UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-17020
Larson Davis Incorporated
(Exact name of registrant as specified in its charter)
Nevada 87-0429944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1681 West 820 North
Provo, Utah 84601
(Address of principal executive offices) (Zip Code)
(801) 375-0177
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal
year, if changed since last report)
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 12, 1997, the Issuer had 11,652,714 shares of its common
stock, par value $0.001 per share, issued and outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Larson Davis Incorporated (the "Company") has included the consolidated
balance sheets of the Company and its subsidiaries as of June 30, 1997
(unaudited), and December 31, 1996 (the end of the Company's transition period),
and unaudited consolidated statements of operations for the three and six months
ended June 30, 1997 and 1996, and unaudited consolidated statements of cash
flows for the six months ended June 30, 1997 and 1996, together with unaudited
condensed notes thereto. In the opinion of management of the Company, the
financial statements reflect all adjustments, all of which are normal recurring
adjustments, necessary to fairly present the financial condition, results of
operations, and cash flows of the Company for the interim periods presented.
The financial statements included in this report on Form 10-Q should be read in
conjunction with the audited financial statements of the Company and the notes
thereto included in the annual report of the Company on Form 10-KSB for the year
ended June 30, 1996, and the report of the Company on Form 10-K for the
six month transition period ended December 31, 1996.
LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- --------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,191,467 $ 2,696,542
Trade accounts receivable, net of
allowance for doubtful accounts 2,534,431 2,598,582
Inventories 4,008,291 4,096,445
Other current assets 98,884 130,096
-------------- --------------
Total current assets 9,833,073 9,521,665
Property and equipment, net of
accumulated depreciation
and amortization 2,277,817 1,815,455
Assets under capital lease obligations,
net of accumulated amortization 828,614 613,675
Long-term contractual arrangement, net
of accumulated cost recoveries 2,756,784 2,872,014
Intangible assets, net of accumulated
amortization 4,960,255 5,083,712
Note receivable from officer 69,375 -
-------------- --------------
$ 20,725,918 $ 19,906,521
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
<S> <C> <C>
Current liabilities:
Line of credit $ 805,904 $ 1,033,018
Accounts payable 468,135 902,926
Accrued liabilities 693,418 764,393
Current maturities of long-term debt 49,025 91,902
Current maturities of capital lease obligations 215,679 159,515
-------------- --------------
Total current liabilities 2,232,161 2,951,754
Long-term debt, less current maturities 741,368 759,709
Capital lease obligations, less current maturities 702,687 523,185
-------------- --------------
Total liabilities 3,676,216 4,234,648
-------------- --------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.001 par value; authorized
10,000,000 shares; issued and outstanding
zero shares at June 30, 1997, and 200,000
shares at December 31, 1996 - 200
Common stock, $0.001 par value; authorized
290,000,000 shares; issued and outstanding
11,520,116 shares at June 30, 1997, and
10,717,790 shares at December 31, 1996 11,520 10,718
Additional paid-in capital 24,228,725 19,999,375
Accumulated deficit (7,256,327) (4,418,780)
Cumulative foreign currency translation
adjustment 65,784 80,360
-------------- --------------
Total stockholders' equity 17,049,702 15,671,873
-------------- --------------
$ 20,725,918 $ 19,906,521
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 2,147,647 $ 1,785,904 $ 4,352,345 $ 4,103,334
------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of sales 1,158,085 1,186,457 2,366,452 2,292,048
Research and development 953,541 739,187 1,900,752 1,320,794
Selling, general, and administrative 1,500,499 1,201,906 2,862,524 2,109,078
------------ ------------ ------------ ------------
3,612,125 3,127,550 7,129,728 5,721,920
------------ ------------ ------------ ------------
Operating loss (1,464,478) (1,341,646) (2,777,383) (1,618,586)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 48,814 12,320 92,813 12,320
Interest expense (67,705) (152,279) (142,437) (254,045)
Other, net 3,901 (53,727) 4,460 (65,868)
------------ ------------ ------------ ------------
(14,990) (193,686) (45,164) (307,593)
------------ ------------ ------------ ------------
Loss before income taxes (1,479,468) (1,535,332) (2,822,547) (1,926,179)
Income tax expense - - - -
------------ ------------ ------------ ------------
Net loss $ (1,479,468) $ (1,535,332) $ (2,822,547) $ (1,926,179)
============ ============ ============ ============
Loss per common share:
Primary $ (0.13) $ (0.17) $ (0.25) $ (0.23)
Fully diluted (0.13) (0.17) (0.25) (0.23)
Weighted average common and common
equivalent shares:
Primary 11,418,781 9,257,953 11,267,295 8,649,572
Fully diluted 11,418,781 9,257,953 11,267,295 8,649,572
</TABLE>
The accompanying notes are an integral part of these financial statements.
LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
-------------- --------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities
Net loss $ (2,822,547) $ (1,926,179)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 258,351 275,560
Amortization 307,017 164,835
Stock issued in payment of compensation 43,698 59,640
Loss (gain) on sale of property and equipment (4,460) 37,604
Changes in assets and liabilities:
Trade accounts receivable 64,151 168,096
Inventories 88,154 14,629
Other current assets 31,212 (345,556)
Accounts payable (434,791) (39,925)
Accrued liabilities (70,975) 374,195
-------------- --------------
Net cash used in operating activities (2,540,190) (1,217,101)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment (759,513) (424,904)
Proceeds from sale of assets 43,260 17,700
Payments for intangible assets (51,475) (365,791)
Collection of loans to officers - 81,000
Proceeds from long-term contractual arrangement 115,230 195,648
-------------- --------------
Net cash used in investing activities (652,498) (496,347)
-------------- --------------
Cash flows from financing activities
Net change in lines of credit (227,114) (368,341)
NetProceeds from long-term obligations 25,486 -
Principal payments of long-term debt (86,704) (790,843)
Net proceeds from issuances of common stock and
exercise of options and warrants 4,116,879 6,548,086
Principal payments on capital lease obligations (111,358) (69,197)
Preferred dividends (15,000) (22,500)
-------------- --------------
Net cash provided by financing activities 3,702,189 5,297,205
-------------- --------------
Effect of exchange rates on cash (14,576) 9,659
-------------- --------------
Net increase in cash and cash equivalents 494,925 3,593,416
Cash and cash equivalents at beginning of period 2,696,542 329,244
-------------- --------------
Cash and cash equivalents at end of period $ 3,191,467 $ 3,922,660
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
LARSON DAVIS INCORPORATED AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(A) Basis of Presentation
The accompanying unaudited consolidated financial statements of LarsonoDavis
Incorporated and Subsidiaries (the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnote disclosures required by generally accepted accounting principles
for complete financial statements. These financial statements and footnote
disclosures should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's annual
report on Form 10-KSB for the year ended June 30, 1996, and report on Form 10-K
for the six month transition period ended December 31, 1996. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
fairly present the Company's consolidated financial position as of June 30,
1997, its consolidated results of operations for the three months ended June 30,
1997 and 1996, and its consolidated results of operations and cash flows for the
six months ended June 30, 1997 and 1996. The results of operations for the
three months and six months ended June 30, 1997, may not be indicative of the
results that may be expected for the year ending December 31, 1997.
(B) Earnings (Loss) Per Common Share
Earnings (loss) per common share is computed by dividing net income (loss) by
the weighted average common shares outstanding during the period, including
common equivalent shares (if dilutive). Common equivalent shares include stock
options and warrants. Net income used in this calculation is decreased (net
loss is increased) by the dividends paid to preferred stockholders during the
periods the preferred stock was outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS No. 128).
SFAS No. 128 establishes new standards for computing and presenting earnings per
share (EPS). SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. Upon adoption of SFAS No. 128, restatement of all
prior period EPS data will be required. SFAS No. 128 replaces the presentation
of primary and fully diluted EPS with a presentation of basic and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects potential dilution and is
calculated similarly to fully diluted EPS under current accounting standards.
Under SFAS No. 128, basic and diluted loss per share for the Company for the
three months and the six months ended June 30, 1997 and 1996, would have been
the same as primary and fully diluted loss per share presented in the
accompanying financial statements.
(C) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw materials $ 1,239,758 $ 1,276,413
Work in process 1,177,147 1,398,229
Finished goods 1,591,386 1,421,803
------------- -------------
$ 4,008,291 $ 4,096,445
============= =============
</TABLE>
(D) 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. As of December 31, 1996,
warrants to purchase 2,100,167 shares of common stock at $6.25 per share were
outstanding.
In January 1997, the board of directors approved a reduction in the exercise
price, from $6.25 to $5.30 per share, of certain of these warrants related to
1,715,832 shares of common stock. In consideration of this reduction, the
holders of the warrants agreed to the early exercise of the warrants which
were otherwise permitted to be exercised until November 1, 1998. The holders
agreed to exercise a portion of the warrants on or before January 31, 1997,
which exercise occurred and resulted in the issuance of 651,103 shares and gross
proceeds to the Company of approximately $4,069,000. This initial issuance was
priced at $6.25 per share because the reduced pricing is contingent upon the
timely exercise of the warrants related to all 1,715,832 shares.
Initially, the remaining portion of the warrants were to be exercised by April
16, 1997, but the agreement has been amended to allow the exercise of the
remaining warrants until the date which is 90 days after the effective date of a
registration statement filed with the Securities and Exchange Commission to
permit the resale of the common stock issued on the exercise of the warrants.
That registration statement has been filed, is in the process of review by the
Staff of the Securities and Exchange Commission, and consequently is not yet
effective. If the remaining exercise occurs, it will result in the issuance of
an additional 1,064,729 shares of common stock and additional gross proceeds to
the Company of approximately $5,025,000. If these remaining warrants are
exercised, an aggregate of 1,715,832 shares will have been issued for aggregate
gross proceeds of approximately $9,094,000, resulting in an average exercise
price of $5.30 per share. In addition, under the terms of the agreement, the
Company will issue replacement warrants to acquire up to 1,715,832 shares of
common stock at an exercise price of $8.75 per share.
(E) Building Lease
In April 1997, the Company entered into a new lease agreement covering existing
and additional office and manufacturing space. The lease covers approximately
18,300 square feet of space, has an initial term through March 31, 1999, and
contains options to extend the lease for five additional one-year periods
thereafter. The rental payment under the lease is $13,730 per month and
increases by 2% on April 1, 1998, and, if extended, by 4% on April 1, 1999, and
each year thereafter.
(F) Preferred Stock
At December 31, 1996, the Company had 200,000 shares of preferred stock
outstanding. This preferred stock was converted, in accordance with the
governing provisions of the designation, into 58,842 shares of common stock
effective April 30, 1997.
(G) Stock Option Plan
In May 1997, the board of directors approved the 1997 Stock Option and Award
Plan (the "1997 Plan") that was subsequently approved by the shareholders in
June 1997. Under the 1997 Plan, the Company may grant options to acquire or
award up to 750,000 shares of common stock. The exercise prices and vesting
periods of options granted under the 1997 Plan are determined by the board of
directors at the time of grant.
(H) Subsequent Event
Effective July 1, 1997, the Company has entered into a Technical Information
Agreement and a Patent License Agreement with Lucent Technologies, Inc. (the
"Agreement"). Under the Agreement, the Company holds the sole rights, subject
to certain overall technology sharing agreements amongst Lucent Technologies,
AT&T, and NCR, to technologies related to the manufacture of particle analysis
systems and related rights to market such systems. Using the technology
licensed under the Agreements, coupled with other technology already owned or
licensed, the Company intends to develop and, if successful, to manufacture and
market a particle analysis mass spectrometer.
Under the Agreements, the Company is obligated to make an initial payment of
$200,000 for the rights granted thereunder. Additionally, the Company is
obligated to pay royalties equal to a percentage of the market value of items
sold pursuant to the Agreements, subject to a minimum annual royalty ranging
from $250,000 for the year ended June 30, 1999, to $600,000 for the year ended
June 30, 2003. The Agreements have an initial term of six years, although the
Company may effectively extend the Agreements thereafter by continuing to pay
the percentage royalties, subject to a minimum annual royalty of $600,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and related notes contained herein and in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and the audited consolidated financial statements
included in the Company's report on Form 10-KSB for the year ended June 30,
1996, and on Form 10-K for the six-month transition period ended December 31,
1996.
This report and other information made publicly available by the Company
from time to time may contain certain forward looking statements and other
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made concerning information
then currently available to management. Such statements reflect the views of
management of the Company at the time they are made and are not intended to be
accurate descriptions of the future. The discussion of the future business
prospects of the Company is subject to a number of risks and assumptions,
including the completion of commercial products within projected time frames,
the market acceptance of products to be developed, the ability of the Company to
successfully address technical and manufacturing problems in producing new
products, the ability of the Company to enter 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, the ability of the Company to successfully protect
and defend its intellectual rights, 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 in the forward looking statements. The Company does not intend to
update these forward looking statements, except as may occur in the regular
course of its periodic reporting obligations.
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 Corporation.
These technologies have placed the Company in a position to develop a number of
sophisticated analytical instruments in addition to its historical acoustic
and vibration business. The Company has also recently entered into a license
agreement with Lucent Technologies, Inc. (formerly Bell Labs) in which it
acquired the sole rights to technology developed by Lucent. (See discussion
under "RECENT DEVELOPMENTS," below.) The Company believes that it will be
able to develop a range of instruments based on the patented technology
acquired by it that will be technically superior to those currently being
offered, that will be on the cutting edge of certain emerging markets, or that
will address needs in certain industries in a more cost efficient manner.
In order to accomplish its goals, the Company initiated a research and
development plan designed to convert the underlying technologies into commercial
products. The Company currently has one commercial product based on these
acquisitions available, its time of flight mass spectrometer ("TOF 2000").
In addition, the Company continues to introduce acoustic and vibration
products and has made significant advances toward additional products.
However, there have been unanticipated delays in finalization of these
products. The Company experienced delays of several months to approximately
one year in the introduction of its DSP80 Series and its Model 814. The
Company does not currently expect to introduce its Model 824 and Jaguar
products, both of which were originally scheduled for the first quarter of
1997, until late 1997 or early 1998. The Company does not anticipate that
there will be a significant impact on its revenues until after these and
other products the Company is working on have been introduced and have
established market acceptance. While management of the Company continues
to believe that it can develop a range of superior products designed to
meet the needs in significant markets, the products currently being
developed by the Company are designed for sophisticated applications,
and there can be no assurance that the Company will be successful in its
development efforts or that alternative technologies may not be developed
by some other entity that provide a more advantageous solution to the needs
of the various industries targeted by the Company. If the Company is unable
to successfully develop the targeted products or the development of such
products continues to be delayed, the Company's ability to obtain the
necessary financing to continue its research and development program may
be adversely affected.
Sales of the Company's TOF 2000 have been increasing, resulting in
approximately $850,000 in revenues in the first six months of this year. The
Company current markets this product to the semi-conductor industry through SAES
Getters S.p.A. ("SAES"). Under the terms of the agreement, SAES is obligated to
sell a minimum of nine units in 1997 in order to maintain its exclusive rights,
a target that it is not anticipated to meet this year. Sales of the TOF 2000
through SAES have historically been hampered by the parties' inability to
mutually agree on acceptable performance standards for the instrumentation.
However, the most recent instruments shipped by the Company to SAES customers
were subject to a "burn-in" process and extensive testing and certification
at the factory before shipping under supervision of SAES. The Company believes
that this procedure resolved many of the open specification issues with SAES.
The Company currently anticipates that revenues from this product will be in
the range of $750,000 to $1,000,000 for the last six months of the year.
There can be no assurance that this goal will be met.
The Company is unable to fund its increased research, development, and
other activities from operations and has sought and obtained equity financing,
primarily from private placements to a small number of private investors, in
order to meet these costs. This capital has been and is currently being used
for various purposes, including increased research and development activities
and general operations. It is anticipated the Company will continue to
experience operating losses until new products are brought to market and begin
to generate significantly large enough sales to substantially increase the
Company's revenue. While the Company currently has adequate resources to
continue its development plans through the end of the fiscal year, it will
continue to be reliant on obtaining outside financing in 1998. There can be no
assurance as to the Company's ability to obtain such financing on terms
favorable to it, or on the timing of significant sales or as to the success of
the products that may ultimately permit the Company to meet its obligations from
operations. If the planned products prove unsuccessful, the Company may not be
able to recover its associated research and development costs, which could have
a significant material, adverse impact on the business and activities of the
Company.
RECENT DEVELOPMENTS
The Company has recently entered into a Technical Information Agreement and
a Patent License Agreement with Lucent Technologies, Inc. (the "Agreement").
Under the Agreement, the Company was granted certain rights to technologies
related to the manufacture of particle analysis systems and related rights to
market such systems. The Agreement has a term of six years, although the
Company is obligated to introduce a commercial particle analysis system which
incorporates the licensed technical information by August 1, 1998. Using the
technology licensed under the Agreement, coupled with other technology already
owned or licensed, the Company intends to develop and, if successful, to
manufacture and market a particle analysis mass spectrometer. This new market
for the Company is expected to include sales to entities involved in
pharmaceuticals, semiconductor, inorganic/organic chemicals, plastics,
glass/ceramics, process control, environmental testing, medical, military,
manufacturing, and quality assurance.
RESULTS OF OPERATIONS
Comparison of Three Months ended June 30, 1997, and 1996
Net Sales
Net sales for the three months ended June 30, 1997, and 1996, were
$2,147,647 and $1,785,904, respectively. This represents an overall increase of
$361,743, or 20.3%, for 1997 as compared to 1996. The increase is due to higher
unit sales for both the core acoustical product families and for the newer
Sensar chemical analysis products. The Company continues to experience
fluctuations in the sales of its chemical analysis products because revenues
from this source results from the sale of a relatively small number of high-
priced systems. As a result, the timing of the sale of a single system can have
a significant impact on the Company's quarterly revenue. The failure to receive
anticipated orders or delays in shipments in a particular quarter may cause
revenue to fall below the Company's expectations. At June 30, 1997, the Company
had orders for three chemical analysis systems, two of which were substantially
completed and awaiting final testing, customer training, and product acceptance
prior to shipment in the next quarter.
Cost of Sales
Cost of sales for the three months ended June 30, 1997, were $1,158,085, or
53.9% of net sales, compared to $1,186,457, or 66.4% of net sales for the three
months ended June 30, 1996. The decreased level in cost of sales as a
percentage of net sales is principally the result of the following factors.
First, the cost of materials, initial production costs and other related
manufacturing costs associated with production of the initial Sensar products
has decreased in 1997 compared to 1996. Management expects the cost of sales
as a percentage of net sales to further decline as 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.
Second, cost of sales as a percentage of net sales for the quarter ended
June 30, 1996, was higher due to the absorption of fixed costs by lower
than normal sales levels. Finally, in the quarter ended June 30, 1996,
the carrying cost of certain inventories was adjusted downward by
approximately $100,000 to better reflect the lower of cost or market.
This adjustment was charged to, and thereby increased, cost of sales in 1996.
Selling, General, and Administrative
Selling, general, and administrative expenses increased to $1,500,499, or
69.9% of net sales, for the three months ended June 30, 1997, compared to
$1,201,906, or 67.3% of net sales, for the three months ended June 30, 1996.
The increase in the dollar amount of selling, general, and administrative
expenses was principally due to several factors, including increased consulting,
travel, legal, and administrative costs associated with the pursuit of strategic
marketing and research alliances; training and implementation costs associated
with a new electronic data processing system; costs associated with holding the
shareholders' meeting (there was no shareholders' meeting in 1996), including
the preparation of the annual report and the solicitation of proxies; and
increased costs associated with other corporate and marketing activities. In
addition, the Company has incurred costs necessary to establish the
infrastructure to support its potential growth as new products are
commercialized. As product demand is achieved for products currently in
development, selling, general, and administrative expenses as a percentage of
net sales should decline, although no assurance can be made that the Company
will be successful in accomplishing such reduction. The Company does not
currently anticipate that revenues will increase significantly in the last six
months of 1997.
Research and Development
For the three months ended June 30, 1997, research and development costs
were $953,541, or 44.4% of net sales, compared to $739,187, or 41.4% of net
sales, for the three months ended June 30, 1996. The increase in the amount of
research and development over the prior period, as well as over historical
levels, is due to the Company's continuing commitment to the research and
development of new products from technologies acquired in recent years. The
increased expenses principally relate to the employment of additional scientists
and engineers with pertinent experience and education in chemistry, electrical
engineering, software development, and manufacturing production. The increased
costs also include higher expenses associated with materials and supplies used
in the development process and consultation with outside experts. It is
anticipated that research and development costs will continue to exceed
historical levels as a percentage of net sales at least until the development of
new products is completed and significant sales levels of the new products are
achieved.
Comparison of Six Months ended June 30, 1997, and 1996
Net Sales
Net sales for the six months ended June 30, 1997, and 1996, were $4,352,345
and $4,103,334, respectively. This represents an overall increase of $249,011,
or 6.1%, for 1997 as compared to 1996. The overall increase is the net
difference between a decrease in sales of approximately $122,000 in the
acoustical and vibration product families and an increase of approximately
$371,000 in revenue from the Sensar products. Sales of acoustical and vibration
products for the six months ended June 30, 1997, reflect decreases from last
year primarily due to the delayed introduction of certain new products. The
Company originally anticipated that these new acoustical products would be
available at the beginning of 1997. The introduction of the Company's Model 814
and DSP 80 Series products have only recently begun shipping and the
introduction of the Model 824 and associated options have been delayed and are
currently targeted for the fourth quarter of 1997. In the interim, sales of
the Company's prior products declined. Management expects that these recent
introductions and the introduction later this year, will cause acoustical
and vibration products sales to return to and exceed historical levels,
although no assurance can be made that such expectation will be realized.
As mentioned above, the sales attributed to the Company's Sensar products
have increased over last year comparative periods, although not to the levels
originally anticipated by the Company. Sales from this source were
approximately $850,000 for the six months ended June 30, 1997, and the Company
anticipates a slight increase in this amount for the second six months of fiscal
1997. Based on the foregoing, the Company does not currently believe its
revenues for the third and fourth quarter of 1997 will show a substantial
increase over the revenues of the first half of the year.
Cost of Sales
Cost of sales for the six months ended June 30, 1997, were $2,366,452, or
54.4% of net sales, compared to $2,292,048, or 55.9% of net sales for the six
months ended June 30, 1996. The decreased level in costs of sales as a
percentage of net sales is principally the result of two factors, as discussed
above. These factors are decreasing manufacturing costs associated with
production of the initial Sensar products and an inventory adjustment in 1996 to
better reflect the lower of cost or market.
Selling, General, and Administrative
Selling, general, and administrative expenses increased to $2,862,524, or
65.8% of net sales, for the six months ended June 30, 1997, compared to
$2,109,078, or 51.4% of net sales, for the six months ended June 30, 1996. As
discussed above, the increase in the dollar amount of selling, general, and
administrative expenses was principally due to several factors, including
increased costs associated with the pursuit of strategic marketing and research
alliances; costs associated with the implementation of a new electronic data
processing system; costs associated with holding the stockholders' meeting,
including the preparation of the annual report and proxies; and increased costs
associated with other corporate and marketing activities. In addition, the
Company has incurred costs necessary to establish the infrastructure to support
its potential growth as new products are commercialized. As product demand is
achieved for products currently in development, selling, general, and
administrative expenses as a percentage of net sales should decline in the
future, although no assurance can be made that the Company will be successful in
accomplishing such reduction.
Research and Development
For the six months ended June 30, 1997, research and development costs were
$1,900,752, or 43.7% of net sales, compared to $1,320,794, or 32.2% of net
sales, for the six months ended June 30, 1996. As described above, the increase
in the amount of research and development over the prior period, as well as over
historical levels, is due to the Company's continuing commitment to the research
and development of new products from technologies acquired in recent years. The
increased expenses principally relate to the employment of additional scientists
and engineers, costs associated with materials and supplies used in the
development process, and consultation with outside experts. It is anticipated
that research and development costs will continue to exceed historical levels as
a percentage of net sales at least until the development of new products is
completed and significant sales levels of the new products are achieved.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had total current assets of $9,833,073,
including cash and cash equivalents of $3,191,467. The Company had total
current liabilities of $2,232,161, resulting in working capital of $7,600,912
and a working capital ratio of 4.4 to 1. At June 30, 1997, the Company had
drawn $805,904 on its line of credit. The maximum limit on this line of credit
is $3,000,000, although the actual amount that the Company can borrow is
adjusted from time to time based on the amount of eligible accounts receivable
and inventories that secure the line of credit. The 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 technical violation of certain covenants,
the most significant of which relate to the maintenance of net worth and the
achievement of certain results of operations. The lender waived all violations
of these covenants through June 30, 1997. Subsequent to June 30, 1997, certain
loan covenants were amended, including those related to net worth and results
of operations, bringing the Company back into compliance with all loan
covenants. The loan covenants will be further revised at the end of the
calendar year. The Company expects this line of credit to continue to be
available to it, although it could be cancelled at any time that the Company
is out of compliance.
The Company has significant long-term assets, including intangible assets
totaling $4,960,255 related to product technology acquisition costs, license
rights, software development costs, and goodwill, as well as a long-term
contractual arrangement with a carrying value of $2,756,784. The intangible
assets are being amortized over estimated useful lives ranging from five to
fifteen years. The long-term contractual arrangement is being accounted for on
the cost-recovery method. On an ongoing basis, management reviews the valuation
and amortization periods of these assets to determine possible impairment or
changes in useful lives. Although management believes its estimates of useful
lives and realizability of long-term assets are reasonable, there is no
assurance that actual future results will not differ from current expectations.
In the event of such a change in expectation, the carrying value or amortization
period of the long-term assets would be adjusted which would affect the
Company's results of operations in the period in which such adjustment occurred.
The Company's primary source of cash for the six months ended June 30,
1997, was the issuance of common stock, principally resulting from the exercise
of stock warrants. The Company has relied on the sale of common stock as a
method to fund increases in working capital, operational losses, and research
and development efforts. During the six months ended June 30, 1997, net
proceeds from the issuance of common stock were $4,116,879. 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
additional gross proceeds of $7,426,610. 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 $8.75
per share. There is no obligation on the part of the holders of these rights to
exercise them, and the exercise will largely depend on the price of the
Company's common stock in the public trading market, as to which no assurance
can be given.
The Company's primary uses of cash for the six months ended June 30, 1997,
were funds used in operations of $2,540,190 and the purchase of property and
equipment of $759,513. Management expects that in the short-term, the primary
uses of cash will continue to be operations and the purchase of property and
equipment due to the continued research and development activities.
Additionally, the Company has recently entered into a Technical Information
Agreement and a Patent License Agreement requiring the payment of royalties and
fees over the next six years. Under this Agreement, the Company is obligated to
make an initial payment of $200,000 before August 31, 1997, for the rights
granted thereunder. Additionally, the Company is obligated to pay royalties
equal to a percentage of the market value of items sold pursuant to the
Agreements, subject to a minimum annual royalties ranging from $250,000 for the
year ended June 30, 1999, to $600,000 for the year ended June 30, 2003. The
Agreement have an initial term of six years, although the Company may
effectively extend the Agreements thereafter by continuing to pay the percentage
royalties, subject to a minimum annual royalty of $600,000.
Management believes that existing cash balances and borrowings available
under the line of credit will be adequate to meet the Company's estimated cash
requirements through the end of 1997. The Company intends to continue to fund
its short-term operating and capital requirements through equity financing,
principally through the exercise of stock warrants. As newly developed
products are commercialized and product demand is achieved, management believes
that its long-term operating and capital requirements will be funded
principally through cash generated from operations, supplemented as necessary
from equity or long-term debt financing.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an annual meeting of its shareholders on June 25, 1997, at
which management's nominees were elected to serve as directors of the Company
and the 1997 Stock Option and Award Plan, the 1997 Employee Stock Purchase Plan,
and the 1996 Director Stock Option Plan were approved. The specific results are
as follows:
Election of Directors
<TABLE>
<CAPTION>
Nominee Number of Votes For Number of Votes Withheld
- ----------------- ------------------- ------------------------
<S> <C> <C>
Brian G. Larson 9,593,820 65,053
Larry J. Davis 9,593,620 65,253
Dan J. Johnson 9,555,954 102,919
William E. Hosker 9,593,920 64,953
Gerard L. Seelig 9,591,020 67,853
</TABLE>
1997 Stock Option and Award Plan
For 5,031,664 Against 514,881 Abstain 79,763 Non-Votes 4,032,565
1997 Employee Stock Purchase Plan
For 5,363,286 Against 187,587 Abstain 75,435 Non-Votes 4,032,565
1996 Director Stock Option Plan
For 4,870,018 Against 678,859 Abstain 77,431 Non-Votes 4,032,565
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are included as part of this report:
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
<S> <C> <C>
1 (10) Technical Information Agreement and Exhibit to report
Patent License Agreement between on Form 10-Q for
Lucent Technologies, Inc., and the quarter ended
Larson Davis Incorporated, June 30, 1997
effective as of July 1, 1997
2 (10) Second Amendment to Agreement to Registration Statement
Issue Warrants to Congregation filed on Form S-3,
Ahavas Tzdokah Z'Chesed Exhibit 10, SEC File
dated June 5, 1997 No. 333-29923
3 (10) Second Amendment to Agreement to Registration Statement
Issue Warrants to Ezer Mzion filed on Form S-3,
Organization dated June 5, 1997 Exhibit 11, SEC File
No. 333-29923
4 (10) Second Amendment to Agreement to Registration Statement
Issue Warrants to Laura Huberfeld filed on Form S-3,
and Naomi Bodner dated June 5, 1997 Exhibit 12, SEC File
No. 333-29923
5 (10) Second Amendment to Agreement to Registration Statement
Issue Warrants to Connie Lerner filed on Form S-3,
dated June 5, 1997 Exhibit 13, SEC File
No. 333-29923
6 (27) Financial Data Schedule Exhibit to report
on Form 10-Q for
the quarter ended
June 30, 1997
</TABLE>
[FN]
*Incorporated by reference
REPORTS ON FORM 8-K
During the quarter ended June 30, 1997, the Company did not file a report
on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Larson Davis Incorporated
Dated: September 30, 1997 By /s/ Brian G. Larson
Brian G. Larson, President
(Duly Authorized Officer)
Dated: September 30, 1997 By /s/ Craig E. Allen
Craig E. Allen
(Principal Financial and
Accounting Officer)
