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, 1998
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, 1998 were $4,089,050.
The aggregate market value of the voting stock held by non-affiliates is
$1,916,196 based on a closing price of $.68 on December 31, 1998.
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 December 31, 1998, there were 3,319,546 shares of Common Stock, par value
$0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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, 1998.
Part I PAGE
----
Item 1. Description of Business ....................................... 1
Item 2. Description of Property ....................................... 6
Item 3. Legal Proceedings ............................................. 6
Item 4. Submission of Matters to a Vote of Security Holders ........... 6
Part II
Item 5. Market for Common Equity and Related Stockholder Matters ...... 6
Item 6. Management's Discussion and Analysis .......................... 7
Item 7. Financial Statements .......................................... 11
Balance Sheet ........................................... 13
Statements of Operations ................................ 14
Statements of Cash Flows ................................ 16
Notes to Financial Statements ........................... 18
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure .................................................... 28
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act .... 28
Item 10. Executive
Compensation .................................................. 32
Item 11. Security Ownership of Certain Beneficial Owners and
Management .................................................... 33
Item 12. Certain Relationships and Related
Transactions .................................................. 35
Item 13. Exhibits and Reports on Form 8-K .............................. 36
Signatures ................................................................ 38
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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
molecular biology services to the pharmaceutical, biotechnology and agbio
industries. Lark's services are used worldwide by research organizations and
drug development institutions. Lark's contract research service portfolio
consists of over a hundred different molecular biology services in the areas of
Nucleic Acid Extraction Services, DNA Sequencing Services, Genetic Stability
Testing Services, Gene Expression and Detection Services, and Custom Molecular
Biology Services.
o NUCLEIC ACID EXTRACTION SERVICES. Lark either extracts and purifies the
nucleic acids from its clients' samples or receives them already prepared
by its clients. Lark uses a variety of extraction procedures to analyze
DNA and/or RNA from blood, tissue, and other body fluids as well as,
bacterial, plant and cell culture samples. The Company has established the
Good Laboratory Practices (GLPs) facilities and personnel training
necessary to extract nucleic acids from human and animal origins.
o DNA SEQUENCING SERVICES. Lark has assembled a breadth of DNA sequencing
services to meet a variety of end user applications. The Company has
extensive expertise in DNA sequencing and has incorporated multiple
sequencing technologies into its laboratory to accommodate both high
throughput and high complexity projects. Depending upon the nature of a
project Lark will develop an optimal sequencing strategy to generate
consistent, high quality sequence data for use in applications spanning
research to FDA submissions.
HIGH VOLUME SEQUENCING SERVICES. Lark's high volume sequencing
services involve sequencing thousands of selected clones from a
genomic or expressed sequence tag (EST) library utilizing high
throughput automated systems. The libraries are provided by the
customers and usually consist of clones from a specific genome of
interest.
LARGE SCALE GENOMIC SEQUENCING SERVICES. Lark constructs libraries
from a variety of genomic constructs and assembles them into full
length sequences. Lark applies a shotgun strategy to randomly
produce plasmid clones from cosmids, bacterial artificial
chromosomes (BACs) and
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phage artificial chromosomes (PACs) to sequence using automated
sequencing capabilities. The Company assembles these random
fragments into a consensus sequence and closes any missing sequence
applying gap sequencing strategies.
FAST TURNAROUND SEQUENCING SERVICES. Lark has a fast turnaround
sequencing team dedicated to providing high accuracy double or
single strand sequence information to clients on selected clones of
interest in a short timeframe. Clients use these services to obtain
complete sequence information on specific clones or regions of
interest and as a way to confirm initial sequence information.
Typically these services have a two to ten day turnaround time
depending upon the size of the clone to be sequenced.
o GENETIC STABILITY TESTING SERVICES. Lark assists clients in meeting the
regulatory guidelines established for development of certain
genetically-engineered biotechnology products. Lark analyzes and provides
a comprehensive report on the genetic integrity of cell banks used to
produce recombinant proteins, monoclonal antibodies, gene therapy, and
vaccine products.
FDA SEQUENCING. Lark's FDA sequencing service generates 100%
accurate DNA sequence verification for a sequence region of
interest. Usually, Lark sequences the insert and flanking regions of
the sequence to be expressed to confirm no modifications have
occurred to the sequence during the cell banking and production
process.
COPY NUMBER. Lark uses various copy number analysis methods to
monitor the number of gene expression constructs contained in a cell
throughout the product production process.
INSERTION NUMBER. Lark uses molecular analysis techniques to
determine the insertion number of target sequences used to express
certain products in mammalian cell banks. The insertion number is
used to measure the stability of a eucaryotic cell bank.
RESTRICTION ENZYME ANALYSIS. Lark performs restriction enzyme
analysis on prokaryotic and eucaryotic cell banks to determine if
any unexpected genetic rearrangements have occurred in the
expression construct. The analysis supports confirmation of the
stability of a cell bank throughout the pre and post production
process.
PLASMID LOSS DETECTION. Lark has developed assays to detect the
percentage of cells in a cell bank which are missing product
producing plasmid systems. Increases in plasmid loss may be
indicative of instability and inefficiencies in the target cell
bank.
PHAGE DETECTION. Phage are bacterial viruses which can kill or alter
the bacterium's growth cycle or expression levels. Lark's phage
detection service is designed to detect contamination of a
prokaryotic cell bank by either lysogenic or lytic phage.
o GENE EXPRESSION AND DETECTION SERVICES. Lark offers several services to
assist its clients in ascertaining the biological role of a gene by
determining if, when and at what level a gene is being expressed in a
variety of samples of interest. These services are important in
identifying novel genes, confirming the validity of a gene as a drug
target, and monitoring a target gene through the product development
process. The Company believes these services are highly complementary to
genomic research.
DIFFERENTIAL DISPLAY ANALYSIS. Lark uses differential display
analysis methods to determine differences in gene expression between
control samples and one or more test samples. Lark's method utilizes
specific DNA amplification procedures to display variances in gene
expression patterns between control and test samples.
QUANTITATIVE POLYMERASE CHAIN REACTION (QPCR). Lark's QPCR service
is used for highly accurate gene sequence detection. This method
analyzes the distribution and expression of target DNA or RNA in a
high throughput format. The service has applications in
biotechnology
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product development including gene therapy distribution and
expression analysis, drug response studies, mutation detection, and
expression system development.
o CUSTOM MOLECULAR BIOLOGY SERVICES. Lark offers a variety of custom
services.
MANUAL SEQUENCING. Lark uses manual sequencing techniques for FDA
sequencing and complex sequencing projects. Lark utilizes manual
sequencing to support its automated DNA sequencing services when
accuracy and/or coverage has been guaranteed as part of a service.
Manual sequencing methods use radioisotopes and Lark maintains
licenses to use isotopes.
SUBCLONING. Subcloning is a procedure used to transfer a DNA region
of interest into a vector that is more suitable for procedures such
as DNA sequencing and gene expression. Lark provides a strategy and
services for subcloning a variety of different sequence fragments,
including PCR products, into standard vector systems.
LIBRARY SCREENING. Lark uses gene fragments to screen a customer's
library of clones and isolate the full length cDNA of interest. Lark
also provides services to search a library to find homologous genes
in related species or isolate the genomic equivalent of a cDNA.
POLYMERASE CHAIN REACTION (PCR). Lark uses PCR techniques to amplify
a specific sequence of interest to a customer from plasmid, viral,
or genomic DNA. Lark also has the expertise to provide reverse
transcriptase PCR for amplification of an RNA product.
DNA PREPARATION. Lark provides services to prepare plasmid DNA or
phage DNA on a large-scale basis for its customers.
Previously, Lark had 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 currently pursuing the licensing of
this technology through the activities of Sennes Drug Innovations.
BUSINESS STRATEGY. The Company plans to expand its leadership position as
a high quality molecular biology Contract Research Organization (CRO) on a
global basis by, 1) capitalizing on its current customer base and leveraging its
high level of repeat business, 2) growing its existing molecular biology service
business to support the high growth genomics industry, 3) establishing a broad
range of molecular biology services to meet expanding outsourcing needs of large
pharmaceutical clients, and 4) applying its molecular biology service expertise
to new and expanding market opportunities.
o CAPITALIZE ON THE CURRENT CUSTOMER BASE AND LEVERAGE REPEAT BUSINESS. The
Company has significant relationships with a number of leading
biotechnology companies and has served 18 of the 20 largest pharmaceutical
companies. The Company has also attained a high level repeat business.
Lark believes it can further capitalize on its commercial relationships by
enhancing its direct sales force and applying an account focused approach
to its selling process.
o GROW EXISTING SERVICE BUSINESS TO SUPPORT HIGH GROWTH GENOMICS INDUSTRY.
The Company has established four product lines which support
genomics-based research and development efforts 1) Nucleic Acid Extraction
Services, 2) DNA Sequencing Services, 3) Gene Expression Services, and 4)
Gene Detection Services. Within each of these product lines are specific
services designed to meet specific project needs. Through the Company's
interactions with clients and awareness of the industry, Lark has
identified future services to add to these product lines in further
support of its client's genomics programs.
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o ESTABLISH BROAD RANGE OF MOLECULAR BIOLOGY SERVICES TO SUPPORT EXPANDING
OUTSOURCING NEED. A factor which influences Lark's new products program is
the requests made by Lark's clients for specific new services. Lark
believes the number of new services it will introduce will be
significantly impacted by the expanding outsourcing needs of its
client-base. By assemblying a portfolio of automated, molecular biology
services the Company believes it will be able to decrease its clients
product development timelines. Many of Lark's contractual arrangements are
customized proposals composed of a number of individual services
integrated into a production-oriented format. The Company plans to
continue to introduce high throughput approaches to accelerate its
client's abilities to efficiently analyze multiple samples.
o MOLECULAR BIOLOGY SERVICES FOR NEW AND EXPANDING MARKET OPPORTUNITIES.
The Company believes that molecular biology has applications extending
beyond the classical biopharmaceutical industry. Lark has identified the
agricultural biotechnology markets as a new and expanding opportunity for
its molecular biology services. Lark has developed a sales program to
penetrate the fast-growing agbio sector of the biotechnology industry and
has initiated several contracts for agbio customers.
MARKET OVERVIEW AND COMPETITION.
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 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
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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 a
distributor covering the Benelux area in Europe.
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.
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 one (1) issued U.S. patent and one (1) U.S. patent
application and shared ownership in another patent application. 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
parties 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 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
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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, 1998, the Company had a total of 40 full
time employees of which 32 were based in the US and 8 were based in the UK. 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.
FORWARD-LOOKING INFORMATION. This Annual Report contains various
forward-looking statements and information that are based on management's belief
as well as assumptions made by and information currently available 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 risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
projected or expected.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 12,482 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 May 31, 2000. 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
None
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, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 America On Line, the high and low bids for each quarter of
1997 and 1998 are shown on the following table. These bids reflect the price
paid by the buyer, and do not include the commission withheld by the broker(s).
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STOCK PRICES
1997 1998
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
Quarter Ending March 31, $2.56 $1.50 $1.94 $1.25
Quarter Ending June 30, $1.56 $1.06 $2.00 $1.50
Quarter Ending September 30, $2.50 $1.31 $1.56 $0.75
Quarter Ending December 31, $2.38 $1.25 $0.81 $0.63
As of December 31, 1998, there were approximately 2,026 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
customers. In addition, the majority of 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 impact of the unpredictable project fluctuations from 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.
Since the middle of 1997, the Company has introduced three new service
lines. In late 1997 the Company introduced a new service, Quantitative PCR. Then
in the second quarter of 1998, the Company introduced its new Genetically
Modified Organizims service and, finally, at the very end of 1998, introduced
it's new Genotyping service.
In addition to the new services, the Company established a new lab
operation in its Saffron Walden, England facility. Although the Company has
maintained a sales office in the UK for many years, this is the first lab
facility the company has established there. This facility employs eight full
time people and utilizes equipment which cost approximately $321,000.
RESULTS OF OPERATIONS
GROSS REVENUES. Gross revenues decreased 9% from $4,469,722 to $4,089,050
for the years ended December 31, 1997 and 1998, respectively. The lower revenues
for 1998 were the result of changes in the management of the sales and marketing
function at the company which emphasized the new services offered by the Company
and the development of the new lab in Saffron Walden in order to broaden the
Company's revenue base. Although operations began late in the year, revenues
from the new lab in the UK were approximately $245,000 for 1998.
COSTS OF SERVICES. Costs of services consist primarily of labor and
laboratory supplies. Costs of services increased 9% from $1,896,679 to
$2,065,604 for the years ended December 31, 1997 and 1998, respectively.
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These costs increased although revenue decreased due to the costs incurred to
establish the new services mentioned earlier. Costs of services as a percentage
of revenue were 42% and 51% for the years ended December 31, 1997 and 1998,
respectively.
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 19% from
$2,070,838 to $2,463,818 for the years ended December 31, 1997 and 1998,
respectively. Sales, general and administrative expenses as a percentage of
revenue were 46% and 60% for the years ended December 31, 1997 and 1998,
respectively. In previous years, the costs for the UK office were included in
this caption because they were primarily sales and marketing related. During
1998, six additional employees were hired to start the UK lab and provide sales
support for it. Since most of these lab costs occurred late in the year and are
relatively immaterial, they are included in this caption to aid comparability
between 1997 and 1998. The overall cost of operation for the UK facility was
approximately $559,000 during 1998. These costs, net of the UK generated
revenue, accounted for approximately $314,000 of the Company's net loss for
1998.
RESEARCH AND DEVELOPMENT. Research and development costs were $234,607 and
$63,946 for the years ended December 31, 1997 and 1998, respectively. Research
and development costs as a percentage of revenue were 5% and 2% for the years
ended December 31, 1997 and 1998, respectively. The expenses in 1997 and a
portion of 1998 were related to the development of new services and the gene
senescence project described in Item 1 "Description of Business" above. In 1998,
research and development expenses decreased because the Company discontinued
payments under the Sponsored Research Agreement and related consulting agreement
with the principal researcher as described in note 9 to the financial
statements.
VARIABILITY OF FUTURE OPERATING RESULTS. The Company experienced a
significant revenue decrease and increased costs in 1998 due in large part to
its concentration of selling and marketing efforts on the new services now
offered and the establishment of the new lab operating in the UK. The Company
added these new services and the new lab in order to broaden the Company's
revenue base and to participate more actively in the European markets. Although
the Company expects higher and less variable revenue streams as a result of
these changes, the ultimate success of these changes can not be reasonably
predicted.
LIQUIDITY AND CAPITAL RESOURCES. Operating cash flow was $235,155 and
$300,540 for the years ended December 31, 1997 and 1998, respectively. The
improvement in operating cash flow was the result of better working capital
utilization.
During 1998, the Company invested $228,452 in laboratory equipment and an
additional $519,618 in lab equipment subject to capital leases mentioned in note
9 to the financial statements in order to support the current and expected
increase in revenues made possible by the addition of the new services and lab
in the UK.
The Company's bank debt, totaling approximately $199,000 at December 31,
1998, matures May 31, 1999. On March 13, 1998, the Company refinanced its line
of credit and with another bank and extended the maturity of the new line
through May 31, 1999. As a result of this refinancing, the Company now has a
revolving line of credit of $600,000 and an advised discretionary line of credit
for equipment financing. The advised discretionary line was originally granted
in the amount of $300,000 but increased to $600,000 in August, 1998. Under the
terms of the revolving line of credit agreement, the Company is required to
maintain certain financial ratios and a specific level of net worth. The Company
was in violation of certain covenants and obtained waivers from the bank through
December 31, 1998. The Company is currently negotiating with the bank to renew
these lines of credit. See Note 7 of the Financial Statements for additional
discussion of notes. 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.
MATERIAL COMMITMENTS. The Company currently has no outstanding material
commitments.
8
<PAGE>
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace some portions of its software and certain hardware
so that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be mitigated. However, if
such modifications and replacements are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed assessment indicated that
most of the Company's significant information technology systems could be
affected, particularly the general ledger, billing, and inventory systems. That
assessment also indicated that software and hardware (embedded chips) used by
the Company to provide services (hereafter also referred to as operating
equipment) also are at risk. Affected systems include automated sequencing and
related equipment used in various aspects of the services provided by the
Company. However, based on a review of its services, the Company has determined
that most of the services it has sold and will continue to sell do not require
remediation to be Year 2000 compliant. Accordingly, the Company does not believe
that the Year 2000 presents a material exposure as it relates to the Company's
services. In addition, the Company is gathering information about the Year 2000
compliance status of its significant suppliers and subcontractors and continues
to monitor their compliance.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
For its information technology exposures, to date the Company is just
beginning the remediation phase and expects to complete software reprogramming
and replacement no later than June 30, 1999. Once software is reprogrammed or
replaced for a system, the Company will begin testing and implementation. These
phases run concurrently for different systems. To date, the Company has
completed 50% of its testing and has implemented 30% of its remediated systems.
Completion of the testing phase for all significant systems is expected by April
30, 1999, with all remediated systems fully tested and implemented by June 30,
1999, with 100% completion targeted for September 30, 1999.
Over all, the remediation of operating equipment is not significantly more
difficult than the remediation of the information technology systems because
many of the Company's pieces of opersating equipment are already Y2K compliant.
However, some of the manufacturers of a few pieces of equipment are no longer in
business. As such, the Company is only 40% complete in the remediation phase of
its operating equipment requiring remediation. Testing of this equipment is also
more difficult than the testing of the information technology systems; as a
result, the Company is only 20% complete with the testing of its remediated
operating equipment. Once testing is complete, the operating equipment will be
ready for immediate use. The Company expects to complete its remediation efforts
by June 30 , 1999. Testing and implementation of affected equipment is expected
to be completed by September 30, 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company does not currently use systems which directly interface with
vendors. Accordingly, the Company's exposure in this area is very low.
9
<PAGE>
The Company has queried its significant suppliers and subcontractors that
do not share information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
COSTS
The Company will utilize both internal and external resources to reprogram
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at
$15,000 and is being funded through operating cash flows. To date, the Company
has incurred approximately $4,000 (all expensed) related to all phases of the
Year 2000 project. Of the total remaining project costs, approximately $8,000 is
attributable to the purchase of new software and operating equipment, which will
be capitalized. The remaining $3,000 relates to repair of hardware and software
and will be expensed as incurred.
RISKS
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company would be
unable to take customer orders, provide services, invoice customers or collect
payments. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
CONTINGENCY PLANS
The Company currently has no contingency plans in place in the event it does not
complete all phases of the Year 2000 program. The Company plans to evaluate the
status of completion in April, 1999 and determine whether such a plan is
necessary.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
LARK TECHNOLOGIES, INC.
Index to Financial Statements
Years ended December 31, 1998 and 1997
Contents
Page
----
Report of Independent Auditors......................................... 12
Financial Statements
Balance Sheets as of December 31, 1998............................ 13
Statements of Operations for
Years Ended December 31, 1997 and 1998....................... 14
Statements of Stockholders' Equity for
Years Ended December 31, 1997 and 1998....................... 15
Statements of Cash Flows
Years Ended December 31, 1997 and 1998....................... 16
Notes to Financial Statements.......................................... 18
11
<PAGE>
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, 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. 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 financial position of Lark Technologies, Inc. at
December 31, 1998, and the results of its operations and cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
March 1, 1999
12
<PAGE>
LARK TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 465,506
Accounts receivable 598,795
Due from related parties 14,180
Work-in-process 139,779
Prepaid expenses 80,124
-----------
Total current assets 1,298,384
Property and equipment, net 1,077,488
Other assets, net 16,749
-----------
Total assets $ 2,392,621
===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 629,786
Notes payable 228,143
Capital lease obligation, current portion 243,230
Accrued expenses 130,793
Customer deposits 191,989
Deposits from related parties 87,578
-----------
Total current liabilities 1,511,519
Capital lease obligation, less current portion 138,297
-----------
Total liabilities 1,649,816
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
Outstanding shares - 3,319,546
Issued shares 3,324
Additional paid-in capital 2,450,754
Treasury stock at cost (4,946)
Amounts due from stockholders (15,045)
Accumulated deficit (1,691,282)
-----------
Total stockholders' equity 742,805
-----------
Total liabilities and stockholders' equity $ 2,392,621
===========
SEE ACCOMPANYING NOTES.
13
<PAGE>
LARK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Years ended December 31,
---------------------------
1997 1998
---------------------------
Revenue:
Laboratory Services $ 4,469,722 $ 4,089,050
Costs and expenses:
Costs of services 1,896,679 2,065,604
Sales, general and administrative 2,070,838 2,463,818
Research and development 234,607 63,946
----------- -----------
Total costs and expenses 4,202,124 4,593,368
----------- -----------
Operating income (loss) 267,598 (504,318)
Other income and (expense):
Interest expense (24,783) (43,897)
Interest income 27,522 22,637
----------- -----------
Total other income (expense) 2,739 (21,260)
----------- -----------
Income (loss) before income taxes 270,337 (525,578)
Provision for income taxes 27,771 0
----------- -----------
Net income (loss) $ 242,566 ($ 525,578)
=========== ===========
Basic and diluted earnings per common share $ 0.07 ($ 0.16)
=========== ===========
14
<PAGE>
LARK TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, & 1998
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Amounts
Shares At Par Paid-in due from Accumulated
Outstanding Value Capital Shares Cost Stockholders Deficit Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,326,400 $3,326 $2,468,316 ($45,045) ($1,408,271) $1,018,326
Common stock issued 500 374 374
Common stock repurchase & retired (2,854) (2) (4,621) (4,623)
Amt received fr stockholders 30,000 30,000
Cost of rights offering (13,315) (13,315)
Net income 242,566 242,566
--------------------- --------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 3,324,046 $3,324 $2,450,754 $0 ($15,045) ($1,165,705) $1,273,328
Common Stock repurchased 4,500 (4,946) (4,946)
Net Income (Loss) (525,577) (525,577)
===================== ====================================================================
BALANCE AT DECEMBER 31, 1998 3,324,046 $3,324 $2,450,754 4,500 ($4,946) ($15,045) ($1,691,282) $742,805
===================== ====================================================================
</TABLE>
SEE ACCOMPANYING NOTES
15
<PAGE>
LARK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------
1997 1998
-----------------------
OPERATING ACTIVITIES
Net income (loss) $ 242,566 ($525,577)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 187,190 214,352
Provision for losses on accounts receivables -- 150,000
Changes in operating assets and liabilities:
Accounts receivable (173,542) 229,106
Work-in-process 63,208 (115,771)
Prepaid expenses (12,511) 22,011
Other assets (8,129) 2
Due from related parties (68,775) 42,714
Accounts payable (93,832) 409,891
Accrued expenses 56,357 (112,667)
Deposits 42,623 (67,091)
--------- ---------
Net cash provided by operating activities 235,155 246,970
INVESTING ACTIVITIES
Purchases of property and equipment (285,891) (172,017)
--------- ---------
Net cash used in investing activities (285,891) (172,017)
FINANCING ACTIVITIES
Principal payments on notes payable (38,259) (236,231)
Proceeds from notes payable -- 216,480
Repayment on capital lease obligations -- (210,753)
Proceeds from issuance of common stock 374 --
Repurchase common stock (4,623) (4,946)
Proceeds from note receivable from stockholder 30,000 --
Repayment of debentures payable (45,000) --
--------- ---------
Net cash used in financing activities (57,508) (235,450)
--------- ---------
Net increase (decrease) in cash and cash equivalents (108,244) (160,497)
Cash and cash equivalents at beginning of year 734,247 626,003
--------- ---------
Cash and cash equivalents at end of year $ 626,003 $ 465,506
========= =========
SEE ACCOMPANYING NOTES
16
<PAGE>
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31,
-------------------------
1997 1998
-------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $27,598 $ 43,897
Income taxes $12,010
Noncash activities:
Capital lease to acquire property and equipment $72,663 $519,618
Note payable for prepaid insurance $43,620 $ 43,620
SEE ACCOMPANYING NOTES
17
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Lark Technologies, Inc., a Delaware corporation (the "Company" or "Lark"),
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
WORK IN PROCESS INVENTORY
The Company's work in process inventory includes an estimate of the direct
and indirect costs associated with projects that had been started but not yet
completed at December 31, 1998. Direct costs include such items as the cost of
labor, reagents and supplies directly associated with each project. Indirect
costs include such items as general supplies, laboratory management,
depreciation, and costs to operate the lab. These costs are applied to each
project on the basis of direct labor hours incurred for the project up to the
point of measurement such as the end of an accounting period.
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.
18
<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
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 compensation
are set forth in Note 9.
USE OF ESTIMATES
The preparation of financial statements 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, 1997 and 1998 was approximately
$122,000 and $97,036, respectively.
INCOME TAX
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statements and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, and Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. These statements, which
19
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
were effective for periods beginning after December 15, 1997, expanded and
modified disclosures and, accordingly, had no impact on the Company's reported
financial position, results of operations, or cash flows. The company has no
components of comprehensive income.
3. CONCENTRATION OF RISK
The Company provides laboratory services primarily to major researchers in
the United States and Europe. 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's accounts receivable balance at December 31, 1998 is
presented net of an allowance for doubtful accounts of $50,000.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998:
Laboratory equipment $1,711,677
Furniture and fixtures 90,648
Computer equipment 308,419
Leasehold improvements 69,439
-------------
2,180,183
Less accumulated depreciation and amortization (1,102,695)
-------------
Property and equipment, net $1,077,488
=============
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1998:
Accrued payments under sponsored research agreement $20,000
Accrued audit and tax preparation fees 30,250
Accrued property taxs payable 20,400
Accrued UK VAT tax payable 11,173
Other (individually less than 5% of current liabilities) 48,970
=============
$130,793
=============
20
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE
At December 31, 1998, the Company had a revolving line of credit
with a bank. The terms of this revolving line of credit provided for maximum
borrowings of $600,000. Borrowings were to bear interest at the bank's prime
rate (7.5% at December 31, 1998) plus 1% and the line of credit expires May 31,
1999. The line of credit is secured by qualified accounts receivable of the
Company. At December 31, 1998, the Company had $199,000 outstanding under this
line of credit. The borrowing base for this line of credit is equal to 80% of
certain accounts receivable that are no more than 90 days old. On December 31,
1998, the company had an unused line of credit of $174,398. Under the terms of
the revolving line of credit agreement, the Company is required to maintain
certain financial ratios and a specific level of net worth. The Company was in
violation of certain covenants and obtained waivers from the bank through
December 31, 1998. Subsequent to December 31, 1998, the Company continued to
violate these covenants. The Company is currently negotiating with the bank to
renew this line of credit and modify the terms of the financial covenants.
On March 13, 1998, the company arranged an advised discretionary credit
line for the financing of equipment with the same bank used for the revolving
credit line. Under the terms of this discretionary credit, the Company could
borrow up to $300,000 secured by the equipment purchased with the proceeds of
the borrowings. This discretionary credit line provides for borrowings of up to
75% of the purchase price of equipment at the bank's prime plus 1.5%. This
credit line provides for repayment terms up to 36 months and matures on May 31,
1999. On August 12, 1998, at the request of the Company, the Bank increased the
limit the Company may borrow on this discretionary credit line from $300,000 to
$600,000. There were no other changes to the terms and conditions of this line.
As of December 31, 1998, there were no outstanding borrowings under this
facility.
8. FEDERAL INCOME TAX
At December 31, 1998, the Company had net operating loss carryforwards of
$1,861,176 for income tax purposes that expire in 2005 through 2018. 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 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, 1998:
Deferred tax assets (liabilities):
Accumulated Depreciation $ (27,542)
Net operating loss 632,800
Net deferred tax assets 605,258
Valuation allowance (605,258)
===========
Deferred taxes $ -
===========
21
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
1997 1998
Amount Percent Amount Percent
------------------------------------------
Tax at U.S. statutory rates $82,472 34% $(178,696) (34%)
State income taxes 27,771 11% -- 0%
Change in valuation
allowance (37,386) (15%) 154,876 29%
Other (45,086) (19%) 23,820 5%
-------------------- -------------------
$ 27,771 11% -- --
==================== ===================
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 520,968 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 after 6 months.
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 and net income 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 the Black-Scholes option pricing ("Black-Scholes") model for the 1998 and
1997 options granted with the following weighted average assumptions: (I)
risk-free interest rates ranging from 5.00% to 6.00% (ii) a dividend yield of 0%
for both years, (iii) volatility factors of the expected market price of the
company's common stock of 71% and 105%, respectively, and (iv) a weighted
average expected life of two 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.
22
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and net
income per common share would have been adjusted to the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31,
1997 1998
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
Net income (loss) $242,566 $189,762 $(525,577) $(612,971)
Basic and diluted net income
(loss) per common share $ 0.07 $ 0.06 $ (0.16) $ (0.18)
During 1997 and 1998, 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:
Year Ended December 31,
1997 1998
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
OUTSTANDING-
BEGINNING OF YEAR 39,463 $ 0.98 264,963 $ 1.81
Granted 226,800 $ 1.95 65,250 $ 1.60
Exercised 500 $ 0.75 -- --
Forfeited 800 $ 1.25 69,507 $ 1.70
Outstanding - end of 264,963 $ 1.81 260,706 $ 1.80
year
Options exercisable at
year-end 94,591 132,206
Weighted average fair
value of options
granted during the
year $ 1.64 $ 0.48
23
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following summarizes information related to stock options outstanding
at December 31, 1998:
Options outstanding Options exercisable
--------------------------------- ----------------------
Weighted
Weighted average Weighted
Range of average remaining average
Exercise exercise contractual exercise
Prices Options price life Options price
- - --------------- -------- --------- ----------- --------- -----------
(in thousands, except per share amounts)
$0.15 - $0.75 13,156 $0.46 5.9 yrs. 13,156 $0.46
$1.42 - $2.45 247,550 $1.87 8.9 yrs 119,050 $1.79
-------- ---------
260,706 $1.80 8.6 yrs. 132,206 $1.65
======== =========
At December 31, 1998, there are 252,079 options available for future grants
under the Plan.
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. Total rent expense for all
operating leases for the years ended December 31, 1997 and 1998 was $288,445 and
$287,794 respectively.
Future minimum payments under these operating leases are as follows:
Year ending December 31,
1999 $182,402
2000 --
--------
$182,402
========
During 1997 and 1998, the Company acquired certain pieces of lab equipment
subject to capital leases. The equipment acquired was recorded at the Company's
cost basis of $592,281. Under the terms of the capital leases, the Company is
obligated to make payments as set forth in the table below and, subject to
certain conditions, may purchase the equipment at the end of the lease for a
nominal amount.
Future minimum payments under these capital operating leases are as
follows:
1999 $271,883
2000 147,711
--------
Total payments $419,594
Less interest portion
of payments 38,067
--------
Net present value of
lease payments 381,527
========
Less current portion 243,230
--------
Capital lease obligation
less current portion $138,297
========
Amortization of capital lease asset is included in the depreciation expense.
24
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SALES COMMITMENTS
During August 1997, the Company entered into a contract with one
customer to perform DNA sequencing services totaling approximately $2,300,000.
As of December 31, 1997, approximately $1,350,000 remained on this contract. As
of December 31, 1998, the Company did not have any similar contract or
commitments.
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 expired on July 31, 1997 and required the
Company to pay Baylor a total of $53,739 annually in monthly installments over
the term of the contract. At December 31, 1998, the Company owed $20,000 to
Baylor under this agreement and did not renew the agreement.
The Company entered into a related consulting agreement with the Principal
Investigator at Baylor. This agreement expired on August 1, 1997 and required
the Company to pay the researcher a total of $24,000 annually in monthly
installments over the term of the contract. The Company has not renewed the
agreement.
25
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 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 permissible 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 contributions to the plan of $9,917 for the 1997 year and none
for 1998.
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 $11,902 and none in 1997
and 1998, respectively. The Company has also provided laboratory services, at
rates normally charged to third-parties, to affiliates of stockholders of the
Company totaling approximately $66,720 and $86,491 in 1997 and 1998,
respectively.
The Company purchased approximately $117,205 and $22,969 of laboratory
supplies and other services from affiliates of stockholders of the Company in
1997 and 1998, respectively.
TaKaRa periodically advances the Company funds to be applied against
future laboratory services purchased by TaKaRa. At December 31, 1998, the
unearned balance of TaKaRa deposits was $86,889.
The due from related parties at December 31, 1998 is comprised primarily
of amounts due from affiliates of stockholders of the Company for laboratory
services rendered to those affiliates.
26
<PAGE>
LARK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. MAJOR CUSTOMERS
During 1997, 21% of the Company's revenue was with a single customer and
those sales were to a division of the customer located in the United Kingdom
During 1998, approximately 27% of the Company's revenue was with a different
single customer located in the United States.
13. SEGMENT INFORMATION
The proportion of the Company's sales to customers in foreign countries is
as follows:
1997 1998
---- ----
Sales - European Community 12% 5%
Identifiable assets (primarily property
and equipment)
US $1,488,548 $1,852,836
UK - 327,347
------------- -------------
Total $1,488,548 $2,180,183
============= =============
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. The carrying amount of the capital lease
obligation approximates fair value based on rates currently available to the
Company.
15. EARNINGS PER SHARE
The following table sets forth the weighted average shares outstanding for
the computation of basic and diluted earnings per share:
For the year ending December 31,
-------------------------------
1997 1998
------------------------------
Weighted average common shares outstanding 3,325,773 3,322,694
Dilutive securities - employee stock options 21,269 -
------------------------------
Weighted average common shares outstanding
assuming full dilution 3,347,042 3,322,694
==============================
All options to purchase common stock outstanding during 1998 were not
included in the computation of diluted earnings per share because the effect
would be antidilutive.
27
<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, 58 Director, 1989(1)
Chairman of
the Board 1989(2)
Vincent P. Kazmer, 49 Director, 1995(1)
President, CEO 1995(2)
George M. Britton, 50 Director 1989(1)
David A. Lawson, 51 Director 1989(1)
Frank Vazquez, 58 Director, 1991(1)
Vice-Chairman 1989(2)
James M. Chubb, 51 Director 1997(1)
Douglas B. Wheeler, 53 Vice President,
Finance Secretary
and Treasurer 1996(2)
Raymond A. Vonder
Haar, Ph.D., 52 Scientific
Director 1993(1)
(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.
28
<PAGE>
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 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 manager 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.
JAMES M. CHUBB, PH.D., has nearly twenty years experience in the
biopharmaceutical industry. He served as President and Director of Aronex
Pharmaceuticals, Inc. from 1995 through 1997. From 1990 to 1995, Dr. Chubb was
President and Chief Executive Officer of Triplex Pharmaceutical Company. From
1978 to 1990, he held a number of positions with increasing responsibility at
Glaxo, Inc., a major pharmaceutical company. At Glaxo, Dr. Chubb headed the
anti-infective, respiratory, dermatological, cardiovascular, and
gastrointestinal development groups. He held the position of Adjunct Professor
at the University of North Carolina College of Pharmacy from 1986 to 1990.
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.
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.
29
<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.
EMPLOYEE
PERSON OFFICE SINCE
David Alan Wall, Ph.D., 36 Director, Support Services
and Compliance(1) 1994
J. D. Kittle, Jr., Ph.D., 40 Senior Director
Scientific Project Development(1) 1996
Heidi B. Nelson, Ph.D., 35 Manager,
Gene Quantitation(1) 1997
George (Guo-Wei) Xu,
Ph.D., 48 Director, Advanced Molecular
Biology Services (AMBS) 1998
Li, Li, Ph.D., 39 Senior Scientist, Manager of
Genotyping Service 1998
Roderick Westrop, Ph.D. Director, Sales and Business
Development, Europe(1) 1997
(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.
DAVID A. WALL, PH.D., has served as Director, Support Services and
Compliance since January 1999. 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 Senior Director, Scientific
Project Development since January 1999. 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.
HEIDI NELSON, PH.D., has served as Manager of Gene Quantitation since
November 1998. Prior to joining Lark she worked as a Scientist at Zonagen
Pharmaceuticals, Inc. in the Molecular Biology Division. Between 1985 and 1986
Dr. Nelson worked as a technician in an immunology lab at Tufts University. Dr.
Nelson graduated with a B.S. in Biology and Russian from Duke University in May
of 1985 and obtained her Ph.D. in Cellular and Molecular Biology from the
University of Wisconsin-Madison in 1993.
GEORGE XU, PH.D., has served as Director of Advanced Molecular Biology
Services since June 1998. Prior to joing Lark he worked as Research Scientist at
Energy Biosystems in The Woodlands, Texas. Between 1988 to 1993, Dr. Xu worked
as a Postdoctoral Research Associate in the Microbiology lab and the Plant
Genetics lab at Texas A&M University. Dr. Xu arrived in the United States in
1981 and is a graduate from Washington State University with a M.S. and a Ph.D.
in Microbiology.
30
<PAGE>
LI LI, PH.D., has recently joined Lark as the Senior Scientist and Manager
of Genoytping Service. Prior to joining Lark, Dr. Li worked as a Post-Doctor
fellow and senior research associate in the Human Genetics Center, University of
Texas, in charge of various throughput genotyping, sequencing, SNP discovery and
large scale DNA extraction between 1992-1998. Previously, she also worked as a
research scientist with the USDA for three years. Dr. Li received her B.S. in
plant biology from South China University of Tropcalcrops and her Ph.D. in
Zoology from Reading University, England.
RODERICK WESTROP, PH.D. has served as Lark's Director for Europe since
July of 1997. Previously, Dr. Westrop was Sales Manager for Pharmacia Biotech.
Dr. Westrop holds a Ph.D. in Physiology from Kings College in London and a B.S.
in Applied Biology from the University of Hertford.
31
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
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>
Vincent P. Kazmer(1), (2) 1998 143,000 2,767 -
President & CEO 1997 132,000 4,090 95,000
1996 125,000 17,713 -
- - --------------------------------------------------------------------------------------------------------------------------------
Douglas B. Wheeler 1998 101,042 1,740 -
Vice President Finance 1997 75,000 7,415 21,500
1996 11,429 - 8,000
- - --------------------------------------------------------------------------------------------------------------------------------
Bethany J. Pimentel 1998 52,564 19,264 -
Vice President 1997 84,182 34,749 47,500
1996 74,677 21,992 4,500
- - --------------------------------------------------------------------------------------------------------------------------------
Raymond Vonder Haar 1998 85,938 1,679 -
Vice President, Science 1997 75,729 2,255 45,000
1996 66,957 8,236 -
- - --------------------------------------------------------------------------------------------------------------------------------
Alan B. Carter 1998 75,729 2,255 -
VP, Sales & Marketing 1997 - - -
1996 - - -
- - --------------------------------------------------------------------------------------------------------------------------------
Christine Powaser 1998 - - -
VP, CFO 1997 - - -
1996 67,083 6,863 1,000
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Kazmer was elected President, CEO and a director in September, 1995.
Significant terms of his employment contract are detailed in Note 9 "Other
Commitments" to the Financial Statements.
(2) As of December 31, 1998, Mr. Kazmer held 141,452 shares of restricted
common stock valued at $124,478 based on a closing price of $0.88 on March
15, 1999. These shares vest over a period of four years at a rate of
35,613 shares per year. It is not anticipated that dividends will be paid
for these shares.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Percent of
Number of total
Securities options/SARs
Underlying granted to exercise or
Options/SARs employees in base price Expiration
Name granted fiscal year ($/Share) date
- - ---------------------------------------------------------------------
Alan B. Carter 40,000 21.00% $1.70 7/1/08
- - ---------------------------------------------------------------------
32
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
None
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.
33
<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 Douglas B. Wheeler 18,000 *
514 Enchanted River Dr.
Spring, Texas 77388
Common Directors and Executive
Officers as a Group 536,852(2) 16.2
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.
34
<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.
35
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ending December 31, 1998.
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.
36
<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 MARCH 31, 1999 /s/ STEPHEN J. BANKS
Stephen J. Banks, Director
Chairman of the Board
Date MARCH 31, 1999 /s/ VINCENT P. KAZMER
Vincent P. Kazmer, Director
President and Chief Executive
Officer
Date MARCH 31, 1999 /s/ GEORGE M. BRITTON
George M. Britton, Director
Date MARCH 31, 1999 /s/ DAVID LAWSON
David Lawson, Director
Date MARCH 31, 1999 /s/ DOUGLAS B. WHEELER
Douglas B. Wheeler
Vice President, Finance
37
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements Form S-8 (No. 333-08847) pertaining to the Lark Sequencing
Technologies, Inc. 1990 Stock Option Plan and Form S-8 (No. 333-35675)
pertaining to the Lark Technologies, Inc. 1997 Nonqualified Stock Option Plan
for Non-Employee Directors of our report dated March 1, 1999, with respect
to the financial statements of Lark Technologies, Inc. included in the Annual
Report (Form 10-KSB) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Houston, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 465,506
<SECURITIES> 0
<RECEIVABLES> 612,975
<ALLOWANCES> 0
<INVENTORY> 139,779
<CURRENT-ASSETS> 80,124
<PP&E> 2,180,183
<DEPRECIATION> 1,102,695
<TOTAL-ASSETS> 2,392,621
<CURRENT-LIABILITIES> 1,511,519
<BONDS> 0
0
0
<COMMON> 3,324
<OTHER-SE> 739,481
<TOTAL-LIABILITY-AND-EQUITY> 2,392,621
<SALES> 4,089,050
<TOTAL-REVENUES> 4,089,050
<CGS> 2,065,604
<TOTAL-COSTS> 4,593,368
<OTHER-EXPENSES> 21,260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,897
<INCOME-PRETAX> (525,578)
<INCOME-TAX> 0
<INCOME-CONTINUING> (525,578)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (525,578)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
