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 October 31, 1999
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 Identification
incorporation or organization) 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 Decenber 13, 1999, there were 6,119,570 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 Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
___________ ___________ ___________ ___________
Revenues:
Systems sales $ 1,761,950 2,595,118 5,422,988 3,976,939
Support and consulting revenues 1,279,806 1,354,009 4,063,667 3,748,968
___________ ___________ ___________ ___________
Total revenues 3,041,756 3,949,127 9,486,655 7,725,907
___________ ___________ ___________ ___________
Cost of revenues:
Systems sales 863,893 1,235,044 2,916,893 2,289,325
Support and consulting revenues 1,195,519 1,476,529 3,455,734 3,451,452
___________ ___________ ___________ ___________
Total cost of revenues 2,059,412 2,711,573 6,372,627 5,740,777
___________ ___________ ___________ ___________
Gross profit 982,344 1,237,554 3,114,028 1,985,130
Operating expenses:
Sales and marketing 1,022,398 1,277,951 2,704,976 4,394,522
Research and development 460,408 591,655 1,550,129 1,474,524
General and administrative 893,478 983,129 3,051,698 3,056,151
___________ ___________ ___________ ___________
Total operating expenses 2,376,284 2,852,735 7,306,803 8,925,197
___________ ___________ ___________ ___________
Operating loss (1,393,940) (1,615,181) (4,192,775) (6,940,067)
Other income (expense), net:
Other, net (131,248) 302,854 (291,991) 322,493
Synergis management expenses,
acquisition and offering costs -- (393,878) (179,663) (1,080,131)
___________ ___________ ___________ ___________
Total other income (expense), net (131,248) (91,024) (471,654) (757,638)
___________ ___________ ___________ ___________
Loss from continuing operations
before income tax benefit (1,525,188) (1,706,205) (4,664,429) (7,697,705)
Income tax benefit (11,176) (206,147) (11,176) (1,666,370)
___________ ___________ ___________ ___________
Loss from continuing operations (1,514,012) (1,500,058) (4,653,253) (6,031,335)
Income from discontinued operations -- -- -- 177,299
___________ ___________ ___________ ___________
Net loss (1,514,012) (1,500,058) (4,653,253) (5,854,036)
___________ ___________ ___________ ___________
Conversion discount on preferred stock -- -- 346,285 --
Preferred stock dividend requirements 82,000 -- 164,000 --
___________ ___________ ___________ ___________
Loss attributable to common shareholders $(1,596,012) (1,500,058) (5,163,538) (5,854,036)
=========== =========== =========== ===========
Net loss per common share - basic and diluted:
Continuing operations $ (0.26) (0.25) (0.85) (0.98)
Discontinued operations -- -- -- 0.03
___________ ___________ ___________ ___________
Net loss per common share $ (0.26) (0.25) (0.85) (0.95)
=========== =========== =========== ===========
Weighted average number of shares of
common stock outstanding 6,098,955 6,085,537 6,059,056 6,138,572
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, January 31,
1999 1999
___________ ____________
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,967,154 1,148,099
Accounts receivable, less allowance for doubtful accounts
of $195,800 at October 31, 1999 and $155,000 at
January 31, 1999 4,523,711 5,595,273
Other receivables 31,336 70,769
Income taxes refundable -- 550,000
Inventories 533,122 442,312
Prepaid expenses 632,406 656,588
___________ ___________
Total current assets 7,687,729 8,463,041
___________ ___________
Capitalized software development costs, net 2,751,199 2,559,823
Fixed assets, net 1,361,039 1,648,093
Excess of cost over fair value of net assets acquired, net 745,694 714,448
Other assets 217,142 291,402
___________ ___________
$12,762,803 13,676,807
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 114,343 222,558
Borrowings on line of credit 2,167,009 507,017
Accounts payable 1,099,338 1,712,392
Accrued expenses 1,490,948 2,099,124
Deferred revenue 1,131,832 1,158,128
___________ ___________
Total current liabilities 6,003,470 5,699,219
___________ ___________
Obligations under capital leases, excluding current installments 74,081 148,746
Long-term debt, net of deferred debt costs and discounts 1,893,037 2,250,000
___________ ___________
Total liabilities 7,970,588 8,097,965
___________ ___________
Shareholders' equity:
Preferred shares, $.01 par value, authorized 5,000,000
shares; issued 2,371,815 shares at October 31, 1999 23,718 -
Common stock, no par value, authorized 15,000,000 shares;
issued 6,255,269 shares at October 31, 1999
and 6,225,371 shares at January 31, 1999 - -
Additional paid-in capital 21,488,038 17,639,105
Treasury stock, at cost, 200,000 shares (863,497) (863,497)
Accumulated deficit (15,820,754) (11,167,502)
Unearned stock compensation (35,290) (29,264)
___________ ___________
Total shareholders' equity 4,792,215 5,578,842
___________ ___________
$12,762,803 13,676,807
=========== ===========
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Nine Months
Ended Ended
October 31, October 31,
1999 1998
___________ ____________
(unaudited)
Cash flows from operating activities:
Loss from continuing operations $(4,653,253) (6,031,335)
Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:
Synergis acquisition and offering costs -- 139,143
Amortization of capitalized software development costs 530,615 355,732
Depreciation of fixed assets 457,013 389,624
Amortization of unearned stock compensation costs 42,834 68,234
Amortization of excess of cost over fair value of net assets acquired 64,754 60,093
Amortization of deferred costs related to long-term debt 71,938 --
Deferred income taxes -- (319,502)
Realized (gain) loss on sales of fixed assets 480 16,612
Provision for loss on doubtful accounts 40,800 108,962
Changes in assets and liabilities:
Accounts receivable 1,045,022 (1,898,634)
Other receivables 39,434 80,928
Inventories (90,809) 17,280
Prepaid expenses and other assets 30,183 (107,653)
Accounts payable and accrued expenses (988,451) (510,116)
Income taxes 550,000 (1,946,869)
Deferred revenue (26,296) 381,468
___________ ____________
Net cash used in operating activities (2,885,736) (9,096,033)
___________ ____________
Cash flows from investing activities:
Capitalization of software development costs (721,990) (760,636)
Purchases of fixed assets (170,440) (503,095)
Synergis acquisition and offering costs (222,774) (1,684,540)
Payments made for acquisitions of businesses (32,666) (19,858)
Other advances and investments -- (291,291)
___________ ____________
Net cash used in investing activities (1,147,870) (3,259,420)
___________ ____________
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs -- 58,084
Proceeds from issuance of preferred shares, net of issuance costs 3,740,242 --
Purchases of treasury stock -- (809,940)
Proceeds from borrowings on line of credit 7,321,080 2,411,518
Repayments on line of credit (7,887,088) (1,657,748)
Proceeds from issuance of long-term debt 2,000,000 --
Principal payments on capital lease obligations (182,880) (140,991)
Payment of debt issue costs (138,693) --
___________ ____________
Net cash provided by (used in) financing activities 4,852,661 (139,077)
___________ ____________
Discontinued operations -- (94,505)
___________ ____________
Net increase (decrease) in cash and cash equivalents 819,055 (12,589,035)
Cash and cash equivalents, beginning of period 1,148,099 13,794,473
___________ ____________
Cash and cash equivalents, end of period $ 1,967,154 1,205,438
=========== ============
Interest paid $ 320,871 88,678
=========== ============
Income taxes paid $ 9,211 600,000
=========== ============
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") provides information technology
solutions designed to enable customers to manage information
efficiently and cost effectively through innovative technology,
consulting, and education. The Company's solutions focus on
various elements of process analysis and redesign, document
imaging and management, workflow, systems integration and
technology education.
The Company's healthcare related products, included in its
Healthcare Solutions segment, presently consist of the
ChartMaxx[tm] Enterprise-wide Patient Record System ("ChartMaxx")
and the OptiMaxx[r] Archival System ("OptiMaxx"). ChartMaxx is an
enterprise-wide electronic patient record system that enables
health care organizations to create and manage a fully paperless
electronic patient record comprising clinical, financial and
administrative data captured from scanned paper and digital data.
Recently, the ChartMaxx product line has been modified to allow
for its purchase and implementation by module, thus enabling
tailored solutions that will be less costly and can be implemented
in a shorter time frame. OptiMaxx is an optical disk-based
archival system designed to meet the departmental and enterprise-
wide 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, hospital and
reference laboratories and physician offices.
The Company's Universal Document Management Systems, Inc.
subsidiary ("Universal Document"), included in its Workflow and
Document Management segment, develops and sells Step2000[r], a
workflow, document management and application development software
product that enhances the utilization of information on an
enterprise-wide basis, regardless of hardware platform or
operating environment.
DiaLogos[tm] Incorporated ("DiaLogos"), included in the Company's
Distributed Computing Products and Services segment, is a
majority-owned subsidiary and specializes in assisting
organizations in the integration of enterprise-wide business
systems with existing applications and data using distributed
object computing, including CORBA and Java technologies, through
education, consulting and implementation services. In the second
quarter of fiscal 2000, the Company's majority interest in
DiaLogos increased from 58.5% to 78% as a result of the purchase
by DiaLogos of its outstanding stock held by a minority
shareholder.
(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,
1999 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. Certain fiscal 1999 and quarter one, fiscal 2000 amounts
have been reclassified to conform to fiscal 2000 presentation.
(c) Net Earnings (Loss) Per Common 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 1999 plan
year was funded in March 1999 through the issuance of 12,197
shares of the Company's common stock. The Company also issued
17,701 shares of the Company's common stock in February 1999 to
fund its Employee Stock Purchase Plan for the fiscal 1999 plan
year. 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) Bank Agreements
At January 31, 1999, the Company had a revolving line of credit
agreement with a bank with a maximum amount available of
$3,250,000. In the first quarter of fiscal 2000, the bank amended
the credit agreement to reduce the limit to $3,000,000 and to
extend the expiration of $2,250,000 of this limit to February 2000,
subject to a defined net worth formula (as defined in the line of
credit agreement). Amounts in excess of the $2,250,000 due in
February 2000 become payable to the bank at specified dates
throughout fiscal 2000. As of January 31, 1999, the Company
classified $507,017 of the outstanding balance as current and
$2,250,000 as non-current in the Consolidated Balance Sheet. The
interest rate on the new financing agreement is payable at the
bank's prime rate plus 1 1/2%. The new agreement contained a
closing fee of $60,000 and requires a quarterly commitment fee of
1% on the line of credit limit. The line of credit is secured by
all assets of the Company.
As of October 31, 1999, the maximum amount available was $2,500,000
and $2,167,990 was outstanding and classified as current in the
Consolidated Balance Sheet. Based upon the defined net worth
formula, the Company was required to maintain a defined net worth
of $8,000,000 at October 31, 1999. As the Company's defined net
worth did not meet this requirement as of October 31, 1999, the
Company was in non-compliance with this covenant. However, the
Company has obtained a waiver for this covenant violation from the
bank until January 31, 2000. Also, the Company has been
negotiating with its senior lender to extend or replace this
obligation due in February 2000 with a longer-term facility (See
also Footnote 8 "Liquidity").
(4) Debt and Equity Financing
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"). Certain terms of the
Agreement were amended in June 1999. The proceeds of the financing
will be 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 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 Shares 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 Shares,
but would receive a reduced number of Preferred Shares.
On June 25, 1999, the Company 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 $3,740,242). The Preferred Shares 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 Shares include (a) 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. These warrants cannot be exercised
unless the value of the Company's stock price as traded on the
NASDAQ over a twenty-day period exceeds $7.17.
The $2,000,000 Notes issued by the Company on April 30, 1999 have
been recorded, net of debt issuance costs and discounts, in the
Consolidated Balance Sheet as long-term debt for the current
quarter. 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 have been recorded as additional paid-in-capital in the
Consolidated Balance Sheet. The Preferred Shares and related
warrants have also been recorded in shareholders' equity in the
Consolidated Balance Sheet based upon their 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 recognized in the second quarter a beneficial
conversion feature on the Preferred Shares of $346,285 that was
included in the consolidated statement of operations as an
adjustment to net loss. This amount represents the effect of the
differential between the conversion price and the closing market
price on the date of commitment of the Preferred Shares. Although
the beneficial conversion feature has no impact on the financial
condition or cash flows of the Company, it has a negative impact on
the Company's earnings (loss) per common share-basic and diluted in
the second quarter of fiscal 2000. The Company also records
dividends on the preferred shares 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 earnings (loss) per share-basic
and diluted in the second quarter of fiscal 2000.
(5) Synergis Management Expenses, Acquisition and Offering Costs
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, most recently, through
private financing. The Company has incurred expenses related to
management expenses, acquisition and offering costs of $179,663 and
$1,080,131 for the nine months ended October 31, 1999 and 1998,
respectively. In the first quarter of fiscal 2000, the Company had
terminated all efforts to merge Synergis with other entities. As
all negotiations have been terminated, the Company has not incurred
any expenses subsequent to the first quarter of fiscal 2000 and
does not anticipate any additional expenses related to the Synergis
transaction on a prospective basis.
(6) Legal Contingencies
Various lawsuits arising during the normal course of business are
pending against the Company and its consolidated subsidiaries. In
the opinion of management, no material effect on the Company's
consolidated financial position or results of operations is
expected to result from these matters.
During the third quarter of fiscal 2000, the Company settled a
claim filed by a former contractor of the Company for $375,000.
The Company made a cash payment of $150,000 in the third quarter of
fiscal 2000 which has been included in operating activities in the
Consolidated Statement of Cash Flows. The remaining amount will be
paid over the next six months. The Company recorded expense of
$246,000 in the third quarter of fiscal 2000 which was included in
sales and marketing expense in the Consolidated Income Statement.
The Company also recorded additional expense of $129,000 in the
first and second quarters of fiscal 2000 based upon management's
estimated of settlement costs.
(7) Operating Segments
Based upon management's organization of its products and services, the company has three reportable segments: Healthcare
Solutions (ChartMaxx, OptiMaxx, and FutureCORE), Workflow and Document Management (Universal Document), and Distributed
Computing Products and Services (DiaLogos). 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
increased its sales and marketing efforts internationally. 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 Nine Months Ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
__________ __________ __________ __________
Revenues:
Healthcare solutions $ 2,249,902 3,607,498 7,336,522 6,162,563
Workflow and document management 452,049 369,080 901,284 1,112,918
Distributed computing products and services 341,030 373,540 1,297,309 1,076,860
Less intercompany (1,225) (352,030) (48,460) (626,434)
__________ __________ __________ __________
Total revenues $ 3,041,756 3,949,127 9,486,655 7,725,907
Segment operating results:
Healthcare solutions $ (667,212) (286,814) (1,428,954) (2,985,532)
Workflow and document management 197,108 91,020 230,050 (135,160)
Distributed computing products and services (238,507) (580,585) (694,734) (1,074,923)
__________ __________ __________ __________
Total segment operating loss (708,611) (776,379) (1,893,638) (4,195,615)
Corporate expenses (685,329) (838,802) (2,299,137) (2,744,452)
__________ __________ __________ __________
Total operating loss (1,393,940) (1,615,181) (4,192,775) (6,940,067)
__________ __________ __________ __________
Other income (expense):
Other, net (131,248) 302,854 (291,991) 322,493
Synergis management expenses, acquisition
and offering costs -- (393,878) (179,663) (1,080,131)
__________ __________ __________ __________
Loss from continuing operations before
income tax benefit $ (1,525,188) (1,706,205) (4,664,429) (7,697,705)
(8) Liquidity and Subsequent Event
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, most recently, a subordinated debt and
preferred share equity financing. Over the past few years, the
Company's net cash outlays have exceeded its ability to generate
cash through operations resulting in the need to obtain additional
working capital. In addition, as of October 31, 1999, the Company
did not meet a covenant related to a minimum defined net worth
requirement for its line of credit with a bank (see footnote 3
"Bank Agreements"). The Company has obtained a waiver for the
covenant violation and has been negotiating with its senior lender
to extend or replace this debt due in February 2000 with a longer-
term facility.
Subsequent to October 31, 1999, the Company entered into a letter
of intent with a third party to license its ChartMaxx system for a
five-year term for $2,500,000. The agreement would allow a fully
integrated ChartMaxx solution including Internet connectivity to
provide physicians with access to critical clinical and
demographic data. The license fee is payable to the Company upon
final contract execution and will be utilized to fund the ongoing
operations of the Company.
In order to continue to fund its current working capital
requirements, it is critical for the Company to replace or extend
its line of credit and increase its current level of sales while
controlling costs. Management believes that the expected near-
term refinancing of its senior debt, a potential sale of a portion
of the Company's assets or other financing alternatives, and the
execution of its current business plan-including the letter of
intent received subsequent to quarter end, will be sufficient to
finance near term working capital requirements. 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, Inc. (the "Company") provides information technology
solutions designed to enable customers to manage information
efficiently and cost effectively through innovative technology,
consulting, and education. It has been the Company's practice to
continue to develop new products, enhance existing applications,
make selected strategic acquisitions, and introduce consulting
services, which has led to revenue growth since the commencement
of operations. The Company's solutions focus on various elements
of process analysis and redesign, document imaging and management,
workflow, systems integration and technology education.
The Company's healthcare related products presently consist of the
ChartMaxx Enterprise-wide Patient Record System ("ChartMaxx") and
the OptiMaxx Archival System ("OptiMaxx"). ChartMaxx is an
enterprise-wide electronic patient record system that enables
healthcare organizations to create and manage a fully paperless
electronic patient record comprising clinical, financial and
administrative data captured from scanned paper and digital data.
Recently, the ChartMaxx product line has been modified to allow
for purchase and implementation by module, thus enabling tailored
solutions that will be less costly and can be implemented in a
shorter time frame. OptiMaxx is an optical disk-based archival
system designed to meet the departmental and enterprise-wide needs
of healthcare providers that require electronic storage and quick
retrieval of information. The Company's FutureCORE, Inc.
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") develops and licenses Step2000,
a workflow, document management and application development
software product that enhances the utilization of information on
an enterprise-wide basis, regardless of hardware platform or
operating environment.
In January 1998, the Company acquired a majority interest in
DiaLogos Incorporated ("DiaLogos"). DiaLogos specializes in
assisting organizations in the integration of enterprise-wide
business systems with existing applications and data using
distributed object computing, including CORBA and Java
technologies, through education, consulting and implementation
services.
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 priced 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 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.
Discontinued Operations
In January 1998, the Company sold all the assets of its
IntelliCode division to Becton Dickinson and Company ("Becton
Dickinson") for $17,334,558 plus royalty payments over five
years. In connection with the sale, Becton Dickinson also assumed
certain liabilities of the IntelliCode division, primarily
deferred revenues and obligations related to service contracts and
an office lease. The Company recognized a pre-tax gain of
$14,724,720 and an after-tax gain of $10,268,710 related to this
transaction for the year ended January 31, 1998. The royalty
payments are based on future defined revenues and are recorded as
income when earned. No royalty payments were earned for the
periods reported.
In January 1998, the Company had decided to sell the net assets of
the Step2000 segment of Universal Document. However, during
fiscal 1999, the Company decided to retain the segment and reduce
operations to primarily research and development and customer
support while a new generation of products was developed. The
Step2000 segment had been accounted for as a discontinued
operation until the second quarter of fiscal 1999. However, as a
result of the Company's decision to retain the Step2000 segment,
the results of operations and financial position of the segment
have been included in continuing operations in the Company's
consolidated financial statements for the periods presented.
Prior years' financial statements have been presented on a
comparable basis.
Synergis Commitments
During 1997, the Company's Universal Document subsidiary began a
process to identify and recruit certain design automation software
resellers and integrators (the "Founding Companies") that
Universal Document could acquire or with which it could combine
(the "Acquisitions"), and to review the possibility of an initial
public offering of its common stock. In October 1997, Universal
Document filed a registration statement on Form S-1 with the
Securities and Exchange Commission, which was subsequently amended
in December 1997 and January 1998, to offer its common stock to
the public. Due to adverse market conditions for initial public
offerings in January 1998, Universal Document postponed the
initial public offering upon the advice of its underwriters.
During early 1998, the Company evaluated the business operations
of Universal Document and determined that it no longer
complemented the businesses of the Founding Companies. As a
result, the Company created its Synergis subsidiary to serve as
the acquirer in the Acquisitions. The Company expected the newly
created Synergis subsidiary to complete the Acquisitions and an
initial public offering of its common stock. Due to adverse
conditions in the equity capital markets, however, Synergis' plans
to conduct an initial public offering were postponed for a second
time in August 1998. As of January 31, 1999, the Company was
considering the financing of the Synergis transaction on a private
basis.
During the first quarter of fiscal 2000, the Company terminated
all efforts to merge Synergis with other entities. As all
negotiations have been terminated, the Company does not anticipate
incurring any additional expenses related to the Synergis
transaction on a prospective basis.
Results of Operations
Three Months Ended October 31, 1999 and October 31, 1998
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 October 31, 1999
("third quarter of fiscal 2000") were $3,041,756, a decrease of
$907,371, or 23%, from $3,949,127 for the three months ended
October 31, 1998 ("third quarter of fiscal 1999"). Systems sales
decreased $833,168 or 32% from the third quarter of fiscal 1999,
primarily due to the sale of two large OptiMaxx systems in the
third quarter of fiscal 1999. Support and consulting revenues of
$1,279,806 for the third quarter of fiscal 2000 decreased $74,203,
or 5%, from the third quarter of fiscal 1999 due to decreased
consulting revenues in the Company's DiaLogos and UDMS
subsidiaries, offset by 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.
Gross Profit: Gross profit for the three months ended October 31,
1999 was $982,344, or 32% of revenues, compared to $1,237,554, or
31% of revenues, for the three months ended October 31, 1998. The
gross profit percentage on systems sales remained strong at 51% for
both quarters as the Company sold a higher proportion of
proprietary software relative to lower margin third party hardware
and software during both periods. The gross profit percentage on
support and consulting revenues increased from -9% in the third
quarter of fiscal 1999 to 6% in the second quarter of fiscal 2000.
The increase in this percentage was primarily a result of increased
support revenues on the Company's ChartMaxx and OptiMaxx contracts.
In addition, last year's expenses were negatively impacted by an
increase in customer support, installation, and consulting
personnel in advance of related revenues and lower than expected
utilization rates of these personnel. Margins for future quarters
will remain depressed until the level of support and consulting
revenues increase to better utilize fixed resources. Future gross
profit margins for support and consulting services can be affected
by the timing of systems sales, unforeseen delays in
implementation schedules, the number and timing of additions to
the implementation and consulting staff relative to when they
become billable to customers, or the need to use independent
consultants while the Company is further developing its
implementation and consulting staff.
Operating Expenses: Total operating expenses for the third quarter
of fiscal 2000 were $2,376,284, a decrease of $476,451, or 17%,
compared to $2,852,735 for the third quarter of fiscal 1999. Sales
and marketing expenses decreased $255,553, or 20%, from the
comparable period of 1999 due to personnel reductions directly
related to a change in sales and marketing focus for the ChartMaxx
product line and the DiaLogos subsidiary. Offsetting this decrease,
the Company recorded expense of $246,000 in the current quarter
related to the settlement of a claim filed by a former contractor
of the Company. Research and development expenses decreased
$131,247, or 22%, compared to the third quarter of fiscal 1999 as
the Company experienced personnel reductions in the area of
product development for its DiaLogos group. General and
administrative expenses decreased slightly by $89,651, or 9%, due
to the Company's ongoing monitoring of these types of expenses.
Other Income (Expense): Other income (expense), net, consists
primarily of interest income, interest expense, and expenses
incurred with the Synergis transaction. "Other expense" increased
from $302,854 of income for the quarter ended October 31, 1998 to
$131,248 of expense for the quarter ended October 31, 1999. This
increase is a result of higher interest expense due to borrowings
on the Company's line of credit and subordinated debt during the
current quarter. In addition, the Company recognized income of
$297,000 in the third quarter of fiscal 2000 related to the
recognition of minority interest income associated with its
DiaLogos subsidiary. Expenses related to the employment of
Synergis management, acquisition, and offering costs discussed
above under "Synergis Commitments" were $0 and $393,878 for the
quarters ended October 31, 1999 and 1998, respectively. During the
first quarter of fiscal 2000, the Company had terminated all
efforts to merge Synergis with other entities. As all negotiations
have been terminated, the Company does not anticipate any
additional expenses related to the Synergis transaction on a
prospective basis.
Income Tax Benefit: The Company recognized an income tax benefit of
$11,176 in the current quarter related to a refund for prior tax
years' in excess of the amount originally estimated. The Company
did not recognize an income tax benefit on the current year's
operations as the recognition of these benefits did not meet the
recognition criteria for accounting purposes 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. The Company recognized a tax benefit of $206,147 on
its operating loss for the quarter ended October 31, 1998 due to
the Company's ability for income tax purposes to carry back this
loss against taxable income in fiscal 1998 generated by the sale of
the IntelliCode division.
Net Loss: Net loss has remained comparable between quarters. The
current quarter was negatively affected in comparison to the prior
year's comparable quarter by lower sales and the inability to
recognize an income tax benefit for accounting purposes on its loss
from continuing operations. This was offset by an overall decrease
in operating expenses and the cessation of the Company's activities
related to Synergis.
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.
Nine Months Ended October 31, 1999 and October 31, 1998
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 nine months ended October 31, 1999
("first three quarters of fiscal 2000") were $9,486,655, an
increase of $1,760,748, or 23%, from $7,725,907 for the nine months
ended October 31, 1998 ("first three quarters of fiscal 1999").
Systems sales increased $1,446,049 or 36% from the first three
quarters of fiscal 1999, primarily due to an increase in the number
of ChartMaxx and OptiMaxx sales recognized in the first three
quarters of fiscal 2000, as well as revenue recognized on certain
projects under the percentage of completion method of accounting.
Additionally, support and consulting revenues of $4,063,667 for the
first three quarters of fiscal 2000 increased $314,699, or 8%, from
the first three quarters of fiscal 1999 due to increased year-to-
date consulting revenues in the Company's DiaLogos subsidiary as
well as 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.
Gross Profit: Gross profit for the nine months ended October 31,
1999 was $3,114,028, or 33% of revenues, compared to $1,985,130, or
26% of revenues, for the nine months ended October 31, 1998. The
gross profit percentage on systems sales increased from 42% in the
first three quarters of fiscal 1999 to 46% in the first three
quarters of fiscal 2000 due to a higher proportion of proprietary
software relative to lower margin third party hardware and software
included in sales during the comparable period. The gross profit
percentage on support and consulting revenues increased from 8% in
the first three quarters of fiscal 1999 to 15% in the first three
quarters of fiscal 2000. The increase in this percentage is
primarily attributable to increased support revenues on the
Company's ChartMaxx and OptiMaxx contracts and increased year-to-
date revenues in DiaLogos. Offsetting the full benefit of
increased revenues was an increase in customer support,
installation, and consulting personnel in advance of related
revenues. Margins for future quarters will remain depressed until
the level of sales increases to better utilize fixed resources.
Future gross profit margins for support and consulting services
can be affected by the timing of systems sales, unforeseen delays
in implementation schedules, the number and timing of additions to
the implementation and consulting staff relative to when they
become billable to customers, or the need to use independent
consultants while the Company is further developing its
implementation and consulting staff.
Operating Expenses: Total operating expenses for the first three
quarters of fiscal 2000 were $7,306,803, a decrease of $1,618,394,
or 18%, compared to $8,925,197 for the first three quarters of
fiscal 1999. Sales and marketing expenses decreased $1,689,546 or
38% from the comparable period of 1999 due to personnel reductions
directly related to a change in sales and marketing focus for the
ChartMaxx product line and the DiaLogos subsidiary. Offsetting this
decrease, the Company expensed $246,000 in the current quarter
related to the settlement of a claim filed by a former contractor
of the Company. Research and development expenses increased
$75,605, or 5%, compared to the first three quarters of fiscal
1999. This increase relates to personnel increases in the area of
product development for ChartMaxx and OptiMaxx. Offsetting this
increase, the Company also reduced its product development staff
for its DiaLogos subsidiary in the second 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 slightly by $4,453,
as the Company continues to monitor of these types of expenses.
Other Income (Expense): Other income (expense), net, consists
primarily of interest income, interest expense, and expenses
incurred with the Synergis transaction. "Other expense" increased
from income of $322,493 for the first three quarters of fiscal 1999
to expense of $291,991 for the first three quarters of fiscal 2000.
This increase in expense is a result of higher interest expense
due to borrowings on the Company's line of credit and subordinated
debt. In addition, the Company recognized income of $297,000 in
the third quarter of fiscal 1999 related to the recognition of
minority interest income associated with its DiaLogos subsidiary.
Expenses related to the employment of Synergis management,
acquisition, and offering costs discussed above under "Synergis
Commitments" were $179,663 and $1,080,131 for the nine months ended
October 31, 1999 and 1998, respectively. As of the first quarter
of fiscal 2000, the Company has terminated all efforts to merge
Synergis with other entities. As all negotiations have been
terminated, the Company does not anticipate incurring any
additional expenses related to the Synergis transaction.
Income Tax Benefit: The Company recognized an income tax benefit of
$11,176 in the current quarter related to a refund for prior tax
years' in excess of the amount originally estimated. The Company
did not recognize an income tax benefit on its loss from continuing
operations for fiscal 2000 as the recognition of these benefits did
not meet the recognition criteria for accounting purposes 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. The Company recognized a tax benefit of $1,666,370
on its operating loss for fiscal 1999 due to the Company's ability
for income tax purposes to carry back this loss against taxable
income in fiscal 1998 generated by the sale of the IntelliCode
division.
Discontinued Operations: Discontinued operations for fiscal 1999
represents the reversal of a portion of the accrued loss related to
the Step2000 segment which the Company decided to retain in August
1998.
Net Loss: The 21% improvement in the Company's net loss was a
direct result of improvements in the Company's revenues and gross
profit combined with decreased operating and other expenses. This
was partially offset by the Company's inability to recognize an
income tax benefit for accounting purposes on its loss from
continuing operations.
Conversion Discount on Preferred Stock: During the second quarter
of fiscal 2000, the Company issued 2,371,815 shares of its
preferred stock to certain investors at a purchase price of $1.729
per share for gross proceeds of $4,100,000 and net proceeds of
$3,740,242 (see Financing in Liquidity and Capital Resources). As
a result of this issuance, the Company recorded a conversion
discount on the preferred stock of $346,285. This amount
represents the effect of the differential between the conversion
price of $1.729 and the closing market price of $1.88 on the date
of commitment of the Preferred Shares. Although the beneficial
conversion feature has no impact on the financial condition or cash
flows of the Company, it does negatively impact the Company's loss
per common share-basic and diluted.
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 items 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,
anticipated revenue growth, capital expenditures and strategic
investments. 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 and the sale of the
assets of its IntelliCode division. 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 which are deemed to have strategic
value to the Company
The Company's current cash and cash equivalents outstanding in the
Consolidated Balance Sheet as of October 31, 1999 are not
sufficient to repay its outstanding line of credit due in February
2000. This line of credit was considered in default as of October
31, 1999 due to a covenant violation. However, the Company has
obtained a waiver for this covenant violation from the bank until
January 31, 2000 (see also footnote 3 "Bank Agreements"). In
addition, the Company will continue to need funds to meet its
working capital needs in the near term. The Company has been
negotiating with its senior lending partner to extend or replace
this debt with a longer-term facility. Also, subsequent to
quarter end, the Company entered into a letter of intent with a
third party to license its ChartMaxx product for a five-year term
for $2.5 million, payable upon contract execution. The Company is
also considering obtaining funding from other sources, including
the sale of a portion of its operational assets or a potential
equity offering to meet its working capital needs and bank
commitments. There can be no assurances, however, that funding
will be obtained or these goals will be accomplished in the near
term.
Under Nasdaq National Market ("NASDAQ") regulations, the Company
is required to maintain a minimum public float of $5,000,000.
During the third quarter of fiscal 2000, the Company's public
float was under this required minimum. This was the result of the
Company's stock trading at depressed values over the past few
months. Meeting the public float requirement is essential for the
Company to continue to be listed on the Nasdaq National Market and
is contingent upon a sufficient increase in the Company's stock
price in the near term. During November 1999, the Company's
public float had reached an acceptable level for compliance with
Nasdaq regulations over the required time period. As a result, on
December 13, 1999, the Company received a letter from Nasdaq
acknowledging that the Company was now in compliance with the
regulation and that the issue was resolved.
Financing
At January 31, 1999, the Company had a revolving line of credit
agreement with a bank with a maximum amount available of
$3,250,000. In the first quarter of fiscal 2000, the bank amended
the credit agreement to reduce the limit to $3,000,000 and to
extend the expiration of $2,250,000 of this limit to February 2000,
subject to a defined net worth formula. Amounts in excess of the
$2,250,000 due in February 2000 become payable to the bank at
specified dates throughout fiscal 2000. As of October 31, 1999,
the maximum amount available was $2,500,000 and $2,167,990 was
outstanding and classified as current in the Consolidated Balance
Sheet. Based upon the defined net worth formula, the Company was
required to maintain a defined net worth of $8,000,000 at October
31, 1999. As the Company's defined net worth did not meet this
requirement as of October 31, 1999, the loan was considered in
default. However, the Company has obtained a waiver for this
covenant violation from the bank until January 31, 2000. Also, the
Company has been negotiating with its senior lending partner to
extend or replace this debt due in February 2000 with a longer-term
facility.
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"). Certain terms of the
Agreement were amended in June 1999. The proceeds of the financing
will be 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 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 Shares 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 Shares,
but would receive a reduced number of Preferred Shares.
On June 25, 1999, the Company 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 $3,740,242). The Preferred Shares 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 Shares include (a) 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. These warrants cannot be exercised
unless the value of the Company's stock price as traded on the
NASDAQ over a twenty-day period exceeds $7.17.
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 for the three months ended October 31,
1999. On a cumulative basis, the Company has repurchased 200,000
shares. During the three months ended October 31, 1998, the
Company repurchased 164,600 shares at a cost of $645,000.
Cash Flows from Operations and Liquidity
Cash flows used by operating activities was $2,885,736 and
$9,096,033 for the nine months ended October 31, 1999 and 1998,
respectively. The reduction in cash used in operations for the
first nine months of fiscal 2000 in comparison to fiscal 1999 was
largely the result of the significantly better operating
performance of the Company and the improvement of working capital
for the Company. In addition, the Company had income tax expense
of $1,946,869 in the first three quarters of fiscal 1999, compared
to the receipt of over $550,000 for a tax refund in the first three
quarters of fiscal 2000.
Management has continued to incur operating losses from continuing
operations and has been reviewing 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. As resolution of this matter occurs, the
Company anticipates sales of ChartMaxx and OptiMaxx will increase,
although there is no assurance that this trend will occur in the
near term. Management believes that current potential in the e-
commerce market, the Company's current pipeline for its ChartMaxx
product, its contract for an imaging and workflow solution for
Quest Diagnostics Incorporated and the marketing of its solution to
other reference laboratories and other hospitals are key
opportunities to increase cash flows from operations over the next
twelve to eighteen months. There can be no assurance as to the
extent or timing of the Company's success in achieving these goals.
Year 2000 Compliance
Some existing computer programs use only the last two digits to
refer to a year. Because these programs may not properly recognize
a year that begins with "20" rather than "19" and thus may fail or
create errors in the year 2000, they are not considered "year 2000
compliant." The Company has been reviewing, and continues to
review, all potential year 2000 compliance issues which may have a
material effect on the Company's business, results of operations or
financial condition.
Specifically, the most recent releases of the Company's ChartMaxx
and OptiMaxx products have both been developed using four digit
date fields and, as such, are year 2000 compliant. The Company's
standard license agreements for the most recent releases of each of
these products now include a year 2000 compliance warranty.
Customers who have earlier versions of these products may upgrade
to the versions warranted by the Company as year 2000 compliant
under the terms of their license agreements with the Company or the
Company's standard maintenance and support agreements, as the case
may be.
Although the most recent releases of the Company's ChartMaxx and
OptiMaxx products are year 2000 compliant, the Company is also
working to ensure that its customers do not experience problems
where data entered into a ChartMaxx or OptiMaxx system includes two
digit date fields. Currently, if a two digit date field is passed
from another system to ChartMaxx or OptiMaxx, the product's four
digit date field is automatically populated with the first two
digits of the current ChartMaxx or OptiMaxx system date. The
Company has completed final year 2000 testing for these systems and
verified that the most recent releases are year 2000 compliant.
In addition, both systems incorporate third party software and
hardware. While the Company's year 2000 compliance warranty covers
the components of third party products which are incorporated into
the ChartMaxx or OptiMaxx application, the Company does not
independently warrant any third party product. The Company has
received certifications from many of its third party vendors that
their products are year 2000 compliant and is currently reviewing
the remaining third party products and working with those vendors,
to determine what steps, if any, are required to ensure compliance.
Furthermore, the ChartMaxx and OptiMaxx products operate in
conjunction with third party hardware and operating systems
provided by the Company, but excluded from the Company's year 2000
compliance warranty. The Company has advised, and continues to
advise, its customers to contact the manufacturers of the hardware
and operating systems in order to upgrade these systems to the year
2000 compliant versions, if necessary. Where possible, the Company
will provide its customers with specific information regarding how
they may obtain upgrades to their operating system software via the
Internet or other means.
The Company's Universal Document subsidiary has completed its
testing of the Step2000 software product and verified that it is
year 2000 compliant. Step2000, however, may be used by a customer
to develop other software applications. The customer is
responsible for ensuring that these developed applications are also
year 2000 compliant. Universal Document has provided a year 2000
compliance warranty to its customers, but the warranty excludes
developed applications from coverage.
The Company's critical internal software systems have been tested
and are currently year 2000 compliant.
The Company has to date, and will in the foreseeable future use,
internal resources to continue to monitor its products for year
2000 compliance. If modifications to any of the Company's products
are required to ensure year 2000 compliance, the Company plans to
use internal resources for those modifications. The Company does
not anticipate the total cost of its year 2000 compliance measures
to be material based on the results of its review and testing to
date. The cost of the year 2000 effort will be funded by cash on
hand and cash from operations. The Company does not anticipate,
based on its current understanding of the year 2000 issue and the
results of its review and testing to date, that the year 2000 issue
will have a material effect on the Company's results of operations
or result in significant operational problems for the Company.
Forward Looking Statements
The Company notes that many of the statements made herein are
forward-looking statements. As such, factors may occur which could
cause actual events to differ materially from those anticipated in
these statements.
Management believes that current potential in the e-commerce
market, the Company's current pipeline for its ChartMaxx product,
the ability to expand its existing imaging and workflow contract
with Quest Diagnostics Incorporated and its current backlog and
opportunities for other OptiMaxx, UDMS, and DiaLogos sales will
result in significant opportunities to increase revenues over the
next twelve to eighteen months. However, any number of factors,
including those beyond the control of MedPlus such as each
potential customer's financial condition and/or the time frame in
which it may receive contract approval, could prevent the execution
of such agreements during this period. Furthermore, whether (i)
improvements in operating cash flow from the expense reductions and
increased revenues combined with cash and cash equivalents, (ii)
the Company's available line of credit and its ability to obtain
senior debt refinancing (iii) cash received from the debt and
equity financing which occurred during fiscal 2000 and (iv) other
potential financing sources such as equity/debt financing and sales
of assets will be sufficient to finance expected growth and cash
requirements is also uncertain.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: As of the date hereof, the Company is
not a party to any material legal proceeding and, to the Company's
knowledge, there are no material legal proceedings pending against
the Company, as described in SEC Reg. Sec. 228.103. However, as
mentioned in the Notes to Consolidated Financial Statements filed
with the Company's 10-KSB for its fiscal year 1999, the Company
recently arbitrated a dispute filed in September 1998 through the
American Arbitration Association in Cincinnati, Ohio with Valcor
Associates, Inc., an independent contractor previously retained by
the Company to sell certain of its products (the "independent
contractor"). The independent contractor demanded $1,076,000 in
past and future commissions it believes it was owed as a result of
a representative sales agreement by and between the contractor and
MedPlus. MedPlus believed the contractor's position was without
merit, vigorously contested the arbitration and filed a
counterclaim against the contractor to recover lost sales which
resulted from the contractor's failure to provide its best efforts
under the representative sales agreement. Without the admission
of liability by either party, in October 1999 both parties
dismissed their claims with prejudice and the matter was settled
as described above in Note 6 to Consolidated Financial Statements
- - "Legal Contingencies."
Item 2. Changes in Securities: N/A
Item 3. Defaults Upon Senior Securities: In accordance with the
revolving line of credit agreement the Company has with a bank (see
Note 3 to Consolidated Financial Statements - "Bank Agreements"),
the Company was required to maintain a net worth (as defined in the
agreement) of $8,000,000 at October 31, 1999. Because the Company
did not meet this requirement as of October 31, 1999, the Company
was in default under this covenant. The bank has, however, waived
this covenant until January 31, 2000.
Item 4. Submission of Matters to a Vote of Security Holders: N/A
Item 5. Other Information: N/A
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are hereby filed as part of this Form
10-QSB:
Exhibit
Number Description of Exhibits
27.1 Financial Data Schedule for nine months ended
October 31, 1999
(b) No Reports were filed on Form 8-K for the three month period
ended October 31, 1999
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: December 14, 1999 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.
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