UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2000
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 48-1094982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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 15, 2000, there were 6,225,275 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, 2000 April 30, 1999
______________ _____________
Revenues:
Systems $ 1,376,300 2,882,200
Support and consulting 1,524,100 936,500
______________ _____________
Total revenues 2,900,400 3,818,700
Cost of revenues:
Systems 653,900 1,417,200
Support and consulting 903,700 898,700
______________ _____________
Total cost of revenues 1,557,600 2,315,900
______________ _____________
Gross profit 1,342,800 1,502,800
Operating expenses:
Sales and marketing 856,200 863,700
Research and development 511,000 286,200
General and administrative 753,700 883,600
______________ _____________
Total operating expenses 2,120,900 2,033,500
______________ _____________
Operating loss (778,100) (530,700)
Other income (expense):
Interest expense (143,100) (67,100)
Other income (expense), net 47,100 16,600
Synergis management and offering costs -- (179,700)
______________ _____________
Total other income (expense), net (96,000) (230,200)
______________ _____________
Loss before income tax benefit (874,100) (760,900)
Income tax benefit -- --
______________ _____________
Loss from continuing operations (874,100) (760,900)
Loss from discontinued
operations -- (318,900)
______________ _____________
Net loss (874,100) (1,079,800)
______________ _____________
Preferred stock dividend requirements (82,000) --
______________ _____________
Loss attributable to common shareholders $ (956,100) (1,079,800)
============== =============
Loss per share - basic and diluted:
Continuing operations $ (0.15) (0.13)
Discontinued operations -- (0.05)
______________ _____________
Net loss per share $ (0.15) (0.18)
============== =============
Weighted average number of shares of
common stock outstanding 6,206,885 6,050,198
============== =============
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, January 31,
2000 2000
_________________ _________________
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,843,700 3,471,000
Accounts receivable, less allowance for
doubtful accounts of $155,000 at April 30, 2000
and $196,000 at January 31, 2000 2,936,900 2,790,800
Other receivables 47,700 20,100
Costs in excess of billings 402,000 387,400
Inventories 336,300 415,700
Prepaid expenses 684,100 615,000
_________________ _________________
Total current assets 7,250,700 7,700,000
_________________ _________________
Capitalized software development costs, net 3,077,700 2,833,700
Fixed assets, net 1,184,800 1,184,800
Other assets 281,700 238,700
Net assets from discontinued operations -- 204,200
_________________ _________________
$ 11,794,900 12,161,400
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under
capital leases $ 10,300 18,200
Borrowings on line of credit 2,000,000 1,112,500
Accounts payable 1,083,500 929,300
Accrued expenses 1,568,800 1,549,900
Deferred revenue 1,460,600 2,120,500
_________________ _________________
Total current liabilities 6,123,200 5,730,400
_________________ _________________
Long-term notes payable 2,033,800 2,017,100
_________________ _________________
Total liabilities 8,157,000 7,747,500
_________________ _________________
Shareholders' equity:
Preferred stock with liquidation preferences, $.01
par value, authorized 5,000,000 shares;
issued 2,371,815 shares 23,700 23,700
Common stock, no par value, authorized 15,000,000
Shares; issued 6,415,232 shares at April 30, 2000
and 6,364,533 shares at January 31, 2000 - -
Additional paid-in capital 21,735,600 21,653,400
Treasury stock, at cost, 200,000 shares (863,500) (863,500)
Accumulated deficit (17,220,200) (16,346,100)
Unearned stock compensation (37,700) (53,600)
_________________ _________________
Total shareholders' equity 3,637,900 4,413,900
_________________ _________________
$ 11,794,900 12,161,400
================= =================
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, 2000 April 30, 1999
_________________ _________________
Cash flows from operating activities:
Net loss (874,100) (1,079,800)
Loss from discontinued operations -- (318,900)
_________________ _________________
Loss from continuing operations $ (874,100) (760,900)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Amortization of capitalized software development costs 211,200 170,500
Depreciation of fixed assets 112,800 98,800
Amortization of unearned stock compensation costs 15,900 15,800
Amortization of deferred costs related to long-term debt 22,600 --
Realized gain on sales of fixed assets -- (600)
Provision for loss on doubtful accounts (41,000) 400
Changes in assets and liabilities:
Accounts receivable (82,900) 216,100
Other receivables (27,600) (41,600)
Costs in excess of billings (14,600) (309,400)
Inventories 79,400 110,100
Prepaid expenses and other assets (140,400) 156,500
Accounts payable and accrued expenses 105,700 (262,800)
Deferred revenue (659,900) 183,200
Income taxes -- 525,000
_________________ _________________
Net cash provided by (used in)
continuing operations (1,292,900) 101,100
Net cash used in discontinued operations -- (4,600)
_________________ _________________
Net cash provided by (used in)
operating activities (1,292,900) 96,500
_________________ _________________
Cash flows from investing activities:
Capitalization of software development costs (455,200) (230,500)
Purchases of fixed assets (112,800) (14,300)
Proceeds from the sale of discontinued operations 270,800 --
Synergis acquisition and offering costs -- (157,400)
_________________ _________________
Net cash used in investing
activities (297,200) (402,200)
_________________ _________________
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs 83,200 --
Proceeds from borrowings on line of credit 2,542,000 2,622,700
Repayments on line of credit (1,654,500) (2,516,400)
Proceeds from long-term debt -- 2,000,000
Principal payments on capital lease obligations (7,900) (7,100)
Payment of debt issue costs -- (99,800)
_________________ _________________
Net cash provided by financing
activities 962,800 1,999,400
_________________ _________________
Net increase (decrease) in cash
and cash equivalents (627,300) 1,693,700
Cash and cash equivalents, beginning of period 3,471,000 1,024,500
_________________ _________________
Cash and cash equivalents, end of period $ 2,843,700 2,718,200
================= =================
Interest paid $ 59,200 80,200
================= =================
Income taxes paid $ -- --
================= =================
See accompanying notes to consolidated financial statements.
MEPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(1) Description of the Business
MedPlus is an E-Health business to business provider of web-based
information technology solutions that enable health care providers
to access and manage information efficiently and cost effectively.
The Company's solutions focus on various elements of process
analysis and redesign, document imaging and management and
workflow systems integration.
The Company's health care related products, included in its Health
Care Solutions segment, consist of the ChartMaxx[tm] and
E.Maxx[tm] Enterprise-wide Private Health Record Systems
("ChartMaxx" and "E.Maxx") and the OptiMaxx[R] Archival System
("OptiMaxx"). ChartMaxx is an enterprise-wide electronic private
health record system that provides users with a web-enabled,
patient-centric data repository of clinical and administrative
information provided from sources such as hospitals, reference
laboratories, clinics and the physician office. In addition, this
system assists health care organizations in complying with the
proposed Health Insurance Portability and Accountability Act of
1996 (HIPAA) regulations. E.Maxx is the web-enabled, transactional
based model of ChartMaxx. OptiMaxx is an optical disk-based
archival and retrieval system designed to meet the needs of health
care providers that require electronic storage and quick retrieval
of information. The Company's FutureCORE[R], Inc. subsidiary
("FutureCORE") provides process improvement and automation
services, primarily in the areas of medical records and patient
accounts departments within hospital and reference laboratories
and physician offices.
The Company's Universal Document Management Systems, Inc.
subsidiary, included in its Workflow and Content Management
Segment, develops and sells Step2000[R], a workflow content
management and application development software product that
enhances the utilization of information on an enterprise-wide
basis, regardless of hardware platform or operating environment.
(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, 2000 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
The Company's discretionary contribution to its Retirement
Savings and Investment Plan for the fiscal 2000 plan year was
funded in February 2000 through the issuance of 3,208 shares of
the Company's common stock. In February 1999, the Company also
contributed 12,197 shares of the Company's common stock to fund
its Retirement Savings and Investment Plan for the fiscal 1999
plan year. The Company issued 35,121 and 17,701 shares of the
Company's common stock in the first quarters of fiscal 2000 and
1999, respectively, in connection with its Employee Stock Purchase
Plan.
The Company granted, in February 1999, a warrant to purchase
100,000 shares of the Company's common stock to a consultant of
the Company. This warrant has an estimated fair value of $48,860
that is being amortized into expense over the related service
period of two years.
As these are non-cash transactions, they have not been
presented in the Consolidated Statements of Cash Flows.
(3) Discontinued Operation
In March 2000, the Company completed the sale of its investment in
the stock of DiaLogos to a private investment group. As a result,
DiaLogos has been reported as a discontinued operation in the
consolidated financial statements. The terms of the arrangement
include cash consideration of $300,000, a two-year $450,000 note
with interest payable at a 2% premium over the current prime rate
and a warrant to purchase 10% of the outstanding shares of DiaLogos
common stock. The warrant is exercisable based upon a future sale
or public offering of DiaLogos. The note is collateralized by the
stock of DiaLogos. Due to DiaLogos' history of operating losses
and negative cash flows, the Company has fully reserved the value
of the note and warrant.
(4) Bank Agreements
As of April 30, 2000, the Company had a $2,000,000 revolving line
of credit agreement with a bank that had an outstanding balance of
$2,000,000 and was due on May 15, 2000. The interest rate on the
line of credit agreement was payable at the bank's prime rate plus
1-1/2%.
On May 15, 2000, the Company retired the line of credit by paying
off the outstanding balance with its existing cash on hand. As a
result of the debt repayment, the Company no longer has a line of
credit agreement or any other credit facility. See also Footnote
8 relating to Liquidity and Subsequent Events for further
discussion of the effect of the debt repayment on the Company's
working capital and the Company's additional equity financing.
(5) 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.
On April 30, 1999, the Company issued the Notes, due 2004, with an
annual coupon rate, payable quarterly, of 10% in the first year,
12% from May 1, 2000 through October 31, 2000 and 14% thereafter.
The Company also is required to pay a 2% fee on the amount of
principal outstanding on each annual anniversary of October 31,
1999. The principal portion of the Notes is payable as follows:
$666,666 in April 2002, $666,667 in April 2003 and $666,667 in
April 2004; however, the Company may redeem the Notes at any time
during their term without penalty. In circumstances specified in
the Agreement, if the Company receives cash from certain
transactions, as defined, the Company may be required to pay any
outstanding principal balance and accumulated interest thereon. The
holders of the Notes also received warrants to purchase 281,137
Preferred Stock at an exercise price of $1.66. This warrant price
is subject to adjustment if the Company does not meet specified
requirements relating to the appreciation of its stock price at the
end of a defined two-year period. Holders of the warrants can also
elect a non-cash conversion of the warrants to Preferred Stock, but
would receive a reduced number of shares of Preferred Stock.
On June 25, 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 are 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) include voting rights, (b) receive
preferential treatment upon liquidation of the Company and (c)
convert 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. Also, ten-year warrants for the
purchase of 721,702 Preferred Stock were issued to the Investors at
a purchase price of $1.66.
As of April 30, 2000 and 1999, the $2,000,000 Notes issued by the
Company have been recorded in the Consolidated Balance Sheet as
long-term debt. Debt issuance costs and discounts on the Notes
will be amortized to interest expense over the remaining term of
the Notes. The effective interest yield on the Notes is estimated
at an annual rate of 14.5%. The estimated fair value of the Note
warrants were recorded in quarter two of fiscal 2000 as additional
paid-in-capital in the Consolidated Balance Sheet. The Preferred
Stock and related warrants were also recorded in shareholders'
equity in quarter two of fiscal 2000 in the Consolidated Balance
Sheet based upon their relative estimated fair value. The
estimated fair value of all financial instruments were based upon
an external appraisal by an investment banking firm unrelated to
the Company. The Company also records dividends on the preferred
stock on a quarterly basis beginning in the second quarter of
fiscal 2000. 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.
The Notes include a provision requiring the Company to repay the
outstanding debt if the Company receives cash from certain non-
operating transactions, including equity financing. In May 2000,
the holders of the Notes waived this repayment requirement until
the earlier of the Company receiving in excess of $6,000,000 of
additional non-operating funding or February 1, 2001. In exchange
for the waiver, the Company agreed to issue to the Notes' holders
25,000 warrants for the Company's common stock with an exercise
price equal to the current fair value of the Company's stock price.
In the second quarter of fiscal 2001, the Company will be
expensing approximately $85,000 relating to the fair market value
of these warrants. The Company also agreed to certain other terms
including the elimination of a trading restriction on the Company's
preferred stock warrants and the potential issuance of additional
warrants if the Notes are not repaid by Fiscal 2003. Also, if the
Notes are not paid by their scheduled due dates, they may be
converted into the Company's preferred stock at the option of the
Notes' holders.
(6) Synergis Management Expenses, Acquisition and Offering
Costs
Beginning in 1997, the Company began negotiations to combine
certain design automation software resellers and integrators for
the expected merger of these entities with a subsidiary of the
Company, which eventually would become the Company's Synergis
subsidiary. This newly merged entity was expected to spin-off from
the Company through an initial public offering or, later, through
private financing. The Company incurred expenses of $179,700 for
the quarter ended April 30, 1999 for operating costs associated
with the senior management team hired to manage the expected merger
of the entities and the public offering or private financing of the
Synergis subsidiary. As of April 1999, the Company terminated all
negotiations and has not incurred any expenses subsequent to that
date. The Company does not anticipate any additional expenses
related to the Synergis transaction on a prospective basis.
(7) Operating Segments
Based upon management's organization of its products and services,
the company has two reportable segments: Healthcare Solutions
(ChartMaxx, E.Maxx, 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. Also, the Company
primarily sells to customers within the United States, but has
currently been focusing on international customers. Revenues from
customers located internationally were not material.
The following table presents the revenues and segment operating
results of the Company by operating segment:
Three Months Ended
April 30, April 30,
2000 1999
___________ __________
Revenues:
Healthcare solutions $ 2,527,300 3,648,500
Workflow and content management 375,800 200,200
Less intercompany (2,700) (30,000)
___________ __________
Total revenues $ 2,900,400 3,818,700
=========== ==========
Segment operating results:
Healthcare solutions $ (145,800) 181,800
Workflow and content management 141,000 (2,900)
___________ __________
Total segment operating loss (4,800) 178,900
Corporate expenses (773,300) (709,600)
___________ __________
Total operating loss (778,100) (530,700)
___________ __________
Other income (expense):
Other income (expense), net (96,000) (50,500)
Synergis management expenses,
acquisition and offering costs -- (179,700)
___________ __________
Loss from continuing
operations before income
tax benefit $ (874,100) (760,900)
=========== ==========
(8) Liquidity and Subsequent Events
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 its
IntelliCode division, debt financing, offerings of its common
stock to the public and a subordinated debt and preferred share
equity financing.
On May 15, 2000, the Company retired its existing line of credit by
paying off the outstanding balance with its existing cash on hand.
As a result of the debt repayment, the Company no longer has a line
of credit agreement or any other credit facility.
In June 2000, the Company entered into an equity financing
agreement with Quest Diagnostics Incorporated ("Quest"), a leading
provider of diagnostic testing, information and services, to
provide approximately $9.5 million in equity financing to the
Company. Quest is also a customer of the Company. The terms of
the agreement allow Quest to acquire up to 19.9% interest in the
common stock of the Company. Also, the Company will issue common
stock warrants with an exercise price of 110% of the contractually
calculated value of the Company's stock price providing for a
potential ownership interest of up to 30% of the Company's common
and common stock equivalents. 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.
In addition, the agreement provides Quest with a position on the
Company's Board of Directors. Certain terms of the agreement are
subject to shareholder approval occurring at the Company's annual
shareholder meeting in July 2000 and the Company not having a
material adverse change, as defined in the agreement, prior to the
annual shareholder meeting. The proceeds of this agreement will
be utilized to fund working capital and repay existing debt. In
conjunction with the equity financing agreement, the Company also
executed a national sales and marketing agreement with Quest. In
addition to the equity financing received by the Company, the
chief executive officer of MedPlus sold to Quest 100,000 shares of
MedPlus stock.
Management believes that its current operating plan, combined with
the equity financing noted above and potentially future bank or
other financing will enable the Company to continue its growth
strategy in the E-Health market. There can be no assurances,
however, that these goals will be accomplished or that the Company
will return to profitability in the near term.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
MedPlus is a provider of web-based information technology
solutions that enable health care providers to access and manage
information efficiently and cost effectively. The Company's
solutions focus on various elements of process analysis and
redesign, document imaging and management and workflow systems
integration.
The Company's health care related products, included in its Health
Care Solutions segment, consist of the ChartMaxx Enterprise-wide
Private Health Record System ("ChartMaxx"), the E.Maxx Enterprise-
wide Private Health Record System, and the OptiMaxx Archival
System ("OptiMaxx"). ChartMaxx is an enterprise-wide electronic
private health record system that provides users with a web-
enabled, patient-centric data repository of clinical and
administrative information provided from sources such as
hospitals, reference laboratories, clinics and physician offices.
In addition, this system assists health care organizations in
complying with the proposed Health Insurance Portability and
Accountability Act of 1996 (HIPAA) regulations. E-Maxx is the web-
enabled version of the Company's ChartMaxx system. OptiMaxx is an
optical disk-based archival and retrieval system designed to meet
the needs of health care providers that require electronic storage
and quick retrieval of information. The Company's FutureCORE
subsidiary ("FutureCORE") provides process improvement and
automation services, primarily in the areas of medical records and
patient accounts departments, hospital and reference laboratories
and physician offices.
The Company's Universal Document Management Systems, Inc.
subsidiary ("Universal Document"), included in its Workflow and
Content Management Segment, develops and sells Step2000[R], a
workflow content management and application development software
product that enhances the utilization of information on an
enterprise-wide basis, regardless of hardware platform or
operating environment.
Revenue Recognition Cycle
The Company's revenues are derived from systems sales, including
software licenses and hardware, support contracts and
installation, implementation, training and education and
consulting services. Systems sales consist of software licenses
for proprietary software, third party software and hardware, and
related installation services. The gross profit percentage on
systems sales may vary among customers based upon the relative
proportion of proprietary software and third party software and
hardware included in a sale. Revenues from support contracts
include software and hardware maintenance and support. Consulting
service revenues are derived from implementation, training and
education, custom software development and process improvement
services. Revenues from support contracts and consulting services
are expected to increase as the number of installed systems
increases. The gross profit percentage on support contracts and
consulting services may fluctuate based upon the negotiated terms
of each contract and the Company's ability to fully utilize its
customer support, implementation and consulting personnel.
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, 2000 had an accumulated
deficit of $17.2 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.
Discontinued Operations
In December 1999, the Company's board of directors authorized
management to enter into negotiations to dispose of its majority
interest in DiaLogos Incorporated, its education subsidiary. In
March 2000, the Company completed the sale of its investment in
the stock of DiaLogos to a private investment group for cash
consideration of $300,000, a two-year $450,000 note and a warrant
to purchase 10% of the outstanding shares of DiaLogos common
stock.
Results of Operations
Three Months Ended April 30, 2000 and April 30, 1999
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, 2000
("first quarter of fiscal 2001") were $2,900,400, a decrease of
$918,300, or 24%, from $3,818,700 for the three months ended April
30, 1999 ("first quarter of fiscal 2000"). The primary reason for
this decrease relates to systems sales, which decreased $1,505,900,
or 52%, from the first quarter of fiscal 2000, primarily due to a
decrease in the number of ChartMaxx and OptiMaxx sales recognized
in the first quarter of fiscal 2001. This decrease was partially
offset by an increase in the sales of licenses for the Company's
Universal Document subsidiary. Although the Company has executed
contracts with various hospitals, 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
$1,524,100 for the first quarter of fiscal 2001 increased $587,600,
or 63%, from the first quarter of fiscal 2000 due to increased
support and consulting revenues from the Company's ChartMaxx and
OptiMaxx product lines as the number of installed sites of these
products continues to increase. Fiscal 2001 also included the
positive impact of recognizing approximately $500,000 of consulting
revenue for a significant contract that occurred in the fourth
quarter of fiscal 2000. 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,
2000 was $1,342,800, or 46% of revenues, compared to $1,502,800, or
39% of revenues, for the three months ended April 30, 1999. The
gross profit percentage on systems sales remained relatively
comparable at 51% in the first quarter of fiscal 2000 and 52% in
the first quarter of fiscal 2001. The gross profit percentage on
support and consulting revenues increased from 4% in the first
quarter of fiscal 2000 to 41% in the first quarter of fiscal 2001.
Fiscal 2001 included the positive impact of recognizing
approximately $500,000 of consulting revenue for a significant
contract that occurred in the fourth quarter of fiscal 2000 which
is not necessarily indicative of a future trend in margin.
However, the Company does anticipate a gradual improvement in the
support and consulting revenue as service contracts relating to the
Company's ChartMaxx and OptiMaxx products continues to increase.
Operating Expenses: Total operating expenses for the first quarter
of fiscal 2001 were $2,120,900, an increase of $87,400, or 4%,
compared to $2,033,500 for the first quarter of fiscal 2000. Sales
and marketing expenses remained comparable between periods.
Research and development expenses increased $224,800, or 79%,
compared to the first quarter of fiscal 2000. 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. General and administrative
expenses decreased by $129,900, or 15%, over the comparable period
of the prior year primarily due to the recognition of expenses in
the first quarter of fiscal 2000 related to a legal contingency
that was settled in the third quarter of fiscal 2000.
Other Income (Expense): Other income (expense), net, consists
primarily of interest income and interest expense. Interest
expense increased primarily as the result of increases in the
average balance on the Company's line of credit and interest
associated with its long-term debt. Other income relates primarily
to interest income that increased due to higher average cash
balances in fiscal 2001. Expenses related to the employment of
Synergis management, acquisition, and offering costs are not
anticipated to recur in the future.
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 2001 or 2000 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.
Discontinued Operations: Discontinued operations for the first
quarter of fiscal 2000 represents the effect of the operations of
DiaLogos which was divested in March 2000.
Preferred Stock Dividend Requirements: The Company began recording
quarterly dividends on its preferred stock in the second quarter of
fiscal 2000. 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 in the second quarter of fiscal 2000 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 E-Health 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 financed its
operations, working capital needs, and investments through the sale
of common stock, the issuance of preferred shares and subordinated
debt, bank borrowings, capital lease financing agreements, the sale
of the assets of its IntelliCode division and most recently,
through a private placement of its equity.
Financing
The Company had a revolving line of credit agreement with a bank
with an outstanding balance of $2,000,000 as of April 30, 2000 and
that was due on May 15, 2000. The Company retired its existing
line of credit in May 2000 by paying off the outstanding balance
with its existing cash on hand. As a result of the debt repayment,
the Company no longer has a line of credit agreement or any other
credit facility.
In June 2000, the Company entered into an equity financing
agreement with Quest Diagnostics Incorporated ("Quest"), a leading
provider of diagnostic testing, information and services, to
provide approximately $9.5 million in equity financing to the
Company. Quest is also a customer of the Company. The terms of
the agreement allow Quest to acquire up to 19.9% interest in the
common stock of the Company. Also, the Company will issue common
stock warrants with an exercise price of 110% of the contractually
calculated value of the Company's stock price providing for a
potential ownership interest of up to 30% of the Company's common
and common stock equivalents. 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.
In addition, the agreement provides Quest with a position on the
Company's Board of Directors. Certain terms of the agreement are
subject to shareholder approval occurring at the Company's annual
shareholder meeting in July 2000 and the Company not having a
material adverse change, as defined in the agreement, prior to the
annual shareholder meeting. The proceeds of this agreement will
be utilized to fund working capital and repay existing debt. In
conjunction with the equity financing agreement, the Company also
executed a national sales and marketing agreement with Quest. In
addition to the equity financing received by the Company, the
chief executive officer of MedPlus sold to Quest 100,000 shares of
MedPlus stock.
Management believes that its current operating plan, combined with
the equity financing noted above and potentially future bank or
other financing will enable the Company to continue its growth
strategy in the E-Health market. There can be no assurances,
however, that these goals will be accomplished or that the Company
will return to profitability in the near term.
In the first quarter of fiscal 2000, 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 Shares (the "Preferred Shares"). The proceeds of the
financing have been utilized to fund working capital requirements
and continue product development and market penetration of certain
of the Company's core products. On April 30, 1999, the Company
issued the Notes, due 2004, with an annual coupon rate, payable
quarterly, of 10% in the first year, 12% from May 1, 2000 through
October 31, 2000 and 14% thereafter. The principal portion of the
Notes is payable as follows: $666,666 in April 2002, $666,667 in
April 2003 and $666,667 in April 2004; however, the Company may
redeem the Notes at any time during their term without penalty. The
Notes also contain certain restrictions including the Company's
ability to use cash proceeds received from non-operating sources.
The holders of the Notes also received warrants to purchase 281,137
Preferred Shares at an exercise price of $1.66. On June 25, 1999,
the Company also issued to the investors 2,371,815 Preferred
Shares, 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 Shares are convertible into the
Company's common stock on a one-for-one basis. 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
Preferred Shares (a) include voting rights, (b) receive
preferential treatment upon liquidation of the Company and (c)
convert 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 Shares
into common shares of the Company. Also, ten-year warrants for the
purchase of 721,702 Preferred Shares were issued to the Investors
at a purchase price of $1.66.
The Notes include a provision requiring the Company to repay the
outstanding debt if the Company receives cash from certain non-
operating transactions, including equity financing. In May 2000,
the holders of the Notes waived this repayment requirement until
the earlier of the Company receiving in excess of $6,000,000 of
additional non-operating funding or February 1, 2001. In exchange
for the waiver, the Company agreed to issue to the Notes' holders
25,000 warrants for the Company's common stock with an exercise
price equal to the current fair value of the Company's stock price.
In the second quarter of fiscal 2001, the Company will be expensing
approximately $85,000 relating to the fair market value of these
warrants. The Company also agreed to certain other terms including
the elimination of a trading restriction on the Company's preferred
stock warrants and the potential issuance of additional warrants if
the Notes are not repaid by Fiscal 2003. Also, if the Notes are
not paid by their scheduled due dates, they may be converted into
the Company's preferred stock at the option of the Notes' holders.
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 2001
or Fiscal 2000. On a cumulative basis, the Company has repurchased
200,000 shares.
Cash Flows from Operations and Liquidity
Cash flows used by operating activities for continuing operations
for the first quarter of fiscal 2001 were $1,292,900. The
principal uses of cash include various changes in working capital
accounts including deferred revenue. In fiscal 2000, cash flows
provided by operating activities for continuing operations were
$106,200. Positive cash flows for the prior year were largely the
result of the improvement of working capital for the Company
including the receipt of a tax refund of $525,000 in fiscal 2000.
Management continues to review the Company's current operations to
identify areas to reduce or maintain current levels of expenses
until revenues increase sufficiently to justify increased
investments in certain areas. Over the past two years, the Company
has made significant strides in curtailing expenses, primarily in
the area of sales of marketing, and continues to review its current
structure to properly manage expenses. In addition to expense
reductions, increased revenues will also be needed to improve
operating cash flow. The Company believes that it has historically
experienced lower-than-anticipated revenues because many of its
potential customers have been focusing on resolving internal Year
2000 issues rather than purchasing enterprise-wide solutions, such
as ChartMaxx or OptiMaxx. The Company anticipates sales of
ChartMaxx and OptiMaxx will increase in fiscal 2001, although there
is no assurance that this trend will occur in the near term. 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.
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.
Year 2000 Compliance
The Company's business is dependent on the operation of numerous
systems that could have been impacted by Year 2000 related
problems. Those systems include, among others, hardware and
software systems used by the Company to deliver services to the
Company's customers, including proprietary software systems and
hardware and software supplied by third parties, communications
networks, the internal systems of the Company's customers and
suppliers, and the hardware and software systems used internally.
During the transition into the Year 2000, the Company and its
customers did not experience any significant problems related to
Year 2000, and the Company does not expect any to arise in the
future.
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 2001, 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.
In addition, subsequent to quarter end, the Company entered an
agreement with Quest Diagnostics Incorporated. Certain terms of
this agreement are subject to shareholder approval occurring at the
Company's annual shareholder meeting in July 2000. There can be no
assurance that approval will be granted or that the financing
received from this transaction will be adequate to fund the
Company's future commitments.
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
3 Articles of Incorporation and Code of Regulations See Note 1
10.1 Stock Subscription Agreement by and between the Company and
Quest Diagnostics Ventures, Inc., dated June 19, 2000
10.2 Warrant to purchase shares of the Company's Common Stock, dated
June 19, 2000
10.3 Stock Purchase Agreement by and between Quest Diagnostics Ventures
LLC and Richard A. Mahoney, dated June 19, 2000
10.4 Registration Rights Agreement by and between the Company, Quest
Diagnostics Incorporated, Cahill, Warnock Strategic Partners Fund,
L.P. and Strategic Associates, L.P. dated June 19, 2000.
10.5 National Sales and Marketing Agreement by and between Quest
Diagnostics Incorporated and the Company, dated June 19, 2000.
27.1 Financial Data Schedule for the three months ended April 30, 2000
Filed on EDGAR
Note 1: Amended Articles of Incorporation are incorporated by reference to the
Company's Annual Report on Form 10-KSB filed May 1, 2000 and the Company's
Code of Regulations is incorporated by reference to the Registration Statement
on Form SB-2, Registration No. 33-77896C, effective May 24, 1994.
(b) There were no reports on Form 8-K filed during the three month
period ended April 30, 2000
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.
Date: June 19, 2000 By: /s/ Daniel A. Silber
Daniel A. Silber *
Vice President and Chief Financial
Officer
* 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.