SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission only (as permitted by Rule
14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
LARSON DAVIS INCORPORATED
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filling Proxy Statement, if other than the
registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total Fee Paid:
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$1,700
2) Form, Schedule, or Registration Statement No.:
Initial filing of Preliminary Proxy Statement
3) Filing Party:
LarsonoDavis Incorporated
4) Date Filed:
December 14, 1998
[LARSON DAVIS LETTERHEAD/LOGO]
Dear Shareholder:
I am writing to you to explain the rationale of your Board in presenting
the transactions contained within the enclosed Proxy Statement. The two
underlying strategies we have adopted are to reorganize the Company from a
business focus standpoint and to propose certain measures which would give the
Company the flexibility to deal with pressing matters which may be affecting the
Company's stock price.
Dealing with the business issues first, we have decided to sell the
acoustics operation to PCB Group, Inc. From a strategic standpoint, we believe
it is difficult to effectively operate our acoustics business as a global
business with sales of only $7 million and with a limited infrastructure. Over
the past few months, we have explored ways to grow this business ourselves in a
more aggressive manner by either buying complementary companies, partnering, or
from internal growth spearheaded by new product development.
Given the historically fragile state of the Company's finances, none of
these options has proven to be attractive or feasible when balanced against the
risks involved and the resources of the Company. Consequently, the Company
decided to explore alternatives for maximizing the amount it could realize from
the sale of the acoustics business. PCB is a fast growing and relatively
significant player in the acoustics and vibration industry and was able to
justify payment of an attractive price for the acoustics business as a way to
continue its expansion.
As you can see from the enclosed financials, the acoustics business lost in
excess of $3 million in 1997 and has traded at only break-even in the first nine
months of 1998. A significant turnaround has been achieved for this business
that is still ongoing. PCB has agreed to purchase this business on the basis of
this turnaround. The transaction involves an up front payment of $5.25 million
in cash and a note payable by the end of 1999 of $500,000. PCB will also assume
$1.8 million in liabilities associated with the business.
Jeffrey Cohen, COO of the Company, in conjunction with his Sensar duties,
will continue to run the acoustics business under the guidance of PCB once the
transaction is completed and until the end of 1999.
The other major factor considered by the Company in deciding to sell the
acoustics business relates to its financing arrangements. Historically, the
Company has been financed by the exercise of warrants and options with the
subsequent dilution to the shareholders of Common Stock. In early 1998, the
holders of warrants declined to continue to exercise their warrants as a result
of the precipitous decline in the Company's stock price. Partially as a result
of the termination of ongoing equity financing, a $1 million line of credit was
called for renegotiation on onerous terms and the Company elected to repay this
debt. In urgent need for further rapid financing, the Company entered into a
private placement of preferred shares.
Aggressive terms attached to this financing, although it was not envisioned
that the impact of the conversion of these preferred shares would be materially
dilutive to the shareholders of Common Stock given the prevailing stock price at
that time. However, as the stock price continued to fall during the subsequent
months, the impact of this conversion has increased proportionately, creating a
very material overhang in the stock market. It is now difficult to attract new
buyers to the stock even at the currently depressed levels.
As a result of the low price of the stock, the Company is under threat of
delisting from Nasdaq in the absence of any remedial measures.
Without the sale of the acoustics business, the Company is unable to redeem
the Series A Preferred Stock and eliminate the overhang from its own resources.
Access to commercial financing is not available due to the historically high
level of losses and further access to the equity markets is not a viable option.
The Company was, therefore, faced with the dilemma of allowing a potentially
disorderly conversion which would result in very significant dilution of the
Common Stock or finding a way to eliminate or minimize the impact of the
preferred conversion. Simply permitting the conversion to occur on the current
terms would crystallize delisting from Nasdaq and make any return extremely
difficult due to the dilutive nature of the conversion.
We have negotiated an agreement with the holders of the Series A Preferred
Stock that will permit us to repurchase that stock. The sale of the acoustics
business would result in sufficient cash to permit the Company to complete this
transaction. In this document however, we have asked you to provide us with the
flexibility to allow conversion by increasing the allowable dilution above the
20% restriction required by Nasdaq.
We have asked for this flexibility for two reasons. First, we would like
to explore possible uses of the cash and related proceeds of the sale of the
acoustics business for acquisition opportunities, which will allow us to begin
to enhance shareholder value by other avenues in addition to our technology
development. Second, the Company has now substantially eliminated its loss
position and repositioned its product line sufficiently that the future outlook
is significantly more attractive. This may allow alternative equity investors
to be attracted allowing any potential conversion of the preferred stock to be
carried out in an orderly manner. This would leave the Company in a strong cash
position enabling several alternative strategies to be adopted.
If an acquisition program is to be adopted, then the preservation of the
Nasdaq listing will be a critical element of the strategy. We have, therefore,
also asked for the flexibility to consider a reverse split for the stock. Our
review of other companies indicates that quite often reverse splits do not
result in a long-term price increase for the stock. However, in certain
circumstances, reverse splits do achieve their goals when associated with
positive announcements and a more comprehensive reorganization similar to what
is being presented in the Proxy Statement.
As a result of the sale of the acoustics business, our focus will now be
narrowed to our Jaguar mass spectrometry line and the CrossCheck resistivity
product. We announced in mid-October that we had entered into a letter of
intent with JEOL to partner with them over the next five years for development
and marketing of the Jaguar product. We have now completed the formalization of
this agreement.
From a financial perspective, JEOL will pay an up front fee of $300,000
and, subject to our meeting development milestones, will guarantee the purchase
of a certain number of units. In conjunction with this and our efforts to sign
up independent distributors in Europe and Asia, we believe that the Sensar
division will trade at or near break even for 1999.
CrossCheck continues to represent a potentially significant opportunity for
the Company, although we continue to struggle to gain momentum with the product
despite interesting technological successes. At the present time, we continue
to believe that our work with our utility partner will lead to promising product
developments in early 1999.
In 1997, the Company incurred an overall loss of nearly $15 million. This
has been reduced to a loss for the nine months ended September 30, 1998, of
approximately $6 million (including approximately $3.0 million of unusual
charges). In the absence of any material changes to our market penetration, we
anticipate that in 1999 the Company overall, will have a very modest loss that
would be easily funded from the cash reserves created from the acoustics sale.
In 2000, the full impact of the JEOL transaction and additional European and
Asian distribution, as well as possibly a significant contribution from
CrossCheck, hold the promise of returning the Company to a profitable trading
position.
We are, therefore, asking you to approve the proposals as presented.
Sincerely,
Andrew Bebbington
Chairman of the Board and
Chief Executive Officer
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE, AND RETURN YOUR PROXY
LARSONoDAVIS INCORPORATED
1681 WEST 820 NORTH
PROVO, UTAH 84601
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH , 1999
TO THE SHAREHOLDERS OF LARSONoDAVIS INCORPORATED:
A special meeting of the shareholders (the "Special Meeting") of
LarsonoDavis Incorporated (the "Company") will be held at the
, Utah, on March , 1999. The
Special Meeting will convene at 9:00 a.m., local time, to consider and take
action on the following proposals:
(1) To sell substantially all of the assets and operations of the
Company's acoustics and vibration instrumentation business (the "Asset Sale")
pursuant to an Asset Purchase Agreement, dated November 30, 1998, as amended
February , 1999, between PCB Group, Inc., and the Company (the "Purchase
Agreement"). A copy of the Purchase Agreement is attached as Appendix A to the
accompanying Proxy Statement.
(2) To amend the Company's Articles of Incorporation to change the
Company's name to Sensar Corporation immediately following the consummation of
the Asset Sale. A copy of the proposed amendment is attached as Appendix B to
the accompanying Proxy Statement.
(3) To approve the possible issuance of shares of Common Stock of the
Company on conversion of the issued and outstanding 1998 Series A Preferred
Stock ("Series A Preferred Stock") that may equal or exceed 20% of the Common
Stock that was issued and outstanding at the time the Series A Preferred Stock
was created.
(4) To approve a possible reverse stock split of the issued and
outstanding Common Stock of the Company whereby the Company would issue one new
share of Common Stock of the Company in exchange for every five to ten shares of
currently outstanding Common Stock, with the precise conversion ratio to be
determined by the Company's board of directors at a later time.
(5) To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
ONLY OWNERS OF RECORD OF THE 13,392,562 SHARES OF THE COMPANY'S COMMON
STOCK AND THE 2,938.75 SHARES OF THE COMPANY'S SERIES A PREFERRED STOCK ISSUED
AND OUTSTANDING AS OF THE CLOSE OF BUSINESS ON FEBRUARY 3, 1999 (THE "RECORD
DATE"), WILL BE ENTITLED TO NOTICE OF AND TO VOTE AT THE SPECIAL MEETING. THE
COMMON STOCK AND THE SERIES A PREFERRED STOCK WILL VOTE JOINTLY AS A SINGLE
CLASS. EACH SHARE OF COMMON STOCK IS ENTITLED TO ONE (1) VOTE AND EACH SHARE OF
THE SERIES A PREFERRED STOCK IS ENTITLED TO TWO HUNDRED SEVENTY EIGHT (278)
VOTES.
THE ATTENDANCE AT AND/OR VOTE OF EACH SHAREHOLDER AT THE SPECIAL MEETING IS
IMPORTANT, AND EACH SHAREHOLDER IS ENCOURAGED TO ATTEND. PLEASE COMPLETE, SIGN,
DATE, AND PROMPTLY MAIL THE ENCLOSED PROXY, WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING.
LARSONoDAVIS INCORPORATED
BY ORDER OF THE BOARD OF DIRECTORS
Andrew Bebbington, CEO
Provo, Utah
Dated: , 1999
Preliminary Copy
LARSONoDAVIS INCORPORATED
1681 WEST 820 NORTH
PROVO, UTAH 84601
PROXY STATEMENT
This Proxy Statement is being furnished to shareholders of LarsonoDavis
Incorporated (the "Company") to seek their approval of several major changes to
the business and structure of the Company. The proposed changes are far
reaching and will fundamentally effect the future direction of the Company.
YOUR CONSIDERATION OF THESE PROPOSALS AND VOTE AT THE SPECIAL MEETING ARE
VERY IMPORTANT. PLEASE CAREFULLY READ THIS PROXY STATEMENT AND THE ATTACHED
MATERIALS AND DATE, SIGN, AND RETURN THE ENCLOSED PROXY SO YOUR SHARES CAN BE
VOTED AT THE SPECIAL MEETING.
The Company has negotiated the sale of its acoustics and vibration business
(the "Acoustics Business") to PCB Group, Inc. ("PCB"), a privately-held company
engaged in the acoustics and vibration industry, primarily through the design,
manufacture, and sale of accelerometers. The Acoustics Business has been the
"core" business of the Company since inception and the alternative of expanding
this business was explored at some length prior to reaching a decision to sell.
The Company explored acquiring complementary businesses, seeking financing to
fund the growth of the Acoustics Business, and using internally generated funds
and newly developed products to expand the Acoustic Business. For a variety of
reasons, none of these avenues proved fruitful. Absent growth, management did
not believe the Company would be able to significantly increase its market share
and fund a restructuring of its distribution system, limiting the long-term
potential of the Acoustics Business to the Company.
At the same time, the sharp decline in the price of the Common Stock of the
Company has created a significant "overhang" in the public market. The holders
of the Company's 1998 Series A Preferred Stock (the "Series A Preferred Stock")
have the right to convert their Series A Preferred Stock into shares of Common
Stock at any time at an effective price of 85% of the current market price of
the Common Stock. Consequently, they can receive an immediate 15% return if
they simultaneously sell the Common Stock. Because of the currently low price
of the Common Stock, the holders of the Series A Preferred Stock, if they
elected to convert based on the market price of the Company's Common Stock for
the ten trading days preceding February 3, 1999, would hold approximately
9,800,000 shares of Common Stock. If they attempted to sell such a large number
of shares, the market price of the Common Stock would continue to decline and
ultimately the liquidity in the public market could disappear. While the
decision to hold or sell Common Stock belongs to each individual shareholder,
the Company believes that most of the holders of the Series A Preferred Stock
would not be willing to accept the market risk of holding the Common Stock long-
term.
The Company has recently entered into agreements with the remaining holders
of the issued and outstanding Series A Preferred Stock to reacquire the Series A
Preferred Stock for the amount originally paid to the Company by the holders,
plus a calculated amount equal to 4% per annum. Under the terms of the
agreement, the purchase will occur within 15 days of the closing of the sale of
the Acoustics Business to PCB and holders have agreed not to convert the Series
A Preferred Stock to Common Stock in the interim. The Company's obligation to
purchase the Series A Preferred Stock is dependent on the closing of the sale to
PCB. The Company has the right to assign its interest in the agreements and may
do so in appropriate circumstances so that it can retain its working capital and
maintain maximum flexibility in deciding on the future strategy of the Company.
Consequently, the Company is seeking approval of the issuance of the Common
Stock on conversion of the Series A Preferred Stock. The agreements with the
holders of Series A Preferred Stock will lapse on March 31, 1999, if the
proposed Asset Sale to PCB is not completed by that time.
THIS PROXY STATEMENT AND FORM OF PROXY ARE FIRST BEING MAILED TO
SHAREHOLDERS ON OR ABOUT FEBRUARY , 1999.
The decline in the stock price has had another effect. One of the
requirements of the Nasdaq National Market, on which the Common Stock of the
Company is traded, is that the stock price not be less than $1.00 per share.
The Company was informed by Nasdaq that in the event that the Common Stock did
not trade above this minimum for ten consecutive days prior to January 13, 1999,
it was the intent of Nasdaq to delist the Common Stock. The Company filed a
request for a hearing with respect to this decision on January 12, 1999, and has
been granted an oral hearing set for March 19, 1999. In the event that the
developments in the business of the Company or the other actions taken by the
Company do not result in a significant increase in the market price for the
Common Stock, the Company is seeking your approval of a "reverse split," or
consolidation, of the currently issued Common Stock. This consolidation would
be on the basis of a ratio to be selected by the Company at a later date of from
five-to-one up to ten-to-one. That is, each five shares of outstanding Common
Stock up to ten shares of outstanding Common Stock would be consolidated into a
single share of Common Stock (the "Consolidation"). The Consolidation would
apply to all outstanding shares of Common Stock so the percentage ownership of
the Company of each shareholder would not change. However, the overall number
of outstanding shares would be reduced, making each individual share more
valuable.
Finally, since the Company is selling PCB the right to continue to use the
brand name "LarsonoDavis" in connection with the acoustics instrumentation
products, the Company is seeking your approval of a change in its corporate name
to "Sensar Corporation."
A great deal of additional information about the Company and the proposals
to be submitted to shareholders is contained in the remaining parts of this
Proxy Statement. Shareholders are encouraged to review such information
thoroughly and to return the enclosed proxy so that their shares can be voted at
the Special Meeting.
On December 10, 1998, the last trading day prior to the announcement of the
sale of the Acoustics Business to PCB, the closing price for the Company's
Common Stock was $0.4375.
Proxies are being solicited on behalf of the Company. In addition to this
solicitation by mail, the directors, officers, and employees of the Company may
solicit proxies by mail, telephone, facsimile transmission, or in person. Such
persons will not receive additional compensation in connection with such
solicitation but may be reimbursed for reasonable out-of-pocket expenses. All
costs of solicitation shall be paid by the Company.
The enclosed proxy, even though executed and returned to the Company,
may be revoked at any time before it is voted, either by giving a written
notice, mailed or delivered to the secretary of the Company so it is received
prior to the Special Meeting, by submitting a new proxy prior to the Special
Meeting bearing a later date, or by voting in person at the Special Meeting. If
the proxy is returned to the Company without specific direction, the proxy will
be voted in accordance with the board of directors' recommendations. The board
of directors has unanimously recommended the adoption of all proposals submitted
to the shareholders.
For a discussion of certain risks associated with the proposals to
shareholders, see the discussion under "RISK FACTORS" beginning on page 17.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Proxy Statement and accompanying materials contain certain
forward looking statements and information relating to the Company and its
business that are based on the beliefs of management of the Company and
assumptions made concerning information currently available to management. Such
statements reflect the current views of management of the Company and are not
intended to be accurate descriptions of the future. The discussion of the
future business prospects of the Company is subject to a number of risks and
assumptions, including the completion of the proposed transaction with PCB, the
approval by the shareholders of the other proposals of the Company, the decision
of Nasdaq whether or not to permit the continued listing of the Company's Common
Stock, the ability of the Company to modify its Jaguar products to meet
specifications established by JEOL, 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 Company's ability to enter into favorable strategic
alliances, joint ventures, or other collaborative arrangements with established
industry partners for Europe and Asia, the success of the marketing efforts of
the Company and the entities with which it has agreements, the success of the
Company in developing its technology and designing and constructing products
based on that technology, the ability of the Company to successfully protect its
patent rights to prevent competitors from benefiting from the technology, the
ability of the Company to compete with larger, more established entities, 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 provide incorrect, actual results of
the Company may vary materially from those described. The Company does not
intend to update these forward looking statements, except as may occur in the
regular course of its periodic reporting obligations.
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
SUMMARY.....................................................................7
SPECIAL MEETING...........................................................7
Date, Time, and Place...................................................7
Purpose of the Special Meeting..........................................7
Record Date.............................................................7
Shares Outstanding and Entitled to Vote.................................7
Quorum..................................................................8
Required Votes..........................................................8
PROPOSAL 1: THE ASSET SALE...............................................8
Reasons for the Asset Sale..............................................8
LarsonoDavis Laboratories...............................................8
PCB Group, Inc..........................................................8
Beehive Acquisition Corp................................................8
Purchase Price..........................................................8
Use of Proceeds from the Asset Sale.....................................9
The Company's Anticipated Operations Following the Asset Sale...........9
Interest of Management and Rights of Executives.........................9
Potential Consequences of Terminating the Purchase Agreement...........10
Conditions to Consummation of the Asset Sale...........................10
Closing Date...........................................................10
Termination Date.......................................................10
Termination Fee........................................................10
Federal Tax Consequences...............................................11
Recommendation of the Board of Directors...............................11
PROPOSAL 2: CORPORATE NAME CHANGE.......................................11
Reasons for the Corporate Name Change..................................11
Recommendation of the Board of Directors...............................11
PROPOSAL 3: ISSUANCE OF COMMON STOCK ON CONVERSION OF SERIES A
PREFERRED STOCK..........................................................12
Background and Reasons for Proposal 3..................................12
Agreement With Preferred Holders.......................................12
Conversion Terms.......................................................13
Recommendation of the Board of Directors...............................13
PROPOSAL 4: REVERSE STOCK SPLIT.........................................13
Background and Reasons for Proposal 4..................................13
Nasdaq Requirements....................................................14
Effect on Outstanding Stock and Rights.................................14
Exchange of Certificates; Fractional Shares............................14
Tax Consequences.......................................................15
Recommendation of the Board of Directors...............................15
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA................................16
RISK FACTORS...............................................................17
HISTORY OF LOSSES........................................................17
NARROWED FOCUS OF COMPANY BUSINESS.......................................17
LACK OF EMPLOYEES AND INFRASTRUCTURE.....................................17
FUTURE STRATEGIC ISSUES..................................................17
RISK OF CHANGE OF CONTROL................................................18
POTENTIAL LOSS OF DISTRIBUTORS...........................................18
RISK OF REDUCED CAPITALIZATION...........................................18
POTENTIAL LOSS OF NASDAQ LISTING.........................................18
NEED FOR ADDITIONAL CAPITAL..............................................18
RISKS IF ISSUANCE OF COMMON STOCK NOT APPROVED...........................19
CONDITIONS TO CLOSING OF SALE OF ACOUSTICS BUSINESS......................19
EXECUTIVE AGREEMENTS.....................................................19
PROPOSAL NO. 1: THE ASSET SALE............................................19
BACKGROUND AND REASONS FOR THE ASSET SALE................................19
RECOMMENDATION OF THE BOARD OF DIRECTORS.................................21
PLANS FOR THE COMPANY SUBSEQUENT TO THE ASSET SALE.......................22
TERMS OF THE ASSET PURCHASE..............................................23
Sale of Assets.........................................................23
Assumed Liabilities....................................................23
The Purchase Price.....................................................24
Closing................................................................24
Related Agreements.....................................................25
Representations and Warranties.........................................25
Operations of the Company Prior to Closing.............................26
No Shop................................................................26
Non-Competition Obligations............................................26
Termination of the Purchase Agreement..................................27
Termination Fee........................................................27
Indemnification; Survival of Representations and Warranties............27
Expenses...............................................................28
RIGHTS OF EXECUTIVES.....................................................28
INTEREST OF MANAGEMENT OR DIRECTORS IN ASSET SALE........................28
ACCOUNTING TREATMENT OF THE ASSET SALE...................................28
TAX CONSEQUENCES.........................................................29
GOVERNMENT AND REGULATORY APPROVALS......................................29
ARMS' LENGTH TRANSACTION.................................................29
NO DISSENTERS' RIGHTS....................................................29
REQUIRED VOTES...........................................................29
PROPOSAL 2: CORPORATE NAME CHANGE.........................................30
REQUIRED VOTES...........................................................30
PROPOSAL 3: ISSUANCE OF COMMON STOCK ON CONVERSION OF SERIES A
PREFERRED STOCK............................................................30
TERMS OF THE SERIES A PREFERRED STOCK....................................30
NASDAQ SHAREHOLDER APPROVAL REQUIREMENTS.................................31
RECENT AGREEMENT WITH CERTAIN HOLDERS....................................31
CONVERSION OF SERIES A PREFERRED STOCK...................................32
REQUIRED VOTES...........................................................32
PROPOSAL 4: REVERSE STOCK SPLIT...........................................33
GENERAL..................................................................33
NASDAQ MINIMUM BID PRICE.................................................33
BOARD DISCRETION TO IMPLEMENT THE CONSOLIDATION..........................35
EFFECTS OF THE CONSOLIDATION ON REGISTRATION, VOTING RIGHTS,
AND SERIES A PREFERRED STOCK...........................................35
EFFECT ON STOCK OPTIONS AND WARRANTS.....................................36
CHANGES IN STOCKHOLDERS' EQUITY..........................................36
INCREASE IN STOCK AVAILABLE FOR ISSUANCE.................................36
EXCHANGE OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES.........36
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................37
NO DISSENTERS' RIGHTS....................................................38
REQUIRED VOTES...........................................................38
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS......................39
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...........43
SELECTED HISTORICAL FINANCIAL DATA.........................................45
CERTAIN FINANCIAL DATA...................................................45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................47
OVERVIEW.................................................................47
RESULTS OF OPERATIONS....................................................48
Comparison of Nine Months Ended September 30, 1998 and 1997............48
Net Sales ...........................................................48
Cost of Sales .......................................................49
Selling, General, and Administrative ................................49
Research and Development ............................................49
Unusual Charges .....................................................49
Comparison of Years Ended December 31, 1997 and 1996...................50
Net Sales ...........................................................50
Cost of Sales .......................................................50
Selling, General, and Administrative ................................51
Research and Development ............................................51
Unusual and Nonrecurring Charges ....................................51
Comparison of Six Months Ended December 31, 1996 and 1995..............52
Net Sales ...........................................................52
Cost of Sales .......................................................52
Selling, General, and Administrative ................................52
Research and Development ............................................52
Comparison of Years Ended June 30, 1996 and 1995.......................53
Net Sales ...........................................................53
Cost of Sales .......................................................53
Selling, General, and Administrative ................................53
Research and Development ............................................53
LIQUIDITY AND CAPITAL RESOURCES..........................................53
YEAR 2000................................................................54
BUSINESS OF THE COMPANY....................................................55
GENERAL..................................................................55
TOF MASS SPECTROMETER TECHNOLOGY.........................................55
CROSSCHECK TECHNOLOGY....................................................56
LICENSED TECHNOLOGY......................................................56
PATENTS AND TRADEMARKS...................................................57
MANUFACTURING AND ASSEMBLY...............................................57
MARKETING AND DISTRIBUTION...............................................57
BACKLOG..................................................................57
COMPETITION..............................................................58
GOVERNMENTAL REGULATION..................................................58
ENVIRONMENTAL COMPLIANCE.................................................58
MAJOR CUSTOMERS AND FOREIGN SALES........................................58
PERSONNEL................................................................58
LEGAL PROCEEDINGS........................................................58
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS....................59
SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT..............60
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..................61
SHAREHOLDER PROPOSALS......................................................62
OTHER MATTERS..............................................................62
INDEPENDENT PUBLIC ACCOUNTANTS.............................................62
AVAILABLE INFORMATION......................................................63
INDEX TO FINANCIAL STATMEENTS..............................................64
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS..............................64
INDEPENDENT AUDITORS' REPORTS............................................64
CONSOLIDATED FINANCIAL STATEMENTS........................................64
</TABLE>
APPENDIX A - Asset Purchase Agreement
APPENDIX B - Amendment to Articles of Incorporation
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information, including the financial
statements appearing elsewhere herein. Shareholders are urged to read this
Proxy Statement and the appendices attached hereto carefully and in their
entirety. Capitalized terms used in this Proxy Statement shall have the meaning
ascribed to them herein.
SPECIAL MEETING
Date, Time, and Place: March , 1999, at 9:00 a.m., local time, at
.
Purpose of the Special
Meeting: (1) To authorize the sale of the Acoustics
Business (the "Asset Sale") pursuant to an Asset
Purchase Agreement, dated November 30, 1998, as
amended February , 1999, by and among PCB
Group, Inc., its wholly-owned subsidiary Beehive
Acquisition Corp., the Company and the wholly-
owned subsidiary of the Company, LarsonoDavis
Laboratories (the "Purchase Agreement"). A copy
of the Purchase Agreement is attached as Appendix
A to this Proxy Statement.
(2) To amend the Company's Articles of
Incorporation to change the Company's name to
Sensar Corporation (the "Corporate Name Change").
A copy of the proposed amendment is attached as
Appendix B to this Proxy Statement.
(3) To approve the issuance of shares of Common
Stock on conversion of the issued and outstanding
Series A Preferred Stock even if such conversion
would result in the issuance of 20% or more of the
Common Stock that was outstanding at the time the
Series A Preferred Stock was created.
(4) 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 by
the Company's board of directors at a later time.
(5) To transact such other business as may
properly come before the Special Meeting or any
adjournment(s) thereof.
Record Date: The close of business on February 3, 1999.
Shares Outstanding and
Entitled to Vote: On the Record Date, there were 13,392,562 shares
of Common Stock of the Company outstanding, with
each share entitled to cast one vote per share at
the Special Meeting, and 2,938.75 shares of the
Series A Preferred Stock outstanding, with each
share entitled to cast 278 votes. The Common
Stock and the Series A Preferred Stock will vote
together as a single voting class.
Quorum: The bylaws of the Company require that holders of
at least 33-1/3% of the voting power of issued and
outstanding Common Stock and Series A Preferred
Stock be in attendance at the Special Meeting, in
person or by proxy in order to constitute a
quorum.
Required Votes: The affirmative vote of the holders of a majority
of the voting power of all outstanding shares of
Common Stock and Series A Preferred Stock entitled
to vote thereon is required to approve the sale of
the Acoustics Business and the Corporate Name
Change. The affirmative vote of a majority of the
votes cast at the Special Meeting, if a quorum is
present, is required to approve the Consolidation
and the issuance of Common Stock on conversion of
the Series A Preferred Stock.
PROPOSAL 1: THE ASSET SALE
Reasons for the Asset Sale: Management believes that the Company would need to
be substantially larger and to make significant
investment in both new products and enhanced
distribution capabilities to be successful for the
longer term in the acoustics industry and to
compete effectively in this global market. Given
the Company's financial resources, the risk
associated with such investment, and the lack of
suitable other alternatives, management believes
that the sale of the Acoustics Business offers
more value to the Company.
LarsonoDavis Laboratories: LarsonoDavis Laboratories is a wholly-owned
subsidiary of the Company and is the operating
entity through which the Acoustics Business has
primarily been conducted. LarsonoDavis
Laboratories will not have material assets or
operations on consummation of the Asset Sale.
PCB Group, Inc.: PCB Group, Inc. ("PCB"), is a privately-held
company based in Depew, New York, engaged in the
acoustics and vibration industry, primarily
through the manufacture and sale of
accelerometers. PCB's principal executive offices
are located at 3425 Walden Avenue, Depew, New York
14043, and its telephone number is (716) 684-0001.
Beehive Acquisition Corp.: Beehive Acquisition Corp. ("Beehive") is a wholly-
owned subsidiary of PCB formed specifically to
consummate the Asset Sale and to operate the
Acoustics Business thereafter. Beehive's
principal executive offices are located at 3425
Walden Avenue, Depew, New York 14043, and its
telephone number is (716) 684-0001.
Purchase Price: Pursuant to the Purchase Agreement, Beehive will
pay the Company cash in the amount of $5.25
million and deliver a note for $500,000 payable
monthly based on a two-year amortization schedule
with a final balloon payment on December 31, 1999.
The cash payment and note are subject to
adjustment based on the calculated net asset value
of the Acoustics Business at December 31, 1998.
Based on preliminary information, the Company does
not believe this adjustment will be material.
Beehive will also assume approximately $1.8
million in liabilities associated with the
Acoustics Business.
Use of Proceeds from the
Asset Sale: The Company anticipates that the primary uses of
the after tax proceeds to be received by the
Company from the Asset Sale (the "Proceeds") will
be to fund the acquisition of the outstanding
Series A Preferred Stock subject to agreements
with the Company, at a cost of approximately $3.1
million, to use a limited amount to fund its
Jaguar and CrossCheck technologies, to provide
funds for possible future acquisitions, and as
working capital. The Company is currently seeking
an investor willing to take a longer-term position
in the Company to acquire the Series A Preferred
Stock so that the Company can preserve its working
capital. The Company currently does not intend to
make any distribution of the Proceeds to the
shareholders. Pending the Company's use of the
Proceeds, such funds will be temporarily invested
in liquid, short-term bank instruments.
The Company's Anticipated
Operations Following the
Asset Sale: Following the consummation of the Asset Sale, the
Company will primarily focus on its Jaguar and
CrossCheck technologies. If it is unable to sell
these operations, the Company will evaluate the
airport noise monitoring contracts that have been
serviced by Harris, Miller, Miller & Hansen, Inc.
("HMMH"), under a technology license from the
Company since June 30, 1995. The Company has
recently entered into a Technical Development
and Marketing Agreement with JEOL for its Jaguar
technology which will significantly enhance the
Company's ability to market its products. The
Company is also working with a major utility
company on an application for its CrossCheck
technology and hopes to commercialize a product
for this market in 1999. The Company may seek
to acquire additional businesses or to merge
with a larger established business.
Interest of Management and
Rights of Executives: Jeffrey Cohen, the chief operating officer of the
Company will continue to serve, on a part-time
basis, as the operations manager of the Acoustics
Business during 1999, in addition to his duties
with the Company. The Company will be reimbursed
by PCB at an annual rate of $60,000 for Mr.
Cohen's services to the Acoustics Business. The
Executive Employment Agreements of Andrew
Bebbington, the chief executive officer of the
Company, and Mr. Cohen give them the right to
terminate their agreements at any time within 60
days following the sale of "all or substantially
all of the assets." Neither Mr. Bebbington nor Mr.
Cohen has provided the Company with notice of
their intent to exercise this right. If they did
so, they would be entitled to certain specified
payments. (See "RISK FACTORS: Executive
Agreements" and "PROPOSAL 1: THE ASSET SALE:
Rights of Executives" and "Interest of Management
or Directors in Asset Sale.")
Potential Consequences of
Terminating the Purchase
Agreement: If the Asset Sale is not consummated, the Company
will continue to conduct the Acoustics Business
and will re-evaluate the ways in which the Company
can seek to enhance shareholder value. The
Company would not have sufficient cash assets to
redeem the Series A Preferred Stock if the Asset
Sale is not completed. (See "RISK FACTORS.")
Conditions to Consummation
of the Asset Sale: The Purchase Agreement provides that the
respective obligations of the Company,
LarsonoDavis Laboratories, Beehive and PCB to
consummate the Asset Sale are conditioned upon,
among other things, the fulfillment of the
agreements and covenants contained therein, the
continued validity of the representations and
warranties made by the parties, the lack of any
material adverse change to the business, the
approval of the Asset Sale by the Company's
shareholders, and obtaining the consents of
certain third parties to the assignment of the
material contracts of the Acoustics Business.
(See "RISK FACTORS: Conditions to Closing of Sale
of Acoustics Business.")
Closing Date: If the sale of the Acoustics Business is approved
by the shareholders, the Company anticipates
consummating the transaction within five business
days following the Special Meeting (the "Closing
Date").
Termination Date: The Purchase Agreement may be terminated prior to
the Closing Date upon the occurrence of certain
events, including (a) by mutual written consent of
the parties; (b) by the Company or PCB if the
Asset Sale shall not have been consummated on or
before March 31, 1999; (c) by PCB if the Company
commences negotiations concerning an alternative
acquisition proposal; (d) by PCB if the Company's
board of directors withdraws its recommendation to
shareholders to approve the Asset Sale or
recommends an alternative transaction to
shareholders; and (e) by either party if the other
party materially breaches its representations or
warranties or fails to perform its covenants or
agreements and such breach continues without cure
for a period of 30 days after the breaching
party's receipt of notice of breach.
Termination Fee: If the Purchase Agreement is terminated as a
result of (i) a breach by the Company of its
representations or covenants; or (ii) the
withdrawal by the board of directors of its
recommendation of the sale of the Acoustics
Business to PCB, the Company will be obligated
to pay a termination fee of $300,000 to PCB.
Federal Tax Consequences: The Company will recognize gain on the sale of the
Acoustics Business. The Company anticipates that
it will have net operating losses ("NOL")
available to offset the taxable gain attributable
to the transaction. The Company also anticipates
that it will have alternative minimum tax net
operating losses ("AMTNOL") available to offset at
least 90% of its alternative minimum taxable
income. Any remaining alternative minimum taxable
income will be taxed at 20%, which amount of tax
the Company does not consider to be material to
its financial position. The sale of the Acoustics
Business will not have a tax consequence for
individual shareholders of the Company.
Recommendation of the
Board of Directors: The terms of the Asset Sale are the result of
arms' length negotiations between the Company and
PCB. The Company's board of directors has
considered the terms of the Purchase Agreement,
including the consideration to be received by the
Company in the Asset Sale, in light of the
economic, financial, legal, and market factors
facing the Company and has concluded that the
Asset Sale is advisable and in the best interests
of the Company and its shareholders. THE
COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE ASSET SALE AND THE PURCHASE AGREEMENT
AND RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS
VOTE "FOR" THE PROPOSAL TO SELL THE ACOUSTICS
BUSINESS.
PROPOSAL 2: CORPORATE NAME CHANGE
Reasons for the Corporate
Name Change: The assets being sold to PCB include the right to
use the name "LarsonoDavis" that is associated
with the Company's acoustical instrumentation
products. As a consequence, the Purchase
Agreement requires that the Company change its
corporate name and that of its wholly-owned
subsidiary, LarsonoDavis Laboratories, in
connection with the closing of the transaction.
The Company anticipates implementing this name
change whether or not the Asset Sale is
consummated since, as a result of the
reorganization of management in November of 1997,
the original founders of the Company, Mr. Larson
and Mr. Davis, are no longer part of executive
management of the Company.
Recommendation of the
Board of Directors: The Company's board of directors has considered
the change in the Company's name in light of the
affect such change may have on the business of the
Company and in the public market for the Company's
stock and has concluded that such a change in
advisable and in the best interests of the Company
and its shareholders. THE COMPANY'S BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE CORPORATE
NAME CHANGE AND RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE
THE CORPORATE NAME CHANGE.
PROPOSAL 3: ISSUANCE OF COMMON STOCK ON CONVERSION OF SERIES A PREFERRED STOCK
Background and Reasons for
Proposal 3: The Company issued 3,500 shares of Series A
Preferred Stock and 700,000 warrants to purchase
Common Stock at $4.50 per share for an aggregate
gross sales price of $3.5 million in February
1998. The Series A Preferred Stock is
convertible, at the election of the holders, at
85% of the trading price for the Company's Common
Stock at the time of conversion. When the Series
A Preferred Stock was issued, the Company's Common
Stock was trading at approximately $3.60 per share
and it was anticipated that the Series A Preferred
Stock would be converted into approximately 9% of
the issued and outstanding Common Stock. The
corporate governance rules of Nasdaq require
shareholder approval of any transaction at less
than market value that would result in the
issuance of 20% or more of the Common Stock.
Since the time of issuance, the trading price for
the Company's Common Stock has declined so that if
the Series A Preferred Stock were converted based
on the market price of the Company's Common Stock
during the ten trading days ended February 3,
1999, such conversion would result in the issuance
of approximately 9,800,000 shares, or
approximately 42% of the then issued and
outstanding shares of Common Stock. Consequently,
in order to permit the conversion of the Series A
Preferred Stock at the current market price, the
Company is obligated to seek the approval of its
shareholders under Nasdaq rules. In the event
that the Company is unable to obtain such approval
and the Common Stock continues to be listed on
Nasdaq, the holders of the Series A Preferred
Stock could require the redemption of the Series A
Preferred Stock, plus accrued dividends, issued
and outstanding subsequent to the issuance of
2,332,984 shares of Common Stock (approximately
20% of the shares of Common Stock that were
outstanding at the time of issuance of the Series
A Preferred Stock) which would result in a cash
liability to the Company of approximately $2.6
million based on the current market price for the
Company's Common Stock.
Agreement With Preferred
Holders: The Company has recently entered into agreements
with the holders of all 2,938.75 shares of Series
A Preferred Stock currently issued pursuant to
which such holders have agreed to sell their
shares of Series A Preferred Stock to the Company
for payment of their original investment of $1,000
per share plus a calculated amount equal to 4%
per annum since the date of their investment
until payment. The aggregate cost to the Company
will be approximately $3.1 million and will be
paid from the Proceeds from the sale of the
Acoustics Business. The completion of the sale
is a condition precedent to the Company's
obligation to purchase the shares of Series A
Preferred Stock. If the Series A Preferred Stock
is not purchased prior to March 31, 1999, the
agreements terminate. In the event that the
sale to PCB is not completed and the Company's
Common Stock remains listed on Nasdaq,
shareholder approval of the conversion will
still be required. In addition, the Company
has the right to assign its right to purchase the
Series A Preferred Stock and may do so if a new
investor agreed to certain changes to limit the
impact of the conversion and sale of the Common
Stock acquired. Again, if the Common Stock
remains listed on Nasdaq, shareholder approval
would be required for the new investor to convert
the Series A Preferred Stock to Common Stock
beyond the 20% limitation.
Conversion Terms: Each share of Series A Preferred Stock is
convertible, at the election of the holder, 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 notice of
conversion as reported by the Nasdaq National
Market System on which the Company's Common Stock
is traded. Until conversion, the Series A
Preferred Stock bears an annual dividend of 4%, or
$40 per share per annum. The holders of the
outstanding shares of Series A Preferred Stock
have agreed to not exercise their right to convert
pending the sale of the Acoustics Business and the
potential purchase of such stock by the Company.
Recommendation of the
Board of Directors: The Company's board of directors has considered
the approval of the issuance of additional shares
of Common Stock in light of the Company's
contractual obligations and cash position and has
concluded that the authorization is advisable and
in the best interests of the Company and its
shareholders. THE COMPANY'S BOARD OF DIRECTORS
HAS UNANIMOUSLY APPROVED THE ISSUANCE OF COMMON
STOCK ON CONVERSION OF THE SERIES A PREFERRED
STOCK AND RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS VOTE "FOR" SUCH PROPOSAL.
PROPOSAL 4: REVERSE STOCK SPLIT
Background and Reasons for
Proposal 4: The Company's stock price has declined over the
past several months to a price of $0.3125 per
share as of February 3, 1999. The lower price for
the Company's Common Stock makes it unsuitable for
certain institutional investors and limits the
ability of broker-dealers to recommend an
investment in the Common Stock. This may
adversely affect the liquidity in the market for
the Company's Common Stock and, consequently, the
ability of shareholders to purchase and sell
shares of Common Stock. While there is no
mathematical certainty associated with a reverse
stock split, the Company believes that the
Consolidation of the issued and outstanding stock,
together with the other steps being taken by the
Company, should result in a higher price per share
for the Company's Common Stock. However, even if
the per share price increases, the Consolidation
may result in a reduced overall market
capitalization. (See "RISK FACTORS.")
Nasdaq Requirements: One of the requirements of the Nasdaq National
Market is that listed securities have a minimum
closing bid price of $1.00 per share. The
Company's Common Stock traded below this minimum
for 30 days resulting in a letter from Nasdaq
indicating that the Common Stock would be delisted
unless the closing bid price exceeded $1.00 per
share for ten consecutive trading days prior to
January 13, 1999. The Company filed a request for
an oral hearing to review this decision on January
12, 1999, and has been granted a hearing date of
March 19, 1999. During the interim, the Company's
Common Stock will continue to trade on the Nasdaq
National Market. In addition, in order to
maintain the listing for the Common Stock, the
Company must remain in compliance with certain
other minimum Nasdaq requirements. There is no
assurance the Company will be able to do so. (See
"RISK FACTORS.")
Effect on Outstanding Stock
and Rights: Every five to ten shares of Common Stock of the
Company issued and outstanding on the effective
date of the Consolidation would be converted
automatically into one share of new Common Stock,
par value $0.001 per share, with the precise
conversion ratio to be determined by the board of
directors at a later time. Since all of the
issued and outstanding Common Stock would be
consolidated, the percentage ownership of each
shareholder would remain unchanged. Rights to
acquire shares of Common Stock (such as options or
shares of Series A Preferred Stock) would be
adjusted so that the number of shares subject to
such rights would be reduced. As a consequence,
such issued and outstanding rights would represent
the right to acquire fewer shares, but the same
percentage of the Common Stock. Until conversion,
the relative voting rights of the Series A
Preferred Stock would increase. Each share of
Series A Preferred Stock has a fixed 278 votes
which will not be reduced by a reverse split.
Holders of the 2,938.75 shares currently
outstanding would continue to have an aggregate of
816,973 votes after a reverse split even though
the voting power of the Common Stock would be
reduced from 13,392,562 to 2,678,512 in the
event of a five-to-one Consolidation and to
1,339,256 in the event of a ten-to-one
Consolidation. (See "RISK FACTORS: Risk of
Change of Control.")
Exchange of Certificates;
Fractional Shares: Subsequent to the effective date, shareholders of
the Company will receive a transmittal letter (the
"Transmittal Letter") from the transfer agent of
the Company, Progressive Transfer Company,
instructing shareholders as to the steps necessary
for them to receive certificates representing new
Common Stock, identified by a new CUSIP Number.
If your old certificate(s) are sent to Progressive
Transfer Company on or before April 30, 1999, the
Company will pay the cost of the issuance of the
new certificate. If the certificates are sent in
subsequent to such date, the shareholders will be
required to bear such costs. In order to avoid
the issuance of fractional shares, shareholders
who would otherwise be entitled to receive a
fractional share of new Common Stock will receive
a cash distribution in lieu thereof. Such cash
distribution shall be calculated based on the
average closing price for the Company's Common
Stock for the five days preceding the effective
date as reported by the Nasdaq National Market or,
if the Company's Common Stock is no longer quoted
on the Nasdaq National Market, as reported by the
listing system on which the Company's Common Stock
is traded.
Tax Consequences: The reverse stock split will not have any federal
income tax consequences to the Company.
Typically, shareholders of the Company will not
have any federal income tax consequence with
respect to the Consolidation, other than the
receipt of cash in lieu of a fractional share. On
receipt of cash for a fractional share, the
shareholder will have capital gain or loss
determined by subtracting the tax basis of the
shareholder in such fractional share from the
amount received from the Company for the
fractional share.
Recommendation of the
Board of Directors: The Company's board of directors has considered
the impact such Consolidation may have on the per
share price of the Company's Common Stock and the
potential liquidity in the market for the
Company's Common Stock. The Company's board of
directors has determined that the Consolidation is
advisable and in the best interests of the Company
and its shareholders. THE COMPANY'S BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE REVERSE
STOCK SPLIT AND RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
CONSOLIDATE THE ISSUED AND OUTSTANDING STOCK OF
THE COMPANY.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth selected unaudited pro forma financial data
as of and for the nine months ended September 30, 1998, and for the year ended
December 31, 1997, and summarizes the estimated pro forma effect of the sale of
the Acoustics Business on the Company's financial position and results of
operations. The statement of operations data assumes that the Asset Sale had
occurred at the beginning of each of the respective periods and the balance
sheet data assumes that the Asset Sale had occurred on September 30, 1998. The
following table also summarizes the estimated pro forma effect on results of
operations from the sale or discontinuance of the TOF2000, SFC, and PAMS
technologies as though the sale or discontinuation had occurred at the beginning
of each of the respective periods. The pro forma data may not be indicative of
the results of operations and financial position of the Company as it may be in
the future, or as it might have been had the transaction been consummated on the
respective dates assumed. The selected unaudited pro forma financial data
should be read in conjunction with the Company's consolidated historical
financial statements and Unaudited Pro Forma Consolidated Financial Information
included elsewhere in this Proxy Statement.
Statement of Operations Data:
<TABLE>
<CAPTION>
Sale of Acoustics Business TOF2000, SFC, and PAMS
------------------------------------- -------------------------------------
Nine Months Ended Year Ended Nine Months Ended Year Ended
September 30, 1998 December 31, 1997 September 30, 1998 December 31, 1997
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 1,512,562 $ 1,275,077 $ 512,411 $ 4,537
------------- ------------- ------------- -------------
Costs and operating expenses:
Cost of sales 1,648,721 1,465,678 308,699 1,848
Research and development 1,289,471 2,807,932 1,289,471 2,807,932
Selling, general, and administrative 1,547,770 2,129,530 1,547,770 2,129,530
Unusual and non-recurring charges 3,036,733 1,567,296 164,826 1,383,964
------------- ------------- ------------- -------------
7,522,695 7,970,436 3,310,766 6,323,274
------------- ------------- ------------- -------------
Operating loss (6,010,133) (6,695,359) (2,798,355) (6,318,737)
Other income (expense), net (34,823) (31,729) 18,302 5,176
------------- ------------- ------------- -------------
Loss from continuing operations ($ 6,044,956) ($ 6,727,088) ($ 2,780,053) ($ 6,313,561)
============= ============= ============= =============
Loss per common share:
Basic ($0.59) ($0.58) ($0.33) ($0.55)
Diluted ($0.59) ($0.58) ($0.33) ($0.55)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1998
------------------
<S> <C>
Total assets $ 8,462,331
Total liabilities $ 1,003,289
Stockholders' equity $ 7,459,042
</TABLE>
RISK FACTORS
HISTORY OF LOSSES
The Company had a net loss of $14.8 million for the year ended December 31,
1997, and $6.1 million for the nine months ended September 30, 1998. In
connection with the sale of the Acoustics Business, the Company will seek to
eliminate a substantial portion of its overhead. However, as reflected on the
Pro Forma Consolidated Financial Statements, if the Company had sold the
Acoustics Business at the beginning of 1997, it would have had a loss of $6.7
million for 1997 and, if it had sold the Acoustics Business at the beginning of
1998, it would have had a loss of $6.0 million for the nine months ended
September 30, 1998. Of the 1998 loss, $3.5 million was principally associated
with the write down of intangible assets and inventories on the balance sheet,
which did not affect the cash position of the Company. Following completion
of the sale of the Acoustics Business, the profitability of the Company will
depend on the Company's ability to significantly increase its revenues from
the Jaguar and CrossCheck product lines or to acquire a profitable business.
There can be no assurance that the future operations of the Company will be
profitable. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.")
NARROWED FOCUS OF COMPANY BUSINESS
The sale of the Acoustics Business, if approved, will significantly narrow
the focus of the Company to two technologies, CrossCheck and Jaguar. While the
Company believes that both technologies offer medium- and long-term value, there
are several factors which may offset the eventual success of these technologies.
These include the ability of JEOL to sell the Jaguar product, the ability of
Sensar to enter into distribution agreements for the Jaguar product with
distributors in Europe and Asia, and the ability of Sensar to complete the
design of the Jaguar product in accordance with revised requirements from JEOL.
For CrossCheck, the instrument still needs to be developed from prototype stage
to a market specified product for various specialized high volume applications.
In addition, the risk of market acceptance of such potential products has yet to
be eliminated. The Company will seek to sell its rights underlying the
agreement with HMMH. If it is unable to do so, it will evaluate the risks and
rewards of servicing the existing contracts directly or permitting HMMH to
continue without a royalty obligation to the Company. As a result of the
narrowed focus, the business risk of the Company will increase.
LACK OF EMPLOYEES AND INFRASTRUCTURE
Upon consummation of the Asset Sale, the Company will have
significantly reduced its personnel to approximately 18 full-time employees
leaving the Company at risk should any employees decide to leave. Furthermore,
the infrastructure to support the potential growth of the Jaguar and CrossCheck
products will no longer be fully available and may need to be increased over the
coming year.
FUTURE STRATEGIC ISSUES
The Company believes that by selling the Acoustics Business for $5.25
million plus a short-term note for $500,00, it may be able to expand the
Company through acquisition or merger. In the event that it uses $3.1 million
of the Proceeds to acquire the Series A Preferred Stock, the Company would have
only a reduced amount to pursue its future goals. The funds available for this
purpose would be further reduced in the event the Company was obligated to make
payments to its executive officers under the terms of their employment
agreements which could aggregate approximately $560,000. (See the discussion
under "Executive Agreements" below.) In this case, it is unlikely that the
Company could pursue an effective acquisition strategy. Even if the Company
is able to preserve its working capital subsequent to the sale of the Acoustics
Business, there can be no assurance that the Company will be able to find any
suitable acquisition or merger candidate. In addition, there can be no
assurance that the share price of the Common Stock will increase sufficiently
to allow the Company to maintain its Nasdaq listing.
RISK OF CHANGE OF CONTROL
If the Consolidation is approved and implemented, even without conversion
of their holdings into Common Stock, the holders of the Series A Preferred Stock
would have substantially increased voting power vis-a-vis the Common Stock. The
voting power of the Series A Preferred Stock is fixed at 278 votes per share, or
an aggregate of 816,973 votes for the 2,938.75 shares currently issued and
outstanding. This would represent approximately 23% of the voting power in the
event of a five-to-one Consolidation and approximately 38% of the voting power
in the event of a ten-to-one Consolidation. Alternatively, if the Company does
not redeem the Series A Preferred Stock, the preferred shareholders could seek
to convert their holdings into Common Stock. Given the size of the potential
dilution, it is possible that the preferred shareholders will gain control of a
substantial percentage of the issued Common Stock of the Company. Potentially
the preferred shareholders (or their transferees) could have the right to elect
new directors and to materially alter the strategic focus of the Company, either
as a result of the Consolidation or a result of the conversion to Common Stock.
POTENTIAL LOSS OF DISTRIBUTORS
The Company has been informed by Sage Technologies, Inc. ("Sage"), a major
United States distributor for the products of the Acoustics Business, that it
has terminated its relationship with the Company. Since PCB has its own
existing distribution, it is likely that there is a certain duplication of
distribution arrangements in other areas of the world. Consequently, it is
possible that other distributors may terminate their relationship with the
Company on learning of the sale to PCB or reduce their efforts to actively
promote the sale of the products of the Acoustics Business. The termination of
these relationships will adversely affect the business of the Company if the
sale of the Acoustics Business is not consummated for any reason.
RISK OF REDUCED CAPITALIZATION
The Consolidation of the outstanding Common Stock is intended to increase
the per share market value of the Common Stock. However, there is no
mathematical certainty as to the Consolidation and there can be no assurance
that the per share price will increase sufficiently to permit the Common Stock
to continue to be listed on Nasdaq. If the per share price increases by a
factor less than the conversion ratio selected by the board of directors, then
the overall market capitalization of the Company (its total market value) will
be reduced. This could lead to a failure of the Company to meet the minimum
public float requirements of Nasdaq.
POTENTIAL LOSS OF NASDAQ LISTING
The Consolidation is proposed, in part, in an effort to increase the per
share price of the Common Stock to greater than $1.00 to meet this minimum
requirement for continued listing on Nasdaq. However, Nasdaq has a number of
other minimum requirements, including in particular, a requirement that the
"public float" (shares of Common Stock held by nonaffiliates) have a market
value of $5 million. Based on recent trading prices, and giving effect to the
potential reduction in market capitalization that may result from the
Consolidation, the Company may not be able to meet this or some other
requirement of Nasdaq. Delisting of the Company's Common Stock could result in
a decrease in liquidity of the trading market and a reduction in the per share
trading price of the Common Stock. Lack of a Nasdaq listing would also make the
Company less attractive as a merger or acquisition candidate.
NEED FOR ADDITIONAL CAPITAL
If the sale of the Acoustics Business is not consummated for any reason,
the Company may require additional working capital. The Company had $1.2
million in cash and cash equivalents at September 30, 1998, and management
believes that this would be sufficient to fund ongoing operations into 1999.
However, the Company has experienced significant losses in the past and may
continue to do so. If the cash flow requirements of continuing to operate its
business exceed its cash reserves, the Company would need to seek additional
financing. There can be no assurance that such financing would be available to
the Company or, if available, could be obtained on terms acceptable to the
Company.
RISKS IF ISSUANCE OF COMMON STOCK NOT APPROVED
If the issuance of Common Stock on conversion of the Series A Preferred
Stock is not approved and the Company's Common Stock continues to be listed on
Nasdaq, the holders of the Series A Preferred Stock would have the right to
require the Company to redeem any shares of Series A Preferred Stock remaining
after 2,332,984 shares of Common Stock had been issued on conversion. Based on
the market price for the Common Stock for the ten trading days ended February 3,
1999, this obligation would be approximately $2.6 million. If the sale of the
Acoustics Business is not completed for any reason, the Company would not have
the cash resources to meet this obligation and the Company would either have to
seek alternative sources of financing which it is unlikely to find, obtain
shareholder approval at that point, or delist its Common Stock from Nasdaq to
permit the conversion.
CONDITIONS TO CLOSING OF SALE OF ACOUSTICS BUSINESS
There are several conditions precedent to the closing of the sale of the
Acoustics Business. Even if the sale is approved by the shareholders, there
can be no assurance that all of the other conditions will be met or waived by
the parties. In such event, the sale of the Acoustics Business would not be
completed. One of such conditions is that there is no material adverse change
in the business of the Company. On January 7, 1999, the Company was informed by
HMMH that it intended to terminate its agreement with the Company as of June 30,
1999, unless it could eliminate its royalty obligation to the Company. PCB
indicated that it was not interested in acquiring the direct operation of the
airport noise monitoring systems which have been serviced by HMMH since
August 15, 1995, and the parties agreed to amend the Purchase Agreement to
eliminate these assets and the potential earnout consideration and to reduce
the cash payment to the Company from $6.5 million to $5.75 million.
EXECUTIVE AGREEMENTS
The sale of the Acoustics Business will give Jeffrey Cohen and Andrew
Bebbington the right to terminate their employment agreements for cause if it is
determined to be the sale of "all or substantially all" of the assets of the
Company. On such termination, the Company would owe Jeffrey Cohen one year's
base salary of $140,000 and Andrew Bebbington approximately 20 months' of his
base salary of $250,000 per year. The executives will have this right for a 60
day period following the closing of the sale of the Acoustics Business. Neither
executive has indicated that he intends to exercise or waive these rights.
PROPOSAL 1: THE ASSET SALE
BACKGROUND AND REASONS FOR THE ASSET SALE
Since the change in management of the Company in November 1997, the Company
has been evaluating the technologies and businesses held by the Company and
quantifying the potential and prospects associated with each. The Company has
taken significant steps to focus its research and development efforts and to
eliminate financial commitments when, in the opinion of management, the
potential financial rewards were insufficient. As a result of this reassessment
and re-evaluation, the Company has retained its Acoustics Business, its mass
spectrometer technology, and its CrossCheck technology and has discontinued the
sale of its TOF2000 product, sold its SFC technology to a group of former
employees, and terminated it's development agreement with Lucent Technologies.
Management has implemented significant cost cutting measures and changes to
the management structure of the Acoustics Business to permit the profitable
operation of this business. Excluding the nonrecurring and unusual charges, the
Acoustics Business had revenues of approximately $7 million for the year ended
December 31, 1997, with an operating loss of approximately $3.5 million. For
the nine months ended September 30, 1998, the Acoustics Business had revenues of
approximately $5.4 million with a slight operating loss. Since many of the
changes were implemented in 1998, the results of operations for the nine months
ended September 30, 1998, do not fully reflect the effects of such changes for
the entire period.
As a result of the changes made to the operations of the Acoustic Business,
management of the Company expects an increase in revenues and profitable
operations in 1999. However, management believes that the acoustics
instrumentation business is a mature market dominated by Bruel & Kjaer which
accounts for over 60% of sales to this market and, therefore, offers limited
growth potential to a participant in the Company's position. Management of the
Company believes that the growth of the Acoustics Business must come primarily
from increasing its market share in the future. In order to do so, management
believes that the Company would need to be substantially larger to compete
effectively and would need to make significant investment in new products as
well as investing heavily in new distribution alternatives. Given the
historical losses associated with this business and the need for profitable
performance combined with the high cost of new product development, management
concluded that maximum value for the shareholders in the short- and medium-term
could be realized through the sale of the Acoustics Business to an entity
engaged in the industry with an established distribution capability and presence
in the marketplace. Consequently, the Company contacted a number of entities
engaged in the acoustical instrumentation industry in order to gauge the
interest in acquiring the Company's Acoustic Business.
This investigation resulted in the receipt of offers from a number of
companies, of which two were of sufficient interest for the Company to pursue.
Both companies participated in a due diligence process resulting in firm
proposals being presented. Based on the certainty of the offers, the value to
be realized by the Company, the time to close, and the need to relocate (or not)
the business, the board of directors decided to proceed with PCB and provided it
with a standstill agreement until a final agreement could be negotiated. The
alternative offer involved the relocation of the business, offered an only
slightly higher up front payment, and did not provide for an earnout
opportunity. Based on an analysis of the likely performance of the Acoustics
Business for 1999, the Company concluded that PCB's offer was financially higher
and also assumed continuation of employment for the employees of the Company,
both of which were attractive to the board of directors.
Management of the Company was able to successfully negotiate the terms of
the Purchase Agreement with PCB for a payment at closing of $6.5 million ($5
million in cash and $1.5 million in a secured promissory note, subject to
certain adjustments as discussed under "Terms of the Asset Purchase," below),
plus the assumption or payment of certain liabilities in the amount of $1.8
million. In addition, the Purchase Agreement provided for up to an additional
$2 million to be paid based on the performance of the Acoustics Business in
1999.
On January 7, 1999, the Company received a notice from HMMH that HMMH
intended to terminate the license agreement with the Company unless the royalty
obligation to the Company could be eliminated. The Company had transferred its
airport noise monitoring operations to HMMH in 1995 and licensed the Company's
proprietary software to HMMH to permit it to continue to place systems and to
service the existing systems. The obligation from HMMH generated royalties
to the Company of $253,000 and $266,000 in 1998 and 1997, respectively.
The Company intends to sell these operations that it has the right to
reacquire on termination of the agreement and initially approached PCB. PCB
indicated that it was not interested in assuming these operations directly.
Consequently, the parties negotiated an amendment to the Purchase Agreement
to eliminate the assets associated with airport noise monitoring, to eliminate
the earnout provision of the original contract, and to reduce the initial
payment from $6.5 million to $5.75 million. This payment will be made
$5.25 million at closing and $500,000 by delivery of a promissory note due
December 31, 1999. The initial payment is subject to adjustment based on
the calculated net working capital of the Company as of December 31, 1998.
If the Company can identify a purchaser for an acceptable price prior to
June 30, 1999, it will sell these operations. If not, it will evaluate whether
it would be more beneficial to assume the operations (which it has the right to
do under the contract with HMMH) or permit HMMH to continue to operate without
payment of a royalty stream to the Company.
PCB is obtaining financing in connection with the acquisition from a
commercial financial lender. Under the terms of the Acquisition Agreement, PCB
had until December 11, 1998, to terminate the agreement without penalty if PCB
was unable to obtain the necessary financing commitment. PCB did not exercise
this right.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors of the Company has determined that the terms of the
Purchase Agreement and the Asset Sale are advisable and fair and in the best
interests of the Company and the shareholders of the Company and have
unanimously approved the Purchase Agreement and the transactions contemplated
thereby. In reaching their decision to approve the sale of the Acoustics
Business to PCB, the board of directors of the Company considered the following
factors:
(a) The belief that despite the progress the Company has made in
changes to the operations of the Acoustics Business, the Company continues
to face short and long-term liquidity requirements;
(b) The substantial investment required in developing new products
and distribution systems balanced against the risks and potential rewards
of such investment;
(c) The competitive position of PCB that permits it to acquire the
Acoustics Business for the purchase price and provides an opportunity for
the Company to receive the earnout payment;
(d) The terms of the transaction with PCB as compared to the terms of
other offers received by the Company with respect to the Acoustics
Business;
(e) The commitment by PCB to retain all the Acoustics Business
employees and to maintain the business in its entirety in Provo, Utah;
(f) The fact that other alternatives available to the Company to
achieve its strategic objectives such as expanding the business through
acquisition or expansion were limited in light of the Company's liquidity
and capital requirements and the availability of financing sources
therefore;
(g) The determination of the board of directors to the effect that
the financial terms of the Purchase Agreement are fair;
(h) The contractual obligations entered into between PCB and the
Company for the existing Sensar business to continue to operate out of the
Provo site and for the Acoustics Business to continue to provide financial
record keeping, information technology, and manufacturing services
sufficient to support the Sensar business for a period of one year; and
(i) The appointment by PCB of Mr. Jeffrey Cohen to run the operations
of the Acoustics Business on a part-time basis during 1999.
In approving the sale of the Acoustics Business, the board of directors
also considered certain negative aspects of the proposed transaction, including
the following:
(a) the fact that the Acoustics Business contributes approximately
80% of the Company's total revenues and constitutes approximately 60% of
the Company's total assets, such that immediately following the Asset Sale,
the Company's operations will be significantly smaller;
(b) the uncertainty that exists as to whether the Company will be
able to utilize the Proceeds from the Asset Sale to produce profits that
will ultimately increase shareholder value and provide ongoing liquidity
for the Common Stock;
(c) the taxable nature of the Asset Sale to the Company, which is
expected to utilize approximately $4 million to $6 million of the Company's
available NOL, depending on whether or not the $2 million contingent
payment is actually received based on 1999 operations;
(d) the fact that no portion of the Proceeds from the Asset Sale is
expected to be distributed to the shareholders in light of the board's
determination that the shareholders will obtain greater value for their
shares in the long-term as a result of the Company reinvesting such
Proceeds;
(e) the fact that $500,000 of the Proceeds is payable by way of a
promissory note; and
(f) the fact that the sale of the Acoustics Business could trigger
the right of Andrew Bebbington and Jeffrey Cohen to terminate their
Executive Employment Agreements.
After considering the matter, including the factors described above, the
board of directors unanimously determined that the Purchase Agreement and the
Asset Sale are advisable and fair and in the best interests of the Company and
the shareholders of the Company.
This discussion of the information and factors considered and given weight
by the board of directors is not intended to be exhaustive, but is believed to
include all material factors considered by the board of directors. In reaching
the determination to approve and recommend the Purchase Agreement, the board of
directors did not assign any relative or specific weight to the foregoing
factors which were considered, and individual directors may have given differing
weights to different factors.
PLANS FOR THE COMPANY SUBSEQUENT TO THE ASSET SALE
The Company will continue to fund research and development efforts with
respect to its Jaguar and CrossCheck technologies. Under the terms of a
Technical Development and Marketing Agreement that the Company has entered into
with JEOL, JEOL will become the exclusive distributor for Sensar's mass
spectrometer products for North and South America. The initial term of this
agreement is for a period of five years.
In consideration for JEOL and Sensar entering into this Agreement, JEOL
will pay Sensar $300,000 and, subject to the Company meeting certain design
modification milestones, will guarantee the purchase of 12 Jaguar units in
the calendar year of 1999. If these units are not purchased, then JEOL will pay
Sensar $50,000 for each unit shortfall. As a result of these financial
commitments by JEOL, the Company does not currently anticipate that funding the
ongoing development work during 1999 will require a major portion of the
Proceeds from the Asset Sale.
Sensar intends to appoint exclusive distributors in Europe and Asia to
augment the sales of Jaguar products in 1999.
Sensar continues to promote the CrossCheck technology to a variety of
applications. However, in the short-term, the Company has focused its efforts
on developing applications of specific products in the petroleum and utility
markets. The Company has successfully completed "field" trials of prototype
products and remains enthusiastic that after further development activity
revenue will be generated from these areas in 1999.
In addition, the Company intends to sell its rights underlying the
license agreement with HMMH. If it is unable to do so, the Company will
evaluate the airport noise monitoring operations of HMMH and the existing
maintenance agreements to determine whether to continue these operations
subsequent to June 30, 1999, or to permit HMMH to continue to operate them
without a royalty obligation to the Company.
Proceeds received from the Asset Sale will be retained by the Company and
will be temporarily invested in short-term securities, during which time the
board of directors will evaluate the Company's strategic alternatives regarding
the use of the Proceeds to enhance shareholder value. The shareholders of the
Company will not receive any distributions out of the Proceeds. Approximately
$3.1 million of the Proceeds will be used to acquire the shares of Series A
Preferred Stock subject to agreements with the Company, unless the Company is
successful in locating an investor to acquire this position. If there are
sufficient remaining Proceeds, a portion may be used to seek acquisition or
merger candidates. Any remaining Proceeds will be used for working capital.
The Company has not determined the amount of the Proceeds that will be used
for expansion, acquisition, redemption of stock, or working capital,
respectively, because such uses will be dependent on opportunities for growth
that may not yet exist or have not yet been identified by the Company and on
whether the Company is successful in identifying and negotiating an
acquisition or other transaction. Management believes that, with the cash
on hand as a result of the transaction and the Company's net operating
loss, subject to the limitations on use of such net operating loss under the
Internal Revenue Code, a combination between the Company and another entity may
be attractive to potential partners and would better serve the interests of the
Company's shareholders than a liquidation of the Company and distribution of its
assets to such shareholders. If the Company were liquidated, holders of the
Series A Preferred Stock would receive an amount equal to the liquidation
preference of the Series A Preferred Stock (currently an aggregate of
approximately $3.2 million) and holders of the Common Stock would receive the
balance, after payment of all obligations of the Company. (See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Liquidity and Capital Resources.")
TERMS OF THE ASSET PURCHASE
The following is a summary of the material aspects of the Acquisition
Agreement and is qualified in its entirety by the terms of the Acquisition
Agreement included with this Proxy Statement as Appendix A.
Sale of Assets
Under the terms of the Purchase Agreement, the Company will sell to PCB
essentially all of the assets and operations associated with the Acoustics
Business, other than the airport noise monitoring assets. This includes the
manufacturing facilities of the Company and the various patents, technology, and
know-how of the Company with respect to the design, manufacturing, and marketing
of acoustical instrumentation. The assets will also include the right to the
name "LarsonoDavis" which has traditionally been associated with the Company's
acoustic product line.
In addition to the foregoing, the Company will transfer all inventory,
sales orders, accounts receivable, and operating records associated with the
Acoustics Business to PCB. Specifically excluded from the list of transferred
assets are the cash and current bank accounts of the Company, all assets
associated with the Company's Jaguar and CrossCheck technologies, all assets
associated with the license agreement with HMMH, certain receivable balances,
and the tools and equipment that formerly made up the Company's machine shop
which have been sold separately. The Company will also retain its employee
benefit plans.
The assets being sold to PCB include the real property owned by the Company
in which its administrative offices and the Acoustics Business is currently
housed. It is anticipated that PCB will continue to operate the Acoustic
Business in this facility, but PCB has agreed to lease a portion of the facility
back to the Company for the 1999 year. The Company will relocate its Sensar
employees into this leased space allowing it to terminate its lease of the
facility currently housing the Sensar research and development labs, resulting
in substantial cost savings to the Company.
In connection with the closing of the Asset Sale, the Company will
terminate all of the employees associated with the Acoustics Business. However,
PCB has agreed to make employment offers to all of such employees at their
current salary rates, and giving credit to the employees for accrued vacation
and original dates of hire by the Company. Consequently, it is anticipated that
essentially all of the Acoustics Business employees of the Company will become
employees of PCB and will continue to perform essentially the same functions
that they currently perform in connection with the Acoustics Business. PCB has
agreed to retain Jeffrey Cohen, on a part-time basis, as operations manager of
the Acoustics Business until December 31, 1999. PCB will reimburse the Company
for a portion of Mr. Cohen's salary in connection with these services. PCB has
also agreed to provide manufacturing, record keeping, and information technology
support to the Sensar operation until December 31, 1999.
Assumed Liabilities
PCB will assume the accrued trade and other accounts payable associated
with the Acoustics Business, will refinance the mortgage on the real property to
be acquired from the Company, and will assume certain other accrued liabilities
associated with the Acoustics Business. In addition, PCB will assume the
obligations of the Company under the terms of all contracts transferred to PCB
in connection with the Acoustics Business, including its obligations under
leases with respect to leased equipment. PCB will also assume up to $50,000 of
warranty work with respect to products previously sold by the Company. Any
warranty work over this amount would be paid for by the Company. The
liabilities to be assumed by PCB total, in the aggregate, approximately $1.8
million.
The Company will continue to have responsibility for all liabilities
associated with the Acoustics Business not assumed by PCB. However, based on
the historical experience of the Company with respect to warranty work and the
identification of the obligations that are not being assumed by PCB, the Company
does not anticipate that this will be a material amount.
The Purchase Price
The purchase price for the acquired assets will include the cash payment to
be made on the Closing Date of $5.25 million, a secured promissory note for
$500,000 (the "Promissory Note") payable in full on December 31, 1999, and the
amount of the liabilities assumed by PCB of approximately $1.8 million. The
Promissory Note will bear interest at Libor, plus 2%, as of the Closing Date,
and will be paid in equal monthly installments calculated on a two year
amortization schedule. All unpaid principal and interest will be due in a
balloon payment on or before December 31, 1999.
The amount of the initial cash payment is subject to adjustment based on a
target value of $3 million less the accounts receivable from HMMH at December
31, 1998, of approximately $75,000 for the assets and liabilities transferred
to PCB, valued as of January 1, 1999. The calculation will be based on the
book value on the Company's records of the assets being transferred, with
specified adjustments, less the book value of the liabilities being assumed
by PCB. The adjustments to the book value of the assets associated with the
Acoustics Business include the increase of the book value of the real property
to an agreed value of $1.4 million (the real property appraised at $1,430,000),
and the exclusion of the book value of the intellectual property. To the
extent that the net asset value is less than the target value of $3 million,
the purchase price will be reduced. To the extent that the net asset value at
January 1, 1999, is greater than the target value, the purchase price will be
increased.
The parties agreed to use their best efforts to estimate the net asset
value as of January 1, 1999, as quickly as practicable. On or before February
28, 1999, the Company will prepare a statement of the net asset value for
purposes of determining the final purchase price adjustments. If acceptable to
both parties, the purchase price will be adjusted as set forth on the statement.
If the parties are unable to agree on the appropriate adjustment, the matter
will be submitted for binding arbitration to Arthur Andersen, L.L.P. Any
reduction to the purchase price paid on the Closing Date will be offset against
the Promissory Note due to the Company. Any increase to the purchase price will
be paid immediately by PCB to the extent the net asset value does not exceed
$3.1 million; will be paid in four equal monthly installments for all amounts in
excess of $3.1 million but less than $3.2 million; and will be paid on the same
terms as the Promissory Note for all amounts in excess of $3.2 million. Based
on the preliminary numbers currently available to it, management of the Company
does not believe that the purchase price adjustment based on the net book value
at January 1, 1999, will be material. However, these preliminary numbers are
subject to change and potentially a subsequent audit by Arthur Anderson, L.L.P.
as discussed above.
In order to give PCB the benefit and responsibility of a portion of the
operations of the Acoustics Business subsequent to January 1, 1999, the Company
established a new operating account into which all of the revenues from the
assets being transferred will be deposited and from which all of the liabilities
that come due that would otherwise be paid by PCB subsequent to closing, will be
paid. PCB will receive the cash balance of such account at closing and will
repay LDI for any advances made by it to such account.
Closing
The transaction will be consummated only if the Purchase Agreement is
approved and adopted by the requisite votes of the holders of the Common Stock
and Series A Preferred Stock voting as a single class. The closing of the
transaction contemplated by the Purchase Agreement also is subject to the
satisfaction of certain other conditions specified in the Purchase Agreement,
unless such conditions are waived by the party in whose favor the condition runs
(to the extent such waiver is permitted by law). The failure of any such
condition to be satisfied, if not waived, would prevent consummation of the
transaction.
The obligations of PCB to consummate the transactions to be performed by it
in connection with the closing are subject to satisfaction of, among others, the
following conditions: (i) the representations and warranties of the Company
contained in the Purchase Agreement will be true and correct in all material
respects as of the Closing Date; (ii) the Company will have performed and
complied with all of its covenants under the Purchase Agreement in all material
respects through the closing; (iii) the Company will have procured all required
third-party consents; (iv) there shall have been no material adverse change in
the business, property, operations, financial condition, or business
relationships of the Company; (v) no action, suit, or proceeding will be pending
or threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by the Purchase
Agreement, (B) cause any of the transactions contemplated by the Purchase
Agreement to be rescinded following consummation; (vi) the Company will have
delivered to PCB a certificate to the effect that each of the conditions
specified in (i), (ii), (iii), (iv), and (v) above is satisfied in all respects;
and (vii) all actions to be taken by the Company in connection with consummation
of the transactions contemplated by the Purchase Agreement and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated by the Purchase Agreement will be reasonably satisfactory in form
and substance to PCB.
The obligations of the Company to consummate the transactions to be
performed by it in connection with the closing are subject to satisfaction of
the following conditions, among others: (i) the representations and warranties
of PCB contained in the Purchase Agreement will be true and correct in all
material respects as of the Closing Date; (ii) PCB will have performed and
complied with all of its covenants under the Purchase Agreement in all material
respects through the closing; (iii) no action, suit, or proceeding will be
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
the Purchase Agreement; (iv) PCB will have delivered to the Company a
certificate to the effect that each of the conditions specified in (i), (ii),
(iii), and (iv) above is satisfied in all respects; (v) the transactions
contemplated by the Purchase Agreement will be approved by the Company's
shareholders; and (vi) all actions to be taken by PCB in connection with
consummation of the transactions contemplated by the Purchase Agreement and all
certificates, opinions, instruments, and other documents required to effect the
transactions contemplated by the Purchase Agreement will be reasonably
satisfactory in form and substance to the Company.
Related Agreements
In connection with the Purchase Agreement, the parties also agreed to enter
into a Shared Services Agreement, a Manufacturing Agreement, and a Lease
Agreement on closing. Under the provisions of the Lease Agreement and the
Shared Services Agreement, the Company will occupy a portion of the facility
currently used by the Acoustics Business that will then be owned by PCB and will
terminate its lease on the building currently occupied by the Sensar operations.
In addition, PCB will manufacture printed circuit boards for the Jaguar products
and will provide accounting, administrative, and inventory support services to
the Company. The Company will also be able to use the computer and telephone
system owned by PCB. As discussed above, Mr. Cohen will function as the
operations manager of the Acoustics Business until December 31, 1999. The
Company will be reimbursed at a rate of $60,000 per annum for Mr. Cohen's time
and will pay an agreed to amount to PCB of approximately $16,000 per month for
the provision of the other services. This amount is subject to adjustment in
the event that the business of the Company requires significantly more
commitment from PCB employees than currently anticipated.
Under the terms of the Manufacturing Agreement, PCB has agreed to
manufacture the circuit boards required for the Jaguar product and to provide
space to the employees of the Company for final assembly. The Company will pay
PCB for the circuit boards at an amount calculated to cover PCB's direct costs
and overhead, plus 10%.
Representations and Warranties
The Purchase Agreement contains various representations and warranties
related to, among other things, (a) the due organization, authority, and power
of the parties and similar corporate matters; (b) the authorization, execution,
delivery, and enforceability of the Purchase Agreement; (c) the conflicts under
charters or bylaws or violations of agreements or laws applicable to the
Acoustics Business; (d) representations as to the accuracy and completeness of
financial information; (e) absence of adverse changes to the Acoustics Business;
(f) representations as to the extent of liabilities associated with the
Acoustics Business; (g) representations as to the insurance carried by the
Company with respect to the Acoustics Business; (h) representations as to the
completeness and accuracy of previous tax filings; (i) representations with
respect to real property matters; (j) representations with respect to certain
environmental matters; (k) the Company's title to the assets being transferred
and the condition of such assets; (l) representations as to the continued
viability of the contracts being assigned; (m) representations as to the leases
being assigned; (n) representations as to the quality of the inventory and
accounts receivable being assigned; (o) representations as to labor matters and
employee benefit plans; (p) representations with respect to transactions with
affiliated persons; (q) representations as to the current status and pay scale
of employees associated with the Acoustics Business; (r) representations as to
the intellectual property being transferred; (s) representations as to the lack
of litigation and claims; (t) the availability of necessary permits to conduct
the Acoustics Business, the compliance of the Company with laws applicable to
the Acoustics Business, and the adequacy of the books and records associated
with the Acoustics Business; and (u) representations as to the Company's efforts
and potential obligations with respect to year 2000 compliance.
Operations of the Company Prior to Closing
The Company has agreed that, prior to the Closing Date, the Acoustics
Business of the Company will be conducted in accordance with certain
restrictions set forth in the Purchase Agreement. Among other things, the
Company has agreed that except as otherwise expressly provided by the Purchase
Agreement, or as PCB may otherwise consent to in writing, the Company shall not
engage in any activity or enter into any transaction outside of the ordinary and
usual course of the Company's business or which would be inconsistent with the
Company's past practice or with the terms of the Purchase Agreement or which
would render inaccurate as of the Closing Date any of the representations and
warranties set forth in the Purchase Agreement as if such representations and
warranties were made at and as of the Closing Date.
No Shop
The Purchase Agreement provides for the Company to recommend that
shareholders approve the sale of the Acoustics Business to PCB, unless the
Company receives an unsolicited offer to acquire the Acoustics Business that, in
the good faith opinion of the board of directors, is superior to the terms of
the transaction negotiated with PCB. The Company is prohibited from soliciting,
and has agreed not to permit its officers or advisors to solicit, any offers,
engage in negotiations, or provide information to any other potential purchaser
of the Acoustics Business unless it receives an offer that is better than the
terms of the transaction with PCB.
In the event that the Company receives such an unsolicited superior offer,
the board of directors, pursuant to its fiduciary obligation to seek the best
value for the shareholders, would consider such offer and, if the final terms of
such offer were superior to those made by PCB, would recommend such offer to the
shareholders. Absent receipt of a superior offer, the board of directors has
agreed to continue to recommend the sale of the Acoustics Business to PCB on the
terms set forth in the Purchase Agreement.
If the Purchase Agreement is terminated because the board of directors
withdraws its recommendation of the sale of the Acoustics Business to PCB, the
Company would be obligated to pay a termination fee to PCB of $300,000.
Non-Competition Obligations
In connection with the sale of the Acoustics Business to PCB, the Company
has agreed not to sell scientific instrumentation for use in the acoustics and
vibration industry, or compete with the products or services of the Acoustics
Business for a period of ten years after the Closing Date. In addition, the
Company has agreed not to attempt to divert any customer from the Acoustics
Business or to solicit any customer of the Acoustics Business. Finally, for a
period of five years following the Closing Date, the Company has agreed not to
solicit or attempt to employ any employee of the Acoustics Business.
Termination of the Purchase Agreement
The Purchase Agreement may be terminated under any of the following
circumstances:
(a) Mutual Consent. Upon the mutual consent of all parties;
(b) Adverse Proceedings. By PCB, Beehive, or the Company if any
order to restrain, enjoin or otherwise prevent the consummation of the
Purchase Agreement shall have been entered or, on the Closing Date, there
is any pending or threatened litigation in any court, or any proceeding by
or before any governmental body, with a view to seeking to restrain or
prohibit consummation of the Purchase Agreement or in which damages are
sought in connection with the Purchase Agreement, or if any investigation
by any governmental body is pending or threatened which might result in any
such litigation or other proceeding;
(c) Expiration of Time. By either party if the transactions
contemplated by the Purchase Agreement have not been consummated by March
31, 1999, provided that the terminating party is not then in material
default under the terms of the Purchase Agreement;
(d) For cause by PCB and Beehive. By PCB and Beehive, upon written
notice to the Company, if (i) the Company has breached any representation,
warranty, or covenant contained in the Purchase Agreement in any material
respect and the breach has continued without cure for a period of thirty
(30) days after notice of breach; or (ii) the board of directors of the
Company withdraws or modifies in any manner adverse to Beehive its
recommendation of the transactions contemplated by the Purchase Agreement
due to the Company entering into an agreement with respect to a competing
proposal; and
(e) For cause by the Company. By the Company, upon written notice to
PCB and Beehive, if PCB or Beehive has breached any representation,
warranty, or covenant contained in the Purchase Agreement in any material
respect and the breach has continued without cure for a period of thirty
(30) days after notice of breach.
Termination Fee
If the Purchase Agreement is terminated for cause by PCB or Beehive, the
Company will be obligated to pay PCB a termination fee of $300,000 as liquidated
damages for reimbursement of the costs and expenses incurred by PCB in
connection with the negotiation and execution of the Purchase Agreement. PCB
has the right to terminate the Purchase Agreement for cause if the Company
breaches any representation, warranty, or covenant in any material respect and
the breach is not cured within 30 days of notice; or (ii) the board of directors
of the Company withdraws its recommendation of the sale of the Acoustics
Business to PCB. (See discussion under "BUSINESS OF THE COMPANY: Licensed
Technology.")
If the Purchase Agreement is terminated by the Company for cause, PCB has
agreed to reimburse the Company for its costs, expenses, and damages caused by
the breach up to a maximum of $300,000; provided that, any damages to the
Company arising from actions taken by Sage, the principal United States
distributor for products of the Acoustics Business, as a result of the execution
of the Purchase Agreement may be more than $300,000 but not more than $700,000.
In addition, in the event that damages occur to the Company as a result of PCB
entering into an agreement subsequent to the execution of the Purchase Agreement
with any other current distributor of the Company, recovery of such damages may
exceed $300,000 but may not exceed $700,000.
Indemnification; Survival of Representations and Warranties
Pursuant to the terms of the Purchase Agreement, the Company has agreed to
indemnify PCB and its affiliates, officers, directors, employees, and other
representatives, whether by offset against the earnout payment, the Promissory
Note, or otherwise, from and against any and all damages, claims, liabilities,
losses, costs and expenses (including, costs of investigation and costs of
preparing and defending any pending or threatened claim or suit and attorneys'
fees and disbursements whether such pending or threatened claim or suit involves
solely the parties hereto or third parties) whatsoever arising out of,
attributable to, resulting from, or incurred with respect to (a) any breach of
the Purchase Agreement by the Company; (b) any act or omission of the Company
related to the Acoustics Business prior to the Closing Date and not assumed by
PCB; and (c) any environmental matters existing prior to the Closing Date. The
representations and warranties made by the Company in the Purchase Agreement
survive for a period of two years subsequent to the closing, except for
representations as to corporate authority, tax matters, environmental matters,
and litigation and claims, all of which survive indefinitely.
Expenses
In connection with the preparation of this Proxy Statement, solicitation of
proxies, and closing of the Asset Sale, the Company expects to incur the
following estimated expenses:
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses $ 50,000
Accounting fees and expenses 15,000
Appraisal and survey costs 15,000
Printing, mailing, and solicitation costs 20,000
Transfer Agent Costs 20,000
Other 30,000
----------
$ 150,000
==========
</TABLE>
All such expenses will be paid by the Company from cash reserves currently
available to it.
RIGHTS OF EXECUTIVES
Under the terms of the Executive Employment Agreements with Andrew
Bebbington, the chief executive officer, and Jeffrey Cohen, the chief operating
officer, the employees have the right to terminate their agreements at any time
within 60 days following the sale of "all or substantially all of the assets" of
the Company. If the executives elect to terminate their agreements under such
provision, they would be entitled to specified payments. In the case of Mr.
Bebbington, this payment would be equal to his base salary of $250,000 per year
through December 31, 2000. In the case of Mr. Cohen, he would be entitled to
payment of his base salary of $140,000 for a one-year period. Neither Mr.
Bebbington nor Mr. Cohen has indicated their intent to terminate their executive
employment agreements based on the sale of the Acoustics Business. However,
both gentlemen have the option for a period of 60 days subsequent to the closing
to make such election.
INTEREST OF MANAGEMENT OR DIRECTORS IN ASSET SALE
Under the terms of the Purchase Agreement, Jeffrey Cohen, the chief
operating officer of the Company, will continue to serve, on a part-time basis,
as the operations manager of the Acoustics Business. It is anticipated that Mr.
Cohen will divide his time approximately equally between the management of the
Acoustics Business and his management obligations with respect to the Jaguar and
CrossCheck technologies. The Company will be reimbursed for Mr. Cohen's time
with respect to the Acoustics Business at an annual amount equal to $60,000.
Mr. Cohen will be permitted to disclose to the Company certain aspects of the
operation of the Acoustics Business so as to permit the Company to monitor the
progress of the Acoustics Business for purposes of calculating the potential
earnout payment.
As discussed under the caption above "RIGHTS OF EXECUTIVES," both Mr.
Bebbington and Mr. Cohen may have the right under their executive employment
agreements to terminate those agreements for cause within 60 days of the
consummation of the sale of the Acoustics Business to PCB, thereby entitling
them to certain payments.
ACCOUNTING TREATMENT OF THE ASSET SALE
The Asset Sale will be reflected on the Company's financial statements as a
sale of the acoustics assets and assumption of certain liabilities with a gain
to be recognized for the difference between the total of proceeds received and
liabilities assumed, less carrying costs of assets sold.
TAX CONSEQUENCES
The following summary of the federal income tax consequences of the Asset
Sale by the Company is not intended to be tax advice to any person, nor is it
binding upon the Internal Revenue Service. In addition, no information is
provided herein with respect to the tax consequences of the Asset Sale under
applicable foreign, state, or local laws.
The Company will recognize a gain on the Asset Sale equal to the amount
realized by the Company from the sale less the Company's adjusted basis in the
assets sold. The amount realized will equal the sum of money received by the
Company in consideration for the assets plus the amount of the liabilities
assumed by PCB. The Company anticipates that its available NOL will offset the
taxable gain attributable to the transaction. The Company will also be subject
to a alternative minimum tax. The gain on the Asset Sale will be included with
the Company's alternative minimum taxable income or loss for the tax year ending
June 30, 1999. The resultant alternative minimum taxable income will be reduced
by 90% due to the availability of the Company's AMTNOL. The remaining 10% of
alternative minimum taxable income would be taxed at 20%. The Company does not
expect its alternative minimum tax, if any, for the tax year ended June 30,
1999, to be material to its financial position.
Consummation of the transaction will not result in any federal income tax
consequences to shareholders of the Company.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH HOLDER OF SHARES OF COMMON STOCK IS URGED TO CONSULT HIS
OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH
SHAREHOLDER OF THE TRANSACTION (INCLUDING THE APPLICABILITY AND EFFECT OF
FOREIGN, STATE, LOCAL AND OTHER TAX LAWS).
GOVERNMENT AND REGULATORY APPROVALS
Both the Company and PCB made representations in the Purchase Agreement
that the relative size of their operations and the proposed transaction would
not trigger the requirements of the Hart-Scott-Rodino Act. Consequently, the
Company does not believe any regulatory approvals are required in connection
with the sale of the Acoustics Business to PCB.
ARMS' LENGTH TRANSACTION
The terms of the Purchase Agreement were the result of arms' length
negotiations. Neither PCB nor the Company, nor any of their respective officers
and directors, holds an interest in the other. Other than Mr. Cohen, no officer
or director of the Company will become an officer, director, or employee of PCB
in connection with the sale of the Acoustics Business to PCB.
NO DISSENTERS' RIGHTS
Under the Nevada corporate law, shareholders are not entitled to
dissenters' rights of appraisal with respect to the sale of the Acoustics
Business to PCB.
REQUIRED VOTES
The sale of the Acoustics Business to PCB is required to be approved by a
majority of the voting power of the issued and outstanding Common Stock and
Series A Preferred Stock, voting as a single class. Since each share of Series
A Preferred Stock entitles the holder to 278 votes, this means that the proposal
must receive 7,104,768 affirmative votes in order to be approved. Directors
and executive officers holding 20,473 shares of Common Stock have indicated
their intention to vote in favor of the sale of the Acoustics Business. Broker
non-votes and other abstentions will have the same effect as a vote against the
proposed sale of the Acoustics Business.
PROPOSAL 2: CORPORATE NAME CHANGE
The shareholders will also be asked at the Special Meeting to authorize an
amendment to the Company's Amended Articles of Incorporation to effect the
Corporate Name Change. The Amendment is attached as Appendix B to this Proxy
Statement. This proposal, if approved by the shareholders, will be implemented
whether or not the Asset Sale is approved and consummated and will be effected
by the filing of the Amendment with the state of Nevada.
The terms of the Purchase Agreement require the Company to use its best
efforts change its corporate name to Sensar Corporation as the right to use the
name "LarsonoDavis" is to be sold to PCB as part of the Asset Sale. The
Company's board of directors also believes the name change is appropriate since
the two original founders who gave their names to the Company, Mr. Larson and
Mr. Davis, are no longer a part of executive management of the Company.
Additionally, upon consummation of the Asset Sale, the board of directors
will cause LarsonoDavis Laboratories, a wholly-owned subsidiary to the Company,
to amend its Articles of Incorporation to change its corporate name to SC, Inc.
and Sensar Corporation, a wholly-owned subsidiary of the Company, to change its
name to Sensar Analytical, Inc.
REQUIRED VOTES
The adoption of the Amendment to effect the Corporate Name Change is
required to be approved by a majority of the voting power of the issued and
outstanding Common Stock and Series A Preferred Stock, voting as a single class.
Since each share of Series A Preferred Stock entitles the holder to 278 votes,
this means that the proposal must receive 7,104,768 affirmative votes in order
to be approved. Directors and executive officers holding 20,473 shares of
Common Stock have indicated their intention to vote in favor of the adoption of
the Amendment. Broker non-votes and other abstentions will have the same effect
as a vote against the adoption of the Amendment.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
AMENDMENT TO THE COMPANY'S AMENDED ARTICLES OF INCORPORATION TO EFFECT THE
CORPORATE NAME CHANGE.
PROPOSAL 3: ISSUANCE OF COMMON STOCK ON CONVERSION OF
SERIES A PREFERRED STOCK
TERMS OF THE SERIES A PREFERRED STOCK
In February, 1998, the Company completed the private placement of 100
Units, each Unit consisting of 35 shares of Series A Preferred Stock and 7,000
Warrants ("Warrants") to purchase Common Stock, at a purchase price of $35,000
per Unit, or an aggregate gross sales price of $3.5 million. The Series A
Preferred Stock is convertible, at the election of the holder, 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 notice of
conversion as reported by the Nasdaq National Market System on which the
Company's Common Stock is traded. Until conversion, the Series A Preferred
Stock bears an annual dividend of 4%, or $40 per share per annum.
The Series A Preferred Stock votes as a class with the Common Stock, except
as otherwise required by the corporate laws of the state of Nevada, and each
share has 278 votes on any issue submitted to the shareholders. If not
previously converted, the Series A Preferred Stock will automatically convert
into shares of Common Stock as of December 31, 1999. In addition, the Company
can require the conversion of the Series A Preferred Stock if it makes a public
offering of its Common Stock at any time subsequent to February 1, 1999. The
Company currently has sufficient shares of Common Stock authorized to permit the
conversion of the Series A Preferred Stock.
Each Warrant gives the holder the right to purchase one share of Common
Stock at an exercise price of $4.50 per share. If not earlier exercised, the
Warrants expire July 30, 2000. The Company can provide 30 days written notice
to the holders of the Warrants at any time that the closing price of the
Company's Common Stock equals or exceeds $6.50 per share for 20 consecutive
trading days as reported on the Nasdaq National Market System. If the holders
do not exercise the Warrants by the end of the 30 day period, the Warrants would
then expire.
The Units, the Series A Preferred Stock, the Warrants, and the Common Stock
issuable on the conversion of the Series A Preferred Stock and the exercise of
the Warrants are restricted securities. The Company filed a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
registering the public resale of the Common Stock issuable on conversion of the
Series A Preferred Stock and the exercise of the Warrants. The registration
statement became effective on May 29, 1998, and the Company has agreed to
maintain its effectiveness until the earlier of (a) the resale of all shares of
Common Stock subject to such registration; or (b) the date on which such shares
can be freely sold by the investors under Rule 144.
NASDAQ SHAREHOLDER APPROVAL REQUIREMENTS
Rule 4460(i)(1)(D) of The Nasdaq Stock Market, Inc., requires companies
whose securities are traded on Nasdaq NMS (such as the Company) to obtain
shareholder approval prior to issuing common stock (or shares convertible into
common stock) in a transaction other than a public offering at a price less than
the market value of the common stock when the amount of common stock to be
issued (or issuable upon conversion) is or will be 20% or more of the common
stock or voting power of the company outstanding prior to issuance. The initial
issuance of the Series A Preferred Stock did not require shareholder approval
pursuant to Rule 4460(i)(1)(D) as the Company was not contractually obligated to
issue any shares of its Common Stock upon conversion of the Series A Preferred
Stock which would be equal to or exceed 20% of the issued and outstanding Common
Stock. The Company, however, must obtain shareholder approval of this proposal
prior to the issuance of shares of Common Stock exceeding that limit if it
wishes to maintain its Nasdaq listing. As a result of the decline in the
trading price of the Company's Common Stock, if the holders of a material number
of the issued and outstanding Series A Preferred Stock elected to convert, the
Company would currently be unable to issue the necessary Common Stock. In such
event, the Company would then be obligated to seek shareholder approval or, if
it was unable to obtain such approval, pay to each holder of the Series A
Preferred Stock an amount in cash per preferred share equal to $1,000, plus all
accrued but unpaid dividends.
RECENT AGREEMENT WITH HOLDERS
In an attempt to eliminate the potential market disruption of a significant
conversion of the Series A Preferred Stock and to potentially provide for a more
orderly conversion or the redemption of the Series A Preferred Stock, the
Company has entered into agreements with the holders of the outstanding shares
of Series A Preferred Stock. Under the terms of the agreements, the holders
have agreed to sell their shares of Series A Preferred Stock to the Company for
their original investment of $1,000 per share, plus an amount equal to an
assumed preferred dividend of 4% per annum from the date of the original
purchase of the Series A Preferred Stock (February 13, 1998) until the date of
payment to the holder. The Company will use a portion of the Proceeds from the
sale of the Acoustics Business to PCB for this purpose and will complete the
transaction within 15 days of the closing of the PCB sale. The Company
anticipates that the aggregate amount to be paid under the terms of the
agreements will be approximately $3.1 million. If the sale of the Acoustics
Business to PCB does not close, the Company would not have an obligation, or the
funds, to proceed with the purchase of the Series A Preferred Stock. If the
purchase of the Series A Preferred Stock is not completed prior to March 31,
1999, the agreements are no longer binding.
If the Series A Preferred Stock is purchased under the terms of the
agreements, the Company has agreed to reprice Warrants to acquire 100 shares of
Common Stock for each share of Series A Preferred Stock (an aggregate of
approximately 293,875 Warrants) at $0.50 per share and to cancel a like number
of Warrants.
The Company has the right under the terms of the agreements to assign the
right to purchase the Series A Preferred Stock to another person or entity.
If an acceptable agreement concerning the conversion of the Series A Preferred
Stock and the sale of any Common Stock received on conversion can be reached
with a new investor, the Company may assign its rights to acquire the Series A
Preferred Stock in order to preserve the approximately $3.1 million purchase
price and pursue its other strategic objectives. There can be no assurance
that the Company will be able to reach an acceptable agreement with any such
investor.
CONVERSION OF SERIES A PREFERRED STOCK
Assuming approval of this proposal, the ultimate number of shares of Common
Stock into which the 2,938.75 shares of Series A Preferred Stock currently
issued and outstanding, including accrued dividends, may be convertible is
unknown at this time. However, based upon (i) an assumed conversion price of
$0.311 per share, after giving effect to the 15% reduction from the market
price for the ten trading days preceding February 3, 1999, the Company would
issue an additional approximately 9,800,000 shares of Common Stock. Such
additional shares of Common Stock would represent approximately 42% of the
Company's issued and outstanding Common Stock, giving pro forma effect to such
issuance. The amount of shares and percentage of Common Stock ultimately
issuable upon conversion of all 2,938.75 shares of Series A Preferred Stock
currently outstanding may increase or decrease substantially, depending on
changes in the closing bid price of the Company's Common Stock and other anti-
dilutive provisions contained in the Series A Preferred Stock.
Each holder of Series A Preferred Stock can make an election to sell the
Common Stock issued on conversion or hold such Common Stock for investment.
Since the Company has registered the resale of the Common Stock by Series A
Preferred Stock shareholders, pursuant to its contractual obligation to do so,
the sale of the Common Stock can be made immediately. The Company believes that
a majority of the holders of Series A Preferred Stock are likely to try and
realize the 15% gain inherent in the conversion terms by immediately selling the
Common Stock rather than assuming the market risk of holding the Common Stock
for investment. The potential sale of such a significant block of Common Stock
would greatly exceed the historical trading volumes, may decrease the trading
price for the Common Stock, and may eliminate the liquidity in the market for
the Common Stock. In such event, other shareholders of Common Stock may be
unable to sell their shares or to realize the current market price for their
shares.
In the event that the issuance of Common Stock on conversion of the Series
A Preferred Stock is not approved by the shareholders and the Common Stock of
the Company is delisted from Nasdaq, the board of directors may elect to amend
the designation governing the Series A Preferred Stock to permit the conversion
and the issuance of Common Stock in excess of the 20% limitation. Such action
would not require shareholder approval and would only be undertaken in the event
that the board of directors determined that the cash demand on the Company from
a forced redemption would result in a negative impact on the Company and its
shareholders.
REQUIRED VOTES
The proposal to issue Common Stock on conversion of the Series A Preferred
Stock in excess of the 20% limitation requires the affirmative vote of a
majority of votes cast, in person or by proxy, at the Special Meeting.
Directors and executive officers holding 20,473 shares of Common Stock have
indicated their intention to vote in favor of the proposal. Broker non-votes
and other abstentions will not be counted for purposes of determining the
outcome.
The issuance of Common Stock on conversion of the Series A Preferred Stock
does not require shareholder approval under Nevada corporate law. The
requirement for shareholder approval arises from the Nasdaq rules and is only
applicable so long as the Common Stock continues to be listed on Nasdaq. If the
proposal is not approved by the shareholders and the Common Stock is no longer
listed on Nasdaq, the board of directors may elect to permit the issuance if it
determines it is in the best interests of the Company and its shareholders to do
so.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
ISSUANCE OF COMMON STOCK ON CONVERSION OF THE SERIES A PREFERRED STOCK.
PROPOSAL 4: REVERSE STOCK SPLIT
GENERAL
The board of directors has determined that it would be advisable to effect
a reverse stock split (the "Consolidation") of one new share for every five to
ten shares (the "Conversion Ratio") of the Company's issued and outstanding
Common Stock with the precise Conversion Ratio to be determined by the board of
directors at a later date. If the Consolidation is approved by the
shareholders, each five to ten shares (depending upon the Conversion Ratio) of
Common Stock, par value $0.001 per share (the "Old Common Stock") outstanding on
the Effective Date (as defined below) will be converted automatically into one
share of new Common Stock, par value $0.001 per share (the "New Common Stock").
To avoid the existence of fractional shares of New Common Stock, shareholders
who would otherwise be entitled to receive fractional shares of New Common Stock
shall receive a cash distribution in lieu thereof. Each shareholder that owns
fewer than five to ten shares (depending upon the Conversion Ratio) of Common
Stock will have such shareholder's fractional share of Common Stock converted
into the right to receive cash as set forth below in "Exchange of Stock
Certificates and Payment for Fractional Shares." The interest of such
shareholder in the Company will thereby be terminated, and such shareholder will
have no right to share in the assets or potential for future growth of the
Company. Each shareholder that owns five to ten (depending upon the Conversion
Ratio) or more shares of Common Stock will continue to own shares of Common
Stock and will continue to share in the assets and potential for future growth
of the Company as a shareholder.
Each shareholder will continue to hold the same percentage interest in the
Company as held prior to the Consolidation (subject only to minor variations as
a result of the redemption of fractional shares) but such interest will be
represented by one-fifth to one-tenth (depending upon the Conversion Ratio) as
many shares. The number of shares of Common Stock that may be purchased upon
the exercise of outstanding options, warrants, and other securities convertible
into, exercisable, or exchangeable for, shares of Common Stock (collectively,
"Convertible Securities") and the per share exercise or conversion prices
thereof, will be adjusted appropriately as of the Effective Date, so that the
aggregate number of shares of Common Stock issuable will be one-fifth to one-
tenth (depending upon the Conversion Ratio) of the number issuable in respect
thereof immediately prior to the Effective Date, the per share exercise price
immediately following the Effective Date will be 500% to 1000% (depending upon
the Conversion Ratio) of the per share exercise or conversion price immediately
prior to the Effective Date, and the aggregate exercise or conversion prices
thereunder shall remain unchanged. The "Effective Date" of the Consolidation
will be the date set by the board of directors and announced to the market,
which is anticipated to be as soon as practicable following the date of the
Special Meeting.
NASDAQ MINIMUM BID PRICE
Rule 4450 of the Nasdaq Marketplace Rules requires issuers listed on the
Nasdaq National Market to maintain a minimum bid price of $1.00 per share for
the listed stock. The Company's shares of Common Stock traded below $1.00 for
30 days, and will be delisted from the Nasdaq National Market unless the Company
is able to successfully appeal such decision. The board of directors believes
that such a delisting could adversely affect the ability of the Company to
attract new investors and to effect expansion of the Company through
acquisitions. In addition, the board of directors believes that the delisting
may result in decreased liquidity for the outstanding shares of Common Stock
and, consequently, could reduce the price at which such shares trade and the
transaction costs inherent in trading such shares. The Company believes that,
if the Consolidation is approved, there is a greater likelihood that the minimum
bid price of the Common Stock will be increased to and maintained at a level
over $1.00 per share.
An increase in per share price of the Company's Common Stock, which the
Company expects as a consequence of the Consolidation, may also enhance the
acceptability of the Common Stock by the financial community and the investing
public and broaden the investor pool from which the Company might be able to
obtain additional financing. In theory, the total number of shares outstanding
should not, by itself, affect the marketability of the Common Stock, the type of
investor who acquires it, or the Company's reputation in the financial
community. However, because of the trading volatility often associated with
low-priced stocks, as a matter of policy, many institutional investors are
prohibited from purchasing such stocks. For the same reason, brokers often
discourage their customers from purchasing such stocks.
Additionally, because broker's commissions on low-priced stocks generally
represent a higher percentage of the stock price than commissions on higher-
priced stocks, the current price per share of the Company's Common Stock can
result in individual shareholders paying transaction costs representing a higher
percentage of their total share value than would be the case if the share price
were substantially higher. If the Consolidation is implemented, however,
holders of fewer than 100 shares of Common Stock ("odd-lots") after the
Consolidation is effected may be charged brokerage fees that are proportionately
higher than holders of more than 100 shares of Common Stock ("round-lots").
The reduction in the number of outstanding shares of Common Stock caused by
the Consolidation is anticipated initially to increase the per share market
price of the Common Stock. However, because some investors may view the
Consolidation negatively, there can be no assurance that the market price of the
Common Stock will reflect proportionately the Consolidation, that any price that
may be achieved, or that any price gain will be sustained in the future.
The Company's shares of Common Stock have been listed, and have traded, on
the Nasdaq NMS since January 30, 1997. The rules of the Nasdaq NMS require that
as a condition of the continued listing of a company's securities on the Nasdaq
NMS, a company satisfy certain maintenance requirements, including meeting
certain minimum criteria relating to its financial condition, results of
operations, and trading market for its listed securities. The maintenance
criteria applicable to the Company consist of maintaining (i) a public float of
at least 750,000 shares; (ii) a market value of the public float (those shares
held by nonaffiliates) of at least $5 million; (iii) a minimum bid price equal
or greater than $1.00 per share; (iv) at least 400 shareholders (round-lot
holders); (v) net tangible assets of at least $4 million; (vi) at least two
registered market makers; and (vii) compliance with certain corporate governance
requirements. Based on a current market price for its Common Stock of $0.3125
at February 3, 1999, the Company had a public float of approximately $4.2
million, below the $5 million requirement. Consequently, even if the Company is
able to satisfy the minimum bid price requirement, the Common Stock could still
be delisted. The Company believes that if the Consolidation is approved by the
shareholders at the Special Meeting, and effectuated, the Company's shares of
Common Stock will have a minimum bid price in excess of $1.00 per share.
However, the Company's overall market capitalization (total market value) may be
reduced as a result of the Consolidation, which could result in its continuing
failure to meet the requirement concerning the market value of the public float.
In such event, the Common Stock could be delisted from Nasdaq, even if the
minimum $1.00 bid price was met.
The delisting of the Company's Common Stock from the Nasdaq NMS could
adversely affect the liquidity of the Company's Common Stock and the ability of
the Company to raise capital. In the event of delisting, the Company's Common
Stock would be traded in the over-the-counter market maintained by the NASD
Electronic Bulletin Board and the spread between the bid and ask price of the
shares of Common Stock is likely to be greater than at present. Shareholders
may also experience a greater degree of difficulty in obtaining accurate, timely
information concerning pricing and trading volume and in engaging in trades of
shares of Common Stock. In addition, if the Common Stock were to become
delisted from trading on Nasdaq and the trading price of the Common Stock were
to remain below $5.00 per share, trading in the Company's Common Stock would be
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended, which require additional disclosure by broker-
dealers in connection with any trades involving a stock defined as a "penny
stock" (generally, any non-Nasdaq equity security that has a market price of
less than $5.00 per share, subject to certain exceptions). The additional
burdens imposed upon broker-dealers by such requirements could discourage
broker-dealers from effecting transactions in the Common Stock, which could
limit the market liquidity of the Common Stock and the ability of investors to
trade the Company's Common Stock. There is no guaranty that the Consolidation
will result in compliance with the Nasdaq minimum trading price requirement or
the Company will continue to meet all of the other requirements for continued
listing. The Company's securities may be delisted even after the Consolidation.
BOARD DISCRETION TO IMPLEMENT THE CONSOLIDATION
If the Consolidation is approved by the shareholders of the Company at the
Special Meeting, the Conversion Ratio will be determined by the board of
directors and the Consolidation will be effected, only upon a determination by
the board of directors that such Consolidation is in the best interests of the
Company and its shareholders. Such determination shall be based upon certain
factors, including, but not limited to, the current market conditions, existing
and expected trading prices for the Common Stock, and the likely effect of
business developments on the market price of the Common Stock. Notwithstanding
approval of the Consolidation by the shareholders, the board of directors may,
in its sole discretion, determine not to implement the Consolidation.
EFFECTS OF THE CONSOLIDATION ON REGISTRATION, VOTING RIGHTS, AND SERIES A
PREFERRED STOCK
The Company's Common Stock is currently registered under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company is subject to the periodic reporting and other requirements of the
Exchange Act. The Consolidation will not affect the registration of the
Company's Common Stock under the Exchange Act. After the Consolidation, the
Company's Common Stock (if still listed on Nasdaq National Market) will continue
to be reported on the Nasdaq National Market under the symbol "LDII" (although
Nasdaq will add the letter "D" to the end of the trading symbol for a period of
20 trading days to indicate the Consolidation has occurred).
The Consolidation will result in an adjustment to the conversion ratio of
the Company's Series A Preferred Stock that will reduce the number of shares of
Common Stock issuable upon conversion of the Company's outstanding Series A
Preferred Stock in proportion to the Exchange Ratio of the Consolidation. The
amount of Common Stock issuable on conversion of the Series A Preferred Stock
will continue to vary after the Consolidation since the conversion rights of the
holders are based on the market price of the Common Stock at the time of
conversion. As a result, proportionate ownership rights of the holders of
Common Stock and the Series A Preferred Stock will not be affected by the
Consolidation (other than as a result of the payment of cash in lieu of
fractional shares as described above). For example, a holder of Series A
Preferred Stock which represents the right to convert into 2% of the outstanding
shares of Common Stock immediately prior to the effective time of the
Consolidation would continue to hold a right to convert the Series A Preferred
Stock into 2% of the outstanding shares of Common Stock after the Consolidation.
Although the Consolidation will not affect any shareholder's proportionate
equity interest in the Company (subject to the treatment of fractional shares),
the number of authorized shares of Common Stock will not be reduced which will
increase the number of unissued shares that could be issued by board of
directors' action in the future without further shareholder action. The number
of shareholders of record will not be affected by the Consolidation (except to
the extent that any shareholder holds only a fractional share interest and
receives cash for such interest after the Consolidation).
The relative voting rights of the Common Stock and the Series A Preferred
Stock will be affected by the Consolidation. The Series A Preferred Stock has
278 votes per share, an aggregate of 816,973 votes, or approximately 6% of the
current total voting power. If the Common Stock were consolidated on the basis
of five-to-one, the votes associated with the Series A Preferred Stock would
represent approximately 23% of the total voting power. If the Consolidation is
completed on the basis of ten-to-one, the Series A Preferred Stock would
represent approximately 38% of the total voting power.
EFFECT ON STOCK OPTIONS AND WARRANTS
The Consolidation will effect a reduction in the number of shares of
Common Stock available for issuance under the Company's 1987 Employee Stock
Option Plan, 1991 Employee Stock Award Plan, 1991 Director Stock Option Plan,
1996 Director Stock Option Plan, 1997 Employee Stock Purchase Plan, and 1997
Stock Option and Award Plan (the "Plans") in proportion to the Conversion Ratio.
The maximum number of shares of Common Stock authorized for issuance under the
Plans is 3,675,000 shares (prior to giving effect to the Consolidation). The
par value of the Company's Common Stock and Series A Preferred Stock will
remain at $0.001 per share following the effective time of the Consolidation.
The Company currently has outstanding stock options and warrants to
purchase approximately 3,300,000 shares of the Company's Common Stock. Under
the terms of the outstanding stock options and warrants, the Consolidation will
effect a reduction in the number of shares of Common Stock issuable upon
exercise of such stock options and warrants in proportion to the Conversion
Ratio and will effect a proportionate increase in the exercise price per share
of such outstanding stock options and warrants. In connection with the
Consolidation, the number of shares of Common Stock issuable upon exercise of
outstanding stock options and warrants will be rounded to the nearest whole
share, and no cash payment will be made in respect of such rounding.
CHANGES IN STOCKHOLDERS' EQUITY
As an additional result of the Consolidation, the Company's stated capital,
which consists of the par value per share of Common Stock multiplied by the
number of shares of Common Stock issued, will be reduced by approximately
$11,000 to approximately $2,000 on the Effective Date in the event of a five-to-
one Consolidation and approximately $13,000 to approximately $1,000 in the event
of a ten-to-one Consolidation. Correspondingly, the Company's additional paid-
in capital, which consists of the difference between the Company's stated
capital and the aggregate amount paid to the Company upon the issuance by the
Company of all currently outstanding Common Stock, will be increased by
approximately $11,000 to $13,000, respectively.
INCREASE IN STOCK AVAILABLE FOR ISSUANCE
The Company currently has 300,000,000 shares of capital stock authorized,
of which 290,000,000 shares are designated as Common Stock. The authorized
shares of the Company will not be affected by the Consolidation. Consequently,
the number of authorized but unissued shares of Common Stock effectively will be
increased. The issuance of such additional authorized shares may have the
effect of diluting the earnings per share and book value per share of the
Company, as well as the percentage stock ownership and voting rights of
outstanding Common Stock. The effective increase in the number of authorized
but unissued shares of Common Stock may be construed as having an anti-takeover
effect by facilitating the issuance of shares to purchasers who might oppose a
hostile takeover bid or oppose any efforts to amend or repeal certain provisions
of the Company's Articles of Incorporation or Bylaws.
EXCHANGE OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
The consolidation and reclassification of shares of Common Stock pursuant
to the Consolidation will occur automatically on the Effective Date without any
action on the part of shareholders of the Company and without regard to the date
certificates representing shares of Common Stock are physically surrendered for
new certificates. If the number of shares of Common Stock to which a holder is
entitled as a result of the Consolidation would otherwise include a fraction,
the Company will pay to the shareholder, in lieu of issuing fractional shares of
the Company, cash in an amount equal to the same fraction multiplied by five to
ten times (depending upon the Conversion Ratio) the average closing price of the
Common Stock on the Nasdaq NMS (or such other exchange as the Common Stock may
then be listed on) for the five days immediately preceding the Effective Date.
A change in the closing price of the Common Stock will affect the amount
received by shareholders in lieu of fractional shares.
As soon as practicable after the Effective Date, transmittal forms will be
mailed to each holder of record of certificates for shares of Common Stock to be
used in forwarding such certificates for surrender and exchange for certificates
representing the number of shares of Common Stock such shareholder is entitled
to receive as a consequence of the Consolidation. The transmittal forms will be
accompanied by instructions specifying other details of the exchange. Upon
receipt of such transmittal form, each shareholder should surrender the
certificates representing shares of Common Stock prior to the Consolidation, in
accordance with the applicable instructions. Each holder who surrenders
certificates will receive new certificates representing the whole number of
shares of Common Stock that he holds as a result of the Consolidation and any
cash payable in lieu of a fractional share. If the certificates are surrendered
prior to April 30, 1999, the Company will pay the cost of the replacement
certificates. The costs of obtaining a replacement certificate subsequent to
that date will be borne by individual shareholders. SHAREHOLDERS SHOULD NOT
SEND THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
After the Effective Date, each certificate representing shares of Common
Stock outstanding prior to the Effective Date (an "Old Certificate") will, until
surrendered and exchanged as described above, be deemed, for all corporate
purposes, to evidence ownership of the whole number of shares of Common Stock,
and the right to receive from the Company the amount of cash for any fractional
shares, into which the shares of Common Stock evidenced by such certificate have
been converted by the Consolidation, except that the holder of such unexchanged
certificates will not be entitled to receive any dividends or other
distributions payable by the Company after the Effective Date, until the Old
Certificates have been surrendered. Such dividends and distributions, if any,
will be accumulated, and at the time of surrender of the Old Certificates, all
such unpaid dividends or distributions will be paid without interest.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes certain material federal income tax
considerations relating to the Consolidation. This discussion is based upon the
Internal Revenue Code of 1986 (the "Code"), existing and proposed regulations
thereunder, legislative history, judicial decisions, and current administrative
rulings and practices, all as amended and in effect on the date hereof. Any of
these authorities could be repealed, overruled, or modified at any time. Any
such change could be retroactive and, accordingly, could cause the tax
consequences to vary substantially from the consequences described herein. No
ruling from the Internal Revenue Service (the "IRS") with respect to the matters
discussed herein has been requested, and there is no assurance that the IRS
would agree with the conclusions set forth in this discussion. All shareholders
should consult with their own tax advisors.
This discussion may not address certain federal income tax consequences
that may be relevant to particular shareholders in light of their personal
circumstances (such as persons subject to the alternative minimum tax) or to
certain types of shareholders (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions, and tax-
exempt entities) who may be subject to special treatment under the federal
income tax laws. This discussion also does not address any tax consequences
under state, local, or foreign laws.
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR
TAX CONSEQUENCES TO THEM OF THE CONSOLIDATION, INCLUDING THE APPLICABILITY OF
ANY STATE, LOCAL, OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE TAX LAWS, AND ANY
PENDING OR PROPOSED LEGISLATION.
The Company will not recognize any gain or loss as a result of the
Consolidation. No gain or loss will be recognized by a shareholder who receives
only Common Stock upon the Consolidation. A shareholder who receives cash in
lieu of a fractional share of Common Stock that otherwise would be held as a
capital asset generally should recognize capital gain or loss on an amount equal
to the difference between the cash received and the shareholder's basis in such
fractional share of Common Stock. For this purpose, a shareholder's basis in
such fractional share of Common Stock will be determined as if the shareholder
actually received such fractional share. Except as provided with respect to
fractional shares, the aggregate tax basis of the shares of Common Stock held by
a shareholder following the Consolidation will equal the shareholder's aggregate
basis in the Common Stock held immediately prior to the Consolidation and
generally will be allocated among the shares of Common Stock held following the
Consolidation on a pro-rata basis. Shareholders who have used the specific
identification method to identify their basis in shares of Common Stock combined
in the Consolidation should consult their own tax advisors to determine their
basis in the post-Consolidation shares of Common Stock received in exchange
therefor.
Based on certain exceptions contained in regulations issued by the Internal
Revenue Service, the Company does not believe that it or fractional shareholders
will be subject to backup withholding or information reporting with respect to
the cash distributed to a fractional shareholder unless the amount of cash
distributed to the fractional shareholder is $10 or more.
NO DISSENTERS' RIGHTS
Under Nevada law, shareholders are not entitled to dissenters' rights of
appraisal with respect to the Consolidation.
REQUIRED VOTES
In order to be approved by the shareholders, the proposal to implement the
Consolidation must receive the affirmative votes of a majority of the votes
cast, in person or by proxy, at the Special Meeting. Directors and executive
officers holding 20,473 shares of Common Stock have indicated their intention to
vote in favor of the Consolidation. Broker non-votes and other abstentions will
not be considered in determining the outcome.
Shareholder approval of the Consolidation is not required by Nevada
corporate law or any other rule or regulation applicable to the Company. The
board of directors has elected to submit the proposal to the shareholders to
obtain guidance as to the determination of the shareholders on this matter. In
the event that the Consolidation is not approved by the shareholders, it will
not be implemented unless the board of directors determines it is in the best
interests of the Company and its shareholders to do so.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
CONSOLIDATION OF THE ISSUED AND OUTSTANDING COMMON STOCK OF THE COMPANY.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of
September 30, 1998, estimates the pro forma effect of the Asset Sale on the
Company's financial position as if the Asset Sale and the transactions
contemplated in the Purchase Agreement had been consummated on September 30,
1998. The following unaudited pro forma consolidated statements of operations
for the nine months ended September 30, 1998, and for the year ended December
31, 1997, estimate the pro forma effects of the Asset Sale on the Company's
results of operations as if the Asset Sale had occurred at the beginning of each
of the respective periods. The following unaudited pro forma consolidated
statements of operations also estimate the pro forma effects of the
discontinuance and/or sale of certain products or technologies on sales and cost
of sales for the corresponding periods. The pro forma adjustments are described
in the accompanying notes and are based upon available information and certain
assumptions that the Company believes are reasonable. The pro forma information
may not be indicative of the results of operations and financial position of the
Company, as it may be in the future or as it might have been had the
transactions been consummated on the respective dates assumed. The pro forma
information is included for comparative purposes and should be read in
conjunction with the Company's consolidated financial statements and related
notes included elsewhere.
The actual amount of the purchase price and the net purchase proceeds
(exclusive of the earnout payment) from the Asset Sale is to be finalized
subsequent to January 1, 1999. The Company believes that such amount will not
be materially different from the amount of purchase proceeds reflected in the
pro forma consolidated balance sheet presented below.
The Company has recently entered into agreements with the remaining holders
of the issued and outstanding Series A Preferred Stock to reacquire the Series A
Preferred Stock for the amount originally paid to the Company by the holders,
plus all accrued but unpaid dividends. The Company can assign its rights to
purchase the Series A Preferred Stock and may do so to retain its working
capital and maintain maximum flexibility in deciding on the future strategy of
the Company if it can reach an acceptable agreement with a new investor.
Under the terms of the agreements, the purchase will occur within 15 days of
the closing of the Asset Sale. The holders have agreed not to convert the
Series A Preferred Stock to Common Stock in the interim. The Company's
obligation to purchase the Series A Preferred Stock is dependent on the
closing of the Asset Sale. If the Company redeems the Series A Preferred
Stock, the redemption price will be approximately $3.1 million. The possible
redemption of the Series A Preferred Stock has not been reflected in the
accompanying unaudited pro forma consolidated financial statements.
The Asset Sale will give the present chief executive officer and chief
operating officer the right to terminate their employment agreements for cause
if it is determined to be the sale of "all or substantially all" of the assets
of the Company. On such termination, the Company would owe the chief executive
officer approximately 20 months of his base salary of $250,000 per year and
would owe the chief operating officer one year's base salary of $140,000. The
executives will have this right for a 60 day period following the closing of the
Asset Sale. The potential payments of amounts due in the event the chief
executive office and/or the chief operating officer exercise these rights have
not been reflected in the accompanying unaudited pro forma consolidated
financial statements.
LARSONoDAVIS INCORPORATED AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet
September 30, 1998
<TABLE>
<CAPTION>
Sale of Acoustics Business
-------------------------------------
Historical Pro Forma Pro Forma
Consolidated Adjustments Consolidated
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,192,407 $ 5,160,000 (a) $ 6,202,407
(150,000) (b)
Trade accounts receivable, net of
allowance for doubtful accounts 1,626,511 (1,088,005) (a) 538,506
Note receivable - 500,000 (a) 500,000
Inventories 2,146,822 (1,235,898) (a) 910,924
Other current assets 46,962 (19,209) (a) 27,753
------------ ------------ ------------
Total current assets 5,012,702 3,166,888 8,179,590
Property and equipment, net of
accumulated depreciation and
amortization 1,532,588 (1,359,769) (a) 172,819
Assets under capital lease obligations,
net of accumulated amortization 221,808 (208,234) (a) 13,574
Intangible assets, net of accumulated
amortization 399,151 (302,803) (a) 96,348
------------ ------------ ------------
$ 7,166,249 $ 1,296,082 $ 8,462,331
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 458,483 $ (296,215) (a) $ 162,268
Accrued liabilities 1,076,829 (480,098) (a) 596,731
Current maturities of long-term debt 709,363 (695,747) (a) 13,616
Current maturities of capital lease obligations 209,006 (204,496) (a) 4,510
------------ ------------ ------------
Total current liabilities 2,453,681 (1,676,556) 777,125
Deferred gain - 200,000 (a) 200,000
Long-term debt, less current maturities 17,472 - 17,472
Capital lease obligations, less current maturities 126,093 (117,401) (a) 8,692
------------ ------------ ------------
Total liabilities 2,597,246 (1,593,957) 1,003,289
------------ ------------ ------------
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 3 - 3
Common stock, $0.001 par value; authorized
290,000,000 shares; issued and outstanding
12,986,551 shares at September 30, 1998 12,987 - 12,987
Additional paid-in capital 30,708,272 - 30,708,272
Accumulated deficit (25,448,935) 3,040,039 (a) (22,558,896)
(150,000) (b)
Note receivable from sale of stock (774,684) - (774,684)
Cumulative foreign currency translation 71,360 (a) 71,360
adjustment ------------ ------------ ------------
Total stockholders' equity 4,569,003 2,890,039 7,459,042
------------ ------------ ------------
$ 7,166,249 $ 1,296,082 $ 8,462,331
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
LARSONoDAVIS INCORPORATED AND SUBSIDIARIES
Pro Forma Consolidated Statements of Operations
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Sale of Acoustics Business TOF2000, SFC, and PAMS(f)
------------------------------- -------------------------------
Historical Pro Forma Pro Forma Pro Forma
Consolidated Adjustments Consolidated Adjustments Pro Forma
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 6,862,851 $(5,350,289) (c) $ 1,512,562 $(1,000,151) (f) $ 512,411
----------- ----------- ----------- ----------- -----------
Costs and operating expenses:
Cost of sales (2,589,003) (c) (1,340,022) (f) 308,699
4,237,724 1,648,721
Research and development 2,312,644 (1,023,173) (c) 1,289,471 - (f) 1,289,471
Selling, general, and administrative 3,285,793 (1,800,018) (c) 1,547,770 - (f) 1,547,770
61,995 (d)
Unusual charges 3,036,733 - 3,036,733 (2,871,907) (f) 164,826
----------- ----------- ----------- ----------- -----------
12,872,894 (5,350,199) 7,522,695 (4,211,929) 3,310,766
----------- ----------- ----------- ----------- -----------
Operating loss (6,010,043) (90) (6,010,133) 3,211,778 (2,798,355)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income 110,032 - 110,032 - 110,032
Interest expense (116,165) 69,906 (c) (46,259) 18,904 (f) (27,355)
Other, net (103,851) 5,255 (c) (98,596) 34,221 (f) (64,375)
----------- ----------- ----------- ----------- -----------
(109,984) 75,161 (34,823) 53,125 18,302
----------- ----------- ----------- ----------- -----------
Loss from continuing operations $(6,120,027) $ 75,071 $(6,044,956) $ 3,264,903 $(2,780,053)
=========== =========== =========== =========== ===========
Loss per common share:
Basic $ (0.59) (e) $ (0.59) (e) $ (0.33)
Diluted $ (0.59) (e) $ (0.59) (e) $ (0.33)
Weighted average common and
common equivalent shares:
Basic 12,560,991 12,560,991 12,560,991
Diluted 12,560,991 12,560,991 12,560,991
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
LARSONoDAVIS INCORPORATED AND SUBSIDIARIES
Pro Forma Consolidated Statements of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Sale of Acoustics Business TOF2000, SFC, and PAMS(f)
------------------------------- --------------------------------
Historical Pro Forma Pro Forma Pro Forma
Consolidated Adjustments Consolidated Adjustments Pro Forma
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 8,313,328 $ (7,038,251) (c) $ 1,275,077 $ (1,270,540) (f) $ 4,537
------------ ------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of sales 6,074,883 (4,609,205) (c) 1,465,678 (1,463,830) (f) 1,848
Research and development 4,860,993 (2,053,061) (c) 2,807,932 - (f) 2,807,932
Selling, general, and 6,019,282 (3,972,412) (c) 2,129,530 - (f) 2,129,530
administrative 82,660 (d)
Non-recurring and unusual charges 5,937,355 (4,370,059) (c) 1,567,296 (183,332) (f) 1,383,964
------------ ------------ ------------ ------------ ------------
22,892,513 (14,922,077) 7,970,436 (1,647,162) 6,323,274
------------ ------------ ------------ ------------ ------------
Operating loss (14,579,185) 7,883,826 (6,695,359) 376,622 (6,318,737)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income 140,870 - 140,870 140,870
Interest expense (301,411) 143,081 (c) (158,330) 25,000 (f) (133,330)
Other, net (78,085) 63,816 (c) (14,269) 11,905 (f) (2,364)
------------ ------------ ------------ ------------ ------------
(238,626) 206,897 (31,729) 36,905 5,176
------------ ------------ ------------ ------------ ------------
Loss from continuing operations $(14,817,811) $ 8,090,723 $ (6,727,088) $ 413,527 $ (6,313,561)
============ ============ ============ ============ ============
Loss per common share:
Basic $ (1.29) $ (0.58) $ (0.55)
Diluted $ (1.29) $ (0.58) $ 0.55)
Weighted average common and
common equivalent shares:
Basic 11,507,701 11,507,701 11,507,701
Diluted 11,507,701 11,507,701 11,507,701
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) The unaudited pro forma consolidated balance sheet gives effect to the
sale of the assets of the Company's acoustic and vibration business and
assumption of certain related liabilities as though the sale had occurred on
September 30, 1998. Estimated net proceeds, liabilities assumed, assets sold,
and resultant gain from the sale of the assets is as follows:
<TABLE>
<CAPTION>
<S> <C>
Consideration to be received:
Cash (less estimated $90,000
net working capital adjustment) $ 5,160,000
Note receivable 500,000
------------
Purchase price 5,660,000
Liabilities assumed 1,793,957
------------
Total proceeds received 7,453,957
Historical cost of assets sold 4,213,918
------------
Total gain on sale 3,240,039
Gain deferred on non-compete agreement 200,000
------------
Gain on sale recognized $ 3,040,039
============
</TABLE>
The Company has not provided pro forma income taxes on the gain on sale of
assets because of the availability of sufficient net operating loss
carryforwards to absorb the gain. The Company may be liable for alternative
minimum tax in the year of sale, although the Company does not expect the
alternative minimum tax, if any, to be material to its pro forma consolidated
financial position after the sale.
(b) This pro forma adjustment reflects the estimated expenses of the Asset
Sale, which include:
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses $ 50,000
Accounting fees and expenses 15,000
Appraisal and survey costs 15,000
Printing, mailing, and solicitation costs 20,000
Transfer Agent costs 20,000
Other 30,000
------------
$ 150,000
============
</TABLE>
(c) The unaudited pro forma consolidated statements of operations for the
nine months ended September 30, 1998, and for the year ended December 31, 1997,
give effect to the sale as though it had occurred on January 1, 1998, and
January 1, 1997, respectively. This pro forma adjustment eliminates the
historical results of the Company's Acoustics Business. The gain from the Asset
Sale is not included in the pro forma consolidated statements of operations.
Nonrecurring and unusual charges have been associated with the operations
from which they originated. Nonrecurring and unusual charges associated with
the Acoustics Business for the year ended December 31, 1997, include:
<TABLE>
<CAPTION>
<S> <C>
Restructuring charges:
Termination and related costs of former employees $ 87,906
Write down of assets:
Intangible assets 1,649,372
Property and equipment 75,878
Impairment charges on long-term contractual arrangement 2,556,903
------------
$ 4,370,059
============
</TABLE>
See Note B to 1997 Consolidated Financial Statements for further
explanation of nonrecurring and unusual charges.
(d) This pro forma adjustment reflects the anticipated costs to the
Company under the Shared Services Agreement and the Lease Agreement and the
reimbursement to the Company for Mr. Cohen's time devoted to the Acoustics
Business. The annualized estimated amounts are as follows:
<TABLE>
<CAPTION>
<S> <C>
Finance department $ 41,252
Occupancy 25,260
Telephone 18,000
Utilities 4,800
Information systems 53,348
---------
142,660
Less reimbursement for Mr. Cohen (60,000)
---------
$ 82,660
=========
</TABLE>
(e) For the nine months ended September 30, 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 Series A
Preferred Stock and related warrants. The beneficial feature is computed as the
difference between the market value of the Common Stock into which the Series A
Preferred Stock can be converted and the value assigned to the Series A
Preferred Stock in the private placement. The imputed dividend, in the amount
of $1,239,290, is a one-time, non-cash charge of approximately $0.10 per share
to the loss per common share.
(f) During 1998, the Company has: (1) terminated its distribution
arrangement with SAES Getters S.p.A. and discontinued the sale of the TOF2000;
(2) terminated the Technical Information Agreement and Patent License Agreement
with Lucent Technologies under which the Company had intended to develop a
particle analysis mass spectrometer (PAMS); and (3) sold its Supercritical
Fluid Chromatography (SFC) technology. This pro forma adjustment eliminates
historical results of operations that are specifically identifiable with the
technologies that have been sold or discontinued during 1998.
Presently, the remaining technologies in the Company are its Jaguar mass
spectrometer technology and its CrossCheck technology. In the preparation of
the pro forma adjustments, it was not practical to specifically segregate
research and development or selling, general, and administrative expenses
between the discontinued and continuing product lines and technologies because
the Company does not account for such expenses by product line or technology.
Accordingly, no pro forma adjustment has been made to reflect the reduction of
research and development or selling, general, and administrative expenses that
has occurred with the discontinuance of these technologies. With the
disposition of these technologies, the Company has reduced personnel. After the
sale of the Acoustics Business, the Company will have 18 employees, composed of
12 employees in research and development, 2 senior executive employees, and 4
employees in sales and marketing. This compares to 27 employees that were
either Sensar or senior executive employees at January 1, 1998. Based on this
level of operation, the Company currently estimates its annual research and
development, and selling, general, and administrative expenses to be
approximately $800,000 and $1,400,000, respectively, which represents a
significant reduction from the amounts shown in the pro forma columns for the
nine months ended September 30, 1998, and for the year ended December 31, 1997.
SELECTED HISTORICAL FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data as of and for
the periods ended December 31, 1997 and 1996, and June 30, 1996, 1995, 1994, and
1993, were derived from the audited Consolidated Financial Statements of the
Company. In January 1997, the Company changed its fiscal year end from June 30
to December 31 effective December 31, 1996. The Consolidated Financial
Statements of the Company for the fiscal year ended December 31, 1997, for the
six months ended December 31, 1996, and for the fiscal years ended June 30,
1996, 1995, 1994, and 1993, have been audited by independent certified public
accountants. The Consolidated Financial Statements of the Company for the year
ended December 31, 1996, are unaudited; however, in the Company's opinion, such
statements reflect all adjustments, consisting only of normal recurring items,
necessary for a fair presentation of the financial position and results of
operations of the Company for such period. The following statement of
operations and balance sheet data as of and for the periods ended September 30,
1998 and 1997, have been derived from the Unaudited Consolidated Financial
Statements of the Company. Results of interim periods are not necessarily
indicative of the results expected for the year. The selected financial data
below should be read in conjunction with the Consolidated Financial Statements
of the Company and the notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included elsewhere herein.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Six Months
Nine Months Ended Ended
September 30, Year Ended December 31, December Year Ended June 30,
-------------------------- ------------------------- 31, -------------------------------------------------
1998(1) 1997 1997(2) 1996 1996 1996(3) 1995(5) 1994(4)(5) 1993
------------ ------------ ------------ ----------- ----------- ----------- ---------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $6,862,851 $6,672,750 $8,313,328 $8,992,614 $4,889,280 $8,255,607 $6,515,830 $5,137,638 $6,180,082
Costs and
operating
expenses
Cost of
sales $4,237,724 $3,492,116 $6,074,883 $4,469,351 $2,177,304 $3,407,613 $1,916,413 $1,718,769 $2,553,105
Research
and
development $2,312,644 $3,253,354 $4,860,993 $3,055,705 $1,734,911 $2,149,384 $708,679 $834,520 $868,957
Selling,
general,
and admini-
strative $3,285,793 $4,184,575 $6,019,282 $4,643,721 $2,534,643 $3,922,976 $3,131,938 $2,863,074 $2,374,707
Unusual and
non-recurring
charges $3,036,733 - $5,937,355 - - - - - -
Operating
profit (loss) ($6,010,043) ($4,257,295) ($14,579,185) ($3,176,163) ($1,557,578) ($1,224,366) $758,800 ($278,725) $383,313
Other income
(expense),
net ($109,984) ($90,790) ($238,626) ($393,936) ($86,342) ($481,882) ($300,289) ($162,511) ($252,496)
Income (loss)
from
continuing
operations ($6,120,027) ($4,348,085) ($14,817,811) ($3,570,099) ($1,643,920) ($1,706,248) $458,511 ($441,236) $130,819
Basic
earnings
(loss) from
continuing
operations
per common
share ($0.59) ($0.38) ($1.29) ($0.38) ($0.16) ($0.21) $0.08 ($0.08) $0.02
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
At September 30, At December 31, At June 30,
---------------- --------------------------- ----------------------------------------------------------
1998 1997 1996 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $7,166,249 $12,195,430 $19,906,521 $19,769,028 $11,579,667 $11,011,119 $10,300,253
Long-term obligations $143,565 $1,275,512 $1,282,894 $1,136,006 $1,213,331 $1,078,073 $827,623
Cash dividends
per common share $0 $0 $0 $0 $0 $0 $0
</TABLE>
[FN]
(1) For the nine months ended September 30, 1998, there are unusual charges of
$3,527,615 ($0.28 per share) included in operating loss and in loss from
continuing operations. These unusual charges principally represent the
writeoff of intangible assets and surplus inventory associated with the
Sensar TOF2000 technology. (See Note D to 1998 Unaudited Consolidated
Financial Statements). Exclusive of these unusual charges, operating
loss and loss from continuing operations for the nine months ended
September 30, 1998, would have been $2,482,428 and $2,592,412,
respectively.
(2) For the year ended December 31, 1997, there are unusual and nonrecurring
charges of $5,937,355 ($0.52 per share) included in operating loss and in
loss from continuing operations. These unusual and nonrecurring charges
related to the restructuring of the Company and certain impairment losses
recognized in the fourth quarter of 1997. (See Note B to 1997
Consolidated Financial Statements.) Exclusive of these unusual and
nonrecurring charges, operating loss and loss from continuing operations
for the year ended December 31, 1997, would have been $8,641,830 and
$8,880,456, respectively.
(3) Effective October 27, 1995, the Company acquired Sensar Corporation in a
transaction accounted for as a purchase.
(4) During the quarter ended March 31, 1994, the Company acquired Larson Davis,
Ltd., in a transaction accounted for as a purchase.
(5) During the years ended June 30, 1995 and 1994, the Company discontinued
the operations of its Airport Noise Monitoring Business and its Software
Licensing Business, respectively. The results of these operations have
been segregated from continuing operations in the Consolidated Statements
of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes contained herein.
OVERVIEW
The Company has historically been engaged in designing and manufacturing
precision acoustical and vibration instrumentation. Beginning in 1994 and
continuing to the present, the Company has acquired the rights to a number of
core technologies and has dedicated significant time, effort, and expense to a
research and development efforts to create products designed for the scientific
instrumentation industry. Management in place during the acquisition phase of
these technologies believed that these technologies placed the Company in a
position to develop a number of sophisticated analytical instruments in addition
to its historical acoustical and vibration based business.
In order to accomplish its goals, the Company initiated research and
development plans and developed certain commercial products based on these
acquired technologies. In addition, the Company continued to introduce newly
developed acoustic and vibration products. However, there were unanticipated
delays in the finalization of many of these products. During this period of
time, the Company incurred significant losses, principally as a result of the
expanded research and development effort and increased infrastructure put in
place to deal with the anticipated increase in revenues. The Company was unable
to fund its increased research, development, and other activities from
operations, and sought and obtained equity financing, primarily from private
placements (including the placement of the Series A Preferred Stock) to private
investors, in order to meet these costs. This capital has been and is currently
being used for various purposes, including further research and development
activities, costs associated with the market introduction of new key products,
and general operations.
In November 1997, the board of directors appointed Andrew C. Bebbington as
the new chief executive officer of the Company with the expectation of reversing
the severe losses of the Company through a combination of restructuring and
redirection of priorities and leading the Company into the next stage of its
development: the finalization of products, establishment of standardized
manufacturing, and market penetration for existing and developing products. In
connection with the appointment of Mr. Bebbington, Brian G. Larson, Larry J.
Davis, and Dan J. Johnson, the former executive management team, resigned their
positions, including their positions on the board of directors of the Company.
Mr. Bebbington, with the endorsement of the outside board members,
immediately undertook an evaluation of all aspects of the Company's operations,
research and development projects, sales and marketing approaches, product
offerings, personnel and management, contractual arrangements, and overall cost
structure. As a result, the new chief executive officer recommended, and the
board of directors approved in December 1997, additional restructuring steps and
certain changes in the strategic direction of the Company. This resulted in a
reduction of personnel, the cessation of certain business activities, a renewed
focus on certain research and development projects, and a de-emphasis or
abandonment of other projects. These restructuring activities and certain other
events in the fourth quarter of 1997 resulted in unusual and nonrecurring
charges to the Statement of Operations for the year ended December 31, 1997 in
the aggregate amount of $5,937,355. (See Note B to the 1997 Consolidated
Financial Statements.)
Over the course of 1998, the Company has further reviewed each of the
technologies in its portfolio and to the extent the technology could not support
its level of overhead in the short term, appropriate cost cutting measures have
been taken. As a result of the Company's technology review, the Company, by
mutual consent, terminated its agreement with Lucent Technologies, Inc.,
concerning certain development technologies and its distribution agreement with
SAES Getters S.p.A., concerning marketing its TOF2000 product. The Company has
also recently sold its SFC business to a group of former employees. In each
case, the Company has reduced personnel and overhead accordingly.
During the course of 1998, the Company, through its Sensar division,
completed the initial development of its Jaguar technology. In parallel with
the development program, the Company had been searching for a marketing partner
for its mass spectrometer technology to provide additional distribution
capability. The Company has now entered into an agreement with JEOL regarding
development and distribution of the Company's Jaguar time-of-flight mass
spectrometer product. This arrangement will provide the Company with an
additional $300,000 of research funds and, subject to the Company meeting
certain design modification milestones, a minimum guaranteed purchase of 12
Jaguar instruments in 1999.
Development of the CrossCheck product and exploration of its market
potential is continuing. 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 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 technological feasibility, market acceptance, and acceptable
commercial terms.
On the acoustics side, the Company continued to invest in new product
development with the intention of upgrading the product line and improving its
technical competitiveness. Several new products are planned for launch during
1999. Significant improvement in the performance of the Acoustics Business based
on a year-to-year comparison of results of operations has already occurred.
Management believes that these steps permitted the successful negotiation of the
sale of the Acoustics Business to PCB.
The Company has continued with its cost cutting initiatives which it
introduced at the beginning of 1998. However, in spite of improvement, the
Company suffers from other financial difficulties, including a depressed stock
price and related significant possible dilution of the common shareholders from
the conversion of the Series A Preferred Stock. With the proposed Asset Sale,
the Company would have additional cash resources of approximately $5 million, a
portion of which could be used to redeem the Series A Preferred Stock and
eliminate the potential dilution, or alternatively, could be used for
acquisition opportunities to enhance shareholder value in other ways.
While management of the Company continues to believe in, and is committed
to, development of a range of superior products designed to meet the needs of
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 and marketing 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.
RESULTS OF OPERATIONS
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 from $1,587,234 to $1,512,563 during the first nine months of 1998.
Cost of Sales
Cost of sales for the nine months ended September 30, 1998, were
$4,237,724, or 61.7% 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
inventory adjustments in the third quarter of approximately $491,000 in
connection with the discontinuance of the TOF2000 product line and also due
to the sales of TOF2000 and beta Jaguar and SFC instruments in the Sensar
division for which the gross margin was less than normal margins for
commercial instruments. Cost of sales for acoustic products during the
nine months ended September 30, 1998, decreased from 49.7% in 1997 to 48.4%
largely as a result of personnel reductions in manufacturing overhead of
four full-time and three part-time positions.
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.
The decrease in the dollar amount of selling, general, and administrative
expenses was principally due to progress on corporate objectives of cost
control, achieved through personnel reductions and more aggressive procurement
practices, such as budgetary constraints, preauthorization of all expenditures,
seeking competitive quotes, etc. Reductions in selling, general, and
administrative expenses principally consist of decreases of approximately (1)
$418,000 in professional and consulting fees; (2) $272,000 in payroll and
associated labor costs from a reduction of nine full-time positions; and (3)
$99,000 in travel and related expenses. Additionally, depreciation and
amortization expense decreased by approximately $77,000 due to the reduction in
carrying value of certain assets at December 31, 1997. 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. The decrease in the
amount of research and development over the prior period, as well as over recent
historical levels, is due primarily to the cost control measures discussed
above, personnel reduction, and greater discipline over prototype activity,
through a much stronger design control process that evaluates manufacturability,
material costs, and market requirements prior to prototype development.
Reductions in research and development costs principally consist of decreases of
approximately (1) $360,000 in materials and supplies principally used in
prototype development; (2) $303,000 in payroll and associated labor costs from a
reduction of nine full-time positions; and (3) $51,000 in professional and
consulting fees. Additionally, depreciation and amortization expenses decreased
by approximately $90,000 due to the reduction in carrying value of certain
assets at December 31, 1997. Research and development 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.
Unusual Charges
During the quarter ended September 30, 1998, the Company recognized unusual
charges of $3,036,733 principally resulting from the termination of the
exclusive distribution arrangement with SAES Getters S.p.A. ("SAES") during
September 1998. The unusual charges are composed of the writeoff of assets
related to the discontinuance of the TOF2000 product in the amount of
$2,458,004; a provision for costs related to the discontinuance of the TOF2000
and SFC products and closure of machine shop in the amount of $250,000; the
expected loss on the disposal of the machine shop equipment of $163,903; and an
allowance against the receivable from the former CEO for $164,826.
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, 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, 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 evaluated the carrying value
of assets associated with the TOF2000 product and has recorded non cash charges
for the writeoff of assets related to this product. The writeoff principally
consists of the unamortized excess purchase price of the Sensar acquisition in
the amount of $2,279,883.
During the quarter ended September 30, 1998, the Company also decided to
dispose of its SFC product line and close its machine shop. As a result of
these decisions, the Company has provided $150,000, principally for expected
exit costs related to these product lines. Future cash flows, which have been
accrued related to these technologies, are expected to be the costs of customer
support, payment of certain fixed costs for vacated space, and other winding up
costs. In addition, $100,000 has been provided to cover the probable losses on
the disposition of net assets related to the SFC product line.
Other components of the unusual charges include the expected loss of
approximately $164,000 from the disposal of the machine shop and an allowance
against a receivable due from the former CEO. During the quarter ended
September 30, 1998, management concluded that it was not cost effective for the
Company to continue to operate its own machine shop and decided to sell the
machine shop equipment and payoff the capital leases associated with the
equipment. Also during the quarter, management of the Company concluded that
the collectibility of approximately $165,000 due from the former CEO to the
Company was in doubt. The amount due originated from withholding taxes paid by
the Company on behalf of the CEO in conjunction with the issuance of stock to
him as a result of the 1997 restructuring of the Company.
Comparison of Years Ended December 31, 1997 and 1996
The Company changed its fiscal year end from June 30 to December 31,
effective December 31, 1996. The Company's audited financial statements cover
the six months ended December 31, 1996, and the year ended June 30, 1996.
Financial information for the year ended December 31, 1996, is unaudited but has
been derived from these two periods and is presented for comparative purposes
only.
Net Sales
Net sales for the years ended December 31, 1997, and 1996, were $8,313,328
and $8,992,614, respectively. This represents a decrease of $679,286, or 7.6%,
for 1997 as compared to 1996. The overall decrease is principally the result of
a decrease in sales in the acoustical and vibration product families. Sales of
acoustical and vibration products for the year ended December 31, 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 only began shipping in commercial
quantities in late 1997 and the introduction of the Model 824 and associated
options have been delayed with volume shipments starting in the first quarter of
1998. In the interim, sales of the Company's prior products declined.
Current year revenue from the Company's chemical analysis instruments was
approximately the same as in the prior year. The Company currently markets its
TOF2000 to the semi-conductor industry through SAES. Under the terms of the
marketing agreement, SAES was obligated to sell a minimum of nine units in 1997
in order to maintain its exclusive rights, a target that was not met. Sales of
the TOF2000 through SAES have historically been hampered by the parties'
inability to mutually agree on acceptable performance standards for the
instrumentation and the Company has had difficulty in meeting certain heightened
specifications required by certain new end users. At December 31, 1997, the
Company has reversed revenue recognition in the amount of approximately $430,000
on two units pending resolution of certain issues that was originally recognized
in the third quarter.
During the year ended December 31, 1997, export sales represented 52% of
net sales compared to 49% for the year ended December 31, 1996. The Company's
export sales are billed, collected, and denominated in U.S. dollars, other than
its sales through its subsidiary, LTD, which are in British Pounds Sterling.
The impact of foreign currency translation adjustments has not historically been
significant, aggregating approximately $65,000 at December 31, 1997. The
Company does not consider its foreign currency risks to be significant and has
not taken a position in the currency markets or derivatives in an attempt to
hedge any risk that might exist.
Cost of Sales
Cost of sales for the year ended December 31, 1997 was $6,074,883, or 73.1%
of net sales, compared to $4,469,351, or 49.7% of net sales for the year ended
December 31, 1996. The increase in 1997 of cost of sales as a percentage of net
sales is due to a variety of significant factors, including: (1) the absorption
of an estimated $225,000 of higher fixed manufacturing expenses and personnel
costs on decreased acoustic and vibration sales in 1997; (2) an estimated
$390,000 of costs related to meeting heightened specifications of the TOF2000
product and certain related other provisions for that product; (3) increases of
$614,000 in estimated provisions for excess and obsolete inventories,
principally associated with the restructuring of operations and changes in
strategic direction of the Company; and (4) increases during the fourth quarter
of $174,000 in the Company's estimated provisions for warranty work. With the
restructuring of the Company in late 1997, new senior management established an
objective to redevelop the Company's product portfolio on a three-year rotating
cycle. Prior to the restructuring, products were not redeveloped unless product
demand decreased significantly. Many acoustic products have been in the
Company's product portfolio since prior to 1990. With the change in managerial
direction, certain quantities of raw materials on hand were now in excess of
expected demand. Management evaluated such quantities and increased estimated
reserves against those inventories for the estimated losses. The Company
intends to return certain raw materials to vendors, although it expects that the
amounts that are recoverable will be minimal. The Company also revised its
estimates for warranty reserves during the year principally related to the
TOF2000 product and certain related performance issues.
Selling, General, and Administrative
Selling, general, and administrative expenses increased to $6,019,282, or
72.4% of net sales, for the year ended December 31, 1997, compared to
$4,643,721, or 51.6% of net sales, for the year ended December 31, 1996. The
increase in the dollar amount of selling, general, and administrative expenses
was due to several corporate objectives and activities, 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 a shareholders' meeting in 1997, including
the preparation of the annual report and proxy statement; the cost of additional
employees necessary to establish the infrastructure to support the Company's
anticipated growth; the recruitment and relocation costs of the new chief
executive officer; and costs associated with other corporate and marketing
activities. The increases in selling, general, and administrative expenses in
support of these objectives and activities were primarily reflected as increases
of approximately (1) $513,000 for compensation and associated labor costs
principally for new employees in anticipation of growth in the Company; (2)
$206,000 for employee recruitment and relocation costs principally incurred in
the fourth quarter for the new chief executive officer; (3) $85,000 for
stockholder relations and outside director costs; (4) $75,000 for travel and
related expenses; (5) $56,000 for software maintenance, installation, and
training costs; and (6) $71,000 for depreciation on the increased capital
equipment acquired. The new chief executive officer has implemented certain
cost control procedures, reduced overhead, and restructured operations to reduce
nonessential spending in this area.
Research and Development
Research and development expenses increased to $4,860,993, or 58.5% of net
sales, for the year ended December 31, 1997, compared to $3,055,705, or 34.0% of
net sales, for the year ended December 31, 1996. The increase in the amount of
research and development expenses 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 increases of approximately (1) $753,000
for compensation and associated labor costs principally of additional scientists
and engineers; (2) $521,000 in materials and supplies primarily used in
prototype development of the TOF Mass Spectrometer and SFC products which
progressed on an increasing scale through the year; (3) $187,000 for
depreciation on the increased capital equipment acquired; and (4) $124,000 for
consulting, legal, and other outside services received. The new chief executive
officer implemented certain cost control procedures, reduced overhead, and
restructured operations to reduce nonessential spending in this area.
Historical levels of research and development costs as a percentage of sales for
the fiscal years ended June 30, 1991 to 1995, averaged approximately 11% of
sales.
Unusual and Nonrecurring Charges
During the fourth quarter of 1997, the Company recognized unusual and
nonrecurring charges in the amount of $5,937,355. The charges include
restructuring charges of $3,197,121, which are primarily composed of (1)
termination costs for former management of $1,384,000; and (2) writeoff of the
unamortized costs of the Company's ENOMS technology in the amount of $1,391,000.
The termination costs of former management include the market value of the
200,000 shares of the Company's Common Stock issued to them, plus severance
payments paid in connection with their termination agreements. The ENOMS
technology was an internally developed proprietary software system for
environmental noise monitoring. As a result of the new chief executive
officer's evaluation of all aspects of the Company's operations and product
offerings, the ENOMS technology was abandoned, resulting in the writeoff of the
remaining cost of this technology.
The Company also recognized impairment losses of $2,740,234 in the fourth
quarter of 1997, related to the write-down of the carrying value of certain
assets. The principal component of the impairment charge was the write down of
the carrying value of the long-term contractual agreement in the amount of
$2,557,000. See Note S to the Consolidated Financial Statements for details of
this arrangement. The carrying value of this asset is dependent on the future
revenue stream derived from the sale of environmental noise monitoring systems.
This market has become increasingly competitive forcing a probable renegotiation
of this contract. The carrying value of this asset at December 31, 1997, has
been reduced to management's estimate of its current value, the amount of the
guaranteed minimum royalties through August 15, 1998, the date when the other
party to the contract can first unilaterally cancel the contract. See Note B to
the 1997 Consolidated Financial Statements. Non-cash portions of the unusual
and nonrecurring charges were approximately $5,615,000.
In addition to the unusual and nonrecurring charges of $5,937,355 discussed
above, certain other adjustments were recorded in the financial statements
during the fourth quarter of 1997. Largely as a result of the change in
strategic direction of the Company, certain inventories were rendered obsolete
or overstocked. Accordingly, a write down in the carrying value of inventories
to salvage value in the amount of $614,000 was recognized in the fourth quarter
of 1997. Additionally, the Company recognized other adjustments and significant
expenses related to increases in the estimated provision for warranty work,
adjustments to inventories related to the absorption of labor and overhead into
cost of sales, and the reversal of the sales revenue recorded in the third
quarter of 1997 in the approximate amount of $430,000 for two instruments for
uncertainties involving final acceptance of the instruments by the customer.
Other material expenses recorded in the fourth quarter in excess of normal
operating expenses include increasing costs incurred towards the development of
the TOF Mass Spectrometer and the SFC products and costs associated with the
recruitment and relocation of the new chief executive officer.
Comparison of Six Months Ended December 31, 1996 and 1995
Net Sales
Net sales from continuing operations for the six months ended December 31,
1996, and 1995, were $4,889,280 and $4,152,273, respectively. This represents
an increase of $737,007, or 17.7%, for 1996 as compared to 1995. The
acquisition of Sensar occurred October 27, 1995. As such, the operations of
Sensar are included for the entire six month period ended December 31, 1996,
while the operations of Sensar were only included for approximately two months
of the six-month period ended December 31, 1995. The increase in sales is
principally due to increased revenue from Sensar products of approximately
$627,000.
During the six months ended December 31, 1996, export sales experienced a
significant increase as a percentage of total sales, to 57% of sales. This
growth was due to a continuing increase in sales to the Pacific Rim and
increases in sales in Europe, compared to the prior period. Domestic sales, on
an annualized basis, declined compared to the prior year, but have increased
compared to 1995 and 1994.
Cost of Sales
Cost of sales for the six months ended December 31, 1996, were $2,177,304,
or 44.5% of net sales, compared to $1,182,566, or 28.5% of sales, for the six
months ended December 31, 1995. This elevated level of cost compared to
historical levels continues principally due to high cost of materials, initial
production costs, and development costs associated with production of initial
Sensar products.
Selling, General, and Administrative
Selling, general, and administrative expenses increased as a percentage of
sales from 42.0% for the six months ended December 31, 1995, to 51.8% for the
corresponding period of 1996. The increase was due to several factors,
including increased audit, legal, and consulting fees, establishment of a new
European sales manager, and increased costs related to various corporate and
marketing activities.
Research and Development
For the six months ended December 31, 1996, research and development costs
were $1,734,911, or 35.5% of net sales, compared to $833,407, or 20.1% of net
sales, for the six months ended December 31, 1995. The increase over the prior
period, as well as increases above historical levels, is reflective of the
Company's continuing commitment to the development of new products.
Comparison of Years Ended June 30, 1996 and 1995
Net Sales
Net sales from continuing operations for the fiscal years ended June 30,
1996, and 1995, were $8,255,607 and $6,515,830, respectively. This represents
an approximate 27% increase in its acoustic and vibration instrumentation sales.
The increased sales were attributable to a general expansion of the underlying
market, and an increase in the unit sales of the Company's products.
The acquisition of Sensar on October 27, 1995, did not materially impact
the net sales for the year ended June 30, 1996, with approximately $607,000 in
revenue attributable to the Sensar operations during that period.
During 1996, export sales declined from 53% to 33% of total sales. This
decline was the result of decreased sales in Europe, but was also due to strong
sales increases domestically.
Cost of Sales
The Company's cost of sales of $3,407,613 in the year ended June 30, 1996,
and $1,916,413 in the year ended June 30, 1995, increased as a percentage of
sales from continuing operations to 41.3% from 29.4%. The increase in 1996 was
due primarily to the high cost of materials, initial production costs, and
development costs associated with production of initial Sensar products. Prior
to the Company's acquisition, Sensar purchased major electronics subsystems from
a third party. The pricing structure was based on the premise of a high price
for a limited number of systems to provide the manufacturer a way to recover
development costs. Since the acquisition of Sensar, the Company has designed a
replacement subsystem which reduced the cost of the electronics for this
component by approximately 90%. Because of the use of the remaining highly
priced electronics subsystems in Sensar's inventory in fiscal year June 30,
1996, the entire material and development costs were expensed during the period.
Selling, General, and Administrative
Selling, general, and administrative expenses remained relatively constant
as a percentage of sales for the year ended June 30, 1996, compared to the year
ended June 30, 1995. Selling, general, and administrative expenses were
$3,922,976, or 47.5% of net sales, for the year ended June 30, 1996. This
represents a small decline when compared to the year ended June 30, 1995, when
selling, general, and administrative expenses were $3,131,938, or 48.1% of net
sales.
Research and Development
The Company is involved in a high-tech industry which demands constant
improvements and development of its instrumentation to remain technically
viable. Since its inception, the Company has dedicated significant operating
funds to research and development. For the five fiscal years June 30, 1991 to
1995, research and development expenses averaged approximately 11% of net sales
and in the year ended June 30, 1995, were $708,679, or approximately 10.9% of
net sales.
For the fiscal year ended June 30, 1996, research and development expenses
were $2,149,384, approximately 26.0% of net sales. This level of research and
development reflects management's commitment to develop new products to enhance
the revenue potential of the Company.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 and December 31, 1997, the Company had total current
assets of $5,012,702 and $6,160,440, respectively, including cash and cash
equivalents of $1,192,407 and $1,212,473, respectively. The Company had total
current liabilities at September 30, 1998 and December 31, 1997 of $2,453,681
and $4,066,915, respectively, resulting in working capital of $2,559,021 and
$2,093,525, respectively and working capital ratios of 2.0 to 1 and 1.5 to 1,
respectively.
The Company's primary source of cash for the nine months ended September
30, 1998 and for the year ended December 31, 1997, 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 and $4,627,630, respectively. Shortly after the
arrival of the new chief executive officer, the Company started a search for
additional capital resources. As a result of these efforts, a private placement
of Series A Preferred Stock was completed in February 1998 in the amount of
$3,500,000, less the expenses of the placement.
The Company's primary use of cash for the nine months ended September 30,
1998 and for the year ended December 31, 1997 were funds used in operations of
$2,431,065 and $5,122,057, respectively. The Company also used $1,198,766 for
the termination of its line of credit during the nine months ended September 30,
1998 because limitations on the borrowing base for this line of credit had
become so restrictive that it was not a significant source of reasonably priced
working capital.
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 at September 30, 1998, is the balance of the mortgage in the
amount of $695,747. The Company has obtained the consent of the mortgage lender
to a short extension of the due date for the balloon payment and this obligation
will be paid as part of the sale of the Acoustics Business.
The Company has significantly reduced its historically heavy use of cash to
fund the yearly losses in the acoustic business and the continued investment in
research in Sensar. Nevertheless, the Company is still not trading on a cash
positive basis and hence continues to reduce its cash resources.
The Company believes that it can sustain its current Sensar operation for
the short- and medium-term with its current working capital and by taking into
account the $300,000 cash injection which JEOL is contracted to pay to Sensar in
the first quarter of 1999. However, should the sale of the Acoustics Business
not be completed, the Company would need to renegotiate the mortgage on its
properties which would fall due. The Company believes that based on a recently
appraised value of $1.4 million that this should be possible.
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. Management believes that current cash on hand, along with cash
that will be generated from the Asset Sale, will be sufficient to allow the
Company to meet its operating needs and development plans and will provide funds
for possible future acquisitions and the redemption of the Series A Preferred
Stock if the board of directors decides that it is in the best interest of the
Company. However, should the Company fail to close the Asset Sale or to
otherwise 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.
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.
BUSINESS OF THE COMPANY
GENERAL
The Company is engaged in the design and development of analytical
instruments and has invested substantial sums in the research and development of
certain technologies over the past three years. A more complete discussion of
the historical business of the Company can be found in its report on Form 10-K
for the year ended December 31, 1997, and the subsequent reports filed by the
Company since that date.
Following the sale of the Acoustics Business which provided 78% of the
Company's revenues for the nine months ended September 30, 1998, and 85% and 86%
of the Company's revenues for the two calendar years ended December 31, 1997,
and 1996, respectively, the business of the Company will be based upon the
successful commercialization of two technologies, the Jaguar Time-of-Flight Mass
Spectrometer ("TOF Mass Spectrometer") and the CrossCheck resistivity monitor.
The TOF Mass Spectrometer and CrossCheck are both recently introduced products.
The TOF Mass Spectrometer provided approximately 7% of the Company's revenue in
the nine months ended September 30, 1998. The contribution to revenues from the
CrossCheck technology have been negligible to date.
TOF MASS SPECTROMETER TECHNOLOGY
Mass spectrometry is an important technique for the analysis of chemicals
in a wide variety of industries such as pharmaceutical, biotechnology, chemical,
polymer and consumer products. Mass spectrometry is used to identify unknown
chemicals, quantify known materials, and to determine the structural and
chemical properties of molecules. TOF mass spectrometry is currently the
fastest growing mass spectrometry technique. It determines the mass-to-charge
ratio of ions by measuring the time it takes for the ion to reach the detector.
Sensar launched its Jaguar mass detector in the second quarter of 1998.
Jaguar is based upon Sensar technology found in the TOF2000 (a discontinued
product) as well as new developments for which Sensar has received or is seeking
patent coverage. Designed as a detector for liquid chromatography, Jaguar will
establish a new standard for speed, sensitivity, and dynamic range for liquid
chromatography-mass spectrometers (LC-MS). LC-MS is a rapidly growing technique
used in the pharmaceutical and biotechnology industries for drug discovery,
combinatorial chemistry, metabolic, and degradation profiling of
pharmaceuticals, peptide mapping and protein sequencing, and quality assurance.
CROSSCHECK TECHNOLOGY
The Company holds the exclusive license to a technology utilized in the
"CrossCheck" product, a process used to measure resistance of materials in real
time. The instrument differs from other devices that also measure resistance in
that CrossCheck is a compact device operating with low voltage alternating
current with the ability to measure resistance to very high levels. CrossCheck
is of interest across a wide industrial base. For example, CrossCheck has been
successfully applied to determine the curing characteristics of paints, coatings
and epoxy materials. As these materials cure, the chemical changes that occur
cause a detectable change in the measured resistance. Disposable probes can be
quickly coated with the material to be monitored; CrossCheck then provides real-
time data that is used to evaluate the quality and characteristics of the
material under test. CrossCheck can also be used to monitor liquids in
pipelines and tankage. Measurement of the bulk resistance of liquids provides
information that can be used to determine when chemical changes may have
occurred in the liquid or when a different liquid may have been introduced into
a liquid stream. The Company is actively pursuing placement of prototype
instruments within key industrial and university sites. Results from these
evaluations have been used to refine the design for production models of the
CrossCheck technology.
The Company has concentrated on applications of CrossCheck within major
industrial segments which provide the largest potential markets for this
product. These markets include:
Paints and Coatings - Laboratory work at Larson-Davis and at selected
industrial sites confirm the effectiveness of CrossCheck as a real-time
monitor of the curing process.
Adhesives - Cure rates of adhesives are affected by material composition,
additives and contaminants. CrossCheck is an effective real-time cure-rate
monitor for these materials.
Power industry - Transformer oils and switching box oils are eventually
degraded by temperature, chemical contamination and electrical discharge
effects. CrossCheck is being evaluated as a real-time monitor to assess
the extent of change in these oils.
Petroleum pipeline industry - CrossCheck can determine the change in
resistance of fluids as the material composition changes. In a joint
project with a major pipeline company, CrossCheck is being evaluated as a
method to precisely determine the point of interface between adjacent
fluids in petroleum product pipelines.
Concrete industry - The cure rate of concrete products can be determined by
measurement of the electrical properties of the concrete slurry.
CrossCheck is being evaluated for application in this large industrial
segment.
LICENSED TECHNOLOGY
Pursuant to an agreement dated August 15, 1995, the Company licensed its
technology related to the airport noise monitoring systems software to Harris,
Miller, Miller & Hansen, Inc. ("HMMH"). Under the terms of the agreement, HMMH
is obligated to pay an annual royalty of $150,000 to the Company, plus a varying
royalty of 2.5% to 4% of gross revenues. This agreement resulted in royalties
to the Company of $253,000 for the year ended December 31, 1998, and $266,000
for the year ended December 31, 1997.
HMMH has recently provided the Company with a letter indicating its intent
to terminate the agreement as of June 30, 1999, unless the royalty obligation to
the Company can be eliminated. On termination, HMMH is obligated to transfer
the technology, plus any enhancements and improvements, to the Company. Based
on HMMH's position, the Company is actively seeking to sell the intellectual
property and the maintenance contracts. If the Company is unable to negotiate
a sale, it will evaluate the existing contracts to which HMMH is a party, the
potential for revenues from the application of the intellectual property, the
potential for profitable operations, and the risks involved. Based on this
evaluation, the Company may elect to assume the contracts or may elect to
permit HMMH to continue to service the contracts, without a royalty obligation
to the Company. The Company is currently unable to predict whether a new
agreement will be negotiated with HMMH, whether the Company will be successful
in selling its position, or whether the Company will assume the contractual
obligations of HMMH.
PATENTS AND TRADEMARKS
The technology owned or licensed by the Company is proprietary in nature.
The Company is the exclusive licensee of key patents belonging to Brigham Young
University regarding Jaguar and CrossCheck. Sensar has obtained additional
patents through its own development efforts that are the sole property of the
Company. The Company's key patents expire at various times from 2010 through
2016. The technology contained in these patents results in the competitive
advantages of the Sensar products. The Company believes that patents are an
important part of doing business in the analytical instrument industry and
intends to protect all of its intellectual property from unauthorized use. The
Company is currently in negotiation with one of its competitors regarding the
possible infringement of one of its patents.
MANUFACTURING AND ASSEMBLY
The Company's manufacturing capabilities will be sold with the sale of the
Acoustics Business. However, to ensure Sensar's capability to meet expected
product demand, Sensar has entered into a Manufacturing Agreement with PCB which
ensures the ongoing manufacturing activities of Sensar for 1999, subject to
certain conditions being met.
MARKETING AND DISTRIBUTION
The Company has recently entered into a Technical Development and Marketing
Agreement with JEOL in respect to its Jaguar technology. This is a five-year
agreement initially covering both North and South America. For the year ended
December 1999, JEOL has obligations to procure at least 12 units while product
development is ongoing. For the years ended 2000 and 2001, the targeted number
of units increases substantially.
The Company is also in the process of appointing distributors for Europe
and Asia which will augment the minimum number of units to be sold in the coming
year.
The Company's CrossCheck technology is currently included in certain
catalogs. It is anticipated that the product will be included in other catalogs
in 1999. In addition, the Company continues to seek other alternative sources
of distribution for certain specific niche markets.
BACKLOG
As of September 30, 1998, the Company had an order backlog believed to be
firm of approximately $490,000, which is not reflected in the financial
statements included elsewhere herein. This compares to a backlog at December
31, 1997, of approximately $1,080,000.
COMPETITION
The Jaguar product competes in a substantial segment of the multi-billion
analytical instrument market. The competition in this mass spectrometry market
segment is intense. Acquisitions in the past year in the mass spectrometry
segment involving large instrument companies seeking to add TOF Mass
Spectrometer capabilities will have a great effect on the competitive landscape
in the near future. These acquisitions, however, demonstrate the strong market
demand for TOF Mass Spectrometer products such as the Jaguar. The Jaguar
product is competitive with the limited number of TOF mass spectrometers
currently on the market and offers advantages in the areas of speed,
sensitivity, and price. The Company believes that with the distribution
agreement with JEOL that it will be able to compete effectively against
significantly larger competitors. The JEOL agreement provides the Company with
substantial sales and marketing resources to compete with the larger players in
the industry. Competition in the CrossCheck market is much less intense where
currently there are no companies that market a hand-held resistivity meter such
as CrossCheck.
GOVERNMENTAL REGULATION
The products of the Company are not subject to the authority of a specific
governmental regulatory agency and do not generally require approval or
certification by such agencies. They are, however, compliant to general
industry standards such as "CE Mark," and FCC (where appropriate). There are no
existing, or to the knowledge of the Company, pending governmental regulations,
that would have a material effect on the business conducted by the Company.
ENVIRONMENTAL COMPLIANCE
The manufacturing activities of the Company involve the use, storage, and
disposal of small quantities of certain hazardous chemicals. The costs to the
Company of complying with environmental regulations are not material to its
operations. The Company employs an outside service to handle the disposal of
these chemicals. The Company conducts training courses for its employees in
safety and the handling of these chemicals and maintains a safety committee to
review its policies and procedures from time to time.
MAJOR CUSTOMERS AND FOREIGN SALES
In 1998, the Company has only made a small number of placements of its
Jaguar and CrossCheck products. There are, therefore, no major customers upon
which the business is dependent and only limited export sales.
PERSONNEL
As of September 30, 1998, the Company had 97 employees, 29 of which were
involved in professional or technical development of products, 41 in
manufacturing, 17 in marketing and sales, and 10 in administrative and clerical.
None of the employees of the Company are represented by a union or subject to a
collective bargaining agreement, and the Company considers its relations with
its employees to be favorable.
Once the sale of the Acoustics Business is complete, the Company will have
22 employees of which 13 are involved in the technical development of the
products, 7 in sales and administration, and 2 in production.
LEGAL PROCEEDINGS
In October 1998, the Company filed a legal proceeding, LarsonoDavis, Inc.
v. Brian G. Larson, Civil No. 980406043 in the Fourth Judicial District Court of
Utah County, Utah, seeking reimbursement of withholding taxes it paid on behalf
of Mr. Larson, a former officer and director of the Company. Mr. Larson filed a
response and counterclaim alleging a breach of the termination agreement between
himself and the Company and asserting a claim based on his former employment
agreement. Mr. Larson has requested damages of no less than $500,000. There
has not been any discovery in this matter and the Company cannot currently
predict the potential outcome. If the Company was wholly unsuccessful in its
claim and Mr. Larson wholly successful in his counterclaim, the financial
position of the Company would be adversely impacted.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The common stock of the Company is currently listed on the Nasdaq National
Market ("NNM"), under the symbol "LDII." Prior to January 30, 1997, the
Company's common stock was listed on the Nasdaq SmallCap Market.
The following table sets forth the approximate range of high and low bids
for the common stock of the Company during the periods indicated. The
quotations presented reflect interdealer prices, without retail markup,
markdown, or commissions, and may not necessarily represent actual transactions
in the common stock.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
----------------- ---------- ---------
<S> <C> <C>
December 31, 1996 $ 12.375 $ 8.75
March 31, 1997 $ 13.875 $ 9.25
June 30, 1997 $ 11.125 $ 7.25
September 30, 1997 $ 9.50 $ 7.50
December 31, 1997 $ 7.6875 $ 2.625
March 31, 1998 $ 3.6875 $ 2.25
June 30, 1998 $ 3.125 $ 1.6875
September 30, 1998 $ 2.0625 $ 0.4375
December 31, 1998 $ 0.59375 $ 0.25
</TABLE>
On February 3, 1999, the closing quotation for the common stock on NNM was
$0.3125. As reflected by the high and low bids on the foregoing table, the
trading price of the Common Stock of the Company can be volatile with dramatic
changes over short periods. The trading price may reflect market reaction to
the perceived applications of the Company's technology, the potential products
that may be based on that technology, the direction and results of research and
development efforts, and many other factors. Investors are cautioned that the
trading price of the common stock can change dramatically based on changing
market perceptions that may be unrelated to the Company and its activities.
As of February 3, 1999, there were 13,392,562 shares of common stock
issued and outstanding, held by approximately 400 shareholders of record.
The Company has not paid dividends with respect to its common stock. The
Company presently has 2,938.75 shares of its Series A Preferred Stock issued
and outstanding which prohibit the payment of dividends on the common stock if
the annual dividend of $40 per share of preferred stock is in arrears. Other
than the foregoing, there are no restrictions on the declaration or payment of
dividends set forth in the articles of incorporation of the Company or any other
agreement with its shareholders or creditors. Management anticipates retaining
any potential future earnings for working capital and investment in growth and
expansion of the business of the Company and does not anticipate paying
dividends on the common stock in the foreseeable future.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 3, 1999, the number of
shares of the Company's Common Stock, par value $0.001, and Series A Preferred
Stock held of record or beneficially by each person who held of record or was
known by the Company to own beneficially, more than 5% of the Company's stock,
and the name and shareholdings of each director and named executive officer and
of all executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Nature of Ownership
-------------------------------------
Sole Voting and Percent of
Name of Person or Group Investment Power(1) Class(2)(3)
- ---------------------------------- ------------------- -----------
<S> <C> <C> <C>
Principal Shareholders:
Larry J. Davis(4) Common Stock 585,000 4.4%
10455 North Edinburgh Options 190,000 1.4%
Highland, Utah 84003 --------- -----
Total 775,000 5.7%
The Ace Foundation Series A Preferred Stock(5) 1,988,605 12.9%
1650 49th Street $4.50 Warrants(6) 119,000 0.8%
Brooklyn, New York 11204 --------- -----
Total 2,107,605 13.6%
Charles Kushner Series A Preferred Stock(5) 1,637,675 10.9%
26 Columbia Turnpike $4.50 Warrants(6) 98,000 0.6%
Florham Park, New Jersey 07932 --------- -----
Total 1,735,675 11.5%
Murray Kushner Series A Preferred Stock(5) 935,814 6.5%
26 Columbia Turnpike $4.50 Warrants(6) 56,000 0.4%
Florham Park, New Jersey 07932 --------- -----
Total 991,814 6.9%
Jules Norducht Series A Preferred Stock(5) 1,169,768 8.0%
255 West Beech Street $4.50 Warrants(6) 70,000 0.5%
Long Beach, New York 11561 Common Stock 20,000 0.1%
--------- -----
Total 1,259,768 8.6%
Wayne Saker Series A Preferred Stock(5) 818,837 5.8%
55 Shaw Road $4.50 Warrants(6) 49,000 0.3%
Chestnut Hill, Massachusetts 02167 --------- -----
Total 867,837 6.1%
Richard Stadmaur Series A Preferred Stock(5) 701,861 5.0%
26 Columbia Turnpike $4.50 Warrants(6) 42,000 0.3%
Florham Park, New Jersey 07932 --------- -----
Total 743,861 5.3%
Named Executive Officers
and Directors:
Andrew C. Bebbington(7) Common Stock 10,000 0.1%
Options 1,000,000 6.9%
--------- -----
Total 1,010,000 7.0%
Jeffrey S. Cohen(8) Common Stock 6,000 0.0%
Options 300,000 2.2%
--------- -----
Total 306,000 2.2%
Sir Colin Dollery(9) Common Stock 0 0.0%
Options 30,000 0.2%
--------- -----
Total 30,000 0.2%
Stanley Friedman(10) Common Stock 1,000 0.0%
Options 30,000 0.2%
--------- -----
Total 31,000 0.2%
All Officers and Directors Common Stock 20,473 0.2%
as a Group (5 Persons) Options 1,370,000 9.3%
--------- -----
Total 1,390,473 9.4%
</TABLE>
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record, and each shareholder has sole
voting and investment power.
(2) The percentages shown are based on 13,392,562 shares of common stock of
the Company issued and outstanding as of the Record Date.
(3) The percentage ownership for the options, warrants, and Series A Preferred
Stock held by the indicated individuals is based on an adjusted total of
issued and outstanding shares giving effect only to the exercise or
conversion of each individual's securities.
(4) Mr. Davis was a co-founder of the Company and a prior executive officer
and director. Mr. Davis resigned from these positions in November 1997.
Mr. Davis is currently an employee of the Company.
(5) The amount shown assumes the conversion of the Series A Preferred Stock,
plus accrued dividends, at $0.310845, 85% of the average market price for
the Common Stock for the ten trading days preceding February 3, 1999. The
conversion rate varies with the market price of the Common Stock, and the
number of shares actually issued on conversion may be significantly
different than shown above. The holders of substantially all of the
Series A Preferred Stock have temporarily agreed not to exercise their
right to convert to Common Stock.
(6) Substantially all of the holders of $4.50 Warrants shown on the above
table have entered into agreements with the Company to sell their shares
of Series A Preferred Stock. On consummation, one-half of the Warrants
reflected will be cancelled and the remaining Warrants will be repriced
at $0.50 per share.
(7) The options held by Mr. Bebbington were granted to him in connection with
his agreement to assume the positions of chief executive officer and a
director of the Company. Options with respect to 500,000 shares are
currently vested. The remainder will vest with respect to 250,000 shares
on each of December 31, 1999 and 2000. The exercise price of the options
ranges from $3.60 per share to $6.50 per share.
(8) The options held by Mr. Cohen were granted to him in connection with his
agreement to become the chief operating officer and a director of the
Company. Options with respect to 150,000 shares are currently vested.
The remainder will vest with respect to 75,000 shares on each December 31,
1999 and 2000. The exercise price of the options ranges from $2.99 to
$5.50.
(9) The option held by Mr. Dollery was granted to him in connection with his
joining the board of directors. The option vests with respect to 15,000
shares annually and no shares are currently vested. The option has an
exercise price of $2.9375 per share.
(10) The option held by Mr. Friedman was granted to him in connection with his
joining the board of directors. The option vests with respect to 15,000
shares annually and no shares are currently vested. The option has an
exercise price of $2.9375 per share.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of equity securities of the Company. Officers, directors,
and greater than 10% shareholders are required to furnish the Company with
copies of all Section 16(a) forms they file.
The report on Form 4 for the month of March 1998 of Andrew Bebbington was
filed one day late and the report on Form 4 for the month of August 1998 of
Stanley Friedman was filed one day late.
Other than the foregoing, the Company believes that all reports required by
Section 16(a) for transactions in 1998 have been timely filed.
SHAREHOLDER PROPOSALS
No proposals have been submitted by shareholders of the Company for
consideration at the Special Meeting. It is anticipated that the next annual
meeting of shareholders will be held during June 1999. Shareholders may present
proposals for inclusion in the proxy statement to be mailed in connection with
the 1999 annual meeting of shareholders of the Company, provided such proposals
are received by the Company no later than February 1, 1999, and are otherwise in
compliance with applicable laws and regulations and the governing provisions of
the articles of incorporation and bylaws of the Company.
OTHER MATTERS
Management does not know of any business other than that referred to in the
Notice which may be considered at the Special Meeting. If any other matters
should properly come before the Special Meeting, it is the intention of the
persons named in the accompanying form of proxy to vote the proxies held by them
in accordance with their best judgment.
In order to assure the presence of the necessary quorum and to vote on the
matters to come before the Special Meeting, please indicate your choices on the
enclosed proxy and date, sign, and return it promptly in the envelope provided.
The signing of a proxy by no means prevents your attending and voting at the
Special Meeting.
INDEPENDENT PUBLIC ACCOUNTANTS
In January 1996, the Company changed its accountants from Peterson, Siler &
Stevenson (currently known as Pritchett Siler & Hardy, P.C.) to Grant Thornton
LLP. This change was approved by the board of directors of the Company.
The report of Peterson, Siler & Stevenson on the Company's financial
statements as of June 30, 1995, and the two years then ended did not contain an
adverse opinion, or a disclaimer of opinion, nor was its report qualified or
modified as to uncertainty, audit scope, or accounting principles, other than a
limitation as to the representation of the financials on a going concern basis.
During the engagement of Peterson, Siler & Stevenson, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if not
resolved to the satisfaction of Peterson, Siler & Stevenson, would have caused
it to make reference to the subject matter of the disagreements in connection
with its reports.
The Company was not advised by Peterson, Siler & Stevenson that internal
controls necessary for the Company to develop reliable financial statements did
not exist nor that information came to its attention that led it to no longer be
able to rely on management's representations or that made it unwilling to be
associated with the financial statements prepared by management. The Company
was not advised by Peterson, Siler & Stevenson of the need to expand
significantly the scope of the Company's audit, nor was the Company advised that
any information came to the attention of Peterson, Siler & Stevenson that on
further investigation may (i) materially impact the fairness or reliability of
either a previously issued audit report or the underlying financial statements,
or the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report, or (ii) cause Peterson, Siler & Stevenson to be unwilling to rely
on management's representations or be associated with the Company's financial
statements. The Company provided its former auditors, Peterson, Siler &
Stevenson with a copy of the foregoing disclosures. The Company has filed a
concurrence of the former auditors with the foregoing statements as an exhibit
to its reports filed with the Securities and Exchange Commission.
The Company did not consult Grant Thornton LLP prior to its appointment
regarding the application of accounting principles to a specific completed or
contemplated transaction, the type of audit opinion, or other accounting advice
that was considered by the Company in reaching a decision as to an accounting,
auditing, or financial reporting issue.
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure. It is expected that a
representative of Grant Thornton LLP will be present at the Special Meeting and
available to respond to appropriate questions.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Any interested party may inspect information
filed by the Company, without charge, at the public reference facilities of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at its regional offices at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511, and 7 World Trade Center, Suite 1300, New York, New York 10048. Any
interested party may obtain copies of all or any portion of the information
filed by the Company at prescribed rates from the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. In addition, the Commission maintains
an Internet site that contains reports, proxy and information statements and
other information regarding the Company and other registrants that file
electronically with the Commission at http://www.sec.gov.
The Company's Common Stock is listed on the Nasdaq National Market and
trades under the symbol "LDII." Reports and other information concerning the
Company can be inspected at the offices of Nasdaq at 1735 "K" Street, N.W.,
Washington, D.C. 20006-1500.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 F-1
Consolidated Statements of Operations for the Nine Months Ended September 30, 1998
and 1997 F-3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998
and 1997 F-4
Condensed Notes to Consolidated Financial Statements F-5
INDEPENDENT AUDITORS' REPORTS
Report of Grant Thornton LLP, independent certified public accountants
on the December 31, 1997 and 1996, and June 30, 1996 financial statements F-8
Report of Pritchett, Siler & Hardy, independent certified public accountants
on the June 30, 1995 financial statements F-9
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and 1996,
and June 30, 1996 F-10
Consolidated Statements of Operations for the year ended
December 31, 1997, for the six months ended December 31, 1996,
and for the years ended June 30, 1996 and 1995 F-12
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1997, for the six months ended December 31, 1996,
and for the years ended June 30, 1996 and 1995 F-13
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, for the six months ended December 31, 1996,
and for the years ended June 30, 1996 and 1995 F-15
Notes to Consolidated Financial Statements F-16
</TABLE>
All financial statement schedules are omitted because they are not applicable or
because the required information is contained in the Consolidated Financial
Statements or the notes thereto.
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>
Nine months ended September 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 6,862,851 $ 6,672,750
------------ ------------
Costs and operating expenses:
Cost of sales 4,237,724 3,492,116
Research and development 2,312,644 3,253,354
Selling, general, and administrative 3,285,793 4,184,575
Unusual charges 3,036,733 -
------------ ------------
12,872,894 10,930,045
------------ ------------
Operating loss (6,010,043) (4,257,295)
------------ ------------
Other income (expense):
Interest income 110,032 124,002
Interest expense (116,165) (216,284)
Other, net (103,851) 1,492
------------ ------------
(109,984) (90,790)
------------ ------------
Loss before income taxes (6,120,027) (4,348,085)
Income tax expense - -
------------ ------------
Net loss $ (6,120,027) $ (4,348,085)
============ ============
Loss per common share:
Basic $ (0.59) $ (0.38)
Diluted (0.59) (0.38)
Weighted average common and common
equivalent shares:
Basic 12,560,991 11,382,960
Diluted 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 nine 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 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.
For the nine months ended September 30, 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 F). The beneficial conversion feature is
computed as the difference between the market value of the common stock into
which the Series A Preferred Stock can be converted and the value assigned to
the Series A Preferred Stock in the private placement. The imputed dividend
is a one-time, non-cash charge and is 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 are first convertible.
Basic and diluted loss per common share were calculated as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net loss $(6,120,027) $(4,348,085)
Preferred dividends (77,317) (15,000)
Imputed dividend from beneficial conversion feature (1,239,290) -
----------- -----------
Net loss attributable to common stockholders $(7,436,634) $(4,363,085)
=========== ===========
Weighted average common and common equivalent shares 12,560,991 11,382,960
=========== ===========
Loss per common share $ (0.59) $ (0.38)
=========== ===========
</TABLE>
(C) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
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
========== ==========
</TABLE>
(D) Unusual Charges
During the quarter ended September 30, 1998, the Company recognized unusual
charges of $3,036,733 and provided additional allowances against inventory of
$659,174. As discussed below, both adjustments principally resulted from the
termination of the exclusive distribution arrangement with SAES Getters S.p.A.
("SAES") during September 1998. The unusual charges and inventory adjustments
are composed of the following:
<TABLE>
<CAPTION>
Inventory
Unusual charges adjustments
---------------- -------------
<S> <C> <C>
Writeoff of assets related to the discontinuance
of the TOF2000 product $ 2,458,004 $ 490,882
Provision for costs related to the discontinuance
of the TOF2000 and SFC products and closure of
machine shop 250,000 -
Expected loss on the disposal of the machine shop
equipment 163,903 -
Allowance against receivable from former CEO 164,826 -
Additional allowance for acoustic inventory - 168,292
------------- ------------
$ 3,036,733 $ 659,174
============= ============
</TABLE>
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, 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, 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 evaluated the carrying value
of assets associated with the TOF2000 product and has recorded non cash charges
for the writeoff of assets related to this product. The writeoff principally
consists of the unamortized excess purchase price of the Sensar acquisition in
the amount of $2,279,883. Inventory written off consisted of three
substantially completed TOF2000 instruments, plus certain component parts for
this technology.
During the quarter ended September 30, 1998, the Company also decided to
dispose of its SFC product line and close its machine shop. As a result of
these decisions, the Company has provided $150,000, principally
for expected exit costs related to these product lines. Future cash flows,
which have been accrued related to these technologies, are expected to be the
costs of customer support, payment of certain fixed costs for vacated space,
and other winding up costs. In addition, $100,000 has been provided to cover
the probable losses on the disposition of net assets related to the SFC
product line. Sales and cost of sales (including the inventory write off)
for these discontinued products for the nine months ended September 30, 1998,
were $1,000,151 and $1,340,022, respectively.
Other components of the unusual charges include the expected loss of
approximately $164,000 from the disposal of the machine shop and an allowance
against a receivable due from the former CEO. During the quarter ended
September 30, 1998, management concluded that it was not cost effective for the
Company to continue to operate its own machine shop and decided to sell the
machine shop equipment and payoff the capital leases associated with the
equipment. Also during the quarter, management of the Company concluded that
the collectibility of approximately $165,000 due from the former CEO to the
Company was in doubt. The amount due originated from withholding taxes paid by
the Company on behalf of the CEO in conjunction with the issuance of stock to
him as a result of the 1997 restructuring of the Company.
Based on its sales and production forecasts for the acoustic products, the
Company has revised its estimates of obsolete and overstock inventory. The
Company increased the allowance against acoustic inventory by approximately
$168,000 during the quarter based of those forecasts.
(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. Of the total gross proceeds of $3,500,000, approximately
$549,000 was assigned to the warrants and the balance was assigned to the
Preferred Stock. 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.
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
LarsonoDavis Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of LarsonoDavis
Incorporated and Subsidiaries as of December 31, 1997 and 1996, and June 30,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1997, for the six months
ended December 31, 1996 and for the year ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LarsonoDavis
Incorporated and Subsidiaries as of December 31, 1997 and 1996, and June 30,
1996, and the consolidated results of their operations and their consolidated
cash flows for the year ended December 31, 1997, for the six months ended
December 31, 1996, and for the year ended June 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
Provo, Utah
February 20, 1998
INDEPENDENT AUDITORS' REPORT
Board of Directors
LarsonoDavis Incorporated and Subsidiaries
Provo, Utah
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of LarsonoDavis Incorporated and
Subsidiaries for the year ended June 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
consolidated cash flows of LarsonoDavis Incorporated and Subsidiaries for the
year ended June 30, 1995, in conformity with generally accepted accounting
principles.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
August 4, 1995
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------------ June 30,
1997 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,212,473 $ 2,696,542 $ 3,922,660
Trade accounts receivable, net of
allowance for doubtful accounts (Note H) 2,215,945 2,598,582 2,332,417
Inventories (Notes D and H) 2,631,562 4,096,445 2,923,650
Other current assets 100,460 130,096 502,211
------------- ------------- -------------
Total current assets 6,160,440 9,521,665 9,680,938
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
and amortization (Notes B, E, H and I) 2,165,467 1,815,455 1,610,473
ASSETS UNDER CAPITAL
LEASE OBLIGATIONS,
net of accumulated amortization (Note I) 681,576 613,675 356,255
LONG-TERM CONTRACTUAL
ARRANGEMENT, net of
accumulated cost recoveries
(Notes B and S) 87,500 2,872,014 2,978,014
INTANGIBLE ASSETS, net of
accumulated amortization
(Notes B, F, H and T) 3,100,447 5,083,712 5,143,348
------------- ------------- -------------
$ 12,195,430 $ 19,906,521 $ 19,769,028
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
------------------------------- -------------
1997 1996 1996
-------------- ------------- -------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Lines of credit (Note H) $ 1,198,766 $ 1,033,018 $ 1,302,306
Accounts payable 1,080,624 902,926 581,377
Accrued liabilities (Note G) 1,518,147 764,393 767,254
Current maturities of long-term debt (Note I) 50,729 91,902 209,808
Current maturities of capital lease
obligations (Note I) 218,649 159,515 95,500
-------------- ------------- -------------
Total current liabilities 4,066,915 2,951,754 2,956,245
LONG-TERM DEBT
less current maturities (Note I) 716,697 759,709 778,835
CAPITAL LEASE OBLIGATIONS,
less current maturities (Note I) 558,815 523,185 357,171
-------------- ------------- -------------
Total liabilities 5,342,427 4,234,648 4,092,251
-------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes H, I, L, O and P)
- - -
STOCKHOLDERS' EQUITY
(Notes B, M, N, O, T and V)
Preferred stock, $.001 par value; authorized 10,000,000
shares; issued and outstanding zero shares at December 31,
1997 and 200,000 shares at December 31, 1996 and June 30,
1996 - 200 200
Common stock, $.001 par value; authorized 290,000,000 shares;
issued and outstanding 12,125,393 shares at December 31,
1997, 10,717,790 shares at December 31, 1996, and
10,258,406 shares at June 30, 1996 12,125 10,718 10,258
Additional paid-in capital 26,097,332 19,999,375 18,402,999
Accumulated deficit (19,251,591) (4,418,780) (2,752,360)
Note receivable from exercise of options (69,375) - -
Cumulative foreign currency translation adjustments 64,512 80,360 15,680
-------------- ------------- -------------
Total stockholders' equity 6,853,003 15,671,873 15,676,777
-------------- ------------- -------------
$ 12,195,430 $ 19,906,521 $ 19,769,028
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Six months
ended ended Year ended June 30,
December 31, December 31, --------------------------------
1997 1996 1996 1995
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales (Note Q) $ 8,313,328 $ 4,889,280 $ 8,255,607 $ 6,515,830
--------------- ---------------- -------------- --------------
Cost and operating expenses
Cost of sales 6,074,883 2,177,304 3,407,613 1,916,413
Research and development 4,860,993 1,734,911 2,149,384 708,679
Selling, general and administrative 6,019,282 2,534,643 3,922,976 3,131,938
Unusual and nonrecurring charges (Note B) 5,937,355 - - -
--------------- ---------------- -------------- --------------
22,892,513 6,446,858 9,479,973 5,757,030
--------------- ---------------- -------------- --------------
Operating profit (loss) (14,579,185) (1,557,578) (1,224,366) 758,800
--------------- ---------------- -------------- --------------
Other income (expense)
Interest income 140,870 59,638 12,320 7,302
Interest expense (301,411) (154,440) (447,907) (301,402)
Other, net (78,085) 8,460 (46,295) (6,189)
--------------- ---------------- -------------- --------------
(238,626) (86,342) (481,882) (300,289)
--------------- ---------------- -------------- --------------
Income (loss) from continuing operations (14,817,811) (1,643,920) (1,706,248) 458,511
Loss from discontinued operations, net of
income taxes (Note S) - - - (770,128)
--------------- ---------------- -------------- --------------
Net loss $ (14,817,811) $ (1,643,920) $ (1,706,248) $ (311,617)
=============== ================ ============== ==============
Earnings (loss) per
common share (Note K)
Basic
Income (loss) from
continuing operations $ (1.29) $ (0.16) $ (0.21) $ 0.08
Net loss (1.29) (0.16) (0.21) (0.05)
Diluted
Income (loss) from
continuing operations (1.29) (0.16) (0.21) 0.07
Net loss (1.29) (0.16) (0.21) (0.05)
Weighted average common and common equivalent
shares
Basic 11,507,701 10,410,820 8,138,722 6,100,992
Diluted 11,507,701 10,410,820 8,138,722 6,227,707
</TABLE>
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31, 1997, six months ended December 31, 1996
and years ended June 30, 1996 and 1995
Note Cumulative
receivable foreign
Preferred stock Common stock Additional Accumu- from currency
------------------ -------------------- paid-in lated exercise translation
Shares Amount Shares Amount capital deficit of options adjustments Total
--------- -------- --------- --------- ----------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 1,
1994 - $ - 5,827,249 $ 5,827 $5,663,650 $ (685,745) $ - $ 3,413 $ 4,987,145
Shares issued upon
exercise of options
(Note O) - - 19,325 19 42,896 - - - 42,915
Shares issued in
various private
placements (Note N) - - 614,000 614 990,729 - - - 991,343
Shares issued for
services rendered
(Note N) - - 98,905 99 209,039 - - - 209,138
Preferred shares
issued for payment
of a note payable
(Note M) 200,000 200 - - 499,800 - - - 500,000
Equity adjustment for
translation of
foreign currency - - - - - - - (7,434) (7,434)
Net loss for the year - - - - - (311,617) - - (311,617)
--------- -------- ---------- --------- ---------- ----------- ---------- ---------- -----------
Balances at June 30,
1995 200,000 200 6,559,479 6,559 7,406,114 (997,362) - (4,021) 6,411,490
Shares issued upon
exercise of options
(Note O) - - 61,117 61 142,644 - - - 142,705
Shares issued on
exercise of warrants
(Note O) - - 3,000,000 3,000 9,124,282 - - - 9,127,282
Shares issued for
payment of interest
on debt (Note N) - - 16,483 17 42,244 - - - 42,261
Shares issued for
services rendered
(Note N) - - 34,940 35 178,355 - - - 178,390
Shares issued in
Sensar acquisition
(Note T) - - 586,387 586 1,509,360 - - - 1,509,946
Equity adjustment for
translation of
foreign currency - - - - - - - 19,701 19,701
Preferred dividends - - - - - (48,750) - - (48,750)
Net loss for the year - - - - - (1,706,248) - - (1,706,248)
--------- -------- --------- --------- ----------- ---------- ----------- ------------ -----------
Balances at June 30,
1996 200,000 200 10,258,406 10,258 18,402,999 (2,752,360) - 15,680 15,676,777
Shares issued in
Sensar acquisition
(Note T) - - 31,336 31 80,659 - - - 80,690
Shares issued for
services rendered
(Note N) - - 548 1 5,000 - - - 5,001
Shares issued upon
exercise of options
(Note O) - - 52,500 53 368,770 - - - 368,823
Shares issued on
exercise of warrants
(Note O) - - 375,000 375 1,141,947 - - - 1,142,322
Equity adjustment for
translation of
foreign currency - - - - - - - 64,680 64,680
Preferred dividends - - - - - (22,500) - - (22,500)
Net loss for the
period - - - - - (1,643,920) - - (1,643,920)
--------- -------- ---------- --------- ---------- ----------- ---------- ---------- -----------
Balances at
December 31, 1996 200,000 200 10,717,790 10,718 19,999,375 (4,418,780) - 80,360 15,671,873
Shares issued for
services rendered
(Note N) - - 54,849 55 262,104 - - - 262,159
Shares issued upon
exercise of options
(Note O) - - 217,631 218 115,407 - (69,375) - 46,250
Shares surrendered in
payment of advance
(Note N) - - (1,739) (2) (9,998) - - - (10,000)
Shares purchased
under employee stock
purchase plan
(Note O) - - 15,407 15 83,986 - - - 84,001
Shares issued on
exercise of warrants
(Note O) - - 862,613 862 4,496,517 - - - 4,497,379
Shares issued to
former executives
(Note B) - - 200,000 200 1,149,800 - - - 1,150,000
Conversion of
preferred stock (200,000) (200) 58,842 59 141 - - - -
(Note M)
Equity adjustment for
translation of
foreign currency - - - - - - - (15,848) (15,848)
Preferred dividends - - - - - (15,000) - - (15,000)
Net loss for the year - - - - - (14,817,811) - - (14,817,811)
--------- -------- ---------- --------- ---------- ----------- ---------- ---------- -----------
Balances at
December 31, 1997 - $ - 12,125,393 $ 12,125 $6,097,332 (19,251,591) $ (69,375) $ 64,512 $ 6,853,003
========= ======== ========== ========= ========== =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Six months ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
------------ ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Net cash provided by (used in) operating
activities (Note U) (5,122,057) (1,944,738) (2,019,944) 33,604
----------- ----------- ----------- ------------
Cash flows from investing activities
Purchase of property and equipment (1,041,383) (421,573) (560,861) (449,917)
Proceeds from sale of assets 44,543 35,900 49,543 59,477
Purchase of stock of Sensar Corporation - - (1,184,069) -
Purchase of technology - (25,233) (414,991) (1,235,229)
Proceeds from long-term contractual arrangement 265,646 106,000 157,762 -
Patent acquisition costs (123,017) (5,215) (125,577) -
----------- ----------- ----------- ------------
Net cash used in investing activities (854,211) (310,121) (2,078,193) (1,625,669)
----------- ----------- ----------- ------------
Cash flows from financing activities
Net change in lines of credit 165,748 (269,288) (916,881) 427,687
Proceeds from long-term obligations 68,571 - 679,366 56,656
Principal payments of long-term debt (152,756) (137,032) (855,383) (230,293)
Net proceeds from issuance of common stock
and exercise of options and warrants 4,627,630 1,493,489 9,269,987 1,023,688
Principal payments on capital
lease obligations (186,146) (100,608) (170,538) (67,205)
Preferred dividends (15,000) (22,500) (48,750) -
Increase (decrease) in bank overdraft - - (40,039) 40,039
----------- ----------- ----------- ------------
Net cash provided by
financing activities 4,508,047 964,061 7,917,762 1,250,572
----------- ----------- ----------- ------------
Effect of exchange rates on cash (15,848) 64,680 19,701 (7,434)
----------- ----------- ----------- ------------
Net increase (decrease) in cash
and cash equivalents (1,484,069) (1,226,118) 3,839,326 (348,927)
Cash and cash equivalents at
beginning of period 2,696,542 3,922,660 83,334 432,261
----------- ----------- ----------- ------------
Cash and cash equivalents at
end of period $ 1,212,473 $ 2,696,542 $ 3,922,660 $ 83,334
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Larson.Davis Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996, and June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Business activity and principles of consolidation
Larson Davis Incorporated (the Company) is primarily engaged in the design,
development, manufacture, and marketing of analytical instruments. The
Company sells its measurement instruments to private industries and
governmental agencies for both industrial and research applications. The
accompanying consolidated financial statements of the Company include the
accounts of the Company and its wholly-owned subsidiaries; LarsonoDavis
Laboratories Corporation, Sensar Corporation, and Larson Davis Ltd. (a UK
Corporation). All significant intercompany transactions and accounts have
been eliminated in consolidation.
2. Revenue recognition
The Company recognizes revenues on the majority of its product sales and
services at the time of product delivery or the rendering of services.
Significant future obligations or contingencies such as satisfaction of
customer mandated performance criteria, unilateral rights to return
products, etc. delay revenue recognition until the obligation is satisfied
or contingency resolved. Cost of insignificant obligations are accrued when
revenue is recognized.
3. Depreciation and amortization
Property and equipment are stated at cost. Depreciation and amortization
are provided in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under
capital leases and leasehold improvements are amortized over the shorter of
the lives of the respective leases or over the service lives of the asset.
The straight-line method of depreciation is followed for financial reporting
purposes and accelerated methods are used for income tax purposes.
4. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. An
allowance against deferred tax assets is recorded when it is more likely
than not that such tax benefits will not be realized.
5. Cash and cash equivalents
For purposes of the financial statements, the Company considers all highly
liquid debt instruments with an original maturity of three months or less
when purchased to be cash equivalents.
6. Inventories
Inventories consisting of raw materials, work-in process, and finished goods
are stated at the lower of cost or market. During 1997, the Company changed
its method of determining the cost of inventory from the average cost method
to the first-in, first-out (FIFO) method. The effect of the change was not
material. Prior to the change, the Company used the average cost method,
which approximated the first-in-first-out method.
7. Earnings (loss) per common share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128
established new standards for computing and presenting earnings per share
(EPS). SFAS No. 128 requires the presentation of basic and diluted EPS.
Basic EPS are calculated by dividing earnings (loss) available to common
shareholders by the weighted average number of common shares outstanding
during each period. Diluted EPS 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. The
EPS for all prior periods have been restated as required by SFAS No. 128.
8. Research and development costs
The Company conducts research and development to develop new products and
product improvements. Research and development costs have been charged to
expense as incurred.
9. Concentrations of credit risk
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash equivalents and trade receivables.
The Company maintains its cash and cash equivalents principally at one major
financial institution. Cash equivalents are invested through a daily
repurchase agreement with the financial institution. The agreement provides
for the balance of available funds to be invested in an undivided interest
in one or more direct obligations of, or obligations that are fully
guaranteed as to principal and interest by, the United States Government, or
an agency thereof. These securities are not a deposit and are not insured
by the Federal Deposit Insurance Corporation.
At December 31, 1997, one customer represents 19% of accounts receivable and
no other customers represent more than 10% of accounts receivable.
Otherwise, concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of customers and their
dispersion across many geographic regions and industries. The Company
reviews customers' credit histories before extending credit. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and
other information.
10. Intangible assets
The Company capitalizes costs incurred to acquire product technology and
patents. The amounts are amortized on the straight-line method over the
estimated useful life or the terms of the respective technology or patent,
whichever is shorter. The original estimated useful lives range from 5 to
15 years.
The Company capitalizes costs incurred to develop software after
technological feasibility has been established. Amortization of these costs
is calculated using the greater of the amount computed using (a) the ratio
of current gross sales to the total current and anticipated future gross
sales or (b) the straight-line method over original estimated useful lives
of 5 to 10 years. Software development costs capitalized for the year ended
December 31, 1997, the six months ended December 31, 1996, and the years
ended June 30, 1996 and 1995, were $0, $25,233, $77,984, and $570,873,
respectively.
The Company capitalized as goodwill, the excess acquisition costs over the
fair value of the net assets acquired, in connection with the purchase of a
subsidiary, which costs are being amortized on the straight-line method over
10 years.
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by comparing the carrying
value to the undiscounted estimated future cash flows of the related assets
and necessary adjustments, if any, are recorded. During 1997, certain
adjustments were recognized for the impairment of intangible assets. See
Note B.
11. Translation of foreign currencies
The foreign subsidiary's asset and liability accounts, which are originally
recorded in the appropriate local currency, are translated, for consolidated
financial reporting purposes, into U.S. dollar amounts at period-end
exchange rates. Revenue and expense accounts are translated at the average
rates for the period. Transaction gains and losses, the amounts of which
are not material, are included in general and administrative expenses.
Foreign currency translation adjustments are accumulated as a separate
component of stockholders' equity.
12. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Estimates also affect the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from these estimates. Such
estimates of significant accounting sensitivity are the allowance for
doubtful accounts, the allowance for inventory overstock or obsolescence,
and the estimated useful lives of property and equipment and intangible
assets. Additionally, certain estimates which are affected by expected
future gross revenues or royalty receipts are capitalized software costs,
the long-term contractual arrangement and patents on proprietary technology.
On an ongoing basis, management reviews such estimates, and if necessary,
makes changes to them. The effect of changes in estimates are reflected in
the financial statements in the period of the change. Management believes
the estimates used in determining carrying values of assets as of the
respective balance sheet dates were reasonable at the dates the estimates
were made. During 1997, adjustments to certain estimates were recognized.
See Note B.
13. Fair value of financial instruments
The estimated fair value of financial instruments is not presented because,
in management's opinion, the carrying amounts and estimated fair values of
financial instruments in the accompanying consolidated balance sheets, with
the exception of the long-term contractual arrangement, is not materially
different. In the past, it has not been practicable to estimate the fair
value of the long-term contractual arrangement, since its value was
dependent on the future revenues of an unrelated entity, which was not
readily determinable by the Company. However, recent events have caused
management to believe that this asset has been impaired and appropriate
adjustments have been made to the carrying value of the asset. See Note B.
14. Stock options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Under APB 25, because the exercise price of the Company's share options
equals or exceeds the market price of the underlying shares on the date of
grant, the Company does not recognize any compensation expense.
15. Recently issued Statements of Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with
reclassification of financial statements for earlier periods provided for
comparative purposes required. Adoption of SFAS No. 130 is not expected to
have a material effect on the Company's financial statements.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Adoption of SFAS No. 131 will not
have an effect on the Company's financial position or results of operations,
but will result in disclosures about the Company's products and services not
previously required.
NOTE B - UNUSUAL AND NONRECURRING CHARGES
In the fourth quarter of 1997, the Company recognized unusual and
nonrecurring charges as follows:
<TABLE>
<CAPTION>
<S> <C>
Restructuring charges:
Termination settlements with former executives
and employees, and other related costs $ 1,471,870
Write down of assets:
Intangible assets 1,649,373
Property and equipment 75,878
-----------
Total restructuring charges 3,197,121
-----------
Impairment charges:
Long-term contractual arrangement 2,556,903
Other impairment charge 183,331
-----------
Total impairment charges 2,740,234
-----------
Total unusual and nonrecurring charges $ 5,937,355
===========
</TABLE>
1. Restructuring charges
In November 1997, the Company announced the restructuring of its executive
management team. The board of directors appointed Andrew Bebbington as the
new chief executive officer and as a member of the board of directors. In
connection with the appointment of the new chief executive officer, the
board accepted the resignation of three members of the executive management
team, including the former chief executive officer and the former vice-
president of product development, and the former chief financial officer,
all of whom also served as members of the board of directors. The former
vice-president of product development subsequently entered into an
employment arrangement to provide his services as a scientist and engineer
in connection with the ongoing development of the Company's technologies. In
conjunction with their resignation, these former executives entered into
termination agreements with the Company which provided for, among other
things, the issuance of an aggregate of 200,000 shares of common stock, the
surrender of options to acquire an aggregate of 1,425,000 shares of common
stock at prices ranging from $4.25 to $7.00 per share, the cancellation of
the balance of each of their five-year employment contracts, and three
months of severance pay.
Under the direction of the new chief executive officer, and with the
endorsement of the outside board members, an evaluation was made of existing
research and development projects, marketing arrangements, manufacturing
processes, the products offered, licensing agreements, and the overall cost
structure of the Company. As a result of this evaluation, additional
restructuring steps were recommended and approved by the board of directors
in December 1997. The restructuring included implementation of a plan to
redevelop the Company's product portfolio on a three-year rotating cycle,
which is a much more aggressive development cycle than has been followed
in the past for the Company's acoustic products. The restructuring process
also included the reorganization and consolidation of personnel in the
research and marketing functions. These additional steps have been
implemented and have resulted in a reduction of personnel, the closure of
the UK subsidiary, and the related hiring of distributors in the UK, the
discontinuance of certain peripheral business activities, and a new focus on
a revised strategic direction for the Company. The narrowed focus on certain
elements of the strategic direction of the Company is expected to result in
the earlier commercialization of certain technologies, the revitalization
of the existing product line, and the strengthening of the distribution
capacity of the Company. The changes in strategic direction also resulted
in the discontinuance or de-emphasis of certain other projects, the most
significant of which was the abandonment of the ENOMS technology, an
internally developed proprietary software system for environmental noise
monitoring. As a result of these changes in the direction of the Company,
the carrying values of certain intangible assets and property and equipment
have been impaired and associated losses totaling $1,725,251 were recognized
of which approximately $1,391,000 pertained to the writeoff of the
unamortized balance of the ENOMS technology. Additionally, largely as a
result of the change in the development cycle of products in the acoustic
portfolio, certain inventories have been rendered obsolete or overstocked.
Although the Company intends to return overstocked inventory to vendors, it
expects that the amounts that are recoverable will be minimal. Accordingly,
a write down in the amount of $614,000 in the carrying value of inventories
to salvage value has been recognized and is included in
cost of sales.
2. Impairment charges
In December 1997, as discussed below, certain events occurred which caused
management to question the recoverability of the carrying costs of the
long-term contractual arrangement created as a result of the discontinuation
of a business. See Note S for details of this arrangement. The carrying
value of this asset is dependent on the future revenue stream derived from
the sale of environmental noise monitoring systems by HMMH, which market
has become increasingly competitive. In recent years, this contractual
arrangement, which can be terminated by HMMH as early as August 15, 1998,
contains certain minimum and percentage royalty provisions that had to be
recovered through the revenue stream from the sales of systems by HMMH.
HMMH notifed the Company that this contractual arrangement was placing
them at a serious disadvantage and requested that discussions commence
regarding this contract. Based on these factors, management expects
there to be a renegotiation of this contract. The carrying value of
this asset at December 31, 1997 has been reduced to $87,500,
management's estimate of the current value of the asset representing
the guaranteed minimum royalty through August 15, 1998, and an
impairment loss of $2,556,903 has been recognized.
The unusual and nonrecurring charges include noncash elements of
approximately $5,615,000. The current or future cash requirements are
approximately $322,000, of which approximately $220,000 was paid prior to
December 31, 1997.
In addition to the write down of inventories, referred to above, the Company
recognized other adjustments and significant expenses in the fourth quarter
of 1997. The most significant of these adjustments included in the fourth
quarter were adjustments related to increases of approximately $174,000
in the estimated provision for warranty work charged to cost of sales
principally related to certain performance issues on the TOF2000,
adjustments to inventories of an estimated $225,000 related to the
absorption of labor and overhead into cost of sales, and the reversal
of the sales revenue in the approximate amount of $430,000 for two
instruments pending final acceptance by the customer. Other material
expenses recorded in the fourth quarter that affect the comparability
between quarters include increasing costs incurred towards the development
of the new time-of-flight mass spectrometry and the supercritical fluid
chromatography products and costs associated with the recruitment and
relocation of the new chief executive officer.
NOTE C - CHANGE IN FISCAL YEAR END
On January 23, 1997, the Board of Directors of the Company approved a change
of its fiscal year end from June 30, to December 31, effective December 31,
1996. The following is selected financial data for the year ended December
31, 1997 and the comparable twelve months ended December 31, 1996, which
includes the six month transition period ended December 31, 1996.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Net sales $ 8,313,328 $ 8,992,614
------------- -------------
Costs and operating expenses
Cost of sales 6,074,883 4,469,351
Research and development 4,860,993 3,055,705
Selling, general and administrative 6,019,282 4,643,721
Unusual and nonrecurring charges 5,937,355 -
------------- -------------
22,892,513 12,168,777
------------- -------------
Operating loss (14,579,185) (3,176,163)
Other income (expense), net (238,626) (393,936)
------------- -------------
Net loss $ (14,817,811) $ (3,570,099)
============= =============
Loss per common share (1.29) $ (0.38)
============= =============
</TABLE>
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- June 30,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials $ 1,127,335 $ 1,276,413 $ 1,129,835
Work in process 700,055 1,398,229 680,972
Finished goods 804,172 1,421,803 1,112,843
------------ ------------ ------------
$ 2,631,562 $ 4,096,445 $ 2,923,650
============ ============ ============
</TABLE>
During the fourth quarter of 1997, the Company made certain changes in
estimates related to excess and obsolete inventories in the amount of
$614,000, principally related to write downs associated with the
restructuring of the operations and changes in strategic direction of the
Company. Prior to the change in strategic direction, the Company's practice
was to write off inventory directly to cost of sales as it was identified as
being obsolete, the amounts of which were not material to the financial
statements.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------ June 30,
Years 1997 1996 1996
----- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Land - $ 25,000 $ 25,000 $ 25,000
Buildings and improvements 5-30 1,109,412 984,965 966,969
Machinery and equipment 3-10 1,710,082 2,426,317 2,249,482
Furniture and fixtures 3-10 631,401 529,221 386,644
------------- ------------- -------------
3,475,895 3,965,503 3,628,095
Less accumulated depreciation
and amortization (1,310,428) (2,150,048) (2,017,622)
------------- ------------- -------------
$ 2,165,467 $ 1,815,455 $ 1,610,473
============= ============= =============
</TABLE>
NOTE F - INTANGIBLE ASSETS
Intangible assets consist of acquired technology, capitalized software
development costs, goodwill, and patents. The long-term value of these
assets is connected to the application of technologies and software costs to
viable products which management believes can be successfully marketed by
the Company. On an ongoing basis, management reviews the valuation and
amortization of intangible assets to determine possible impairment by
comparing the carrying value to the undiscounted estimated future cash flows
of the related assets and necessary adjustments, if any, are recorded.
During 1997, the carrying value of certain intangible assets was adjusted to
better reflect management's current expectations for the realizability of
these assets. The principal adjustment relates to the write off of
capitalized software formerly expected to be used in certain future
products, but that are now not expected to be developed under new
management. See Note B. Management believes current and projected sales
levels of its existing and planned products will support the carrying costs
of the assets, as adjusted.
The following is a summary of intangible assets:
<TABLE>
<CAPTION>
December 31,
----------------------------- June 30,
1997 1996 1996
------------ ------------- -------------
<S> <C> <C> <C>
Acquired technology $ 3,364,326 $ 3,621,730 $ 3,588,793
Capitalized software development costs 189,920 1,932,333 1,907,101
Goodwill - 142,277 142,277
Patents 262,248 139,229 134,015
------------ ------------- -------------
3,816,494 5,835,569 5,772,186
Less accumulated amortization (716,047) (751,857) (628,838)
------------ ------------- -------------
$ 3,100,447 $ 5,083,712 $ 5,143,348
============ ============= =============
</TABLE>
NOTE G - ACCRUED LIABILITIES
Accrued liabilities are composed of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- June 30,
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Accrued compensation $ 516,271 $ 326,364 $ 338,385
Customer deposits 201,816 253,500 -
Payable to officers - - 105,000
Payroll taxes 166,798 90,622 78,605
Royalties 163,730 19,732 13,461
Warranty 216,930 - -
Other 252,602 74,175 231,803
------------ ------------ ------------
$ 1,518,147 $ 764,393 $ 767,254
============ ============ ============
</TABLE>
NOTE H - LINES OF CREDIT
Lines of credit are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------- June 30,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Prime plus 2.5% (11% at
December 31, 1997) revolving line of credit;
maximum available of $3,000,000; commitment
fee equal to .50% per annum of the unused
amount; collateralized by inventories, trade
accounts receivable, equipment, and intangible
assets; due
September 30, 2000 (A) $ 1,198,766 $ 1,033,018 $ -
Prime plus 2.75% revolving line of credit;
maximum available of $2,400,000;
collateralized by trade accounts receivable
and inventories; paid and terminated in
October 1996 - - 1,302,306
------------ ------------ ------------
$ 1,198,766 $ 1,033,018 $ 1,302,306
============ ============ ============
</TABLE>
(A) At December 31, 1997, the outstanding line of credit contains certain
covenants including, but not limited to, provisions that the Company
maintain certain levels of net worth, achieve certain results of operations,
meet certain financial ratios, and restrict the amount of capital
expenditures. At times, including at December 31, 1997, the Company has
been in violation of certain of these covenants. Subsequent to December 31,
1997, the Company has notified the lender of its intent to terminate this
line of credit as of March 31, 1998 and payoff the line of credit from
available cash and cash equivalents.
NOTE I - LONG-TERM OBLIGATIONS
1. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------- June 30,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
8.25% note payable to a commercial bank,
collateralized by property, payable in monthly
installments of $8,246 including interest, due
January 1999 $ 726,456 $ 762,928 $ 775,907
9.0% note payable to a finance company in
monthly installments of $15,845 including
interest, paid March 1997 - 45,792 134,354
Other installment loans 40,970 42,891 78,382
----------- ----------- -----------
767,426 851,611 988,643
Less current maturities (50,729) (91,902) (209,808)
----------- ----------- -----------
$ 716,697 $ 759,709 $ 778,835
=========== =========== ===========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
1998 $ 50,729
1999 703,585
2000 13,112
Thereafter -
----------
$ 767,426
==========
</TABLE>
2. Capital leases
The Company leases certain equipment on 36 to 60 month capital leases.
Substantially all of the leases contain provisions that convey title to the
Company or that allows the Company to acquire the equipment at the end of
the lease term through payment of a nominal amount. Assets under capital
lease obligations are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Equipment $ 1,134,973 $ 1,110,450 $ 748,099
Less accumulated amortization (453,397) (496,775) (391,844)
----------- ----------- -----------
$ 681,576 $ 613,675 $ 356,255
=========== =========== ===========
</TABLE>
Total amortization expense on equipment under capital lease obligations was
$218,919 for the year ended December 31, 1997, $82,434 for the six months
ended December 31, 1996, and $158,693 and $111,496 for the years ended June
30, 1996 and 1995, respectively.
Total future minimum lease payments, under capital lease obligations are as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
1998 $ 328,252
1999 241,035
2000 197,410
2001 149,002
2002 24,701
Thereafter -
-----------
Total minimum leases payments 940,400
Less amount representing interest (162,936)
-----------
Present value of net minimum
capital lease payments 777,464
Less current maturities 218,649
-----------
$ 558,815
===========
</TABLE>
3. Operating leases
The Company leases certain office and manufacturing space and equipment
under operating leases. The lease on office and manufacturing space expires
in March 1999, but is renewable at the option of the Company for five
additional one-year periods with an increase of 4% per year in the lease
payment. Leases of equipment expire through 2002. Minimum future payments
under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
1998 $ 175,156
1999 51,586
2000 10,396
2001 10,396
2002 5,198
Thereafter -
-----------
$ 252,732
===========
</TABLE>
Total rent expense under operating leases was $142,616 for the year ended
December 31, 1997, $75,408 for the six months ended December 31, 1996, and
$83,857 and $62,932 for the years ended June 30, 1996 and 1995,
respectively.
NOTE J - INCOME TAXES
The income tax expense (benefit) on continuing operations reconciled to the
tax computed at the statutory federal rate of 34% is as follows:
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended June 30,
December 31, December 31, ------------------------
1997 1996 1996 1995
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Income taxes (benefit) at
statutory rate $ (5,038,056) $ (558,933) $(580,124) $ 155,894
State income taxes (benefit)
net of federal tax effect (488,988) (54,249) (56,306) 15,131
Amortization of acquired technology 60,797 30,398 31,447 -
Settlement with former directors 165,750 - - -
Operating losses (carryforwards)
with no current tax benefit (expense) 5,292,150 579,600 595,189 (183,840)
Other, net 8,347 3,184 9,794 12,815
------------- ------------- --------- ---------
Income tax expense $ - $ - $ - $ -
============= ============= ========= =========
</TABLE>
Deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------ June 30,
1997 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Deferred tax assets
Benefit of net operating
loss carryforwards $ 6,334,645 $ 3,099,642 $ 2,488,443
Capitalized software development
costs and amortization of
intangible assets 746,839 - -
Inventory allowances 335,327 - -
Employee termination costs 261,251 - -
Accrued liabilities 129,153 21,692 56,438
Allowance for doubtful accounts 32,776 14,920 5,116
Other, net 4,271 224 224
------------- ------------- -------------
7,844,262 3,136,478 2,550,221
Less valuation allowance (7,759,162) (2,490,596) (1,913,470)
------------- ------------- -------------
85,100 645,882 636,751
------------- ------------- -------------
Deferred tax liabilities
Capitalized software development costs and
amortization of
intangible assets - (626,682) (617,668)
Depreciation of property and equipment (85,100) (19,200) (19,083)
------------- ------------- -------------
(85,100) (645,882) (636,751)
------------- ------------- -------------
Net deferred tax asset (liability) $ - $ - $ -
============= ============= =============
</TABLE>
The Company has sustained net operating losses in each of the periods
presented. There were no deferred tax assets or income tax benefits
recorded in the financial statements for net deductible temporary
differences or net operating loss carryforwards because the likelihood of
realization of the related tax benefits cannot be established. Accordingly,
a valuation allowance has been recorded to reduce the net deferred tax asset
to zero and consequently, there is no income tax provision or benefit for
any of the periods presented. The increase (decrease) in the valuation
allowance was $5,268,566, $577,126, $1,454,363, and ($381,591) for the year
ended December 31, 1997, the six months ended December 31, 1996, and for
the years ended June 30, 1996 and 1995, respectively.
As of December 31, 1997, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $17,000,000 expiring in various
years through 2012. Utilization of approximately $3,100,000 of the total
net operating loss is dependent on the profitable operation of Sensar
Corporation in the future under the separate return limitation rules and
limitations on the carryforward of net operating losses after a change in
ownership. The valuation allowance associated with the preacquisition
Sensar net operating losses is approximately $1,160,000, and if realized,
will be recognized by reducing costs allocated to acquired technology in the
purchase of Sensar.
NOTE K - EARNINGS (LOSS) PER COMMON SHARE
The following data show the amounts used in computing earnings (loss) per
common share, including the effect on income (loss) of preferred stock
dividends and the weighted average number of shares and dilutive potential
common stock.
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
-------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations $ (14,817,811) $ (1,643,920) $(1,706,248) $ 458,511
Dividends on preferred stock (15,000) (22,500) (48,750) -
------------- ------------- ----------- ----------
Income (loss) from continuing
operations applicable to
common stock (14,832,811) (1,666,420) (1,754,998) 458,511
Loss from discontinued operations - - - (770,128)
------------- ------------- ----------- ----------
Net loss applicable to common stock $ (14,832,811) $ (1,666,420) $(1,754,998) $ (311,617)
============= ============= =========== ==========
Common shares outstanding during the
entire period 10,717,790 10,258,406 6,559,479 5,827,249
Weighted average common shares issued
during the period 789,911 152,414 1,579,243 273,743
------------- ------------- ----------- ----------
Weighted average number of common
shares used in basic EPS 11,507,701 10,410,820 8,138,722 6,100,992
Dilutive effect of stock options
and warrants - - - 126,715
------------- ------------- ----------- ----------
Weighted average number of common
shares and dilutive potential common
stock used in diluted EPS 11,507,701 10,410,820 8,138,722 6,227,707
============= ============= =========== ==========
</TABLE>
Included in income (loss) from continuing operations for the year ended
December 31, 1997 are unusual and nonrecurring charges of $5,937,355. The
effect of these unusual and nonrecurring charges on net loss was $0.52 per
common share.
For the year ended December 31, 1997, the six months ended December 31,
1996, and the year ended June 30, 1996, all of the options and warrants that
were outstanding, as described in Note O, were not included in the
computation of diluted EPS because to do so would have been anti-dilutive.
For the year ended June 30, 1995, options and warrants to acquire 245,000
shares and 500,000 shares of common stock, respectively, were not included
in the computation of diluted EPS because their exercise price was greater
than the average market price of the common stock during the year.
Additionally, as described in Note V, certain transactions occurred after
December 31, 1997, which, had they taken place during fiscal 1997, would
have changed the number of common shares or potential common shares
outstanding during the period.
NOTE L - 401(K) PROFIT SHARING PLAN
In February 1995, the Company adopted a 401(K) profit sharing plan under
which eligible employees may choose to contribute up to 15% of their wages
on a pre-tax basis, subject to IRS limitations. Employees who have
completed six months of qualified service with the Company are eligible to
enroll in the plan. The Company will match 50% of the employee's
contribution to the plan up to a maximum of 1.5% of the employee's eligible
annual salary. The Company's contributions vest at a rate of 20% per year
beginning with the second year of service and participants are fully vested
after six years of service. The Company contributed $67,242 for the year
ended December 31, 1997, $38,581 for the six months ended December 31, 1996,
and $34,594 and $15,282 for the years ended June 30, 1996 and 1995,
respectively.
NOTE M - PREFERRED STOCK
During the year ended June 30, 1995, the Company issued 200,000 shares of
preferred stock in payment of $500,000 of short-term debt. The preferred
stock had a liquidation preference equal to $2.50 per share, plus unpaid
dividends. This preferred stock paid cumulative dividends at a rate of
$0.225 per share per annum, payable monthly. The preferred stock was
convertible into common stock at the option of the holder or the option of
the Company at the rate of $3.00 per share divided by an amount equal to the
average of the closing bid prices for the common stock for the twenty
consecutive trading days immediately prior to the date that the holder
provides notice of such conversion. The preferred stock was converted, in
accordance with the governing provisions of the designation, into 58,842
shares of common stock effective April 30, 1997.
NOTE N - COMMON STOCK
During the year ended December 31, 1997, the six months ended December 31,
1996 and the years ended June 30, 1996 and 1995, the Company issued 54,849
shares, 548 shares, 34,940 shares and 98,905 shares, respectively, of common
stock valued at prices ranging from $3.38 to $13.25 per share, $9.13 per
share, $4.75 to $6.00 per share, and $2.50 per share, respectively, for
services rendered. During the year ended December 31, 1997, an officer
surrendered 1,739 shares of common stock in payment of a non-interest
bearing advance. During the year ended June 30, 1996 the Company also
issued 16,483 shares of common stock, at prices ranging from $2.19 to $2.88
per share, as payment of interest on the Company's long-term debt. The
common stock was valued at fair market value as determined by the closing
price of the Company's stock on the date of the transaction.
During the year ended June 30, 1995, the Company issued 614,000 shares of
common stock in various private placements at prices ranging from $1.63 to
$1.75 per share. Proceeds to the Company, less expenses of $34,767, were
$991,343.
NOTE O - STOCK OPTIONS AND WARRANTS
1. Stock-based compensation plans
During the periods presented in the accompanying financial statements, the
Company has granted stock options under four stock option plans; the 1991
Director Stock Option Plan (the 1991 Director Plan), the 1996 Director Stock
Option Plan (the 1996 Director Plan), the 1997 Stock Option and Award Plan
(the 1997 Employee Plan), and the 1987 Stock Option Plan (the 1987 Employee
Plan). The Company has also granted options under executive employment
agreements.
Under the 1991 Director Plan, the Company granted 30,000 options annually to
each director, up to an aggregate of 750,000 options. Options granted under
this plan vested immediately and expire five years after the grant. The
1991 Director Plan terminated July 1, 1996.
Under the 1996 Director Plan, the Company has reserved 1,400,000 shares of
common stock to be granted to directors of the Company. In 1996, the
Company granted options to each director to acquire 200,000 shares of common
stock (for a total of 1,000,000 options) at $7.00 per share. Options under
the 1996 Director Plan vest 25% on the grant date and 25% for each year of
service thereafter and expire five years after their vesting date. Of the
options granted in 1996, options with respect to 600,000 shares were
canceled in 1997. See Note B.
Under the 1987 Employee Plan, as amended in 1994, the Company may grant
options to acquire up to 750,000 shares of common stock, of which options to
acquire 728,453 shares have been granted as of December 31, 1997. Options
granted under the 1987 Employee Plan vest at varying dates from zero to five
years after the grant date and expire five years after the vesting date.
The 1997 Employee Plan was approved by the shareholders in 1997. The 1997
Employee Plan reserves 750,000 shares of common stock for issuance pursuant
to stock options or stock awards granted, of which options to acquire
202,000 shares have been granted and 215,135 shares have been awarded to
employees as of December 31, 1997. Options granted under the 1997 Employee
Plan vest at varying dates from one to five years after the grant date and
expire five years after the vesting date. Shares awarded primarily consist
of stock issued to former management in connection with their termination
(see Note B) and was recorded at fair value of $1,150,000 on the date of
their termination.
In January 1996, the Company granted options to three executives under newly
executed employment agreements. The agreements granted options to acquire
an aggregate of 825,000 shares of common stock at an exercise price of $4.25
per share. The options under the employment agreements vested 20% on the
grant date and 20% for each year of service thereafter, and would have
expired in January 2006. All of the options granted in 1996 were canceled
in 1997. See Note B.
In conjunction with the 1997 employment of the new chief executive officer,
the Company granted options to acquire 1,000,000 shares of common stock. The
options were granted at $5.75 per share, but are exercisable at the lower of
the grant price or 80% of the trading price on the date of exercise (but not
less than $3.60 per share). These options vest 25% on the grant date and
25% per year for each of the next three years, although the vesting of
500,000 of the options is subject to the achievement of certain performance
targets. The options expire five years after vesting. Subsequent to
December 31, 1997, this option was terminated in favor of an option to
purchase 1,000,000 shares of common stock, of which the right to exercise is
immediately vested with respect to 250,000 shares at $3.60 per share; the
right to exercise will vest with respect to 83,333 shares on each of
December 31, 1998, 1999, and 2000 at $3.60 per share; and the right to
exercise will vest with respect to 166,667 shares on each of December 31,
1998, 1999, and 2000, at $4.50 per share, $5.50 per share, and $6.50 per
share, respectively.
A summary of the status of the options granted under the Company's stock
option plans and employment agreements at December 31, 1997 and 1996, and
June 30, 1996 and 1995 and changes during the periods then ended is
presented in the table below:
<TABLE>
<CAPTION>
Year ended June 30,
Year ended Six months ended ---------------------------------------
December 31, 1997 December 31, 1996 1996 1995
-------------------- ------------------- ------------------- -------------------
Weighted- Weighted- Weighted- Weighted-
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
---------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 3,049,841 $ 4.87 3,092,906 $ 4.88 930,430 $ 2.89 788,000 $ 2.24
Granted 1,202,000 6.14 10,000 10.50 2,237,476 5.63 652,800 2.75
Exercised (290,000) 2.68 (52,500) 6.76 (61,117) 2.33 (19,325) 2.22
Forfeited - - (565) 2.06 (13,883) 2.33 (8,245) 2.06
Canceled (1,425,000) 5.41 - - - - (482,800) 1.70
---------- --------- --------- --------
Outstanding at end
of period 2,536,841 5.42 3,049,841 4.87 3,092,906 4.88 930,430 2.89
========== ========= ========= =======
Exercisable at
end of period 1,174,355 $ 4.49 1,364,860 $ 3.90 1,370,430 $ 3.97 930,430 $ 2.89
========== ========= ========= =======
Weighted average fair
value of options
granted $ 3.04 $ 5.35 $ 3.06 $1.19
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the periods ended December 31, 1997 and
1996, and June 30, 1996 and 1995, respectively: risk-free interest rates of
6.0%, 5.9%, 6.1% and 7.4%, expected dividend yields of zero for all periods,
expected lives of 5.8, 5.0, 6.4 and 4.0 years, and expected volatility of
42%, 50%, 47% and 59%.
A summary of the status of the options outstanding under the Company's stock
option plans and employment agreements at December 31, 1997 is presented
below:
<TABLE>
<CAPTION>
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life price exercisable price
- ------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 2.00 - $ 3.99 512,365 1.82 years $ 2.69 512,365 $ 2.69
$ 4.00 - $ 5.99 1,412,476 6.05 5.55 459,990 5.39
$ 6.00 - $ 10.50 612,000 5.78 7.41 202,000 7.03
--------- ---------
$ 2.00 - $ 10.50 2,536,841 5.13 $ 5.42 1,174,355 $ 4.49
========= =========
</TABLE>
The Company adopted the 1997 Employee Stock Purchase Plan (the Stock
Purchase Plan) effective as of February 1, 1997. The maximum number of
shares of common stock which are available under this plan is 100,000
shares. The Stock Purchase Plan provides an opportunity to the employees of
the Company to purchase shares of common stock in the Company at 85% of fair
market value on each offering date. During the year ended December 31,
1997, the employees of the Company purchased 15,407 shares of common stock
for gross proceeds of $84,001.
The Company accounts for these plans under APB 25 and related
interpretations. Accordingly, since all options granted under these plans
were granted at or in excess of fair market value of the stock on the date
of the grant, no compensation cost has been recognized in the accompanying
financial statements for options granted under these plans. Had
compensation cost for these plans been determined based on the fair value of
the options at the grant dates for awards under these plans consistent with
the method prescribed by SFAS 123, the Company's net loss and loss per
common share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended
December 31, December 31, June 30,
1997 1996 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss As reported $(14,817,811) $(1,643,920) $(1,706,248)
Pro forma (16,118,507) (2,310,698) (2,192,447)
Loss per common share As reported $(1.29) $(0.16) $(0.21)
Pro forma (1.40) (0.22) (0.27)
</TABLE>
2. Stock warrants
In conjunction with a private placement in May 1995, the Company issued
warrants to a group of investors to acquire common stock of the Company.
Since that time, the Company has issued additional warrants to this group as
the previously outstanding warrants were exercised.
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 767,810 shares on or before January 31, 1997,
which exercise occurred and resulted in gross proceeds to the Company of
$4,069,393. This initial issuance was priced at $6.25 per share and
resulted in the issuance of 651,103 shares, with 116,707 shares held in
reserve, because the reduced pricing was contingent upon the timely exercise
of the warrants related to all 1,715,832 shares.
The agreement relating to the exercise of the remaining 948,022 warrants was
amended on November 14, 1997. The exercise price remained at $5.30 per
share or an aggregate of $5,024,517 to be paid in ten equal installments
commencing November 15, 1997, and continuing on the day that is five weeks
subsequent to the preceding payment until the full amount is paid. On
receipt of each payment, the Company agreed to issue a certificate
representing the stock then being acquired, calculated at an exercise price
of $5.30 per share, and issue a replacement warrant covering the same number
of shares. Additionally, on receipt of the first payment, the Company
agreed to deliver certificates representing the 116,707 shares held in
reserve and to issue replacement warrants for the 767,810 shares, exercised
in January 1997, referred to in the previous paragraph. Replacement
warrants have an exercise price of $8.75 per share and are exercisable at
any time through April 16, 2003. In the event that a warrant holder fails
to make one or more payments when due, that portion of the outstanding
warrants that was then due would thereafter have an exercise price of
$6.25 per share and the holder would not be entitled to a replacement
warrant, if and when the outstanding warrant is exercised.
A summary of the status of common stock underlying the warrants issued at
December 31, 1997 and 1996, and June 30, 1996 and 1995 and changes during
the periods then ended is presented in the table below:
<TABLE>
<CAPTION>
Year ended June 30,
Year ended Six months ended -----------------------------------------
December 31, 1997 December 31, 1996 1996 1995
------------------- --------------------- ------------------- -------------------
Weighted- Weighted- Weighted- Weighted-
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
--------- -------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 2,100,167 $ 6.25 2,100,167 $ 5.71 1,000,000 $3.00 - $ -
Issued 862,613 8.75 375,000 6.25 4,100,167 4.51 1,000,000 3.00
Exercised (862,613) 5.30 (375,000) 3.25 (3,000,000) 3.17 - -
--------- --------- ---------- ---------
Outstanding at end
of period 2,100,167 $ 6.89 2,100,167 $ 6.25 2,100,167 $5.71 1,000,000 $3.00
========= ========= ========= =========
</TABLE>
NOTE P - COMMITMENTS AND CONTINGENCIES
1. Litigation
The Company is from time to time involved in litigation as a normal part of
its ongoing operations. At December 31, 1997, there was no litigation which
would have a material impact on the financial condition of the Company.
2. Employment agreements
In November 1997, the Company terminated employment agreements with three
officers (see Note B) and entered into a letter agreement (to be followed by
a definitive employment agreement) with a new Chief Executive Officer which
provides for, among other things, a base salary of $250,000 per year and
bonuses based on the achievement of performance targets (including a
guaranteed bonus of $100,000 for 1998). The initial term of the agreement is
from November 17, 1997 through December 31, 2000 and, thereafter, is
automatically renewed for one year periods until terminated. The agreement
also contains provisions that would entitle the Chief Executive Officer to
the greater of his remaining base compensation or one year's salary plus the
vesting of all time-based options and one half of the performance-based
options in the event of the change in control of the Company and a
termination of his employment.
3. Licensing agreements
The Company has also entered into licensing agreements for the use of
certain patented technology. Certain of the patents are owned by a
university, which is also a stockholder of the Company. These licensing
agreements require royalty payments through the ends of the lives of the
underlying patents which expire at various dates through 2013. Royalty
payments are equal to specified percentages of the sales amounts of certain
products, but not less than minimum annual royalty requirements of up to
$156,000 per year.
Effective July 1, 1997, the Company entered into a Technical Information
Agreement and a Patent License Agreement with Lucent Technologies, Inc. (the
Agreements). Under the Agreements, the Company was granted certain rights
to technologies related to the manufacture of particle analysis systems and
related rights to market such systems. Using the technology acquired under
the Agreements, coupled with other technology already owned or licensed, the
Company intends to manufacture and market a particle analyzing mass
spectrometer.
Under the Agreements, the Company made an initial payment of $200,000 for
the rights granted thereunder. Additionally, the Company is obligated to
pay royalties ranging from 5% to 8% of the market value of items sold
pursuant to the Agreements, subject to minimum periodic installments
starting at a total of $250,000 payable during the year ended June 30, 1999
and increasing to a total of $600,000 payable during 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 payment of
$600,000.
Royalty expenses included in the statements of operations were $172,144 for
the year ended December 31, 1997, $82,000 for the six months ended December
31, 1996, and $92,919 and $73,937 for the years ended June 30, 1996 and
1995, respectively.
NOTE Q - SALES
Sales by geographical area are as follows:
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
United States $ 3,970,719 $ 2,005,065 $ 5,428,961 $ 2,920,953
Europe 3,181,688 1,363,083 1,698,739 2,581,748
Pacific Rim 856,663 1,414,238 902,830 836,339
Canada 163,449 74,060 129,576 169,428
Other 140,809 32,834 95,501 7,362
------------ ------------ ------------ ------------
Total $ 8,313,328 $ 4,889,280 $ 8,255,607 $ 6,515,830
============ ============ ============ ============
</TABLE>
During the year ended December 31, 1997, one customer accounted for 12% of
net sales and during the six months ended December 31, 1996, one customer
accounted for 13% of net sales. During the years ended June 30, 1996, and
1995, no customers accounted for more than 10% of net sales.
NOTE R - RELATED PARTY TRANSACTIONS
In the ordinary course of business of the Company, the two founders and
principal stockholders of the Company have been required to guarantee
certain obligations, including its principal line of credit. The personal
guarantees of the principal line of credit of the Company were eliminated
when it was placed with another financial institution in October 1996.
The Company has entered into consulting arrangements during 1997 and 1996,
with a corporation owned and controlled by a director of the Company. Under
the terms of the arrangements, the corporation agreed to provide the Company
with advisory and consulting services concerning the commercialization of
the technology held by Sensar Corporation, the identification of markets for
such products, the establishment of marketing contacts, and the development
of an operational plan for the development and marketing of products based
on the Sensar technology. Under the arrangements the Company has incurred
compensation expense of $95,540 and $100,000 in 1997 and 1996, respectively,
plus the reimbursement of third-party expenses incurred on behalf of the
Company.
Under the terms of various contractual arrangements with a university, the
Company owed approximately $215,500 for royalties, license fees, and
reimbursement of patent expenses, had additional upcoming expenses of
approximately $109,000, and had an obligation to issue 6,000 shares of
common stock to the university. The university agreed to accept shares of
the Company's restricted common stock in satisfaction of the cash
obligations. The stock was valued at the closing price of the Company's
common stock on July 17, 1996, of $9.00 per share discounted by 20% to
recognize the restricted nature of the securities. The Company purchased an
aggregate of 49,272 shares of common stock from two of its executive
officers and directors, at a price equal to the obligations to the
university, in order to deliver the shares to the university. A portion of
the purchase price was paid by offsetting amounts due to the Company for
advances made to the officers during the fiscal year ended June 30, 1996 in
the aggregate principal amount of $105,000, plus accrued interest of
approximately $5,300.
NOTE S - DISCONTINUED OPERATIONS
In connection with a decision by the Company in the year ended June 30,
1995, the Company entered into an agreement to divest its airport noise
monitoring business. Under the terms of this agreement Harris Miller Miller
and Hanson, Inc. (HMMH), an established consulting firm with its primary
business related to transportation industry acoustic and vibration analysis,
purchased all of the Company's tangible assets and contracts related to the
airport noise monitoring business and assumed approximately $100,000 of the
Company's liabilities. HMMH also entered into a licensing agreement with
the Company, which transfers the ownership of the Company's related software
for application in the airport noise monitoring industry. Under the
licensing agreement, the Company is entitled to installment payments of
$150,000 annually plus a varying royalty of 2 1/2% to 4% on gross revenues
of HMMH resulting from the sale, installation, upgrade, and maintenance of
airport noise and operations monitoring systems for the lesser of ten years
or the term of the contract.
The accompanying consolidated financial statements reflect the transaction
with the carrying value of the long-term contractual arrangement being
assigned the basis of the net assets sold or licensed and no gain or loss
being recognized at the date of the transaction. The Company has recognized
the proceeds received on a "cost recovery" method whereby the carrying cost
of the asset was reduced accordingly. In December 1997, certain events
occurred which caused management to question the recoverability of the
carrying cost of this long-term contractual arrangement and accordingly, the
Company recognized an impairment loss (see Note B).
During the year ended December 31, 1997, the six months ended December 31,
1996, and the year ended June 30, 1996, the Company recognized payments from
HMMH in the amounts of $265,646, $106,000, and $388,146, respectively.
The airport noise monitoring business has been accounted for as discontinued
operations, and accordingly, the results of its operations are segregated
from continuing operations in the accompanying statements of operations.
Net sales, costs and operating expenses, other income and expense, and
income taxes of this business for the fiscal year ended June 30, 1995 has
been reclassified as discontinued operations.
Summary operating results of discontinued operations for the fiscal year
ended June 30, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net sales $ 2,374,697
Operating loss (697,017)
Loss before income taxes (770,128)
Income taxes (benefit) -
Loss from discontinued operations (770,128)
</TABLE>
NOTE T - ACQUISITION
Effective October 27, 1995, the Company acquired 100% of the stock of Sensar
Corporation (Sensar). Sensar holds manufacturing and distribution rights to
patented technology developed at Brigham Young University related to time-
of-flight mass spectrometers. The Company issued 586,387 shares and 31,336
shares of common stock during the year ended June 30, 1996 and the six
months ended December 31, 1996, respectively (valued at an aggregate of
$1,590,636), assumed an outstanding obligation of Sensar with regard to a
line of credit in the amount of $535,823 at October 27, 1995, and paid
$280,000 to Sensar to be used by Sensar to redeem 1,400,000 shares of its
common stock. This transaction was accounted for using the purchase method
of accounting; accordingly the purchased assets and liabilities have been
recorded at their estimated fair value at the date of acquisition, with the
excess purchase price of $2,774,707 being allocated to acquired technology.
A useful life of 15 years has been determined with amortization being
calculated using the straight-line method. The results of operations of the
acquired business have been included in the financial statements since the
date of acquisition.
The following unaudited pro forma summary represents the combined results of
operations as if the acquisition of Sensar had occurred as of the beginning
of each year presented. This summary does not purport to be indicative of
what would have occurred had the acquisition been made as of the dates set
forth, or of results which may occur in the future.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Net sales $ 8,544,000 $ 7,365,000
Loss from continuing operations (1,821,000) (515,000)
Loss from discontinued operations - (770,000)
Net loss (1,821,000) (1,285,000)
Loss per share (0.20) (0.19)
</TABLE>
NOTE U - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended June 30,
December 31, December 31, --------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities are as follows:
Net loss $(14,817,811) $ (1,643,920) $(1,706,248) $ (311,617)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 487,687 189,151 278,417 217,790
Amortization 672,848 243,991 350,120 517,948
Provision for losses on accounts receivable 41,146 28,834 20,000 875
Provision for inventory write downs 614,000 - - -
Provision for impairment losses 4,246,367 - - -
Stock issued in payment of compensation 1,412,159 22,657 178,390 219,708
Stock issued in payment of interest - - 42,261 -
Loss (gain) on sale of property and equipment 78,085 (8,460) (17,014) 6,189
Changes in assets and liabilities
Trade accounts receivable 331,491 (294,999) (221,582) (520,395)
Inventories 850,883 (1,172,795) (770,882) 2,464
Other current assets 29,636 372,115 (166,545) 233,507
Due from related party - - - 29,817
Accounts payable 177,698 321,549 (305,112) (303,477)
Accrued liabilities 753,754 (2,861) 298,251 (59,205)
------------ ------------ ----------- ---------
Net cash provided by (used in) operating
activities $ (5,122,057) $ (1,944,738) $ 2,019,944) $ 33,604
============ ============ =========== =========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 299,438 $ 144,399 $ 400,686 $ 355,988
Income taxes - - - -
Significant noncash investing and financing
activities
Acquisition of equipment through long-term
obligations $ 326,960 $ 240,876 $ 234,210 $ 189,747
Note receivable issued in exercise of stock options 69,375 - - -
Issuance of common stock for purchase of
Sensar (Note R) - 80,690 1,509,946 -
Issuance of preferred stock in satisfaction of debt - - - 500,000
Conversion of short-term debt into long-term debt - - - 300,000
</TABLE>
NOTE V - SUBSEQUENT EVENTS
1. Private placement
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 (Warrants) to purchase common stock, at
a purchase price of $35,000 per Unit, or an aggregate gross sales price of
$3,500,000. The Preferred Stock is convertible, at the election of the
holder, at any time subsequent to 90 days after the closing of the offering
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 notice of conversion as reported by the Nasdaq National Market
System on which the Company's common stock is traded. Until conversion, the
Preferred Stock bears an annual dividend of 4%, or $40 per share per annum.
If not previously converted, the Preferred Stock will automatically convert
into shares of common stock as of December 31, 1999. In addition, the
Company can require the conversion of the Preferred Stock if it makes a
public offering of its common stock at any time subsequent to February 1,
1999. The Company paid a finder's fee of 6%, or an aggregate of $210,000,
and expects to incur legal, accounting, listing fees, and other costs of the
offering estimated to be approximately $35,000.
Each Warrant gives the holder the right to purchase one share of common
stock at an exercise price of $4.50 per share. If not earlier exercised,
the Warrants expire July 30, 2000. The Company can provide 30 days written
notice to the holders of the Warrants at any time that the closing price of
the Company's common stock equals or exceeds $6.50 per share for 20
consecutive trading days as reported on the Nasdaq National Market System.
If the holders do not exercise the Warrants by the end of the 30 day period,
the Warrants would then expire.
2. Stock options
In February 1998, the Company granted options to a newly hired chief
operating officer to purchase 300,000 shares of common stock at $2.9875 per
share. The options vest 25% on the grant date and 25% per year for each of
the next three years and expire five years after vesting. The vesting of
112,500 shares over the next three years is subject to the achievement of
certain performance objectives.
Also in February 1998, certain former executive officers of the Company
exercised their remaining options to acquire 276,365 shares of common stock,
at prices ranging from $2.06 to $3.64 per share, by delivering to the
Company notes in the aggregate amount of $726,190. The notes bear interest
at 8.5% and are payable in three equal annual installments.
In March 1998, the Company has also granted options to existing employees
and a current director to purchase 367,500 shares of common stock
principally at $3.1375 per share. The options vest in varying percentages
over the next three years and expire five years after vesting. Concurrently
with the granting of these options, the Company canceled existing options
previously granted to certain employees and the director to purchase 382,000
shares of common stock at prices ranging from $4.69 to $10.50 per share.
APPENDIX A
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement") dated as of the 30th day
of November, 1998, by and among PCB GROUP, INC., a New York corporation, with an
address at 3425 Walden Avenue, Depew, New York 14043 ("PCB"), BEEHIVE
ACQUISITION CORP., a Delaware corporation and a wholly owned subsidiary of PCB,
with an address at 3425 Walden Avenue, Depew , New York 14043 (the "Buyer"), and
LARSONoDAVIS INCORPORATED, a Nevada corporation with its principal office at
1681 West 820 North, Provo, Utah 84601 ("LDI"), and LARSONoDAVIS LABORATORIES, a
Utah corporation and wholly-owned subsidiary of LDI (the "Seller").
W I T N E S S E T H:
WHEREAS, LDI and the Seller are, among other things, engaged in the
business of designing, manufacturing, distributing, promoting, marketing,
selling and servicing of instrumentation, firmware and software for use in the
acoustic and vibration industry and related activities (collectively, the
"Business"); and
WHEREAS, LDI and the Seller desire to sell to the Buyer and the Buyer
desires to purchase from LDI and the Seller all of the Business and
substantially all the technology and assets of the Business, all on the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
representations, warranties and covenants contained herein, the parties agree as
follows:
ARTICLE I
PURCHASE AND SALE
1.1 Sale of Assets. At the Closing (as hereinafter defined) and subject
to all other terms and conditions of this Agreement, the Seller, or in the event
that the assets are held directly, LDI, shall sell, assign, transfer and convey
to the Buyer good and marketable title, free and clear of all liens,
liabilities, encumbrances, security interests, claims and other restrictions
other than Assumed Liabilities, in and to all assets used in the Business of
every kind and description, tangible and intangible, real, personal and mixed,
wherever located, excepting only the Excluded Assets (as hereinafter defined).
The assets to be sold by LDI and the Seller to the Buyer are sometimes
hereinafter referred to as the "Subject Assets." The Subject Assets shall
include, without limitation, the following:
(a) all machinery and equipment, computer equipment, fixtures,
furniture, office equipment, tools, test equipment, tooling, vehicles, software
and other tangible personal property of LDI and the Seller used in the Business
identified on Schedule 1.1(a) (collectively the "Personal Property");
(b) all inventory used in the Business wherever located, including
raw materials, work-in process, finished goods and consigned inventory,
including, but not limited to, all inventory identified in Schedule 1.1.(b)
(collectively the "Inventory");
(c) all patents, copyrights and trademarks (and all applications for
any of the foregoing) and all licenses, processes, products, apparatus,
formulas, trade secrets, know-how, discoveries, inventions (including
conceptions of inventions), product drawings, schematics, bills of materials,
specifications, computer programs, and design, manufacturing, engineering and
other technical information of LDI and the Seller used in the Business
including, without limitation, such intellectual property identified on Schedule
1.1(c) (collectively the "Intellectual Property");
(d) all sales orders, purchase orders, personal property and software
leases, license agreements, confidentiality and/or non-competition or similar
agreements, distributor and representative agreements or appointments,
arrangements and/or other contracts, agreements or commitments of the Seller or
LDI related to the Business which are identified on Schedule 1.1(d) and sales
orders, purchase orders, contracts, agreements, distribution and representative
agreements or appointments, arrangements and/or commitments of the Seller or LDI
related to the Business dated after the date hereof as of the "Closing Date" (as
hereinafter defined) (collectively the "Contracts");
(e) all current and prospective customer and vendor lists for the
Business;
(f) to the extent assignable, all governmental and other permits,
licenses, approvals, certificates of inspection, filings, franchises and other
authorizations relating to the Subject Assets including, but not limited to,
those listed in Schedule 1.1(f). Schedule 1.1(f) contains a list of all Permits
and Licenses used in the Business, whether assignable or not (collectively the
"Permits and Licenses");
(g) all rights of LDI or the Seller pursuant to any express or
implied warranties, and pursuant to any representations or guarantees made by
suppliers furnishing goods or services to the Business;
(h) all original accounting, operating and other books, records,
files, sales literature and other data of LDI and the Seller relating to the
Business, the Subject Assets or the Contracts (other than records pertaining to
any Excluded Assets, the corporate minute books and stock records of LDI and the
Seller); provided, however, that LDI and the Seller may retain a copy of all
accounting, operating and business records, which may be used solely for the
purposes set forth in Section 11.6 hereof;
(i) all accounts receivable of LDI and the Seller relating to the
Business and all books and records related thereto (the "Accounts Receivable");
(j) all prepaid expenses of LDI and the Seller relating to the
Business (collectively the "Prepaid Expenses");
(k) all claims, causes of action and rights of recovery of the
Business;
(l) all rights to all trade names and marks used by LDI and the
Seller in the Business, including, but not limited to, any and all rights of LDI
and the Seller to use the name "LarsonoDavis", and any and all variations
thereof and all marks related thereto;
(m) all goodwill associated with the Business;
(n) the real property and improvements commonly known as 1681 West
820 North, Provo, Utah 84601, as further described on Schedule 1.1(n) (the
"Owned Property"); and
(o) to the extent provided in Section 1.4(f), the balance of the bank
account established by the Seller for the Business subsequent to December 31,
1998.
1.2 Excluded Assets. The Subject Assets shall not include the following
assets (collectively, the "Excluded Assets"):
(a) except as provided in Section 1.1(o), the cash, cash equivalents,
or bank accounts maintained by LDI or the Seller, whether or not associated with
the Business;
(b) the tools and equipment located in the machine shop, as such
assets are further described on Schedule 1.2(b);
(c) the assets of LDI or the Seller not related to the Business,
including those assets associated with LDI's other businesses, including, but
not limited to, LDI's mass spectrometry, CrossCheck, and SFC technologies
(collectively, the "Sensar Division");
(d) all corporate books and records of LDI or the Seller not relating
to the Business, including minute books, stock transfer records, shareholder
records of LDI or the Seller, and the books and records related to LDI's Sensar
Division;
(e) LDI and the Seller's employee benefit plans; and
(f) the items described on Schedule 1.2(e).
1.3 Assumed Liabilities. At the Closing, the Buyer shall assume the
following obligations (the "Assumed Liabilities"):
(a) accrued trade and other accounts payable associated with the
Business as of the Closing calculated on the same basis as used to prepare the
January Balance Sheet, as hereinafter defined;
(b) the mortgage (the "Mortgage") and mortgage debt, as further
described on Schedule 1.3(b), on the Owned Property;
(c) those accrued liabilities of LDI or the Seller listed on Schedule
1.3(c);
(d) LDI's and the Seller's obligations under the Contracts to the
extent set forth in Section 1.7; and
(e) LDI's and the Seller's obligations under the leases listed in
Schedule 1.3(e).
1.4 Payment of the Purchase Price.
(a) Purchase Price. In consideration of the sale by LDI and the
Seller to the Buyer of the Subject Assets, and LDI's and the Seller's
performance of this Agreement, the Buyer shall (i) pay to LDI or the Seller the
aggregate amount of Six Million, Five Hundred Thousand and 00/100 Dollars
($6,500,000.00), subject to adjustments as provided in Section 1.5 below (the
"Cash Purchase Price"), (ii) subject to the provisions contained in Section
1.4(b) hereof, pay to LDI or the Seller an earnout payment of up to Two Million
and 00/100 Dollars ($2,000,000.00) (the "Earnout Payment"), and (iii) assume the
Assumed Liabilities (collectively, the Cash Purchase Price, the Earnout Payment
and the Assumed Liabilities shall be referred to herein as the "Purchase
Price"). At the Closing, the Buyer shall pay the Cash Purchase Price as
follows:
(i) Cash. The Buyer shall wire transfer immediately available
funds to an account designated by LDI or the Seller in the amount of the Cash
Purchase Price less One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00) (the "Initial Cash Payment"); and
(ii) Note. The Buyer and PCB shall execute and deliver to LDI
or the Seller a non-negotiable promissory note (the "Note") in the original
principal amount of One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00), which Note shall be in the form of Exhibit A hereto. The Note
shall bear a fixed interest rate equal to Libor, plus two percent (2%), as of
the Closing Date and shall be paid monthly based on a two (2) year amortization
schedule. Any remaining principal and interest shall be payable one (1) year
after the Closing Date. The Buyer's obligation under the Note shall be secured
by a general security interest in the assets of PCB, including assets held by
its operating subsidiaries other than Oceana Sensor Technologies, Inc., but
excluding those assets that are pledged as security for PCB's obligations under
the Town of Lancaster Industrial Development Revenue Bond (1998 PCB
Piezotronics, Inc. Project), pursuant to which PCB has purchased or will
purchase certain equipment and machinery to be used in connection with the
construction of an approximately 30,000 square foot addition to an existing
approximately 61,000 square foot facility at 3425 Walden Avenue. The security
interest shall be evidenced by a commercially reasonable security agreement and
standard uniform commercial code filing documents in the jurisdictions in which
the assets are located. The Note shall provide that it is subordinate to the
rights of PCB and/or the Buyer's principal lender providing the financing
necessary to complete the transactions contemplated by this Agreement or any
successor principal lender thereto. LDI and/or the Seller agree to execute such
documents as may be required by the Buyer's lender to evidence such
subordination.
(b) Earnout Payment. The amount of the Earnout Payment shall be
based on the "Calculated Pretax Profit" (as hereinafter defined) for the
Business for the year ending December 31, 1999, and determined as set forth in
this Section.
(i) If the Calculated Pretax Profit is equal to or less than
Eight Hundred Thousand and 00/100 Dollars ($800,000.00), no Earnout Payment
shall be due to LDI or the Seller;
(ii) If the Calculated Pretax Profit is more than Eight Hundred
Thousand and 00/100 Dollars ($800,000.00), but equal to or less than One Million
and 00/100 Dollars ($1,000,000.00), the Earnout Payment shall equal (x) the
Calculated Pretax Profit less Eight Hundred Thousand and 00/100 Dollars
($800,000.00) multiplied by (y) 7.5;
(iii) If the Calculated Pretax Profit is greater than One
Million and 00/100 Dollars ($1,000,000.00) but equal to or less than One Million
Five Hundred Thousand and 00/100 Dollars ($1,500,000.00), the Earnout Payment
shall equal (x) the amount calculated in accordance with subparagraph (ii) above
plus (y) the Calculated Pretax Profit less One Million and 00/100 Dollars
($1,000,000.00);
(iv) If the Calculated Pretax Profit is greater than One Million
Five Hundred Thousand and 00/100 Dollars ($1,500,000.00), no additional amounts
other than those calculated in accordance with subparagraphs (ii) and (iii)
above shall be due to LDI or the Seller.
(c) Calculated Pretax Profit. For purposes of determining the
Earnout Payment, the "Calculated Pretax Profit" shall be the pretax profit of
the Business acquired by the Buyer pursuant to this Agreement, including any
payments received by the Buyer from LDI or the Seller under the provisions of
Section 12.2 (but only to the extent that an amount equal to any such payments
is also included as an expense for purposes of calculating the Calculated Pretax
Profit), determined in accordance with GAAP, applied on a basis consistent with
the past practice of LDI or the Seller and based on the policies and procedures
used to prepare the 1999 Budget for the Business attached hereto as Exhibit H
(the "Budget Projections"), with the following modifications:
(i) Costs of goods sold shall not exceed forty-four percent
(44%) of the initial Eight Million and 00/100 Dollars ($8,000,000.00) in
revenues;
(ii) All other categories of costs associated with the operation
of the Business will be fixed for up to the initial Eight Million and 00/100
Dollars ($8,000,000.00) in revenues at the amounts shown under the column titled
"Totals" on Exhibit H, except:
(aa) the administrative costs in Exhibit H shall be
increased by up to One Hundred Twenty Thousand and 00/100 Dollars ($120,000.00)
(from One Hundred Seventy Thousand Seven Hundred Fifty and 00/100 Dollars
($170,750.00) to Two Hundred Ninety Thousand Seven Hundred Fifty and 00/100
Dollars ($290,750.00)); and
(bb) the costs (including any expenses incurred to make it
operable) of moving and reinstalling the PC board cleaner included in the
Acquired Assets will be capitalized and depreciated during the 1999 fiscal year
based on a straight line 5 year depreciation schedule;
(iii) The Calculated Pretax Profit on all revenues in excess of
Eight Million and 00/100 Dollars ($8,000,000.00) shall be deemed to be forty-six
percent (46%) of such excess.
(iv) The parties acknowledge that, among other things, the
foregoing calculations reflect depreciation based on LDI's or the Seller's
current basis and depreciation schedule for the Subject Assets (i.e., the
depreciation related to the step-up in basis of the Subject Assets attributable
to the Buyer's purchase price and the adoption of new depreciation schedules by
the Buyer will not be included in the calculation of the Calculated Pretax
Profit), do not include the interest costs associated with any financing
obtained by the Buyer, and include estimated depreciation for all capital costs
of the Buyer subsequent to the Closing (other than those related to the PC board
cleaner as set forth in (ii)(bb) above).
(v) "Calculated Pretax Profit" shall not include any payments
received by the Buyer pursuant to the Shared Services Agreement, as hereinafter
defined in Section 1.10 hereof or the Lease Agreement, as hereinafter defined in
Section 1.11 hereof, all to the extent such payments are identified on the last
page of Schedule H under the heading "Shared Services: Paid to PCB Buffalo."
Payments received by the Buyer or PCB under the terms of the Manufacturing
Agreement shall not be included in revenue for purposes of calculating the
Calculated Pretax Profit, but shall reduce the costs of goods sold in such
calculation on a dollar for dollar basis.
(d) Adjustments for Budget Discrepancies. The foregoing calculation
of the Earnout Payment is based in part on the Budget Projections prepared by
the Seller and attached hereto as Exhibit H. The calculated Earnout Payment
shall also be subject to the following adjustments:
(i) In the event the Budget Projections omit a recurring expense
of greater than Twenty Thousand and 00/100 Dollars ($20,000.00) or a number of
recurring expenses of greater than Five Thousand and 00/100 Dollars ($5,000.00)
each that in the aggregate exceed Twenty Thousand and 00/100 Dollars
($20,000.00), the limitations on costs set forth above shall be appropriately
adjusted to take into account the existence of such recurring expenses, although
the Buyer agrees to use its good faith efforts to minimize the impact of any
such adjustment. The intent of this subparagraph is to make appropriate
adjustments only if a recurring expense item has been omitted from the Budget
Projections. There shall be no adjustments for changes in the levels of
expenses for those items included in the Budget Projections.
(ii) In the event there is a non-recurring expense item during
fiscal 1999 of which LDI or the Seller was aware or should have been aware, but
which was not included in the Budget Projections or provided for in Section
1.4(c) above, LDI or the Seller shall have the right to pay all or part of such
expense item and have it excluded from the Earnout Payment calculations to the
extent paid. If neither the Seller nor LDI was aware or should have been aware
of the non-recurring expense, and hence, such expense was not included in the
Budget Projections, it shall be paid by the Buyer, but excluded from the Earnout
Payment calculations.
(e) Obligations of the Buyer. The Buyer agrees to use its
commercially reasonable good faith efforts to maximize revenues and the
Calculated Pretax Profit earned with the Subject Assets and Business during
fiscal 1999. In particular, the Buyer agrees (i) subject to the provisions and
under the terms of the Shared Services Agreement (as hereinafter defined in
Section 1.10), to offer to employ Jeffrey Cohen as its operations manager for
the Business; and (ii) to not seek to defer revenue until after December 31,
1999, or to accelerate costs to any period prior to December 31, 1999. The
parties shall work in good faith to cooperate in the determination of the
Calculated Pretax Profit and Earnout Payment based on the principles set forth
above. In the event that the parties are unable to agree on the calculation of
the Earnout Payment on or before February 29, 2000, they shall submit the matter
to the determination of Arthur Anderson LLP (the "CPA Firm") and agree to be
bound by such decision. All costs and expenses of the CPA Firm in connection
with the determination shall be shared equally by the parties. In the event
that the parties have not agreed on the calculation by March 15, 2000, the Buyer
shall release and cause to be paid to LDI or the Seller that portion of the
Earnout Payment that is not in dispute. Any part of the Earnout Payment that is
not paid by April 30, 2000, shall thereafter bear interest at seven and one-half
percent (7.5%) per annum until paid in full; provided that, if any part of the
Earnout Payment is not paid within fifteen (15) days of the final determination
of the Earnout Payment, the unpaid balance shall bear interest at twelve percent
(12%) per annum until paid.
(f) Benefit of the Business Subsequent to December 31, 1998.
Beginning January 1, 1999, all revenues of the Business, except those associated
with Excluded Assets, shall be deposited in a newly established bank account
(the "New Account") and all obligations of the Business, to the extent such
obligations would be Assumed Liabilities under Section 1.3, that thereafter
become due shall be paid out of such account. As of the Closing Date, all
rights to such account shall be transferred to the Buyer. The Buyer shall have
the right to review the transactions in such account and all underlying
financial records of LDI and the Seller. To the extent that the Buyer concludes
that there has been an error in the management of such account, the Buyer shall,
as quickly as practicable but in no event more than thirty (30) days subsequent
to the Closing, provide a statement to LDI and the Seller (the "Account
Statement") setting forth in detail the errors and the adjustment proposed by
the Buyer. The Account Statement shall be binding on the parties unless within
ten (10) days of the receipt of such Account Statement by LDI and the Seller,
LDI or the Seller shall deliver to the Buyer notice of their disagreement with
the proposed adjustment. If such notice of disagreement is delivered by LDI or
the Seller, the Account Statement shall become binding on the written agreement
of the parties resolving all disagreements with respect to the Account
Statement. If the Account Statement is not binding by the fifteenth day
following its receipt by LDI and the Seller, the disagreement shall be resolved
pursuant to Section 1.5(g) hereof. To the extent that the binding Account
Statement shows that a higher balance should have been in the New Account as of
the Closing Date, LDI or the Seller shall pay such difference to the Buyer. To
the extent the binding Account Statement shows that a lower balance should have
been in the New Account as of the Closing date, the Buyer shall pay such amount
to LDI or the Seller. All amounts due under this Section 1.4(f) shall be paid
within ten (10) days of the date the Account Statement becomes binding.
(g) Payments into Escrow. The Earnout Payment shall be calculated
quarterly and held in escrow by an Escrow Agent as follows:
Within forty-five (45) days of the end of each calendar quarter, the
Buyer shall calculate the Earnout Payment, pro rata for the year to the end of
that quarter, and pay to Citibank, N.A. as escrow agent (the "Earnout Escrow
Agent") any balance of the Earnout Payment due for the preceding quarter, with
notice to LDI or the Seller. If the Earnout Escrow Agent is holding funds in
excess of the pro rata Earnout Payment, such excess shall be refunded to the
Buyer, with notice to LDI or the Seller. The Buyer shall pay all costs and
expenses of the Earnout Escrow Agent for services it renders.
1.5 Minimum Net Asset Value.
(a) The parties agree that the Purchase Price is in part dependent on
the Net Asset Value (as hereinafter defined) on January 1, 1999, being Three
Million and 00/100 Dollars ($3,000,000.00) (such sum being the "Target Value").
"Net Asset Value," as used herein, shall be equal to LDI's or the Seller's book
value of the Subject Assets on January 1, 1999, less the aggregate amount of the
Assumed Liabilities, all as determined in accordance with GAAP applied on a
basis consistent with the past practice of LDI or the Seller (the "January
Balance Sheet"); provided, however, that such January Balance Sheet and Net
Asset Value set forth therein (i) shall, notwithstanding the actual book value
of the Owned Property, use the agreed upon fair market value of One Million Four
Hundred Thousand and 00/100 Dollars ($1,400,000.00), (ii) shall reflect, to the
extent paid by LDI or the Seller prior to January 1, 1999, the amount of the
bonuses due to employees of the Business for 1998 (the September 30, 1998,
balance of which appears on the line item titled "Bonus Accrual" in the column
headed "Closing Balance Sheet" on Schedule 1.5) and property taxes on the Owned
Property for 1998 (the September 30, 1998, balance of which appears on the line
item titled "Property Tax Payable" on Schedule 1.5) as a payable to LDI (the
"Post-Closing Payable"), assumed by LDI or the Seller and payable in four (4)
equal monthly installments commencing thirty (30) days subsequent to Closing,
(iii) shall not include the book value of any patents, capitalized software, or
acquired technology of the Seller or LDI, and (iv) shall give a fixed value to
the line item "Inventory: Demo" of One Hundred Ninety-One Thousand Two Hundred
Sixty-Four and 63/100 Dollars ($191,264.63). Notwithstanding the foregoing, the
agreed to value of the Owned Property of One Million Four Hundred Thousand and
00/100 Dollars ($1,400,000.00) shall be reduced if the appraisal of the Owned
Property is less than One Million Three Hundred Twenty-Five Thousand and 00/100
Dollars ($1,325,000.00). Such reduction shall be equal to One Million Three
Hundred Twenty-Five Thousand and 00/100 Dollars ($1,325,000.00) less the
appraisal amount. The agreed to value of One Million Four Hundred Thousand and
00/100 Dollars ($1,400,000.00) shall be increased if the appraised value of the
Owned Property is greater than One Million Four Hundred Seventy-Five Thousand
and 00/100 Dollars ($1,475,000.00). Such increase shall be equal to the
appraised value less One Million Four Hundred Seventy-Five Thousand and 00/100
Dollars ($1,475,000.00). Notwithstanding the foregoing, in the event that the
appraisal of the Owned Property is less than One Million Two Hundred Thousand
and 00/100 Dollars ($1,200,000.00), the Seller shall have the option to obtain a
second appraisal of the value of the Owned Property, with such appraisal to be
completed by an independent real estate appraiser, reasonably acceptable to the
Buyer, who is a member of the American Institute of Real Estate Appraisers. In
such event, the appraised value used to determine any reduction or increase in
the agreed to value of the Owned Property as set forth above shall be based on
the average of the two (2) appraisals.
(b) In the event the Net Asset Value as of the January Balance Sheet
is less than the Target Value, the Cash Purchase Price shall be reduced dollar-
for-dollar by the extent to which the Target Value exceeds the Net Asset Value
as of the January Balance Sheet (the "Purchase Price Reduction"). In the event
that the Net Asset Value as of the January Balance Sheet is greater than the
Target Value, the Cash Purchase Price shall be increased dollar-for-dollar by
the extent to which the Net Asset Value exceeds the Target Value as of the
January Balance Sheet (the "Purchase Price Increase"); provided that, to the
extent that the Net Asset Value as of the January Balance Sheet exceeds Three
Million One Hundred Thousand and 00/100 Dollars ($3,100,000.00), any excess
shall not be used to increase the Cash Purchase Price but (i) to the extent that
it is more than Three Million One Hundred Thousand and 00/100 Dollars
($3,100,000.00), but less than Three Million Two Hundred Thousand and 00/100
Dollars ($3,200,000.00), shall be paid to LDI or the Seller by the Buyer on the
same terms as the Post-Closing Payable; and (ii) to the extent that it is more
than Three Million Two Hundred Thousand and 00/100 Dollars ($3,200,000.00),
shall be paid to LDI or the Seller by the Buyer on the same terms as the Note.
The Purchase Price Reduction and the Purchase Price Increase shall each be
referred to generally herein as the "Purchase Price Adjustment."
(c) For purposes of determining appropriate adjustments to the Cash
Purchase Price at Closing, the parties shall estimate the Purchase Price
Adjustment as of January 1, 1999 by such procedures as the parties establish
(the "Purchase Price Adjustment Estimate"). The Purchase Price Adjustment
Estimate shall be made in good faith based on the best estimates of the parties
as of the Closing Date. Final adjustments shall thereafter be made pursuant to
the procedures set forth below.
(d) On or before February 15, 1999, the Seller shall prepare a
statement of the Net Asset Value as of January 1, 1999 (the "Net Asset Value
Statement") and shall submit the same to the Buyer and PCB for purposes of
determining final adjustments pursuant to this Section 1.5. Notwithstanding any
other provision to the contrary of this Section 1.5, if the Net Asset Value
contained on the Net Asset Value Statement exceeds Three Million One Hundred
Thousand and 00/100 Dollars ($3,100,000.00), any excess shall not be used to
increase the Cash Purchase Price but (i) to the extent greater than Three
Million One Hundred Thousand and 00/100 Dollars ($3,100,000.00) but less than
Three Million Two Hundred Thousand and 00/100 Dollars ($3,200,000.00), shall be
paid to LDI or the Seller by the Buyer on the same terms as the Post-Closing
Payable; and (ii) to the extent greater than Three Million Two Hundred Thousand
and 00/100 Dollars ($3,200,000.00) shall be paid to LDI or the Seller by the
Buyer on the same terms as the Note. If the parties cannot agree on the Net
Asset Value Statement within ten (10) days of its submission to the Buyer and
PCB, the disagreement shall be resolved pursuant to Section 1.5(g) hereof.
(e) Within ten (10) days after the date the parties agree on the Net
Asset Value Statement or, if there is a disagreement with respect to the Net
Asset Value Statement, ten (10) days after such disagreement is finally resolved
pursuant to Section 1.5(g) hereof, the parties shall make the final payments as
required by this Section 1.5(e). In the event the Purchase Price as adjusted by
the final determination of the Purchase Price Adjustment, is less than the
Purchase Price based on the Purchase Price Adjustment Estimate, LDI or the
Seller shall pay to the Buyer an aggregate amount equal to such difference. In
the event the final determination of the Purchase Price as adjusted by the final
determination of the Purchase Price Adjustment is greater than the Purchase
Price based on the Purchase Price Adjustment Estimate, the Buyer shall pay to
LDI or the Seller an amount equal to such difference.
(f) Any payment under this Section 1.5 or under Section 1.4 shall be
made in immediately available funds. Without limiting any other remedies
available to the Buyer, in the event that LDI or the Seller shall fail to make
timely payment of any amount owed to the Buyer pursuant to this Section 1.5
after a final determination of the Purchase Price, or under Section 1.4 after a
final determination of the Account Statement, the Buyer may set off such amount
against the Note and/or the Earnout Payment.
(g) Disagreements with respect to Net Asset Value Statement or the
Account Statement not resolved within fifteen (15) days of the submission of the
Net Asset Value Statement or the Account Statement, as the case may be, to LDI
and the Seller shall be submitted to the CPA Firm for resolution, whose
determination shall be conclusive and binding on the Buyer and the Seller. The
Buyer and the Seller shall use their best efforts to cause the CPA Firm to
render its decision within thirty (30) days after the parties' submission of the
dispute. All costs and expenses of the CPA Firm in connection with the
submission shall be shared equally by the parties.
(h) An example of the calculation of the Net Asset Value pursuant to
this Section 1.5, using the asset values included in the Latest Balance Sheet,
as hereinafter defined, is attached hereto as Schedule 1.5.
1.6 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Subject Assets in accordance with Schedule 1.6 hereto. The parties
shall complete and separately file Form 8594 with their respective federal
income tax returns for the tax year in which the Closing Date occurs in
accordance with such allocation and guidelines, and none of the parties shall,
without the written consent of the other parties hereto, take a position on any
tax return before any governmental agency charged with the collection of any
such tax, or in any judicial proceeding, that is in any manner inconsistent with
the terms of such allocation.
1.7 Assumption of Contracts. At the Closing, the Buyer shall assume those
obligations of LDI and the Seller that are due or that are to be performed after
the Closing Date under the Contracts; provided, however, that the Buyer shall
assume no liability or obligation of LDI or the Seller that was due or was to be
performed prior to the Closing Date, except as accrued on the Net Asset Value
Statement.
1.8 No Other Assumption of Liabilities. Except as specifically provided
in Sections 1.3 and 1.7, neither PCB nor the Buyer will assume, be liable for,
or become responsible for any liability of LDI or the Seller of any nature,
whether accrued, absolute, contingent or otherwise.
1.9 Manufacturing Agreement. At the Closing, the parties shall enter into
an agreement in the form of Exhibit B setting forth the terms and conditions
pursuant to which the Buyer will agree to manufacture for LDI, subsequent to the
Closing, certain components (the "Manufacturing Agreement").
1.10 Shared Services Agreement. At the Closing, the parties shall enter
into a Shared Services Agreement in the form of Exhibit C, whereby the Buyer
shall appoint Jeffrey Cohen as operations manager (subject to Mr. Cohen's
acceptance of such position) allow LDI to use certain systems of the Business,
and allow LDI to utilize the services of certain employees of the Buyer through
December 31, 1999 (the "Shared Services Agreement").
1.11 Lease. At the Closing, the parties shall enter into a lease
agreement whereby the Buyer shall lease to LDI a portion, as further described
on Exhibit D, of the Owned Property (the "Lease Agreement"). Such Lease
Agreement shall include such terms and conditions set forth on Exhibit D and
shall otherwise be in a form reasonably acceptable to the parties.
1.12 Accounts Receivable.
(a) The Buyer shall collect all the Accounts Receivable for its
benefit after the Closing. Any payments received by the Buyer from an account
debtor shall be applied against such account debtor's account to the oldest
account first, except in cases where a particular account is disputed by the
account debtor or where an account debtor has otherwise designated the account
being paid. The Buyer shall use commercially reasonable efforts (excluding
litigation or referral to a collection agency) to collect such Accounts
Receivable on or before May 30, 1999 and will not, without prior written consent
of LDI, agree to forgive or compromise any of the Accounts Receivable.
(b) In the event any Accounts Receivable, other than the receivable
from HMMH in relation to the variable royalty (the "HMMH Receivable"), are
uncollected as of May 30, 1999 (the "Repurchase Date"), then LDI or the Seller
shall repurchase such uncollected Accounts Receivable (the "Uncollected
Accounts") from the Buyer at an amount equal to (i) the book value, net of
reserves, for the Accounts Receivable on the final Net Asset Value Statement
less (ii) all amounts collected by the Seller or the Buyer on the Accounts
Receivable subsequent to December 31, 1998, and prior to the Repurchase Date and
less (iii) the book value of the HMMH Receivable at the Repurchase Date. LDI or
the Seller shall remit payment to the Buyer of the purchase price for such
Uncollected Accounts within fifteen (15) days after the date the Buyer provides
a statement of such Uncollected Accounts. Such payment shall be made in
immediately available funds or by offset against the Note or any Earnout
Payment. Upon receipt of such purchase price, the Buyer shall promptly return
to LDI or the Seller all records regarding the Uncollected Accounts and all
amounts received with respect to the Accounts Receivable subsequent to the
Repurchase Date shall be for the benefit of LDI or the Seller. The parties
shall at all times cooperate with the other as each may reasonably request with
respect to collection of the Accounts Receivable. If either party receives any
payment at any time to which the other is entitled, such party shall hold such
payment in trust for the other, and immediately transmit such payment to the
other. Notwithstanding any of the foregoing, the Buyer may elect, at its
option, to retain any or all of the Uncollected Accounts for its own benefit by
not providing LDI or the Seller with a statement of the Uncollected Accounts
within ten (10) days after the Repurchase Date or by excluding those Uncollected
Accounts that it wishes to retain and in such event, LDI or the Seller shall not
repurchase such Uncollected Accounts. All Uncollected Accounts retained by the
Buyer shall be credited against the book value, net of reserves, of the Accounts
Receivable on the final Net Asset Value Statement at full face value. The HMMH
Receivable shall be subject to repurchase by LDI or the Seller in accordance
with this Section 1.12 in the event that it remains uncollected in full or in
part on December 31, 1999, and the sum of the (i) amounts collected by the
Seller or the Buyer subsequent to December 31, 1998, with respect to the
Accounts Receivable (excluding any amounts collected by the Buyer on Uncollected
Accounts that the Buyer elected to retain and for which LDI or the Seller was
given a credit as of the Repurchase Date for full face value); (ii) any
repurchase amount paid to the Buyer by LDI or the Seller; and (iii) the face
value of any Uncollected Accounts retained by the Buyer and for which LDI or the
Seller was given a credit as of the Repurchase Date, is less than the book
value, net of reserves, for the Accounts Receivable on the final Net Asset Value
Statement. The repurchase price for the HMMH Receivable shall equal the amount
such sum is less than the book value, net of reserves, of the Accounts
Receivable on the final Net Asset Value Statement. The repurchase price for the
HMMH Receivable shall be paid; the election of the Buyer to retain the HMMH
Receivable; and the benefit for whom the HMMH Receivable is collected, shall all
be on the same terms as set forth above for the repurchase of the Uncollected
Accounts.
ARTICLE II
CLOSING
2.1 Closing. The sale and purchase of the Subject Assets shall be
consummated at a closing (the "Closing") to be held at the offices of Kruse,
Landa & Maycock, L.L.C., 50 West Broadway, Eighth Floor, Salt Lake City, Utah
84101 on February 15, 1999, 10:00 a.m. or such date and time as the parties
hereto shall mutually agree (the "Closing Date"). The Closing shall be
effective as of 12:01 a.m. on the Closing Date.
2.2 Closing Documentation. At the Closing,
(a) LDI or the Seller will deliver to the Buyer:
(i) a duly executed Bill of Sale and Assignment Agreement in the
form of Exhibit E hereto and such other instruments as the Buyer shall
reasonably request in order to effectively transfer to and vest in the Buyer
good and marketable title to all of the Subject Assets, free and clear of all
liabilities and all liens, encumbrances, security interests, claims and other
restrictions, other than the Assumed Liabilities;
(ii) a duly executed and acknowledged special warranty deed, in
proper recordable form, containing both a record and perimeter (surveyed)
description, conveying good and marketable fee simple title to the Owned
Property to the Buyer, free and clear of all liens and encumbrances except for
Permitted Encumbrances (as hereinafter defined);
(iii) the Title Insurance Policy (as hereinafter defined) dated
as of the Closing in the form described in Section 5.8(a);
(iv) the duly executed certificates required pursuant to Section
8.1(d) hereof;
(v) the duly executed Manufacturing Agreement;
(vi) the duly executed Shared Services Agreement;
(vii) the duly executed Lease Agreement;
(viii) the duly executed opinion of counsel required pursuant to
Section 8.1(e);
(ix) Schedule 1.1(d) updated to the Closing Date; and
(x) such other documents as the Buyer may reasonably request.
(b) The Buyer will deliver to LDI or the Seller:
(i) The Initial Cash Payment in immediately available funds by
wire transfer;
(ii) the duly executed Note;
(iii) the duly executed Manufacturing Agreement;
(iv) the duly executed Lease Agreement; and
(v) the duly executed Shared Services Agreement; and
(vi) the duly executed certificate required pursuant to Section
9.1(b) hereof.
2.3 Shareholder Approval. LDI agrees to prepare and file with the United
States Securities and Exchange Commission (the "SEC") a proxy statement meeting
the requirements of the Securities and Exchange Act of 1934, as amended, and the
regulations promulgated thereunder (collectively, the "Exchange Act"). Such
proxy statement (the "SEC Filing") shall be filed with the SEC within twenty
(20) days of the execution of this Agreement and shall be distributed to the
shareholders of LDI and a shareholders' meeting (the "Meeting") noticed as
quickly thereafter as reasonably practicable. The board of directors of LDI
shall recommend the shareholders vote in favor of the transactions contemplated
by this Agreement, subject only to the provisions of Section 2.4.
2.4 No Shop.
(a) From and after the date hereof until the Closing Date, neither
LDI nor the Seller shall, and they shall not permit their respective officers,
employees, representatives, and other advisers to, directly or indirectly,
(i) solicit, initiate, or engage in discussions or negotiations
with any person, encourage submission of any inquiries, proposals, or offers by,
or take any other action intended or designed to facilitate the efforts of any
person, other than the Buyer, relating to the possible acquisition of the
Business; or
(ii) provide nonpublic information with respect to the Business,
or afford any access to the properties, books, or records of the same, to
anyone, other than the Buyer, that may wish to propose or pursue acquisition of
the Business; provided, however, that prior to the Meeting in response to an
unsolicited bona fide offer to purchase the Business (a "Competing Proposal")
that in the good faith opinion of the board of directors of LDI would reasonably
be expected to result in a Superior Proposal (as defined below), LDI and the
Seller may: (A) furnish such information or access with respect to the Business
to the person making such Competing Proposal pursuant to a customary
confidentiality agreement with such person; or (B) participate in negotiations
regarding such Competing Proposal.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding sentence by any officer, director, or
employee or other adviser or representative of LDI or the Seller or any of their
subsidiaries shall be deemed to be a breach of this paragraph by LDI or the
Seller.
If, prior to the Meeting, LDI or the Seller has received a Superior Proposal,
the board of directors of LDI may: (A) withdraw or modify its recommendation of
the transactions contemplated by this Agreement; (B) approve or recommend a
Superior Proposal; or (C) cause LDI or the Seller to enter into an agreement to
effect a Superior Proposal, but in each case only if: (x) the board of
directors of LDI determines in good faith that such action is necessary in order
for such board to act in a manner consistent with its fiduciary duties under
applicable law, and (y) LDI and the Seller shall have furnished the Buyer with
written notice at least five (5) business days prior to the date any such
actions are proposed to be taken specifying which actions are proposed to be
taken and after taking into account modifications to this Agreement proposed by
the Buyer during such five (5) business day period, such Competing Proposal
would still constitute a Superior Proposal. In addition, if the board of
directors of LDI takes any of the actions permitted by the preceding sentence
with respect to any Competing Proposal, LDI or the Seller must, prior to the
taking of such action, pay, or cause to be paid, to the Buyer the Termination
Fee (as defined in Section 10.2). The term "Superior Proposal" shall mean any
bona fide written Competing Proposal that has the following characteristics:
(1) it is a definitive proposal to acquire the Business, directly or indirectly,
for consideration consisting of cash and/or readily marketable securities; (2)
the terms of such proposal in the good faith judgment of the board of directors
of LDI are more favorable to LDI and its shareholders than those proposed by the
Buyer; and (3) the transactions envisioned by such proposal, in the good faith
judgment of the board of directors of LDI are readily financeable, are
reasonably likely to be approved by the shareholders of LDI, and are reasonably
likely to be consummated without unreasonable delay compared to the transactions
contemplated by this Agreement.
(b) LDI and the Seller shall promptly advise the Buyer orally and in
writing of:
(i) any request for information which may relate to a Competing
Proposal;
(ii) any Competing Proposal;
(iii) any inquiry with respect to or that could lead to any
Competing Proposal; or
(iv) any action taken in accordance with Section 2.4(a),
including in each case the material terms and conditions of such request,
Competing Proposal, inquiry, or action, the identity of the person making any
such, request, Competing Proposal, or inquiry or with respect to which such
action is taken and whether or not LDI or the Seller believes any Competing
Proposal so reported is or could result in a Superior Proposal. LDI and the
Seller will keep the Buyer fully and timely informed of the status and details
(including amendments or proposed amendments) of any such request, Competing
Proposal, inquiry, or action and any restrictions relating thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF LDI AND THE SELLER
3.1 LDI and the Seller jointly and severally represent and warrant to PCB
and the Buyer as follows and confirm that PCB and the Buyer are relying upon the
accuracy of each such representation and warranty in connection with it's the
purchase of the Business and Subject Assets and the completion of the
transactions contemplated thereby:
(a) Corporate Status. LDI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada and has full
power and authority to own, operate and lease its properties as presently owned,
operated and leased and to carry on its business as now and heretofore
conducted. The Seller is a wholly-owned subsidiary of LDI, is a corporation
duly organized, validly existing, and in good standing under the laws of the
state of Utah, and has full power and authority to own, operate, and lease its
properties as presently owned, operated, and leased and to carry on its business
as now and heretofore conducted. LDI and the Seller have delivered to the Buyer
true and complete copies of their respective articles of incorporation and
bylaws. The Seller is qualified to do business, is in good standing and has all
required and appropriate licenses in each jurisdiction in which the conduct of
the Business or the ownership of the Subject Assets requires it to be so
qualified. Schedule 3.1(a) sets forth all jurisdictions where the Seller is
qualified to do business.
(b) Authority Relative to Agreement. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which LDI or the Seller is a party (collectively, the "Ancillary Agreements")
and consummation by LDI and the Seller of the transactions contemplated hereby
and thereby have been duly and effectively authorized by all necessary corporate
action, except for the approval of LDI's shareholders. This Agreement has been
duly executed and delivered by LDI and the Seller and constitutes, and the
Ancillary Agreements when executed will constitute, legal, valid and binding
obligations of LDI and the Seller enforceable against LDI or the Seller,
respectively, in accordance with their respective terms, except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other similar laws affecting the enforcement of
creditors rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court in which such proceedings may be brought.
(c) Effect of Agreement. Except as set forth on Schedule 3.1(c), the
execution, delivery and performance of this Agreement and the Ancillary
Agreements by LDI and the Seller and the consummation by each such party of the
transactions contemplated hereby and thereby (i) except with respect to the SEC
Filing, do not require the filing with, or the consent, waiver, approval,
license or authorization of any person, government agency or public or
regulatory authority; (ii) do not violate, with or without the giving of notice
or the passage of time or both, any provision of law applicable to LDI or the
Seller; (iii) do not conflict with or result in a breach of LDI's or the
Seller's certificate of incorporation or by-laws, or, with or without the giving
of notice or the passage of time or both, any mortgage, deed of trust (in the
case of both the mortgage and deed of trust, subject to the approval of the
lender to assumption of the mortgage by the Buyer), license, indenture or other
agreement or other instrument (in the case of certain Contracts identified on
Schedule 3.1(l) and the leases assumed hereunder, subject to the consent of the
other parties thereto to the assumption by the Buyer), or any order, judgment,
decree, statute, regulation or any other restriction of any kind or character,
to which LDI or the Seller is a party or by which LDI or the Seller or any of
the Subject Assets may be bound or give to others any right to terminate, or
result in termination of any provision of such instruments; and (iv) do not
result in the creation of any liability, lien, encumbrance, claim or other
restriction upon any of the Subject Assets.
(d) Financial Statements.
(i) Attached in Schedule 3.1(d) are (A) the audited consolidated
balance sheets of LDI as of December 31, 1997, and the related consolidated
statements of operations, cash flows, and stockholders' equity for the fiscal
year then ended (including the notes thereto) (the "Audited Financial
Statements"); and (B) the unaudited balance sheet of the Seller with respect to
the Business (including the Excluded Assets) dated August 31, 1998 (the "August
Balance Sheet"), and the unaudited statements of operations, and cash flows for
the period then ended (the "August Financial Statements"), and (C) the unaudited
balance sheet of the Seller with respect to the Business (including the Excluded
Assets) (the "Latest Balance Sheet") dated as of September 30, 1998 (the "Latest
Balance Sheet Date"), and the unaudited statements of operations, and cash flows
for the period then ended (the "Latest Financial Statements"); and (D) the
unaudited balance sheet of the Seller with respect to the Business (the "October
Balance Sheet") dated as of October 31, 1998, and the unaudited statements of
operations and cash flows for the period then ended (the "October Financial
Statements").
(ii) The Audited Financial Statements (A) were prepared in
accordance with the books and records of LDI; (B) were, except as reflected in
the notes, prepared in accordance with GAAP applied on a basis consistent with
that of similar periods for preceding years; (C) fairly present the Seller's
financial condition and the results of LDI's operations as of the relevant dates
thereof and for the periods covered thereby; (D) contain and reflect all
necessary adjustments and accruals for a fair presentation of the results of
LDI's operations for the periods covered by said financial statements; (E)
contain and reflect adequate provisions for all reasonably anticipated
liabilities for all taxes, federal, state, local or foreign, with respect to the
periods then ended and all prior periods; and (F) with respect to contracts and
commitments for the sale of goods or the provision of services by the Seller,
contain and reflect adequate reserves for all reasonably anticipated losses and
costs and expenses in excess of expected receipts.
(iii) Except as set forth on Schedule 3.1(d)(iii), the August
Financial Statements, the Latest Financial Statements and the October Financial
Statements (A) were prepared in accordance with the books and records of the
Seller; (B) were prepared in accordance with GAAP, except for footnote
disclosure, year-end accruals and other audit adjustments that would be
reflected in a year-end audited statement; (C) fairly present the financial
condition of the Business (subject to adjustments for the Excluded Assets,
including, without limitation, cash and the machine shop assets) and the results
of the operations of the Business as at the relevant dates thereof and for the
periods covered thereby; (D) contain and reflect all necessary adjustments and
accruals for a fair presentation of the results of the operations of the
Business for the periods covered by said financial statements, except for year
end accruals and other audit adjustments that would be reflected in a year-end
audited statement; and (E) contain and reflect adequate provisions for all
reasonably anticipated liabilities for all taxes, federal, state, local or
foreign, with respect to the periods then ended.
(e) Absence of Certain Changes or Events. Since the Latest Balance
Sheet Date, except as specified in Schedule 3.1(e) hereto, the Seller has not,
with respect to the Business or the Subject Assets:
(i) undergone any material adverse change in its condition
(financial or other), properties, assets, liabilities, business, operations or
prospects except changes in the ordinary and usual course of its business and
consistent with its past practice and which have not been, either in any case or
in the aggregate, materially adverse to it;
(ii) mortgaged, pledged or subjected to any lien, lease,
security interest, encumbrance or other restriction any of the Subject Assets;
(iii) acquired or disposed of any interest in any asset or
property with respect to the Business, other than Excluded Assets, except the
purchase of materials and supplies and the sale of inventory in the ordinary and
usual course of the Business and consistent with its past practice;
(iv) forgiven or canceled any debt or claim with respect to the
Business, waived any right with respect to the Business, or, except in the
ordinary and usual course of the Business and consistent with its past practice,
incurred or paid any liability or obligation;
(v) adopted or amended any profit sharing plan, agreement,
arrangement or practice for the benefit of any director, officer or employee of
the Business or changed the compensation (including bonuses) to be paid to any
director, officer, or employee of the Business;
(vi) suffered any damage, destruction or loss (whether or not
covered by insurance) which materially adversely affects the Business or the
Subject Assets;
(vii) amended or terminated any contract, agreement, or lease
related to the Business;
(viii) experienced any labor difficulty or loss of employees or
customers that adversely affects the Business;
(ix) entered into or amended any collective bargaining
agreement;
(x) sold or granted or transferred to any party or parties any
contract or license, or granted an option to acquire a license to manufacture or
sell any of the products manufactured or sold in the Business, or to use any
trademarks, service marks, trade names, copyrights, patents or any pending
applications for any of the foregoing, or any of its trade secrets or know-how
of the Business;
(xi) undergone any reduction or increase (inclusive of any
write-downs or write-offs) in the inventory levels of the Business, except in
the ordinary course of business and consistent with past practice;
(xii) undergone any reduction or increase in the Accounts
Receivable, except in the ordinary course of business and consistent with past
practice;
(xiii) increased or decreased prices charged to customers of the
Business, except in the ordinary course of business and consistent with past
practice;
(xiv) without limiting the generality of any of the foregoing,
entered into any transaction except in the ordinary and usual course of the
Business and consistent with its past practice; or
(xv) agreed to, permitted or suffered any of the acts,
transactions or other things described in Subsections (i) through (xiv) of this
Section 3.1(d).
(f) Liabilities/Creditors. Neither LDI nor the Seller has any
liabilities or obligations of any nature with respect to the Business, whether
accrued, absolute, contingent or otherwise, including without limitation,
liabilities for federal, state, local or foreign taxes, except (i) as set forth
in the Latest Financial Statements or as identified in Schedule 3.1(f) hereto;
and (ii) trade payables incurred in the ordinary and usual course of its
business consistent with past practice since the Latest Balance Sheet Date.
(g) Insurance. Included in Schedule 3.1(g) hereto is a list of all
policies of property, fire, liability, life and other forms of insurance, and
indemnity bonds, carried by LDI or the Seller with respect to the Business in
the last three (3) years identifying the nature of risks covered and the amount
of coverage in each case. Schedule 3.1(g) also accurately identifies each such
policy that is currently in effect and the annual and other premiums payable
from time to time thereunder. LDI or the Seller has given due and timely notice
of any claim and of any occurrence known to LDI or the Seller which may give
rise to a claim which may be covered by any such insurance and has otherwise
complied in all respects with the provisions of such policies.
(h) Tax Matters. Except as disclosed in Schedule 3.1(h),
(i) LDI and the Seller has duly filed with the appropriate
foreign, federal, state and local governmental agencies all tax returns and
reports which are required to be filed, and has paid in full all taxes
(including interest and penalties) owed by it and now due;
(ii) All tax returns filed by LDI or the Seller for any open tax
years constitute complete and accurate representations of LDI's or the Seller's,
as appropriate, tax liabilities for such years and accurately set forth all
items (to the extent required to be included or reflected in such returns)
relevant to its future tax liabilities, including the tax basis of its
properties and assets;
(iii) Adequate accrual has been made in the Latest Balance Sheet
for all the accrued and unpaid foreign, federal, state and local taxes
(including interest and penalties) of LDI or the Seller related to the Business
for the period then ended whether or not yet due and payable and whether or not
disputed;
(iv) Within the last four (4) years, neither the tax returns of
LDI nor those of the Seller have been audited by the Internal Revenue Service or
any other governmental authority;
(v) Neither LDI nor the Seller has executed or filed with the
Internal Revenue Service or any other taxing authority any agreement extending
the period for assessment or collection of any taxes;
(vi) Neither LDI nor the Seller is a party to any pending action
or proceeding, nor is any action or proceeding threatened, by any governmental
authority for assessment or collection of taxes, and no claim for assessment or
collection of taxes, has been asserted against LDI or the Seller; and
(vii) Neither LDI nor the Seller has received notice of any
intention to audit any of its tax returns.
(i) Real Property. Schedule 3.1(i): (a) contains the legal
description and street address of, and indicates the owner of the Owned Property
and also references any other real property used by LDI or the Seller in the
Business over the last five (5) years; and (b) sets forth a list of all title
insurance policies, commitments and deeds relating to the Owned Property in
possession of LDI or the Seller, all of which policies, commitments and deeds
have previously been delivered or made available to the Buyer by LDI or the
Seller. With respect to such Owned Property: (a) LDI or the Seller has or will
have immediately prior to the Closing good and marketable title, free and clear
of any liens, encumbrances, covenants, conditions, easements and exceptions
other than the Permitted Exceptions (as hereinafter defined), and liens for real
estate taxes not yet due and payable; (b) there are no pending or, to the
knowledge of LDI or the Seller, threatened condemnation proceedings, suits or
administrative actions relating to the Owned Property or other matters affecting
adversely the current use, occupancy or value thereof; (c) all facilities have
received all approvals of governmental authorities (including licenses and
permits) required in connection with the ownership or operation thereof and have
been operated and maintained in accordance with all applicable laws, ordinances,
rules and regulations; (d) except for easements listed as Permitted Exceptions,
there are no contracts, agreements or other arrangements granting to any party
or parties the right of use or occupancy of any portion of the Owned Property,
and there are no parties (other than LDI or the Seller) in possession of any of
the Owned Properties; (e) there are no outstanding options or rights of first
refusal or similar rights to purchase the Owned Property or any portion thereof
or interest therein; and (f) all improvements, buildings, fixtures and systems
located on the Owned Property are suitable for their current use and all such
items, including, but not limited to, the mechanical systems, are in good
condition and repair, and all such items are free from all structural defects.
(j) Environmental Matters. Except as set forth in on Schedule
3.1(j):
(i) During the period of ownership or control of the Premises
(as hereinafter defined) by LDI and the Seller, and, to LDI's and the Seller's
best knowledge, prior to such time, the Premises have not been used for the
storage, treatment, generation, transportation, processing, handling, production
or disposal of any Hazardous Substance (as hereinafter defined), except as
allowed by law, or as a landfill or other waste disposal site or for military
purposes or for the storage of petroleum or petroleum-based fuel products.
(ii) Aboveground storage tanks for any Hazardous Substance or
underground storage tanks are not, and, to LDI's and the Seller's best
knowledge, prior to LDI's and the Seller's ownership or occupancy of the
Premises have not been, located on the Premises.
(iii) The soil, subsoil, bedrock, surface water and groundwater
of the Premises are free of any Hazardous Substances.
(iv) There has been no Release (as hereinafter defined) from
LDI's or the Seller's operations nor, to the LDI's or the Seller's best
knowledge, is there the threat of a Release on, at or from the Premises, or to
LDI's or the Seller's best knowledge from any property adjacent to or within the
immediate vicinity of the Premises which through soil, subsoil, bedrock, surface
water or groundwater migration could come to be located on the Premises, and
neither LDI nor the Seller has received any form of notice or inquiry from any
federal, state or local governmental agency or authority, any operator, tenant,
subtenant, licensee or occupant of the Premises or any property adjacent to or
within the immediate vicinity of the Premises or any other person with regard to
a Release or the threat of a Release on, at or from the Premises or any property
adjacent to or within the immediate vicinity of the Premises.
(v) All Environmental Permits (as hereinafter defined) with
respect to the Premises have been obtained and are in full force and effect.
(vi) No event has occurred with respect to the Premises which,
with the passage of time or the giving of notice or both, would constitute a
violation of any applicable Environmental Law (as hereinafter defined) or non-
compliance with any Environmental Permit.
(vii) There are no agreements, consent orders, decrees,
judgments, license or permit conditions or other orders or directives of any
federal, state or local court, governmental agency or authority relating to
Environmental Laws and pertaining to the past, present or future ownership, use,
operation, sale, transfer or conveyance of the Premises which require any change
in the present condition of the Premises or any work, repairs, construction,
containment, clean-up, investigations, studies, removal or other remedial action
or capital expenditures with respect to the Premises.
(viii) There are no actions, suits, claims or proceedings,
pending or threatened, which could cause the occurrence of expenses or costs of
any name or description or which seek money damages, injunctive relief, remedial
action or any other remedy that arise out of, relate to or result from (A) a
violation or alleged violation of any applicable Environmental Law or non-
compliance or alleged non-compliance with any Environmental Permit, (B) the
presence of any Hazardous Substance or a Release or the threat of a Release on,
at or from the Premises or any property adjacent to or within the immediate
vicinity of the Premises, or (C) human exposure to any Hazardous Substance,
noises, vibrations or nuisances of whatever kind to the extent the same arise
from the condition of the Premises or the ownership, use, operation, sale,
transfer or conveyance thereof.
(ix) The Seller's current operations are in compliance with, and
neither LDI nor the Seller has been charged with, has not received any notice of
alleged non-compliance with, nor is under investigation for its failure to
comply in any respect with, and has in the past complied with, any and all
statutes, laws, ordinances, rules, regulations, permits, licenses, orders and/or
directives of any Governmental Agency, governing or regulating the presence,
use, generation, storage, transportation, handling, transferring, disposing,
discharging or emitting of any materials or substances, or constituents or
components thereof, that have been determined by a Governmental Agency to be of
a hazardous, toxic or pollutive nature ("Regulated Materials").
(x) Neither LDI nor the Seller has, at the Premises or
otherwise, nor, to LDI's and the Seller's best knowledge, has any third party at
the Premises, disposed of, abandoned, dumped, released, discharged, buried,
emitted, or improperly stored any Regulated Materials, including, but not
limited to, any Hazardous Substance.
(xi) Except in a manner that is in compliance with applicable
law, no employee of LDI or the Seller has been exposed to any Regulated
Materials (excluding asbestos) in the course of employment with LDI or the
Seller.
(xii) Without limiting the scope of the foregoing, LDI and the
Seller has made available to the Buyer any and all environmental audit or
similar reports and analyses within the possession or control of LDI or the
Seller concerning the environmental compliance status of LDI, the Seller or the
Premises and any presence thereon of any Hazardous Substances, pollutants, and
contaminants. The attached Schedule 3.1(j) is a complete list of all such
environmental audits and all Environmental Permits presently required for the
ownership, use or operation of the Premises and the businesses located thereon.
(xiii) All capitalized terms used in this Section 3.1(j) and not
heretofore defined shall have the meanings set forth below:
"Environment" means any water or water vapor, land surface
or subsurface, air, fish, wildlife, biota and all other natural resources.
"Environmental Laws" means all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances and codes relating to the protection, preservation or
restoration of the Environment or governing the exposure to, use, storage,
treatment, generation, transportation, processing, handling, production or
disposal of Hazardous Substances and the rules, regulations, policies,
guidelines, interpretations, decisions, orders and directives of federal, state
and local governmental agencies and authorities. The term Environmental Laws
includes, without limitation, the following statutes, each as amended (i) the
federal Clean Air Act; (ii) the federal Clean Water Act; (iii) the federal
Resource Conservation and Recovery Act of 1976 ("RCRA"); (iv) the federal
Comprehensive Environmental Response Compensation and Liability Act of 1980
("CERCLA"); (V) the federal Toxic Substances Control Act; (vi) the federal
Occupational Safety and Health Act of 1970; (vii) the federal Safe Drinking
Water Act; and (viii) the federal Insecticide, Fungicide and Rodenticide Act.
"Environmental Permits" means all permits, licenses,
approvals, authorizations, consents, or registrations required by any applicable
Environmental Law in connection with the ownership, use and/or operation of the
Premises for the storage, treatment, generation, transportation, processing,
handling, production or disposal of Hazardous Substances or the sale, transfer
or conveyance of the Premises.
"Governmental Agency" means any federal, state, local or
foreign political subdivision, court, agency, or any other entity, body,
organization or group, exercising any executive, legislative, judicial, quasi-
judicial, regulatory or administrative function of government.
"Hazardous Substance" means, without limitation, any
flammable materials, explosives, radon, radioactive materials, asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum
based products, methane, hazardous materials, hazardous wastes, hazardous or
toxic substances or related materials, as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended (42
U.S.C. Sections 9601, et seq. (CERCLA)), the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Sections 1801, et seq.), the Resource Conservation
and Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.), the Toxic
Substances Control Act, as amended (15 U.S.C. Sections 2601, et seq.), or any
other applicable Environmental Law and regulations adopted and publications
promulgated thereunder.
"Improvements" means the buildings, structures and other
improvements (if any) located upon the Premises.
"Premises" means any or all land now or previously owned,
used, managed, occupied, possessed, leased or controlled by LDI or the Seller
and used in the Business, including, but not limited to, the Owned Property.
"Release" has the same meaning as given to that term in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. Sections 9601, et seq.), and the regulations promulgated
thereunder.
(k) Title to and Condition of Properties and Assets. All of the
vehicles, machinery and equipment and other personal property, tangible and
intangible, owned or leased by LDI or the Seller and used in the Business are
included within the Subject Assets, except for the Excluded Assets. Except as
specifically described in Schedule 3.1(k) hereto:
(i) LDI and/or the Seller has good and marketable title to all
the Subject Assets, including all such property reflected in the Latest
Financial Statements, other than the Subject Assets held pursuant to leases,
free and clear of all liens, leases, encumbrances, claims under bailment and
storage agreements, conditional sales contracts, security interests, charges and
other restrictions.
(ii) No officer or director of LDI or the Seller owns, directly
or indirectly, in whole or in substantial part, any personal property presently
used by LDI or the Seller in the Business that is material to the Business;
(iii) All tangible personal property presently used by LDI or
the Seller in the Business and leased by LDI or the Seller is in such condition
that upon the return of such property to its owner in its present condition and
payment of all required amounts for the remaining lease term and at the end of
the relevant lease term or as otherwise contemplated by the applicable
agreement, the obligations of LDI or the Seller to such owner or lessor will be
discharged;
(iv) All tangible personal property included in the Subject
Assets is in good condition and repair, reasonable wear and tear excepted, has
been well maintained, conforms with all applicable laws, ordinances and
regulations (including but not limited to occupational health and safety
requirements), and is fit for its intended use; and neither LDI nor the Seller
know of any pending or threatened change of any applicable ordinance, regulation
or zoning or other law, standard or requirement with which any of such property
would not conform; and
(v) LDI and the Seller own or otherwise have the right to use
all of the tangible personal properties now used by them in the operation of the
Business which are sufficient to allow LDI or the Seller to fulfill all current
customer orders for products currently manufactured in the Business.
(l) Contracts; No Defaults. Except as set forth in Schedule 3.1(l),
neither LDI nor the Seller is a party to or subject to any agreement, contract
or commitment (whether oral or written) with respect to the Business except the
Contracts. True and complete copies of each Contract have been delivered to the
Buyer, or where they are oral, true and complete written summaries thereof, are
set forth in Schedule 3.1(l). Except as set forth in Schedule 3.1(l):
(i) Each of the Contracts is a valid and binding agreement of
LDI or the Seller and, to the best knowledge of LDI or the Seller, all other
parties thereto;
(ii) LDI or the Seller has fulfilled all obligations required
pursuant to each Contract to have been performed by LDI or the Seller prior to
the date hereof;
(iii) There has not occurred any default under any of the
Contracts on the part of LDI or the Seller or, to the best of LDI's or the
Seller's knowledge, on the part of any other party thereto, nor has any event
occurred which, with the giving of notice or the lapse of time or both, would
constitute any default on the part of LDI or the Seller or, to the best of LDI's
or the Seller's knowledge, has any event occurred which with the giving of
notice or the lapse of time or both, would constitute any default on the part of
any other party to any of the Contracts;
(iv) Neither LDI nor the Seller is restricted, or purported to
be restricted by any Contract, from carrying on the Business anywhere in the
world; and
(v) Each Contract may be assigned to the Buyer without the
consent of any person and without giving notice to any person regarding this
Agreement or the sale and transfer of the Subject Assets or the other
transactions contemplated hereby.
(m) Leases. Schedule 3.1(m) contains a true and complete list of all
leases (including capital leases) and lease-purchase arrangements pursuant to
which LDI or the Seller leases any personal property from others with respect to
the Business, including the general terms thereof. Such Schedule 3.1(m)
specifies which of such leases are capital leases. All such leases which are
required to be capitalized by GAAP have been so accounted for in LDI's and the
Seller's financial statements. True and complete copies of all such leases have
been provided to the Buyer.
(n) Inventory. Subject to the reserve included on the Latest Balance
Sheet, the Inventory consists of items of good and merchantable quality, useable
in the ordinary and usual course of the Business as conducted on the date of
this Agreement and with respect to work in process or finished goods, materially
complies with customer orders and specifications therefor, and the quantities of
all inventory are reasonable and warranted in the present circumstances of the
Business. The amounts at which inventories are carried on the Latest Financial
Statements and on the books of LDI and the Seller reflect the normal inventory
valuation policy of LDI and the Seller of valuing inventory on the basis of
first in first out ("FIFO") in accordance with GAAP.
(o) Accounts Receivable. Subject to the reserve included on the
Latest Balance Sheet, the accounts receivable shown on the Latest Financial
Statements and all accounts receivable of LDI or the Seller which have arisen
subsequent to the Latest Balance Sheet Date, have been collected or are good and
fully collectible in the ordinary and usual course of the Business, and are not
subject to any claims or offsets. LDI and the Seller have furnished the Buyer a
true and complete report of accounts receivable aging which sets forth all
accounts receivable of the Business, which shall be updated as of the Closing
Date and attached as Exhibit F to this Agreement.
(p) Advance Payments. Except as disclosed on Schedule 3.1(p),
neither LDI nor the Seller has received any payment in respect of goods or
services of the Business which have not been provided or delivered.
(q) Labor Matters. There are no strikes, arbitrations, grievances,
other labor disputes or union organizational drives pending or threatened
between the Seller and any of its employees. Except as described in Schedule
3.1(q) hereto the Seller is not a party to any union, collective bargaining or
other similar agreements. The Seller has provided a true, correct and complete
copy of all such agreements to the Buyer. The Seller has paid in full all
wages, salaries, commissions, bonuses and other compensation (including
severance pay and vacation benefits) for all services performed by its
employees. Schedule 3.1(q) hereto describes the vacation policy of the Seller.
The Seller is not liable for any arrears of wages or any payroll taxes or any
penalties or other damages for failure to comply with any applicable foreign,
federal, state and local laws relating to the employment of labor.
(r) Employee Benefit Plans. Schedule 3.1(r) contains a true and
complete list as of the date of this Agreement of all employee benefit plans and
arrangements applicable to the employees of LDI or the Seller and all fixed or
contingent liabilities or obligations of LDI or the Seller with respect to any
person now or formerly employed by LDI or the Seller, including, without
limitation, pension or thrift plans, multiemployer benefit plans as defined in
Section 3(37) and 4001(a)(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), welfare benefit plans as defined in Section 3(1) of
ERISA, pension benefit plans as defined in Section 3(2) of ERISA, individual or
supplemental pension or accrued compensation arrangements, contributions to
hospitalization or other health or life insurance programs, incentive plans,
bonus arrangements and vacation, sick leave, disability and termination
arrangements or policies, including workers' compensation policies. LDI or the
Seller has furnished or made available to the Buyer true and complete copies of
all employee handbooks, employee rules and regulations, all applicable plan
documents, trust documents, insurance contacts, contracts with employees, and
summary plan descriptions of the written plans and arrangements listed in
Schedule 3.1(r), and with descriptions, in writing, of the unwritten plans
listed in Schedule 3.1(r). All employee benefits and welfare plans or
arrangements listed in Schedule 3.1(r) were established and have been executed,
managed and administered without material exception in accordance with all
applicable requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), ERISA, and of other applicable laws. All contributions, premiums or
claim payments required to be made to or on behalf of all employee benefit plans
and arrangements set forth on Schedule 3.1(r) by law, contract, or the terms of
such plans have been made or properly accrued, and all expenses relating to
contributions, premiums, or claim payments due or owing with respect to such
plans have been properly accrued and reflected in LDI's or the Seller's
financial statements through the Closing Date. Any group health plan within the
meaning of Section 607(l) of ERISA and Section 162(i) of the Code, is in
compliance with Section 601 through 609 of ERISA and Section 4980(B)(f) of the
Code. Neither LDI nor the Seller is aware of the existence of any governmental
audit or examination of any of such plans or arrangements or of any facts which
would lead it to believe that any such audit or examination is pending or
threatened. There exists no action, suit or claim (other than routine claims
for benefits) with respect to any of such plans or arrangements pending or, to
the knowledge of LDI or the Seller, threatened against any of such plans or
arrangements, and neither LDI nor the Seller possesses knowledge of any facts
which could give rise to any such action, suit or claim. Neither LDI or the
Seller nor any trade or business, whether or not incorporated, which is part of
a controlled group under common control or affiliated with LDI or the Seller
within the meaning of Sections 414(b), (c), (m), or (o) of the Code or Section
4001(b) of ERISA (a "Controlled Group") has incurred, nor expects to incur,
either directly or indirectly, any liability under Title IV of ERISA, including,
without limitation, any withdrawal liability within the meaning of ERISA with
respect to any multi employer plan (as defined in Section 4001(a)(3) of ERISA),
but excluding liability for premiums to the Pension Benefit Guaranty
Corporation. Except as disclosed in Schedule 3.1(r) hereto, neither LDI or the
Seller nor any other member of the Controlled Group maintains or contributes to,
or is obligated to maintain or contribute to, or has ever maintained or
contributed to any employer pension benefit plan, fund, arrangement or practice,
including, without limitation, any retirement, deferred compensation, incentive
compensation, pension, profit sharing, thrift, stock bonus, stock purchase,
stock grant, stock option, unemployment or severance pay plan, fund, arrangement
or practice entered into between LDI, the Seller or any other member of the
Controlled Group and any current or former officer, consultant, director or
employee of LDI or the Seller that is not a welfare benefit plan as defined in
Section 3(l) of ERISA or a pension benefit plan as defined in Section 3(2) of
ERISA.
(s) Transactions With Certain Persons. Except as disclosed on
Schedule 3.1(s), no current or former director, officer, employee or shareholder
of LDI or the Seller or any of their affiliates has any interest in any
property, real or personal, tangible or intangible, used in or pertaining to the
Business and there have been no transactions between LDI or the Seller and any
current or former director, officer, employee or shareholder of LDI or the
Seller or their affiliates pertaining to the Business or the Subject Assets.
The Seller is not indebted, directly or indirectly, to any person who is an
officer, director or shareholder of the Seller in any amount whatsoever, other
than for salaries for services rendered or reimbursable business expenses, in
the ordinary and usual course of business, nor is any such officer, director,
stockholder or affiliate indebted to the Seller.
(t) Salary. Schedule 3.1(t) hereto contains the names and current
annual salary of all present officers and salaried employees of the Seller
engaged in any manner with the Business. Schedule 3.1(t) hereto also contains
the names and a brief description of the wage rates of all hourly employees of
the Seller engaged in any manner with the Business.
(u) Intellectual Property. The Intellectual Property constitutes all
patents, trademarks, service marks, trade names, copyrights (including any
pending applications for any of the foregoing), trade secrets, discoveries, and
know-how (whether patentable or unpatentable) owned by LDI or the Seller and
used by the Seller in the Business. Except as set forth on Schedule 3.1(u), the
Intellectual Property is not subject to any outstanding licenses, liens,
encumbrances, claims or other restrictions or rights of others and there are no
pending or threatened challenges to any of the Intellectual Property. The
business of the Seller as heretofore conducted does not infringe or constitute,
and has not infringed or constituted, an unlawful invasion of any rights of any
person and no notice of any such infringement or invasion has been received by
LDI or the Seller. The Seller has the right to use free and clear of the claims
or rights of others all formulae, trade secrets, customer lists and processes
material to the conduct of its business. Except as set forth on Schedule
3.1(u), neither LDI nor the Seller has sold, licensed or otherwise disposed of
any Intellectual Property to any person nor has LDI or the Seller agreed to
indemnify any person for any patent, trademark, copyright or Intellectual
Property infringement. The Intellectual Property constitutes all such property
necessary to conduct the Business as heretofore conducted and the Intellectual
Property is sufficient to allow the Seller to fulfill all current customer
orders for products of the Business.
(v) Litigation and Claims. Except as set forth in Schedule 3.1(v)
hereto, there is no pending or threatened action, suit, proceeding, claim,
investigation or notice (collectively "Actions") by or against LDI or the Seller
affecting the Business (whether or not covered by insurance), and there is no
outstanding order, notice, writ, injunction or decree of any court, government
or governmental agency against or affecting LDI or the Seller (whether or not
covered by insurance). Schedule 3.1(v) identifies all Actions as to which LDI
or the Seller has been a party affecting the Business which have been resolved
during the past thirty-six (36) months (whether by settlement, arbitration,
judicial decision or otherwise).
(w) Permits; Burdensome Agreements. LDI and the Seller holds all
licenses, permits, and other approvals that are required to permit it to conduct
their businesses as heretofore conducted and all such licenses, permits, and
other approvals are described in Schedule 1.1(f) hereto and are valid and in
full force and effect. This Agreement and consummation of the transactions
contemplated hereby will not terminate or adversely affect the existence,
validity and continued effectiveness of any of such licenses, permits or other
approvals. Neither LDI nor the Seller is subject to or bound by any agreement,
judgment, decree or order which adversely affects the Business or prospects, its
condition, financial or otherwise, or any of its assets or property.
(x) Compliance With Law. Except as set forth on Schedule 3.1(x), the
Seller is and has been in compliance with all laws, ordinances, regulations,
orders, licenses, franchises, permits, decrees, or similar items applicable to
it, its properties and assets, and to the operation of its business, including,
but not limited to such laws and regulations relating to protection of the
public health or environment, waste disposal, hazardous substances or wastes and
occupational health and safety.
(y) Books and Records. The books and records of the Seller are
complete and correct and accurately reflect the basis for the financial
condition and results of operations of the Seller, as set forth in the financial
statements referred to in Section 3.1(d) hereof.
(z) Finders' Fees. No person acting on behalf of LDI or the Seller
has a claim to, or is entitled to, under any contract or otherwise, any payment
as a broker, finder or intermediary in connection with the origin, negotiation,
execution or consummation of the transactions provided for in this Agreement or
any of the Ancillary Agreements.
(aa) General Representation and Warranty. Neither this Agreement nor
any schedule, certificate or other documents furnished by or on behalf of LDI or
the Seller in connection with this Agreement and the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state any
material fact necessary to make the statements contained herein or therein not
misleading. There is no fact or circumstance known to LDI or the Seller which
adversely affects, or in the future, as now reasonably foreseeable, is likely to
adversely affect the Business or the Subject Assets which has not been set forth
in this Agreement or the schedules hereto.
(bb) Investigation by PCB and the Buyer. Notwithstanding any
investigation by PCB and the Buyer of LDI and the Seller and notwithstanding any
knowledge of facts determined or determinable by PCB or the Buyer pursuant to
such investigation, PCB and the Buyer has the right to rely fully upon the
representations, warranties, covenants and agreements contained in this
Agreement or in any exhibits and schedules annexed hereto as part of this
Agreement. All representations, warranties, covenants and agreements of LDI and
the Seller shall be true and complete as of the Closing Date and shall survive
the execution and delivery hereof and the Closing.
(cc) Hart-Scott-Rodino Antitrust Improvements Act of 1976. The gross
revenues of LDI are below the amounts which would require filing under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and
no notification of the transactions contemplated hereby is required to be filed
with the Federal Trade Commission, the United States Assistant Attorney General
or any other party pursuant to 15 U.S.C. Section 18a (Section 7A of the HSR
Act).
(dd) Year 2000 Compliance. LDI and/or the Seller have made written
inquiry to the manufacturer of each of the computer systems and software used in
the Business that are material to the functioning of the Business. LDI and/or
the Seller has received a written response from each of such manufacturers
indicating that the computer systems and software are, or will be in a timely
fashion, Year 2000 Compliant, as hereinafter defined. LDI and/or the Seller has
conducted an internal review of the software manufactured by them which is
contained in the products of the Business. Except as set forth on Schedule
3.1(dd), LDI and/or the Seller has resolved any issues that would cause such
software not to be Year 2000 Compliant. "Year 2000 Compliant" shall mean the
ability of a computer system, product or piece of equipment containing an
embedded microchip to (a) handle date information, before, during, and after the
Year 2000, including, but not limited to, accepting date input, providing date
output, and performing calculations on dates or portions of dates, (b) function
accurately and without interruption before, during and after January 1, 2000,
without any change in operations associated with the advent of the new century;
(c) respond to two-digit year-date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner; and (d) store and
provide output of date information in ways that are unambiguous as to century.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PCB AND THE BUYER
4.1 PCB and the Buyer represent and warrant to LDI and the Seller as
follows:
(a) Organization. PCB is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York and has
full power and authority to own, operate and lease its properties as presently
owned, operated and leased and to carry on its business as now and heretofore
conducted. The Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has full power and
authority to own, operate and lease its properties as presently owned, operated
and leased and to carry on its business as now and heretofore conducted. The
Buyer is a wholly owned subsidiary of PCB.
(b) Authority Relative to Agreement. The execution, delivery
and performance of this Agreement and the Ancillary Agreements by PCB and the
Buyer and consummation by PCB and the Buyer of the transactions contemplated
hereby and thereby have been duly and effectively authorized by all necessary
corporate action, and this Agreement constitutes, and when executed each of the
Ancillary Agreements will constitute, a legal, valid and binding obligations of
the PCB and the Buyer enforceable against them in accordance with its terms,
except as the enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court in which such proceedings may be brought.
(c) Effect of Agreement. The execution, delivery and
performance of this Agreement and the Ancillary Agreements by PCB and the Buyer
and the consummation by them of the transactions contemplated hereby and thereby
(i) do not require the filing with, or the consent, waiver, approval, license or
authorization of, any person, government agency or public or regulatory
authority; (ii) do not violate, with or without the giving of notice or the
passage of time, any provision of law applicable to PCB or the Buyer; or (iii)
do not conflict with or result in a breach of PCB's or the Buyer's Certificate
of Incorporation or its by-laws or any mortgage, deed of trust, license,
indenture, or other agreement or instrument or any order, judgment, decree,
statute, regulation or any other restriction of any kind or character to which
either PCB or the Buyer is a party or by which PCB, the Buyer, or any of their
respective assets may be bound or give to others any right to terminate, or
result in termination of any provision of such instruments, except for those
agreements for which consents shall be obtained prior to the Closing.
(d) Hart-Scott-Rodino Antitrust Improvements Act of 1976. The
gross revenues of the Buyer are below the amounts which would require a filing
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
HSR Act) and no notification of the transactions contemplated hereby is required
to be filed with the Federal Trade Commission, the United States Assistant
Attorney General or any other party pursuant to 15 U.S.C. Section 18a (Section
7A of the HSR Act).
(e) Finders' Fees. No person acting on behalf of PCB or the
Buyer has claims to, or is entitled to under any contract or otherwise, any
payment as a broker, finder or intermediary in connection with the origin,
negotiation, execution or consummation of the transactions provided for in this
Agreement or the Ancillary Agreements.
ARTICLE V
COVENANTS OF LDI AND THE SELLER
5.1 Conduct of Business Pending Closing. From the date of this
Agreement to the Closing Date:
(a) Negative Covenants. Except as otherwise expressly provided
by this Agreement, or as the Buyer may otherwise consent to in writing, the
Seller shall not, subsequent to the date of this Agreement, engage in any
activity or enter into any transaction outside of the ordinary and usual course
of the Seller's business or which would be inconsistent with the Seller's past
practice or with the terms of this Agreement or which would render inaccurate as
of the Closing Date any of the representations and warranties set forth in
Article III as if such representations and warranties were made at and as of the
Closing Date. Without limiting the generality of the foregoing, the Seller
shall not, with respect to the Business or the Subject Assets: (i) undergo any
material adverse change in its condition (financial or other), properties,
assets, liabilities, business, operations or prospects except (x) for Sage
Technologies ("Sage") terminating its distribution of the products of the
Business, (y) refinancing or extending the Mortgage when due (so long as any
such refinancing does not increase the principal balance of the Mortgage or
contain a prepayment penalty), or (z) changes in the ordinary and usual course
of its business and consistent with its past practice and which have not been,
either in any case or in the aggregate, adverse to the Seller; (ii) mortgage,
pledge or subject to any lien, lease, security interest, encumbrance, or other
restriction, any of the Subject Assets; (iii) acquire or dispose of any interest
in any asset or property except the purchase of materials and supplies and the
sale of inventory in the ordinary and usual course of its business and
consistent with its past practice; (iv) forgive or cancel any debt or claim,
waive any right, or, except in the ordinary and usual course of its business and
consistent with its past practice, incur or pay any liability or obligation; (v)
adopt or amend any profit sharing plan, agreement, arrangement or practice for
the benefit of any director, officer or employee or change the compensation
(including bonuses) to be paid to any director, officer or employee of the
Business; (vi) suffer any damage, destruction or loss (whether or not covered by
insurance); (vii) amend or terminate any contract, agreement or lease; (viii)
experience any labor difficulty, or loss of employees or customers that
adversely affects it; (ix) enter into any collective bargaining agreement; (x)
sell, grant or transfer to any party or parties any license, or grant an option
to acquire a license to manufacture or sell any of the products of the Seller,
or to use any trademark, service mark, trade name, copyright, patent or pending
application for any of the foregoing, or any trade secret or know-how of the
Seller; (xi) declare any bonus or increase in the salary or compensation of any
employee; (xii) undergo any reduction or increase (exclusive of any write-downs
or write-offs) in its inventory levels, except in the ordinary course of
business and consistent with past practice; (xiii) undergo any reduction or
increase in its accounts receivable (inclusive of any write-downs or write-
offs), except in the ordinary course of business and consistent with past
practice; (xiv) undergo or impose any change in the procedures, practices or
accounting principles applicable to financial reporting; (xv) increase or
decrease prices charged to customers; (xvi) without limiting the generality of
any of the foregoing, enter into any transaction except in the ordinary and
usual course of its business and consistent with its past practice; (xvii) or
agree to, permit or suffer any of the acts, transactions or other things
described in Subsections (i) through (xvi) of this Section 5.1(a).
(b) Conduct of Business. With respect to the Business, LDI and
the Seller shall use their commercially reasonable efforts to preserve intact
its business organization, to retain its present employees, and to preserve its
good will with all suppliers, customers, employees and others having business
relations with LDI and/or the Seller. Notwithstanding the foregoing, the
parties acknowledge that Sage has indicated an intent to terminate distribution
of the products of the Business as soon as it becomes aware of the execution of
this Agreement. Neither LDI nor the Seller shall, without the prior consent of
PCB, sell any of the demonstration inventory prior to Closing, subject only to
fulfilling obligations existing as of the date of this Agreement. In the event
of any such sale in accordance with this Section 1.5(b), the fixed value for the
demonstration inventory set forth in Section 1.5(a)(vi) shall be reduced by
fifty-five percent (55%) of the amount received by LDI or the Seller on such
transaction.
(c) Access to Information. LDI and the Seller shall afford PCB,
the Buyer and their representatives full access, during normal business hours
and upon reasonable notice, to all of the assets, properties, books, records,
and agreements of LDI and the Seller with respect to the Business, and shall
furnish to PCB, the Buyer and their representatives such information regarding
LDI or the Seller relating to the Business as PCB and the Buyer may reasonably
request. LDI and the Seller shall cooperate with PCB and the Buyer in visiting
or contacting employees and customers of, and persons having other business
relationships with, LDI and/or the Seller as PCB or the Buyer shall specify
prior to the Closing. LDI and the Seller shall also cooperate with the Buyer in
an inspection of the Owned Property and all improvements thereon, including,
without limitation, an environmental audit of the Owned Property, to be
conducted at the Buyer's expense. The investigation by PCB and the Buyer and
furnishing of information to PCB and the Buyer shall not affect the right of PCB
and the Buyer to rely on the representations, warranties, covenants and
agreements of LDI and the Seller in this Agreement.
5.2 Consents of Others. Prior to the Closing, LDI and the Seller
shall use commercially reasonable efforts to obtain, and to the extent necessary
shall have fully cooperated with the Buyer to assist the Buyer's efforts to
obtain, all authorizations, consents and permits of others required to permit
the consummation of the transactions contemplated by this Agreement and the
continuation by the Buyer of the Business as heretofore conducted. Without
limiting the generality of the foregoing, LDI and the Seller shall use
commercially reasonable efforts to obtain all consents necessary for assignment
of the Contracts to the Buyer. The Buyer acknowledges that the consent of
third-parties to the assumption of the Mortgage and the leases on the Subject
Assets is dependent on such parties analysis of the financial strength and
resources of the Buyer.
5.3 Change in Representations and Warranties. Prior to the Closing,
in the event LDI and/or the Seller learns that any of the representations and
warranties of LDI and/or the Seller contained in or referred to in this
Agreement is or will become inaccurate, LDI and/or the Seller shall give
immediate detailed written notice thereof to the Buyer and PCB.
5.4 LDI's and the Seller's Cooperation. On and after the Closing,
LDI and the Seller shall assist and cooperate with the Buyer in effecting a
transition of ownership of the Business to the Buyer without a disruption of the
operations of the Business and to best preserve the good will of its customers
and others having business relationships with the Business. In order to
facilitate the transition from LDI and the Seller to the Buyer, LDI or the
Seller may, with the Buyer's written consent, pay certain post-closing costs on
behalf of the Buyer. The Buyer agrees to reimburse LDI or the Seller for such
costs within five (5) days of delivery to the Buyer of LDI's or the Seller's
written request.
5.5 Change of Name. Immediately after the Closing, LDI and the
Seller shall discontinue using the names "LarsonoDavis" and any variations
thereof and LDI and the Seller shall use commercially reasonable efforts to
promptly amend their articles of incorporation to change their name to a name
which does not include the names "LarsonoDavis" or any variations thereof.
Evidence of the completion of such amendment shall be furnished to the Buyer
within ten (10) days after completion.
5.6 Conditions. LDI and the Seller shall use its best efforts to
cause all conditions for the Closing to be met.
5.7. Audit/Inspection. Prior to the Closing, LDI and the Seller
shall permit the Buyer to cause comprehensive occupational and safety audits of
the Owned Property to assess the compliance with OSHA or any similar federal,
state, local or foreign law, rule or regulation.
5.8 Title Insurance and Surveys.
(a) Within ten (10) days after the date of this Agreement, LDI
or the Seller shall, at its cost and expense, obtain and deliver to the Buyer, a
commitment for title insurance (the "Commitment"), together with legible copies
of all vesting and exception documents, to be issued by a title company
acceptable to the Buyer (the "Title Company") committing to issue an ALTA Owners
Policy of Title Insurance (10-17-92) (the "Title Policy") for the Owned Property
in an amount equal to the fair market value of the property. The premium for
the Title Policy shall be paid by LDI or the Seller. The Title Policy shall
show fee simple title to the Owned Property vested in the Buyer subject only to
the Mortgage, real estate taxes not yet due and payable as of the Closing Date,
and such other covenants, conditions, easements, and exceptions to title as do
not materially affect the marketability or use of the Owned Property as now used
in the Business or as the Buyer may approve in writing (collectively, the
"Permitted Exceptions"). The Commitment and the Title Policy to be issued by
the Title Company shall be "extended form coverage" with the exceptions relating
to all matters (except for property taxes) described on Schedule 5.8 deleted,
and shall contain an ALTA Endorsement 9, an ALTA Zoning Endorsement 3.1 , CLTA
103.7, CLTA 110.1 (7(b) of Conditions and Stipulations), CLTA 116, CLTA 116.7, a
contiguity endorsement (CLTA 116.4), and an ALTA Survey Endorsement (CLTA
116.1). At the Closing, LDI and the Seller shall deliver such affidavits or
other instruments as the Title Company may reasonably require to delete the
general exceptions and to provide the special endorsements required hereunder.
At the Closing, LDI and the Seller shall cause the commitments to be brought
current as of the Closing Date.
(b) Within thirty (30) days after the date of this Agreement but
before the Closing, LDI or the Seller, at its cost and expense, shall deliver to
the Buyer and the Title Company an as-built survey of the Owned Property (the
"Survey") prepared by a registered land surveyor or engineer, licensed in the
state of Utah, dated on or after the date hereof, certified to the Buyer, the
Title Company, and such other entities as the Buyer may designate in writing to
LDI or the Seller prior to the Closing, and conforming to current ALTA/ACSM
Minimum Detail Requirements for Land Title Surveys, sufficient to cause the
Title Company to delete the standard survey exception. The Survey shall show
access from the land to dedicated roads and shall include a flood plain
certification. The Survey may be a recertification of a prior survey, provided
that it meets the above-described criteria.
(c) If (i) the Commitment discloses a title exception other than
a Permitted Exception (an "Unpermitted Exception") or (ii) the Survey discloses
any encroachment, overlap, or gap or any other matter which renders title to the
Owned Property unmarketable or reflects that any utility service to the
improvements or access thereto does not lie wholly within the applicable parcel
of real property, or an encumbered easement for the benefit of such parcel of
real property, or reflects any other matter adversely affecting the use or
improvements of such parcel of real property (a "Survey Defect"), then LDI or
the Seller, prior to the Closing, shall have the right to attempt to have the
Unpermitted Exception removed from such Commitment or the Survey Defect
corrected or insured over by an appropriate title insurance endorsement all in a
manner satisfactory to the Buyer. If LDI or the Seller does not, or is unable
to remove such Unpermitted Exception or correct such Survey Defect to the
satisfaction of the Buyer within thirty (30) days, the Buyer shall have the
right to terminate this Agreement or may waive the same and proceed to Closing.
(d) At the Closing, LDI or the Seller shall pay any taxes and/or
fees incurred in connection with the delivery and/or recording the deed or in
connection with the transfer of the Owned Property, including, but not limited
to, any deed tax, and the costs of recording any instruments necessary to
satisfy objections to title.
ARTICLE VI
COVENANTS OF PCB AND THE BUYER
6.1 Conduct of Business Pending Closing. Except as otherwise
provided in this Agreement, or as LDI or the Seller may otherwise consent to in
writing, PCB and the Buyer shall not, pending Closing, engage in any activity or
enter into any transaction (i) which would be inconsistent with the terms of
this Agreement; or (ii) which would render inaccurate as of the Closing Date any
of its representations and warranties set forth in this Agreement as if such
representations and warranties were made at and as of the Closing Date.
6.2 Consents of Others. Prior to the Closing, PCB and the Buyer
shall have obtained all authorizations, consents and permits of others required
of it to permit it to consummate the transactions contemplated by this
Agreement.
6.3 Change in Representations and Warranties. Prior to the Closing,
in the event PCB or the Buyer learns that any of the representations and
warranties of PCB or the Buyer contained in or referred to in this Agreement is
or will become inaccurate, PCB and/or the Buyer shall give immediate detailed
written notice thereof to LDI and the Seller.
6.4 Distribution of the Products of the Business. If, subsequent to
the execution of this Agreement and prior to Closing, LDI or the Seller receives
notice from Sage that Sage intends to discontinue representing the products of
the Business, the Buyer agrees, subject to same terms and conditions of LDI's or
the Seller's current agreement with Sage, to use its commercially reasonable
good faith efforts to distribute the products in those areas formerly served by
such distributors until the earlier of (i) the Closing or (ii) the termination
of this Agreement.
6.5 Conduct of Business Subsequent to Closing. Prior to December 31,
1999, the Buyer shall use its good faith, commercially reasonable efforts to
continue the Business and maintain good working relationships with the
employees, suppliers, customers, and distributors of the Business.
6.6 Conditions. The Buyer shall use its best efforts to cause all
conditions for the Closing to be met.
ARTICLE VII
EMPLOYEES AND EMPLOYEE MATTERS
7.1 Termination of Employees. Upon the Closing, LDI or the Seller
shall terminate the employment of each employee who is listed on Schedule 7.1
hereto (the "Employees"). The Buyer shall offer employment to each of such
Employees, other than those individuals who were not actively employed by LDI or
the Seller immediately before the Closing or on disability or other leave, at
the rate of pay for each such Employee stated on Schedule 7.1 hereto, giving
credit to each Employee for the date of hire of such Employee by LDI or the
Seller, and on such additional terms as the Buyer, in its sole discretion, shall
determine. The Buyer shall assume and fulfill those obligations related to
Employees included in the Assumed Liabilities.
7.2 List of Employees. Schedule 7.1 lists the name, gender, date of
birth, date of hire, department, job title, labor grade and rate of pay of the
Employees and LDI and the Seller warrants to the Buyer that such schedule is
materially accurate and complete to the best knowledge of LDI or Seller.
7.3 Liability. Except with respect to any Assumed Liabilities, LDI
and the Seller shall retain and pay all obligations and liabilities arising out
of their employment of the Employees and the termination thereof, including, but
not limited to, obligations and liability under Sections 601-609 of ERISA and
Section 4980(B)(f) of the Code and liability for all claims with respect to
matters or occurrences prior to the Closing Date (regardless of when such claim
is filed) arising out or labor, employment, workers compensation, disability,
unemployment insurance and related matters.
7.4 Severance and WARN Act. It is expressly agreed that the Buyer is
not responsible for any liability, cost or expense with respect to any Employee
who refuses the Buyer's offer of employment. Notwithstanding the foregoing, LDI
and the Seller agree to not take any action that would result in a violation of
the Worker Adjustment and Retraining Notification Act, and the regulations
thereunder, in connection with the transactions contemplated by this Agreement.
ARTICLE VIII
CONDITIONS TO OBLIGATION OF
PCB AND THE BUYER TO CONSUMMATE CLOSING
8.1 Conditions. The obligation of PCB and the Buyer under this
Agreement to consummate the Closing is subject to the conditions that:
(a) Covenants, Representations and Warranties. LDI and the
Seller shall have performed all obligations and agreements and complied with all
covenants contained in this Agreement to be performed and complied with by each
of them prior to or at the Closing Date. The representations and warranties of
LDI and the Seller set forth in this Agreement shall be accurate in all
respects, at and as of the date made and also at and as of the Closing Date,
with the same force and effect as though made on and as of the Closing Date.
(b) No Adverse Change. There shall have been, in the good faith
judgment of PCB and the Buyer, no material adverse change in the business,
properties, operations, financial condition, earnings or contractual or business
relationships with third parties of LDI and the Seller with respect to the
Business since the date of this Agreement, other than the termination by Sage of
its distribution of the products of the Business or the refinancing or extension
of the Mortgage (so long as any such refinancing does not increase the principal
balance of such Mortgage or contain a prepayment penalty).
(c) Consents. The Buyer shall have obtained all authorizations,
consents and permits of others necessary for the Buyer to continue to conduct
the Business as heretofore conducted and to consummate the transactions
contemplated by this Agreement, including, without limitation, all consents
required to assign each of the Contracts that are material to the Business to
the Buyer specifically including the Contracts set forth on Schedule 8.1(c)
hereto. The Buyer shall be assured that all permits, licenses and other
authorizations necessary for the Buyer to continue the Business as heretofore
conducted and to consummate the transactions contemplated by this Agreement have
been obtained or are obtainable by the Buyer. The Buyer shall be reasonably
satisfied that, except as expressly provided in this Agreement, its acquisition
of the Subject Assets shall not adversely affect the prospects of the Business
and that the contractual relationships of the Business shall not be thereby
adversely affected. Based upon the results of the Buyer's environmental audit
of the Owned Property, the Buyer shall be satisfied, in its sole discretion,
that there is no hazardous or toxic material or waste on the Owned Property
which would violate any federal, state or local law, rule or regulation. The
Buyer shall be satisfied with the condition of the Owned Property based upon any
OSHA audit or other inspection of the Owned Property.
(d) Certificates. The Buyer shall have received a certificate
executed by LDI and the Seller dated the Closing Date, in the form of Exhibit G
hereto, which certifies to the Buyer that the representations and warranties
made in this Agreement are accurate as of the Closing Date.
(e) Opinion of the Seller's Counsel. PCB and the Buyer shall
have received from counsel to the Seller a commercially reasonable opinion
letter, dated the Closing Date, in a form reasonably acceptable to PCB and the
Buyer.
(f) Shareholder Approval. PCB and the Buyer shall have received
adequate assurances that the transactions contemplated by this Agreement have
been approved by the shareholders of LDI and the Seller.
(g) Title Insurance and Surveys. The Buyer shall have received
all items set forth in Section 5.8.
ARTICLE IX
CONDITIONS TO OBLIGATION OF LDI AND THE SELLER
TO CONSUMMATE THE CLOSING
9.1 Conditions. The obligations of LDI and the Seller under this
Agreement to consummate the Closing are subject to the conditions that:
(a) Covenants, Representations and Warranties. PCB and the
Buyer shall have performed all obligations and agreements and complied with all
covenants contained in this Agreement to be performed and complied with by PCB
and the Buyer prior to or at the Closing and the representations and warranties
of PCB and the Buyer set forth in Article IV shall be accurate in all respects,
at and as of the Closing Date, with the same force and effect as though made on
and as of the Closing Date.
(b) Certificate. LDI and the Seller shall have received a
certificate executed by PCB and the Buyer, dated the Closing Date, in the form
of Exhibit I hereto.
(c) Assumed Liabilities. The Buyer shall have obtained the
consent to its assumption of the Mortgage and the leases with respect to the
Subject Assets or shall have obtained replacement financing with respect to such
obligations to permit them to be paid in full at the Closing.
(d) Shareholder Approval. The transactions contemplated by this
Agreement have been approved by the shareholders of LDI and the Seller.
ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) Mutual Consent. Upon the mutual consent of all parties
hereto.
(b) Adverse Proceedings. By PCB, the Buyer, LDI, or the Seller
if any order to restrain, enjoin or otherwise prevent the consummation of this
Agreement or transactions contemplated hereby shall have been entered or, on the
Closing Date, there is any pending or threatened litigation in any court, or any
proceeding by or before any governmental body, with a view to seeking to
restrain or prohibit consummation of this Agreement or in which damages are
sought in connection with this Agreement, or if any investigation by any
governmental body is pending or threatened which might result in any such
litigation or other proceeding.
(c) Expiration of Time. By either party if the transactions
contemplated by this Agreement have not been consummated by February 28, 1999,
provided that the terminating party is not then in material default under the
terms of this Agreement.
(d) Financing. By PCB and the Buyer, on or before December 11,
1998, or such later date as the parties may agree in writing, if despite their
good faith efforts, they are unable to obtain the financing necessary to
complete the transactions contemplated by this Agreement on terms acceptable to
them.
(e) For Cause by PCB and the Buyer. By PCB and the Buyer, upon
written notice to LDI and the Seller, if (i) LDI or the Seller has breached any
representation, warranty, or covenant contained in this Agreement in any
material respect and the breach has continued without cure for a period of
thirty (30) days after notice of breach; (ii) the board of directors of LDI
withdraws or modifies in any manner adverse to the Buyer its recommendation of
the transactions contemplated by this Agreement due to LDI or the Seller
entering into an agreement with respect to a Competing Proposal; or (iii) if LDI
has not obtained the consent of HMMH to the assignment to the Buyer or PCB of
the HMMH Contract prior to February 28, 1999, or such later date as the parties
may mutually agree.
(f) For Cause by LDI or the Seller. By LDI or the Seller, upon
written notice to PCB and the Buyer, if (i) PCB or the Buyer has breached any
representation, warranty, or covenant contained in this Agreement in any
material respect and the breach has continued without cure for a period of
thirty (30) days after notice of breach; or (ii) if PCB and/or the Buyer has not
terminated this Agreement under Section 10.1(d) and has not obtained the
financing necessary to permit the Buyer to consummate the transactions
contemplated by this Agreement prior to February 28, 1999, or such later date as
the parties may mutually agree.
10.2 Effect of Termination. If this Agreement is terminated pursuant
to Section 10.1(a), l0.l(b), 10.1(c), or 10.1(d), this Agreement shall become
void and of no further force and effect, and none of the parties hereto (or
their respective representatives, directors, officers, shareholders or agents)
shall have any liability as a result of such termination. If this Agreement is
terminated pursuant to Section 10.1(e), LDI and/or the Seller shall pay Three
Hundred Thousand and 00/100 Dollars ($300,000.00) (the "Termination Fee") to the
Buyer for liquidated damages as reimbursement for the costs and expenses
(including attorneys' fees) incurred by the Buyer and PCB in connection with the
negotiation and execution of this Agreement and the Ancillary Agreements. If
this Agreement is terminated pursuant to Section 10.1(f), PCB and/or the Buyer
shall reimburse LDI and the Seller for their costs and expenses (including
attorneys' fees) and damages caused by the breach up to a maximum of Three
Hundred Thousand and 00/100 Dollars ($300,000.00); provided that, any damages to
LDI and/or the Seller arising from actions taken by Sage, which actions are the
result of the execution of this Agreement and the transactions contemplated
hereby, may exceed Three Hundred Thousand and 00/100 Dollars ($300,000.00), but
shall not exceed Seven Hundred Thousand and 00/100 Dollars ($700,000.00); and
provided further that, any damage to LDI and/or the Seller arising from any
action taken by a distributor with which PCB or the Buyer enters into a
distribution, sales, or marketing agreement subsequent to the date of this
Agreement and prior to Closing, may exceed Three Hundred Thousand and 00/100
Dollars ($300,000.00), but shall not exceed Seven Hundred Thousand and 00/100
Dollars ($700,000.00). In the event that the Seller or LDI has damages as a
result of actions taken by Sage or another distributor, as set forth above, they
agree to work in good faith to mitigate such damages to the extent possible,
including without limitation, appointing PCB and/or the Buyer as the distributor
for the products for one (1) year on the same terms and conditions under which
the terminating distributor operated. The rights set forth in this Section 10.2
shall be the exclusive remedies for termination of this Agreement.
ARTICLE XI
POST CLOSING COVENANTS
11.1 Warranty Repairs. From and after the Closing, the Buyer shall
perform, at the Buyer's expense to the extent of Fifty Thousand and 00/100
Dollars ($50,000.00), repair or replacement services required under the Seller's
standard limited product warranty or which may be legally required to make
products of the Business Year 2000 Compliant for products manufactured, sold or
shipped by the Business prior to the Closing. Notwithstanding the foregoing,
the Buyer shall not assume, be liable for, or become responsible for any product
liability or other claims for damage to property or injury to or death of any
persons with respect to, caused by, or related to, products sold, manufactured
or shipped by the Business prior to the Closing. In the event that warranty
repairs, replacement services, or Year 2000 compliance services for products
manufactured, sold or shipped by the Business prior to the Closing Date that are
required as stated above exceed Fifty Thousand and 00/100 Dollars ($50,000.00),
such additional warranty repairs or replacement services shall be performed by
the Buyer at LDI's or the Seller's expense. All such costs shall be calculated
for purposes of this paragraph consistent with LDI's and the Seller's current
internal accounting policies, including, without limitation, the exclusion of
software fixes and patches; provided that, software fixes and patches shall be
included, at the Buyer's standard rates offered to others, for any Year 2000
compliance obligations.
11.2 Insurance. For a period of four (4) years following the
Closing, LDI or the Seller shall maintain product liability insurance coverage
with respect to products sold by LDI or the Seller on or before the Closing Date
with its current carrier.
11.3 Intellectual Property and Telephone System. Without limiting
LDI's and the Seller's obligations under the non-competition provisions of this
Agreement, upon the Closing, LDI and the Seller shall not retain copies or
duplications of any Intellectual Property and neither shall LDI nor the Seller
use or disclose any such Intellectual Property. The Buyer agrees to permit LDI
and the Seller to use the telephone system, general ledger and accounting
software, the manufacturing systems software, and the payroll systems software
included in the Subject Assets through December 31, 1999, under the terms of the
Shared Services Agreement.
11.4 Product Liability. Without limiting the generality of Section
1.8, from and after the Closing, LDI and the Seller shall, except for warranty
service to be performed by the Buyer pursuant to Section 11.1 hereof, retain all
liability and obligations for products sold, shipped or manufactured by LDI or
the Seller prior to the Closing Date.
11.5 Use of Name. From and after the Closing, neither LDI nor the
Seller shall not use the name "LarsonoDavis" or any variations thereof.
11.6 Financial, Operating and Business Records. For a period of five
(5) years following the Closing Date, (i) PCB and the Buyer shall afford LDI and
the Seller and their representatives with full access to, during normal business
hours, upon reasonable notice, and for proper business purposes, all of the
books and records transferred from LDI and the Seller to the Buyer pursuant to
this Agreement, and (ii) LDI and the Seller shall afford PCB, the Buyer and
their representatives will full access to, during normal business hours, upon
reasonable notice, and for proper business purposes, all of the books and
records regarding any of the Excluded Assets. For purposes of this Section,
proper business purposes shall include, without limitation, litigation, matters
relating to any indemnification claim, financial reporting, and tax matters.
11.7 Non-Competition and Confidentiality.
(a) LDI and the Seller covenant that they shall not, and that
they shall cause their Affiliates (as hereinafter defined) not to, directly or
indirectly:
(i) for a period of ten (10) years after the Closing Date,
engage or become interested, anywhere within the world, as an owner, partner,
consultant, representative, agent, officer, director, or through stock ownership
(except for LDI's or the Seller's ownership of less than one percent (1%) of the
number of shares outstanding of any securities which are listed for trading on
any national securities exchange), investment of capital, lending of money or
property, rendering of services, or otherwise, whether alone or in association
with others, in the business of designing, manufacturing, distributing,
promoting, marketing, selling or servicing (A) scientific instrumentation for
use in the acoustic and vibration industry, (B) any product of the Business
prior to the Closing Date, (C) any derivatives of any products included in
subsections (A) or (B) above, or (D) any products or services competitive with
such products or services. Notwithstanding the foregoing, the parties agree
that the use of techniques and hardware to achieve separations of elements by
acoustical vibrations for purposes of mass spectrometry or the use of acoustical
fingerprinting in conjunction with the CrossCheck technology of LDI shall not be
a violation of this Section 11.7(a)(i).
(ii) for a period of ten (10) years following the Closing
Date, divert or attempt to divert from the Business any business whatsoever by
influencing or attempting to influence, or soliciting or attempting to solicit,
any customers of the Business or any customers of the Business prior to the
Closing Date; and
(iii) for a period of five (5) years following the Closing
Date, solicit or otherwise attempt to employ any employee of the Business or
otherwise induce any such employee to terminate their employment with the Buyer,
including, but not limited, to any employee employed by LDI or the Seller in the
Business prior to the Closing Date.
(b) For purposes of this Agreement, "Affiliate" shall mean any
entity that directly or indirectly through one or more intermediaries is
controlled by LDI or the Seller.
(c) LDI and the Seller hereby acknowledge and agree that the
covenants, restrictions, agreements and obligations set forth herein are founded
upon valuable consideration and, with respect to the covenants, restrictions,
agreements and obligations set forth in this Section 11.7, are reasonable in
duration and geographic scope.
(d) LDI and the Seller agree that they will not, and will cause
each of their Affiliates not to:
(i) disclose or cause to be disclosed in any manner any
Confidential Information (as hereinafter defined), or any part thereof, to any
person, firm, corporation, association, limited liability company, or any other
operation or entity, or use or permit the use of any Confidential Information on
their own behalf or for the benefit of others, for any reason or purpose, except
as otherwise set forth in this Agreement, without the express prior written
consent of the Buyer;
(ii) distribute or cause to be distributed any Confidential
Information to any third person or permit the reproduction of any Confidential
Information; and
(iii) take all reasonable care to avoid unauthorized
disclosure of any Confidential Information.
(e) LDI and the Seller further agree to cause their directors,
officers, employees and agents at all times to protect the Confidential
Information as required by this Section 11.7.
(f) For purposes of this Agreement, "Confidential Information"
shall mean any written or unwritten information relating to the Business on or
prior to the Closing Date, including, without limitation, its products,
services, processes, equipment, customer lists, intellectual property, financial
information, and suppliers, regardless of how such information was developed or
acquired; provided, however, that "Confidential Information" shall not include
information which LDI or the Seller can conclusively demonstrate: (i) had been
published and was part of the public domain prior to the date of this Agreement;
or (ii) had been published after the date of this Agreement, unless such
publication results from the breach of this Agreement by LDI or the Seller or
any of their Affiliates. The above-referenced exceptions shall not be
interpreted as justification for LDI or the Seller to disregard the obligations
set forth in this Agreement with respect to the Confidential Information as a
whole, in the event any portion of any information falls within the exceptions.
(g) Notwithstanding anything in this Section 11.7, LDI and the
Seller shall be permitted to disclose Confidential Information to the extent
that such disclosure is required by applicable law or the order of a court or
administrative agency having proper jurisdiction; provided, however, that prior
to any such disclosure, LDI and the Seller shall give written notice thereof to
the Buyer so as to allow the Buyer to seek any protective remedy.
(h) In the event of a breach or threatened breach by LDI or the
Seller of any of the covenants, restrictions, agreements and obligations set
forth in this Section 11.7, monetary damages or the other remedies at law that
may be available to PCB or the Buyer for such breach or threatened breach will
be inadequate and, without prejudice to PCB or the Buyer's rights to pursue any
remedies at law or equity available to it for such breach or threatened breach,
including without limitation, the recovery of damages from LDI or the Seller,
PCB and the Buyer will be entitled to injunctive relief as a means of having LDI
and the Seller comply with the provisions hereof.
(i) In the event that the covenants contained in this Section
11.7 are judicially held invalid or unenforceable as to time period and/or
geographical area, they will be valid and enforceable in such geographical
area(s) and for such time period(s) which the court determines to be reasonable
and enforceable. Furthermore, any period of restriction or covenant herein
stated shall be extended by any period of any violation of any restriction or
covenant herein stated.
11.8 Reimbursement. In the event that either party pays an
obligation that the other party has agreed to pay under the terms of this
Agreement, the paying party shall be immediately reimbursed by the party in
whose favor the payment was made. The parties agree that they will not take
action to pay an obligation on behalf of the other party prior to the due date
of such obligation and other than in the ordinary course of business.
ARTICLE XII
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS AND INDEMNIFICATION
12.1 Survival. Each of the representations and warranties made in
this Agreement shall survive for a period of two (2) years from the Closing
Date, except for the representations and warranties set forth in Section 3.1(b)
(Authority Relative to Agreement), Section 3.1(h) (Tax Matters), Section 3.1(j)
(Environmental Matters), and Section 3.1(v) (Litigation and Claims) which shall
survive indefinitely, subject to applicable statutes of limitations. All
covenants and other obligations of the parties hereto shall survive the delivery
of this Agreement and the Closing.
12.2 LDI's and the Seller's Indemnification Obligation. The Seller
and LDI jointly and severally agree to defend, indemnify and hold harmless PCB,
the Buyer, and their affiliates and their officers, directors, employees, and
other representatives, whether by offset against the Earnout Payment, the Note
or otherwise, from and against any and all damages, claims, liabilities, losses,
costs and expenses (including, costs of investigation and costs of preparing and
defending any pending or threatened claim or suit and attorneys' fees and
disbursements whether such pending or threatened claim or suit involves solely
the parties hereto or third parties) whatsoever arising out of, attributable to,
resulting from, or incurred with respect to (a) any breach of warranty or
misrepresentation by or on behalf of the Seller and/or LDI under this Agreement
or any of the Ancillary Agreements, (b) the breach or non-performance of any
covenant, agreement, or obligation to be performed by the Seller and/or LDI
under this Agreement or any of the Ancillary Agreements; (c) any
misrepresentation in, or omission from, any certificate or instrument executed
and delivered or to be executed and delivered by or on behalf of the Seller
and/or LDI in connection with this Agreement; (d) any act or omission of the
Seller and/or LDI related to the Business prior to the Closing Date, including,
but not limited to, (i) any product liability claims or obligations for products
sold, shipped or manufactured by the Seller and/or LDI prior to the Closing
Date; or (ii) except with respect to the Assumed Liabilities, any employee
benefit claim or other claims or liabilities (A) by or related to any employees
of the Seller and/or LDI prior to the Closing Date or (B) any employee benefit
plans, including, without limitation, any withdrawal liability within the
meaning of ERISA with respect to any multiemployer plan (as defined in Section
4001(a)(3) of ERISA); (e) any claim or liability with respect to the Business or
the Owned Property under any Environmental Law related to acts, omissions or
events prior to the Closing Date; (f) any liability or obligation of the Seller
and/or LDI not expressly assumed by the Buyer pursuant to this Agreement; (g)
the failure of the parties to comply with the provisions of any bulk sale, bulk
transfer or any similar act in connection with the transactions contemplated by
this Agreement; and (h) any claim or liability relating to any termination by
the Buyer of the existing Representative Agreement between Microspec and the
Seller dated October 4, 1982 or any successor agreement in effect on the Closing
Date, in excess of a full commission on all orders dated during the thirty (30)
day period immediately following the date of the notice of such termination.
12.3 Limitation on LDI's and the Seller's Indemnification Obligation.
Neither PCB nor the Buyer may assert a claim based on Section 12.2(a) or 12.2(c)
of this Agreement (except with respect to breaches of Sections 3.1(b), (h), (j),
or (v) of this Agreement which may be asserted at any time) at any time
subsequent to two (2) years after the Closing Date unless PCB or the Buyer shall
have notified the Seller or LDI in writing of such claim prior to the expiration
of the two (2) year period. PCB and the Buyer shall not be entitled to
indemnification based upon Section 12.2(a) or Section 12.2(c) of this Agreement
in an aggregate amount greater than the Purchase Price; provided, however, that
except with respect to breaches by LDI and/or the Seller of the representations
and warranties contained in Sections 3.1(b), (h), (j) or (v) of this Agreement,
PCB shall not be entitled to indemnification based upon Section 12.2 (a) or
Section 12.2(c) of this Agreement in an aggregate amount greater than
$5,000,000.00. Notwithstanding the foregoing and Section 12.2 of this
Agreement, neither PCB nor the Buyer shall be entitled to indemnification for
any Claim (as hereinafter defined) pursuant to this Agreement unless and until
the aggregate amount of all such Claims exceeds Twenty-Five Thousand and 00/100
Dollars ($25,000.00) in which case PCB and the Buyer shall be entitled to
indemnification for all such Claims.
12.4 PCB and the Buyer's Indemnification Obligation. PCB and the
Buyer hereby agrees to defend, indemnify and hold harmless LDI and the Seller
from and against any and all damages, claims, liabilities, losses, costs and
expenses whatsoever (including attorneys' fees) arising out of, attributable to,
resulting from or incurred with respect to (i) any breach of warranty or
misrepresentation by or on behalf of PCB or the Buyer under this Agreement or
any Ancillary Agreement, or the breach or nonperformance of any covenant,
agreement or obligation to be performed by PCB or the Buyer under this Agreement
or any Ancillary Agreement; (ii) any misrepresentation in, or omission from, any
certificate or instrument executed and delivered or to be delivered and executed
by or on behalf of PCB or the Buyer in connection with this Agreement or any
Ancillary Agreement; and (iii) any claim or liability arising out of the
operation of the Business or the Owned Property or act or omission by the Buyer
related to the Business or the Owned Property subsequent to the Closing Date;
and (iv) any claim based on the hiring policies or practices of the Buyer.
12.5 Indemnity Procedure.
(a) If a claim for damages (a "Claim") is to be made by a party
entitled to indemnification hereunder against the indemnifying party, the party
claiming such indemnification shall give a written notice ("Claim Notice") to
the indemnifying party as soon as practicable after the party entitled to
indemnification becomes aware of any fact, condition or event which may give
rise to damages for which indemnification may be sought under Section 12.2 or
Section 12.3, as the case may be. The Claim Notice shall describe in reasonable
detail the factual and legal basis for the claim and the damages that may be
assessed therewith to the extent then known. The failure of any indemnified
party to give timely notice hereunder shall not affect rights to indemnification
hereunder, except to the extent that the indemnifying party demonstrates actual
damage caused by such failure.
(b) After an indemnifying party's receipt of a Claim Notice
regarding a claim asserted by a third party filed against a party seeking
indemnification hereunder (a "Third Party Claim"), if the indemnifying party
shall acknowledge in writing to the indemnified party that the indemnifying
party shall be obligated under the terms of its indemnity hereunder in
connection with such Third Party Claim, then the indemnifying party shall be
entitled, if it so elects, (i) to take control of the defense and investigation
of such Third Party Claim, (ii) to employ and engage attorneys of its own choice
to handle and defend the Third Party Claim, at the indemnifying party's cost,
risk and expense unless the named parties to such Third Party Claim include both
the indemnifying party and the indemnified party and the indemnified party has
been advised in writing by counsel that there may be one or more legal defenses
available to such indemnified party that are different from or additional to
those available to the indemnifying party, and (iii) to compromise or settle
such Third Party Claim, which compromise or settlement shall be made only with
the written consent of the indemnified party, such consent not to be
unreasonably withheld. If the indemnifying party fails to assume the defense of
such lawsuit or action within fifteen (15) calendar days after receipt of notice
thereof, the indemnified party against which such has been asserted will (upon
delivering notice to such effect to the indemnifying party) have the right to
undertake, at the indemnifying party's cost and expense, the defense, compromise
or settlement of such lawsuit or action on behalf of and for the account and
risk of the indemnifying party; provided, however, that such lawsuit or action
shall not be compromised or settled without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld. In the
event the indemnified party assumes the defense of the lawsuit or action, the
indemnified party will keep the indemnifying party reasonably informed of the
progress of any such defense, compromise or settlement. The indemnifying party
shall be liable for any settlement of any action effected pursuant to and in
accordance with this Section 12.4 and for any final judgment (subject to any
right of appeal), and the indemnifying party agrees to indemnify and hold
harmless the indemnified party from and against any damages by reason of such
settlement or judgment.
12.6 Nonexclusivity. The rights to indemnification provided by this
Article XII are not exclusive and shall not be construed to exclude or preclude
the exercise of, and shall be in addition to, any other rights of the parties
hereto, express or implied, under this Agreement or applicable law for
misrepresentation, breach of contract or warranty or the breach or non-
performance of any agreement, covenant or obligation.
ARTICLE XIII
MISCELLANEOUS
13.1 Entire Agreement. This Agreement, together with the Ancillary
Agreements, constitutes the entire Agreement and supersedes all prior agreements
and understandings, both written and oral, between the parties hereto with
respect to the subject matter hereof and no party shall be liable or bound to
the other in any manner by any warranties, representations, covenants or
agreements except as specifically set forth herein or expressly required to be
made or delivered pursuant hereto.
13.2 Modifications. Any amendment, change or modification of this
Agreement shall be void unless in writing and signed by all parties hereto.
13.3 Further Assurances. From time to time after the Closing Date,
LDI and the Seller will execute all such instruments and take all such actions
as the Buyer shall reasonably request in order to more effectively convey and
transfer all of the Subject Assets to the Buyer. LDI and the Seller shall also
execute and deliver to the appropriate other party such other instruments as may
be reasonably required in connection with the performance of this Agreement and
each shall take all further actions as may be reasonably required to carry out
the transactions contemplated by this Agreement.
13.4 Binding Effect and Benefits. This Agreement shall not be
assignable by either party without the prior written consent of the other party.
This Agreement shall be binding upon and shall inure to the benefit of PCB, the
Buyer, LDI, the Seller and their respective successors, assigns, transferees and
legal representatives.
13.5 Expenses. Each party shall bear and pay all costs and expenses
respectively incurred by each of them on their behalf in connection with this
Agreement, including, without limitation, fees and expenses of their own
financial consultants, accountants and counsel.
13.6 Knowledge or Belief. The knowledge of any director, officer or
employee of LDI or the Seller shall be deemed to be knowledge of LDI or the
Seller.
13.7 Notices. Any notices or other communications required or
permitted to be given pursuant to this Agreement shall be deemed to have been
given if in writing and delivered personally or sent by certified mail, postage
prepaid, addressed as follows:
(a) To PCB or the Buyer:
PCB Group, Inc.
3425 Walden Avenue
Depew, New York 14043-2495
Attn: John A. Lally
Fax: (716) 684-0987
Confirmation: (716) 684-0001
With a copy to:
Albrecht, Maguire, Heffern & Gregg, P.C.
2100 Main Place Tower
Buffalo, New York 14202
Attn: Arthur A. Russ, Jr., Esq.
Fax: (716) 852-2609
Confirmation: (716) 853-1521
(b) To LDI or the Seller:
Larson Davis Incorporated
Attn: Andrew Bebbington, President and CEO
1681 West 820 North
Provo, Utah 84601
Fax: (801) 375-0182
Confirmation: (801) 375-0177
With a copy to:
Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Fax: (801) 531-7091
Confirmation: (801) 531-7090
or such other addresses as shall be furnished in writing by the Buyer, PCB, LDI,
or the Seller to the other party in accordance with this Section 13.7.
13.8 Headings. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meanings hereof.
13.9 Agreement. Whenever a statement is qualified by "except as
otherwise disclosed in this Agreement," or "except as otherwise provided in this
Agreement," or a similar provision, the reference shall be to the entirety of
this Agreement, including the schedules and exhibits attached hereto.
13.10 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
13.11 Governing Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of the State of New York without regard to
principles of conflicts of law.
13.12 Specific Performance. Since PCB and the Buyer could not be
adequately compensated by money damages in the event of the breach of this
Agreement by LDI or the Seller, PCB and the Buyer shall be entitled, either
before or after the Closing, in addition to any other right or remedy available,
to an injunction restraining such breach or a threatened breach and to specific
performance of any provision of this Agreement, and in such case no bond or
other security shall be required in connection therewith, and LDI and the Seller
hereby consent to the issuance of such an injunction and to the ordering of
specific performance.
13.13 Bulk Sales. LDI and the Seller shall comply with the bulk
sales provisions of the sales tax laws and the Uniform Commercial Code in any
state in which such provisions are imposed upon LDI or the Seller. LDI and the
Seller agree to indemnify and hold harmless PCB and the Buyer from any loss,
liability or expense, including, without limitation, the reasonable fees and
disbursements of counsel, suffered or incurred by PCB or the Buyer by reason of
the failure of LDI or the Seller to comply with the provisions of the sales tax
laws or Uniform Commercial Code of any jurisdiction regarding bulk sales or any
other bulk sales provisions.
13.14 No Third Party Rights. This Agreement is not intended and
shall not be construed to create any rights in any parties other than LDI, the
Seller, PCB and the Buyer and no other person shall assert any rights as a third
party beneficiary hereunder.
13.15 Public Announcements. On and after the date hereof and through
the Closing Date, none the parties hereto shall issue any press release or make
any public statement regarding the transactions contemplated by this Agreement
prior to obtaining the other parties' approval, which approval shall not be
unreasonably withheld, except that no such approval shall be necessary to the
extent that, in the opinion of counsel to the party proposing to make such
disclosure, disclosures are required by law. Such opinion of counsel shall be
confirmed in writing and promptly delivered to other parties. The parties may
disclose information with respect to the transactions contemplated hereby to
their employees, agents, securities analysts, lenders, rating agencies and
portfolio managers and consultants only to the extent such persons have a need
to know and agree to be bound by the terms hereof relative to the disclosure of
such information.
IN WITNESS WHEREOF, each of the parties hereto have duly executed this
Agreement as of the date above first written.
PCB GROUP, INC.
By: /s/ John A. Lally
John A. Lally, Vice-President,
Special Project
BEEHIVE ACQUISITION CORP.
By: /s/ John A. Lally
John A. Lally, Vice-President
LARSON DAVIS, INCORPORATED
By: /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
LARSON DAVIS LABORATORIES
By: /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
APPENDIX B
CERTIFICATE OF AMENDMENT TO
THE ARTICLES OF INCORPORATION OF
LARSON DAVIS INCORPORATED
(CHANGED HEREIN TO SENSAR CORPORATION)
The following Certificate of Amendment to the articles of incorporation of
the above-named corporation is adopted pursuant to the provisions of NRS 78.385
and 78.390. We, the undersigned, as president and secretary of Larson Davis
Incorporated (changed herein to Sensar Corporation) (the "Company"), do hereby
certify:
That the board of directors of the Company duly adopted on ,
1998, in accordance with the provisions of NRS 78.315, a resolution to
amend the articles of incorporation as follows:
ARTICLE I shall be amended to read as follows:
ARTICLE I
NAME OF CORPORATION
The name of the Corporation shall be:
Sensar Corporation
On the authorization and recommendation of the board of directors, the
foregoing resolution was submitted to a vote at a special meeting of the
shareholders of the Company duly noticed and held [ ]. The
aggregate voting power of the shares of common stock of the Company and the
shares of 1998 Series A Preferred Stock of the Company, which vote as a single
class outstanding on the record date and entitled to vote on the foregoing
resolution was [13,929,034]; the resolutions, including the amendment to the
articles of incorporation of the Company set forth above, were approved in
accordance with NRS 78.325 by the affirmative vote of , with
votes against and votes abstaining. No other class of
stock of the Company is outstanding or entitled to vote thereon.
DATED this day of , 1999.
LARSON DAVIS INCORPORATED
By
Andrew C. Bebbington, President
By
Nathan H. West, Secretary
PROXY
LARSON DAVIS INCORPORATED
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Andrew Bebbington and Nathan West proxies, with
full power of substitution, to vote the shares of Common Stock or 1998 Series A
Preferred Stock of LarsonoDavis Incorporated (the "Company"), which the
undersigned is entitled to vote at the Special Meeting of shareholders of the
Company ("Special Meeting") to be held at
, Utah, on
March , 1999, at 9:00 a.m., local time, or any adjournment(s) thereof, such
proxies being directed to vote as specified below. If no instructions are
specified, this proxy will be voted "FOR" all proposals in accordance with the
recommendation of the board of directors.
1. To sell substantially all of the assets and operations of the
Company's acoustics and vibration instrumentation business (the "Asset Sale")
pursuant to an Asset Purchase Agreement, dated November 30, 1998, between PCB
Group, Inc., and the Company (the "Purchase Agreement"). A copy of the Purchase
Agreement is attached as Appendix A to the accompanying Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. To amend the Company's Articles of Incorporation to change the
Company's name to Sensar Corporation immediately following the consummation of
the Asset Sale. A copy of the proposed amendment is attached as Appendix B to
the accompanying Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
3. To approve the possible issuance of shares of Common Stock of the
Company on conversion of the issued and outstanding 1998 Series A Preferred
Stock ("Series A Preferred Stock") that may equal or exceed 20% of the Common
Stock that was issued and outstanding at the time the Series A Preferred Stock
was created.
FOR / / AGAINST / / ABSTAIN / /
4. To approve a possible reverse stock split of the issued and
outstanding Common Stock of the Company whereby the Company would issue one new
share of Common Stock of the Company in exchange for every five to ten shares of
currently outstanding Common Stock, with the precise conversion ratio to be
determined by the Company's board of directors at a later time.
FOR / / AGAINST / / ABSTAIN / /
5. To transact such other business as may properly come before the Annual
Meeting or any adjournment(s) thereof.
FOR / / AGAINST / / WITHHOLD AUTHORITY / /
The proposals have been made by the Board of Directors and the Board of
Directors unanimously recommends that the shareholders vote "FOR" all proposals.
To vote in accordance with the Board of Directors' recommendations, sign below.
The "FOR" box may, but need not, be checked. To vote against any proposal or to
abstain from voting on any proposal, check the appropriate box above.
PLEASE PRINT YOUR NAME AND SIGN EXACTLY AS YOUR NAME APPEARS IN THE RECORDS OF
THE COMPANY. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN.
Dated:
Signature
Signature (if held jointly)
PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY TO:
PROGRESSIVE TRANSFER COMPANY
P.O. BOX 17561
SALT LAKE CITY, UTAH 84117
