UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 0-17020
SENSAR CORPORATION
----------------------------------------------------
(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)
LARSON-DAVIS INCORPORATED
----------------------------------------------
(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 CORPORATE ISSUERS
As of May 13, 1999, the Issuer had 2,928,512 shares of its common stock,
par value $0.001 per share, issued and outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Sensar Corporation (the "Company") has included the consolidated balance
sheets of the Company and its subsidiaries as of March 31, 1999 (unaudited), and
December 31, 1998 (the end of the Company's most recently completed fiscal
year), and unaudited consolidated statements of operations and cash flows for
the three months ended March 31, 1999 and 1998, 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, 1998.
SENSAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1999 1998
---------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $1,841,866 $ 694,959
Trade accounts receivable, net of
allowance for doubtful accounts 192,705 1,738,478
Inventories 974,071 2,046,871
Notes receivable 609,050 120,000
Other current assets 23,534 37,046
---------- ----------
Total current assets 3,641,226 4,637,354
Property and equipment, net of
accumulated depreciation and
amortization 893,755 1,327,248
Assets under capital lease
obligations, net of accumulated
amortization - 202,026
Intangible assets, net of accumulated
amortization 44,603 322,779
---------- ----------
$4,579,584 $6,489,407
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 417,238 $ 538,121
Accrued liabilities 623,925 921,683
Current maturities of long-term debt 675,548 682,982
Current maturities of capital lease
obligations - 128,064
---------- ----------
Total current liabilities 1,716,711 2,270,850
Capital lease obligations, less
current maturities - 168,985
Deferred credit 200,000 -
---------- ----------
Total liabilities 1,916,711 2,439,835
---------- ----------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.001 par value;
authorized 10,000,000 shares;
issued and outstanding zero shares
at March 31, 1999, and 3,039.95
shares at December 31, 1998 - 3
Common stock, $0.001 par value;
authorized 290,000,000 shares;
issued and outstanding 2,678,512
shares at March 31, 1999, and
2,614,183 shares at December 31,
1998 2,678 2,614
Additional paid-in capital 27,765,136 30,703,947
Accumulated deficit (24,780,257) (26,282,308)
Notes receivable from sale of stock (324,684) (374,684)
---------- ----------
Total stockholders' equity 2,662,873 4,049,572
---------- ----------
$4,579,584 $6,489,407
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SENSAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended March 31,
-------------------------------
1999 1998
------------ ------------
Net sales $1,579,141 $2,356,138
---------- ----------
Costs and operating expenses:
Cost of sales 816,442 1,320,998
Research and development 392,161 858,779
Selling, general, and administrative 763,519 1,128,537
Unusual charges 195,000 -
---------- ----------
2,167,122 3,308,314
---------- ----------
Operating loss (587,981) (952,176)
---------- ----------
Other income (expense):
Interest income 4,493 34,100
Interest expense (9,273) (66,652)
Gain on sale of acoustics division 2,140,165 -
Other, net (19,939) (61,269)
---------- ----------
2,115,446 (93,821)
---------- ----------
Net income (loss) 1,527,465 (1,045,997)
Other comprehensive income-foreign
currency translation adjustments - 9,336
---------- ----------
Comprehensive income (loss) $1,527,465 $(1,036,661)
========== ==========
Earnings (loss) per common share:
Basic and diluted $ 0.56 $ (0.68)
Weighted average common and common
equivalent shares:
Basic and diluted 2,663,262 2,504,918
The accompanying notes are an integral part of these financial statements.
<PAGE>
SENSAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
----------------------------
1999 1998
---------- -----------
Increase (decrease) in cash and cash
equivalents:
Cash flows from operating activities
Net income (loss) $1,527,465 $(1,045,997)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities
Depreciation 88,435 138,839
Amortization 31,202 129,297
Stock issued in payment of
compensation and services - 148,313
Loss (gain) on sale of property
and equipment 19,939 (3,106)
Gain on sale of acoustics
division (2,140,165) -
Changes in assets and
liabilities:
Trade accounts receivable 314,699 385,454
Inventories (143,514) (36,796)
Other current assets 7,848 (231,304)
Accounts payable 194,701 (660,990)
Accrued liabilities 124,429 (210,998)
---------- ----------
25,039 (1,387,288)
---------- ----------
Net cash provided by (used in)
operating activities
Cash flows from investing activities
Net proceeds from sale of
acoustics division 4,219,436 -
Purchase of property and equipment (71,248) (57,395)
Collection of notes receivable 10,950 -
Proceeds from sale of assets - 21,316
Proceeds from long-term
contractual arrangement - 37,500
---------- ----------
Net cash provided by investing
activities 4,159,138 1,421
---------- ----------
Cash flows from financing activities
Net change in line of credit - (389,514)
Principal payments of long-term
debt (7,434) (13,112)
Net proceeds from issuance of
preferred and Common stock and
exercise of options and warrants 50,000 3,673,115
Redemption of preferred stock (3,071,437) -
Principal payments on capital
lease obligations (8,399) (64,226)
---------- ----------
Net cash provided by (used in)
financing activities (3,037,270) 3,206,263
---------- ----------
Effect of exchange rates on cash - 9,336
Net increase in cash and cash
equivalents 1,146,907 1,829,732
Cash and cash equivalents at beginning
of period 694,959 1,212,473
---------- ----------
Cash and cash equivalents at end of
period
$1,841,866 $3,042,205
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SENSAR CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Sensar
Corporation (formerly 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, 1998. 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 March 31, 1999, and its consolidated
results of operations and cash flows for the three months ended March 31, 1999
and 1998. The results of operations for the three months ended March 31, 1999,
may not be indicative of the results that may be expected for the year ending
December 31, 1999.
(B) SALE OF ACOUSTICS DIVISION
On November 30, 1998, as amended on February 11, 1999, and March 31, 1999, the
Company entered into an Asset Purchase Agreement (the "Agreement") with PCB
Group, Inc. ("PCB"), under which the Company agreed to sell essentially all of
the assets and operations associated with the acoustics division of the Company.
Assets of the acoustics division to be sold included the manufacturing
facilities of the Company, certain intellectual property, the "Larson-Davis"
name, inventories, accounts receivable, and property and equipment. The sales
price for the assets was $5.75 million (payable $5.25 million in cash at closing
and a note for $500,000 payable in equal monthly installments based on a two-
year amortization with a balloon payment of the unpaid balance on April 1, 2000)
plus the assumption by PCB of liabilities of approximately $1.7 million.
Closing of the sale of the assets of the acoustics division was subject to
shareholder approval. A special meeting of stockholders was held March 18,
1999, where the sale was approved by a majority of the outstanding voting
interest of common and preferred stockholders. Prior to closing, certain issues
arose during the due diligence investigation that delayed the sale of the land
and buildings. The sale of the remaining assets of the acoustics division was
consummated on March 31, 1999, wherein the Company received gross cash proceeds
of approximately $4.6 million. As a result of the sale of the assets, the
Company recognized a gain of approximately $2.1 million from the sale during the
quarter ended March 31, 1999, and has deferred $200,000 of gain associated with
the obligations of the Company under a non-compete agreement. No income tax
provision was recognized during the quarter ended March 31, 1999 due to the
availability of net operating loss carryforwards sufficient to offset the gain.
The Company entered into a short-term lease with PCB covering the land and
buildings. The parties anticipate that this leasing arrangement will be
temporary and that the anticipated sale of the land and buildings will close in
the near future. The Company expects to receive additional net proceeds of
approximately $700,000 from the sale of the real estate after the payoff of the
underlying mortgage. As consideration for an extension of the due date of the
mortgage until July 15, 1999, the Company pledged a money market account with a
balance of approximately $680,000 as additional collateral against the mortgage.
In the event that the sale of the real property has not been closed by July 15,
1999, the bank will use this additional collateral to pay off the mortgage at
that time.
The following pro forma information estimates the pro forma effect of the sale
on the Company's results of operations for the three months ended March 31,
1999, and 1998, assuming the sale had occurred on January 1, 1999, and 1998,
respectively. The gain from the sale is not included in the pro forma results
of operations.
Three Months Ended March 31,
-----------------------------
1999 1998
---------- -----------
Net sales $ 21,307 $ 623,306
Net loss $(598,575) $(1,190,189)
Net loss per common share $ (0.23) $ (0.74)
(C) 1998 SERIES A PREFERRED STOCK
The Company has reacquired and cancelled all of the outstanding shares of its
1998 Series A Preferred Stock (the "Preferred Stock") pursuant to agreements
entered into in January 1999. Under the terms of the agreements, the Company
paid an amount equal to $1,000 per share plus all accrued but unpaid dividends.
The Company paid approximately $3.07 million to redeem 2,938.75 shares of
Preferred Stock. As part of the terms of these agreements, the Company agreed
to reprice one-half of the associated warrants to acquire 58,775 shares at $2.50
per share and to cancel the other half of the warrants.
The Preferred Stock was issued in February 1998, in a private placement of 100
units, each unit consisting of 35 shares of 1998 Preferred Stock and 7,000
warrants to purchase common stock, at a purchase price of $35,000 per unit. Of
the total gross proceeds of $3,500,000, approximately $549,000 was assigned as
the value of the warrants and the balance was assigned as the value of the
Preferred Stock. The Preferred Stock had an annual dividend of 4%, or $40 per
share per annum, and had a liquidation preference equal to $1,000 per share plus
all accrued but unpaid dividends.
The Preferred Stock was 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 (1) $18.00 or (2) 85% of the average
closing price of the common stock for the ten trading days preceding the
conversion. During the three months ended March 31, 1999, and the year ended
December 31, 1998, 101.20 shares and 460.05 shares of Preferred Stock were
converted into 64,016 and 94,629 shares of common stock, respectively, of the
Company.
(D) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during each period. The number of shares outstanding has been
adjusted to give effect to the one-for-five consolidation of the common shares
of the Company that took effect May 3, 1999. 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.
For the three months ended March 31, 1998, net loss attributable to common
shareholders includes a non-cash imputed dividend to the preferred shareholders
related to the beneficial conversion feature on the 1998 Series A Preferred
Stock and related warrants (see Note C). The beneficial conversion feature was
computed as the difference between the market value of the common stock into
which the Series A Preferred Stock could be converted and the value assigned to
the Series A Preferred Stock in the private placement. The imputed dividend was
a one-time, non-cash charge and was amortized against the loss per common share
for the period from the date of issuance of the 1998 Series A Preferred Stock
through the date 90 days later when the securities were first convertible. With
the redemption of the Preferred Stock discussed in Note C, of the beneficial
conversion feature associated with this stock was terminated.
Basic and diluted earnings (loss) per common share were calculated as follows:
Three Months Ended March 31,
----------------------------
1999 1998
---------- -----------
Net income (loss) $ 1,527,465 $(1,045,997)
Preferred dividends (25,414) (18,278)
Imputed dividend from beneficial conversion
feature - (647,185)
----------- -----------
Net income (loss) attributable to common
stockholders $ 1,502,051 $(1,711,460)
=========== ===========
Weighted average common and common equivalent
shares 2,663,262 2,504,918
=========== ===========
Income (loss) per common share $ 0.56 $ (0.68)
=========== ===========
(E) INVENTORIES
Inventories consist of the following:
March 31, December 31,
1999 1998
--------- ---------
Raw materials $ 251,216 $1,113,839
Work in process 511,295 379,407
Finished goods 211,560 553,625
--------- ---------
$ 974,071 $2,046,871
========= ==========
(F) SEGMENT INFORMATION
The Company has two reportable segments, namely (1) acoustics and vibration
instrumentation and (2) chemical analysis instrumentation. The acoustics and
vibration division produces instruments for a wide variety of industries to
measure sound, noise, and vibration levels. Substantially all of the assets of
the acoustics and vibration division were sold on March 31, 1999. The chemical
analysis division produces instruments that identify and quantify the chemical
composition of liquids. The Company evaluates performance of each segment based
on earnings or loss from operations, excluding unusual charges. The Company's
reportable segments are separate business units that offer different products
and services and are managed separately because each business unit is based on
different scientific disciplines and marketing strategies. Certain general and
administrative expenses, consisting principally of finance and information
systems expenses, are allocated to each segment proportionally to each segment's
relative net sales. Corporate property and equipment for administration,
finance, and information systems and the assets of the machine shop were
reported to management with the assets of the acoustics and vibration segment,
with depreciation allocated to corporate general and administrative expenses and
to the machine shop, respectively. The assets of the machine shop were sold in
December 1998, and, accordingly, are not included in the segment information for
the three months ended March 31, 1999.
Segment information for the acoustics and vibration and chemical analysis
divisions are as follows:
Three Months Ended March 31,
----------------------------
1999 1998
----------- -----------
Net sales
Acoustics and vibration $ 1,557,834 $1,732,832
Chemical analysis 21,307 623,306
----------- ----------
Consolidated totals $ 1,579,141 $2,356,138
=========== ==========
Operating profit (loss)
Acoustics and vibration $ (3,651) $ 158,018
Chemical analysis (261,928) (933,032)
----------- ----------
(265,579) (775,014)
Corporate administration (127,402) (177,162)
Unusual charges (195,000) -
----------- ----------
Consolidated totals $ (587,981) $ (952,176)
=========== ==========
Total assets
Acoustics and vibration $ 782,044 $6,013,053
Chemical analysis 1,346,624 4,338,323
----------- ----------
2,128,668 10,351,376
Corporate assets (cash and
certain receivables) 2,450,916 3,289,981
----------- ----------
Consolidated totals $ 4,579,584 $13,641,357
=========== ==========
Depreciation and amortization
Acoustics and vibration $ 62,556 $ 130,346
Chemical analysis 18,685 96,727
----------- ----------
81,241 227,073
Corporate administration,
finance and information
systems 38,396 41,063
----------- ----------
Consolidated totals $ 119,637 $ 268,136
=========== ==========
Capital expenditures
Acoustics and vibration $ 51,357 $ 28,895
Chemical analysis 19,891 28,500
----------- ----------
Consolidated totals $ 71,248 $ 57,395
=========== ==========
(G) SUBSEQUENT EVENTS
Effective April 21, 1999, the then current members of the board of directors of
the Company resigned and a new board was appointed consisting of Howard S.
Landa, Steven Strasser, and Brian B. Lewis, with Mr. Landa serving as the newly
appointed chief executive officer. The new board authorized a private placement
of 250,000 shares of common stock at $4.00 per share, subject to up to a 10%
adjustment if the average closing price of the common stock is less than $4.00
for any 20 day period prior to the effectiveness of a registration statement the
Company has committed to file. This private placement was completed May 3,
1999, with net proceeds to the Company, after associated expenses, of
approximately $970,000.
Under the employment agreements of the former chief executive officer and chief
operating officer, each had the right to terminate his employment agreement for
cause with the sale of the assets of the acoustics division and to receive
compensation equal to his base salary remaining under their employment
agreements, which would have been approximately $560,000 in the aggregate. In
lieu of this payout, the new board of directors negotiated a termination benefit
of $195,000 in the aggregate and consulting arrangements whereby the former
chief executive officer would provide transitional services to the Company and
the former chief operating officer would continue as the chief operating officer
of the Company to supervise the ongoing operations of the Company in exchange
for monthly compensation of $10,000 each and aggregate options to acquire 70,000
shares of common stock, half of which are exercisable at $3.00 per share and the
other half at $5.00 per share. Since the right to the termination benefit arose
in connection with the sale of the assets of the acoustics division, the
termination benefit of $195,000 has been recorded in the quarter ended March 31,
1999, as an unusual charge.
At a special meeting of stockholders held on March 18, 1999, a proposal was
voted on to approve the consolidation of the issued and outstanding common stock
of the Company whereby the Company would issue one new share of common stock in
exchange for every five to ten shares of currently outstanding common stock,
with the precise conversion ratio to be determined and approved by the Company's
board of directors at a later time. The proposal was approved by a majority of
the votes cast. During April 1999, the new board of directors approved the
consolidation of the Company's issued and outstanding common stock on the basis
of one share for each fives shares previously outstanding, effective for all
shares issued and outstanding as of the close of business on April 30, 1999. As
a consequence of the consolidation, all common share and per common share
information included in the accompanying financial statements has been
retroactively restated to reflect the one-for-five consolidation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 successful identification of appropriate investment opportunities, the
negotiation of investments with terms favorable to the Company, the business
success of the entities in which the Company invests, the implementation of a
successful exit strategy for any investments made by the Company, the ability of
the Company to raise additional capital, the completion of commercial products
within projected time frames, 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, and the success of the marketing efforts of the Company and
the entities with which it has agreements. 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.
The following discussion should be read in conjunction with the
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,
1998.
RECENT EVENTS
On March 31, 1999, the Company closed the sale of its acoustics and
vibration assets to PCB Group, Inc. ("PCB") The Company used a portion of the
cash proceeds from this sale to redeem its outstanding 1998 Series A Preferred
Stock.
On April 21, 1999, the directors of the Company resigned and a newly
elected board of directors was appointed. In addition, the former chief
executive officer of the Company resigned and a new chief executive officer was
appointed. The long-term employment agreement with the Company's chief
operating officer was terminated and replaced with a new short-term agreement.
For information concerning the three individuals appointed to the board of
directors and management and the agreements surrounding the transition, please
see the Company's report on Form 8-K for April 21, 1999.
Subsequently, on May 5, 1999, an additional director, Mickey Hale, was
appointed to the board. Ms. Hale was granted an option to acquire 100,000
shares of common stock, with an exercise price of $3.00 per share for 50,000
shares and $5.00 per share for 50,000 shares. In addition, the Company has
retained Steve Witzel as a technical consultant.
Mickey Hale has been president and chief executive officer of Imperial
Development Corporation and related travel services and real estate entities
since 1990. Ms. Hale was an investment advisor at Shearson Lehman Brothers from
1987-1990 and served in the same capacity at Paine Webber from 1980-1987. Ms.
Hale received her bachelor of science in Political Science from the University
of Utah in 1970.
Steve Witzel has most recently been executive vice-president of sales and
marketing for Access Software, Inc., where he has been involved with the
development and marketing of its products since 1988. In connection with
Microsoft, Inc.' s acquisition of Access Software, Inc., Mr. Witzel will
continue to provide consulting services to Access Software, Inc., and others in
the computer industry. In addition to his experience at Access Software, Mr.
Witzel obtained a United States Patent for "RealSound," a technology used to
reproduce sound on computers without a sound board. Mr. Witzel received the
Technical Achievement Award for RealSound from the Software Publishers
Association and has received a Technical Excellence Plaque from PC Magazine.
Mr. Witzel has a Masters of Science degree in electrical engineering from
Virginia Polytechnic Institute.
The new board of directors authorized the implementation of a one-for-five
consolidation of the issued and outstanding common stock of the Company that had
previously been approved by the shareholders. This consolidation, together with
the change in the Company's name to "Sensar Corporation," and the change of the
trading symbol for the Company's common stock to "SCII" took effect May 3, 1999.
All of the common stock information contained in this report gives effect to the
one-for-five consolidation.
Management intends to use some of the cash reserves to invest or
participate in other companies. This strategy emulates a number of publicly
held companies who have used innovative investment strategies much like a
private venture capital company to create value for their shareholders. The
Company is currently reviewing possible transactions with a number of companies.
Management looks principally for three factors in any situation: (1) product
that can reach market; (2) management with sufficient experience and energy; and
(3) a viable exit strategy. A portion of the Company's investments will
probably be in privately held companies and, consequently, constitute illiquid
investments for the Company. The Company will continue to operate its various
lines of technology and believes it has more than sufficient resources to do so.
In order to provide the Company with some additional capital, a private
placement of 250,000 shares of common stock at a purchase price of $4.00 per
share was completed May 3, 1999. The Company received net proceeds after
deduction of associated expenses of approximately $970,000 from this private
placement.
The Company continues to seek to resolve some zoning and boundary issues
with respect to its real property in order to be able to complete the sale of
the real property to PCB. The agreed to sales price of the property is $1.4
million and the Company currently has a mortgage obligation of approximately
$700,000 against the property. Consequently, the completion of the sale will
result in net additional proceeds to the Company of approximately $700,000. The
Company anticipates that this transaction will be completed during the second
quarter of 1999.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET SALES
Net sales for the three months ended March 31, 1999 were $1,579,141,
consisting of acoustics sales of $1,557,834 and chemical analysis sales of
$21,307, compared to net sales for the three months ended March 31, 1998 of
$2,356,138, which consisted of acoustics sales of $1,732,832 and chemical
analysis sales of $623,306. The decrease in acoustics sales of $174,998, or
10.1%, was principally due to changes being made in the distribution channel for
acoustics products related to the pending sale of the acoustics division to PCB,
which sale closed March 31, 1999. The decrease in chemical analysis sales from
1998 to 1999 is related to a variety of circumstances. In the quarter ended
March 31, 1998, chemical analysis sales included beta shipments of the Jaguar
mass spectrometer and supercritical fluid chromatograph instruments (SFC), as
well as one TOF2000 instrument. Later in 1998, the Company discontinued or
otherwise disposed of the SFC and TOF2000 product lines. The Company has
entered into a Technical Development and Marketing Agreement with JEOL USA, Inc.
for the further development of the Jaguar instruments and granting marketing
rights to JEOL for distribution of these instruments in the Western Hemisphere.
The Company has recently shipped an enhanced unit for JEOL's evaluation.
The Company is still investigating markets for its CrossCheck technology.
Recently, the Company has placed a pre-production unit of a specialized
CrossCheck product on a petroleum pipeline. This product is designed to detect
various petroleum interfaces as they move along the pipeline. Testing of this
product is expected to continue throughout the second quarter. In addition, the
Company is continuing its development of a CrossCheck product to provide
maintenance information to the power industry for the monitoring of high voltage
circuit breakers and transformers.
COST OF SALES
Cost of sales for the three months ended March 31, 1999, were $816,442, or
51.7% of net sales, compared to $1,320,998, or 56.1% of net sales, for the three
months ended March 31, 1998. The principal cause of the improvement in gross
margin in 1999 relates to sales of chemical analysis products in 1998. As
discussed above, in the first quarter of 1998, the shipments of chemical
analysis products primarily consisted of beta units of SFC and Jaguar, on which
there was relatively little gross margin. Cost of sales for chemical analysis
products in the first quarter of 1998 was 84.5% of net sales, which had the
effect of increasing the overall percentage of cost of sales to 56.1% for the
quarter. Cost of sales for the three months ended March 31, 1999 for shipments
of acoustics products was 47.0% of net sales, which is largely consistent with
the corresponding quarter of 1998 when cost of sales of acoustics products was
45.8%.
The Company anticipates that as the manufacturing process of its new
chemical analysis products becomes standardized and as these new products are
sold in volume quantities, cost of goods sold as a percentage of net sales will
decline. However, such a result will depend on the Company's ability to
standardize the manufacturing process and control costs, as well as sufficient
market acceptance to create volume sales of the Company's new products, for
which no assurance can be given.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses decreased to $763,519 for the
three months ended March 31, 1999, compared to $1,128,537 for the three months
ended March 31, 1998. As a percentage of net sales, selling, general, and
administrative expenses of 48.4% for the three months ended March 31, 1999, was
consistent with the comparable quarter of 1998 at 47.9%. The decrease in costs
relate principally to continued emphasis of certain cost control procedures and
to the discontinuance or disposal of certain technologies. Improvements in cost
control resulted in reduced personnel and associated labor costs, reduced
professional and consulting costs, the closure of the foreign sales offices in
the United Kingdom and Italy, and other reductions in overhead. The disposal or
discontinuance of the SFC and TOF2000 technologies later in 1998 resulted in
decreases in marketing personnel and related marketing costs.
New directors and management have recently been engaged without any
appreciable increase in expenses due to the fact that new management will rely
principally upon incentive programs such as stock options and deferred
compensation rather than salary to pay its top managers.
RESEARCH AND DEVELOPMENT
For the three months ended March 31, 1999, research and development costs
were $392,161, or 24.8% of net sales, compared to $858,779, or 36.4% of net
sales, for the three months ended March 31, 1998. As described above for
selling, general, and administrative expenses, the decrease in costs relates in
part to the continued emphasis of certain cost control procedures and to
discontinuance or disposal of certain technologies. Improvements in cost
control resulted in reduced personnel and associated labor costs and reductions
generally in research and development overhead. The disposal or discontinuance
of the SFC and TOF2000 technologies later in 1998 resulted in decreases in
engineering and scientific personnel, associated labor costs, and related
development expenses associated with these technologies. Another cause for the
reduction in research and development costs is that JEOL, through its agreement
with the Company, agreed to subsidize the continuing development of the Jaguar
in the amount of $300,000, of which $180,000 was recognized as a reduction of
research and development costs during the first quarter of 1999.
UNUSUAL CHARGES
Effective April 21, 1999, the current members of the board of directors of
the Company resigned and a new board was appointed consisting of Howard S.
Landa, Steven Strasser, and Brian B. Lewis, with Mr. Landa serving as the newly
appointed chief executive officer. Under the employment agreements of the
former chief executive officer and chief operating officer, each had the right
to terminate his employment agreement for cause with the sale of the assets of
the acoustics division and to receive compensation equal to his base salary
remaining under their employment agreements, which would have been approximately
$560,000 in the aggregate. In lieu of this payout, the new board of directors
negotiated a termination benefit of $195,000 in the aggregate and consulting
arrangements whereby the former chief executive officer would provide
transitional services to the Company and the former chief operating officer
would continue as the chief operating officer of the Company to supervise the
ongoing operations of the Company in exchange for monthly compensation of
$10,000 each, bonuses to be paid on the occurrence of certain events, and
aggregate options to acquire 70,000 shares of common stock, half of which are
exercisable at $3.00 per share and the other half at $5.00 per share. Since the
right to the termination benefit arose in connection with the sale of the assets
of the acoustics division, the termination benefit of $195,000 has been recorded
in the quarter ended March 31, 1999, as an unusual charge.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had total current assets of $3,641,226
(including cash and cash equivalents of $1,841,866) and total current
liabilities of $1,716,711, resulting in working capital of $1,924,515 and a
working capital ratio of 2:1.
During the quarter ended March 31, 1999, the Company's primary source of
cash was from the sale of the assets of the acoustics division to PCB, exclusive
of the sale of the real property. See Note B to the consolidated financial
statements. As a result of the sale, the Company received proceeds, net of the
costs of the transaction, of $4,219,436. Additionally, the Company expects to
close the sale to PCB of the real property in the near future, which should
provide additional proceeds to the Company of approximately $700,000, after
transaction costs and the payoff of the underlying mortgage.
The Company has historically relied heavily on the sale of common and
preferred stock as the primary method to fund its working capital needs,
operational losses, and research and development efforts. In the first quarter
of 1998, the Company completed the private placement of its 1998 Series A
Preferred Stock in the aggregate amount of $3,500,000. The Preferred Stock was
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 (1) $18.00 or (2) 85% of the average closing price of the common
stock for the ten trading days preceding the conversion. The Company was
concerned that the subsequent decrease in the Company's stock price combined
with the potential for conversion of the Preferred Stock and related sale of the
common stock received, created a market "overhang" that was potentially
detrimental to the shareholders of the Company. The Company sought and obtained
the agreement of the holders of the remaining Preferred Stock to sell that stock
back to the Company. Using part of the proceeds from the sale of the acoustics
division, the Company has reacquired all of the remaining Preferred Stock for
the amount of approximately $3.07 million, which represents the amount
originally paid by the investors plus accrued but unpaid dividends.
The Company recently added approximately $970,000 in capital, after the
payment of associated expenses, by the sale of 250,000 shares of common stock.
See Note G to the consolidated financial statements.
Management believes that the principal use of cash for the remainder of the
1999 year will be investments in other entities. This use of cash is entirely
discretionary and can be discontinued at any time if it appears that operations
or other activities of the Company will require more cash than currently
anticipated.
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 also reviewed its noninformation technology
systems, including bench-top tools, environmental chambers, and laboratory
equipment. 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 is currently on track to complete all necessary
modifications prior to December 31, 1999. The Company has spent an estimated
$25,000 in these efforts to date and has budgeted an additional $8,000 for the
remainder of 1999.
The Company has also conducted a survey of its business partners and
vendors for their Year 2000 compliance. The Company has obtained written
verification that all business partners and 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.
Based on its review and the steps it has taken to date, the Company has not
adopted a formal Year 2000 contingency plan to address unresolved or undetected
issues. 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. In such event, significant technical resources could be diverted from
the Company's ongoing development work and technical support functions until
such issues were resolved. 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:
SEC
Exhibit Reference
Number Number Title of Document
------- -------- --------------------------
1 (27) Financial Data Schedule
REPORTS ON FORM 8-K
During the quarter ended March 31, 1999, the Company did not file any
report on Form 8-K. The Company did file a report on Form 8-K dated April 21,
1999, reporting a change in the officers and directors of the Company.
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.
Sensar Corporation
Dated: May 14, 1999 By /s/ Howard S. Landa, Chairman of
the Board (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 MARCH 31, 1999, AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,841,866
<SECURITIES> 0
<RECEIVABLES> 198,910
<ALLOWANCES> 6,205
<INVENTORY> 974,071
<CURRENT-ASSETS> 3,641,226
<PP&E> 1,430,708
<DEPRECIATION> (536,953)
<TOTAL-ASSETS> 4,579,584
<CURRENT-LIABILITIES> 1,716,711
<BONDS> 0
<COMMON> 2,678
0
0
<OTHER-SE> 2,660,195
<TOTAL-LIABILITY-AND-EQUITY> 4,579,584
<SALES> 1,579,141
<TOTAL-REVENUES> 1,579,141
<CGS> 816,442
<TOTAL-COSTS> 1,972,122
<OTHER-EXPENSES> 19,939
<LOSS-PROVISION> 195,000
<INTEREST-EXPENSE> 9,273
<INCOME-PRETAX> 1,527,465
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,527,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,527,465
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
