UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number Z - 24196
MEDPLUS, INC.
(Exact name of registrant as specified in its charter)
Ohio (State or other jurisdiction of incorporation or organization) | | | 48-1094982 (I.R.S. Employer Identification No.) |
| |
|
8805 Governor's Hill Drive, Suite 100
Cincinnati, OH 45249
(Address of principal executive offices)
(513) 583-0500
(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 report(s), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No _____
As of June 11, 2001, there were 8,175,267 shares of the registrant's common stock without par value issued and outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
| | | Three Months | | Three Months |
| | | Ended | | Ended |
| | | April 30, | | April 30, |
| | | 2001 | | 2000 |
Revenues: | | | | | |
Systems | | $ | 1,223,600 | | 1,376,300 |
Support and consulting | | | 1,364,800 | | 1,524,100 |
Total revenues | | | 2,588,400 | | 2,900,400 |
| | | | | |
Cost of revenues: | | | | | |
Systems | | | 775,300 | | 653,900 |
Support and consulting | | | 1,370,700 | | 903,700 |
Total cost of revenues | | | 2,146,000 | | 1,557,600 |
Gross profit | | | 442,400 | | 1,342,800 |
| | | | | |
Operating expenses: | | | | | |
Sales and marketing | | | 798,400 | | 856,200 |
Research and development | | | 971,000 | | 511,000 |
General and administrative | | | 1,062,900 | | 753,700 |
Total operating expenses | | | 2,832,300 | | 2,120,900 |
Operating loss | | | (2,389,900) | | (778,100) |
| | | | | |
Other income (expense): | | | | | |
Interest expense | | | -- | | (143,100) |
Other income (expense), net | | | (422,700) | | 47,100 |
| | | | | |
Total other income (expense), net | | | (422,700) | | (96,000) |
Loss before income tax benefit | | | (2,812,600) | | (874,100) |
Income tax benefit | | | -- | | -- |
Net loss | | | (2,812,600) | | (874,100) |
| | | | | |
Preferred stock dividend requirements | | | (82,000) | | (82,000) |
| | | | | |
Loss attributable to common shareholders | | $ | (2,894,600) ======== | | (956,100) ======= |
| | | | | |
Loss per share - basic and diluted: | | $ | (0.35) ======== | | (0.15) ======= |
| | | | | |
Weighted average number of shares of common stock outstanding | | |
8,164,873======== | |
6,206,885======= |
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
| | April 30, | | January 31, |
| | 2001 | | 2001 |
| | (unaudited) | | |
ASSETS | | | | |
| | | | |
Current assets: | | | | |
Cash and cash equivalents | $ | 1,208,600 | | 1,986,600 |
Accounts receivable, less allowance for doubtful accounts of | | | | |
$149,000 at April 30, 2001 and $155,000 at January 31, 2001 | | 2,796,900 | | 4,095,200 |
Other receivables | | 6,200 | | 6,700 |
Costs in excess of billings | | 599,800 | | 571,500 |
Inventories | | 273,400 | | 385,300 |
Prepaid expenses | | 744,900 | | 582,900 |
Total current assets | | 5,629,800 | | 7,628,200 |
| | | | |
Capitalized software development costs, net | | 4,212,800 | | 4,128,400 |
Fixed assets, net | | 1,377,900 | | 1,396,300 |
Other assets | | 53,900 | | 53,800 |
| $ | 11,274,400 ======== | | 13,206,700 ======== |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
| | | | |
Current liabilities: | | | | |
Accounts payable | $ | 1,482,900 | | 1,252,600 |
Accrued expenses | | 1,946,000 | | 1,725,200 |
Billings in excess of cost | | 537,400 | | 326,900 |
Deferred revenue | | 1,685,600 | | 1,635,900 |
Total current liabilities | | 5,651,900 | | 4,940,600 |
| | | | |
Shareholders' equity: | | | | |
Preferred stock with liquidation preferences, $.01 par value, | | | | |
authorized 5,000,000 shares; issued 2,371,815 shares | | 23,700 | | 23,700 |
Class A preferred stock, $.01 par value, authorized | | | | |
5,000,000 shares, no issued shares | | --- | | --- |
Common stock, no par value, authorized 15,000,000 shares; | | | | |
issued 8,375,267 shares at April 30, 2001 and 8,343,639 shares | | | | |
at January 31, 2001 | | --- | | --- |
Additional paid-in capital | | 31,879,700 | | 31,867,400 |
Equity line of credit-warrants | | --- | | (150,300) |
Treasury stock, at cost, 200,000 shares | | (863,500) | | (863,500) |
Accumulated deficit | | (25,398,100) | | (22,585,500) |
Unearned stock compensation | | (19,300) | | (25,700) |
Total shareholders' equity | | 5,622,500 | | 8,266,100 |
| | | | |
| $ | 11,274,400 ======== | | 13,206,700 ======== |
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
| | | Three Months | | Three Months |
| | | Ended | | Ended |
| | | April 30, | | April 30, |
| | | 2001 | | 2000 |
Cash flows from operating activities: | | | | | |
Net loss | | $ | (2,812,600) | | (874,100) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Amortization of capitalized software development costs | | | 344,800 | | 211,200 |
Depreciation of fixed assets | | | 169,000 | | 112,800 |
Amortization of unearned stock compensation costs | | | 6,400 | | 15,900 |
Amortization of deferred costs related to long-term debt | | | -- | | 22,600 |
Expenses associated with warrants for equity line of credit | | | 200,300 | | -- |
Realized loss on sales of fixed assets | | | 5,900 | | -- |
Provision for loss on doubtful accounts | | | (6,000) | | (41,000) |
Changes in assets and liabilities: | | | | | |
Accounts receivable | | | 1,304,300 | | (82,900) |
Other receivables | | | 500 | | (27,600) |
Costs in excess of billings | | | (28,200) | | (14,600) |
Inventories | | | 111,900 | | 79,400 |
Prepaid expenses and other assets | | | (162,100) | | (140,400) |
Accounts payable and accrued expenses | | | 399,600 | | 105,700 |
Deferred revenue | | | 260,200 | | (659,900) |
Net cash used in operating activities | | | (206,000) | | (1,292,900) |
| | | | | |
Cash flows from investing activities: | | | | | |
Capitalization of software development costs | | | (429,300) | | (455,200) |
Purchases of fixed assets | | | (156,500) | | (112,800) |
Net cash used in investing activities | | | (585,800) | | (297,200) |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of common stock, net of issuance costs | | | 13,800 | | 83,200 |
Proceeds from borrowings on line of credit | | | -- | | 2,542,000 |
Repayments on line of credit | | | -- | | (1,654,500) |
Principal payments on capital lease obligations | | | -- | | (7,900) |
Net cash provided by financing activities | | | 13,800 | | 962,800 |
Net decrease in cash and cash equivalents | | | (778,000) | | (627,300) |
Cash and cash equivalents, beginning of period | | | 1,986,600 | | 3,471,000 |
Cash and cash equivalents, end of period | | $ | 1,208,600 ======= | | 2,843,700 ======= |
Interest paid | | $ | -- ======= | | 59,200 ======= |
Income taxes paid | | $ | -- ======= | | -- ======= |
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(1) Description of the Business
MedPlus(R), Inc. (the "Company") is a leading developer and integrator for clinical connectivity and data management solutions for health care organizations and clinicians. These solutions efficiently and securely collect, store, manage and retrieve clinical and other information within an organization, enterprise or community via virtual private networks and/or the Internet. The Company also provides workflow and content management solutions to customers in a variety of industries. The Company classifies its business in two operating segments: (1) Health Care Solutions and (2) Workflow and Content Management.
Health Care Solutions: The Company's health care solutions include eMaxxTM (physician-focused clinical integration portal solution), ChartMaxxTM(electronic patient record solution) and OptiMaxx(R) (records storage and retrieval solution). These products have been implemented in more than 125 hospitals throughout North America.
Workflow and Content Management: The Company's Universal Document Management Systems, Inc. subsidiary (Universal Document) develops and sells Step2000(R), a workflow content management and application development software product that coordinates the utilization of information on an enterprise-wide basis. Universal Document serves customers in a variety of industries through value added resellers and OEMs.
(2) Summary of Significant Accounting Policies
(a) Interim Financial Information
The consolidated financial statements and the related notes thereto are unaudited and have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, such unaudited financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the information set forth therein.
(b) Significant Accounting Policies
A description of the Company's significant accounting policies can be found in the footnotes to the Company's annual consolidated financial statements for the year ended January 31, 2001 included in its Annual Report filed on Form 10-KSB. The accompanying consolidated financial statements should be read in conjunction with those footnotes. The results for interim periods are not necessarily indicative of results to be expected for the year.
(c) Earnings (Loss) Per Share
Basic earnings (loss) per share is based on the weighted average number of shares of common stock outstanding for each period excluding any shares related to nonvested employee stock awards. Dilutive securities have not been included in the weighted average shares used for the calculation of diluted earnings per share in periods of losses from continuing operations because the effect of such securities would be antidilutive.
(d) Supplemental Cash Flow Information
On a quarterly basis, the Company issues dividends on its Preferred Stock. Certain holders of Preferred Stock have elected to receive their dividend in the form of common stock. During first quarter fiscal years 2002 and 2001, the Company issued 8,577 and 6,003 shares, respectively, of its common stock in satisfaction of its dividend requirement. These common stock dividends issued during fiscal 2002 and 2001 had a fair value at the date of grant
of $80,000 in each year. As these are non-cash transactions, they have not been presented in the Consolidated Statements of Cash Flows.
(3) Debt and Equity Financing
In April 1999, the Company entered into an Agreement (the "Agreement") with three investment firms to obtain $6,100,000 in debt and equity financing. The terms of the Agreement provide for financing of $2,000,000 in subordinated debentures (the "Notes") and $4,100,000 in Series A Convertible Preferred Stock (the "Preferred Stock"). Certain terms of the Agreement were amended in June 1999 and in May 2000. The Notes originally issued in April 1999, were repaid in June, 2000. The Company has no further commitment related to these notes.
In June 1999, the Company issued to the investors 2,371,815 of Preferred Stock, with a $ .01 stated par value, at a purchase price of $1.729 per share for gross proceeds of $4,100,000 (net proceeds of $3,773,047). The Preferred Stock is convertible into the Company's common stock on a one-for-one basis. However, the conversion ratio could be subject to certain price and dilution adjustments which essentially place restrictions on the Company's ability to issue warrants, options or other rights (except to employees), issue convertible securities or stock dividends, or make changes in option prices or conversion rates. The Company is required to pay a cumulative dividend quarterly at a rate of 4% per share for the first three years, increasing to 10% thereafter. The market rate related to the dividends is estimated at an annual rate of 8%. The Preferred Stock (a) includes voting rights, (b) receives preferential treatment upon liquidation of the Company and (c) converts into common shares upon certain events. In addition, upon meeting certain requirements specified in the Agreement, the Company can elect at its option to convert the Preferred Stock into common shares of the Company. The Company records dividends on the preferred stock on a quarterly basis. Although the Company is only required to pay dividends at an annual rate of 4% for the first three years, the preferred stock dividend requirement disclosed in the consolidated statement of operations has been based upon the Company's estimated market rate of 8%. The incremental 4% had no impact on the financial condition or cash flows of the Company, but negatively impacts the Company's loss per share-basic and diluted.
In conjunction with the Notes and Preferred Stock, the Company issued the following warrants which are convertible into Preferred Stock: 281,137 five-year warrants at an exercise price of $1.66 and 721,702 ten-year warrants at an exercise price of $1.66. Additionally, the Company granted 25,000 warrants in conjunction with a subsequent amendment to the Agreement. These warrants are convertible into Common Stock at an exercise price of $5.73.
(4) Quest Diagnostics Capital Investment
In June 2000, the Company entered into an agreement with Quest Diagnostics Incorporated ("Quest Diagnostics"), a leading provider of diagnostic testing, information and services, to provide approximately $9,500,000 in equity financing to the Company. Based on the terms of the agreement, Quest Diagnostics acquired 1,918,465 shares of the Company's common stock, representing 18.4% of the then-outstanding voting stock of the Company. In addition, the Company issued 2,884,513 common stock warrants with an exercise price of $5.73 providing for a then 30% interest in the Company's total preferred, common and common stock equivalents. These warrants expire in December 2001. The exercise price for the warrants is subject to certain antidilution provisions related to future issuance of the Company's common stock and convertible securities. The agreement also provides Quest Diagnostics with a position on the Company's Board of Directors. In conjunction with the equity financing agreement, the Company also executed a national sales and marketing agreement with Quest Diagnostics.
(5) Related Party Transactions
For the past three fiscal years, Quest Diagnostics Incorporated ("Quest Diagnostics") has been a customer of the Company's OptiMaxx product and most recently, within the Company's eHealth business. Due to the capital investment in the Company by Quest Diagnostics in June 2000, Quest Diagnostics became a related party of the Company. Included in the Company's Consolidated Statement of Operations for the first quarters of fiscal 2002 and 2001 are revenues from Quest Diagnostics of $140,200 and $141,300, respectively. The Company also had accounts receivable from Quest Diagnostics included in its consolidated balance sheet of $86,700 at April 30, 2001 and $571,000 as of January 31, 2001.
(6) Operating Segments
Based upon management's organization of its products and services, the company has two reportable segments: Healthcare Solutions (ChartMaxx, eMaxx, OptiMaxx, and FutureCore), and Workflow and Content Management (Universal Document). The Company's management evaluates performance of each segment based on profit or loss from operations before allocation of corporate expenses, unusual, infrequent and extraordinary items, interest and income taxes. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the Consolidated Financial Statements). All of the Company's operations are located in the United States. The Company primarily sells to customers within the United States.
The following table presents the revenues and segment operating results of the Company by operating segment:
| | Three Months Ended |
| | April 30, | | April 30, |
| | 2001 | | 2000 |
Revenues: | | | | |
Healthcare solutions | $ | 1,868,600 | | 2,527,300 |
Workflow and content management | | 722,400 | | 375,800 |
Less intercompany | | (2,600) | | (2,700) |
Total revenues | $ | 2,588,400 ======= | | 2,900,400 ======= |
| | | | |
Segment operating results: | | | | |
Healthcare solutions | $ | (1,922,100) | | (269,300) |
Workflow and content management | | 421,100 | | 141,000 |
Total segment operating loss | | (1,501,000) | | (128,300) |
Corporate expenses | | (888,900) | | (649,800) |
Total operating loss | | (2,389,900) | | (778,100) |
Other income (expense), net | | (422,700) | | (96,000) |
Loss before income tax benefit | $ | (2,812,600) ======== | | (874,100) ======= |
(7) Liquidity and Quest Diagnostics Merger
Since inception in 1991, the Company has funded its operations, working capital needs and capital expenditures primarily through a combination of cash generated by operations, the sale of operating assets, debt financing, offerings of its common stock to the public and a preferred share equity financing. In order to continue its strategy and remain competitive in the markets in which it operates, the Company will require significant sources of cash.
<R>On April 25, 2001, the Company and Quest Diagnostics executed a definitive merger agreement, the closing of which is subject to a number of conditions customary in such transactions, such as, but not limited to, obtaining majority shareholder approval, the absence of material adverse changes in the business of MedPlus and the timely receipt of all necessary governmental approvals and third-party consents, which if not satisfied, could delay or prevent the closing or could otherwise cause the outcome to be materially different.
Additionally, in order for the Company to meet its short-term operating requirements, Quest Diagnostics has provided the Company with a secured line of credit arrangement of up to $5,000,000. This agreement extends until February 1, 2002 and is secured by all assets of the Company.
In the event the merger does not occur, MedPlus would have to reduce its expenditures, extend its line of credit with Quest Diagnostics and pursue alternative financing in an effort to satisfy its obligations. In the event that sufficient financing was not available to allow the Company to meets its obligations, the Company may be unable to continue as a going concern. </R>
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
MedPlus(R), Inc. (the "Company") is a leading developer and integrator for clinical connectivity and data management solutions for healthcare organizations and clinicians. These solutions efficiently and securely collect, store, manage and retrieve clinical and other information within an organization, enterprise or community via virtual private networks and/or the Internet. The Company also provides workflow and content management solutions to customers in a variety of industries. The Company classifies its business in two operating segments: (1) Health Care Solutions and (2) Workflow and Content Management.
Health Care Solutions: The Company's health care solutions include eMaxxTM (physician-focused web-based clinical integration portal solution), ChartMaxxTM (complete electronic patient record solution) and OptiMaxx(R)(records storage and retrieval solution). These products have been implemented in more than 125 hospitals throughout North America and they currently meet Federal privacy and security laws, as well as current regulatory guidelines.
Workflow and Content Management: The Company's Universal Document Management Systems, Inc. subsidiary (Universal Document) develops and sells Step2000(R), a workflow content management and application development software product that coordinates the utilization of information on an enterprise-wide basis. Universal Document serves customers in a variety of industries through value-added resellers and OEMs.
<R>On April 2, 2001, the Company announced that its board of directors authorized management to enter discussions for an acquisition of the Company by Quest Diagnostics Incorporated ("Quest Diagnostics"), a related party to the Company. This action was taken by the board of directors after concluding that the current operating performance of the Company, coupled with the recent and continued downturn in the capital markets, have adversely affected the Company's ability to raise the debt or equity financing necessary to fund the Company's ongoing operations. Quest Diagnostics, which owns approximately 18% of MedPlus' outstanding voting stock, has proposed to acquire all of the remaining outstanding shares of preferred and common stock at $2.00 per share in cash. The Company, upon the direction of its Board of Directors, obtained an opinion from an independent third party indicating that the merger consideration was fair to MedPlus shareholders from a financial point of view. On April 25, 2001, the Company and Quest Diagnostics executed a definitive merger agreement, the closing of which is contingent upon various items including obtaining majority shareholder approval of the transaction.</R>
Revenue Recognition Cycle
The Company's revenues are derived primarily from systems sales, including software licenses and hardware, support contracts, installation, implementation, training and consulting services.
Revenue related to system sales is recognized in compliance with American Institute of Certified Public Accountants Statements of Position ("SOP") 97-2, 98-4 and 98-9, which pertain to Software Revenue Recognition. Due to the complexity or terms of certain customer contracts, various system sales are recognized under the percentage of completion method of accounting in accordance with Accounting Research Bulletin No. 45 and SOP 81-1, which pertain to Long-term Construction-Type Contracts.
For OptiMaxx and Universal Document system sales, revenue is generally recognized upon shipment. Revenue recognition for ChartMaxx systems generally commences when a contract is signed and the system is configured and shipped. If a contract requires the Company to perform services or provide modifications that are deemed significant to system acceptance, the Company recognizes revenue for the entire contract under the percentage of completion method of accounting. The Company recognizes eMaxx revenue under an Application Service Provider ("ASP") model on a transactional basis. To date, revenue for this business has not been material. Revenues from installation, implementation, training, and consulting services are recognized in the period in which the services are performed. Revenues from support contracts are recognized ratably over the term of the contract.
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. The sales cycle for the Company's ChartMaxx systems is typically six to eighteen months from initial contact to the execution of a sales agreement. As a result, the sales cycle causes variations in quarter to quarter results. These agreements cover the entire implementation of the system and specify the implementation schedule, which typically takes place in one or more phases. The agreements generally provide for the licensing of the Company's software and third party software with a one-time perpetual license fee that is adjusted depending on the number of concurrent users using the software. Third party hardware is usually sold outright, with a one-time fee charged for installation and training. Site specific customization, interfaces with existing customer systems and other consulting services are sold on a fixed fee or a time and material basis.
Fluctuations in Results of Operations
The Company has historically experienced significant quarterly and annual fluctuations in revenues and operating results that may continue in the future. The Company's revenues have fluctuated due to the length of the sales cycle, the number and timing of systems sales, and the timing of installation, implementation and consulting services. As a significant percentage of the Company's operating expenses are fixed, quarterly operating results will vary with the fluctuation in revenues. As a result, period to period comparisons of the Company's past operating results may not be necessarily indicative of future operating results of the Company.
History of Operating Losses
The Company has historically incurred operating losses from continuing operations and as of April 30, 2001 had an accumulated deficit of $25.4 million. The Company's software development efforts, the development of new products and the expansion of its marketing, sales and customer support staff, among other aspects of the Company's strategy, will require significant expenditures over the next several years that may not be offset by revenues. The Company's ability to achieve and maintain significant revenues or profitability will be dependent upon its ability to obtain and maintain demand from customers for its current and future products. As a result, there can be no assurance that the Company will ever achieve significant revenues or profitable operations.
Results of Operations
Three Months Ended April 30, 2001 and April 30, 2000
Comparisons in this section are consistent with the presentation located in the Company's Consolidated Statement of Operations located at Item 1. Financial Statements of this 10-QSB. Please refer to Item 1 for the income statement depicting the amounts in this narrative.
Revenues: Revenues for the three months ended April 30, 2001 ("first quarter of fiscal 2002") were $2,588,400, a decrease of $312,000 or 11%, from $2,900,400 for the three months ended April 30, 2000 ("first quarter of fiscal 2001"). System sales have decreased by $152,700, or 11%, from the comparable period in the prior year. Although the Company has executed three contracts with various hospitals in the current quarter, compared to two in the comparable previous quarter, based upon accounting rules relating to the recognition of revenue, the Company has deferred the recognition of revenue related to system sales for certain contracts to future quarters. Support and consulting revenues of $1,364,800 for the first quarter of fiscal 2002 decreased $159,300 or 11%, from the first quarter of fiscal 2001. With the exception of $500,000 recognized in the prior year for a significant contract, revenues for the Company's ChartMaxx and OptiMaxx product lines were comparable between the two periods. The Company's E-Health business is still in the preliminary stages of development and significant revenues from this initiative are not expected in the near-term.
Gross Profit: Gross profit for the three months ended April 30, 2001 was $442,400, or 17% of revenues, compared to $1,342,800, or 46% of revenues, for the three months ended April 30, 2000. The gross profit on systems sales decreased from 52% of revenue to 36% of revenue from the first quarter of fiscal 2001. This decline in margin is largely attributable to increased third party software pricing as well as the product mix related to system sales. The gross profit percentage on support and consulting revenues decreased from 41% in the first quarter of fiscal 2001 to 0% in the first quarter of fiscal 2002. The sharp decline in margin relates to the incurrence of E-Health related costs of approximately $300,000 in the current year, with no related revenues in this product line. Although the Company expects to continue incurring costs, the Company's E-Health product is still in the preliminary stages of marketing, and significant revenues are not anticipated for the remainder of the year.
Operating Expenses: Total operating expenses for the first quarter of fiscal 2002 were $2,832,300, an increase of $711,400, or 34%, compared to $2,120,900 for the first quarter of fiscal 2001. Sales and marketing expenses declined by 7% related primarily to a decrease in personnel in this area between the two periods. The Company does not anticipate that this will be a continuing trend in this area. Research and development expenses increased $460,000, or 90%, compared to the first quarter of fiscal 2001. The Company believes that product development related activities are the cornerstone to maintaining a competitive position in the market and will continue to invest in these types of activities. Most significantly, the Company has increased its investment in E-health related research and development, and additionally has increased its personnel related to its ChartMaxx product line as the Company has been working toward a major upgrade of this product. General and administrative expenses increased by $309,200 or 41%, over the comparable period of the prior year. Combined with modest growth in this type of expense, the Company has incurred costs related to legal and valuation fees, of approximately $220,000 in connection with the proposed merger of the Company with Quest Diagnostics.
Other Income (Expense): Other income (expense), net, consists primarily of interest income, interest expense and other non-operating expenses. In fiscal 2002, the Company had no outstanding debt, therefore, the Company incurred no interest expense. Other expense in fiscal year 2002 includes various items related to the probable termination of its equity line of credit agreement with a private investment firm including a $250,000 termination fee and write-off of $200,300 for deferred costs related to warrants issued in connection with this transaction.
Income Tax Benefit: The Company's did not recognize an income tax benefit relating to its net operating losses for the first quarters of fiscal 2002 or 2001 as the realization of these benefits did not meet the recognition criteria at the end of either period due to the Company's history of operating losses. The Company's ability to recognize the full benefit of its net operating loss in future periods will be dependent upon the generation of future taxable income, limitations imposed by the Internal Revenue Service, and other matters potentially affecting the realizability of these carryforwards.
Preferred Stock Dividend Requirements: The Company records quarterly dividends on its preferred stock. Although the Company is only required to pay dividends at an annual rate of 4% for the first three years, the preferred stock dividend requirement disclosed in the Consolidated Statement of Operations has been calculated using the Company's estimated market rate of 8%. A market rate of 8% was utilized as the dividends are considered increasing rate dividends for accounting purposes. The incremental 4% has no impact on the financial condition or cash flows of the Company, but negatively impacts the Company's earnings (loss) per common share-basic and diluted.
Loss Attributable to Common Shareholders and Loss Per Common Share: Net Loss has been adjusted for the dividend requirements related to the preferred shares issued to derive the "Loss Attributable to Common Shareholders." This amount has been utilized in the calculation of net loss per common share.
Liquidity and Capital Resources
The Company's business requires significant amounts of working capital to finance new product research and development, its strategic focus on the eHealth market, the expansion of its sales and marketing organization, anticipated revenue growth, capital expenditures and strategic investments. The Company's principal uses of cash since inception have been for funding operations, capital expenditures, research and development activities and investments in and advances to companies that are deemed to have strategic value to the Company. The Company has funded its operations, working capital needs and capital expenditures primarily through a combination of cash generated by operations, the sale of operating assets, debt financing, offerings of its common stock to the public and a preferred share equity financing. In order to continue its strategy and remain competitive in the markets in which it operates, the Company will require significant sources of cash.
On April 25, 2001, the Company and Quest Diagnostics executed a definitive merger agreement, the closing of which is subject to a number of conditions customary in such transactions, such as, but not limited to, obtaining majority shareholder approval, the absence of material adverse changes in the business of MedPlus and the timely receipt of all necessary governmental approvals and third-party consents, which if not satisfied, could delay or prevent the closing or could otherwise cause the outcome to be materially different.
Additionally, in order for the Company to meet its short-term operating requirements, Quest Diagnostics has provided the Company with a secured line of credit arrangement of up to $5,000,000. This agreement extends until February 1, 2002 and is secured by all assets of the Company.
In the event the merger does not occur, MedPlus would have to reduce its expenditures, extend its line of credit with Quest Diagnostics and pursue alternative financing in an effort to satisfy its obligations. In the event that sufficient financing was not available to allow the Company to meets its obligations, the Company may be unable to continue as a going concern.
Common Stock Repurchase Program
The Company's Board of Directors authorized a common stock repurchase program in November 1996. Under the program the Company may repurchase up to 500,000 shares of the Company's common stock. No shares were repurchased during the first quarters of Fiscal 2002 or Fiscal 2001. On a cumulative basis, the Company has repurchased 200,000 shares.
Cash Flows from Operations and Liquidity
Cash flows used by operating activities for the first quarter of fiscal 2002 were $192,200. The principal uses of cash include the Company's net loss position, offset by amortization and depreciation and by various changes in working capital accounts. In fiscal 2001, cash flows used by operating activities were $1,292,900.
Other Risk Factors
The Company manufactures and sells software technology in the health care industry. As a result, there are certain risks inherent with operating in these markets including the competitiveness of the software technology industry, the Company's dependence on market acceptance of existing and future products, technological changes in the industry, reliance on key partnerships and the Company's reliance on the health care industry. The Company has also been historically dependent on certain key customers. Internally, the Company must also focus on managing its growth, including retaining and attracting key employees and obtaining the funding necessary to finance its growth strategy. Although management of the Company has been focused on achieving its business plan, there is no guarantee that the Company will be able to achieve profitability under these market conditions.
<R>Material Commitment
In June 2000, the Company executed a national sales and marketing agreement with Quest Diagnostics. In exchange for the promotion and marketing of the Company's product, the Company will pay Quest Diagnostics a referral fee equal to 3% of the gross revenue generated in connection with the sale. To-date, no fees have been paid as no sales have been earned under the contract.</R>
Forward Looking Statements
The Company notes that many of the statements made herein are forward-looking statements. As such, in addition to the risk factors addressed herein, factors may occur which could cause actual events to differ materially from those anticipated in these statements.
For example, although the Company anticipates sales of ChartMaxx and OptiMaxx will increase in fiscal 2002, there can be no assurance that an increase will occur. Trends in the market, acceptance of new technology and government regulation could have a substantial impact on Company sales. In addition, as noted, the Company is also focusing on its E-Health strategy, which will require significant cash outlays in order to realize its full potential. There can be no assurance as to the extent or timing of the Company's success in achieving these goals.
Furthermore, the Company's ability to assist its customers with HIPAA compliance and other regulatory compliance matters will depend in large part on the version of HIPAA regulations eventually adopted and updates to those and other regulations from time to time. In addition, the Company's involvement in the online health care industry will necessarily require its partnership with third party vendors, the specific terms and conditions of which will not be finalized until the requirements of that industry are better understood.
PART II. OTHER INFORMATION
Items 1-5. None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are hereby filed as part of this Form 10-QSB:
Exhibit | | | | | | | | | Sequentially |
Number | Description of Exhibits | | | | | | Numbered Page |
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3 | | Articles of Incorporation and Code of Regulations | | | See Note 1 |
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10.1 | | Agreement and Plan of Merger dated as of April 25, 2001 by and among MedPlus, Inc., Quest Diagnostics Incorporated and Q-M Merger Sub, Inc. | | See Note 2 |
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10.2 | | Voting Agreement dated as of April 25, 2001 by and among Quest Diagnostics Incorporated and the shareholders of the Company named therein. | | See Note 2 |
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10.3 | | Credit Agreement dated as of April 25, 2001 by and among MedPlus, Inc. and Quest Diagnostics Incorporated. | | See Note 2 |
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10.4 | | Security Agreement dated as of April 25, 2001 made by MedPlus, Inc. and the additional grantors named therein to Quest Diagnostics Incorporated. | | See Note 2 |
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Note 1 Amended Articles of Incorporation are incorporated by reference to the Company's Annual Report on Form 10-KSB filed May 3, 2001 and the Company's Code of Regulations is incorporated by reference to the Registration Statement of Form SB-2, Registration No. 33-77896C, effective May 24, 1994.
Note 2 Filed as an Exhibit to Form 8-K on May 3, 2001.
(b) Form 8-K filed during the three month period ended April 30, 2001
On May 3, 2001, the Company filed a Form 8-K announcing the intended merger between the Company, Quest Diagnostics Incorporated, and Q-M Merger Sub, Inc.
SIGNATURE
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.
| | | | | | MedPlus, Inc. |
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Date: 9/13/01 | | | | By: /s/ Daniel A. Silber Daniel A. Silber * Vice President and Chief Financial Officer | |
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| | | | | *Pursuant to the last sentence of General Instruction G to Form 10-QSB, Mr. Daniel A. Silber has executed this Quarterly report on Form 10-QSB both on behalf of the registrant and in his capacity as its principal financial and accounting officer. | |
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