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, 2002
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 September 9, 2002: 8,945,338.
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....................................................... 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, January 31,
2002 2002
------------ ------------
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 6,419,816 $ 7,865,053
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively 1,887,319 1,451,027
Unbilled receivables 2,213,345 1,742,785
Prepaid expenses related to unrecognized revenue 78,203 113,081
Other 350,258 201,962
------------ ------------
Total current assets 10,948,941 11,373,908
Property and equipment:
Computer equipment 2,430,353 1,875,590
Computer software 730,774 421,962
Office furniture, fixtures and equipment 1,153,934 1,139,457
Leasehold improvements 131,248 117,795
------------ ------------
4,446,309 3,554,804
Accumulated depreciation and amortization (3,193,530) (3,048,793)
------------ ------------
1,252,779 506,011
Capitalized software development costs, net of accumulated
amortization of $1,900,228 and $1,700,228, respectively 1,289,701 1,189,701
Installment receivables 433,339 267,969
Other 133,585 171,516
------------ ------------
$ 14,058,345 $ 13,509,105
============ ============
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, January 31,
2002 2002
------------ ------------
Current liabilities:
Accounts payable $ 427,457 $ 230,571
Accrued compensation 441,852 235,958
Accrued other expenses 1,370,095 1,525,096
Deferred revenues 1,536,495 1,371,200
Current portion of capitalized lease obligations 188,694 -
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 -
Long-term debt 2,000,000 3,000,000
Long-term accrued interest 2,383,521 2,239,798
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, 8,945,338 and 8,913,947 shares issued, respectively 89,453 89,139
Capital in excess of par value 34,825,947 34,787,849
Accumulated (deficit) (31,670,605) (31,970,506)
------------ ------------
Total stockholders' equity 3,244,795 2,906,482
------------ ------------
$ 14,058,345 $ 13,509,105
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended July 31,
(Unaudited)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Systems sales $ 1,235,151 $ 419,521 $ 2,672,505 $ 1,476,501
Services, maintenance and support 1,844,903 1,475,716 3,245,772 2,940,023
Application-hosting services 192,134 203,666 387,130 394,782
----------- ----------- ----------- -----------
Total revenues 3,272,188 2,098,903 6,305,407 4,811,306
Operating expenses:
Cost of systems sales 277,703 158,147 643,904 308,578
Cost of services, maintenance and support 819,511 789,596 1,537,921 1,535,712
Cost of application-hosting services 75,680 87,042 142,329 172,547
Selling, general and administrative 906,547 633,470 1,750,074 1,338,714
Product research and development 542,753 569,629 1,049,833 1,121,776
----------- ----------- ----------- -----------
Total operating expenses 2,622,194 2,237,884 5,124,061 4,477,327
----------- ----------- ----------- -----------
Operating profit (loss) 649,994 (138,981) 1,181,346 333,979
Other income (expense):
Interest income 27,829 73,480 57,752 177,912
Interest expense (476,191) (504,277) (952,197) (980,128)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 201,632 (569,778) 286,901 (468,237)
Income tax (provision) benefit - - 13,000 -
----------- ----------- ----------- -----------
Net income (loss) $ 201,632 $ (569,778) $ 299,901 $ (468,237)
=========== =========== =========== ===========
Basic net income (loss) per common share $ .02 $ (.06) $ .03 $ (.05)
=========== =========== =========== ===========
Diluted net income (loss) per common share $ .02 $ (.06) $ .03 $ (.05)
=========== =========== =========== ===========
Number of shares used in per common share computations:
Basic 8,927,966 8,884,534 8,921,073 8,881,931
=========== =========== =========== ===========
Diluted 9,184,346 8,884,534 9,208,693 8,881,931
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 31,
(Unaudited)
2002 2001
----------- -----------
Operating activities:
Net income (loss) $ 299,901 $ (468,237)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 344,737 361,809
Increase in long-term accrued interest 143,723 85,820
Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables (1,072,222) 735,479
Other current assets (28,792) (79,496)
Accounts payable and accrued expenses 247,779 (348,246)
Deferred revenues 165,295 (380,809)
----------- -----------
Net cash provided by (used for) operating activities 100,421 (93,680)
----------- -----------
Investing activities:
Proceeds from disposal of property and equipment - 56,301
Purchases of property and equipment (322,001) (201,936)
Capitalization of software development costs (300,000) (250,000)
Payment on note receivable - 75,000
Other 37,931 (22,246)
----------- -----------
Net cash (used for) investing activities (584,070) (342,881)
----------- -----------
Financing activities:
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) -
----------- -----------
Net cash (used for) provided by financing activities (961,588) 19,319
=========== ===========
(Decrease) in cash and cash equivalents (1,445,237) (417,242)
Cash and cash equivalents at beginning of period 7,865,053 8,549,732
----------- -----------
Cash and cash equivalents at end of period $ 6,419,816 $ 8,132,490
=========== ===========
Supplemental cash flow disclosures:
Interest paid $ 786,667 $ 862,000
=========== ===========
Capital lease obligations incurred $ 654,130 $ -
=========== ===========
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 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 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 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, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 2003.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 23 of its 2001 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. 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.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The decrease in cash and cash equivalents results primarily from the payment of
$1,000,000 in long-term debt 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 unbilled receivables is due to higher amounts due from a
remarketing partner. Royalty payments are remitted to LanVision in accordance
with the remarketing agreement, and are accounted for as unbilled receivables
until the royalty payments are received.
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 increase in property and equipment, net, is primarily the result of the
acquisition, mostly via capitalized leases, of computer equipment and software
necessary to support current 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.
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 increase in accounts payable results primarily from the delivery of hardware
to new customers in July, the invoices for which were not paid at the quarter
end.
The increase in accrued compensation results primarily from the increase in the
accrual for 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 increase in deferred revenues results from 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 of 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 six months of the current fiscal year, the Company granted no
stock options under any Stock Option Plan. During the same period no options
were forfeited under all plans. Stock Options to acquire 8,332 shares of Common
Stock were exercised in the second quarter. No Stock Options were exercised in
the first quarter.
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 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 shares in the second
quarter and 287,620 shares in the first six months of 2002). The Company had
approximately 100,775 option shares outstanding at July 31, 2002 that were not
included in the diluted net income per share calculation as the inclusion
thereof would be antidilutive.
The diluted (loss) per common share calculation for 2001, excludes the effect of
the common stock equivalents (stock options) 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 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 U. S. 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
9
LanVision Systems, Inc. ("LanVision"(TM) or the "Company") is an Electronic
Medical Record solution software and application-hosting services provider.
LanVision is a leading supplier of Healthcare Information Access Solutions
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. LanVision's products and services are complementary
to existing clinical and financial systems, and use document imaging and
workflow tools to ensure end-users can electronically access both "structured"
and "unstructured" patient data and 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 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 and secure
healthcare information repository. LanVision'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. LanVision 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, 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), Cerner Corporation and will soon
integrate its products with IDX Information Systems Corporation (IDX)
applications. 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. LanVision'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.
Historically, LanVision has derived its revenues from systems sales involving
the licensing, either directly or through remarketing partners, of its
Electronic Medical Record solution software 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 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 and hardware, 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 solution on an application-hosting basis as an
Application Service Provider. LanVision established a hosting data center and
installed LanVision's Electronic Medical Record suite, called ASPeN (Application
Service Provider eHealth Network) within the hosting data center. Under this
arrangement, customers electronically capture information and transmit the data
to the hosting data center. The ASPeN services 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-based applications. The ASPeN services 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, LanVision sold its 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
continue to use the hosting data center to provide ASPeN services to LanVision's
current customers. Although 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 building a second application-hosting data center in order to
provide the capacity for its newest ASPeN services clients and into which it
will consolidate all of its existing ASPeN application-hosting services at some
time in the future. Approximately $570,000 in new equipment and software has
been leased 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 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 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 systems sales is recognized when an agreement is signed
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 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.
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.
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
application-hosting services operations are expected to increase over time, as
more hospitals outsource services to LanVision's ASPeN services division and
existing customers increase the volume of documents stored on the systems, and
the number of retrievals increases.
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, 2002, were $3,272,188,
compared with $2,098,903 reported in the comparable quarter of 2001. Revenues
for the six months ended July 31, 2002, were $6,305,407, compared with
$4,811,306 reported in the comparable period of 2001. 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 for the first six months 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.
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 second
quarter of fiscal 2002 and 2001 were 22% and 38%, respectively and for the first
six months of fiscal 2002 and 2001 were 24% and 21%, respectively. The lower
percentage of cost of sales for the quarter reflects a greater volume of
LanVision software sold during the current period compared to the
14
comparable prior period, which had lower LanVision 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.
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% and 54% for
the second quarter and 47% and 52% for the first six months, respectively, of
fiscal 2002 and 2001. The decrease in the percentages is due to greater
utilization of the professional services staff with little additional cost. The
Company's support margins are highest on LanVision's proprietary software.
Accordingly, margins are expected to improve as more customers are added.
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.
Cost of application-hosting services
The Company currently incurs expenses for its application-hosting services only
for the third party outsourcing services it uses, which are 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.
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 2002, Selling, General and Administrative expenses
increased to $906,547 compared with $633,470 in the comparable prior quarter.
During the first six months of fiscal 2002, Selling, General 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 initiated by the Company. [See Part II. Item 1
Legal
15
Proceedings of this Form 10-Q.] In addition, the Company has gradually
redirected its resources to focus its sales efforts on indirect distribution
through its 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.
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, research and development expenses were
$542,753 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 decrease results from lower
staff costs resulting from converting consultants to company employees at lower
costs, and increased capitalized software development costs for the newest
product codingANYware under development. The Company closely monitors and
augments its Research and Development staff, as necessary, to accelerate the
development of new products. The Company capitalized, in accordance with
Statement of Financial Accounting Standards No. 86, $300,000 and $250,000 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 2002 was $649,994 compared
with an operating loss of $138,981 in the second quarter of fiscal 2001, an
improvement of approximately $789,000. The operating profit for the first six
months of fiscal 2002 was $1,181,346 compared with an operating profit of
$333,979 in the first six months of fiscal 2001, an improvement of approximately
$847,000. The increase in the 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 discussed
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.
Interest expense relates to the long-term debt. In connection with setting the
loan covenants for fiscal year 2002, the Company made an additional $500,000
special payment of the long-term deferred interest on March 13, 2002.
Net income
16
The net income for the second quarter of fiscal 2002 was $201,632 ($.02 per
share) compared with net loss of $569,778 ($.06 per share loss) in the second
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 income
is the primarily the result of the increased revenues as noted above.
Notwithstanding the less than anticipated number of new customer agreements
signed by the Company and its resellers in the past, 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 LanVision
to capture 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 and
2001, 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
During the last five fiscal years, LanVision has funded its operations, working
capital needs and capital expenditures primarily from the proceeds of the 1996
Initial Public Offering, cash generated by operations 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 $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 pay to the lender an
amount necessary so that the market value of the stock underlying the Warrants
issued to the lender 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, 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, increased revenues and improved operating performance,
LanVision's expenses continue to increase. Accordingly, to continue to achieve
increasing profitability, and positive cash flow, it is necessary for LanVision
to increase revenues or 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 agreement and the 3M
agreements 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, LanVision had cash and cash equivalents of $6,419,816. 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 the next twelve months, $2,000,000 of long-term debt is
required to be repaid to the lender.
LanVision has significantly reduced operating expenses during the last three
fiscal years, and believes it will continue to improve operating results in
fiscal 2002. Notwithstanding the increases in fiscal year 2001 and the first six
months of fiscal 2002 revenues and operating profit, for the foreseeable future,
LanVision will need to 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
significantly reduce operating expenses, this could have an adverse effect on
future operating performance.
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, 2002.
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 into
master agreements for systems and services (excluding support and maintenance
and transaction based revenues for the ASPeN services division), which had not
yet been delivered, installed and accepted which, if fully performed, would
generate revenue to LanVision of approximately $4,322,000, compared with
approximately $4,417,000 at the end of fiscal 2001. The systems and services are
currently expected to be delivered over the next two to three years. In
addition, the Company anticipates approximately $390,000 in application-hosting
services revenues for the ASPeN services division's current client over the
remaining six-month life 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.
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 2001, 2000 and 1999 were approximately $4,032,000,
$3,678,000, and $3,264,000, respectively. Maintenance and support revenues are
expected to increase in 2002.
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 ASPeN services division. Therefore, LanVision is
unable to accurately predict the revenues it expects to achieve in 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.
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. While the outcome of these claims, as
well as any claims that may not have yet been asserted against LanVision,
whether in these actions or otherwise, cannot be predicted with certainty at
this time, 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 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 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.
(*) Incorporated by reference.
(b) Reports on Form 8-K
None
20
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, 2002 By: /s/ J. BRIAN PATSY
------------------ -------------------------------------
J. Brian Patsy
Chief Executive Officer and President
DATE: September 10, 2002 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 Registrant as of, and for, the periods presented in
this quarterly report.
September 10, 2002 /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 Registrant as of, and for, the periods presented in
this quarterly report.
September 10, 2002 /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.
23
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.