Werner Heidemann, President
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into this
9th day of December, 1996, by and between CRAIG E. ALLEN ("Employee") and LARSON
DAVIS INCORPORATED, a Nevada corporation ("Larson Davis"), based on the
following:
Premises
A. Larson Davis desires to employ Employee as its Chief Financial
Officer, and Employee wishes to be so employed.
B. The parties desire to set forth the terms of such employment in
writing.
Agreement
NOW, THEREFORE, based on the foregoing premises, which are incorporated
herein by reference, and for and in consideration of the mutual covenants and
agreements hereinafter set forth and the mutual benefit to the parties to be
derived herefrom, it is hereby agreed as follows:
1. Employment and Term.
(a) Larson Davis hereby employs Employee and Employee hereby accepts
employment upon the terms and conditions set forth herein. The term of
Employee's employment shall begin on the date hereof. The term of this
Agreement, hereinafter referred to as the "Employment Period," shall be
five (5) years, unless terminated earlier pursuant to the other provisions
of this Agreement.
(b) During the Employment Period, Employee will serve as Larson
Davis' chief financial officer. Employee agrees to serve in such position
with Larson Davis or any of its subsidiaries and such substitute or further
positions of substantially consistent rank and authority as shall, from
time to time, be determined by Larson Davis' executives or board of
directors. Employee agrees to perform such duties appropriate for the
chief financial officer of Larson Davis as may be assigned to him from time
to time by Larson Davis.
2. Performance of Services.
(a) During the Employment Period, Employee agrees to perform
faithfully the duties assigned to him by the board of directors or
management of Larson Davis to the best of his ability, to devote his full
and undivided business time, attention, and services to the business of
Larson Davis and not to engage in any other substantial business activities
other than at the direction or with the approval of the board of directors
of Larson Davis; provided, however, that nothing herein shall restrict
Employee from conducting incidental personal business that does not
conflict with his obligations under the terms of this Agreement.
(b) All duties hereunder shall be rendered in Utah County, Utah, and,
on a temporary basis, at such other places as the interests, needs,
business, and opportunities of Larson Davis shall require; provided,
however, that Employee shall not be required to relocate his residence
without the mutual consent of Larson Davis and Employee.
(c) Employee shall observe and comply with the commercially
reasonable rules and regulations of Larson Davis respecting its business
and shall carry out and perform such commercially reasonable orders,
directions, and policies of Larson Davis as they may be from time to time
communicated to Employee either orally or in writing. Employee shall
further observe and comply with all applicable rules, regulations, and laws
governing the business of Larson Davis known to Employee.
3. Professional Standards. Employee shall perform his duties under this
Agreement in a professional manner and in accordance with such standards as may
be established from time to time by the executive officers or board of directors
of Larson Davis and such other legal, ethical, and fiduciary standards as may be
applicable to Employee and his conduct.
4. Exclusivity of Services and Nondisclosure of Confidential Information.
(a) Employee agrees that for a period ending on the first anniversary
of the termination of the Employment Period:
(i) he will not engage in any activity competitive with the
business of Larson Davis or any of its affiliates (the "Larson Davis
Group"), directly or indirectly, in the market defined in subsection
4(c), whether as employer, proprietary owner, partner, stockholder
(other than the holder of less than five percent (5%) of the stock of
an entity, the securities of which are traded on a national securities
exchange or in the over-the-counter market), director, officer,
employee, consultant, or agent;
(ii) he will not solicit, in competition with the Larson Davis
Group, any person who is a customer of the business conducted by the
Larson Davis Group at the date hereof or a customer of the business
conducted by the Larson Davis Group at any time during the Employment
Period; and
(iii) he will not induce or attempt to persuade any employee
of the Larson Davis Group to terminate his or her employment
relationship in order to enter into employment with any party in
competition with the Larson Davis Group.
(b) Employee further agrees that he will not, at any time during the
Employment Period or at any time after the termination of this Agreement,
irrespective of the time, manner, or cause of termination, use, disclose,
copy, or assist any other person or firm in the use, disclosure, or copying
of any trade secrets or other confidential information of the Larson Davis
Group, except to the extent authorized in writing by Larson Davis. Upon
termination of his employment hereunder, Employee will surrender to Larson
Davis all records and other documents obtained by him or entrusted to him
during the course of his employment by Larson Davis (together with all
copies thereof); provided, however, that Employee may retain copies of such
documents as are necessary for Employee's personal records for income tax
purposes. For purposes of this section 4, proprietary information about
the business of the Larson Davis Group shall be treated as confidential
until it has been published or is generally or publicly known outside the
Larson Davis Group or until it has been recognized as standard practice
outside the Larson Davis Group.
(c) The following provisions shall apply to the covenants of Employee
contained in this section 4:
(i) The covenants contained in clauses (i) and (ii) of
subsection 4(a) shall apply to those markets in which the Larson Davis
Group is doing business at the termination of the Employment Period
and those markets in which the Larson Davis Group has publicly or
internally issued written plans to enter prior to the termination of
the Employment Period.
(ii) Employee agrees that a breach or threatened breach on his
part of any covenant contained in this section 4 will cause such
damage to Larson Davis as will be irreparable. Therefore, without
limiting the right of Larson Davis to pursue all other legal and
equitable remedies available for violation by Employee of the
covenants contained in this section 4, it is expressly agreed that
remedies other than injunctive relief cannot fully compensate the
Larson Davis Group for such a violation and that Larson Davis and the
Larson Davis Group shall be entitled to injunctive relief to prevent
any such violation or continuing violation.
(iii) It is the intent and understanding of each party hereto
that if, in any action before any court or agency legally empowered to
enforce the covenants contained in this section 4, any term,
restriction, covenant, or promise contained therein is found to be
unreasonable and for that reason unenforceable, then such term,
restriction, covenant, or promise shall be deemed modified to the
extent necessary to make it enforceable by such court or agency.
5. Business Ideas.
(a) Employee acknowledges that Larson Davis will own all rights in
all "Business Ideas" (as hereinafter defined) which are originated or
developed by Employee, either alone or with employees or consultants of
Larson Davis, during the Employment Period.
(b) Employee agrees that, during the Employment Period, he will:
(i) assign to Larson Davis all Business Ideas and promptly
execute all documents which Larson Davis may reasonably require to
protect its patent, copyright, and other rights to such Business Ideas
throughout the world; and
(ii) promptly disclose to Larson Davis all information concerning
all material Business Ideas "originated" by Employee or any employee
of Larson Davis, which come to his attention and which concern the
business of Larson Davis.
(c) For purposes of this section 5, "Business Ideas" shall mean all
ideas, whether or not patentable, which are originated or developed by
Employee in connection with his employment by Larson Davis and which relate
to the business of Larson Davis and/or the Larson Davis Group.
6. Compensation and Benefits. For all services rendered by Employee
pursuant to this Agreement, Larson Davis shall compensate Employee as follows:
(a) As compensation for Employee's services hereunder, Larson Davis
agrees to pay Employee during the Employment Period an annual salary of
$85,000. Such annual salary may be increased from time to time during the
Employment Period, at the sole discretion of the board of directors of
LarsonoDavis or the designated compensation committee, taking into
consideration the performance of Larson Davis and its subsidiaries, the
contribution of Employee to such performance, and such other factors as the
board of directors or the compensation committee may deem appropriate.
(b) Larson Davis shall also grant Employee an option to acquire
10,000 shares of common stock of LarsonoDavis at an exercise price of
$10.50 per share and subject to such additional terms and conditions as are
set forth on Exhibit "A" attached hereto and incorporated herein by this
reference. So long as he is then an employee of Larson Davis, the right to
exercise such option shall vest with respect to twenty percent (20%) of the
shares subject to the option as of the date that is one year subsequent to
the date of grant and an additional twenty percent (20%) of such shares on
each following anniversary of the date of grant. If not previously
exercised, the option shall expire with respect to twenty percent (20%) of
the shares each year beginning on the date that is five years subsequent to
the initial vesting of the option.
(c) If he is then an employee of Larson Davis, Employee shall receive
an award under Larson Davis' Employee Stock Award Plan on January 1, 1998,
of shares of common stock with a value of $10,000, calculated at the then
current trading price of Larson Davis' common stock as reported by the
Nasdaq Stock Market.
(d) Larson Davis shall provide to Employee, at the principal
executive offices of Larson Davis, suitable offices and facilities
appropriate for Employee's position and suitable for the performance of
Employee's responsibilities.
(e) Employee shall be entitled to three weeks vacation and sick leave
in accordance with the general policy of the Larson Davis Group for
employees of like level. Vacations shall be taken by Employee at a time
and with starting and ending dates mutually convenient to Larson Davis and
Employee. Vacations or portions of vacations not used in one employment
year shall be treated in accordance with LarsonoDavis' standard policy as
it exists from time to time.
(f) Larson Davis shall reimburse Employee for all proper expenses
incurred by him in the performance of his duties hereunder in accordance
with the policies and procedures established by Larson Davis. Such
expenses shall include, but not be limited to, reimbursement of
professional licensing and membership costs.
(g) Larson Davis shall pay for the cost of Employee attending ongoing
professional educational programs mutually acceptable to Larson Davis and
Employee. Time spent attending such programs shall not be treated as
vacation.
(h) Employee shall have the right to participate in employee benefit
programs provided by the Larson Davis Group. Employee's participation in
such plans shall be on the terms and conditions specified in the various
plans.
(i) Larson Davis shall withhold from Employee's compensation
hereunder all proper federal and state payroll taxes and income taxes on
compensation paid to Employee and shall provide an accounting to Employee
for such amounts withheld.
7. Termination of Agreement.
(a) Termination by Larson Davis for Cause. Larson Davis shall have
the right, without further obligation to Employee other than for
compensation previously accrued, to terminate this Agreement for cause
("Cause") by showing that (i) Employee has materially breached the terms
hereof; (ii) Employee, in the reasonable determination of the board of
directors of Larson Davis, has been grossly negligent or engaged in
material willful or gross misconduct in the performance of his duties; or
(iii) Employee has committed or been convicted of fraud, embezzlement,
theft, or dishonesty or other criminal conduct against Larson Davis.
(b) Termination Upon Death or Disability of Employee. This Agreement
shall terminate immediately upon Employee's death or upon the disability of
Employee. "Disability" is defined as the inability of Employee, by reason
of physical or mental illness or other cause, to substantially perform his
duties for a period of 90 days or more.
(c) Termination by Notice. This Agreement can be terminated by
either party on 30 days written notice. In the event of a termination
under this paragraph as a result of written notice form Larson Davis to
Employee, Employee, in addition to compensation accrued through the end of
the 30 day notice period but not then paid, shall be entitled to receive
severance compensation in an amount equal to an additional two months of
Employee's then base pay.
(d) Change of Control. Notwithstanding the foregoing provisions, if
this Agreement is terminated by Larson Davis within one hundred and twenty
days (120) days of a change of control of Larson Davis, Employee shall be
entitled to receive severance pay as of the date of termination, equal to
three (3) months of Employee's base pay as of the date of such change of
control. In addition, on any change of control, the right to acquire the
shares of common stock subject to any options previously granted to
Employee by Larson Davis shall immediately become one hundred percent
(100%) vested. For purposes of this provision, a "change of control" is
defined as the occurrence of any of the following events:
(i) The sale, lease, exchange or other transfer in one
transaction or a series of transactions of all or substantially all of
the assets of Larson Davis to a single purchaser that is not a wholly
owned subsidiary of Larson Davis or to a group of associated
purchasers;
(ii) The sale, lease, exchange, or other disposition to a single
person or group of persons under common control in one transaction or
a series of related transactions resulting in such person or persons
owning, directly or indirectly, greater than twenty-five percent (25%)
of the combined voting power of the outstanding shares of Larson
Davis' common stock;
(iii) As a result of a merger, consolidation, sale of all or
substantially all of the assets of Larson Davis, a contested election,
or any combination of the foregoing, the persons who were directors of
Larson Davis immediately prior thereto shall cease to constitute a
majority of the board of directors of Larson Davis or any successor to
LarsonoDavis;
(iv) The decision by Larson Davis to terminate its business and
liquidate its assets;
(v) The merger or consolidation of Larson Davis in a transaction
in which the shareholders of Larson Davis immediately prior to such
merger or consolidation receive less than fifty percent (50%) of the
outstanding voting securities of the new or continuing corporation; or
(vi) A person (within the meaning of Section 3(a)(9) or Section
13(d)(3), as in effect on the date hereof, of the Securities Exchange
Act of 1934 (the "Exchange Act")) shall become the beneficial owner
(within the meaning of rule 13d-3 of the Exchange Act as in effect on
the date hereof) of fifty percent (50%) or more of the outstanding
voting securities of Larson Davis.
(e) Exit Interview. To insure a clear understanding of this
Agreement, including but not limited to the protection of the business
interests of Larson Davis, Employee agrees, upon termination of this
Agreement for any reason or the expiration of the Employment Period, at no
additional expense to Larson Davis, to engage in an exit interview with
Larson Davis at a time and place designated by Larson Davis.
8. Indemnification. Larson Davis shall indemnify Employee and hold
Employee harmless from liability for acts or decisions made by Employee while
performing services for Larson Davis to the extent permitted by applicable law.
Larson Davis shall use its best efforts to obtain coverage for Employee under
any insurance policy now in force or hereafter obtained during the term of this
Agreement insuring officers and directors of Larson Davis against such
liability. Employee agrees to indemnify and to hold Larson Davis harmless from
any and all damages, losses, claims, liabilities, costs, or expenses arising
from Employee's acts or omissions in violation of his duties under this
Agreement which constitute fraud, gross negligence, or willful and knowing
violations of the terms of this Agreement.
9. Notice. Any notice or request required or permitted to be given
hereunder shall be sufficient if in writing and delivered personally, sent by
facsimile transmission, or sent by registered mail, return receipt requested, to
the addresses hereinabove set forth or to any other address designated by either
of the parties hereto by notice similarly given. Such notice shall be deemed to
have been given upon such personal delivery, facsimile transmission, or mailing,
as the case may be, to the addresses set forth below:
If to Employee, to: Craig E. Allen
2961 East 9690 South
Sandy, Utah 84092
Confirmation: (801) 942-0690
If to Larson Davis, to: Larson Davis Incorporated
Attn: Brian G. Larson, President
1681 West 820 North
Provo, Utah 84601
Fax: (801) 375-0182
Confirmation: (801) 375-0177
With a copy to: Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Fax: (801) 359-3954
Confirmation: (801) 531-7090
10. Assignment. Neither this Agreement nor any rights or benefits
hereunder may be assigned by either party hereto without the prior written
consent of the other party.
11. Attorneys' Fees. In the event that any action, suit, arbitration, or
other proceeding is instituted concerning or arising out of this Agreement, the
prevailing party shall be entitled to recover all of such party's costs,
including reasonable attorneys' fees, incurred in each and every such action,
suit, arbitration, or other proceeding, including any and all appeals or
petitions therefrom.
12. Validity of Provisions and Severability. If any provision of this
Agreement is, or becomes, or is deemed invalid, illegal, or unenforceable in any
jurisdiction, such provision shall be deemed amended to conform to the
applicable jurisdiction, or if it cannot be so amended without materially
altering the intention of the parties, it will be stricken. However, the
validity, legality, and enforceability of any such provisions shall not in any
way be effected or impaired thereby in any other jurisdiction and the remainder
of this Agreement shall remain in full force and effect.
13 Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties pertaining to the subject matter of this
Agreement. This Agreement supersedes all prior agreements, if any, any
understandings, negotiations, and discussions, whether oral or written. No
supplement, modification, waiver, or termination of this Agreement shall be
binding unless executed in writing by the party to be bound thereby.
14. Governing Law. This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the state of Utah.
IN WITNESS WHEREOF, Larson Davis has caused this Agreement to be signed by
its duly authorized officer and Employee has signed this Agreement as of the
date first above written.
Larson Davis:
LARSON DAVIS INCORPORATED
By /s/ Dan J. Johnson
Duly Authorized Officer
Employee:
/s/ Craig E. Allen
Craig E. Allen
AGREEMENT TO ISSUE WARRANTS
THIS AGREEMENT TO ISSUE WARRANTS (this "Agreement") is entered into as of
this 9th day of January, 1997, by and among LARSON DAVIS INCORPORATED, a Nevada
corporation (the "Company"), and CONGREGATION AHAVAS TZDOKAH Z'CHESED
("Holder"), based on the following premises.
Premises
A. Holder holds warrants (the "Outstanding Warrants") to acquire shares
of common stock of the Company, par value $0.001 per share (the "Common Stock").
B. Holder has agreed to the early exercise of the Outstanding Warrants
currently held by it and the modification of the Company's registration
obligations with respect to the shares of Common Stock underlying the
Outstanding Warrants in consideration of the Company's agreement to reduce the
exercise price of the Outstanding Warrants and to grant it additional warrants
to acquire shares of Common Stock on the terms and conditions set forth in this
Agreement.
Agreement
NOW, THEREFORE, based on the stated premises, which are incorporated herein
by reference, and for and in consideration of the mutual covenants and
agreements hereinafter set forth and the mutual benefit to the parties to be
derived therefrom, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, it is hereby agreed as follows:
Article I
Warrants
1.1 Outstanding Warrants. Holder holds Outstanding Warrants to acquire
370,208 shares of Common Stock. The Outstanding Warrants currently have an
exercise price of $6.25 per share of Common Stock. The parties agree to reduce
the exercise price of the Outstanding Warrants to $5.30 per share; provided
that, the Outstanding Warrants are exercised on the timetable and other terms
and conditions set forth in this Agreement.
1.2 Exercise of Outstanding Warrants. Holder agrees to deliver to the
Company $877,998 on or before January 31, 1997, as payment of the exercise price
of a portion of the Outstanding Warrants. Holder agrees to deliver an
additional $1,084,104.40 to the Company on or before April 16, 1997, as payment
of the exercise price for its remaining Outstanding Warrants. On receipt of the
first payment on or before January 31, 1997, the Company agrees to immediately
provide irrevocable written instructions to its transfer agent to issue a
certificate representing 140,480 shares of Common Stock be registered in the
name of Ezer Mzion Organization, and to deliver such certificates to Holder. An
additional 25,180 shares shall be held in reserve and issued on the timely
payment of the second amount on or before April 16, 1997. On receipt of the
second payment on or before April 16, 1997, the reserved shares shall be issued
and an additional 204,548 shares shall be issued and delivered to Holder.
1.3 Failure to Make Payments. In the event that Holder fails to make the
payment due by January 31, 1997, this Agreement shall be null and void and the
parties shall be governed by the prior agreements between the parties concerning
the Outstanding Warrants. In the event that Holder makes the payment due on or
before January 31, 1997, and then fails to timely make the payment due on or
before April 16, 1997, the exercise price of all of the Outstanding Warrants
(including those exercised on or before January 31, 1997) held by Holder shall
be $6.25 per share of Common Stock and the 25,180 shares of stock reserved for
Holder under the provisions of paragraph 1.2 shall not be issued.
1.4 Issuance of Additional Warrants. On exercise of the Outstanding
Warrants on or before April 16, 1997, the Company agrees to issue warrants to
Holder to acquire a like number of shares of Common Stock at an exercise price
of $10.75 per share of Common Stock (the "$10.75 Warrants"). The $10.75
Warrants shall be exercisable at any time after August 1, 1997, and prior to the
close of business on April 16, 1999. The $10.75 Warrants shall be in the form
attached hereto as Exhibit "A" and incorporated herein by this reference.
Article II
Representations, Covenants, and Warranties of the Company
As an inducement to, and to obtain the reliance of, Holder, the Company
represents and warrants as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing, and in good standing under laws of the state of
Nevada, and has the corporate power and is duly authorized, qualified,
franchised, and licensed under all applicable laws, regulations, ordinances, and
orders of public authorities to own all of its properties and assets and to
carry on its business in all material respects as it is now being conducted.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance with the terms
hereof will not, violate any provision of the Company's certificate of
incorporation or bylaws. The Company has taken all action required by law, its
certificate of incorporation, its bylaws, or otherwise to authorize the
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated.
2.2 Approval of Agreement. The board of directors of the Company has
authorized the execution and delivery of this Agreement by the Company and has
approved the consummation of the transactions contemplated hereby. This
Agreement is the legal, valid, and binding agreement of the Company enforceable
between the parties in accordance with its terms.
2.3 Financial Information. Each of the financial statements contained in
the information referred to in section 2.4 present fairly the financial
condition of the Company as of the respective dates of such financial statements
and the results of its operations for the periods indicated. All such audited
and unaudited financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved as explained in the notes to such financial statements and have
been presented in accordance with the requirements of the rules and regulations
promulgated by the SEC regarding the form and content of and requirements for
financial statements to be filed with the SEC.
2.4 Information. The information concerning the Company set forth in this
Agreement, the annual report on Form 10-KSB filed with the SEC for the year
ended June 30, 1996, and the quarterly report on Form 10-QSB for the quarter
ended September 30, 1996, is, or was, as of the date of the respective reports,
complete and accurate in all material respects and did not contain any untrue
statement of a material fact or omit to state a material fact required to make
the statements made, in light of the circumstances under which they were made,
not misleading.
2.5 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which the Company is a party or to which
any of its properties or assets are subject require the consent of any other
party in order to consummate the transactions herein contemplated, except where
the failure to obtain such consent would not have a material adverse effect on
the transactions contemplated herein. Except for the satisfaction of
requirements of federal and state securities and corporation laws, no
authorization, approval, consent, or order of, or registration, declaration, or
filing with, any court or other governmental body is required in connection with
the execution and delivery by the Company of this Agreement and the consummation
by the Company of the transactions contemplated hereby.
2.6 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated by this Agreement will not
result in the breach of any term or provision of, or constitute an event of
default under, any indenture, mortgage, deed of trust, lease, or other contract,
agreement, or instrument to which the Company is a party or to which any of its
properties or operations are subject and the breach of which would have a
material adverse effect on the Company.
Article III
Representations, Covenants, and Warranties of Holder
As an inducement to, and to obtain the reliance of the Company, Holder
represents and warrants as follows:
3.1 Binding Agreement. This Agreement is the legal, valid, and binding
obligation of Holder enforceable in accordance with its terms.
3.2 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which Holder is a party or to which any
of its properties or assets are subject require the consent of any other party
in order to consummate the transactions herein contemplated, except where the
failure to obtain such consent would not have a material adverse effect on the
transactions contemplated herein. No authorization, approval, consent, or order
of, or registration, declaration, or filing with, any court or other
governmental body is required in connection with the execution and delivery by
Holder of this Agreement and the consummation by Holder of the transactions
contemplated hereby.
3.3 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated hereby, will not result in
the breach of any term or provision of, constitute an event of default under, or
require the consent or approval of any third-party pursuant to, any material
contract, agreement, or instrument to which Holder is a party or to which any of
its properties or assets are subject.
3.4 Information. The information concerning Holder set forth in this
Agreement is complete and accurate in all material respects and does not contain
any untrue statement of a material fact or omit to state a material fact
required to make the statements made, in light of the circumstances under which
they were made, not misleading.
Article IV
Special Covenants
4.1 Indemnification by Holder. Holder agrees to indemnify and hold
harmless the Company and its directors and officers, and each person, if any,
who controls the Company within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), from and against any and all losses, claims,
damages, expenses, liabilities, or actions to which any of them may become
subject under applicable law (including the Securities Act and the Exchange Act)
and will reimburse them for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any claims or actions,
whether or not resulting in liability, insofar as such losses, claims, damages,
expenses, liabilities, or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
application or statement filed with a governmental body or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary in order to make the statements
therein not misleading, but only insofar as any such statement or omission was
made in reliance upon and in conformity with information furnished in writing by
Holder expressly for use therein. Holder agrees at any time upon the request of
the Company to furnish to it a written letter or statement confirming the
accuracy of the information with respect to Holder contained in any report or
other application or statement referred to in this Article IV, or in any draft
of any such documents, and confirming that the information with respect to
Holder contained in such document or draft was furnished by Holder, indicating
the inaccuracies or omissions contained in such document or draft or indicating
the information not furnished by Holder expressly for use therein. The
indemnity agreement contained in this section 4.1 shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
the Company and shall survive the consummation of the transactions contemplated
by this Agreement.
4.2 Indemnification by the Company. The Company will indemnify and hold
harmless Holder from and against any and all losses, claims, damages, expenses,
liabilities, or actions to which it may become subject under applicable law
(including the Securities Act and the Exchange Act) and will reimburse it for
any legal or other expenses reasonably incurred by it in connection with
investigating or defending any claims or actions, whether or not resulting in
liability, insofar as such losses, claims, damages, expenses, liabilities, or
actions arise out of or are based upon any breach of this Agreement or any
untrue statement or alleged untrue statement of a material fact contained in any
application or statement filed with a governmental body or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary in order to make the statements
therein not misleading, but only insofar as any such statement or omission was
made in reliance upon and in conformity with information furnished in writing by
the Company expressly for use therein. The Company agrees at any time upon the
request of Holder to furnish to it a written letter or statement confirming the
accuracy of the information with respect to the Company contained in any report
or other application or statement referred to in this Article IV, or in any
draft of any such document, and confirming that the information with respect to
the Company contained in such document or draft was furnished by the Company,
indicating the inaccuracies or omissions contained in such document or draft or
indicating the information not furnished by the Company expressly for use
therein. The indemnity agreement contained in this section 4.2 shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of Holder and shall survive the consummation of the transactions
contemplated by this Agreement.
4.3 The Acquisition of Purchased Stock. The consummation of this
Agreement and the issuance of $10.75 Warrants to Holder contemplated herein and
the issuance of Common Stock on the exercise of the Outstanding Warrants
constitutes the offer and sale of securities as those terms are defined under
the Securities Act and applicable state statutes. Such transactions shall be
consummated in reliance on certain exemptions from the registration requirements
of federal and state securities laws, which depend, among other items, on the
circumstances under which such securities are acquired.
(a) In order to provide documentation for reliance upon such
exemptions, Holder makes the following representations and warranties:
(i) Holder acknowledges that neither the SEC nor the securities
commission of any state or other federal agency has made any
determination as to the merits of acquiring the Warrants or the shares
of Common Stock issuable on exercise of the Warrants, and that this
transaction involves certain risks.
(ii) Holder has received and read this Agreement and understand
the risks related to the consummation of the transactions herein
contemplated.
(iii) Holder has such knowledge and experience in business
and financial matters that it is capable of evaluating the Company and
its business operations.
(iv) Holder has adequate means of providing for its current needs
and possible personal contingencies and have no need now, and
anticipates no need in the foreseeable future, to sell any of the
Warrants or the shares of Common Stock issuable on exercise of the
Warrants. Holder is able to bear the economic risks of this
investment, and, consequently, without limiting the generality of the
foregoing, is able to hold the Warrants and the shares of Common Stock
issuable on exercise of the Warrants for an indefinite period of time,
and has a sufficient net worth to sustain a loss of the entire
investment, in the event such loss should occur.
(v) Holder has been provided with all information contained in
the Company's annual report on Form 10-K for the year ended June 30,
1996, and all subsequent interim reports filed by the Company with the
Securities and Exchange Commission. Holder's representatives have
personally met with the officers and directors of the Company and have
investigated the intellectual property assets of the Company. Holder
and its representatives have been given the opportunity to meet with
and ask questions of the officers and directors of the Company and to
obtain any additional information they consider material to the
acquisition of the Warrants and the shares of Common Stock issuable on
exercise of the Warrants.
(vi) Holder is acquiring the Warrants and the shares of Common
Stock issuable on exercise of the Warrants for its own account and not
for resale to others.
(vii) Holder confirms that it is an "accredited investor" as
defined under rule 501 of regulation D promulgated under the
Securities Act.
(viii) Holder is an organization existing under the laws of
the state of New York with principal offices located in New York.
(ix) Holder understands that none of the Warrants or the shares
of Common Stock issuable on exercise of the Warrants has been
registered, but are being acquired by reason of a specific exemption
under the Securities Act as well as under certain state statutes for
transactions by an issuer not involving any public offering and that
any disposition of the Warrants and the shares of Common Stock
issuable on exercise of the Warrants may, under certain circumstances,
be inconsistent with this exemption and may make the holder an
"underwriter" within the meaning of the Securities Act. Holder
further acknowledges that the Warrants and the shares of Common Stock
issuable on exercise of the Warrants must be held and may not be sold,
transferred, or otherwise disposed of for value unless they are
subsequently registered under the Securities Act or an exemption from
such registration is available; the Company is under no obligation to
register the Warrants or the shares of Common Stock issuable on
exercise of the Warrants under the Securities Act or under section 12
of the Exchange Act, except as provided in this Agreement or as may be
expressly agreed to by it in writing; if rule 144 is available, and no
assurance is given that it will be, initially only routine sales of
the Warrants and the shares of Common Stock issuable on exercise of
the Warrants in limited amounts can be made in reliance on rule 144 in
accordance with the terms and conditions of that rule; the Company is
under no obligation to the undersigned to make rule 144 available,
except as may be expressly agreed to by it in writing; in the event
rule 144 is not available, compliance with regulation A or some other
exemption may be required before any holder can sell, transfer, or
otherwise dispose of the Warrants or the shares of Common Stock
issuable on exercise of the Warrants without registration under the
Securities Act; the Company's registrar and transfer agent will
maintain a stop transfer order against the registration of transfer of
the Warrants and the shares of Common Stock issuable on exercise of
the Warrants; and the certificate(s) representing the Warrants and the
shares of Common Stock issuable on exercise of the Warrants will bear
a legend in substantially the following form so restricting the sale
of the Warrants and the shares of Common Stock issuable on exercise of
the Warrants:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN
THE MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES
ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE
144 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION OR OTHER
COMPLIANCE UNDER THE SECURITIES ACT.
(b) In order to more fully document reliance on the exemptions as
provided herein, Holder shall execute and deliver to the Company such
further letters of representation, acknowledgment, suitability, or the
like, as the Company and its counsel may reasonably request in connection
with reliance on exemptions from registration under such securities laws.
(c) The parties to this Agreement acknowledge that the basis for
relying on exemptions from registration or qualification are factual,
depending on the conduct of the various parties, and that no legal opinion
or other assurance will be required or given to the effect that the
transactions contemplated hereby are in fact exempt from registration or
qualification.
Article V
Registration Rights
5.1 Registration of Common Stock. On or before April 30, 1997, the
Company shall prepare and file with the Securities and Exchange Commission (the
"SEC"), a registration statement (the "Registration Statement") that includes
resale of the shares of Common Stock issuable on exercise of the Outstanding
Warrants and the $10.75 Warrants subject to this Agreement. Thereafter, the
Company shall use its best efforts to cause such Registration Statement to
become effective as soon as is practicably possible and to keep such
Registration Statement effective as provided herein. The Company further agrees
to:
(a) Prepare and file with the SEC such amendments and post-effective
amendments to the New Registration Statement as may be necessary to keep
the New Registration Statement effective for a period of not less than two
(2) years from the date of exercise of the $10.75 Warrants, or such shorter
period which will terminate when all securities covered by such
Registration Statement have been sold or withdrawn; cause the prospectus
which is part of the Registration Statement to be supplemented by any
required prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act applicable to it with respect to the disposition of all
securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the
sellers thereof set forth in such Registration Statement or supplement to
the prospectus;
(b) Notify any holder of Common Stock covered by the Registration
Statement (the "Selling Shareholders") when a prospectus is required to be
delivered under the Securities Act, when the Company becomes aware of the
happening of any event as a result of which the prospectus included in such
Registration Statement (as then in effect) contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein (in the case of the prospectus or any preliminary
prospectus, in light of the circumstances under which they were made) not
misleading and, as promptly as practicable thereafter, prepare and file
with the SEC and furnish to Selling Shareholders a supplement or amendment
to such prospectus so that, as thereafter delivered to the purchasers of
such securities, such prospectus will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(c) Enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
securities;
(d) Use its best efforts to cause all securities of Selling
Shareholders included in such Registration Statement to be listed, by the
date of the first sale of securities pursuant to such Registration
Statement, on each securities or trading exchange on which the Company's
securities of the same class are then listed or proposed to be listed, if
any;
(e) On or prior to the date on which the Registration Statement is
declare effective, use its best efforts to register or qualify, and
cooperate with Selling Shareholders, the underwriter or underwriters, if
any, and their counsel, in connection with the registration or
qualification of, the securities of Selling Shareholders covered by the
Registration Statement for offer and sale under the securities or blue sky
laws of each state and other jurisdiction of the United States as Selling
Shareholders or the underwriter reasonably requests in writing, to use its
best efforts to keep each such registration or qualification effective,
including through new filings, or amendment or renewals, during the period
such Registration Statement is required to be keep effective and to do any
and all other acts or things necessary or advisable to enable the
disposition in all such jurisdictions of the securities of Selling
Shareholders covered by the New Registration Statement; provided that, the
Company will not be required to (1) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this paragraph (e), (2) consent to general service of process in any such
jurisdiction, or (3) subject itself to general taxation in any such
jurisdiction;
(f) Cooperate with Selling Shareholders and the managing underwriter
or underwriters, if any, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legends) representing
securities to be sold by Selling Shareholders under the New Registration
Statement, and enable such securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if
any, or Selling Shareholders may request; and
(g) Use it best efforts to cause the securities of Selling
Shareholders covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the
United States as may be necessary to enable Selling Shareholders or the
underwriter or underwriters, if any, to consummate the disposition of such
securities.
5.2 Cooperation by Holder.
(a) Holder shall furnish to the Company in writing such information
and affidavits as the Company may reasonably require in connection with any
registration, qualification or compliance with respect to such securities.
It shall be a condition precedent to the obligations of the Company to take
any action pursuant to this Agreement with respect to the securities of any
Selling Shareholder that such Selling Shareholder shall furnish to the
Company such information regarding the Selling Shareholder, the securities
to be registered and other securities in the Company held, and the intended
method of disposition of such securities as shall be required to effect the
registration of such securities.
(b) By exercising its Warrants, Holder shall be deemed to have
confirmed at the time of such exercise the continuing accuracy of the
information respecting its status as an accredited investor and the
suitability of an investment in the Common Stock for it that is contained
herein, all except as it may then advise the Company in writing. The
Company may also require, as a condition precedent to exercise, that Holder
complete and deliver to the Company a suitability letter containing
representations and warranties regarding suitability of the investment of
like tenor to those contained herein.
(c) Holder, upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph (b) of section
5.2, will forthwith discontinue disposition of the securities until its
receipt of copies of the supplemented or amended prospectus contemplated by
paragraph (b) of section 5.2 or until it is advised in writing (the
"Advice") by the Company that the use of the prospectus may be resumed, and
has received copies of any additional or supplemental filings which are
incorporated by reference in the prospectus, and, if so directed by the
Company, Holder will, or will request the managing underwriter or
underwriters, if any, to, deliver to the Company all copies, other than
permanent file copies then in their possession, of the prospectus covering
such securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time period mentioned in
paragraph (a) of section 5.2 shall be extended by the number of days during
the period from and including the date of the giving of such notice to and
including the date when Holder shall have received the copies of the
supplemented or amended prospectus contemplated by paragraph (b) of section
5.2 hereof or the Advice.
(d) At the end of any period during which the Company is obligated to
keep any Registration Statement current and effective (and any required
extensions), Holder shall discontinue sales of securities pursuant to such
Registration Statement upon receipt of notice from the Company of its
intention to remove from registration the securities covered by such
Registration Statement which remain unsold, and Holder shall notify the
Company of the number of securities registered which remain unsold promptly
after receipt of such notice from the Company.
(e) Holder acknowledges that the registration of the resale of the
securities or the availability of an exemption from registration in certain
states may impose certain limitations and conditions on the manner and
nature of such sales. The Company shall advise Holder in writing of such
registration or exemption and the related limitations and conditions from
time to time. Holder shall be solely responsible for its own compliance
with such limitations and conditions.
5.3 Holdback Agreement. Holder, if requested by the managing underwriter
or underwriters for any underwritten, registered offering of the securities of
the Company, agrees not to effect any public sale or distribution of securities,
including a sale pursuant to Rule 144 (or any similar provision then in force)
under the Securities Act, during the 15 days prior to, and during the 120-day
period commencing on the effective date of such registration (except as part of
such registration). In the event Holder is prohibited from effecting a sale of
securities pursuant to this section 5.5, the time period in paragraph (a) of
section 5.2 shall be extended by the number of days Holder is so prohibited.
5.4 Registration and Selling Expenses. All of the costs and expenses of
registration provided for herein will be borne by the Company, including the
fees and expenses of the counsel and accountants for the Company (including the
expenses of any special audit and "cold comfort" letters required by or incident
to such performance), and all other costs and expenses of the Company incident
to the preparation, printing, and filing under the Securities Act of any
registration statement (and all amendments and supplements thereto) and
furnishing copies thereof and of the prospectus included therein, and the costs
and expenses incurred by the Company in connection with the qualification of the
Warrants and shares of Common Stock received on exercise of Warrants under the
state securities or blue sky laws of various jurisdictions; provided that, the
Company shall not bear the costs and expenses of Holder comprising underwriters'
commissions, brokerage fees, transfer taxes, or the fees and expenses of any
counsel, accountant, or other representative retained by Holder.
5.5 Rule 144. The Company agrees that it will use its best efforts to
file in a timely manner all reports required to be filed by it pursuant to the
Exchange Act and, at any time and upon request of Holder, will furnish it with
such information generated by the Company in the ordinary course of business as
may be reasonably necessary to enable it to effect sales of Common Stock
received on exercise of Warrants without registration pursuant to Rule 144 under
the Securities Act. Notwithstanding the foregoing, the Company may deregister
any class of its securities under section 12 of the Exchange Act or suspend its
duty to file reports with respect to any class of its securities pursuant to
section 15(d) of the Exchange Act if it is then permitted to do so pursuant to
the Exchange Act and the rules and regulations thereunder.
5.6 Participation in Underwritten Registrations. Holder may not
participate in any underwritten piggyback registration in which it chooses to
have stock included unless Holder (a) agrees to sell shares of Common Stock
received on exercise of Warrants on the basis provided in any underwriting
arrangements approved by the Company and the underwriter, and (b) completes and
executes all questionnaires, powers of attorney, underwriting agreements and
other documents customarily required under the terms of such underwriting
arrangements.
Article VI
Miscellaneous
6.1 No Brokers. Holder and the Company agree that no third person has in
any way brought the parties together or been instrumental in the negotiation,
execution, or consummation of this Agreement. Holder and the Company agree to
indemnify the other against any claim by any third person for any commission,
brokerage, finder's fee, or other payment with respect to this Agreement or the
transactions contemplated hereby based upon any alleged agreement or
understanding between such party and such third person, whether expressed or
implied, arising from the actions of such party. The covenants set forth in
this section 6.1 shall survive the date hereof and the consummation of the
transactions herein contemplated.
6.2 Governing Law. This Agreement shall in all respects, including all
matters of construction, validity, and performance, be governed by, and
construed and enforced in accordance with, the laws of the state of Utah
applicable to contracts entered into in that state between citizens of that
state and to be performed wholly within that state without reference to any
rules governing conflicts of laws
6.3 Notices. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:
If to the Company, to: Larson Davis Incorporated
Attn.: Brian G. Larson, President
1681 West 820 North
Provo, Utah 84601
Facsimile Transmission: (801) 375-0182
Confirmation: (801) 375-0177
With copies to: Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Facsimile Transmission: (801) 359-3954
Confirmation: (801) 531-7090
If to Holder, to: Congregation Ahavas Tzdokah Z'Chesed
3814-A 15th Avenue
Brooklyn, New York 11218
Facsimile Transmission: (212) --- ----
Confirmation: (212) --- ----
or such other addresses and facsimile numbers as shall be furnished in writing
by any party in the manner for giving notices hereunder, and any such notice,
demand, request, or other communication shall be deemed to have been given as of
the date personally delivered or on the first business day after a legible copy
sent by facsimile transmission is received, three days after the date mailed by
registered or certified mail, or on the first business day after the date sent
by overnight delivery.
6.4 Attorneys' Fees. In the event that any party institutes and prevails
in any action or suit to enforce this Agreement or to secure relief from any
default hereunder or breach hereof, the defaulting or breaching party or parties
shall reimburse the nonbreaching party or parties for all costs, including
reasonable attorneys' fees, incurred in connection therewith and in enforcing or
collecting any judgment rendered therein.
6.5 Best Knowledge. Whenever any representation is made to the "best
knowledge" of any party, it shall be deemed to be a representation that an
officer or director or other official of such party, after reasonable
investigation, does not have any current actual knowledge that would make such
representation untrue.
6.6 Entire Agreement. This Agreement, together with the documents to be
delivered pursuant hereto, represents the entire agreement between the parties
relating to the subject matter hereof. To the extent inconsistent therewith,
this Agreement supersedes all earlier agreements governing the Outstanding
Warrants, including the Agreement to Issue Warrants between the parties dated
May 15, 1996, and the warrant certificates representing the Outstanding
Warrants. There are no other courses of dealing, understandings, agreements,
representations, or warranties, written or oral, except as set forth herein.
6.7 Survival; Termination. The representations, warranties, and covenants
of the respective parties as set forth in this Agreement shall survive the
closing and consummation of the transactions contemplated by this Agreement for
a period of two years from the date of this Agreement. The Company's cumulative
liability to Holder for breaches of this Agreement shall not exceed the
aggregate exercise price of the Warrants covered hereby.
6.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
6.9 Amendment or Waiver. Every right and remedy provided herein shall be
cumulative with every other right and remedy, whether conferred herein, at law,
or in equity, and may be enforced concurrently herewith, and no waiver by any
party of the performance of any obligation by the other shall be construed as a
waiver of the same or any other default then, theretofore, or thereafter
occurring or existing. This Agreement may be amended by a writing signed by all
parties hereto, with respect to any of the terms contained herein, and any term
or condition of this Agreement may be waived or the time for performance thereof
may be extended by a writing signed by the party or parties for whose benefit
the provision is intended.
6.10 Third-Party Beneficiaries. This Agreement is solely between the
parties hereto and no director, officer, stockholder, employee, agent,
independent contractor, or any other person or entity shall be deemed to be a
third-party beneficiary of this Agreement.
6.11 No Public Announcement. None of the parties to this Agreement shall,
without the approval of each other party, make any press release or other public
announcement concerning the transactions contemplated by this Agreement without
first providing a copy of such press release or public announcement to the other
parties to this Agreement at least five days prior to release. Nothing
contained herein shall prohibit any party from making any pubic disclosure or
announcement which is required by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
The Company:
LARSON DAVIS INCORPORATED
By /s/ Brian G. Larson
Brian G. Larson, President
Holder:
CONGREGATION AHAVAS TZDOKAH
Z'CHESED
By /s/
, President
---------------------------
AGREEMENT TO ISSUE WARRANTS
THIS AGREEMENT TO ISSUE WARRANTS (this "Agreement") is entered into as of
this 9th day of January, 1997, by and among LARSON DAVIS INCORPORATED, a Nevada
corporation (the "Company"), and EZER MZION ORGANIZATION ("Holder"), based on
the following premises.
Premises
A. Holder holds warrants (the "Outstanding Warrants") to acquire shares
of common stock of the Company, par value $0.001 per share (the "Common Stock").
B. Holder has agreed to the early exercise of the Outstanding Warrants
currently held by it and the modification of the Company's registration
obligations with respect to the shares of Common Stock underlying the
Outstanding Warrants in consideration of the Company's agreement to reduce the
exercise price of the Outstanding Warrants and to grant it additional warrants
to acquire shares of Common Stock on the terms and conditions set forth in this
Agreement.
Agreement
NOW, THEREFORE, based on the stated premises, which are incorporated herein
by reference, and for and in consideration of the mutual covenants and
agreements hereinafter set forth and the mutual benefit to the parties to be
derived therefrom, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, it is hereby agreed as follows:
Article I
Warrants
1.1 Outstanding Warrants. Holder holds Outstanding Warrants to acquire
370,208 shares of Common Stock. The Outstanding Warrants currently have an
exercise price of $6.25 per share of Common Stock. The parties agree to reduce
the exercise price of the Outstanding Warrants to $5.30 per share; provided
that, the Outstanding Warrants are exercised on the timetable and other terms
and conditions set forth in this Agreement.
1.2 Exercise of Outstanding Warrants. Holder agrees to deliver to the
Company $877,998 on or before January 31, 1997, as payment of the exercise price
of a portion of the Outstanding Warrants. Holder agrees to deliver an
additional $1,084,104.40 to the Company on or before April 16, 1997, as payment
of the exercise price for its remaining Outstanding Warrants. On receipt of the
first payment on or before January 31, 1997, the Company agrees to immediately
provide irrevocable written instructions to its transfer agent to issue a
certificate representing 140,480 shares of Common Stock be registered in the
name of Ezer Mzion Organization, and to deliver such certificates to Holder. An
additional 25,180 shares shall be held in reserve and issued on the timely
payment of the second amount on or before April 16, 1997. On receipt of the
second payment on or before April 16, 1997, the reserved shares shall be issued
and an additional 204,548 shares shall be issued and delivered to Holder.
1.3 Failure to Make Payments. In the event that Holder fails to make the
payment due by January 31, 1997, this Agreement shall be null and void and the
parties shall be governed by the prior agreements between the parties concerning
the Outstanding Warrants. In the event that Holder makes the payment due on or
before January 31, 1997, and then fails to timely make the payment due on or
before April 16, 1997, the exercise price of all of the Outstanding Warrants
(including those exercised on or before January 31, 1997) held by Holder shall
be $6.25 per share of Common Stock and the 25,180 shares of stock reserved for
Holder under the provisions of paragraph 1.2 shall not be issued.
1.4 Issuance of Additional Warrants. On exercise of the Outstanding
Warrants on or before April 16, 1997, the Company agrees to issue warrants to
Holder to acquire a like number of shares of Common Stock at an exercise price
of $10.75 per share of Common Stock (the "$10.75 Warrants"). The $10.75
Warrants shall be exercisable at any time after August 1, 1997, and prior to the
close of business on April 16, 1999. The $10.75 Warrants shall be in the form
attached hereto as Exhibit "A" and incorporated herein by this reference.
Article II
Representations, Covenants, and Warranties of the Company
As an inducement to, and to obtain the reliance of, Holder, the Company
represents and warrants as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing, and in good standing under laws of the state of
Nevada, and has the corporate power and is duly authorized, qualified,
franchised, and licensed under all applicable laws, regulations, ordinances, and
orders of public authorities to own all of its properties and assets and to
carry on its business in all material respects as it is now being conducted.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance with the terms
hereof will not, violate any provision of the Company's certificate of
incorporation or bylaws. The Company has taken all action required by law, its
certificate of incorporation, its bylaws, or otherwise to authorize the
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated.
2.2 Approval of Agreement. The board of directors of the Company has
authorized the execution and delivery of this Agreement by the Company and has
approved the consummation of the transactions contemplated hereby. This
Agreement is the legal, valid, and binding agreement of the Company enforceable
between the parties in accordance with its terms.
2.3 Financial Information. Each of the financial statements contained in
the information referred to in section 2.4 present fairly the financial
condition of the Company as of the respective dates of such financial statements
and the results of its operations for the periods indicated. All such audited
and unaudited financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved as explained in the notes to such financial statements and have
been presented in accordance with the requirements of the rules and regulations
promulgated by the SEC regarding the form and content of and requirements for
financial statements to be filed with the SEC.
2.4 Information. The information concerning the Company set forth in this
Agreement, the annual report on Form 10-KSB filed with the SEC for the year
ended June 30, 1996, and the quarterly report on Form 10-QSB for the quarter
ended September 30, 1996, is, or was, as of the date of the respective reports,
complete and accurate in all material respects and did not contain any untrue
statement of a material fact or omit to state a material fact required to make
the statements made, in light of the circumstances under which they were made,
not misleading.
2.5 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which the Company is a party or to which
any of its properties or assets are subject require the consent of any other
party in order to consummate the transactions herein contemplated, except where
the failure to obtain such consent would not have a material adverse effect on
the transactions contemplated herein. Except for the satisfaction of
requirements of federal and state securities and corporation laws, no
authorization, approval, consent, or order of, or registration, declaration, or
filing with, any court or other governmental body is required in connection with
the execution and delivery by the Company of this Agreement and the consummation
by the Company of the transactions contemplated hereby.
2.6 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated by this Agreement will not
result in the breach of any term or provision of, or constitute an event of
default under, any indenture, mortgage, deed of trust, lease, or other contract,
agreement, or instrument to which the Company is a party or to which any of its
properties or operations are subject and the breach of which would have a
material adverse effect on the Company.
Article III
Representations, Covenants, and Warranties of Holder
As an inducement to, and to obtain the reliance of the Company, Holder
represents and warrants as follows:
3.1 Binding Agreement. This Agreement is the legal, valid, and binding
obligation of Holder enforceable in accordance with its terms.
3.2 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which Holder is a party or to which any
of its properties or assets are subject require the consent of any other party
in order to consummate the transactions herein contemplated, except where the
failure to obtain such consent would not have a material adverse effect on the
transactions contemplated herein. No authorization, approval, consent, or order
of, or registration, declaration, or filing with, any court or other
governmental body is required in connection with the execution and delivery by
Holder of this Agreement and the consummation by Holder of the transactions
contemplated hereby.
3.3 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated hereby, will not result in
the breach of any term or provision of, constitute an event of default under, or
require the consent or approval of any third-party pursuant to, any material
contract, agreement, or instrument to which Holder is a party or to which any of
its properties or assets are subject.
3.4 Information. The information concerning Holder set forth in this
Agreement is complete and accurate in all material respects and does not contain
any untrue statement of a material fact or omit to state a material fact
required to make the statements made, in light of the circumstances under which
they were made, not misleading.
Article IV
Special Covenants
4.1 Indemnification by Holder. Holder agrees to indemnify and hold
harmless the Company and its directors and officers, and each person, if any,
who controls the Company within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), from and against any and all losses, claims,
damages, expenses, liabilities, or actions to which any of them may become
subject under applicable law (including the Securities Act and the Exchange Act)
and will reimburse them for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any claims or actions,
whether or not resulting in liability, insofar as such losses, claims, damages,
expenses, liabilities, or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
application or statement filed with a governmental body or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary in order to make the statements
therein not misleading, but only insofar as any such statement or omission was
made in reliance upon and in conformity with information furnished in writing by
Holder expressly for use therein. Holder agrees at any time upon the request of
the Company to furnish to it a written letter or statement confirming the
accuracy of the information with respect to Holder contained in any report or
other application or statement referred to in this Article IV, or in any draft
of any such documents, and confirming that the information with respect to
Holder contained in such document or draft was furnished by Holder, indicating
the inaccuracies or omissions contained in such document or draft or indicating
the information not furnished by Holder expressly for use therein. The
indemnity agreement contained in this section 4.1 shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
the Company and shall survive the consummation of the transactions contemplated
by this Agreement.
4.2 Indemnification by the Company. The Company will indemnify and hold
harmless Holder from and against any and all losses, claims, damages, expenses,
liabilities, or actions to which it may become subject under applicable law
(including the Securities Act and the Exchange Act) and will reimburse it for
any legal or other expenses reasonably incurred by it in connection with
investigating or defending any claims or actions, whether or not resulting in
liability, insofar as such losses, claims, damages, expenses, liabilities, or
actions arise out of or are based upon any breach of this Agreement or any
untrue statement or alleged untrue statement of a material fact contained in any
application or statement filed with a governmental body or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary in order to make the statements
therein not misleading, but only insofar as any such statement or omission was
made in reliance upon and in conformity with information furnished in writing by
the Company expressly for use therein. The Company agrees at any time upon the
request of Holder to furnish to it a written letter or statement confirming the
accuracy of the information with respect to the Company contained in any report
or other application or statement referred to in this Article IV, or in any
draft of any such document, and confirming that the information with respect to
the Company contained in such document or draft was furnished by the Company,
indicating the inaccuracies or omissions contained in such document or draft or
indicating the information not furnished by the Company expressly for use
therein. The indemnity agreement contained in this section 4.2 shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of Holder and shall survive the consummation of the transactions
contemplated by this Agreement.
4.3 The Acquisition of Purchased Stock. The consummation of this
Agreement and the issuance of $10.75 Warrants to Holder contemplated herein and
the issuance of Common Stock on the exercise of the Outstanding Warrants
constitutes the offer and sale of securities as those terms are defined under
the Securities Act and applicable state statutes. Such transactions shall be
consummated in reliance on certain exemptions from the registration requirements
of federal and state securities laws, which depend, among other items, on the
circumstances under which such securities are acquired.
(a) In order to provide documentation for reliance upon such
exemptions, Holder makes the following representations and warranties:
(i) Holder acknowledges that neither the SEC nor the securities
commission of any state or other federal agency has made any
determination as to the merits of acquiring the Warrants or the shares
of Common Stock issuable on exercise of the Warrants, and that this
transaction involves certain risks.
(ii) Holder has received and read this Agreement and understand
the risks related to the consummation of the transactions herein
contemplated.
(iii) Holder has such knowledge and experience in business
and financial matters that it is capable of evaluating the Company and
its business operations.
(iv) Holder has adequate means of providing for its current needs
and possible personal contingencies and have no need now, and
anticipates no need in the foreseeable future, to sell any of the
Warrants or the shares of Common Stock issuable on exercise of the
Warrants. Holder is able to bear the economic risks of this
investment, and, consequently, without limiting the generality of the
foregoing, is able to hold the Warrants and the shares of Common Stock
issuable on exercise of the Warrants for an indefinite period of time,
and has a sufficient net worth to sustain a loss of the entire
investment, in the event such loss should occur.
(v) Holder has been provided with all information contained in
the Company's annual report on Form 10-K for the year ended June 30,
1996, and all subsequent interim reports filed by the Company with the
Securities and Exchange Commission. Holder's representatives have
personally met with the officers and directors of the Company and have
investigated the intellectual property assets of the Company. Holder
and its representatives have been given the opportunity to meet with
and ask questions of the officers and directors of the Company and to
obtain any additional information they consider material to the
acquisition of the Warrants and the shares of Common Stock issuable on
exercise of the Warrants.
(vi) Holder is acquiring the Warrants and the shares of Common
Stock issuable on exercise of the Warrants for its own account and not
for resale to others.
(vii) Holder confirms that it is an "accredited investor" as
defined under rule 501 of regulation D promulgated under the
Securities Act.
(viii) Holder is not organized under the laws of the United
States or any of the states of the United States and was not formed by
a United States person for the purpose of investing in securities.
(ix) Holder understands that none of the Warrants or the shares
of Common Stock issuable on exercise of the Warrants has been
registered, but are being acquired by reason of a specific exemption
under the Securities Act as well as under certain state statutes for
transactions by an issuer not involving any public offering and that
any disposition of the Warrants and the shares of Common Stock
issuable on exercise of the Warrants may, under certain circumstances,
be inconsistent with this exemption and may make the holder an
"underwriter" within the meaning of the Securities Act. Holder
further acknowledges that the Warrants and the shares of Common Stock
issuable on exercise of the Warrants must be held and may not be sold,
transferred, or otherwise disposed of for value unless they are
subsequently registered under the Securities Act or an exemption from
such registration is available; the Company is under no obligation to
register the Warrants or the shares of Common Stock issuable on
exercise of the Warrants under the Securities Act or under section 12
of the Exchange Act, except as provided in this Agreement or as may be
expressly agreed to by it in writing; if rule 144 is available, and no
assurance is given that it will be, initially only routine sales of
the Warrants and the shares of Common Stock issuable on exercise of
the Warrants in limited amounts can be made in reliance on rule 144 in
accordance with the terms and conditions of that rule; the Company is
under no obligation to the undersigned to make rule 144 available,
except as may be expressly agreed to by it in writing; in the event
rule 144 is not available, compliance with regulation A or some other
exemption may be required before any holder can sell, transfer, or
otherwise dispose of the Warrants or the shares of Common Stock
issuable on exercise of the Warrants without registration under the
Securities Act; the Company's registrar and transfer agent will
maintain a stop transfer order against the registration of transfer of
the Warrants and the shares of Common Stock issuable on exercise of
the Warrants; and the certificate(s) representing the Warrants and the
shares of Common Stock issuable on exercise of the Warrants will bear
a legend in substantially the following form so restricting the sale
of the Warrants and the shares of Common Stock issuable on exercise of
the Warrants:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN
THE MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES
ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE
144 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION OR OTHER
COMPLIANCE UNDER THE SECURITIES ACT.
(b) In order to more fully document reliance on the exemptions as
provided herein, Holder shall execute and deliver to the Company such
further letters of representation, acknowledgment, suitability, or the
like, as the Company and its counsel may reasonably request in connection
with reliance on exemptions from registration under such securities laws.
(c) The parties to this Agreement acknowledge that the basis for
relying on exemptions from registration or qualification are factual,
depending on the conduct of the various parties, and that no legal opinion
or other assurance will be required or given to the effect that the
transactions contemplated hereby are in fact exempt from registration or
qualification.
Article V
Registration Rights
5.1 Registration of Common Stock. On or before April 30, 1997, the
Company shall prepare and file with the Securities and Exchange Commission (the
"SEC"), a registration statement (the "Registration Statement") that includes
resale of the shares of Common Stock issuable on exercise of the Outstanding
Warrants and the $10.75 Warrants subject to this Agreement. Thereafter, the
Company shall use its best efforts to cause such Registration Statement to
become effective as soon as is practicably possible and to keep such
Registration Statement effective as provided herein. The Company further agrees
to:
(a) Prepare and file with the SEC such amendments and post-effective
amendments to the New Registration Statement as may be necessary to keep
the New Registration Statement effective for a period of not less than two
(2) years from the date of exercise of the $10.75 Warrants, or such shorter
period which will terminate when all securities covered by such
Registration Statement have been sold or withdrawn; cause the prospectus
which is part of the Registration Statement to be supplemented by any
required prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act applicable to it with respect to the disposition of all
securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the
sellers thereof set forth in such Registration Statement or supplement to
the prospectus;
(b) Notify any holder of Common Stock covered by the Registration
Statement (the "Selling Shareholders") when a prospectus is required to be
delivered under the Securities Act, when the Company becomes aware of the
happening of any event as a result of which the prospectus included in such
Registration Statement (as then in effect) contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein (in the case of the prospectus or any preliminary
prospectus, in light of the circumstances under which they were made) not
misleading and, as promptly as practicable thereafter, prepare and file
with the SEC and furnish to Selling Shareholders a supplement or amendment
to such prospectus so that, as thereafter delivered to the purchasers of
such securities, such prospectus will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(c) Enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
securities;
(d) Use its best efforts to cause all securities of Selling
Shareholders included in such Registration Statement to be listed, by the
date of the first sale of securities pursuant to such Registration
Statement, on each securities or trading exchange on which the Company's
securities of the same class are then listed or proposed to be listed, if
any;
(e) On or prior to the date on which the Registration Statement is
declare effective, use its best efforts to register or qualify, and
cooperate with Selling Shareholders, the underwriter or underwriters, if
any, and their counsel, in connection with the registration or
qualification of, the securities of Selling Shareholders covered by the
Registration Statement for offer and sale under the securities or blue sky
laws of each state and other jurisdiction of the United States as Selling
Shareholders or the underwriter reasonably requests in writing, to use its
best efforts to keep each such registration or qualification effective,
including through new filings, or amendment or renewals, during the period
such Registration Statement is required to be keep effective and to do any
and all other acts or things necessary or advisable to enable the
disposition in all such jurisdictions of the securities of Selling
Shareholders covered by the New Registration Statement; provided that, the
Company will not be required to (1) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this paragraph (e), (2) consent to general service of process in any such
jurisdiction, or (3) subject itself to general taxation in any such
jurisdiction;
(f) Cooperate with Selling Shareholders and the managing underwriter
or underwriters, if any, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legends) representing
securities to be sold by Selling Shareholders under the New Registration
Statement, and enable such securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if
any, or Selling Shareholders may request; and
(g) Use it best efforts to cause the securities of Selling
Shareholders covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the
United States as may be necessary to enable Selling Shareholders or the
underwriter or underwriters, if any, to consummate the disposition of such
securities.
5.2 Cooperation by Holder.
(a) Holder shall furnish to the Company in writing such information
and affidavits as the Company may reasonably require in connection with any
registration, qualification or compliance with respect to such securities.
It shall be a condition precedent to the obligations of the Company to take
any action pursuant to this Agreement with respect to the securities of any
Selling Shareholder that such Selling Shareholder shall furnish to the
Company such information regarding the Selling Shareholder, the securities
to be registered and other securities in the Company held, and the intended
method of disposition of such securities as shall be required to effect the
registration of such securities.
(b) By exercising its Warrants, Holder shall be deemed to have
confirmed at the time of such exercise the continuing accuracy of the
information respecting its status as an accredited investor and the
suitability of an investment in the Common Stock for it that is contained
herein, all except as it may then advise the Company in writing. The
Company may also require, as a condition precedent to exercise, that Holder
complete and deliver to the Company a suitability letter containing
representations and warranties regarding suitability of the investment of
like tenor to those contained herein.
(c) Holder, upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph (b) of section
5.2, will forthwith discontinue disposition of the securities until its
receipt of copies of the supplemented or amended prospectus contemplated by
paragraph (b) of section 5.2 or until it is advised in writing (the
"Advice") by the Company that the use of the prospectus may be resumed, and
has received copies of any additional or supplemental filings which are
incorporated by reference in the prospectus, and, if so directed by the
Company, Holder will, or will request the managing underwriter or
underwriters, if any, to, deliver to the Company all copies, other than
permanent file copies then in their possession, of the prospectus covering
such securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time period mentioned in
paragraph (a) of section 5.2 shall be extended by the number of days during
the period from and including the date of the giving of such notice to and
including the date when Holder shall have received the copies of the
supplemented or amended prospectus contemplated by paragraph (b) of section
5.2 hereof or the Advice.
(d) At the end of any period during which the Company is obligated to
keep any Registration Statement current and effective (and any required
extensions), Holder shall discontinue sales of securities pursuant to such
Registration Statement upon receipt of notice from the Company of its
intention to remove from registration the securities covered by such
Registration Statement which remain unsold, and Holder shall notify the
Company of the number of securities registered which remain unsold promptly
after receipt of such notice from the Company.
(e) Holder acknowledges that the registration of the resale of the
securities or the availability of an exemption from registration in certain
states may impose certain limitations and conditions on the manner and
nature of such sales. The Company shall advise Holder in writing of such
registration or exemption and the related limitations and conditions from
time to time. Holder shall be solely responsible for its own compliance
with such limitations and conditions.
5.3 Holdback Agreement. Holder, if requested by the managing underwriter
or underwriters for any underwritten, registered offering of the securities of
the Company, agrees not to effect any public sale or distribution of securities,
including a sale pursuant to Rule 144 (or any similar provision then in force)
under the Securities Act, during the 15 days prior to, and during the 120-day
period commencing on the effective date of such registration (except as part of
such registration). In the event Holder is prohibited from effecting a sale of
securities pursuant to this section 5.5, the time period in paragraph (a) of
section 5.2 shall be extended by the number of days Holder is so prohibited.
5.4 Registration and Selling Expenses. All of the costs and expenses of
registration provided for herein will be borne by the Company, including the
fees and expenses of the counsel and accountants for the Company (including the
expenses of any special audit and "cold comfort" letters required by or incident
to such performance), and all other costs and expenses of the Company incident
to the preparation, printing, and filing under the Securities Act of any
registration statement (and all amendments and supplements thereto) and
furnishing copies thereof and of the prospectus included therein, and the costs
and expenses incurred by the Company in connection with the qualification of the
Warrants and shares of Common Stock received on exercise of Warrants under the
state securities or blue sky laws of various jurisdictions; provided that, the
Company shall not bear the costs and expenses of Holder comprising underwriters'
commissions, brokerage fees, transfer taxes, or the fees and expenses of any
counsel, accountant, or other representative retained by Holder.
5.5 Rule 144. The Company agrees that it will use its best efforts to
file in a timely manner all reports required to be filed by it pursuant to the
Exchange Act and, at any time and upon request of Holder, will furnish it with
such information generated by the Company in the ordinary course of business as
may be reasonably necessary to enable it to effect sales of Common Stock
received on exercise of Warrants without registration pursuant to Rule 144 under
the Securities Act. Notwithstanding the foregoing, the Company may deregister
any class of its securities under section 12 of the Exchange Act or suspend its
duty to file reports with respect to any class of its securities pursuant to
section 15(d) of the Exchange Act if it is then permitted to do so pursuant to
the Exchange Act and the rules and regulations thereunder.
5.6 Participation in Underwritten Registrations. Holder may not
participate in any underwritten piggyback registration in which it chooses to
have stock included unless Holder (a) agrees to sell shares of Common Stock
received on exercise of Warrants on the basis provided in any underwriting
arrangements approved by the Company and the underwriter, and (b) completes and
executes all questionnaires, powers of attorney, underwriting agreements and
other documents customarily required under the terms of such underwriting
arrangements.
Article VI
Miscellaneous
6.1 No Brokers. Holder and the Company agree that no third person has in
any way brought the parties together or been instrumental in the negotiation,
execution, or consummation of this Agreement. Holder and the Company agree to
indemnify the other against any claim by any third person for any commission,
brokerage, finder's fee, or other payment with respect to this Agreement or the
transactions contemplated hereby based upon any alleged agreement or
understanding between such party and such third person, whether expressed or
implied, arising from the actions of such party. The covenants set forth in
this section 6.1 shall survive the date hereof and the consummation of the
transactions herein contemplated.
6.2 Governing Law. This Agreement shall in all respects, including all
matters of construction, validity, and performance, be governed by, and
construed and enforced in accordance with, the laws of the state of Utah
applicable to contracts entered into in that state between citizens of that
state and to be performed wholly within that state without reference to any
rules governing conflicts of laws
6.3 Notices. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:
If to the Company, to: Larson Davis Incorporated
Attn.: Brian G. Larson, President
1681 West 820 North
Provo, Utah 84601
Facsimile Transmission: (801) 375-0182
Confirmation: (801) 375-0177
With copies to: Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Facsimile Transmission: (801) 359-3954
Confirmation: (801) 531-7090
If to Holder, to: Ezer Mzion Organization
16 Eshel Avraham Street
Beni- Brak, Israel
Facsimile Transmission: ( ) --- ----
Confirmation: ( ) --- ----
or such other addresses and facsimile numbers as shall be furnished in writing
by any party in the manner for giving notices hereunder, and any such notice,
demand, request, or other communication shall be deemed to have been given as of
the date personally delivered or on the first business day after a legible copy
sent by facsimile transmission is received, three days after the date mailed by
registered or certified mail, or on the first business day after the date sent
by overnight delivery.
6.4 Attorneys' Fees. In the event that any party institutes and prevails
in any action or suit to enforce this Agreement or to secure relief from any
default hereunder or breach hereof, the defaulting or breaching party or parties
shall reimburse the nonbreaching party or parties for all costs, including
reasonable attorneys' fees, incurred in connection therewith and in enforcing or
collecting any judgment rendered therein.
6.5 Best Knowledge. Whenever any representation is made to the "best
knowledge" of any party, it shall be deemed to be a representation that an
officer or director or other official of such party, after reasonable
investigation, does not have any current actual knowledge that would make such
representation untrue.
6.6 Entire Agreement. This Agreement, together with the documents to be
delivered pursuant hereto, represents the entire agreement between the parties
relating to the subject matter hereof. To the extent inconsistent therewith,
this Agreement supersedes all earlier agreements governing the Outstanding
Warrants, including the Agreement to Issue Warrants between the parties dated
May 15, 1996, and the warrant certificates representing the Outstanding
Warrants. There are no other courses of dealing, understandings, agreements,
representations, or warranties, written or oral, except as set forth herein.
6.7 Survival; Termination. The representations, warranties, and covenants
of the respective parties as set forth in this Agreement shall survive the
closing and consummation of the transactions contemplated by this Agreement for
a period of two years from the date of this Agreement. The Company's cumulative
liability to Holder for breaches of this Agreement shall not exceed the
aggregate exercise price of the Warrants covered hereby.
6.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
6.9 Amendment or Waiver. Every right and remedy provided herein shall be
cumulative with every other right and remedy, whether conferred herein, at law,
or in equity, and may be enforced concurrently herewith, and no waiver by any
party of the performance of any obligation by the other shall be construed as a
waiver of the same or any other default then, theretofore, or thereafter
occurring or existing. This Agreement may be amended by a writing signed by all
parties hereto, with respect to any of the terms contained herein, and any term
or condition of this Agreement may be waived or the time for performance thereof
may be extended by a writing signed by the party or parties for whose benefit
the provision is intended.
6.10 Third-Party Beneficiaries. This Agreement is solely between the
parties hereto and no director, officer, stockholder, employee, agent,
independent contractor, or any other person or entity shall be deemed to be a
third-party beneficiary of this Agreement.
6.11 No Public Announcement. None of the parties to this Agreement shall,
without the approval of each other party, make any press release or other public
announcement concerning the transactions contemplated by this Agreement without
first providing a copy of such press release or public announcement to the other
parties to this Agreement at least five days prior to release. Nothing
contained herein shall prohibit any party from making any pubic disclosure or
announcement which is required by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
The Company:
LARSON DAVIS INCORPORATED
By /s/ Brian G. Larson
Brian G. Larson, President
Holder:
EZER MZION ORGANIZATION
By /s/
, President
---------------------------
AGREEMENT TO ISSUE WARRANTS
THIS AGREEMENT TO ISSUE WARRANTS (this "Agreement") is entered into as of
this 9th day of January, 1997, by and among LARSON DAVIS INCORPORATED, a Nevada
corporation (the "Company"), and LAURA HUBERFELD ("Huberfeld") and NAOMI BODNER
("Bodner"), based on the following premises.
Premises
A. Huberfeld and Bodner each hold warrants (the "Outstanding Warrants")
to acquire shares of common stock of the Company, par value $0.001 per share
(the "Common Stock").
B. Huberfeld and Bodner have agreed to the early exercise of the
Outstanding Warrants currently held by them and the modification of the
Company's registration obligations with respect to the shares of Common Stock
underlying the Outstanding Warrants in consideration of the Company's agreement
to reduce the exercise price of the Outstanding Warrants and to grant them
additional warrants to acquire shares of Common Stock on the terms and
conditions set forth in this Agreement.
Agreement
NOW, THEREFORE, based on the stated premises, which are incorporated herein
by reference, and for and in consideration of the mutual covenants and
agreements hereinafter set forth and the mutual benefit to the parties to be
derived therefrom, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, it is hereby agreed as follows:
Article I
Warrants
1.1 Outstanding Warrants. Huberfeld and Bodner each hold Outstanding
Warrants to acquire 300,208 shares, or an aggregate of 600,416 shares, of Common
Stock. The Outstanding Warrants currently have an exercise price of $6.25 per
share of Common Stock. The parties agree to reduce the exercise price of the
Outstanding Warrants to $5.30 per share; provided that, the Outstanding Warrants
are exercised on the timetable and other terms and conditions set forth in this
Agreement.
1.2 Exercise of Outstanding Warrants. Huberfeld and Bodner each agree to
deliver to the Company $712,002 (an aggregate of $1,424,004) on or before
January 31, 1997, as payment of the exercise price of a portion of the
Outstanding Warrants. Huberfeld and Bodner each agree to deliver an additional
$879,100.40 (an aggregate of $1,758,200.80) to the Company on or before April
16, 1997, as payment of the exercise price for their remaining Outstanding
Warrants. On receipt of the first payment on or before January 31, 1997, the
Company agrees to immediately provide irrevocable written instructions to its
transfer agent to issue certificates representing 227,840 shares of Common
Stock, 113,920 shares to be registered in the name of Laura Huberfeld and
113,920 shares to be registered in the name of Naomi Bodner, and to deliver such
certificates to Huberfeld and Bodner. An additional 40,840 shares (20,420
shares each) shall be held in reserve and issued on the timely payment of the
second amount on or before April 16, 1997. On receipt of the second payment on
or before April 16, 1997, the reserved shares shall be issued and an additional
331,736 shares (165,868 shares each) shall be issued and delivered to Ms.
Huberfeld and Bodner.
1.3 Failure to Make Payments. In the event that either Bodner or
Huberfeld fails to make the payment due by January 31, 1997, this Agreement
shall be null and void as to such individual and the parties shall be governed
by the prior agreements between the parties concerning the Outstanding Warrants.
In the event that either Bodner or Huberfeld makes the payment due on or before
January 31, 1997, and then fails to timely make the payment due on or before
April 16, 1997, the exercise price of all of the Outstanding Warrants (including
those exercised on or before January 31, 1997) held by such individual shall be
$6.25 per share of Common Stock and the 20,420 shares of stock reserved for such
individual under the provisions of paragraph 1.2 shall not be issued.
1.4 Issuance of Additional Warrants. On exercise of the Outstanding
Warrants on or before April 16, 1997, the Company agrees to issue warrants to
Huberfeld and Bodner to acquire a like number of shares of Common Stock at an
exercise price of $10.75 per share of Common Stock (the "$10.75 Warrants"). The
$10.75 Warrants shall be exercisable at any time after August 1, 1997, and prior
to the close of business on April 16, 1999. The $10.75 Warrants shall be in the
form attached hereto as Exhibit "A" and incorporated herein by this reference.
Article II
Representations, Covenants, and Warranties of the Company
As an inducement to, and to obtain the reliance of, Huberfeld and Bodner,
the Company represents and warrants as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing, and in good standing under laws of the state of
Nevada, and has the corporate power and is duly authorized, qualified,
franchised, and licensed under all applicable laws, regulations, ordinances, and
orders of public authorities to own all of its properties and assets and to
carry on its business in all material respects as it is now being conducted.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance with the terms
hereof will not, violate any provision of the Company's certificate of
incorporation or bylaws. The Company has taken all action required by law, its
certificate of incorporation, its bylaws, or otherwise to authorize the
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated.
2.2 Approval of Agreement. The board of directors of the Company has
authorized the execution and delivery of this Agreement by the Company and has
approved the consummation of the transactions contemplated hereby. This
Agreement is the legal, valid, and binding agreement of the Company enforceable
between the parties in accordance with its terms.
2.3 Financial Information. Each of the financial statements contained in
the information referred to in section 2.4 present fairly the financial
condition of the Company as of the respective dates of such financial statements
and the results of its operations for the periods indicated. All such audited
and unaudited financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved as explained in the notes to such financial statements and have
been presented in accordance with the requirements of the rules and regulations
promulgated by the SEC regarding the form and content of and requirements for
financial statements to be filed with the SEC.
2.4 Information. The information concerning the Company set forth in this
Agreement, the annual report on Form 10-KSB filed with the SEC for the year
ended June 30, 1996, and the quarterly report on Form 10-QSB for the quarter
ended September 30, 1996, is, or was, as of the date of the respective reports,
complete and accurate in all material respects and did not contain any untrue
statement of a material fact or omit to state a material fact required to make
the statements made, in light of the circumstances under which they were made,
not misleading.
2.5 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which the Company is a party or to which
any of its properties or assets are subject require the consent of any other
party in order to consummate the transactions herein contemplated, except where
the failure to obtain such consent would not have a material adverse effect on
the transactions contemplated herein. Except for the satisfaction of
requirements of federal and state securities and corporation laws, no
authorization, approval, consent, or order of, or registration, declaration, or
filing with, any court or other governmental body is required in connection with
the execution and delivery by the Company of this Agreement and the consummation
by the Company of the transactions contemplated hereby.
2.6 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated by this Agreement will not
result in the breach of any term or provision of, or constitute an event of
default under, any indenture, mortgage, deed of trust, lease, or other contract,
agreement, or instrument to which the Company is a party or to which any of its
properties or operations are subject and the breach of which would have a
material adverse effect on the Company.
Article III
Representations, Covenants, and Warranties of Huberfeld and Bodner
As an inducement to, and to obtain the reliance of the Company, Huberfeld
and Bodner represent and warrant as follows:
3.1 Binding Agreement. This Agreement is the legal, valid, and binding
obligation of each of Huberfeld and Bodner enforceable in accordance with its
terms.
3.2 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which Huberfeld or Bodner is a party or
to which any of their properties or assets are subject require the consent of
any other party in order to consummate the transactions herein contemplated,
except where the failure to obtain such consent would not have a material
adverse effect on the transactions contemplated herein. No authorization,
approval, consent, or order of, or registration, declaration, or filing with,
any court or other governmental body is required in connection with the
execution and delivery by Huberfeld and Bodner of this Agreement and the
consummation by Huberfeld and Bodner of the transactions contemplated hereby.
3.3 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated hereby, will not result in
the breach of any term or provision of, constitute an event of default under, or
require the consent or approval of any third-party pursuant to, any material
contract, agreement, or instrument to which Huberfeld or Bodner is a party or to
which any of their respective properties or assets are subject.
3.4 Information. The information concerning Huberfeld or Bodner set forth
in this Agreement is complete and accurate in all material respects and does not
contain any untrue statement of a material fact or omit to state a material fact
required to make the statements made, in light of the circumstances under which
they were made, not misleading.
Article IV
Special Covenants
4.1 Indemnification by Huberfeld and Bodner. Huberfeld and Bodner agree
to jointly and severally indemnify and hold harmless the Company and its
directors and officers, and each person, if any, who controls the Company within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"),
from and against any and all losses, claims, damages, expenses, liabilities, or
actions to which any of them may become subject under applicable law (including
the Securities Act and the Exchange Act) and will reimburse them for any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any claims or actions, whether or not resulting in liability,
insofar as such losses, claims, damages, expenses, liabilities, or actions arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any application or statement filed with a
governmental body or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary in order to make the statements therein not misleading, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing by Huberfeld or Bodner
expressly for use therein. Huberfeld and Bodner agree at any time upon the
request of the Company to furnish to it a written letter or statement confirming
the accuracy of the information with respect to Huberfeld and Bodner contained
in any report or other application or statement referred to in this Article IV,
or in any draft of any such documents, and confirming that the information with
respect to Huberfeld and Bodner contained in such document or draft was
furnished by Huberfeld or Bodner, indicating the inaccuracies or omissions
contained in such document or draft or indicating the information not furnished
by Huberfeld or Bodner expressly for use therein. The indemnity agreement
contained in this section 4.1 shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of the Company and
shall survive the consummation of the transactions contemplated by this
Agreement.
4.2 Indemnification by the Company. The Company will indemnify and hold
harmless Huberfeld and Bodner from and against any and all losses, claims,
damages, expenses, liabilities, or actions to which either of them may become
subject under applicable law (including the Securities Act and the Exchange Act)
and will reimburse them for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any claims or actions,
whether or not resulting in liability, insofar as such losses, claims, damages,
expenses, liabilities, or actions arise out of or are based upon any breach of
this Agreement or any untrue statement or alleged untrue statement of a material
fact contained in any application or statement filed with a governmental body or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein, or necessary in order to make the
statements therein not misleading, but only insofar as any such statement or
omission was made in reliance upon and in conformity with information furnished
in writing by the Company expressly for use therein. The Company agrees at any
time upon the request of Huberfeld or Bodner to furnish to them a written letter
or statement confirming the accuracy of the information with respect to the
Company contained in any report or other application or statement referred to in
this Article IV, or in any draft of any such document, and confirming that the
information with respect to the Company contained in such document or draft was
furnished by the Company, indicating the inaccuracies or omissions contained in
such document or draft or indicating the information not furnished by the
Company expressly for use therein. The indemnity agreement contained in this
section 4.2 shall remain operative and in full force and effect, regardless of
any investigation made by or on behalf of Huberfeld and Bodner and shall survive
the consummation of the transactions contemplated by this Agreement.
4.3 The Acquisition of Purchased Stock. The consummation of this
Agreement and the issuance of $10.75 Warrants to Huberfeld and Bodner
contemplated herein and the issuance of Common Stock on the exercise of the
Outstanding Warrants constitutes the offer and sale of securities as those terms
are defined under the Securities Act and applicable state statutes. Such
transactions shall be consummated in reliance on certain exemptions from the
registration requirements of federal and state securities laws, which depend,
among other items, on the circumstances under which such securities are
acquired.
(a) In order to provide documentation for reliance upon such
exemptions, Huberfeld and Bodner make the following representations and
warranties:
(i) Huberfeld and Bodner acknowledge that neither the SEC nor
the securities commission of any state or other federal agency has
made any determination as to the merits of acquiring the Warrants or
the shares of Common Stock issuable on exercise of the Warrants, and
that this transaction involves certain risks.
(ii) Huberfeld and Bodner have received and read this Agreement
and understand the risks related to the consummation of the
transactions herein contemplated.
(iii) Huberfeld and Bodner have such knowledge and experience
in business and financial matters that each of them is capable of
evaluating the Company and its business operations.
(iv) Huberfeld and Bodner have adequate means of providing for
their current needs and possible personal contingencies and have no
need now, and anticipates no need in the foreseeable future, to sell
any of the Warrants or the shares of Common Stock issuable on exercise
of the Warrants. Huberfeld and Bodner are each able to bear the
economic risks of this investment, and, consequently, without limiting
the generality of the foregoing, are able to hold the Warrants and the
shares of Common Stock issuable on exercise of the Warrants for an
indefinite period of time, and have a sufficient net worth to sustain
a loss of the entire investment, in the event such loss should occur.
(v) Huberfeld and Bodner have each been provided with all
information contained in the Company's annual report on Form 10-K for
the year ended June 30, 1996, and all subsequent interim reports filed
by the Company with the Securities and Exchange Commission.
Huberfeld's and Bodner's representatives, including their legal
counsel, have personally met with the officers and directors of the
Company and have investigated the intellectual property assets of the
Company. Each of Huberfeld and Bodner and their representatives have
been given the opportunity to meet with and ask questions of the
officers and directors of the Company and to obtain any additional
information they consider material to the acquisition of the Warrants
and the shares of Common Stock issuable on exercise of the Warrants.
(vi) Each of Huberfeld and Bodner is acquiring the Warrants and
the shares of Common Stock issuable on exercise of the Warrants for
her own account and not for resale to others.
(vii) Each of Huberfeld and Bodner confirms that she is an
"accredited investor" as defined under rule 501 of regulation D
promulgated under the Securities Act. Each of Huberfeld and Bodner
confirms that her individual net worth, or joint net worth with her
spouse, at the time of her purchase exceeds $1,000,000, or that she
had an individual income in excess of $200,000 in each of the two most
recent years or joint income with her spouse in excess of $300,000 in
each of those years and has a reasonable expectation of reaching the
same income level in the current year.
(viii) Each of Huberfeld and Bodner is a resident of the New
York.
(ix) Each of Huberfeld and Bodner understands that none of the
Warrants or the shares of Common Stock issuable on exercise of the
Warrants has been registered, but are being acquired by reason of a
specific exemption under the Securities Act as well as under certain
state statutes for transactions by an issuer not involving any public
offering and that any disposition of the Warrants and the shares of
Common Stock issuable on exercise of the Warrants may, under certain
circumstances, be inconsistent with this exemption and may make the
holder an "underwriter" within the meaning of the Securities Act.
Each of Huberfeld and Bodner further acknowledges that the Warrants
and the shares of Common Stock issuable on exercise of the Warrants
must be held and may not be sold, transferred, or otherwise disposed
of for value unless they are subsequently registered under the
Securities Act or an exemption from such registration is available;
the Company is under no obligation to register the Warrants or the
shares of Common Stock issuable on exercise of the Warrants under the
Securities Act or under section 12 of the Exchange Act, except as
provided in this Agreement or as may be expressly agreed to by it in
writing; if rule 144 is available, and no assurance is given that it
will be, initially only routine sales of the Warrants and the shares
of Common Stock issuable on exercise of the Warrants in limited
amounts can be made in reliance on rule 144 in accordance with the
terms and conditions of that rule; the Company is under no obligation
to the undersigned to make rule 144 available, except as may be
expressly agreed to by it in writing; in the event rule 144 is not
available, compliance with regulation A or some other exemption may be
required before any holder can sell, transfer, or otherwise dispose of
the Warrants or the shares of Common Stock issuable on exercise of the
Warrants without registration under the Securities Act; the Company's
registrar and transfer agent will maintain a stop transfer order
against the registration of transfer of the Warrants and the shares of
Common Stock issuable on exercise of the Warrants; and the
certificate(s) representing the Warrants and the shares of Common
Stock issuable on exercise of the Warrants will bear a legend in
substantially the following form so restricting the sale of the
Warrants and the shares of Common Stock issuable on exercise of the
Warrants:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN
THE MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES
ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE
144 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION OR OTHER
COMPLIANCE UNDER THE SECURITIES ACT.
(b) In order to more fully document reliance on the exemptions as
provided herein, each of Huberfeld and Bodner shall execute and deliver to
the Company such further letters of representation, acknowledgment,
suitability, or the like, as the Company and its counsel may reasonably
request in connection with reliance on exemptions from registration under
such securities laws.
(c) The parties to this Agreement acknowledge that the basis for
relying on exemptions from registration or qualification are factual,
depending on the conduct of the various parties, and that no legal opinion
or other assurance will be required or given to the effect that the
transactions contemplated hereby are in fact exempt from registration or
qualification.
Article V
Registration Rights
5.1 Registration of Common Stock. On or before April 30, 1997, the
Company shall prepare and file with the Securities and Exchange Commission (the
"SEC"), a registration statement (the "Registration Statement") that includes
resale of the shares of Common Stock issuable on exercise of the Outstanding
Warrants and the $10.75 Warrants subject to this Agreement. Thereafter, the
Company shall use its best efforts to cause such Registration Statement to
become effective as soon as is practicably possible and to keep such
Registration Statement effective as provided herein. The Company further agrees
to:
(a) Prepare and file with the SEC such amendments and post-effective
amendments to the New Registration Statement as may be necessary to keep
the New Registration Statement effective for a period of not less than two
(2) years from the date of exercise of the $10.75 Warrants, or such shorter
period which will terminate when all securities covered by such
Registration Statement have been sold or withdrawn; cause the prospectus
which is part of the Registration Statement to be supplemented by any
required prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act applicable to it with respect to the disposition of all
securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the
sellers thereof set forth in such Registration Statement or supplement to
the prospectus;
(b) Notify any holder of Common Stock covered by the Registration
Statement (the "Selling Shareholders") when a prospectus is required to be
delivered under the Securities Act, when the Company becomes aware of the
happening of any event as a result of which the prospectus included in such
Registration Statement (as then in effect) contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein (in the case of the prospectus or any preliminary
prospectus, in light of the circumstances under which they were made) not
misleading and, as promptly as practicable thereafter, prepare and file
with the SEC and furnish to Selling Shareholders a supplement or amendment
to such prospectus so that, as thereafter delivered to the purchasers of
such securities, such prospectus will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(c) Enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
securities;
(d) Use its best efforts to cause all securities of Selling
Shareholders included in such Registration Statement to be listed, by the
date of the first sale of securities pursuant to such Registration
Statement, on each securities or trading exchange on which the Company's
securities of the same class are then listed or proposed to be listed, if
any;
(e) On or prior to the date on which the Registration Statement is
declare effective, use its best efforts to register or qualify, and
cooperate with Selling Shareholders, the underwriter or underwriters, if
any, and their counsel, in connection with the registration or
qualification of, the securities of Selling Shareholders covered by the
Registration Statement for offer and sale under the securities or blue sky
laws of each state and other jurisdiction of the United States as Selling
Shareholders or the underwriter reasonably requests in writing, to use its
best efforts to keep each such registration or qualification effective,
including through new filings, or amendment or renewals, during the period
such Registration Statement is required to be keep effective and to do any
and all other acts or things necessary or advisable to enable the
disposition in all such jurisdictions of the securities of Selling
Shareholders covered by the New Registration Statement; provided that, the
Company will not be required to (1) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this paragraph (e), (2) consent to general service of process in any such
jurisdiction, or (3) subject itself to general taxation in any such
jurisdiction;
(f) Cooperate with Selling Shareholders and the managing underwriter
or underwriters, if any, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legends) representing
securities to be sold by Selling Shareholders under the New Registration
Statement, and enable such securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if
any, or Selling Shareholders may request; and
(g) Use it best efforts to cause the securities of Selling
Shareholders covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the
United States as may be necessary to enable Selling Shareholders or the
underwriter or underwriters, if any, to consummate the disposition of such
securities.
5.2 Cooperation by Huberfeld and Bodner.
(a) Huberfeld and Bodner shall furnish to the Company in writing such
information and affidavits as the Company may reasonably require in
connection with any registration, qualification or compliance with respect
to such securities. It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Agreement with respect to
the securities of any Selling Shareholder that such Selling Shareholder
shall furnish to the Company such information regarding the Selling
Shareholder, the securities to be registered and other securities in the
Company held, and the intended method of disposition of such securities as
shall be required to effect the registration of such securities.
(b) By exercising their Warrants, Huberfeld and Bodner shall be
deemed to have confirmed at the time of such exercise the continuing
accuracy of the information respecting their status as accredited investors
and the suitability of an investment in the Common Stock for them that is
contained herein, all except as such investors may then advise the Company
in writing. The Company may also require, as a condition precedent to
exercise, that Huberfeld or Bodner, as the case may be, complete and
deliver to the Company a suitability letter containing representations and
warranties regarding suitability of the investment of like tenor to those
contained herein.
(c) Huberfeld and Bodner, upon receipt of any notice from the Company
of the happening of any event of the kind described in paragraph (b) of
section 5.2, will forthwith discontinue disposition of the securities until
their receipt of copies of the supplemented or amended prospectus
contemplated by paragraph (b) of section 5.2 or until they are advised in
writing (the "Advice") by the Company that the use of the prospectus may be
resumed, and have received copies of any additional or supplemental filings
which are incorporated by reference in the prospectus, and, if so directed
by the Company, Huberfeld and Bodner will, or will request the managing
underwriter or underwriters, if any, to, deliver to the Company all copies,
other than permanent file copies then in their possession, of the
prospectus covering such securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the time
period mentioned in paragraph (a) of section 5.2 shall be extended by the
number of days during the period from and including the date of the giving
of such notice to and including the date when Huberfeld and Bodner shall
have received the copies of the supplemented or amended prospectus
contemplated by paragraph (b) of section 5.2 hereof or the Advice.
(d) At the end of any period during which the Company is obligated to
keep any Registration Statement current and effective (and any required
extensions), Huberfeld and Bodner shall discontinue sales of securities
pursuant to such Registration Statement upon receipt of notice from the
Company of its intention to remove from registration the securities covered
by such Registration Statement which remain unsold, and Huberfeld and
Bodner shall notify the Company of the number of securities registered
which remain unsold promptly after receipt of such notice from the Company.
(e) Huberfeld and Bodner acknowledge that the registration of the
resale of the securities or the availability of an exemption from
registration in certain states may impose certain limitations and
conditions on the manner and nature of such sales. The Company shall
advise Huberfeld and Bodner in writing of such registration or exemption
and the related limitations and conditions from time to time. Huberfeld
and Bodner shall be solely responsible for their own compliance with such
limitations and conditions.
5.3 Holdback Agreement. Huberfeld and Bodner, if requested by the
managing underwriter or underwriters for any underwritten, registered offering
of the securities of the Company, agree not to effect any public sale or
distribution of securities, including a sale pursuant to Rule 144 (or any
similar provision then in force) under the Securities Act, during the 15 days
prior to, and during the 120-day period commencing on the effective date of such
registration (except as part of such registration). In the event Huberfeld and
Bodner are prohibited from effecting a sale of securities pursuant to this
section 5.5, the time period in paragraph (a) of section 5.2 shall be extended
by the number of days Huberfeld and Bodner are so prohibited.
5.4 Registration and Selling Expenses. All of the costs and expenses of
registration provided for herein will be borne by the Company, including the
fees and expenses of the counsel and accountants for the Company (including the
expenses of any special audit and "cold comfort" letters required by or incident
to such performance), and all other costs and expenses of the Company incident
to the preparation, printing, and filing under the Securities Act of any
registration statement (and all amendments and supplements thereto) and
furnishing copies thereof and of the prospectus included therein, and the costs
and expenses incurred by the Company in connection with the qualification of the
Warrants and shares of Common Stock received on exercise of Warrants under the
state securities or blue sky laws of various jurisdictions; provided that, the
Company shall not bear the costs and expenses of Huberfeld and Bodner comprising
underwriters' commissions, brokerage fees, transfer taxes, or the fees and
expenses of any counsel, accountant, or other representative retained by
Huberfeld and Bodner.
5.5 Rule 144. The Company agrees that it will use its best efforts to
file in a timely manner all reports required to be filed by it pursuant to the
Exchange Act and, at any time and upon request of Huberfeld or Bodner, will
furnish them with such information generated by the Company in the ordinary
course of business as may be reasonably necessary to enable them to effect sales
of Common Stock received on exercise of Warrants without registration pursuant
to Rule 144 under the Securities Act. Notwithstanding the foregoing, the
Company may deregister any class of its securities under section 12 of the
Exchange Act or suspend its duty to file reports with respect to any class of
its securities pursuant to section 15(d) of the Exchange Act if it is then
permitted to do so pursuant to the Exchange Act and the rules and regulations
thereunder.
5.6 Participation in Underwritten Registrations. Huberfeld and Bodner may
not participate in any underwritten piggyback registration in which they chose
to have stock included unless Huberfeld and Bodner (a) agree to sell shares of
Common Stock received on exercise of Warrants on the basis provided in any
underwriting arrangements approved by the Company and the underwriter, and (b)
complete and execute all questionnaires, powers of attorney, underwriting
agreements and other documents customarily required under the terms of such
underwriting arrangements.
Article VI
Miscellaneous
6.1 No Brokers. Huberfeld, Bodner, and the Company agree that no third
person has in any way brought the parties together or been instrumental in the
negotiation, execution, or consummation of this Agreement. Huberfeld, Bodner,
and the Company each agree to indemnify the other against any claim by any third
person for any commission, brokerage, finder's fee, or other payment with
respect to this Agreement or the transactions contemplated hereby based upon any
alleged agreement or understanding between such party and such third person,
whether expressed or implied, arising from the actions of such party. The
covenants set forth in this section 6.1 shall survive the date hereof and the
consummation of the transactions herein contemplated.
6.2 Governing Law. This Agreement shall in all respects, including all
matters of construction, validity, and performance, be governed by, and
construed and enforced in accordance with, the laws of the state of Utah
applicable to contracts entered into in that state between citizens of that
state and to be performed wholly within that state without reference to any
rules governing conflicts of laws
6.3 Notices. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:
If to the Company, to: Larson Davis Incorporated
Attn.: Brian G. Larson, President
1681 West 820 North
Provo, Utah 84601
Facsimile Transmission: (801) 375-0182
Confirmation: (801) 375-0177
With copies to: Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Facsimile Transmission: (801) 359-3954
Confirmation: (801) 531-7090
If to Huberfeld
or Bodner, to: Ms. Laura Huberfeld
Ms. Naomi Bodner
c/o Broad Capital Associates, Inc.
152 West 57th Street, 54th Floor
New York, New York 10019
Facsimile Transmission: (212) 581-0002
Confirmation: (212) 581-0500
With copies to: Michael Solovay, Esq.
Solovay Marshall & Edlin
845 Third Avenue
New York, New York 10022
Facsimile Transmission: (212) 355-4608
Confirmation: (212) 752-1000
or such other addresses and facsimile numbers as shall be furnished in writing
by any party in the manner for giving notices hereunder, and any such notice,
demand, request, or other communication shall be deemed to have been given as of
the date personally delivered or on the first business day after a legible copy
sent by facsimile transmission is received, three days after the date mailed by
registered or certified mail, or on the first business day after the date sent
by overnight delivery.
6.4 Attorneys' Fees. In the event that any party institutes and prevails
in any action or suit to enforce this Agreement or to secure relief from any
default hereunder or breach hereof, the defaulting or breaching party or parties
shall reimburse the nonbreaching party or parties for all costs, including
reasonable attorneys' fees, incurred in connection therewith and in enforcing or
collecting any judgment rendered therein.
6.5 Best Knowledge. Whenever any representation is made to the "best
knowledge" of any party, it shall be deemed to be a representation that such
party, or an officer or director of such party, after reasonable investigation,
does not have any current actual knowledge that would make such representation
untrue.
6.6 Entire Agreement. This Agreement, together with the documents to be
delivered pursuant hereto, represents the entire agreement between the parties
relating to the subject matter hereof. To the extent inconsistent therewith,
this Agreement supersedes all earlier agreements governing the Outstanding
Warrants, including the Agreement to Issue Warrants between the parties dated
May 15, 1996, as amended, and the warrant certificates representing the
Outstanding Warrants. There are no other courses of dealing, understandings,
agreements, representations, or warranties, written or oral, except as set forth
herein.
6.7 Survival; Termination. The representations, warranties, and covenants
of the respective parties as set forth in this Agreement shall survive the
closing and consummation of the transactions contemplated by this Agreement for
a period of two years from the date of this Agreement. The Company's cumulative
liability to Huberfeld and Bodner for breaches of this Agreement shall not
exceed the aggregate exercise price of the Warrants covered hereby.
6.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
6.9 Amendment or Waiver. Every right and remedy provided herein shall be
cumulative with every other right and remedy, whether conferred herein, at law,
or in equity, and may be enforced concurrently herewith, and no waiver by any
party of the performance of any obligation by the other shall be construed as a
waiver of the same or any other default then, theretofore, or thereafter
occurring or existing. This Agreement may be amended by a writing signed by all
parties hereto, with respect to any of the terms contained herein, and any term
or condition of this Agreement may be waived or the time for performance thereof
may be extended by a writing signed by the party or parties for whose benefit
the provision is intended.
6.10 Third-Party Beneficiaries. This Agreement is solely between the
parties hereto and no director, officer, stockholder, employee, agent,
independent contractor, or any other person or entity shall be deemed to be a
third-party beneficiary of this Agreement.
6.11 No Public Announcement. None of the parties to this Agreement shall,
without the approval of each other party, make any press release or other public
announcement concerning the transactions contemplated by this Agreement without
first providing a copy of such press release or public announcement to the other
parties to this Agreement at least five days prior to release. Nothing
contained herein shall prohibit any party from making any pubic disclosure or
announcement which is required by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
The Company:
LARSON DAVIS INCORPORATED
By /s/ Brian G. Larson
Brian G. Larson, President
Huberfeld:
/s/ Laura Huberfeld
Laura Huberfeld
Address: 152 West 57th Street
New York, New York 10019
Bodner:
/s/ Naomi Bodner
Naomi Bodner
Address: 152 West 57th Street
New York, New York 10019
AGREEMENT TO ISSUE WARRANTS
THIS AGREEMENT TO ISSUE WARRANTS (this "Agreement") is entered into as of
this 9th day of January, 1997, by and among LARSON DAVIS INCORPORATED, a Nevada
corporation (the "Company"), and CONNIE LERNER ("Lerner"), based on the
following premises.
Premises
A. Lerner holds warrants (the "Outstanding Warrants") to acquire shares
of common stock of the Company, par value $0.001 per share (the "Common Stock").
B. Lerner has agreed to the early exercise of the Outstanding Warrants
currently held by her and the modification of the Company's registration
obligations with respect to the shares of Common Stock underlying the
Outstanding Warrants in consideration of the Company's agreement to reduce the
exercise price of the Outstanding Warrants and to grant her additional warrants
to acquire shares of Common Stock on the terms and conditions set forth in this
Agreement.
Agreement
NOW, THEREFORE, based on the stated premises, which are incorporated herein
by reference, and for and in consideration of the mutual covenants and
agreements hereinafter set forth and the mutual benefit to the parties to be
derived therefrom, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, it is hereby agreed as follows:
Article I
Warrants
1.1 Outstanding Warrants. Lerner holds Outstanding Warrants to acquire
375,000 shares of Common Stock. The Outstanding Warrants currently have an
exercise price of $6.25 per share of Common Stock. The parties agree to reduce
the exercise price of the Outstanding Warrants to $5.30 per share; provided
that, the Outstanding Warrants are exercised on the timetable and other terms
and conditions set forth in this Agreement.
1.2 Exercise of Outstanding Warrants. Lerner agrees to deliver to the
Company $889,393 on or before January 31, 1997, as payment of the exercise price
of a portion of the Outstanding Warrants. Lerner agrees to deliver an
additional $1,098,107 to the Company on or before April 16, 1997, as payment of
the exercise price for her remaining Outstanding Warrants. On receipt of the
first payment on or before January 31, 1997, the Company agrees to immediately
provide irrevocable written instructions to its transfer agent to issue a
certificate representing 142,303 shares of Common Stock be registered in the
name of Connie Lerner, and to deliver such certificates to Lerner. An
additional 25,507 shares shall be held in reserve and issued on the timely
payment of the second amount on or before April 16, 1997. On receipt of the
second payment on or before April 16, 1997, the reserved shares shall be issued
and an additional 207,190 shares shall be issued and delivered to Lerner.
1.3 Failure to Make Payments. In the event that Lerner fails to make the
payment due by January 31, 1997, this Agreement shall be null and void and the
parties shall be governed by the prior agreements between the parties concerning
the Outstanding Warrants. In the event that Lerner makes the payment due on or
before January 31, 1997, and then fails to timely make the payment due on or
before April 16, 1997, the exercise price of all of the Outstanding Warrants
(including those exercised on or before January 31, 1997) held by Lerner shall
be $6.25 per share of Common Stock and the 25,507 shares of stock reserved for
Lerner under the provisions of paragraph 1.2 shall not be issued.
1.4 Issuance of Additional Warrants. On exercise of the Outstanding
Warrants on or before April 16, 1997, the Company agrees to issue warrants to
Lerner to acquire a like number of shares of Common Stock at an exercise price
of $10.75 per share of Common Stock (the "$10.75 Warrants"). The $10.75
Warrants shall be exercisable at any time after August 1, 1997, and prior to the
close of business on April 16, 1999. The $10.75 Warrants shall be in the form
attached hereto as Exhibit "A" and incorporated herein by this reference.
Article II
Representations, Covenants, and Warranties of the Company
As an inducement to, and to obtain the reliance of, Lerner, the Company
represents and warrants as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing, and in good standing under laws of the state of
Nevada, and has the corporate power and is duly authorized, qualified,
franchised, and licensed under all applicable laws, regulations, ordinances, and
orders of public authorities to own all of its properties and assets and to
carry on its business in all material respects as it is now being conducted.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance with the terms
hereof will not, violate any provision of the Company's certificate of
incorporation or bylaws. The Company has taken all action required by law, its
certificate of incorporation, its bylaws, or otherwise to authorize the
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated.
2.2 Approval of Agreement. The board of directors of the Company has
authorized the execution and delivery of this Agreement by the Company and has
approved the consummation of the transactions contemplated hereby. This
Agreement is the legal, valid, and binding agreement of the Company enforceable
between the parties in accordance with its terms.
2.3 Financial Information. Each of the financial statements contained in
the information referred to in section 2.4 present fairly the financial
condition of the Company as of the respective dates of such financial statements
and the results of its operations for the periods indicated. All such audited
and unaudited financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved as explained in the notes to such financial statements and have
been presented in accordance with the requirements of the rules and regulations
promulgated by the SEC regarding the form and content of and requirements for
financial statements to be filed with the SEC.
2.4 Information. The information concerning the Company set forth in this
Agreement, the annual report on Form 10-KSB filed with the SEC for the year
ended June 30, 1996, and the quarterly report on Form 10-QSB for the quarter
ended September 30, 1996, is, or was, as of the date of the respective reports,
complete and accurate in all material respects and did not contain any untrue
statement of a material fact or omit to state a material fact required to make
the statements made, in light of the circumstances under which they were made,
not misleading.
2.5 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which the Company is a party or to which
any of its properties or assets are subject require the consent of any other
party in order to consummate the transactions herein contemplated, except where
the failure to obtain such consent would not have a material adverse effect on
the transactions contemplated herein. Except for the satisfaction of
requirements of federal and state securities and corporation laws, no
authorization, approval, consent, or order of, or registration, declaration, or
filing with, any court or other governmental body is required in connection with
the execution and delivery by the Company of this Agreement and the consummation
by the Company of the transactions contemplated hereby.
2.6 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated by this Agreement will not
result in the breach of any term or provision of, or constitute an event of
default under, any indenture, mortgage, deed of trust, lease, or other contract,
agreement, or instrument to which the Company is a party or to which any of its
properties or operations are subject and the breach of which would have a
material adverse effect on the Company.
Article III
Representations, Covenants, and Warranties of Lerner
As an inducement to, and to obtain the reliance of the Company, Lerner
represents and warrants as follows:
3.1 Binding Agreement. This Agreement is the legal, valid, and binding
obligation of Lerner enforceable in accordance with its terms.
3.2 Third-Party Consents. None of the contracts, agreements, leases, or
other commitments, written or oral, to which Lerner is a party or to which any
of her properties or assets are subject require the consent of any other party
in order to consummate the transactions herein contemplated, except where the
failure to obtain such consent would not have a material adverse effect on the
transactions contemplated herein. No authorization, approval, consent, or order
of, or registration, declaration, or filing with, any court or other
governmental body is required in connection with the execution and delivery by
Lerner of this Agreement and the consummation by Lerner of the transactions
contemplated hereby.
3.3 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated hereby, will not result in
the breach of any term or provision of, constitute an event of default under, or
require the consent or approval of any third-party pursuant to, any material
contract, agreement, or instrument to which Lerner is a party or to which any of
her properties or assets are subject.
3.4 Information. The information concerning Lerner set forth in this
Agreement is complete and accurate in all material respects and does not contain
any untrue statement of a material fact or omit to state a material fact
required to make the statements made, in light of the circumstances under which
they were made, not misleading.
Article IV
Special Covenants
4.1 Indemnification by Lerner. Lerner agrees to hold harmless the Company
and its directors and officers, and each person, if any, who controls the
Company within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), from and against any and all losses, claims, damages,
expenses, liabilities, or actions to which any of them may become subject under
applicable law (including the Securities Act and the Exchange Act) and will
reimburse them for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any claims or actions, whether or not
resulting in liability, insofar as such losses, claims, damages, expenses,
liabilities, or actions arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any application or
statement filed with a governmental body or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary in order to make the statements therein not
misleading, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished in writing by Lerner
expressly for use therein. Lerner agrees at any time upon the request of the
Company to furnish to it a written letter or statement confirming the accuracy
of the information with respect to Lerner contained in any report or other
application or statement referred to in this Article IV, or in any draft of any
such documents, and confirming that the information with respect to Lerner
contained in such document or draft was furnished by Lerner, indicating the
inaccuracies or omissions contained in such document or draft or indicating the
information not furnished by Lerner expressly for use therein. The indemnity
agreement contained in this section 4.1 shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of the Company
and shall survive the consummation of the transactions contemplated by this
Agreement.
4.2 Indemnification by the Company. The Company will indemnify and hold
harmless Lerner from and against any and all losses, claims, damages, expenses,
liabilities, or actions to which she may become subject under applicable law
(including the Securities Act and the Exchange Act) and will reimburse her for
any legal or other expenses reasonably incurred by her in connection with
investigating or defending any claims or actions, whether or not resulting in
liability, insofar as such losses, claims, damages, expenses, liabilities, or
actions arise out of or are based upon any breach of this Agreement or any
untrue statement or alleged untrue statement of a material fact contained in any
application or statement filed with a governmental body or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary in order to make the statements
therein not misleading, but only insofar as any such statement or omission was
made in reliance upon and in conformity with information furnished in writing by
the Company expressly for use therein. The Company agrees at any time upon the
request of Lerner to furnish to her a written letter or statement confirming the
accuracy of the information with respect to the Company contained in any report
or other application or statement referred to in this Article IV, or in any
draft of any such document, and confirming that the information with respect to
the Company contained in such document or draft was furnished by the Company,
indicating the inaccuracies or omissions contained in such document or draft or
indicating the information not furnished by the Company expressly for use
therein. The indemnity agreement contained in this section 4.2 shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of Lerner and shall survive the consummation of the transactions
contemplated by this Agreement.
4.3 The Acquisition of Purchased Stock. The consummation of this
Agreement and the issuance of $10.75 Warrants to Lerner contemplated herein and
the issuance of Common Stock on the exercise of the Outstanding Warrants
constitutes the offer and sale of securities as those terms are defined under
the Securities Act and applicable state statutes. Such transactions shall be
consummated in reliance on certain exemptions from the registration requirements
of federal and state securities laws, which depend, among other items, on the
circumstances under which such securities are acquired.
(a) In order to provide documentation for reliance upon such
exemptions, Lerner makes the following representations and warranties:
(i) Lerner acknowledges that neither the SEC nor the securities
commission of any state or other federal agency has made any
determination as to the merits of acquiring the Warrants or the shares
of Common Stock issuable on exercise of the Warrants, and that this
transaction involves certain risks.
(ii) Lerner has received and read this Agreement and understand
the risks related to the consummation of the transactions herein
contemplated.
(iii) Lerner has such knowledge and experience in business
and financial matters that she is capable of evaluating the Company
and its business operations.
(iv) Lerner has adequate means of providing for her current needs
and possible personal contingencies and have no need now, and
anticipates no need in the foreseeable future, to sell any of the
Warrants or the shares of Common Stock issuable on exercise of the
Warrants. Lerner is able to bear the economic risks of this
investment, and, consequently, without limiting the generality of the
foregoing, is able to hold the Warrants and the shares of Common Stock
issuable on exercise of the Warrants for an indefinite period of time,
and has a sufficient net worth to sustain a loss of the entire
investment, in the event such loss should occur.
(v) Lerner has been provided with all information contained in
the Company's annual report on Form 10-K for the year ended June 30,
1996, and all subsequent interim reports filed by the Company with the
Securities and Exchange Commission. Lerner has personally met with
the officers and directors of the Company and has investigated the
intellectual property assets of the Company. Lerner and her
representatives have been given the opportunity to meet with and ask
questions of the officers and directors of the Company and to obtain
any additional information they consider material to the acquisition
of the Warrants and the shares of Common Stock issuable on exercise of
the Warrants.
(vi) Lerner is acquiring the Warrants and the shares of Common
Stock issuable on exercise of the Warrants for her own account and not
for resale to others.
(vii) Lerner confirms that she is an "accredited investor" as
defined under rule 501 of regulation D promulgated under the
Securities Act. Lerner confirms that her individual net worth, or
joint net worth with her spouse, at the time of her purchase exceeds
$1,000,000, or that she had an individual income in excess of $200,000
in each of the two most recent years or joint income with her spouse
in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year.
(viii) Lerner is a resident of New York.
(ix) Lerner understands that none of the Warrants or the shares
of Common Stock issuable on exercise of the Warrants has been
registered, but are being acquired by reason of a specific exemption
under the Securities Act as well as under certain state statutes for
transactions by an issuer not involving any public offering and that
any disposition of the Warrants and the shares of Common Stock
issuable on exercise of the Warrants may, under certain circumstances,
be inconsistent with this exemption and may make the holder an
"underwriter" within the meaning of the Securities Act. Lerner
further acknowledges that the Warrants and the shares of Common Stock
issuable on exercise of the Warrants must be held and may not be sold,
transferred, or otherwise disposed of for value unless they are
subsequently registered under the Securities Act or an exemption from
such registration is available; the Company is under no obligation to
register the Warrants or the shares of Common Stock issuable on
exercise of the Warrants under the Securities Act or under section 12
of the Exchange Act, except as provided in this Agreement or as may be
expressly agreed to by it in writing; if rule 144 is available, and no
assurance is given that it will be, initially only routine sales of
the Warrants and the shares of Common Stock issuable on exercise of
the Warrants in limited amounts can be made in reliance on rule 144 in
accordance with the terms and conditions of that rule; the Company is
under no obligation to the undersigned to make rule 144 available,
except as may be expressly agreed to by it in writing; in the event
rule 144 is not available, compliance with regulation A or some other
exemption may be required before any holder can sell, transfer, or
otherwise dispose of the Warrants or the shares of Common Stock
issuable on exercise of the Warrants without registration under the
Securities Act; the Company's registrar and transfer agent will
maintain a stop transfer order against the registration of transfer of
the Warrants and the shares of Common Stock issuable on exercise of
the Warrants; and the certificate(s) representing the Warrants and the
shares of Common Stock issuable on exercise of the Warrants will bear
a legend in substantially the following form so restricting the sale
of the Warrants and the shares of Common Stock issuable on exercise of
the Warrants:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN
THE MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES
ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLYING WITH RULE
144 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION OR OTHER
COMPLIANCE UNDER THE SECURITIES ACT.
(b) In order to more fully document reliance on the exemptions as
provided herein, Lerner shall execute and deliver to the Company such
further letters of representation, acknowledgment, suitability, or the
like, as the Company and its counsel may reasonably request in connection
with reliance on exemptions from registration under such securities laws.
(c) The parties to this Agreement acknowledge that the basis for
relying on exemptions from registration or qualification are factual,
depending on the conduct of the various parties, and that no legal opinion
or other assurance will be required or given to the effect that the
transactions contemplated hereby are in fact exempt from registration or
qualification.
Article V
Registration Rights
5.1 Registration of Common Stock. On or before April 30, 1997, the
Company shall prepare and file with the Securities and Exchange Commission (the
"SEC"), a registration statement (the "Registration Statement") that includes
resale of the shares of Common Stock issuable on exercise of the Outstanding
Warrants and the $10.75 Warrants subject to this Agreement. Thereafter, the
Company shall use its best efforts to cause such Registration Statement to
become effective as soon as is practicably possible and to keep such
Registration Statement effective as provided herein. The Company further agrees
to:
(a) Prepare and file with the SEC such amendments and post-effective
amendments to the New Registration Statement as may be necessary to keep
the New Registration Statement effective for a period of not less than two
(2) years from the date of exercise of the $10.75 Warrants, or such shorter
period which will terminate when all securities covered by such
Registration Statement have been sold or withdrawn; cause the prospectus
which is part of the Registration Statement to be supplemented by any
required prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act applicable to it with respect to the disposition of all
securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the
sellers thereof set forth in such Registration Statement or supplement to
the prospectus;
(b) Notify any holder of Common Stock covered by the Registration
Statement (the "Selling Shareholders") when a prospectus is required to be
delivered under the Securities Act, when the Company becomes aware of the
happening of any event as a result of which the prospectus included in such
Registration Statement (as then in effect) contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein (in the case of the prospectus or any preliminary
prospectus, in light of the circumstances under which they were made) not
misleading and, as promptly as practicable thereafter, prepare and file
with the SEC and furnish to Selling Shareholders a supplement or amendment
to such prospectus so that, as thereafter delivered to the purchasers of
such securities, such prospectus will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(c) Enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
securities;
(d) Use its best efforts to cause all securities of Selling
Shareholders included in such Registration Statement to be listed, by the
date of the first sale of securities pursuant to such Registration
Statement, on each securities or trading exchange on which the Company's
securities of the same class are then listed or proposed to be listed, if
any;
(e) On or prior to the date on which the Registration Statement is
declare effective, use its best efforts to register or qualify, and
cooperate with Selling Shareholders, the underwriter or underwriters, if
any, and their counsel, in connection with the registration or
qualification of, the securities of Selling Shareholders covered by the
Registration Statement for offer and sale under the securities or blue sky
laws of each state and other jurisdiction of the United States as Selling
Shareholders or the underwriter reasonably requests in writing, to use its
best efforts to keep each such registration or qualification effective,
including through new filings, or amendment or renewals, during the period
such Registration Statement is required to be keep effective and to do any
and all other acts or things necessary or advisable to enable the
disposition in all such jurisdictions of the securities of Selling
Shareholders covered by the New Registration Statement; provided that, the
Company will not be required to (1) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this paragraph (e), (2) consent to general service of process in any such
jurisdiction, or (3) subject itself to general taxation in any such
jurisdiction;
(f) Cooperate with Selling Shareholders and the managing underwriter
or underwriters, if any, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legends) representing
securities to be sold by Selling Shareholders under the New Registration
Statement, and enable such securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if
any, or Selling Shareholders may request; and
(g) Use it best efforts to cause the securities of Selling
Shareholders covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the
United States as may be necessary to enable Selling Shareholders or the
underwriter or underwriters, if any, to consummate the disposition of such
securities.
5.2 Cooperation by Lerner.
(a) Lerner shall furnish to the Company in writing such information
and affidavits as the Company may reasonably require in connection with any
registration, qualification or compliance with respect to such securities.
It shall be a condition precedent to the obligations of the Company to take
any action pursuant to this Agreement with respect to the securities of any
Selling Shareholder that such Selling Shareholder shall furnish to the
Company such information regarding the Selling Shareholder, the securities
to be registered and other securities in the Company held, and the intended
method of disposition of such securities as shall be required to effect the
registration of such securities.
(b) By exercising her Warrants, Lerner shall be deemed to have
confirmed at the time of such exercise the continuing accuracy of the
information respecting her status as an accredited investor and the
suitability of an investment in the Common Stock for her that is contained
herein, all except as she may then advise the Company in writing. The
Company may also require, as a condition precedent to exercise, that Lerner
complete and deliver to the Company a suitability letter containing
representations and warranties regarding suitability of the investment of
like tenor to those contained herein.
(c) Lerner, upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph (b) of section
5.2, will forthwith discontinue disposition of the securities until her
receipt of copies of the supplemented or amended prospectus contemplated by
paragraph (b) of section 5.2 or until she is advised in writing (the
"Advice") by the Company that the use of the prospectus may be resumed, and
has received copies of any additional or supplemental filings which are
incorporated by reference in the prospectus, and, if so directed by the
Company, Lerner will, or will request the managing underwriter or
underwriters, if any, to, deliver to the Company all copies, other than
permanent file copies then in her possession, of the prospectus covering
such securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time period mentioned in
paragraph (a) of section 5.2 shall be extended by the number of days during
the period from and including the date of the giving of such notice to and
including the date when Lerner shall have received the copies of the
supplemented or amended prospectus contemplated by paragraph (b) of section
5.2 hereof or the Advice.
(d) At the end of any period during which the Company is obligated to
keep any Registration Statement current and effective (and any required
extensions), Lerner shall discontinue sales of securities pursuant to such
Registration Statement upon receipt of notice from the Company of its
intention to remove from registration the securities covered by such
Registration Statement which remain unsold, and Lerner shall notify the
Company of the number of securities registered which remain unsold promptly
after receipt of such notice from the Company.
(e) Lerner acknowledges that the registration of the resale of the
securities or the availability of an exemption from registration in certain
states may impose certain limitations and conditions on the manner and
nature of such sales. The Company shall advise Lerner in writing of such
registration or exemption and the related limitations and conditions from
time to time. Lerner shall be solely responsible for her own compliance
with such limitations and conditions.
5.3 Holdback Agreement. Lerner, if requested by the managing underwriter
or underwriters for any underwritten, registered offering of the securities of
the Company, agrees not to effect any public sale or distribution of securities,
including a sale pursuant to Rule 144 (or any similar provision then in force)
under the Securities Act, during the 15 days prior to, and during the 120-day
period commencing on the effective date of such registration (except as part of
such registration). In the event Lerner is prohibited from effecting a sale of
securities pursuant to this section 5.5, the time period in paragraph (a) of
section 5.2 shall be extended by the number of days Lerner is so prohibited.
5.4 Registration and Selling Expenses. All of the costs and expenses of
registration provided for herein will be borne by the Company, including the
fees and expenses of the counsel and accountants for the Company (including the
expenses of any special audit and "cold comfort" letters required by or incident
to such performance), and all other costs and expenses of the Company incident
to the preparation, printing, and filing under the Securities Act of any
registration statement (and all amendments and supplements thereto) and
furnishing copies thereof and of the prospectus included therein, and the costs
and expenses incurred by the Company in connection with the qualification of the
Warrants and shares of Common Stock received on exercise of Warrants under the
state securities or blue sky laws of various jurisdictions; provided that, the
Company shall not bear the costs and expenses of Lerner comprising underwriters'
commissions, brokerage fees, transfer taxes, or the fees and expenses of any
counsel, accountant, or other representative retained by Lerner.
5.5 Rule 144. The Company agrees that it will use its best efforts to
file in a timely manner all reports required to be filed by it pursuant to the
Exchange Act and, at any time and upon request of Lerner, will furnish her with
such information generated by the Company in the ordinary course of business as
may be reasonably necessary to enable her to effect sales of Common Stock
received on exercise of Warrants without registration pursuant to Rule 144 under
the Securities Act. Notwithstanding the foregoing, the Company may deregister
any class of its securities under section 12 of the Exchange Act or suspend its
duty to file reports with respect to any class of its securities pursuant to
section 15(d) of the Exchange Act if it is then permitted to do so pursuant to
the Exchange Act and the rules and regulations thereunder.
5.6 Participation in Underwritten Registrations. Lerner may not
participate in any underwritten piggyback registration in which she chooses to
have stock included unless Lerner (a) agrees to sell shares of Common Stock
received on exercise of Warrants on the basis provided in any underwriting
arrangements approved by the Company and the underwriter, and (b) completes and
executes all questionnaires, powers of attorney, underwriting agreements and
other documents customarily required under the terms of such underwriting
arrangements.
Article VI
Miscellaneous
6.1 No Brokers. Lerner and the Company agree that no third person has in
any way brought the parties together or been instrumental in the negotiation,
execution, or consummation of this Agreement. Lerner and the Company agree to
indemnify the other against any claim by any third person for any commission,
brokerage, finder's fee, or other payment with respect to this Agreement or the
transactions contemplated hereby based upon any alleged agreement or
understanding between such party and such third person, whether expressed or
implied, arising from the actions of such party. The covenants set forth in
this section 6.1 shall survive the date hereof and the consummation of the
transactions herein contemplated.
6.2 Governing Law. This Agreement shall in all respects, including all
matters of construction, validity, and performance, be governed by, and
construed and enforced in accordance with, the laws of the state of Utah
applicable to contracts entered into in that state between citizens of that
state and to be performed wholly within that state without reference to any
rules governing conflicts of laws
6.3 Notices. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:
If to the Company, to: Larson Davis Incorporated
Attn.: Brian G. Larson, President
1681 West 820 North
Provo, Utah 84601
Facsimile Transmission: (801) 375-0182
Confirmation: (801) 375-0177
With copies to: Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Facsimile Transmission: (801) 359-3954
Confirmation: (801) 531-7090
If to Lerner, to: Ms. Connie Lerner
c/o Broad Capital Associates, Inc.
152 West 57th Street, 54th Floor
New York, New York 10019
Facsimile Transmission: (212) 581-0002
Confirmation: (212) 581-0500
With copies to: Michael Solovay, Esq.
Solovay Marshall & Edlin
845 Third Avenue
New York, New York 10022
Facsimile Transmission: (212) 355-4608
Confirmation: (212) 752-1000
or such other addresses and facsimile numbers as shall be furnished in writing
by any party in the manner for giving notices hereunder, and any such notice,
demand, request, or other communication shall be deemed to have been given as of
the date personally delivered or on the first business day after a legible copy
sent by facsimile transmission is received, three days after the date mailed by
registered or certified mail, or on the first business day after the date sent
by overnight delivery.
6.4 Attorneys' Fees. In the event that any party institutes and prevails
in any action or suit to enforce this Agreement or to secure relief from any
default hereunder or breach hereof, the defaulting or breaching party or parties
shall reimburse the nonbreaching party or parties for all costs, including
reasonable attorneys' fees, incurred in connection therewith and in enforcing or
collecting any judgment rendered therein.
6.5 Best Knowledge. Whenever any representation is made to the "best
knowledge" of any party, it shall be deemed to be a representation that such
party, or an officer or director of such party, after reasonable investigation,
does not have any current actual knowledge that would make such representation
untrue.
6.6 Entire Agreement. This Agreement, together with the documents to be
delivered pursuant hereto, represents the entire agreement between the parties
relating to the subject matter hereof. To the extent inconsistent therewith,
this Agreement supersedes all earlier agreements governing the Outstanding
Warrants, including the Agreement to Issue Warrants between the parties dated
May 29, 1996, as amended, and the warrant certificates representing the
Outstanding Warrants. There are no other courses of dealing, understandings,
agreements, representations, or warranties, written or oral, except as set forth
herein.
6.7 Survival; Termination. The representations, warranties, and covenants
of the respective parties as set forth in this Agreement shall survive the
closing and consummation of the transactions contemplated by this Agreement for
a period of two years from the date of this Agreement. The Company's cumulative
liability to Lerner for breaches of this Agreement shall not exceed the
aggregate exercise price of the Warrants covered hereby.
6.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
6.9 Amendment or Waiver. Every right and remedy provided herein shall be
cumulative with every other right and remedy, whether conferred herein, at law,
or in equity, and may be enforced concurrently herewith, and no waiver by any
party of the performance of any obligation by the other shall be construed as a
waiver of the same or any other default then, theretofore, or thereafter
occurring or existing. This Agreement may be amended by a writing signed by all
parties hereto, with respect to any of the terms contained herein, and any term
or condition of this Agreement may be waived or the time for performance thereof
may be extended by a writing signed by the party or parties for whose benefit
the provision is intended.
6.10 Third-Party Beneficiaries. This Agreement is solely between the
parties hereto and no director, officer, stockholder, employee, agent,
independent contractor, or any other person or entity shall be deemed to be a
third-party beneficiary of this Agreement.
6.11 No Public Announcement. None of the parties to this Agreement shall,
without the approval of each other party, make any press release or other public
announcement concerning the transactions contemplated by this Agreement without
first providing a copy of such press release or public announcement to the other
parties to this Agreement at least five days prior to release. Nothing
contained herein shall prohibit any party from making any pubic disclosure or
announcement which is required by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
The Company:
LARSON DAVIS INCORPORATED
By /s/ Brian G. Larson
Brian G. Larson, President
Lerner:
/s/ Connie Lerner
Connie Lerner
Address: 152 West 57th Street
New York, New York 10019
Exhibit 11
Larson Davis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
EARNINGS (LOSS) PER SHARE CALCULATION
Year ended June 30,
Six months ended -----------------------------------------------
December 31, 1996 1996 1995 1994
----------------- ----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) from continuing
operations $(1,643,920) $(1,706,248) $ 458,511 $ (441,236)
Dividends on preferred
stock (22,500) (48,750) - -
----------- ----------- ----------- -----------
Income (loss) from continuing
operations applicable to
common stock (1,666,420) (1,754,998) 458,511 (441,236)
Loss from discontinued
operations - - (770,128) (1,913,907)
Cumulative effect of change in
accounting principle - - - 486,992
----------- ----------- ----------- -----------
Net loss applicable to common
stock $(1,666,420) $(1,754,998) $ (311,617) $(1,868,151)
=========== =========== =========== ===========
Shares:
Common shares outstanding
during the entire period 10,258,406 6,559,479 5,827,249 5,413,127
Weighted average common
shares issued during the
period 152,414 1,579,243 273,743 70,270
----------- ----------- ----------- -----------
Weighted average common
shares outstanding during
the period 10,410,820 8,138,722 6,100,992 5,483,397
Dilutive effect of common stock
equivalents under stock
warrants and options - 1,178,575 126,715 340,948
----------- ----------- ----------- -----------
Weighted average common and
dilutive common equivalent
shares outstanding 10,410,820 9,317,297 6,227,707 5,824,345
=========== =========== =========== ===========
Earnings (loss) per common share:
Continuing operations $ (0.16) $ (0.19) $ 0.07 $ (0.08)
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>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated August
4, 1995, relating to the June 30, 1995, financial statements of Larson Davis
incorporated, appearing in the annual report of Larson Davis incorporated on
Form 10-K 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 LarsonoDavis Incorporated included in the Annual Report
of LarsonoDavis Incorporated on Form 10-K for the six months ended December 31,
1996. We hereby consent to the incorporation by reference of said report in the
Registration Statements of LarsonoDavis 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996, AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTH TRANSITION
PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,696,542
<SECURITIES> 0
<RECEIVABLES> 2,638,582
<ALLOWANCES> (40,000)
<INVENTORY> 4,096,445
<CURRENT-ASSETS> 9,521,665
<PP&E> 3,965,503
<DEPRECIATION> (2,150,048)
<TOTAL-ASSETS> 19,906,521
<CURRENT-LIABILITIES> 2,951,754
<BONDS> 0
<COMMON> 10,718
0
200
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,906,521
<SALES> 4,889,280
<TOTAL-REVENUES> 4,889,280
<CGS> 2,177,304
<TOTAL-COSTS> 6,446,858
<OTHER-EXPENSES> 8,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,440
<INCOME-PRETAX> (1,643,920)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,643,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,643,920)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
