UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17020
LarsonoDavis Incorporated
(Exact name of registrant as specified in its charter)
Nevada 87-0429944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1681 West 820 North, Provo, Utah 84601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 375-0177
Securities registered under section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under section 12(g) of the Act:
Common Stock, Par Value $0.001
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[x] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
As of March 26, 1999, there were 13,392,562 shares of the Issuer's common
stock, par value $0.001, issued and outstanding. The aggregate market value of
the Issuer's voting stock held by nonaffiliates of the Issuer was approximately
$4,596,000, computed at the closing quotation for the Issuer's common stock of
$0.34375 as of March 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes. None.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number and Caption Page
- ----------------------- ----
<S> <C>
PART I
1. Business..................................................................................... 3
2. Properties................................................................................... 9
3. Legal Proceedings............................................................................ 9
4. Submission of Matters to a Vote of Security Holders.......................................... 10
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 11
Unaudited Pro Forma Consolidated Financial Statements........................................ 13
6. Selected Financial Data...................................................................... 18
7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20
8. Financial Statements and Supplementary Data.................................................. 31
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................................... 31
PART III
10. Directors and Executive Officers of the Registrant........................................... 32
11. Executive Compensation....................................................................... 34
12. Security Ownership of Certain Beneficial Owners and Management............................... 40
13. Certain Relationships and Related Transactions............................................... 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 43
SIGNATURES............................................................................................ 48
</TABLE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company is engaged in the design, development, manufacturing, and
marketing of analytical instruments and has invested substantial sums in the
research and development of certain technologies over the past three years to
bring them to market.
On November 30, 1998, the Company entered into a definitive agreement to
sell its acoustics business to PCB Group, Inc. ("PCB"), in order to raise
additional working capital and to allow the Company to focus on its chemical
analysis business. This transaction was approved at the special meeting of
shareholders held March 18, 1999, and completed March 31, 1999. The business of
the Company is now focused upon the successful commercialization of two
technologies, the Jaguar Time-of-Flight mass spectrometer and the CrossCheck
resistivity monitor. The Jaguar TOF mass spectrometer and CrossCheck are both
recently introduced products. The Jaguar TOF mass spectrometer provided
approximately 6% of the Company's revenue in the year ended December 31, 1998.
The contribution to revenues from the CrossCheck technology have been negligible
to date.
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This report on Form 10-K contains certain forward looking statements and
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made concerning information
currently available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including the completion of
product enhancements in accordance with its contractual requirements, 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, 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
prove incorrect, actual results of the Company may vary materially from those
described. The Company does not intend to update these forward looking
statements, except as may occur in the regular course of its periodic reporting
obligations.
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 one of the
fastest growing mass spectrometry techniques. 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 TOF Mass Spectrometer 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 establishes 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.
Mass spectrometry instruments such as the Jaguar are sophisticated
instruments with a significant initial purchase price and customer requirements
for ongoing support. The Company believes that a major impediment to the
successful commercialization of its Jaguar TOF product was the lack of an
existing distribution structure and an established, long-term participant in the
industry. Consequently, the Company actively sought an industry partner to
assist in the marketing and support of the Jaguar. The Company was successful
in identifying and negotiating an arrangement with JEOL USA, Inc., a wholly-
owned subsidiary of JEOL, Inc., in December 1998. This is a five-year
partnership under which JEOL will have exclusive marketing rights to North and
South America on the meeting of certain minimum purchase requirements. The
parties established benchmarks for certain improvements to the Jaguar instrument
to be made by the Company that will enhance the function and performance of the
product. The Company has completed the initial improvements and one unit was
shipped to JEOL in January 1999. Based on the Company's ongoing ability to
complete further enhancements, JEOL is obligated to purchase a fixed number of
units in each year under the terms of the contract.
The Company is also negotiating a similar agreement with a European partner
to distribute the product in Europe and is actively seeking partners for the
Asian market. While the Company's partners have indicated their belief in the
market acceptance of this product, the Company will, to a large extent, be
dependent on its partners' efforts in realizing the potential value associated
with this business.
CROSSCHECK TECHNOLOGY
The Company holds the exclusive license to a technology utilized in its
"CrossCheck" products, a process used to measure resistance of materials in real
time. The technology differs from other devices that also measure resistance in
that CrossCheck is a compact device operating on low voltage alternating current
that has the ability to measure resistance to very high levels. CrossCheck is
potentially 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
the transmission 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.
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
was 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 terminating the
agreement as of May 18, 1999. On termination, HMMH is obligated to transfer
the technology, plus any enhancements and improvements, and the airport noise
monitoring maintenance contracts that rely on the technology, to the Company.
Based on HMMH's termination, 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 continue to seek patents and to use other methods to seek 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 agreed to sell its manufacturing facilities in connection with
the sale of the acoustics business. However, this portion of the transaction
has been delayed in order to provide the Company with an opportunity to seek to
resolve certain title issues unacceptable to the buyer. (See discussion under
"ITEM 2. PROPERTIES.") In order to ensure Sensar's capability to meet expected
product demand, Sensar entered into a Manufacturing Agreement with PCB covering
the anticipated manufacturing needs of the Company for 1999.
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 purchase 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 being 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 December 31, 1998, the Company had an order backlog for the chemical
analysis instrumentation believed to be firm of approximately $180,000, which is
not reflected in the financial statements included elsewhere herein. This
compares to a backlog at December 31, 1997, of approximately $400,000.
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 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 hand-held resistivity meters 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 "Underwriters Laboratories," "CE Mark," and FCC
regulations (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 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 December 31, 1998, the Company had 76 full-time employees, 27 of
which were involved in professional or technical development of products, 28 in
manufacturing, 13 in marketing and sales, and 8 in administrative and clerical.
The majority of these employees were terminated by the Company in connection
with the sale of the acoustics business to PCB. These employees were offered
employment by PCB at the manufacturing facility previously owned by the Company.
The Company currently has 20 full-time employees of which 12 are involved in the
technical development of the products, 6 in sales and administration, and 2 in
production. 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.
HISTORICAL OPERATIONS
The Company was engaged in the acoustics and vibration instrumentation
industry prior to the sale of this business to PCB. (See "ITEM 1. BUSINESS:
General," "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS," and "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.") The acoustic and vibration products of the Company focused on
precision measurement instruments for use in a variety of industries, including
environmental monitoring, product design and improvement, structural dynamics,
medical applications, professional sound, and defense and government.
Patents and Trademarks
The Company held patents covering certain aspects of its acoustical and
vibration measurement instrumentation that were transferred to PCB in connection
with the sale.
Manufacturing and Assembly
The Company owned its manufacturing facility for the acoustics
instrumentation manufacturing and performed most of its manufacturing directly.
The Company has agreed to transfer this facility to PCB Group, Inc., in
connection with the sale of the acoustics business. (See "ITEM 2.
PROPERTIES.")
Marketing and Distribution
The Company marketed its acoustics and vibration hardware products
primarily through independent manufacturer's representatives in the United
States and stocking distributors throughout the rest of the world. The Company
believes that the marketing of the acoustics products will be primarily through
the in-house distribution organization of PCB.
Backlog
As of December 31, 1998, the Company had an order backlog believed to be
firm of approximately $632,000 for acoustics and vibration equipment as compared
to a backlog at December 31, 1997, of approximately $674,000.
BUSINESS HISTORY
During recent years, the Company has been involved in a number of
significant business changes as follows:
June 1994--The Company acquired substantially all of the intangible assets
of a privately-held Massachusetts corporation related to the airport noise
monitoring industry. Also purchased were the rights to approximately 25
contracts for the installation, maintenance, and support of airport noise
monitoring systems. In August 1995, the Company entered into an agreement to
transfer the airport noise monitoring operations to an established consulting
firm engaged in the transportation industry and licensed its proprietary
software to this firm. The Company also transferred the management of
substantially all of its airport contracts to the consulting firm and agreed not
to compete within the industry. The consulting firm recently indicated its
intention to terminate this license as of May 18, 1999.
June 1994--With the return of the minority interest in LarsonoDavis Info,
Inc. ("Info"), a subsidiary of the Company, held by Commerce Clearing House, the
Company discontinued the operations of two of its software based subsidiaries,
Info and Advantage Software, Inc. Management terminated the business of these
subsidiaries and reduced the carrying value of the related assets to zero.
October 1995--The Company acquired all of the outstanding stock of Sensar
Corporation.
November 1997--Senior management of the Company was reorganized, with three
of the five directors resigning and the Company employing a new executive
management team. The Company recognized restructuring and other charges in
connection with this change.
1998--The Company implemented a number of cost cutting measures,
terminating a development project with Lucent Technologies, terminating a
distribution arrangement with SAES Getters S.p.A. and discontinuing its TOF 2000
product, and selling its Supercritical Fluid Chromatography technology to a
group of former employees.
March 1999--The Company completed the sale of its acoustics instrumentation
business to PCB.
ITEM 2. PROPERTIES
The Company agreed to sell its administrative and manufacturing facilities
in Provo, Utah, to PCB in connection with the sale of the acoustics business.
However, certain issues have arisen during the due diligence investigation that
has delayed this sale. The Company has entered into a short-term lease
agreement with PCB. The parties anticipate that this arrangement will be
temporary and that the anticipated sale of the property to PCB will close in the
near future. The facilities consist of 13,200 square feet of administrative,
engineering, and research and development space and approximately 11,500 square
feet of manufacturing, storage, and shipping space. These facilities, less the
approximately 16% occupied by the Company's Sensar Division, are currently
leased to PCB for a monthly lease payment of $7,495.00. The Company has the
right to utilize a portion of the space for its Sensar operations until December
31, 1999.
The Company recently terminated its lease of facilities in which the Sensar
division was previously located.
ITEM 3. 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. The counterclaim was recently dismissed, without
prejudice, by the court in a ruling which indicated that Mr. Larson had failed
to establish grounds for rescission and could no longer seek damages under his
former employment agreement. There has been only limited discovery in this
matter and the Company cannot currently predict the potential outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended December 31, 1998, the Company did not hold a
shareholders' meeting and no matters were submitted to a vote of the security
holders of the Company, through the solicitation of proxies or otherwise. At
the special meeting of shareholders held March 18, 1999, all proposals of
management were approved by the shareholders. The proposal to sell the
acoustics business to PCB was approved by a vote of 7,822,243.5 for, 76,849
against, 449,101 abstaining, and 329,659 broker non votes. The proposal to
amend the Company's articles of incorporation to change its name to Sensar
Corporation was approved by a vote of 7,815,577.5 for, 77,666 against, 454,950
abstaining, and 329,659 broker non votes. The proposal to approve the issuance
of common stock on conversion of the 1998 Series A Preferred Stock was approved
by a vote of 7,364,280.5 for, 504,706 against, 479,207 abstaining, and 329,659
broker non votes. The proposal to approve a reverse split of the issued and
outstanding common stock of the Company was approved by a vote of 6,210,065.5
for, 1,653,014 against, 485,114 abstaining, and 329,659 broker non votes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of the Company is currently listed on the Nasdaq National
Market ("NNM"), under the symbol "LDII." The rules of the NNM require that as a
condition of the continued listing of a company's securities on the NNM, a
company satisfy certain maintenance requirements, including, among other things,
maintaining a market value of the public float of at least $5 million and a
minimum bid price equal or greater than $1.00 per share. The Company's common
stock has traded below the minimum bid price of $1.00 per share since the end of
August 1998, and Nasdaq notified the Company that its 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 appeared before a hearing
panel to contest this decision on March 19, 1999. At that hearing, the Company
requested that its common stock be moved from the NNM to the Nasdaq SmallCap
Market. The Company has not received a decision with respect to its request.
During the interim, the Company's common stock will continue to trade on the
NNM, unless the NASD makes a determination to deny the Company's appeal and
delist the common stock.
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
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<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 March 26, 1999, the closing quotation for the common stock on NNM was
$0.34375. As reflected by the high and low bids on the foregoing table, the
trading price of the common stock of the Company can be volatile with dramatic
changes over short periods. The trading price may reflect market reaction to
the perceived applications of the Company's technology, the potential products
that may be based on that technology, the direction and results of research and
development efforts, and many other factors. Investors are cautioned that the
trading price of the common stock can change dramatically based on changing
market perceptions that may be unrelated to the Company and its activities.
As of March 26, 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. As of
March 26, 1999, the Company 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 Series A 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.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of December
31, 1998, estimates the pro forma effect of the sales of its acoustics business
on the Company's financial position as if the sale and the transactions
contemplated in the Asset Purchase Agreement, as amended, had been consummated
on December 31, 1998. The following unaudited pro forma consolidated statement
of operations for the year ended December 31, 1998, estimates the pro forma
effects of the sale on the Company's results of operations as if the sale had
occurred on January 1, 1998. The following unaudited pro forma consolidated
statement of operations also estimates the pro forma effects of the
discontinuance and/or sale of certain products or technologies on sales and cost
of sales for the corresponding period. 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.
In January 1999, the Company 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. Under the terms of the
agreements, the purchase will occur within 15 days of the closing of the sale.
The holders have agreed not to convert the Series A Preferred Stock to common
stock in the interim. The total cost to the Company to redeem all of the
currently outstanding Series A Preferred Stock is approximately $3.1 million.
The redemption of the Series A Preferred Stock has not been reflected
in the accompanying unaudited pro forma consolidated financial statements.
The sale gives 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 sale. The
potential payments of amounts due in the event the chief executive officer
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
December 31, 1998
<TABLE>
<CAPTION>
Sale of Acoustics Business
-------------------------------------
Historical Pro Forma Pro Forma
Consolidated Adjustments Consolidated
------------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 694,959 $ 5,336,479 (a) $ 5,785,921
(245,517) (b)
Trade accounts receivable, net of
allowance for doubtful accounts 1,738,478 (1,340,290) (a) 398,188
Note receivable - 500,000 (a) 500,000
Inventories 2,046,871 (1,326,891) (a) 719,980
Other current assets 157,046 (11,217) (a) 91,346
(54,483) (b)
------------ ------------ ------------
Total current assets 4,637,354 2,858,081 7,495,435
Property and equipment, net of
accumulated depreciation and
amortization 1,327,248 (1,152,339) (a) 174,909
Assets under capital lease obligations,
net of accumulated amortization 202,026 (202,026) (a) -
Intangible assets, net of accumulated
amortization 322,779 (274,826) (a) 47,953
------------ ------------ ------------
$ 6,489,407 $ 1,228,890 $ 7,718,297
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 538,121 $ (347,068) (a) $ 191,053
Accrued liabilities 921,683 (385,692) (a) 535,991
Current maturities of long-term debt 682,982 (682,982) (a) -
Current maturities of capital lease obligations 128,064 (128,064) (a) -
------------ ------------ ------------
Total current liabilities 2,270,850 (1,543,806) 727,044
Deferred gain - 200,000 (a) 200,000
Capital lease obligations, less current maturities 168,985 (168,985) (a) -
------------ ------------ ------------
Total liabilities 2,439,835 (1,512,791) 927,044
------------ ------------ ------------
Commitments and contingencies - - -
Stockholders' equity:
Preferred Stock, $0.001 par value; authorized
10,000,000 shares; issued and outstanding
3,039.95 shares at December 31, 1998 3 - 3
Common stock, $0.001 par value; authorized
290,000,000 shares; issued and outstanding
13,070,914 shares at December 31, 1998 13,071 - 13,071
Additional paid-in capital 30,693,490 - 30,693,490
Accumulated deficit (26,282,308) 3,041,681 (a) (23,540,627)
(300,000) (b)
Notes receivable from sale of stock (374,684) - (374,684)
------------ ------------ ------------
Total stockholders' equity 4,049,572 2,741,681 6,791,253
------------ ------------ ------------
$ 6,489,407 $ 1,228,890 $ 7,718,297
============ ============ ============
</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, 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> <C> <C> <C> <C>
Net sales $ 8,729,192 $(7,068,785) (c) $ 1,660,407 $(1,129,624) (f) $ 530,783
----------- ----------- ----------- ----------- -----------
Costs and operating expenses:
Cost of sales 5,241,186 (3,269,907) (c) 1,971,279 (1,581,374) (f) 389,905
Research and development 2,919,945 (1,311,368) (c) 1,608,577 - (f) 1,608,577
Selling, general, and
administrative 4,055,188 (2,255,267) (c) 1,882,581 - (f) 1,882,581
82,660 (d)
Unusual charges 3,436,733 - 3,436,733 (2,871,907) (f) 564,826
----------- ----------- ----------- ----------- -----------
15,653,052 (6,753,882) 8,899,170 (4,453,281) 4,445,889
----------- ----------- ----------- ----------- -----------
Operating loss (6,923,860) (314,903) (7,238,763) 3,323,657 (3,915,106)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income 137,814 - 137,814 - 137,814
Interest expense (132,388) 79,827 (c) (52,561) 25,206 (f) (27,355)
Other, net (5,010) (63,330) (c) (68,340) 34,220 (f) (34,120)
----------- ----------- ----------- ----------- -----------
416 16,497 16,913 59,426 76,339
----------- ----------- ----------- ----------- -----------
Net loss $(6,923,444) $ (298,406) $(7,221,850) $ 3,383,083 $ (3,838,767)
=========== =========== =========== =========== ============
Loss per common share:
Basic $ (0.65) (e) $ (0.68) (e) $ (0.41)(e)
Diluted $ (0.65) (e) $ (0.68) (e) $ (0.41)(e)
Weighted average common and
common equivalent shares:
Basic 12,683,658 12,683,658 12,683,658
Diluted 12,683,658 12,683,658 12,683,658
</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
December 31, 1998. The sale of the business was completed March 31, 1999. The
related sale of real property and improvements was deferred for a period in
order for the Company to seek to resolve certain title issues that were
unacceptable to the buyer. Estimated net proceeds, liabilities assumed, assets
sold, and resultant gain from the entire sale of the assets is as follows:
<TABLE>
<CAPTION>
<S> <C>
Consideration to be received:
Cash (plus $86,479 net
working capital adjustment) $ 5,336,479
Note receivable 500,000
-------------
Purchase price 5,836,479
Liabilities assumed 1,712,791
-------------
Total proceeds received 7,549,270
Historical cost of assets sold 4,307,589
-------------
Total gain on sale 3,241,681
Gain deferred on non-compete agreement 200,000
-------------
Gain on sale recognized $ 3,041,681
=============
</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 sale,
which include:
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses $ 125,000
Accounting fees and expenses 30,000
Appraisal and survey costs 15,000
Printing, mailing, and solicitation costs 80,000
Transfer agent costs 20,000
Other 30,000
------------
$ 300,000
============
</TABLE>
(c) The unaudited pro forma consolidated statement of operations for the
year ended December 31, 1998 gives effect to the sale as though it had occurred
on January 1, 1998. This pro forma adjustment eliminates the historical results
of operations of the Company's acoustics business. The gain from the sale is
not included in the pro forma consolidated statement of operations.
(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 year ended December 31, 1998, net loss attributable to common
shareholders includes a non-cash imputed dividend to the preferred shareholders
related to the beneficial conversion feature on the 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 20 employees, composed of
12 employees in research and development, 2 senior executive employees, 4
employees in sales and marketing, and 2 employees in production. 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
column for the year ended December 31, 1998.
Nonrecurring and unusual charges have been specifically identified with the
technologies or products to which they relate. The principal charges associated
with the discontinued technologies or products are the write off of assets and
provisions for costs related to the discontinuance of the TOF2000 product. See
Note B to the December 31, 1998, consolidated financial statements included
elsewhere.
ITEM 6. SELECTED FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data as of and for
the periods ended December 31, 1998, 1997, and 1996, and June 30, 1996, 1995,
and 1994, were derived from the 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, 1998, and 1997,
for the six months ended December 31, 1996, and for the fiscal years ended June
30, 1996, 1995, and 1994, 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 selected financial data below
should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Six Months
Ended
Year Ended December 31, December Year Ended June 30,
---------------------------------------------- 31, ------------------------------------------
1998(1) 1997(2) 1996 1996 1996(3) 1995(5) 1994(4)(5)
---------- ---------- ------------ ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $8,729,192 $8,313,328 $8,992,614 $4,889,280 $8,255,607 $6,515,830 $5,137,638
Costs and operating
expenses
Cost of sales $5,241,186 $6,074,883 $4,469,351 $2,177,304 $3,407,613 $1,916,413 $1,718,769
Research and
development $2,919,945 $4,860,993 $3,055,705 $1,734,911 $2,149,384 $708,679 $834,520
Selling, general,
and administrative $4,055,188 $6,019,282 $4,643,721 $2,534,643 $3,922,976 $3,131,938 $2,863,074
Unusual and non-
recurring charges $3,436,733 $5,937,355 - - - - -
Operating profit ($6,923,860) ($14,579,185) ($3,176,163) ($1,557,578) ($1,224,366) $758,800 ($278,725)
(loss)
Other income
(expense), net $416 ($238,626) ($393,936) ($86,342) ($481,882) ($300,289) ($162,511)
Income (loss) from
continuing
operations ($6,923,444) ($14,817,811) ($3,570,099) ($1,643,920) ($1,706,248) $458,511 ($441,236)
Basic earnings (loss)
from continuing
operations per
common share ($0.65) ($1.29) ($0.38) ($0.16) ($0.21) $0.08 ($0.08)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
At December 31, At June 30,
--------------------------------------------- -------------------------------------------
1998 1997 1996 1996 1995 1994
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets $6,489,407 $12,195,430 $19,906,521 $19,769,028 $11,579,667 $11,011,119
Long-term obligations $168,985 $1,275,512 $1,282,894 $1,136,006 $1,213,331 $1,078,073
Cash dividends
per common share $0 $0 $0 $0 $0 $0
</TABLE>
[FN]
(1) For the year ended December 31, 1998, there are unusual charges of
$3,436,733 ($0.27 per share) included in operating loss and in loss from
continuing operations. These unusual charges principally represent the
writeoff of intangible assets associated with the Sensar TOF2000
technology. (See Note B to Consolidated Financial Statements).
Exclusive of these unusual charges, operating loss and loss from
continuing operations for the year ended December 31, 1998, would have
been $3,487,127 and $3,486,711, 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 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
LarsonoDavis, 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.
ITEM 7. 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 was historically engaged in designing and manufacturing
precision acoustical and vibration instrumentation. From 1994 through 1997,
the Company acquired the rights to a number of technologies and dedicated
significant time, effort, and expense to research and development efforts to
create products designed for the chemical analysis 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 instrumentation business.
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 to individual investors, in order to meet
these costs.
In November 1997, the board of directors, due in part to missed product
deadlines and significant ongoing operating losses, replaced executive
management of the Company. Andrew C. Bebbington was appointed 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.
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, 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 Consolidated Financial Statements.)
Clear goals and targets were set for each remaining business segment such
that the technology would be profitable by the end of the third quarter of 1998,
could clearly demonstrate a path to profitability soon thereafter, or would be
eliminated from the Company's short-term goals.
Over the course of 1998, the Company continued to monitor each of the
technologies in its portfolio in light of these goals and, where necessary,
additional appropriate cost cutting measures were taken. As a result, 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
also sold its SFC business to a group of former employees. In each case, the
Company reduced personnel and overhead accordingly. Largely as a result of the
discontinuance of these products and technologies, the Company recorded unusual
charges of $3,436,733 during 1998. (See Note B to the Consolidated Financial
Statements.)
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 in 1999 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 a utility company
directly, and has begun the process of product evaluation directly with
potential end users. The Company is 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 an initial
unit has been installed for field tests. 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 during 1998 with the intention of upgrading the product line and
improving its technical competitiveness. At the same time, the Company
continued its cost cutting measures and took steps to implement operational
discipline in the acoustics business. Significant improvement in the
performance of the acoustics business based on a year-to-year comparison of
results of operations was obtained. Management believes that these steps
permitted the successful negotiation of the sale of the acoustics business to
PCB.
Under the terms of the agreement with PCB, the Company received cash at
closing of approximately $4.6 million and a promissory note due April 1, 2000,
in the principal amount of $500,000. PCB also assumed approximately $1,100,000
of the Company's liabilities. Subject to the resolution of certain title and
zoning issues, PCB will also acquire the manufacturing and administrative
facilities of the Company for an agreed price of $1.4 million. The Company has
a loan of approximately $700,000 that will be required to be paid in connection
with this sale. This cash infusion and decrease in debt will permit the Company
to redeem its 1998 Series A Preferred Stock, which had a conversion feature very
disadvantageous to the holders of common stock, and to have sufficient funds to
bring its Jaguar TOF mass spectrometer and CrossCheck products to market.
While management of the Company continues to believe in, and is committed
to, development of superior products designed to meet the needs of significant
markets, the products currently being introduced and 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 and market the
targeted products or market acceptance or development of such products is
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 Years Ended December 31, 1998 and 1997
Net Sales
Net sales for the year ended December 31, 1998 and 1997, were $8,729,192
and $8,313,328, respectively. Acoustic sales represent 81.0% of total Company
sales in 1998 compared to 84.7% in 1997. Sales have increased by $415,864, or
5.0%, for 1998 as compared to 1997. The increase is principally due to an
increase in Sensar's chemical analysis for sales of $385,330 from $1,275,077 in
1997 to $1,660,407 in 1998. During 1998, Sensar had its first sales of Jaguar
and SFC totalling $766,852. TOF2000 sales and service declined by $321,774.
Acoustic sales were $7,068,785 in 1998 compared to $7,038,251 in 1997, an
increase of $30,534, or 0.4%.
During the year ended December 31, 1998, export sales represented 45% of
net sales compared to 52% for the year ended December 31, 1997. 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. 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, 1998, were $5,241,186, or
60.0% of net sales, compared to $6,074,883, or 73.1% of net sales, for the year
ended December 31, 1997. The increased level in costs of sales as a percentage
of net sales for both 1998 and 1997 above historical levels are due to a variety
of reasons. For 1998, the increased level of cost of sales is principally the
result of inventory adjustments 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. For 1997, see
the discussion at page 23 under "Cost of Sales" for reasons for the increased
level of cost of sales. Cost of sales for acoustic products during the year
ended December 31, 1998, was 46.3% of net sales reflecting personnel reductions
in manufacturing overhead of six full-time and four part-time positions.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased to $4,055,188, or
46.5% of net sales, for the year ended December 31, 1998, compared to
$6,019,282, or 72.4% of net sales, for the year ended December 31, 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) $473,000 in
professional and consulting fees; (2) $438,000 in payroll and associated labor
costs from a reduction of 14 full-time positions; (3) $161,000 in employee
recruitment and relocation costs; and (4) $156,000 in travel and related
expenses. Additionally, depreciation and amortization expense decreased by
approximately $90,000 principally 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 year ended December 31, 1998, research and development costs were
$2,919,945, or 33.5% of net sales, compared to $4,860,993, or 58.5% of net
sales, for the year ended December 31, 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) $840,000 in materials and supplies principally used in
prototype development; and (2) $260,000 in payroll and associated labor costs
from a reduction of 11 full-time positions. Additionally, depreciation and
amortization expenses decreased by approximately $190,000 principally 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 year ended December 31, 1998, the Company recognized unusual
charges of $3,436,733 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
allowances against receivables from former executive officers for $564,826.
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 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 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 1998, 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. Additionally, with the decline in the price of the Company's common
stock, an uncertainty has arisen regarding the ability of the former executives
to fully pay their notes from the exercise of options. Accordingly, the Company
has provided an allowance of $400,000 against the notes at December 31, 1998.
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 1996 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.
1997 revenue from the Company's chemical analysis instruments was
approximately the same as in 1996. The Company marketed 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 were historically 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 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 were comparable to
the prior year representing 52% of net sales compared to 49% for the year ended
December 31, 1996.
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 had 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 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.
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. 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 December 31, 1998 and December 31, 1997, the Company had total current
assets of $4,637,354 and $6,160,440, respectively, including cash and cash
equivalents of $694,959 and $1,212,473, respectively. The Company had total
current liabilities at December 31, 1998 and December 31, 1997 of $2,270,850 and
$4,066,915, respectively, resulting in working capital of $2,366,504 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 years ended December 31, 1998
and 1997, was from the issuance of preferred and common stock and from the
exercise of options and warrants in the aggregate amount of $3,743,485 and
$4,627,630, respectively.
The Company's primary use of cash for the years ended December 31, 1998 and
1997, were funds used in operations of $2,709,872 and $5,122,057, respectively.
The Company also used $1,198,766 for the termination of its line of credit
during the year ended December 31, 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 December 31, 1998, is the balance of the mortgage in the
amount of $682,982. The Company has obtained the consent of the mortgage lender
to a short extension of the due date for the balloon payment to July 15, 1999,
and this obligation will be paid as part of the sale of the real property.
The Company has significantly reduced its historically heavy use of cash to
fund the losses in the acoustic business and the continued investment in
research in Sensar. Nevertheless, the Company is still not operating on a cash
positive basis and hence continues to reduce its cash resources. As a result of
these continuing losses and the decreasing cash reserves of the Company,
management elected to negotiate the sale of the acoustics business to PCB.
The Series A Preferred Stock placed by the Company in 1998 contain a
beneficial conversion feature. The Company was concerned that the decrease in
the Company's stock price combined with the potential for conversion of the
Series A Preferred Stock and subsequent sale of the common stock received,
created a market "overhang" that was potentially detrimental to the shareholders
of the Company. The Company sought and obtained the agreement of the holders of
the remaining Series A Preferred Stock to sell their stock back to the Company.
The Company intends to use approximately $3.1 million of the proceeds from the
sale of the acoustics business to redeem the Series A Preferred Stock in
accordance with the terms of the moratorium agreement entered into in January
1999. After payment of the associated costs and meeting its other obligations,
the Company expects to have cash reserves of approximately $2.3 million on
completion of the sale.
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 four months of 1999.
As product demand is achieved, management believes that its long-term
operating and capital requirements will be funded principally through cash
generated from operations, supplemented as necessary from equity or long-term
debt financing. Management believes that current cash on hand, 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. However, should the costs of introduction and
support of its products exceed the Company's expectations, the Company 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth immediately
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name and age of each executive officer and director
of the Company, together with all positions and offices of the Company held by
each and the term of office and the period during which each has served:
<TABLE>
<CAPTION>
Director and/or
Name Age Position and Office Held Executive Officer Since
-------------------- --- ------------------------ -----------------------
<S> <C> <C> <C>
Andrew C. Bebbington 38 President and Chairman
of the Board November 1997
Jeffrey S. Cohen 38 Chief Operating Officer
and Director February 1998
Sir Colin Dollery 67 Director April 1998
Stanley Friedman 71 Director April 1998
</TABLE>
A director's regular term is for a period of three years or until his
successor is duly elected and qualified. The terms of the board are staggered
so that one-third of the board is subject to election at each annual
shareholders' meeting. The current term of Andrew C. Bebbington expires at the
2001 annual meeting; the current term of Jeffrey S. Cohen expires at the 1999
annual meeting; and the current terms of Sir Colin Dollery and Stanley Friedman
expire at the 2000 annual meeting.
There is no family relationship among the current directors and executive
officers. The following sets forth brief biographical information for each
director and executive officer of the Company.
Andrew C. Bebbington, was appointed as a director and president of the
Company in November 1997. Mr. Bebbington was formerly president of Neslab
Instruments Inc. for a period of six years, as well as serving on the board of
directors of Life Sciences International PLC until its purchase by Thermo
Electron, Inc., in March 1997. Prior to this position, Mr. Bebbington served as
business development director of Life Sciences for a period of four years during
which time he was responsible for coordinating Life Sciences' rapid expansion
through acquisition. Mr. Bebbington is a graduate of the London School of
Economics and is a Chartered Accountant. Mr. Bebbington served in the KPMG
consulting practice specializing in mergers, acquisitions, and other strategic
and financial planning activities.
Jeffrey S. Cohen, was appointed as a director of the Company in February
1998 and to serve as chief operating officer of the Company. Mr. Cohen was
formerly a vice-president at Orion Research, a subsidiary of Thermedics
Corporation, itself a subsidiary of Thermo Electron Inc. Prior to this
position, Mr. Cohen held a variety of positions encompassing senior management
roles in engineering, operations, and marketing for several different
organizations. He holds a masters degree from the University of Lowell in
computer engineering, and an undergraduate degree in microbiology from The
University of Massachusetts at Amherst. He also holds an MBA from Northeastern
University.
Sir Colin Dollery, was appointed as a director of the Company in April
1998. Sir Colin Dollery currently serves as a senior consultant to the research
and development group at SmithKline Beecham PLC. Prior to this, he served as
Chairman of Clinical and Biopharmaceutical Consultancy Ltd., served as a non-
executive director of Life Sciences International PLC, and has been employed by
Merck & Company as well as by Zeneca Pharmaceuticals PLC in various senior
advisory roles, reporting to the Board of Directors. A former Professor and
Chairman of the Department of Clinical Pharmacology at the Royal Postgraduate
Medical School, he holds the title of Professor Emeritus at the University of
London and holds a number of advanced degrees.
Stanley Friedman, was appointed as a director of the Company in April 1998.
Mr. Friedman has had extensive experience in high technology corporations. He
served at ITT Corporation for 15 years, retiring as a Corporate Vice-President
and Group Executive. Previous executive positions included Vice-President and
Division General Manager with Lockheed Electronics, a division of Lockheed
Aircraft Corporation, as well as management positions with RCA Corp. An
electrical engineering graduate of Worcester Polytechnic Institute, he holds an
advanced engineering degree from Purdue University in addition to being a Sloan
Fellow at Stanford University. He is currently a director of Spaulding
Composites, Inc., a manufacturer of industrial materials.
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 C. 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to the
chief executive officer of the Company and the other executive officer of the
Company who received compensation in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
----------------------------- ------------------------- -------
Other
Annual All Other
Compen- Restricted LTIP Compen-
Name and sation Stock Options/ Payouts sation
Principal Position Year Salary($) Bonus($) ($)(1) Awards($) SARs(#) ($) ($)(4)
- ------------------------- ----------- --------- --------- -------- ---------- ------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew C. Bebbington, 12/31/98 $250,000 $100,000 $ 6,569 $ 0 1,000,000(5) $ 0 $53,303
CEO and Chairman 12/31/97(2) $ 31,250 $ 0 $ 575 $ 0 1,000,000(5) $ 0 $ 0
of the Board
Jeffrey S. Cohen, 12/31/98(3) $128,333 $ 45,000 $ 6,001 $ 0 300,000 $ 0 $14,577
Chief Operating Officer
and Director
</TABLE>
[FN]
(1) These amounts reflect the benefit to the named executive officers of
amounts paid by the Company for health, disability, and life insurance.
(2) Mr. Bebbington accepted the positions of chief executive officer and a
member of the board of directors effective November 17, 1997.
Mr. Bebbington was not previously an employee of the Company. The
foregoing table reflects amounts paid, awarded, or accrued for
Mr. Bebbington from November 17, 1997, to December 31, 1997.
(3) Mr. Cohen accepted the positions of chief operating officer and a member
of the board of directors effective February 2, 1998. Mr. Cohen was not
previously an employee of the Company. The foregoing table reflects
amounts paid, awarded, or accrued for Mr. Cohen from February 2, 1998,
to December 31, 1998.
(4) These amounts reflect amounts paid by the Company to, or on behalf of, the
named executive officers for relocation costs in conjunction with their
employment by the Company.
(5) In 1997, as part of his employment by the Company, Mr. Bebbington was
granted an option to acquire 1,000,000 shares of common stock. In March
1998, the option granted in 1997 was terminated in favor of an option to
acquire 1,000,000 shares of common stock with modified provisions for
vesting and exercise prices.
The following table sets forth the information concerning the options
granted to the named executive officers during the year ended December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed
Annual Rates of Stock Appreciation
Individual Grants for Option Term
- ------------------------------------------------------------------------ -------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number of Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees During Base Price Expiration 5% 10%
Name Granted (#) Fiscal Year ($/share) Date ($) ($)
- -------------------- -------------------- ---------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Andrew C. Bebbington 1,000,000 56.8% (1) (3) $ 68,149 $712,992
Jeffrey S. Cohen 300,000 17.0% (2) (3) $198,997 $576,524
</TABLE>
[FN]
(1) An option was granted in the year ended December 31, 1997, for 1,000,000
shares of common stock. That 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 vests 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 vests 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.
(2) The option was granted to purchase 300,000 shares of common stock, of
which the right to exercise is immediately vested with respect to 75,000
shares and vests with respect to 75,000 shares on each December 31, 1998,
1999, and 2000, and is exercisable at prices ranging from $2.99 to $5.50
per share.
(3) The option expires with respect to each block of stock five years
subsequent to the vesting of the right to exercise such block of stock.
The following table sets forth the information concerning the options
exercised by the named executive officers during the year ended December 31,
1998, and the value of unexercised options as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- -------------------- --------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Andrew C. Bebbington 0 $0 500,000/500,000 $0/$0
Jeffrey S. Cohen 0 $0 150,000/150,000 $0/$0
</TABLE>
During 1998, the terms of the options held by Mr. Bebbington and Mr. Cohen
were amended. Mr. Bebbington was originally granted an option when he joined
the Company to acquire 1,000,000 shares of common stock that vested 250,000 on
execution of a definitive employment agreement and 250,000 on each of December
31, 1998, 1999, and 2000. The exercise price for the options was $5.75 provided
that if the initial 500,000 options were exercised at a time when the market
price was less than $7.50, the exercise price would be the greater of 80% of
market or $3.60 per share. Options with respect to 166,667 shares were subject
to vesting on each of December 31, 1998, 1999, and 2000, on the meeting of
performance criteria to be established by the board of directors. When Mr.
Cohen joined the Company in February 1998, the Company committed to a similar
option for 300,000 shares of common stock at an initial exercise price of
$2.9876.
In the course of negotiation of definitive employment agreements, these
options were modified. Mr. Bebbington's options now vest 250,000 on his joining
the Company and 250,000 on each of December 31, 1998, 1999, and 2000, so long as
he remains an employee of the Company (500,000 shares are currently vested).
The initial 250,000 shares and 83,333 shares that vest on December 31, 1998,
1999, and 2000, have an exercise price of $3.60 per share. The remaining
166,667 shares that vested on December 31, 1998, have an exercise price of $4.50
per share. The remaining 166,667 shares that vest December 31, 1999, have an
exercise price of $5.50 per share, and the remaining 166,667 that vest December
31, 2000, have an exercise price of $6.50 per share.
The options held by Mr. Cohen vested 75,000 in February 1998 and in
December 1998, and will vest 75,000 on December 31, 1999, and 2000, so long as
he is then an employee of the Company. The exercise price with respect to
187,000 options is $2.9875. The exercise price of the 37,500 options vesting
December 31, 1998, have an exercise price of $3.60, 37,500 options vesting
December 31, 1999, have an exercise price of $4.50, and 37,500 options vesting
December 31, 2000, have an exercise price of $5.50.
Also, in March 1998, the Company cancelled options to acquire 10,000
shares at an exercise price of $10.50 per share that were held by Craig Allen,
the chief financial officer of the Company, and issued him options to acquire
15,000 shares at an exercise price of $3.1375 per share.
The board of directors approved the changes to the options to be granted to
Mr. Bebbington, Mr. Cohen, and Mr. Allen based on a number of factors, including
the decrease in the price for the Company's common stock, the ability to fix the
exercise price of all of the options, and the necessity of structuring a
transaction attractive enough to retain executive management.
The Company does not have any other option repricings with respect to
options held by executive officers during the preceding ten years.
The following performance graph compares the performance of the Company's
common stock to the Total Returns Index for the Nasdaq Stock Market (U. S.
Companies) and an industry peer group. The industry peer group, selected by the
Company, is comprised of 123 U. S. companies whose stock is traded on Nasdaq and
which are included in Standard Industrial Code Classification No. 382 entitled
"Measuring and Controlling Devices." The graph assumes that $100 was invested on
June 30, 1994, in the Company's stock and the indices. It is also assumed that
dividends, if any, were reinvested when paid. The Company's fiscal year
formerly ended on June 30, but was changed to December 31, effective December
31, 1996.
[Graphical representation of the performance of the Company's stock as compared
to the Total Returns Index for the Nasdaq Stock Market and an industry peer
group selected by the Company with the following data points.]
<TABLE>
<CAPTION>
6/30/94 6/30/95 6/30/96 12/31/96 12/31/97 12/31/98
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
The Company 100 92 263 313 85 9
Nasdaq Stock Market Total Return Index 100 134 171 186 228 321
Industry Peer Group (SIC code 382) 100 168 220 237 271 243
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with its chief executive
officer (CEO) and chief operating officer (COO) as of November 1997 and February
1998, respectively. These agreements have initial terms that expire December
31, 2000, and February 2, 1999, respectively, but renew automatically so there
is always an unexpired one-year term. The employment agreements require
devotion of the full business time of the executive to the Company, prohibit the
executive from competing in any fashion with the Company during the term of the
agreement and for one year subsequent to termination, and prohibit disclosure or
use by the executive of trade secrets or other confidential information of the
Company for a period of three years subsequent to termination.
The employment agreements provide for annual compensation of $250,000 and
$140,000 for the CEO and COO, respectively, plus certain guaranteed bonuses for
1998 only. Under the terms of the employment agreements, the salary for Mr.
Cohen is subject to an annual increase as may be determined by the board of
directors or the compensation committee of the Company. Bonuses in future years
may be paid at the discretion of the board of directors or compensation
committee based on performance.
In connection with the execution of the employment agreements, the CEO was
granted options to acquire 1,000,000 shares of common stock with an exercise
price of between $3.60 and $6.50 per share. The COO was granted options to
acquire 300,000 shares of common stock of which 187,500 have an exercise price
of $2.99 per share. The right to exercise such options vest in the executive
with respect to 25% of the shares as of the date of grant and an additional 25%
each year thereafter. The options expire, if not previously exercised, five
years after vesting.
In the event that the executive is disabled or dies during the term of his
employment agreement, he is entitled to the better of (i) the benefits under any
disability policy maintained by the Company; or (ii) his base salary for a
period of 90 days.
The employment agreements can be terminated by the Company for cause by
showing that the executive has materially breached the terms of the employment
agreement, that the executive, in the reasonable determination of the board of
directors, has been grossly negligent or engaged in material willful or gross
misconduct in the performance of his duties, or that the executive has committed
or been convicted of fraud, embezzlement, theft, dishonesty, or other criminal
conduct against the Company. On the sale or transfer of all or substantially
all of the assets of the Company, the merger of the Company into another entity,
the termination of the business of the Company, a change in control of the
Company, or the continued breach by the Company of the employment agreement
after 20 days written notice, the executive has the right to terminate the
employment agreement. In the event of a termination of the employment agreement
other than by the Company for cause, the executive will receive an amount equal
to the amount of salary that would otherwise accrue to executive during the
remaining employment period, except that in the case of the CEO, the amount will
not be less than his base salary for a one-year period. In addition, the
options held by the executive that had not previously vested would immediately
vest and become exercisable.
The Company agrees to indemnify the executives and hold them harmless from
liability for acts or decisions made by the executive in connection with
providing services to the Company to the greatest extent permitted by law. The
Company has an obligation to use its best efforts to obtain officer's and
director's insurance covering the executive. Each of the executives agree to
indemnify the Company and hold it harmless from liabilities arising from their
acts or omissions in violation of their duties under the employment agreements
that constitute fraud, gross negligence, or willful and knowing violations.
COMPENSATION OF DIRECTORS
The Company compensates its outside directors for service on the board of
directors by payment of a monthly fee of $1,000, payment of $2,000 for each
board meeting attended, payment of $500 for each telephone board meeting, and
reimbursement of expenses incurred in attending board meetings. The Company
does not separately compensate its board members who are also employees of the
Company for their service on the board.
In 1998, the board of directors appointed Sir Colin Dollery and Mr. Stanley
Friedman as non-executive directors. As part of their compensation, they were
each awarded options to acquire 30,000 shares of common stock of the Company at
an exercise price of $2.9375 per share. The right to exercise this option vests
with respect to 50% of the shares on each of the two succeeding anniversaries of
the grant provided that the individual holder is then a director of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company has a compensation committee comprised of the two non-executive
directors and the CEO. The entire board, other than the particular individual
executive officer involved, participates in the setting of compensation for
senior management. This committee meets annually for the purpose of setting the
compensation of the COO and CEO.
Report on Executive Compensation
Management compensation is overseen by the board of directors of the
Company, which consists of two members of senior management and two outside
directors who are not employees of the Company.
Compensation Philosophy. The board of directors recognizes the need to
attract and retain qualified executives with appropriate experience and
technical capabilities. The Company operates in the high-technology
instrumentation field, which is a fast moving, dynamic, and competitive market
place. Compensation programs reflect this challenging environment and are made
up of three critical elements; a competitive base-line salary, a bonus program
dependent on the achievement of pre-determined profit targets, and a medium- to
long-term incentive program based on the increase of shareholder value over
time.
Chief Executive Compensation. The Company has entered into a three year
employment contract with Mr. Bebbington with annual compensation of $250,000.
His compensation for 1997 represented only his base salary for the period from
November 17, 1997. Mr. Bebbington's salary was set after consultation with an
independent firm specializing in placing employees, who were engaged to provide
advice to the board of directors as part of the executive search for a
replacement CEO in 1997. This base salary is fixed for three years.
Bonus and Stock Option Compensation. For 1998 only, Mr. Bebbington was
entitled to a guaranteed bonus of $100,000 and Mr. Cohen was entitled to a
guaranteed bonus of $45,000. In future years, these bonuses will become
variable based on pre-determined objectives set by the board of directors around
achievement of budget goals. These arrangements for 1998 were entered into as
part of the overall package to induce Messrs. Bebbington and Cohen to relocate
to Utah from the Eastern United States.
Options to acquire 1,000,000 shares of common stock have been granted to
Mr. Bebbington at exercise prices of $3.60, $4.50, $5.50, and $6.50, with
vesting in equal increments on the date of grant and on December 31, 1998, 1999,
and 2000. Options to acquire 300,000 shares of common stock have been granted
to Mr. Cohen, of which 187,500 are exercisable at $2.99, 37,500 at $3.60, 37,500
at $4.50, and 37,500 at $5.50, with vesting in equal increments on the date of
grant and on December 31, 1998, 1999, and 2000.
Review of Performance. Messrs. Bebbington and Cohen were recruited to turn
the Company around from heavy losses in 1997. Their immediate focus was to
reduce the level of losses and bring the Company to profitability as quickly as
possible by commercializing the available technology in the Company. 1998 has
already shown significant progress towards that goal as evidenced by the
dramatic improvement at the operating level. The board of directors is
encouraged by the progress made, given extremely difficult circumstances and
believes that significant improvement to the performance of the Company will now
be achieved in 1999 with the launch of the Jaguar product through JEOL and
others. The board of directors believes the compensation of the executive
officers is fair and reasonable for both the officers and the shareholders of
the Company.
Board of Directors:
Andrew C. Bebbington
Jeffrey S. Cohen
Sir Colin Dollery
Stanley Friedman
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 26, 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) 2,228,252 14.3%
1650 49th Street $4.50 Warrants(6) 119,000 0.8%
Brooklyn, New York 11204 --------- -----
Total 2,347,252 14.9%
Charles Kushner Series A Preferred Stock(5) 1,835,031 12.1%
26 Columbia Turnpike $4.50 Warrants(6) 98,000 0.6%
Florham Park, New Jersey 07932 --------- -----
Total 1,933,031 12.6%
Murray Kushner Series A Preferred Stock(5) 1,048,589 7.3%
26 Columbia Turnpike $4.50 Warrants(6) 56,000 0.4%
Florham Park, New Jersey 07932 --------- -----
Total 1,104,589 7.6%
Jules Norducht Series A Preferred Stock(5) 1,310,737 8.9%
255 West Beech Street $4.50 Warrants(6) 70,000 0.5%
Long Beach, New York 11561 Common Stock 20,000 0.1%
--------- -----
Total 1,400,737 9.5%
Wayne Saker Series A Preferred Stock(5) 880,066 6.2%
55 Shaw Road $4.50 Warrants(6) 49,000 0.3%
Chestnut Hill, Massachusetts --------- -----
02167 Total 929,066 6.5%
Richard Stadmaur Series A Preferred Stock(5) 786,442 5.5%
26 Columbia Turnpike $4.50 Warrants(6) 42,000 0.3%
Florham Park, New Jersey 07932 --------- -----
Total 828,442 5.8%
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>
[FN]
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record, and each shareholder has sole
voting and investment power.
(2) The percentages shown are based on 13,392,562 shares of common stock of
the Company issued and outstanding as of March 26, 1999.
(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 $0.27890625, 85% of the average market price
for the common stock for the ten trading days preceding March 26, 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 the Series A Preferred Stock
have temporarily agreed not to exercise their right to convert to
common stock.
(6) 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The holders of all of the 2,938.75 shares of the Series A Preferred Stock
currently outstanding have entered into an agreement with the Company, giving
the Company the right and obligation to redeem such stock at any time prior to
March 31, 1999, for an amount equal to the price originally paid by the holders,
$1,000 per share, plus a calculated amount equal to 4% per annum. In addition,
associated warrants to acquire 293,875 shares of common stock will be terminated
and the remaining warrants to acquire 293,875 shares of common stock will be
repriced at $0.50 per share. The shareholders include holders who, if they
converted the Series A Preferred Stock and exercised their warrants would hold
in excess of 5% of the issued and outstanding common stock of the Company as
identified on the table set forth under "ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT." The Company's obligation to redeem the Series
A Preferred Stock was subject to the closing of the sale of the acoustics
business to PCB.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements, including the index to the financial statements,
are included immediately following the signatures to this report.
EXHIBITS
<TABLE>
<CAPTION>
SEC
Exhibit Reference
No. No. Title of Document Location
- ------- --------- --------------------------------------------- ----------------------
<S> <C> <C> <C>
1 (3) Articles of Incorporation, as amended Exhibit to report on
November 3, 1987 Form 10-K for the year
ended June 30, 1988*
2 (3) Certificate of Amendment to the Exhibit to report on
Articles of Incorporation Form 10-K for the year
filed July 3, 1989 ended June 30, 1989*
3 (3) Designation of Rights, Privileges, and Registration Statement
Preferences of 1995 Series Preferred Stock filed on Form SB-2,
Exhibit 3, SEC File
No. 33-59963*
4 (3) Designation of Rights, Privileges, and Exhibit to report on
Preferences of 1998 Series A Preferred Stock Form 8-K dated
February 13, 1998*
5 (3) Bylaws Registration Statement
filed on Form S-18,
Exhibit 5, SEC File
No. 33-3365-D*
6 (4) Form of Registration Rights Agreement Exhibit to report on
Form 8-K dated
February 13, 1998*
7 (4) Form of $6.25 Warrant Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
8 (4) Form of $4.50 Warrant Exhibit to report on
Form 8-K dated
February 13, 1998*
9 (10) 1987 Stock Option Plan of LarsonoDavis Exhibit to report on
Incorporated, as amended Form 10-K for the year
ended June 30, 1988*
10 (10) 1991 Employee Stock Award Plan of Exhibit to report on
LarsonoDavis Incorporated Form 10-K for the year
ended June 30, 1992*
11 (10) 1991 Director Stock Option and Stock Exhibit to report on
Award Plan of LarsonoDavis Form 10-K for the year
Incorporated ended June 30, 1992*
12 (10) Amended and Restated 1996 Director Exhibit to report on
Stock Option Plan Form 10-Q for
the quarter ended
March 31, 1997*
13 (10) 1997 Employee Stock Purchase Plan Exhibit to report on
Form 10-K for
the transitional
period ended
December 31, 1996*
14 (10) 1997 Stock Option and Award Plan Exhibit to report on
Form 10-Q for the
quarter ended
March 31, 1997*
15 (10) Technology Development and Marketing This Filing
Agreement between Sensar Corporation,
LarsonoDavis Incorporated, and JEOL
USA, Inc., dated December 10, 1998
16 (10) Asset Purchase Agreement by and among Exhibit "A" to Proxy
PCB Group, Inc., Beehive Acquisition Corp., Statement dated
LarsonoDavis Incorporated, and LarsonoDavis February 16, 1999
Laboratories, dated November 30, 1998
17 (10) First Amendment to Asset Purchase Exhibit "A" to Proxy
Agreement by and among PCB Group, Inc., Statement dated
Beehive Acquisition Corp., LarsonoDavis February 16, 1999
Incorporated, and LarsonoDavis Laboratories,
dated February 16, 1999
18 (10) Second Amendment to Asset Purchase This Filing
Agreement by and among PCB Group, Inc.,
Beehive Acquisition Corp., LarsonoDavis
Incorporated, and LarsonoDavis Laboratories,
dated March 31, 1999
19 (10) Form of Market Stand Off and This Filing
Redemption Agreement by and between
LarsonoDavis Incorporated and Investors
of 1998 Series A Preferred Stock,
dated January , 1999
20 (10) Technology License, Assumption, and Exhibit to report on
Maintenance Agreement between Form 8-K/A dated
LarsonoDavis Incorporated and June 30, 1995*
Harris Miller Miller & Hanson, Inc.,
dated August 15, 1995
21 (10) Technical Information Agreement and Exhibit to report on
Patent License Agreement between Form 10-Q for the
LarsonoDavis Incorporated and quarter ended
Lucent Technologies, Inc., June 30, 1997*
effective as of July 1, 1997
22 (10) Termination Agreement between Exhibit to report on
LarsonoDavis Incorporated and Form 10-Q for the
Brian G. Larson dated November 14, 1997 quarter ended
September 30, 1997*
23 (10) Termination Agreement between Exhibit to report on
LarsonoDavis Incorporated and Form 10-Q for the
Larry J. Davis dated November 14, 1997 quarter ended
September 30, 1997*
24 (10) Termination Agreement between Exhibit to report on
LarsonoDavis Incorporated and Form 10-Q for the
Dan J. Johnson dated November 14, 1997 quarter ended
September 30, 1997*
25 (10) Executive Employment Agreement Exhibit to report on
between LarsonoDavis Incorporated Form 10-K for
and Andrew C. Bebbington, the year ended
effective November 17, 1997 December 31, 1997*
26 (10) Executive Employment Agreement Exhibit to report on
between LarsonoDavis Incorporated Form 10-K for
and Jeffrey S. Cohen, dated February 2, 1998 the year ended
December 31, 1997*
27 (10) Agreement to Issue Warrants to Exhibit to: report on
Congregation Ahavas Tzdokah Z'Chesed Form 10-K for
dated January 9, 1997, as amended the transitional
April 16, 1997, June 5, 1997, and period ended
November 14, 1997 December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
28 (10) Agreement to Issue Warrants to Ezer Exhibit to: report on
Mzion Organization dated January 9, 1997, Form 10-K for
as amended April 16, 1997, June 5, 1997, the transitional
and November 14, 1997 period ended
December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
29 (10) Agreement to Issue Warrants to Exhibit to: report on
Laura Huberfeld and Naomi Bodner Form 10-K for
dated January 9, 1997, as amended the transitional
April 16, 1997, June 5, 1997, and period ended
November 14, 1997 December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
30 (10) Agreement to Issue Warrants to Exhibit to: report on
Connie Lerner, dated January 9, 1997, Form 10-K for
as amended April 16, 1997, June 5, 1997, the transitional
and November 14, 1997 period ended
December 31, 1996*;
Form 10-Q for the
quarter ended
March 31, 1997*;
Form 10-Q for the
quarter ended
June 30, 1997*; and
Form 10-Q for the
quarter ended
September 30, 1997*
31 (21) Subsidiaries of LarsonoDavis Incorporated Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
32 (23) Consent of Grant Thornton LLP This Filing
33 (27) Financial Data Schedule This Filing
*Incorporated by reference
</TABLE>
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1998, the
Company filed two reports on Form 8-K, dated October 7, 1998, and December 10,
1998.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
LARSONoDAVIS INCORPORATED
Dated: March 31, 1999 By /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
(Chief Executive Officer and
Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
Dated: March 31, 1999 By /s/ Andrew C. Bebbington
Andrew C. Bebbington, Director
Dated: March 31, 1999 By /s/ Jeffrey S. Cohen
Jeffrey S. Cohen, Director
Dated: March 30, 1999 By /s/ Sir Colin Dollery
Sir Colin Dollery, Director
Dated: March 29, 1999 By /s/ Stanley Friedman
Stanley Friedman, Director
LarsonoDavis Incorporated and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Financial Statements:
Report of Grant Thornton LLP, independent certified public accountants on the
December 31, 1998, 1997, and 1996, and June 30, 1996, financial statements F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations and Comprehensive Loss for the years
ended December 31, 1998 and 1997, for the six months ended December 31, 1996,
and for the year ended June 30, 1996 F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997, for the six months ended December 31, 1996,
and for the year ended June 30, 1996 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1998
and 1997, for the six months ended December 31, 1996, and for the year ended
June 30, 1996 F-8
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules:
Report of Grant Thornton LLP, independent certified public accountants
on the December 31, 1998, 1997, and 1996, and June 30, 1996,
financial statement schedule F-42
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1998 and 1997, for the six months ended December 31, 1996,
and for the year ended June 30, 1996 F-43
</TABLE>
All other financial statement schedules are omitted because they are not
applicable or because the required information is contained in the Consolidated
Financial Statements or the Notes thereto.
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
LarsonoDavis Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of LarsonoDavis
Incorporated and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity, and cash flows for the years ended December 31, 1998 and 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years ended December 31, 1998 and 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
Grant Thornton LLP
Provo, Utah
January 29, 1999, expect for Note C
for which the date is March 31, 1999
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 694,959 $ 1,212,473
Trade accounts receivable, net of
allowance for doubtful accounts (Note H) 1,738,478 2,215,945
Inventories (Notes D and H) 2,046,871 2,631,562
Other current assets 157,046 100,460
------------- -------------
Total current assets 4,637,354 6,160,440
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
and amortization
(Notes B, E, H and I) 1,327,248 2,165,467
ASSETS UNDER CAPITAL
LEASE OBLIGATIONS,
net of accumulated amortization (Note I) 202,026 681,576
INTANGIBLE ASSETS, net of
accumulated amortization
(Notes B, F, H and T) 322,779 3,100,447
LONG-TERM CONTRACTUAL
ARRANGEMENT, net of
accumulated cost recoveries
(Notes B and S) - 87,500
------------- -------------
$ 6,489,407 $ 12,195,430
============= =============
</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,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Line of credit (Note H) $ - $ 1,198,766
Accounts payable 538,121 1,080,624
Accrued liabilities (Note G) 921,683 1,518,147
Current maturities of long-term debt (Note I) 682,982 50,729
Current maturities of capital lease
obligations (Note I) 128,064 218,649
------------- -------------
Total current liabilities 2,270,850 4,066,915
LONG-TERM DEBT
less current maturities (Note I) - 716,697
CAPITAL LEASE OBLIGATIONS,
less current maturities (Note I) 168,985 558,815
------------- -------------
Total liabilities 2,439,835 5,342,427
------------- -------------
COMMITMENTS AND CONTINGENCIES
(Notes C, I, L, M, O and P) - -
STOCKHOLDERS' EQUITY
(Notes B, M, N, O and T)
Preferred stock, $0.001 par value; authorized
10,000,000 shares; issued and outstanding
3,039.95 shares at December 31, 1998 and
zero shares at December 31, 1997
(liquidation preference $3,147,000) 3 -
Common stock, $0.001 par value; authorized
290,000,000 shares; issued and outstanding
13,070,914 shares at December 31, 1998 and
12,125,393 shares at December 31, 1997 13,071 12,125
Additional paid-in capital 30,693,490 26,097,332
Accumulated deficit (26,282,308) (19,251,591)
Notes receivable from exercise of options (374,684) (69,375)
Accumulated other comprehensive income - 64,512
------------- -------------
Total stockholders' equity 4,049,572 6,853,003
------------- -------------
$ 6,489,407 $ 12,195,430
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Six months Year
Year ended December 31, ended 31, Ended
------------------------------ December 31, June 30,
1998 1997 1996 1996
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Net sales (Note Q) $ 8,729,192 $ 8,313,328 $ 4,889,280 $ 8,255,607
------------- ------------- --------------- ------------
Cost and operating expenses
Cost of sales 5,241,186 6,074,883 2,177,304 3,407,613
Research and development 2,919,945 4,860,993 1,734,911 2,149,384
Selling, general and administrative 4,055,188 6,019,282 2,534,643 3,922,976
Unusual and nonrecurring
charges (Note B) 3,436,733 5,937,355 - -
------------- ------------- --------------- ------------
15,653,052 22,892,513 6,446,858 9,479,973
------------- ------------- --------------- ------------
Operating loss (6,923,860) (14,579,185) (1,557,578) (1,224,366)
------------- ------------- --------------- ------------
Other income (expense)
Interest income 137,814 140,870 59,638 12,320
Interest expense (132,388) (301,411) (154,440) (447,907)
Other, net (5,010) (78,085) 8,460 (46,295)
------------- ------------- --------------- ------------
416 (238,626) (86,342) (481,882)
------------- ------------- --------------- ------------
Net loss (6,923,444) (14,817,811) (1,643,920) (1,706,248)
Other comprehensive income
(loss) - foreign currency
translation adjustments (64,512) (15,848) 64,680 19,701
------------- ------------- --------------- ------------
Comprehensive loss $ (6,987,956) $ (14,833,659) $ (1,579,240) $ (1,686,547)
============= ============= =============== ============
Net loss per common share (Note K)
Basic and diluted $ (0.65) $ (1.29) $ (0.16) $ (0.21)
Net loss applicable to common stock $ (8,270,007) $ (14,832,811) $ (1,666,420) $ (1,754,998)
Weighted average common and
common equivalent shares
Basic and diluted 12,683,658 11,507,701 10,410,820 8,138,722
</TABLE>
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1997, six months ended December 31, 1996
and year ended June 30, 1996
Notes Accumulated
receivable other
Preferred stock Common stock Additional Accumu- from comprehensive
------------------- --------------------- paid-in lated exercise income
Shares Amount Shares Amount capital deficit of options (loss) Total
-------- -------- ---------- --------- ---------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
July 1, 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 upon
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
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 upon
exercise of
warrants (Note O) - - 375,000 375 1,141,947 - - - 1,142,322
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 upon
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
(Note M) (200,000) (200) 58,842 59 141 - - - -
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 26,097,332 (19,251,591) (69,375) 64,512 6,853,003
Shares issued for
services rendered
(Note N) - - 48,747 49 148,264 - - - 148,313
Shares issued upon
exercise of
options (Note O) - - 276,365 276 725,914 - (726,190) - -
Shares purchased
under employee
stock purchase
plan (Note O) - - 73,182 74 81,098 - - - 81,172
Shares issued upon
exercise of - - 74,084 74 359,750 - - - 359,824
warrants (Note O)
Shares issued in
private placement
(Note M) 3,500.00 3 - - 3,281,605 - - - 3,281,608
Conversion of
preferred stock
(Note M) (460.05) - 473,143 473 (473) - - - -
Collection of and
allowance on notes
receivable from
exercise of
options (Note O) - - - - - - 420,881 - 420,881
Adjustment for
translation of
foreign currency - - - - - - - (64,512) (64,512)
Preferred dividends - - - - - (107,273) - - (107,273)
Net loss for the year - - - - - (6,923,444) - - (6,923,444)
--------- ------- ---------- -------- ----------- ----------- --------- ---------- ----------
Balances at
December 31, 1998 3,039.95 $ 3 13,070,914 $ 13,071 $30,693,490 ($26,282,308) $(374,684) $ - $4,049,572
========= ======= ========== ======== =========== =========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months Year
Year ended December 31, Ended ended
-------------------------------- December 31, June 30,
1998 1997 1996 1996
--------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Net cash used in operating activities (Note U) $ (2,709,872) $ (5,122,057) $ (1,944,738) $ (2,019,944)
--------------- ------------ -------------- ------------
Cash flows from investing activities
Purchase of property and equipment (322,737) (1,041,383) (421,573) (560,861)
Proceeds from sale of assets 284,298 44,543 35,900 49,543
Proceeds from long-term contractual
arrangement 87,500 265,646 106,000 157,762
Patent acquisition costs (20,588) (123,017) (5,215) (125,577)
Purchase of technology - - (25,233) (414,991)
Purchase of stock of Sensar Corporation - - - (1,184,069)
--------------- ------------ -------------- ------------
Net cash provided by (used in)
investing activities 28,473 (854,211) (310,121) (2,078,193)
--------------- ------------ -------------- ------------
Cash flows from financing activities
Net change in lines of credit (1,198,766) 165,748 (269,288) (916,881)
Proceeds from long-term obligations - 68,571 - 679,366
Principal payments of long-term debt (84,444) (152,756) (137,032) (855,383)
Net proceeds from issuance of preferred
and common stock, and exercise of
options and warrants 3,743,485 4,627,630 1,493,489 9,269,987
Principal payments on capital
lease obligations (231,878) (186,146) (100,608) (170,538)
Preferred dividends - (15,000) (22,500) (48,750)
Decrease in bank overdraft - - - (40,039)
--------------- ------------ -------------- ------------
Net cash provided by
financing activities 2,228,397 4,508,047 964,061 7,917,762
--------------- ------------ -------------- ------------
Effect of exchange rates on cash (64,512) (15,848) 64,680 19,701
--------------- ------------ -------------- ------------
Net increase (decrease) in cash
and cash equivalents (517,514) (1,484,069) (1,226,118) 3,839,326
Cash and cash equivalents at
beginning of period 1,212,473 2,696,542 3,922,660 83,334
--------------- ------------ -------------- ------------
Cash and cash equivalents at
end of period $ 694,959 $ 1,212,473 $ 2,696,542 $ 3,922,660
=============== ============ ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Business activity and principles of consolidation
LarsonoDavis 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 is 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
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. Net loss per common share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128
requires the presentation of basic and diluted EPS. Basic EPS are
calculated by dividing earnings (loss) available to common stockholders 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.
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, 1998, one customer represents 24 percent of accounts
receivable and no other customers represent more than 10 percent 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.
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 1998 and 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 an element of other
comprehensive income (loss) and are included in accumulated other
comprehensive income (loss) in the statement of stockholders' equity. With
the closure of the foreign subsidiary and resulting disposition of its
assets and liabilities, the cumulative foreign currency translation
adjustments are zero at December 31, 1998.
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 1998 and 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, events in 1997 caused
management to believe that this asset has been impaired and appropriate
adjustments were 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 stock 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. The Company has
implemented SFAS No. 130 during the year ended December 31, 1998, with
reclassification of financial statements for earlier periods provided for
comparative purposes.
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. The Company has implemented SFAS No.
131 during the year ended December 31, 1998.
Other recently issued Statements of Financial Accounting Standards do not
apply to the Company or its operations.
NOTE B - UNUSUAL AND NONRECURRING CHARGES
During 1998 and 1997, the Company has recognized unusual and nonrecurring
charges as follows:
Year ended December 31, 1998
During the year ended December 31, 1998, the Company recognized unusual
charges of $3,436,733 and provided additional allowances against inventory
of $768,300. 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>
Unusual Inventory
charges adjustments
------------ -------------
<S> <C> <C>
Write off 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 receivables from former officers 564,826 -
Additional allowance for inventory obsolescence and
overstock - 277,418
------------ -----------
$ 3,436,733 $ 768,300
============ ===========
</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 sought alternative distributors for this product or to sell this
technology as a whole, but 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 noncash
charges for the write off of assets related to this product. The write
off 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 cost of
customer support, payment of certain fixed costs for vacated space, and
other winding up costs. In addition, $100,000 was provided to cover the
probable losses on the disposition of net assets related to the SFC product
line. Net sales included in the consolidated financial statements for these
discontinued product lines were $1,129,624, $1,270,540, $739,030 and
$607,409 for the years ended December 31, 1998 and 1997, for the six months
ended December 31, 1996, and for the year ended June 30, 1996, respectively.
Other components of the unusual charges included 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 pay off 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
Brian Larson, 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. Additionally, the Company has provided an
allowance of $400,000 against notes receivable from the exercise of options
by former executive officers.
Based on its sales and production forecasts for the Company's remaining
products, the Company has revised its estimates of obsolete and overstock
inventory. The Company increased the allowance against inventory by
approximately $277,000 based on those forecasts.
Year ended December 31, 1997
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 write-off 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 could be terminated by HMMH as early as August 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
notified 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 - SUBSEQUENT EVENT - SALE OF ACOUSTIC DIVISION
On November 30, 1998, as amended on February 11, 1999 and March 31, 1999,
the Company entered into an Asset Purchase Agreement (the Agreement) with
PCB Group, Inc. (PCB) under which the Company agreed to sell essentially all
of the assets and operations associated with the acoustic division of the
Company. Assets of the acoustic division to be sold include the
manufacturing facilities of the Company, certain intellectual property, the
"LarsonoDavis" name, inventories, accounts receivable, and property and
equipment. The sales price for the assets is $5.75 million (payable $5.25
million in cash at closing and a note for $500,000 payable in equal monthly
installments based on a two year amortization with a balloon payment of the
unpaid balance on April 1, 2000) plus the assumption by PCB of liabilities
of approximately $1.7 million. The amount of the cash payment is subject to
potential upward or downward adjustment based on a target value of
approximately $3 million for the net assets to be acquired by PCB.
Closing of the sale of the assets of the acoustic division is subject to
shareholder approval. A special meeting of stockholders was held March 18,
1999, where the sale was approved by a majority of the outstanding voting
interest of common and preferred stockholders. Prior to closing, certain
issues have arisen during the due diligence investigation that has delayed
the sale of the land and buildings. The sale of the remaining assets was
consummated on March 31, 1999, wherein the Company received cash proceeds of
approximately $4.6 million. The Company has entered into a short-term lease
with PCB covering the land and building. The parties anticipate that this
leasing agreement will be temporary and that the anticipated sale of the
land and building will close in the near future. The Company expects to
receive additional net proceeds of approximately $700,000 from the sale of
the real estate and the payoff of the underlying mortgage. The estimated
gain, net of expenses, on the entire sale of the assets of the acoustic
division is expected to be approximately $2.7 million.
The following unaudited pro forma information estimates the pro forma effect
of the sale on the Company's financial position as of December 31, 1998
(assuming the entire sale had occurred on December 31, 1998) and estimates
the pro forma effect of the sale on the Company's results of operations for
the year then ended (assuming the entire sale had occurred on January 1,
1998). The estimated gain from the sale is not included in the pro forma
results of operations for the year ended December 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents $ 5,785,921
Current assets 7,495,435
Total assets 7,718,297
Current liabilities 727,044
Stockholders' equity 6,791,253
Net sales 1,660,407
Net loss (7,221,850)
Net loss per common share (0.68)
</TABLE>
NOTE D - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 1,113,839 $ 1,127,335
Work in process 379,407 700,055
Finished goods 553,625 804,172
------------ ------------
$ 2,046,871 $ 2,631,562
============ ============
</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 of acoustic inventory
associated with the restructuring of the operations and changes in strategic
direction of the Company. In 1998, the Company wrote inventory down by
approximately $768,000, principally related to the discontinuance of the
TOF2000 product (See Note B).
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
Years 1998 1997
----- ------------- -------------
<S> <C> <C> <C>
Land - $ 25,000 $ 25,000
Buildings and improvements 5-30 1,067,971 1,109,412
Machinery and equipment 3-10 758,129 1,710,082
Furniture and fixtures 3-10 472,944 631,401
------------- -------------
2,324,044 3,475,895
Less accumulated depreciation
and amortization (996,796) (1,310,428)
------------- -------------
$ 1,327,248 $ 2,165,467
============= =============
</TABLE>
NOTE F - INTANGIBLE ASSETS
Intangible assets consist of acquired technology, capitalized software
development costs 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 1998 and 1997, the carrying value of certain intangible assets was
adjusted to better reflect management's current expectations for the
realizability of these assets (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.
<TABLE>
<CAPTION>
The following is a summary of intangible assets:
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Acquired technology $ 338,316 $ 3,364,326
Patents 211,718 262,248
Capitalized software development costs - 189,920
------------ ------------
550,034 3,816,494
Less accumulated amortization (227,255) (716,047)
------------ ------------
$ 322,779 $ 3,100,447
============ ============
</TABLE>
NOTE G - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities are composed of the following:
December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accrued compensation and payroll taxes $ 475,737 $ 683,069
Warranty 139,976 216,930
Dividends 107,273 -
Royalties 70,795 163,730
Customer deposits 60,000 201,816
Other 67,902 252,602
------------ ------------
$ 921,683 $ 1,518,147
============ ============
</TABLE>
NOTE H - LINE OF CREDIT
<TABLE>
<CAPTION>
Line of credit is as follows:
December 31,
---------------------------
1998 1997
----------- ------------
<S> <C> <C>
Prime plus 2.5% 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
$ - $ 1,198,766
=========== ============
</TABLE>
As a result of high interest and other charges associated with the loan and
restrictive loan provisions, in March 1998, the Company notified the
provider of its line of credit of the Company's intent to terminate the
line. In April 1998, the Company paid off the line of credit and associated
termination fees from available cash and cash equivalents.
NOTE I - LONG-TERM OBLIGATIONS
1. Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
8.25% note payable to a commercial bank, collateralized by property,
payable in monthly installments of $8,246 including interest, due
July 15, 1999 $ 682,982 $ 726,456
Other installment loan - 40,970
----------- -----------
682,982 767,426
Less current maturities (682,982) (50,729)
----------- -----------
$ - $ 716,697
=========== ===========
</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 allow 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,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Equipment $ 703,785 $ 1,134,973
Less accumulated amortization (501,759) (453,397)
----------- -----------
$ 202,026 $ 681,576
=========== ===========
</TABLE>
Total amortization expense on equipment under capital lease obligations was
$173,224 and $218,919 for the years ended December 31, 1998 and 1997,
$82,434 for the six months ended December 31, 1996, and $158,693 for the
year ended June 30, 1996, respectively.
<TABLE>
<CAPTION>
Total future minimum lease payments, under capital lease obligations are as follows:
Year ending December 31,
- ------------------------
<S> <C>
1999 $ 155,970
2000 112,346
2001 63,937
2002 10,523
Thereafter -
-----------
Total minimum lease payments 342,776
Less amount representing interest 45,727
-----------
Present value of net minimum
capital lease payments 297,049
Less current maturities 128,064
-----------
$ 168,985
===========
</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. The Company plans to vacate this space and consolidate its
operations into its remaining owned real estate. 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>
1999 $ 51,586
2000 10,396
2001 10,396
2002 5,198
Thereafter -
-----------
$ 77,576
===========
</TABLE>
Total rent expense under operating leases was $147,718 and $142,616 for the
years ended December 31, 1998 and 1997, $75,408 for the six months ended
December 31, 1996, and $83,857 for the year ended June 30, 1996,
respectively.
NOTE J - INCOME TAXES
The income tax expense (benefit) reconciled to the tax computed at the
statutory federal rate of 34 percent is as follows:
<TABLE>
<CAPTION>
Six months Year
Year ended December 31, ended ended
------------------------ December 31, June 30,
1998 1997 1996 1996
----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Income tax benefit at statutory rate $2,353,971) $5,038,056) $ (558,933) $(580,124)
State income tax benefit
net of federal tax effect (228,474) (488,988) (54,249) (56,306)
Amortization and write off of acquired
technology 900,420 60,797 30,398 31,447
Settlement with former directors 70,427 165,750 - -
Operating losses with no current tax
benefit 1,605,535 5,292,150 579,600 595,189
Other, net 6,063 8,347 3,184 9,794
---------- ---------- ------------- ---------
Income tax expense $ - $ - $ - $ -
========== ========== ============= =========
</TABLE>
<TABLE>
<CAPTION>
Deferred income tax assets and liabilities are as follows:
December 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets
Benefit of net operating loss carryforwards $ 7,831,621 $ 6,334,645
Capitalized software development costs and
amortization of intangible assets 796,526 746,839
Inventory allowances 376,365 335,327
Employee termination costs - 261,251
Accrued liabilities 113,199 129,153
Provision for collectibility of certain
receivables 256,287 32,776
Other, net 4,345 4,271
------------- -------------
9,378,343 7,844,262
Less valuation allowance (9,373,873) (7,759,162)
------------- -------------
4,470 85,100
Deferred tax liabilities
Depreciation of property and equipment (4,470) (85,100)
------------- -------------
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 in the valuation allowance was
$1,614,711 and $5,268,566, for the years ended December 31, 1998 and 1997,
$577,126 for the six months ended December 31, 1996, and $1,454,363 for the
year ended June 30, 1996, respectively.
As of December 31, 1998, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $21,000,000 expiring in various
years through 2018. 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.
NOTE K - EARNINGS (LOSS) PER COMMON SHARE
The following data show the amounts used in computing net loss per common
share, including the effect on net loss for preferred stock dividends and a
beneficial conversion feature associated with preferred stock and warrants.
The following data also show the weighted average number of shares and
dilutive potential common stock. For 1998, net loss applicable to common
stock includes a noncash imputed dividend to the preferred stockholders
related to the beneficial conversion feature on the 1998 Series A Preferred
Stock and related warrants (See Note M). 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, noncash charge against the net loss per
common share.
<TABLE>
<CAPTION>
Six months Year
Year ended December 31, ended ended
---------------------------- December 31, June 30,
1998 1997 1996 1996
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Net loss $ (6,923,444) $14,817,811) $ (1,643,920) $1,706,248)
Dividends on preferred stock (107,273) (15,000) (22,500) (48,750)
Imputed dividend from beneficial
conversion feature (1,239,290) - - -
------------- ----------- ------------- ----------
Net loss applicable to common stock $ (8,270,007) $14,832,811) $ (1,666,420) $1,754,998)
============= =========== ============= ==========
</TABLE>
<TABLE>
<CAPTION>
Six months Year
Year ended December 31, ended ended
---------------------------- December 31, June 30,
1998 1997 1996 1996
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> Common shares outstanding during the
entire period 12,125,393 10,717,790 10,258,406 6,559,479
Weighted average common shares issued
during the period 558,265 789,911 152,414 1,579,243
------------- ----------- ------------- ----------
Weighted average number of common
shares used in basic EPS 12,683,658 11,507,701 10,410,820 8,138,722
Dilutive effect of stock options
and warrants - - - -
------------- ----------- ------------- ----------
Weighted average number of common
shares and dilutive potential common
stock used in diluted EPS 12,683,658 11,507,701 10,410,820 8,138,722
============= =========== ============= ==========
</TABLE>
Included in net loss for the years ended December 31, 1998 and 1997 are
unusual and nonrecurring charges of $3,436,733 and $5,937,355, respectively.
The effect of these unusual and nonrecurring charges on net loss was $0.27
and $0.52 per common share, respectively.
For the years ended December 31, 1998 and 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.
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 percent 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 percent of the employee's
contribution to the plan up to a maximum of 1.5 percent of the employee's
eligible annual salary. The Company's contributions vest at a rate of 20
percent per year beginning with the second year of service and participants
are fully vested after six years of service. The Company contributed $46,957
and $67,242 for the years ended December 31, 1998 and 1997, $38,581 for the
six months ended December 31, 1996, and $34,594 for the year ended June 30,
1996, respectively.
NOTE M - PREFERRED STOCK
1998 Series A 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 as the value of the warrants
and the balance was assigned as the value of the Preferred Stock. The
Preferred Stock bears an annual dividend of four percent, or $40 per share
per annum and has a liquidation preference equal to $1,000 per share plus
all accrued, but unpaid dividends. The preferred stockholders vote as a
class with the common stockholders and each preferred share has 278 votes.
The Preferred Stock is convertible at the election of the holders into that
number of shares of common stock calculated by dividing $1,000 plus any
accrued but unpaid dividends, by the lower of (1) $3.60 or (2) 85 percent of
the average closing price of the common stock for the ten trading days
preceding the conversion. 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. During the year ended
December 31, 1998, the Company received notice from holders of 460.05 shares
of Preferred Stock for the conversion of their Preferred Stock into 473,143
shares of common stock of the Company.
Notwithstanding the provisions of the previous paragraph, if at any time the
conversion of the Preferred Stock would result in the total number of shares
of common stock issued on conversion to exceed 2,332,984 shares, then, to
the extent required by the bylaws of the NASD to maintain the listing of the
Company's common stock on the Nasdaq National Market, such Preferred Stock
may not be converted unless and until the conversion of the additional
shares has been approved by the stockholders of the Company. If the Company
is unable to obtain the necessary shareholder approval, it shall redeem the
remaining Preferred Stock at a redemption price of $1,000 per share plus all
accrued and unpaid dividends. At December 31, 1998, the outstanding
Preferred Stock if converted at that date, would have been convertible into
approximately 12,084,000 shares of common stock based on the trading price
of the last ten trading days in 1998. Had such conversion been requested by
the preferred shareholders, the Company could have converted approximately
468 shares of Preferred Stock into common stock, and would have been
required to seek the approval of the stockholders to convert the remaining
shares. In the absence of the approval of the stockholders to convert the
remaining shares of Preferred Stock, the Company would have had a commitment
to redeem the remaining Preferred Stock for approximately $2,663,000.
However, subsequent to December 31, 1998, the Company entered into an
agreement with the holders of substantially all of the remaining shares of
Preferred Stock in an attempt to eliminate the potential market disruption
of a significant conversion of the Preferred Stock and to potentially
provide for a more orderly conversion or redemption of the Preferred Stock.
In January 1999, the Company entered into agreements with the holders of
2,938.75 shares (approximately 96.7 percent of the outstanding Preferred
Stock) of the Preferred Stock to reacquire the Preferred Stock for the
amount originally paid to the Company by the holders equal to $1,000 per
share, plus all accrued but unpaid dividends. Under the terms of the
agreements, the purchase will occur within 15 days of the closing of the
sale of the assets of the acoustic division (See Note C). Holders of this
Preferred Stock have agreed not to convert the Preferred Stock into common
stock in the interim. The Company's obligation to purchase the Preferred
Stock is dependent on the closing of the sale of the acoustic division. As
part of the terms of the agreements, if the Preferred Stock is purchased,
the Company has agreed to reprice one half of the associated warrants at
$0.50 per share and cancel the other half of the warrants. If the Preferred
Stock is not purchased prior to March 31, 1999, the agreements terminate.
The Company has the right to assign its interest in the agreements and may
do so if a new investor agreed to certain conditions to limit the impact of
the conversion and sale of the common stock acquired. By so doing, this
would allow the Company to retain its working capital. If the Company
redeems the Preferred Stock, the redemption amount will be approximately
$3.1 million and will be paid from the proceeds of the sale of the acoustic
division.
1995 Series Preferred Stock
During the year ended June 30, 1995, the Company issued 200,000 shares of
1995 Series 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 years ended December 31, 1998 and 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996, the Company issued
48,747 shares, 54,849 shares, 548 shares, and 34,940 shares, respectively,
of common stock valued at prices ranging from $2.30 to $4.63 per share,
$3.38 to $13.25 per share, $9.13 per share, and $4.75 to $6.00 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
noninterest-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.
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 percent on the grant date and 25 percent 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). During 1998, options with
respect to an additional 300,000 shares were canceled or forfeited, leaving
options for 100,000 shares outstanding at December 31, 1998.
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 642,453 shares have been exercised or are outstanding as of December
31, 1998. 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 reserves 750,000 shares of common stock for issuance
pursuant to stock options or stock awards granted, of which options to
acquire 364,000 shares have been exercised or are outstanding and 263,882
shares have been awarded to employees and others as of December 31, 1998.
Concurrently with the granting of certain options in 1998, the Company
canceled existing options previously granted to certain employees to
purchase 182,000 shares of common stock at prices ranging from $4.69 to
$10.50 per shares. 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 percent on
the grant date and 20 percent 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 1998 and 1997, two former executives exercised options to acquire 276,365
shares and 30,000 shares, respectively, of common stock in exchange for
notes receivable in the aggregate amount of $726,190 and $69,375,
respectively. Interest accrues at 8.0 percent to 8.5 percent and is payable
annually. The notes are payable in three equal annual installments of
principal on each of the succeeding anniversary dates of the notes. With
the decline in the price of the Company's common stock, an uncertainty has
arisen regarding the ability of the former executive to pay these notes in
full. Accordingly, the Company has provided an allowance of $400,000
against the notes at December 31, 1998.
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 were
exercisable at the lower of the grant price or 80 percent of the trading
price on the date of exercise (but not less than $3.60 per share). These
options vest 25 percent on the grant date and 25 percent per year for
each of the next three years, although the vesting of 500,000 of the
options was subject to the achievement of certain performance targets.
The options expire five years after vesting. During 1998, this option
was canceled 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 vests 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 vests 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.
During 1998, the Company granted options to acquire 300,000 shares of
common stock to the new Chief Operating Officer. The options are
exercisable at prices ranging from $2.99 to $5.50 per share and vest 25
percent on the grant date and 25 percent on December 31, 1998, 1999 and
2000, respectively, and will expire five years after vesting.
A summary of the status of the options granted under the Company's stock
option plans and employment agreements at December 31, 1998, 1997 and 1996,
and June 30, 1996 and changes during the periods then ended is presented in
the table below:
<TABLE>
<CAPTION>
Six months
Year ended December 31, ended Year ended
----------------------------------------- December 31, June 30,
1998 1997 1996 1996
-------------------- -------------------- -------------------- -------------------
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 2,536,841 $ 5.42 3,049,841 $ 4.87 3,092,906 $ 4.88 930,430 $ 2.89
Granted 1,760,000 3.98 1,202,000 6.14 10,000 10.50 2,237,476 5.63
Exercised (276,365) 2.63 (290,000) 2.68 (52,500) 6.76 (61,117) 2.33
Forfeited (326,000) 5.15 - - (565) 2.06 (13,883) 2.33
Canceled (1,382,000) 6.22 (1,425,000) 5.41 - - - -
---------- ---------- --------- ---------
Outstanding at end
of period 2,312,476 $ 4.21 2,536,841 $ 5.42 3,049,841 4.87 3,092,906 4.88
========== ========== ========= =========
Exercisable at
end of period 1,207,485 $ 4.08 1,174,355 $ 4.49 1,364,860 $ 3.90 1,370,430 $ 3.97
========== ========== ========= =========
Weighted average fair
value of options $ 1.15 $ 3.04 $ 5.35 $ 3.06
granted
</TABLE>
The fair value of each option granted 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 years ended December 31,
1998 and 1997, the six months ended December 31, 1996, and the year ended
June 30, 1996, respectively: risk-free interest rates of 5.5 percent, 6.0
percent, 5.9 percent and 6.1 percent, expected dividend yields of zero
for all periods, expected lives of 5.4, 5.8, 5.0, and 6.4 years, and
expected volatility of 46 percent, 42 percent, 50 percent, and 47
percent.
A summary of the status of the options outstanding under the Company's stock
option plans and employment agreements at December 31, 1998 is presented
below:
<TABLE>
<CAPTION>
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life (years) price exercisable price
- ------------------------ ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.67 - $ 3.00 432,500 4.00 $ 2.65 267,500 $ 2.60
$ 3.00 - $ 4.00 852,499 5.20 3.47 430,833 3.62
$ 4.00 - $ 7.50 1,027,477 5.10 5.49 509,152 5.24
--------- ---------
$ 1.67 - $ 7.50 2,312,476 4.93 $ 4.21 1,207,485 $ 4.08
========= =========
</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
percent of fair market value on each offering date. During the years
ended December 31, 1998 and 1997, the employees of the Company purchased
73,182 and 15,407 shares of common stock for gross proceeds of $81,172
and $84,001, respectively. The Stock Purchase Plan expired December 31,
1998.
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
Year ended December 31, ended ended
---------------------------- December 31, June 30,
1998 1997 1996 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net loss As reported $(6,923,444) $(14,817,811) $(1,643,920) $(1,706,248)
Pro forma (7,737,855) (16,118,507) (2,310,698) (2,192,447)
Loss per common share As reported $(0.65) $(1.29) $(0.16) $(0.21)
Pro forma (0.72) (1.40) (0.22) (0.27)
</TABLE>
2. Stock warrants
In 1998, in connection with a private placement of the Preferred Stock, the
Company granted warrants to purchase 700,000 shares of common stock at $4.50
per share. If not earlier exercised, these warrants expire July 30, 2000.
Subsequent to December 31, 1998, the Company has modified the terms of these
warrants (See Note M).
In conjunction with a private placement of common stock in May 1995, the
Company issued warrants to a group of investors to acquire common stock of
the Company. Since that time, the Company 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 was five weeks
subsequent to the preceding payment until the full amount was 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 failed
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 was exercised. Due to the declining market
price of the Company's common stock, this group only exercised 168,887
warrants after the amendment, and the remaining warrants expired in November
1998.
A summary of the status of common stock underlying the warrants issued at
December 31, 1998, 1997 and 1996, and June 30, 1996 and changes during
the periods then ended is presented in the table below:
<TABLE>
<CAPTION>
Year ended December 31, Six months ended Year ended
------------------------------------------ December 31, June 30,
1998 1997 1996 1996
--------------------- -------------------- ------------------- -------------------
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 $ 6.89 2,100,167 $ 6.25 2,100,167 $ 5.71 1,000,000 $ 3.00
Issued 774,084 4.91 862,613 8.75 375,000 6.26 4,100,167 4.51
Exercised (74,084) 5.30 (862,613) 5.30 (375,000) 3.25 (3,000,000) 3.17
Expired (1,163,470) 5.61 - - - - - -
---------- --------- --------- ----------
Outstanding at end
of period 1,636,697 6.93 2,100,167 $ 6.89 2,100,167 $ 6.25 2,100,167 $ 5.71
========== ========= ========= ==========
</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, 1998, 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 has entered into employment agreements with a
new Chief Executive Officer and Chief Operating Officer. The agreement
with the Chief Executive Officer 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 options in
the event of the change in control of the Company and a termination of
his employment.
The agreement with the Chief Operating Officer provides for a base salary
of $140,000 per year, plus raises and bonuses based on performance
(including a guaranteed bonus of $45,000 for 1998). The term of the
agreement is for one year commencing February 2, 1998 and always has a
one year unexpired term unless otherwise terminated. The agreement also
contains provisions that would entitle the Chief Operating Officer to one
year's salary plus the vesting of all options in the event of the change
in control of the Company and a termination of his employment.
3. Licensing agreements
The Company has 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 2014. 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 $110,000 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 intended 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 was obligated
to pay royalties for the term of the Agreements ranging from 5 percent to
8 percent 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 Company worked
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
concluded, based on the market size for the product, the difficulties
facing the semiconductor market, 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
Agreements during 1998. The termination agreement canceled all financial
obligations due to Lucent by the Company, including the 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.
Royalty expenses included in the statements of operations were $86,412 and
$172,144 for the years ended December 31, 1998 and 1997, $82,000 for the six
months ended December 31, 1996, and $92,919 for the year ended June 30,
1996, respectively.
NOTE Q - SALES
Sales by country are based on the location of the customer and are as
follows:
<TABLE>
<CAPTION>
Six months Year
Year ended December 31, ended ended
--------------------------- December 31, June 30,
1998 1997 1996 1996
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Austria $ 202,808 $ 214,315 $ 81,420 $ 55,321
Canada 206,696 163,449 74,060 129,576
Germany 322,312 18,613 40,078 160,401
Italy 1,169,905 1,370,879 376,814 586,480
Japan 276,025 220,407 414,130 154,376
Korea 35,584 153,849 230,661 311,653
Russia 429,784 247,820 141,508 166,949
Sweden 303,588 181,382 80,096 113,418
Taiwan 55,154 347,264 636,769 187,933
United Kingdom 439,328 756,461 506,183 358,832
All other foreign countries 453,292 668,170 302,496 601,707
------------ ------------ ------------ ------------
Total export sales 3,894,476 4,342,609 2,884,215 2,826,646
United States 4,834,716 3,970,719 2,005,065 5,428,961
------------ ------------ ------------ ------------
Total sales $ 8,729,192 $ 8,313,328 $ 4,889,280 $ 8,255,607
============ ============ ============ ============
</TABLE>
During the years ended December 31, 1998 and 1997, one customer accounted
for 11 percent and 12 percent of net sales; for the six months ended
December 31, 1996, one customer accounted for 13 percent of net sales; and
for the year ended June 30, 1996, no customer accounted for more than 10
percent of net sales, respectively. In all periods, these customers were in
the acoustics and vibration segment.
NOTE R - RELATED PARTY TRANSACTIONS
In the ordinary course of business of the Company, the two founders and
principal stockholders of the Company had been required to guarantee certain
obligations, including its principal line of credit. The personal
guarantees of the principal line of credit of the Company were eliminated
when it was placed with another financial institution in October 1996.
The Company entered into 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 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
percent 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 - LONG-TERM CONTRACTUAL ARRANGEMENT
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 21/2 percent to 4 percent 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). Subsequent to December 31, 1998, HMMH
notified the Company of its intent to terminate this arrangement as of
May 18, 1999.
During the years ended December 31, 1998 and 1997, the six months ended
December 31, 1996, and the year ended June 30, 1996, the Company
recognized payments from HMMH in the approximate amounts of $253,000,
$266,000, $106,000, and $388,000, respectively.
NOTE T - ACQUISITION
Effective October 27, 1995, the Company acquired 100 percent 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 were 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 had been determined with amortization being calculated using the
straight-line method. During the year ended December 31, 1998, certain
events occurred which impaired the recoverability of this intangible
asset (See Note B). The results of operations of the acquired business
have been included in the financial statements since the date of
acquisition.
NOTE U - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six months Year
Year ended December 31, ended ended
-------------------------- December 31, June 30,
1998 1997 1996 1996
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities are as
follows:
Net loss $ (6,923,444) $14,817,811) $ (1,643,920) $1,706,248)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation 483,407 487,687 189,151 278,417
Amortization 508,348 672,848 243,991 350,120
Provision for losses on accounts
receivable (21,717) 56,279 28,834 20,000
Provision for inventory write downs 768,300 614,000 - -
Provision for impairment losses 3,186,733 4,246,367 - -
Stock issued in payment of compensation
and services 148,313 1,412,159 22,657 178,390
Stock issued in payment of interest - - - 42,261
Loss (gain) on sale of property and
equipment 16,960 78,085 (8,460) (17,014)
Changes in assets and liabilities
Trade accounts receivable 499,184 316,358 (294,999) (221,582)
Inventories 7,656 850,883 (1,172,795) (770,882)
Other current assets (178,949) 29,636 372,115 (166,545)
Accounts payable (542,503) 177,698 321,549 (305,112)
Accrued liabilities (662,160) 753,754 (2,861) 298,251
------------ ---------- ------------ ----------
Net cash used in operating
activities $ (2,709,872) $5,122,057) $ (1,944,738) $2,019,944)
============ ========== ============ ==========
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest $ 146,510 $ 299,438 $ 144,399 $ 400,686
Income taxes - - - -
Significant noncash investing and financing
activities
Acquisition of equipment through long-term
obligations $ - $ 326,960 $ 240,876 $ 234,210
Note receivable issued in exercise of
stock options 726,190 69,375 - -
Issuance of common stock for purchase of
Sensar (See Note T) - - 80,690 1,509,946
</TABLE>
NOTE V - SEGMENT INFORMATION
The Company has two reportable segments, namely 1) acoustics and
vibration instrumentation and 2) chemical analysis instrumentation. The
acoustics and vibration division produces instruments for a wide variety
of industries to measure sound, noise, and vibration levels. The
chemical analysis division produces instruments that identify and
quantify the chemical composition of liquids and gases. The accounting
policies of the segments are the same as those described in the summary
of significant accounting policies. The Company evaluates performance of
each segment based on earnings or loss from operations, excluding unusual
and nonrecurring charges. The Company's reportable segments are separate
business units that offer different products and services. The segments
are managed separately because each business unit has different products
that are based on different scientific disciplines and marketing
strategies. Certain general and administrative expenses, consisting
principally of finance and information systems expenses, are allocated to
each segment proportionally to each segment's relative net sales.
Corporate property and equipment for administration, finance, and
information systems and the assets of the machine shop are reported to
management with the assets of the acoustics and vibration segment, with
depreciation allocated to corporate general and administrative expenses
and to the machine shop, respectively.
Segment information for the acoustics and vibration and chemical analysis
divisions are as follows:
<TABLE>
<CAPTION>
Six months Year
Year ended December 31, ended ended
-------------------------- December 31, June 30,
1998 1997 1996 1996
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales
Acoustics and vibration $ 7,068,785 $ 7,038,251 $ 4,150,250 $ 7,648,198
Chemical analysis 1,660,407 1,275,077 739,030 607,409
------------ ----------- ------------ -----------
Consolidated totals $ 8,729,192 $ 8,313,328 $ 4,889,280 $ 8,255,607
============ =========== ============ ===========
Operating profit (loss)
Acoustics and vibration $ 892,436 (3,910,167) 13,409 (92,270)
Chemical analysis (3,670,673) (3,650,495) (1,185,107) (656,139)
------------ ----------- ------------ -----------
(2,778,237) (7,560,662) (1,171,698) (748,409)
Corporate administration (708,890) (1,081,168) (385,880) (475,957)
Unusual and nonrecurring charges (3,436,733) (5,937,355) - -
------------ ----------- ------------ -----------
Consolidated totals $ (6,923,860) $14,579,185) $ (1,557,578) $(1,224,366)
============ =========== ============ ===========
Total assets
Acoustics and vibration $ 4,359,613 $ 7,036,070 $ 13,045,680 $12,107,781
Chemical analysis 1,260,352 3,946,887 4,164,299 3,738,587
------------ ----------- ------------ -----------
5,619,965 10,982,957 17,209,979 15,846,368
Corporate assets (cash and certain
receivables) 869,442 1,212,473 2,696,542 3,922,660
------------ ----------- ------------ -----------
Consolidated totals $ 6,489,407 $ 2,195,430 $ 19,906,521 $19,769,028
============ =========== ============ ===========
Depreciation and amortization
Acoustics and vibration $ 522,093 $ 689,795 $ 239,598 $ 403,060
Chemical analysis 312,580 329,869 151,125 147,657
------------ ----------- ------------ -----------
834,673 1,019,664 390,723 550,717
Corporate administration, finance and
information systems 157,082 140,871 42,419 77,820
------------ ----------- ------------ -----------
Consolidated totals $ 991,755 $ 1,160,535 $ 433,142 $ 628,537
============ =========== ============ ===========
Capital expenditures
Acoustics and vibration $ 187,778 $ 769,139 $ 374,221 $ 455,809
Chemical analysis 134,959 272,244 47,352 105,052
------------ ----------- ------------ -----------
Consolidated totals $ 322,737 $ 1,041,383 $ 421,573 $ 560,861
============ =========== ============ ===========
</TABLE>
NOTE W - 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)
============== ==============
Net loss per common share $ (1.29) $ (0.38)
============== ==============
</TABLE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE
Board of Directors
LarsonoDavis Incorporated and Subsidiaries
In connection with our audit of the financial statements of LarsonoDavis
Incorporated and Subsidiaries referred to in our report dated January 29, 1999,
expect for Note C for which the date is March 31, 1999, which is included in the
Form 10-K, we have also audited Schedule II - valuation and qualifying accounts
for the years ended December 31, 1998 and 1997, for the six months ended
December 31, 1996, and for the year ended June 30, 1996. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Provo, Utah
January 29, 1999, expect for Note C
for which the date is March 31, 1999
LarsonoDavis Incorporated and Subsidiaries
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at
beginning charged to cost end
Description of period and expenses Deductions of period
- ----------------------------------- ------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts $ 87,870 $ (21,717) $ 15,929 $ 50,224
Allowance for receivables from
former officers - 564,826 - 564,826
Allowance for inventory overstock
or obsolescence 614,000 768,300 539,247 843,053
Warranty reserves 173,625 (15,410) 103,465 54,750
Accrual for exit and closure costs - 250,000 82,774 167,226
Deferred tax asset valuation
allowance 7,759,162 1,614,711 - 9,373,873
Year ended December 31, 1997
Allowance for doubtful accounts 36,167 56,279 4,576 87,870
Allowance for inventory overstock
or obsolescence - 614,000 - 614,000
Warranty reserves - 173,625 - 173,625
Deferred tax asset valuation
allowance 2,490,596 5,268,566 - 7,759,162
Six months ended December 31, 1996
Allowance for doubtful accounts 13,717 28,834 6,384 36,167
Allowance for inventory overstock
or obsolescence 100,178 - 100,178 -
Deferred tax asset valuation
allowance 1,913,470 577,126 - 2,490,596
Year ended June 30, 1996
Allowance for doubtful accounts 15,825 20,000 22,108 13,717
Allowance for inventory overstock
or obsolescence - 100,178 - 100,178
Deferred tax asset valuation
allowance 459,107 1,454,363 - 1,913,470
</TABLE>
TECHNICAL DEVELOPMENT AND MARKETING AGREEMENT
This TECHNICAL DEVELOPMENT AND MARKETING AGREEMENT (this "Agreement") is
made and entered into as of the 10th day of December, 1998, by and between
SENSAR CORPORATION, a Utah corporation with a usual place of business at 1652
West 820 North, Provo, Utah 84601, and its corporate parent, LARSONoDAVIS
INCORPORATED, a Nevada corporation (Sensar Corporation and LarsonoDavis
Incorporated are hereinafter jointly referred to as "Sensar"), and JEOL USA,
INC., a Delaware corporation with a usual place of business at 11 Dearborn Road,
Peabody, Massachusetts 01960-6043 ("JEOL"), based on the following:
Premises
A. Sensar owns and/or holds licenses to certain technology that it has
used to develop and manufacture its "Jaguar" time-of-flight mass spectrometer
product.
B. JEOL is engaged in the sale and marketing of mass spectrometers and
related products and services. JEOL wishes to market Sensar's Jaguar product
and to assist Sensar in continuing to develop its Jaguar product and related
software.
Agreement
NOW, THEREFORE, based on the foregoing premises and for and in
consideration of the mutual covenants herein contained and the benefit of the
parties to be derived therefrom, the parties agree as follows:
1. Appointment as a Distributor. Sensar hereby appoints JEOL, on the
terms and conditions set forth in this Agreement, exclusive distributor in
North, Central, and South America (the "Territory") to market and solicit orders
for the sale of the Sensar Jaguar time-of-flight mass spectrometer (the "Jaguar
Product") currently being sold by Sensar to the mass spectrometry market (the
"Market"). JEOL accepts this appointment upon the terms and conditions set
forth herein and agrees to use its best efforts to promote the sale of the
Jaguar Product to the Market in the Territory. JEOL may use the commercial
distribution network of JEOL, its parent JEOL, Ltd., and all entities owned or
controlled by JEOL, Inc. (the "JEOL Group"), for the promotion, marketing, and
the sale of the Jaguar Product. Sensar shall be entitled to (i) subject to JEOL
approval, complete the sale to those entities purchasing Jaguar Products with
delivery of the product prior to April 1, 1999; (ii) sell to those entities
identified on Schedule A; and (ii) sell to purchasers outside the Territory.
2. Marketing and Sales Responsibilities.
(a) JEOL shall provide comprehensive marketing and sales service for
the Territory. JEOL shall use its best efforts to solicit orders of sales
of the Jaguar Product by advertising, symposium presentations, catalog
placements, mailings, booths at trade shows, journal articles, journal
advertising, and such other methods as may be appropriate. JEOL shall from
time to time, but not less than semi-annually, review with Sensar its
marketing plan, including documentation related thereto. JEOL shall
actively seek out new applications for the Jaguar Product and promptly
follow-up sales leads obtained from any source in a professional manner.
JEOL shall be responsible for maintaining proper records and documentation
of all sales, consistent with good accounting practices.
(b) Sensar shall provide technical and service training for JEOL
technicians and sales and applications data and training for JEOL sales and
marketing staff. It is anticipated that the technical and service training
will be at Sensar and the sale and applications training will be at JEOL.
Sensar shall bear the cost of the initial meeting at Sensar and the initial
meeting at JEOL; provided that, each party shall bear their own costs of
travel and lodging. Thereafter, the cost of training shall be invoiced to
JEOL at Sensar's standard rates.
(c) During the term of this Agreement, JEOL shall not act as a
distributor for any product that competes with the Jaguar Product without
the prior written consent of Sensar. For purposes of this Agreement, the
parties agree that (i) Maldi time-of-flight; (ii) ICP mass spectrometers;
(iii) any products currently manufactured by JEOL; and (iv) any products
manufactured by JEOL in the future for which the list price is more than
$200,000 will not be deemed to be competing products.
(d) JEOL shall be responsible for all expenses incurred in connection
with the marketing and sales efforts for the Jaguar Product within the
Territory. This includes, but is not limited to: preparing product
brochures and application notes, advertising, mailing of marketing
materials, participating in trade shows, conducting surveys, and conducting
demonstrations of the Jaguar Product.
(e) JEOL shall pay all sales taxes, import or export duties, or
levies of any kind imposed by any governmental authority which may arise in
connection with the sale or delivery of the Jaguar Products.
(f) JEOL shall provide reasonable commercial levels of after-sales
service and support to all purchasers of Jaguar Products from JEOL within
the Territory and make every reasonable effort to resolve or assist in the
resolution of customer complaints or concerns. JEOL agrees to provide a
minimum of three (3) years of such support for all installed units, whether
during or after the term of this Agreement at its usual service contract or
demand service rates. JEOL shall be responsible for its share of warranty
costs as provided in paragraph 5.
(g) JEOL shall be solely responsible for any representations or
warranties to customers or potential customers concerning the Jaguar
Products that are not contained in written materials provided by Sensar.
(h) JEOL shall not undertake any act that is materially detrimental
to Sensar or the Jaguar Products.
(i) Sensar shall provide, in a timely manner and in good faith, any
technical data and professional assistance reasonably requested by JEOL in
support of the marketing and sale of the Jaguar Products. Sensar shall
furnish JEOL with technical data, sales data, engineering materials, and
such other information as may be needed to solicit sales of the Jaguar
Products. Sensar shall use its best efforts to provide materials and
technical assistance to JEOL wherever and whenever Sensar is reasonably
required to assist in the sales of the Jaguar Product, including, but not
limited to, service manuals, block diagrams, and customer instruction
manuals in form and substance suitable to enable JEOL to market, service,
and support the Jaguar Product.
(j) Sensar shall promptly refer any inquiries, requests, and/or
orders related to the Jaguar Product received from the Territory for sales
to the Market to JEOL, and JEOL will promptly refer all inquiries,
requests, and/or orders related to the Jaguar Product to Sensar received
from outside the Market or any geographical area outside the Territory.
(k) Sensar reserves the right to maintain technical contacts and
relationships with potential and future customers; provided, however, that
JEOL shall be promptly informed of said contacts. In the event services
are performed by Sensar for customers in the Territory and Market, billing
shall be through JEOL and Sensar shall be reimbursed for its services.
(l) Sensar agrees to provide parts for the Jaguar Product for a
minimum of five (5) years from the date of the termination of this
Agreement or cessation of manufacture of the part by Sensar whichever is
later. Sensar reserves the right to substitute parts provided they are
compatible with earlier Jaguar Products sold by JEOL. At the expiration of
the five (5) year period, if Sensar is no longer maintaining an inventory
of parts, Sensar will provide to JEOL documentation sufficient to allow
JEOL to acquire the necessary parts from third-party suppliers.
(m) In the event Sensar materially fails to provide service, parts,
or support in accordance with the provisions of this Agreement and such
failure continues for a period of three (3) months after written notice
from JEOL, Sensar shall cooperate with JEOL at no additional charge, to
provide JEOL with the necessary information to permit JEOL to fully support
service, operations, and parts back up. In the event of any bankruptcy or
cessation of operations by Sensar, in addition to JEOL's rights under
paragraphs 3(b), (c), and (d), below, JEOL shall have a right of first
refusal to acquire any parts inventory related to service support of
purchased and installed Jaguar Products.
3. Manufacturing of Jaguar Product.
(a) The Jaguar Product shall meet or exceed the Specifications as
defined in Schedule B by the deadlines indicated in such schedule. Sensar
shall directly or indirectly through the use of subcontractors, manufacture
the Jaguar Products for sale by JEOL under this Agreement. Sensar shall
use its best efforts to manufacture the Jaguar Product in such a manner so
as to timely meet the sales orders placed by JEOL in accordance with the
forecasts of JEOL. Sensar shall use reasonable commercial efforts to
deliver Jaguar Products as promptly as possible, typically within six (6)
weeks from the date of the order if within the volume of sales forecasted
by JEOL as provided in subparagraph (b) below or sixteen (16) weeks if in
excess of forecasted volumes. The Jaguar Product shall be year 2000
compliant as further defined in the Specifications as defined herein.
(b) Commencing with the month of December 1998, JEOL will provide
Sensar with six (6) month sales and parts forecasts on a monthly basis
during the term of this Agreement. The initial three (3) months of each
sales and parts forecast shall be treated as a purchase order from JEOL
against which Sensar can manufacture products and replacement parts which
JEOL shall be obligated to purchase. In the event that Sensar is unable to
manufacture and deliver the Jaguar Products as a result of a cessation of
business, Sensar will grant to JEOL a manufacturing license for the Jaguar
Product and shall provide JEOL with all information necessary for JEOL to
manufacture and to provide full technical support of the Jaguar Product.
In such event, Sensar shall have the right to sell its existing inventory
to JEOL at the then current book value of such inventory and shall be
entitled to a royalty of seven and one-half percent (7.5%) of the sale
price of all Jaguar Products manufactured by JEOL. Sensar shall also
provide JEOL with the written consent of all patent holders for the
technology underlying the Jaguar Product to permit such manufacture.
(c) Within ten (10) days of signing this Agreement, Sensar will place
into escrow its then current technical documentation (the "Documentation
Package"), including, but not limited to, source codes, schematics, service
manuals, final test procedures, field installation manuals, and operation
manuals relating to the Jaguar Product and within sixty (60) days
thereafter, all engineering drawings, bill of materials, list of suppliers
and sub-contractors, final test procedures, and other such items JEOL deems
necessary. All technical and technological updates and improvements
implemented by Sensar relating to the Jaguar Product will also be placed
into escrow.
(d) The Documentation Package will be held by a mutually acceptable
independent party, under the terms of the Escrow Agreement attached hereto
as Schedule "C."
(e) Sensar agrees that it shall indemnify, defend, and hold JEOL
harmless from and against any claims, damages, costs, and expenses
(including attorneys' fees) caused by the negligence of Sensar in the
manufacture of the Jaguar Product, including, without limitation, claims
for product liability or claims based on patent, copyright, or trademark
infringement and caused by reason of any defective design or manufacture of
the Jaguar Product and without the fault or negligence of JEOL. JEOL
agrees that it shall indemnify, defend, and hold Sensar harmless from and
against any claims, damages, costs, and expenses (including attorneys'
fees) attributable to or arising out of the fault or negligence of JEOL.
(f) Notwithstanding the foregoing, Sensar's liability during the
warranty period shall be limited to its standard warranty for the Jaguar
Product as it may exist from time to time during the term of this
Agreement.
(g) To the extent necessary for JEOL to provide necessary support to
its installed customer base, the provisions of paragraphs 3(b), (c), (d),
(e), and (f) shall survive any termination of this Agreement.
4. Marketing and Manufacturing Information and Changes. JEOL shall
provide Sensar with field performance and quality information on any ongoing
basis but in no event less often than once a month during the term of this
Agreement. Such information shall contain all customer comments concerning the
implementation, use, and application of Jaguar Products. Sensar will provide
JEOL with a monthly report of any corrective action taken in response to the
information previously provided to Sensar by JEOL. The parties agree to
mutually cooperate to implement a routine corrective action process.
5. Warranty.
(a) Sensar will provide its standard printed warranty attached hereto
as Schedule D to the ultimate end user of the Jaguar Products, which is
limited to the Jaguar Products being free from defects in material and
workmanship under normal use and service, Sensar's obligation being limited
to repairing or replacing at its manufacturing facility in accordance with
the terms of the Limited Warranty shipped with such Jaguar Products. The
warranty term shall commence upon the earlier of (i) JEOL's final customer
acceptance on demonstration that the product meets the specifications at
the customer's site; or (ii) one hundred eighty (180) days subsequent to
shipment from Sensar. Sensar, with the prior written consent of JEOL,
which shall not be unreasonably withheld or delayed, may change the terms
of said Limited Warranty with respect to any Jaguar Products not yet
shipped. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE FOREGOING WARRANTY
OF SENSAR IS EXPRESSLY IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, and Sensar neither assumes nor authorizes any person to
assume for it any other liability in connection with the manufacture,
design, construction, sale, delivery, or installation of the Jaguar
Products. It is further understood and agreed that in no event shall
Sensar be liable for indirect or consequential damages of any kind arising
out of any warranty claim. JEOL shall not make, nor authorize any other
person or entity to make, any representation or warranty with respect to
the Jaguar Products greater than as set forth in this Agreement or Sensar's
Limited Warranty.
(b) The parties agree that Sensar will provide all replacement parts
and JEOL will provide all services with respect to any warranty work.
Sensar will bear the cost of any replacement parts and JEOL will bear the
cost of any necessary services up to five percent (5%) of the selling price
to the end user of the unit. Thereafter, JEOL and Sensar shall evenly
divide the costs of any necessary additional services. The costs of
services shall be calculated by the hourly rate set by JEOL for internal
charges.
6. Product Development Activities.
(a) The parties shall mutually cooperate in a joint effort to improve
Jaguar Product performance, increase quality, reduce costs, extend the
capabilities, improve marketability, and develop new instrumentation.
Sensar shall have the primary development responsibility, although JEOL
shall provide Sensar all information that is available, or which may in the
future become available, to JEOL, regarding customer needs, specifications,
know-how, technical assistance, and engineering which would assist Sensar
in such development.
(b) The parties have prepared detailed written specifications as set
forth on Schedule B (the "Specifications"), including agreed upon
milestones and target completion dates, for the initial development work to
be completed for the Jaguar Products no later than April 10, 1999.
Thereafter, Sensar shall prepare and deliver to JEOL, within ten (10)
business days of the end of each month, a report of the development
activities conducted during the month and a summary of Sensar's progress as
compared to the milestones and target completion dates set forth in the
plan.
(c) Any changes to the Specifications shall be in writing and shall
be mutually agreed to by the parties.
(d) JEOL agrees to provide partial funding for the initial
development project in the amount of $60,000 per month for the initial five
(5) months of this Agreement, or an aggregate of $300,000. The first
payment will be made on the date of this Agreement and thereafter, on
achieving certain milestones as defined in Schedule B so that the entire
balance is paid by the 10th of April 1999. Notwithstanding the foregoing,
in the event that the parties make material changes to the development
plan, they agree to negotiate in good faith to share the increased costs
associated with such changes in a reasonable manner.
(e) Any enhancements or improvements to the Jaguar Product or related
products resulting from the joint development program of the parties shall
be included in the definition of Jaguar Products for purposes of granting
JEOL exclusive marketing rights in the Territory and shall be added to the
Documentation Package held in escrow.
(f) The parties agree to hold joint meetings, on at least a quarterly
basis, alternating between Provo, Utah, and Peabody, Massachusetts, between
the project managers and key individuals involved in the sales and
marketing and development process. Both parties shall be able to set
agenda items for these meetings which shall be fixed five (5) business days
prior to the meeting.
(g) It is further agreed that Sensar will redesign the Jaguar Product
to ensure that it achieves a mass accuracy of 10ppm on a consistent basis
by no later than October 30, 1999. The definition of mass accuracy of
10ppm is contained in Schedule E. Should the redesign involved with such
mass accuracy result in increased component or labor costs for the
manufacture of the Jaguar Product, the parties agree that such increases
shall be included in the price of the Jaguar Product to JEOL at an amount
equal to such increased cost plus forty percent (40%); provided that, the
price increase to JEOL shall in no event exceed Five Thousand Dollars
($5,000.00)
7. Ownership of Jaguar Product. Subject to the provisions of paragraphs
3(b), (c), and (d), all of the rights relating to the development and commercial
application of any products produced in connection with this Agreement, and any
products which result therefrom, are, and shall remain, the sole property of
Sensar, including (without limitation) each source code, invention, discovery,
use, improvement, device, formula, application, design, apparatus, practice,
process, method of production or product, including models or prototypes, which
is conceived, developed, or reduced to practice by Sensar, its employees,
agents, or subcontractors as a result of the duties performed with respect to
this Agreement, as well as all patent applications, patents, trademarks, and
copyrights with respect to such products. Sensar's property rights shall extend
to copies of any and all notebooks, memoranda, specifications, and other items
developed as a result of the work performed hereunder. JEOL shall hold all such
information in a fiduciary capacity for Sensar and any patents, trademarks, and
copyrights that issue with respect to any product shall be in the name of, or
assigned to, Sensar. On completion of the development or other work, JEOL
shall, on Sensar's request, deliver to Sensar the items specified above, which
are owned by Sensar. In the event that Sensar and JEOL mutually agree to
develop a new product or a complete redesign of the Jaguar Product, they agree
to enter into an agreement concerning the joint ownership of such new
development efforts.
8. Jaguar Product Purchase Agreement and Schedule.
(a) JEOL shall purchase Jaguar Products from Sensar at a price to be
negotiated from time to time by the parties. The price to JEOL for the
Jaguar Product as it exists at the date of this Agreement shall be $95,000
per unit, FOB Provo, Utah, for the initial year of this Agreement.
Thereafter, the price shall be renegotiated at semi-annual intervals based
on any increased costs in parts or materials and in light of the final
specifications of the Jaguar Products as developed by the parties. JEOL
shall be free to set its own price for sale of the Jaguar Products to end
users.
(b) JEOL shall purchase a minimum of Jaguar Products from Sensar as
set forth in this Agreement. Upon the signing of this Agreement, one (1)
demonstration unit shall be ordered by JEOL, for delivery in twenty (20)
days from the order date and shall be paid for upon achieving the April
1999 Specifications.
Thereafter, JEOL shall purchase the minimum number of Jaguar Products (or
improved products if identified differently) as set forth below:
<TABLE>
<CAPTION>
Period Number of Jaguar Products
- ----------------------------------- ------------------------------------
<S> <C>
April 1999 2 (including the demonstration unit)
May 1999 2
June 1999 2
July 1999 through December 31, 1999 1 per month
January 1 through December 31, 2000 44
January 1 through December 31, 2001 68
</TABLE>
It is the parties intention to maintain a continuous flow of orders to
permit orderly production schedules and cash flow. Both parties will cooperate
to ensure, to the extent possible, this result. If at any time subsequent to
December 31, 1999, JEOL purchases less than two (2) units in a month, then
Sensar shall have the right to terminate this Agreement upon thirty (30) days
written notice to JEOL. If at any time subsequent to December 31, 1999, JEOL
purchases less than four (4) units in a month, the parties agree, at the request
of either party, to mutually review their relationship and to make such
modifications as may be appropriate. To the extent that the parties are unable
to agree within ninety (90) days of the notice, either party can terminate this
Agreement on thirty (30) days written notice.
(c) If JEOL does not purchase the minimum amount of Jaguar Products
indicated above for the periods through December 31, 1999, it shall, within
ten (10) days of the end of each such period, pay $50,000 to Sensar for
each unit not purchased. Any units including the demonstration unit
purchased in advance of the minimum requirements shall be credited against
future minimums for the period ending December 31, 1999. If, at December
31, 1999, JEOL has sold at least a minimum of twelve (12) units, Sensar
shall give JEOL credit for any dollar amounts paid to Sensar during the
preceding period in lieu of minimum purchases.
(d) All Jaguar Products shall be shipped at the direction of JEOL,
FOB Sensar's manufacturing facility. Payment shall be due from JEOL within
forty-five (45) days after receipt of a unit but in no event more than
sixty (60) days after shipment. Amounts not due when paid and other terms
of the sale shall be governed by Sensar's standard purchase order
provisions, a copy of which is attached hereto as Schedule F and which
shall not be modified as to the products sold hereunder to JEOL, without
JEOL's prior written consent which shall not be unreasonably withheld or
delayed.
9. Expansion of Territory. If the activities under the terms of this
Agreement are mutually satisfactory, the parties agree to seek to negotiate a
mutually agreeable expansion of the Territory to other parts of the world. If
JEOL desires such expansion, it agrees to give Sensar six (6) months prior
written notice so that Sensar can notify the other party to any distribution
arrangement it may have in place at such time.
10. Definition of Confidential Information. For purposes of this
Agreement, the term "Confidential Information" does not apply to information
generally available to the public or to businesses in the industry in which
Sensar and/or JEOL is engaged, but otherwise shall mean (a) information
disclosed to or known to JEOL or Sensar as a direct or indirect consequence of
or through its engagement with the other, including, but not limited to, the
special proprietary and economic information regarding the business, methods,
and operation of each company; and (b) all information disclosed to JEOL or
Sensar, or to which JEOL has access during the period of its engagement, for
which there is any reasonable basis to be believed is, or which appears to be,
treated by Sensar or JEOL as Confidential Information.
11. Protection of Goodwill. JEOL and Sensar acknowledge that in the
course of carrying out, performing, and fulfilling its responsibilities to the
other, each company will be given access to and be entrusted with Confidential
Information relating to the other's business. JEOL and Sensar recognizes that
(i) the goodwill of each company depends upon, among other things, its keeping
the Confidential Information confidential and that unauthorized disclosure of
the Confidential Information would irreparably damage each company; and (ii)
disclosure of any Confidential Information to competitors of Sensar or to the
general public would be highly detrimental to Sensar and JEOL.
12. Covenants Regarding Confidential Information. In consideration of the
agreements between JEOL and Sensar and in consideration of the sums to be paid
to Sensar and compensation to be paid to JEOL during its engagement, JEOL hereby
agrees that (a) it will not, during its engagement with the other or at any time
after termination of its engagement, irrespective of the time, manner, or cause
of termination, use, disclose, copy, or assist any other person or firm in the
use, disclosure, or copying of any Confidential Information unless otherwise
ordered by a court of competent jurisdiction; and (b) all files, records,
documents, drawings, equipment, and similar items relating to the business of
Sensar or JEOL shall remain the exclusive property of the creating party and
shall not be removed from the premises of Sensar, except where necessary in
carrying out the provisions of this Agreement, without the prior written consent
of Sensar. Upon termination of this Agreement, JEOL and Sensar each agree to
deliver to the other party all Confidential Information and all copies thereof
along with any and all other property belonging to Sensar whatsoever. The
provisions of this paragraph are subject to the provisions of paragraphs 3(b),
(c), and (d) and the cross licensing provisions of paragraph 7.
13. Survival. The provisions of paragraphs 10, 11, and 12 shall survive
the termination of this Agreement.
14. Non-Solicitation of Employees. The parties agree that they will not
solicit the employees of the other or in any other way interfere with the
employment relationships of the other. The parties agree that they will not
hire the former employees of the other at any time within six (6) months of the
termination of the employment relationship. The provisions of this paragraph 14
shall survive the termination of this Agreement for one (1) year unless Sensar
is no longer actively conducting business.
15. Relief. JEOL agrees that a breach or threatened breach on its part of
the covenants contained in paragraphs 2(c), 10, 11, 12, and 14 of this Agreement
may cause such damage to Sensar as will be irreparable and for that reason, JEOL
further agrees that Sensar may be entitled as a matter of right to an injunction
out of any court of competent jurisdiction, restraining any further violation of
such covenants by JEOL, its employer, employees, partners, or agents. The right
to injunction shall be cumulative and in addition to whatever other remedies
Sensar may have, including, specifically, recovery of damages.
16. Term. Except as provided herein, the term of this Agreement shall be
for a period of five (5) years beginning on the effective date of this
Agreement. This Agreement shall continue for successive one-year periods upon
the expiration of such original period. In the event of termination in
accordance with paragraph 17, all amounts previously paid by one party to the
other shall be deemed to be in full satisfaction of the obligations of either
party, except as to payment for outstanding purchase orders and as to the
provisions of this Agreement which by their explicit terms, survive this
Agreement.
17. Termination for Cause. Either party shall have the right, without
further obligation to the other party other than for compensation previously
paid or accrued, to terminate this Agreement in the event of such other party's
fraud, theft, or any material act of gross negligence, of malfeasance, or of
intentional breach of any material covenant or term of this Agreement. Such
termination shall be effective immediately upon the acts of fraud or theft or
upon thirty (30) days prior written notice for such other events.
For purposes of this Agreement, "breach" by Sensar entitling JEOL to
terminate for cause shall be any one or more of the following:
(i) Failure to provide any of the Documentation Package within thirty
(30) days written notice from JEOL;
(ii) Failure to deliver any shipment of the Jaguar Product in full as
provided herein, within thirty (30) days written notice from JEOL;
(iii) Cessation of business or the filing of any petition for
voluntary or involuntary bankruptcy or receivership;
(iv) Failure to provide training as set forth herein;
(v) Any material failure of the Jaguar Product to meet the
Specifications per the milestones provided in Schedule B unless Sensar
shall, within sixty (60) days of written notice from JEOL, have undertaken
remedial action to cure such failure and thereafter proceed with due
diligence to complete such remedial action; and
(vi) The merger, acquisition, or consolidation of Sensar with a direct
competitor of JEOL.
Notwithstanding the foregoing, if the Jaguar Product has not met the 10ppm
specification set forth in paragraph 6(g), JEOL's remedy shall be to require
Sensar to repurchase, at seventy percent (70%) of JEOL's cost, any inventory
held by JEOL at March 31, 2000; provided that, JEOL has used good faith efforts
to sell such inventory. Sensar's obligation shall be limited to six (6) units
if JEOL has purchased all twelve (12) guaranteed units or four (4) units if JEOL
has purchased only ten (10) units. Payment shall be by delivery to JEOL of a
promissory note due December 31, 2000.
For purposes of this Agreement, "breach" by JEOL entitling Sensar to
terminate for cause shall be any one or more of the following:
(i) Failure to purchase the minimum quantity of the Jaguar Product as
set forth in paragraph 8(b);
(ii) Failure to make all payments as set forth herein;
(iii) Cessation of business or the filing of any bankruptcy or
receivership;
(iv) Failure of JEOL to use good faith efforts to meet the minimum
sales goals set forth in paragraph 8.
18. Savings Clause. If any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect the validity and enforceability of any other provisions hereof.
Further, should any provisions within this Agreement ever be reformed or
rewritten by a judicial body, those provisions as rewritten shall be binding
upon Sensar and JEOL.
19. Right of Setoff. Sensar and JEOL shall each be entitled, at its
option and not in lieu of any other remedies to which it may be entitled, to set
off any amounts due from the other or any affiliate of the other against any
amount due and payable by such person or any affiliate of such person pursuant
to this Agreement or otherwise.
20. Representations. JEOL and Sensar represent and warrant to the other
that it has not previously assumed any obligations inconsistent with those of
this Agreement.
21. Succession. This Agreement and the rights and obligations hereunder
shall be binding upon and inure to the benefit of the parties hereto and their
respective legal representatives, and shall also bind and inure to the benefit
of any successor of Sensar by merger or consolidation of any assignee of all or
substantially all of its property. Except to any such successor or assignee of
Sensar, neither this Agreement nor any rights or benefits hereunder may be
assigned by either party hereto.
22. Notices. All notices provided for by this Agreement shall be made in
writing, (a) either by actual delivery of the notice into the hands of the
parties entitled to notice, or (b) by the mailing of the notice in the United
States mail to the address set forth in the introductory paragraph, certified or
registered mail, postage prepaid, return receipt requested or by Federal
Express, UPS, or other overnight carrier. The notice shall be deemed to be
received in case (a) on the date of its actual receipt by the parties entitled
thereto, and in case (b) three (3) days after the date of deposit in the United
States mail. Any party hereto may, at any time by giving notice to the other
party in the manner prescribed above, designate any other address in
substitution of the foregoing address to which such notice shall be given.
23. Entire Agreement. This Agreement contains the entire Agreement
between the parties hereto with respect to the subject matter contained herein.
No change, addition, or amendment shall be made except by written agreement
signed by the parties hereto.
24. Waiver of Breach. The waiver by either party hereto of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by any party.
25. Governing Law. The laws of the state of Delaware shall govern the
validity, construction, enforcement, and interpretation of this Agreement.
26. Attorneys' Fees. In the event that any party institutes any action or
suit to enforce this Agreement or to secure relief from any default hereunder or
breach hereof, the breaching party shall reimburse the nonbreaching party for
all costs, including reasonable attorneys' fees, incurred in connection
therewith and in enforcing or collecting any judgment rendered therein,
including such costs which are incurred in any bankruptcy or appellate
proceeding.
DATED as of the date first above written.
Sensar:
SENSAR CORPORATION
By /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
LARSONoDAVIS INCORPORATED
By /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
JEOL:
JEOL USA, INC.
By /s/ Gary Cogswell
Gary Cogswell, Chief Executive
Officer
By /s/ Kazuyoshi Yasutake
Kazuyoshi Yasutake, President and
Treasurer
SECOND AMENDMENT TO
ASSET PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO ASSET PURCHASE AGREEMENT (this "Amendment") is
entered into as of March 31, 1999, by and among PCB GROUP, INC., a New York
corporation ("PCB"), BEEHIVE ACQUISITION CORP., a Delaware corporation and
wholly-owned subsidiary of PCB (the "Buyer"), and LARSONoDAVIS INCORPORATED, a
Nevada corporation ("LDI"), and LARSONoDAVIS LABORATORIES, a Utah corporation
and wholly-owned subsidiary of LDI (the "Seller"), based on the following:
Premises
A. PCB, the Buyer, LDI, and the Seller are parties to the Asset Purchase
Agreement dated November 30, 1998, as amended February 16, 1999 (the "Purchase
Agreement"), pursuant to which the Buyer is acquiring the Subject Assets from
the Seller.
B. In the course of the due diligence investigation of the status of the
Owned Property, certain matters have come to the attention of the parties that
cannot be satisfactorily resolved prior to the closing of the transaction
contemplated by the Purchase Agreement. The parties have agreed to proceed with
the proposed transaction without transfer of the Owned Property at the initial
closing and wish to set forth the terms and conditions of this modification in
writing.
C. This Amendment is entered into in conformance with Section 13.2 of the
Purchase Agreement which requires that any modification of the Purchase
Agreement be set forth in writing and signed by all parties.
Agreement
NOW, THEREFORE, based on the foregoing premises and in consideration of the
mutual representations, warranties, and covenants contained herein, the parties
agree as follows:
1. Defined Meanings. Capitalized terms used in this Amendment and not
defined shall have the meanings given to them in the Purchase Agreement.
2. Exclusion of Owned Property from Initial Closing. The parties agree
to proceed with the Closing on or before March 31, 1999, without transfer of the
Owned Property that was included as a portion of the Subject Assets under the
terms of the Purchase Agreement. The agreed to fair market value of the Owned
Property of One Million Four Hundred Thousand Dollars and 00/100 ($1,400,000.00)
shall be excluded from the assets being transferred for purposes of calculating
the Net Asset Value as of the December Balance Sheet and the liability secured
by a deed of trust on the Owned Property of Six Hundred Eighty-Two Thousand Nine
Hundred Eighty-Two Dollars and 30/100 ($682,982.30) shall be excluded as a
liability for purposes of calculating the Net Asset Value as of the December
Balance Sheet. The resulting Purchase Price Reduction shall reduce the Initial
Cash Payment by Seven Hundred Seventeen Thousand Seventeen Dollars and 70/100
($717,017.70). Attached hereto as Exhibit "A" is a copy of the December Balance
Sheet that has been agreed to by all of the parties for purposes of calculating
the Purchase Price as of the Closing.
3. Purchase of Owned Property. Within thirty (30) days after the Seller
has completed all actions set forth below necessary to cause title to the Owned
Property to be good and marketable, the Buyer shall acquire the Owned Property
from the Seller for an agreed price of One Million Four Hundred Thousand Dollars
and 00/100 ($1,400,000.00):
(a) obtain and record a release for that portion of the Mountain Fuel
Supply Company easement which runs under the building located on parcel 2;
(b) obtain and record a release for that portion of the Mountain
States Telephone & Telegraph easement which runs under the building located
on parcel 2;
(c) (i) obtain and record an easement from the property owner to the
East (apparently Press Publishing Co.) for the area East of parcel 2 which
is enclosed within the fencing; or (ii) remove the fence and provide
evidence satisfactory to the Buyer that the foregoing easement is not
required for adequate access to the utilities; or (iii) relocate all of
such items such that none (including the fence) encroaches onto the area
East of parcel 2;
(d) obtain from the property owner to the West (apparently 3 W
Partners and others) and record (i) a waiver from any claim of boundary by
acquiescence due to the encroachment of the fence along the westerly
boundary line onto the Owned Property, and (ii) an easement agreement
regarding the transformer and other utility improvements which encroach
onto parcel 1 from the property to the West;
(e) eliminate exception 10 on Schedule B, Section 2, of the title
commitment from First American Title Insurance Company, Utah Division,
Order No. 4040-63246, 1st Amendment;
(f) (i) obtain and record an easement for the area enclosed within
fencing along the southern boundary of the property, which includes, among
other things, asphalt; or (ii) move the existing fencing to, or within, the
property boundary and remove the asphalt encroaching on the property to the
South;
(g) obtain a variance from Provo City for any rear yard set back
requirements or other zoning restrictions with respect to which the Owned
Property is not in compliance; and
(h) correct to the satisfaction of the Buyer any other matters that
materially affect the marketability or financing of the Owned Property.
The parties agree to mutually cooperate in resolving any title and zoning issues
and agree to work in good faith to encourage GE Capital Mortgage or another
purchase money lender to accept any minor defects that do not materially
adversely affect the insurability or marketability of the Owned Property.
4. Zoning Action. Notwithstanding any other provision of this Amendment,
if at any time Provo City commences an action in any court seeking any remedy
based on a zoning violation with respect to the Owned Property, or if there is a
casualty to the improvements located on the Owned Property resulting in the
destruction of twenty-five percent (25%) or more of such improvements, the Buyer
shall no longer have an obligation to purchase the Owned Property.
5. Lease of the Owned Property. The parties agree to enter into a lease
of the facilities located on the Owned Property in the form attached hereto as
Exhibit "B" pursuant to which the Seller will lease to the Buyer that portion of
the Owned Property described herein, with such Lease commencing on the Closing
Date and continuing through the earlier of the sale of the Owned Property to the
Buyer or July 15, 2000. This lease can be terminated on at least ninety (90)
days prior written notice given at any time subsequent to September 30, 1999, or
at such earlier time as provided in the Lease.
6. Reimbursement of Certain Expenses. The Seller agrees to reimburse the
Buyer on demand for any amounts charged by GE Capital Mortgage to extend its
loan commitment until July 15, 1999, up to an amount of Five Thousand Three
Hundred Dollars and 00/100 ($5,300.00). In the event that the sale of the Owned
Property is not completed on or before the expiration of the loan commitment
from GE Capital Mortgage solely or primarily as a result of title and/or zoning
issues with respect to the Owned Property, the Seller agrees to reimburse the
Buyer on demand for the commitment fee of Fifty-Two Thousand Dollars and 00/100
($52,000.00), the non-utilization fee, and any miscellaneous fees such as legal,
engineering, and surveying costs, required to be paid to GE Capital Mortgage in
connection with such financing by the Buyer.
7. Replacement Lender. In the event that the lending commitment from GE
Capital Mortgage expires and the Seller subsequently resolves all title and
zoning issues in accordance with paragraph 3 hereof, the Buyer shall use its
commercially reasonable efforts to obtain a new commitment from GE Capital
Mortgage and/or another lender and to proceed with the purchase of the Owned
Property. Notwithstanding the foregoing, the Buyer shall not be obligated to
accept a new commitment which provides for an interest rate in excess of eight
percent (8%) or that has materially different terms than the loan commitment
from GE Capital Mortgage that are not acceptable to the Buyer, in its sole
discretion. In the event that the Buyer is required to obtain a new loan
commitment and proceeds to closing of the acquisition of the Owned Property, the
Seller shall pay at the Closing Fifty Thousand Dollars and 00/100 ($50,000.00)
to the Buyer to compensate the Buyer for a portion of its loan costs.
Notwithstanding any other provision of this Amendment, in the event that the
Owned Property transaction has not closed on or before September 30, 1999, the
Buyer shall have no further obligation to (but may) purchase the Owned Property.
8. Moving Costs. In the event that the Owned Property sale has not
closed on or before September 30, 1999, and the Buyer elects to move the
operations of the acoustics business on or before July 15, 2000, to a location
within a fifty (50) mile radius of Provo, Utah, the Seller shall reimburse the
Buyer for any costs paid to third-parties for parking, loading, transportation,
unloading, and unpacking all of the assets of the business located at the Owned
Property; provided that, in no event shall the Seller's obligations under this
paragraph exceed One Hundred Fifty Thousand Dollars and 00/100 ($150,000.00).
9. Reduction of Promissory Note. To the extent that the Seller is
obligated to pay any amounts to the Buyer under the provisions of paragraphs 6,
7, or 8 of this Amendment, such amounts shall be paid by an immediate credit
against the outstanding principal balance of the Promissory Note, except that
the Seller will pay the Buyer any amounts due with respect to commitment
extension fees as provided in paragraph 5 within ten (10) days of receipt of the
appropriate documentation; provided, however, that in the event that no amounts
remain outstanding under the Promissory Note, the Seller will pay any amounts
owing pursuant to paragraphs 6, 7, or 8 of this Amendment on demand of the
Buyer.
10. Lease to Sensar Corporation. It is anticipated that Sensar
Corporation will continue to occupy a portion of the Owned Property for a
limited time. Sensar Corporation agrees to use its commercially reasonable
efforts to obtain its own facilities on or before September 30, 1999, and agrees
in any event to vacate on or before December 31, 1999. If the Owned Property is
acquired by the Buyer on or before September 30, 1999, the Buyer agrees to lease
a portion of the Owned Property to Sensar Corporation in accordance with a Lease
Agreement, a form of which is attached hereto as Exhibit "C."
11. Non-Disturbance Agreement. On or before the date of this Amendment,
the Seller shall obtain the written agreement of Key Bank acknowledging the
lease of the facilities to the Buyer and agreeing that such lease can remain in
effect even in the event of a foreclosure of its security interest in the Owned
Property.
12. Commitment from Lender. The Buyer shall deliver to the Seller a
letter from Buyer's lender stating that the Buyer has a sufficient and adequate
line of credit with which to pay the difference between the purchase price of
the Owned Property and the lending commitment of GE Capital Mortgage and that
amounts advanced under such line of credit are permitted to be used for the
acquisition of the Owned Property.
13. Indemnification of the Buyer. The Seller agrees to indemnify and hold
the Buyer harmless from any cost and expense relating to any zoning violation
existing as of the date of this Amendment with respect to the Owned Property;
provided that, to the extent that such costs and expenses are related to moving
costs, they shall be governed by the provisions of paragraph 8 of this
Amendment.
14. Payment to Key Bank. In the event that the total payment to Key Bank
of Utah and/or KeyCorp Leasing, Ltd. required to obtain releases of all UCC
financing statements held by them exceeds Three Hundred Ten Thousand Eight
Hundred Thirty-Two Dollars and 00/100 ($310,832.00), such excess shall be paid
by the Seller.
15. Taxes. The Seller shall be responsible for the payment of real
property taxes with respect to the Owned Property; provided that, if the Buyer
acquires the Owned Property, it agrees to pay all real property taxes accruing
subsequent to January 1, 1999.
16. Post-Closing Payable. Section 5(a)(ii) of the Purchase Agreement is
hereby deleted in its entirety and the parties agree that the liabilities
included in the Post-Closing Payable shall not be included on the December 31,
1998, Balance Sheet.
17. Cash Account. The parties have reviewed the cash account maintained
under Section 1.4(f) of the Purchase Agreement and have agreed to resolve all of
the items listed on Exhibit "D" attached hereto for a payment to the cash
account by Sensar Corporation of Thirty-Three Thousand Dollars and 00/100
($33,000.00). Such payment shall be made within ten (10) days of this
Amendment. Such resolution shall not affect the Buyer's rights with respect to
any items not included on Exhibit "D."
18. Ratification of Purchase Agreement. Except as specifically provided
in paragraphs 1 through 17 hereof, the parties specifically ratify, confirm, and
adopt as binding and enforceable, all of the terms and conditions of the
Purchase Agreement.
EXECUTED effective the date first above 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
LARSONoDAVIS INCORPORATED
By /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
LARSONoDAVIS LABORATORIES
By /s/ Andrew C. Bebbington
Andrew C. Bebbington, President
MARKET STAND OFF AND REDEMPTION AGREEMENT
THIS MARKET STAND OFF AND REDEMPTION AGREEMENT (this "Agreement") is
entered into this day of January, 1999, by and between LARSONoDAVIS
INCORPORATED, a Nevada corporation ("LarsonoDavis"), on the one hand, and the
undersigned (the "Investor"), on the other, based on the following:
Premises
A. The Investor holds that number of shares of 1998 Series A Preferred
Stock of LarsonoDavis (the "Preferred Stock") and warrants, exercisable at $4.50
per share (the "Warrants"), to purchase common stock (the "Common Stock") of
LarsonoDavis indicated on the signature page. The Preferred Stock is
convertible, at the election of the Investor, into shares of Common Stock of
LarsonoDavis. The sale of the Common Stock issuable on conversion of the
Preferred Stock or exercise of the Warrants is subject to a registration
statement filed on Form S-3 by LarsonoDavis pursuant to its obligations under
the terms of a Registration Rights Agreement entered into by LarsonoDavis and
the Investor (the "Registration Rights Agreement").
B. Since the time of the acquisition of the Preferred Stock and Warrants
by the Investor, the price for LarsonoDavis' Common Stock in the public market
has declined to a point lower than originally anticipated by the parties,
adversely affecting the ability of the Investor to sell the Common Stock in the
public market should the Investor desire to do so.
C. LarsonoDavis has entered into an Asset Purchase Agreement with PCB
Group, Inc. (the "Asset Purchase Agreement"), pursuant to which it will, subject
to the fulfillment of certain conditions precedent including obtaining the
approval of its shareholders, sell the assets and operations associated with
LarsonoDavis' acoustics business (the "Acoustics Business"). In addition,
LarsonoDavis has taken a number of additional steps and is investigating other
potential avenues that may materially change its business, operations, and
prospects.
Agreement
NOW THEREFORE, based on the foregoing premises and for and in consideration
of the mutual promises and covenants contained herein, the adequacy of which is
hereby acknowledged, it is hereby agreed as follows:
1. Redemption of Preferred Stock and Reformation of Warrants.
LarsonoDavis agrees to redeem, and the Investor irrevocably agrees to sell any
and all rights the Investor may have in and to, the Preferred Stock, the Common
Stock issuable on the conversion of the Preferred Stock, and the Registration
Rights Agreement, all on the terms and conditions set forth in this Agreement.
In addition, the number of shares of Common Stock subject to the Warrants held
by the Investor shall be reduced to equal one hundred (100) shares of Common
Stock for each share of Preferred Stock sold by the Investor pursuant to this
Agreement and the exercise price of such remaining Warrants shall be reduced to
$0.50 per share (the "Reformed Warrants"). Notwithstanding the foregoing,
LarsonoDavis will use its commercially reasonable efforts to maintain the
effectiveness of the registration statement currently covering the sale of the
Common Stock issued on conversion of the Preferred Stock until July 31, 2001.
2. Redemption Price. The redemption price (the "Redemption Price") to be
paid to the Investor shall be cash equal the purchase price to the Investor of
the Preferred Stock currently held by the Investor plus all accrued but unpaid
dividends on such Preferred Stock as of the date of redemption. LarsonoDavis
shall redeem the Preferred Stock (or the Common Stock issuable on conversion)
and the Warrants shall be reformed within fifteen (15) days of the closing of
the sale of the Acoustics Business to PCB Group, Inc. The cash portion of the
Redemption Price shall be paid by bank check, wire transfer, or other
immediately available funds as directed by the Investor.
3. Closing of PCB Transaction; Delivery of Certificates. As a condition
precedent to any obligation of LarsonoDavis under the terms of this Agreement,
the sale of the Acoustics Business to PCB Group, Inc., must be completed. As a
condition precedent to the payment of the Redemption Price and the reformation
of the Warrants, the Investor shall deliver to LarsonoDavis the original of the
certificates representing the Preferred Stock and the Warrants.
4. Agreement Not to Convert or Sell. During the term of this Agreement,
the Investor agrees that, without the prior consent of LarsonoDavis, the
Investor will not exercise the Investor's right to convert the Preferred Stock
or to exercise the Warrants. In addition, the Investor agrees not to sell or
transfer the Preferred Stock or Warrants during the term of this Agreement.
5. Agreement of Other Holders. The Preferred Stock and Warrants were
acquired by the Investor in connection with a private placement by LarsonoDavis
to a number of investors (the "Placement"). An aggregate of 3,500 shares of
Preferred Stock and Warrants to acquire 700,000 shares of Common Stock were
issued in the Placement. Of this amount, 3,040 shares of Preferred Stock and
all of the Warrants remain issued and outstanding. In the event that the
holders of at least 2,750 shares of Preferred Stock do not enter into an
agreement on the same terms and conditions as set forth in this Agreement on or
before December 31, 1998, LarsonoDavis may elect not to redeem any shares of
Preferred Stock or reform the Warrants. If it makes this election, LarsonoDavis
shall provide written notice to the holders of Preferred Stock on or before
January 8, 1999, and this Agreement shall thereafter be null and void.
6. Termination of Equity Interest in LarsonoDavis. The redemption of the
Preferred Stock and the reformation of the Warrants, and the Common Stock
issuable on conversion or exercise, will completely terminate any equity
interest of the Investor in LarsonoDavis associated with such securities other
than as represented by the Reformed Warrants. In the event that the Preferred
Stock, Warrants, or Common Stock of LarsonoDavis thereafter increases in value,
the Investor would not participate in or benefit from such increase, except to
the extent the Investor could acquire shares of Common Stock on exercise of the
Reformed Warrants.
7. Review of Information. LarsonoDavis' reports to the SEC are available
and have been reviewed by the Investor, including its report on Form 10-K for
the year ended December 31, 1997; its reports on Form 10-Q for the quarters
ended March 31, June 30, and September 30, 1998; and its reports on Form 8-K
dated January 7, February 13, May 1, October 7, and December 10, 1998.
LarsonoDavis has also provided a preliminary draft of its Proxy Statement for
the special shareholders' meeting to be held in the first quarter of 1999 to the
Investor. The draft of the Proxy Statement is preliminary in nature, is
currently being reviewed by the staff of the Securities and Exchange Commission,
and is subject to change and amendment. Implementation of the proposals
included in the current draft is subject, in addition to the approval of the
shareholders, the further approval of the board of directors of LarsonoDavis.
In addition, LarsonoDavis is actively seeking, and is engaged in discussions
with, potential acquisition targets and/or merger candidates. Such efforts may
lead to a transaction that could materially affect the long-term financing and
business prospects of LarsonoDavis and could result in increased liquidity and
market price for the Common Stock. The foregoing materials are collectively
referred to as the "Disclosure Materials". LarsonoDavis will provide, free of
charge, a copy of any document contained in the Disclosure Materials, on
request. Requests should be directed to Andrew C. Bebbington (801) 375-0177,
1681 West 820 North, Provo, Utah 84601. In addition, the officers and directors
of LarsonoDavis are available to discuss any information contained in the
Disclosure Materials and, on execution of suitable confidentiality agreements,
the current status of LarsonoDavis' ongoing efforts to restructure the Company
and identify suitable business partners and/or merger candidates. The Investor
has reviewed the Disclosure Materials and understands the risks involved in
agreeing to the redemption of the Preferred Stock and reformation of the
Warrants, including the risk that LarsonoDavis will be successful in the future
and the price of its securities may increase and wishes to enter into this
Agreement despite such risks.
8. Reaffirmation of Certain Assurances. In connection with the
Placement, the Investor provided representations and warranties to LarsonoDavis
contained in a Subscription Agreement, Suitability Letter, and Investor Letter
executed by the Investor and delivered to LarsonoDavis. The Investor reaffirms
all of such representations and warranties as if made as of the date of this
Agreement, including, without limitation, the Investor's status as an accredited
investor as defined in Rule 501 of Regulation D promulgated under the Securities
Act of 1933, as amended; the Investor's sophistication, knowledge, and
experience concerning investments similar to the Placement; the Investor's
investment intent in acquiring the Preferred Stock and Warrants; and the
Investor's financial ability to assume the risks involved in the Placement.
9. Effect of Redemption. Payment of the Redemption Price to the Investor
and reformation of the Warrants shall be in full and complete satisfaction of
all rights the Investor may have under the Preferred Stock, the original
Warrants, the Registration Rights Agreement, the Placement, and the ownership of
the Preferred Stock and the original Warrants since the completion of the
Placement. The Investor fully and completely releases LarsonoDavis and its
officers, directors, and others associated with the Placement from any and all
claims or liabilities related to the Preferred Stock, the original Warrants, the
Registration Rights Agreement, and the Placement, subject only to the payment of
the Redemption Price by LarsonoDavis and the reformation of the Warrants.
10. Termination of Agreement. In the event that the closing of the sale
of the Acoustics Business to PCB Group, Inc., and the redemption of the
Preferred Stock and reformation of the Warrants has not been completed on or
before March 31, 1999, this Agreement shall terminate and neither party shall
have any further rights or obligations hereunder.
11. Assignment. In order to preserve its working capital, LarsonoDavis
may seek to identify investors who may be willing to acquire the Preferred
Stock, or the Common Stock issuable on conversion and exercise thereof. In the
event that LarsonoDavis is able to do so, the Investor agrees that the right to
purchase all or any portion of the Preferred Stock or the Common Stock issuable
on conversion or exercise, may be assigned by LarsonoDavis to another person or
entity and the Investor agrees to sell the Investor's Preferred Stock, or the
Common Stock issuable thereon, to such other person or entity at a price equal
to the Redemption Price and to deliver the original of the certificates
representing the original Warrants to LarsonoDavis to permit the issuance of the
Reformed Warrants. At the request of such other person or entity, and on
assurance of payment satisfactory to the Investor, the Investor agrees to
exercise the Investor's right to convert the Preferred Stock to Common Stock.
Neither the Preferred Stock, the Warrants, this Agreement, nor any benefits
hereunder are otherwise assignable by the Investor.
12. Entire Agreement. The provisions herein constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements, oral or written, and all other communications
relating to the subject matter hereof. No amendment or modification of any
provision of this agreement will be effective unless set forth in a document
that purports to amend this Agreement and is executed by both parties.
13. Governing Law. The validity, construction, and performance of this
Agreement shall be governed by the substantive laws of the state of Nevada to
the extent applicable to the redemption of the Preferred Stock and Warrants and
otherwise by the substantive laws of the state of Utah.
14. Jurisdiction. The parties agree that the state or federal courts of
the state of Utah shall have jurisdiction for resolving any disputes under the
terms of this Agreement and consent to such jurisdiction for such purpose.
15. Costs. In the event of an action under the terms of this Agreement,
the non-prevailing party shall pay the reasonable costs and expenses of the
prevailing party, including all reasonable attorneys' fees.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
LarsonoDavis:
LARSONoDAVIS INCORPORATED
By
Andrew Bebbington, President
The Investor:
Shares of Preferred Stock Held ------------------------------------
(Signature)
- -------------------
------------------------------------
Warrants Held (Print Name)
- -------------------
CONSENT
We have issued our reports dated January 29, 1999, except for Note C for which
the date is March 31, 1999, accompanying the consolidated financial statements
and schedule of LarsonoDavis Incorporated included in the Annual Report of
LarsonoDavis Incorporated on Form 10-K for the year ended December 31, 1998. We
hereby consent to the incorporation by reference of said reports in the
Registration Statements of LarsonoDavis Incorporated on Forms S-3 (File No. 333-
1505, effective March 22, 1996; File No. 333-6527, effective August 2, 1996;
File No. 333-29923, effective October 3, 1997; and File No. 333-49989, effective
May 29, 1998) and on Forms S-8 (File No. 33-44784, filed December 30, 1991; File
No. 33-35751, filed July 5, 1990; File No. 333-24553, filed April 4, 1997; and
File No. 333-38919, filed October 28, 1997).
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Provo, Utah
January 29, 1999, except for Note C for which
the date is March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998,
AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 694,959
<SECURITIES> 0
<RECEIVABLES> 1,788,702
<ALLOWANCES> (50,224)
<INVENTORY> 2,046,871
<CURRENT-ASSETS> 4,637,354
<PP&E> 2,324,044
<DEPRECIATION> (996,796)
<TOTAL-ASSETS> 6,489,407
<CURRENT-LIABILITIES> 2,270,850
<BONDS> 0
<COMMON> 13,071
0
3
<OTHER-SE> 4,036,498
<TOTAL-LIABILITY-AND-EQUITY> 6,489,407
<SALES> 8,729,192
<TOTAL-REVENUES> 8,729,192
<CGS> 5,241,186
<TOTAL-COSTS> 10,411,866
<OTHER-EXPENSES> 5,010
<LOSS-PROVISION> 3,436,733
<INTEREST-EXPENSE> 132,388
<INCOME-PRETAX> (6,923,444)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,923,444)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,923,444)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
