-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jmf29TD+omGupujfrBjJtj3FWQ0lGmOle/DKCel5m4DZQMgNiwnAb6o0m0o+/SVz z+xvr1Gc/YuUbdW51/k3yg== 0000912057-99-003907.txt : 19991109 0000912057-99-003907.hdr.sgml : 19991109 ACCESSION NUMBER: 0000912057-99-003907 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LORONIX INFORMATION SYSTEMS INC CENTRAL INDEX KEY: 0000925538 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330248747 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24738 FILM NUMBER: 99743196 BUSINESS ADDRESS: STREET 1: 820 AIRPORT RD CITY: DURANGO STATE: CO ZIP: 81301 BUSINESS PHONE: 9702596161 MAIL ADDRESS: STREET 1: 820 AIRPORT RD CITY: DURANGO STATE: CO ZIP: 81301 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 OCTOBER 15, 1999, THERE WERE 5,000,488 SHARES OF THE ISSUER'S COMMON STOCK OUTSTANDING. LORONIX INFORMATION SYSTEMS, INC. INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET 1 AS OF SEPTEMBER 30, 1999 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS 3 OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF 4 CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 NOTES TO UNAUDITED 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 5. OTHER INFORMATION 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURES. 16
PART I - FINANCIAL INFORMATION LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET ASSETS
SEPTEMBER 30, 1999 ------------- (UNAUDITED) Current assets: Cash and cash equivalents $ 3,867,215 Accounts receivable: Trade, net of allowance for doubtful accounts of $979,954 6,521,662 Officers and employees 14,458 Inventory, net 2,696,042 Prepaid expenses and other assets 142,296 Notes receivable, related parties 107,454 ----------- Total current assets 13,349,127 Property and equipment, net of accumulated depreciation of $3,109,107 3,967,636 Capitalized software and third party design costs, net of accumulated amortization of $1,671,614 980,357 Notes receivable, related parties 15,611 Accounts receivable - officers and employees 139,847 Deposits and other assets 22,940 ----------- Total assets $18,475,518 ===========
(continued) 1 LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, 1999 ------------- (UNAUDITED) Current liabilities: Current installments of long-term debt $ 80,733 Accounts payable 2,688,248 Accrued liabilities 2,728,989 Accrued commissions 312,500 ----------- Total current liabilities 5,810,470 Long-term debt, exluding current installments 1,016,066 ----------- Total liabilities 6,826,536 ----------- 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 4,966,409 shares. 4,967 Additional paid-in capital 16,280,717 Notes receivable from stockholders (147,883) Accumulated deficit (4,488,819) ----------- Total stockholders' equity 11,648,982 ----------- Total liabilities and stockholders' equity $18,475,518 ===========
See accompanying notes to condensed consolidated financial statements. 2 LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 -------------------------------- -------------------------------- (UNAUDITED) (UNAUDITED) -------------------------------- -------------------------------- Systems, supplies and maintenance revenue $11,079,420 $5,336,735 $25,999,489 $9,225,281 ---------------- -------------- --------------- -------------- Operating costs and expenses: Cost of products sold 5,988,677 2,863,504 14,152,984 4,932,997 Operations and customer support 709,750 486,630 1,852,523 1,147,937 Selling, general and administrative 2,665,070 1,521,904 6,214,989 3,585,020 Patent litigation settlement 900,000 - 900,000 - Research and development 363,002 363,587 1,204,807 1,043,246 ---------------- -------------- --------------- -------------- Total cost and expenses 10,626,499 5,235,625 24,325,303 10,709,200 Income (loss) from operations 452,921 101,110 1,674,186 (1,483,919) Other income (expense): Interest income 48,742 37,918 113,599 104,551 Interest expense (30,309) (16,743) (86,265) (50,259) Other income (expense), net 4,132 (18,186) (802) (22,239) ---------------- -------------- --------------- -------------- 22,565 2,989 26,532 32,053 Income (loss) before income taxes 475,486 104,099 1,700,718 (1,451,866) Income tax expense (129,800) - (178,092) (800) ---------------- -------------- --------------- -------------- Net income (loss) $345,686 $104,099 $1,522,626 ($1,452,666) ================ ============== =============== ============== Basic income (loss) per share $0.07 $0.02 $0.32 ($0.31) ================ ============== =============== ============== Diluted income (loss) per share $0.06 $0.02 $0.28 ($0.31) ================ ============== =============== ============== Weighted-average shares outstanding - basic 4,852,079 4,646,836 4,798,637 4,646,384 ================ ============== =============== ============== Diluted weighted-average shares outstanding 5,573,937 4,689,394 5,443,860 4,646,384 ================ ============== =============== ==============
See accompanying notes to condensed consolidated financial statements 3 LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ------------------------------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income (loss) $1,522,626 $(1,452,666) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,077,283 881,889 Gain on disposal of capital equipment (8,966) - Loss (gain) on foreign currency exchange 1,744 (3,156) Compensation expense related to grant of stock options 7,385 - Changes in operating assets and liabilities: Increase in accounts receivable, net (4,119,971) (727,742) Increase in inventory, net (984,974) (704,518) Decrease in prepaid expenses and other assets 16,210 786,145 Decrease in deposits and other assets 13,535 8,276 Increase in accounts payable 2,003,163 829,264 Increase in accrued liabilities and commissions 2,522,529 466,103 ----------------- ---------------- Net cash provided by operating activities 2,050,564 83,595 ----------------- ---------------- Cash flows from investing activities: Capital expenditures (398,854) (860,789) Proceeds from disposal of capital equipment 46,236 - (Increase) decrease in notes receivable, related parties (46,160) 48,996 Capitalized software and third party designs (418,809) (289,869) ----------------- ---------------- Net cash used in investing activities (817,587) (1,101,662) ----------------- ---------------- Cash flows from financing activities: (Payments on) proceeds from bank borrowings (45,761) 500,000 Payments on facility mortgage (18,139) (16,506) Payments on capital lease (8,983) (11,296) Proceeds from exercise of stock options 1,081,862 1,814 ----------------- ---------------- Net cash provided by financing activities: 1,008,979 474,012 Net increase in cash 2,241,956 (544,055) Cash and cash equivalents, beginning of year 1,625,259 3,334,124 ----------------- ---------------- Cash and cash equivalents, end of September $3,867,215 $2,790,069 ================= ================ Supplemental cash flow information: Interest paid $86,266 $50,259 ================= ================ Income taxes paid $41,300 $800 ================= ================ Noncash investing activities: In 1999 the Company transferred inventory valued at $213,982 to property and equipment. In 1998 the Company transferred inventory valued at $49,071 to property and equipment.
See accompanying notes to condensed consolidated financial statements. 4 LORONIX INFORMATION SYTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (SEPTEMBER 30, 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 with the exception of the cost associated with the litigation settlement agreement (see Note 4: Legal Proceedings). NOTE 2: EARNINGS PER SHARE The Company presents net income and net loss per share in accordance with SFAS No. 128, "Earnings per Share." As required by SFAS No. 128, the Company must present basic and diluted net income and net loss per share as defined. Basic net income and net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed to incorporate the incremental dilutive shares issuable upon the assumed exercise of stock options. All prior period net income and net loss per common share information are presented in accordance with SFAS No. 128. Stock options to purchase a total of 1,137,850 common shares were outstanding at September 30, 1999. Stock options and warrants to purchase a total of 1,372,073 common shares were outstanding at September 30, 1998. For the three months ended September 30, 1999 and 1998, 721,858 and 42,558 shares, representing the dilutive effect of stock options and warrants, were included in computing the diluted net income per share, respectively. For the nine months ended September 30, 1999, 645,223 shares, representing the dilutive effect of stock options, were included in computing the diluted net income per share. Stock options and warrants to purchase a total of 1,372,073 common shares for the nine months ended September 30, 1998, were not included in computing the diluted net loss per share because the effect would have been antidilutive. 5 NOTE 3: SEGMENT INFORMATION The Company has identified two primary segments: digital video recording products ("CCTVware-Registered Trademark- Products") and digital identification products ("ID Products") in accordance with SFAS No. 131. Segment selection was based upon internal organization structure and the availability of financial results.
Three Months Ended Nine Months Ended September 30 September 30 CCTVware ID Total CCTVware ID Total --------------------------------------------------------------------------------------- 1999 Sales $10,580,000 $499,400 $11,079,400 $24,340,900 $1,658,600 $25,999,500 Cost of goods sold 5,706,700 282,000 5,988,700 13,229,000 924,000 14,153,000 --------------------------------------------------------------------------------------- Segment margin $ 4,873,300 $217,400 $ 5,090,700 $11,111,900 $ 734,600 $11,846,500 Segment gross margin % 46.1% 43.5% 45.9% 45.7% 44.3% 45.6% Additions to capitalized software $ 120,900 $ 8,800 $ 129,700 $ 313,900 $ 24,800 $ 338,700 Software amortization $ 113,000 $ 23,200 $ 136,200 $ 317,400 $ 69,700 $ 387,100 Capitalized software $ 1,585,700 $985,900 $ 2,571,600 $ 1,585,700 $ 985,900 $ 2,571,600 Accumulated amortization 785,700 879,600 1,665,300 785,700 879,600 1,665,300 --------------------------------------------------------------------------------------- Net book value of capitalized software costs $ 800,000 $106,300 $ 906,300 $ 800,000 $ 106,300 $ 906,300 1998 Sales $ 4,702,000 $634,700 $ 5,336,700 $ 7,656,900 $1,568,400 $ 9,225,300 Cost of goods sold 2,491,600 371,900 2,863,500 4,125,900 807,100 4,933,000 --------------------------------------------------------------------------------------- Segment Margin $ 2,210,400 $262,800 $ 2,473,200 $ 3,531,000 $ 761,300 $ 4,292,300 Segment gross margin % 47.0% 41.4% 46.3% 46.1% 48.5% 46.5% Additions to capitalized software $ 169,800 $ 7,000 $ 176,800 $ 348,800 $ 21,000 $ 369,800 Software amortization $ 84,100 $ 26,600 $ 110,700 $ 215,500 $ 89,700 $ 305,200 Capitalized software $ 1,102,500 $948,100 $ 2,050,600 $ 1,102,500 $ 948,100 $ 2,050,600 Accumulated amortization 376,500 787,400 1,163,900 376,500 787,400 1,163,900 --------------------------------------------------------------------------------------- Net book value of capitalized software costs $ 726,000 $160,700 $ 886,700 $ 726,000 $ 160,700 $ 886,700
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 September 1998 to allege infringement by the Company's other CCTVware Products. The suit sought injunctive relief against further infringement and damages. The lawsuit also named one of the Company's domestic dealers as a co-defendant. On July 6, 1998, the Company filed counterclaims against PFI. These counterclaims included a request for Declaratory Judgment of Patent Invalidity and six other counterclaims. The Company and PFI agreed to separate the patent infringement claims from all other claims and resolve the patent infringement issues first. 6 On September 29, 1999, the Company and PFI agreed to settle all of their legal differences with neither party admitting any liability. Under the terms of the settlement agreement the Company will pay to PFI $900,000 over a period of one year and received a fully paid, royalty free license for all of its products under all of PFI's patents. Payments through September 1999 totaled $300,000. 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, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 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. Revenue increased from $5,336,700 the third quarter of 1998 to $11,079,400 in the third quarter of 1999, representing a 108% increase. Revenue in the third quarter of 1998 and 1999 included approximately $4,702,000, or 88% of total revenue, and approximately $10,580,000, or 95% of total revenue, respectively, of CCTVware Products. For the three months ended September 30, 1999 sales to two customers accounted for 72% of the Company's revenue. The Company is expanding its customer base and does not expect that these two customers will account for as high of a percentage of the Company's sales, if any at all, in the future.* 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 $2,863,500 in the third quarter of 1998 to $5,988,700 in the third quarter of 1999, and represented 54% of revenue in both periods. The cost of revenue in the third quarter of 1998 and 1999 included approximately $80,200, or 3% of the cost of revenue, and approximately $436,600, or 7% of the cost of revenue, respectively, of warranty charges for CCTVware Products. The increase in the warranty cost of revenue as a percentage was primarily attributable to warranty charges associated with a retrofit program of certain of the Company's CCTVware transit products. OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support expenses increased from approximately $486,600 in the third quarter of 1998 to approximately $709,800 in the first quarter of 1999, and represented 9% and 6% of revenue, respectively. The increase in such expenses in absolute terms resulted primarily from headcount and compensation-related increases. 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 third quarter of 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased from approximately $1,521,900 in the third quarter of 1998 to $2,665,100 in the third quarter of 1999, and represented 29% and 24% of revenue, respectively. The increase in such expenses in absolute terms resulted primarily from headcount and compensation-related increases and increases in travel, recruiting, telecommunications, product promotions, 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 third quarter of 1999. PATENT LITIGATION SETTLEMENT. Patent litigation settlement expenses of $900,000 represents the settlement costs associated with settling the Company's legal differences with PFI (see note 4: Legal Proceedings). - --------------------------------- * Forward-looking statement (see Certain Factors Bearing On Future Results). 7 RESEARCH AND DEVELOPMENT. Research and development expenses, net of capitalized software costs, decreased slightly from approximately $363,600 in the third quarter of 1998 to approximately $363,000 in the third quarter of 1999, and represented 7% and 3% of revenue, respectively. The decrease in such expenses in absolute terms resulted primarily from headcount and compensation-related increases that were more than offset by an increase in capitalized software costs. The decrease in these expenses in percentage terms is the result of substantially higher revenue in the third quarter of 1999. INTEREST INCOME. Interest income increased from approximately $37,900 in the third quarter of 1998 to approximately $48,700 in the third quarter of 1999. This increase was due to an increase in the average cash available for investment. INTEREST EXPENSE. Interest expense increased from approximately $16,700 in the third quarter of 1998 to approximately $30,300 in the third quarter of 1999 as a result of increased bank borrowings. INCOME TAX EXPENSE. In the third quarter of 1998, the Company recorded no income tax expense due to losses. In the third quarter of 1999, income tax expense of $129,800 was recorded due to the Company's increased profitability and was at an effective rate below the statutory tax rate due to the reduction of a valuation allowance previously established against the carry-forward of net operating losses. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 REVENUE Revenue increased from $9,225,300 in the first nine months of 1998 to $25,999,500 in the first nine months of 1999, representing a 182% increase. Revenue in the first nine months of 1998 and 1999 included approximately $7,656,900, or 83% of total revenue, and approximately $24,340,900, or 94% of total revenue, of CCTVware Products, respectively. For the nine months ended September 30, 1999 sales to two customers accounted for 63% of the Company's revenue. The Company is expanding its customer base and does not expect that these two customers will account for as high of a percentage of the Company's sales, if any at all, in the future.* 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 $4,933,000 in the first nine months of 1998 to $14,153,000 in the first nine months of 1999, and represented 54% of revenue in both periods. The cost of revenue in the first nine months of 1998 and 1999 included approximately $155,000, or 3% of the cost of revenue, and approximately $779,200, or 6% of the cost of revenue, respectively, of warranty charges for CCTVware Products. The increase in the warranty cost of revenue as a percentage was primarily attributable to warranty charges associated with a retrofit program of certain of the Company's CCTVware transit products. OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support expenses increase from $1,147,900 in the first nine months of 1998 to $1,852,500 in the first nine months of 1999, and represented 12% 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, supplies, telecommunications and facility 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 nine months of 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased from $3,585,000 in the first nine months of 1998 to $6,215,000 in the first nine months of 1999, and represented 39% and 24% of revenue, respectively. The increase in such expenses in absolute terms resulted primarily from headcount and compensation-related increases and increases in travel, recruiting, supplies, telecommunications, product promotions, facility, maintenance and depreciation expenses and an increase in the provision for doubtful accounts. - --------------------------------- * Forward-looking statement (see Certain Factors Bearing On Future Results). 8 The decrease in these expenses in percentage terms is the result of substantially higher revenue in the first nine months of 1999. PATENT LITIGATION SETTLEMENT. Patent litigation settlement expenses of $900,000 represents the settlement fees associated with settling the Company's legal differences with PFI (see note 4: Legal Proceedings). RESEARCH AND DEVELOPMENT. Research and development expenses, net of capitalized software costs, increased from $1,043,200 in the first nine months of 1998 to $1,204,800 in the first nine months of 1999, and represented 11% and 5% of revenue, respectively. The increase in such expenses in absolute terms resulted primarily from headcount and compensation-related increases and increases in recruiting, supplies and telecommunications expense. The decrease in these expenses in percentage terms is the result of substantially higher revenue in the first nine months of 1999. INTEREST INCOME. Interest income increased from approximately $104,600 in the first nine months of 1998 to approximately $113,600 the first nine months of 1999. This increase was due to an increase in the average cash available for investment. INTEREST EXPENSE. Interest expense increased from approximately $50,300 in the first nine months of 1998 to approximately $86,300 in the first nine months of 1999 as a result of increased bank borrowings. INCOME TAX EXPENSE. In the first nine months of 1998, an income tax expense of $800, representing minimum estimated California franchise tax, was recorded. In the first nine months of 1999, income tax expense of $178,100 was recorded due to the Company's increased profitability and was at an effective rate below the statutory tax rate due to the reduction of a valuation allowance previously established against the carry-forward of net operating losses. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES During the nine month period ended September 30, 1998, the Company financed its operations primarily from working capital. During the nine month period ended September 30, 1999, the Company financed its operations primarily from cash from operations. The Company's principal uses of cash during each of the nine month periods ended September 30, 1998 and 1999 were to acquire property and equipment and invest in the development of software. During the first nine months of 1998, the Company's cash and cash equivalents decrease from $3,334,100 at December 31, 1997 to $2,790,100 at September 30, 1998. Net cash provided by operating activities of $83,600 consisted primarily of losses of $1,452,700, and increases in accounts receivable and inventory of $1,432,300 offset by depreciation and amortization, a decrease in prepaid expenses and other assets and increases in accounts payable and accrued liabilities and commissions of $2,963,400. Net cash used in investing activities of $1,101,700 consisted primarily of $860,800 of capital expenditures and $289,900 of capitalized software and third party designs. Net cash provided by financing activities of $474,000 consisted primarily of $500,000 from a bank borrowing. During the first nine months of 1999, the Company's cash and cash equivalents increased from $1,625,300 at December 31, 1998 to $3,867,200 at September 30, 1999. Net cash provided by operating activities of $2,050,600 consisted primarily of income of $1,522,600, depreciation and amortization and increases in accounts payable and accrued liabilities and commissions of $5,603,000 offset by increases in accounts receivable and inventory of $5,104,900. Net cash used in investing activities of $817,600 consisted primarily of $398,900 of capital expenditures and $418,800 of capitalized software and third party designs. Net cash provided by financing activities of $1,009,000 consisted primarily of proceeds from the exercise of stock options of $1,081,900 offset by payments on bank borrowings, facility mortgage and capital leases of $72,900. At September 30, 1999, the Company had $7,538,700 in working capital, including $6,521,700 of trade accounts receivable and $2,696,000 of inventory. Days sales outstanding, calculated using an average accounts receivable balance, were approximately 52 days as of September 30, 1999, compared to 53 days for the same period a year ago. The Company has provided and may continue to provide payment term extensions to certain of its 9 customers from time to time.* As of September 30, 1999, the Company had payment term extensions outstanding of approximately $425,000. The Company's inventory balance at September 30, 1998 and 1999 was $2,100,900 and $2,696,000 respectively. Annualized inventory turns, calculated using an average inventory balance, were 2.3 and 8.9 as of September 30, 1998 and 1999, 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 has not been used to date. The Company anticipates capital expenditures for the remainder of 1999 of approximately $1,000,000.* Such capital expenditures include $800,000 to expand its existing facility in Durango, Colorado by 20,000 square feet. On October 14, 1999, the Company entered into a six month construction loan for up to $800,000 with 9% interest only payments due monthly beginning November 1999. Upon completion of the facility the construction loan will be refinanced with a commercial real estate loan. Such loan will be amortized over fifteen years with interest equal to the prime rate at the time of closing plus .75%. The Company believes that, based on its current financial projections, it has sufficient working capital, inclusive of its line of credit facility, to meet its capital requirements and fund operations for at least the next twelve months.* YEAR 2000 READINESS, COSTS, RISKS AND CONTINGENCY PLANS Many computer systems may experience problems handling dates beyond 1999. Therefore, some computer hardware and software need to be modified prior to 2000 in order to remain functional. The Company has substantially completed its assessment of the readiness and compliance of its computer-based products available for sale and its assessment of its computer-based systems used internally, and the Company has substantially implemented successfully the system and programming changes necessary to address year 2000 related issues. COMPUTER-BASED PRODUCTS AVAILABLE FOR SALE. The Company has two primary product lines available for sale, CCTVware Products and ID Products. CCTVWARE PRODUCTS. The Company's CCTVware Products consists of the CCTVware MSeries and Enterprise products and the CCTVware Transit product ("Transit"). The Company has created and executed a series of tests to determine the possible problems year 2000 might have on the operation of the CCTVware Products, including versions 1.2, 1.3, and 1.3.1 of the MSeries and Enterprise products, and versions 1.4 and 1.5 of the Transit product. These tests indicated that year 2000 would not adversely affect the performance of the CCTVware Products.* A key component of determining the Company's year 2000 state of readiness was 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. 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 was 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. 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 - --------------------------------- * Forward-looking statement (see Certain Factors Bearing On Future Results). 10 products were written to accept either 2 or 4 digit years and 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 those ID Products.* A key component of determining the Company's year 2000 state of readiness was 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. 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 was 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 sent letters to various vendors and received and analyzed 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 ID Products with respect to the year 2000 issue.* 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 therefore, 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 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. From 1989 through 1997, the Company developed eleven different ID Products. 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. Because these products were no longer in warranty 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. 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*. The Company has substantially completed its assessment of other internal computer-based systems to determine their susceptibility to the year 2000 issue and does not anticipate any significant issues related to the year 2000 issue. Currently, the Company is assessing its personal desk-top computers for year 2000 compliance issues and expects to complete its assessment and incorporate any required fixes to ensure compatibility with year 2000 by December 1, 1999.* COST OF YEAR 2000 CONVERSION. To date, the Company estimates that it has spent less than $25,000 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 $25,000.* CONTINGENCY PLANS. The Company has communicated with its major service providers and parts suppliers regarding potential year 2000 issues, and based upon the results to date, has no reason to believe that there will be a disruption of its business due to year 2000 issues. Therefore, the Company has not created, and does not intend to create, a contingency plan for a most likely worst case scenario relating to year 2000 non-compliance issues. However, there can be no assurance that year 2000 issues will not have an adverse effect on the Company's future results of operations, liquidity or financial condition.* - --------------------------------- * Forward-looking statement (see Certain Factors Bearing On Future Results). 11 CERTAIN FACTORS BEARING ON FUTURE RESULTS The sentences in this report identified with an asterisk (*) 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. CAPITAL REQUIREMENTS. To the extent that the Company experiences growth generally, or the Company's CCTVware Products generate high demand, or the Company receives extraordinarily large orders for certain CCTVware Products from large business, institutional or government buyers, the Company's capital requirements may exceed the Company's available capital resources. Additionally, the Company has suffered losses in seven of the past eleven 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 Vision Systems, Ltd., Alpha Systems Lab, NICE Systems, Ltd., Mavix Ltd., Prism Video, Inc., Telexis Corporation and Integrated Electronic Systems for MSeries and Enterprise products. The Company believes that the principal competitive factors in its markets include: system performance, functionality, integration flexibility, price, 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, functionality, integration 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 September 29, 1999, the Company and PFI agreed to settle all of their legal differences with neither party admitting any liability. Under the terms of the settlement agreement the Company will pay to PFI $900,000 over a period of one year and received a fully paid, royalty free license for all of its products under all of PFI's patents. Payments through September 1999 totaled $300,000. 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 12 adverse effect on the Company's future international sales, if any, and, consequently, the Company's business, operating results and financial condition. DEPENDENCE ON MAJOR CUSTOMERS. For the three and nine months ended September 30, 1999, sales to two customers accounted for 72% and 63%, respectively, of the Company's revenue. These customers are not obligated to purchase any minimum levels of the Company's products, and although they have placed additional orders with the Company, there can be no assurance that any further business will arise from these customers. Any significant reduction in product sales to these customers that cannot be replaced with new business may materially and adversely affect the Company's business, operating results and financial condition. 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 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. As a result of the unprecedented and potentially complex nature of the year 2000 issue 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. The Company has not tested all of the third party software and hardware products that are incorporated into or interface with its CCTVware Products and ID Products. There can be no assurance that the Company has successfully implemented all of the required changes to mitigate all of the potential year 2000 issues and as such there can be no assurance that unanticipated year 2000 issues will not have an adverse effect on future results of operations, liquidity or financial condition. Certain of the Company's ID Products include interfaces to various access control applications. 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. The Company does not track its internal costs associated with the year 2000 issue. Such costs are principally the related payroll costs of its internal information systems staff. DEPENDENCE ON NEW PRODUCTS. The market for the Company's products is characterized by ongoing technological development and evolving industry standards. The Company's success will depend upon its ability to enhance its current products and to introduce new products which address technological and market developments and satisfy the increasingly sophisticated needs of customers. There can be no assurance that the Company will be successful in developing, marketing or selling on a timely basis any fully functional product enhancements or new products that respond to the technological advances by others. There also can be no assurance that the Company's new products will be accepted by customers. MANAGEMENT AND EMPLOYEES. The Company's future success depends in significant part upon the continued service of its key technical and senior management personnel and its continuing ability to attract and retain highly qualified technical and managerial personnel in the future. The Company has in the past encountered some difficulties in fulfilling its hiring needs in the Durango, Colorado employment market, and there can be no assurance that the Company will be successful in hiring and retaining qualified employees in the future. PROPRIETARY RIGHTS. The Company is not aware that its products, trademarks or other proprietary rights infringe on the proprietary rights of any third parties. However, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims against the Company, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements. Such royalty and licensing agreements, if required, may not be available on terms acceptable to the Company. VARIABILITY OF OPERATING RESULTS. The Company's revenue and operating results have fluctuated significantly from quarter to quarter, and may continue to fluctuate, due to a combination of factors. These factors include relatively long sales cycles for certain products, the timing or cancellation of orders from major customers, 13 the timing of new product introductions by the Company or its competitors, the Company's use of third-party distribution channels, the fulfillment of large one-time orders to particular customers and general economic conditions and other factors affecting capital spending. For example, a longer than expected sales cycle for the CCTVware Products initially delayed anticipated revenue. Additionally, the Company has, from time to time, shipped a large number of orders in the quarter in which such orders are received, and accordingly, revenue in any quarter may be substantially dependent on the orders booked and shipped in that quarter. Further, it is not unusual for the Company to recognize a substantial portion of its revenue in the last month of the quarter. Because the Company's operating expense levels are relatively fixed and based, to some extent, on anticipated revenue levels, a small variation in revenue can cause significant variations in operating results from quarter to quarter and may result in losses. Due to all of the foregoing, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. 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. 14 PART II. OTHER INFORMATION Item 5. OTHER INFORMATION On November 1, 1999, Mr. George Duffy resigned his Director position on the Company's Board of Directors. Mr. Duffy's resignation reflects his desire to retire from business related activities. 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 September 30, 1999. 15 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. November 5, 1999 /s/ Jonathan C. Lupia - ---------------- --------------------------- Date Jonathan C. Lupia, Chief Operating Officer and Chief Financial Officer 16 EX-27 2 EXHIBIT 27
5 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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 3,867,215 0 7,501,616 979,954 2,696,042 13,349,127 7,076,743 3,109,107 18,475,518 5,810,470 0 0 0 4,967 11,644,015 18,475,518 25,999,489 25,999,489 14,152,984 24,325,303 (112,797) 0 86,265 1,700,718 178,092 1,522,626 0 0 0 1,522,626 .32 .28 THE COMPANY HAS ONE OUTSTANDING LETTER OF CREDIT COLLATERALIZED BY A COMBINATION OF CERTIFICATE OF DEPOSIT AND CASH TOTALING APPROXIMATELY $29,000.
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