-----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, Ruth2F8/zbYAOzA5/mLFdRe6jU9ECiZVeMzbU9ppBnR5fC/vy6fb90MRkRcFLkbB acKxKIQi4rqt+1HsQ6vQ9Q== 0000912057-00-021688.txt : 20000505 0000912057-00-021688.hdr.sgml : 20000505 ACCESSION NUMBER: 0000912057-00-021688 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000504 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-24738 FILM NUMBER: 618940 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 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2000 or [ ] Transition Report under section 13 or 15(d) of the Securities Exchange Act for the transition period from ________ to ________. Commission file number: 0-24738 LORONIX INFORMATION SYSTEMS, INC. (Exact name of small business issuer as specified in its charter) NEVADA 33-0248747 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 820 AIRPORT ROAD, DURANGO, COLORADO 81301 (Address of principal executive offices) ISSUER'S TELEPHONE NUMBER: (970) 259-6161 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of April 20, 2000, there were 5,153,175 shares of the issuer's common stock outstanding. LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY INDEX
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Unaudited Consolidated Balance Sheet 1 as of March 31, 2000 Unaudited Consolidated Statements 2 of Operations for the three months ended March 31, 2000 and 1999 Unaudited Consolidated Statements of 3 Cash Flows for the three months ended March 31, 2000 and 1999 Notes to Unaudited Consolidated Financial 4 Statements Item 2. Management's Discussion and Analysis of 7 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES. 14
PART I - FINANCIAL INFORMATION LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET March 31, 2000
ASSETS (unaudited) ------------ Current assets: Cash and cash equivalents $ 5,179,562 Accounts receivable: Trade, net of allowance for doubtful accounts of $707,946 5,394,605 Officers and employees 101,547 Inventory, net 4,409,567 Prepaid expenses and other assets 564,245 Notes receivable, related parties 97,840 ------------ Total current assets 15,747,366 Property and equipment, net 4,516,750 Capitalized software costs, net of accumulated amortization of $1,880,454 892,981 Accounts receivable - officers and employees 4,675 Deposits and other assets 21,532 ------------ Total assets $ 21,183,304 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 80,733 Accounts payable 2,875,313 Litigation settlement payable 300,000 Customer deposits 1,243,249 Accrued liabilities 624,011 Accrued warranty 487,562 Accrued bonuses and commissions 533,034 ------------ Total current liabilities 6,143,902 Long-term debt, excluding current installments 1,522,420 Long-term accrued liabilities 51,243 ------------ Total liabilities 7,717,565 ------------ Stockholders' equity: 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 5,151,400 shares 5,152 Additional paid-in capital 16,883,097 Notes receivable from stockholders (97,875) Accumulated deficit (3,324,635) ------------ Total stockholders' equity 13,465,739 ------------ Total liabilities and stockholders' equity $ 21,183,304 ============
See accompanying notes to consolidated financial statements 1 LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 2000 and 1999
2000 1999 ----------- ----------- (unaudited) (unaudited) ----------- ----------- Systems and supplies revenue $ 7,186,697 $ 7,390,036 ----------- ----------- Costs and expenses: Cost of systems, supplies and maintenance 3,766,754 4,003,867 Operations 329,582 227,667 Marketing, sales and customer support 2,179,003 1,314,046 General and administrative 720,581 875,275 Research and development 417,521 382,908 ----------- ----------- Total cost and expenses 7,413,441 6,803,763 (Loss) income from operations (226,744) 586,273 Other income (expense): Interest income 57,439 31,396 Interest expense (32,952) (29,847) Other income (expense) 9,797 (667) ----------- ----------- 34,284 882 (Loss) income before income taxes (192,460) 587,155 Income tax expense (6,442) (32,000) ----------- ----------- Net (loss) income $ (198,902) $ 555,155 =========== =========== Basic net (loss) income per share $ (0.04) $ 0.12 =========== =========== Weighted-average shares outstanding - basic 5,116,968 4,734,279 =========== =========== Diluted net (loss) income per share $ (0.04) $ 0.11 =========== =========== Weighted-average shares outstanding - diluted 5,116,968 5,008,413 =========== ===========
See accompanying notes to consolidated financial statements 2 LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months ended March 31, 2000 and 1999
2000 1999 ----------- ----------- (unaudited) (unaudited) ----------- ----------- Cash flows from operating activities: Net (loss) income $ (198,902) $ 555,155 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 414,445 336,635 Loss (gain) on disposal of capital equipment and software 8,788 (4,570) Loss on foreign currency exchange 2,081 833 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable, net 1,350,484 (1,862,862) Increase in inventory, net (461,958) (121,855) (Increase) decrease in prepaid expenses and other assets (258,228) 8,948 Decrease in deposits and other assets 764 12,043 Increase in accounts payable and litigation settlement payable 253,117 1,541,092 Increase in customer deposits 637,387 373,819 (Decrease) increase in accrued liabilities, warranty, bonuses and commissions (447,219) 320,751 ----------- ----------- Net cash provided by operating activities 1,300,759 1,159,989 ----------- ----------- Cash flows from investing activities: Capital expenditures (480,016) (123,064) Proceeds from disposal of capital equipment 2,758 9,454 Decrease in notes receivable, related parties 9,614 9,613 Capitalized software costs (109,309) (101,640) ----------- ----------- Net cash used in investing activities (576,953) (205,637) ----------- ----------- Cash flows from financing activities: Proceeds on bank borrowings 316,143 -- Principal payments on notes payable (21,221) (24,020) Payments on capital lease -- (2,695) Proceeds from exercise of stock options 263,405 519,679 ----------- ----------- Net cash provided by financing activities: 558,327 492,964 ----------- ----------- Net increase in cash 1,282,133 1,447,316 Cash and cash equivalents, beginning of year 3,897,429 1,625,259 ----------- ----------- Cash and cash equivalents, end of March $ 5,179,562 $ 3,072,575 =========== =========== Supplemental cash flow information: Interest paid $ 32,952 $ 29,847 =========== =========== Income taxes paid $ 6,442 $ 32,000 =========== =========== Noncash investing activities: In 2000 the Company transferred inventory valued at $127,893 to property and equipment In 1999 the Company transferred inventory valued at $41,932 to property and equipment
See accompanying notes to consolidated financial statements 3 LORONIX INFORMATION SYTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (March 31, 2000 - unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the Form 10-KSB for the year ended December 31, 1999 of Loronix Information Systems, Inc. (the "Company"). The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. NOTE 2: EARNINGS PER SHARE The Company presents net income and net loss per share in accordance with SFAS No. 128, "Earnings per Share." As required by SFAS No. 128, the Company must present basic and diluted net income and net loss per share as defined. Basic net income and net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed to incorporate the incremental dilutive shares issuable upon the assumed exercise of stock options. All prior period net income and net loss per common share information are presented in accordance with SFAS No. 128. Stock options to purchase a total of 930,763 common shares outstanding at March 31, 2000 were not included in computing the diluted net loss per share because the effect would have been antidilutive. Stock options and warrants to purchase a total of 1,417,974 common shares were outstanding at March 31, 1999. For the three months ended March 31, 1999, 274,134 shares, representing the dilutive effect of stock options, were included in computing the diluted net income per share. Warrants totaling 240,000 shares were not included in computing the diluted net income per share at March 31, 1999 because the effect would have been antidilutive. 4 NOTE 3: SEGMENT INFORMATION The Company has identified two primary segments: digital video recording products ("CCTVware-Registered Trademark- Products") and digital identification products ("ID Products") in accordance with SFAS No. 131. Segments were determined based upon internal management reporting and organization structure and the availability of financial results.
Three Months Ended March 31 Products CCTVware ID Total -------- ---------- ---------- ---------- 2000: Systems and supplies revenue $6,541,384 $ 645,313 $7,186,697 Cost of systems, supplies and maintenance 3,527,189 239,565 3,766,754 ---------- ---------- ---------- Segment gross margin $3,014,195 $ 405,748 $3,419,943 ========== ========== ========== Segment gross margin % 46.08% 62.88% 47.59% ========== ========== ========== Additions to capitalized software $ 95,935 $ 13,374 $ 109,309 ========== ========== ========== Software amortization $ 109,547 $ 23,195 $ 132,742 ========== ========== ========== Capitalized software $1,754,073 $1,019,362 $2,773,435 Accumulated amortization 953,842 926,612 1,880,454 ---------- ---------- ---------- Net book value of capitalized software costs $ 800,231 $ 92,750 $ 892,981 ========== ========== ========== 1999: Systems and supplies revenue $6,800,515 $ 589,521 $7,390,036 Cost of systems, supplies and maintenance 3,701,174 302,693 4,003,867 ---------- ---------- ---------- Segment gross margin $3,099,341 $ 286,828 $3,386,169 ========== ========== ========== Segment gross margin % 45.58% 48.65% 45.82% ========== ========== ========== Additions to capitalized software $ 92,862 $ 8,778 $ 101,640 ========== ========== ========== Software amortization $ 98,693 $ 23,186 $ 121,879 ========== ========== ========== Capitalized software $1,364,995 $ 969,807 $2,334,802 Accumulated amortization 567,185 832,907 1,400,092 ---------- ---------- ---------- Net book value of capitalized software costs $ 797,810 $ 136,900 $ 934,710 ========== ========== ==========
For the three months ended March 31, 2000, revenue from one customer of the Company's CCTVware segment represented 33% of the Company's consolidated revenue. For the three months ended March 31, 1999, revenue from three customers of the Company's CCTVware segment represented 71% of the Company's consolidated revenue. (continued) 5 The Company's areas of operations are principally in the United States and the United Kingdom as follows:
Three Months Ended March 31 United United States Kingdom Total ------------- ----------- ----------- 2000: Systems and supplies revenue $ 5,957,980 $ 1,228,717 $ 7,186,697 Cost of systems, supplies and maintenance 3,190,152 576,602 3,766,754 ----------- ----------- ----------- Gross margin $ 2,767,828 $ 652,115 $ 3,419,943 =========== =========== =========== Gross margin % 46.46% 53.07% 47.59% =========== =========== =========== Depreciation and amortization $ 401,807 $ 12,638 $ 414,445 =========== =========== =========== Capital expenditures $ 441,917 $ 38,099 $ 480,016 =========== =========== =========== Total assets $20,238,447 $ 944,857 $21,183,304 =========== =========== =========== 1999: Systems and supplies revenue $ 7,077,143 $ 312,893 $ 7,390,036 Cost of systems, supplies and maintenance 3,781,605 222,262 4,003,867 ----------- ----------- ----------- Gross margin $ 3,295,538 $ 90,631 $ 3,386,169 =========== =========== =========== Gross margin % 46.57% 28.97% 45.82% =========== =========== =========== Depreciation and amortization $ 323,665 $ 12,970 $ 336,635 =========== =========== =========== Capital expenditures $ 2,697 $ 120,367 $ 123,064 =========== =========== =========== Total assets $14,099,507 $ 602,496 $14,702,003 =========== =========== ===========
NOTE 4: MERGER WITH COMVERSE TECHNOLGY INC. On March 5, 2000, the Company entered into an Agreement and Plan of Merger with Comverse Technology Inc. (Comverse), a maker of special purpose computer and communications systems and software for multimedia communications and information processing applications. Under the principal terms of the agreement, Comverse will issue 0.385 new common shares 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 (calculated after giving effect to the exercise of such option). 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. 6 FORWARD-LOOKING STATEMENTS THIS REPORT ON FORM 10-QSB 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-QSB, 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Under the Merger Agreement, Comverse will issue 0.385 new common shares 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 which shall be calculated after giving effect to the exercise of such option (the "Stock 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 (together with the Stock Option and Merger Agreement, the "Merger Documents"). In connection with the Merger Agreement, the Company also amended its Preferred Shares Rights Agreement (the "Rights Agreement") on March 5, 2000 to specifically exclude the Merger Documents from triggering any provision of the Rights Agreement. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes related thereto included herein. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 REVENUE The Company's revenue is derived from sales of systems and supplies and from maintenance services. Historically, systems and supplies have accounted for greater than 90% of total revenue, with systems accounting for a substantial majority of total revenue. Revenue decreased from $7,390,000 in the first quarter of 1999 to $7,186,700 in the first quarter of 2000, representing a 3% decrease. Revenue of $7,186,700 for the first quarter of 7 2000 does not include the shipment of approximately $4.1 million in sales value of product in conformance with the Company's revenue recognition policies. Revenue in the first quarter of 1999 and 2000 included approximately $6,801,000, or 92% of total revenue, and approximately $ 6,541,400, or 91% of total revenue, respectively, of CCTVware Products. For the three months ended March 31, 2000, sales to one customer accounted for 33% of the Company's revenue. COSTS AND EXPENSES COST OF REVENUE. The cost of revenue, consisting principally of the costs of hardware components and supplies as well as warranty costs and software amortization, decreased from $4,003,900 in the first quarter of 1999 to $3,766,800 in the first quarter of 2000, and represented 54% and 52% of revenue, respectively. OPERATIONS. Operations expenses increased from approximately $227,700 in the first quarter of 1999 to approximately $329,600 in the first quarter of 2000, and represented 3% and 5% of revenue, respectively. The increase, in absolute terms, in such expenses resulted primarily from headcount and compensation-related increases and increases in supplies, postage and telecommunications expenses. The percentage increase from the first quarter of 1999 to the first quarter of 2000 resulted from the combination of increased expenses and a 3% decrease in revenue. MARKETING, SALES AND CUSTOMER SUPPORT. Marketing, sales and customer support expenses increased from approximately $1,314,000 in the first quarter of 1999 to $2,179,000 in the first quarter of 2000, and represented 18% and 30% 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 and depreciation expenses. The percentage increase from the first quarter of 1999 to the first quarter of 2000 resulted from the combination of increased expenses and a 3% decrease in revenue. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased from approximately $875,300 in the first quarter of 1999 to $720,600 in the first quarter of 2000, and represented 12% and 10% of revenue, respectively. The decrease, in absolute terms, in such expenses resulted primarily from decreases in legal fees and depreciation expense offset somewhat by, primarily, headcount and compensation-related increases. The reduction in legal fees is the result of settling the Company's legal dispute with Prima Facie, Inc. in the third quarter of 1999. The percentage decrease from the first quarter of 1999 to the first quarter of 2000 resulted from the decrease in expenses without a commensurate decrease in revenue. RESEARCH AND DEVELOPMENT. Research and development expenses, net of capitalized software costs, increased from approximately $382,900 in the first quarter of 1999 to approximately $417,500 in the first quarter of 2000, and represented 5% and 6% of revenue, respectively. The increase, in absolute terms, in such expenses resulted primarily from increases in travel, supplies and depreciation expenses offset to some extent by, primarily, headcount and compensation-related decreases. The percentage increase from the first quarter of 1999 to the first quarter of 2000 resulted from the combination of increased expenses and a 3% decrease in revenue. INTEREST INCOME. Interest income increased from approximately $31,400 in the first quarter of 1999 to approximately $57,400 in the first quarter of 2000. This increase was primarily due to an increase in the average cash available for investment. INTEREST EXPENSE. Interest expense increased from approximately $29,800 in the first quarter of 1999 to approximately $33,000 in the first quarter of 2000 as a result of increased bank borrowings. INCOME TAX EXPENSE. In the first quarter of 1999, the Company recorded $32,000 of income tax expense after giving effect to the carry-forward of net operating losses. In the first quarter of 2000, income tax expense of approximately $6,400 was recorded for various state tax obligations. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES During the three month period ended March 31, 1999, the Company financed its activities primarily through cash from operations and proceeds from the exercise of stock options. During the three month period ended March 31, 2000, the Company financed its activities primarily through cash from operations, bank borrowings and proceeds from the exercise of stock options. The Company's principal uses of cash during each of 8 the three month periods ended March 31, 1999 and 2000 were (i) to fund operating activities; (ii) to acquire property and equipment; and (iii) to invest in the development of software. During the first three months of 1999, the Company's cash and cash equivalents increased from $1,625,300 at December 31, 1998 to $3,072,600 at March 31, 1999. Net cash provided by operating activities of $1,160,000 consisted primarily of net income of $555,200, plus non-cash charges for depreciation and amortization of $336,600, increases in accounts payable, customer deposits and accrued liabilities and commissions of $2,235,700 offset by increases in accounts receivable and inventory of $1,984,700. Net cash used in investing activities of $205,600 consisted primarily of $123,100 of capital expenditures and $101,600 of software development costs. Net cash generated from financing activities of $493,000 consisted primarily of proceeds from the exercise of stock options. During the first three months of 2000, the Company's cash and cash equivalents increased from $3,897,400 at December 31, 1999 to $5,179,600 at March 31, 2000. Net cash provided by operating activities of $1,300,800 consisted primarily of net losses of $198,900, plus non-cash charges for depreciation and amortization of $414,400, a decrease in accounts receivable and increases in accounts payable and customer deposits of $2,241,000 offset by increases in inventory, prepaid expenses and other assets and accrued liabilities, warranty and bonuses and commissions of $1,167,400. Net cash used in investing activities of $577,000 consisted primarily of $480,000 of capital expenditures and $109,300 of software development costs. Net cash generated from financing activities of $558,300 consisted primarily of bank borrowings of $316,100 of construction loans associated with the Company's new facility and proceeds from the exercise of stock options. As of March 31, 2000, the Company had $9,603,500 in net working capital, including $5,394,600 of trade accounts receivable and $4,409,600 of inventory. Days sales outstanding were approximately 77 days as of March 31, 2000 compared to 57 days for the same period a year ago. The increase in days sales outstanding is primarily the result of advanced prepayments on shipments received in the first quarter of 1999 and payment term extension amounts outstanding at March 31, 2000. The Company has provided and may continue to provide payment term extensions to certain of its customers from time to time.* As of March 31, 2000, the Company had payment term extensions outstanding of approximately $885,000. The Company's inventory balance at March 31, 1999 and 2000 was $2,005,000 and $4,409,600, respectively. Annualized inventory turns were 7.6 and 3.3 as of March 31, 1999 and 2000, respectively. The reduction in inventory turns is primarily the result of (i) not including the cost of goods sold associated with $4.1 million sales value of product shipments that was not recognized as revenue in a conformance with the Company's revenue recognition policies, and (ii) increased inventory levels associated with certain key components that the Company purchased to stock. The cost of the $4.1 million of product shipments has been offset against customer deposits in the accompanying consolidated financial statements. 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 a $1,000,000 line of credit based on a percentage of the Company's eligible accounts receivable. The line of credit expires in May 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 the remainder of 2000 of approximately $1.5 million.* Such capital expenditures include approximately $251,900 to complete the 20,000 square foot expansion of its existing facility in Durango, Colorado. The Company began occupying the expanded facility in April, 2000. 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 November 1999. 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 banks 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 BULLETIN In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 summarizes certain of 9 the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. We are presently evaluating the impact, if any, that SAB No. 101 will have on our reported results. 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.* CERTAIN FACTORS BEARING ON FUTURE RESULTS The risk factors set forth below 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 "Merger Agreement with Comverse Technology, Inc.") 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 eight of the past thirteen 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 Communication, Security & Imaging, Inc. ("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 10 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. 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 the first quarter of 2000, sales to one customer accounted for 33% of the Company's revenue. This customer is not obligated to purchase any minimum levels of the Company's products, and although this customer has placed additional orders with the Company, there can be no assurance that any further business will arise from this customer. Any significant reduction in product sales to this customer 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 11 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. 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. 12 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 2.1 (1) Agreement and Plan of Merger between Comverse Technology, Inc. and the Company dated March 5, 2000. 10.2 (2) Stock Option Agreement between Comverse Technology, Inc. and the Company dated March 5, 2000. 10.3 (3) Amendment to Preferred Shares Rights Agreement, dated March 5, 2000. 27 Financial Data Schedule for the quarter ended March 31, 2000
------------------- (1) Incorporated by reference to Exhibit 1 filed to Comverse Technology, Inc.'s Schedule 13D filed on March 14, 2000. (2) Incorporated by reference to Exhibit 2 filed to Comverse Technology, Inc.'s Schedule 13D filed on March 14, 2000. (3) Incorporated by reference to Exhibit 10.8 filed to Registrant's Annual Report on Form 10-KSB filed on March 29, 2000. (b) REPORTS ON FORM 8-K None 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Loronix Information Systems, Inc. May 3, 2000 /s/ Jonathan C. Lupia - ----------- --------------------- Date Jonathan C. Lupia, Chief Operating Officer and Chief Financial Officer 14 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LORONIX CONSOLIDATED BALANCE SHEET, STATEMENT OF OPERATIONS AND CASH FLOWS FROM ITS 10-QSB FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 5,179,562 0 6,102,551 707,946 4,409,567 15,747,366 8,143,962 3,627,212 21,183,304 6,143,902 0 0 0 5,152 13,460,587 21,183,304 7,186,697 7,186,697 3,766,754 7,413,441 67,236 0 (32,952) (192,460) (6,442) (198,902) 0 0 0 (198,902) (.04) (.04)
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