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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended December 31, 1999
[ ] 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)
NEVADA 33-0248747
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or 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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value, and Preferred Share Purchase Rights.
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(Title of class)
Indicate by check mark whether the Registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
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. [ ]
The Registrant's revenue for the fiscal year ended December 31, 1999 was
$37,477,368.
As of February 4, 2000, 5,092,500 shares of the Registrant's Common Stock
were outstanding and the aggregate market value of such Common Stock held by
non-affiliates was approximately $98,378,145 based on the closing price of
$25.13 per share on that date.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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FORWARD-LOOKING STATEMENTS
THIS REPORT ON FORM 10-KSB CONTAINS STATEMENTS THAT ARE NOT
HISTORICAL FACTS BUT ARE FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS
AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, NEW PRODUCTS AND
SIMILAR MATTERS. SUCH STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF
FORWARD-LOOKING WORDS AND PHRASES, SUCH AS "INTENDED," "EXPECTS,"
"ANTICIPATES" AND "IS (OR ARE) EXPECTED (OR ANTICIPATED)." THESE
FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED TO THOSE IDENTIFIED IN
THIS REPORT WITH AN ASTERISK (*) SYMBOL. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND THE COMPANY'S
STOCKHOLDERS SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN
THIS REPORT ON FORM 10-KSB, INCLUDING THOSE SET FORTH UNDER THE CAPTION
"CERTAIN FACTORS BEARING ON FUTURE RESULTS."
THE COMPANY MAY FROM TIME TO TIME MAKE ADDITIONAL WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND IN ITS REPORTS TO
STOCKHOLDERS. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENTS THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY.
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, with few
exceptions, uses an open architecture design approach that allows
compatibility with commercially available computer and video hardware and
software.
RECENT DEVELOPMENT
On March 5, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Comverse Technology, Inc. ("Comverse"),
a maker of special purpose computer and communications systems and software
for multimedia communications and information processing applications. On
March 7, 2000, Comverse announced a two-for-one stock split to be paid as a
stock dividend on April 3, 2000 to holders of record at the close of business
on March 27, 2000.
Under the Merger Agreement, Comverse will issue 0.1925 new common
shares (0.385 after giving effect to the stock split) for each outstanding
share of the Company's Common Stock and will assume all of the Company's
outstanding stock options. The Company has the right to terminate the
agreement if, based on the average of the daily closing prices of Comverse
Common Stock on the Nasdaq National Market for the five consecutive trading
days ending on the third trading day prior to the merger, the value of
Comverse shares to be received by Company stockholders is less than $36 per
share of Company Common Stock. If the Company exercises this right of
termination, Comverse has the right to increase the exchange ratio to adjust
the consideration to $36 per share. The Company has also granted Comverse an
option to purchase up to 19.9 percent of the Company's outstanding shares of
Common Stock (calculated after giving effect to the exercise of such option).
Comverse has also entered into voting agreements with holders of
approximately 22 percent of the outstanding shares of the Company's Common
Stock requiring them to vote in favor of the transaction.
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CCTVWARE PRODUCTS
In August of 1995, the Company began developing a new product
technology named CCTVware. This technology (i) permits digital video
recording and storage, eliminating the need for videotapes and videocassette
recorders ("VCRs") primarily in surveillance environments, and (ii) enables
high-speed access, retrieval and playback of stored video. The Company
currently markets four principal digital recording products incorporating its
CCTVware technology and began commercial shipments of certain of those
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 that alerts the user if the recorded video has been altered.
CCTVWARE VISION
The Vision product is a digital video recorder providing up to six
inputs of video and audio per unit. It records full-motion video at 30 frames
per second ("FPS") and can be implemented with existing VCR based systems or
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 recorder 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 recorder is targeted at CCTV camera
environments requiring full-motion video recording and playback without the
networking and archiving capabilities offered by the Enterprise system.
CCTVWARE M SERIES WAVELET
The M Series Wavelet product is a digital video recorder with the
capability of recording up to 32 camera inputs at up to 7.5 images per second
("IPS") simultaneously on all inputs. The recording rate for each input can
be independently configured from 0.5 to 7.5 IPS with the ability to change
IPS rates in response to alarms. With 8 camera inputs, the recording rates
can be independently configured from 0.5 to 15 IPS. The M Series Wavelet
recorder 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 Wavelet recorder, like the Vision recorder, 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). The M
Series recorder is targeted at CCTV camera environments not requiring
full-motion video recording and playback.
CCTVWARE REMOTE
The Remote product is a digital video recorder with the capability
of recording up to 16 camera inputs and streaming live video over a local
area network, wide area network or the Internet. Remote recorders can be
configured, maintained and monitored from a central site. The Remote recorder
is targeted at CCTV camera environments where remote monitoring or viewing
recorded video is desired from a central site.
CCTVWARE MOBILE
The Mobile product is a stand-alone digital recorder designed to
operate in mobile environments, such as buses, subways and rail cars. The
current product is capable of recording up to five black and white or color
camera inputs at 1 to 2 IPS and one audio input. The Company anticipates
introducing a new version of the Mobile recorder in the second quarter of
2000 capable of recording up to eight black and white or color camera inputs
at up to 7.5 IPS and one audio input.* The Mobile recorder operates on
12-volt DC power and is designed to withstand shock and vibration. It 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.
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CCTVWARE ENTERPRISE
The Enterprise system is comprised of multiple Vision and/or M
Series Wavelet 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.
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. 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 enhance or
replace customers' 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 principal ID Products are ImageSHARE,
Instant ID Plus 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. It can also be configured to operate as a stand-alone
product. 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.
INSTANT ID PLUS
The Company's mid-range ID Product, the Instant ID Plus system is
scheduled for release in March of 2000.* It is targeted primarily for use by
medium-sized businesses, institutions and government entities that require
advanced data management and networking capabilities. Instant ID Plus is the
latest in a series of products derived from Instant ID. Instant ID Plus can
be installed and configured as a single, three, five or ten user system, in a
local or wide area network configuration. Instant ID Plus allows database
connectivity to Microsoft Access, SQL Server and Oracle databases. It
requires minimal customization and may be configured to address the specific
needs of various vertical market applications. Instant ID Plus replaced the
Company's ImageSHARE Express product.
INSTANT ID
The Company's low-end ID Product, Instant ID, 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 a Microsoft
Windows compatible ink jet, laser or plastic card printer.
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MARKETING AND CUSTOMERS
The Company markets its CCTVware products domestically through a
small direct sales force, manufacturing representatives, systems integrators
and under a private label agreement with Philips Communications, Security &
Imaging, Inc. ("Philips CSI"). The Company markets its ID Products
domestically through a small direct sales force, retail stores and catalogs.
Internationally, the Company primarily markets its CCTVware products
through its wholly owned subsidiary in the United Kingdom. In August of 1999,
the Company entered into a memorandum of understanding with Philips CSI
whereby Philips CSI will sell the Loronix CCTVware products internationally
under the Philips brand name. To date the definitive agreement has not been
completed. The Company expects to complete the definitive agreement by the
end of May 2000.*
In 1999, two customers accounted for 29% and 22%, respectively, of
the Company's revenue. In 1998, one customer accounted for 38% of the
Company's revenue (see DEPENDENCE ON A MAJOR CUSTOMER under the caption
"Certain Factors Bearing on Future Results").
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 (Polaroid), and (ii) in digital-based systems, Polaroid, Data
Card Corporation, Dactek International, Inc., Imaging Technology Corporation,
G & A Imaging, Goddard Technology Corporation and Laminex, Inc., as well as
many other companies. Competitors in the surveillance market include numerous
VCR suppliers and digital video recording suppliers including, among others:
(i) Kalatel, Inc. and Prima Facie, Inc. for the Mobile product; and (ii)
Sensormatic Corporation, Primary Image, Ltd., Alpha Systems Lab, Telexis
Corporation and NICE Systems, Ltd. for the CCTVware Products other than the
Mobile product.
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
products; rather, it assembles its products 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
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invention assignment agreements with its employees and mutual non-disclosure
agreements with its manufacturing representatives, systems integrators and
Philips CSI 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 the timeliness and quality of support services. See "Legal
Proceedings" in Item 3 for information on a patent infringement lawsuit that
was settled in September 1999.
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 1999 and 1998, the Company spent, net of capitalized software
costs, $1,684,100 and $1,381,200, respectively, for research and development.
EMPLOYEES
As of January 31, 2000, the Company employed 125 persons including
four persons in part-time positions. The Company's future success depends in
significant part on the continued service of its key technical and senior
management personnel and its ability to attract and retain highly qualified
technical and managerial personnel.
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 of 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 of
1999, the Company began construction of an additional 20,000 square foot
facility adjacent to its existing facility in Durango, Colorado. The expected
completion date is in March of 2000.* The new facility is being constructed
to accommodate growth and will primarily house the Company's product
warehousing, assembly, testing and shipping operations. In October of 1998,
the Company entered into a ten-year lease, with cancellation rights at the
end of three and five years, for approximately 2,400 square feet of office
space in Basingstoke, England for its wholly-owned United Kingdom subsidiary.
In June of 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 product demonstration office. In June of 1999, the Company extended
its Las Vegas, Nevada office lease for three years. In September of 1998, the
Company entered into a one-year lease for approximately 5,000 square feet of
additional product assembly space in Durango, Colorado. Beginning in
September of 1999, this lease converted to a month-to-month lease. The
Company expects to terminate this month-to-month lease upon occupancy of the
new 20,000 square foot facility in March of 2000.*
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In July of 1997, the Company entered into a $700,000 mortgage
agreement for its original Durango-La Plata County facility secured by a
first priority deed of trust. On October 14, 1999, the Company entered into a
six month construction loan for its new 20,000 square foot facility, the
terms of which provide a credit commitment of $800,000 and 9% interest-only
payments due monthly beginning in November of 1999. Upon completion of the
facility, the Company has arranged to refinance the construction loan with a
commercial real estate loan.* The principal amount of such real estate loan
will be amortized over fifteen years with a balloon payment at the end of 5
years. Interest on amounts outstanding under the commercial real estate loan
will accrue at the bank's prime rate at the time of closing plus .75%.
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 interfered with PFI's business relationships. The claim was amended
in September of 1998 to allege infringement by the Company's other CCTVware
Products. The suit sought injunctive relief against further infringement and
damages. The lawsuit also named one of the Company's domestic dealers as a
co-defendant. On July 6, 1998, the Company filed counterclaims against PFI.
These counterclaims included a request for Declaratory Judgment of Patent
Invalidity and six other counterclaims. The Company and PFI agreed to
separate the patent infringement claims from all other claims and resolve the
patent infringement issues first.
On September 29, 1999, the Company and PFI agreed to settle their
dispute with neither party admitting any liability. Under the terms of the
settlement agreement, the Company agreed to pay to PFI a total of $900,000
over a period of one year and received a fully paid-up, royalty-free license
for itself and its distributors and customers covering all of its products
under all of PFI's patents. The Company has made payments through December
1999, under the settlement totaling $450,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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1999
First quarter $ 7.750 $ 2.313
Second quarter $ 12.438 $ 6.500
Third quarter $ 11.875 $ 7.000
Fourth quarter $ 28.000 $ 11.375
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
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As of February 4, 2000, there were approximately 82 stockholders of
record of the Company's Common Stock. The Company estimates that there are
approximately 2,650 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'S 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, 1999, COMPARED TO 1998
REVENUE
The Company's revenue is derived from sales of systems, including
embedded software, supplies and 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
195% from $12.7 million in 1998 to $37.5 million in 1999, and included
approximately $10.7 million and $35.2 million of CCTVware Product sales,
respectively. In 1999, two customers accounted for 29% and 22%, respectively,
of the Company's revenue. In 1998, one customer accounted for 38% of the
Company's revenue (see DEPENDENCE ON A MAJOR CUSTOMER under the caption
"Certain Factors Bearing on Future Results"). The Company is expanding its
customer base and does not expect that these two customers will account for
as high of a percentage of Company's revenue, if any at all, in the future.*
The Company attributes the increase in revenue from 1998 to 1999 primarily to
(i) the market's general acceptance of, and migration toward, the use of
digital CCTV recording technology versus the traditional use of analog CCTV
recording technology, and (ii) expansion of business from one of its major
customers.
COSTS AND EXPENSES
COST OF REVENUE. The cost of revenue, consisting principally of the
costs of hardware components, supplies, warranty and software amortization,
increased from $6.8 million in 1998 to $20.3 million in 1999, and represented
approximately 54% of revenue in both periods. The cost of revenue in 1998 and
1999 included approximately $230,000, or 3% of the cost of revenue, and
approximately $1.3 million, or 6% of the cost of revenue, respectively, of
warranty charges for CCTVware Products. The increase in the warranty cost of
revenue as a percentage was primarily attributable to warranty charges
associated with a retrofit program of certain of the Company's CCTVware
mobile products.
OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support
expenses increased from $1.6 million in 1998 to $2.6 million in 1999, and
represented approximately 13% and 7% of revenue, respectively. The increase,
in absolute terms, in such expenses resulted primarily from headcount and
compensation-related increases and increases in travel, supplies, postage,
telecommunications and facility expenses. The percentage decrease from 1998
to 1999 resulted from a 195% increase in revenue without a commensurate
increase in expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $5.1 million in 1998 to $9.0 million
in 1999, and represented approximately 40% and 24% of revenue, respectively.
The increase, in absolute terms, in such expenses resulted primarily from
headcount and compensation-related increases and increases in travel,
recruiting, supplies, telecommunications, product promotions, facility,
maintenance and
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depreciation expenses and an increase in bad debt expense. The percentage
decrease from 1998 to 1999 resulted from a 195% increase in revenue without a
commensurate increase in expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses, net of
capitalized software costs, increased from $1.4 million in 1998 to $1.7
million in 1999, and represented approximately 11% and 4% of revenue,
respectively. The increase in such expenses resulted primarily from headcount
and compensation-related increases and increases in recruiting, depreciation
and prototype product expenses. Further, in 1999, the Company wrote-off
approximately $42,800 of capitalized software costs associated with two
products that it no longer markets. The percentage decrease from 1998 to 1999
resulted from a 195% increase in revenue without a commensurate increase in
expenses. The Company expects to continue to fund new product development in
2000 at or above the dollar levels expended in 1999.*
PATENT LITIGATION SETTLEMENT. Patent litigation settlement expenses
of $900,000 represents the settlement costs associated with settling the
Company's lawsuit with PFI (see "Legal Proceedings" in Item 3).
INTEREST INCOME. Interest income increased from approximately
$142,400 in 1998 to approximately $181,900 in 1999. This increase was
primarily due to an increase in the average cash available for investment.
INTEREST EXPENSE. Interest expense increased from approximately
$75,500 in 1998 to approximately $112,900 in 1999 as a result of increased
bank borrowings.
OTHER INCOME/EXPENSE. Other income was approximately $7,300 in 1999
compared to other expense of approximately $14,300 in 1998. Other income
resulted primarily from gains on the disposal of capital equipment.
INCOME TAX. Income tax expense increased from $800 in 1998 to
approximately $121,200 in 1999. In 1998, the Company recognized minimal state
income tax and no benefit was recognized due to the Company's history of
losses. In 1999, the Company recognized income tax expense equal to
approximately 4% of its pretax income. The income tax percentage is less than
the statutory federal rate of 34% because of the benefit of net operating
loss carry-forwards. In the future the Company expects its U.S. tax rate to
increase significantly due to the depletion of its net operation loss
carry-forwards.*
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1998, the Company financed its
operations primarily from working capital and bank borrowings. During 1999,
the Company financed its activities primarily through cash from operations
and proceeds from the exercise of stock options. The Company's principal uses
of cash during 1998 and 1999 were (i) to fund operating activities; (ii) to
acquire property and equipment; and (iii) to invest in the development of its
software.
During 1998, the Company's cash and cash equivalents decreased from
approximately $3.3 million at December 31, 1997, to approximately $1.6
million at December 31, 1998. Net cash used in operating activities of
$714,000 consisted primarily of a net loss of $2.2 million plus non-cash
charges for depreciation and amortization of $1.2 million, an increase in
inventory of $612,100, 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 and commissions of $30,300. Net cash used in
investing activities of $1.5 million consisted primarily of $970,500 of
capital expenditures and $551,500 of software development costs offset by a
decrease in notes receivable, and proceeds from the disposal of capital
equipment of $70,100. 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 and an interest rate of 8.5%.
During 1999, the Company's cash and cash equivalents increased from
approximately $1.6 million at December 31, 1998, to approximately $3.9
million at December 31, 1999. Net cash provided by operating activities of
$2.1 million consisted primarily of net income of $2.9 million plus non-cash
charges for depreciation and
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amortization of $1.5 million, increases in accounts payable and accrued
liabilities and commissions of $4.5 million offset by increases in accounts
receivable, inventory and prepaid expenses and other assets of $6.8 million.
Net cash used in investing activities of $1.4 million consisted primarily of
$864,800 of capital expenditures and $554,400 of software development costs.
Net cash generated from financing activities of $1.6 million consisted
primarily of bank borrowing and proceeds from the exercise of stock options.
The bank borrowing consists of $232,000 of construction loans associated with
Company's new facility.
As of December 31, 1999, the Company had $9.5 million in net working
capital, including $6.7 million of trade accounts receivable and $4.1 million
in inventory. Days sales outstanding, calculated using an average accounts
receivable balance, were approximately 55 days as of December 31, 1999,
compared to 83 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.*
The Company's inventory balance at December 31, 1999 and 1998 was
$4.1 and $1.9 million, respectively. Annualized inventory turns, calculated
using an average inventory balance, were 7.5 and 3.5 as December 31, 1999 and
1998, 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 of 2000. The Company expects that it will successfully extend
the line of credit through May 2001.* The line of credit has not been used to
date. The Company anticipates capital expenditures for 2000 of approximately
$2.0 million.* Such capital expenditures include $800,000 to expand its
existing facility in Durango, Colorado by 20,000 square feet. On October 14,
1999, the Company entered into a six month construction loan for its new
20,000 square foot facility, the terms of which provide a credit commitment
of $800,000 and 9% interest-only payments due monthly beginning in November
of 1999. Upon completion of the facility, the Company has arranged to
refinance the construction loan with a commercial real estate loan.* The
principal amount of such real estate loan will be amortized over fifteen
years with a balloon payment at the end of 5 years. Interest on amounts
outstanding under the commercial real estate loan will accrue at the bank's
prime rate at the time of closing plus .75%. 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 Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which established 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. This Statement was amended by SFAS 137 which
defers the effective date to all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS 133 is effective for the Company's first quarter in
the fiscal year ending December 30, 2001 and is not expected to have a
material effect on the Company's financial position or results of operations.*
YEAR 2000 COMPLIANCE
The Company's computer systems and products successfully transitioned to
the Year 2000 with no significant problems. The Company will continue to
monitor latent problems that could surface at key dates or events in the
future. It is not anticipated that there will be any significant problems
related to these dates or events.* To date, the Company has not incurred
material costs associated with Year 2000 compliance or any disruption with
vendors or operations. Furthermore, the Company believes that any future
costs associated with Year 2000 compliance efforts will not be material.*
10
<PAGE>
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The risk factors set forth below and elsewhere in this Report on
Form 10-KSB are important factors that may affect future results and that
could cause actual results to differ materially from those projected in
forward-looking statements that may be made by the Company from time to time.
MERGER WITH COMVERSE. If the merger with Comverse (see "Recent
Development" in Item 1) is not completed for any reason, the Company may be
subject to a number of material risks, including the following: (i) being
required to pay Comverse a termination fee of $11 million; (ii) the grant of
an option to Comverse to buy up to 19.9% of the Company's Common Stock may
become exercisable; (iii) the price of the Company's Common Stock may decline
to the extent that the current market price of the Company's Common Stock
reflects a market assumption that the merger will be completed; (iv) costs
related to the merger, such as legal, accounting and financial advisor fees,
must be paid even if the merger is not completed. In addition, the Company's
customers may, in response to the announcement of the merger, delay or defer
purchasing decisions. Any delay or deferral in purchasing decisions by
customers could have a material adverse effect on the Company's business,
regardless of whether or not the merger is ultimately completed. Similarly,
the Company's current and prospective employees may experience uncertainty
about their future role with Comverse until Comverse's strategies with regard
to the Company are announced or executed. This may adversely affect the
Company's ability to attract and retain key management, marketing and
technical personnel.
Further, if the merger is terminated and the Company's Board of
Directors determines to seek another merger or business combination, there
can be no assurance that it will be able to find a partner willing to pay an
equivalent or more attractive price than that which would be paid in the
merger. Additionally, while the Merger Agreement is in effect, subject to
certain limited exceptions, the Company is prohibited from soliciting,
initiating or knowingly encouraging or entering into certain extraordinary
transactions, such as a merger, sale of assets or other business combination,
with any party other than Comverse. Furthermore, if the Merger Agreement is
terminated and Comverse exercises its option to purchase the Company's Common
Stock, the Company would not be able to account for future transactions as a
"pooling of interests."
CAPITAL REQUIREMENTS. To the extent that the Company experiences
growth generally, or the Company's CCTVware Products generate high demand, or
the Company receives extraordinarily 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
twelve 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 CCTVware Products depends in part on its ability
to maintain distribution relationships with manufacturing representatives,
systems integrators and Philips CSI and to cultivate additional systems
integrator 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.
11
<PAGE>
INTERNATIONAL SALES. The Company is seeking to expand its
international presence by entering into a definitive international sale and
distribution agreement with Philips CSI. There can be no assurance that the
Company and Philips CSI will reach such an agreement. Further, the Company
has in the past generated, and may continue to generate, sales in certain
foreign countries. 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 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 MAJOR CUSTOMERS. In 1999, sales to two customers
accounted for 29% and 22%, respectively, of the Company's revenue. These
customers are not obligated to purchase any minimum levels of the Company's
products, and although one of these customers has placed additional orders
with the Company, there can be no assurance that any further business will
arise from these customers. Any significant reduction in product sales to
these customers that cannot be replaced with new business may materially and
adversely affect the Company's business, operating results and financial
condition.
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. There can be no assurance that the Company will be successful in
developing, marketing or selling on a timely basis any 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. However, there can be no assurance that 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.
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 initially delayed anticipated revenue.
Additionally, the Company has, from time to time, shipped a large number of
orders in the quarter in which such orders are received, and accordingly,
revenue in any quarter may be substantially dependent on the orders booked
and shipped in that quarter. Further, it is not unusual for the Company to
recognize a substantial portion of its revenue in the last month 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. 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.
12
<PAGE>
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, 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
David T. Ledwell 53 President, Chief Executive Officer and Director
Jonathan C. Lupia 48 Chief Operating Officer, Chief Financial Officer and Secretary
Peter A. Jankowski 37 Chief Technical Officer and Vice President, Marketing and Sales
Timothy S. Whitehead 46 Vice President, Operations
F. James Price 62 Vice President, Special Projects
Edward Jankowski (2)(3) 62 Chairman of the Board of Directors
Louis E. Colonna (1) 66 Director
13
<PAGE>
Donald R. Price 60 Director
Don W. Stevens(1)(2)(3) 67 Director
C. Rodney Wilger(1)(2)(3) 67 Director
</TABLE>
- ----------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
Officers are appointed by and serve at the discretion of the Board
of Directors. The Company currently has no employment agreements with any of
its officers. Peter A. Jankowski, the Company's Chief Technical Officer, is
the son of Edward Jankowski, the Chairman of the Board of Directors. There
are no other family relationships between directors and executive officers of
the Company.
David T. Ledwell joined the Company in September of 1999, as
President and Chief Executive Officer replacing Mr. E. Jankowski in those
positions. Mr. Ledwell has also served as a Director of the Company since
November 1999. From March 1985 to February 1998, Mr. Ledwell served in
various executive capacities at DH Technology, Inc., a company engaged in the
development, marketing, sales and support of transaction and bar code
printers and credit card readers. From 1995 to 1998, Mr. Ledwell served as
Executive Vice President responsible for several subsidiaries and divisions
involved in transaction printers, credit card readers, related components and
service businesses. From 1990 to 1995, Mr. Ledwell served as Vice President
and General Manager responsible for the overall leadership and direction of
the company's core business divisions providing high technology printer
components and support services. In October of 1997, DH Technology, Inc. was
acquired by Axiohm Transaction Solutions, Inc.
Jonathan C. Lupia joined the Company in February of 1994 and assumed
the positions of Chief Financial Officer and Secretary in April of 1994. In
June of 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 of 1987 and served as Vice President, Research and Development from
the Company's inception to October 1992, when he was appointed Chief
Technical Officer. In July of 1999, Mr. Jankowski assumed the additional
position of Vice President, Marketing and Sales. Mr. Jankowski began his
career in August of 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 and
co-founder of the Company.
Timothy S. Whitehead joined the Company's predecessor corporation in
September of 1990 as Vice President, Operations and was appointed Vice
President, Quality in January of 1995, Vice President, Special Projects in
October of 1995 and Vice President, Operations in January of 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 of 1994 as Manager,
Production Operations and was appointed Vice President, Operations in January
of 1995 and Vice President, Special Projects in January of 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.
Edward Jankowski has served as Chairman of the Board of Directors of
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 M.
Dean Gilliam, the
14
<PAGE>
Company's former President and Chief Executive Officer, Mr. Jankowski assumed
the responsibilities of President and Chief Executive Officer, and in
February 1998, the Board of Directors appointed Mr. Jankowski President and
Chief Executive Officer. Mr. Jankowski resigned from his position as
President and Chief Executive Officer in September of 1999, but retained his
title as Chairman of the Board of Directors.
Louis E. Colonna has served as a Director of the Company since May
1997. Since January 1979, Mr. Colonna has served as Chief Executive Officer
and Director of Tess-Com, Inc., a privately owned company founded by Mr.
Colonna, which designs and manufactures process and control instrumentation
and sampling systems for the various process related industries. Prior to
founding Tess-Com, Inc., Mr. Colonna worked for 19 years in various
management positions with Beckman Instruments, Inc.
Donald R. Price has served as a Director of the Company since
November 1999. From February 1970 to present, Mr. Price has been a partner in
the law firm of Sikora and Price where he has been a principal practicing
business law.
Don W. Stevens has served as a Director of the Company since April
1994. From September 1987 until his retirement in January 1991, Mr. Stevens
served as a division manager of the Process Division of Milton Roy
Corporation, a company which provides industrial instrumentation systems to
various industries.
C. Rodney Wilger has served as a Director of the Company since
October 1992. Mr. Wilger is the Chairman and Chief Executive Officer of the
Wilger Company, which owns various businesses involved in photo processing,
manufacturing and distribution of men's and women's sportswear and
accessories, men's wear retailing, and real estate investment and development.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned in each of the
last three years by the Company's Chief Executive Officer and each executive
officer who earned in excess of $100,000 in the fiscal year ended December
31, 1999 (collectively the "Named Executive Officers"):
[The remainder of this page has bee left blank intentionally]
15
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
----------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- ------------------------------------ ---------- --------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Edward Jankowski(2) ............... 1999 $182,800 $111,313 20,000 $ 58,823
Chairman of the Board of 1998 $157,594 $ 6,900 20,000 $ 44,988
Directors and former 1997 $131,000 -- 140,000 $ 41,425
Chief Executive Officer
David T. Ledwell(2) ............... 1999 $ 51,808 -- 60,000 $ 8,455
Chief Executive Officer and 1998 -- -- -- --
President 1997 -- -- -- --
Peter Jankowski ................... 1999 $123,253 $ 82,614 22,500 $ 27,492
Chief Technology Officer 1998 $106,292 $ 9,865 18,000 $ 12,215
1997 $ 89,192 -- 39,500 $ 11,192
Jonathan Lupia .................... 1999 $120,145 $ 74,751 5,000 $ 14,342
Chief Financial Officer, Chief 1998 $107,567 $ 4,140 40,000 $ 14,160
Operating Officer and Secretary 1997 $ 83,290 -- 37,000 $ 13,300
Timothy S. Whitehead .............. 1999 $104,575 $ 44,625 5,000 $ 13,519
Vice President, Operations 1998 $ 94,570 $ 2,760 5,000 $ 13,289
1997 $ 77,140 -- 10,000 $ 12,515
F. James Price .................... 1999 $ 76,000 $ 44,625 10,000 $ 17,076
Vice President, Special 1998 $ 68,000 $ 2,760 -- $ 12,356
Projects 1997 $ 67,926 -- 2,000 $ 12,464
</TABLE>
- ----------------------
(1) Includes: (a) health insurance premiums of $1,232 for Mr. Ledwell in 1999
and $4,618, $4,864 and $4,921 for Mr. E. Jankowski, $4,618, $4,864 and
$5,240 for Mr. P. Jankowski, $4,618, $4,864 and $5,240 for Mr. Lupia,
$4,618, $4,864 and $5,240 for Mr. Whitehead and $4,618, $4,864 and $4,921
for Mr. Price in 1997, 1998 and 1999, respectively; (b) life insurance
premiums of $17,310, $17,310 and $17,391 for Mr. E. Jankowski, $590, $732
and $767 for Mr. P. Jankowski, $1,097, $1,261 and $1,543 for Mr. Lupia,
$699, $857 and $919 for Mr. Whitehead and $457, $465 and $470 for Mr. Price
in 1997, 1998 and 1999, respectively; (c) medical reimbursements of $1,981,
$2,677 and $5,451 for Mr. E. Jankowski, $359, $322 and $7,928 for Mr. P.
Jankowski, $1,960, $2,064 and $1,253 for Mr. Lupia, $1,573, $1,943 and
$1,735 for Whitehead and $1,764, $1,402 and $3,556 for Mr. Price in 1997,
1998 and 1999, respectively; (d) automobile reimbursements of $15,953,
$5,625, $5,625, $5,625 and $5,625 for Messrs E. Jankowski, P. Jankowski,
Lupia, Whitehead and Price, respectively, in each of 1997, 1998 and 1999;
(e) aircraft usage of $1,563 for Mr. E. Jankowski in 1997, $4,184, $672 and
$526 for Messrs. E. Jankowski, P. Jankowski and Lupia, respectively, in
1998 and $15,107, $7,932, $681 and $2,504 for Messrs. E. Jankowski, P.
Jankowski, Lupia and Price, respectively, in 1999; and (f) relocation costs
of $7,223 for Mr. Ledwell in 1999.
(2) Mr. Ledwell joined the Company in September of 1999, as President and Chief
Executive Officer replacing Mr. E. Jankowski in those positions. Mr. E
Jankowski remains an employee of the Company along with his service on as
the Chairman of the Board of Directors.
16
<PAGE>
The table below provides the specified information concerning grants
of options to purchase the Company's Common Stock made during the fiscal year
ended December 31, 1999 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS EXERCISE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE EXPIRATION
NAME GRANTED(#)(1) IN 1999 ($/SHARE) DATE
- ----------------------------------- -------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Edward Jankowski .................. 20,000 6.5% $ 2.44 01/04/2009
David T. Ledwell .................. 60,000 19.4% $ 9.81 09/07/2009
Peter A. Jankowski ................ 22,500 7.3% $ 2.44 01/04/2009
Jonathan C. Lupia ................. 5,000 1.6% $ 2.44 01/04/2009
Timothy S. Whitehead............... 5,000 1.6% $ 2.44 01/04/2009
F. James Price .................... 10,000 3.2% $ 2.44 01/04/2009
</TABLE>
- ----------------------
(1) The Company granted options to purchase a total of 309,050 shares of
Common Stock during the fiscal year ended December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth, for each of the Named Executive
Officers, the options exercised during the fiscal year ended December 31,
1999 and the year-end value of unexercised options as of December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AT FY-END(#): OPTIONS AT FY-END($)(2):
ON EXERCISE REALIZED
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward Jankowski ......... 147,999 $ 904,304 10,000 140,000 $ 177,800 $2,314,807
David T. Ledwell ......... -- -- -- 60,000 -- $ 596,400
Peter A. Jankowski ....... -- -- 126,750 32,500 $2,110,409 $ 563,486
Jonathan C. Lupia ........ -- -- 85,500 34,500 $1,447,393 $ 611,618
Timothy S. Whitehead...... 30,000 $ 625,546 38,750 13,250 $ 638,738 $ 227,743
F. James Price ........... -- -- 48,750 13,750 $ 794,983 $ 236,153
</TABLE>
- ----------------------
(1) Market value of underlying securities on date of exercise, minus the
exercise or base price.
(2) Represents the Nasdaq National Market closing price for the Company's
Common Stock of $19.75 per share on December 31, 1999 minus the
exercise price of the options multiplied by the number of shares
subject to the option. All of the options listed above were issued at
exercise prices ranging from $1.50 to $9.81.
17
<PAGE>
DIRECTOR COMPENSATION
Directors do not typically receive any cash compensation for their
services as members of the Board of Directors, although they are reimbursed
for their expenses in attending out-of-town meetings. In November 1999, the
Board of Directors authorized a one-time payment of $49,500 to George Duffy,
upon his resignation as a Company Director, in recognition of his long-time
standing as a Director and his valuable contributions over the years. The
Company's Director Option Plan (the "Director Plan") was approved by the
Board of Directors in March 1995 and by the stockholders in May 1995. A total
of 100,000 shares have been reserved for issuance thereunder. Under the
Director Option Plan as currently in effect, a non-employee Chairman of the
Board automatically receives options for 10,000 shares of the Company's
Common Stock upon such individual's reelection to the Board of Directors, and
each non-employee director automatically receives options for 5,000 shares of
the Company's Common Stock upon each such individual's reelection to the
Board of Directors. On May 24, 1999, Messrs. Colonna, Duffy, Stevens and
Wilger each received options for 5,000 shares of the Company's Common Stock,
all such options having an exercise price of $10.63 per share.
EMPLOYMENT AGREEMENTS
The Company plans to enter into Employment Agreements with Messrs.
Ledwell, P. Jankowski and Lupia in connection with the Company's Merger
Agreement with Comverse (see "Recent Development" in Item 1). Under the terms
of the Merger Agreement, such Employment Agreements must be entered into
prior to the merger's closing date. The terms of such Employment Agreements
are under negotiation. The Company has no other Employment Agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 15, 2000 (except as
noted) certain information with respect to the beneficial ownership of the
Company's Common Stock by (i) each director of the Company, (ii) each of the
Named Executive Officers, (iii) each beneficial owner of more than 5% of the
Company's outstanding Common Stock and (iv) all directors, executive officers
and 5% holders as a group. Except as indicated in the footnotes to this
table, the persons and entities named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES OF COMMON STOCK PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(2) OWNERSHIP
<S> <C> <C>
Comverse Technology, Inc. ................................ 2,168,481(3) 35.14%
170 Crossways Park Drive
Woodbury, New York 11797
Edward Jankowski(1) ...................................... 760,133(4) 14.69%
David T. Ledwell(1) ...................................... 2,000 *
Peter A. Jankowski(1) .................................... 338,866(4) 6.42%
Jonathan C. Lupia(1) ..................................... 107,000(4) 2.04%
Timothy S. Whitehead(1) .................................. 71,414(4) 1.37%
F. James Price(1) ........................................ 79,200(4) 1.52%
C. Rodney Wilger(1) ...................................... 126,068(4)(5) 2.43%
Donald W. Stevens(1) ..................................... 27,800(4) *
Louis E. Colonna(1) ...................................... 3,750(4) *
18
<PAGE>
Donald R. Price(1) ....................................... -- --
All directors, executive officers and 5% stockholders as a 2,558,731(4) 39.00%
group (11 persons)
</TABLE>
- ------------------------
* Less than 1%.
(1) The address for Mssrs. E. Jankowski, Ledwell, P. Jankowski, Lupia,
Whitehead, F.J. Price, Wilger, Stevens, Colonna and D. Price is c/o
Loronix Information Systems, Inc., 820 Airport Road, Durango, Colorado
81301.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable
within 60 days of March 15, 2000 are deemed to be beneficially owned by
the person holding such option or warrant for computing the percentage
ownership of such person, but are not treated as outstanding for
computing the percentage of any other person.
(3) Includes the following: (i) 1,020,000 shares of the Common Stock of the
Company that Comverse has the option to purchase upon the happening of
specific events, none of which has occurred as of March 15, 2000,
pursuant to a Stock Option Agreement dated March 5, 2000; (ii)
1,125,981 shares of Common Stock owned by officers and directors of the
Company with whom Comverse has entered into voting agreements (strictly
in their capacities as stockholders and not as directors or officers of
the Company); and (iii) 22,500 shares of Common Stock owned by Comverse
and purchased in the open market. Pursuant to the Voting Agreements
referred to in clause (ii) above, Comverse may be deemed to have shared
voting power with respect to the shares to which the Voting Agreements
pertain. Each stockholder has agreed to vote or cause to be voted all
shares of Common Stock held of record or beneficially owned by him
(whether currently owned or thereafter acquired) in favor of the merger
with Comverse and the adoption of the Merger Agreement, and not to
sell, transfer, pledge, encumber, assign or otherwise dispose of any of
his shares of Common Stock. Nothing contained herein shall be deemed to
be an admission by Comverse as to the beneficial ownership of any
Common Stock (other than the 22,500 shares referred to in clause (iii)
above), and Comverse disclaims beneficial ownership of the shares
referred to in clauses (i) and (ii) above. Pursuant to Rule 13d-3 under
the Securities Exchange Act of 1934, the shares referred to in clause
(i) above are also deemed to be outstanding for the purpose of
computing the percentage of Comverse's beneficial ownership of the
Common Stock. See "Recent Development" in Item 1 for further
information with respect to the transactions contemplated by the Merger
Agreement, upon consummation of which Comverse would gain control of
the Company.
(4) Includes the following numbers of shares which are exercisable within
60 days of March 15, 2000: for Mr. E. Jankowski, 25,000; for Mr. P.
Jankowski, 131,250; for Mr. Lupia, 90,000; for Mr. Whitehead, 43,250;
for Mr. F.J. Price, 54,500; for Mr. Wilger, 37,500; for Mr. Stevens,
5,000; for Mr. Colonna, 3,750; and for all directors and executive
officers, 390,250.
(5) Includes 36,476 and 45,592 shares of Common Stock owned of record by
Serendipity, Inc. and the Wilger Profit Sharing Fund, respectively,
both of which are under the control of Mr. Wilger.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has from time to time made non-interest bearing loans to
certain of its officers and directors. As of December 31, 1999, the
outstanding amounts of such loans were: Mr. E. Jankowski (Director),
$102,878; Mr. P. Jankowski (Chief Technical Officer and Vice President of
Marketing and Sales), $69,000; Mr. Lupia (Chief Financial Officer, Chief
Operating Officer and Secretary), $7,000, and Mr. F.J. Price (Vice
President), $5,993. These loans have no stated maturity date. In January
2000, Messrs. E. Jankowski, Lupia and F.J. Price paid down their loans by
$20,000, $7,000 and $5,052, respectively.
19
<PAGE>
The Company also has notes receivable in an aggregate amount of
$97,875 from Mr. Lupia 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 of 4.0% and 5.34% each, and mature on December 31,
2000.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
3.1 (1) Articles of Incorporation of Registrant, as amended to date.
3.3 (2) Bylaws of Registrant, as amended to date.
4.1 (3) Specimen Common Stock Certificate of Registrant.
10.1 (4) 1992 Stock Option Plan of Registrant.
10.2 (5) 1995 Directors Option Plan of the Registrant.
10.3 (6) Preferred Shares Rights Agreement between American Stock Transfer and Trust and the Company dated
January 9, 1997.
10.4 (7) 1999 Non-Statutory Stock Option Plan of Registrant.
10.5 (8) Agreement and Plan of Merger between Comverse Technology, Inc. and the Company dated March 5, 2000.
10.6 (9) Stock Option Agreement between Comverse Technology, Inc. and the Company dated March 5, 2000.
10.7 (10) Form of Voting Agreement with the Loronix Stockholders
10.8 Amendment to Preferred Shares Rights Agreement, dated March 5, 2000.
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
24.1 Power of attorney (see page 22)
27.1 Financial data schedule for the year ended December 31, 1999
</TABLE>
------------------------------------------------------------
(1) Incorporated by reference to Exhibit 3.1 to
Registrant's Quarterly Report on Form 10-QSB filed on
November 11, 1994.
(2) Incorporated by reference to Exhibit 3.2 to
Registrant's Quarterly Report on Form 10-QSB filed on
November 11, 1994.
(3) Incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form SB-2
filed on June 9, 1994, as amended.
(4) Incorporated by reference to Exhibit 10.7 to
Registrant's Registration Statement on Form SB-2
filed on June 9, 1994, as amended.
(5) Incorporated by reference to the Registrant's
definitive Proxy Materials filed on April 22, 1995.
(6) Incorporated by reference to Exhibit 1 filed in
connection with the Registrant's Form 8-A which was
filed on January 13, 1997.
(7) Incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-8 filed
on April 22, 1995.
(8) Incorporated by reference to Exhibit 3 to Comverse
Technology, Inc.'s Schedule 13D filed on March 14,
2000.
(9) Incorporated by reference to Exhibit 1 filed to
Comverse Technology, Inc.'s Schedule 13D filed on
March 14, 2000.
(10) Incorporated by reference to Exhibit 2 filed to
Comverse Technology, Inc.'s Schedule 13D filed on
March 14, 2000.
20
<PAGE>
(b) Reports on Form 8-K
None
[The remainder of this page has been left blank intentionally]
21
<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 28, 2000
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.
<TABLE>
<S> <C>
By: /s/ David T. Ledwell Date: March 28, 2000
---------------------------------------
David T. Ledwell, President and
Chief Executive Officer
By: /s/ Jonathan C. Lupia Date: March 28, 2000
---------------------------------------
Jonathan C. Lupia, Chief Financial Officer,
Chief Operating Officer, and Secretary
By: /s/ Edward Jankowski Date: March 28, 2000
---------------------------------------
Edward Jankowski, Chairman of the Board
By: /s/ Donald R. Price Date: March 28, 2000
---------------------------------------
Donald R. Price, Director
By: /s/ Rodney Wilger Date: March 28, 2000
---------------------------------------
C. Rodney Wilger, Director
By: /s/ Donald W. Stevens Date: March 28, 2000
---------------------------------------
Donald W. Stevens, Director
By: /s/ Louis E. Colonna Date: March 28, 2000
---------------------------------------
Louis E. Colonna, Director
</TABLE>
22
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheet at December 31, 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<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, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period then ended. 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, 1999, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
San Diego, California
January 28, 2000,
except as to Note 12, which is
as of March 5, 2000
F-2
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1999
ASSETS (NOTE 5)
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 3,897,429
Accounts receivable:
Trade, net of allowance for doubtful accounts of $627,946 (note 2) 6,720,693
Officers and employees 125,497
Inventory 4,075,502
Prepaid expenses and other assets 306,017
Notes receivable, related parties (note 4) 107,454
------------
Total current assets 15,232,592
Property and equipment, net (note 3) 4,204,172
Capitalized software costs, net of accumulated amortization of $1,747,713 916,414
Accounts receivable - officers and employees 5,121
Deposits and other assets 22,296
------------
Total assets $ 20,380,595
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 5) $ 83,248
Accounts payable 2,472,196
Customer deposits 605,862
Litigation settlement payable 450,000
Accrued liabilities 590,469
Accrued warranty 487,600
Accrued bonuses 432,000
Accrued commissions 633,000
------------
Total current liabilities 5,754,375
Long-term debt, excluding current installments (note 5) 1,224,984
------------
Total liabilities 6,979,359
------------
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 5,075,038 shares 5,075
Additional paid-in capital 16,619,769
Notes receivable from stockholder (note 4) (97,875)
Accumulated deficit (3,125,733)
------------
Total stockholders' equity 13,401,236
Commitments and contingencies (notes 9 and 11)
------------
Total liabilities and stockholders' equity $ 20,380,595
============
</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, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
------------ ------------
Systems and supplies revenue (note 2) $ 37,477,368 12,710,871
------------ ------------
Costs and expenses:
Cost of systems, supplies and maintenance 20,301,441 6,816,573
Operations and customer support 2,644,985 1,606,021
Selling, general and administrative 9,016,276 5,121,269
Research and development 1,684,100 1,381,231
Patent litigation settlement 900,000 --
------------ ------------
Total costs and expenses 34,546,802 14,925,094
------------ ------------
Income (loss) from operations 2,930,566 (2,214,223)
------------ ------------
Other income (expense):
Interest income 181,918 142,439
Interest expense (112,913) (75,453)
Other income (expense), net 7,333 (14,342)
------------ ------------
Other income 76,338 52,644
------------ ------------
Income (loss) before income taxes 3,006,904 (2,161,579)
Income tax expense (note 6) (121,192) (800)
------------ ------------
Net income (loss) $ 2,885,712 (2,162,379)
============ ============
Basic net income (loss) per share $ 0.59 (0.47)
============ ============
Weighted-average shares outstanding - basic 4,859,359 4,646,549
============ ============
Diluted net income (loss) per share $ 0.52 (0.47)
============ ============
Weighted-average shares outstanding - diluted 5,515,647 4,646,549
============ ============
</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, 1999 and 1998
<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, 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
Exercise of common stock options
(note 7) 406,148 406 1,374,343 -- -- 1,374,749
Net exercise of common stock
warrant (note 7) 22,054 22 (22) -- -- --
Payment on note receivable from
stockholder -- -- -- 50,008 -- 50,008
Tax benefit related to stock
options -- -- 46,273 -- -- 46,273
Net income -- -- -- -- 2,885,712 2,885,712
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 5,075,038 $ 5,075 16,619,769 (97,875) (3,125,733) 13,401,236
=========== =========== =========== =========== =========== ===========
</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, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,885,712 (2,162,379)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,495,962 1,233,989
Loss on disposal of capital equipment and software 36,175 14,538
Loss on foreign currency exchange 4,898 27,015
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (4,295,315) 167,901
Increase in inventory (2,405,776) (612,115)
(Increase) decrease in prepaid expenses and other assets (114,838) 749,941
Decrease in deposits and other assets 14,179 6,332
Increase (decrease) in accounts payable 1,787,111 (169,449)
Increase in accrued liabilities and other accruals 2,693,571 30,274
----------- -----------
Net cash provided by (used in) operating activities 2,101,679 (713,953)
----------- -----------
Cash flows from investing activities:
Capital expenditures (864,771) (970,469)
Proceeds from disposal of capital equipment 56,889 11,463
(Increase) decrease in notes receivable (30,549) 58,610
Capitalized software (554,386) (551,462)
----------- -----------
Net cash used in investing activities (1,392,817) (1,451,858)
----------- -----------
Cash flows from financing activities:
Proceeds from bank borrowings 231,988 500,000
Payments on bank borrowings (84,454) (30,877)
Payments on capital lease (8,983) (13,991)
Repayments of borrowings by stockholder 50,008 --
Proceeds from exercise of stock options 1,374,749 1,814
----------- -----------
Net cash provided by financing activities 1,563,308 456,946
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,272,170 (1,708,865)
Cash and cash equivalents, beginning of year 1,625,259 3,334,124
----------- -----------
Cash and cash equivalents, end of year $ 3,897,429 1,625,259
=========== ===========
Supplemental cash flow information:
Interest paid $ 112,913 75,453
=========== ===========
Income taxes paid $ 88,592 800
=========== ===========
Noncash activities:
In 1999, the Company transferred inventory valued at $255,325 to property
and equipment.
In 1998, the Company transferred inventory valued at $198,113 to property
and equipment.
In 1999, the Company recognized a $46,273 tax benefit related to
stock options.
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(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.
(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 computer related components and
finished goods and is stated at the lower of cost or market value.
Cost is determined by the average cost method which approximates
the first-in, first-out (FIFO) method.
(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.
(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,
F-7 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
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 greater of the straight-line
method over a three-year useful life or the ratio that current
product revenue bears to the total of actual and anticipated
revenue for the product. Amortization expense for the years ended
December 31, 1999 and 1998 was $550,127 and $419,474,
respectively.
(h) RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research and development costs are expensed in
the year incurred. In 1999 and 1998, the Company recorded
expenses, net of capitalized software costs, of $1,684,100 and
$1,381,231, 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 4,859,359 and
4,646,549 for the years ended December 31, 1999 and 1998,
respectively. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company.
Options totaling approximately 27,250 shares and options and
warrants totaling approximately 1,450,473 shares were excluded
from the diluted net income (loss) calculation for the years ended
December 31, 1999 and 1998, 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, and
accrued liabilities 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-8 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(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 income (loss) is the same as comprehensive
income (loss) for the years ended December 31, 1999 and 1998,
respectively.
(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 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation.
F-9 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(2) BUSINESS CONCENTRATION
For the year ended December 31, 1999, the Company had sales of CCTVware
products to two customers which accounted for 29% and 22% of total
revenue, respectively. Outstanding receivables from these same customers
accounted for 15% and 1% of trade accounts receivable at December 31,
1999, respectively. For the year ended December 31, 1998, the Company had
sales of CCTVware products to one customer which accounted for 38% of
total revenue.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1999:
<TABLE>
<S> <C>
Land $ 225,977
Building 1,217,720
Machinery and equipment and third-party software 4,721,644
Office equipment and furniture 378,952
Airplane 772,400
Automobiles 16,652
Construction in progress 231,987
------------
7,565,332
Less accumulated depreciation and amortization (3,361,160)
------------
Total $ 4,204,172
============
</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. The promissory notes had an outstanding
balance of $38,454 as of December 31, 1999. In addition, the Company has
outstanding receivables of $199,618 at December 31, 1999 from various
officers, directors and employees for general advances and loans.
The Company also has two notes receivable from a stockholder which were
received in exchange for the issuance of common stock. These notes are
secured by the underlying common stock, accrue interest annually at 4.00%
and 5.34% and mature on December 31, 2000.
F-10 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(5) LONG-TERM DEBT
Long-term debt at December 31, 1999 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 $ 645,182
8.5% note payable to bank due in monthly installments through
maturity in 2001. The note is secured by the Company's
airplane 431,062
9% construction note payable that matures April 14, 2000. Interest-only
payments are due in monthly installments. The note is
collateralized with (i) a first deed of trust or mortgage to the
property together with all water, well, ditch and reservoir rights,
(ii) an assignment of all leases, rents, issues and profits, and
(iii) a first security lien on all fixtures, water and sewer taps,
and all other real or personal property, both tangible and
intangible, located at or to be located at property 231,988
---------------------
1,308,232
Less current portion (83,248)
---------------------
Long-term debt, net of current portion $ 1,224,984
=====================
</TABLE>
Aggregate maturities of the notes payable for the periods subsequent to
December 31, 1999 consist of the following:
<TABLE>
<S> <C>
Year ending December 31:
2000 $ 83,248
2001 406,640
2002 33,660
2003 36,817
2004 40,271
Thereafter 707,596
----------
$1,308,232
==========
</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, 1999). At December 31, 1999, 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.
F-11 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
On October 14, 1999, the Company entered into a restated loan agreement
which replaces all prior loan agreements between the lending institution
and the Company. This restated loan agreement includes a six-month
construction loan for its new 20,000 square-foot facility, the terms of
which provide a credit commitment of $800,000 and 9% interest-only
payments due monthly beginning November 1999. Upon completion of the
facility, the Company will convert the construction loan and the mortgage
note payable into a commercial real estate loan, with monthly principal
and interest payments due using a 15-year amortization schedule and a
balloon payment at the end of 5 years. Interest on amounts outstanding
under the commercial real estate loan will accrue at the bank's prime
rate at the time of closing plus 0.75%. The restated loan agreement
contains restrictive covenants, which include restrictions on working
capital, tangible net worth, cash flow, the payment of dividends and
capital expenditures.
(6) INCOME TAXES
The current year income tax expense (benefit) consists of the following
at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current:
Federal $ 170,492 --
State 7,400 800
--------- ---------
177,892 800
--------- ---------
Deferred:
Federal (49,300) --
State (7,400) --
--------- ---------
(56,700) --
--------- ---------
$ 121,192 800
========= =========
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1999 and
1998 differs from the amount computed by applying the federal statutory
rate of 34% as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computed at federal statutory rate $ 1,054,300 (734,900)
State tax 112,300 (29,900)
Change in the valuation allowance (1,180,800) 866,200
Nondeductible expenses, net 135,392 90,300
General business credits -- (190,900)
----------- -----------
$ 121,192 800
=========== ===========
</TABLE>
F-12 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
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, 1999 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 645,100
Research and experimentation credits 425,200
Alternative minimum tax credits 83,800
Accounts receivable principally due to the allowance for doubtful
accounts 241,100
Inventory 95,900
Other - accrued expenses 531,500
-------------------
Total gross deferred tax assets 2,022,600
Valuation allowance (1,451,800)
-------------------
Net deferred tax assets 570,800
-------------------
Deferred tax liabilities:
Depreciation 248,800
Software development costs 322,000
-------------------
Total deferred tax liabilities 570,800
-------------------
Net deferred income taxes $ -
===================
</TABLE>
In 1999, the Company recognized a decrease in the valuation allowance of
$372,900. Based upon the level of historical taxable income and
projections for future taxable income including tax deductions related to
stock options 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, 1999. The Company has net
operating loss carryforwards for federal tax reporting purposes, which
amounted to approximately $1,633,000 as of December 31, 1999, which begin
to expire in 2012. Additionally, the Company has research and development
credits for federal tax reporting purposes amounting to $425,200, which
begin to expire in 2006, and alternative minimum tax credits of $83,800,
which have no expiration date.
The tax benefits associated with the exercise of nonqualified stock
options and the disqualifying disposition of stock acquired with
incentive stock options reduced federal taxes payable by $46,300 in 1999.
Such benefits were recorded as an increase to additional paid-in capital.
(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. 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
F-13 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
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. On August 16, 1999, the warrants were
exercised through a cashless exercise.
(b) STOCK OPTION PLANS
In 1992, the Company established a Stock Option Plan (the 1992
Plan) for employees and consultants. Options granted under the
1992 Plan may be incentive stock options (ISOs) or nonstatutory
stock options (NSOs). The 1992 Plan was amended in 1996, and the
maximum number of shares of common stock which may be optioned and
sold under the 1992 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.
In 1999, the Company adopted a Non-Statutory Stock Option Plan
(the 1999 Plan). A total of 200,000 shares of common stock are
reserved for issuance to employees and consultants. Options under
the 1999 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.
F-14 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
ISO and NSO option activity from 1997 through 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF EXERCISE EXERCISE
SHARES PRICES PRICE
-------------------- ------------------- -------------------
<S> <C> <C> <C>
ISO options:
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
Granted 167,424 2.44 - 11.69 5.38
Exercised (138,643) 1.69 - 4.88 3.15
Canceled (78,425) 1.75 - 9.94 3.01
--------------------
Outstanding at December 31, 1999 578,324 1.50 - 11.69 3.52
==================== =================== ===================
Exercisable at December 31, 1998 288,643 $ 1.88 - 6.00 3.38
==================== =================== ===================
Exercisable at December 31, 1999 263,649 $ 1.50 - 6.00 3.16
==================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF EXERCISE EXERCISE
SHARES PRICES PRICE
-------------------- ------------------- -------------------
<S> <C> <C> <C>
NSO options:
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
Granted 161,626 2.44 - 26.25 8.84
Exercised (267,505) 1.50 - 5.10 3.51
Canceled (13,500) 2.75 - 10.63 6.34
--------------------
Outstanding at December 31, 1999 463,126 1.50 - 26.25 5.23
==================== =================== ===================
Exercisable at December 31, 1998 387,505 $ 2.00 - 5.10 3.52
==================== =================== ===================
Exercisable at December 31, 1999 158,750 $ 2.75 - 4.88 3.48
==================== =================== ===================
</TABLE>
F-15 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
As of December 31, 1999, the range of exercise prices and
weighted-average remaining contractual lives of ISO and NSO
options outstanding was $1.50 - $11.69 and 7.2 years, and $1.50 -
$26.25 and 6.9 years, respectively. The following is a summary of
stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 - 5.00 847,700 6.5 $ 3.06 414,899 $ 3.23
5.01 - 10.00 165,500 9.4 8.89 7,500 6.00
10.01 - 15.00 21,750 9.4 11.12 - -
15.01 - 20.00 1,500 9.8 16.99 - -
20.01 - 25.00 1,750 9.9 22.90 - -
25.01 - 30.00 3,250 9.8 25.39 - -
---------------- ---------------- ---------------- ----------------
1,041,450 7.0 4.28 422,399
================ ================ ================ ================
</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>
1999 1998
------------------------------------- ------------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 2,885,712 2,500,085 (2,162,379) (2,654,717)
Basic net income (loss) per
share .59 .51 (.47) (.57)
Diluted net income (loss) per
share .52 .45 (.47) (.57)
================= ================= ================== ===============
</TABLE>
Pro forma net loss reflects only options granted after 1995.
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, 1996 is
not considered.
The per share weighted-average fair value of ISO and NSO stock
options granted during 1999 and 1998, at an exercise price equal
to the fair market value on the date of grant, was $5.05 and
$1.43, respectively, using the Black-Scholes option-pricing model.
The following weighted-average
F-16 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
assumptions were used for 1999 and 1998 grants: expected dividend
yield of 0%, risk-free interest rate of 5.5%, expected life of
four years, and expected volatility of 93% and 91%, 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'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, 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.
F-17 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
The Company's reportable segment financial data is as follows:
<TABLE>
<CAPTION>
PRODUCTS CCTVWARE ID TOTAL
- ----------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
1999:
Sales $35,252,582 2,224,786 37,477,368
Cost of goods sold 19,022,457 1,278,984 20,301,441
----------- ----------- -----------
Segment gross margin $16,230,125 945,802 17,175,927
=========== =========== ===========
Segment gross margin % 46.04% 42.51% 45.83%
=========== =========== ===========
Additions to capitalized software $ 509,426 44,960 554,386
=========== =========== ===========
Write-off of capitalized software $ 123,422 -- 123,422
=========== =========== ===========
Software amortization $ 456,431 93,696 550,127
=========== =========== ===========
Loss on write-off of capitalized software $ 42,794 -- 42,794
=========== =========== ===========
Capitalized software $ 1,658,138 1,005,988 2,664,126
Accumulated amortization 844,295 903,417 1,747,712
----------- ----------- -----------
Net book value of capitalized
software costs $ 813,843 102,571 916,414
=========== =========== ===========
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
=========== =========== ===========
</TABLE>
F-18 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
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>
1999:
Sales $36,329,024 1,148,344 37,477,368
Cost of goods sold 19,605,268 696,173 20,301,441
----------- ----------- -----------
Gross margin $16,723,756 452,171 17,175,927
=========== =========== ===========
Gross margin % 46.03% 39.38% 45.83%
=========== =========== ===========
Depreciation and amortization $ 1,433,072 62,890 1,495,962
=========== =========== ===========
Capital expenditures $ 801,571 63,200 864,771
=========== =========== ===========
Total assets $19,748,807 631,788 20,380,595
=========== =========== ===========
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 $10,822,469 595,751 11,418,220
=========== =========== ===========
</TABLE>
F-19 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(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.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
YEARS ENDING DECEMBER 31 LEASES
--------------------------------------------------- ------------------
<S> <C>
2000 $ 87,738
2001 76,712
2002 14,867
------------------
Total minimum lease payments $ 179,317
==================
</TABLE>
Rental expense under operating leases was approximately $136,000 and
$87,000 for the years ended December 31, 1999 and 1998, 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, 1999 and 1998.
(11) CONTINGENCIES
The Company is involved in various 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.
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.
On September 29, 1999, the Company settled their patent infringement
lawsuit with Prima Facie, Inc. ("PFI"), with neither party admitting any
liability. Under the terms of the settlement agreement, the Company
agreed to pay to PFI a total of $900,000 over a period of one year and
received a fully paid, royalty-free license for itself and its
distributors and customers covering all of its products under all of
PFI's patents. The Company has made payments through December 1999
totaling $450,000.
F-20 (Continued)
<PAGE>
LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(12) SUBSEQUENT EVENT
On March 5, 2000, the Company entered into an Agreement and Plan of
Merger with Comverse Technology Inc. (Comverse), a maker of software
systems that provide services over wireless communications systems. Under
the principal terms of the agreement, Comverse will issue 0.1925 new
common share for each outstanding share of the Company's common stock and
will convert all of the Company's outstanding stock options into Comverse
options based upon the same ratio. The Company has the right to terminate
the agreement if the value of Comverse shares to be received by Company
stockholders is less than $36 per share of Company common stock, provided
that Comverse retains the right to increase the exchange ratio to adjust
the consideration to $36 per share. In addition, as part of the
agreement, the Company has granted Comverse an option to purchase up to
19.9% of the Company's outstanding shares of common stock. If certain
events occur and the merger is not completed, the option may become
exercisable and the Company may be required to pay Comverse an $11
million termination fee.
F-21
<PAGE>
Exhibit 10.8
AMENDMENT NO. 1 TO PREFERRED SHARES RIGHTS AGREEMENT
AMENDMENT NO. 1 TO PREFERRED SHARES RIGHTS AGREEMENT (this
"Amendment"), dated as of March 5, 2000, to the Preferred Shares Rights
Agreement (the "Rights Agreement"), dated as of January 9, 1997, between
Loronix Information Systems, Inc., a Nevada corporation (the "Company"), and
American Stock Transfer & Trust Company, (the "Rights Agent").
W I T N E S S E T H
WHEREAS, concurrently with the execution hereof, the Company has
entered into an Agreement and Plan of Merger among Converse Technology, Inc.
("PARENT"), a New York corporation, Comverse Acquisition Corp., a Nevada
corporation, and the Company (the "Merger Agreement") and a Stock Option
Agreement with parent; and
WHEREAS, the Board of Directors of the Company has approved,
authorized and adopted the Merger Agreement and the transactions contemplated
thereby and, subject to certain conditions, is bound to recommend the
shareholders of the Company the approval and adoption of the Merger
Agreement; and
WHEREAS, the Board of Directors of the Company has determined that
in connection with the Merger Agreement and the transactions contemplated
thereby, it is desirable and in the best interests of the shareholders of the
Company to amend the Rights Agreement as set forth herein; and
WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company
and the Rights Agent desire to amend the Rights Agreement as set forth herein;
NOW, THEREFORE, the Rights Agreement is amended as follows:
SECTION 1. AMENDMENT.
(a) The following subsection (e) is hereby added to Section 3 of the
Rights Agreement in its appropriate position:
(e) Notwithstanding any other provisions of this Agreement to
the contrary, (i) no Distribution Date, Shares Acquisition Date or
Triggering Event shall be deemed to have occurred, (ii) neither Parent
nor any of its Subsidiaries (collectively, the "ACQUISITION GROUP")
shall be deemed to have become an Acquiring Person and (iii) no holder
of Rights shall be entitled to any rights or benefits pursuant to
Sections 7(a), 11(a) or any other provision of this Agreement, in each
case by reason of (x) the approval, execution, delivery and performance
of that certain Agreement and Plan of Merger, dated as of the date
hereof, among Converse Technology, Inc., a New York corporation
("Parent"), Comverse Acquisition Corp., a Nevada corporation, and the
Company (the "MERGER AGREEMENT") by the parties thereto or that certain
Stock Option Agreement, dated as of the date hereof, between the
Company and Parent by the parties thereto, (y) the approval of the
Merger Agreement by the shareholders of the Company or (z) the
consummation of the transactions contemplated by the Merger Agreement
or the Stock Option Agreement; PROVIDED that in the event that one or
more members of the Acquisition Group collectively become the
Beneficial Owner of 15% or more of the Common Shares then outstanding
in any manner other than as set forth in the Merger Agreement or the
Stock Option Agreement, the provisions of this sentence (other than
this proviso) shall terminate immediately prior thereto.
(b) Section 1(r) of the Rights Agreement is hereby deleted in its
entirety and replaced with the following:
(r) "EXPIRATION DATE" shall mean the earliest to occur of: (i)
the Close of Busines on the Final Expiration Date, (ii) the Redemption
Date, (iii) consummation of any transaction contemplated by Section
13(f) hereof, (iv) the time at which the Board of Directors orders the
exchange of the Rights as provided in
23
<PAGE>
Section 24 hereof, or (v) immediately prior to the Effective Time as
such term is defined in that certain Agreement and Plan of Merger,
dated as of March 5, 2000, by and among Comverse technology, Inc., a
New York corporation, Comverse Acquisition Corp., a Nevada corporation,
and the Company.
SECTION 3. EFFECTIVENESS. This Amendment shall be deemed effective
as of the date first set forth above. Except as amended hereby, the Rights
Agreement shall remain in full force and effect and shall be otherwise
unaffected hereby.
SECTION 4. MISCELLANEOUS. This Amendment shall be deemed to be a
contract made under the laws of the State of Nevada and for all purposes
shall be governed by and construed in accordance with the laws of such state
applicable to contracts to be made and performed entirely within such state.
This Amendment may be executed in any number of counterparts, each of such
counterparts shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute one and the same instrument. If any
term, provision, covenant or restriction of this Amendment is held by a court
of competent jurisdiction or other authority to be invalid, illegal, or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Amendment shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
[The remainder of this page has been left blank intentionally.]
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
LORONIX INFORMATION SYSTEMS, INC.
By:
---------------------------------------
Name:
Title:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:
---------------------------------------
Name:
Title:
25
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Loronix Information Systems, Limited (U.K.)
26
<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, 333-49217 and 333-87399) on Form S-8 of Loronix
Information Systems, Inc. of our report dated January 28, 2000, relating to
the consolidated balance sheet of Loronix Information Systems, Inc. and
subsidiary as of December 31, 1999, 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, 1999, which report appears in the
December 31, 1999, annual report on Form 10-KSB of Loronix Information
Systems, Inc.
/s/ KPMG LLP
San Diego, California
March 27, 2000
27
<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, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,897,429
<SECURITIES> 0
<RECEIVABLES> 7,348,639
<ALLOWANCES> 627,946
<INVENTORY> 4,075,502
<CURRENT-ASSETS> 15,232,592
<PP&E> 7,565,332
<DEPRECIATION> 3,361,160
<TOTAL-ASSETS> 20,380,595
<CURRENT-LIABILITIES> 5,754,375
<BONDS> 0
0
0
<COMMON> 5,075
<OTHER-SE> 13,396,161
<TOTAL-LIABILITY-AND-EQUITY> 20,380,595
<SALES> 37,477,368
<TOTAL-REVENUES> 37,477,368
<CGS> 20,301,441
<TOTAL-COSTS> 34,546,802
<OTHER-EXPENSES> (189,251)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,913
<INCOME-PRETAX> 3,006,904
<INCOME-TAX> 121,192
<INCOME-CONTINUING> 2,885,712
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,885,712
<EPS-BASIC> .59
<EPS-DILUTED> .52
</TABLE>
