<PAGE>
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 JUNE 30, 1998 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 JULY 30, 1998 THERE WERE 4,646,836 SHARES OF THE ISSUER'S COMMON
STOCK OUTSTANDING.
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
INDEX
<TABLE>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet 1
as of June 30, 1998
Condensed Consolidated Statements 3
of Operations for the three and six months
ended June 30, 1998 and 1997
Condensed Consolidated Statements of 4
Cash Flows for the six months ended
June 30, 1998 and 1997
Notes to Condensed Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES. 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents $3,822,693
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $138,533 2,483,698
Officers and employees 140,494
Inventory, net 1,962,652
Prepaid expenses and other assets 346,179
Note receivable 107,734
Notes receivable, related parties 38,454
-----------
Total current assets 8,901,904
Property and equipment, net of accumulated
depreciation of $2,101,721 3,519,921
Capitalized software costs, net of accumulated
amortization of $1,054,013 819,847
Notes receivable, related parties 57,678
Deposits and other assets 42,671
-----------
Total assets $13,342,021
-----------
-----------
</TABLE>
(continued)
1
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
Current liabilities:
Accounts payable $ 889,489
Accrued liabilities 226,837
Facility mortgage, current portion 22,516
Capital lease 10,780
Customer deposits 1,834,885
Deferred maintenance revenue 45,808
-----------
Total current liabilities 3,030,315
Facility mortgage, net of current portion 658,003
Capital lease 3,593
-----------
Total liabilities 3,691,911
-----------
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,
4,646,836 shares 4,647
Additional paid-in capital 15,199,175
Notes receivable from stockholders (147,883)
Accumulated deficit (5,405,829)
-----------
Total stockholders' equity 9,650,110
-----------
Total liabilities and stockholders' equity $13,342,021
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
--------------------------- --------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Systems, supplies and maintenance
revenue $1,984,676 $2,453,514 $ 3,888,545 $ 4,127,414
Operating costs and expenses:
Cost of products sold 1,065,930 1,453,690 2,069,493 2,261,758
Operations and customer support 313,383 406,007 661,307 812,990
Selling, general and administrative 1,163,438 910,091 2,063,115 1,784,241
Research and development 339,763 328,448 679,659 705,082
---------- ---------- ----------- -----------
Total cost and expenses 2,882,514 3,098,236 5,473,574 5,564,071
Loss from operations (897,838) (644,722) (1,585,029) (1,436,657)
Other income (expense):
Interest income, net 18,098 30,617 33,118 90,163
Other expense (8,429) (8,537) (4,053) (17,584)
---------- ---------- ----------- -----------
9,669 22,080 29,065 72,579
Loss before income taxes (888,169) (622,642) (1,555,964) (1,364,078)
Income tax (expense) benefit - 187,062 (800) 398,024
---------- ---------- ----------- -----------
Net loss ($888,169) ($435,580) ($1,556,764) ($966,054)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Basic and diluted loss per share ($0.19) ($0.09) ($0.34) ($0.21)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted-average shares outstanding 4,646,329 4,662,279 4,646,258 4,662,108
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,556,764) $ (966,054)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Depreciation and amortization 594,292 480,400
Loss on disposal of capital equipment 6,857 12,466
(Gain) loss on foreign currency exchange (1,175) 5,118
Provision for deferred income taxes - (398,594)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (24,566) (1,810,112)
Increase in inventory, net (500,675) (686,024)
Decrease/(increase) in prepaid expenses and other assets 562,268 (116,497)
Increase/(decrease) in accounts payable 34,955 (20,175)
Decrease in accrued liabilities (54,967) (60,327)
Increase in customer deposits 1,691,473 -
(Decrease)/increase in deferred revenue (17,662) 18,934
----------- -----------
Net cash provided by/(used in) operating activities 734,036 (3,540,865)
----------- -----------
Cash flows from investing activities:
Capital expenditures (102,829) (561,322)
Proceeds from disposal of capital equipment - 15,000
Decrease in notes receivable 55,920 25,364
Decrease in deposits and other assets 2,844 2,370
Capitalized software (192,160) (243,100)
----------- -----------
Net cash used in investing activities (236,225) (761,688)
----------- -----------
Cash flows from financing activities:
Payments on facility mortgage (11,056) -
Proceeds from exercise of stock options 1,814 3,593
----------- -----------
Net cash (used in)/ provided by financing activities: (9,242) 3,593
Net increase/(decrease) in cash 488,569 (4,298,960)
Cash and cash equivalents, beginning of year 3,334,124 6,126,484
----------- -----------
Cash and cash equivalents, end of June $ 3,822,693 $ 1,827,524
</TABLE>
(continued)
4
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
SIX MONTHS ENDED
June 30,
1998 1997
-------------------------
(unaudited) (unaudited)
<S> <C> <C>
Supplemental cash flow information:
Interest paid $33,515 -
------- -------
------- -------
Income taxes paid $ 800 -
------- -------
------- -------
Noncash investing activities:
In 1998 the Company transferred inventory valued at $49,071 to property and
equipment.
In 1997 the Company transferred inventory valued at $224,871 to property and
equipment.
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(JUNE 30, 1998 - UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed 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, 1997 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: REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board SFAS No. 130, REPORTING COMPREHENSIVE INCOME. This Statement
established standards for reporting and display of comprehensive income and
its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The adoption of this statement had no material impact to the Company's
financial condition or results of operation as of June 30, 1998 and for the
three and six month periods ended June 30, 1998 and 1997 as comprehensive
income did not differ from the Company's net loss.
NOTE 3: NET LOSS PER SHARE
The Company presents 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 loss per share as defined. Basic net loss per common
share is computed using the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is computed
to incorporate the incremental dilutive shares issuable upon the assumed
exercise of stock options. All prior period net loss per common share
information are presented in accordance with SFAS No. 128.
Stock options and warrants totaling 1,329,898 shares and 1,282,008
shares for the three and six months ended June 30, 1998 and 1997,
respectively, were not included in computing the diluted loss per share
because the effect would have been antidilutive.
NOTE 4: LEGAL PROCEEDINGS
On October 17, 1997, the Company received notice that it had been named
as a defendant in a patent infringement lawsuit brought by a competitor,
Prima Facie, Inc. ("PFI") in the U.S. District Court for the District of
Maryland. The lawsuit alleged that the Company's CCTVware Transit product
infringed certain claims of two patents held by PFI and that the Company has
interfered with PFI's business relationships. The claim has recently been
amended to allege infringement by the Company's other CCTVware products. The
suit seeks injunctive relief against further infringement and damages. The
lawsuit also names one of the Company's domestic distributors as a
codefendant. The Company believes these claims are without merit and is
defending itself vigorously.
On July 6, 1998, the Company filed counterclaims against PFI. These
counterclaims include a Declaratory Judgment of Patent Invalidity and six
other counterclaims. The Company and PFI have agreed to separate the patent
infringement claims from all other claims and resolve the patent infringement
issues first. To date there has been no trial scheduled.
6
<PAGE>
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 condensed consolidated financial statements and the notes
related thereto included herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
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. The Company expects this trend to
continue for the foreseeable future. Revenue decreased from $2.45 million in
the second quarter of 1997 to $1.98 million in the second quarter of 1998,
representing a 19% decrease. Revenue in the second quarters of 1997 and 1998
included approximately $1.68 million, or 69% of total revenue, and
approximately $1.39 million, or 70% of total revenue, of digital recording
related products ("CCTVware-Registered Trademark- Products"), respectively.
The Company ended the second quarter of 1998 with a backlog of approximately
$4.0 million which the Company expects to ship in the third and fourth
quarters of 1998.
COSTS AND EXPENSES
COST OF PRODUCTS SOLD. The cost of products sold, consisting
principally of the costs of hardware components and supplies as well as
software amortization, decreased from $1.45 million in the second quarter of
1997 to $1.07 million in the second quarter of 1998, and represented 59% and
54% of revenue, respectively. The decrease in the cost of products sold as a
percentage of revenue was primarily attributable to general industry cost
reductions related to CCTVware Product components.
OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support
expenses decreased from $406,000 in the second quarter of 1997 to $313,400 in
the second quarter of 1998, and represented 17% and 16% of revenue,
respectively. The decrease in such expenses resulted primarily from
compensation decreases and decreases in telecommunication expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $910,100 in the second quarter of 1997
to $1.16 million in the second quarter of 1998, and represented 37% and 59%
of revenue, respectively. The increase in such expenses resulted primarily
from an increase in legal fees associated with the Company's patent
litigation with PFI.
RESEARCH AND DEVELOPMENT. Research and development expenses, net of
capitalized software costs, increased from $328,400 in the second quarter of
1997 to $339,800 in the second quarter of 1998, and represented 13% and 17%
of revenue, respectively. The actual research and development expenses did
not increase materially in the second quarter of 1998, and the difference in
percentage terms is the result of lower revenue in the second quarter of 1998.
INTEREST INCOME, NET. Net interest income decreased from $30,600 in the
second quarter of 1997 to $18,100 in the second quarter of 1998. This
decrease was due to a reduction in the average cash available for investment.
INCOME TAX EXPENSE/BENEFIT. An income tax benefit of $187,100 for the
second quarter of 1997 was estimated at 30% of the pretax loss. In the
second quarter of 1998, any tax benefit from the operating loss was offset by
an increase in the valuation allowance for deferred tax assets.
7
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUE
Revenue decreased from $4.13 million in the first six months of 1997 to
$3.89 million in the first six months of 1998, representing a 6% decrease.
Revenue in the first six months of 1997 and 1998 included approximately $2.40
million, or 58% of total revenue, and approximately $2.91 million, or 75% of
total revenue, of CCTVware Products, respectively.
COSTS AND EXPENSES
COST OF PRODUCTS SOLD. The cost of products sold decreased from $2.26
million in the first six months of 1997 to $2.07 million in the first six
months of 1998, and represented 55% and 53% of revenue, respectively. The
decrease in the cost of products sold as a percentage of revenue was
primarily attributable to general industry cost reductions related to
CCTVware components.
OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support
expenses decreased from $813,000 in the first six months of 1997 to $661,300
in the first six months of 1998, and represented 20% and 17% of revenue,
respectively. The decrease in such expenses resulted primarily from headcount
and compensation-related decreases and decreases in travel and
telecommunication expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $1.78 million in the first six months
of 1997 to $2.06 million in the first six months of 1998, and represented 43%
and 53% of revenue, respectively. The increase in such expenses resulted
primarily from an increase in legal fees associated with the Company's patent
litigation with Prima Facie, Inc. and increases in travel expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses, net of
capitalized software costs, decreased from $705,100 in the first six months
of 1997 to $679,700 in the first six months of 1998, and represented 17% of
revenue in both periods.
INTEREST INCOME, NET. Net interest income decreased from $90,200 in the
first six months of 1997 to $33,100 in the first six months of 1998. This
decrease was due to a reduction in the average cash available for investment.
INCOME TAX EXPENSE/BENEFIT. An income tax benefit of $398,000 for the
first six months of 1997 was estimated at 29% of the pretax loss. In the
first six months of 1998, any tax benefit from the operating loss was offset
by an increase in the valuation allowance for deferred tax assets.
YEAR 2000 CONVERSION
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company
has assessed the readiness and compliance of its internal computer-based
systems and of its computer-based products sold to customers and expects to
implement successfully the system and programming changes necessary to
address year 2000 issues by mid 1999. The Company does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes on a timely basis could have an adverse effect on future results of
operations.
The Company is also assessing the possible effects on the Company's
operations of the year 2000 compliance of its key suppliers. The Company is
contacting certain key suppliers to determine whether their products supplied
to the Company are year 2000 compliant and is in the process of evaluating
information to determine the impact products that are not Year 2000 compliant
may have on the operations of the Company. The Company's reliance on
suppliers, and, therefore, on the proper functioning of their products, which
are incorporated into the Company's products, means that their failure to
address year 2000 issues could have a material impact on the Company's sales,
operations and financial results, however, the potential impact and related
costs are not known at this time.
8
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1997 and 1998, the Company financed
its operations primarily from working capital.
The Company's principal uses of cash during the six months ended June
30, 1997 and 1998 were to (i) acquire property and equipment; (ii) invest in
the development of software; and (iii) in 1997, to fund operating activities.
During the first six months of 1997, the Company's cash and cash
equivalents decreased from $6,126,500 at December 31, 1996 to $1,827,500 at
June 30, 1997. Net cash used in operating activities of $3.5 million
consisted primarily of a net loss of $966,100, increases in deferred income
tax assets, accounts receivable, inventory, prepaid expenses and other assets
and decreases in accounts payable and accrued liabilities offset by
depreciation and amortization and an increase in deferred revenue. Net cash
used in investing activities of $761,700 consisted primarily of $561,300 of
capital expenditures and $243,100 of capitalized software.
During the first six months of 1998, the Company's cash and cash
equivalents increased from $3,334,100 at December 31, 1997 to $3,822,700 at
June 30, 1998. Net cash provided by operating activities of $734,000
consisted primarily of a net loss of $1.6 million, increases in accounts
receivable and inventory and decreases in accrued liabilities and deferred
revenue offset by depreciation and amortization and a decrease in prepaid
expenses and other assets and increases in accounts payable and customer
deposits. Customer deposits increased by $1.7 million representing a partial
pre-payment by one customer for orders to be delivered in the third and
fourth quarters of 1998. Net cash used in investing activities of $236,200
consisted primarily of capital expenditures of $102,800 and $192,200 of
capitalized software.
At June 30, 1998, the Company had $5.9 million in working capital,
including $2.48 million of trade accounts receivable and $1.96 million of
inventory. Of the $2.48 million of trade accounts receivable, approximately
$862,000 was recorded in conjunction with June 1998 sales. Days sales
outstanding, calculated using an average accounts receivable balance, were
approximately 103 days as of June 30, 1998, compared to 102 days for the same
period a year ago. The days sales outstanding is consistent with prior
periods. The Company has provided and may continue to provide extended
payment terms to certain of its customer from time-to-time. As of June 30,
1998 the Company had extended payments equal to approximately $775,000. The
Company has historically collected its outstanding receivables and believes
it will be successful in the collection of its receivable balance as of June
30, 1998.
The Company's inventory balance at June 30, 1998 and 1997 was $1.96
million and $1.45 million, respectively. Annualized inventory turns,
calculated using an average inventory balance, were 2.2 and 3.0 as of June
30, 1998 and 1997, respectively. The decrease in the inventory turns is
primarily attributable to inventory purchases in June 1998 in support of the
Company's $4.0 million backlog position as of June 30, 1998.
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 $1.0 million line of credit based on a
percentage of the Company's eligible accounts receivable. The line of credit
facility expires in May 1999. The line of credit has not been used to date.
The Company anticipates capital expenditures for the remainder of 1998 of
approximately $300,000. The Company believes that, based on its current
financial projections, it has sufficient working capital to meet its capital
requirements and fund operations for at least the next twelve months.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The statements in the third and last sentences under the caption
"Revenue" on page 7, the last sentence of the fifth paragraph and the last
two sentences of the seventh paragraph under the caption "Financial
Condition, Liquidity and Capital Resources", and the first sentence under the
caption "Capital Requirements" on page 11 are forward-looking statements. In
addition, the Company may from time to time make oral forward-looking
statements. The following are important factors that could cause results to
differ materially from those projected in any such forward-looking statements.
9
<PAGE>
DISTRIBUTION RELATIONSHIPS. The Company believes its success in
penetrating markets for its identification products ("ID Products") and
CCTVware Products depends in part on its ability to maintain distribution
relationships with manufacturing representatives, dealers, systems
integrators and distributors and to cultivate additional, similar
relationships. There can be no assurance that the Company will be successful
in maintaining or expanding its distribution relationships. The loss of
certain distribution relationships could adversely affect the Company's
business, operating results and financial condition. Further, there can be
no assurance that the businesses with which the Company has developed or is
seeking to develop 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's products or will not
otherwise discontinue their relationships with the Company.
INTERNATIONAL SALES. The Company is seeking to expand its international
presence by developing new distribution channels in certain foreign countries
where it has not previously had a presence. International sales are subject
to a number of risks, including political and economic instability,
unexpected changes in regulatory requirements, tariffs and other trade
barriers, fluctuating exchange rates and the possibility of greater
difficulty in accounts receivable collection. There can be no assurance that
these and 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.
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.
Moreover, while the Company believes that the price/performance
characteristics of its products are currently competitive, increased
competition has created, and will continue to create, pricing pressures which
could materially and adversely affect the Company's business, operating
results and financial condition.
PROPRIETARY RIGHTS. The Company is not aware that its products,
trademarks or other proprietary rights infringe on the proprietary rights of
any other third parties, except that a claim of infringement has been
asserted against the Company by PFI. Although the Company believes this
claim is without merit, an adverse result in this litigation with PFI could
have a negative impact on the financial position and results of operations of
the Company. There can be no assurance that other third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. As the number of software products in the
industry increases and the functionality of these products further overlaps,
the Company believes that software developers may become increasingly subject
to infringement claims. Any such claims against the Company, with or without
merit, could result in costly litigation or might require the Company to
enter into royalty or licensing agreements. Such royalty and licensing
agreements, if required, may not be available on terms acceptable to the
Company.
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 results of operations or financial position.
DEPENDENCE ON NEW PRODUCTS. The market for the Company's products is
characterized by ongoing technological development and evolving industry
standards. The Company's success will depend upon its ability to enhance its
current products and to introduce new products which address technological
and market developments and satisfy the increasingly sophisticated needs of
customers. For instance, the Company has released several products based on
its CCTVware technology and has recently announced that it expects to
release, in the near future, additional products based on new technology.
There can be no assurance that the Company will be successful in developing,
marketing and selling sufficient volumes of its new CCTVware products or
developing and marketing on a timely basis any other fully functional product
enhancements or new products that respond to the technological advances by
others. For instance, the Company expected to introduce its Solo Remote
product in the second quarter of 1998, but because of resource allocations
and customer requested product enhancements the Company has delayed the
introduction of the Solo Remote product until the third quarter of 1998.
There also can be no assurance that the Company's new products will be
accepted by customers.
10
<PAGE>
VARIABILITY OF OPERATING RESULTS. The Company's revenue and operating
results have fluctuated significantly from quarter to quarter, and may
continue to fluctuate, due to a combination of factors. These factors
include relatively long sales cycles for certain products, the timing or
cancellation of orders from major customers, the timing of new product
introductions by the Company or its competitors, the Company's use of
third-party distribution channels, the fulfillment of large one-time orders
to particular customers and general economic conditions and other factors
affecting capital spending. For example, a longer than expected sales cycle
for the CCTVware Products has delayed anticipated revenue, and the conclusion
of the Aramco Contract has led to a sharp decrease in the Company's ID
Product revenue. Additionally, the Company generally ships orders in the
quarter in which such orders are received, and accordingly, revenue in any
quarter is substantially dependent on the orders booked and shipped in that
quarter. The Company has typically recognized a substantial portion of its
revenue in the last month of the quarter, with much of this revenue
concentrated in the last two weeks of the quarter. Because the Company's
operating expense levels are relatively fixed and based, to some extent, on
anticipated revenue levels, a small variation in revenue can cause
significant variations in operating results from quarter to quarter and may
result in losses. 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.
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, PFI, in the U.S. District Court for the District of
Maryland. The lawsuit alleged that the Company's CCTVware Transit product
infringed certain claims of two patents held by PFI and that the Company has
interfered with PFI's business relationships. The claim has recently been
amended to allege infringement by the Company's other CCTVware products. The
suit seeks injunctive relief against further infringement and damages. The
lawsuit also names one of the Company's domestic distributors as a
codefendant. Although the Company believes these claims are without merit
and is defending itself vigorously, an adverse result in the litigation could
have a negative impact on the financial position and the results of
operations of the Company.
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 continued 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.
CAPITAL REQUIREMENTS. The Company believes that, based on its current
projections, it has sufficient working capital to meet its requirements for
at least the next 12 months. However, to the extent that the Company
experiences growth generally, or the Company's CCTVware line of products
generates high demand, or the Company receives extraordinary large orders for
certain CCTVware products from large business, institutional or government
buyers, the Company's capital requirements may exceed the Company's available
capital resources. Additionally, the Company has suffered losses in each of
the past six quarters, and such losses, which may continue in the foreseeable
future, will 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, financial condition and results of operation.
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.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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, PFI,
in the U.S. District Court for the District of Maryland. The lawsuit alleged
that the Company's CCTVware Transit product infringed certain claims of two
patents held by PFI and that the Company has interfered with PFI's business
relationships. The claim has recently been amended to allege infringement by
the Company's other CCTVware products. The suit seeks injunctive relief
against further infringement and damages. The lawsuit also names one of the
Company's domestic distributors as a codefendant. (see Legal Proceedings
under the caption "Certain Risks Bearing on Future Results").
On July 6, 1998 the Company filed counterclaims against PFI. These
counterclaims include a Declaratory Judgment of Patent Invalidity and six
other counterclaims. The Company and Prima Facie, Inc. have agreed to
separate the patent infringement claims from all other claims and resolve the
patent infringement issues first. To date there has been no trial scheduled.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Matters submitted for a vote by security holders at the Company's May
27, 1998 annual meeting of stockholders included:
(a) approval of the minutes of the 1997 annual meeting of stockholders;
(b) election of directors; and
(c) ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending
December 31, 1998.
The results of the stockholder votes were as follows:
(a) the minutes of the prior year's annual meeting of stockholders were
approved.
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained
--------- -------- ---------
<S> <C> <C> <C>
(b) Election of Directors
Edward Jankowski 4,108,023 103,985
George M. Duffy 4,108,023 103,985
C. Rodney Wilger 4,108,023 103,985
Don W. Stevens 4,108,023 103,985
Louis E. Colonna 4,108,023 103,985
(c) Appointment of KPMG 4,196,608 11,000 4,400
Peat Marwick LLP
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
12
<PAGE>
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.
August 10, 1998 /s/ Jonathan C. Lupia
- --------------- ---------------------------
Date Jonathan C. Lupia,
Chief Operating Officer and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LORONIX
CONDENSED CONSOLIDATED BALANCE SHEET STATEMENT OF OPERATIONS AND CASH FLOWS FROM
ITS 10-KSB FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,822,693<F1>
<SECURITIES> 0
<RECEIVABLES> 2,622,231
<ALLOWANCES> 138,533
<INVENTORY> 1,962,652
<CURRENT-ASSETS> 8,901,904
<PP&E> 5,621,642
<DEPRECIATION> 2,101,721
<TOTAL-ASSETS> 13,342,021
<CURRENT-LIABILITIES> 3,030,315
<BONDS> 0
0
0
<COMMON> 4,647
<OTHER-SE> 9,645,463
<TOTAL-LIABILITY-AND-EQUITY> 13,342,021
<SALES> 3,888,545
<TOTAL-REVENUES> 3,888,545
<CGS> 2,069,493
<TOTAL-COSTS> 5,473,574
<OTHER-EXPENSES> (45,758)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,693
<INCOME-PRETAX> (1,555,964)
<INCOME-TAX> (800)
<INCOME-CONTINUING> (1,556,764)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,556,764)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
<FN>
<F1>THE COMPANY HAS TWO OUTSTANDING LETTERS OF CREDIT COLLATORALIZED BY A
COMBINATION OF CERTIFICATES OF DEPOSIT AND CASH TOTALING APPROXIMATELY
$100,000.
</FN>
</TABLE>
