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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended OctoberJuly 31, 19981999
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.)
One Financial Way,4700 Duke Drive, Suite 400
Cincinnati, Ohio 45242-5859170
Mason, OH 45040-9374
(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 December 11, 1998: 8,814,520.
This report consists of 29 pages, and the Exhibit Index appears on page
23.September 10, 1999: 8,838,033.
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TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements....................................................... 3
Condensed Consolidated Balance Sheets at OctoberJuly 31, 19981999 and January 31, 1998....................1999....................... 3
Condensed Consolidated Statements of Operations for the three and ninesix months ended OctoberJuly 31, 19981999
and 1997.....................................................................................1998.......................................................................................... 5
Condensed Consolidated Statements of Cash Flows for the ninesix months ended OctoberJuly 31, 19981999 and 1997..............................................................................................1998... 6
Notes to Condensed Consolidated Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 219
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 2120
Item 3. Defaults on Senior Securities..................................................................... 21
Item 5. Other Information................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................................................. 2221
Signatures........................................................................................ 2221
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) (Audited)
OctoberJuly 31, January 31,
1998 1998
-------------------- --------------------1999 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 1,371,9534,001,122 $ 2,142,881
Investment securities 5,014,435 5,074,2585,445,498
Accounts receivable, net of allowance for doubtful
accounts of $310,000$355,000 and $265,000,$325,000, respectively 3,132,826 2,992,9873,366,279 3,642,330
Unbilled receivables 2,940,027 1,135,3651,856,951 2,383,964
Other 1,276,603 1,179,603
-------------------- --------------------1,006,197 1,024,960
------------ ------------
Total current assets 13,735,844 12,525,09410,230,549 12,496,752
Property and equipment:
Computer equipment 4,406,425 3,876,9624,442,631 4,407,863
Computer software 590,591 588,441 487,841
Office furniture, fixtures and equipment 1,515,654 1,424,0361,379,043 1,534,206
Leasehold improvements 949,490 931,020
-------------------- --------------------
7,460,010 6,719,859648,230 930,920
------------ ------------
7,060,495 7,461,430
Accumulated depreciation and amortization (2,868,189) (1,563,202)
-------------------- --------------------
4,591,821 5,156,657
Investment securities - 3,834,908(3,895,017) (3,321,466)
------------ ------------
3,165,478 4,139,964
Capitalized software development costs, net of accumulated
amortization of $878,561$1,010,228 and $661,896,$920,228, respectively 692,368 612,033809,701 749,701
Other 87,046 71,430
-------------------- --------------------86,429 98,633
------------ ------------
$ 19,107,07914,292,157 $ 22,200,122
==================== ====================17,485,050
============ ============
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See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Equity
(Unaudited) (Audited)
OctoberJuly 31, January 31,
1998 1998
------------------ ------------------1999 1999
------------ ------------
Current liabilities:
Accounts payable $ 319,172642,137 $ 1,631,941474,189
Accrued compensation 581,435 943,221363,101 543,790
Accrued other expenses 2,281,264 1,746,8832,224,712 3,105,021
Deferred revenues 1,053,187 1,061,996
------------------ ------------------1,509,406 1,083,837
------------ ------------
Total current liabilities 4,235,058 5,384,0414,739,356 5,206,837
Long-term debt 6,000,000 -6,000,000
Long-term accrued interest 231,833 -831,571 431,167
Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized - --- --
Stockholders' equity:
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 8,896,500 shares issued 88,965 88,965
Capital in excess of par value 35,051,461 35,102,459 35,110,817
Treasury stock, at cost, 81,98068,467 and 90,50081,980 shares, respectively (325,451) (389,692) (430,188)
Accumulated other comprehensive income 25,152 75,203
Accumulated (deficit) (26,186,696) (18,028,716)
------------------ ------------------(32,093,745) (28,954,686)
------------ ------------
Total stockholders' equity 8,640,188 16,816,081
------------------ ------------------2,721,230 5,847,046
============ ============
$ 19,107,07914,292,157 $ 22,200,122
================== ==================17,485,050
============ ============
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended July 31,
(Unaudited)
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended October 31,
(Unaudited)
Three Months Ended NineSix Months Ended
--------------------------------- -------------------------------------------------------------- -----------------------------
1999 1998 19971999 1998
1997
--------------- --------------- --------------- --------------------------- ------------ ------------ ------------
Revenues:
Systems sales $ 1,307,886541,678 $ 1,160,1161,565,010 $ 4,979,8261,468,648 $ 2,758,963
Service,3,671,940
Services, maintenance and support 1,276,852 1,168,599 4,047,450 3,251,7311,459,805 1,334,998 2,749,958 2,770,598
Service bureau operations 251,591 - 422,305 -
--------------- --------------- --------------- ----------------- 108,214 154,925 170,714
------------ ------------ ------------ ------------
Total revenues 2,836,329 2,328,715 9,449,581 6,010,6942,001,483 3,008,222 4,373,531 6,613,252
Operating expenses:
Cost of systems sales 315,912 493,633 1,525,768 1,658,513114,783 431,135 550,247 1,209,856
Cost of service,services, maintenance and support 1,340,522 1,276,395 4,298,875 3,630,152979,010 1,431,677 1,909,055 2,958,353
Cost of service bureau operations 755,534 - 2,103,374 -405,457 725,571 831,876 1,347,840
Selling, general and administrative 1,516,922 2,205,518 6,092,729 7,129,4601,194,846 2,109,586 2,456,085 4,575,807
Product research and development 722,443 1,304,364 3,121,056 3,534,214525,042 948,122 1,071,054 2,398,613
Restructuring expense - --- 300,000 -
--------------- --------------- --------------- ----------------- 300,000
------------ ------------ ------------ ------------
Total operating expenses 4,651,333 5,279,910 17,441,802 15,952,339
--------------- --------------- --------------- ---------------3,219,138 5,946,091 6,818,317 12,790,469
------------ ------------ ------------ ------------
Operating (loss) (1,815,004) (2,951,195) (7,992,221) (9,941,645)(1,217,655) (2,937,869) (2,444,786) (6,177,217)
Interest income 94,112 287,484 291,741 901,00539,188 94,366 88,132 197,629
Interest expense 390,000 - 457,500 -
--------------- --------------- --------------- ---------------401,572 67,500 782,405 67,500
------------ ------------ ------------ ------------
Net (loss) $ (2,110,892)(1,580,039) $ (2,663,711)(2,911,003) $ 8,157,980(3,139,059) $ (9,040,640)
=============== =============== =============== ===============(6,047,088)
============ ============ ============ ============
Basic net (loss) per common share $ (.24)(.18) $ (.30)(.33) $ (.93)(.36) $ (1.02)
=============== =============== =============== ===============(.69)
============ ============ ============ ============
Diluted net (loss) per common share $ (.24)(.18) $ (.30)(.33) $ (.93)(.36) $ (1.02)
=============== =============== =============== ===============(.69)
============ ============ ============ ============
Number of shares used in per common share computations 8,814,520 8,806,000 8,809,856 8,834,716
=============== =============== =============== ===============8,819,073 8,808,871 8,816,834 8,807,459
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 31,
(Unaudited)
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended October 31,
(Unaudited)1999 1998
1997
------------------ ------------------------------ ------------
Operating activities:
Net (loss) $ (8,157,980)(3,139,059) $ (9,040,640)(6,047,088)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 1,521,653 722,732955,358 1,039,755
Increase in long-term accrued interest 400,404 32,500
Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables (1,944,501) (233,563)798,209 (2,007,077)
Other current assets (97,000) (762,452)23,618 (300,411)
Accounts payable and accrued expenses (1,140,175) 300,429(746,444) (536,230)
Deferred revenues (8,809) 695,412
Long-term accrued interest 231,833 -
------------------ ------------------425,569 (1,959)
------------ ------------
Net cash (used for) operating activities (9,594,979) (8,318,082)(1,282,345) (7,820,510)
Investing activities:
Purchases of investment securities -- (9,836,409) (20,990,860)
Sales of investment securities 13,681,089 31,828,880-- 11,663,279
Proceeds from disposal of property and equipment 9,006 --
Purchases of property and equipment (740,151) (1,742,328)(46,484) (720,824)
Capitalization of software development costs (297,000) (297,000)(150,000) (198,000)
Other (15,616) (34,046)
------------------ ------------------12,204 (14,639)
------------ ------------
Net cash (used for) provided by investing activities 2,791,913 8,764,646(175,274) 893,407
Financing activities:
Proceeds of long-term debt -- 6,000,000 -
Sale of treasury stock to employee stock purchase plan 13,243 32,138
-
Purchase of treasury stock - (430,188)
------------------ ------------------------------ ------------
Net cash provided by (used for) financing activities 13,243 6,032,138
(430,188)
------------------ ------------------
Increase (decrease)------------ ------------
Decrease in cash (770,928) 16,376(1,444,376) (894,965)
Cash and short term cash equivalents at beginning of period 5,445,498 2,142,881
664,223
------------------ ------------------------------ ------------
Cash and short term cash equivalents at end of period $ 1,371,9534,001,122 $ 680,599
================== ==================1,247,916
============ ============
Supplemental cash flow disclosures:
Income taxes paid $ - $ -
Interest paid $ 152,000362,000 $ ---
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been
prepared by the Company without audit, in accordance with generally accepted
accounting principles for interim financial information, pursuant to the rules
and regulations applicable to quarterly reports on Form 10-Q of the 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, Commission File Number 0-28132. Operating
results for the three and nineor six months ended OctoberJuly 31, 1998,1999, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 1999.2000.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 1821 of its 19971998 Annual Report to Stockholders. Users of
financial information for interim periods are encouraged to refer to the
footnotes contained in the Annual Report to Stockholders when reviewing interim
financial results. There has been no material change in the accounting policies
followed by the Company during 1998.
The Company is accounting for the minimum guaranteed rate of return on the
long-term debt (see note 4) as if the loan were guaranteed to earn a 25%
compound annual return. Accordingly, in addition to the 12% coupon interest, the
Company records as interest expense the difference between the minimum guarantee
and the 12% coupon interest as additional interest expense. This liability is
reflected as long-term accrued interest.1999.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The net decrease in cash and cash equivalents and investment securities results from the sale of investments and use of cash to fund
current operations and purchase additional fixed assets.
The increasedecrease in receivables is due to increased salesimproved collections, lower revenues in
the current quarter compared withto the quarter endingprior period ended January 31, 1998.
Revenue recorded1999, and the
write off of some previously reserved accounts.
In August 1997, the Company announced the formation of Virtual Healthware
Services (VHS), a new healthcare information application service provider
division that delivers high quality, transaction-based document
imaging/management services to healthcare providers from a central data center.
Also, in August 1997, the Company announced that The Detroit Medical Center
(DMC) signed a three-year agreement with VHS and the contract was expected to
generate in excess of milestone billings$6,000,000 in revenues over the initial term of the
agreement. In 1997, and the first part
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of 1998, the Company spent approximately $4,000,000 to build the central data
center and place it into production. During the first quarter of 1998, VHS began
production at the DMC. However, during 1998, The Detroit Medical Center
encountered financial difficulties, and as previously announced in February,
1999, the DMC as part of an overall financial restructuring, notified the
Company that it sought to terminate its agreement with VHS. The agreement
between the DMC and LanVision does not provide for early termination, and the
Company has filed a complaint seeking the recovery of damages in excess of
$2,000,000 and initiated arbitration proceedings against the DMC. However, at
the present time, the Company is recorded as unbilled
receivables.unable to predict the outcome of these
proceedings. At July 31, 1999, LanVision's receivables due from the DMC
approximated $667,000. Management believes it has adequately provided for any
possible uncollectible amounts.
The increasedecrease in unbilled receivablesproperty and equipment is due to an increase in new
sales contracts, royalties due in accordance
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with the termsdownsizing of facilities
including the Remarketing Agreement with Shared Medical Systems
Corporation (See Resultsdisposal of Operations),excess office furniture and the implementationequipment and abandonment
of additional
phases of existing contracts.certain leasehold improvements.
Other current assets consist primarily of prepaid expenses, including
commissions, and acquired software and hardware awaiting installation.
The increase at October 31, 1998, results primarily from prepaid expenses related to
the long-term debt (see note 4) which is being amortized over the life of the
loan.
The increase in property and equipment relates primarily to the purchase of
equipment for the service bureau operations, which went on-line in the first
half of fiscal 1998.
The decrease in accounts payable is due to a reduction in purchasesthe timing of hardware
and third-party software for resale and reduced levels of capital expenditures
in the current quarter compared with the quarter ended January 31, 1998.payments on certain
payables.
The decrease in accrued compensation results from a smaller accrual for bonuses.reduction in headcount and
the payment of incentive compensation.
The increasedecrease in accrued other expenses results from an increase in reserves for
the possible settlement of
contractual issues relating to certain aspects of implementation on several
contracts.contracts and the use of the accrued restructuring liability for facilities
downsizing.
The increase in deferred revenues is due to the receipt of advance payments on
several contracts prior to revenue recognition.
Note 4 - LONG-TERM DEBT
In July, 1998, the Company issued a $6,000,000 note to The HillStreet Fund,
L.P., which bears interest at 12%, payable monthly. The note is repayable in
quarterly installments of $500,000 commencing October, 2001 through July, 2004.
In July, 2002, the Company has a one-time option to prepay in full the then
outstanding balance of the note. The note is secured by all of the assets of the
Company and the loan agreement restricts the Company from incurring additional
indebtedness for borrowed money, including capitalized leases, limits certain
investments, restricts substantial asset sales, capital expenditures, cash
dividends, stock repurchases and mergers and consolidations with unaffiliated
entities. In addition, the Company is required to maintain certain financial
conditions, including minimum levels of revenues, combined cash and investments
and net worth.
In connection with the issuance of the note, the Company issued Warrants to
purchase 750,000 shares of common stock of the Company at $3.87 per share at any
time after May 16, 1999 through July 16, 2008. The Warrants are subject to the
customary antidilution and registration rights provisions.
Under the terms of the loan agreement, the Company has guaranteed the lender
that the increase in the market value of the stock underlying the Warrants, at
the time of loan maturity, over the exercise price plus the 12% interest paid on
the loan will yield the lender a 25% compound annual return. If the yield from
the Warrants plus interest paid does not provide the lender with the guaranteed
return, the Company is required to pay the additional amount in cash at the time
of maturity. Should the Company exercise its prepayment option in July, 2002,
then the minimum guaranteed rate of return is increased to 30%. However, to the
extent that the computed
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minimum compound annual rate of return exceeds 30% at the date of the
prepayment, the Company has the right to cancel up to 150,000 warrants.
In addition, the founders and majority shareholders of the Company have
consented to certain restrictions on the sale or transfer of their shares.
Maturities of long-term debt are as follows: fiscal years 1999 & 2000, $-0-;
2001, $1,000,000; 2002, $2,000,000; 2003, $2,000,000; 2004, $1,000,000.
The Company was in compliance with all of the terms and conditions of the loan
agreement as of October 31, 1998.
Note 5 - STOCKHOLDERS' EQUITY
The Company has reserved 2,271,321 shares of Common Stock for issuance as
follows: 750,000 shares for issuance upon exercise of the Warrants issued in
connection with the long-term debt (see Note 4), and 1,521,321 shares for
issuance in connection with various Stock Option Plans and the Employee Stock
Purchase Plan.
On June 30,1998, 8,520 shares of Treasury Stock were sold to the Employee Stock
Purchase Plan. The $8,358 loss on the sale of the Treasury Stock has been
recorded as a reduction of capital in excess of par value in the Stockholders'
Equity.
Note 6 - STOCK OPTIONS
During the first ninesix months of the current fiscal year, the Company granted
248,000101,000 stock options at the weighted average exercise price of $3.00 per share
under the 1996 Employee Stock Option Plan. During the same
period 24,875202,387 options were forfeited under all plans. In August, 1999, options
to purchase 10,000 shares of Common Stock were exercised.
Note 75 - RESTRUCTURING EXPENSE
During the second quarter,prior fiscal year, the company restructured certain aspects of its
operations to flatten the management structure, reduce expenses in all areas,
and, at the same time, improve customer service.operations. Accordingly, the Company accrued $300,000$700,000 for the anticipated costs
of severance and related taxes and fringe benefits for the reduction of the work
force by 16 people. The liability
was recorded as apeople and downsizing the existing facilities to the current liability at the endand
near term need. At July 31, 1999, approximately $632,000 of the second quarter and
substantially all of the liability was paid during the third quarter. As
LanVision has completed certain of its major software development projects, the
Companyaccrual has been
able to reduce its staffused for the restructuring and the use of outside contractors in
product development.approximately $68,000 remains for additional
facilities downsizing.
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Note 86 - EARNINGS PER SHARE
The basic (loss) per common share is calculated using the weighted average
number of common shares outstanding during the period.
The diluted (loss) per common share calculation, excludes the effect of the
common stock equivalents (stock options) as the inclusion thereof would be
antidilutive.
Note 97 - COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Accordingly, the Company has
accounted for the unrealized holding gains on available-for-sale securities in
accordance with this new accounting standard, as follows:
Three months ended OctoberJuly 31, NineSix months ended OctoberJuly 31,
------------------------------------ ----------------------------------------------------------------- ------------------------------
1999 1998 19971999 1998
1997
--------------- -------------- -------------- ------------------------- ----------- ----------- -----------
Net (loss) $ (2,110,892) $ (2,663,711) $ (8,157,980) $ (9,040,640)$(1,580,039) $(2,911,003) $(3,139,059) $(6,047,088)
Unrealized holding gains (losses)
arising during the period 12,023 8,661 6,393 119,240-- (4,827) -- (5,630)
Reclassification adjustment for
gains included in Net (loss) (1,758) (23,200) (56,444) (88,858)
--------------- -------------- -------------- ---------------- (14,164) -- (54,686)
----------- ----------- ----------- -----------
Comprehensive (loss) $ (2,100,627) $ (2,678,250) $ (8,208,031) $ (9,010,258)
=============== ============== ============== ==============$(1,580,039) $(2,929,994) $(3,139,059) $(6,107,404)
=========== =========== =========== ===========
Note 8 - LONG-TERM DEBT
At the present time the Company's Long-term Debt Agreement includes certain
financial covenants requiring the Company to maintain a minimum cash balance of
$2,400,000 and maintain minimum revenues and net worth. The Company is
renegotiating these covenants with the Lender and the minimum cash balance
required will increase to $2,700,000 at October 31, 1999.
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, Year 2000 Compliance priorities, fluctuations
in operating results and other risks detailed from time to time in the LanVision
Systems, Inc. filings with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking
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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 10
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made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
GENERAL
LanVision(TM)LanVision Systems, Inc. ("LanVision"(TM) or the "Company") is a leading
providersupplier of healthcare information access systemsHealthcare Information Access Systems and web-based outsourced data center operationsservices and an
Application Service Provider with solutions that can utilize the power of the
Internet/Intranet to link hospitals, physicians, patients and payers to a robust
electronic medical record that enable, hospitals and integrated
healthcare networkson a real-time basis, access to capture, store, manage, route, retrieve and process vast
amountsall the
various forms of clinical and financial patient information.information from a single
permanent health information repository. LanVision's solutions enable the
coordination of both "structured" and "unstructured" patient data through a
single health information repository. The Company's products are complementary
to existing clinical and financial systems, and use document imaging and
workflow tools to ensure end users can electronically access all the various
forms of healthcare information including clinician's handwritten notes,
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 and eventually a patient's home using web browser
technology. Web access to the entire medical record significantly 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 Company's solutions integrate a proprietary document
imaging platform, application suites, and image and web-enabling tools, that
allow for the seamless merger of "back office" functionality with existing
Clinical Information Systems at the desktop. The Company offers a robust
document imaging/management infrastructure that is built for high volume
transaction processing and is optimized for the healthcare industry. In addition
to providing the clinician access to information not previously available at the
desktop, the Company's applications fulfill the administrative and legal needs
of the Medical Records and Patient Financial Services departments. Furthermore,
these systems have been specifically designed to integrate with other Clinical
and Patient Account Information Systems. For example, the Company has integrated
its products with selected systems from Shared Medical Systems Corporation,
Cerner Corporation, IDX Systems Corporation, and Oacis Healthcare Holdings Corp.
By offering electronic access to all the components of the Medical Record, this
integration completes one of the most difficult tasks necessary to provide a
true Computer Based Patient Record. The Company's systems deliver on-line
enterprise-wideenterprisewide 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.
LanVision's
systems, which incorporate data management, document imaging/management and
workflow technologies, consolidate patient information into a single repository
and provide fast and efficient access to patient information from universal
workstations located throughout the enterprise, including the point of patient
care. The systems are specifically designed to meet the needs of physicians and
other medical and administrative personnel and can accommodate multiple users
requiring simultaneous access to patient information, thereby eliminating file
contention. By providing access to all forms of patient information, the Company
believes that its Healthcare Information Access Systems are essential components
of the computer-based patient record.
The Company's revenues are derived from: the licensing and sale of systems
comprising LanVision software and third-party software and hardware components;components, product
support, maintenance, and professional services;services, and service bureau operations (outsourced data center operations).operations.
Professional services include implementation and training,
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project management, and custom software development and currently are provided only
to the Company's customers with installed systems or who are in the process of
installing systems. Revenues from professional services, maintenance and support
services typically are expected to increase as the number of installed systems
increase. The Company earns its highest margins on proprietary LanVision
software and the lowest margins aremargin is on third-party hardware. Systems sales to
customers may include differingdifferent configurations of software and hardware,
resulting in varying margins among contracts. The margins on professional
services revenues are expected to fluctuate based upon the negotiated terms of
the agreement with each customer and the Company's ability to fully utilize its
professional services, maintenance and support services staff. Revenues from the
Company's service bureau operations, which provides high quality,
transaction-based document imaging/management services from a centralizedcentral data
center, commenced in the
first quarter of fiscal 1998 and are expected to increase as the number of hospitals outsource services
to the Company's Virtual Healthware Services division (VHS)("VHS"). Additionally,
revenue from each VHS customer is expected to increase as the volume of archived
historical data increases and retrievals of data increaseincreases as the systems are
fully implemented within a healthcare facility. VHS is currently installing its
system at The Health Alliance, Inc., a group of five hospitals in the Greater
Cincinnati Area.
The systems and service bureau operations enable hospitals and integrated
healthcare networks to capture, store, manage, route, retrieve and process vast
amounts of clinical and financial patient information. LanVision's systems,
which incorporate data management, document imaging/management and workflow
technologies, consolidate patient information into a single repository and
provide fast and efficient access to patient information from universal
workstations, wherever located, including the point of patient care.
Sales are made by the Company's direct sales force and through a Remarketing
Agreement with Shared Medical Systems Corporation.
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12
On February 23, 1998, the Company entered into a Remarketing Agreement with
Shared Medical Systems Corporation ("SMS"). Under the terms of the agreement,
SMS was granted an exclusive worldwide license to distribute WebView(TM),
ChartVision(R), On-Line Chart Completion(TM) and Release of Information
(ROI)(TM) (formerly called Enterprisewide Correspondence(TM)) to the SMS
customer base and prospect base, as defined in the agreement, and a
non-exclusive license to distribute all other LanVision products. If SMS
distributes any other electronic medical record product competing with
LanVision's products, the Company may terminate the SMS Remarketing Agreement.
SMS has over 1,800 customers in the United States and a total of 3,500 customers
in 20 countries and territories in North America and Europe. The large
Healthcare Information Access Systems providers, such as SMS, are often able to
positively influence the buying decisions within their customer base. LanVision
management believes the distribution of its products by SMS will shorten sales
cycles and increase revenues. Although SMS has already begun to actively promote
LanVision's products, the full impact of this distribution agreement will likely
not be realized until later in fiscal 1998 or early 1999, as more of the SMS organization is
trained to sell and implement the LanVision products. OnTo date SMS has sold six
systems to end users through August 18, 1998, the Company announced that SMS had completed its first sale
of ChartVision, which included a license for more than 250 concurrent users.
In 1996, the Company entered into a non-exclusive Remarketing Agreement with
Lanier Worldwide, Inc. (Lanier). Under the terms of the Agreement, Lanier was
entitled to market and distribute ChartVision, On-Line Chart Completion and
related products throughout North America. Through April 30, 1998, Lanier had
licensed the Company's products to two customers. The Remarketing Agreement
expired and has not been extended. Under the terms of a settlement with Lanier,
LanVision has no ongoing royalty obligation to Lanier. LanVision refunded to
Lanier $131,250 of development fees related to porting certain software to the
Lanier platform. This liability had been previously accrued. Additionally, the
Company forgave $210,385 of receivables due from Lanier, and of this $160,521
was charged to expense in the second quarter and $49,864 charged to expense in
the third quarter.31, 1999.
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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. Throughout
1996, 1997, 1998 and the first ninesix months of 1998,1999, the Company has experienced
extended sales cycles, and sales in each yearperiod have been less than the
Company's internal plans. 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 results.
Furthermore, healthcare organizations are assessing and implementing many new
technology solutions, including Year 2000 Compliance, etc., and although many of
these systems do not compete with the LanVisionLanVision's products, these systems do compete
for capital budget dollars and the available time of information system
personnel within the healthcare organizations. The LanVision agreements cover
the entire implementation of the system and specify the implementation schedule,
which typically takes place in phases. The agreements
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13 generally provide for the
licensing of the Company's proprietary software and third-party software with a
one-time perpetual license fee that is adjusted depending on the number of
workstations using the software. Third-party hardware is sold outright, with a
one-time fee charged for installation and training. Interfaces with existing
customer systems and other consulting services are sold on a fixed fee or a time
and materials basis.
Generally, revenues from systems sales are recognized when a purchase agreement
is signed and products are delivered. Revenues from the service elements of a
contract including: routine installation, integration, project management,
interface development, training, etc. are 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 completed, depending
on the contractual terms. Revenues from maintenance and support 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.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Any of
the Company's internal use computer programs and hardware as well as its
software products that are date sensitive may recognize a date using "00" as the
Year 1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers who rely on its
products.
The Company is actively engaged in, but has not yet completed all stages of reviewing, correcting and testing all of the Year
2000 Compliance issues. Based on the
current, albeit incomplete review and remediation, the Company has determined
that it will be requiredissues related to modify or replace some of its internal use software and hardware modify certain existing softwareand the
Company's products, including third-party software so that they will function properly, as a system, with respect to dates
in the Year 2000 and thereafter.components offered for
resale.
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13
The Company presently believes that with modifications to its products and
third-party software and the replacement of internal use software and
non-compatible hardware, the Year 2000 Compliance issue will not pose
significant operational problems for the Company or its customers. However, if
such modificationsclients do not make the necessary changes to equipment and replacements are not made, or not completedupgrade to Year 2000
Compliant software in a timely manner, the Year 2000 Compliance issue could have
a material impact on the Company and its customers.
The Company has divided the Year 2000 Compliance issue into two areas: software
products and systems sold to customers;customers and internal use software and hardware.
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14
With regard to software products sold to customers, the Company has: completed
the overall Year 2000 Compliance remediation plan; made a preliminary review of the existing
software code; corrected all known Year 2000 code problems; and
developed a test
plan. The testing ofplan; and tested the revised code and thefor quality assurance. The Year 2000 compliant third-partyquality
assurance testing, which included integration testing of LanVision software
products that are requirements of the overall
LanVision System has begun and based upon the test results, the code may need
further revisions, with re-testing in successive iterations, until such time as
all of the components are determined to be Year 2000 compliant. Based on current
estimates, the above phases should be completed by December 31, 1998.
The Company has begun the integration testing phase of the various components of
the system, LanVision software,other third-party software and hardware system components, has been
completed and where necessary the major hardware
components, for compatibilitycode was modified. This testing and
interoperability as they relate to themodification was done in several iterations. All LanVision Year 2000 Compliance issue. Based on current estimates, the above integration-testing
phase should beCompliant
software products have completed by December 31, 1998. The Company will then deliver
revised Year 2000 compliant software to its customers forBeta testing at the
customer sites using the customers then current hardware configurations.and are in General Release. The
Company believes that Year 2000 compatible equipment is available for
acquisition by customers, if necessary, to ensure installed systems operate
properly.
Should the LanVisionThe Company is now working with its customers to upgrade their systems sold to customers not be timely modified to be Year
2000 compliant, the most likely worst case scenario would be that customers
could: suspend use of the system until such time as the Year 2000 Compliance
issues are remediated; or continue to use the systems with reduced
functionality. However, basedCompliance. Based upon current information and the time remaining for
clients to complete the remediation,upgrade their systems to be Year 2000 Compliant, including upgrading
to LanVision's Year 2000 Compliant software, the Company believes that the risk
of such occurrencea customer not having a Year 2000 Compliant system is minimal. Contingency
plans have not yet been developed. However, if needed, contingency plans will be
developed if they are needed.developed.
With regard to the Company's service bureau operations, the Company has
determined that its systems and equipment are Year 2000 compliant except forCompliant, including the
LanVision software products discussed above which are in the process of
remediation, and telecommunications services
provided by outside vendors. The
Company is in the process of determining the Year 2000 Compliance issues that
could affect operations should the telecommunications vendors not be compliant.
Without Year 2000 compliantCompliant LanVision software and
telecommunications, the service bureau operations willwould not be able to provide
current levels of services to its customers and no contingency plan has yet been
developed.developed based upon our current review of the systems, software and
telecommunications services. However, if needed, contingency plans will be
developed if they are needed.developed.
With regard to internal use software and hardware, the Company has reviewed
substantially all of the internal useinternally used software and equipment, and has
determined that a small amount of older computer equipment must be replaced, but
the type and amount are not significant and will be replaced in the ordinary
course as systems are upgraded. With regard to third-party software, it has been
determined that some software is not compliant and will need to be upgraded, in 1999, as
vendors provide Year 2000 compliantCompliant versions. The companyCompany also utilizes
third-party vendors for processing data and payments, e.g. payroll services,
401(k) plan administration, check processing, medical benefits processing, etc.
The Company has initiated communications with its vendors to determine the
status of their systems. Should theseThe major vendors not be compliant in a timely
manner,have advised the
13
14
15
the Company may be required to process transactions manually or delay processing
until such time as the vendorsthey are currently Year 2000 compliant.Compliant. No contingency plan has yet been
developed. However, if needed, contingency plans will be developed if they are
needed.developed.
The Company will utilizeutilized both internal and external resources to reprogram, or
replace and test its software products for the Year 2000 modifications. The
Company anticipates completing the Year 2000 Compliance
project as soon as
practical, but not later than December 31, 1998, which is prior to any
anticipated impact.modifications. The total cost of the Year 2000 projectCompliance remediation is not
considered to be material, and will be funded through existing cash resources and future
operating cash flows. The requirements for the correction of Year 2000
Compliance issues and the date on which the Company believes it will complete
the Year 2000 Compliance modifications are based on management's current best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that may cause such material differences
include, but are not limited to, the availability of personnel trained in this
area, the ability to locate and collect all relevant computer codes and similar
uncertainties.less than $500,000
The Company has warranted, to certain customers, that its products will be Year
2000 compliant. In addition, provisionsCompliant. If the Company were unable to provide a Year 2000 Compliant
solution to these customers, the customers could claim breach of itscontract and
seek available legal remedies. Provisions of the Company's long-term debt
agreement and the Remarketing Agreement with SMS requirerequired the Company's products
be Year 2000 compliant. Non-compliance withCompliant by December 31, 1998. Although, LanVision's products were
modified to be Year 2000 Compliant by December 31, 1998, all Alpha and Beta
testing was not completed as of that date. Waivers of compliance have been
received from our lender and the product warranties, debt covenants and Remarketing Agreement would result in an event of default on the long-term debt
and may give rise legal action for breach of contract relating to the product
warranties and Remarketing Agreement.with SMS is being
amended. Based upon the current best estimate for remediation of the Year 2000
Compliance issues, the Company believes the risk is minimal that the Company willhas
not complycomplied with current commitments and internal
processing needs.commitments.
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 the VHS
service bureau which commenced operations in the first quarter of 1998, are expected to increase over time, as more hospitals
outsource services to VHS, existing customers increase the volume of documents
stored on the systems, and the number of retrievals increase. VHS is currently
installing its system at The Health Alliance, Inc., a group of five hospitals in
the Greater Cincinnati Area. Because a significant percentage of the Company's
operating costs are expensed as incurred, a variation in the usage of VHS
services, the timing of systems sales and installations and the resulting
revenue recognition, can cause significant variations in operating results from
quarter to quarter.
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16
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 LanVision document imaging and workflow systems,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. 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.
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15
REVENUES
Revenues for the thirdsecond fiscal quarter ended OctoberJuly 31, 1998,1999, were $2,836,329, a
22% increase,$2,001,483,
compared with $2,328,715$3,008,222 reported in the comparable quarter of 1997.1998. Revenues
for the first ninesix months ended OctoberJuly 31, 1998,1999, were $9,449,581, a
57% increase,$4,373,531 compared with $6,010,694$6,613,252
in the comparable periodprior period. Revenues for the second quarter and first six
months of 1997.
Althoughfiscal 1999 do not include approximately $1,270,000 of revenues for
previously announced sales made by our Remarketing Partner Shared Medical
Systems Corporation. As previously disclosed, revenues on the three and nine months ended were greater than the
corresponding periods in fiscal 1997, revenues for the periods were less than
the Company's internal plan.
During the first quarter, the Company signed one new contract with Christiana
Care Health Services.contracts have
been deferred until certain integration was completed. During the second
quarter, LanVision delivered to SMS signed its first contract
to sell ChartVision,versions of LanVision's Medical Record Suite
that were integrated with SMS's Patient Accounts Imaging Management System. SMS
and LanVision successfully completed the initial integration testing. Revenue
will be recognized, probably in the third quarter, LanVision signed onewhen final integration
testing of the software is completed. The decrease in revenues, in both periods,
results primarily from the decrease in new contract
with the Medical University of South Carolina. Through the first nine months of
1998, the Company recognized approximately $2,600,000 of revenues from these
three contracts. The remaining systems sales revenuescustomers during the nine months
came from implementation of previously signed agreements (backlog) and from
add-on sales to existing customers. During the first quarter, the Company's
newly formed Virtual Healthware Services division began operations.
Sales activity has been slower than plannedcurrent periods
as manymost healthcare institutions are
focusedorganizations concentrated on resolving Year 2000 Compliance problems withremediation of legacy
systems rather than installing new systems.
Additionally, consolidations and mergers within the healthcare industry and the
attendant changes in management have delayed or terminated sales discussions.
Additionally, healthcare institutions are assessing and implementing many new
technologies. Although many of these systems do not compete with the LanVision
products, these systems do compete for capital budget dollars and the available
time of information systems personnel within the healthcare industries.
Management believes the healthcare industry's focus on Year 2000 Compliance will
continue to adversely affect potential sales opportunities for its direct sales
force through at least the first halfmost of fiscal 1999. Also, the Remarketing Agreement with Shared
Medical Systems Corporation has developed more slowly than expected. However,To date,
SMS's Marketing of LanVision's products has been conducted by a small
specialized sales force. Additionally, SMS's strategy is to tightly control
marketing activities until such time that the recent sales pipeline reportintegrated LanVision/SMS solution
can be successfully demonstrated at its key customers. The integrated products
have been delivered to two SMS customers and initial integration testing has
been successfully completed. Final integration testing is encouragingscheduled for
September. LanVision expects that SMS's marketing activities related to the
LanVision products will increase and LanVision
remains optimistic about the long-term revenue potential of this Remarketing
Agreement. Management believes revenue from this Remarketing
Agreement will represent a greater percentage of the Company's total revenues in
the future.
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17
As previously discussed, afterAfter 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 more fully discussed under
"Uneven Patterns of Quarterly Operating Results." Three customers accounted for
approximately 56%47% of the revenues for the thirdsecond quarter of 1998 and three customers accounted for 31% of the revenues39% for the first
ninesix months of 1998.1999 compared with 53% and 37%, respectively, of revenues in the
comparable periods of the prior year.
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16
OPERATING EXPENSES
Cost of Systems Sales
The cost of systems sales includes amortization of capitalized software
development costs on a straight-line basis, royalties and the cost of
third-party software and hardware. Cost of systems sales as a percentage of
systems sales may vary from period to period depending on the mix of hardware
and software of the systems or add-on sales delivered. The cost of systems sales
as a percentage of systems sales for the thirdsecond quarter of 1999 and 1998 were
21% and 1997 were 24%
and 43%27%, respectively, and 31% and 60%, respectively for the first nine months
of 1998 and 1997.respectively. The lower cost reflects the higherchange in the mix of
LanVision software with higher margins relative to the hardware and third-partythird party
software components with lower margins and higher costs. In addition, theThe cost of systems
sales as a percentage of systems sales for the ninefirst six months includes an $83,333 write off of 1999 and 1998
were 37% and 33%, respectively reflecting the lower mix of LanVision software
previously acquired
from a third-party.and higher hardware sales in the current period compared with the prior period.
Cost of Service,Services, Maintenance and Support
The cost of service,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 service,services, maintenance and support
revenues, the cost of such service,services, maintenance and support was 105%67% and 109%107%
for the thirdsecond quarter of fiscal 1998 and 1997, respectively69% and 106% and 112%,
respectively,107% for the first ninesix months of fiscal 1999
and 1998, respectively. The improvement in the cost of sales is due to reduced
operating expenses and 1997.
The LanVision Customer Support existing staff is sufficient tomore effective utilization of the professional services
and support the
existing customer base. Increases in customers do not require a proportional
increase in support staffing or total support costs.staffs. 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 has, in the past,
experienced 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 developing
training courses and developing plans to move to LanVision's new product
releases, etc. Management believes the 17
18
increase in experience of its
Professional Services staff and thean increase in backlog should improve the
overall efficiency and operating performance of this group.
Cost of Services Bureau Operations
The cost of service bureau operations has declined in both the current quarter
and first six months compared with the comparable prior periods as the overall
operations were significantly reduced when The Detroit Medical Center terminated
their agreement. See Note 3 of the Notes to Condensed Consolidated Financial
Statements. The ongoing cost of the service bureau operations is primarily
depreciation and core staff assisting in the implementation of a new VHS
customer, The Health Alliance, Inc., which is expects to begin using the system
in production in the third quarter.
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17
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 1998,1999, Selling, General and Administrative expenses
decreased to $1,516,922$1,194,846 compared with $2,205,518$2,109,586 in the comparable prior quarter
and decreased to $6,092,729 in the first nine months$2,456,085 compared with $7,129,460$4,575,807 in the comparable prior period. For the ninesix
months Selling, General and
Administrative expenses include a charge of approximately $160,000 related to
the expiration of the Lanier Remarketing Agreement.1998. The reductions in Selling, General and Administrative expenses
is due to decreased staffing levels and reduced expenses in other areas. At October 31, 1998,The
Company has gradually reduced its direct sales staff as the Company'sCompany focuses its
sales efforts on indirect distribution through its current and marketing staff consisted of ten personnel compared with twenty-nine personnel
at October 31, 1997. Additionally, general and administrative staffing at
October 31, 1998 was fourteen compared with nineteen at October 31, 1997.future
Remarketing Partners.
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. At October 31, 1998,During the productsecond quarter of fiscal 1999, research and development
staff
consisted of sixteen employeesexpenses decreased to $525,042 compared with thirty-one employees at October 31,
1997. However, the Company supplements its development staff through the use of
independent contractors and software development firms. Research and development
expenses$948,122 in the firstcomparable prior
quarter and decreased to $1,071,054 compared with $2,398,613 in the comparable
prior six months of fiscal 1998, increased to $1,450,491 as a result of stepped-upa reduction of staff and use of outside
contractors as major development efforts related to the many new products recently
released. Research and development expenses for the second quarterprojects were $948,122
and $722,443completed in the third quarter, reflecting the use of fewer contractors and
reduced staffing subsequent to completion of major projects. During the current
fiscal year LanVision released upgrades to ChartVision and provided the general
release of On-Line Chart Completion, Release of Information (ROI) formerly known
as Enterprisewide Correspondence, OmniVision(TM), WebView(TM), and new Document
Capture System(TM) modules. These new releases have enabled LanVision to offer
an expanded product portfolio to new customers and allowed existing customers to
expand their uselater portion of
the LanVision systems.prior fiscal year. The Company capitalized, in accordance with Statement of
Financial Accounting Standards No. 86, $297,000$150,000 and $198,000 of product research
and development costs in the first ninesix months of fiscal 1999 and 1998,
and 1997.respectively.
Interest income consists primarily of interest on investment securities.invested cash. The decrease in
interest income results from the sale of investment securities and use of cash
to fund operations and acquire fixed assets.
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19
Interest expense relates to the new long-term debt (see Item 1, Note 4 of Notes
to Financial Statements).debt.
Net loss
The net loss for the third fiscalsecond quarter of 1998fiscal 1999 was $2,110,892$1,580,039 ($.24).0.18 per
share) compared with a net loss of $2,663,711$2,911,003 ($.30).0.33 per share) in the thirdsecond
quarter of 1997.fiscal 1998. The net loss for the first ninesix months of 1998fiscal 1999 was
$8,157,980$3,139,059 ($.93).0.36 per share) compared with a net loss of $9,040,640$6,047,088 ($1.02).0.69 per
share) in the first ninesix months of 1997. Thefiscal 1998.The decrease in the net lossesloss for
the periods results primarily from the increased margins on systems
sales, with a higher mix of LanVision proprietary software, reductions in selling, general and
administrative expenses and product research and development. Excluding the $1,987,258 operating lossdevelopment as well as
reductions in costs of the new VHS division,
the $293,718 in special charges mentioned abovesales, primarily as a result of staff reductions and
the $300,000 restructuring
charge, LanVision's operating loss for the nine months ended October 31,1998 was
$5,411,245, a significant improvement when compared with an operating lossbetter utilization of $9,941,645 in the corresponding nine months of 1997.staff.
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18
In spite of the less than anticipated number of new customer agreements signed
in the past, nine months, management continues to believe that the healthcare document
imaging and workflow market is going to be a significant market. Management
believes it has made 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.growth
primarily through third party distributors and remarketing partners, and
potentially emerging healthcare Internet Service Providers, Application Service
Providers and content/E-commerce organizations.
Since commencing operations in 1989, the Company has incurred operating losses.
Although the Company achieved profitability in fiscal years 1992 and 1993, the
Company incurred a net loss in fiscal years 1994 through 1997.1998. 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
Since its inception in 1989, LanVisionthe Company has funded its operations, working
capital needs and capital expenditures primarily from a combination of cash
generated by operations, a 1994 private placement of convertible redeemable
preferred stock, and an initial public offering and borrowings, including in
July, 1998, a
$6,000,000 loan ( see Item 1, Note 4 of the Notes to Financial
Statements).in July, 1998.
The Company'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, recently 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.
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20
The Company has no significant obligations for capital resources, other than
noncancelable operating leases in the total amount of approximately $2,500,000,$1,400,000,
payable over the next sixfive years. However, the VHS service bureau operationoperations
will need to acquire additional software and equipment as VHS adds additional
hospitals and clinics to its customer base. The centralizedcentral data center has been
originally
configured to serve approximately fifty hospitals, with significant expansion
capabilities. However, for each customer,certain new customers VHS establisheswill operate one or more
onsite document capture centers and provideswill provide the necessary scanning
equipment. Each document capture center is expected to require approximately
$125,000 of equipment. Also, because VHS charges for its services on a per
transaction fee basis, LanVision'sthe Company's cash flow for capital and operating
expenses will normally be greater than cash inflows until customers begin to use
the system at anticipated normal volumes for a period of time.
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19
Over the last several years, the Company's revenues have been less than the
Company's internal plans. However, during the same time period, the Company has
expended significant amounts for capital expenditures, product research and
development, sales, support and consulting expenses as the Company expanded its
operations in anticipation of significant revenue growth. This has resulted in
significant net cash outlays over the last twothree years. Although the Company has
increased its revenues,
reduced staffing levels and related expenses and improved operating performance,
the Company's expenses continue to exceed its revenues. Accordingly, to achieve
profitability and positive cash flow, it is necessary for the Company to
increase revenues or continue to reduce expenses. Management believes that the
recent general release of thenew or enhanced versions of products described
above under "Product Research and Development" has significantly
strengthened the product portfolio.lines. Additionally, the SMS Remarketing Agreement has
significantly expanded the sales distribution capabilities, and management
believes that market opportunities are such that the Company should be able to
continue to increase its revenues. However, there can be no assurance the Company will be
able to continue to increase its revenues.
At October 31, 1998,July 31,1999, the Company had unrestricted cash and investmentscash equivalents of $3,986,388. Investments$4,001,122. Cash
equivalents consist primarily of U.S. Government obligations with
maturities ranging from one month to twelve months.
In December, 1998,overnight bank repurchase agreements. Under the terms of
its loan agreement, the Company announced that it has retained CIBC Oppenheimer
Corporation asagreed to maintain a financial advisor to evaluate alternatives for maximizing
shareholder value. If overminimum cash and
investment balance of $2,400,000.
Management has significantly reduced operating expenses throughout 1998 and the
nextfirst six months of fiscal year 1999, and believes the Company is well
positioned to achieve quarterly break-even or profitability, before interest,
expense, in the second half of fiscal year 1999 with modest increases in
revenues. However, based upon current expenditure levels and in the absence of
increased revenues, dothe Company would continue to operate at a loss.
Accordingly, for the foreseeable future, management will need to continually
assess its revenue prospects compared to its current expenditure levels. If it
does not appear likely that revenues will increase, it will be necessary for the Company to
further reduce operating expenses or secureraise cash through additional borrowings,
which will require lender approval,the sale of assets, or other equity financing. CIBC
OppenheimerCertain of these actions will
assist the Company in this process.require lender approval. However, there can be no assurance the Company will be
successful in itsany of these efforts. If it is necessary to significantly reduce
operating expenses, this could have an adverse affect on future operating
performance.
In December, 1998, the Company retained CIBC World Markets [ formerly CIBC
Oppenheimer Corp.] as a financial advisor to help the Company plan for future
capital needs and assist the Company with decisions that maximize shareholder
value.
To date, inflation has not had a material impact on the Company's revenues or
income.expenses. Additionally, the Company does not have any significant market risk
exposure at July 31, 1999.
SIGNED AGREEMENTS - BACKLOG
LanVision enters into master agreements with its customers to specify the scope
of the system to be installed, services to be provided by LanVision, the agreed
upon aggregate price, and the timetable for implementation. The master agreement
typically provides that the Company will deliver the system in phases pursuant
to the customer's purchase orders, thereby allowing the customer
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21flexibility 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. Certain Master Agreements allow customers to cancel
subsequent phases without penalty. 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 this trend will
continue in the future.
At OctoberJuly 31, 1998,1999, the Company's customers (excluding customers of the Virtual
Healthware Services division) had entered into master agreements for systems and
related services (excluding support and maintenance, and transaction
based revenues for VHS)maintenance) which had not yet been delivered,
installed and accepted which, if fully performed, would generate sales of
approximately $9,000,000. See
"Results of Operations: General" for a description$6,073,000, compared with $6,616,000 and $6,881,000 at the end of
the Company's agreements
with customers.first quarter of fiscal 1999 and the end of fiscal 1998, respectively. The
systems and services related to the agreements are currently expected to be delivered or performed, based upon customer implementation schedules, over the next two to
three years. In addition, the Company anticipates approximately $2,000,000 in
transaction-based fee revenues for the Virtual Healthware Services division's
new client over the four-year life of the contract. Because implementation and
service bureau transaction-based fees are dependent upon the customer's schedule
and usage, the Company is unable to predict accurately the amount of these
revenues in future periods. As previously discussed, an additional $1,270,000 in
revenues on systems sold by SMS will probable be recognized in the third
quarter.
The Company's master agreements also generally provide for an initial
maintenance period and give the customer the right to subscribe for maintenance
and support services on a monthly, quarterly or annual basis. In addition,Maintenance and
support revenues for fiscal years 1998 and 1997 and 1996 were approximately
$2,755,000, $2,151,000 and $1,186,000, respectively and are expected to increase
as new or expanded systems are installed.
The commencement of revenue recognition varies depending on the size and
complexity of the system, the implementation schedule requested by the customer
and usage by customers of the VHS division has entered intoservice bureau operations. Therefore,
LanVision is unable to accurately predict the revenue 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 its master agreement or delay
installations. A termination or installation delay of one or more phases of an
agreement, which is expected
to generate revenues in excess of $5,500,000 overor the remaining lifefailure of the contract.
Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its cash balances, in excess of its current needs, in U.S.
Government Securities. The Company does not invest for the purposes of trading
in securities, however, the portfolio is managed and invested for maximum
returnto procure additional agreements, could
have a material adverse effect on the investment. The marketable securities at October 31, 1998, which
are recorded at a fair valueCompany's business, financial condition
and results of $5,014,435 and include unrealized gains of
$25,152, have exposure to price risk. This risk is estimated, absent any
economic justification for the selection of a different amount, as the
potential loss in fair value resulting from a hypothetical 10% adverse change
in price quoted by dealers and amounts to $501,444. Actual results may differ.
The fair market values of investment securities are based on the quoted market
prices at the reporting date for those investments. The estimated fair market
value of investment securities by contractual maturity at October 31, 1998 is as
follows: $5,014,435 in 1998.operations.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not currently engaged in any material adverse litigation.
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Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan AgreementAgreement.
Item 5. OTHER INFORMATION
On December 2, 1998,In July, 1999, the Company announced that it has retained CIBC Oppenheimer
Corporationmoved its Corporate Headquarters from offices at One
Financial Way, Cincinnati, OH to assist the Company in evaluating several possible strategies to
enhance
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shareholder value and optimize LanVision's position in the marketplace. (See
also Part I, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.4700 Duke Drive, Suite 170, Mason, OH,
45040-9374.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a) First Amendment to the Employment10 Lease Termination Agreement among LanVision
Systems, Inc., LanVision, Inc. and J. Brian Patsy.
10(b) First Amendment to the Employment Agreement among LanVision
Systems, Inc., LanVision, Inc. and Eric S. Lombardo.
10(c) First Amendment to Loan and Security Agreement between The
HillStreet Fund, L.P. and LanVision Systems, Inc.
11 Computation of Earnings (Loss) Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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 11, 1998September 14, 1999 By: /s/ J. BRIAN PATSY
------------------------ -----------------------------------------------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: December 11, 1998September 14, 1999 By: /s/ THOMAS E. PERAZZO
------------------------ -----------------------------------------------------------------------------
Thomas E. Perazzo
Vice President, Chief Operating
Officer, Chief Financial Officer and
Treasurer
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INDEX TO EXHIBITS
Exhibit No. Exhibit
10(a) # First Amendment to the Employment Agreement among LanVision Systems, Inc.,
LanVision, Inc. and J. Brian Patsy...................................................
10(b) # First Amendment to the Employment Agreement among LanVision Systems, Inc.,
LanVision, Inc. and Eric S. Lombardo.................................................
10(c) First Amendment to Loan and Security Agreement between The HillStreet Fund, L.P. and
LanVision Systems, Inc...............................................................
11 Computation of Earnings (Loss) Per Common Share......................................
27 Financial Data Schedule..............................................................
- ----------------
# Management Contracts and Compensatory Agreements.
23INDEX TO EXHIBITS
Exhibit No. Exhibit
----------- -------
10 Lease Termination Agreement
11 Computation of Earnings (Loss) Per Common Share
27 Financial Data Schedule
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