UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 October 13, 1998, the Issuer had 13,040,360 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 September 30, 1998
(unaudited), and December 31, 1997 (the end of the Company's most recently
completed fiscal year), and unaudited consolidated statements of operations for
the three and nine months ended September 30, 1998 and 1997, and unaudited
consolidated statements of cash flows for the nine months ended September 30,
1998 and 1997, 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-K for the year ended December 31, 1997.
LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,192,407 $ 1,212,473
Trade accounts receivable, net of
allowance for doubtful accounts 1,626,511 2,215,945
Inventories 2,146,822 2,631,562
Other current assets 46,962 100,460
------------- -------------
Total current assets 5,012,702 6,160,440
Property and equipment, net of
accumulated depreciation
and amortization 1,532,588 2,165,467
Assets under capital lease obligations,
net of accumulated amortization 221,808 681,576
Long-term contractual arrangement, net
of accumulated cost recoveries - 87,500
Intangible assets, net of accumulated
amortization 399,151 3,100,447
------------- -------------
$ 7,166,249 $ 12,195,430
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
<S> <C> <C>
Current liabilities:
Line of credit $ - $ 1,198,766
Accounts payable 458,483 1,080,624
Accrued liabilities 1,076,829 1,518,147
Current maturities of long-term debt 709,363 50,729
Current maturities of capital lease obligations 209,006 218,649
------------- -------------
Total current liabilities 2,453,681 4,066,915
Long-term debt, less current maturities 17,472 716,697
Capital lease obligations, less current maturities 126,093 558,815
------------- -------------
Total liabilities 2,597,246 5,342,427
------------- -------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.001 par value; authorized
10,000,000 shares; issued and outstanding
3,067 shares at September 30, 1998, and zero
shares at December 31, 1997 3 -
Common stock, $0.001 par value; authorized
290,000,000 shares; issued and outstanding
12,986,551 shares at September 30, 1998,
and 12,125,393 shares at December 31, 1997 12,987 12,125
Additional paid-in capital 30,708,272 26,097,332
Accumulated deficit (25,448,935) (19,251,591)
Notes receivable from exercise of options (774,684) (69,375)
Cumulative foreign currency translation
adjustment 71,360 64,512
------------- -------------
Total stockholders' equity 4,569,003 6,853,003
------------- -------------
$ 7,166,249 $ 12,195,430
============= =============
</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 September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 2,085,510 $ 2,320,405 $ 6,862,851 $ 6,672,750
------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of sales 1,067,263 1,125,664 3,746,842 3,492,116
Research and development 714,829 1,352,602 2,312,644 3,253,354
Selling, general, and administrative 1,057,197 1,322,051 3,285,793 4,184,575
Unusual charges 3,527,615 - 3,527,615 -
------------ ------------ ------------ ------------
6,366,904 3,800,317 12,872,894 10,930,045
------------ ------------ ------------ ------------
Operating loss (4,281,394) (1,479,912) (6,010,043) (4,257,295)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 32,745 31,189 110,032 124,002
Interest expense (28,199) (73,847) (116,165) (216,284)
Other, net (47,299) (2,968) (103,851) 1,492
------------ ------------ ------------ ------------
(42,753) (45,626) (109,984) (90,790)
------------ ------------ ------------ ------------
Loss before income taxes (4,324,147) (1,525,538) (6,120,027) (4,348,085)
Income tax expense - - - -
------------ ------------ ------------ ------------
Net loss $ (4,324,147) $ (1,525,538) $ (6,120,027) $ (4,348,085)
============ ============ ============ ============
Loss per common share:
Basic $ (0.34) $ (0.13) $ (0.49) $ (0.38)
Diluted (0.34) (0.13) (0.49) (0.38)
Weighted average common and common
equivalent shares:
Basic 12,780,784 11,610,518 12,560,991 11,382,960
Diluted 12,780,784 11,610,518 12,560,991 11,382,960
</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>
Nine months ended September 30,
--------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities
Net loss $ (6,120,027) $ (4,348,085)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 401,236 364,323
Amortization 443,706 508,923
Provision for inventory write downs 659,174 -
Provision for impairment losses 2,786,733 -
Stock issued in payment of compensation 148,313 43,698
Loss (gain) on sale of property and equipment 44,441 (3,818)
Changes in assets and liabilities:
Trade accounts receivable 631,897 90,424
Inventories (174,434) 207,671
Other current assets (111,328) (141,759)
Accounts payable (622,141) (344,797)
Accrued liabilities (518,635) 96,804
-------------- --------------
Net cash used in operating activities (2,431,065) (3,526,616)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment (162,101) (941,477)
Proceeds from sale of assets 173,933 42,679
Payments for intangible assets (20,179) (83,019)
Proceeds from long-term contractual arrangement 87,500 172,542
-------------- --------------
Net cash provided by (used in) investing
activities 79,153 (809,275)
-------------- --------------
Cash flows from financing activities
Net change in line of credit (1,198,766) 158,055
Proceeds from long-term obligations - 25,486
Principal payments of long-term debt (40,591) (98,909)
Net proceeds from issuances of preferred and
common stock and from exercise of options
and warrants 3,758,183 4,130,371
Principal payments on capital lease obligations (193,828) (189,652)
Preferred dividends - (15,000)
-------------- --------------
Net cash provided by financing activities 2,324,998 4,010,351
-------------- --------------
Effect of exchange rates on cash 6,848 (30,592)
-------------- --------------
Net decrease in cash and cash equivalents (20,066) (356,132)
Cash and cash equivalents at beginning of period 1,212,473 2,696,542
-------------- --------------
Cash and cash equivalents at end of period $ 1,192,407 $ 2,340,410
============== ==============
</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 Larson Davis
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-K for the year ended December 31, 1997. 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 September 30,
1998, its consolidated results of operations for the three months ended
September 30, 1998 and 1997, and its consolidated results of operations and cash
flows for the nine months ended September 30, 1998 and 1997. The results of
operations for the three months and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998.
(B) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding during each period. Diluted earnings (loss) per common share
are similarly calculated, except that the weighted average number of common
shares outstanding includes common shares that may be issued subject to existing
rights with dilutive potential.
(C) Inventories
Inventories consist of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $ 975,023 $1,127,335
Work in process 583,721 700,055
Finished goods 588,078 804,172
---------- ----------
$2,146,822 $2,631,562
========== ==========
(D) Unusual Charges
In October 1995, the Company acquired all of the outstanding stock of Sensar
Corporation ("Sensar"). At the time, the business contained within Sensar
consisted of its Time-of-Flight technology as applied to its TOF2000
instrumentation. The TOF2000 has been distributed on an exclusive basis over
the past three years by SAES Getters S.p.A., a global supplier of "Getter"
filters. Unfortunately, this product has failed to meet its full potential in
the market place and negotiations commenced in July, 1998, with SAES Getters,
which led by mutual agreement to the termination of the exclusive distribution
arrangement during September 1998. The Company has been seeking alternative
distributors for this product or to sell this technology as a whole, but to date
has been unsuccessful for several reasons, including the aggressive downturn in
the semiconductor market.
As a result of these events, the Company has evaluated the carrying value of
assets associated with the TOF2000 product and has recorded non-cash charges in
the quarter ended September 30, 1998, for approximately $3.5 million,
principally representing the writeoff of intangible assets and surplus inventory
associated with this technology.
(E) Technical Information and Patent License Agreements
On July 1, 1997, the Company entered into a Technical Information Agreement and
a Patent License Agreement with Lucent Technologies, Inc. (the "Agreement").
Under the Agreement, the Company held the sole rights, subject to certain
overall technology sharing agreements among 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
Agreement, coupled with other technology already owned or licensed, the Company
intended to develop and, if successful, to manufacture and market a particle
analysis mass spectrometer.
Under the Agreement, the Company was obligated to make an initial payment of
$200,000 for the rights granted thereunder. Additionally, the Company was
obligated to pay royalties equal to a percentage of the market value of items
sold pursuant to the Agreement, 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 Agreement had an initial term of six years, although the Company
could have effectively extended the Agreement thereafter by continuing to pay
the percentage royalties, subject to a minimum annual royalty of $600,000.
The Company has been working closely with Lucent during 1998 to substantiate the
performance specifications of the technology and to assess the market potential
of this technology in light of the final specifications. The Company has
concluded, based on the market size for the product, the difficulties facing the
semiconductor market currently, the required investment to bring the product to
market, and the overall risk associated with the technology, not to proceed with
this development project. Lucent was apprised of the situation, and the Company
and Lucent negotiated a termination of the Agreement during the quarter ended
September 30, 1998. The termination agreement cancelled all financial
obligations due to Lucent by the Company, including minimum fixed royalty
payments of over $2 million. The termination agreement also provided that
Lucent would purchase the prototype model for $100,000 that the Company had
developed.
(F) Preferred Stock
In February 1998, the Company completed the private placement of 100 Units, each
Unit consisting of 35 shares of 1998 Series A Preferred Stock (the "Preferred
Stock") and 7,000 Warrants to purchase common stock, at a purchase price of
$35,000 per unit. The Preferred Stock is now convertible at the election of the
holders into that number of shares of common stock calculated by dividing $1,000
plus any accrued but unpaid dividends, by the lower of (i) $3.60 or (ii) 85% of
the average closing price of the common stock for the ten trading days preceding
the conversion.
During the quarter ended September 30, 1998, the Company received notice from
holders of 433 shares of Preferred Stock for the conversion of their Preferred
Stock into common stock of the Company. The 433 shares were converted into
411,248 shares of common stock.
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-K for the year ended December 31,
1997.
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 market acceptance of products, 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 generate
sufficient revenue such that it can support its current cost structure without
which the Company would need to obtain 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.
During the course of 1998, the Company through its Sensar division
completed the development of its SFC and Jaguar technology. In parallel with
the development program, the Company has been searching for a trading partner
for its mass spectrometer technology to provide additional distribution
capability. Unfortunately, no such partnership was established during the
quarter ended September 30, 1998. This forced the Company to begin direct
selling of its products in competition with certain well established and
entrenched multinational companies. The Company has now entered into
negotiations with a potential partner that, if consummated, will provide the
Company with increased distribution capability.
During the quarter ended September 30, 1998, the Company experienced a
sharp decline in the per share price of its common stock. This decline caused
significant anxiety among the Company's customers regarding the long-term
viability of the Company. In particular, several sales of the Company's more
expensive high technology products were either cancelled or deferred due, at
least in part, to this instability. The cancellation of these sales
substantially impacted the third quarter revenues.
On the acoustics side, the Company continues to invest aggressively in new
product development with the intention of upgrading the product line over the
coming 18 months and improving its technical competitiveness. Several new
products are planned for launch later this year and early 1999. The Company
believes that this will help restore the Company's growth profile and improve
its financial performance. Significant improvement for the acoustics business
has already been made based on a year-to-year comparison of results of
operations.
The Company has continued with its cost cutting initiatives which it
introduced at the beginning of this year. The acoustics business is now
operating profitably again and generating positive cash flow. Its gross margin
has improved and the acoustics business is now poised to grow from a stable
financial platform.
On the Sensar side, the Company has reviewed each of the technologies in
its portfolio and to the extent the technology cannot support its level of
overhead in the short term, then appropriate cost cutting measures have been
taken. As a result, the Company, by mutual consent, has terminated its
agreement with Lucent Technologies, Inc., and with SAES Getters S.p.A., and
reduced personnel and overhead accordingly.
In the second quarter of 1998, the Company terminated its marketing
agreement with Weidemann. Since the termination of this agreement, the Company
has approached and is now working with two utility companies directly, and has
begun the process of product evaluation directly with the end users. The
Company is also continuing to work with a major pipeline company to develop
a product for detecting the transition between petroleum products within
pipelines. This product has now been specified and is expected to be
available in the first quarter of 1999. However, the successful
commercialization of CrossCheck for this application is subject to a number
of risks and unknowns, including final technical feasibility, market
acceptance, and acceptable commercial terms.
The Company historically has been unable to fund its 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 research and development
activities and general operations. It is anticipated the Company will continue
to experience operating losses at least through the end of 1998, but on a
reducing basis. The Company currently has adequate resources to continue its
development plans through the end of the fiscal year 1998 and into 1999,
provided it continues to meet its forecast for revenues for that period of time.
Should the Company fail to meet its revenue generation goals, it would be unable
to sustain its current level of overhead and would either need to reduce its
commitment to certain projects or to obtain additional financing. There can be
no assurance as to the Company's ability to obtain such financing on terms
favorable to it. In addition, there can be no assurance as to the timing of
increased sales or as to the success of the products that may ultimately permit
the Company to meet its obligations from operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1998 and 1997
Net Sales
Net sales for the three months ended September 30, 1998 and 1997, were
$2,085,510 and $2,320,405, respectively. This represents an overall decrease of
$234,895, or 10.1%, for 1998 as compared to 1997. The net decrease is composed
of an increase in acoustic sales of $243,688 for the current quarter compared to
the corresponding quarter of 1997, or 15.2%, and a decrease in shipments of
Sensar products of $478,583. The increase in acoustic sales is largely due to
market acceptance of new products released during 1998 and to continued
improvements in marketing efforts. The decline in Sensar sales was due to a
decrease in product shipments during the quarter.
At September 30, 1998, the Company had an order backlog of $486,000
relating principally to its acoustics business.
Cost of Sales
Cost of sales for the three months ended September 30, 1998, were
$1,067,263, or 51.2% of net sales, compared to $1,125,664, or 48.5% of net
sales, for the three months ended September 30, 1997. Acoustic cost of sales
for the quarter as a percentage of acoustic sales improved from 50.6% in 1997 to
50.0% during the third quarter of 1998. Included in cost of sales for the
acoustic business for the quarter was an increase in the inventory obsolescence
reserves of approximately $168,000, which implies that the gross margin on
acoustic sales has improved even further over the prior year. Cost of sales for
Sensar as a percentage of its sales for the quarter increased to 60.0%, largely
as a result of the absorption of certain fixed costs over decreased shipments.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased to $1,057,197, or
50.7% of net sales, for the three months ended September 30, 1998, compared to
$1,322,051, or 57.0% of net sales, for the three months ended September 30,
1997. The decrease in the dollar amount of selling, general, and administrative
expenses principally continues to be due to several factors, including personnel
reduction, cost control, and more aggressive procurement practices. The Company
continues to reduce its overhead and to seek to balance its expenses with its
expected sales revenue.
Research and Development
For the three months ended September 30, 1998, research and development
costs were $714,829, or 34.3% of net sales, compared to $1,352,602, or 58.3% of
net sales, for the three months ended September 30, 1997. The decrease in the
amount of research and development over the prior period, as well as over recent
historical levels, continues to be due to several factors, including personnel
reduction, cost control, and more aggressive procurement practices, as well as
improved prototype management.
Unusual Charges
During September 1998, the exclusive distribution arrangement between the
Company and SAES Getters S.p.A. for the TOF2000 technology was terminated and no
alternative distributor or buyer for this technology has been found. As a
result of these events and the Company's evaluation of the carrying values of
assets associated with this technology, the Company recognized unusual charges
in the amount of $3,527,615 during the quarter ended September 30, 1998. The
charges principally relate to the writeoff of intangible assets and surplus
inventory associated with the TOF2000 technology.
Comparison of Nine Months Ended September 30, 1998 and 1997
Net Sales
Net sales for the nine months ended September 30, 1998 and 1997, were
$6,862,851 and $6,672,750, respectively. On a year to date basis, acoustic
sales represent 77.9% of total Company sales. Sales have increased by $190,101,
or 2.8%, for 1998 as compared to 1997. The increase is principally due to an
increase in acoustic sales of $264,772, or 4.9%, for the nine months ended
September 1998 compared to 1997. The increase in acoustic sales is largely due
to market acceptance of new products released during 1998 and to continued
improvements in marketing efforts. Sensar shipments have declined slightly by
$74,671 during the first nine months of 1998.
Cost of Sales
Cost of sales for the nine months ended September 30, 1998, were
$3,746,842, or 54.6% of net sales, compared to $3,492,116, or 52.3% of net
sales, for the nine months ended September 30, 1997. The increased level in
costs of sales as a percentage of net sales is principally the result of the
sales of beta instruments in the Sensar division for which the gross margin is
less than a normal margin for commercial instruments. Cost of sales for
acoustic products during the nine months ended September 30, 1998, improved from
49.7% in 1997 to 48.4%.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased to $3,285,793, or
47.9% of net sales, for the nine months ended September 30, 1998, compared to
$4,184,575, or 62.7% of net sales, for the nine months ended September 30, 1997.
As discussed above, the decrease in the dollar amount of selling, general, and
administrative expenses was principally due to several factors, including
personnel reduction, cost control, and more aggressive procurement practices.
Selling, general, and administrative expenses as a percentage of net sales
should continue to decline in the future as the Company continues to seek to
bring its expenses in line with its revenue estimates, although no assurance can
be made that the Company will be successful in accomplishing such reduction.
Research and Development
For the nine months ended September 30, 1998, research and development
costs were $2,312,644, or 33.7% of net sales, compared to $3,253,354, or 48.8%
of net sales, for the nine months ended September 30, 1997. As described above,
the decrease in the amount of research and development over the prior period, as
well as over recent historical levels, is due to several factors, including
personnel reduction, cost control, more aggressive procurement practices, and
greater discipline over prototype activity.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had total current assets of $5,012,702,
including cash and cash equivalents of $1,192,407. The Company had total
current liabilities of $2,453,681, resulting in working capital of $2,559,021
and a working capital ratio of 2.0 to 1.
The Company's primary source of cash for the nine months ended September
30, 1998, was from the issuance of preferred and common stock and from the
exercise of options and warrants in the aggregate amount of $3,758,183.
The Company's primary uses of cash for the nine months ended September 30,
1998, were funds used in operations of $2,431,065 and the termination of the
line of credit of $1,198,766. Management expects that in the short-term, the
primary use of cash will be in operations until such time as the Company moves
to a sales level generating sufficient revenue to cause a breakeven level of
operations.
In 1993, the Company entered into a mortgage arrangement when it purchased
its current plant. The terms of the mortgage involved a five-year balloon
payment at January 1, 1999. Included in current maturities of long-term debt on
the balance sheet is the balance of the mortgage in the amount of $695,747. It
is the current intention of management to renegotiate this payment into a longer
term obligation and avoid the immediate cash flow drain. Management believes
that the current market value of the land and property is substantially in
excess of this amount and that a renegotiation should be possible. However, no
assurance can be given that this renegotiation will be completed. In the
absence of such renegotiation, the Company would need to raise additional
financing to meet this short-term obligation.
Management's goal is for the current cash balances to provide the Company
with sufficient capital to fund its operations and development plans for the
remainder of 1998 and into 1999. As 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. However, the Company's ability to meet
this goal depends on the successful generation of revenue during this time
period.
YEAR 2000
The Company has largely completed its assessment of Year 2000 issues that
affect its business. As part of its assessment, the Company has evaluated its
internal information systems, including its accounting, manufacturing, and
networking software; its outside payroll service; its telecommunications
systems; its file servers and workstations; and other applications software and
instrumentation. The Company has sought and obtained verification from each of
the vendors responsible for the software and hardware referred to above,
indicating that the software and hardware is Year 2000 compliant. Where
necessary, the Company has installed the software patches and upgrades provided
by the vendor to make the systems Year 2000 compliant.
The Company has also made an assessment of the products that it sells for
Year 2000 compliance. In some cases, product firmware required modification to
be Year 2000 compliant. The necessary modifications have been made for all
products currently in the Company's product portfolio to be Year 2000 compliant.
This upgraded firmware has been made available to customers, either through the
Company's web site or through a program to update products that should be
returned to the Company. Some of the Company's customers are using product
versions that the Company will not support for Year 2000 issues. The Company is
encouraging these customers to upgrade to current product versions that are Year
2000 compliant.
The Company has also conducted a survey of its vendors for their Year 2000
compliance. The Company has obtained written verification that its significant
vendors are either Year 2000 compliant or that they are on track to be fully
compliant before the year 2000. The Company believes that there are no
significant vendors that, if they failed to become Year 2000 compliant, could
not be replaced with other vendors that are.
While the Company believes that it has taken prudent steps to assess and
mitigate the effects of Year 2000 issues, there can be no assurance that the
systems of other companies with which the Company deals, or upon which the
Company's internal systems rely, will not fail or have significant Year 2000
problems. The costs to the Company of making its assessment of Year 2000
compliance, including installing necessary patches and upgrades and upgrading
its own firmware for its products has not been, nor is it expected to be,
significant to its financial statements.
PART II
OTHER INFORMATION
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
------- --------- -----------------------
<S> <C> <C>
1 (27) Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
During the quarter ended September 30, 1998, 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: October 15, 1998 By /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
(Chief Executive Officer and
Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,192,407
<SECURITIES> 0
<RECEIVABLES> 1,707,674
<ALLOWANCES> 81,163
<INVENTORY> 2,146,822
<CURRENT-ASSETS> 5,012,702
<PP&E> 2,740,435
<DEPRECIATION> 1,207,847
<TOTAL-ASSETS> 7,166,249
<CURRENT-LIABILITIES> 2,453,681
<BONDS> 0
<COMMON> 12,987
0
3
<OTHER-SE> 4,556,013
<TOTAL-LIABILITY-AND-EQUITY> 7,166,249
<SALES> 6,862,851
<TOTAL-REVENUES> 6,862,851
<CGS> 3,746,842
<TOTAL-COSTS> 3,746,842
<OTHER-EXPENSES> 5,598,437
<LOSS-PROVISION> 3,527,615
<INTEREST-EXPENSE> 116,165
<INCOME-PRETAX> (6,120,027)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,120,027)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,120,027)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
