UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ][X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002April 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 0-28132
LANVISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1455414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5481 Creek Road
Cincinnati, Ohio 45242-4001
(Address of principal executive offices) (Zip Code)
(513) 794-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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[X] No --- ---[ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Number of shares of Registrant's Common Stock ($.01 par value per
share) issued and outstanding, as of September 9, 2002: 8,945,338.April 30, 2003: 8,977,670.
1
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...................... 3
Condensed Consolidated Balance Sheets at July 31, 2002 and
January 31, 2002................................................. 3
Condensed Consolidated Statements of Operations for the
three and six months ended July 31, 2002 and 2001................ 5
Condensed Consolidated Statements of Cash Flows for the
six months ended July 31, 2002 and 2001.......................... 6
Notes to Condensed Consolidated Financial Statements............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 20
Item 3. Defaults on Senior Securities.................................... 20
Item 6. Exhibits and Reports on Form 8-K................................. 20
Signatures.......................................................
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements....................................................... 3
Condensed Consolidated Balance Sheets at April 30, 2003 and January 31, 2003...................... 3
Condensed Consolidated Statements of Operations for the three months ended
April 30, 2003 and 2002 .......................................................................... 5
Condensed Consolidated Statements of Cash Flows for the three months ended
April 30, 2003 and 2002 .......................................................................... 6
Notes to Condensed Consolidated Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 20
Item 3. Defaults on Senior Securities..................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................................................. 20
Signatures........................................................................................ 21
Certifications.................................................................................... 21
Certifications................................................... 22
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) (Audited)
July 31,April 30, January 31,
2002 2002
------------ ------------2003 2003
------------- -------------
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 6,419,8165,121,274 $ 7,865,0537,242,230
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively 1,887,319 1,451,027
Unbilled1,562,504 1,499,767
Contract receivables 2,213,345 1,742,7853,408,451 3,074,596
Prepaid expenses related to unrecognized revenue 78,203 113,08125,899 79,214
Other 350,258 201,962304,790 246,966
------------ ------------
Total current assets 10,948,941 11,373,90810,422,918 12,142,773
Property and equipment:
Computer equipment 2,430,353 1,875,5902,371,688 2,351,203
Computer software 730,774 421,962760,827 743,204
Office furniture, fixtures and equipment 1,154,795 1,153,934 1,139,457
Leasehold improvements 131,248 117,795157,227 153,549
------------ ------------
4,446,309 3,554,8044,444,537 4,401,890
Accumulated depreciation and amortization (3,193,530) (3,048,793)(3,280,316) (3,137,943)
------------ ------------
1,252,779 506,0111,164,221 1,263,947
Capitalized software development costs, net of accumulated
amortization of $1,900,228$2,225,228 and $1,700,228,$2,100,228, respectively 1,289,701 1,189,7011,464,701 1,389,701
Installment receivables 433,339 267,969433,339
Other 133,585 171,51648,598 107,316
------------ ------------
$ 14,058,34513,533,777 $ 13,509,10515,337,076
============ ============
See Notes to Condensed Consolidated Financial Statements.
3
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Equity
(Unaudited) (Audited)
July 31,April 30, January 31,
2002 2002
------------ ------------2003 2003
------------- -------------
Current liabilities:
Accounts payable $ 427,457550,475 $ 230,571721,402
Accrued compensation 441,852 235,958239,936 308,658
Accrued other expenses 1,370,095 1,525,0961,274,691 1,392,157
Deferred revenues 1,536,495 1,371,2001,646,928 2,220,383
Current portion of capitalized lease obligations 188,694 -leases 209,498 206,051
Current portion of long-term debt 2,000,000 2,000,000
------------ ------------
Total current liabilities 5,964,593 5,362,825
Long-term capitalized lease obligations 465,436 -5,921,528 6,848,651
Capitalized leases 334,634 388,320
Long-term debt 2,000,000 3,000,000500,000 1,000,000
Long-term accrued interest 2,383,521 2,239,7983,470,290 3,133,369
Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized - -
Stockholders' equity:
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 8,945,3388,977,670 and 8,913,9478,959,004 shares issued, respectively 89,453 89,13989,777 89,590
Capital in excess of par value 34,825,947 34,787,84934,851,833 34,835,639
Accumulated (deficit) (31,670,605) (31,970,506)(31,634,285) (30,958,493)
------------ ------------
Total stockholders' equity 3,244,795 2,906,4823,307,325 3,966,736
------------ ------------
$ 14,058,34513,533,777 $ 13,509,10515,337,076
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended July 31,April 30,
(Unaudited)
Three Months Ended
Six Months Ended
---------------------------- ---------------------------------------------------------
2003 2002
2001 2002 2001
----------- ----------- ----------- ----------------------- ------------
Revenues:
Systems sales $ 1,235,151622,496 $ 419,521 $ 2,672,505 $ 1,476,5011,437,354
Services, maintenance and support 1,844,903 1,475,716 3,245,772 2,940,0231,569,244 1,400,869
Application-hosting services 192,134 203,666 387,130 394,782
----------- -----------428,242 194,996
----------- -----------
Total revenues 3,272,188 2,098,903 6,305,407 4,811,3062,619,982 3,033,219
Operating expenses:
Cost of systems sales 277,703 158,147 643,904 308,578462,463 366,201
Cost of services, maintenance and support 819,511 789,596 1,537,921 1,535,712662,877 718,410
Cost of application-hosting services 75,680 87,042 142,329 172,547215,368 66,649
Selling, general and administrative 906,547 633,470 1,750,074 1,338,714944,198 843,527
Product research and development 542,753 569,629 1,049,833 1,121,776
----------- -----------583,093 507,080
----------- -----------
Total operating expenses 2,622,194 2,237,884 5,124,061 4,477,327
----------- -----------2,867,999 2,501,867
----------- -----------
Operating profitincome (loss) 649,994 (138,981) 1,181,346 333,979(248,017) 531,352
Other income (expense):
Interest income 27,829 73,480 57,752 177,91219,034 29,923
Interest expense (476,191) (504,277) (952,197) (980,128)(446,809) (476,006)
----------- -----------
----------- -----------
EarningsIncome (loss) before income taxes 201,632 (569,778) 286,901 (468,237)(675,792) 85,269
Income tax (provision) benefitprovision (benefit) - - 13,000 -
----------- -----------(13,000)
----------- -----------
Net income (loss) $ 201,632(675,792) $ (569,778) $ 299,901 $ (468,237)
=========== ===========98,269
=========== ===========
Basic net income (loss) per common share $ .02(.07) $ (.06) $ .03 $ (.05)
=========== ===========.01
=========== ===========
Diluted net income (loss) per common share $ .02(.07) $ (.06) $ .03 $ (.05)
=========== ===========.01
=========== ===========
Number of shares used in per common share
computations:
Basic 8,927,966 8,884,534 8,921,073 8,881,931
=========== ===========8,964,449 8,913,947
=========== ===========
Diluted 9,184,346 8,884,534 9,208,693 8,881,931
=========== ===========8,964,449 9,232,807
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SixThree Months Ended July 31,April 30,
(Unaudited)
2003 2002 2001
----------- -----------
Operating activities:
Net income (loss) $ 299,901(675,792) $ (468,237)98,269
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 344,737 361,809267,373 174,088
Increase (decrease) in long-term accrued interest 143,723 85,820336,921 (183,481)
Cash (used for) provided by (used for) assets and liabilities:
Accounts and unbilled receivables (1,072,222) 735,479(396,592) (382,320)
Other current assets (28,792) (79,496)(4,509) (41,120)
Accounts payable and accrued expenses 247,779 (348,246)(357,115) 150,584
Deferred revenues 165,295 (380,809)(573,455) (14,522)
----------- -----------
Net cash provided by (used for) operating activities 100,421 (93,680)(1,403,169) (198,502)
----------- -----------
Investing activities:
Proceeds from disposal of property and equipment - 56,301
Purchases of property and equipment (322,001) (201,936)(42,647) (130,147)
Capitalization of software development costs (300,000) (250,000)
Payment on note receivable - 75,000(200,000) (150,000)
Other 37,931 (22,246)58,718 13,474
----------- -----------
Net cash (used for) investing activities (584,070) (342,881)(183,929) (266,673)
----------- -----------
Financing activities:
Repayment of long-term debt (500,000) (500,000)
Payment of capitalized leases (50,239) -
Exercise of stock options and shares issued under the Employee Stock
Purchase Plan 38,412 19,319
Repayment of long-term debt (1,000,000)16,381 -
----------- -----------
Net cash (used for) provided by financing activities (961,588) 19,319(533,858) (500,000)
=========== ===========
(Decrease) in cash and cash equivalents (1,445,237) (417,242)(2,120,956) (965,175)
Cash and cash equivalents at beginning of period 7,242,230 7,865,053 8,549,732
----------- -----------
Cash and cash equivalents at end of period $ 6,419,8165,121,274 $ 8,132,4906,899,878
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 11,000 $ -
=========== ===========
Interest paid $ 786,66799,902 $ 862,000
=========== ===========
Capital lease obligations incurred $ 654,130 $ -650,167
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
LANVISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying Unauditedunaudited Condensed Consolidated Financial Statements have been
prepared by the Company without audit, in accordance with accounting principles
generally accepted in the United States for interim financial information,
pursuant to the rules and regulations applicable to quarterly reports on Form
10-Q of the U. S. Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the Condensed Consolidated Financial
Statements have been included. These Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements and notes thereto
included in the most recent LanVision Systems, Inc. Annual Report on Form 10-K, for the
fiscal Year ended January 31, 2002 -
Commission File Number 0-28132. Operating results for the three and six months ended
July 31, 2002,April 30, 2003, are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2003.2004.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 2334 of its 20012002 Annual Report to Stockholders which can be
found as Exhibit 13.1 of the Annual Report on Form 10-K, for the fiscal Year
ended January 31, 2002.10-K.
Users of financial information for interim periods are encouraged to refer to
the footnotes contained in the Annual Report to Stockholders when reviewing
interim financial results. There has been no material change in the accounting
policies followed by the Company during fiscal year 2002.
Beginning in fiscal year 2002, certain expenses that were previously classified
as cost of services, maintenance and support and selling, general and
administrative expenses have been reclassified to product research and
development because the work performed by the individuals involved have, over
time, evolved into more product development related activities. Prior year
amounts have been reclassified to conform to the 2002 financial statement
presentation.2003.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The decrease in cash and cash equivalents results primarily from the operating
activities during the quarter and the payment of $1,000,000$550,239 in long-term debt and
capitalized leases during the first six months and $500,000 of the
long-term accrued interest on the outstanding debt during the first quarter.
The increase in accounts receivable, net is due to higher revenues from our
direct customers and higher royalties due from a remarketing partner at the end
of the second quarter.
7
The increase in unbilledcontract receivables is due to higher amounts due from a
remarketing partner. Royalty payments are remitted to LanVisionsales in accordancethe first quarter with
the remarketing agreement, and are accounted for as unbilled receivables
until the royalty payments are received.deferred payment provisions.
Other current assets consist of software and hardware awaiting installation
(related to unrecognized revenue) and prepaid expenses, including commissions.
The increase relates primarily to additional prepaid maintenance on new property
and equipment and prepaid maintenance required to provide customer support.
The increasedecrease in property and equipment, net, is primarily the result of the
acquisition mostly via capitalized leases, of computerreplacement equipment and software necessary to support current
customers, offset by normal depreciation and future ASPeN(SM) application-hosting services
customers.
The increase in installment receivables results from the sale of an additional
system by a reseller on the installment basis.amortization.
7
Other non-current assets consist primarily of prepaid long-term debt closing
costs, which are amortized to expense over the life of the loan.
The increasedecrease in accounts payable results primarily from the deliverypayment of invoices
for hardware sales to new customers in July, the invoices for which were not paid at the quarter
end.late January.
The increasedecrease in accrued compensation results primarily from the increasedecrease in the
accrual for first quarter bonuses payable under the employee bonus plans.
At January 31, 2002,
the accrual was lower because the Company did not meet its bonus payout goals
for the fiscal year.
The decrease in accrued other expenses relates primarily to the settlement of certain
accrued obligations during the first quarter.
The increasedecrease in deferred revenues results from the recognition of revenue
related to billings to customers recorded prior to revenue recognition.
The increase in long-term accrued interest is net of a special payment of
$500,000 of such interest at the time the loan agreement was amended, during the
first quarter, to set the financial covenants for fiscal 2002, net ofresults from the normal increase in
the deferred interest payable under the loan.
During the second quarter the Company acquired computer equipment and related
software for a second application-hosting services data center, which are
accounted for as capitalized leases. The amount of the leased assets by category
are: computer equipment $372,705; computer software $196,799; and prepaid
maintenance & expenses $84,626, for a total of $654,130 in new assets. The
leases are payable monthly in installments of $11,668 commencing September 2002,
through August 2005 and $8,323 commencing January 2003, through December 2005.
The present value of the future lease payments is $654,130 and assumes the
interest rates implicit in the lease agreements at the inception of the leases.
Note 4 - STOCK OPTIONS
8
During the first sixthree months of the current fiscal year, the Company granted no
stock options under any Stock Option Plan. During the same period, no3,834 options
were forfeited under all plans. Stock Options to acquire 8,332 shares of Common
Stockplans and 18,666 options were exercised during the
quarter.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, establishes a fair value method of financial accounting and
reporting for stock-based compensation plans. LanVision elected to continue to
account for stock options under the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and, accordingly, has adopted the disclosure only provisions of
Statement 123. At April 30, 2003, LanVision had three stock-based compensation
plans, which are more fully disclosed in Note 7 of the Notes to Consolidated
Financial Statements in the second quarter.Form 10-K for the Fiscal year ended January 31,
2003. No Stock Options were exercisedstock-based compensation cost is reflected in the first quarter.net income, as all
options granted under the plans had exercise prices equal to the fair market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share as if LanVision
had applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, to stock-based employee compensation.
8
Three months ended April 30, 2003 2002
--------------- --------------
Net income (loss), as reported $ (675,792) $ 98,269
Deduct: Total stock based compensation
expense determined under the fair value based
method for all awards, net of related tax
effects (13,746) (45,971)
-------------- -------------
Pro forma net income (loss) $ (689,538) $ 52,298
============== =============
Earnings per share:
Basic - as reported $ (0.07) $ 0.01
============== =============
Basic - pro forma $ (0.08) $ 0.01
============== =============
Diluted - as reported $ (0.07) $ 0.01
============== =============
Diluted - pro forma $ (0.08) $ 0.01
============== =============
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect current market conditions and
prior experience.
Note 5 - EARNINGS PER SHARE
The basic net income (loss) per common share is calculated using the weighted
average number of common shares outstanding during the period.
The 2003 diluted net (loss) per common share calculation, excludes the effect of
the common stock equivalents (stock options), as the inclusion thereof would be
antidilutive. The Company had approximately 544,838 option shares outstanding at
April 30, 2003 that were not included in the diluted net income (loss) per share
calculation as the inclusion thereof would be antidilutive.
The 2002 diluted net income per common share calculation, is based on the
weighted average number of common shares outstanding adjusted for the dilutive
effect of stock options and the employee stock purchase plan (256,380(318,860 option shares in the second
quarter and 287,620 shares in the first six months of 2002). The Company had
approximately 100,775103,775 option shares outstanding at July 31,April 30, 2002 that were not
included in the diluted net income per share calculation as the inclusion
thereof would be antidilutive.
Note 6 - CONTRACTUAL OBLIGATIONS
The diluted (loss) per common share calculation for 2001, excludesfollowing table details the effectremaining obligations, by fiscal year, as of the
commonend of the quarter for, the capitalized leases, long-term debt, accrued interest
on the long-term debt and the operating leases.
9
2003 2004 2005 2006 2007
---------- ---------- ---------- --------- --------
Capitalized leases $ 179,921 $ 239,895 $ 173,234 $ - $ -
Long-term debt 1,500,000 1,000,000 - - -
Accrued interest, assuming
no Warrant value (see below) - 5,238,618 - - -
Operating leases 369,776 36,421 9,007 5,690 -
---------- ---------- ---------- --------- --------
Total $2,049,697 $6,514,934 $ 182,241 $ 5,690 $ -
========== ========== ========== ========= ========
Capitalized Leases
During fiscal year 2002, LanVision acquired computer equipment and related
software for a new application-hosting services data center, which are accounted
for as capitalized leases. The amount of the leased assets by category is
computer equipment $372,705; computer software $196,799; and prepaid maintenance
and expenses $84,626, for a total of $654,130 in new assets. The leases are
payable monthly in installments of $19,991, through August 2005 and an
additional amount of $8,323, through December 2005. The present value of the
future lease payments upon lease inception was $654,130 using the interest rates
implicit in the lease agreements at the inception of the leases.
Long-term Debt
The long-term debt of $2,500,000 is secured by all of the assets of LanVision
and the loan agreement, as amended, restricts LanVision from incurring
additional indebtedness for borrowed money, including capitalized leases, limits
certain investments, restricts substantial asset sales, capital expenditures,
cash dividends, stock equivalents (stock options)repurchases, and mergers and consolidations with
unaffiliated entities without lender consent. In addition, LanVision is required
to meet certain financial covenants, including minimum levels of revenues,
earnings, and net worth. In addition, the loan agreement requires LanVision to
maintain a minimum cash balance of $4,300,000 through July 29, 2003, at which
time the amount is reduced to $3,800,000, which will be maintained through the
maturity of the loan in July 2004. LanVision complied with all of the provisions
of the loan agreement during the quarter except for the Earnings Before Interest
and Taxes, which the Company fell short of the requirement by $28,983. The
lender has granted the Company a waiver of this provision through July 31, 2003.
LanVision believes that it will be able to comply with all of its covenants for
the remainder of fiscal 2003, and the likelihood of defaulting on the debt
covenants is not likely absent any material adverse events that may affect the
Company, the healthcare industry or our market. In the past, LanVision has
requested, and the lender has granted, waivers of certain debt covenants.
However, our expectations of future operating results and continued compliance
with the debt covenants cannot be assured and the lenders' actions are not
controllable by us. If our projections of future operating results are not
achieved and the debt is placed in default, LanVision would experience a
material adverse impact on the reported financial position and results of
operations.
In connection with the issuance of the long-term debt, LanVision issued Warrants
to purchase 750,000 shares of Common Stock of LanVision at $3.87 per share at
any time through July 16, 2008. The Warrants are subject to customary
antidilution and registration rights provisions.
10
Under the terms of the long-term debt agreement, LanVision has guaranteed the
lender that the increase in the market value of the stock underlying the
Warrants, at the time of loan maturity, over the exercise price plus the 12%
interest paid on the loan will yield the lender a 25% compound annual return. If
the yield from the Warrants plus interest paid does not provide the lender with
the 25% guaranteed compound annual return, LanVision is required to pay the
additional amount in cash at the time of maturity. Accordingly, LanVision is
accruing interest on the loan at a 25% compound interest rate, regardless of the
market value of the stock and the inherent value of the Warrants. Assuming that
the Warrants have no value, the maximum amount of the accrued and unpaid
interest at maturity in July 2004 will be $5,238,618.
Warranties and Indemnities
LanVision provides for the estimated cost of the product warranties at the time
revenue is recognized. Should products fail to meet certain performance
standards for an initial warranty period, LanVision's estimated warranty
liability might need to be increased. LanVision bases its warranty estimates on
the nature of any performance complaint, the effort necessary to resolve the
issue, customer requirements and any potential concessions, which may be
required to be granted to a customer, which result from performance issues.
LanVision's ASPeN application-hosting services guarantees specific "up-time" and
"response time" performance standards, which, if not met may result in reduced
revenues, as a penalty, for the inclusion thereof would be
antidilutive.month in which the standards are not met.
LanVision's standard agreements with its customers also usually include
provisions to indemnify them from and against third party claims, liabilities,
damages, and expenses arising out of LanVision's operation of its business or
any negligent act or omission of LanVision. To date, LanVision has always
maintained the ASPeN performance standards and has not been required to make any
material penalty payments to customers or indemnify any customers for any
material third party claims. At April 30, 2003 and January 31, 2003 LanVision
had a warranty reserve in the amount of $250,000. Each contract is reviewed
quarterly with the appropriate LanVision Client Manager to determine the need
for a warranty reserve based upon the most currently available information as to
the status of the contract, the customer comments, if any, and the status of any
open or unresolved issues with the customer.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information contained herein, this Discussion and
Analysis, as well as other Items in this Form 10-Q, contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements, included
herein. These risks and uncertainties include, but are not limited to, the
impact of competitive products and pricing, product demand and market
acceptance, new product development, key strategic alliances with vendors that
resell LanVision products, the ability of the Company to control costs,
availability of products producedobtained from third party vendors, the healthcare
regulatory environment, healthcare information systems budgets, availability of
healthcare information systems trained personnel for implementation of new
systems, as well as maintenance of legacy systems, fluctuations in operating
results and other risks detailed from time to time in the LanVision Systems,
Inc. filings with the U. S. Securities and Exchange Commission. Readers are
11
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
LanVision's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires LanVision
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent
liabilities. On an on-going basis, LanVision evaluates its estimates, including
those related to product revenues, bad debts, capitalized software development
costs, income taxes, warranty obligations, support contracts, contingencies, and
litigation. LanVision bases its estimates on historical experience and on
various other assumptions that LanVision believes are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and revenue recognition. Actual
results may differ from these estimates under different assumptions or
conditions.
RESULTS OF OPERATIONS
GENERAL
9
LanVision Systems, Inc. ("LanVision"(TM)(LanVision(TM) or the "Company")Company) is an Electronica Medical Record
Workflow solution softwareprovider and application-hosting services provider. LanVision
is a leading supplier of Healthcare Information Access Solutionstechnologically advanced software and
application-hosting services specializing in connectivity solutionsWeb based applications that
utilizeleverage the poweravailability of the Internet/Intranet to link hospitals,Internet and Intranets. LanVision's Medical
Record Workflows allow authenticated users, such as physicians, patientsnurses,
administrative and financial personnel, and payers with access to a robust
Electronic Medical Record.patient
healthcare information that exists in disparate systems across the continuum of
care. LanVision's software application products and services are complementary
to existing clinical and financial systems, and use document imaging and
advanced workflow tools to ensure end-usersusers can electronically access both
"structured" and "unstructured" patient data and all the various forms of
clinical and financial healthcare information from a single permanent and secure
repository, including clinician's handwritten notes, lab reports, photographs,
insurance cards, etc. LanVision's workflow solutions offer value to all of the
constituents in the healthcare delivery process by enabling them to
simultaneously access and utilize LanVision's accessANYware(TM) advanced
technological workflow application to process the information, on a real-time
basis, from virtually any location, including the physician's desktop, using
Web browser-basedWeb-based technology. Web access to the entire medical record repository
improves physician productivityand administrative personnel productivity; allows for
multiple simultaneous access to the records necessary to review and complete,
using completionANYware(TM), the information necessary to process claims for
payment, using codingANYware(TM), and reduces administrative costs such as
filing, storage, retrieval, using accessANYware and upkeepreleaseANYware(TM) and
reduces the cost of maintaining medical records and reduces clinical costs, such
as redundant diagnostic testing. The system enables
healthcare providers to access, on a real-time basis, all the various forms of
clinical and financial patient information from a single permanent and secure
healthcare information repository. LanVision's solutions integrate a proprietary
document
imaging platform, application workflow suites, and image and Web-enabling tools
that
12
allow for the seamless merger of "back office" functionality with existing
Clinical Information Systems at the desktop. LanVision offers a robust document
imaging/management infrastructure (Foundation Suite) that is built for high
volume transaction processing and is optimizedspecifically designed for the healthcare
industry. In addition to providing the clinician access to information not previously
available at the desktop, LanVision's applications fulfill the administrative
and legal needs of the Medical Records and Patient Financial Services
departments. Furthermore, these systems have been specifically designed to
integrate with any Clinical Information System. For example, LanVision has
integrated its products with selected systems from Siemens Medical Solutions
Health Services Corporation (Siemens), and Cerner Corporation and will soon
integrate its products with IDX Information Systems Corporation (IDX)
applications. By offering electronic access to all the patient information
components of the medical record, this integration completes one of the most
difficult tasks necessary to provide a true Computer Based Patient Record.Electronic Health Record (EHR).
LanVision's systems deliver on-line enterprisewide access to fully-updatedfully updated
patient information, which historically was maintained on a variety of media,
including paper, magnetic disk, optical disk, x-ray film, video, audio and microfilm.
Historically, LanVision has derived most of its revenues from systems sales and
professional services involving the licensing, either directly or through
remarketing partners, of its Electronic Medical Record solution softwareWorkflow solutions to Integrated
Healthcare Delivery Networks (IDN). In a typical transaction, LanVision, or its
remarketing partners, enter into a perpetual or term license or fee-for-service
agreement for LanVision's Electronic Medical Record software application suite and may license or sell
other third-party software and hardware components to the IDN. Additionally,
LanVision, or its remarketing partners provide professional services, including
implementation, training, and product support.
With respect to systems sales, LanVision earns its highest margins on
proprietary LanVision software or application-hosting services and the lowest
margins on third-party hardware. Systems sales to customers may include
different configurations of software hardware and hardware,professional services,
resulting in varying margins among contracts. The margins on professional
services revenues fluctuate based upon the negotiated terms of the agreement
with each customer and LanVision's ability to fully utilize its professional
services, maintenance, and support services staff.
10
Beginning in 1998, LanVision began offering customers the ability to obtain its
Electronic Medical Record solutionworkflow solutions on an application-hosting basis as an Application Service
Provider.Provider (ASP). LanVision established a hosting data center and installed
LanVision's Electronic Medical Record suite of workflow products, called ASPeNASPeN(SM) (Application Service
Provider eHealth Network) within the hosting data center. Under this
arrangement, customers electronically capture information and securely transmit
the data to the hosting data center. The ASPeN services division storesstore and managesmanage the
data using LanVision's Electronic Medical Record suite of applications, and customers can view, print,
or fax, and process the information from anywhere using the LanVision Web-based
applications. The ASPeN services divisionLanVision charges and recognizes revenue for these ASPeN services
on a per transaction or subscription basis as information is captured, stored,
retrieved and retrieved.processed.
In February 2000, LanVision sold its hostingapplication-hosting data center.
Simultaneously therewith, LanVision entered into an annual service agreement
with the buyer. Under the terms of this service agreement, which can be renewed annually at the
sole option of the Company, in exchange for processing fees, LanVision will
continuecontinued
to use the hostingthis data center to provide ASPeN services to LanVision's
current customers. Althoughthrough January 2003. LanVision
sold the original hosting data center
assets, LanVision continues to market its ASPeN services solution and continues
to provide its ASPeN services through the hosting data center. LanVision is in
the process of building13
has established a secondnew application-hosting data center in order to provide the
capacity for all of its newest ASPeN services clients and into which it will consolidate all ofhas
consolidated its existing ASPeN application-hosting services at some
time in the future.services. Approximately
$570,000$865,000 in new equipmenthardware and third-party software has
beenwas leased or purchased, in
fiscal year 2002, for the new application-hosting data center.
The decision by a healthcare provider to replace, substantially modify, or
upgrade its information systems is a strategic decision and often involves a
large capital commitment requiring an extended approval process. Since
inception, LanVision has experienced extended sales cycles, which has adversely
affected revenues. It is commonnot uncommon for sales cycles to take six to eighteen
months from initial contact to the execution of an agreement. As a result, the
sales cycles can cause significant variations in quarter-to-quarter operating
results. These agreements cover the entire implementation and maintenance of the
system and specify the implementationinstallation schedule, which typically takes place in one
or more phases. The licensing agreements generally provide for the licensing of
LanVision's proprietary software and third-party software with a perpetual or
term license fee that is adjusted depending on the number of concurrent users or
workstations using the software. Third-party hardware is sold outright, with a
one-time fee charged for installation and training. Site-specific customization,
interfaces with existing customer systems and other consulting services are sold
on a fixed fee or a time and materials basis. Alternatively, with LanVision's
ASPeN services solution, the application-hosting services agreements generally
provide for utilizing LanVision's software and third-party software on a fee per
transaction or subscription basis.
The ASPeN services division was designed to overcome obstacles in the buying decision such as
large capital commitment, length of implementation, and the scarcity of time for
Healthcare Information Systems personnel to implement new systems. LanVision
believes that Integrated Delivery Networks will begin to look for this type of
ASP application because of the ease of implementation and lower entry-level
costs. LanVision believes its business model is especially well suited for the
ambulatory marketplace and is actively pursuing remarketing agreements, in
addition to those discussed below, with other Healthcare Information Systems
providers to distribute LanVision's Electronic Medical
Record solution.
11
Generally, revenue from systemsworkflow solutions.
LanVision's quarterly operating results have varied in the past and may continue
to do so in the future because of various reasons including: demand for
LanVision's products and services, long sales is recognized whencycles, and extended installation
and implementation cycles based on customer's schedules. Sales are often delayed
because of customers' budgets and competing capital expenditure needs as well as
personnel resource constraints within an agreement is signedintegrated delivery network.
Delays in anticipated sales or installations may have a significant impact on
LanVision's quarterly revenues and products are made available to end-users. Revenue recognition related to
routine installation, integration and project management is deferred until the
work is performed. If an agreement requires the Company to perform services and
modifications that are deemed significant to system acceptance, revenue is
recorded either on the percentage-of-completion method or revenue related to the
delivered hardware and software components is deferred until such obligations
are deemed insignificant, depending on the contractual terms. Revenues from
consulting, training and application-hosting services are recognized as the
services are performed. Revenues from short-term support and maintenance
agreements are recognized ratably over the termoperating results, because substantial
portions of the agreements. Billings to
customers recorded prior to the recognition of the revenueoperating expenses are classified as
deferred revenues. Revenue recognized prior to progress billings to customers is
recorded as unbilled receivables.
In 1998, LanVision entered into a five year Remarketing Agreement with Siemens
Medical Solutions Health Services Corporation. Under the terms of the Agreement,
Siemens was granted an exclusive worldwide license to distribute ChartVision,
On-Line Chart Completion, WebView and Enterprisewide Correspondence to the
Siemens customer base and prospect base, as defined in the Agreement, and a
non-exclusive license to distribute all other LanVision products. If Siemens
distributes any other Electronic Medical Record product competing with
LanVision's products, LanVision may terminate the Siemens Remarketing Agreement.
LanVision and Siemens are currently in negotiations for a new agreement to
replace the existing agreement that expires in early 2003.
Under the terms of the agreement, Siemens remits royalties to LanVision based
upon Siemens sublicensing of LanVision's software to Siemens' customers.
Twenty-five percent of the royalty is due 30 days following the end of the
quarter in which Siemens executes the end user license agreement with its
customer. LanVision recognizes this revenue upon receipt of the royalty
statement. The remaining seventy-five percent of the royalty is due 30 days
following the end of the quarter in which Siemens commences software
implementation activities. The Company records this revenue when the 75% payment
due from Siemens is fixed and determinable, which is when the software
implementation activities commence. Through July 31, 2002, Siemens has sold
twenty-two systems to end-users.
In January 2002, LanVision entered into a five year Remarketing Agreement with
IDX Information Systems Corporation. Under the terms of the agreement, IDX was
granted a non-exclusive worldwide license to distribute certain LanVision
Electronic Medical Record software including accessANYware(SM),
codingANYware(SM) when it becomes available, and ASPeN application-hosting
services to IDX customers and prospective customers, as defined in the
Remarketing Agreement.
Under the terms of a Remarketing Agreement, IDX remits royalties to LanVision
based upon IDX sublicensing LanVision's software to IDX's customers. Thirty
percent of the royalty is due 45 days following the end of the month in which
IDX executes an end-user license agreement with its customer. LanVision
recognizes this revenue upon receipt of the royalty report. The remaining
seventy percent of the royalty is due from IDX, in varying amounts based on
implementation milestones, 45 days following the end of the month in which a
milestone occurs. LanVision records this revenue when the seventy percent
payment due from IDX is fixed and
12
determinable, which is generally when the software implementation activities
commence. The IDX Remarketing Agreement was signed in January 2002. Through July
31, 2002, IDX has sold two systems to end-users.
In May 2002, LanVision entered into a Marketing and Referral Agreement with the
3M Health Information Systems, division of 3M, whereby 3M and LanVision entered
into a referral marketing agreement for its new product codingANYware. Revenues
from this agreement are expected to begin after the general release of
codingANYware in 2002.relatively fixed.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS
The Company's revenues from systems sales have varied, and may continue to vary,
significantly from quarter-to-quarter as a resultbecause of the volume and timing of
systems sales and delivery. Professional services revenues also fluctuate from
quarter to quarter as a resultbecause of the timing of the
14
installation of software and hardware, project management and customized
programming. Revenues from maintenance services do not fluctuate significantly
from quarter to quarter, but have been increasing as the number of customers
increase. Revenues from ASP application-hosting services operations are expected
to increase over time, as more hospitals outsource services to LanVision's ASPeN services divisionASP
Division, or its remarketing partners begin to utilize the software, and
existing customers increase the volume of documents stored on the systems, and
the number of retrievals increases.increase.
The Company's revenues and operating results may vary significantly from
quarter-to-quarter as a resultbecause of a number of other factors, many of which are
outside the Company's control. These factors include the relatively high
purchase price of a system, unpredictability in the number and timing of systems
sales, length of the sales cycle, delays in the installation process and changes
in the customer's financial condition or budget and the sales activities of the
remarketing partners. As a result, period-to-period comparisons may not be
meaningful with respect to the past operations of the Company nor are they
necessarily indicative of the future operations of the Company.
REVENUES
Revenues for the secondfirst fiscal quarter ended July 31, 2002,April 30, 2003, were $3,272,188,$2,619,982,
compared with $2,098,903$3,033,219 reported in the comparable quarter of 2001. Revenues
for2002. The
decrease was primarily a result of a decline in system sales "software revenues"
when compared to the six months ended July 31, 2002, were $6,305,407, compared with
$4,811,306 reportedcomparable prior quarter, which had an uncharacteristically
high volume of software revenues. Traditionally, the first two quarters are the
most challenging because of the seasonality of software licensing revenues,
which the Company has experienced in the comparable periodpast, with a greater portion of 2001.the
annual revenues recorded in later two quarters. The decrease in software
revenues in the first quarter were partially offset by increases in
application-hosting, services, maintenance, and support revenues. The increase
in both the quarter and six months is due to new sales from our remarketing partners and
implementation of existing contracts through our remarketing partners.
Revenues forASPeN application-hosting revenues during the first six monthsquarter resulted from
adding two new clients in the third quarter of fiscal 2001 and 2002 continued to be
affected because many healthcare organizations deferred new software purchases
until final Federal Health Privacy Regulations were promulgated, to comply with
the requirements of HIPAA (Health Insurance Portability and Accountability Act
of 1996).
Additionally, healthcare institutions are assessing and implementing many new
technologies. Although many of these systems do not compete with LanVision
products, these systems do compete for capital budget dollars and the available
time of information systems personnel within the healthcare industries. However,
management continues to believe that revenue from
13
its Remarketing Agreements with Siemens and IDX will increase in the future
since LanVision's product has been fully integrated with the Siemens products
and will soon be integrated with the IDX products. In addition, our Web
browser-based ASPeN services application, which is currently available and in
production with our customers and available through our Resellers, should
further enhance application-hosting revenues to LanVision with minimal
additional cost. Both our Remarketing and Reseller Agreements should represent a
greater percentage of the Company's total revenues in the future.
Many healthcare organizations are beginning to plan additional information
technology projects following Year 2000 remediation and in anticipation of HIPAA
compliance. The HIPAA Regulations are a series of standards that are intended to
regulate the way health information is secured and transmitted. A healthcare
industry report (Fitch IBCA, Duff & Phelps) stated that in order to comply with
the HIPAA healthcare information electronic transmission regulations, healthcare
systems will need to adjust existing systems or purchase new information
technology systems, hire and retrain staff, and make significant changes to the
current processes associated with maintaining patient privacy, the cost of which
is estimated to be somewhere between three to four times the amount of
expenditures required for Year 2000 remediation, or an amount in excess of $25
billion. LanVision believes its highly evolved, secure and technologically
advanced Web browser-based ASPeN services solution will position the Company to
take advantage of, what we continue to believe will be, significantly increasing
market opportunities for LanVision and its distribution partners in the future.
After an agreement is executed, LanVision does not record revenues until it
delivers the hardware and software or performs the agreed upon services. The
commencement of revenue recognition varies depending on the size and complexity
of the system and the scheduling of the implementation, training, interface
development and other services requested by the customer. Accordingly,
significant variations in revenues can result as was more fully discussed above
under "Uneven Patterns of Quarterly Operating Results". Three customers,
excluding our remarketing partners Siemens and IDX, accounted for approximately
23%, or $1,485,668 of the revenues for the first six months of 2002 compared
with 27%, or $1,306,614 of revenues in the comparable period of the prior year.
Revenues from our remarketing partners accounted for approximately 38% or
$2,438,204 for the six months ended July 31, 2002, compared with approximately
20% or $945,270 for the six months ended July 31, 2001. This increase in
revenues results primarily from our newest partner, IDX.2002.
OPERATING EXPENSES
Cost of Systems Sales
The cost of systems sales includes amortization of capitalized software
development costs on a straight-line basis, royalties and the cost of third
party software and hardware. Cost of systems sales as a percentage of systems
sales may vary from period to period depending on the mix of hardware and
third
party software and LanVision software of the systems or add-on sales delivered. The cost of systems sales as
a percentage of systems sales for the secondfirst quarter of fiscal 2003 and 2002 were
74% and 2001 were 22% and 38%, respectively and for the first
six months of fiscal 2002 and 2001 were 24% and 21%25%, respectively. The lowerhigher percentage of cost of sales for the quarter reflects a
greater volume of LanVision softwarehardware sold during the current period compared to the
14
comparable prior period, which had lower LanVisionhardware and higher software revenues.
For the
six-month period in 2002 the cost of sales is higher than the comparable prior
period because of higher hardware and lower software sales, primarily in the
first quarter of fiscal 2002 when compared to the comparable prior period.15
Cost of Services, Maintenance and Support
The cost of services, maintenance and support includes compensation and benefits
for support and professional services personnel and the cost of third party
maintenance contracts. As a percentage of services, maintenance and support
revenues, the cost of such services, maintenance and support was 44%42% and 54% for
the second quarter and 47% and 52%51% for
the first six months, respectively,quarter of fiscal 2003 and 2002, and 2001. The decrease in the percentages is due to greater
utilization of the professional services staff with little additional cost.respectively. The Company's support
margins are highest on LanVision's proprietary software. Accordingly, margins
are expected to improve as more customers are added.
Cost of Application-hosting services
The LanVision Professional Services staff provides services on a time and
material or fixed fee basis. The Professional Services staff periodically
experiences some inefficiencies in the delivery of services, and certain
projects have taken longer to complete than originally estimated, thus adversely
affecting operating performance. Additionally, the Professional Services staff
does spend a portion of its time on non-billable activities, such as assisting
in the selling of additional products and services to existing clients,
developing training courses and plans to move existing customers to LanVision's
new product releases, etc. Management believes an increase in the number of new
systems sold, and the related backlog, should improve the overall efficiency and
operating performance of this group.
Costcost of application-hosting services Theoperations increased because of the
addition of the new data center, which opened in August 2002 in order to provide
the capacity necessary for new clients. Prior thereto, the Company currently incursincurred
expenses for its application-hosting services only for the third party outsourcing servicesdata center it uses,used, which arewere directly
related to the application-hosting services revenues generated by the ASPeN
services
division. The current cost of sales is between 39% and 43%, but is expected to
temporarily increase as a second application-hosting data center, which the
company has built and will operate goes on line, that has a fixed cost rather
than a variable cost structure which the Company now pays to the outsourcing
service bureau we currently uses.Division.
Selling, General and Administrative
Selling, General and Administrative expenses consist primarily of:of compensation
and related benefits and reimbursable travel and living expenses related to the
Company's sales, marketing and administrative personnel; advertising and
marketing expenses, including trade shows and similar type sales and marketing
expenses; and general corporate expenses, including occupancy costs. During the
secondfirst quarter of fiscal 2002,2003, Selling, General and Administrative expenses
increased to $906,547when compared with $633,470 in the comparable prior quarter.
During the first six monthsquarter primarily because of fiscal 2002, Selling, Generala
nonrecurring expense for a healthcare market and Administrative
expenses increased to $1,750,074 compared with $1,338,714 in the comparable
prior period. The increase in Selling, General and Administrative expenses is
due to normal inflation and the increased cost to defend our intellectual
property rights in two matters initiatedindustry consulting project
commissioned by the Company. [See Part II. Item 1
Legal
15
ProceedingsDemand for Medical Record Workflow (MRW)
technologies and healthcare information access systems is growing and the
frequency of this Form 10-Q.] In addition, therequests for proposals received is increasing. Accordingly, Company
has gradually
redirectedincreased its resourcesdirect sales force to focus its sales efforts on indirect distribution
through itstake advantage of current and future Remarketing, Reseller, and ASPeN services
partners. The increased emphases on indirect sales include additional personnel
assigned to the Corporate Development Group and increased travel and living
expenses as the pace of corporate development activities has increased. Also,
the internal resources of our Client Managers has been redirected to more
intense selling into our current installed base and less on managing
Professional Services engagements. Accordingly, the costs associated with the
Client Managers are now reported as Selling, General and Administrative expenses
rather than cost of Professional Services.market
opportunities.
Product Research and Development
Product research and development expenses consist primarily of:of compensation and
related benefits; the use of independent contractors for specific development
projects; and an allocated portion of general overhead costs, including
occupancy. During the secondfirst quarter, research and development expenses were
$542,753increased
compared with $569,629 in the comparable prior quarter. During the
first six months, research and development expenses were $1,049,833 compared
with $1,121,776 in the comparable prior period. The decreaseincrease results from lowerthe use of
additional outside contractors, which were used to augment the in-house staff costs resulting from converting consultants to
company employees at lower
costs,complete the development and increased capitalized software development coststesting for the Company's newest product codingANYware under development.products. The
Company monitors closely monitors and augments its Research and Development staff, as
necessary, with outside contractors to accelerateassist with the development and testing
of new products. The Company capitalized, in accordance with Statement of
Financial Accounting Standards No. 86, $300,000$200,000 and $250,000$150,000 of product research
and development costs in the first six months of fiscal 2002
and 2001. The capitalized costs during the first six months of fiscal 2002
relate primarily to LanVision's two new products under development,
accessANYware and codingANYware.
Operating profit
The operating profit for the second quarter of fiscal 2003 and 2002,
was $649,994 compared
with anrespectively.
Operating profit
16
The operating loss of $138,981 infor the secondfirst quarter of fiscal 2001, an
improvement of approximately $789,000. The operating profit for the first six
months of fiscal 20022003 was $1,181,346($248,017) compared
with an operating profit of $333,979$531,352 in the first six monthsquarter of fiscal 2001, an improvement2002. The
decrease is the result of approximately
$847,000. The increasethe decline in revenues and the increases in operating profit results primarily from: (1)
continued stringent cost controls, (2) increased revenues of approximately
$1,494,000, primarily LanVision software licensing revenues offset by (3) higher
cost of system sales because of a higher content of hardware sales, with lower
margins, and increased Selling, General and Administrative
expenses as discussednoted above.
Interest income consists primarily of interest on invested cash. The decreases
in interest income results from lower cash balances and significantly lower
interest rates.balances.
Interest expense relates primarily to the long-term debt. In connection with settingdebt and includes the
loan covenants for fiscal year 2002,interest expense on the Company made an additional $500,000
special payment of the long-term deferred interest on March 13, 2002.capitalized leases in 2003.
Net income 16
(loss)
The net income(loss) for the secondfirst quarter of fiscal 20022003 was $201,632 ($.02675,792) ($.07 per
share) compared with net lossincome of $569,778$98,269 ($.06.01 per share loss)share) in the secondfirst quarter
of fiscal 2001. The net income for the first six months of fiscal 2002
was $299,901 ($.04 per share) compared with net loss of $468,237 ($.05 per share
loss) in the first six months of fiscal 2001. The improvement in the net income2002. This decrease is the primarily the result of thelower revenues and increased
revenuesexpenses as noted above.
Notwithstanding the less than anticipated number of new customer agreements
signed by the Company and its resellers in the past,first quarter, management
continues to believe that the healthcare document imaging and workflow market is
significant
which, with the help of our existing and future partners, will enable LanVisiongoing to capturebe a significant portion of the market. Management believes it has made, and continues
to make, the investments in the talent and technology necessary to establish the
Company as a leader in this marketplace, and continues to believe the Company is
well positioned to experience significant revenue growth primarily through third
party distributors and remarketing partners.
Since commencing operations in 1989, the Company has incurred operating losses.
Although the Company achieved profitability in fiscal years 1992, 1993, 2000,
2001, and 2001,2002, the Company incurred a net loss in fiscal years 1994 through
1999. In view of the Company's prior operating history, there can be no
assurance that the Company will be able to achieve consistent profitability on a
quarterly or annual basis or that it will be able to sustain or increase its
revenue growth in future periods. Based upon the expenses associated with
current and planned staffing levels, profitability is dependent upon increasing
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
During the last five fiscal years, LanVision has funded its operations, working
capital needs, and capital expenditures primarily from the proceedsa combination of the 1996
Initial Public Offering, cash
generated by operations, and a $6,000,000 loan. LanVision's liquidity is
dependent upon numerous factors to include the timing and amount of revenues and
collection of contractual amounts from customers, amounts invested in research
and development and capital expenditures, and the level of operating expenses.
LanVision's customers typically have been well-established hospitals or medical
facilities withor major Healthcare Information Systems companies that resell
LanVision' products, which have good credit histories and payments have beenare received
within normal time frames for the industry. However, some healthcare
organizations have experienced significant operating losses as a resultbecause
17
of limits on third-party reimbursements from insurance companies and
governmental entities. Agreements with customers often involve significant
amounts and contract terms typically require customers to make progress
payments.
LanVision has no significant obligations for capital resources, other than noncancelable operating leasesas
noted in the total amount of approximately $224,000,
payable over the next four years and Capitalized Leases with payments totaling
$720,000 over the next four years.
In July 2004, upon maturity of the long-term debt, LanVision may, under the
terms of the long-term debt agreement, be required to paynote 6 to the lender an
amount necessary so that the market value of the stock underlying the Warrants
issued to the lenderfinancial statements included herein.
Although LanVision achieved its revenue goals in connection with the long-term debt, plus the 12%
interest paid on the loan will yield the lender a 25% compound annual return. If
the yield from the value of the Warrants plus interest paid does not provide the
lender with the 25% guaranteed compound annual return, LanVision is required to
pay the additional amount in
17
cash at the time of maturity. Accordingly, LanVision is accruing interest on the
loan at a 25% compound interest rate, regardless of the value of the stock and
the inherent value of the Warrants. The current estimate of the maximum
obligation at maturity, which would be required to be paid to the lender,
assuming the Warrants have no value, is approximately $5,800,000. Depending on
the amount of cash LanVision has at that time, and the value of the Warrants, it
may be necessary for LanVision to borrow funds or obtain additional equity in
order to fund the deferred interest payable to the lender at that time.
LanVision believes that continued operating performance improvements should
enable it to fund a portion of the obligation and borrow the additional funds
necessary to fully retire the obligation at maturity. However, there can be no
assurance LanVision will be able to do so.
Over the last several years,Fiscal Year 2002, LanVision's
revenues were less than its internal plans.plans in the first quarter of the current
fiscal year. However, duringover the same period,last three years, LanVision has expended
significant amounts for capital expenditures, product research and development,
sales, support and consulting expenses. This resulted in significant net cash
outlays over the last fivethree years. Although LanVision has reduced staffing
levels and related expenses, increased revenues and improved operating
performance, LanVision's expenses will continue to increase. Accordingly, to
continue to achieve increasing profitability, and positive cash flow, it is
necessary for LanVision to increase revenues or continue to reduce expenses.
LanVision believes that the requirement for healthcare organizations to become
HIPAA compliant, and the recent signing of the IDX Information Systems
Corporation remarketing agreementRemarketing Agreement and the 3M agreementsMarketing and Referral Agreement
should offer significant opportunities to increase revenues.
Additionally, the IDX and Siemens Remarketing Agreements, as previously noted,
have significantly expanded the sales distribution capabilities and LanVision. LanVision believes
that market opportunities are such that LanVision should be able to increase its
revenues. However, there can be no assurance LanVision will be able to do so.
In February 2000, LanVision sold its hosting data center for $2,900,000. The
sale resulted in a gain of approximately $1,400,000.
At July 31, 2002,April 30, 2003, LanVision had cash and cash equivalents of $6,419,816.$5,121,274. Cash
equivalents consist primarily of overnight bank repurchase agreements and short-term commercial paper. Under the terms of
its loan agreement, as amended, LanVision has agreed to maintain a minimum cash
and cash equivalent balance of $4,800,000. Over$4,300,000 through July 29, 2003, at which time
the next twelve months,amount is reduced to $3,800,000, which will be maintained through the
maturity of the loan in July 2004. During fiscal 2003, $2,000,000 of long-term
debt is required to be repaid to the lender.
LanVision has significantly reducedcarefully monitored operating expenses during the last three
fiscal years, and believes it will continue to improve operating results in
fiscal 2002.2003. Notwithstanding the increases in fiscal year 2001 and the first six
months of fiscal 2002 revenues
and operating profit, for the foreseeablenear future, LanVision will need to assess
continually assess its revenue prospects compared to its then current expenditure
levels. If it does not appear likely that revenues will increase, it may be
necessary to reduce operating expenses or raise cash through additional
borrowings, the sale of assets, or other equity financing. Certain of these
actions will require lender approval. However, there can be no assurance
LanVision will be successful in any of these efforts. If it is necessary to
reduce significantly reduce operating expenses, this could have an adverse effect on
future operating performance.
LanVision believes that its present cash position, combined with cash generation
anticipated from operations, will be sufficient to meet anticipated cash
requirements during fiscal year 2003.
To date, inflation has not had a material impact on LanVision's revenues or
expenses. Additionally,In addition, LanVision does not have any significant market risk
exposure at July 31, 2002.April 30, 2003.
18
SIGNED AGREEMENTS - BACKLOG
LanVision, or its remarketing partners, enter into master agreements with their
customers to specify the scope of the system to be installed and services to be
provided, the agreed upon aggregate price and the timetable for implementation.
The master agreement typically provides that the Company, or its remarketing
partner, will deliver the system in phases pursuant to the customer's purchase
orders, thereby allowing the customer flexibility in the timing of its receipt
of systems and to make adjustments that may arise based upon changes in
technology or changes in customer needs. The master agreement also allows the
customer to request additional components as the installation progresses, which
additions are then separately negotiated as to price and terms. Historically,
customers have ultimately purchased systems and services in addition to those
originally contemplated by the master agreement. Although there can be no
assurance that customers will continue in the future to expand their systems and
purchase additional licenses and services, LanVision believes, based on its past
experience, that its customers will expand their existing systems.
At July 31, 2002, the Company's and its resellers' customers had entered intoApril 30, 2003, LanVision has master agreements, purchase orders or royalty
reports from remarketing partners for systems and related services (excluding
support and maintenance, and transaction basedtransaction-based revenues for the
ASPeN services division),application-hosting services) which hadhave not
yet been delivered, installed and
accepted which, if fully performed, wouldwill generate revenue to LanVisionfuture revenues of
approximately $4,322,000, compared with
approximately $4,417,000 at the end of fiscal 2001.$4,100,000. The systemsrelated products and services are
currently expected to be
delivered over the next two to three years. In
addition, the Company anticipates approximately $390,000Furthermore, LanVision has entered
into application-hosting agreements, which are expected to generate revenues in
application-hosting
services revenues for the ASPeN services division's current clientexcess of $4,300,000 over the remaining six-month lifelives of the contract. However, LanVision has also received
an interim Purchase Order to provide start up ASPeN services to a new client,
pending approval of a negotiated three-year agreement by the new client's board.
When the agreement receives approval, an estimated additional $3,400,000 in
application-hosting services revenues will be added to the backlog.agreements.
LanVision's master agreements also generally provide for an initial maintenance
period and give the customer the right to subscribe for maintenance and support
services on a monthly, quarterly, or annual basis. Maintenance and support
revenues for fiscal years 2002, 2001 2000 and 19992000 were approximately $4,176,000,
$4,032,000 $3,678,000, and $3,264,000,$3,678,000, respectively. Maintenance and support revenues are
expected to increase in 2002.2003. At April 30, 2003, LanVision had Maintenance
Agreements, purchase orders or royalty reports from remarketing partners for
maintenance, which if fully performed, will generate future revenues of
approximately $2,046,000, through their respective renewal dates in fiscal 2003.
The commencement of revenue recognition varies depending on the size and
complexity of the system,system; the implementation schedule requested by the customer
and usage by customers of the ASPeN services division.application-hosting services. Therefore, LanVision
is unable to predict accurately predict the revenuesrevenue it expects to achieve in any
particular period. The Company'sLanVision's master agreements generally provide that the
customer may terminate its agreement upon a material breach by the Company,LanVision, or may
delay certain aspects of the installation. There can be no assurance that a
customer will not cancel all or any portion of a master agreement or delay
installations. A termination or installation delay of one or more phases of an
agreement, or the failure of the CompanyLanVision to procure additional agreements, could
have a material adverse effect on the Company'sLanVision's business, financial condition, and
results of operations.
19
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
LanVision is a party to various legal proceedings and claims that arise in the
ordinary course of business from time to time. Currently, LanVision is a party
to several pending lawsuits that were initiated by LanVision to protect its
intellectual property rights, to enforce non-competition covenants and/or to
prevent third parties from improperly interfering in LanVision's business. The
defendants in one or more of these actions have asserted, and may assert in the
future, counterclaims against LanVision. WhileThe company has negotiated, in
principle, the outcomesettlement of these claims, as
well as any claimsall of the outstanding litigation that may not have yet been asserted against LanVision,
whetherit has
initiated, and is in these actions or otherwise, cannot be predicted with certainty at
this time,the process of executing settlement agreements. LanVision
is not aware of any legal matters that will have a material adverse effect on
LanVision's consolidated results of operations or consolidated financial
position.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 28, 2003, the
following members were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
George E. Castrucci 8,734,900 164,918
Richard C. Levy, M.D. 8,879,393 20,425
Eric S. Lombardo 8,849,668 50,150
J. Brian Patsy 8,849,668 50,150
Z. David Patterson 8,734,900 164,918
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of LanVision Systems, Inc.(*)
3.2 Bylaws of LanVision Systems, Inc.(*)
11 Computation of Earnings (Loss) Per Common Share
99.1 Certification byof Chief Executive Officer
pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification byof Chief Financial Officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(*) Incorporated by reference.
(b) Reports on Form 8-K
None
20
On April 1, 2003, the Company filed a Form 8-K, reporting under Item 12, the
Fiscal Year End January 31, 2003 Results of Operations.
SIGNATURES
Pursuant to 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.
LANVISION SYSTEMS, INC.
DATE: September 10, 2002June 6, 2003 By: /s/ J. BRIAN PATSY
------------------
-------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: September 10, 2002June 6, 2003 By: /s/ PAUL W. BRIDGE, JR.
------------------
-------------------------------------
Paul W. Bridge, Jr.
Chief Financial Officer and Treasurer
21
CERTIFICATIONS
I, J. Brian Patsy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LanVision
Systems, Inc. ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrantregistrant as of, and for, the periods presented in
this quarterly report.
September 10, 20024. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is
21
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
June 6, 2003 /s/ J. Brian Patsy
------------------
Chief Executive Officer and
President
22
I, Paul W. Bridge, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of LanVision
Systems, Inc. ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrantregistrant as of, and for, the periods presented in
this quarterly report.
September 10, 2002report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
23
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
June 6, 2003 /s/ Paul W. Bridge, Jr.
-----------------------
Chief Financial Officer and
Treasurer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the
Certification as set forth in Form 10-Q have been omitted, consistent with the
Transition Provisions of SEC Exchange Act Release No. 34-46427, because this
Quarterly report of Form 10-Q covers a period ending before the Effective Date
of such Release.
2324
INDEX TO EXHIBITS
Exhibit No. Exhibit
- -----------
3.1 Certificate of Incorporation of LanVision Systems,
Inc.
Previously filed with the Commission and incorporated
herein by reference from, the Registrant's
Registration Statement on Form S-1, File Number
333-01494, as filed with the Commission on April 15,
1996.
3.2 Bylaws of LanVision Systems, Inc.
Previously filed with the Commission and incorporated
herein by reference from, the Registrant's
Registration Statement on Form S-1, File Number
333-01494, as filed with the Commission on April 15,
1996.
11 Computation of Earnings (Loss) Per Common Share
99.1 Certification by Chief Executive Officer pursuant to
U.S.C. Section *** 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to
U.S.C. Section *** 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.