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 April 30, 2002
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 May 31, 2002: 8,922,279.
1
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements....................................................... 3
Condensed Consolidated Balance Sheets at April 30, 2002 and January 31, 2002...................... 3
Condensed Consolidated Statements of Operations for the three months ended April 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2002 and 2001 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................................................................................. 18
Item 3. Defaults on Senior Securities..................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................................................. 19
Signatures........................................................................................ 20
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) (Audited)
April 30, January 31,
2002 2002
------------ ------------
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 6,899,878 $ 7,865,053
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively 1,867,070 1,451,027
Unbilled receivables 1,709,062 1,742,785
Prepaid expenses related to unrecognized revenue 75,949 113,081
Other 280,214 201,962
------------ ------------
Total current assets 10,832,173 11,373,908
Property and equipment:
Computer equipment 1,952,417 1,875,590
Computer software 475,282 421,962
Office furniture, fixtures and equipment 1,139,457 1,139,457
Leasehold improvements 117,795 117,795
------------ ------------
3,684,951 3,554,804
Accumulated depreciation and amortization (3,122,881) (3,048,793)
------------ ------------
562,070 506,011
Capitalized software development costs, net of accumulated
amortization of $1,800,228 and $1,700,228, respectively 1,239,701 1,189,701
Installment receivables 267,969 267,969
Other 158,042 171,516
------------ ------------
$ 13,059,955 $ 13,509,105
============ ============
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)
April 30, January 31,
2002 2002
------------ ------------
Current liabilities:
Accounts payable $ 437,830 $ 230,571
Accrued compensation 381,657 235,958
Accrued other expenses 1,322,722 1,525,096
Deferred revenues 1,356,678 1,371,200
Current portion of long-term debt 2,000,000 2,000,000
------------ ------------
Total current liabilities 5,498,887 5,362,825
Long-term debt 2,500,000 3,000,000
Long-term accrued interest 2,056,317 2,239,798
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, 8,913,947 shares issued 89,139 89,139
Capital in excess of par value 34,787,849 34,787,849
Accumulated (deficit) (31,872,237) (31,970,506)
------------ ------------
Total stockholders' equity 3,004,751 2,906,482
------------ ------------
$ 13,059,955 $ 13,509,105
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended April 30,
(Unaudited)
Three Months Ended
--------------------------
2002 2001
----------- -----------
Revenues:
Systems sales $ 1,437,354 $ 1,056,980
Services, maintenance and support 1,400,869 1,464,307
Application-hosting services 194,996 191,116
----------- -----------
Total revenues 3,033,219 2,712,403
Operating expenses:
Cost of systems sales 366,201 150,431
Cost of services, maintenance and support 718,410 746,117
Cost of application-hosting services 66,649 85,505
Selling, general and administrative 843,527 705,244
Product research and development 507,080 552,146
----------- -----------
Total operating expenses 2,501,867 2,239,443
----------- -----------
Operating profit 531,352 472,960
Other income (expense):
Interest income 29,923 104,432
Interest expense (476,006) (475,851)
----------- -----------
Earnings before income taxes 85,269 101,541
Income tax provision (benefit) (13,000) --
----------- -----------
Net income $ 98,269 $ 101,541
=========== ===========
Basic net income per common share $ .01 $ .01
=========== ===========
Diluted net income per common share $ .01 $ .01
=========== ===========
Number of shares used in per common share computations:
Basic 8,913,947 8,879,241
=========== ===========
Diluted 9,232,807 8,969,919
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 30,
(Unaudited)
2002 2001
----------- -----------
Operating activities:
Net income $ 98,269 $ 101,541
Adjustments to reconcile net income to net cash
(used for) operating activities:
Depreciation and amortization 174,088 180,040
(Decrease) increase in long-term accrued interest (183,481) (218,303)
Cash (used for) provided by assets and liabilities:
Accounts and unbilled receivables (382,320) 293,644
Other current assets (41,120) (98,476)
Accounts payable and accrued expenses 150,584 (85,472)
Deferred revenues (14,522) (437,039)
----------- -----------
Net cash (used for) operating activities (198,502) (264,065)
----------- -----------
Investing activities:
Purchases of property and equipment (130,147) (145,694)
Capitalization of software development costs (150,000) (125,000)
Payment on note receivable -- 75,000
Other 13,474 17,776
----------- -----------
Net cash (used for) investing activities (266,673) (177,918)
----------- -----------
Financing activities:
Repayment of long-term debt (500,000) --
----------- -----------
Net cash (used for) financing activities (500,000) --
=========== ===========
(Decrease) in cash and cash equivalents (965,175) (441,983)
Cash and cash equivalents at beginning of period 7,865,053 8,549,732
----------- -----------
Cash and cash equivalents at end of period $ 6,899,878 $ 8,107,749
=========== ===========
Supplemental cash flow disclosures:
Interest paid $ 650,167 $ 680,000
=========== ===========
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 Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the Condensed Consolidated Financial Statements have been
included. These Condensed Consolidated Financial Statements should be read in
conjunction with the financial statements and notes thereto included in the
LanVision Systems, Inc. Annual Report on Form 10-K, Commission File Number
0-28132. Operating results for the three months ended April 30, 2002, are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 31, 2003.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 23 of its 2001 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 2002.
Beginning in fiscal year 2002, certain expenses that were previously classified
as cost of services, maintenance and support and selling, general and
administrative expenses have been reclassified to product research and
development. Prior year amounts have been reclassified to conform to the 2002
financial statement presentation.
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 debt and $500,000 on long-term accrued interest on the
outstanding debt during the quarter.
The increase in accounts receivable, net is due to higher royalties due from a
remarketing partner at the end of the quarter.
Other current assets consist of software and hardware awaiting installation
(related to unrecognized revenue) and prepaid expenses, including commissions.
The increase in property and equipment, net, is primarily the result of the
acquisition of computer equipment and software necessary to support current
customers.
7
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 increase in accounts payable results primarily from the delivery of hardware
to new customers in April, the invoices for which were not paid at the quarter
end.
The increase in accrued compensation results primarily from the increase in the
accrual for first quarter bonuses payable under the employee bonus plans.
The decrease in accrued other expenses relates to the settlement of certain
accrued obligations during the quarter.
The decrease in deferred revenues results from the recognition of revenue
related to billings to customers recorded prior to revenue recognition.
The decrease in long-term accrued interest results from the 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 2002, net of the normal
increase in the deferred interest payable under the loan.
Note 4 - STOCK OPTIONS
During the first three months of the current fiscal year, the Company granted no
stock options under any Stock Option Plan. During the same period no options
were forfeited under all plans and no stock options were exercised during the
quarter.
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
stock options ( 318,860 option shares in 2002, and 90,678 option shares in 2001
) The Company had approximately 103,775 option shares outstanding at April 30,
2002 that were not included in the diluted net income per share calculation 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 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
8
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 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 Systems, Inc. ("LanVision"(TM) or the "Company") is an Electronic
Medical Record solution provider and a leading supplier of Healthcare
Information Access Solutions 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. LanVision's products are
complementary to existing clinical and financial systems, and use document
imaging and workflow tools to ensure end-users can electronically access both
"structured" and "unstructured" patient data and 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 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 and secure
healthcare information repository. LanVision'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. LanVision 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, LanVision'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, LanVision has
integrated its products with selected systems from Siemens Medical Solutions
Health Services Corporation (Siemens), Cerner Corporation and will soon
integrate its products with IDX Information Systems Corporation (IDX)
applications. By offering electronic access to all the components of the medical
record, this integration completes one of the most difficult tasks necessary to
provide a true Computer Based Patient Record. LanVision'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.
9
Historically, LanVision has derived its revenues from systems 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, LanVision, or its remarketing partners, enter
into a perpetual or term license or fee-for-service agreement for LanVision's
Electronic Medical Record software suite and may license or sell other
third-party software and hardware components to the IDN. Additionally,
LanVision, or its remarketing partners provide professional services, including
implementation, training and product support.
With respect to systems sales, LanVision earns its highest margins on
proprietary LanVision software or 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 fluctuate based
upon the negotiated terms of the agreement with each customer and LanVision's
ability to fully utilize its professional services, maintenance and support
services staff.
Beginning in 1998, LanVision began offering customers the ability to obtain its
Electronic Medical Record solution on an application-hosting basis as an
Application Service Provider (ASP). LanVision's ASP Division, established a
hosting data center and installed LanVision's Electronic Medical Record suite,
called ASPeN (Application Service Provider eHealth Network) within the hosting
data center. Under this arrangement, customers electronically capture
information and transmit the data to the hosting 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-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, LanVision sold its hosting data center for $2,900,000.
Simultaneously therewith, LanVision entered into an annual service agreement
with the buyer. Under the terms of this service agreement, which can be renewed
annually at the sole option of the Company, in exchange for processing fees,
LanVision will continue to use the hosting data center to provide ASP services
to LanVision's current and future customers. Although LanVision sold the hosting
data center assets, LanVision continues to market its ASP solutions. LanVision
continues to provide its ASP solutions through the hosting data center and
intends to utilize other hosting 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
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, in
conjunction with their affiliate Alpharetta, Georgia based Smart Professional
Photocopy Corporation d/b/a Smart Corporation, distributes their services
through Smart Corporation's extensive sales distribution network which currently
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 application. To
date, the revenues from SmartHealth have not been significant and LanVision is
unable, at this time, to determine the magnitude of future revenues.
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
10
extended approval process. Since inception, LanVision 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 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 LanVision'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
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 LanVision's ASPeN Services solution, the Application-hosting
Services agreements generally provide for utilizing LanVision's software and
third-party software on a fee per transaction or subscription basis.
The ASPeN Services 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 application-hosting services on a per transaction or
subscription basis, and the centralized data center applications are operated
and maintained by LanVision personnel and/or its agents. In 1999, the ASPeN
Services 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 solution. LanVision believes that more IDN's will begin to look for this
type of ASP application. LanVision believes its business model is especially
well suited for the ambulatory marketplace and is actively pursuing remarketing
agreements, in addition to those discussed below, with other Healthcare
Information Systems providers to distribute LanVision's Electronic Medical
Record solution.
Generally, revenue from systems sales is recognized when an agreement is signed
and products are made available to end-users. 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.
In 1998, LanVision entered into a five year Remarketing Agreement with Siemens
Medical Solutions Health Services Corporation. Under the terms of the Agreement,
Siemens was granted an exclusive worldwide license to distribute ChartVision,
On-Line Chart Completion, WebView and Enterprisewide Correspondence to the
Siemens customer base and prospect base, as defined in the Agreement, and a
non-exclusive license to distribute all other LanVision products. If Siemens
distributes any other Electronic Medical Record product competing with
LanVision's products, LanVision may terminate the Siemens Remarketing Agreement.
LanVision and Siemens are currently in negotiations for a new agreement to
replace the existing agreement which expires in early 2003.
11
Under the terms of the agreement, Siemens remits royalties to LanVision based
upon Siemens sublicensing the Company's software to Siemens' customers.
Twenty-five percent of the royalty is due 30 days following the end of the
quarter in which Siemens executes the end user license agreement with its
customer. LanVision recognizes this revenue upon receipt of the royalty
statement. The remaining seventy-five percent of the royalty is due 30 days
following the end of the quarter in which Siemens commences software
implementation activities. The Company records this revenue when the 75% payment
due from Siemens is fixed and determinable, which is when the software
implementation activities commence. Through April 30, 2002, Siemens has sold
twenty-three systems to end-users.
In January 2002, LanVision entered into a five year Remarketing Agreement with
IDX Information Systems Corporation. Under the terms of the agreement, IDX was
granted a non-exclusive worldwide license to distribute certain LanVision
Electronic Medical Record software including accessANYware, codingANYware when
it becomes available, and ASPeN services to IDX customers and prospective
customers, as defined in the Agreement.
Under the terms of a remarketing agreement with IDX Information Systems
Corporation (IDX) royalties are remitted by IDX to LanVision based upon IDX
sublicensing LanVision's software to IDX's customers. Thirty percent of the
royalty is due 45 days following the end of the month in which IDX executes an
end-user license agreement with its customer. LanVision recognizes this revenue
upon receipt of the royalty report. The remaining seventy percent of the royalty
is due from IDX, in varying amounts based on implementation milestones, 45 days
following the end of the month in which a milestone occurs. LanVision records
this revenue when the seventy percent payment due from IDX is fixed and
determinable, which is generally when the software implementation activities
commence. The IDX remarketing agreement was signed in January 2002. Through
April 30, 2002, IDX has sold one system to an end-user.
In December 2001, a letter of intent was signed by 3M Health Information
Systems, division of 3M, whereby 3M and LanVision will enter into a referral
marketing agreement for its new product codingANYware, the terms and conditions
of which are in the final stages of negotiation. Revenues from this agreement
are expected to begin after the general release of codingANYware in 2002.
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 services 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
12
in the customer's financial condition or budget and the sales 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 first fiscal quarter ended April 30, 2002, were $3,033,219,
compared with $2,712,403 reported in the comparable quarter of 2001. The
increase is due to new sales from our remarketing partners and implementation of
existing contracts through our remarketing partners. Revenues for the first
three months of fiscal 2001 and 2002 continued to be affected because many
healthcare organizations deferred new software purchases until final Federal
Health Privacy Regulations were promulgated, to comply with the requirements of
HIPAA (Health Insurance Portability and Accountability Act of 1996).
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 Agreements
with Siemens and IDX will increase in the future since LanVision's product has
been fully integrated with the Siemens products and will soon be integrated with
the IDX products. 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 our Remarketing and Reseller
Agreements should 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 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 ASP solutions will position the Company to take
advantage of, what we continue to believe will be, significantly increasing
market opportunities for LanVision and its 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 partners Siemens and IDX, accounted for approximately
27% of the revenues for the
13
first quarter of 2002 compared with 30%, of revenues in the comparable period of
the prior year. Revenues from our remarketing partners accounted for
approximately $956,000 for the three months ended April 30, 2002, compared with
approximately $605,000 for the three months ended April 30, 2001. The increase
in revenues results from new sales from our existing partner and our newest
partner IDX.
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 first quarter of fiscal 2002 and 2001 were
25% and 14%, respectively. The higher percentage of cost of sales reflects a
greater volume of hardware sold during the current period compared to the
comparable prior period, which had lower hardware 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 51% and 51% for
the first quarter of fiscal 2002 and 2001. The Company's support margins are
highest on LanVision's proprietary software. Accordingly, margins are expected
to improve as more customers are added.
The LanVision Professional Services staff provides services on a time and
material or fixed fee basis. The Professional Services staff 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 assisting
in the selling of 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-hosting services
The cost of application-hosting services operations was reduced with the sale,
in February 2000, of the data center. The Company now incurs expenses only for
the outsourcing services it uses, which are directly related to the
application-hosting services revenues generated by the ASPeN Division.
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
14
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 first quarter of fiscal 2002,
Selling, General and Administrative expenses increased to $843,527 compared with
$705,244 in the comparable prior quarter. The increase in Selling, General and
Administrative expenses is due to normal inflation and the increased cost to
defend our intellectual property rights in two matters initiated by the Company.
[See Part II. Item 1 Legal Proceedings of this Form 10-Q.] 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 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 first quarter, research and development expenses were
$507,080 compared with $552,146 in the comparable prior quarter. The decrease
results from lower staff costs resulting from converting consultants to company
employees at lower costs and increased capitalized software development costs
for the newest product codingANYware(SM) under development. The Company monitors
closely and augments its Research and Development staff, as necessary, to
accelerate the development of new products. The Company capitalized, in
accordance with Statement of Financial Accounting Standards No. 86, $150,000 and
$125,000 of product research and development costs in the first quarter of
fiscal 2002 and 2001. The capitalized costs during the first quarter of fiscal
2002 relate primarily to LanVision's two new products under development,
accessANYware(SM) and codingANYware.
Operating profit
The operating profit for the first quarter of fiscal 2002 was $531,352 compared
with an operating profit of $472,960 in the first quarter of fiscal 2001, an
improvement of approximately 12%. The increase in the operating profit results
primarily from: (1) continued stringent cost controls, (2) increased revenues of
approximately $320,000, primarily software licensing revenues offset by (3)
higher cost of system sales because of a higher content of hardware sales, with
lower margins, during the quarter.
Interest income consists primarily of interest on invested cash. The decreases
in interest income results from lower cash balances and significantly lower
interest rates.
Interest expense relates to the long-term debt. In connection with setting the
loan covenants for fiscal year 2002, the company made an additional $500,000
special payment of the long-term deferred interest on March 13, 2002.
Net income
The net income for the first quarter of fiscal 2002 was $98,269 ($.01 per share)
compared with net income of $101,541 ($.01 per share) in the first quarter of
fiscal 2001. This decrease in net income results primarily from the
significantly lower interest income, and other changes as noted above, offset by
a one time tax benefit as a result of a change in the tax law.
15
Notwithstanding the less than anticipated number of new customer agreements
signed by the Company and its resellers in the past, management continues to
believe that the healthcare document imaging and workflow market is going to be
a significant market. Management believes it has made, and continues to make,
the investments in the talent and technology necessary to establish the Company
as a leader in this marketplace, and continues to believe the Company is well
positioned to experience significant revenue growth primarily through third
party distributors and remarketing partners.
Since commencing operations in 1989, the Company has incurred operating losses.
Although the Company achieved profitability in fiscal years 1992, 1993 and 2000,
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 increasing revenues.
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, 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.
LanVision has no significant obligations for capital resources, other than
noncancelable operating leases in the total amount of approximately $110,000,
payable over the next five years.
In July 2004, upon maturity of the long-term debt, LanVision may, under the
terms of the long-term debt agreement, be required to pay to the lender an
amount necessary so that the market value of the stock underlying the Warrants
issued to the lender in connection with the long-term debt, plus the 12%
interest paid on the loan will yield the lender a 25% compound annual return. If
the yield from the Warrants plus interest paid does not provide the lender with
the 25% guaranteed compound annual return, LanVision is required to pay the
additional amount in cash at the time of maturity. Accordingly, LanVision is
accruing interest on the loan at a 25% compound interest rate, regardless of the
market value of the stock and the inherent value of the Warrants. The current
estimate of the maximum amount at maturity, which would be required to be paid
to the lender, assuming the Warrants have no value, is approximately $5,800,000.
Depending on the amount of cash LanVision has at that time, and the value of the
Warrants, it may be necessary for LanVision to borrow funds or obtain additional
equity in order to fund the deferred interest payable to the lender at that
time. LanVision believes that continued operating performance improvements
should enable it to fund a portion of any obligation and borrow the additional
funds necessary to retire the obligation at maturity. However, there can be no
assurance LanVision will be able to do so.
16
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, increased revenues and improved operating performance,
LanVision's expenses may continue to increase. Accordingly, to continue to
achieve increasing 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, and the recent signing of the IDX Information Systems Corporation
remarketing agreement and the 3M agreement in the process of negotiations should
offer significant opportunities to increase revenues. Additionally, the Siemens
Remarketing Agreement, as previously noted, has significantly expanded the sales
distribution capabilities and LanVision believes the IDX agreement will also
expand sales distribution similar to that of Siemens. 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 do so.
In February 2000, LanVision sold its hosting 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 April 30, 2002, LanVision had cash and cash equivalents of $6,899,878. 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
$4,800,000. During fiscal 2002, $2,000,000 of long-term debt is required to be
repaid to the lender.
LanVision has significantly reduced operating expenses during the last three
fiscal years, and believes it will continue to improve operating results in
fiscal 2002. Notwithstanding the increases in fiscal year 2001 revenues and
operating profit, for the foreseeable future, LanVision will need to continually
assess its revenue prospects compared to its then current expenditure levels. If
it does not appear likely that revenues will increase, it may be necessary to
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.
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 April 30, 2002.
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
17
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 April 30, 2002, the Company's and its resellers' customers had entered into
master agreements for systems and services (excluding support and maintenance
and transaction based revenues for the ASPeN Division), which had not yet been
delivered, installed and accepted which, if fully performed, would generate
revenue of approximately $4,970,000, compared with approximately $4,417,000 at
the end of fiscal 2001. The systems and services are currently expected to be
delivered over the next two to three years. In addition, the Company anticipates
approximately $585,000 in transaction-based fee revenues for the ASP Division's
current client over the remaining nine month life of the contract. Because
systems implementations and Application-hosting services 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.
LanVision'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 2001, 2000 and 1999 were approximately $4,032,000,
$3,678,000, and $3,264,000, respectively. Maintenance and support revenues are
expected to increase in 2002.
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 ASPeN 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.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
LanVision is a party to various legal proceedings and claims which arise in the
ordinary course of business from time to time. Currently, LanVision is a party
to several pending lawsuits that were initiated by LanVision to protect its
intellectual property rights, to enforce non-competition covenants and/or to
prevent third parties from improperly interfering in LanVision's business. The
defendants in one or more of these actions have asserted, and may assert in the
future, counterclaims against LanVision. While the outcome of these claims, as
well as any claims that may not have yet been asserted against LanVision,
whether in these actions or otherwise, cannot be predicted with certainty at
this time, LanVision is not aware of any legal matters that will have
18
a material adverse effect on LanVision's consolidated results of operations or
consolidated financial position.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 29, 2002, the
following members were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
George E. Castrucci 8,790,356 12,175
Richard C. Levy, M.D. 8,742,281 60,250
Eric S. Lombardo 8,776,927 25,604
J. Brian Patsy 8,787,181 15,350
Z. David Patterson 8,785,756 16,775
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. (*)
10 First Amendment to the Reseller Agreement between IDX
Information Systems Corporation and LanVision, Inc.
11 Computation of Earnings (Loss) Per Common Share
(*) Incorporated by reference.
(b) Reports on Form 8-K
None
19
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: June 3, 2002 By: /s/ J. BRIAN PATSY
---------------------- ----------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: June 3, 2002 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.
10 First Amendment to the Reseller Agreement between
IDX Information Systems Corporation and LanVision,
Inc.
11 Computation of Earnings (Loss) Per Common Share