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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2001
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 No
--- ---
Number of shares of Registrant's Common Stock ($.01 par value per
share) issued and outstanding, as of August 31, 2001: 8,894,948.
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TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.............................................. 3
Condensed Consolidated Balance Sheets at July 31, 2001 and January 31, 2001.............. 3
Condensed Consolidated Statements of Operations for the three and six months
ended July 31, 2001 and 2000............................................................. 5
Condensed Consolidated Statements of Cash Flows for the six months
ended July 31, 2001 and 2000............................................................. 6
Notes to Condensed Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 19
Item 3. Defaults on Senior Securities............................................................ 19
Item 6. Exhibits and Reports on Form 8-K......................................................... 19
Signatures............................................................................... 20
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) (Audited)
July 31, January 31,
2001 2001
------------ ------------
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 8,132,490 $ 8,549,732
Note receivable .................................................. -- 75,000
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively ........................... 883,054 2,080,154
Unbilled receivables ............................................. 1,818,034 1,356,413
Prepaid expenses related to unrecognized revenue ................. 167,481 146,428
Other ............................................................ 279,304 220,861
------------ ------------
Total current assets ....................................... 11,280,363 12,428,588
Property and equipment:
Computer equipment ............................................... 2,847,952 2,715,246
Computer software ................................................ 562,923 501,077
Office furniture, fixtures and equipment ......................... 1,139,457 1,233,175
Leasehold improvements ........................................... 117,795 114,965
------------ ------------
4,668,127 4,564,463
Accumulated depreciation and amortization ........................ (4,027,709) (3,857,871)
------------ ------------
640,418 706,592
Capitalized software development costs, net of accumulated
amortization of $1,550,228 and $1,400,228, respectively ............ 1,089,701 989,701
Other ................................................................ 255,481 233,235
------------ ------------
$ 13,265,963 $ 14,358,116
============ ============
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Equity
(Unaudited) (Audited)
July 31, January 31,
2001 2001
------------ ------------
Current liabilities:
Accounts payable ............................................. $ 265,273 $ 464,615
Accrued compensation ......................................... 266,565 306,180
Accrued other expenses ....................................... 1,624,342 1,733,631
Deferred revenues ............................................ 1,375,129 1,755,938
Current portion of long-term debt ............................ 2,000,000 1,000,000
------------ ------------
Total current liabilities .............................. 5,531,309 5,260,364
Long-term debt ................................................. 4,000,000 5,000,000
Long-term accrued interest ..................................... 1,528,105 1,442,285
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, 8,896,500 shares issued ........................ 88,965 88,965
Capital in excess of par value ............................... 34,774,070 34,829,406
Treasury stock, at cost, 1,552 and 17,259 shares, respectively (7,383) (82,038)
Accumulated (deficit) ........................................ (32,649,103) (32,180,866)
------------ ------------
Total stockholders' equity ............................. 2,206,549 2,655,467
------------ ------------
$ 13,265,963 $ 14,358,116
============ ============
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended July 31,
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Systems sales .................................... $ 419,521 $ 607,874 $ 1,476,501 $ 878,935
Services, maintenance and support ................ 1,475,716 1,490,391 2,940,023 2,829,606
Service bureau operations ........................ 203,666 199,367 394,782 401,829
----------- ----------- ----------- -----------
Total revenues ............................... 2,098,903 2,297,632 4,811,306 4,110,370
Operating expenses:
Cost of systems sales ............................ 158,147 269,683 308,578 441,619
Cost of services, maintenance and support ........ 829,926 905,686 1,624,316 1,833,790
Cost of service bureau operations ................ 87,042 82,643 172,547 190,482
Selling, general and administrative .............. 777,022 914,451 1,645,936 1,753,959
Product research and development ................. 385,747 459,578 725,950 926,949
----------- ----------- ----------- -----------
Total operating expenses ..................... 2,237,884 2,632,041 4,477,327 5,146,799
----------- ----------- ----------- -----------
Operating income (loss) .............................. (138,981) (334,409) 333,979 (1,036,429)
Other income expense:
Interest income ...................................... 73,480 127,148 177,912 231,860
Interest expense ..................................... (504,277) (460,367) (980,128) (900,948)
Other income, net .................................... -- 28,802 -- 1,381,520
----------- ----------- ----------- -----------
Net (loss) ........................................... $ (569,778) $ (638,826) $ (468,237) $ (323,997)
=========== =========== =========== ===========
Basic net (loss) per common share .................... $ (.06) $ (.07) $ (.05) $ (.04)
=========== =========== =========== ===========
Diluted net (loss) per common share .................. $ (.06) $ (.07) $ (.05) $ (.04)
=========== =========== =========== ===========
Number of shares used in per common share
computations ......................................... 8,884,534 8,855,218 8,881,931 8,851,715
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 31,
(Unaudited)
2001 2000
----------- -----------
Operating activities:
Net (loss) ........................................... $ (468,237) $ (323,997)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
(Gain) on sale of property and equipment, net ... -- (1,431,763)
Depreciation and amortization ................... 361,809 492,603
Increase in long-term accrued interest .......... 85,820 504,640
Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables ............... 735,479 2,222,022
Other current assets ............................ (79,496) 668
Accounts payable and accrued expenses ........... (348,246) (450,888)
Deferred revenues ............................... (380,809) (698,119)
----------- -----------
Net cash (used for) provided by operating activities . (93,680) 315,166
----------- -----------
Investing activities:
Proceeds from disposal of property and equipment ..... 56,301 2,057,000
Purchases of property and equipment .................. (201,936) (61,764)
Capitalization of software development costs ......... (250,000) (210,000)
Payment on note receivable ........................... 75,000 375,000
Other ................................................ (22,246) 13,903
----------- -----------
Net cash (used for) provided by investing activities . (342,881) 2,174,139
----------- -----------
Financing activities:
Sale of treasury stock to employee stock purchase plan 19,319 21,357
----------- -----------
Net cash provided by financing activities ............ 19,319 21,357
----------- -----------
(Decrease) increase in cash and cash equivalents ..... (417,242) 2,510,662
Cash and cash equivalents at beginning of period ..... 8,549,732 5,411,920
----------- -----------
Cash and cash equivalents at end of period ........... $ 8,132,490 $ 7,922,582
=========== ===========
Supplemental cash flow disclosures:
Interest paid .................................... $ 862,000 $ 364,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited 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 United States Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States 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 LanVision Systems, Inc.
Annual Report on Form 10-K, Commission File Number 0-28132. Operating results
for the three and six months ended July 31, 2001, are not necessarily indicative
of the results that may be expected for the fiscal year ending January 31, 2002.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 20 of its 2000 Annual Report to Stockholders. 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 2001.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The decrease in cash and cash equivalents results primarily from the payment of
$500,000 in long-term accrued interest on the outstanding debt, the purchase of
fixed assets and a reduction in deferred revenues and accounts payable, offset
to some extent by the decrease in accounts receivable during the first six
months.
The decrease in accounts receivable, net is due to higher collections, during
the second quarter.
The increase in unbilled receivables represents primarily amounts recorded as
revenue during the first quarter but prior to progress billing customers or
receiving payment from remarketing partners.
Other current assets consist of software and hardware awaiting installation
(related to unrecognized revenue) and prepaid expenses, including commissions.
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The increase in property and equipment, net, is primarily the result of the
acquisition of computer equipment and software necessary to support current
customers.
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 decrease in accounts payable results primarily from the payment of accounts
when due.
The decrease in accrued compensation results primarily from the decrease in the
accrual for second quarter bonuses payable under the employee bonus plans
because the second quarter operating performance of the company did not meet the
plan targets.
The decrease in accrued other expenses relates to the settlement of certain
obligations during the quarter.
The decrease 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 2001.
Note 4 - STOCK OPTIONS
During the first six months of the current fiscal year, the Company granted
10,000 stock options under the 1996 Employee Stock Option Plan at an exercise
price of approximately $0.87 per share. During the same period 11,000 options
were forfeited under all plans. No stock options were exercised during the
quarter or first six months.
Note 5 - EARNINGS PER SHARE
The basic net income per common share is calculated using the weighted average
number of common shares outstanding during the period.
The diluted net income per common share calculation excludes the effect of the
common stock equivalents (stock options and warrants), as the inclusion thereof
would be antidilutive.
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
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strategic alliances with vendors that resell LanVision products, the ability of
the Company to control costs, availability of products produced 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 United States Securities and
Exchange Commission. Readers are 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.
RESULTS OF OPERATIONS
GENERAL
LanVision is an Application Service Provider (ASP) and a leading supplier of
Healthcare Information Access Systems software specializing in connectivity
solutions that utilize the power of the Internet/Intranet to link hospitals,
physicians, patients and payers to a robust Electronic Medical Record. The
Company's products are complementary to existing clinical and financial systems,
and use document imaging and workflow tools to ensure end-users can
electronically access all the various forms of healthcare information including
clinician's handwritten notes, lab reports, photographs, insurance cards, etc.
LanVision's solutions offer value to all of the constituents in the healthcare
delivery process by enabling them to simultaneously access information from
virtually any location, including the physician's desktop, using thin client,
web browser-based technology. Web access to the entire medical record improves
physician productivity and reduces administrative costs such as filing, storage,
retrieval and upkeep of medical records and 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 healthcare information repository. The
Company's solutions integrate a proprietary document imaging platform,
application suites, and image and web-enabling tools, that allow for the
seamless merger of "back office" functionality with existing Clinical
Information Systems at the desktop. The Company offers a robust document
imaging/management infrastructure (Foundation Suite) that is built for high
volume transaction processing and is optimized for the healthcare industry. In
addition to providing the clinician access to information not previously
available at the desktop, the Company'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, the Company has
integrated its products with selected systems from Siemens Medical Solutions
Health Services Corporation and Cerner Corporation. By offering electronic
access to all the components of the Medical Record, this integration completes
one of the most difficult tasks necessary to provide a true Computer Based
Patient Record. The Company's systems deliver on-line enterprisewide access to
fully-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.
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Historically, the Company has derived its revenues from system sales involving
the licensing, either directly or through remarketing partners, of its
Electronic Medical Record solution to Integrated Healthcare Delivery Networks
(IDN). In a typical transaction, the Company, or its remarketing partners, enter
into a term, perpetual or fee-for-service agreement for the Company's Electronic
Medical Record Software Suite and may license or sell other third party software
and hardware components to the IDN. Additionally, the Company, or its
remarketing partners provide professional services, including implementation,
training and product support.
With respect to systems sales, the Company earns its highest margins on
proprietary LanVision software or ASP services and the lowest margins on third
party hardware. Systems sales to customers may include different configurations
of software and hardware, resulting in varying margins among contracts. The
margins on professional services revenues are expected to fluctuate based upon
the negotiated terms of the agreement with each customer and the Company's
ability to fully utilize its professional services, maintenance and support
services staff.
Beginning in 1998, the Company began offering customers the ability to obtain
its Electronic Medical Record solution on a service bureau basis as an ASP. The
Company's ASP division, called ASPeN(SM) (Application Service Provider eHealth
Network), established a centralized data center and installed the Company's
Electronic Medical Record suite, within the data center. Under this arrangement,
customers electronically capture information and transmit the data to the
centralized data center. The ASP Division stores and manages the data using
LanVision's Electronic Medical Record Suite of Applications, and customers can
view, print or fax the information from anywhere using the LanVision Web
browser-based applications. The ASP division charges and recognizes revenue for
these services on a per transaction or subscription basis as information is
captured, stored, and retrieved.
In February 2000, the Company sold its centralized data center for $2,900,000.
Simultaneous therewith, the Company entered into a one-year service agreement
with the buyer. Under the terms of this service agreement, which can be renewed
at the sole option of the Company, in exchange for processing fees, the Company
will continue to use the data center to provide ASP services to LanVision's
current and future customers. The agreement has been renewed through February
2002. Although LanVision sold the data center assets, the Company continues to
market and provide its ASP solutions through the data center and intends to
utilize other data center service providers.
In August 2000, LanVision entered into an agreement with SmartHealth Services,
Inc. (SmartHealth), which allows SmartHealth to utilize LanVision's
MicroVision(TM) Electronic Medical Record (EMR) product combined with web-based
SmartHealth software to provide affordable, web-based EMR document management
and viewing services to hospitals and clinics via the Internet. SmartHealth
Services, Inc., in conjunction with its affiliate, Alpharetta, Georgia based
Smart Professional Photocopy Corporation, d/b/a Smart Corporation, and
distributes their services through Smart Corporation's extensive sales
distribution network which currently consists of over 1,000 hospitals and 4,600
clinic customers throughout 46 states. LanVision is compensated for use of its
software based upon the number of EMR images SmartHealth scans and stores using
the MicroVision(TM) ASP application. LanVision has not received any substantial
revenues from SmartHealth to date, and LanVision is uncertain about future
revenues in light of a current contractual dispute with SmartHealth regarding
licensing revenues.
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In November 2000, LanVision entered into an agreement with Provider HealthNet
Services Inc. (PHNS) a privately held, Dallas, TX based company, which allows
PHNS to offer LanVision's MicroVision EMR product to provide EMR document
management and viewing services to PHNS' customer base. PHNS is a healthcare
industry information technology and business outsourcing company, which provides
information technology and professional management of information systems,
medical records and related business processes to hospitals and other healthcare
providers on a shared basis to improve healthcare services and reduce costs. The
relationship with LanVision will allow PHNS to more effectively use information
technology and the LanVision document imaging and management solution for
medical records and other business processes to improve healthcare services and
reduce costs for its customers. The LanVision ASP services allows PHNS to offer
a state-of-the-art, Application Service Provider-based EMR solution, an offering
that contributes to increased process efficiency for medical records functions.
The LanVision services to be provided by PHNS will be delivered on an ASP basis
through a centralized data center staffed by seasoned information technology
professionals with healthcare experience. LanVision will be compensated by PHNS
for use of its software based upon the number of encounters, or patient visits,
to each hospital using the LanVision EMR software. To date, LanVision has
recorded no revenues from PHNS and cannot currently predict when, if ever,
revenues will be generated from this agreement. The LanVision \ PHNS agreement
contains a provision which enables LanVision or PHNS to terminate the agreement
should certain financial targets not be met by November 6, 2001. LanVision does
not anticipate that the financial targets will be met.
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, the Company has experienced extended sales cycles, which has
adversely affected revenues. It is common 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 of the
system and specify the implementation schedule, which typically takes place in
one or more phases. The agreements generally provide for the licensing of the
Company'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 usually 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 the Company's ASP services, the agreements generally provide for utilizing
the Company's software and third party software on a fee per transaction or
subscription basis.
Generally, revenue from systems sales is recognized when an agreement is signed
and products are shipped. 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 ASP
services are recognized as the services are performed. Revenues from short-term
support and maintenance agreements are
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recognized ratably over the term of the agreements. Billings to customers
recorded prior to the recognition of the revenue are classified as deferred
revenues. Revenue recognized prior to progress billings to customers is recorded
as unbilled receivables.
The Company's ASP 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. Customers pay for such services on a transaction or subscription basis,
and the centralized data center application is operated and maintained by
LanVision personnel and/or its agents. In 1999, the ASP Division signed a
four-year contract with The Health Alliance of Greater Cincinnati, a group of
five hospitals in the Greater Cincinnati Area, to provide outsourced data center
operations of its LanVision Electronic Medical Record System. Management
believes more IDN's will utilize this type of ASP application. Additionally, the
Company believes its business model is especially well suited for the ambulatory
marketplace. LanVision is actively pursuing remarketing agreements with
Healthcare Information Systems providers to distribute the Company's ASP
solutions.
In 1998, the Company entered into a five-year Remarketing Agreement Siemens
Medical Solutions Health Services Corporation (SMS). Under the terms of the
agreement, SMS was granted an exclusive worldwide license to distribute
ChartVision(R), On-Line Chart Completion(TM), WebView(TM) and Enterprisewide
Correspondence(TM) to the SMS customer base and prospect base, as defined in the
agreement, and a non-exclusive license to distribute all other LanVision
products. If SMS distributes any other Electronic Medical Record product
competing with LanVision's products, the Company may terminate the SMS
Remarketing Agreement.
Under the terms of the agreement, SMS remits royalties to LanVision based upon
SMS sublicensing the Company's software to SMS's customers. Generally,
twenty-five percent of the royalty is due 30 days following the end of the
quarter in which SMS executes the end user license agreement with its customer.
LanVision recognizes this revenue upon receipt of the royalty statement.
Generally, the remaining 75% of the royalty is due 30 days following the end of
the quarter in which SMS commences software implementation activities. The
Company records this revenue when the 75% payment due from SMS is fixed and
determinable, which is when the software implementation activities commence.
Through July 31, 2001, SMS has sold fourteen systems to end-users.
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 result of the volume and timing of
systems sales and delivery. Professional services revenues also fluctuate from
quarter to quarter as a result of the timing of the 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
Service Bureau operations are expected to increase over time, as more hospitals
outsource services to LanVision's ASP 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 increase.
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The Company's revenues and operating results may vary significantly from
quarter-to-quarter as a result 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 second fiscal quarter ended July 31, 2001, were $2,098,903,
compared with $2,297,632 reported in the comparable quarter of 2000. Revenues
for the six months ended July 31, 2001, were $4,811,306, compared with
$4,110,370 reported in the comparable period of 2000. The decrease for the
quarter is due to lower hardware and third party software revenues, which are
low margin items. The increase for the first six months, primarily in the first
quarter, is due to increases in LanVision software revenues from add-on sales to
existing customers and implementation of existing contracts through our
remarketing partner. Revenues for the first six months of fiscal 2000 and 2001
continued to be adversely 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). Although the regulations have been
promulgated, many hospitals continue to vacillate and purchase decisions for EMR
products have been postponed for many reasons, including budgetary constraints.
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 its Remarketing Agreement with
SMS will increase in the future since LanVision's product has been fully
integrated with the SMS product. In addition, our Web browser-based ASP
application, which is currently available and in production with our customers
and available, through our resellers, should further enhance revenues through
software royalties 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 recent
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
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technologically advanced Web browser-based ASP solutions 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 partner SMS, accounted for approximately 25% of the
revenues for the second quarter of 2001 compared with 38%, of revenues in the
comparable period of the prior year. Three customers, excluding our remarketing
partner SMS, accounted for approximately 27% of the revenues for the first six
months of 2001 compared with 35%, of revenues in the comparable period of the
prior year. Revenue from SMS accounted for approximately $341,000 and $945,000,
for the three months and six months, respectively, ended July 31, 2001, compared
with approximately $262,000 and $434,000 for the three months and six months,
respectively, in the comparable periods of the prior year. The increase in SMS
revenue results from increased software implementations in the current periods
compared with the prior comparable periods.
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
software of the systems or add-on sales delivered. The cost of systems sales as
a percentage of systems sales for the second quarter and first six months of
fiscal 2001 were 38% and 21%, respectively. The cost of systems sales as a
percentage of systems sales for the second quarter and first six months of
fiscal 2000 were 44% and 50%, respectively. The lower percentage of cost of
sales reflects higher margins on greater volume of LanVision software revenues
and less hardware sold during the current periods compared to the comparable
prior periods, which had lower software revenues.
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 56% and 55% for
the second quarter and first six months, respectively, of fiscal 2001. As a
percentage of services, maintenance and support revenues, the cost of such
services, maintenance and support was 61% and 65% for the second quarter and
first six months, respectively, of fiscal 2000. The Company's support margins
are highest on LanVision's proprietary software. Accordingly, margins are
expected to improve as more customers are
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added. The support costs declined in the current periods due to greater staff
utilization and lower third party maintenance costs.
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 selling
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.
Cost of Service Bureau Operations
The cost of Service Bureau operations was significantly reduced with the sale of
the data center. The Company now incurs expenses only for the outsourcing
services it uses which are directly related to the Service Bureau Revenues
generated by the ASP Division.
Selling, General and Administrative
Selling, General and Administrative expenses consist primarily 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
second quarter of fiscal 2001, Selling, General and Administrative expenses
declined to $777,022 compared with $914,451 in the comparable prior quarter, and
declined in the first six months to $1,645,936 compared with $1,753,959 in the
comparable prior period. The decrease in Selling, General and Administrative
expenses is due to reductions in general corporate expenses. The Company has
gradually reduced its direct sales staff as the Company focuses its sales
efforts on indirect distribution through its current and future Remarketing,
Reseller and ASP Partners. However, the Company may increase its direct sales
force in the foreseeable future as market opportunities arise.
Product Research and Development
Product research and development expenses consist primarily 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 second quarter and first six months, research and
development expenses were $385,747 and $725,950, respectively, compared with
$459,578 and $926,949, respectively, in the comparable prior quarter and first
six months. The decrease results primarily from lower staff costs and occupancy
related expenses. The Company monitors closely its Research and Development
projects, and augments, with contract programmers, its Research and Development
staff, as necessary, to ensure timely completion of its development of new
products or enhancements to existing products. The Company capitalized, in
accordance with Statement of Financial Accounting Standards No. 86, $125,000 of
product research and development costs in each of the first two quarters of
fiscal
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2001 and $105,000 of product research and development cost in each of the first
two quarters of fiscal 2000. The capitalized costs during the first two quarters
of fiscal 2001 relate primarily to LanVision's two new products,
accessANYware(SM), which is in controlled general release and codingANYware(SM),
which is under development.
Operating profit (loss)
The operating loss for the second quarter of fiscal 2001 was $138,981 compared
with a loss of $334,409 in the second quarter of fiscal 2000. The operating
profit for the first six months of fiscal 2001 was $333,979 compared to an
operating loss of $1,036,429 in the comparable prior period. The 1,370,408
decrease in the operating loss results primarily from: (1) continued stringent
cost controls which resulted in decreased operating expenses of approximately
$670,000, and (2) increased revenues of approximately $700,000, primarily
software licensing revenues.
Interest income consists primarily of interest on invested cash. The decrease in
interest income results from lower interest rates.
Interest expense relates to the long-term debt.
Net loss
The net loss for the second quarter of fiscal 2001 was $569,778 ($.06 per share)
compared with a net loss of $638,826 ($.07 per share) in the second quarter of
fiscal 2000. The net loss for the first six months of fiscal 2001 was $468,237
($.05 per share) compared with a net loss of $323,997 ($.04 per share) in the
first six months of fiscal 2000. Excluding the gain on the sale of the data
center from the first quarter of the prior year, the net loss for the first six
months of fiscal 2000 would have been $1,705,517. This $1,237,280 improvement,
results primarily from: (1) the continued stringent cost controls in all areas,
(2) the sale of the data center which reduced the ongoing operating expenses of
the ASP Division and (3) increased revenues of approximately $700,000, as
discussed above.
Notwithstanding the less than anticipated number of new customer agreements
signed in the past, management continues to believe that the healthcare document
imaging and workflow market is going to be a significant 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 and 2000,
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.
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LIQUIDITY AND CAPITAL RESOURCES
During the last five fiscal years, LanVision has funded its operations, working
capital needs and capital expenditures primarily from a combination of cash
generated by operations, an initial public offering, and a $6,000,000 loan.
LanVision's customers typically have been well-established hospitals or medical
facilities with good credit histories, and payments have been received within
normal time frames for the industry. However, some healthcare organizations have
experienced significant operating losses as a result 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 leases in the total amount of approximately $205,000,
payable over the next two years.
Over the last several years, LanVision's revenues were less than its internal
plans. However, during the same period, 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 five years. Although LanVision has reduced staffing levels and
related expenses, and improved operating performance, LanVision's expenses may
continue to approximate or exceed its revenues. Accordingly, to achieve
continuing 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 should offer
a significant opportunity to increase revenues. Additionally, the SMS
Remarketing Agreement has significantly expanded the sales distribution
capabilities. 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 increase its revenues.
In February 2000, LanVision sold its Data Center for $2,900,000. LanVision
received $2,000,000 and the remaining $900,000 was received in twelve monthly
installments. The sale resulted in a gain of approximately $1,400,000.
At July 31, 2001, LanVision had cash and cash equivalents of $8,132,490. 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
$5,300,000. During fiscal 2001, $1,000,000 of long-term debt is required to be
repaid to the lender, $500,000 quarterly, commencing October 1, 2001.
LanVision has significantly reduced its operating expenses during the last two
fiscal years, and believes it will continue to improve operating results in
fiscal 2001. However, based upon current expenditure levels and in the absence
of increased revenues, LanVision could continue to operate at a loss.
Accordingly, for the foreseeable future, LanVision will need to continually
assess its revenue prospects compared to its current expenditure levels. If it
does not appear likely that revenues will increase, it may be necessary to
further reduce operating expenses or
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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 significantly reduce operating expenses, this could have an
adverse effect on future operating performance. However, at this time, LanVision
believes that it should be able to increase its revenues in fiscal 2001,
notwithstanding the uneven pattern of quarterly revenues as discussed above.
To date, inflation has not had a material impact on LanVision's revenues or
expenses. Additionally, LanVision does not have any significant market risk
exposure at July 31, 2001.
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, 2001, the Company's and SMS' customers had entered into master
agreements for systems and services (excluding support and maintenance and
transaction based revenues for the ASP Division), which had not yet been
delivered, installed and accepted which, if fully performed, would generate
revenue of approximately $4,562,000, compared with approximately $4,255,000 at
the end of fiscal 2000. The systems and services are currently expected to be
delivered over the next two to three years. In addition, the Company anticipates
approximately $2,064,000 in transaction-based fee revenues for the ASP
Division's current client over the remaining thirty-month life of the contract.
Because systems implementations and Service Bureau ASP fees are dependent upon
the customer's schedule and / or usage, the Company is unable to accurately
predict the amount of revenues in future periods.
The Company'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 2000, 1999, 1998 and 1997 were approximately
$3,678,000, $3,264,000, $2,755,000 and $2,151,000, respectively and are expected
to increase as new or expanded systems are installed.
The commencement of revenue recognition varies depending on the size and
complexity of the system, the implementation schedule requested by the customer
and usage by customers of the ASP Division. Therefore, LanVision is unable to
accurately predict the revenues it expects to achieve in
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any particular period. The Company's master agreements generally provide that
the customer may terminate its agreement upon a material breach by the Company,
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 Company to procure additional agreements, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not currently engaged in any material adverse litigation.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement
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
(*) Incorporated by reference.
(b) Reports on Form 8-K
None
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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 11, 2001 By: /s/ J. BRIAN PATSY
--------------------------- -----------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: September 11, 2001 By: /s/ PAUL W. BRIDGE, JR.
--------------------------- -----------------------------------------
Paul W. Bridge, Jr.
Chief Financial Officer and Treasurer
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INDEX TO EXHIBITS
EXHIBIT NO. Exhibit
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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