UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 0-28132
LANVISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1455414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5481 Creek Road
Cincinnati, Ohio 45242-4001
(Address of principal executive offices) (Zip Code)
(513) 794-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Number of shares of Registrant's Common Stock ($.01 par value per share)
issued and outstanding, as of November 30, 2001: 8,894,948.
1
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements............................................. 3
Condensed Consolidated Balance Sheets at October 31, 2001 and January 31, 2001.......... 3
Condensed Consolidated Statements of Operations for the three and nine months
ended October 31, 2001 and 2000......................................................... 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
October 31, 2001 and 2000............................................................... 6
Notes to Condensed Consolidated Financial Statements.................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 19
Item 3. Defaults on Senior Securities........................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
Signatures.............................................................................. 20
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) (Audited)
October 31, January 31,
2001 2001
-------------------- ---------------------
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 7,920,390 $ 8,549,732
Note receivable - 75,000
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively 673,064 2,080,154
Unbilled receivables 2,577,124 1,356,413
Prepaid expenses related to unrecognized revenue 113,081 146,428
Other 224,054 220,861
-------------------- ---------------------
Total current assets 11,507,713 12,428,588
Property and equipment:
Computer equipment 1,862,294 2,715,246
Computer software 416,762 501,077
Office furniture, fixtures and equipment 1,139,457 1,233,175
Leasehold improvements 117,795 114,965
-------------------- ---------------------
3,536,308 4,564,463
Accumulated depreciation and amortization (2,959,913) (3,857,871)
-------------------- ---------------------
576,395 706,592
Capitalized software development costs, net of accumulated
amortization of $1,625,228 and $1,400,228, respectively 1,139,701 989,701
Other 194,273 233,235
-------------------- ---------------------
$ 13,418,082 $ 14,358,116
==================== =====================
See Notes to Condensed Consolidated Financial Statements.
3
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Equity
(Unaudited) (Audited)
October 31, January 31,
2001 2001
------------------- ------------------
Current liabilities:
Accounts payable $ 280,564 $ 464,615
Accrued compensation 282,063 306,180
Accrued other expenses 1,565,747 1,733,631
Deferred revenues 1,192,545 1,755,938
Current portion of long-term debt 2,000,000 1,000,000
------------------- ------------------
Total current liabilities 5,320,919 5,260,364
Long-term debt 3,500,000 5,000,000
Long-term accrued interest 1,892,356 1,442,285
Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized - -
Stockholders' equity:
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 8,896,500 shares issued 88,965 88,965
Capital in excess of par value 34,774,070 34,829,406
Treasury stock, at cost, 1,552 and 17,259 shares, respectively (7,383) (82,038)
Accumulated (deficit) (32,150,845) (32,180,866)
------------------- ------------------
Total stockholders' equity 2,704,807 2,655,467
------------------- ------------------
$ 13,418,082 $ 14,358,116
=================== ==================
See Notes to Condensed Consolidated Financial Statements.
4
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended October 31,
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Revenues:
Systems sales $ 1,763,897 $ 999,035 $ 3,240,398 $ 1,877,970
Services, maintenance and support 1,442,407 1,446,180 4,382,430 4,275,786
Application hosting 178,725 201,471 573,507 603,300
--------------- --------------- --------------- ---------------
Total revenues 3,385,029 2,646,686 8,196,335 6,757,056
Operating expenses:
Cost of systems sales 254,750 256,728 563,328 698,347
Cost of services, maintenance and support 861,602 779,360 2,485,918 2,613,150
Cost of application hosting 81,254 84,366 253,801 274,848
Selling, general and administrative 878,962 751,513 2,524,898 2,505,471
Product research and development 307,865 353,469 1,033,815 1,280,418
--------------- --------------- --------------- ---------------
Total operating expenses 2,384,433 2,225,436 6,861,760 7,372,234
--------------- --------------- --------------- ---------------
Operating income (loss) 1,000,596 421,250 1,334,575 (615,178)
Other income expense:
Interest income 56,899 126,526 234,811 358,487
Interest expense (559,238) (508,422) (1,539,366) (1,409,370)
Other income, net - - - 1,381,419
--------------- --------------- --------------- ---------------
Net income (loss) $ 498,257 $ 39,354 $ 30,020 $ (284,642)
=============== =============== =============== ===============
Basic net income (loss) per common share $ .06 $ .00 $ .00 $ (.03)
=============== =============== =============== ===============
Diluted net income (loss) per common share $ .06 $ .00 $ .00 $ (.03)
=============== =============== =============== ===============
Number of shares used for basic net per common share 8,894,948 8,869,238 8,886,318 8,857,585
=============== =============== =============== ===============
Number of shares used for diluted net per common share 9,012,469 8,869,238 8,997,726 8,857,585
=============== =============== =============== ===============
See Notes to Condensed Consolidated Financial Statements.
5
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended October 31,
(Unaudited)
2001 2000
------------------ -----------------
Operating activities:
Net income (loss) $ 30,020 $ (284,642)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
(Gain) on sale of property and equipment, net - (1,381,419)
Depreciation and amortization 521,754 662,591
Increase in long-term accrued interest 450,071 (187,091)
Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables 186,379 2,381,664
Other current assets 30,154 24,531
Accounts payable and accrued expenses (376,052) (848,210)
Deferred revenues (563,393) (101,011)
------------------ -----------------
Net cash provided by (used for) operating activities 278,933 266,413
------------------ -----------------
Investing activities:
Proceeds from disposal of property and equipment 56,301 2,000,000
Purchases of property and equipment (222,857) (77,984)
Capitalization of software development costs (375,000) (315,000)
Payment on note receivable 75,000 600,000
Other 38,962 40,244
------------------ -----------------
Net cash (used for) provided by investing activities (427,594) 2,247,260
------------------ -----------------
Financing activities:
Payment of long-term debt (500,000) -
Sale of treasury stock to employee stock purchase plan 19,319 21,357
------------------ -----------------
Net cash (used for) provided by financing activities (480,681) 21,357
------------------ -----------------
(Decrease) increase in cash and cash equivalents (629,342) 2,535,030
Cash and cash equivalents at beginning of period 8,549,732 5,411,920
------------------ -----------------
Cash and cash equivalents at end of period $ 7,920,390 $ 7,946,950
================== =================
Supplemental cash flow disclosures:
Interest paid $ 1,046,000 $ 1,548,000
================== =================
See Notes to Condensed Consolidated Financial Statements.
6
LANVISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been
prepared by the Company without audit, in accordance with accounting principles
generally accepted in the United States for interim financial information,
pursuant to the rules and regulations applicable to quarterly reports on Form
10-Q of the United States Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Condensed Consolidated Financial Statements have been included. These Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the LanVision Systems, Inc.
Annual Report on Form 10-K, Commission File Number 0-28132. Operating results
for the three and nine months ended October 31, 2001, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 2002.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 20 of its 2000 Annual Report to Stockholders. Users of
financial information for interim periods are encouraged to refer to the
footnotes contained in the Annual Report to Stockholders when reviewing interim
financial results. There has been no material change in the accounting policies
followed by the Company during fiscal year 2001.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The decrease in cash and cash equivalents results primarily from the payment of
$500,000 in long-term accrued interest and $500,000 of principal on the
outstanding debt, the purchase of fixed assets and a reduction in deferred
revenues and accounts payable, offset to some extent by the decrease in accounts
receivable during the first nine months.
The decrease in accounts receivable, net is due to higher collections, during
the second and third quarters.
The increase in unbilled receivables results from increased revenues from our
remarketing partner, which have not yet been remitted to LanVision.
Other current assets consist of software and hardware awaiting installation
(related to unrecognized revenue) and prepaid expenses, including commissions.
7
The decrease in the cost of computer equipment, computer software and
accumulated depreciation results from the disposal of fully depreciated
equipment no longer used in the operations of the company.
Other non-current assets consist primarily of prepaid long-term debt closing
costs, which are amortized to expense over the life of the loan.
The decrease in accounts payable results primarily from the payment of accounts
when due.
The decrease in accrued compensation results primarily from the decrease in the
accrual for quarterly bonuses payable under the employee bonus plans.
The decrease in accrued other expenses relates to the settlement of certain
obligations during the first nine months.
The decrease in deferred revenues results from the recognition of revenue
related to billings to customers recorded prior to revenue recognition.
The increase in long-term accrued interest is net of a special payment of
$500,000 of such interest at the time the loan agreement was amended, during the
first quarter, to set the financial covenants for fiscal 2001.
Note 4 - STOCK OPTIONS
During the first nine months of the current fiscal year, the Company granted
10,000 stock options under the 1996 Employee Stock Option Plan at an exercise
price of approximately $0.87 per share. During the same period 13,500 options
were forfeited under all plans. No stock options were exercised during the
quarter or first nine months.
Note 5 - EARNINGS PER SHARE
The basic net income per common share is calculated using the weighted average
number of common shares outstanding during the period.
The diluted net income per common share calculation, is based on the weighted
average number of common shares outstanding adjusted for the dilutive effect of
117,521 and 111,408 stock options and Employee Stock Purchase Plan shares in the
third quarter and nine months, respectively, of 2001. The Company had 395,775
option shares outstanding at October 31, 2001 that were not included in the
diluted net income per share calculations as the inclusion thereof would be
antidilutive.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information contained herein, this Discussion and
Analysis, as well as other Items in this Form 10-Q, contains forward-looking
statements. The forward-looking
8
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements, included herein. These risks and uncertainties
include, but are not limited to, the impact of competitive products and pricing,
product demand and market acceptance, new product development, key strategic
alliances with vendors that resell LanVision products, the ability of the
Company to control costs, availability of products produced from third party
vendors, the healthcare regulatory environment, healthcare information systems
budgets, availability of healthcare information systems trained personnel for
implementation of new systems, as well as maintenance of legacy systems,
fluctuations in operating results and other risks detailed from time to time in
the LanVision Systems, Inc. filings with the United States Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements, which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
GENERAL
LanVision is an Electronic Medical Records solution provider and a leading
supplier of Healthcare Information Access Systems software specializing in
connectivity solutions that utilize the power of the Internet/Intranet to link
hospitals, physicians, patients and payers to a robust Electronic Medical
Record. The Company's products are complementary to existing clinical and
financial systems, and use document imaging and workflow tools to ensure
end-users can electronically access all the various forms of healthcare
information including clinician's handwritten notes, lab reports, photographs,
insurance cards, etc. LanVision's solutions offer value to all of the
constituents in the healthcare delivery process by enabling them to
simultaneously access information from virtually any location, including the
physician's desktop, using thin client, web browser-based technology. Web access
to the entire medical record improves physician productivity and reduces
administrative costs such as filing, storage, retrieval and upkeep of medical
records and clinical costs, such as redundant diagnostic testing. The system
enables healthcare providers to access, on a real-time basis, all the various
forms of clinical and financial patient information from a single permanent
healthcare information repository. The Company's solutions integrate a
proprietary document imaging platform, application suites, and image and
web-enabling tools, that allow for the seamless merger of "back office"
functionality with existing Clinical Information Systems at the desktop. The
Company offers a robust document imaging/management infrastructure (Foundation
Suite) that is built for high volume transaction processing and is optimized for
the healthcare industry. In addition to providing the clinician access to
information not previously available at the desktop, the Company's applications
fulfill the administrative and legal needs of the Medical Records and Patient
Financial Services departments. Furthermore, these systems have been
specifically designed to integrate with any Clinical Information System. For
example, the Company has integrated its products with selected systems from
Siemens Medical Solutions Health Services Corporation and Cerner Corporation. By
offering electronic access to all the components of the Medical Record, this
integration completes one of the most difficult tasks necessary to provide a
9
true Computer Based Patient Record. The Company's systems deliver on-line
enterprisewide access to fully-updated patient information which historically
was maintained on a variety of media, including paper, magnetic disk, optical
disk, x-ray film, video, audio and microfilm.
Historically, the Company has derived its revenues from system sales involving
the licensing, either directly or through remarketing partners, of its
Electronic Medical Record solution to Integrated Healthcare Delivery Networks
(IDN). In a typical transaction, the Company, or its remarketing partners, enter
into a term, perpetual or fee-for-service agreement for the Company's Electronic
Medical Record Software Suite and may license or sell other third party software
and hardware components to the IDN. Additionally, the Company, or its
remarketing partners provide professional services, including implementation,
training and product support.
With respect to systems sales, the Company earns its highest margins on
proprietary LanVision software or Application Service Provider (ASP) application
hosting services and the lowest margins on third party hardware. Systems sales
to customers may include different configurations of software and hardware,
resulting in varying margins among contracts. The margins on professional
services revenues are expected to fluctuate based upon the negotiated terms of
the agreement with each customer and the Company's ability to fully utilize its
professional services, maintenance and support services staff.
Beginning in 1998, the Company began offering customers the ability to obtain
its Electronic Medical Record solution on an application hosting basis as an
ASP. The Company's ASP division, called ASPeN(SM) (Application Service Provider
eHealth Network), established a centralized data center and installed the
Company's Electronic Medical Record suite of software, within the data center.
Under this arrangement, customers electronically capture information and
transmit the data to the centralized data center. The ASP Division stores and
manages the data using LanVision's Electronic Medical Record Suite of
Applications, and customers can view, print or fax the information from anywhere
using the LanVision Web browser-based applications. The ASP division charges and
recognizes revenue for these services on a per transaction or subscription basis
as information is captured, stored, and retrieved.
In February 2000, the Company sold its centralized data center for $2,900,000.
Simultaneous therewith, the Company entered into a one-year service agreement
with the buyer. Under the terms of this service agreement, which can be renewed
at the sole option of the Company, in exchange for processing fees, the Company
will continue to use the data center to provide ASP services to LanVision's
current and future customers. The agreement has been renewed through February
2003. Although LanVision sold the data center assets, the Company continues to
market and provide its ASP solutions through the data center and intends to
utilize other data center service providers.
In August 2000, LanVision entered into an agreement with SmartHealth Services,
Inc. (SmartHealth), which allows SmartHealth to utilize LanVision's
MicroVision(TM) Electronic Medical Record (EMR) product combined with web-based
SmartHealth software to provide affordable, web-based EMR document management
and viewing services to hospitals and clinics via the Internet. SmartHealth
Services, Inc., in conjunction with its affiliate, Alpharetta, Georgia based
Smart Professional Photocopy Corporation, d/b/a Smart Corporation, distribute
their services through Smart Corporation's extensive sales distribution network
which currently
10
consists of over 1,000 hospitals and 4,600 clinic customers throughout 46
states. LanVision is compensated for use of its software based upon the number
of EMR images SmartHealth scans and stores using the MicroVision ASP
application. LanVision has not received any substantial revenues from
SmartHealth to date, and LanVision is uncertain about future revenues in light
of a current contractual dispute with SmartHealth regarding licensing revenues
payable to LanVision.
In November 2000, LanVision entered into an agreement with Provider HealthNet
Services Inc. (PHNS) a privately held, Dallas, TX based company, which allowed
PHNS to offer LanVision's MicroVision EMR product to provide EMR document
management and viewing services to PHNS' customer base. PHNS is a healthcare
industry information technology and business outsourcing company, which provides
information technology and professional management of information systems,
medical records and related business processes to hospitals and other healthcare
providers on a shared basis to improve healthcare services and reduce costs. The
relationship with LanVision allowed PHNS to more effectively use information
technology and the LanVision document imaging and management solution for
medical records and other business processes to improve healthcare services and
reduce costs for its customers. The LanVision ASP services allowed PHNS to offer
a state-of-the-art, Application Service Provider-based EMR solution, an offering
that contributes to increased process efficiency for medical records functions.
To date, LanVision has recorded no revenues from PHNS. The LanVision/PHNS
agreement contained a provision that enabled LanVision or PHNS to terminate the
agreement should certain financial targets not be met by November 6, 2001. The
financial targets were not met. Accordingly, LanVision terminated the PHNS
agreement effective November 6, 2001.
In November 2001, LanVision announced that it had signed a letter of intent with
3M Health Information Systems, a division of the Minnesota Mining and
Manufacturing Company (3M), to offer remote, web-enabled, internet accessible,
medical records coding and abstracting through the integration of
codingANYware(SM), LanVision's remote coding product, with 3M Health management
technology for patient data abstracting. The planned agreement will provide for
the health information management industry's first fully integrated remote
coding and data abstracting software solution. 3M's strong reputation for
market-leading coding and abstracting products, and LanVision's wealth of
experience in document imaging and workflow solutions will make for a truly
integrated remote coding and abstracting product and will maximize the
efficiency of remote coding operations and streamline billing, thereby reducing
a healthcare organization's accounts receivable. The capabilities of the
combined 3M and LanVision software will help address the industry's critical
shortage of trained coders and abstractors by making it possible to code and
abstract medical records from any location outside the hospital. This new
software creates an effective tool for recruiting coding personnel who prefer to
work from home or for use by remote coding companies who provide outsourcer
coding and abstracting services to the healthcare industry.
The decision by a healthcare provider to replace, substantially modify or
upgrade its information systems is a strategic decision and often involves a
large capital commitment requiring an extended approval process. Since
inception, the Company has experienced extended sales cycles, which has
adversely affected revenues. It is common for sales cycles to take six to
eighteen months from initial contact to the execution of an agreement. As a
result, the sales cycles can cause significant
11
variations in quarter-to-quarter operating results. These agreements cover the
entire implementation of the system and specify the implementation schedule,
which typically takes place in one or more phases. The agreements generally
provide for the licensing of the Company's proprietary software and third party
software with a perpetual or term license fee that is adjusted depending on the
number of concurrent users or workstations using the software. Third party
hardware is usually sold outright, with a one-time fee charged for installation
and training. Site-specific customization, interfaces with existing customer
systems and other consulting services are sold on a fixed fee or a time and
materials basis. Alternatively, with the Company's ASP services, the agreements
generally provide for utilizing the Company's software and third party software
on a fee per transaction or subscription basis.
Generally, revenue from systems sales is recognized when an agreement is signed
and products are shipped. Revenue recognition related to routine installation,
integration and project management is deferred until the work is performed. If
an agreement requires the Company to perform services and modifications that are
deemed significant to system acceptance, revenue is recorded either on the
percentage-of-completion method or revenue related to the delivered hardware and
software components is deferred until such obligations are deemed insignificant,
depending on the contractual terms. Revenues from consulting, training and ASP
services are recognized as the services are performed. Revenues from short-term
support and maintenance agreements are recognized ratably over the term of the
agreements. Billings to customers recorded prior to the recognition of the
revenue are classified as deferred revenues. Revenue recognized prior to
progress billings to customers is recorded as unbilled receivables.
The Company's ASPeN Services, offered by its ASP Division, was designed to
overcome obstacles in the buying decision such as large capital commitment,
length of implementation, and the scarcity of time for Healthcare Information
Systems personnel to implement new systems. Customers pay for such services on a
transaction or subscription basis, and the centralized data center application
is operated and maintained by LanVision personnel and/or its agents. In 1999,
the ASP Division signed a four-year contract with The Health Alliance of Greater
Cincinnati, a group of five hospitals in the Greater Cincinnati Area, to provide
outsourced data center operations of its LanVision Electronic Medical Record
System. Management believes more IDN's will utilize this type of ASP
application. Additionally, the Company believes its business model is especially
well suited for the ambulatory marketplace. LanVision is actively pursuing
remarketing agreements with Healthcare Information Systems providers to
distribute the Company's ASP solutions.
In 1998, the Company entered into a five-year Remarketing Agreement with Siemens
Medical Solutions Health Services Corporation (SMS). Under the terms of the
agreement, SMS was granted an exclusive worldwide license to distribute
ChartVision(R), On-Line Chart Completion(TM), WebView(TM) and Enterprisewide
Correspondence(TM) to the SMS customer base and prospect base, as defined in the
agreement, and a non-exclusive license to distribute all other LanVision
products. If SMS distributes any other Electronic Medical Record product
competing with LanVision's products, the Company may terminate the SMS
Remarketing Agreement.
Under the terms of the agreement, SMS remits royalties to LanVision based upon
SMS sublicensing the Company's software to SMS's customers. Generally,
twenty-five percent of the royalty is due 30 days following the end of the
quarter in which SMS executes the end user license agreement with its customer.
LanVision recognizes this revenue upon receipt of the royalty
12
statement. Generally, the remaining 75% of the royalty is due 30 days following
the end of the quarter in which SMS commences software implementation
activities. The Company records this revenue when the 75% payment due from SMS
is fixed and determinable, which is when the software implementation activities
commence. Through October 31, 2001, SMS has sold twenty systems to end-users.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS
The Company's revenues from systems sales have varied, and may continue to vary,
significantly from quarter-to-quarter as a result of the volume and timing of
systems sales and delivery. Professional services revenues also fluctuate from
quarter to quarter as a result of the timing of the installation of software and
hardware, project management and customized programming. Revenues from
maintenance services do not fluctuate significantly from quarter to quarter, but
have been increasing as the number of customers increase. Revenues from ASP
application hosting operations are expected to increase over time, as more
hospitals outsource services to LanVision's ASP Division, or its remarketing
partners begin to utilize the software, and existing customers increase the
volume of documents stored on the systems, and the number of retrievals
increase.
The Company's revenues and operating results may vary significantly from
quarter-to-quarter as a result of a number of other factors, many of which are
outside the Company's control. These factors include the relatively high
purchase price of a system, unpredictability in the number and timing of systems
sales, length of the sales cycle, delays in the installation process and changes
in the customer's financial condition or budget and the sales and implementation
activities of the remarketing partners. As a result, period to period
comparisons may not be meaningful with respect to the past operations of the
Company nor are they necessarily indicative of the future operations of the
Company.
REVENUES
Revenues for the third fiscal quarter ended October 31, 2001, were $3,385,029,
compared with $2,646,686 reported in the comparable quarter of 2000. Revenues
for the nine months ended October 31, 2001, were $8,196,335, compared with
$6,757,056 reported in the comparable period of 2000. The increase for the
quarter and the first nine months is due to increases in LanVision software
revenues from new contracts and implementation of existing contracts through our
remarketing partner. Notwithstanding the increase in revenues for the first nine
months of fiscal 2001, LanVision believes that the current market opportunity
for its products is significantly greater then the current revenues would
suggest because many healthcare organizations continue to defer new software
purchases until final Federal Health Privacy Regulations are promulgated, to
comply with the requirements of HIPAA (Health Insurance Portability and
Accountability Act of 1996). Although the HIPAA regulations have been
promulgated, many hospitals continue to formulate their implementation options
for compliance with HIPAA and purchase decisions for EMR products have been
postponed because of HIPAA and for many other reasons, including budgetary
constraints.
13
Additionally, healthcare institutions are assessing and implementing many new
technologies. Although many of these systems do not compete with LanVision
products, these systems do compete for capital budget dollars and the available
time of information systems personnel within the healthcare industries. However,
management continues to believe that revenue from its Remarketing Agreement with
SMS will continue to increase in the future since LanVision's product has been
fully integrated with the SMS product. LanVision continues to pursue indirect
sales channel opportunities through strategic business partner relationships to
expand its distribution opportunities. In addition, our Web browser-based ASP
application, which is currently available and in production with our customers
and available, through our resellers, should further enhance revenues through
software royalties to LanVision with minimal additional cost. Both Remarketing
and Reseller Agreements should continue to represent a greater percentage of the
Company's total revenues in the future.
Many healthcare organizations are beginning to plan additional information
technology projects following Year 2000 remediation and in anticipation of HIPAA
compliance. The HIPAA Regulations are a series of standards that are intended to
regulate the way health information is secured and transmitted. A recent
healthcare industry report (Fitch IBCA, Duff & Phelps) stated that in order to
comply with the HIPAA healthcare information electronic transmission
regulations, healthcare systems will need to adjust existing systems or purchase
new information technology systems, hire and retrain staff, and make significant
changes to the current processes associated with maintaining patient privacy,
the cost of which is estimated to be somewhere between three to four times the
amount of expenditures required for Year 2000 remediation, or an amount in
excess of $25 billion. LanVision believes its highly evolved, secure and
technologically advanced Web browser-based solutions will position the Company
to take advantage of, what we continue to believe will be, significantly
increasing market opportunities for LanVision and its strategic distribution
partners in the future.
After an agreement is executed, LanVision does not record revenues until it
delivers the hardware and software or performs the agreed upon services. The
commencement of revenue recognition varies depending on the size and complexity
of the system and the scheduling of the implementation, training, interface
development and other services requested by the customer. Accordingly,
significant variations in revenues can result as was more fully discussed above
under "Uneven Patterns of Quarterly Operating Results." Three customers,
excluding our remarketing partner SMS, accounted for approximately 20% of the
revenues for the third quarter of 2001 compared with 44%, of revenues in the
comparable period of the prior year. Three customers, excluding our remarketing
partner SMS, accounted for approximately 22% of the revenues for the first nine
months of 2001 compared with 36%, of revenues in the comparable period of the
prior year. Revenue from SMS accounted for approximately $1,370,000 and
$2,315,000, for the three months and nine months, respectively, ended October
31, 2001, compared with approximately $98,000 and $532,000 for the three months
and nine months, respectively, in the comparable periods of the prior year. SMS
accounted for approximately 40% of the revenues for the third quarter of 2001
compared with approximately 3%, of revenues in the comparable period of the
prior year. SMS accounted for approximately 28% of the revenues for the first
nine months of 2001 compared with approximately 8%, of revenues in the
comparable period of the prior year. The increase in SMS revenue results from
new sales and increased software implementations in the current periods compared
with the prior comparable periods.
14
OPERATING EXPENSES
Cost of Systems Sales
The cost of systems sales includes amortization of capitalized software
development costs on a straight-line basis, royalties and the cost of third
party software and hardware. Cost of systems sales as a percentage of systems
sales may vary from period to period depending on the mix of hardware and
software of the systems or add-on sales delivered. The cost of systems sales as
a percentage of systems sales for the third quarter and first nine months of
fiscal 2001 were 14% and 17%, respectively. The cost of systems sales as a
percentage of systems sales for the third quarter and first nine months of
fiscal 2000 were 26% and 37%, respectively. The lower percentage of cost of
sales reflects higher margins on greater volume of LanVision software revenues
and less hardware sold during the current periods compared to the comparable
prior periods, which had lower software revenues.
Cost of Services, Maintenance and Support
The cost of services, maintenance and support includes compensation and benefits
for support and professional services personnel and the cost of third party
maintenance contracts. As a percentage of services, maintenance and support
revenues, the cost of such services, maintenance and support was 60% and 57% for
the third quarter and first nine months, respectively, of fiscal 2001. As a
percentage of services, maintenance and support revenues, the cost of such
services, maintenance and support was 54% and 61% for the third quarter and
first nine months, respectively, of fiscal 2000. The Company's support margins
are highest on LanVision's proprietary software. Accordingly, margins are
expected to improve as more customers are added. The professional services costs
increased in the current quarter due to higher use of outside consultants for
specific projects and decreased in the first nine months due to increased
overall staff utilization and lower third party maintenance costs.
The LanVision Professional Services staff provides services on a time and
material or fixed fee basis. The Professional Services staff periodically
experiences some inefficiencies in the delivery of services, and certain
projects have taken longer to complete than originally estimated, thus adversely
affecting operating performance. Additionally, the Professional Services staff
does spend a portion of its time on non-billable activities, such as selling
additional products and services to existing clients, developing training
courses and plans to move existing customers to LanVision's new product
releases, etc. Management believes an increase in the number of new systems
sold, and the related backlog, should improve the overall efficiency and
operating performance of this group.
Cost of Application Hoisting Operations
The cost of Application Hosting operations was significantly reduced with the
sale of the data center. The Company now incurs expenses only for the
outsourcing services it uses which are directly related to the Application
Hosting Revenues generated by the ASP Division.
15
Selling, General and Administrative
Selling, General and Administrative expenses consist primarily of: compensation
and related benefits and reimbursable travel and living expenses related to the
Company's sales, marketing and administrative personnel; advertising and
marketing expenses, including trade shows and similar type sales and marketing
expenses; and general corporate expenses, including occupancy costs. During the
third quarter of fiscal 2001, Selling, General and Administrative expenses
increased to approximately $879,000 compared with approximately $751,000 in the
comparable prior quarter, and increased in the first nine months to
approximately $2,525,000 compared with approximately $2,505,000 in the
comparable prior period. The increase in Selling, General and Administrative
expenses in the third quarter is due to increases in corporate expenses,
especially professional fees. The Company has gradually reduced its direct sales
staff as the Company focuses its sales efforts on indirect distribution through
its current and future Remarketing, Reseller and ASP strategic business
Partners. However, the Company may increase its direct sales force in the
foreseeable future as market opportunities arise.
Product Research and Development
Product research and development expenses consist primarily of: compensation and
related benefits; the use of independent contractors for specific development
projects; and an allocated portion of general overhead costs, including
occupancy. During the third quarter and first nine months, research and
development expenses were approximately $308,000 and $1,034,000, respectively,
compared with approximately $353,000 and $1,280,000, respectively, in the
comparable prior quarter and first nine months. The decrease results primarily
from lower staff costs and occupancy related expenses. The Company monitors
closely its Research and Development projects, and augments, with contract
programmers, its Research and Development staff, as necessary, to ensure timely
completion of its development of new products or enhancements to existing
products. The Company capitalized, in accordance with Statement of Financial
Accounting Standards No. 86, $375,000 of product research and development costs
for the first nine months of fiscal 2001 and $315,000 of product research and
development cost for the first nine months of fiscal 2000. The capitalized costs
relate primarily to LanVision's two new products, accessANYware(SM), which is in
controlled general release and codingANYware, which is under development and is
expected to be released in the first quarter of fiscal 2002.
Operating income (loss)
The operating income for the third quarter of fiscal 2001 was $1,000,596
compared with $421,250 in the third quarter of fiscal 2000. The operating income
for the first nine months of fiscal 2001 was $1,334,575 compared to an operating
loss of $615,178 in the comparable prior period. The $1,949,753 increase in the
year-to-date operating income results primarily from: (1) continued stringent
cost controls which resulted in decreased operating expenses of approximately
$510,000, and (2) increased revenues of approximately $1,439,000, primarily
software licensing revenues.
Interest income consists primarily of interest on invested cash. The decrease in
interest income results from lower interest rates on lower cash balances.
16
Interest expense relates to the long-term debt.
Net income (loss)
The net income for the third quarter of fiscal 2001 was $498,257 ($.06 per
share) compared with net income of $39,354 ($.00 per share) in the third quarter
of fiscal 2000. The net income for the first nine months of fiscal 2001 was
$30,020 ($.00 per share) compared with a net loss of $284,642 ($.03 per share)
in the first nine months of fiscal 2000. Excluding the gain on the sale of the
data center from the first quarter of the prior year, the net loss for the first
nine months of fiscal 2000 would have been $1,666,061. This $1,696,081
improvement in net income, results primarily from: (1) the continued stringent
cost controls in all areas, (2) the sale of the data center which reduced the
ongoing operating expenses of the ASP Division and (3) increased revenues of
approximately $1,439,000, as discussed above.
Notwithstanding the less than anticipated number of new customer agreements
signed in the past, management continues to believe that the healthcare document
imaging and workflow market is going to be a significant market, as evidenced by
five new sales by our remarketing partner in the third quarter. Management
believes it has made, and continues to make, the investments in the talent and
technology necessary to establish the Company as the leader in this marketplace,
and continues to believe the Company is well positioned to experience
significant revenue growth primarily through third party distributors and
strategic business remarketing partners.
Since commencing operations in 1989, the Company has incurred operating losses.
Although the Company achieved profitability in fiscal years 1992, 1993, 2000 and
currently anticipates profitability for 2001, the Company incurred a net loss in
fiscal years 1994 through 1999. In view of the Company's prior operating
history, there can be no assurance that the Company will be able to achieve
consistent profitability on a quarterly or annual basis or that it will be able
to sustain or increase its revenue growth in future periods. Based upon the
expenses associated with current and planned staffing levels, profitability is
dependent upon maintaining current revenues. Notwithstanding the volatility of
quarter-to-quarter results, our year-to-date profitability and the prospect of
adding additional strategic business partners to increase our distribution
opportunities, we believe, should enable LanVision to continue to improve
operating profitability for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
During the last five fiscal years, LanVision has funded its operations, working
capital needs and capital expenditures primarily from a combination of cash
generated by operations, an initial public offering, and a $6,000,000 loan.
LanVision's customers typically have been well-established hospitals or medical
facilities with good credit histories, and payments have been received within
normal time frames for the industry. However, some healthcare organizations have
experienced significant operating losses as a result of limits on third party
reimbursements from insurance companies and governmental entities. Agreements
with customers often involve significant amounts and contract terms typically
require customers to make progress payments.
17
LanVision has no significant obligations for capital resources, other than
noncancelable operating leases in the total amount of approximately $170,000,
payable over the next two years.
Over the last several years, LanVision's revenues were less than its internal
plans. However, during the same period, LanVision has expended significant
amounts for capital expenditures, product research and development, sales,
support and consulting expenses. This resulted in significant net cash outlays
over the last five years. Although LanVision has reduced staffing levels and
related expenses, and improved operating performance, LanVision's expenses may
continue to approximate or exceed its revenues. Accordingly, to achieve
continuing profitability, and positive cash flow, it is necessary for LanVision
to increase revenues or continue to reduce expenses. LanVision believes that the
requirement for healthcare organizations to become HIPAA compliant should offer
a significant opportunity to increase revenues. Additionally, the SMS
Remarketing Agreement has significantly expanded the sales distribution
capabilities. LanVision believes that market opportunities are such that
LanVision should be able to increase its revenues. However, there can be no
assurance LanVision will be able to increase its revenues.
In February 2000, LanVision sold its Data Center for $2,900,000. LanVision
received $2,000,000 and the remaining $900,000 was received in twelve monthly
installments. The sale resulted in a gain of approximately $1,400,000.
At October 31, 2001, LanVision had cash and cash equivalents of $7,920,390. Cash
equivalents consist primarily of overnight bank repurchase agreements and
short-term commercial paper. Under the terms of its loan agreement, as amended,
LanVision has agreed to maintain a minimum cash and cash equivalent balance of
$5,300,000. During fiscal 2001, $1,000,000 of long-term debt is required to be
repaid to the lender, $500,000 quarterly, commencing October 1, 2001, and
annually, thereafter at a rate of $2,000,000 per year to maturity.
LanVision has significantly reduced its operating expenses during the last two
fiscal years, and believes it will continue to improve operating results in
fiscal 2001. However, based upon current expenditure levels and in the absence
of increased revenues, LanVision could continue to operate at a loss.
Accordingly, for the foreseeable future, LanVision will need to continually
assess its revenue prospects compared to its current expenditure levels. If it
does not appear likely that revenues will increase, it may be necessary to
further reduce operating expenses or raise cash through additional borrowings,
the sale of assets, or other equity financing. Certain of these actions will
require lender approval. However, there can be no assurance LanVision will be
successful in any of these efforts. If it is necessary to significantly reduce
operating expenses, this could have an adverse effect on future operating
performance. However, at this time, LanVision believes that it should be able to
increase its revenues in fiscal 2001 and beyond, notwithstanding the uneven
pattern of quarterly revenues as discussed above.
To date, inflation has not had a material impact on LanVision's revenues or
expenses. Additionally, LanVision does not have any significant market risk
exposure at October 31, 2001.
18
SIGNED AGREEMENTS - BACKLOG
LanVision, or its remarketing partners, enter into master agreements with their
customers to specify the scope of the system to be installed and services to be
provided, the agreed upon aggregate price and the timetable for implementation.
The master agreement typically provides that the Company, or its remarketing
partner, will deliver the system in phases pursuant to the customer's purchase
orders, thereby allowing the customer flexibility in the timing of its receipt
of systems and to make adjustments that may arise based upon changes in
technology or changes in customer needs. The master agreement also allows the
customer to request additional components as the installation progresses, which
additions are then separately negotiated as to price and terms. Historically,
customers have ultimately purchased systems and services in addition to those
originally contemplated by the master agreement. Although there can be no
assurance that customers will continue in the future to expand their systems and
purchase additional licenses and services, LanVision believes, based on its past
experience, that its customers will expand their existing systems.
At October 31, 2001, the Company's and SMS' customers had entered into master
agreements for systems and services (excluding support and maintenance and
transaction based revenues for the ASP Division), which had not yet been
delivered, installed and accepted which, if fully performed, would generate
revenue of approximately $3,209,000, compared with approximately $4,255,000 at
the end of fiscal 2000. The systems and services are currently expected to be
delivered over the next two to three years. In addition, the Company anticipates
approximately $1,900,000 in transaction-based fee revenues for the ASP
Division's current clients over the next two years. Because systems
implementations and Application Hosting ASP fees are dependent upon the
customer's schedule and / or usage, the Company is unable to accurately predict
the amount of revenues in future periods.
The Company's master agreements also generally provide for an initial
maintenance period and give the customer the right to subscribe for maintenance
and support services on a monthly, quarterly or annual basis. Maintenance and
support revenues for fiscal years 2000, 1999, 1998 and 1997 were approximately
$3,678,000, $3,264,000, $2,755,000 and $2,151,000, respectively and are expected
to increase as new or expanded systems are installed.
The commencement of revenue recognition varies depending on the size and
complexity of the system, the implementation schedule requested by the customer
and usage by customers of the ASP Division. Therefore, LanVision is unable to
accurately predict the revenues it expects to achieve in any particular period.
The Company's master agreements generally provide that the customer may
terminate its agreement upon a material breach by the Company, or may delay
certain aspects of the installation. There can be no assurance that a customer
will not cancel all or any portion of a master agreement or delay installations.
A termination or installation delay of one or more phases of an agreement, or
the failure of the Company to procure additional agreements, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
19
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not currently engaged in any material adverse litigation.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of LanVision Systems, Inc. (*)
3.2 Bylaws of LanVision Systems, Inc. (*)
11 Computation of Earnings (Loss) Per Common Share
(*) Incorporated by reference.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANVISION SYSTEMS, INC.
DATE: December 5, 2001 By: /s/ J. BRIAN PATSY
--------------------- ---------------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: December 5, 2001 By: /s/ PAUL W. BRIDGE, JR.
--------------------- ---------------------------------------------
Paul W. Bridge, Jr.
Chief Financial Officer and Treasurer
20
INDEX TO EXHIBITS
Exhibit No. Exhibit
- -----------
3.1 Certificate of Incorporation of LanVision Systems, Inc.
Previously filed with the Commission and incorporated
herein by reference from, the Registrant's Registration
Statement on Form S-1, File Number 333-01494, as filed with
the Commission on April 15, 1996.
3.2 Bylaws of LanVision Systems, Inc.
Previously filed with the Commission and incorporated herein
by reference from, the Registrant's Registration Statement
on Form S-1, File Number 333-01494, as filed with the
Commission on April 15, 1996.
11 Computation of Earnings (Loss) Per Common Share