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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For
the transition period from ______ to ______
LARK TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 73-1461841
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9545 KATY FREEWAY, SUITE 465 (713) 464-7488
HOUSTON, TX 77024 (Issuer's telephone number)
(Address of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
Revenues for the fiscal year ending December 31, 1996 were $4,192,406.
The aggregate market value of the voting stock held by non-affiliates is
$4,565,780, based on a closing price of $1.63 on March 23, 1997.
APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of March 17, 1997, there were 3,326,400 shares of Common Stock, par value
$0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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LARK TECHNOLOGIES, INC.
INDEX TO FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
Part I Page
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Item 1. Description of Business........................................... 1
Item 2. Description of Property........................................... 5
Item 3. Legal Proceedings................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............... 5
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.......... 5
Item 6. Management's Discussion and Analysis.............................. 6
Item 7. Financial Statements.............................................. 8
Balance Sheet ..............................................10
Statements of Operations ...................................11
Statements of Cash Flows ...................................13
Notes to Financial Statements ..............................15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................25
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act........25
Item 10. Executive Compensation............................................28
Item 11. Security Ownership of Certain Beneficial Owners and Management....28
Item 12. Certain Relationships and Related Transactions....................31
Item 13. Exhibits and Reports on Form 8-K..................................32
Signatures ...................................................................34
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY HISTORY. Lark Sequencing Technologies, Inc. ("Sequencing") was
incorporated as a Delaware corporation in May 1990. Sequencing's corporate
predecessor was organized in 1989 for the purposes of (i) marketing standard
gene sequencing technologies used by scientists at Baylor College of Medicine
in Houston, Texas and (ii) marketing software developed at Baylor College of
Medicine and used for sequencing.
In June of 1992, Sequencing acquired the assets of a Texas limited
partnership that was engaged in basic research into potential medical uses of
the bio-active proteins present in the venom of poisonous snakes. These assets
were placed by Sequencing in a wholly-owned subsidiary, Summa Biologica Inc., a
Texas corporation ("Summa"). The operations of Summa were not profitable and
were not deemed sufficiently promising to management of Sequencing to continue
expenditures in this respect. In December of 1993, Sequencing sold substantially
all the assets of Summa.
Lark Technologies, Inc. ("Lark" or the "Company") was incorporated under
the laws of the State of Delaware on November 16, 1994 for the purpose of
merging with Sequencing. Prior to the merger, Lark had no business operations or
significant capital and had no intention of engaging in any active business
until it merged with Sequencing. Prior to the merger, the sole shareholder of
Lark was SuperCorp Inc. ("SuperCorp"), an Oklahoma company. Upon approval of the
merger, SuperCorp spun off Lark by transferring its stock in Lark to its
shareholders.
The Company is a successor in interest to Sequencing through a merger
effected in September 1995. As a result of the merger, the shareholders of
Sequencing own 90% of the capital stock of Lark, and the shareholders of
SuperCorp own 10% of the capital stock of Lark.
BUSINESS OF LARK. Lark believes it is a leader in providing contract DNA
sequencing and research services to the pharmaceutical, biotechnology and agbio
industries. Lark's services are used worldwide by research organizations and
drug development institutions. Lark's service portfolio consists of various DNA
sequencing and molecular biology services as follows:
o AUTOMATED DNA SEQUENCING SERVICES. Lark applies automated sequencing
techniques to generate high throughput DNA sequence and fast
turnaround screening information, including genome sequencing
projects.
o GENETIC STABILITY TESTING SERVICES. Lark's genetic stability testing
services are used to characterize Master Cell Banks, Manufacturers
Working Cell Banks and Post Production Cell Samples from bacterial,
yeast and cell cultures. Genetic stability testing is used to
analyze a production strains stability and demonstrate that the
expression system has not undergone any mutations or rearrangements
that would affect the integrity of the product. This service assists
companies producing genetically manufactured products to optimize
production yields, determine product purity, and support regulatory
submissions. This service was introduced in late 1996.
o MANUAL DNA SEQUENCING SERVICES. Lark uses manual isotopic sequencing
techniques for projects that require greater than 99.9% accuracy.
These techniques are useful for DNA sequence information that is
used for patent applications, FDA submissions or the identification
of genetic mutations.
o LIBRARY SCREENING SERVICES. During the gene discovery process,
customers may find only a portion of a gene of interest. As a
service, Lark will use a customer's gene fragment to probe a genetic
library to identify a full length gene. Identification of full
length genes is necessary for determining a gene's function,
developing novel drugs, and securing patent rights.
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o DIFFERENTIAL DISPLAY SERVICE. Lark uses differential display
techniques for analyzing differences in gene expression caused by
the introduction of various drug compounds, viruses or stimulatory
factors. Differential display can be useful in identifying novel
genes and gene functions. Analysis of differential gene expression
can also be useful in assessing the impact of small molecules or
other compounds on cellular function, discovery of novel drug
targets, and analyzing disease status. By understanding how and when
a gene is expressed or repressed, targeted interventions can be
developed to maximize results and minimize harmful side effects.
This service is used to discover novel genes as well as characterize
pharmaceutical effects.
Lark has also undertaken a senescence gene discovery program for its own
account. In 1995, the Company obtained exclusive rights to senescence gene
technology developed at Baylor College of Medicine ("Baylor"), subject to third
party royalty rights and development obligations. Senescence is the final stage
of cellular aging when a cell ceases to divide but remains viable. The genes
which control this process regulate cell immortality. The major disease target
for this gene technology is cancer. Animal studies have demonstrated the ability
of this technology to reduce tumor growth at statistically significant levels.
Lark is actively pursuing the discovery of these novel genes and intends to
exploit the diagnostic and therapeutic applications of the technology by forging
appropriate corporate relationships.
BUSINESS STRATEGY. The Company is a rapidly growing service provider to
the biotechnology, pharmaceutical and agbio industries. The Company intends to
focus its expansion efforts on the maintenance and expansion of long term
relationships with corporate clients in these industries, as well as
establishing new corporate relationships. The Company will seek to identify
trends that impact its clients and develop new products and services to meet the
changing needs of its clients.
Lark intends to use its fundamental capabilities and skills in DNA
sequencing, molecular biology and gene function analysis to drive the two major
components of the Company: (1) the fee for service business and (2) the gene
discovery program. Lark's founding business, DNA sequencing and molecular
biology services, provides current revenue. The Company expects that its skills
and capabilities in this area will permit it to continue to grow this business.
The same skills and capabilities will also be used and expanded to discover the
genes associated with cellular senescence. Management believes that this gene
discovery and technology development program may provide significant value to
the Company in addition to the on-going service business.
The field of genomics is becoming increasingly important. The Company
intends to use it skills and capabilities in the fields of molecular biology and
DNA sequencing to reposition itself to take advantage of the growth in the
genomics marketplace. The Company believes that its efforts in its senescence
gene discovery program will add to its credibility in the genomics arena.
Lark intends to continue to consider the development of new services to
support the needs of the marketplace and its gene discovery program. The Company
will evaluate prospective new services and products as opportunities arise.
MARKET OVERVIEW AND COMPETITION.
SERVICE BUSINESS. The Company was established to provide contract research
services to biotechnology researchers. With the advent of the Human Genome
Project (an initiative to map and sequence the human genome) and revolutionary
advances in the field of molecular biology, the Company has developed quality
services to capitalize upon these market opportunities. Today, the Company's
services are used worldwide by commercial, government and academic institutions.
The Company has earned a reputation as a leading provider of high quality DNA
sequencing. This reputation has allowed the Company to obtain key contracts with
major pharmaceutical and biotechnology companies throughout the world. The
Company is a fee for service contractor and typically takes no ownership
position in the intellectual property rights of the services it performs under
contract.
Several factors influence the current competitive business conditions
faced by the Company. First, the total amount of DNA sequencing is increasing
due to the Human Genome Project and related genome sequencing initiatives, and
competitive pressures in the pharmaceutical industry. Major pharmaceutical
companies have made
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significant financial commitments to gene therapy approaches. These approaches
are maturing and may require demonstration of genetic stability before or during
clinical trials. For example, there are currently over 60 biotech products in
the marketplace and over 260 in clinical trials, and 2,000 in preclinical
development, all of which potentially require FDA submission sequencing in
support of a demonstration of genetic stability.
Additionally, companies in both the pharmaceutical and biotechnology
sectors are facing increasing competitive pressures to reduce fixed
expenditures. Pharmaceutical companies are increasingly outsourcing routine
procedures to maximize the innovative aspects of their internal efforts. The
biotechnology sector has accepted the virtual company model which supports
further outsourcing of routine development efforts.
The Company has many attributes which have enabled it to compete in this
complex environment. The Company is recognized as a quality leader among
contract molecular biology service providers and has operated under the
direction of industry professionals for more than six years. The Company's
technical team follows standard operating procedures which help to produce
consistent, high quality results. Because services are performed in compliance
with Good Laboratory Practices (GLPs) as specified by the Food and Drug
Administration (FDA), Lark can undertake projects that support applications to
the FDA. Finally, the Company provides a breadth of molecular biology services
with flexible protocols to meet project specific objectives.
The Company faces several types of competition. The first is individual
researchers capable of performing the work themselves rather than contracting it
out. A similar type of competition is that of the core lab, either in an
academic setting or within a large company, that can provide services at a much
reduced rate due to subsidies of its overhead expenses. These first types of
competition are difficult to overcome due to the perception of significantly
lower costs. There are several smaller companies which offer DNA sequencing
and/or related molecular biology services, that have not yet demonstrated the
longevity, breadth of services or marketing ability that the Company has.
Finally, there are several recent entrants in the genomics sequencing market.
These companies typically take an ownership position in the sequence information
they generate, whereas Lark takes no ownership position in any sequence data
generated for its clients.
The Company markets its services through advertisements in biological and
pharmaceutical journals, presentations to potential clients, attendance at trade
shows and scientific conferences, and client referrals. The Company's sales
staff in the United States and in its European branch office is compensated with
base salaries and commissions based on performance. The Company also has
distributors based in Northern Europe and the Pacific Rim, and is actively
exploring other distributor arrangements.
SENESCENCE GENE DISCOVERY PROGRAM. Most normal cells in the human body are
unable to proliferate (divide and reproduce themselves) forever. The phenomenon
by which cells stop proliferating is called cell senescence. Cell senescence is
a normal physiological process involving cell senescence genes that eventually
signal the cells to stop dividing. In contrast to normal cells, cancer cells
divide indefinitely, possibly due to changes that have occurred to the cell
senescence genes.
The study of cell senescence has historically been tied to the biological
study of aging. Studies over the past thirty years have shown that the onset of
cell senescence is directly related to the age of the animal in that cells taken
from older animals tend to undergo fewer divisions than cells taken from younger
animals. Because of the correspondence of cell senescence with aging of the body
as a whole, cell senescence has become an accepted model for studying aging at
the cellular level. The terms "cell aging" and "cell senescence" thus are
generally used interchangeably to describe the limited proliferative capacity of
normal cells.
Based upon discoveries made at Baylor College of Medicine, four genetic
pathways have been identified that control the senescence process and may be
involved in suppressing cancer tumors. A defect in one of these four genes may
therefore underlie many types of cancer. Studies performed at Baylor indicate
that the presence of senescence genes may override the tumorigenic effects
associated with mutations in tumor suppresser genes such as p53 or Rb. Initial
animal studies using a fragment containing the first senescence gene demonstrate
the ability of that gene to reduce colon or lung cancer tumor growth at
statistically significant levels. The Company is collaborating with Dr. Olivia
Pereira-Smith at Baylor College of Medicine to clone and sequence the four genes
responsible for regulating these pathways and is in the process of sequencing
the first gene.
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The senescence gene technology could represent a revolutionary method for
diagnosis and treatment of cancer. Studies performed to date indicate that a
defect in one of the four senescence genes is responsible for cellular
immortalization (cancer). Unlike the early stages of tumorigenesis, this central
immortalization event is common to all tumor types independent of the tissue or
cell of origin. Based on the identification of only four senescence gene
pathways, it is postulated that each senescence gene, or a defect therein, may
be implicated in 25% of all cancerous tumors for any given tumor type.
Lark plans to continue its research into the diagnostic and therapeutic
applications of the senescence gene technology by identifying appropriate
corporate partners or commercial licensees. Any revenues or fees arising from
this research and development program are subject to a royalty payment as
described in Note 9 to the financial statements. The Company considers this to
be a highly speculative project. Although the Company would benefit from the
success of this project, this project is not essential to the success of the
Company.
RAW MATERIALS. The principal suppliers of raw materials for the Company's
services and R&D efforts are laboratory supply companies. The Company believes
that there are sufficient alternate suppliers available such that raw materials
will be available in sufficient quantities and at reasonable cost for the
foreseeable future.
CUSTOMERS. The Company provides services to researchers at a large
number of institutions. However, revenues from one major customer accounted
for 42% of total revenues during 1996.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company actively seeks patent
protection in the U.S. and in significant foreign countries for inventions and
technologies for which it deems such protection commercially advisable. In
connection with its senescence gene discovery program, the Company currently has
licensed rights to three (3) U.S. patent applications pending and their foreign
counterparts. The Company believes that this patent protection is important to
its senescence technology, but not essential to the overall success of the
Company. The Company can make no assurances that these applications will be
approved, that similar patents have not been or will not be issued, or that any
patent issued to the Company will not be circumvented or infringed. In
connection with its senescence gene discovery program, the Company is subject to
certain performance and royalty arrangements as described in Note 9 of the
financial statements.
The Company relies on trade secrets and technical know-how in order to
maintain its competitive advantage and scientific expertise. It is the practice
of the Company to enter into confidentiality agreements with employees,
consultants, members of its scientific advisory board, and any third party to
whom it discloses confidential information. There can be no assurance that such
confidential information will not be disclosed or that similar trade secrets or
expertise will not be independently developed, or that access to such
information could not be gained inadvertently.
The Company is, by nature of its work, privy to certain confidential
information of its customers. In order to attract and maintain clients the
Company enters into confidentiality agreements with its customers as both deem
appropriate. There can be no assurance that such confidential information will
not be disclosed or that similar trade secrets or expertise will not be
independently developed, or that access to such information could not be gained
inadvertently.
GOVERNMENTAL APPROVAL. The Company is not dependent upon governmental
approval of its current services. However, many of its clients will submit
applications for new drugs or devices to the FDA. A significant portion of the
projects undertaken by the Company are in support of such applications and thus
are subject to compliance with standards established by the FDA and its foreign
counterparts. The Company employs personnel and utilizes procedures which it
deems necessary to comply with these regulatory standards. Although the Company
and its services are not themselves subject to FDA approval, the Company
complies with these regulatory standards in order to undertake this type of
project for its clients.
By virtue of its work in support of its client's submissions to the FDA
and other regulatory bodies, the Company is subject to inspections by the FDA
and other federal, state and local agencies regarding specific FDA submission
projects it has worked on. Regulatory affairs audit teams from its
pharmaceutical and biotech clients
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frequently inspect the Company's facilities and procedures to ascertain whether
the Company is in sufficient compliance with applicable regulations. The Company
has not had a significant negative finding as a result of such inspections. If
significant violations were discovered during a client or governmental
inspection, the Company might be restricted from undertaking additional
submission projects until the violations were remedied.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL LAWS. The Company is subject to
regulations concerning laboratory and occupational safety practices, the use and
handling of hazardous chemicals and radioisotopes, and environmental protection.
The Company believes that it is in general compliance with such applicable
federal, state and local regulations and does not estimate the costs to be
material.
EMPLOYEES. As of December 31, 1996, the Company had 34 total employees and
30 full time employees. The Company believes that its employee relations are
good, but can make no assurances that it will continue to be able to attract and
retain qualified employees. The Company also has engaged the services of
consultants when appropriate. In connection with licensing the rights to the
senescence technology, the company maintains a sponsored research agreement and
a consulting agreement with a principal investigator at Baylor College of
Medicine as described in the notes to the Financial Statements.
FORWARD-LOOKING INFORMATION. This Annual Report contrains various
forward-looking statements and information that are based on managaement's
belief as well as assumptions made by and informatin cirrently avaliable to
management. When used in this document, the works "anticipate," "estimate",
"project", "expect" and similar expressions are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that expectations will prove to have been correct. Such statements are
subject to certain risks, uncertainties and assumptions. should one or more of
these riskd or uncetainties materialixe, or should underlying assumptions prove
incorrect, actual results may vary materiazlly from those anticipated, estimated
projected or expected.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 11,000 square feet of office and laboratory space for
its corporate headquarters in Houston, Texas pursuant to a lease which expires
on September 30, 1999. The Company also leases office space for its European
branch office. The European branch office, originally located in Hove, England,
was moved to Saffron Walden, England in March, 1996 pursuant to a lease which
expires on March 31, 1999. Future amounts due under the terms of these leases
are detailed in Note 9 - "Commitments and Contingencies - Leases" of the
financial statements. The Company carries commercial insurance which it deems
sufficient to cover loss of lab equipment or occupancy privileges.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Common Stock of the Company has been eligible to be quoted on the
Nasdaq Bulletin Board system under the symbol LDNA since the fourth quarter of
1995. As reported by Bloomberg, the high and low bids were $3.00 and $0.66,
respectively for the year 1996. These bids reflect the price paid by the buyer,
and do not include the commission withheld by the broker(s).
As of December 31, 1996, there were approximately 2,427 holders of record
of the Common Stock.
The Company has never paid dividends on its Common Stock, and does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and the accompanying Notes herein, and is qualified
entirely by the foregoing and by other more detailed financial information
appearing elsewhere.
OVERVIEW. The Company's revenues are derived through provision of DNA
sequencing and related molecular biology services to researchers in the
pharmaceutical, biotechnology, agritechnology and related industries. Quarterly
fluctuations in revenues arise primarily from variations in contract status with
one large customer. In addition, the majority of other customer projects are
individual orders for specific projects ranging in value from $6,000 to
$140,000. Engagement for successive work is highly dependent upon the customer's
satisfaction with the services provided to date. The Company is unable to
predict for more than a few months in advance the number and size of future
projects in any given period. Thus, timing could have a significant impact on
financial results in any given period. The combined impact of the large contract
from a single customer and the unpredictable project fluctuations from other
customers can result in very large fluctuations in financial performance from
quarter to quarter.
The Company believes that its expansion efforts discussed in Part I will
compensate for some of these sales fluctuations. In addition, the Company has
initiated several steps to mitigate the effects of these fluctuations where
possible. In late 1996 the sales and marketing activities for the
quick-turnaround automated DNA sequencing service business were increased to
expand its large, varied customer base. Pricing for services was adjusted for
large projects to reflect timing of project completions. Sales strategies using
long term contracts were implemented.
RESULTS OF OPERATIONS
GROSS REVENUES. Gross revenues increased 66% from $2,518,255 to $4,192,406
for the years ended December 31, 1995 and 1996, respectively. The increase in
revenues for 1996 was primarily attributable to a 206% increase in automated DNA
sequencing services ($847,320 in 1995 compared to $2,592,802 in 1996). Revenues
from the manual DNA sequencing services and library screening services declined
slightly from the previous year. The differential display service, new in 1996,
produced modest revenues. The genetic stability testing service (described in
Item 1) was introduced to the marketplace in late 1996 and did not generate
significant revenues in 1996. Quarterly fluctuations in revenues during 1995 and
1996 were due to the automated sequencing performed for a single customer.
During 1996 revenues in the first, second, and third quarters included revenues
generated by operations performed for this customer. During the fourth quarter
of 1996, no services were performed for this customer. Automated DNA sequencing
services for other customers increased 134% during the fourth quarter of 1996
compared to the first three quarters of 1996.
COSTS OF SERVICES. Costs of services consist primarily of labor and
laboratory supplies. Costs of services increased 53% from $1,210,618 to
$1,850,533 for the years ended December 31, 1995 and 1996, respectively.
Increases in personnel and supply usage for the automated sequencing group as a
result of the increase in services rendered comprised the increase in operating
costs. Costs of services as a percentage of revenue were 48% and 44% for the
years ended December 31, 1995 and 1996, respectively.
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SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses consist primarily of salaries and related costs,
depreciation, amortization, legal and professional costs, rent, travel, and
advertising. Sales, general and administrative expenses increased 14% from
$1,745,389 to $1,985,193 for the years ended December 31, 1995 and 1996,
respectively. Sales, general and administrative expenses as a percentage of
revenue were 69% and 47% for the years ended December 31, 1995 and 1996,
respectively. The increases in these expenses were incurred to support the
growth of the Company. These growth related costs consist primarily of increased
personnel costs in the United States and Europe and commissions on contracts.
RESEARCH AND DEVELOPMENT. Research and development costs were $48,521 and
$180,742 for the years ended December 31, 1995 and 1996, respectively. Research
and development costs as a percentage of revenue were 2% and 4% for the years
ended December 31, 1995 and 1996, respectively. The expenses in 1995 and 1996
were related to the development of new services and the gene senescence project
described in Item 1 "Description of Business" above. In 1996 research and
development expenses increased as a result of this project.
VARIABILITY OF FUTURE OPERATING RESULTS. The Company experienced a
significant revenue increase in 1996 compared to 1995 due in large part to
services performed for a single customer. Operations for various contracts with
this customer impacted the first quarter of 1995 and the first, second, and
third quarters of 1996. The current contract with this customer is scheduled to
be completed during 1997. Completion of contracts with this customer without
replacement business could have a material adverse impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES. The Company has experienced increased
demands on working capital due to actual and anticipated growth in all current
services. Operating cash flow was ($36,247) and ($722) for the years ended
December 31, 1995 and 1996, respectively. In July, 1996, the Company's liquidity
was increased by the receipt of $1,000,852 in proceeds from the Company's Rights
Offering.
The Company's bank debt totaling approximately $242,528 at December 31,
1996, matured March 31, 1997. On March 26, 1997, the Company renewed its
$200,000 line of credit until March 31, 1998, and extended the maturity of its
note payable to January 31, 1998. See Note 7 of the Notes to the Financial
Statements for additional discussion of the renewed debt. Management anticipates
that additional capital expenditures necessary to support the Company's
operating growth can be funded through a combination of existing or proposed
credit facilities and future operating results.
At December 31, 1996, the Company had subordinated redeemable debentures
payable of $45,000 that matured on March 31, 1997. At the request of one of the
holders, the company paid one $10,000 debenture in January, 1997. The Company
has received a request to repay an additional $25,000 of the debentures on March
31, 1997 and has offered to renew the remaining $10,000 debenture outstanding
until September 30, 1997. As of March 26, 1997, the Company has not received a
demand for repayment or instructions to renew this debenture.
The Company has committed to certain minimum expenditures related to its
senescence research and development efforts as outlined in Note 9 to the
Financial Statements "Patent License Agreement" and "Sponsored Research Contract
and Consulting Agreement". Lark will need additional capital in order to expand
its research and development efforts beyond the levels
required by these agreements.
MATERIAL COMMITMENTS. The Company currently has no outstanding material
commitments.
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ITEM 7. FINANCIAL STATEMENTS
LARK TECHNOLOGIES, INC.
Index to Financial Statements
Years ended December 31, 1996 and 1995
Contents
PAGE
Report of Independent Auditors............................................... 9
Financial Statements
Balance Sheet as of December 31, 1996..................................10
Statements of Operations for
Years Ended December 31, 1995 and 1996..............................11
Statements of Stockholders' Equity for
Years Ended December 31, 1995 and 1996..............................12
Statements of Cash Flows for
Years Ended December 31, 1995 and 1996..............................13
Notes to Financial Statements................................................15
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REPORT OF INDEPENDENT AUDITORS
Lark Technologies, Inc.
Board of Directors and Stockholders
We have audited the accompanying balance sheet of Lark Technologies, Inc. (the
"Company") as of December 31, 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 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 Lark
Technologies, Inc. at December 31, 1996, and the results of its operations and
cash flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
March 4, 1997,
except for note 7, as
to which the date is
March 26, 1997
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LARK TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 734,247
Accounts receivable ...................................... 804,360
Due from related parties ................................. 1,525
Work-in-process .......................................... 87,215
Prepaid expenses ......................................... 46,004
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Total current assets .......................................... 1,673,351
Property and equipment, net ................................... 419,788
Other assets, net ............................................. 30,990
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Total assets .................................................. $ 2,124,129
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................ $ 262,439
Debentures payable ....................................... 45,000
Accounts payable ......................................... 313,729
Accrued expenses ......................................... 167,195
Customer deposits ........................................ 212,730
Deposits from related parties ............................ 104,711
-----------
Total current liabilities ..................................... 1,105,804
Commitments and contingencies
Stockholders' equity Preferred stock, $0.001 par value:
Authorized shares - 2,000,000
None issued and outstanding
Common stock, $0.001 par value:
Authorized shares - 8,000,000
Issued and outstanding shares - 3,326,400 ........... 3,326
Additional paid-in capital ............................... 2,468,315
Amounts due from Shareholders ............................ (45,045)
Accumulated deficit ...................................... (1,408,271)
-----------
Total stockholders' equity .................................... 1,018,325
-----------
Total liabilities and stockholders' equity .................... $ 2,124,129
===========
SEE ACCOMPANYING NOTES.
10
<PAGE>
LARK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------
1995 1996
----------- -----------
Revenue:
Laboratory Services ..................... $ 2,518,255 $ 4,192,406
Costs and expenses:
Costs of services ....................... 1,210,618 1,850,533
Sales, general and administrative ....... 1,745,389 1,985,193
Research and development ................ 48,521 180,742
----------- -----------
Total costs and expenses ..................... 3,004,528 4,016,468
----------- -----------
Operating income (loss) ...................... (486,273) 175,938
Other income and (expense):
Interest expense ........................ (19,167) (38,249)
Interest income ......................... 5,606 24,242
Gain/(Loss) on disposal of assets ....... 300 0
----------- -----------
Total other (expense) ........................ (13,261) (14,007)
----------- -----------
Income (loss) before income taxes ............ (499,535) 161,931
Income taxes ................................. 0 0
=========== ===========
Net income (loss) ............................ ($ 499,535) $ 161,931
=========== ===========
Net income (loss) per share .................. ($ 0.25) $ 0.06
=========== ===========
Weighted average number of common
or equivalent shares outstanding ........ 2,024,552 2,721,246
=========== ===========
SEE ACCOMPANYING NOTES.
11
<PAGE>
Statements of Stockholders Deficit
Lark Technologies, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
------------------- Additional Amounts
Shares At Par Paid-in Deferred due from Accumulated
Outstanding Value Capital Compensation Stockholders Deficit Total
---------- ------ ---------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............... $2,000,000 $2,000 $1,401,245 ($1,750) $ 0 ($1,070,667) $ 330,828
Common stock issued for
Compensation ..................... 16,909 17 2,483 -- -- -- 2,500
Common stock issued for note
due from stockholder ............ 101,452 101 14,899 -- (15,000) 0 0
Amortizaation of deferred
compensation for
common stock issued ............ -- -- -- 1,750 -- -- 1,750
Net loss ............................... -- -- -- -- -- (499,535) (499,535)
---------- ------ ---------- ------- -------- ----------- -----------
Balance at December 31, 1995 ............... 2,118,361 2,118 1,418,626 0 (15,000) (1,570,202) (164,458)
Common stock issued .................... 1,157,739 1,158 999,694 -- -- -- 1,000,852
Common stock issued for
notes due from stockholders ...... 50,300 50 49,995 -- (50,045) -- 0
---------- ------ ---------- ------- -------- ----------- -----------
Less: amounts received from stockholders -- -- -- -- 20,000 -- 20,000
Net income ............................. -- -- -- -- -- 161,931 161,931
---------- ------ ---------- ------- -------- ----------- -----------
Balance at December 31, 1996 ............... 3,326,400 $3,326 $2,468,315 $ 0 ($45,045) ($1,408,271) $ 1,018,325
========== ====== ========== ======= ======== =========== ===========
</TABLE>
See accompanying Notes
12
<PAGE>
LARK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1996
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................................... ($499,535) $ 161,931
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and amortization .......................... 186,512 187,418
Compensation expense recognized for
issuance of common stock .......................... 4,250
(Gain) Loss on disposal of assets ...................... (300)
Changes in operating assets and liabilities:
Accounts receivable ............................... (37,299) (379,696)
Work-in-process ................................... (21,456) 1,935
Prepaid expenses .................................. 39,346 (23,370)
Other assets ...................................... (114,542) 32,072
Due to/from related parties ....................... 80,476 24,366
Accounts payable .................................. 148,873 36,690
Accrued expenses .................................. 78,846 (52,885)
Deposits .......................................... 23,983 10,817
--------- -----------
Net cash provided by (used in) operating activities ......... (36,247) (722)
INVESTING ACTIVITIES
Purchases of property and equipment ......................... (44,558) (304,722)
Proceeds from disposal of property and equipment ............ 300 0
--------- -----------
Net cash used in investing activities ....................... (44,258) (304,722)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable ..................... 200,000 189,135
Principal payments on notes payable ......................... (44,532) (246,292)
Proceeds from issuance of common stock ...................... 0 1,000,852
Proceeds from note receiveable from stockholder ............. 20,000
Repayment of debentures payable ............................. (25,000)
--------- -----------
Net cash (used in) provided by financing activities ......... 130,468 963,695
--------- -----------
Net (decrease) increase in cash and cash equivalents ........ (49,962) 658,251
Cash and cash equivalents at beginning of period ............ 26,034 75,996
--------- -----------
Cash and cash equivalents at end of period .................. $ (75,996) $ 734,247
========= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
13
<PAGE>
Years ended December 31,
-------------------
1995 1996
------- -------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest ...................................... $19,167 $37,349
Noncash investing activities:
Long-term debt issued to acquire
property and equipment ...................... $80,479 $ --
Noncash financing activities:
Issuance of common stock for services
rendered .................................... $ 2,500 $ --
Issuance of common stock for note due
from shareholder ............................ $15,000 $50,045
SEE ACCOMPANYING NOTES.
14
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Lark Technologies, Inc., a Delaware corporation (the "Company"), was
formed on November 16, 1994, as a wholly-owned subsidiary of SuperCorp Inc.
("SuperCorp"), for the purpose of merging with Lark Sequencing Technologies,
Inc., a Delaware corporation ("Sequencing"), as outlined in a merger agreement
("Merger Agreement") entered into by SuperCorp and Sequencing on October 28,
1994. The Merger Agreement was approved by SuperCorp on September 5, 1995, and
by the stockholders of Sequencing on September 12, 1995. As a consequence of the
merger, all of the shares of common and preferred stock of Sequencing were
exchanged for 1,800,000 shares of Common Stock of the Company with a par value
of $0.001 per share, and the 200,000 shares of Common Stock of the Company held
by SuperCorp were distributed to the shareholders of SuperCorp. The Company has
succeeded to all of the business previously undertaken by Sequencing. Lark
provides specialized laboratory services for DNA sequencing to biotechnology
researchers.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
For financial reporting purposes, the merger of the Company and Sequencing
has been accounted for as a recapitalization of Sequencing, and the historical
financial statements of Sequencing prior to the merger became the financial
statements of the Company. The financial statements of Sequencing have been
retroactively restated to give effect to the merger transaction as if it had
occurred on January 1, 1994.
REVENUE RECOGNITION
The Company recognizes revenue and related profit upon the completion of
laboratory service projects. For laboratory service projects under government
indefinite delivery contracts, revenue and related profit is recognized as
projects are completed. Costs incurred on partially completed projects are
recorded as work-in-process.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
15
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
expense is recorded over the estimated useful lives of the assets. The
straight-line method is used by the Company in providing depreciation and
amortization for financial reporting purposes. The cost of repairs and
maintenance is expensed as incurred. The estimated useful lives of assets are as
follows:
Laboratory equipment 5 years
Furniture and fixtures 5 years
Computer equipment 30 months to 5 years
Leasehold improvements 3 years
OTHER ASSETS
Other assets consist of the costs of patents and license rights in
connection with the patent license agreement discussed in Note 9. The costs of
patents and license agreements are amortized on a straight-line basis over the
life of the related license agreement (two years) or the life of the patents.
ACCOUNTING FOR LONG-LIVED ASSETS
Effective January 1, 1996, FASB Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, was
adopted which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The adoption had no
material effect on the financial statements.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options. The proforma disclosures required by
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which
established a fair value based method of accounting for stock-based
compensaation are set forth in Note 9.
EARNINGS PER SHARE
Net income (loss) per share was calculated by dividing the Company's net
income (loss) for the period by the weighted average number of common stock and
dilutive common stock equivalents (stock options and warrants) outstanding.
16
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The preparation of financial statemtents in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RESEARCH & DEVELOPMENT
Costs incurred in connection with research and development activities are
expensed as incurred. These consist of direct and indirect costs associated with
specific research and development projects.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended December 31, 1995 and 1996 was approximately
$133,000 and $112,000 respectively.
3. CONCENTRATION OF RISK
The Company provides laboratory services primarily to major researchers in
the United States, Europe, and through a stockholder in Japan. The Company
generally requires a deposit of approximately 50% of total anticipated billings
prior to commencing work on laboratory service projects. The Company performs
ongoing credit evaluations of its customers and generally does not require
additional collateral on its laboratory services.
The Company primarily invests its excess cash in deposits with local banks
and, at times, these deposits may exceed federally insured limits. The Company
selects depository institutions based upon management's review of the financial
stability of the institutions.
4. ACCOUNTS RECEIVABLE
The Company has no allowance for doubtful accounts at December 31, 1996 as
management believes all accounts receivable are collectible.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996:
Laboratory equipment ......................... $ 781,048
Furniture and fixtures ....................... 53,379
Computer equipment ........................... 238,844
Leasehold improvements ....................... 56,724
-----------
1,129,995
Less accumulated depreciation and amortization (710,207)
-----------
Property and equipment, net .................. $ 419,788
===========
17
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1996:
Accrued bonuses ........................................ $ 15,733
Accrued commissions .................................... 47,444
Other (individually less than 5% of current liabilities) 104,018
--------
$167,195
========
7. DEBENTURES AND NOTES PAYABLE
At December 31, 1996, the Company had one note payable to a bank with
interest of prime (8.25% at December 31, 1996) plus 2% which was collateralized
by accounts receivable, property, and equipment. The note is due on demand and
if no demand is made, the note is payable in monthly installments of $3,799
which does not include interest. Any unpaid principal on the note is due at
maturity on March 31, 1997. The amount outstanding under this note was $43,528
at December 31, 1996.
At December 31, 1996, the Company had a revolving line of credit with a
bank. The terms of the line of credit provide for maximum borrowings of
$200,000. Borrowings bear interest at the bank's prime rate plus 2% and the line
of credit expires March 31, 1997. The line of credit was secured by qualified
accounts receivable of the Company. At December 31, 1996 the Company had
$199,000 outstanding under this line of credit.
On March 26, 1997, the Company renewed the line of credit through March
30, 1998 and the demand note payable through January 30, 1998. The interest rate
for the extended line of credit was set at the banks prime rate plus two percent
(11.25%) and the term loan interest was set at the banks prime rate plus one
percent (10.25%). All other terms and conditions of these renewals remained
unchanged.
At December 31, 1996, the Company had subordinated redeemable debentures
payable of $45,000 that matured on March 31, 1997, with interest at 8% per year,
payable quarterly. The Company has offered to renew the subordinated debentures.
At the request of one of the holders, the company paid one $10,000 debenture on
January 15, 1997. As of March 19, 1997, the Company has received a request to
repay an additional $25,000 of the debentures and a request to continue the
remaining $10,000 outstanding until September 30, 1997.
8. FEDERAL INCOME TAX
At December 31, 1996, the Company had net operating loss carryforwards of
$1,400,000 for income tax purposes that expire in 2000 through 2010. These net
operating loss carryforwards may be limited as a result of ownership changes
resulting from issuance of common stock.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
18
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
purposes. A valuation allowance has been recorded against the Company's net
deferred tax assets because of the Company's cumulative loss position.
Significant components of the Company's deferred tax liability and assets
are as follows at December 31, 1996:
Deferred tax liability
Accumulated deprecation ............................... ($ 4,058)
Deferred tax assets:
Net operating loss carryforwards ...................... 475,843
---------
Net deferred tax assets .................................... 471,785
Valuation allowance ........................................ (471,785)
---------
Deferred taxes ............................................. $ --
=========
The reconciliation of income tax computed at the U.S. federal statutory
tax rates to income tax expense is:
1995 1996
------------------ ----------------
Amount Percent Amount Percent
--------- ---- -------- ---
Tax (benefit) at U.S. statutory rates ($169,842) 34% $ 55,056 34%
Change in valuation allowance ....... 105,458 (21%) (50,199) (31%)
Other ............................... 64,384 (13%) (4,857) (3%)
--------- ---- -------- ---
$ 0 0% $ 0 0%
========= ==== ======== ===
9. COMMITMENTS AND CONTINGENCIES
STOCK OPTION PLAN
The Company has an incentive stock option plan (the "Plan") for directors,
certain key employees, and others as determined by the directors. The Company
has reserved 90,968 shares of common stock for issuance under the stock option
plan. The price at which shares may be purchased under the option plan shall not
be less than the greater of (a) 100% of the fair market value of the shares on
the date the option is granted or (b) the aggregate par value of such shares on
the date the option is granted. Common stock options granted are generally
exercisable at a rate of 25% on the date of grant with the remaining 75%
exercisable at a rate of 1/36th per month thereafter.
19
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company applies APB 25 in accounting for the Plan. Because the
exercise price of the options was equal to the market value of the stock at the
date of grant, no compensation cost has been recognized for its fixed stock
option plan. Pro forma information regarding net income (loss) and net income
(loss) per common share is required by FASB Statement No. 123 as if the Company
had accounted for its incentive stock options under the fair value method of
that statement. The fair value of these options was estimated at the date of
grant using a minimum value pricing model for the 1995 options granted because
the company was non-public and a Black-Scholes option pricing ("Black-Scholes")
model for the 1996 options granted with the following weighted average
assumptions: (I) risk-free interest rates ranging from 5.65% to 6.51% (ii) a
dividend yield of 0%, (iii) volatility factors of the expected market price of
the company's common stock of 114% and (iv) a weighted average expected life of
three years.
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employees stock options.
For Purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation for the Company's stock-based compensation plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the method of FASB Statement No. 123, the Company's net income (loss) and
net income (loss) per common share would have been adjusted to the pro forma
amounts indicated below:
Year Ended December 31,
-------------------------------------------------------
1995 1996
-------------------------- -------------------------
As As
Reported Pro Forma Reported Pro Forma
----------- ----------- ----------- -----------
Net income (loss) .... ($ 499,535) ($ 501,456) $ 161,931 $ 136,896
Net income (loss) per
common share ....... ($ 0.25) ($ 0.25) $ 0.06 $ 0.05
During 1995 and 1996, the Company issued incentive stock options under the
Plan, which had exercise prices equal to the fair market value of the common
stock at the date of grant. A summary of the Company's stock options activity
and related information follows:
20
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Year Ended December 31,
--------------------------------------------
1995 1996
-------------------- --------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
------ ---------- ------ ----------
Outstanding-
beginning of year ......... 38,551 $ 0.38 29,927 $ 0.32
Granted ................... 16,908 $ 0.15 32,200 $ 1.39
Exercised ................. 16,909 $ 0.15 21,964 $ 0.61
Forfeited ................. 8,623 $ 0.58 700 $ 0.75
------ ---------- ------ ----------
Outatanding - end of ......... 29,927 $ 0.32 39,463 $ 0.98
year
Options exercisable at
year-end .................. 27,220 26,914
Weighted average fair
value of options
granted during the
year ..................... $ 0.37 $ 0.99
The weighted average remaining contract life for options outstanding as
December 31, 1996, is nine years. At December 31, 1996, there are 48,121 options
available for future grants under the Plan.
WARRANTS
During 1996, there were 81,000 warrants exercised into common stock of the
Company for approximately $17,000 leaving no warrants outstanding at December
31, 1996.
LEASES
The Company leases certain real estate for its corporate office and branch
office in the United Kingdom, as well as certain equipment under noncancelable
lease agreements which expire at various dates.
Future minimum payments under these operating leases are as follows:
1997 . $285,938
1998 . 274,910
1999 . 157,310
--------
$718,158
========
21
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Total rent expense for all operating leases for the years ended December
31, 1995 and 1996 was approximately $125,000 and $276,519 respectively.
SALES COMMITMENTS
During April, 1996, the Company entered into a contract with one
customer to perform DNA sequencing services totaling approximately $1,500,000.
As of December 31, 1996, approximately $329,000 remain on this contract.
PATENT LICENSE AGREEMENT
Effective June 15, 1995, the Company entered into an exclusive patent
sub-license agreement with another biotech company. The agreement grants to the
Company an exclusive license to certain "Licensed Patent Rights" of this third
party and requires the Company to perform research and development efforts as
defined in the agreement. The Company is required to pay the third party a
royalty of 25% to 50% of all consideration the Company receives as a result of
sales of licensed products and licensed processes or a sub-license or assignment
of the Company's rights under the agreement. If the Company does not meet the
research and development milestones as defined in the agreement, or is unable to
successfully commercialize the results of the research and development efforts,
the agreement will terminate. Otherwise, the agreement will terminate upon the
dissolution of the Company or the expiration of the "Licensed Patent Rights".
The agreement may also be terminated by the Company with 60 days written notice
to the third party.
SPONSORED RESEARCH CONTRACT AND CONSULTING AGREEMENT
The Company entered into a sponsored research contract on August 1, 1995,
whereby the Company is required to fund certain research and development efforts
being performed by Baylor College of Medicine ("Baylor"). The research and
development is being performed pursuant to the Patent License Agreement
described in this Note. The agreement expires on July 31, 1997 and requires the
Company to pay Baylor a total of $53,739 annually in monthly installments over
the term of the contract. The agreement may be extended for an additional term
by mutual written consent. As of December 31, 1996 the remaining obligation
under the terms of the contract was $31,347.
The Company entered into a related consulting agreement with the Principal
Investigator at Baylor. This agreement expires on August 1, 1997 and requires
the Company to pay the researcher a total of $24,000 in monthly installments
over the term of the contract. The agreement may be extended for an additional
term by mutual written consent. As of December 31, 1996 the remaining obligation
under the terms of the contract was $14,000.
OTHER COMMITMENTS
In September 1995, the Company entered into a two year employment
agreement with the new President and CEO of the Company providing for a base
salary and bonus arrangement. The President and CEO entered into a Restricted
Stock Purchase Agreement whereby the President and CEO has purchased 101,452
shares of restricted Common Stock at $.1479 per share, subject to the right of
the Company to repurchase a declining portion of such shares should the
President and CEO terminate his employment with the Company prior to the
expiration of 48 months. In connection with the purchase of the restricted
22
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common stock, the Company received a note from the President and CEO in the
amount of $15,000. The note is secured by the restricted stock, is due October
24, 1999, bears simple interest at a variable rate equal to the minimum variable
rate permissable to avoid imputed interest and is reflected as a reduction of
stockholders' equity until paid.
10. 401(K) PLAN
Effective January 1992, the Company adopted an employee 401(k)
retirement plan. Qualified employees may contribute up to 15% of their gross pay
to the plan. Employee contributions are limited to amounts established by law.
The Company may make matching contributions to the plan as determined by the
Board of Directors subject to the limitations under the Internal Revenue Code.
The Company made no contributions to the plan in 1995 or 1996.
11. RELATED PARTY TRANSACTIONS
The Company has appointed TaKaRa Shuzo Co. Ltd. (TaKaRa), a major
stockholder of the Company, as the Company's exclusive representative in Japan,
South Korea, Taiwan, Oceania and Singapore for a ten-year period commencing June
25, 1990. The Company has the right to terminate TaKaRa's exclusivity. The
Company has also agreed to use its best efforts to purchase reagents and
biologics it uses in the performance of services from TaKaRa or PanVera
Corporation, TaKaRa's distributor.
TaKaRa has purchased laboratory services, at rates normally charged to
third-parties, from the Company totaling approximately $1,200 and $3,775 in 1995
and 1996, respectively. The Company has also provided laboratory services, at
rates normally charged to third-parties, to affiliates of stockholders of the
Company totalling approximately $107,642 and $29,118 in 1995 and 1996,
respectively.
The Company purchased approximately $13,970 and $7,285 of reagents and
biologics from PanVera during 1995 and 1996, respectively. The Company purchased
approximately $134,481and $108,161 of laboratory supplies and other services
from affiliates of stockholders of the Company in 1995 and 1996, respectively.
TaKaRa periodically advances the Company funds to be applied against
future laboratory services purchased by TaKaRa. At December 31, 1996, the
unearned balance of TaKaRa deposits was $97,441.
The due from related parties at December 31, 1996 is comprised primarily
of amounts due from affiliates of stockholders of the Company for laboratory
services rendered to those affiliates.
12. MAJOR CUSTOMERS
During 1995 and 1996, approximately 29% and 42%, respectively, of the
Company's total revenue was with one customer; of which 99% and 100%,
respectively, of those sales were to a division of the customer located in the
United Kingdom.
13. SEGMENT INFORMATION
The proportion of the Company's sales to customers in foreign countries is
as follows:
23
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1995 1996
---- ----
European Community 42% 49%
Sales to foreign companies are denominated in U.S. dollars.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined, based on available market information and
appropriate valuation methodologies, that the value of its financial instruments
approximates carrying value. The carrying amounts of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to the
short-term maturity of the instruments. The carrying amounts of debt
approximates fair value because the interest rates under the credit agreement
are variable, based on current market.
24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, and terms of office of each of the
directors and executive officers of the Company and a description of the
business experience of each.
Office Held
Person Office Since
- ------ ------ -----
Stephen J. Banks, 56 Director, 1989(1)
Chairman of the Board 1989(2)
Vincent P. Kazmer, 47 Director, 1995(1)
President, CEO 1995(2)
George M. Britton, 50 Director 1989(1)
David A. Lawson, 49 Director 1989(1)
Frank Vazquez, 56 Director, 1991(1)
Vice-Chairman 1989(2)
Douglas B. Wheeler, 51 Vice President, Finance
Secretary and Treasurer 1996(2)
Bethany Pimentel, 33 Vice President of Sales
and Business Development 1995(2)
(1) The directors shall be elected at the annual meeting of stockholders, and
each director elected shall hold office until his successor shall be elected and
shall qualify.
(2) The officers shall be elected annually by the Board of Directors at its
first regular meeting held after the annual meeting of stockholders or as soon
thereafter as conveniently possible. Each officer shall hold office until his
successor shall have been chosen and shall have qualified.
STEPHEN J. BANKS is the president of BCM Technologies, Inc., the
technology transfer subsidiary of Baylor College of Medicine. Mr. Banks has
been with BCM Technologies, Inc., since 1988. Prior to 1988 he was a vice
president of The Hillman Company, an investment holding company located in
Pennsylvania. Mr. Banks holds an MBA from Harvard University and a BS degree
from the Massachusetts Institute of Technology.
VINCENT P. KAZMER has served as President and CEO and Director since
September, 1995. Prior to joining Lark, Mr. Kazmer was the President and CEO of
Copernicus Gene Systems, Inc., a private gene therapy company where he was a
founder. From 1989 to 1994 he served as Senior Vice President of United States
Biochemical
25
<PAGE>
Corporation with responsibilities for business development, marketing and sales.
While at US Biochemical, Mr. Kazmer served as Vice President of Ribozyme
Pharmaceuticals Inc., a biotechnology company, with responsibilities for its
founding and initial financing. During the period 1978 to 1988, Mr. Kazmer
served in several finance and planning positions at The BFGoodrich Company
including CFO for a specialty chemicals division. Mr. Kazmer also served as a
nuclear submarine officer and qualified nuclear engineer in the US Navy. He
received his B.S. in computer and information science from Ohio State University
and MBA from Stanford University.
GEORGE M. BRITTON is a director of Britton Capital Services, a
closely-held investment and financial consulting firm. Since 1989 approximately
80 percent of his activities have been related to real estate acquisitions,
syndications, development, leasing and management, primarily in commercial
properties in the Houston, Texas area, and approximately 20 percent of his
activities have been related to assisting start up and early-stage companies in
their business plans and in contacting venture capitalists. Mr. Britton holds an
MBA degree from the University of Texas and a BA degree from Vanderbilt
University.
DAVID A. LAWSON is an independent real estate investor and consultant in
Houston, Texas. In this capacity, Mr. Lawson has been actively involved in the
acquisition, syndication and ownership and management of income-producing real
estate in Houston and elsewhere. He is president of three Texas corporations,
Diva Corporation, Twelve Oaks Tower I, Inc., and OFD Redevelopment, Inc., each
of which is the general partner and manage of a limited partnership that owns a
redevelopment real estate project in Houston, Texas. He has been active in this
respect since 1983 with respect to Diva Corporation, since 1991 with respect to
OFD Redevelopment, Inc., and since 1992 with respect to Twelve Oaks Tower I,
Inc. Diva and Twelve Oaks manage medical office buildings in the Texas Medical
Center, and OFD manages a shopping center. Mr. Lawson holds a BS degree from
Trinity University.
FRANK VAZQUEZ was the president and director of Lark from its inception
until April, 1991, when he resigned to become a general management and
business development consultant with Chojnacki & Associates in Houston, Texas
with emphasis upon technology-based business opportunities in the fields of
biotechnology, environmental and energy industries, and medical-related
industries. Since April 1991 Mr. Vazquez has continued to serve as a
director of Lark and as the vice chairman of its board of directors. Mr.
Vazquez was previously employed by Trinity Computing, Inc. and had for
several years been actively engaged in a consulting business. Mr. Vazquez
holds a BS degree from Columbia University.
DOUGLAS B. WHEELER joined Lark in November, 1996 as Vice President,
Finance. Prior to joining Lark, Mr. Wheeler served as Chief Financial Officer
and Director for Minga Oilfield Group NV from 1983 until 1995. From 1980 until
joining Minga, Mr. Wheeler held financial management positions in Baker
International and Enserch Corporation where he assisted in several startup
operations and assisted in numerous acquisitions. He received a BBA degree in
Accounting from Texas Tech University in 1969 and is a CPA.
BETHANY J. PIMENTEL has served as the Vice President of Sales and Business
Development since February, 1995. Ms. Pimentel was recruited from Sennes Drug
Innovations, Inc., a privately held biopharmaceutical company, where she had
been the Director of Business Development since 1993. From September 1990 until
February 1993, she was first a market research analyst and then the Director of
Business Development for BCM Technologies, Inc., where she oversaw the startup
activities of Sennes Drug Innovations, Inc., GeneMedicine, Inc., and Meretek
Diagnostics, Inc. From May 1985 to September 1990 she was employed as a research
technician at Baylor College of Medicine in the Department of Immunology and
Microbiology. She received a B.A. degree in Biopsychology from the University of
Colorado, Boulder in 1985 and an M.B.A. in finance from the University of
Houston in 1990.
26
<PAGE>
SIGNIFICANT EMPLOYEES
Set forth below are the names, ages, and dates of service of each of the
significant employees of the Company and a description of the business
experience of each.
Position Held
Person Office Since
- ------ ------ -----
Raymond A. Vonder Haar, Ph.D., 50 Scientific Director(1) 1993
David Alan Wall, Ph.D., 34 Senior Scientist,
Laboratory Director(1) 1994
J. D. Kittle, Jr., Ph.D., 38 Director, New Products(1) 1996
(1) This person is not a corporate officer or a corporate director of Lark but,
rather is a significant employee whose position carries a title.
RAYMOND A. VONDER HAAR, PH.D., has served as Scientific Director since
1993. Previously, Dr. Vonder Haar was a research scientist at Transgene, S.A.,
in Strasbourg, France. From 1990 to 1992 he was Director of Molecular Biology
Services at Ambion, Inc., in Austin, Texas. From 1979 to 1990 Dr. Vonder Haar
held a faculty position at Texas A&M University in the department of Medical
Biochemistry where he worked on genetic and metabolic control mechanisms in
mammalian systems. For two years he was Director of the DNA Sequencing Synthesis
Core Laboratory at Texas A&M. Dr. Vonder Haar received his A.B. in Zoology from
the University of Missouri and his Ph.D. in Molecular Biology from Purdue
University.
DAVID A. WALL, PH.D., has served as Laboratory Director for molecular
biology services and manual DNA sequencing since October, 1994. Previously, Dr.
Wall was Associate Director of GenTest Laboratories in New Orleans, Louisiana,
in charge of the Paternity Testing Laboratories. He was also Director of
Research and Genetic Testing at ImmGen, Inc., College Station, Texas. Dr. Wall
received his B.S. in animal science and his Ph.D. in genetics from Texas A&M
University in College Station, Texas.
JOSEPH D. KITTLE, JR., PH.D., has served as Director of New Products since
January, 1996. Prior to joining Lark, Dr. Kittle served GeneMedicine, Inc., The
Woodlands, Texas, as Senior Scientist, Expression Systems. Prior to
GeneMedicine, Inc., he was a research scientist at Battelle Memorial Institute.
Dr. Kittle holds a Ph.D. in Chemistry from Harvard University and a B.S. in
Chemistry from Ohio University.
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------- ----------------------------
Awards Payouts
----------------- -------
Restricted Securities
Name and Other annual stock Underlying LTIP All other
principal Salary Bonus compensation award(s) Options/SARs Payouts compensation
position Year ($) ($) ($) ($) (#) ($) ($)
---- ------- ------ ------ ------ ----- -- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vincent P. Kazmer(1), (2)
President & CEO .................. 1996 125,000 17,713 -- -- --
Douglas B. Wheeler
Vice President, Finance .......... 1996 11,429 -- -- 8,000 --
Bethany J. Pimentel
Vice President ................... 1996 74,677 21,992 -- -- 4,500 -- --
Christine B. Powaser(3)
Vice President, CFO .............. 1996 67,093 6,863 -- -- 1,000 -- --
</TABLE>
(1) Mr. Kazmer was elected President, CEO and a director in September, 1995.
Terms of his employment contract are detailed in Note 9 - "Other
Commitments" to the Financial Statements.
(2) As of December 31, 1996, Mr. Kazmer held 141,452 shares of restricted
common stock valued at $165,366.76 based on a closing price of $1.63 on
March 23, 1997. These shares vest over a period of four years at a rate of
25,363 per year. It is not anticipated that dividends will be paid for
these shares.
(3) Ms. Powaser resigned as Vice President and CFO in October, 1996. Her
separation and release package included payment of salary and benefits for
four and one-half months which is reported in the "Salary" column above.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of total
Securities options/SARs
Underlying granted to Exercise or
Options/SARs employees in base price Expiration
Name granted fiscal year ($/Share) date
- --------------------------------------------------------------------------------
Bethany J. Pimentel 1,000 3.00% $0.75 1/19/06
Bethany J. Pimentel 4,500 11.00% $2.00 11/13/06
Douglas B. Wheeler 8,000 25.00% $2.45 12/16/06
Christine B. Powaser 1,000 3.00% $0.75 11/19/06
28
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Value of
Number of unexercised
unexercised in-the-money
options/SARs options/SARs
Shares at FY-end (#) at FY-end ($)
acquired on Value realized exercisable/ exercisable/
Name exercise (#) ($) unexercisable unexercisable
- --------------------------------------------------------------------------------
Bethany J. Pimentel ..... 3,800 $ 570 0 0
Christine B. Powaser .... 3,382 $1,015 0 0
Christine B. Powaser .... 1,000 $ 750 0 0
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR: None
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table describes Security Ownership of Beneficial Owners of more
than 5% of the Common Stock of the Company:
Name and address Amount and nature Percent of
Title Of Class Of Beneficial Owner Of Beneficial Owner Class
- --------------------------------------------------------------------------------
Common Carter Interests, Ltd. 207,569 6.2
5757 Memorial Drive
Houston, Texas 77007
Common TaKaRa Shuzo Co., Ltd. 222,902 6.7
Biotechnology Research Laboratories
SETA 3-4-1 Otsu
Shiga, 520-21, Japan
Common Baylor College of Medicine 257,540(1) 7.7
One Baylor Plaza
Houston, Texas 77030
(1) Mr. Banks is deemed to be the beneficial owner of 50,726 shares of the
Company's Common Stock. Mr. Banks is the President of BCM Technologies,
Inc. which is a subsidiary of Baylor College of Medicine.
29
<PAGE>
The following table describes the Security Ownership of Directors, CEO, and
Directors and Executive Officers as a Group:
Name and address Amount and nature Percent of
Title Of Class Of Beneficial Owner Of Beneficial Owner Class
- --------------------------------------------------------------------------------
Common Baylor College of Medicine 257,540(1) 7.7
One Baylor Plaza
Houston, Texas 77030
Common Stephen J. Banks 50,726(1) 1.5
BCM Technologies, Inc.
1709 Dryden, Suite 901
Houston, Texas 77030
Common George Britton 85,596 2.6
3272 Westheimer, Suite 3
Houston, Texas 77098
Common Vincent P. Kazmer 141,452 4.3
2161 Benjamin Circle
Hudson, Ohio 44236
Common David Lawson 241,078(3) 7.25
2039 Dryden
Houston, Texas 77030
Common Bethany Pimental 6,456 *
9545 Katy Freeway, Suite 465
Houston, Texas 77024
Common Directors and Executive Officers 525,308(2) 15.8
as a Group
9545 Katy Freeway, Suite 465
Houston, Texas 77024
(1) Mr. Banks is deemed to be the beneficial owner of 50,726 shares of the
Company's Common Stock. Mr. Banks is the President of BCM Technologies,
Inc. which is a subsidiary of Baylor College of Medicine.
(2) The Directors and Executive Officers as a group total 7 persons.
(3) This includes 95,517 shares held by D. C. Lawson trust and 95,517 held by
S. R. Lawson trust.
* Indicates less that 1% ownership.
30
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described in Note 11 to the Financial Statements, the Company purchases
laboratory reagents from an affiliate at rates normally charged to a third
party.
31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ending December 31, 1996.
INDEX OF EXHIBITS
* 2.1 The Agreement of Merger of November 18, 1994, between Lark
Technologies, Inc. and Lark Sequencing Technologies, Inc.
providing for the merger of Lark Sequencing Technologies, Inc.
into the Company.
* 3.1 Bylaws of Lark Technologies, Inc., as amended.
* 3.2 The Certificate of Incorporation of Lark Technologies, Inc., as
amended.
* 10.1 1990 Stock Option Plan adopted by the Company.
* 10.2 Agreement between Lark Sequencing Technologies, Inc. and MedProbe,
A.S.
* 10.3 Agreement of 12-28-94 between Lark Sequencing Technologies, Inc.
and SmithKline Beecham PLC.
* 10.4 Patent License Agreement between Sennes Drug Innovations, Inc. and
Lark Sequencing Technologies, Inc.
** 10.5 Form of Warrant Agreement entered into by and between the Company
and each of George Britton, David Lawson, Peter Boatright, Homer
Peterson, and Larry Peterson.
** 10.6 Lease Agreement and Extensions and Modification of Lease Agreement
by and between Lark Sequencing Technologies, Inc. and Lacy
Petroleum, Inc.
*** 10.7 Employment Agreement entered into by and between the Company and
Vincent Kazmer.
*** 10.8 Restricted Stock Purchase Agreement entered into by and between
the Company and Vincent Kazmer.
*** 10.9 Promissory Note entered into by and between the Company and
Vincent Kazmer.
*** 10.10 Lease Agreement between Lark Technologies, Inc. and Oakley
Commercial (UK).
*** 10.11 Sponsored Research Contract entered by and between the Company and
Baylor College of Medicine.
*** 10.12 Consulting Agreement entered into by and between the Company and
Olivia Pereira-Smith.
**** 23.1 Consent of independent auditors.
* Incorporated by reference from the Company's Registration Statement on
Form S-4 dated August 14, 1995, Commission File No. 33-90424. The exhibit
numbering system used in Form S-4 differed from that used in this Form
10-QSB (8a, 2d, 2c, 6b, 6c, 6d-1, and 6f, respectively).
** Incorporated by reference from the Company's Form 10-QSB for the quarterly
period ended June 30, 1995.
*** Incorporated by reference from the Company's Form 10-QSB for the quarterly
period ended September 30, 1995.
**** Filed herewith.
32
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lark Technologies, Inc.
(Registrant)
Date: 3/29/97 /s/ STEPHEN J. BANKS
Stephen J. Banks, Director
Chairman of the Board
Date: 3/29/97 /s/ VINCENT P. KAZMER
Vincent P. Kazmer, Director
President and Chief Executive Officer
Date: 3/29/97 /s/ GEORGE M.BRITTON
George M. Britton, Director
Date: 3/29/97 /s/ DAVID LAWSON
David Lawson, Director
Date: 3/29/97 /s/ DOUGLAS B. WHEELER
Douglas B. Wheeler
Vice President, Finance
33
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-* No. 333-08847) pertaining to the Lark Sequencing Technologies, Inc.
1990 Stock Option Plan of our report dated March 4, 1997, with respect to the
financial statements of Lark Technologies, Inc. included in the Annual Report
(Form 10-KSB) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Houston, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S BALANCE SHEET AND STATEMENT OF OPERATIONS FOR '95 AND '96 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 734,247
<SECURITIES> 0
<RECEIVABLES> 804,360
<ALLOWANCES> 0
<INVENTORY> 87,215
<CURRENT-ASSETS> 1,673,351
<PP&E> 1,129,995
<DEPRECIATION> 710,207
<TOTAL-ASSETS> 2,124,129
<CURRENT-LIABILITIES> 1,105,804
<BONDS> 0
0
0
<COMMON> 3,326
<OTHER-SE> 1,014,999
<TOTAL-LIABILITY-AND-EQUITY> 2,124,129
<SALES> 4,192,406
<TOTAL-REVENUES> 4,192,406
<CGS> 1,850,533
<TOTAL-COSTS> 4,016,468
<OTHER-EXPENSES> 14,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,249
<INCOME-PRETAX> 161,931
<INCOME-TAX> 0
<INCOME-CONTINUING> 161,931
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161,931
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
