-----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, RenZv6g3OgmkB+AaxEY802i8fsm5YbI36lEhQHD8/upbGr+e3o48S0jWN7rMCvdw L+Mc/xGcnVeeV10br0ul8g== 0001047469-98-030432.txt : 19980812 0001047469-98-030432.hdr.sgml : 19980812 ACCESSION NUMBER: 0001047469-98-030432 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980811 SROS: NASD 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: 98682481 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 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ________ TO ________. COMMISSION FILE NUMBER: 0-24738 LORONIX INFORMATION SYSTEMS, INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) Nevada 33-0248747 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 820 AIRPORT ROAD, DURANGO, COLORADO 81301 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ISSUER'S TELEPHONE NUMBER: (970) 259-6161 CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- AS OF JULY 30, 1998 THERE WERE 4,646,836 SHARES OF THE ISSUER'S COMMON STOCK OUTSTANDING. LORONIX INFORMATION SYSTEMS, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. --------------------- -------- Item 1. Financial Statements Condensed Consolidated Balance Sheet 1 as of June 30, 1998 Condensed Consolidated Statements 3 of Operations for the three and six months ended June 30, 1998 and 1997 Condensed Consolidated Statements of 4 Cash Flows for the six months ended June 30, 1998 and 1997 Notes to Condensed Consolidated Financial 6 Statements Item 2. Management's Discussion and Analysis of 7 Financial Condition and Results of Operations PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES. 13
PART I - FINANCIAL INFORMATION LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET ASSETS JUNE 30, 1998 ----------- (UNAUDITED) Current assets: Cash and cash equivalents $3,822,693 Accounts receivable: Trade, net of allowance for doubtful accounts of $138,533 2,483,698 Officers and employees 140,494 Inventory, net 1,962,652 Prepaid expenses and other assets 346,179 Note receivable 107,734 Notes receivable, related parties 38,454 ----------- Total current assets 8,901,904 Property and equipment, net of accumulated depreciation of $2,101,721 3,519,921 Capitalized software costs, net of accumulated amortization of $1,054,013 819,847 Notes receivable, related parties 57,678 Deposits and other assets 42,671 ----------- Total assets $13,342,021 ----------- -----------
(continued) 1 LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30, 1998 ----------- (UNAUDITED) Current liabilities: Accounts payable $ 889,489 Accrued liabilities 226,837 Facility mortgage, current portion 22,516 Capital lease 10,780 Customer deposits 1,834,885 Deferred maintenance revenue 45,808 ----------- Total current liabilities 3,030,315 Facility mortgage, net of current portion 658,003 Capital lease 3,593 ----------- Total liabilities 3,691,911 ----------- Stockholders' equity: Preferred stock, $.001 par value, authorized 2,000,000 shares, no shares issued and outstanding - Common stock, $.001 par value, authorized 20,000,000 shares, issued and outstanding, 4,646,836 shares 4,647 Additional paid-in capital 15,199,175 Notes receivable from stockholders (147,883) Accumulated deficit (5,405,829) ----------- Total stockholders' equity 9,650,110 ----------- Total liabilities and stockholders' equity $13,342,021 ----------- -----------
See accompanying notes to financial statements. 2 LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 --------------------------- -------------------------------- (UNAUDITED) (UNAUDITED) Systems, supplies and maintenance revenue $1,984,676 $2,453,514 $ 3,888,545 $ 4,127,414 Operating costs and expenses: Cost of products sold 1,065,930 1,453,690 2,069,493 2,261,758 Operations and customer support 313,383 406,007 661,307 812,990 Selling, general and administrative 1,163,438 910,091 2,063,115 1,784,241 Research and development 339,763 328,448 679,659 705,082 ---------- ---------- ----------- ----------- Total cost and expenses 2,882,514 3,098,236 5,473,574 5,564,071 Loss from operations (897,838) (644,722) (1,585,029) (1,436,657) Other income (expense): Interest income, net 18,098 30,617 33,118 90,163 Other expense (8,429) (8,537) (4,053) (17,584) ---------- ---------- ----------- ----------- 9,669 22,080 29,065 72,579 Loss before income taxes (888,169) (622,642) (1,555,964) (1,364,078) Income tax (expense) benefit - 187,062 (800) 398,024 ---------- ---------- ----------- ----------- Net loss ($888,169) ($435,580) ($1,556,764) ($966,054) ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Basic and diluted loss per share ($0.19) ($0.09) ($0.34) ($0.21) ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Weighted-average shares outstanding 4,646,329 4,662,279 4,646,258 4,662,108 ---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
See accompanying notes to financial statements. 3 LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 1997 ------------------------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss $(1,556,764) $ (966,054) Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Depreciation and amortization 594,292 480,400 Loss on disposal of capital equipment 6,857 12,466 (Gain) loss on foreign currency exchange (1,175) 5,118 Provision for deferred income taxes - (398,594) Changes in operating assets and liabilities: Increase in accounts receivable, net (24,566) (1,810,112) Increase in inventory, net (500,675) (686,024) Decrease/(increase) in prepaid expenses and other assets 562,268 (116,497) Increase/(decrease) in accounts payable 34,955 (20,175) Decrease in accrued liabilities (54,967) (60,327) Increase in customer deposits 1,691,473 - (Decrease)/increase in deferred revenue (17,662) 18,934 ----------- ----------- Net cash provided by/(used in) operating activities 734,036 (3,540,865) ----------- ----------- Cash flows from investing activities: Capital expenditures (102,829) (561,322) Proceeds from disposal of capital equipment - 15,000 Decrease in notes receivable 55,920 25,364 Decrease in deposits and other assets 2,844 2,370 Capitalized software (192,160) (243,100) ----------- ----------- Net cash used in investing activities (236,225) (761,688) ----------- ----------- Cash flows from financing activities: Payments on facility mortgage (11,056) - Proceeds from exercise of stock options 1,814 3,593 ----------- ----------- Net cash (used in)/ provided by financing activities: (9,242) 3,593 Net increase/(decrease) in cash 488,569 (4,298,960) Cash and cash equivalents, beginning of year 3,334,124 6,126,484 ----------- ----------- Cash and cash equivalents, end of June $ 3,822,693 $ 1,827,524
(continued) 4 LORONIX INFORMATION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SIX MONTHS ENDED June 30, 1998 1997 ------------------------- (unaudited) (unaudited) Supplemental cash flow information: Interest paid $33,515 - ------- ------- ------- ------- Income taxes paid $ 800 - ------- ------- ------- ------- Noncash investing activities: In 1998 the Company transferred inventory valued at $49,071 to property and equipment. In 1997 the Company transferred inventory valued at $224,871 to property and equipment.
See accompanying notes to financial statements. 5 LORONIX INFORMATION SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (JUNE 30, 1998 - UNAUDITED) NOTE 1: BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the Form 10-KSB for the year ended December 31, 1997 of Loronix Information Systems, Inc. (the "Company"). The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. NOTE 2: REPORTING COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board SFAS No. 130, REPORTING COMPREHENSIVE INCOME. This Statement established standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of this statement had no material impact to the Company's financial condition or results of operation as of June 30, 1998 and for the three and six month periods ended June 30, 1998 and 1997 as comprehensive income did not differ from the Company's net loss. NOTE 3: NET LOSS PER SHARE The Company presents net loss per share in accordance with SFAS No. 128, "Earnings per Share." As required by SFAS No. 128, the Company must present basic and diluted net loss per share as defined. Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed to incorporate the incremental dilutive shares issuable upon the assumed exercise of stock options. All prior period net loss per common share information are presented in accordance with SFAS No. 128. Stock options and warrants totaling 1,329,898 shares and 1,282,008 shares for the three and six months ended June 30, 1998 and 1997, respectively, were not included in computing the diluted loss per share because the effect would have been antidilutive. NOTE 4: LEGAL PROCEEDINGS On October 17, 1997, the Company received notice that it had been named as a defendant in a patent infringement lawsuit brought by a competitor, Prima Facie, Inc. ("PFI") in the U.S. District Court for the District of Maryland. The lawsuit alleged that the Company's CCTVware Transit product infringed certain claims of two patents held by PFI and that the Company has interfered with PFI's business relationships. The claim has recently been amended to allege infringement by the Company's other CCTVware products. The suit seeks injunctive relief against further infringement and damages. The lawsuit also names one of the Company's domestic distributors as a codefendant. The Company believes these claims are without merit and is defending itself vigorously. On July 6, 1998, the Company filed counterclaims against PFI. These counterclaims include a Declaratory Judgment of Patent Invalidity and six other counterclaims. The Company and PFI have agreed to separate the patent infringement claims from all other claims and resolve the patent infringement issues first. To date there has been no trial scheduled. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's condensed consolidated financial statements and the notes related thereto included herein. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 REVENUE The Company's revenue is derived from sales of systems and supplies and from maintenance services. Historically, systems and supplies have accounted for greater than 90% of total revenue, with systems accounting for a substantial majority of total revenue. The Company expects this trend to continue for the foreseeable future. Revenue decreased from $2.45 million in the second quarter of 1997 to $1.98 million in the second quarter of 1998, representing a 19% decrease. Revenue in the second quarters of 1997 and 1998 included approximately $1.68 million, or 69% of total revenue, and approximately $1.39 million, or 70% of total revenue, of digital recording related products ("CCTVware-Registered Trademark- Products"), respectively. The Company ended the second quarter of 1998 with a backlog of approximately $4.0 million which the Company expects to ship in the third and fourth quarters of 1998. COSTS AND EXPENSES COST OF PRODUCTS SOLD. The cost of products sold, consisting principally of the costs of hardware components and supplies as well as software amortization, decreased from $1.45 million in the second quarter of 1997 to $1.07 million in the second quarter of 1998, and represented 59% and 54% of revenue, respectively. The decrease in the cost of products sold as a percentage of revenue was primarily attributable to general industry cost reductions related to CCTVware Product components. OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support expenses decreased from $406,000 in the second quarter of 1997 to $313,400 in the second quarter of 1998, and represented 17% and 16% of revenue, respectively. The decrease in such expenses resulted primarily from compensation decreases and decreases in telecommunication expenses. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased from $910,100 in the second quarter of 1997 to $1.16 million in the second quarter of 1998, and represented 37% and 59% of revenue, respectively. The increase in such expenses resulted primarily from an increase in legal fees associated with the Company's patent litigation with PFI. RESEARCH AND DEVELOPMENT. Research and development expenses, net of capitalized software costs, increased from $328,400 in the second quarter of 1997 to $339,800 in the second quarter of 1998, and represented 13% and 17% of revenue, respectively. The actual research and development expenses did not increase materially in the second quarter of 1998, and the difference in percentage terms is the result of lower revenue in the second quarter of 1998. INTEREST INCOME, NET. Net interest income decreased from $30,600 in the second quarter of 1997 to $18,100 in the second quarter of 1998. This decrease was due to a reduction in the average cash available for investment. INCOME TAX EXPENSE/BENEFIT. An income tax benefit of $187,100 for the second quarter of 1997 was estimated at 30% of the pretax loss. In the second quarter of 1998, any tax benefit from the operating loss was offset by an increase in the valuation allowance for deferred tax assets. 7 SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 REVENUE Revenue decreased from $4.13 million in the first six months of 1997 to $3.89 million in the first six months of 1998, representing a 6% decrease. Revenue in the first six months of 1997 and 1998 included approximately $2.40 million, or 58% of total revenue, and approximately $2.91 million, or 75% of total revenue, of CCTVware Products, respectively. COSTS AND EXPENSES COST OF PRODUCTS SOLD. The cost of products sold decreased from $2.26 million in the first six months of 1997 to $2.07 million in the first six months of 1998, and represented 55% and 53% of revenue, respectively. The decrease in the cost of products sold as a percentage of revenue was primarily attributable to general industry cost reductions related to CCTVware components. OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support expenses decreased from $813,000 in the first six months of 1997 to $661,300 in the first six months of 1998, and represented 20% and 17% of revenue, respectively. The decrease in such expenses resulted primarily from headcount and compensation-related decreases and decreases in travel and telecommunication expenses. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased from $1.78 million in the first six months of 1997 to $2.06 million in the first six months of 1998, and represented 43% and 53% of revenue, respectively. The increase in such expenses resulted primarily from an increase in legal fees associated with the Company's patent litigation with Prima Facie, Inc. and increases in travel expenses. RESEARCH AND DEVELOPMENT. Research and development expenses, net of capitalized software costs, decreased from $705,100 in the first six months of 1997 to $679,700 in the first six months of 1998, and represented 17% of revenue in both periods. INTEREST INCOME, NET. Net interest income decreased from $90,200 in the first six months of 1997 to $33,100 in the first six months of 1998. This decrease was due to a reduction in the average cash available for investment. INCOME TAX EXPENSE/BENEFIT. An income tax benefit of $398,000 for the first six months of 1997 was estimated at 29% of the pretax loss. In the first six months of 1998, any tax benefit from the operating loss was offset by an increase in the valuation allowance for deferred tax assets. YEAR 2000 CONVERSION Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company has assessed the readiness and compliance of its internal computer-based systems and of its computer-based products sold to customers and expects to implement successfully the system and programming changes necessary to address year 2000 issues by mid 1999. The Company does not believe that the cost of such actions will have a material effect on the Company's results of operations or financial condition. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the implementation of such changes, and the Company's inability to implement such changes on a timely basis could have an adverse effect on future results of operations. The Company is also assessing the possible effects on the Company's operations of the year 2000 compliance of its key suppliers. The Company is contacting certain key suppliers to determine whether their products supplied to the Company are year 2000 compliant and is in the process of evaluating information to determine the impact products that are not Year 2000 compliant may have on the operations of the Company. The Company's reliance on suppliers, and, therefore, on the proper functioning of their products, which are incorporated into the Company's products, means that their failure to address year 2000 issues could have a material impact on the Company's sales, operations and financial results, however, the potential impact and related costs are not known at this time. 8 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 1997 and 1998, the Company financed its operations primarily from working capital. The Company's principal uses of cash during the six months ended June 30, 1997 and 1998 were to (i) acquire property and equipment; (ii) invest in the development of software; and (iii) in 1997, to fund operating activities. During the first six months of 1997, the Company's cash and cash equivalents decreased from $6,126,500 at December 31, 1996 to $1,827,500 at June 30, 1997. Net cash used in operating activities of $3.5 million consisted primarily of a net loss of $966,100, increases in deferred income tax assets, accounts receivable, inventory, prepaid expenses and other assets and decreases in accounts payable and accrued liabilities offset by depreciation and amortization and an increase in deferred revenue. Net cash used in investing activities of $761,700 consisted primarily of $561,300 of capital expenditures and $243,100 of capitalized software. During the first six months of 1998, the Company's cash and cash equivalents increased from $3,334,100 at December 31, 1997 to $3,822,700 at June 30, 1998. Net cash provided by operating activities of $734,000 consisted primarily of a net loss of $1.6 million, increases in accounts receivable and inventory and decreases in accrued liabilities and deferred revenue offset by depreciation and amortization and a decrease in prepaid expenses and other assets and increases in accounts payable and customer deposits. Customer deposits increased by $1.7 million representing a partial pre-payment by one customer for orders to be delivered in the third and fourth quarters of 1998. Net cash used in investing activities of $236,200 consisted primarily of capital expenditures of $102,800 and $192,200 of capitalized software. At June 30, 1998, the Company had $5.9 million in working capital, including $2.48 million of trade accounts receivable and $1.96 million of inventory. Of the $2.48 million of trade accounts receivable, approximately $862,000 was recorded in conjunction with June 1998 sales. Days sales outstanding, calculated using an average accounts receivable balance, were approximately 103 days as of June 30, 1998, compared to 102 days for the same period a year ago. The days sales outstanding is consistent with prior periods. The Company has provided and may continue to provide extended payment terms to certain of its customer from time-to-time. As of June 30, 1998 the Company had extended payments equal to approximately $775,000. The Company has historically collected its outstanding receivables and believes it will be successful in the collection of its receivable balance as of June 30, 1998. The Company's inventory balance at June 30, 1998 and 1997 was $1.96 million and $1.45 million, respectively. Annualized inventory turns, calculated using an average inventory balance, were 2.2 and 3.0 as of June 30, 1998 and 1997, respectively. The decrease in the inventory turns is primarily attributable to inventory purchases in June 1998 in support of the Company's $4.0 million backlog position as of June 30, 1998. The Company's principal sources of liquidity are its cash and cash equivalents and cash generated from operating activities, if any. The Company also has available up to a $1.0 million line of credit based on a percentage of the Company's eligible accounts receivable. The line of credit facility expires in May 1999. The line of credit has not been used to date. The Company anticipates capital expenditures for the remainder of 1998 of approximately $300,000. The Company believes that, based on its current financial projections, it has sufficient working capital to meet its capital requirements and fund operations for at least the next twelve months. CERTAIN FACTORS BEARING ON FUTURE RESULTS The statements in the third and last sentences under the caption "Revenue" on page 7, the last sentence of the fifth paragraph and the last two sentences of the seventh paragraph under the caption "Financial Condition, Liquidity and Capital Resources", and the first sentence under the caption "Capital Requirements" on page 11 are forward-looking statements. In addition, the Company may from time to time make oral forward-looking statements. The following are important factors that could cause results to differ materially from those projected in any such forward-looking statements. 9 DISTRIBUTION RELATIONSHIPS. The Company believes its success in penetrating markets for its identification products ("ID Products") and CCTVware Products depends in part on its ability to maintain distribution relationships with manufacturing representatives, dealers, systems integrators and distributors and to cultivate additional, similar relationships. There can be no assurance that the Company will be successful in maintaining or expanding its distribution relationships. The loss of certain distribution relationships could adversely affect the Company's business, operating results and financial condition. Further, there can be no assurance that the businesses with which the Company has developed or is seeking to develop such relationships, some of whom have significantly greater financial and marketing resources than the Company, will not develop and market products in competition with the Company's products or will not otherwise discontinue their relationships with the Company. INTERNATIONAL SALES. The Company is seeking to expand its international presence by developing new distribution channels in certain foreign countries where it has not previously had a presence. International sales are subject to a number of risks, including political and economic instability, unexpected changes in regulatory requirements, tariffs and other trade barriers, fluctuating exchange rates and the possibility of greater difficulty in accounts receivable collection. There can be no assurance that these and other factors will not have a material adverse effect on the Company's future international sales, if any, and, consequently, the Company's business, operating results and financial condition. COMPETITION. Certain of the Company's current and prospective competitors have substantially greater technical, financial and marketing resources than the Company. In addition, there can be no assurance that any of the Company's products will be competitive in the face of advances in product technology developed by the Company's current or future competitors. Moreover, while the Company believes that the price/performance characteristics of its products are currently competitive, increased competition has created, and will continue to create, pricing pressures which could materially and adversely affect the Company's business, operating results and financial condition. PROPRIETARY RIGHTS. The Company is not aware that its products, trademarks or other proprietary rights infringe on the proprietary rights of any other third parties, except that a claim of infringement has been asserted against the Company by PFI. Although the Company believes this claim is without merit, an adverse result in this litigation with PFI could have a negative impact on the financial position and results of operations of the Company. There can be no assurance that other third parties will not assert infringement claims against the Company in the future with respect to current or future products. As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims against the Company, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements. Such royalty and licensing agreements, if required, may not be available on terms acceptable to the Company. PRODUCT OBSOLESCENCE. The Company's current products and products under development are limited in number and concentrated primarily in the markets for identification and surveillance products. The life cycles of the Company's products are difficult to estimate due in large measure to changing and developing technology as well as the unknown future effect of products introduced by the Company's competition. Price reductions or declines in demand for the Company's products, whether as a result of competition, technological change or otherwise, would have a materially adverse effect on the Company's results of operations or financial position. DEPENDENCE ON NEW PRODUCTS. The market for the Company's products is characterized by ongoing technological development and evolving industry standards. The Company's success will depend upon its ability to enhance its current products and to introduce new products which address technological and market developments and satisfy the increasingly sophisticated needs of customers. For instance, the Company has released several products based on its CCTVware technology and has recently announced that it expects to release, in the near future, additional products based on new technology. There can be no assurance that the Company will be successful in developing, marketing and selling sufficient volumes of its new CCTVware products or developing and marketing on a timely basis any other fully functional product enhancements or new products that respond to the technological advances by others. For instance, the Company expected to introduce its Solo Remote product in the second quarter of 1998, but because of resource allocations and customer requested product enhancements the Company has delayed the introduction of the Solo Remote product until the third quarter of 1998. There also can be no assurance that the Company's new products will be accepted by customers. 10 VARIABILITY OF OPERATING RESULTS. The Company's revenue and operating results have fluctuated significantly from quarter to quarter, and may continue to fluctuate, due to a combination of factors. These factors include relatively long sales cycles for certain products, the timing or cancellation of orders from major customers, the timing of new product introductions by the Company or its competitors, the Company's use of third-party distribution channels, the fulfillment of large one-time orders to particular customers and general economic conditions and other factors affecting capital spending. For example, a longer than expected sales cycle for the CCTVware Products has delayed anticipated revenue, and the conclusion of the Aramco Contract has led to a sharp decrease in the Company's ID Product revenue. Additionally, the Company generally ships orders in the quarter in which such orders are received, and accordingly, revenue in any quarter is substantially dependent on the orders booked and shipped in that quarter. The Company has typically recognized a substantial portion of its revenue in the last month of the quarter, with much of this revenue concentrated in the last two weeks of the quarter. Because the Company's operating expense levels are relatively fixed and based, to some extent, on anticipated revenue levels, a small variation in revenue can cause significant variations in operating results from quarter to quarter and may result in losses. Due to all of the foregoing, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. LEGAL PROCEEDINGS. On October 17, 1997, the Company received notice that it had been named as a defendant in a patent infringement lawsuit brought by a competitor, PFI, in the U.S. District Court for the District of Maryland. The lawsuit alleged that the Company's CCTVware Transit product infringed certain claims of two patents held by PFI and that the Company has interfered with PFI's business relationships. The claim has recently been amended to allege infringement by the Company's other CCTVware products. The suit seeks injunctive relief against further infringement and damages. The lawsuit also names one of the Company's domestic distributors as a codefendant. Although the Company believes these claims are without merit and is defending itself vigorously, an adverse result in the litigation could have a negative impact on the financial position and the results of operations of the Company. MANAGEMENT AND EMPLOYEES. The Company's future success depends in significant part upon the continued service of its key technical and senior management personnel and its continued ability to attract and retain highly qualified technical and managerial personnel in the future. The Company has in the past encountered some difficulties in fulfilling its hiring needs in the Durango, Colorado employment market, and there can be no assurance that the Company will be successful in hiring and retaining qualified employees in the future. CAPITAL REQUIREMENTS. The Company believes that, based on its current projections, it has sufficient working capital to meet its requirements for at least the next 12 months. However, to the extent that the Company experiences growth generally, or the Company's CCTVware line of products generates high demand, or the Company receives extraordinary large orders for certain CCTVware products from large business, institutional or government buyers, the Company's capital requirements may exceed the Company's available capital resources. Additionally, the Company has suffered losses in each of the past six quarters, and such losses, which may continue in the foreseeable future, will diminish the Company's cash and cash equivalents. There can be no assurance that the Company will be able to raise equity or debt financing on favorable terms, or at all. If the Company fails in such circumstances to raise additional capital as needed, the Company would likely be required to reduce the scope of its product development, selling and marketing activities and other operations, which would have a material adverse effect on the Company's business, financial condition and results of operation. VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock has experienced significant volatility, and is likely to continue to be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, the Company's failure to meet or exceed published earnings estimates, changes in earnings estimates or recommendations by securities analysts, announcements of technological innovations, new products or new contracts by the Company or its existing or potential competitors, developments with respect to patents, copyrights or proprietary rights, adoption of new accounting standards affecting the software industry, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies which have often been unrelated to the operating performance of such companies. These broad market fluctuations may materially adversely affect the market price of the Company's common stock. There can be no assurance that the trading price of the Company's Common Stock will not experience substantial volatility in the future. 11 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On October 17, 1997, the Company received notice that it had been named as a defendant in a patent infringement lawsuit brought by a competitor, PFI, in the U.S. District Court for the District of Maryland. The lawsuit alleged that the Company's CCTVware Transit product infringed certain claims of two patents held by PFI and that the Company has interfered with PFI's business relationships. The claim has recently been amended to allege infringement by the Company's other CCTVware products. The suit seeks injunctive relief against further infringement and damages. The lawsuit also names one of the Company's domestic distributors as a codefendant. (see Legal Proceedings under the caption "Certain Risks Bearing on Future Results"). On July 6, 1998 the Company filed counterclaims against PFI. These counterclaims include a Declaratory Judgment of Patent Invalidity and six other counterclaims. The Company and Prima Facie, Inc. have agreed to separate the patent infringement claims from all other claims and resolve the patent infringement issues first. To date there has been no trial scheduled. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Matters submitted for a vote by security holders at the Company's May 27, 1998 annual meeting of stockholders included: (a) approval of the minutes of the 1997 annual meeting of stockholders; (b) election of directors; and (c) ratification of the appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending December 31, 1998. The results of the stockholder votes were as follows: (a) the minutes of the prior year's annual meeting of stockholders were approved.
Votes Votes Votes For Against Abstained --------- -------- --------- (b) Election of Directors Edward Jankowski 4,108,023 103,985 George M. Duffy 4,108,023 103,985 C. Rodney Wilger 4,108,023 103,985 Don W. Stevens 4,108,023 103,985 Louis E. Colonna 4,108,023 103,985 (c) Appointment of KPMG 4,196,608 11,000 4,400 Peat Marwick LLP
Item 6. Exhibits and Reports on Form 8-K (a) 27 Financial Data Schedule (b) No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1998. 12 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Loronix Information Systems, Inc. August 10, 1998 /s/ Jonathan C. Lupia - --------------- --------------------------- Date Jonathan C. Lupia, Chief Operating Officer and Chief Financial Officer 13 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-KSB FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 3,822,693 0 2,622,231 138,533 1,962,652 8,901,904 5,621,642 2,101,721 13,342,021 3,030,315 0 0 0 4,647 9,645,463 13,342,021 3,888,545 3,888,545 2,069,493 5,473,574 (45,758) 0 16,693 (1,555,964) (800) (1,556,764) 0 0 0 (1,556,764) (.34) (.34) THE COMPANY HAS TWO OUTSTANDING LETTERS OF CREDIT COLLATORALIZED BY A COMBINATION OF CERTIFICATES OF DEPOSIT AND CASH TOTALING APPROXIMATELY $100,000.
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