<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 MARCH 31,
1999 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 16, 1999, THERE WERE 4,803,276 SHARES OF THE ISSUER'S
COMMON STOCK OUTSTANDING.
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET 1
AS OF MARCH 31, 1999
CONDENSED CONSOLIDATED STATEMENTS 3
OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
CONDENSED CONSOLIDATED STATEMENTS OF 4
CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 5
STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES. 15
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1999
-----------------------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents $3,072,575
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $478,434 4,259,174
Officers and employees 26,828
Inventory, net 2,004,973
Prepaid expenses and other assets 149,558
Notes receivable, related parties 38,454
-----------------------
Total current assets 9,551,562
Property and equipment, net of accumulated
depreciation of $2,662,446 4,029,605
Capitalized software costs, net of accumulated
amortization of $1,400,092 934,710
Notes receivable, related parties 28,838
Accounts receivable - officers and employees 132,856
Deposits and other assets 24,432
-----------------------
Total assets $14,702,003
-----------------------
-----------------------
</TABLE>
(continued)
1
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
1999
-----------------------
(UNAUDITED)
<S> <C>
Current liabilities:
Current installments of long-term debt $80,733
Current installments of capital lease obligations 6,288
Accounts payable 2,226,177
Accrued liabilities 946,530
Accrued commissions 267,000
-----------------------
Total current liabilities 3,526,728
Long-term debt, excluding current installments 1,055,946
-----------------------
Total liabilities 4,582,674
-----------------------
-----------------------
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 4,802,836 shares. 4,803
Additional paid-in capital 15,718,699
Notes receivable from stockholders (147,883)
Accumulated deficit (5,456,290)
-----------------------
Total stockholders' equity 10,119,329
-----------------------
Total liabilities and stockholders' equity $14,702,003
-----------------------
-----------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------------------------------
(UNAUDITED)
<S> <C> <C>
Systems, supplies and maintenance
Revenue $7,390,036 $1,903,869
--------------- ----------------
Operating costs and expenses:
Cost of revenue 4,003,867 1,003,563
Operations and customer support 530,135 347,924
Selling, general and administrative 1,886,853 899,677
Research and development 382,908 339,896
--------------- ----------------
Total cost and expenses 6,803,763 2,591,060
Income (loss) from operations 586,273 (687,191)
Other income (expense):
Interest income 31,396 31,843
Interest expense (29,847) (16,823)
Other (expense) income, net (667) 4,376
--------------- ----------------
882 19,396
Income (loss) before income taxes 587,155 (667,795)
Income tax expense 32,000 800
--------------- ----------------
Net income (loss) $555,155 ($668,595)
--------------- ----------------
--------------- ----------------
Basic income (loss) per share $0.12 ($0.14)
--------------- ----------------
--------------- ----------------
Diluted income (loss) per share $0.11 ($0.14)
--------------- ----------------
--------------- ----------------
Weighted-average shares outstanding 4,734,279 4,646,186
--------------- ----------------
--------------- ----------------
Diluted weighted-average shares outstanding 5,008,413 4,646,186
--------------- ----------------
--------------- ----------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
LORONIX INFORMATION
SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $555,155 $(668,595)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 336,635 293,394
(Gain) loss on disposal of capital equipment (4,570) 221
Loss (gain) on foreign currency exchange 833 (4,215)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (1,862,862) (379,815)
Increase in inventory, net (121,855) (3,225)
Decrease in prepaid expenses and other assets 8,948 571,596
Increase (decrease) in accounts payable 1,541,092 (179,279)
Increase (decrease) in accrued liabilities and commissions 694,570 (181,796)
------------ ------------
Net cash provided by (used in) operating activities 1,147,946 (551,714)
------------ ------------
Cash flows from investing activities:
Capital expenditures (123,064) (51,754)
Proceeds from disposal of capital equipment 9,454 -
Decrease in notes receivable, related parties 9,613 29,770
Decrease in deposits and other assets 12,043 7,940
Capitalized software (101,640) (100,760)
------------ ------------
Net cash used in investing activities (193,594) (114,804)
------------ ------------
Cash flows from financing activities:
Payments on bank borrowings (17,945) -
Payments on facility mortgage (6,075) (5,555)
Payments on capital lease (2,695) -
Proceeds from exercise of stock options 519,679 -
------------ ------------
Net cash provided by (used in) financing activities: 492,964 (5,555)
------------ ------------
Net increase (decrease) in cash 1,447,316 (672,073)
Cash and cash equivalents, beginning of year 1,625,259 3,334,124
------------ ------------
Cash and cash equivalents, end of March $3,072,575 $2,662,051
------------ ------------
------------ ------------
Supplemental cash flow information:
Interest paid $29,847 $16,823
------------ ------------
------------ ------------
Income taxes paid - $800
------------ ------------
------------ ------------
Noncash investing activities:
In 1999 the Company transferred inventory valued at $41,932 to property and
equipment.
In 1998 the Company transferred inventory valued at $34,496 to property and
equipment.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LORONIX INFORMATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1999 - 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, 1998 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 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 March 31, 1999 totaled
1,417,974. 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 because the effect
would have been antidilutive. Stock options and warrants totaling 1,302,548
shares for the three months ended March 31, 1998 were not included in
computing the diluted net loss per share because the effect would have been
antidilutive.
NOTE 3: SEGMENT INFORMATION
The Company has identified two primary segments: digital video
recording products ("CCTVware(R) Products") and digital identification
products ("ID Products"). Segment selection was based upon internal
organization structure and the availability of financial results.
<TABLE>
<CAPTION>
CCTVware ID Total
-----------------------------------------------------
<S> <C> <C> <C>
First Quarter 1999
Sales $ 6,801,000 $ 589,000 $7,390,000
Cost of Goods Sold 3,701,000 303,000 4,004,000
-----------------------------------------------------
Segment Margin $ 3,100,000 $ 286,000 $3,386,000
Segment gross margin % 45.6% 48.6% 45.8%
Additions to capitalized software $ 93,000 $ 9,000 $ 102,000
Software amortization $ 99,000 $ 23,000 $ 122,000
Capitalized software $ 1,365,000 $ 970,000 $2,335,000
Accumulated amortization 567,000 833,000 1,400,000
-----------------------------------------------------
Net book value of capitalized
software costs $ 798,000 $ 137,000 $ 935,000
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CCTVware ID Total
-----------------------------------------------------
<S> <C> <C> <C>
First Quarter 1998
Sales $ 1,539,000 $ 365,000 $1,904,000
Cost of Goods Sold 827,000 177,000 1,004,000
-----------------------------------------------------
Segment Margin $ 712,000 $ 188,000 $ 900,000
Segment gross margin % 46.3% 51.5% 47.3%
Additions to capitalized software $ 94,000 $ 7,000 $ 101,000
Software amortization $ 61,000 $ 34,000 $ 95,000
Capitalized software $ 848,000 $ 935,000 $1,783,000
Accumulated amortization 222,000 733,000 955,000
-----------------------------------------------------
Net book value of capitalized
software costs $ 626,000 $ 202,000 $ 828,000
</TABLE>
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 dealers 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 request for 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.
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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
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 $1,904,000 in the
first quarter of 1998 to $7,390,000 in the first quarter of 1999,
representing a 288% increase. Revenue in the first quarter of 1998 and 1999
included approximately $1,516,000, or 80% of total revenue, and approximately
$6,741,000, or 91% of total revenue, respectively, of CCTVware Products. The
Company attributes the increase in revenue to growing demand in the market
for digital video recording technology.
COSTS AND EXPENSES
COST OF REVENUE. The cost of revenue, consisting principally of the
costs of hardware components and supplies as well as software amortization,
increased from $1,004,000 in the first quarter of 1998 to $4,004,000 in the
first quarter of 1999, and represented 53% and 54% of revenue, respectively.
The increase in the cost of revenue 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 $348,000 in the first quarter of 1998
to approximately $530,000 in the first quarter of 1999, and represented 18%
and 7% of revenue, respectively. The increase in such expenses in absolute
terms resulted primarily from headcount and compensation-related increases
and increases in travel, recruiting and supplies expenses. These increased
expenses were associated with increased business levels and more customer
installations and support. The decrease in these expenses in percentage terms
is the result of substantially higher revenue in the first quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $900,000 in the first quarter of 1998
to $1,887,000 in the first quarter of 1999, and represented 47% and 26% of
revenue, respectively. The increase in such expenses in absolute terms
resulted primarily from headcount and compensation-related increases and an
increase in legal fees associated with the Company's patent litigation with
PFI. To a lesser extent, the increase in such expenses in absolute terms also
resulted from increases in travel, telecommunications, maintenance and
depreciation expenses and an increase in the provision for doubtful accounts.
The decrease in these expenses in percentage terms is the result of
substantially higher revenue in the first quarter of 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses, net of
capitalized software costs, increased from approximately $340,000 in the
first quarter of 1998 to approximately $383,000 in the first quarter of 1999,
and represented 18% and 5% of revenue, respectively. The increase in such
expenses in absolute terms resulted primarily from headcount and
compensation-related increases. The decrease in these expenses in percentage
terms is the result of substantially higher revenue in the first quarter of
1999.
INTEREST INCOME. Interest income decreased slightly from
approximately $32,000 in the first quarter of 1998 to approximately $31,000
in the first quarter of 1999. This decrease was due to a reduction in the
average cash available for investment.
INTEREST EXPENSE. Interest expense increased from approximately
$17,000 in the first quarter of 1998 to approximately $30,000 in the first
quarter of 1999 as a result of increased bank borrowings.
7
<PAGE>
INCOME TAX EXPENSE. In the first quarter of 1998, an income tax
expense of approximately $1,000, representing minimum estimated California
franchise tax, was recorded. In the first quarter of 1999, income tax expense
of $32,000 was estimated at 5.5% of pre-tax income after giving effect to the
carry-forward of net operating losses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During each of the three month periods ended March 31, 1998 and
1999, the Company financed its operations primarily from working capital.
The Company's principal uses of cash during each of the three month
periods ended March 31, 1998 and 1999 were to: (i) fund operating activities
in 1998; (ii) acquire property and equipment; and (iii) invest in the
development of software.
During the first three months of 1998, the Company's cash and cash
equivalents decreased from $3,334,000 at December 31, 1997 to $2,662,000 at
March 31, 1998. Net cash used in operating activities of $552,000 consisted
primarily of losses of $669,000, increases in accounts receivable and
decreases in accounts payable and accrued liabilities and commissions of
$741,000 offset by depreciation and amortization and a decrease in prepaid
expenses and other assets of $865,000. Net cash used in investing activities
of $115,000 consisted primarily of $52,000 of capital expenditures and
$101,000 of capitalized software offset by a decrease in notes receivable,
related parties.
During the first three months of 1999, the Company's cash and cash
equivalents increased from $1,625,000 at December 31, 1998 to $3,073,000 at
March 31, 1999. Net cash provided by operating activities of $1,148,000
consisted primarily of income of $555,000, depreciation and amortization and
increases in accounts payable and accrued liabilities and commissions of
$2,572,000 offset by increases in accounts receivable and inventory of
$1,985,000. Net cash used in investing activities of $194,000 consisted
primarily of $123,000 of capital expenditures and $102,000 of capitalized
software. Net cash provided by financing activities consisted primarily of
proceeds from the exercise of stock options of $520,000 offset by payments on
bank borrowings, facility mortgage and capital leases of $27,000.
At March 31, 1999, the Company had $6,025,000 in working capital,
including $4,259,000 of trade accounts receivable and $2,005,000 of
inventory. Days sales outstanding, calculated using an average accounts
receivable balance, were approximately 46 days as of March 31, 1999, compared
to 128 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 March 31, 1999, the Company had payment term extensions
outstanding of approximately $350,000.
The Company's inventory balance at March 31, 1999 and 1998 was
$2,005,000 and $1.480,000, respectively. Annualized inventory turns,
calculated using an average inventory balance, were 7.8 and 2.4 as of March
31, 1999 and 1998, respectively.
The Company's principal sources of liquidity are its cash and cash
equivalents and cash generated from operating activities, if any. The Company
also has available up to a $1,000,000 line of credit based on a percentage of
the Company's eligible accounts receivable. The line of credit facility
expires in May 1999 and the Company expects to renew this credit facility.
The line of credit has not been used to date. The Company anticipates capital
expenditures for the remainder of 1999 of approximately $450,000. Further,
the Company may expand its existing facility at the La Plata County airport
by 20,000 square feet. The cost for such expansion is estimated to be
approximately $700,000. 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.
YEAR 2000 CONVERSION
Many computer systems may experience problems handling dates beyond
1999. Therefore, some computer hardware and software will need to be modified
prior to 2000 in order to remain functional. The Company has completed its
initial assessment of the readiness and compliance of its computer-based
products available for sale and is currently assessing its computer-based
systems used internally, and the Company expects to
8
<PAGE>
implement successfully the system and programming changes necessary to
address year 2000 issues by September 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 which are CCTVware Products and ID
Products.
CCTVWARE PRODUCTS. The Company has created and executed a series of
tests to determine the possible problems year 2000 might have on the
operation of its CCTVware Products version 1.2. These tests indicated that
year 2000 did not adversely affect the performance of the CCTVware Products,
and the Company expects that these products will operate successfully in the
days leading up to and following the year 2000. To date, the Company has not
completed its testing to determine what effect, if any, leap years may have
on the operation of the CCTVware Products. The Company expects to complete
its initial testing of the leap year issue within the next two months and
expects these products will operate successfully.
A key component of determining the Company's year 2000 state of
readiness is to identify those areas of operation where CCTVware 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 CCTVware 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 products
that the Company considers critical to the operation of the CCTVware Products
and gauge their year 2000 compliance efforts. The Company has sent letters to
various vendors and is in the process of receiving and analyzing the
responses to determine the year 2000 state of readiness of such vendor
supplied products. Responses and tests to date indicate that certain
third-party supplied products do not appear to adversely affect the
performance of the CCTVware Products with respect to the year 2000 issue.
The Company has released and expects to release new versions of its
CCTVware Products in the future. The Company will continue to audit and test
compliance with year 2000 performance of its internally developed products.
ID PRODUCTS. The Company has created and executed a series of tests
to determine the possible problems the year 2000 will have on the operation
of those ID Products which the Company continues to support. Such ID products
include: ImageSHARE for NT versions 2.5 and 3.1, ImageSHARE Express 1.1, and
Instant ID 2.0. These tests indicated that if configured properly, the year
2000 will not adversely affect the performance of the ID Products, and the
Company expects that these products will operate successfully in the days
leading up to and following the year 2000.
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; Radionics Ready Key with ImageSHARE 1.21; Mulitnet 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 products supplied
by third parties. 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. At risk are older
computers that may have embedded problems in the basic input/output system
("BIOS") for processing year 2000 dates. Certain routines within the ID
9
<PAGE>
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
compliance effort is to contact those vendors who supply products that the
Company considers critical to the operation of ID Products and gauge their
year 2000 compliance efforts. The Company has sent letters to various vendors
and is in the process of receiving and analyzing the responses to determine
the year 2000 state of readiness of such vendor supplied products. Responses
and tests to date indicated that certain third-party supplied products do not
appear to adversely affect the performance of the ID Products with respect to
the year 2000 issue.
From 1989 through 1997, the Company developed eleven 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); ImageSHARE 1.21; Laser ID Card Creator;
Entry Check; BoldImage and BoldImage Express; and Color Card Creator. Between
1996 and 1999, the Company recognized that the unavailability of peripheral
replacement equipment from third-party vendors and inadequate technical
resources made it infeasible for the Company to continue to support 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, Novell Network Operating System,
SourceSafe, Microsoft Windows and various software application programs, and
(ii) hardware devices, including servers, hubs, proximity readers, motion
detectors, phone systems and personal computers.
In 1998, the Company upgraded its Macola software to the year 2000
compliant version. The Company is currently assessing its other internal
computer-based systems to determine their susceptibility to the year 2000
issue. The Company expects to complete its assessment and incorporate any
required fixes to ensure compatibility with year 2000 by September 1, 1999.
COST OF YEAR 2000 CONVERSION. To date, the Company estimates that it
has spent less than $18,000 of incremental external spending on the year 2000
issue and estimates that future external costs associated with its year 2000
compliance efforts will not exceed $50,000.
CONTINGENCY PLANS. The Company has not yet completed its assessment
of the reasonably likely worst case scenario of Non-Information Technology
Business Systems and/or Information Technology Systems failures and related
consequences. Although the Company does not anticipate any significant issues
relating to year 2000, it intends to create contingency plans as information
becomes available indicating areas of non-compliance that could have an
adverse effect on the Company's future results of operations, liquidity or
financial condition.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The statements in the second sentence of the paragraph under the
caption "Revenue", the third sentence of the fifth paragraph and the third,
fifth, sixth, seventh and eighth sentences in the seventh paragraph under the
caption "Financial Condition, Liquidity and Capital Resources", the second
and third sentences of the first paragraph, the second and fourth sentences
of the third paragraph, the fifth paragraph, the third sentence of the sixth
paragraph, the last sentence of the eleventh paragraph, the twelfth paragraph
and the second sentence of the thirteenth paragraph under the caption "Year
2000 Conversion", the first, second and fifth sentences under the caption
"Capital Requirements" below, the third sentence under the caption
"Dependence on a Major Customer" below, the third and sixth sentences under
the caption "Year 2000 Issues" below, the fourth sentence under the caption
"Proprietary Rights", the first sentence under the caption "Variability of
Operating Results" below and the first sentence under the caption "Volatility
of Stock Price are forward-looking statements. In addition, the Company may
from time to time make oral forward-looking statements. The following are
certain important factors that could cause actual results to differ
materially from those projected in any such forward-looking statements.
10
<PAGE>
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 extraordinarily large
orders for certain CCTVware products from large business, institutional or
government buyers, the Company's capital requirements may exceed the
Company's available capital resources. Additionally, the Company has suffered
losses in seven of the past nine 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 and ID Products depends in part
on its ability to maintain distribution relationships with manufacturing
representatives, dealers and systems integrators 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 have a negative impact on
the Company's revenue stream. Further, there can be no assurance that the
businesses with whom the Company has developed such relationships, some of
whom have significantly greater financial and marketing resources than the
Company, will not develop and market products in competition with the Company
or will not otherwise discontinue their relationships with the Company.
COMPETITION. The markets for the Company's CCTVware Products and ID
Products are extremely competitive. Competitors include a broad range of
companies that develop and market products for the identification and
surveillance markets. Competitors in the identification market include: (i)
in film-based systems, Polaroid Corporation, and (ii) in digital-based
systems, Polaroid Corporation, Data Card Corporation, Dactek International,
Inc., Imaging Technology Corporation, G & A Imaging, Goddard Technology
Corporation and Laminex, Inc., as well as many other organizations.
Competitors in the surveillance market include numerous VCR suppliers and
digital recording suppliers including, among others: (i) TVX, Inc. and Prima
Facie, Inc. for the Transit product; and (ii) Dedicated Micros, Inc.,
Sensormatic Corporation, Primary Image, Ltd., Alpha Systems Lab and NICE
Systems, Ltd. for the M Series products. Loronix has not yet identified any
competitors, other than VCR suppliers, for its Enterprise and Vision products.
The Company believes that the principal competitive factors in its
markets include: system performance and functionality, price, system
configuration flexibility, ease-of-use, system maintenance costs, quality,
reliability, customer support and brand name. Further, the Company believes
that its primary competitive strengths include system performance and
functionality, system configuration flexibility and ease-of-use. Larger, more
established companies with substantially greater technical, financial and
marketing resources than the Company, such as Data Card Corporation,
Sensormatic Corporation and NICE Systems, Ltd., could use such resources to
undermine the Company's ability to compete effectively for sales and market
share. 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.
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 alleges that the Company's
CCTVware Transit product infringes certain claims of two patents held by PFI
and that the Company has interfered with PFI's business relationships. The
claim has 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 Company's business, operating results and
financial condition. More specifically, if the claims of PFI are upheld as
valid, enforceable and infringed, the Company might be held liable for a
substantial damage award and would be required to obtain a license from PFI
or be required to redesign its products to avoid infringement. There can be
no assurance that a license would be available from PFI, or if available,
would be available on terms acceptable to the Company or that the Company
would be able to redesign its products to avoid infringement. Accordingly, an
adverse determination in the pending judicial proceedings could prevent the
Company from manufacturing and selling its CCTVware products which would
almost certainly adversely affect the Company's business, operating results
and financial
11
<PAGE>
condition. Additionally, the Company has incurred and continues to incur
substantial expenses in its litigation with PFI, and there can be no
assurance that the Company will not continue to incur such expenses for some
considerable amount of time.
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.
DEPENDENCE ON A MAJOR CUSTOMER. In 1998, sales to Dayton Hudson
Corporation accounted for 38% of the Company's revenue. Dayton Hudson is not
obligated to purchase any minimum levels of the Company's products, and
although Dayton Hudson Corporation has placed additional orders with the
Company which accounted for 31% of the first quarter 1999 revenue, there can
be no assurance that any further business will arise from this customer. Any
significant reduction in product sales to Dayton Hudson Corporation that
cannot be replaced with new business may 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 has taken steps
to implement new information systems and migrate to year 2000 compliant
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 completed its initial testing program to gauge the year 2000
compliance of its products, and the Company has corresponded with certain
third parties to determine whether they are year 2000 compliant. The Company
will evaluate and follow up on the responses to determine 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.
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. 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. 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, except that a claim of infringement has been asserted
against the Company by PFI (see Part II, Item 1 - Legal Proceedings and "Risk
Factors -Legal Proceedings"). The Company has already expended considerable
resources and funds towards defending itself in this infringement litigation
and an adverse result in this litigation with PFI could have a negative
impact on the financial position and results of operations of the Company.
Further, there can be no assurance that other third parties will not assert
12
<PAGE>
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 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.
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.
13
<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, 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 dealers 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 request for 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.
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 March 31, 1999.
14
<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.
May 7, 1999 /s/ Jonathan C. Lupia
- ----------- ---------------------
Date Jonathan C. Lupia,
Chief Operating Officer and
Chief Financial Officer
15
<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-QSB FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,072,575<F1>
<SECURITIES> 0
<RECEIVABLES> 4,737,608
<ALLOWANCES> 478,434
<INVENTORY> 2,004,973
<CURRENT-ASSETS> 9,551,562
<PP&E> 6,692,051
<DEPRECIATION> 2,662,446
<TOTAL-ASSETS> 14,702,003
<CURRENT-LIABILITIES> 3,526,728
<BONDS> 0
0
0
<COMMON> 4,803
<OTHER-SE> 10,114,526
<TOTAL-LIABILITY-AND-EQUITY> 14,702,003
<SALES> 7,390,036
<TOTAL-REVENUES> 7,390,036
<CGS> 4,003,867
<TOTAL-COSTS> 6,803,763
<OTHER-EXPENSES> (30,730)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,847
<INCOME-PRETAX> 587,155
<INCOME-TAX> 32,000
<INCOME-CONTINUING> 555,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555,155
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
<FN>
<F1>The company has one outstanding letter of credit collateralized by a
combination of certificate of deposit and cash totaling approximately $29,000
</FN>
</TABLE>
