<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 SEPTEMBER 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 OCTOBER 16, 1998 THERE WERE 4,646,836 SHARES OF THE ISSUER'S COMMON
STOCK OUTSTANDING.
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET 1
AS OF SEPTEMBER 30, 1998
CONDENSED CONSOLIDATED STATEMENTS 3
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
CONDENSED CONSOLIDATED STATEMENTS OF 4
CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 6
STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 8
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES. 17
<PAGE>
PART I - FINANCIAL INFORMATION
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents $ 2,790,069
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $162,980 3,193,220
Officers and employees 150,685
Inventory, net 2,100,904
Prepaid expenses and other assets 122,302
Note receivable 107,734
Notes receivable, related parties 38,454
-----------
Total current assets 8,503,368
Property and equipment, net of accumulated
depreciation of $2,256,609 4,104,193
Capitalized software costs, net of accumulated
amortization of $1,163,893 886,676
Notes receivable, related parties 48,065
Deposits and other assets 37,239
-----------
Total assets $13,579,541
-----------
</TABLE>
(continued)
1
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C>
Current liabilities:
Accounts payable $ 1,683,798
Accrued liabilities 480,416
Debt, current portion 76,996
Capital lease 10,780
Customer deposits 426,438
Deferred maintenance revenue 47,935
-----------
Total current liabilities 2,726,363
Debt, net of current portion 1,098,073
Capital lease 898
-----------
Total liabilities 3,825,334
-----------
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 (5,301,732)
-----------
Total stockholders' equity 9,754,207
-----------
Total liabilities and stockholders' equity $13,579,541
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Systems, supplies and maintenance
Revenue $5,336,735 $2,027,404 $9,225,281 $6,154,818
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of products sold 2,863,504 1,064,947 4,932,997 3,326,705
Operations and customer support 486,630 334,532 1,147,937 1,147,523
Selling, general and administrative 1,521,904 1,025,062 3,585,020 2,809,302
Research and development 363,587 373,304 1,043,246 1,078,386
---------- ---------- ---------- ----------
Total cost and expenses 5,235,625 2,797,845 10,709,200 8,361,916
Income (loss) from operations 101,110 (770,441) (1,483,919) (2,207,098)
Other income (expense):
Interest income, net 21,175 12,279 54,436 102,441
Other expense (18,186) (18,315) (22,383) (35,898)
---------- ---------- ---------- ----------
Net other income (expense) 2,989 (6,036) 32,053 66,543
Income (loss) before income tax
(expense) benefit 104,099 (776,477) (1,451,866) (2,140,555)
Income tax (expense) benefit -- (213,158) (800) 184,866
---------- ---------- ---------- ----------
Net income (loss) $104,099 ($989,635) ($1,452,666) ($1,955,689)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share:
Basic $0.02 ($0.21) ($0.31) ($0.42)
Diluted $0.02 ($0.21) ($0.31) ($0.42)
Weighted-average shares outstanding
Basic 4,646,836 4,663,186 4,646,384 4,662,467
Diluted 4,689,394 4,663,186 4,646,384 4,662,467
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,452,666) $(1,955,689)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 881,889 768,391
Loss on disposal of capital equipment -- 27,466
(Gain) loss on foreign currency exchange (3,156) 5,614
Provision for deferred income taxes -- (204,400)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (744,279) (1,624,242)
Increase in inventory, net (704,518) (1,341,096)
Decrease in prepaid expenses and other 786,145 248,352
Increase in accounts payable 829,264 346,547
Increase in accrued liabilities 198,612 77,886
Increase in customer deposits 283,026 --
(Decrease) increase in deferred revenue (15,535) 47,054
----------- ------------
Net cash provided by (used in)
operating activities: 58,782 (3,604,117)
----------- ------------
Cash flows from investing activities:
Capital expenditures (860,519) (686,186)
Proceeds from disposal of capital equipment 15,000
Decrease in notes receivable 65,533 72,017
Decrease (increase) in deposits and other assets 8,276 (17,260)
Capitalized software (289,869) (356,100)
----------- ------------
Net cash used in investing
activities: (1,076,849) (972,529)
----------- ------------
Cash flows from financing activities:
Proceeds from bank borrowings 500,000 --
Proceeds from facility mortgage, net of principal
payments -- 700,000
Payments on facility mortgage (16,506) (3,366)
Payments on capital lease (11,296) --
Proceeds from exercise of stock options 1,814 3,593
----------- ------------
Net cash provided by financing
activities: 474,012 700,227
Net decrease in cash and cash equivalents (544,055) (3,876,419)
Cash and cash equivalents, beginning of year 3,334,124 6,126,484
----------- ------------
Cash and cash equivalents, end of September $2,790,069 $2,250,065
----------- ------------
----------- ------------
</TABLE>
(continued)
4
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Supplemental cash flow information:
Interest paid $50,259 $11,253
----------- ------------
----------- ------------
Income taxes paid -- --
----------- ------------
----------- ------------
Noncash investing activities:
In 1998, the Company transferred inventory valued at $114,662 to
property and equipment.
In 1997, the Company transferred inventory valued at $333,955 to
property and equipment.
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SEPTEMBER 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 on the Company's
financial condition or results of operation as of September 30, 1998 and for
the three and nine-month periods ended September 30, 1998 and 1997. Total
comprehensive income did not differ from (i) the Company's net income for the
three months ended September 30, 1998 or (ii) the Company's net loss for the
three months ended September 30, 1997 or the Company's net loss for the nine
months ended September 30, 1998 and 1997.
NOTE 3: 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 and 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 income and net loss per common share
information are presented in accordance with SFAS No. 128.
Stock options and warrants outstanding at September 30, 1998 totaled
1,372,073. For the three months ended September 30, 1998, 42,558 were
included in computing the diluted net income per share. For the nine months
ended September 30, 1998 stock options and warrants were not included in
computing the diluted net loss per share because the effect would have been
anitdilutive. Stock options and warrants totaling 1,282,133 shares for the
three and nine months ended September 30, 1997 were not included in computing
the diluted net loss per share because the effect would have been
antidilutive.
6
<PAGE>
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 was amended in June
1998 to allege infringement by the Company's other CCTVware products. The
suit seeks injunctive relief against further infringement and damages. The
lawsuit also names one of the Company's domestic distributors as a
co-defendant. The Company believes that these claims are without merit and
is defending itself vigorously.
On July 6, 1998, the Company filed counterclaims against PFI. These
counterclaims include a Declaratory Judgment of Patent Invalidity and six
other counterclaims. The Company and PFI have agreed to separate the patent
infringement claims from all other claims and resolve the patent infringement
issues first. To date no trial has been scheduled.
On August 25, 1998, PFI filed a motion to enjoin the Company from
disseminating allegedly false and misleading information concerning the
capabilities of PFI's products. Although the Company has objected to this
motion, the Company has advised the court hearing the matter that neither the
Company, nor its representatives, will distribute any information concerning
the capabilities of PFI's products.
7
<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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 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 increased from $2.03 million in
the third quarter of 1997 to $5.34 million in the third quarter of 1998,
representing a 163% increase. Revenue in the third quarters of 1997 and 1998
included approximately $1.14 million, or 56% of total revenue, and
approximately $4.67 million, or 87% of total revenue, respectively, of
digital recording related products ("CCTVware-Registered Trademark-
Products"). The Company attributes the increase in revenue to the shipment
of approximately $3.4 million of its approximately $4.0 million third quarter
1998 beginning backlog and increasing general acceptance in the marketplace
of digital recording technology.
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, increased from $1.06 million in the third quarter of
1997 to $2.86 million in the third quarter of 1998, and represented 52% and
54% of revenue, respectively. The increase in the cost of products sold as a
percentage of revenue was primarily attributable to a shift in the product
mix.
OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support
expenses increased from approximately $334,500 in the third quarter of 1997
to approximately $486,600 in the third quarter of 1998, and represented 16%
and 9% of revenue, respectively. The increase in such expenses in absolute
terms resulted primarily from headcount and compensation-related increases
and increases in travel and telecommunications expenses associated with
increased business levels including customer installations and support. The
decrease in these expenses in percentage terms is the result of higher
revenue in the third quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $1.03 million in the third quarter of
1997 to $1.52 million in the third quarter of 1998, and represented 51% and
28% of revenue, respectively. The increase in such expenses in absolute
terms resulted primarily from an increase in legal fees associated with the
Company's patent litigation with PFI and an increase in the allowance for
doubtful accounts. The decrease in these expenses in percentage terms is the
result of higher revenue in the third quarter of 1998. Approximately
$250,000 of the increase in the allowance for doubtful accounts relates to
the Company's agreement to accept the return of certain equipment from one of
its customers that is experiencing financial difficulty.
RESEARCH AND DEVELOPMENT. Research and development expenses, net of
capitalized software costs, decreased from approximately $373,300 in the
third quarter of 1997 to approximately $363,600 in the third quarter of 1998,
and represented 18% and 7% of revenue, respectively. The research and
8
<PAGE>
development expenses in the third quarter of 1998 did not change materially
from such expenses in the third quarter of 1997, and the difference in
percentage terms is the result of higher revenue in the third quarter of 1998.
INTEREST INCOME, NET. Net interest income increased from approximately
$12,300 in the third quarter of 1997 to approximately $21,200 in the third
quarter of 1998. This increase was due to an increase in the average cash
available for investment.
INCOME TAX EXPENSE/BENEFIT. An income tax expense of approximately
$213,200 for the third quarter of 1997 was attributed to an increase in the
valuation allowance for previously recognized deferred tax assets. In the
third quarter of 1998, any tax expense from the operating income was offset
by prior quarters' losses.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUE
Revenue increased from $6.15 million in the first nine months of 1997 to
$9.23 million in the first nine months of 1998, representing a 50% increase.
Revenue in the first nine months of 1997 and 1998 included approximately
$3.54 million, or 58% of total revenue, and approximately $7.57 million, or
82% of total revenue, respectively, of CCTVware Products. The Company
attributes the increase in revenue to the shipment of approximately $3.4
million of its approximately $4.0 million third quarter 1998 beginning
backlog and the increasing general acceptance in the market of digital
recording technology.
COSTS AND EXPENSES
COST OF PRODUCTS SOLD. The cost of products sold increased from $3.33
million in the first nine months of 1997 to $4.93 million in the first nine
months of 1998, and represented 54% and 53% of revenue, respectively.
OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support
expenses of $1.15 million was essentially the same in the first nine months
of 1997 and 1998, and represented 19% and 12% of revenue, respectively. The
decrease in these expenses in percentage terms is the result of higher
revenue in the first nine months of 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $2.81 million in the first nine months
of 1997 to $3.59 million in the first nine months of 1998, and represented
46% and 39% 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 an increase in the allowance for
doubtful accounts. Approximately $250,000 of the increase in the allowance
for doubtful accounts relates to the Company's agreement to accept the return
of certain equipment from one of its customers that is experiencing financial
difficulty. The decrease in these expenses in percentage terms is the result
of higher revenue in the first nine months of 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses, net of
capitalized software costs, decreased from $1.08 million in the first nine
months of 1997 to $1.04 in the first nine months of 1998, and represented 18%
and 11% of revenue, respectively. The research and development expenses in
the first nine months of 1998 did not change materially from such expenses in
the first nine months of 1997, and the difference in percentage terms is the
result of higher revenue in the first nine months of 1998.
9
<PAGE>
INTEREST INCOME, NET. Net interest income decreased from approximately
$102,400 in the first nine months of 1997 to approximately $54,400 in the
first nine months of 1998. This decrease was due to a reduction in the
average cash available for investment and an increase in interest expense due
to an increase in the average outstanding debt.
INCOME TAX EXPENSE/BENEFIT. An income tax benefit of $184,900 for the
first nine months of 1997 was estimated at 9% of the pretax loss. In the
first nine 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
is assessing the readiness and compliance of its computer-based products
available for sale and of its computer-based systems used internally, and the
Company expects to implement successfully the system and programming changes
necessary to address year 2000 issues by mid 1999. The Company does not
believe that the cost of such actions will have a material effect on the
Company's results of operations or financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's
inability to implement such changes on a timely basis could have an adverse
effect on future results of operations, liquidity or financial condition.
COMPUTER BASED PRODUCTS AVAILABLE FOR SALE. The Company has two primary
product lines available for sale consisting of CCTVware Products and
Identification Products ("ID" products). The Company is currently assessing
the state of readiness of these products to address Year 2000 issues. The
Company expects to complete its assessment of its state of readiness by mid
1999.
CCTVWARE PRODUCTS. The CCTVware product line consists of two major
components including: CCTVware Enterprise products ("Enterprise") and the
CCTVware Transit product ("Transit"). Recently, the Company created and
executed a series of tests to determine the possible problems the Year 2000
will have on the operation of Enterprise products version 1.2. Enterprise
products specifically include; Communications Server, Tape Server, Tape
Library Server, Review Software, Control Software, Administrator Software,
Vision Recorder and M Series Recorder. These tests indicated that the Year
2000 did not adversely affect the performance of Enterprise, and the Company
expects that Enterprise products will operate successfully in the days
leading up to year 2000, and beyond.
A key component of determining the Company's Year 2000 state of
readiness is to identify those areas of operation where Enterprise products
incorporate software and hardware products supplied by third party vendors
and thus, where Year 2000 problems may arise as a result of products supplied
by third parties. Third party software products include, but are not limited
to: Microsoft Windows NT 4.0 Server, Microsoft Windows NT 4.0 Workstation,
Microsoft Windows 95, Microsoft SQL Server 6.5 and Microsoft Visual C++.
Third party hardware products include, but are not limited to: video capture
cards, export cards, network switches, motherboards, modems and various
workstations. Because Enterprise products are dependent, in certain
respects, on products supplied by third party vendors, an important part of
the Company's Year 2000 effort is to contact those vendors who supply product
that the Company considers critical to the operation of Enterprise and gauge
their Year 2000 compliance efforts. Tests to date indicate that certain
third party supplied products do not appear to adversely affect the
performance of the Enterprise products with respect to the Year 2000 issue.
The Company expects to release new versions of Enterprise in the future.
The Company will incorporate, as part of its product release process,
procedures that will audit and test compliance with
10
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Year 2000 performance of its internally developed products as will as those
products supplied by third party vendors.
To date the Company has not tested its Transit product for Year 2000
compliance. The Company expects to perform Year 2000 compliance testing
within the next several months.
ID PRODUCTS. The Company is creating a series of tests to determine the
possible problems the Year 2000 will have on the operation of the Company's
currently supported ID products. The Company's current ID products include;
ImageShare 1.21, 2.5 and 3.1, Instant ID 2.0, ImageShare Express, Ready Key
interface 3.1, Color Card Creator and ImageShare 95. The core programs of
these products support 4 digit year date formats and if configured properly
for specific users applications, the Company does not expect to uncover any
issues that are material to Year 2000 compliance.
Certain of the Company's ID products also include interfaces to various
access control applications including: Ccure with Badges 1.66, Ccure with
ImageShare 1.21, Card Key with Badges 1.6x, Casi Rusco with ImageShare 1.21,
Casi Rusco with Badges 1.66+, DAQ with ImageShare 1.21, Oracle Based DAQ with
ImageShare 1.21 and ICAM with ImageShare 1.21. The interface design
methodology used to integrate the ID products are primarily controlled by the
access control vendors. The Company can make no assurances that these
interfaces are Year 2000 compliant.
A key component of determining the Company's Year 2000 state of
readiness is to identify those areas of operation where ID products
incorporate hardware and software products supplied by third party vendors
and thus, where Year 2000 problems may arise as a result of third party
supplied products. Third party hardware products include, but are not
limited to; computers, network adapter cards, video capture cards, controller
cards, printers, encoders, cameras and various types of cabling. For older
ID product configurations, many of the third party vendor hardware products
are no longer manufactured or supported by the supplier. The Company can
make no assurances that these devices are Year 2000 compliant. Of most
concern are older computers that may have embedded problems in the BIOS for
processing Year 2000 dates. Certain routines within the ID products use the
BIOS date information to calculate current dates. Computers that possess this
problem will require the BIOS to be updated and/or the computer replaced.
Third party software products include, but are not limited to; Microsoft
Windows 3.1 and 3.11, Microsoft Windows NT 4.0 Workstation, Microsoft Windows
95 and 98, Microsoft SQL Server, Microsoft Access, Paradox, Informix, Sybase,
IBM DB2, Microsoft Foxpro, Oracle, Microsoft Visual C++, Borland 3.1, 4.5 and
5.01, Strategic Reporting's ReportSmith, and various Open DataBase
Connectivity drivers provided by Intersolv, Microsoft and IBM. Because ID
products are dependent, in certain respects, on products supplied by third
party vendors, an important part of the Company's Year 2000 effort is to
contact those vendors who supply product that the Company considers critical
to the operation of ID products and gauge their Year 2000 compliance efforts.
From 1989 through 1995, the company developed seven different ID
products including: Badges 1.64 - 1.66, Loronix Color Image Management System
Foxpro Based, Dos Based Foxpro BW Imaging System, ImageShare V (Visitor BW,
Foxpro), ImageShare I (Color Foxpro), Laser ID Card Creator and Entry Check.
In 1996, the Company recognized that the lack of availability of peripheral
replacement equipment from third party vendors and inadequate technical
resources, made it infeasible for the Company to continuing supporting these
products. Accordingly, the Company notified its customers that it would no
longer support these products and made available upgrade options to allow
customers to migrate to newer products that would be supported by the Company.
COMPUTER-BASED SYSTEMS USED INTERNALLY. The Company uses various
computer-based systems to operate its business on a day-to-day basis. These
systems include, but are not limited to: (i) software programs, including;
Macola (for accounting, customer order processing, purchasing and inventory
control), CardKey Access Control, Novel Network Operating System, SourceSafe,
Microsoft Windows,
11
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and various software application programs and; (ii) hardware devices,
including; servers, hubs, proximity readers, motion detectors, phone systems,
and personal computers.
The Company's current version of its Macola software is not Year 2000
compliant. The Company has purchased the Year 2000 compliant version of
Macola software and expects to implement this version by December 1998. The
Company is assessing its other internally used computer-based systems to
determine their possible impact relative to the Year 2000 issue.
COST OF YEAR 2000 CONVERSION. To date the Company estimates that it has
spent less than $10,000 on the Year 2000 issue and estimates that future
costs associated with its Year 2000 compliance efforts will not exceed
$50,000.
CONTINGENCY PLANS. The Company is currently in the information
collection phase of addressing Year 2000 issues and has not created a
contingency plan. Although the Company does not anticipate any significant
issues relating to the Year 2000, it will create contingency plans as
information becomes available indicating non-compliance issues that could
have an adverse effect on the Company's future results of operations,
liquidity or financial condition.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1997 and 1998, the Company
financed its operations primarily from working capital.
The Company's principal uses of cash during the nine months ended
September 30, 1997 and 1998 were to (i) in 1997, fund operating activities;
(ii) acquire property and equipment; and (iii) invest in the development of
software.
During the first nine months of 1997, the Company's cash and cash
equivalents decreased from $6.13 million at December 31, 1996 to $2.25
million at September 30, 1997. Net cash used in operating activities of
$3.60 million consisted primarily of a net loss of $1.96 million, increases
in deferred income taxes, accounts receivable and inventory offset by
depreciation and amortization, a decrease in prepaid expenses and other
assets and increases in accounts payable, accrued liabilities and deferred
revenue. Net cash used in investing activities of $972,500 consisted
primarily of $686,200 of capital expenditures and $356,100 of capitalized
software. Net cash provided by financing activities of $700,200 consisted
primarily of $700,000 in proceeds from the financing of the facility.
During the first nine months of 1998, the Company's cash and cash
equivalents decreased from $3.33 million at December 31, 1997 to $2.79 at
September 30, 1998. Net cash provided by operating activities of $58,800
consisted primarily of a net loss of $1.45 million and increases in accounts
receivable and inventory offset by depreciation and amortization and a
decrease in prepaid expenses and other assets and increases in accounts
payable, accrued liabilities and customer deposits. Net cash used in
investing activities of $1.08 million consisted primarily of capital
expenditures of $860,800 and $289,900 of capitalized software. Net cash
provided by financing activities of $474,000 consisted primarily of $500,000
from a bank borrowing. The bank borrowing consists of a three-year balloon
note with a fifteen-year amortization schedule with an interest rate of 8.5%.
At September 30, 1998, the Company had $5.8 million in working capital,
including $3.19 million of trade accounts receivable and $2.10 million of
inventory. Days sales outstanding, calculated using an average accounts
receivable balance, were approximately 53 days as of September 30, 1998,
compared to 126 days for the same period a year ago. The Company has
provided and may continue to provide payment term extensions to certain of
its customers from time-to-time. As of September 30, 1998, the Company had
payment term extensions equal to approximately $350,000. With the exception
12
<PAGE>
of the Company's specific provision for bad debt related to one of its
customers (see SELLING, GENERAL AND ADMINISTRATIVE under the caption "Results
of Operation") the Company has historically collected its outstanding
receivables and believes that it will be successful in the collection of its
net receivable balance as of September 30, 1998.
The Company's inventory balance at September 30, 1998 and 1997 was $2.10
million and $2.0 million, respectively. Annualized inventory turns,
calculated using an average inventory balance, were 4.9 and 2.1 as of
September 30, 1998 and 1997, respectively.
The Company's principal sources of liquidity are its cash and cash
equivalents and cash generated from operating activities, if any. The
Company also has available up to 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 $100,000. The Company believes that, based on its current
financial projections, it has sufficient working capital, inclusive of its
line of credit facility, to meet its capital requirements and fund operations
for at least the next twelve months.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The statements in the third sentence under the caption "Revenue" on page
8, and the third and fourth sentences of the first paragraph, the last
sentence of the second paragraph, the fifth paragraph, the last sentence of
the sixth paragraph, the thirteenth paragraph, and the second sentence of the
fourteenth paragraph under the caption "Year 2000 Conversion", and 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 15 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.
DISTRIBUTION RELATIONSHIPS. The Company believes that 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
13
<PAGE>
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 that 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 expects to release additional products based on
newer 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-TM- 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
1999. There also can be no assurance that the Company's new products will be
accepted by customers. The Company's failure to enhance existing products,
develop and release new products on a timely basis and gain market acceptance
for such new products could materially and adversely affect the Company's
business, operating results and financial condition.
YEAR 2000 ISSUES. The "Year 2000 issue" arises because most computer
systems and programs were designed to handle only a two-digit year, not a
four-digit year. When the Year 2000 begins, these computers may interpret
"00" as the year 1900 and could either stop processing date-related
computations or could process them incorrectly. The Company is taking steps
to implement new information systems and migrate to Year 2000 compatible
software for its accounting, customer order processing, purchasing and
inventory control software, and accordingly, the Company does not currently
anticipate any internal Year 2000 issues from this software. However, the
Company could be adversely impacted by Year 2000 issues related to other
internally used computer-based systems and issues faced by major suppliers,
customers, vendors and distributors with which the Company interacts. The
Company has begun a testing program to gauge the Year 2000 compliance of its
products, and the Company is beginning the process of corresponding with
certain third parties to determine whether they are Year 2000 compliant. The
Company will then evaluate and follow up on the responses to determine
14
<PAGE>
the impact that third parties who are not Year 2000 compliant may have on the
operations and products of the Company. As a result of the unprecedented and
potentially complex nature of the Year 2000 issue however, there can be no
assurance that this issue will not have a material and adverse impact on the
business, operating results and financial condition of the Company, despite
the Company's efforts.
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. Further, 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
co-defendant. Although the Company believes that 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 six of
the past seven quarters, and such losses, which may occur 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.
15
<PAGE>
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.
16
<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 co-defendant. (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 PFI have agreed to separate the patent
infringement claims from all other claims and resolve the patent infringement
issues first. To date no trial has been scheduled.
On August 25, 1998, PFI filed a motion to enjoin the Company from
disseminating allegedly false and misleading information concerning the
capabilities of PFI's products. Although the Company has objected to this
motion, the Company has advised the court hearing the matter that neither the
Company, nor its representatives, will distribute any information concerning
the capabilities of PFI's products.
Item 2. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) 27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during
the quarter ended September 30, 1998
</TABLE>
17
<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.
October 23, 1998 /s/ Jonathan C. Lupia
- ---------------- ---------------------
Date Jonathan C. Lupia,
Chief Operating Officer and
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LORONIX
CONDENSED CONSOLIDATE BALANCE SHEET, STATEMENT OF OPERATIONS AND CASH FLOWS FROM
ITS 10-KSB FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,790,069<F1>
<SECURITIES> 0
<RECEIVABLES> 3,356,200
<ALLOWANCES> 162,980
<INVENTORY> 2,100,904
<CURRENT-ASSETS> 8,503,368
<PP&E> 6,360,802
<DEPRECIATION> 2,256,609
<TOTAL-ASSETS> 13,579,541
<CURRENT-LIABILITIES> 2,726,363
<BONDS> 0
0
0
<COMMON> 4,646,836
<OTHER-SE> 9,749,560
<TOTAL-LIABILITY-AND-EQUITY> 13,579,541
<SALES> 9,225,281
<TOTAL-REVENUES> 9,225,281
<CGS> 4,932,997
<TOTAL-COSTS> 10,709,200
<OTHER-EXPENSES> (82,311)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,258
<INCOME-PRETAX> (1,451,866)
<INCOME-TAX> (800)
<INCOME-CONTINUING> (1,452,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,452,666)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
<FN>
<F1>The company has two outstanding letters of credit collateralized by a
combination of certificates of deposit and cash totaling approximately
$100,000.
</FN>
</TABLE>
