-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HL0ek9yWhvy93p0B/JbaEIXt3dN8lKv5QqucIS1+NRXLLiBqiSMeyX78vCw++t+l gW7sBnPjKyf3z0Mor5XRhw== 0000912057-00-014386.txt : 20000411 0000912057-00-014386.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014386 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LORONIX INFORMATION SYSTEMS INC CENTRAL INDEX KEY: 0000925538 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330248747 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24738 FILM NUMBER: 582914 BUSINESS ADDRESS: STREET 1: 820 AIRPORT RD CITY: DURANGO STATE: CO ZIP: 81301 BUSINESS PHONE: 9702596161 MAIL ADDRESS: STREET 1: 820 AIRPORT RD CITY: DURANGO STATE: CO ZIP: 81301 10KSB 1 FORM 10-KSB 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. --------------------------------- (Name of Registrant as specified in its charter) NEVADA 33-0248747 ------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 820 Airport Road, Durango, CO 81301 ----------------------------- ----- (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. ------------------------------------------------------------------- (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. 1 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. 2 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. 3 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. 4 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 5 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.* 6 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:
High Low ---- --- 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
7 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 8 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 9 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 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 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 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.
Page No. 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
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
NAME AGE POSITION WITH THE COMPANY 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 Donald R. Price 60 Director Don W. Stevens(1)(2)(3) 67 Director C. Rodney Wilger(1)(2)(3) 67 Director
- ---------------- (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 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 $100,000 in the fiscal year ended December 31, 1999 (collectively the "Named Executive Officers"): [The remainder of this page has bee left blank intentionally] 15
LONG-TERM COMPENSATION AWARDS ---------------- ANNUAL COMPENSATION SECURITIES ALL OTHER ------------------------------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1) - ------------------------------------ ---------- --------- -------- ---------------- ------------ 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
- ---------------------- (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 $7,223 for Mr. Ledwell in 1999. (2) Mr. Ledwell joined the Company in September of 1999, as President and Chief Executive Officer replacing Mr. E. Jankowski in those positions. Mr. E Jankowski remains an employee of the Company along with his service on as the Chairman of the Board of Directors. 16 The table below provides the specified information concerning grants of options to purchase the Company's Common Stock made during the fiscal year ended December 31, 1999 to each of the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS EXERCISE UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE EXPIRATION NAME GRANTED(#)(1) IN 1999 ($/SHARE) DATE - ----------------------------------- -------------------- ------------------------ --------- ---------- 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
- ---------------------- (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:
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 - -------------------------- ----------- ---------- ----------- ------------- ----------- ------------- 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
- ---------------------- (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 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.
APPROXIMATE SHARES OF COMMON STOCK PERCENTAGE NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(2) OWNERSHIP 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 Donald R. Price(1) ....................................... -- -- All directors, executive officers and 5% stockholders as a 2,558,731(4) 39.00% group (11 persons)
- ------------------------ * 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 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 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
------------------------------------------------------------ (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 (b) Reports on Form 8-K None [The remainder of this page has been left blank intentionally] 21 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. 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
22 LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued INDEX TO FINANCIAL STATEMENTS 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
F-1 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 LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY Consolidated Balance Sheet December 31, 1999 ASSETS (NOTE 5) 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 ============
See accompanying notes to consolidated financial statements. F-3 LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 1999 and 1998 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 ============ ============
See accompanying notes to consolidated financial statements. F-4 LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended December 31, 1999 and 1998
COMMON STOCK, NOTES $.001 PAR VALUE ADDITIONAL RECEIVABLE TOTAL --------------------------- PAID-IN FROM ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY ----------- ----------- ----------- ------------ ----------- ------------- 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 =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 1999 and 1998
1999 1998 ----------- ----------- 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.
See accompanying notes to consolidated financial statements. F-6 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) 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) 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) 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: 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 ============
(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) 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: 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 =====================
Aggregate maturities of the notes payable for the periods subsequent to December 31, 1999 consist of the following: 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 ==========
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) 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:
1999 1998 --------- --------- Current: Federal $ 170,492 -- State 7,400 800 --------- --------- 177,892 800 --------- --------- Deferred: Federal (49,300) -- State (7,400) -- --------- --------- (56,700) -- --------- --------- $ 121,192 800 ========= =========
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:
1999 1998 ----------- ----------- 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 =========== ===========
F-12 (Continued) 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: 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 $ - ===================
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) 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) 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:
WEIGHTED-AVERAGE RANGE OF EXERCISE EXERCISE SHARES PRICES PRICE -------------------- ------------------- ------------------- 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 ==================== =================== ===================
WEIGHTED-AVERAGE RANGE OF EXERCISE EXERCISE SHARES PRICES PRICE -------------------- ------------------- ------------------- 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 ==================== =================== ===================
F-15 (Continued) 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:
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 --------------- ---------------- ---------------- ---------------- ---------------- ---------------- $ 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 ================ ================ ================ ================
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:
1999 1998 ------------------------------------- ------------------------------------ AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------------- ----------------- ------------------ --------------- 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) ================= ================= ================== ===============
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) 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) LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 The Company's reportable segment financial data is as follows:
PRODUCTS CCTVWARE ID TOTAL - ----------------------------------------------- ----------- ----------- ----------- 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 =========== =========== ===========
F-18 (Continued) 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:
UNITED UNITED STATES KINGDOM TOTAL ----------- ----------- ----------- 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 =========== =========== ===========
F-19 (Continued) 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:
OPERATING YEARS ENDING DECEMBER 31 LEASES --------------------------------------------------- ------------------ 2000 $ 87,738 2001 76,712 2002 14,867 ------------------ Total minimum lease payments $ 179,317 ==================
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) 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 EX-10.8 2 EXHIBIT 10.8 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 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 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 EX-21.1 3 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Loronix Information Systems, Limited (U.K.) 26 EX-23.1 4 EXHIBIT 23.1 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 EX-27.1 5 EXHIBIT 27.1
5 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 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,897,429 0 7,348,639 627,946 4,075,502 15,232,592 7,565,332 3,361,160 20,380,595 5,754,375 0 0 0 5,075 13,396,161 20,380,595 37,477,368 37,477,368 20,301,441 34,546,802 (189,251) 0 112,913 3,006,904 121,192 2,885,712 0 0 0 2,885,712 .59 .52
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