UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q


[X][ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended OctoberJuly 31, 20012002

                                       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 November 30, 2001: 8,894,948.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 October 31, 2001 and January 31, 2001.......... 3 Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2001 and 2000......................................................... 5 Condensed Consolidated Statements of Cash Flows for the nine months ended October 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........................................................ 20 Signatures..............................................................................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) OctoberJuly 31, January 31, 2001 2001 -------------------- ---------------------2002 2002 ------------ ------------ Current assets: Cash and cash equivalents (restricted by long-term debt agreement) $ 7,920,3906,419,816 $ 8,549,732 Note receivable - 75,0007,865,053 Accounts receivable, net of allowance for doubtful accounts of $400,000, respectively 673,064 2,080,1541,887,319 1,451,027 Unbilled receivables 2,577,124 1,356,4132,213,345 1,742,785 Prepaid expenses related to unrecognized revenue 78,203 113,081 146,428 Other 224,054 220,861 -------------------- ---------------------350,258 201,962 ------------ ------------ Total current assets 11,507,713 12,428,58810,948,941 11,373,908 Property and equipment: Computer equipment 1,862,294 2,715,2462,430,353 1,875,590 Computer software 416,762 501,077730,774 421,962 Office furniture, fixtures and equipment 1,153,934 1,139,457 1,233,175 Leasehold improvements 131,248 117,795 114,965 -------------------- --------------------- 3,536,308 4,564,463------------ ------------ 4,446,309 3,554,804 Accumulated depreciation and amortization (2,959,913) (3,857,871) -------------------- --------------------- 576,395 706,592(3,193,530) (3,048,793) ------------ ------------ 1,252,779 506,011 Capitalized software development costs, net of accumulated amortization of $1,625,228$1,900,228 and $1,400,228,$1,700,228, respectively 1,139,701 989,7011,289,701 1,189,701 Installment receivables 433,339 267,969 Other 194,273 233,235 -------------------- ---------------------133,585 171,516 ------------ ------------ $ 13,418,08214,058,345 $ 14,358,116 ==================== =====================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) OctoberJuly 31, January 31, 2001 2001 ------------------- ------------------2002 2002 ------------ ------------ Current liabilities: Accounts payable $ 280,564427,457 $ 464,615230,571 Accrued compensation 282,063 306,180441,852 235,958 Accrued other expenses 1,565,747 1,733,6311,370,095 1,525,096 Deferred revenues 1,192,545 1,755,9381,536,495 1,371,200 Current portion of capitalized lease obligations 188,694 - Current portion of long-term debt 2,000,000 1,000,000 ------------------- ------------------2,000,000 ------------ ------------ Total current liabilities 5,320,919 5,260,3645,964,593 5,362,825 Long-term capitalized lease obligations 465,436 - Long-term debt 3,500,000 5,000,0002,000,000 3,000,000 Long-term accrued interest 1,892,356 1,442,2852,383,521 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, 8,896,5008,945,338 and 8,913,947 shares issued, 88,965 88,965respectively 89,453 89,139 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)34,825,947 34,787,849 Accumulated (deficit) (32,150,845) (32,180,866) ------------------- ------------------(31,670,605) (31,970,506) ------------ ------------ Total stockholders' equity 2,704,807 2,655,467 ------------------- ------------------3,244,795 2,906,482 ------------ ------------ $ 13,418,08214,058,345 $ 14,358,116 =================== ==================13,509,105 ============ ============
See Notes to Condensed Consolidated Financial Statements. 4 LANVISION SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three and NineSix Months Ended OctoberJuly 31, (Unaudited)
Three Months Ended NineSix Months Ended --------------------------------- ------------------------------------------------------------- ---------------------------- 2002 2001 20002002 2001 2000 --------------- --------------- --------------- -------------------------- ----------- ----------- ----------- Revenues: Systems sales $ 1,763,8971,235,151 $ 999,035419,521 $ 3,240,3982,672,505 $ 1,877,9701,476,501 Services, maintenance and support 1,442,407 1,446,180 4,382,430 4,275,786 Application hosting 178,725 201,471 573,507 603,300 --------------- --------------- --------------- ---------------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 3,385,029 2,646,686 8,196,335 6,757,0563,272,188 2,098,903 6,305,407 4,811,306 Operating expenses: Cost of systems sales 254,750 256,728 563,328 698,347277,703 158,147 643,904 308,578 Cost of services, maintenance and support 861,602 779,360 2,485,918 2,613,150819,511 789,596 1,537,921 1,535,712 Cost of application hosting 81,254 84,366 253,801 274,848application-hosting services 75,680 87,042 142,329 172,547 Selling, general and administrative 878,962 751,513 2,524,898 2,505,471906,547 633,470 1,750,074 1,338,714 Product research and development 307,865 353,469 1,033,815 1,280,418 --------------- --------------- --------------- ---------------542,753 569,629 1,049,833 1,121,776 ----------- ----------- ----------- ----------- Total operating expenses 2,384,433 2,225,436 6,861,760 7,372,234 --------------- --------------- --------------- ---------------2,622,194 2,237,884 5,124,061 4,477,327 ----------- ----------- ----------- ----------- Operating incomeprofit (loss) 1,000,596 421,250 1,334,575 (615,178)649,994 (138,981) 1,181,346 333,979 Other income expense:(expense): Interest income 56,899 126,526 234,811 358,48727,829 73,480 57,752 177,912 Interest expense (559,238) (508,422) (1,539,366) (1,409,370) Other(476,191) (504,277) (952,197) (980,128) ----------- ----------- ----------- ----------- Earnings (loss) before income nettaxes 201,632 (569,778) 286,901 (468,237) Income tax (provision) benefit - - 13,000 - 1,381,419 --------------- --------------- --------------- -------------------------- ----------- ----------- ----------- Net income (loss) $ 498,257201,632 $ 39,354(569,778) $ 30,020299,901 $ (284,642) =============== =============== =============== ===============(468,237) =========== =========== =========== =========== Basic net income (loss) per common share $ .06.02 $ .00(.06) $ .00.03 $ (.03) =============== =============== =============== ===============(.05) =========== =========== =========== =========== Diluted net income (loss) per common share $ .06.02 $ .00(.06) $ .00.03 $ (.03) =============== =============== =============== ===============(.05) =========== =========== =========== =========== Number of shares used for basic netin per common share 8,894,948 8,869,238 8,886,318 8,857,585 =============== =============== =============== =============== Number of shares used for diluted net per common share 9,012,469 8,869,238 8,997,726 8,857,585 =============== =============== =============== ===============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 NineSix Months Ended OctoberJuly 31, (Unaudited)
2002 2001 2000 ------------------ ---------------------------- ----------- Operating activities: Net income (loss) $ 30,020299,901 $ (284,642)(468,237) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: (Gain) on sale of property and equipment, net - (1,381,419) Depreciation and amortization 521,754 662,591344,737 361,809 Increase in long-term accrued interest 450,071 (187,091)143,723 85,820 Cash provided by (used for) assets and liabilities: Accounts and unbilled receivables 186,379 2,381,664(1,072,222) 735,479 Other current assets 30,154 24,531(28,792) (79,496) Accounts payable and accrued expenses (376,052) (848,210)247,779 (348,246) Deferred revenues (563,393) (101,011) ------------------ -----------------165,295 (380,809) ----------- ----------- Net cash provided by (used for) operating activities 278,933 266,413 ------------------ -----------------100,421 (93,680) ----------- ----------- Investing activities: Proceeds from disposal of property and equipment - 56,301 2,000,000 Purchases of property and equipment (222,857) (77,984)(322,001) (201,936) Capitalization of software development costs (375,000) (315,000)(300,000) (250,000) Payment on note receivable - 75,000 600,000 Other 38,962 40,244 ------------------ -----------------37,931 (22,246) ----------- ----------- Net cash (used for) provided by investing activities (427,594) 2,247,260 ------------------ -----------------(584,070) (342,881) ----------- ----------- Financing activities: PaymentExercise of stock options and shares issued under the Employee Stock Purchase Plan 38,412 19,319 Repayment of long-term debt (500,000)(1,000,000) - Sale of treasury stock to employee stock purchase plan 19,319 21,357 ------------------ ---------------------------- ----------- Net cash (used for) provided by financing activities (480,681) 21,357 ------------------ -----------------(961,588) 19,319 =========== =========== (Decrease) increase in cash and cash equivalents (629,342) 2,535,030(1,445,237) (417,242) Cash and cash equivalents at beginning of period 7,865,053 8,549,732 5,411,920 ------------------ ---------------------------- ----------- Cash and cash equivalents at end of period $ 7,920,3906,419,816 $ 7,946,950 ================== =================8,132,490 =========== =========== Supplemental cash flow disclosures: Interest paid $ 1,046,000786,667 $ 1,548,000 ================== =================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 unauditedUnaudited Condensed Consolidated Financial Statements have been prepared by the Company without audit, in accordance with accounting principles generally accepted in the United States for interim financial information, pursuant to the rules and regulations applicable to quarterly reports on Form 10-Q of the United StatesU. S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United Statesaccounting 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 ninesix months ended OctoberJuly 31, 2001,2002, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2002.2003. Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Company's significant accounting policies is presented beginning on page 2023 of its 20002001 Annual Report to Stockholders.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 2001.2002. 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 $500,000$1,000,000 in long-term accrued interestdebt during the first six months and $500,000 of principalthe 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 nine months.quarter. The decreaseincrease in accounts receivable, net is due to higher collections, duringrevenues from our direct customers and higher royalties due from a remarketing partner at the end of the second and third quarters.quarter. 7 The increase in unbilled receivables resultsis due to higher amounts due from increased revenues from oura remarketing partner, which have not yet beenpartner. Royalty payments are remitted to LanVision.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. 7 The decreaseincrease 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 costresult of the acquisition, mostly via capitalized leases, of computer equipment computerand software necessary to support current and accumulated depreciationfuture ASPeN(SM) application-hosting services customers. The increase in installment receivables results from the disposalsale of fully depreciated equipment no longer used inan additional system by a reseller on the operations of the company.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 decreaseincrease in accounts payable results primarily from the paymentdelivery of accounts when due.hardware to new customers in July, the invoices for which were not paid at the quarter end. The decreaseincrease in accrued compensation results primarily from the decreaseincrease in the accrual for quarterly 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 nine months.quarter. The decreaseincrease 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 2001.2002, 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 ninesix months of the current fiscal year, the Company granted 10,000no stock options under the 1996 Employeeany Stock Option Plan at an exercise price of approximately $0.87 per share.Plan. During the same period 13,500no options were forfeited under all plans. No stock optionsStock Options to acquire 8,332 shares of Common Stock were exercised duringin the quarter orsecond quarter. No Stock Options were exercised in the first nine months.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 117,521 and 111,408 stock options and Employee Stock Purchase Planthe employee stock purchase plan (256,380 shares in the thirdsecond quarter and nine287,620 shares in the first six months respectively, of 2001.2002). The Company had 395,775approximately 100,775 option shares outstanding at OctoberJuly 31, 20012002 that were not included in the diluted net income per share calculationscalculation 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 8 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 United StatesU. 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 RecordsRecord solution providersoftware and application-hosting services provider. LanVision is a leading supplier of Healthcare Information Access Systems softwareSolutions 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'sLanVision'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 thin client, webWeb 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. The Company'sLanVision's solutions integrate a proprietary document imaging platform, application suites, and image and web-enablingWeb-enabling tools, that allow for the seamless merger of "back office" functionality with existing Clinical Information Systems at the desktop. The CompanyLanVision 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'sLanVision'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 CompanyLanVision has integrated its products with selected systems from Siemens Medical Solutions Health Services Corporation (Siemens), Cerner Corporation and Cerner Corporation.will soon integrate its products with IDX Information Systems Corporation (IDX) applications. By offering electronic access to all the components of the Medical Record,medical record, this integration completes one of the most difficult tasks necessary to provide a 9 true Computer Based Patient Record. The Company'sLanVision'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, the CompanyLanVision has derived its revenues from systemsystems 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, the Company,LanVision, or its remarketing partners, enter into a perpetual or term perpetuallicense or fee-for-service agreement for the Company'sLanVision's Electronic Medical Record Software Suitesoftware suite and may license or sell other third partythird-party software and hardware components to the IDN. Additionally, the Company,LanVision, or its remarketing partners provide professional services, including implementation, training and product support. With respect to systems sales, the CompanyLanVision earns its highest margins on proprietary LanVision software or Application Service Provider (ASP) application hostingapplication-hosting services and the lowest margins on third partythird-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'sLanVision's ability to fully utilize its professional services, maintenance and support services staff. 10 Beginning in 1998, the CompanyLanVision began offering customers the ability to obtain its Electronic Medical Record solution on an application hostingapplication-hosting basis as an ASP. The Company's ASP division,Application Service Provider. LanVision established a hosting data center and installed LanVision's Electronic Medical Record suite, called ASPeN(SM)ASPeN (Application Service Provider eHealth Network), established a centralized data center and installed within the Company's Electronic Medical Record suite of software, within thehosting data center. Under this arrangement, customers electronically capture information and transmit the data to the centralizedhosting data center. The ASP DivisionASPeN services division stores and manages the data using LanVision's Electronic Medical Record Suitesuite of Applications,applications, and customers can view, print, or fax the information from anywhere using the LanVision Web browser-basedWeb-based applications. The ASPASPeN 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, the CompanyLanVision sold its centralizedhosting data center for $2,900,000. Simultaneouscenter. Simultaneously therewith, the CompanyLanVision entered into a one-yearan 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, the CompanyLanVision will continue to use the hosting data center to provide ASPASPeN services to LanVision's current and future customers. The agreement has been renewed through February 2003. Although LanVision sold the original hosting data center assets, the CompanyLanVision continues to market its ASPeN services solution and continues to provide its ASP solutionsASPeN services through the hosting data center. LanVision is in the process of building a second application-hosting 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 softwarein order to provide affordable, web-based EMR document managementthe capacity for its newest ASPeN services clients 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, distribute their services through Smart Corporation's extensive sales distribution networkinto which currently 10 consists of over 1,000 hospitals and 4,600 clinic customers throughout 46 states. LanVision is compensated for useit will consolidate all of its existing ASPeN application-hosting services at some time in the future. Approximately $570,000 in new equipment and software based upon the number of EMR images SmartHealth scans and stores using the MicroVision 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 payable to LanVision. In November 2000, LanVision entered into an agreement with Provider HealthNet Services Inc. (PHNS) a privately held, Dallas, TX based company, which allowed 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 allowed 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 allowed 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. To date, LanVision has recorded no revenues from PHNS. The LanVision/PHNS agreement contained a provision that enabled LanVision or PHNS to terminate the agreement should certain financial targets not be met by November 6, 2001. The financial targets were not met. Accordingly, LanVision terminated the PHNS agreement effective November 6, 2001. In November 2001, LanVision announced that it had signed a letter of intent with 3M Health Information Systems, a division of the Minnesota Mining and Manufacturing Company (3M), to offer remote, web-enabled, internet accessible, medical records coding and abstracting through the integration of codingANYware(SM), LanVision's remote coding product, with 3M Health management technology for patient data abstracting. The planned agreement will providebeen leased for the health information management industry's first fully integrated remote coding andnew application-hosting data abstracting software solution. 3M's strong reputation for market-leading coding and abstracting products, and LanVision's wealth of experience in document imaging and workflow solutions will make for a truly integrated remote coding and abstracting product and will maximize the efficiency of remote coding operations and streamline billing, thereby reducing a healthcare organization's accounts receivable. The capabilities of the combined 3M and LanVision software will help address the industry's critical shortage of trained coders and abstractors by making it possible to code and abstract medical records from any location outside the hospital. This new software creates an effective tool for recruiting coding personnel who prefer to work from home or for use by remote coding companies who provide outsourcer coding and abstracting services to the healthcare industry.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, the CompanyLanVision 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 11 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'sLanVision's proprietary software and third partythird-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 partyThird-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 LanVision's ASPeN services solution, the Company's ASPapplication-hosting services the agreements generally provide for utilizing the Company'sLanVision's software and third partythird-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 shipped.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 ASPapplication-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. The Company's ASPeN Services, offered by its 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 CompanyLanVision entered into a five-yearfive year Remarketing Agreement with Siemens Medical Solutions Health Services Corporation (SMS).Corporation. Under the terms of the agreement, SMSAgreement, Siemens was granted an exclusive worldwide license to distribute ChartVision(R),ChartVision, On-Line Chart Completion(TM), WebView(TM)Completion, WebView and Enterprisewide Correspondence(TM)Correspondence to the SMSSiemens customer base and prospect base, as defined in the agreement,Agreement, and a non-exclusive license to distribute all other LanVision products. If SMSSiemens distributes any other Electronic Medical Record product competing with LanVision's products, the CompanyLanVision may terminate the SMSSiemens 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, SMSSiemens remits royalties to LanVision based upon SMSSiemens sublicensing the Company'sof LanVision's software to SMS'sSiemens' customers. Generally, twenty-fiveTwenty-five percent of the royalty is due 30 days following the end of the quarter in which SMSSiemens executes the end user license agreement with its customer. LanVision recognizes this revenue upon receipt of the royalty 12 statement. Generally, theThe remaining 75%seventy-five percent of the royalty is due 30 days following the end of the quarter in which SMSSiemens commences software implementation activities. The Company records this revenue when the 75% payment due from SMSSiemens is fixed and determinable, which is when the software implementation activities commence. Through OctoberJuly 31, 2001, SMS2002, Siemens has sold twentytwenty-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 hostingapplication-hosting services 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,ASPeN services division and existing customers increase the volume of documents stored on the systems, and the number of retrievals increase.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 and implementation activities of the remarketing partners. As a result, period to periodperiod-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 thirdsecond fiscal quarter ended OctoberJuly 31, 2001,2002, were $3,385,029,$3,272,188, compared with $2,646,686$2,098,903 reported in the comparable quarter of 2000.2001. Revenues for the ninesix months ended OctoberJuly 31, 2001,2002, were $8,196,335,$6,305,407, compared with $6,757,056$4,811,306 reported in the comparable period of 2000.2001. The increase, forin both the quarter and the first ninesix months is due to increases in LanVision software revenuesnew sales from new contractsour remarketing partners and implementation of existing contracts through our remarketing partner. Notwithstanding the increase in revenuespartners. Revenues for the first ninesix months of fiscal 2001 LanVision believes that the current market opportunity for its products is significantly greater then the current revenues would suggestand 2002 continued to be affected because many healthcare organizations continue to deferdeferred new software purchases until final Federal Health Privacy Regulations arewere promulgated, to comply with the requirements of HIPAA (Health Insurance Portability and Accountability Act of 1996). Although the HIPAA regulations have been promulgated, many hospitals continue to formulate their implementation options for compliance with HIPAA and purchase decisions for EMR products have been postponed because of HIPAA and for many other reasons, including budgetary constraints. 13 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 AgreementAgreements with SMSSiemens and IDX will continue to increase in the future since LanVision's product has been fully integrated with the SMS product. LanVision continues to pursue indirect sales channel opportunities through strategic business partner relationships to expand its distribution opportunities.Siemens products and will soon be integrated with the IDX products. In addition, our Web browser-based ASPASPeN services application, which is currently available and in production with our customers and available through our resellers,Resellers, should further enhance application-hosting revenues through software royalties to LanVision with minimal additional cost. Both our Remarketing and Reseller Agreements should continue to 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 technologically advanced Web browser-based solutionsASPeN 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 strategic 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."Results". Three customers, excluding our remarketing partner SMS,partners Siemens and IDX, accounted for approximately 20%23%, or $1,485,668 of the revenues for the third quarterfirst six months of 20012002 compared with 44%27%, or $1,306,614 of revenues in the comparable period of the prior year. Three customers, excludingRevenues from our remarketing partner SMS,partners accounted for approximately 22% of the revenues38% or $2,438,204 for the first ninesix months of 2001 compared with 36%, of revenues in the comparable period of the prior year. Revenue from SMS accounted for approximately $1,370,000 and $2,315,000, for the three months and nine months, respectively, ended OctoberJuly 31, 2001,2002, compared with approximately $98,000 and $532,00020% or $945,270 for the threesix months and nine months, respectively, in the comparable periods of the prior year. SMS accounted for approximately 40% of the revenues for the third quarter of 2001 compared with approximately 3%, of revenues in the comparable period of the prior year. SMS accounted for approximately 28% of the revenues for the first nine months of 2001 compared with approximately 8%, of revenues in the comparable period of the prior year. Theended July 31, 2001. This increase in SMS revenuerevenues results primarily from new sales and increased software implementations in the current periods compared with the prior comparable periods. 14 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 thirdsecond quarter of fiscal 2002 and 2001 were 22% and 38%, respectively and for the first ninesix months of fiscal 2002 and 2001 were 14%24% and 17%, respectively. The cost of systems sales as a percentage of systems sales for the third quarter and first nine months of fiscal 2000 were 26% and 37%21%, respectively. The lower percentage of cost of sales for the quarter reflects higher margins ona greater volume of LanVision software revenues and less hardware sold during the current periodsperiod 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 periods, which had lower software revenues.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 60%44% and 57%54% for the thirdsecond quarter and 47% and 52% for the first ninesix months, respectively, of fiscal 2002 and 2001. As a percentageThe decrease in the percentages is due to greater utilization of the professional services maintenance and support revenues, the cost of such services, maintenance and support was 54% and 61% for the third quarter and first nine months, respectively, of fiscal 2000.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 professional services costs increased in the current quarter due to higher use of outside consultants for specific projects and decreased in the first nine months due to increased overall 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 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 Hoisting Operations The cost of Application Hosting operations was significantly reduced with the sale of the data center.application-hosting services The Company nowcurrently incurs expenses for its application-hosting services only for the third party outsourcing services it uses, which are directly related to the Application Hosting Revenuesapplication-hosting services revenues generated by the ASP Division. 15 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 thirdsecond quarter of fiscal 2001,2002, Selling, General and Administrative expenses increased to approximately $879,000$906,547 compared with approximately $751,000$633,470 in the comparable prior quarter, and increased inquarter. During the first ninesix months of fiscal 2002, Selling, General and Administrative expenses increased to approximately $2,525,000$1,750,074 compared with approximately $2,505,000$1,338,714 in the comparable prior period. The increase in Selling, General and Administrative expenses in the third quarter is due to increasesnormal inflation and the increased cost to defend our intellectual property rights in corporate expenses, especially professional fees. Thetwo matters initiated by the Company. [See Part II. Item 1 Legal 15 Proceedings of this Form 10-Q.] In addition, the Company has gradually reducedredirected its direct sales staff as the Company focusesresources to focus its sales efforts on indirect distribution through its current and future Remarketing, Reseller, and ASP strategic business Partners. However,ASPeN services partners. The increased emphases on indirect sales include additional personnel assigned to the Company may increase its direct sales force inCorporate Development Group and increased travel and living expenses as the foreseeable futurepace 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 market opportunities arise.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 thirdsecond quarter, research and development expenses were $542,753 compared with $569,629 in the comparable prior quarter. During the first ninesix months, research and development expenses were approximately $308,000 and $1,034,000, respectively,$1,049,833 compared with approximately $353,000 and $1,280,000, respectively,$1,121,776 in the comparable prior quarter and first nine months.period. The decrease results primarily from lower staff costs resulting from converting consultants to company employees at lower costs, and occupancy related expenses.increased capitalized software development costs for the newest product codingANYware under development. The Company monitors closely its Research and Development projects,monitors and augments with contract programmers, its Research and Development staff, as necessary, to ensure timely completion of itsaccelerate the development of new products or enhancements to existing products. The Company capitalized, in accordance with Statement of Financial Accounting Standards No. 86, $375,000$300,000 and $250,000 of product research and development costs forin the first ninesix months of fiscal 20012002 and $315,000 of product research and development cost for2001. The capitalized costs during the first ninesix months of fiscal 2000. The capitalized costs2002 relate primarily to LanVision's two new products accessANYware(SM), which is in controlled general release and codingANYware, which is under development, accessANYware and is expected to be released incodingANYware. Operating profit The operating profit for the firstsecond quarter of fiscal 2002. Operating income (loss) The2002 was $649,994 compared with an operating income forloss of $138,981 in the thirdsecond quarter of fiscal 2001, was $1,000,596 compared with $421,250 in the third quarteran improvement of fiscal 2000.approximately $789,000. The operating incomeprofit for the first ninesix months of fiscal 2002 was $1,181,346 compared with an operating profit of $333,979 in the first six months of fiscal 2001, was $1,334,575 compared to an operating lossimprovement of $615,178 in the comparable prior period.approximately $847,000. The $1,949,753 increase in the year-to-date operating incomeprofit results primarily from: (1) continued stringent cost controls, which resulted in decreased operating expenses of approximately $510,000, and (2) increased revenues of approximately $1,439,000,$1,494,000, primarily LanVision software licensing revenues.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 decreasedecreases in interest income results from lower cash balances and significantly lower interest rates on lower cash balances. 16 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 (loss)16 The net income for the thirdsecond quarter of fiscal 20012002 was $498,257$201,632 ($.06.02 per share) compared with net incomeloss of $39,354$569,778 ($.00.06 per share)share loss) in the thirdsecond quarter of fiscal 2000.2001. The net income for the first ninesix months of fiscal 20012002 was $30,020$299,901 ($.00.04 per share) compared with a net loss of $284,642$468,237 ($.03.05 per share)share loss) in the first ninesix months of fiscal 2000. Excluding2001. The improvement in the gain onnet income is the saleprimarily the result of the data center from the first quarter of the prior year, the net loss for the first nine months of fiscal 2000 would have been $1,666,061. This $1,696,081 improvement in net income, 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 $1,439,000, as discussednoted 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 goingsignificant which, with the help of our existing and future partners, will enable LanVision to becapture a significant market, as evidenced by five new sales by our remarketing partner inportion of the third quarter.market. Management believes it has made, and continues to make, the investments in the talent and technology necessary to establish the Company as thea leader in this marketplace, and continues to believe the Company is well positioned to experience significant revenue growth primarily through third party distributors and strategic business 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 currently anticipates profitability for 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 maintaining currentincreasing revenues. Notwithstanding the volatility of quarter-to-quarter results, our year-to-date profitability and the prospect of adding additional strategic business partners to increase our distribution opportunities, we believe, should enable LanVision to continue to improve operating profitability for the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES During the last five fiscal years, LanVision has funded its operations, working capital needs and capital expenditures primarily from a combinationthe proceeds of the 1996 Initial Public Offering, 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 partythird-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. 17 LanVision has no significant obligations for capital resources, other than noncancelable operating leases in the total amount of approximately $170,000,$224,000, payable over the next twofour 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 may continue to approximate or exceed its revenues.increase. Accordingly, to continue to achieve continuingincreasing profitability, and positive cash flow, it is necessary for LanVision to increase revenues or continue to reduce expenses. LanVision believes that the requirement for healthcare organizations to become HIPAA compliant, and the recent signing of the IDX Information Systems Corporation remarketing agreement and the 3M agreements should offer a significant opportunityopportunities to increase revenues. Additionally, the SMSIDX and Siemens Remarketing Agreement hasAgreements, as previously noted, have significantly expanded the sales distribution capabilities.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 increase its revenues.do so. In February 2000, LanVision sold its Data Centerhosting 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 OctoberJuly 31, 2001,2002, LanVision had cash and cash equivalents of $7,920,390.$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 $5,300,000. During fiscal 2001, $1,000,000$4,800,000. Over the next twelve months, $2,000,000 of long-term debt is required to be repaid to the lender, $500,000 quarterly, commencing October 1, 2001, and annually, thereafter at a rate of $2,000,000 per year to maturity.lender. LanVision has significantly reduced its operating expenses during the last twothree fiscal years, and believes it will continue to improve operating results in fiscal 2001. However, based upon current expenditure levels2002. Notwithstanding the increases in fiscal year 2001 and in the absencefirst six months of increasedfiscal 2002 revenues LanVision could continue to operate at a loss. Accordingly,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 further 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. However, at this time, LanVision believes that it should be able to increase its revenues in fiscal 2001 and beyond, 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 OctoberJuly 31, 2001.2002. 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 OctoberJuly 31, 2001,2002, the Company's and SMS'its resellers' customers had entered into master agreements for systems and services (excluding support and maintenance and transaction based revenues for the ASP Division)ASPeN services division), which had not yet been delivered, installed and accepted which, if fully performed, would generate revenue to LanVision of approximately $3,209,000,$4,322,000, compared with approximately $4,255,000$4,417,000 at the end of fiscal 2000.2001. The systems and services are currently expected to be delivered over the next two to three years. In addition, the Company anticipates approximately $1,900,000$390,000 in transaction-based feeapplication-hosting services revenues for the ASP Division'sASPeN services division's current clientsclient over the next two years. Because systems implementations and Application Hosting ASP fees are dependent uponremaining six-month life of the customer's schedule and / or usage,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 Company is unablenew client's board. When the agreement receives approval, an estimated additional $3,400,000 in application-hosting services revenues will be added to accurately predict the amount of revenues in future periods. The Company'sbacklog. 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 1999, 1998 and 19971999 were approximately $4,032,000, $3,678,000, and $3,264,000, $2,755,000respectively. Maintenance and $2,151,000, respectively andsupport revenues are expected to increase as new or expanded systems are installed.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 ASP Division.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 Companydefendants 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 currently engaged inaware of any legal matters that will have a material adverse litigation.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 AgreementAgreement. 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: December 5, 2001September 10, 2002 By: /s/ J. BRIAN PATSY --------------------- --------------------------------------------------------------- ------------------------------------- J. Brian Patsy Chief Executive Officer and President DATE: December 5, 2001September 10, 2002 By: /s/ PAUL W. BRIDGE, JR. --------------------- --------------------------------------------------------------- ------------------------------------- Paul W. Bridge, Jr. Chief Financial Officer and Treasurer 2021 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.