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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
Commission file number: 0-24738
LORONIX INFORMATION SYSTEMS, INC.
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(Name of Registrant as specified in its charter)
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NEVADA 33-0248747
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
820 Airport Road, Durango, CO 81301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (970) 259-6161
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value, and Preferred
Share Purchase Rights. --------------------------------------------
- ---------------------- (Title of class)
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Indicate by check mark whether the Registrant (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 the filing requirements for the
past 90 days. Yes X No
- -
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not 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 ]
The Registrant's revenue for the fiscal year ended December 31, 1998 was:
$12,710,871.
As of February 24, 1999, 4,762,011 shares of the registrant's Common Stock
were outstanding and the aggregate market value of such Common Stock held by
non-affiliates was approximately $13,493,364 based on the closing price of
$3.813 per share on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for Registrant's Annual Meeting of
Stockholders scheduled to be held on May 24, 1999 have been incorporated by
reference in Part III of this Form 10-KSB.
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PART I
ITEM 1. BUSINESS
GENERAL
References made in this Annual Report on Form 10-KSB to "Loronix,"
the "Company" or the "Registrant" refer to Loronix Information Systems, Inc.
Loronix, CCTVware and ImageSHARE are registered trademarks of Loronix.
Loronix was incorporated in 1992. Loronix designs, markets and sells a family
of closed circuit television ("CCTV") digital recording and video management
products ("CCTVware Products") and digital identification products ("ID
Products") based on the Company's proprietary software. Loronix uses an open
architecture design approach that allows compatibility with commercially
available computer and video hardware and software.
CCTVWARE PRODUCTS
In August 1995, the Company began developing a new product
technology named CCTVware. This technology permits (i) digital video
recording and storage that eliminates the need for video tapes and video
cassette recorders ("VCRs") in surveillance environments, and (ii) enables
high-speed access, retrieval and playback of stored video. The Company
currently markets four products incorporating its CCTVware technology and
began commercial shipments of certain of these products in the first quarter
of 1997. All CCTVware products include a full range of image enhancement
tools and a special feature called video authentication which alerts the user
if the recorded video has been altered.
CCTVWARE VISION
The Vision system is a digital video recorder providing up to six
inputs of video and audio per system. The Vision system records full-motion
video at 30 frames per second ("FPS") and can be implemented with existing
VCR based systems or it can be connected to a computer network for storage
and playback of the video (which creates a system offering the benefits of
the CCTVware Enterprise system below). In VCR environments, the Vision system
provides up to eight hours of continuous loop recording for any existing
camera(s) selected by the operator or pre-configured cameras triggered by an
alarm event. In stand-alone configurations, the Vision system is marketed to
surveillance environments requiring full-motion video recording and playback
without the networking and archiving capabilities offered by the Enterprise
system.
CCTVWARE M SERIES
The M Series system is a rack-mounted digital video recorder with
the capability of recording up to 32 camera inputs at up to 7.5 FPS
simultaneously on all inputs. The M Series system uses continuous loop
recording and may be configured to connect directly to a CCTVware review
station for playback of the recorded video. The M Series system, like the
Vision system, can also be connected to a computer network for storage and
playback of the video (which creates a system offering the benefits of the
CCTVware Enterprise system below).
CCTVWARE ENTERPRISE
The Enterprise system is comprised of multiple Vision and/or M
Series recorders. These recorders are combined with various servers including
communications and tape servers and are connected via a local or wide area
network. An advanced intelligent digital tape library system is included for
long-term storage of the recorded video. PC-based playback stations provide
on-demand playback of the recorded video. The Enterprise system is targeted
at large, dynamic, sensitive surveillance environments such as government
facilities, airports, financial institutions, retail operations and casinos.
CCTVWARE TRANSIT
The Transit system is a stand-alone digital recording system
designed to operate in transit environments, such as buses, subways and rail
cars. This system is capable of recording up to five black
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and white or color camera inputs at 1-2 FPS and one audio input. The Transit
system operates on 12 volt DC power and is designed to withstand shock and
vibration. The Transit system uses continuous loop recording on a removable
hard drive which must be removed and installed in a separate CCTVware review
station for playback of the recorded video.
ID PRODUCTS
The Company's ID Products consist of the Company's proprietary
software combined with commercially available hardware components and
software. ID Products can record and store digital images in computer
databases, transmit such images to other control systems or printers, and
retrieve, analyze, reproduce and manipulate these images in a variety of
ways. The Company's ID Products provide positive identification and
verification of an individual's identity for access control, security, retail
point-of-sale, human resource management and other control systems. ID
Products are designed to enhance or replace existing film-based
identification systems.
The Company offers ID Products with a variety of functions and
features targeted to a wide array of customers, ranging from large
organizations requiring a multi-location system operating across a local or
wide area computer network to small organizations requiring a single
stand-alone system. In many instances, the Company configures its systems to
fit a particular customer's needs. The Company's principal ID Products are
the ImageSHARE, ImageSHARE Express and Instant ID.
IMAGESHARE
The Company's high-end ID product, the ImageSHARE system, is
targeted primarily for use by medium to large-sized businesses, institutions
and government entities. These organizations typically operate local and wide
area networks, in which multiple users at individual workstations access
images and data in various applications and information/access control
systems. The ImageSHARE system enables a user to capture, store, manage and
transmit photographs, signatures, fingerprints, images and other information
over these networks, or it can be configured to operate in a stand-alone
mode. The ImageSHARE system provides significant configuration flexibility
and can be integrated with the hardware, software and other components in a
user's existing information/access control system or in an entirely new
system configuration. Because of its open architecture design, which allows
compatibility with commercially available hardware and software, the
ImageSHARE system may be used with a variety of relational database
management systems ("RDBMS").
IMAGESHARE EXPRESS
The Company's low to mid-range ID Product, the ImageSHARE Express
system, is targeted primarily for use by small to medium-sized businesses,
institutions and government entities. This system offers customers an
economical identification system which is pre-configured, color based and
ready to use. It can be implemented as a stand-alone system or within local
or wide area networks. The ImageSHARE Express system allows connectivity to
certain RDMBS, requires minimal customization and may be designed to address
the specific needs of various vertical market applications. The ImageSHARE
Express system, which replaced the Company's ImageSHARE-V, IMAGESHARE I and
Laser I.D. Card Creator systems, can be upgraded easily to the ImageSHARE
system.
INSTANT ID
The Company's low-end ID Product, Instant ID, was released in
February, 1999 and is primarily targeted for use by small businesses
requiring the capability to create and issue identification cards
inexpensively. The Instant ID Product enables users to utilize their existing
Microsoft Windows 95, 98 and NT Workstation version 4.0 compatible computers
to capture and store images and textual data in a Microsoft Access Database.
ID cards can then be printed using Microsoft Windows compatible ink jet,
laser or plastic card printers.
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MARKETING AND CUSTOMERS
The Company markets its products domestically through a small direct
sales force, manufacturing representatives and a network of dealers and
systems integrators.
In 1998, Dayton Hudson Corporation accounted for 38% of the
Company's revenue. In 1997, two customers accounted for 47% of the Company's
revenue.
Internationally, the Company markets its products through its direct
sales force, its wholly-owned subsidiary in the United Kingdom and various
international distributors.
COMPETITION
The markets for the Company's CCTVware and ID Products are extremely
competitive. Competitors include a broad range of companies that develop and
market products for the identification and surveillance markets. Competitors
in the identification market include: (i) in film-based systems, Polaroid
Corporation, and (ii) in digital-based systems, Polaroid Corporation, Data
Card Corporation, Dactek International, Inc., Imaging Technology Corporation,
G & A Imaging, Goddard Technology Corporation and Laminex, Inc., as well as
many other organizations. Competitors in the surveillance market include
numerous VCR suppliers and digital recording suppliers including, among
others: (i) TVX, Inc. and Prima Facie, Inc. for the Transit product; and (ii)
Dedicated Micros, Inc., Sensormatic Corporation, Primary Image, Ltd., Alpha
Systems Lab and NICE Systems, Ltd. for the M Series products. Loronix has not
yet identified any competitors, other than VCR suppliers, for its Enterprise
and Vision products.
The Company believes that the principal competitive factors in its
markets include: system performance and functionality, price, system
configuration flexibility, ease-of-use, system maintenance costs, quality,
reliability, customer support and brand name. Larger, more established
companies with substantially greater technical, financial and marketing
resources than the Company, such as Data Card Corporation, Sensormatic
Corporation and NICE Systems, Ltd., have an enhanced competitive position due
in part to their established brand name franchises. The Company believes that
its primary competitive strengths include system performance and
functionality, system configuration flexibility and ease-of-use.
MANUFACTURING AND SUPPLIERS
The Company does not manufacture any of the hardware in its systems;
rather, it assembles its systems by integrating commercially available
hardware and software together with the Company's proprietary software. The
Company believes that it can continue to obtain components for its systems at
reasonable prices from a variety of sources. Although the Company has
developed certain proprietary hardware components for use in its CCTVware
products and purchases some components from single source suppliers, the
Company believes similar components could be obtained from alternative
suppliers without significant delay. There can be no assurance, however, that
the Company will be able to obtain needed components at reasonable prices.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company regards certain features of its products and
documentation as proprietary and relies on a combination of contract,
copyright, trademark and trade secret laws and other measures to protect its
proprietary information. As part of its confidentiality procedures, the
Company generally (i) enters into confidentiality and invention assignment
agreements with its employees and mutual non-disclosure agreements with its
manufacturing representatives, dealers and systems integrators, and (ii)
limits access to and distribution of its software, documentation and other
proprietary information. The Company has no patents and, while the existing
copyright laws afford only limited protection, the Company intends to apply
for federal copyright registrations for any of its software systems, for
which it has not yet received federal copyright registration. The Company
believes that, because of the rapid pace of technological change in the
computer software industry, trade secret and copyright protection are less
significant than factors such as the knowledge, ability and experience of the
Company's employees, frequent product enhancements and
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the timeliness and quality of support services. See Legal Proceedings in Item
3 for information on a patent infringement lawsuit in which the Company is
involved.
The Company provides its software to end-users under non-exclusive
"shrink-wrap" licenses, which generally are nontransferable and have a
perpetual term. Although the Company does not make source code generally
available to end-users, it has, from time to time, entered into source code
escrow agreements with certain customers. The Company has also licensed
certain software from third parties for incorporation into its products.
RESEARCH AND DEVELOPMENT
The Company believes its success depends in large part on its
ability to enhance its current product line, develop new products, maintain
technological competitiveness and satisfy an evolving range of customer
requirements. The Company's research and development group is responsible for
exploring new applications of its core technologies and incorporating new
technologies into the Company's products. The Company's research and
development resources have been directed primarily toward (i) developing new
products, (ii) improving the functionality and performance of the Company's
proprietary software, and (iii) designing and implementing the device drivers
necessary to maintain the Company's open architecture.
In 1998 and 1997, the Company spent, net of capitalized software
costs, $1,381,000 and $1,526,000, respectively, for research and development.
EMPLOYEES
As of January 31, 1999, the Company employed 86 persons including
four persons in part-time positions. The Company's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel in the future.
The Company has no collective bargaining agreements with any of its
employees. The Company believes its relations with its employees are good.
ITEM 2. PROPERTIES
The Company owns approximately 25 acres of real property adjacent to
the Durango-La Plata County Airport in Colorado. In October 1995, the Company
completed construction of a 20,000 square foot facility on approximately five
of the 25 acres to house administration, marketing, research and development,
operations and customer support. In October 1998, the Company entered into a
three-year lease for approximately 2,400 square feet of office space in
Basingstoke, England for its wholly owned United Kingdom subsidiary. In June
1996, the Company entered into a three-year lease for approximately 1,600
square feet of office space in Las Vegas, Nevada for a sales and
demonstration office. In September 1998, the Company entered into a one-year
lease for approximately 5,000 square feet of additional product assembly
space in Durango, Colorado. Depending on the sales volume of its CCTVware
products, the Company may expand its Durango facility by up to 20,000 square
feet in 1999.
In July 1997, the Company entered into a $700,000 mortgage agreement
for its Durango-La Plata County facility secured by a 1st Deed of Trust.
ITEM 3. LEGAL PROCEEDINGS
On October 17, 1997, the Company received notice that it had been named
as a defendant in a patent infringement lawsuit brought by a competitor, Prima
Facie, Inc. ("PFI"), in the U.S. District Court for the District of Maryland.
The lawsuit alleged that the Company's CCTVware Transit product infringed
certain claims of two patents held by PFI and that the Company has interfered
with PFI's business relationships. The claim was amended in June 1998 to allege
infringement by the Company's other CCTVware products. The suit seeks injunctive
relief against further infringement and damages. The
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lawsuit also names one of the Company's domestic dealers as a co-defendant.
The Company believes that these claims are without merit and is defending
itself vigorously.
On July 6, 1998, the Company filed counterclaims against PFI. These
counterclaims include a request for Declaratory Judgment of Patent Invalidity
and six other counterclaims. The Company and PFI have agreed to separate the
patent infringement claims from all other claims and resolve the patent
infringement issues first. To date no trial has been scheduled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to August 25, 1994, the date of the Company's initial public
offering, there was no public market for the Company's Common Stock. Since
August 25, 1994, the Company's Common Stock has traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol: "LORX." The
following table sets forth, for each period indicated, the high and low sale
prices per share of the Company's Common Stock as reported by Nasdaq:
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High Low
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1998
First quarter $2.125 $1.375
Second quarter $3.375 $1.531
Third quarter $3.063 $1.938
Fourth quarter $2.938 $1.750
1997
First quarter $4.750 $3.125
Second quarter $4.156 $2.500
Third quarter $3.563 $2.500
Fourth quarter $2.656 $1.000
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As of January 15, 1999, there were approximately 94 stockholders of
record of the Company's Common Stock. The Company estimates that there are
approximately 900 beneficial owners.
The Company has never paid cash dividends on its Common Stock and
anticipates that, for the foreseeable future, it will continue to retain any
earnings for use in the operation of its business. Payment of cash dividends
in the future will depend upon the Company's earnings, bank loan covenants,
financial condition, contractual restrictions, restrictions imposed by
applicable law, capital requirements and other factors deemed relevant by the
Company's Board of Directors.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's audited financial statements and the notes thereto
included herein.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998, COMPARED TO 1997
REVENUE
The Company's revenue is derived from sales of systems, including
embedded software, and supplies and from maintenance services. Historically,
systems and supplies have accounted for greater than 90% of total revenue,
with systems accounting for a substantial majority of total revenue. The
Company expects this trend to continue for the foreseeable future. Revenue
increased 36% from $9.4 million in 1997 to $12.7 million in 1998, and
included approximately $5.9 million and $10.7 million of CCTVware Product
sales, respectively. Revenue in 1998 included approximately $4.0 million, or
38%, from a single customer (see DEPENDENCE ON A MAJOR CUSTOMER under the
caption "Certain Factors Bearing on Future Results"). The Company attributes
the increase in revenue from 1997 to 1998 primarily to the market's
acceptance of CCTV digital recording technology.
COSTS AND EXPENSES
COST OF PRODUCTS SOLD. The cost of products sold, consisting
principally of the costs of hardware components, supplies and software
amortization, increased from $5.1 million in 1997 to $6.8 million in
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1998, and represented approximately 54% of revenue in both periods. The
increase in absolute terms resulted from higher total revenue.
OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support
expenses of approximately $1.6 million remained flat from 1997 to 1998, and
represented 17% and 13% of revenue, respectively. The percentage decrease
from 1997 to 1998 was the result of a 36% increase in revenue without a
commensurate increase in expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $3.8 million in 1997 to $5.1 million
in 1998, and represented 40% of total revenue in both periods. The increase,
in absolute terms, in such expenses resulted primarily from an increase in
legal fees associated with Company's patent litigation with PFI and an
increase in bad debt expense. Approximately $250,000 of the increase in bad
debt expense relates to the Company's agreement to accept the return of
products from one of its customers that is experiencing financial difficulty.
RESEARCH AND DEVELOPMENT. Research and development expenses, net of
capitalized software costs, decreased from $1.5 million in 1997 to $1.4
million in 1998, and represented 16% and 11% of revenue, respectively. The
decrease in such expenses resulted primarily from headcount and
compensation-related decreases and decreases in travel, telecommunications
and supplies expense offset somewhat by increases in capitalized software
supplied by third parties. The Company expects to continue to fund new
product development in 1999 at or above the dollar levels expended in 1998.
NET INTEREST INCOME. Net interest income decreased from $121,000 in
1997 to $67,000 in 1998. This decrease was due to a reduction in the average
cash available for investment and an increase in interest expense due to an
increase in the Company's average outstanding debt.
OTHER EXPENSE. Other expense decreased from $42,400 in 1997 to
$14,300 in 1998. This decrease resulted primarily from an $18,100 expense in
1997 resulting from a litigation settlement with the Company's former Vice
President of Sales and Marketing.
INCOME TAX. Income tax expense for 1997 of $32,400 was recorded
despite the pretax loss as a result of increasing the valuation allowance
related to the Company's deferred income tax asset. The Company recognized
minimal state income tax expense for 1998 and no benefit was recognized for
the Company's current year loss due to the current unrealizability of
deferred tax assets as a result of the history of losses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1997 and 1998, the Company
financed its operations primarily from working capital and bank borrowings.
The Company's principal uses of cash during 1997 and 1998 were to (i) fund
operating activities; (ii) acquire property and equipment; and (iii) invest
in the development of its software.
During 1997, the Company's cash and cash equivalents decreased from
$6.1 million at December 31, 1996 to $3.3 million at December 31, 1997. Net
cash used in operating activities of $2.3 million consisted primarily of a
net loss of $2.5 million plus non-cash charges for depreciation, amortization
and deferred income taxes of $1.1 million and increases in accounts
receivable and inventory of $2.1 million, offset by decreases in prepaid
expenses and other assets, and increases in accounts payable and accrued
liabilities of $1.1 million. Net cash used in investing activities of $1.2
million consisted primarily of $766,900 of capital expenditures and $460,500
of software development costs offset by a decrease in notes receivable of
$80,800. Net cash generated from financing activities of $695,200 consisted
primarily of $691,600 in proceeds, net of principal repayments, from the
mortgage of the Company's Colorado facility.
During 1998, the Company's cash and cash equivalents decreased from
$3.3 million at December 31, 1997 to $1.6 million at December 31, 1998. Net
cash used in operating activities of $720,300 consisted primarily of a net
loss of $2.2 million plus non-cash charges for depreciation and amortization
of $1.2 million and an increase in inventory of $612,000, and decreases in
accounts payable of $169,500 offset by decreases in accounts receivable and
prepaid expenses of $917,800 and an increase in accrued liabilities of
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$30,300. Net cash used in investing activities of $1.4 million consisted
primarily of $970,500 of capital expenditures and $551,500 of software
development costs offset by a decrease in notes receivable and deposits and
other assets of $65,000. Net cash generated from financing activities of
$456,900 consisted primarily of $500,000 from bank borrowing. The bank
borrowing consists of a three-year balloon note with a fifteen-year
amortization schedule with an interest rate of 8.5%.
As of December 31, 1998, the Company had $4.9 million in net working
capital, including $2.4 million of trade accounts receivable and $1.9 million
in inventory. Days sales outstanding, calculated using an average accounts
receivable balance, were approximately 83 days as of December 31, 1998,
compared to 98 days for the same period a year ago. The Company has provided
and may continue to provide payment term extensions to certain of its
customers from time to time. As of December 31, 1998, the Company had granted
payment term extensions still outstanding of approximately $350,000.
The Company's inventory balance at December 31, 1998 and 1997 was
$1.9 and $1.5 million, respectively. Annualized inventory turns, calculated
using an average inventory balance, were 3.5 and 3.1 as December 31, 1998 and
1997, respectively.
The Company's principal sources of liquidity are its cash and cash
equivalents and cash generated from operating activities, if any. The Company
also has available up to $1.0 million on a line of credit based on a
percentage of the Company's eligible accounts receivable. The line of credit
expires in May 1999. The Company expects that it will successfully extend the
line of credit through May 2000. The line of credit has not been used to
date. The Company anticipates capital expenditures for 1999 of approximately
$650,000. Depending on the sales volume of its CCTVware products, the Company
may expand its Durango facility by up to 20,000 square feet in 1999. In such
event, the Company estimates an additional capital expenditure of $700,000.
The Company believes that, based on its current financial projections, it has
sufficient working capital, inclusive of its line of credit facility, to meet
its capital requirements and fund operations for at least the next twelve
months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Strandards FAS 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for all fiscal years
beginning after June 15, 1999. SFAS 133 is effective for the Company's fiscal
year ending December 31, 2000 and is not expected to have a material effect
on the Company's financial position or results of operations.
In March 1998, the American Institute of Certified Public
Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which provides guidance on
accounting for the costs of computer software intended for internal use. SOP
98-1 must be adopted by the Company effective as of December 31, 1999 and is
not expected to have a material impact on the Company's consolidated results
of operations or financial position.
YEAR 2000 CONVERSION
Many computer systems may experience problems handling dates beyond
1999. Therefore, some computer hardware and software will need to be modified
prior to 2000 in order to remain functional. The Company is assessing the
readiness and compliance of its computer-based products available for sale
and of its computer-based systems used internally, and the Company expects to
implement successfully the system and programming changes necessary to
address year 2000 issues by mid-1999. The Company does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes on a timely basis could have an adverse effect on future results of
operations, liquidity or financial condition.
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COMPUTER-BASED PRODUCTS AVAILABLE FOR SALE. The Company has two
primary product lines available for sale consisting of CCTVware Products and
ID Products. The Company is currently assessing the state of readiness of
these products to address year 2000 issues. The Company expects to complete
its assessment of its state of readiness by May 1999.
CCTVWARE PRODUCTS. The CCTVware product line consists of two major
components including: CCTVware Enterprise products and the CCTVware Transit
product ("Transit"). Recently, the Company created and executed a series of
tests to determine the possible problems year 2000 might have on the
operation of the Enterprise products version 1.2. These tests indicated that
year 2000 did not adversely affect the performance of the Enterprise system,
and the Company expects that Enterprise products will operate successfully in
the days leading up to and following the year 2000.
A key component of determining the Company's year 2000 state of
readiness is to identify those areas of operation where Enterprise products
incorporate software and hardware products supplied by third party vendors
and thus, where year 2000 problems may arise as a result of products supplied
by third parties. Third party software products include, but are not limited
to: Microsoft Windows NT 4.0 Server, Microsoft Windows NT 4.0 Workstation,
Microsoft Windows 95, Microsoft SQL Server 6.5 and Microsoft Visual C++.
Third party hardware products include, but are not limited to: video capture
cards, export cards, network switches, motherboards, modems and various
workstations. Because Enterprise products are dependent, in certain respects,
on products supplied by third party vendors, an important part of the
Company's year 2000 effort is to contact those vendors who supply products
that the Company considers critical to the operation of the Enterprise
products and gauge their year 2000 compliance efforts. The Company has sent
letters to various vendors and is in the process of receiving and analyzing
the responses to determine the year 2000 state of readiness of such vendor
supplied products. Tests to date indicate that certain third party supplied
products do not appear to adversely affect the performance of the Enterprise
products with respect to the year 2000 issue.
The Company expects to release new versions of the Enterprise
products in the future. The Company will continue to audit and test
compliance with year 2000 performance of its internally developed products.
To date the Company has not completed testing of its Transit product
for year 2000 compliance. The Company expects to complete year 2000
compliance testing by April 1, 1999.
ID PRODUCTS. The Company is creating a series of tests to determine
the possible problems the year 2000 will have on the operation of those ID
products which the Company continues to support. Such ID products include:
ImageSHARE 1.21, 2.5 and 3.1; Instant ID 2.0; ImageSHARE Express; Ready Key
interface 3.1; Color Card Creator and ImageSHARE 95. The core programs of
these products support four digit year date formats and if configured
properly for specific users' applications, the Company does not expect to
uncover any issues that are material to year 2000 compliance.
Certain of the Company's ID products also include interfaces to
various access control applications including: Ccure with Badges 1.66; Ccure
with ImageSHARE 1.21; Card Key with Badges 1.6x; Casi Rusco with IMAGESHARE
1.21; Casi Rusco with Badges 1.66+; DAQ with ImageSHARE 1.21; Oracle Based
DAQ with ImageSHARE 1.21 and ICAM with ImageSHARE 1.21. The interface design
methodology used to integrate the ID Products are primarily controlled by the
access control vendors. The Company can make no assurances that these
interfaces are year 2000 compliant.
A key component of determining the Company's year 2000 state of
readiness is to identify those areas of operation where ID Products
incorporate hardware and software products supplied by third party vendors
and thus, where year 2000 problems may arise as a result products supplied by
third parties. Third party hardware products include, but are not limited to:
computers; network adapter cards; video capture cards; controller cards;
printers; encoders; cameras and various types of cabling. For older ID
Product configurations, many of the third party vendor hardware products are
no longer manufactured or supported by the supplier. The Company can make no
assurances that these devices are year 2000 compliant. At risk are older
computers that may have embedded problems in the basic input/output system
("BIOS") for processing year 2000 dates. Certain routines within the ID
Products use the BIOS date information to calculate current dates. Computers
that possess this problem will require the BIOS to be updated and/or
10
<PAGE>
the computer replaced. Third party software products include, but are not
limited to: Microsoft Windows 3.1 and 3.11; Microsoft Windows NT 4.0
Workstation; Microsoft Windows 95 and 98; Microsoft SQL Server; Microsoft
Access; Paradox; Informix; Sybase; IBM DB2; Microsoft Foxpro; Oracle;
Microsoft Visual C++; Borland 3.1, 4.5 and 5.01; Strategic Reporting's
ReportSmith and various Open DataBase Connectivity drivers provided by
Intersolv, Microsoft and IBM. Because ID Products are dependent, in certain
respects, on products supplied by third party vendors, an important part of
the Company's year 2000 compliance effort is to contact those vendors who
supply products that the Company considers critical to the operation of ID
Products and gauge their year 2000 compliance efforts. The Company has sent
letters to various vendors and is in the process of receiving and analyzing
the responses to determine the year 2000 state of readiness of such vendor
supplied products.
From 1989 through 1995, the Company developed seven different ID
Products including: Badges 1.64 - 1.66; Loronix Color Image Management System
Foxpro Based; Dos Based Foxpro BW Imaging System; ImageSHARE V (Visitor BW,
Foxpro); ImageSHARE I (Color Foxpro); Laser ID Card Creator and Entry Check.
In 1996, the Company recognized that the unavailability of peripheral
replacement equipment from third party vendors and inadequate technical
resources made it infeasible for the Company to continue to support these
products. Accordingly, the Company notified its customers that it would no
longer support these products and made available upgrade options to allow
customers to migrate to newer products that would be supported by the Company.
COMPUTER-BASED SYSTEMS USED INTERNALLY. The Company uses various
computer-based systems to operate its business on a day-to-day basis. These
systems include, but are not limited to: (i) software programs, including
Macola (for accounting, customer order processing, purchasing and inventory
control), CardKey Access Control, Novel Network Operating System, SourceSafe,
Microsoft Windows and various software application programs, and (ii)
hardware devices, including servers, hubs, proximity readers, motion
detectors, phone systems and personal computers.
In 1998, the Company upgraded its Macola software to the year 2000
compliant version. The Company is currently assessing its other internal
computer-based systems to determine their susceptibility to the year 2000
issue.
COST OF YEAR 2000 CONVERSION. To date, the Company estimates that it
has spent less than $18,000 of incremental external spending on the year 2000
issue and estimates that future external costs associated with its year 2000
compliance efforts will not exceed $50,000.
CONTINGENCY PLANS. The Company is currently in the information
collection phase of addressing year 2000 issues and has not yet completed its
assessment of the reasonably likely worst case scenario of Non-IT Business
System and/or IT Systems failures and related consequences. Although the
Company does not anticipate any significant issues relating to year 2000, it
intends to create contingency plans as information becomes available
indicating areas of non-compliance that could have an adverse effect on the
Company's future results of operations, liquidity or financial condition.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The statements in the third sentence of the paragraph under the
caption "Manufacturing and Suppliers", the third sentence in the first
paragraph under the caption "Intellectual Property, Proprietary Rights and
Licenses", the first sentence under the caption "Research and Development" on
page 5, the last sentence of the first paragraph under the caption
"Employees", the last sentence of the first paragraph under the caption
"Properties", the third sentence under the caption "Revenue", the last
sentence under the caption "Research and Development" on page 8, the fourth,
sixth, eighth and ninth sentences of the sixth paragraph under the caption
"Financial Condition, Liquidity and Capital Resources", the last sentence of
the paragraph under the caption "New Accounting Pronouncements", the third
and fourth sentences of the first paragraph under the caption "Year 2000
Conversion", the last sentence under the caption "Computer based products
available for sale", the last sentence of the first paragraph and the third
and fourth paragraphs under the caption "CCTVware Products" on page 10, the
last sentence of the first paragraph under the caption "ID Products", the
first sentence under the caption "Cost of Year 2000 conversion", the second
sentence under the caption "Contingency Plans", the first sentence under the
caption "Capital Requirements" below, the third sentence under the caption
"Dependence on a Major Customer" below, the
11
<PAGE>
third and sixth sentences under the caption "Year 2000 Issues" below, the
first and seventh sentences under the caption "Variability of Operation
Results" below, and first sentence under the caption "Volatility of Stock
Price" below are forward-looking statements. In addition, the Company may
from time to time make oral forward-looking statements. The following are
certain important factors that could cause actual results to differ
materially from those projected in any such forward-looking statements.
CAPITAL REQUIREMENTS. The Company believes that, based on its
current projections, it has sufficient working capital to meet its
requirements for at least the next 12 months. However, to the extent that the
Company experiences growth generally, or the Company's CCTVware line of
products generates high demand, or the Company receives extraordinary large
orders for certain CCTVware products from large business, institutional or
government buyers, the Company's capital requirements may exceed the
Company's available capital resources. Additionally, the Company has suffered
losses in seven of the past eight quarters, and such losses, which may occur
in the foreseeable future, would diminish the Company's cash and cash
equivalents. There can be no assurance that the Company will be able to raise
equity or debt financing on favorable terms, or at all. If the Company fails
in such circumstances to raise additional capital as needed, the Company
would likely be required to reduce the scope of its product development,
selling and marketing activities and other operations, which would have a
material adverse effect on the Company's business, operating results and
financial condition.
DISTRIBUTION RELATIONSHIPS. The Company believes its success in
penetrating markets for its ID Products and CCTVware Products depends in part
on its ability to maintain distribution relationships with manufacturing
representatives, dealers and systems integrators and to cultivate additional,
similar relationships. There can be no assurance that the Company will be
successful in maintaining or expanding its distribution relationships. The
loss of certain distribution relationships could have a negative impact on
the Company's revenue stream. Further, there can be no assurance that the
businesses with whom the Company has developed such relationships, some of
whom have significantly greater financial and marketing resources than the
Company, will not develop and market products in competition with the Company
or will not otherwise discontinue their relationships with the Company.
COMPETITION. Certain of the Company's current and prospective
competitors have substantially greater technical, financial and marketing
resources than the Company. In addition, there can be no assurance that any
of the Company's products will be competitive in the face of advances in
product technology developed by the Company's current or future competitors.
LEGAL PROCEEDINGS. On October 17, 1997, the Company received notice
that it had been named as a defendant in a patent infringement lawsuit
brought by a competitor, Prima Facie, Inc. ("PFI"), in the U.S. District
Court for the District of Maryland. The lawsuit alleges that the Company's
CCTVware Transit product infringes certain claims of two patents held by PFI
and that the Company has interfered with PFI's business relationships. The
claim has been amended to allege infringement by the Company's other CCTVware
Products. The suit seeks injunctive relief against further infringement and
damages. The lawsuit also names one of the Company's domestic distributors as
a codefendant. Although the Company believes these claims are without merit
and is defending itself vigorously, an adverse result in the litigation could
have a negative impact on the Company's business, operating results and
financial condition. More specifically, if the claims of PFI are upheld as
valid, enforceable and infringed, the Company might be held liable for a
substantial damage award and would be required to obtain a license from PFI
or be required to redesign its products to avoid infringement. There can be
no assurance that a license would be available from PFI, or if available,
would be available on terms acceptable to the Company or that the Company
would be able to redesign its products to avoid infringement. Accordingly, an
adverse determination in the pending judicial proceedings could prevent the
Company from manufacturing and selling its CCTVware products. Additionally,
the Company has incurred and continues to incur substantial expenses in its
litigation with PFI, and there can be no assurance that the Company will not
continue to incur such expenses for some considerable amount of time.
INTERNATIONAL SALES. The Company is seeking to expand its
international presence by developing new distribution channels in certain
foreign countries where it has not previously had a presence. International
sales are subject to a number of risks, including political and economic
instability, unexpected changes in regulatory requirements, tariffs and other
trade barriers, fluctuating exchange rates and the possibility of greater
difficulty in accounts receivable collection. There can be no assurance that
these and
12
<PAGE>
other factors will not have a material adverse effect on the Company's future
international sales, if any, and, consequently, the Company's business,
operating results and financial condition.
DEPENDENCE ON A MAJOR CUSTOMER. In 1998, sales to Dayton Hudson
Corporation accounted for 38% of the Company's revenue. Dayton Hudson is not
obligated to purchase any minimum levels of the Company's products, and
although Dayton Hudson Corporation has placed additional orders with the
Company subsequent to 1998, there can be no assurance that any further
business will arise from this customer. Any significant reduction in product
sales to Dayton Hudson Corporation that can not be replaced with new business
may materially and adversely affect the Company's business, operating results
and financial condition.
YEAR 2000 ISSUES. The "year 2000 issue" arises because most computer
systems and programs were designed to handle only a two-digit year, not a
four-digit year. When the year 2000 begins, these computers may interpret
"00" as the year 1900 and could either stop processing date-related
computations or could process them incorrectly. The Company has taken steps
to implement new information systems and migrate to year 2000 compliant
software for its accounting, customer order processing, purchasing and
inventory control software, and accordingly, the Company does not currently
anticipate any internal year 2000 issues from this software. However, the
Company could be adversely impacted by year 2000 issues related to other
internally used computer-based systems and issues faced by major suppliers,
customers, vendors and distributors with which the Company interacts. The
Company has begun a testing program to gauge the year 2000 compliance of its
products, and the Company is beginning the process of corresponding with
certain third parties to determine whether they are year 2000 compliant. The
Company will then evaluate and follow up on the responses to determine the
impact that third parties who are not year 2000 compliant may have on the
operations and products of the Company. As a result of the unprecedented and
potentially complex nature of the year 2000 issue however, there can be no
assurance that this issue will not have a material and adverse impact on the
business, operating results and financial condition of the Company, despite
the Company's efforts.
DEPENDENCE ON NEW PRODUCTS. The market for the Company's products is
characterized by ongoing technological development and evolving industry
standards. The Company's success will depend upon its ability to enhance its
current products and to introduce new products which address technological
and market developments and satisfy the increasingly sophisticated needs of
customers. For instance, the Company has released several products based on
its CCTVware technology. There can be no assurance that the Company will be
successful in developing, marketing and selling sufficient volumes of its new
CCTVware products or developing and marketing on a timely basis any other
fully functional product enhancements or new products that respond to the
technological advances by others. There also can be no assurance that the
Company's new products will be accepted by customers.
MANAGEMENT AND EMPLOYEES. The Company's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel in the future. The Company has
in the past encountered some difficulties in fulfilling its hiring needs in
the Durango, Colorado employment market, and there can be no assurance that
the Company will be successful in hiring and retaining qualified employees in
the future.
PROPRIETARY RIGHTS. The Company is not aware that its products,
trademarks or other proprietary rights infringe on the proprietary rights of
any third parties, except that a claim of infringement has been asserted
against the Company by Prima Facie, Inc. (see Item 3 - Legal Proceedings and
"Risk Factors -Legal Proceedings"). The Company has already expended
considerable resources and funds towards defending itself in this
infringement litigation and an adverse result in this litigation with Prima
Facie, Inc. could have a negative impact on the financial position and
results of operations of the Company. Further, there can be no assurance that
other third parties will not assert infringement claims against the Company
in the future with respect to current or future products. As the number of
software products in the industry increases and the functionality of these
products further overlaps, the Company believes that software developers may
become increasingly subject to infringement claims. Any such claims against
the Company, with or without merit, could result in costly litigation or
might require the Company to enter into royalty or licensing agreements. Such
royalty and licensing agreements, if required, may not be available on terms
acceptable to the Company.
13
<PAGE>
VARIABILITY OF OPERATING RESULTS. The Company's revenue and
operating results have fluctuated significantly from quarter to quarter, and
may continue to fluctuate, due to a combination of factors. These factors
include relatively long sales cycles for certain products, the timing or
cancellation of orders from major customers, the timing of new product
introductions by the Company or its competitors, the Company's use of
third-party distribution channels, the fulfillment of large one-time orders
to particular customers and general economic conditions and other factors
affecting capital spending. For example, a longer than expected sales cycle
for the CCTVware Products delayed anticipated revenue. Additionally, the
Company generally ships orders in the quarter in which such orders are
received, and accordingly, revenue in any quarter is substantially dependent
on the orders booked and shipped in that quarter. The Company has typically
recognized a substantial portion of its revenue in the last month of the
quarter, with much of this revenue concentrated in the last two weeks of the
quarter. Because the Company's operating expense levels are relatively fixed
and based, to some extent, on anticipated revenue levels, a small variation
in revenue can cause significant variations in operating results from quarter
to quarter and may result in losses. Further, the effect of software
amortization related to the Company's capitalized software development costs
at December 31, 1998 on the cost of products sold is expected to increase
from $419,400 in 1998 to approximately $500,000 in 1999. The Company will
continue to capitalize software development costs that will be amortized in
future periods. Due to all of the foregoing, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
PRODUCT OBSOLESCENCE. The Company's current products and products
under development are limited in number and concentrated primarily in the
markets for identification and surveillance products. The life cycles of the
Company's products are difficult to estimate due in large measure to changing
and developing technology as well as the unknown future effect of products
introduced by the Company's competition. Price reductions or declines in
demand for the Company's products, whether as a result of competition,
technological change or otherwise, would have a materially adverse effect on
the Company's business, operating results and financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock has experienced significant volatility, and is likely to continue to be
significantly affected by factors such as actual or anticipated fluctuations
in the Company's operating results, the Company's failure to meet or exceed
published earnings estimates, changes in earnings estimates or
recommendations by securities analysts, announcements of technological
innovations, new products or new contracts by the Company or its existing or
potential competitors, developments with respect to patents, copyrights or
proprietary rights, adoption of new accounting standards affecting the
software industry, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and
volume fluctuations that have particularly affected the market prices for the
common stock of technology companies which have often been unrelated to the
operating performance of such companies. These broad market fluctuations may
materially adversely affect the market price of the Company's common stock.
There can be no assurance that the trading price of the Company's Common
Stock will not experience substantial volatility in the future.
ITEM 7. FINANCIAL STATEMENTS
Information called for by this item is set forth in the Company's
Financial Statements contained in this report and is incorporated herein by
this reference. Specific financial statements can be found at the pages
listed in the following index.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheet at December 31, 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction E(3) to Form 10-KSB, the information
required by Item 9 of Form 10-KSB with respect to identification of directors
is incorporated by reference to the information contained in the sections
captioned "PROPOSAL NO. 1 - ELECTION OF DIRECTORS" and "COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT" in the registrant's definitive proxy
statement for the 1999 annual meeting of stockholders to be filed with the
Securities Exchange Commission (the "Commission"). Additional information is
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Edward Jankowski. 61 President, Chief Executive Officer and Chairman
of the Board of Directors
Jonathan C. Lupia.............. 47 Chief Operating Officer, Chief Financial Officer
and Secretary
Peter A. Jankowski............. 36 Chief Technical Officer
Timothy S. Whitehead......... 45 Vice President and Officer
F. James Price................... 61 Vice President and Officer
Mathiew Bais 44 Vice President Sales and Marketing
</TABLE>
Officers are appointed by and serve at the discretion of the Board
of Directors. The Company has no employment agreements with any of its
officers.
Edward Jankowski has served as Chairman of the Board of Directors
for the Company and the Company's predecessor corporations since August 1987,
as President from August 1987 to June 1993 and as Chief Executive Officer
from February 1992 to June 1993. In September 1997, upon the resignation of
Mr. M. Dean Gilliam, the Company's former President, Chief Executive Officer
and Director, Mr. Jankowski resumed the responsibilities of President and
Chief Executive Officer. In February 1998, Mr. Jankowski was appointed
President and Chief Executive Officer.
Jonathan C. Lupia joined the Company in February 1994 and assumed
the positions of Chief Financial Officer and Secretary in April 1994. In June
1998, Mr. Lupia assumed the additional position of Chief Operating Officer.
From June 1989 to February 1994, Mr. Lupia served as Vice President of
Finance and Administration at Swearingen Aircraft, Inc., a company engaged in
the design, development and manufacture of aircraft.
Peter A. Jankowski co-founded the Company's predecessor corporation
in August 1987 and served as Vice President, Research and Development from
the Company's inception to October 1992 when he was appointed Chief Technical
Officer. Mr. Jankowski began his career in August 1984 as a systems analyst
for Quadrex Computer Systems, Inc., a manufacturer of control systems for
nuclear and petroleum power plants. Mr. Jankowski performed design and
systems analysis on nuclear and petroleum power plants, created and managed a
telemarketing operation and assisted with marketing and project management
decisions. Mr. Jankowski is the son of Edward Jankowski, the Chairman of the
Board of Directors, President, Chief Executive Officer and co-founder of the
Company.
Timothy S. Whitehead joined the Company's predecessor corporation in
September 1990 as Vice President, Operations and was appointed Vice
President, Quality in January 1995, Vice President, Special Projects in
October 1995 and Vice President, Operations in January 1997. From June 1987
to September 1990, Mr. Whitehead was Manufacturing Manager for Electronic
Resources, Inc., a subsidiary of Whittaker Corporation, a manufacturer of
industrial monitoring devices.
F. James Price joined the Company in October 1994 as Manager,
Production Operations and was appointed Vice President, Operations in January
1995 and Vice President, Special Projects in January 1997. From 1979 to 1994,
Mr. Price worked for various companies involved in real estate development,
oil production, finance and computer assembly as either Chief Executive
Officer or Chief Financial Officer.
16
<PAGE>
Mathiew Bais joined the Company in October 1998 as Vice President,
Sales and Marketing. From August 1997 to October 1998, Mr. Bais was President
of IPS Standards, a company engaged in the marketing and distribution of
security related products. From August 1995 to May 1997, Mr. Bais was a
Managing Director of Ultrak, Inc., a company engaged in the marketing and
distribution of security and CCTV related products, where he was involved
with new product acquisitions and technical marketing for domestic and
international markets. From January 1989 to August 1995, Mr. Bais was
President of GPS Standards USA, a company founded by Mr. Bais and
subsequently sold to Ultrak, Inc. in August 1995, which was involved in the
manufacture and distribution of security and CCTV related products
domestically and internationally.
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to instruction E(3) to Form 10-KSB, the information
required by Item 10 of Form 10-KSB with respect to executive compensation is
incorporated by reference to the information contained in the section
captioned "EXECUTIVE COMPENSATION" in the registrant's definitive proxy
statement for the 1999 annual meeting of stockholders to be filed with the
Commission.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to instruction E(3) to Form 10-KSB, the information
required by Item 11 of Form 10-KSB with respect to security ownership of
certain beneficial owners and management is incorporated by reference to the
information contained in the section captioned "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the registrant's definitive proxy
statement for the 1999 annual meeting of stockholders to be filed with the
Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction E(3) to Form 10-KSB, the information
required by Item 12 of Form 10-KSB with respect to certain relationships and
related transactions is incorporated by reference to the information
contained in the section captioned "CERTAIN TRANSACTIONS WITH MANAGEMENT" in
the registrant's definitive proxy statement for the 1999 annual meeting of
stockholders to be filed with the Commission.
17
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS
--------
<S> <C> <C>
3.1 (1) Articles of Incorporation of Registrant, as amended to date.
3.3 (1) Bylaws of Registrant, as amended to date.
4.1 (2) Specimen Common Stock Certificate of Registrant.
4.2 (2) Warrant dated September 1, 1994 issued to Commonwealth Associates.
4.3 (2) Settlement Agreement dated August 1993 among Registrant and
Commonwealth Growth Fund, Philip L. Fischer, Laura Gordon Fisher,
Identification Systems International, Inc. and James Marx, including forms
of warrants issued by Registrant in connection therewith.
10.2 (2) Series A Preferred Stock Purchase Agreement dated December 31, 1992
among Registrant and certain investors.
10.3 (2) OEM Agreement dated March 8, 1993 between Registrant and ADT Security
Systems, Inc.
10.4 (2) Agreement dated December 1, 1993 between Registrant and Diebold
Incorporated.
10.5 (2) Distributor Agreement dated April 12, 1994 between Registrant and Polaroid
Corporation.
10.7 (2) 1992 Stock Option Plan of Registrant.
10.10 (3) 1995 Directors Option Plan
10.11 (4) Contract for Process Computer Systems dated October 16, 1995 between
Registrant and Aramco Services Company.
10.12 (5) Preferred Shares Rights Agreement between
American Stock Transfer and Trust Company dated
January 9, 1997.
23.1 Independent Auditors' Consent
24.1 Power of attorney (see page 19)
27.1 Financial data schedule for the year ended December 31, 1998
--------------------------------------------------------------------------------------
</TABLE>
(1) Incorporated by reference to Registrant's Quarterly Report on
Form 10-QSB filed with the Commission on November 11, 1994.
(2) Incorporated by reference to Registrant's Registration Statement
on Form SB-2 filed on June 9, 1994, as amended.
(3) Incorporated by reference to Registrant's definitive Proxy
Materials filed with the Commission on April 22, 1995.
(4) Incorporated by reference to the revised exhibit filed (in paper
format under cover of Form SE) with the Commission on January 9,
1997
(5) Incorporated by reference to Exhibit 1 filed in connection with
the Registrant's Form 8-A which was filed on January 13, 1997.
(b) REPORTS ON FORM 8-K
None
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LORONIX INFORMATION SYSTEMS, INC.
By: /s/ Jonathan C. Lupia
---------------------
Jonathan C. Lupia
Chief Financial Officer, Chief Operating
Officer, and Secretary
Date: March 22, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jonathan C. Lupia, jointly and
severally, his or her respective attorney-in-fact, with the power of
substitution, for each other in any and all capacities, to sign any
amendments to this Report on Form 10-KSB, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her respective substitute or substitutes, may do
or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ Edward Jankowski Date: March 22, 1999
-------------------------------
Edward Jankowski, President,
Chief Executive Officer and
Chairman of the Board
By: /s/ Jonathan C. Lupia Date: March 22, 1999
---------------------------------------
Jonathan C. Lupia, Chief Financial Officer,
Chief Operating Officer, and Secretary
By: /s/ George M. Duffy Date: March 22, 1999
---------------------------------------
George M. Duffy, Director
By: /s/ Rodney Wilger Date: March 22, 1999
---------------------------------------
C. Rodney Wilger, Director
By: /s/ Donald W. Stevens Date: March 22, 1999
-------------------------------
Donald W. Stevens, Director
By: /s/ Louis E. Colonna Date: March 22, 1999
---------------------------------------
Louis E. Colonna, Director
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheet at December 31, 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Loronix Information Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Loronix
Information Systems, Inc. and subsidiary as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Loronix Information Systems, Inc. and subsidiary as of
December 31, 1998, and the results of their operations and their cash flows
for each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 29, 1999
San Diego, California
F-2
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1998
ASSETS (NOTE 5)
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 1,625,259
Accounts receivable:
Trade, net of allowance for doubtful accounts of $433,171 (Note 2) 2,412,319
Officers and employees 17,890
Inventory 1,925,050
Prepaid expenses and other assets 158,506
Notes receivable, related parties (Note 4) 38,454
----------------
Total current assets 6,177,478
Property and equipment, net (Note 3) 4,085,080
Capitalized software costs, net of accumulated amortization of $1,278,213 954,949
Notes receivable, related parties (Note 4) 38,451
Accounts receivable - officers and employees 125,787
Deposits and other assets 36,475
----------------
Total assets $ 11,418,220
----------------
----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (Note 5) $ 80,733
Current installments of capital lease obligations (Note 9) 8,983
Accounts payable 685,085
Accrued liabilities 431,960
Accrued commissions 87,000
----------------
Total current liabilities 1,293,761
Long-term debt, excluding current installments (Note 5) 1,079,965
----------------
Total liabilities 2,373,726
----------------
Stockholders' equity (Note 7):
Preferred stock, $.001 par value. Authorized 2,000,000 shares; no shares
issued and outstanding --
Common stock, $.001 par value. Authorized 20,000,000 shares; issued and
outstanding 4,646,836 shares 4,647
Additional paid-in capital 15,199,175
Notes receivable from stockholders (Note 4) (147,883)
Accumulated deficit (6,011,445)
----------------
Total stockholders' equity 9,044,494
Commitments and contingencies (Notes 9 and 11)
----------------
Total liabilities and stockholders' equity $ 11,418,220
----------------
----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Systems, supplies and maintenance revenue (Note 2) $ 12,710,871 9,313,980
Contract revenue -- 88,650
------------------- -------------------
Total revenue 12,710,871 9,402,630
------------------- -------------------
Costs and expenses:
Cost of systems, supplies and maintenance 6,816,573 5,098,231
Contract costs -- 18,899
Operations and customer support 1,606,021 1,567,413
Selling, general and administrative 5,121,269 3,750,367
Research and development 1,381,231 1,525,827
------------------- -------------------
Total costs and expenses 14,925,094 11,960,737
------------------- -------------------
Loss from operations (2,214,223) (2,558,107)
------------------- -------------------
Other income (expense):
Interest income 142,439 154,702
Interest expense (75,453) (33,730)
Other expense (14,342) (42,391)
------------------- -------------------
52,644 78,581
------------------- -------------------
Loss before income taxes (2,161,579) (2,479,526)
Income tax expense (Note 6) (800) (32,416)
------------------- -------------------
Net loss $ (2,162,379) (2,511,942)
------------------- -------------------
------------------- -------------------
Basic and diluted net loss per share $ (0.47) (0.54)
------------------- -------------------
------------------- -------------------
Weighted-average shares outstanding 4,646,549 4,659,252
------------------- -------------------
------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
COMMON STOCK, NOTES
$.001 PAR VALUE ADDITIONAL RECEIVABLE TOTAL
-------------------------- PAID-IN FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
---------- ---------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 4,661,936 $ 4,662 15,259,432 (214,981) (1,337,124) 13,711,989
Exercise of common stock options 1,250 1 3,592 -- -- 3,593
Retirement of common stock notes
receivable from stockholders (17,000) (17) (65,662) 67,098 -- 1,419
Net loss -- -- -- -- (2,511,942) (2,511,942)
----------- ---------- ----------- -------------- ----------- ------------
Balances at December 31, 1997 4,646,186 4,646 15,197,362 (147,883) (3,849,066) 11,205,059
Exercise of common stock options 650 1 1,813 -- -- 1,814
Net loss -- -- -- -- (2,162,379) (2,162,379)
----------- ---------- ----------- -------------- ----------- ------------
Balances at December 31, 1998 4,646,836 $ 4,647 15,199,175 (147,883) (6,011,445) 9,044,494
----------- ---------- ----------- -------------- ----------- ------------
----------- ---------- ----------- -------------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,162,379) (2,511,942)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,233,989 1,068,309
Loss on disposal of capital equipment 14,538 8,575
Loss on foreign currency exchange 27,015 10,136
Provision for deferred income taxes -- 32,416
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 167,901 (1,127,030)
Increase in inventory (612,115) (934,530)
Decrease in prepaid expenses and other assets 749,941 620,780
Decrease (increase) in accounts payable (169,449) 225,775
Increase in accrued liabilities and accrued commissions 30,274 271,089
------------------ ------------------
Net cash used in operating activities (720,285) (2,336,422)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures (970,469) (766,868)
Proceeds from disposal of capital equipment 11,463 15,000
Decrease in notes receivable 58,610 80,797
Decrease (increase) in deposits and other assets 6,332 (19,495)
Capitalized software (551,462) (460,540)
------------------ ------------------
Net cash used in investing activities (1,445,526) (1,151,106)
------------------ ------------------
Cash flows from financing activities:
Proceeds from bank borrowings 500,000 --
Proceeds from facility mortgage -- 700,000
Payments on bank borrowings (8,785) --
Payments of facility mortgage (22,092) (8,425)
Payments on capital lease (13,991) --
Proceeds from exercise of stock options 1,814 3,593
------------------ ------------------
Net cash provided by financing activities 456,946 695,168
------------------ ------------------
Net decrease in cash and cash equivalents (1,708,865) (2,792,360)
Cash and cash equivalents, beginning of year 3,334,124 6,126,484
------------------ ------------------
Cash and cash equivalents, end of year $ 1,625,259 3,334,124
------------------ ------------------
------------------ ------------------
</TABLE>
F-6
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 75,453 33,730
------------------- -------------------
------------------- -------------------
Income taxes paid $ 800 800
------------------- -------------------
------------------- -------------------
</TABLE>
Noncash investing and financing activities:
In 1998, the Company transferred inventory valued at $198,113 to
property and equipment.
In 1997, 17,000 shares of common stock were retired in exchange for
forgiveness of a stockholder note receivable of $67,098.
In 1997, the Company transferred inventory valued at $416,440 to
property and equipment.
In 1997, the Company entered into a capital lease for property and
equipment in the amount of $25,085.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
(a) ORGANIZATION AND BUSINESS
Loronix Information Systems, Inc. (the Company) was incorporated
in October 1992 under the laws of the state of Nevada. The
Company was formed in connection with the reincorporation from
Colorado to Nevada of GPC, Inc. dba Loronix and Loronix
Information Systems, Inc. in October 1992, in which GPC, Inc.
merged into the Company. The Company designs, markets and sells
a family of digital identification products and digital CCTV
video management surveillance products based on the Company's
proprietary software.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly owned United Kingdom subsidiary. All
intercompany balances and transactions have been eliminated in
consolidation.
(c) REVENUE RECOGNITION
Revenue from sales of systems and supplies is generally
recorded upon shipment. A portion of this revenue may be deferred
if significant obligations are to be fulfilled in the future,
in which case such revenue is recognized when all obligations
have been fulfilled. Maintenance revenue is recognized ratably
over the term of the contracts, typically one year.
Long-term contract revenue is recognized using the
percentage-of-completion method. Earned revenue is based on the
percentage that incurred costs to date bear to total costs
after giving effect to the most recent management estimate of
total cost, and reflects the original contract price adjusted
for agreed-upon change order revenue, if any. The cumulative
impact of revisions in total cost estimates during the progress
of work is reflected in the year in which these changes become
known. Losses expected to be incurred on jobs in process are
charged to operations as soon as such losses are known.
(d) CASH EQUIVALENTS
Cash equivalents consist primarily of money market funds and other
highly rated short-term investments. For purposes of the statement
of cash flows, the Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be
cash equivalents.
(e) INVENTORY
Inventory consists primarily of finished goods and is stated at
the lower of cost, determined using the first-in, first-out (FIFO)
method, or market value.
(f) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets which range
from 3 to 30 years. Amortization of assets under capital lease is
recorded using the straight-line method based on the shorter of
the lease term or the estimated useful lives of the assets.
F-8
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(g) CAPITALIZED SOFTWARE COSTS
The Company has capitalized costs related to the development of
certain software products which are a component of the Company's
digital identification and CCTV video management surveillance
products. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, capitalization
of costs begins when technological feasibility has been
established and ends when the product is available for general
release to customers. Amortization is computed on an
individual-product basis using the straight-line method over a
three-year useful life. Amortization expense for the years ended
December 31, 1998 and 1997 was $419,474 and $297,745,
respectively.
(h) RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research and development costs are expensed in
the year incurred. In 1998 and 1997, the Company recorded
expenses, net of capitalized software costs, of $1,381,231 and
$1,525,827, respectively.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) BASIC AND DILUTED LOSS PER COMMON SHARE
The weighted average number of common shares outstanding used in
computing basic earnings per share (EPS) was 4,646,549 and
4,659,252 for the years ended December 31, 1998 and 1997,
respectively. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company.
Options and warrants totaling approximately 1,450,473 and
1,262,000 shares were excluded from the computations of net loss
per common share for the years ended December 31, 1998 and 1997,
respectively, as their effect is antidilutive.
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires that fair values be disclosed for most of
the Company's financial instruments. The carrying amounts of cash
and cash equivalents, accounts receivable, accounts payable,
accrued liabilities and accrued commissions are considered to be
representative of their respective fair values because of the
short maturity of these instruments. For the notes receivable,
related parties and notes receivable from stockholders, a
reasonable estimate of fair value is not practicable due to the
inherent difficulty of evaluating the related party relationship
and timing of payments. The carrying amount reported for long-term
debt approximates its fair value because the underlying
instruments bear interest at rates that are comparable to current
rates offered to the Company for similar debt instruments.
F-9
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(m) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related interpretations. As such, compensation
expense would be attributed on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made in 1996 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(n) COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130). SFAS 130 requires that all components of comprehensive
income (loss), including net income (loss), be reported in the
financial statements in the period in which they are recognized.
The adoption of SFAS 130 did not have an impact on the Company, as
the Company's net loss is the same as comprehensive loss for the
years ended December 31, 1998 and 1997.
(o) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period to
prepare these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(p) RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have
been reclassified to conform with the 1998 presentation.
F-10
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) BUSINESS CONCENTRATION
For the year ended December 31, 1998, the Company had sales of CCTVware
products to one customer which accounted for 38% of total revenue.
Outstanding receivables from this same customer accounted for 3% of trade
accounts receivable at December 31, 1998. For the year ended December 31,
1997, the Company had sales of CCTVware products to two customers which
accounted for 47% of total revenue.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Land $ 225,977
Building 1,212,520
Machinery and equipment and third-party software 3,946,070
Office equipment and furniture 351,510
Airplane 772,400
Automobiles 16,652
Capital lease 21,560
-----------------
6,546,689
Less accumulated depreciation and amortization (2,461,609)
-----------------
Total $ 4,085,080
-----------------
-----------------
</TABLE>
(4) NOTES RECEIVABLE, RELATED PARTIES
In November and December 1996, the Company granted to various officers,
directors and an executive, advances for the purchase of automobiles in
exchange for promissory notes in the amount of $216,312 and had an
outstanding balance of $76,905 as of December 31, 1998. In addition, the
Company has outstanding receivables of $143,677 at December 31, 1998 from
various officers, directors and employees for general advances and loans.
The Company also has notes receivable from stockholders which were
received in exchange for the issuance of common stock. These notes are
secured by the underlying common stock, accrue interest annually at rates
ranging from 5.34% to 5.78% and mature on various dates through February
2000.
(5) LONG-TERM DEBT
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
9.5% mortgage note payable to bank due in monthly installments with a
final payment of $562,055 due at maturity in 2002. The note is secured
by substantially all of the Company's assets $ 669,483
8.5% note payable to bank due in monthly installments through maturity in 2001
491,215
------------------
1,160,698
Less current portion (80,733)
------------------
Long-term debt, net of current portion $ 1,079,965
------------------
------------------
</TABLE>
F-11
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Aggregate maturities of the notes payable for the periods subsequent to
December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1999 $ 80,733
2000 88,144
2001 406,162
2002 585,659
-----------------
$ 1,160,698
-----------------
-----------------
</TABLE>
On July 31, 1997, the Company entered into a loan agreement with a
lending institution. The loan agreement includes a mortgage note, as well
as a line of credit agreement under which the Company may borrow up to
$1,000,000. Interest on amounts outstanding under the line of credit
agreement accrues at the bank's prime rate plus one point (9.5% at
December 31, 1998). At December 31, 1998, no amounts were outstanding
under the line of credit agreement. The loan agreement contains
restrictive covenants, which include restrictions on working capital,
tangible net worth, cash flow, the payment of dividends and capital
expenditures. At December 31, 1998, the Company was in violation of
certain of these covenants, however, the Company obtained a waiver as of
December 31, 1998 from the lending institution for the violations.
(6) INCOME TAXES
The current year income tax expense consists of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Current:
Federal $ -- --
State 800 --
------------------ ------------------
800 --
------------------ ------------------
Deferred:
Federal -- 25,216
State -- 7,200
------------------ ------------------
-- 32,416
------------------ ------------------
$ 800 32,416
------------------ ------------------
------------------ ------------------
</TABLE>
F-12
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Income tax expense for the years ended December 31, 1998 and 1997 differs
from the amount computed by applying the federal statutory rate of 34% as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Computed at federal statutory rate $ (734,900) (843,000)
State tax (29,900) (100,800)
Change in the valuation allowance 866,200 958,300
Nondeductible expenses 90,300 98,200
General business credits (190,900) (80,284)
------------------ -----------------
$ 800 32,416
------------------ -----------------
------------------ -----------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,663,500
Research and experimentation credits 376,300
Alternative minimum tax credits 35,000
Accounts receivable principally due to the allowance
for doubtful accounts 167,000
Inventory, principally due to the allowance for obsolescence 88,500
Other 33,500
------------------
Total gross deferred tax assets 2,363,800
Valuation allowance (1,824,700)
------------------
Net deferred tax assets 539,100
------------------
Deferred tax liabilities:
Depreciation 182,900
Software development costs 356,200
------------------
Total deferred tax liabilities 539,100
------------------
Net deferred income taxes $ --
------------------
------------------
</TABLE>
F-13
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
In 1998, the Company recognized an increase in the valuation allowance of
$866,200. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management has provided a full valuation
allowance for the net deferred tax assets as of December 31, 1998. The
Company has net operating loss carryforwards for federal tax reporting
purposes, which amounted to approximately $4,267,000 as of December 31,
1998, which begin to expire in 2008. Additionally, the Company has
research and development credits for federal tax reporting purposes
amounting to $376,300, which begin to expire in 2008, and alternative
minimum tax credits of $35,000, which have no expiration date.
(7) STOCKHOLDERS' EQUITY
On January 13, 1997, the Company announced the declaration of a dividend
distribution to occur on March 14, 1997 of one preferred share purchase
right for each outstanding share of the Company's common stock. Each
right entitles stockholders of record on March 14, 1997 to buy one share
of the Company's Series A participating preferred stock at an exercise
price of $22.00. The rights will become exercisable following the tenth
day after the announcement of acquisition of, or tender offer resulting
in, ownership of 15% or more of the Company's common stock. Prior to the
tenth day following the announcement, the Company is entitled to redeem
the rights at $0.01 per right. The rights are designed to assure that
Loronix stockholders receive fair and equal treatment in the event of any
proposed takeover of the Company and to guard against partial tender
offers and other tactics to gain control of Loronix without paying all
stockholders the fair value of their shares. The rights will expire on
March 14, 2007.
(a) COMMON STOCK WARRANTS
During 1993 and 1994, the Company issued warrants to purchase
shares of common stock. At December 31, 1998, there were 240,000
warrants outstanding at an exercise price of $8.40 per share.
Warrants are exercisable from the date of grant and expire on
August 24, 1999.
The Company determined that the relative fair market value of the
common stock warrants at issuance was immaterial; accordingly, no
value was assigned to such warrants.
(b) STOCK OPTION PLANS
In 1992, the Company established a Stock Option Plan (the Plan)
for employees and consultants. Options granted under the Plan may
be incentive stock options (ISOs) or nonstatutory stock options
(NSOs). The Plan was amended in 1996, and the maximum number of
shares of common stock which may be optioned and sold under the
Plan is 1,300,000. Options have a term of up to ten years, and
generally become exercisable over a four-year period beginning one
year from the date of grant at a price per share equal to the fair
market value on the date of grant.
In 1995, the Company adopted a Non-Employee Directors Stock Option
Plan (Directors Plan). A total of 100,000 shares of common stock
are reserved for issuance to individuals who serve as non-employee
members of the Board of Directors. Options under the Directors
Plan, which have a term of up to ten years, are exercisable at a
price per share not less than the fair market value on the date of
grant and vest over four years.
ISO and NSO option activity from 1996 through 1998 is as follows:
F-14
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
RANGE OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICES EXERCISE PRICE
------------------ -------------------- -------------------
<S> <C> <C> <C>
ISO options:
Outstanding at December 31, 1996
452,769 $ 2.13 - 6.00 $ 3.46
Granted 173,099 1.19 - 4.38 3.23
Exercised (1,250) 2.88 - 2.88 2.88
Canceled (162,275) 2.66 - 4.88 3.87
------------------
Outstanding at December 31, 1997
462,343 1.19 - 6.00 3.23
Granted 211,400 1.50 - 3.00 2.08
Exercised (650) 2.66 - 2.88 2.79
Canceled (45,125) 1.19 - 4.88 2.74
------------------
Outstanding at December 31, 1998
627,968 $ 1.50 - 6.00 $ 2.88
------------------ -------------------- -------------------
------------------ -------------------- -------------------
Exercisable at December 31, 1997 225,567 $ 2.13 - 6.00 $ 3.47
------------------ -------------------- -------------------
------------------ -------------------- -------------------
Exercisable at December 31, 1998 288,643 $ 1.88 - 6.00 $ 3.38
------------------ -------------------- -------------------
------------------ -------------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-
RANGE OF AVERAGE EXERCISE
SHARES EXERCISE PRICES PRICE
------------------ -------------------- -------------------
<S> <C> <C> <C>
NSO options:
Outstanding at December 31, 1996
437,004 $ 3.06 - 5.10 $ 4.01
Granted 238,501 3.08 - 3.88 3.57
Canceled (116,000) 4.88 - 5.10 4.94
------------------
Outstanding at December 31, 1997
559,505 3.06 - 5.10 3.63
Granted 43,000 1.50 - 2.00 1.77
Canceled (20,000) 5.10 - 5.10 5.10
------------------
Outstanding at December 31, 1998
582,505 $ 1.50 - 5.10 $ 3.44
------------------ -------------------- -------------------
------------------ -------------------- -------------------
Exercisable at December 31, 1997 367,755 $ 3.06 - 5.10 $ 3.62
------------------ -------------------- -------------------
------------------ -------------------- -------------------
Exercisable at December 31, 1998 387,505 $ 2.00 - 5.10 $ 3.52
------------------ -------------------- -------------------
------------------ -------------------- -------------------
</TABLE>
As of December 31, 1998, the range of exercise prices and
weighted-average remaining contractual lives of ISO and NSO
options outstanding was $1.50 - $6.00 and 7.3 years, and $1.50 -
$5.10 and 5.7 years, respectively. The following is a summary of
stock options outstanding at December 31, 1998:
F-15
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - 2.00 150,600 9.1 $ 1.69 3,025 $ 2.00
2.01 - 3.00 248,125 8.4 2.63 70,100 2.69
3.01 - 4.00 699,498 5.4 3.41 517,673 3.36
4.01 - 5.00 96,750 6.1 4.46 69,850 4.58
5.01 - 6.00 15,500 5.5 5.54 15,500 5.54
---------------- ----------------
1,210,473 676,148
---------------- ----------------
---------------- ----------------
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its
option plans, and accordingly, no compensation cost has been
recognized for stock options in the consolidated financial
statements. If the Company had determined compensation cost based
on the fair value at the grant date for its stock options under
SFAS No.123, the Company's net loss and net loss per share would
have been adjusted to the pro forma amounts as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Net loss $ (2,162,379) (2,654,717) (2,511,942) (3,064,846)
Net loss per share $ (.47) (.57) (.54) (.66)
</TABLE>
Pro forma net loss reflects only options granted after 1994.
Therefore, the full impact of calculating compensation cost for
stock options under SFAS No.123 is not reflected in the pro forma
net loss amounts presented above because compensation cost is
reflected over the options' vesting period of four years, and
compensation cost for options granted prior to January 1, 1995 is
not considered.
The per share weighted-average fair value of ISO and NSO stock
options granted during 1998 and 1997, at an exercise price equal
to the fair market value on the date of grant, was $1.43 and
$2.41, respectively, using the Black-Scholes option-pricing model.
The following weighted-average assumptions were used for 1998 and
1997 grants: expected dividend yield of 0%, risk-free interest
rate of 5.5%, expected life of four years, and expected volatility
of 91% and 87%, respectively.
The Company notes that the effect of applying SFAS No. 123 for
disclosing compensation cost is not representative of the effects
on reported net income (loss) for future years.
(8) OPERATING SEGMENTS
During 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes new
standards for disclosure of information about operating segments. The
Company's reportable segments include CCTVware products and ID products.
The Company has presented information for the prior year for
comparability purposes.
The Company's CCTVware products permit the digital recording and storage
of CCTV video that eliminates the need for video tapes and video cassette
recorders in surveillance environments and enables high-speed access and
retrieval of stored video. The Company's ID products can record and store
digital images in computer databases, transmit such images to other
control systems or printers,
F-16
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
and retrieve, reproduce and manipulate these images in a variety of
ways. ID products are used to provide positive identification and
verification of an individual's identity for access control, security,
retail point-of-sale and other control systems.
The Company's reportable segment financial data is as follows:
<TABLE>
<CAPTION>
PRODUCTS CCTVWARE ID TOTAL
- --------------------------------------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C>
1998:
Sales $ 10,711,412 1,999,459 12,710,871
Cost of goods sold 5,785,300 1,031,273 6,816,573
-------------------- -------------------- -------------------
Segment gross margin $ 4,926,112 968,186 5,894,298
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Segment gross margin % 45.99% 48.42% 46.37%
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Additions to capitalized software $ 518,734 32,728 551,462
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Software amortization $ 307,432 112,042 419,474
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Capitalized software $ 1,272,134 961,028 2,233,162
Accumulated amortization 468,493 809,720 1,278,213
-------------------- -------------------- -------------------
Net book value of capitalized
software costs $ 803,641 151,308 954,949
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
1997:
Sales $ 5,882,330 3,520,300 9,402,630
Cost of goods sold 3,540,339 1,576,791 5,117,130
-------------------- -------------------- -------------------
Segment gross margin $ 2,341,991 1,943,509 4,285,500
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Segment gross margin % 39.81% 55.21% 45.58%
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Additions to capitalized software $ 373,040 87,500 460,540
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Software amortization $ 161,705 136,040 297,745
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Capitalized software $ 753,400 928,300 1,681,700
Accumulated amortization 161,061 697,678 858,739
-------------------- -------------------- -------------------
Net book value of capitalized
software costs $ 592,339 230,622 822,961
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
</TABLE>
F-17
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Company's areas of operations are principally in the United States
and the United Kingdom as follows:
<TABLE>
<CAPTION>
UNITED
UNITED STATES KINGDOM TOTAL
------------------- ------------------- -------------------
<S> <C> <C> <C>
1998:
Sales $ 12,039,426 671,445 12,710,871
Cost of goods sold 6,459,838 356,735 6,816,573
------------------- ------------------- -------------------
Gross margin $ 5,579,588 314,710 5,894,298
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Gross margin % 46.34% 46.87% 46.37%
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Depreciation and amortization $ 1,192,289 41,700 1,233,989
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Capital expenditures $ 933,469 37,000 970,469
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Total assets $ 11,267,020 151,200 11,418,220
------------------- ------------------- -------------------
------------------- ------------------- -------------------
1997:
Sales $ 8,846,628 556,002 9,402,630
Cost of goods sold 4,857,530 259,600 5,117,130
------------------- ------------------- -------------------
Gross margin $ 3,989,098 296,402 4,285,500
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Gross margin % 45.09% 53.31% 45.58%
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Depreciation and amortization $ 1,024,309 44,000 1,068,309
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Capital expenditures $ 766,868 -- 766,868
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Total assets $ 13,094,828 168,000 13,262,828
------------------- ------------------- -------------------
------------------- ------------------- -------------------
</TABLE>
(9) LEASES
The Company leases various facilities, automobiles and certain equipment
under noncancelable operating leases expiring at various dates through
September 2002. It is expected that leases expiring will be renewed in
the ordinary course of business.
The Company is also obligated under a capital lease for certain office
equipment which expires in 1999. Capital equipment recorded under this
capital lease was $21,560 and had accumulated amortization of $9,882 as
of December 31, 1998. Amortization of assets held under capital lease is
included with depreciation expense.
F-18
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At December 31, 1998, future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASE LEASES
- ---------------------------------------------------------------- ----------------- ------------------
<S> <C> <C>
1999 $ 9,862 95,462
2000 -- 58,887
2001 -- 48,043
2002 -- 531
----------------- ------------------
Total minimum lease payments 9,862 $ 202,923
------------------
------------------
Less amount representing interest (879)
-----------------
Present value of obligations under capital lease 8,983
Less current portion 8,983
-----------------
Long-term capital lease obligations $ --
-----------------
-----------------
</TABLE>
Rental expense under operating leases was approximately $87,000 and
$80,000 for the years ended December 31, 1998 and 1997, respectively.
(10) RETIREMENT PLAN
The Company sponsors a 401(k) Retirement Plan which is available to
substantially all employees after three months of service. Employees may
contribute from 1% to 15% of their wages subject to limits stated in the
Internal Revenue Code. The Company may make discretionary contributions
to the plan, which vest immediately. There were no discretionary
contributions for the years ended December 31, 1998 and 1997.
(11) CONTINGENCIES
On October 17, 1997, the Company received notice that it has been named
as a defendant in a patent infringement lawsuit brought by a competitor,
Prima Facie, Inc., in the U.S. District Court for the District of
Maryland. The lawsuit alleges that the Company's CCTVware products
infringe certain claims of two patents held by Prima Facie, Inc., and
that the Company has interfered with Prima Facie, Inc.'s business
relationships. The lawsuit seeks injunctive relief against further
infringement and damages. The lawsuit also names one of the Company's
domestic distributors as a co-defendant. The Company believes the
allegations of the complaint are without merit and is defending itself
vigorously in this matter, and believes the ultimate liability will not
be material to the consolidated financial position or results of
operations of the Company.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
F-19
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
In July 1996, the Company entered into an agreement with the State of
Colorado, whereby the State would provide certain infrastructure
improvements on behalf of the Company in return for commitments from the
Company to (i) create a certain number of jobs for low to moderate income
families within two years; and (ii) retain its headquarters in La Plata
county for a minimum of five years. In the event the Company ceases
full-time operations or breaches its agreement, it could be liable for
liquidated damages. Such damages would not exceed $150,418, the amount
actually spent on infrastructure improvements by the State.
An outstanding letter of credit, principally related to improvements to
the airport facility land, amounted to approximately $28,700 at December
31, 1998. The letter of credit is collateralized by certificates of
deposit.
F-20
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Loronix Information Systems, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-93730, 333-06165 and 333-49217) on Form S-8 of Loronix Information
Systems, Inc. of our report dated January 29, 1999, relating to the
consolidated balance sheet of Loronix Information Systems, Inc. and
subsidiary as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in
the two-year period ended December 31, 1998, which report appears in the
December 31, 1998, annual report on Form 10-KSB of Loronix Information
Systems, Inc.
/s/ KPMG LLP
San Diego, California
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LORONIX
CONDENSED CONSOLIDATED BALANCE SHEET, STATEMENT OF OPERATIONS AND CASH FLOWS
FROM ITS 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,625,259<F1>
<SECURITIES> 0
<RECEIVABLES> 2,845,490
<ALLOWANCES> 433,171
<INVENTORY> 1,925,050
<CURRENT-ASSETS> 6,177,478
<PP&E> 6,546,689
<DEPRECIATION> 2,461,609
<TOTAL-ASSETS> 11,418,220
<CURRENT-LIABILITIES> 1,293,761
<BONDS> 0
0
0
<COMMON> 4,647
<OTHER-SE> 9,039,847
<TOTAL-LIABILITY-AND-EQUITY> 11,418,220
<SALES> 12,710,871
<TOTAL-REVENUES> 12,710,871
<CGS> 6,816,573
<TOTAL-COSTS> 14,925,094
<OTHER-EXPENSES> (128,097)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,453
<INCOME-PRETAX> (2,161,579)
<INCOME-TAX> 800
<INCOME-CONTINUING> (2,162,379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,162,379)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
<FN>
<F1>THE COMPANY HAS TWO OUTSTANDING LETTERS OF CREDIT COLLATERALIZED BY A
COMBINATION OF CERTIFICATES OF DEPOSIT AND CASH TOTALING APPROXIMATELY
$100,000.
</FN>
</TABLE>
